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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission File Number: 0-22738
QUICKTURN DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0159619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 Clyde Avenue, Mountain View, California 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 967-3300
NO CHANGE
------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of August 4, 1997 there were 17,424,935 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 19 pages, of which this is page 1.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996* 1997 1996*
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenue
Product revenue $ 18,962 $ 21,375 $ 34,489 $ 40,744
Maintenance and service revenue 7,476 4,884 13,351 9,383
--------- --------- --------- ---------
Total revenue 26,438 26,259 47,840 50,127
Cost of revenue
Cost of product revenue 7,492 6,440 12,773 12,737
Cost of maintenance and service revenue 900 1,473 2,453 2,320
--------- --------- --------- ---------
Total cost of revenue 8,392 7,913 15,226 15,057
Gross profit 18,046 18,346 32,614 35,070
--------- --------- --------- ---------
Operating expenses
Research and development 5,884 4,681 11,671 8,948
Sales and marketing 8,787 7,966 17,321 15,153
General and administrative 2,849 1,755 5,357 3,318
Merger related costs -- -- 1,200 --
--------- --------- --------- ---------
Total operating expenses 17,520 14,402 35,549 27,419
--------- --------- --------- ---------
Operating income (loss) 526 3,944 (2,935) 7,651
Other income, net 518 487 910 799
--------- --------- --------- ---------
Net income (loss) before provision for
(benefit from) income taxes 1,044 4,431 (2,025) 8,450
Provision for (benefit from) income taxes 324 1,441 (627) 2,716
--------- --------- --------- ---------
Net income (loss) $ 720 $ 2,990 $ (1,398) $ 5,734
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share $ 0.04 $ 0.17 $ (0.08) $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------
Number of shares used in per share calculations 18,025 17,857 16,701 17,651
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* 1996 has been restated to reflect the February 1997 merger of
the Company and SpeedSim, Inc., which was accounted for as a
pooling of interests.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996*
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 13,024 $ 25,790
Marketable securities 10,296 10,614
Accounts receivable, net of allowance for
doubtful accounts of $1,840 in 1997 and
1996 20,436 21,768
Inventories 14,017 10,141
Prepaid expenses and other current assets 2,402 2,991
Deferred income taxes 5,871 5,871
--------- ---------
Total current assets 66,046 77,175
Marketable securities 23,759 18,198
Fixed assets, net 8,775 11,243
Arkos-related assets 16,500 --
Deferred income taxes 2,939 2,939
Other assets 1,255 2,422
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$ 119,274 $ 111,977
--------- ---------
--------- ---------
LIABILITIES
Current liabilities
Current portion of long term debt $ 2,440 $ 3,502
Accounts payable 1,509 894
Accrued liabilities 12,380 14,586
Deferred revenue 9,190 8,950
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Total current liabilities 25,519 27,932
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STOCKHOLDERS' EQUITY
Common stock, $.001 par value:
Authorized: 20,000,000 shares
Issued and outstanding: 17,339,937 shares
in 1997; 16,526,904 shares in 1996 17 17
Additional paid-in capital 88,638 77,545
Cumulative translation adjustment (75) ---
Unrealized holding gain (loss) on marketable
securities 3 10
Retained earnings 5,844 7,242
Deferred compensation (672) (769)
--------- ---------
Total stockholders' equity 93,755 84,045
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$ 119,274 $ 111,977
--------- ---------
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</TABLE>
* December 31, 1996 has been restated to reflect the February 1997 merger of
the Company and SpeedSim, Inc., which was accounted for as a pooling of
interests.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1997 1996*
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,398) $ 5,734
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Depreciation and amortization 3,436 4,010
Amortization of deferred compensation 97 ---
Changes in current assets and liabilities
Accounts receivable 1,332 (296)
Inventories (4,593) (3,642)
Prepaid expenses and other current assets 589 (671)
Accounts payable and accrued liabilities (1,591) 1,325
Deferred revenue 241 5,885
-------- --------
Net cash provided by (used in) operating
activities (1,887) 12,345
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (2,066) (2,411)
Sale of marketable securities 8,055 9,502
Purchase of marketable securities (13,480) (10,904)
Purchase of Arkos assets (5,000) ---
Increase (decrease) in other assets 1,157 (1,521)
-------- --------
Net cash used in investing activities (11,334) (5,334)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long term debt (1,062) (1,695)
Proceeds from stock issuances 1,593 1,104
-------- --------
Net cash provided by (used in) financing
activities 531 (591)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (76) ---
Net increase (decrease) in cash and cash
equivalents (12,766) 6,420
Cash and cash equivalents at beginning of
period 25,790 17,658
-------- --------
Cash and cash equivalents at end of period $ 13,024 $ 24,078
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for
Interest $ 172 $ 240
Income taxes $ 2,384 $ 4,400
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized holding loss on marketable
securities $ 7 $ 194
Accrued costs related to Arkos purchase $ 2,000 $ --
Common stock and warrants issued in
Arkos purchase $ 9,500 $ --
</TABLE>
* 1996 has been restated to reflect the February 1997 merger of the Company
and SpeedSim, Inc., which was accounted for as a pooling of interests.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements are unaudited (except for
the balance sheet information as of December 31, 1996, which is derived from
audited financial statements after giving effect to restatement for the
SpeedSim Merger - See Note 4, below) and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations contained in
the Company's 1996 Annual Report to Stockholders. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 1997, or any future
interim period.
2. Inventories comprise: (in thousands)
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
Raw materials $ 6,762 $ 8,431
Work in process 7,255 1,710
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$ 14,017 $ 10,141
-------- --------
-------- --------
3. Reclassification: Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. SpeedSim Merger: In February 1997, the Company acquired SpeedSim, Inc.
("SpeedSim"), a provider of cycle-based simulation software for the
verification of digital logic designs ("the SpeedSim Merger"), for 2.8
million shares of Quickturn common stock. The acquisition was accounted for
as a pooling of interests. The Company incurred direct transaction costs of
at least $1.2 million associated with the acquisition, which have been
charged to operations during the quarter ended March 31, 1997. All financial
information herein has been restated to include the operations of SpeedSim.
5. Arkos Acquisition: In June 1997, in an Asset Purchase Agreement among the
Company, Synopsys, Inc. ("Synopsys") and Arkos Design, Inc. ("Arkos"), the
Company purchased from Synopsys certain assets relating to Synopsys'
emulation business, including all the outstanding capital stock of Arkos
("Arkos Acquisition"). The consideration paid by the Company was valued at
$14,500,000 and consisted of $5,000,000 cash, 500,000 shares of Quickturn
Common Stock and warrants to purchase 1,000,000 shares of Quickturn Common
Stock. The exercise price of the warrants is $13.34 per share. The
acquisition was accounted for as a purchase. The Company expects to incur
certain liabilities and will incur other costs relating to the acquisition of
which
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$2 million has been accrued as of June 30, 1997. Upon completion of the
allocation of the purchase price and determination of the other costs, the
Company anticipates charges of $13 to $17 million in the third quarter of
1997. The balance of the purchase price will be amortized over five to seven
years.
6. Recent Accounting Pronouncements: In February 1997, The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supercedes Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. SFAS
128 requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 will not have a material impact
on the Company's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), REPORTING COMPREHENSIVE
INCOME. This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments or contributions by stockholders. The Company is evaluating
alternative formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supercedes Statement of
Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE. The new standard becomes effective for fiscal years
beginning after December 15, 1997, and requires that comparative information
from earlier years be restated to conform to the requirements of this
standard. The Company is evaluating the requirements of SFAS 131 and the
effects, if any, on the Company's current reporting and disclosures.
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7. Fiscal Year: Effective in 1997, the Company changed its fiscal year to
December 31 from a 52-week or 53-week year, ending on the last Sunday in
December. The change had no significant impact on the current period results
of operations.
8. Derivatives: The Company uses forward foreign exchange contracts to hedge
certain assets denominated in foreign currencies. For these instruments,
risk reduction is assessed on a transaction basis and the instruments are
designated as, and effective as a hedge and are highly inversely correlated
to the hedged item as required by generally accepted accounting principles.
Gains and losses on these hedges are included in the carrying amount of the
assets and are ultimately recognized in income as part of those carrying
amounts. If a hedging instrument ceases to qualify as a hedge, any
subsequent gains and losses are recognized currently in income. The Company
does not use any derivatives for trading or speculative purposes. If a
derivative ceases to qualify for hedge accounting, it is accounted for on a
mark to market basis.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUE
The Company's 1997 second quarter revenue of $26.4 million represented a 1%
increase compared to the second quarter revenue in the prior fiscal year and
was a 24% increase compared to revenue in the prior quarter. Revenue for
the first six months of 1997 of $47.8 million was a decrease of 5% from the
first six months of the prior year. The revenue increase in the second
quarter of the current year over the first quarter of the current year and
the revenue decrease in the first half of the current year compared to the
same period last year were primarily attributable to the delay of customer
purchase decisions for the Company's emulation products in the first quarter
of 1997. The Company believes that the delay in such decisions was due to
customers reacting to structural changes within their respective segments of
the electronics industry, including customer corporate restructurings and
management changes that resulted in design project decision delays, and to
near term uncertainty in the emulation industry generated by new competition.
The Company is uncertain about the potential timing of a return to historic
order rates. International sales accounted for approximately 41% and 40% of
total revenue in the second quarters of the current and prior fiscal years,
respectively. For the first six months of the current and prior fiscal
years, international sales were approximately 33% and 41% of total revenue,
respectively. The decrease in international sales as a percentage of total
revenue in the first half of 1997 was primarily due to decreased sales in
Europe in the first quarter of the current year and in the Asia-Pacific
markets, excluding Japan, in the first half of the current year. Revenue from
most international customers is denominated in U.S. dollars. However,
receivables from certain other international customers are denominated in
local currencies. Such receivables are hedged, where practicable, by forward
exchange contracts to minimize the impact of foreign exchange rate movements
on the Company's operating results. There have been no material gains or
losses associated with the Company's hedging program. However, there can be
no assurance that fluctuations in the currency exchange rates in the future
will not have a material adverse impact on the receivables derived from
foreign currency denominated sales and thus the Company's operating results
and financial condition. See Note 2 of the Notes to Consolidated Financial
Statements in the Company's 1996 Annual Report to Stockholders.
Many of the Company's customers order on an as-needed basis and often delay
delivery of firm purchase orders until the commencement dates of such
customers' development projects are determined. Moreover, a significant
portion of the Company's revenue in each quarter generally results from
shipments in the last few weeks of the quarter; therefore, a delay in the
shipment of a few orders can have a significant impact upon total revenue and
results of operations in a given quarter.
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A relatively limited number of customers have historically accounted for a
substantial portion of the Company's revenue. These customers represent
early adopters of emulation technology, typically for the design of complex
integrated circuits. In particular, the Company's top ten customers
represented 53% and 74% of total revenue in the second quarters of 1997 and
1996, respectively. In the first six months of 1997 and 1996, the top ten
customers accounted for 43% and 64% of total revenue, respectively. The
Company expects that sales of its products to a relatively limited number of
customers will continue to account for a high percentage of revenue for the
foreseeable future. The loss of a major customer or any reduction in orders
by such a customer could have an adverse effect on the Company's financial
condition or results of operations. The Company believes that in the future
its results of operations in a quarterly period could be impacted by the
timing of customer development projects and related purchase orders for the
Company's emulation systems, new product announcements and releases by the
Company, and economic conditions generally and in the electronics industry
specifically.
GROSS MARGINS Gross margins were 68% in both the second and prior quarter of
the current year and were 70% in the second quarter of the prior year. Gross
margins associated with product revenues were 61% and 66% in the second
quarter of the current year and prior quarter of the current year,
respectively, and 70% in the second quarter of the prior year. This decrease
in product gross margins was due primarily to reductions in price, as
measured by the average price that customers pay for verification per logic
gate. The Company expects competitive pressures to increase in its market
from existing companies and new entrants, which among other things could
accelerate the trend of such decreasing average price per logic gate. Gross
margins associated with maintenance and service sales were 88% and 74% in
the second quarter of the current year and prior quarter of the current year,
respectively, compared to 70% in the second quarter of the prior year. The
increase in maintenance and service gross margins is due mainly to a larger
revenue base of maintenance and service contracts over which to spread fixed
costs. There can be no assurance that the Company will be able to sustain
its recent gross margins. Furthermore, to the extent that the Company's cost
reduction goals are achieved, any resulting cost savings that are passed on
to the Company's customers may also have an adverse effect on gross margins.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 26% in the second quarter of
1997 compared to the second quarter of the previous year. This increase was
primarily attributable to increased staffing and prototype and equipment
costs necessary to enhance current products and to develop the next
generation emulation and cycle-based simulation products. As a percentage of
total revenue, research and development expenses were approximately 22% for
the second quarter of the current year and 18% for the second quarter of the
previous year. For the six month periods in the current and prior fiscal
years, research and development expenses were 24% and 18% of total revenue,
respectively. The Company expects to continue to invest a significant amount
of its resources in research and development.
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SALES AND MARKETING
Sales and marketing expenses increased 10% in the second quarter of 1997
compared to the second quarter of the previous year. This increase was
largely due to headcount increases to support both domestic and foreign
markets. As a percentage of total revenue, sales and marketing expenses were
approximately 33% and 30% in the second quarters of the current and prior
fiscal years, respectively. For the six month periods in the current and
prior year, sales and marketing expenses were 36% and 30% of total revenue,
respectively. The Company expects that sales and marketing expenses will
continue to increase in absolute dollar amounts as the Company expands its
sales and marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 62% in both the second
quarter and first half of 1997 compared to the second quarter and first half
of the previous year. This increase was largely due to increased legal
costs related to a patent infringement lawsuit filed by the Company in
January 1996. See "Part II., Item 1. Legal Proceedings" of this Form 10-Q.
As a percentage of total revenue, general and administrative expenses were
approximately 11% for the second quarter and the first six months of the
current year and 7% for the second quarter and first six months of the prior
year. The Company expects general and administrative expenses to increase in
1997 due primarily to continued legal costs.
MERGER RELATED COSTS
In connection with its acquisition of SpeedSim, Inc. (the "SpeedSim Merger"),
the Company recorded one-time charges of $1.2 million in the first quarter of
1997 that included fees for investment banking, legal and accounting services
and other costs of consolidating. In connection with the Company's
acquisition of the assets of Arkos (the "Arkos Acquisition"), the Company
expects to incur certain liabilities and other costs aggregating $5 million
to $7 million. Upon completion of the allocation of the purchase price and
determination of other costs, the Company anticipates charges of $13 million
to $17 million in the third quarter of 1997. The balance of the purchase
price will be amortized over five to seven years. See Note 5 of the Notes to
Condensed Consolidated Financial Statements.
OTHER INCOME, NET
Other income, net increased by $31,000 in the first quarter and by $111,000
in the first six months of 1997 compared to the same three and six month
periods in 1996 due primarily to an increase in interest income associated
with a greater average quarterly balance of cash and cash equivalents and
marketable securities.
PROVISION FOR INCOME TAXES
The effective tax rates of 31% for both the three and six months ended June
30, 1997 and the effective tax rates of 32% for both the three and six months
ended June 30, 1996 were lower than the statutory federal rate of 35%
primarily because of federal and state general business credits, interest
income on investments in tax-exempt obligations and benefit from foreign
sales corporation.
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NET INCOME (LOSS) AND QUARTERLY RESULTS
Net income of $720,000 represented a 76% decrease in the second quarter of
1997 compared to net income in the second quarter of 1996. This decrease in
net income was due primarily to increased operating expenses, partially
offset by decreased taxes.
FACTORS AFFECTING OPERATING RESULTS
COMPETITION
The EDA industry is highly competitive and rapidly changing. The Company
faces significant competition for emulation-based system-level verification
and cycle-based simulation, in addition to competition from traditional
design verification methodologies which rely on the approach of building and
then testing complete system prototypes. Because of customers' requirements
for a design verification methodology which reduces the number of costly
design iterations and improves product quality, the Company expects
competition in the market for system-level verification and cycle-based
simulation to increase as other companies attempt to introduce emulation and
cycle-based simulation products and product enhancements. Moreover, the
Company competes with companies that have significantly greater financial,
technical and marketing resources, greater name recognition and larger
installed customer bases than the Company. In addition, many of these
competitors have established relationships with current and potential
customers of the Company. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. The Company believes that the
principal competitive factors in the EDA market are quality of results, the
mission-critical nature of the technology, technical support, product
performance, reputation, price and support of industry standards. The
Company believes that it currently competes favorably with respect to these
factors. However, there can be no assurance that the Company will be able to
compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition.
In addition, competitors may resort to litigation as a means of competition.
Such litigation may result in substantial costs to the Company and
significant diversion of management time. In 1995, Mentor Graphics
Corporation, ("Mentor") filed suit against the Company for declarative
judgment of non-infringement, invalidity and unenforceability of several of
the Company's patents. Six of the Company's patents are now involved in the
disputes and the Company has filed counterclaims against Mentor and Mentor's
French subsidiary, Meta Systems ("Meta"), for infringement and threatened
infringement of those six patents. Furthermore, in January 1996, the Company
filed a complaint with the International Trade Commission, seeking to stop
unfair importation of hardware logic emulation systems manufactured by Meta
on the grounds that such systems infringe the Company's patents. See Part
II, Item 1 below, for a more detailed discussion of these litigation
matters. See Note 14 of the Notes to Consolidated Financial Statements in
the Company's 1996 Annual Report to Stockholders. Although patent and
intellectual property disputes in the EDA industry are often settled through
licensing, cross-licensing or similar arrangements, costs associated with
such litigation and arrangements may be substantial.
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RISKS ASSOCIATED WITH THE SPEEDSIM MERGER
On February 7, 1997, the Company completed the SpeedSim Merger. There can be
no assurance that the Company will not incur additional charges in subsequent
quarters to reflect costs associated with the SpeedSim Merger or that
management will be successful in its efforts to integrate the operations of
the acquired company. Although the Company believes the SpeedSim Merger is
in the best interest of the Company and its stockholders, there are
significant risks associated with these types of transactions, including but
not limited to: (i) difficulties in the integration of SpeedSim, (ii)
difficulties in maintaining revenue levels during product transitions, (iii)
difficulties or delays in achieving product and technology integration
benefits, and (iv) increased competition from other software companies.
Moreover, SpeedSim is a company in the early stages of development. As a
result, the Company believes that the increases in operating expenses
associated with the development and integration of these new technologies
could, in the near term, greatly exceed any associated increases in revenue
which could have an adverse impact on operating results.
RISKS ASSOCIATED WITH THE ARKOS ACQUISITION
On June 14, 1997, the Company completed the Arkos Acquisition. There can be
no assurance that, in addition to anticipated charges of $13 million to $17
million in the third quarter of 1997, the Company will not incur charges in
subsequent quarters to reflect costs associated with the Arkos Acquisition or
that management will be successful in its efforts to transition existing
Synopsys customers using the Arkos product to Quickturn products. Although
the Company believes the Arkos Acquisition is in the best interest
of the Company and its stockholders, there are significant risks associated
with these types of transactions, including but not limited to: (i)
difficulties in the transition of customer projects from Arkos to Quickturn
products, (ii) difficulties in maintaining revenue levels during product
transitions, (iii) difficulties or delays in achieving product and technology
integration benefits, and (iv) increased competition from other companies.
OTHER FACTORS
Other factors which could adversely affect the Company's quarterly operating
results in the future include efficiencies as they relate to managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased sales, customer product delivery requirements and shortages of
components or labor. Moreover, a significant portion of the Company's total
revenue in each quarter generally results from shipments in the last few
weeks of the quarter; therefore, a delay in the shipment of a few orders can
have a significant impact upon total revenue and results of operations in a
given quarter. Additionally, as a significant portion of the Company's total
revenue and net income may come from international operations, fluctuations
of the U.S. dollar against foreign currencies and the seasonality of
Asia-Pacific, European, and other international markets could impact the
Company's results of operations and financial condition in a particular
quarter.
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Due to the factors above, the Company's future earnings and stock price may
be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in total revenue or earnings from levels expected by securities
analysts has had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock.
Additionally, the Company may not learn of such shortfalls until late in a
fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $12.8 million from December 31, 1996
to June 30, 1997. Net cash used in operations was $1.9 million, due
primarily to increased inventory of $4.6 million, partially offset by $3.4
million of depreciation and amortization. Net cash used in investments was
$11.3 million due primarily to purchases of marketable securities of $13.5
million and the purchase of the Arkos assets of $5.0 million, offset by sales
of marketable securities of $8.0 million. Net cash provided by
financing activities was $531,000 due to proceeds from stock issuance of
$1.6 million, offset by payments of capital lease obligations of $1.1 million.
The Company believes that its cash and cash equivalents, together with its
existing credit facility and the cash flows expected to be generated by
operations, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and marketing expansion through at least 1997.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may sell additional equity or
debt securities or obtain additional credit facilities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1995, the Company and certain of its officers and directors were
named in a securities class action filed in the United States District Court
for the Northern District of California. In September 1995, the Court
dismissed with prejudice all claims against several defendants, including the
Company's outside directors. The Court also dismissed with prejudice many of
the allegations and claims asserted against the Company and certain of its
officers. The Company believed that it had meritorious defenses to the claims
remaining in the action. Nevertheless, in order to avoid further legal
expenses and conserve management resources, the Company entered into a
Stipulation of Settlement with plaintiffs in January 1997. The Company's
contribution to the $2.75 million settlement, net of insurance proceeds, was
not material. On April 2, 1997, the Court granted final approval of the
settlement as fair, adequate and reasonable to the parties. The Court
entered the Final Judgment and Order of Dismissal of the action on April 4,
1997.
- 13 -
<PAGE>
Additionally, in January 1996, the Company filed a complaint with the
International Trade Commission (the "ITC") in Washington, DC, seeking to stop
unfair importation of logic emulation systems manufactured by Meta Systems, a
subsidiary of Mentor. In the complaint, the Company alleges that Mentor's
hardware logic emulation systems infringe the Company's patents. In July
1996, the ITC Administrative Law Judge issued an Initial Determination
granting a Temporary Exclusion Order stopping the importation of Mentor's
emulation systems into the U.S., absent the posting of a bond by Mentor. The
ITC Initial Determination included a Cease and Desist Order against all sales
activities regarding unbonded Mentor emulation products imported into the
U.S. In August 1996, the ITC ratified the judges' Initial Determination.
Mentor and Meta have appealed the Temporary Exclusion Order to the Federal
Circuit Court of Appeals, asking that the ITC's Interpretation of Quickturn's
patent claims be overturned. A decision on this appeal is expected in the
next several months. Meanwhile, on August 1, 1997, the ITC Administrative
Law Judge issued an Initial Determination that Mentor's SimExpress emulation
systems and components, including software components, infringe five of the
Company's patents. The Administrative Law Judge recommended that the ITC
issue a Permanent Exclusion Order prohibiting the importation of infringing
SimExpress systems and components. He further recommended that the ITC issue
a Cease and Desist Order prohibiting Mentor from distributing any SimExpress
software of non-U.S. origin in the United States. The ITC has until December
1, 1997, to act upon the Administrative Law Judge's recommendations, after
which the President will have 60 days to review the ITC's actions.
The Company also is engaged in a Federal District Court case with Mentor and
Meta involving six of the Company's patents. Mentor and Meta are seeking a
declaratory judgment of noninfringement, invalidity and unenforceability of
the patents in dispute, and the Company has filed counteractions against
Mentor and Meta for infringement and threatened infringement of the six
patents. Mentor has also claimed in this Federal District Court case that
press releases issued by the Company were defamatory and interfered with
Mentor's prospective economic relations. On August 1, 1997, the U.S. District
Court in Oregon granted Quickturn's motion for a preliminary injunction
against Mentor's domestic emulation activities. Quickturn's motion asked the
District Court to prohibit Mentor from manufacturing, assembling, marketing,
loaning or otherwise distributing emulation products and components in the
United States, which products and components infringe certain claims in
Quickturn's U.S. Patent No. 5,036,473. An Order defining the exact scope of
the preliminary injunction to be entered against Mentor is expected to issue
shortly.
Aptix Corporation ("Aptix") also filed a suit against the Company alleging
various violations of the antitrust laws and unfair competition. The Company
does not believe that Mentor's defamation and tortious interference claims or
the antitrust and unfair competition claims by Aptix are meritorious and has
mounted vigorous defenses against them. The outcome of these actions cannot
be predicted with certainty.
The Company is engaged in certain other legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims
which are pending or known to be threatened, will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
- 14 -
<PAGE>
ITEM 2. CHANGES IN SECURITIES
In connection with the Arkos Acquisition, on June 14, 1997, the Company
issued an aggregate of 500,000 shares of the Company's Common Stock (the
"Acquisition Shares") to Synopsys in partial consideration for all of the
outstanding shares of capital stock of Arkos and certain related assets of
Synopsys. The Acquisition Shares were issued pursuant to the exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"1933 Act") afforded by Section 4(2) of the 1933 Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on April 11, 1997, the
following members were elected to the Board of Directors:
Votes Votes
For Withheld
------------------------------
Richard C. Alberding 14,177,410 503,858
Glen M. Antle 14,178,810 502,458
Michael R. D'Amour 14,126,275 554,993
Yen-Son (Paul) Huang 14,158,071 523,197
Dr. David K. Lam 14,176,506 504,762
Keith R. Lobo 14,175,985 505,283
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Votes
Votes Votes Abstained/
For Against Not Voted
----------------------------------------------------
<S> <C> <C> <C>
1. Amendment to the Company's Certificate
of Incorporation increasing the number of
authorized shares of Common Stock from
20,000,000 to 40,000,000 shares. 14,123,636 529,675 29,957
2. Adoption of the Company's 1997 Stock
Option Plan and the reservation of
1,000,000 shares of Common Stock
thereunder. 5,988,508 4,749,991 3,942,769
3. Amendment to the Employee Qualified
Stock Purchase Plan to increase the number
of shares of Common Stock reserved for
issuance thereunder by 750,000 shares. 8,013,283 3,364,804 3,303,181
4. Ratification of appointment of
Coopers & Lybrand L.L.P. as
independent auditors. 14,638,900 27,398 14,970
</TABLE>
- 15 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share.
Exhibit 27: Financial Data Schedule
(b) REPORT ON FORM 8-K
A Current Report on Form 8-K dated April 9, 1997 was filed with the
Securities and Exchange Commission ("SEC") by the Company in the quarter
ended June 30, 1997 in connection with the Company's earnings announcement
for the first quarter of 1997.
A Current Report on Form 8-K dated June 14, 1997 was filed with the SEC by
the Company in the quarter ended June 30, 1997 in connection with the Arkos
acquisition.
- 16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUICKTURN DESIGN SYSTEMS, INC.
--------------------------------------
(Registrant)
Date August 13, 1997 By: /s/ Raymond K. Ostby
-------------------- -----------------------------------
Raymond K. Ostby,
Vice-President, Finance and Administration,
Chief Financial Officer and Secretary
(Principal Accounting Officer and
Duly Authorized Officer)
- 17 -
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1997 1996* 1997 1996*
------- -------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Common stock 16,839 16,234 16,701 16,149
Common stock equivalents 1,186 1,623 -- 1,502
------- ------- -------- --------
Weighted average common shares and
equivalents 18,025 17,857 16,701 17,651
------- ------- -------- --------
------- ------- -------- --------
Net income (loss) $720 $2,990 ($1,398) $5,734
------- ------- -------- --------
------- ------- -------- --------
Net income (loss) per share (1) $0.04 $0.17 ($0.08) $0.32
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
* 1996 has been restated to reflect the February 1997 merger of the
Company and SpeedSim, Inc., which was accounted for as a pooling
of interests.
(1) There is no difference between primary and fully diluted net income per
share.
- 18 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q
for the period ending June 30, 1997, ans is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,024
<SECURITIES> 10,296
<RECEIVABLES> 22,276
<ALLOWANCES> 1,840
<INVENTORY> 14,017
<CURRENT-ASSETS> 66,046
<PP&E> 33,033
<DEPRECIATION> 24,258
<TOTAL-ASSETS> 119,274
<CURRENT-LIABILITIES> 25,519
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 93,738
<TOTAL-LIABILITY-AND-EQUITY> 119,274
<SALES> 47,840
<TOTAL-REVENUES> 47,840
<CGS> 15,226
<TOTAL-COSTS> 15,226
<OTHER-EXPENSES> 35,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196
<INCOME-PRETAX> (2,026)
<INCOME-TAX> (628)
<INCOME-CONTINUING> (1,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
