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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 September 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.)
55 W. Trimble Road, San Jose, California 95131
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 914-6000
440 Clyde Avenue, Mountain View, California 94043
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(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 November 4, 1997 there were 17,572,744 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 18 pages, of which this is
page 1.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996* 1997 1996*
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<S> <C> <C> <C> <C>
Revenue
Product revenue $ 22,174 $ 23,134 $ 56,663 $ 63,878
Maintenance and service revenue 7,890 5,653 21,241 15,036
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Total revenue 30,064 28,787 77,904 78,914
Cost of revenue
Cost of product revenue 6,420 6,816 19,193 19,553
Cost of maintenance and service revenue 2,393 1,666 4,846 3,986
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Total cost of revenue 8,813 8,482 24,039 23,539
Gross profit 21,251 20,305 53,865 55,375
Operating expenses
Research and development 5,884 5,158 17,555 14,106
Sales and marketing 9,389 8,318 26,710 23,471
General and administrative 3,034 1,790 8,391 5,108
Acquisition and merger related costs 18,031 --- 19,231 ---
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Total operating expenses 36,338 15,266 71,887 42,685
Operating income (loss) (15,087) 5,039 (18,022) 12,690
Other income, net 636 533 1,546 1,332
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Net income (loss) before provision for
(benefit from) income taxes (14,451) 5,572 (16,476) 14,022
Provision for (benefit from) income taxes (6,925) 1,700 (7,552) 4,416
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Net income (loss) $ (7,526) $ 3,872 $ (8,924) $ 9,606
---------- ---------- ---------- ----------
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Net income (loss) per share $ (0.43) $ 0.22 $ (0.53) $ 0.54
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Number of shares used in per share calculations 17,462 17,967 16,954 17,756
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</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>
September 30, December 31,
1997 1996*
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 17,390 $ 25,790
Marketable securities 16,223 10,614
Accounts receivable, net of allowance for doubtful
accounts of $1,840 in 1997 and 1996 25,531 21,768
Inventories 10,168 10,141
Prepaid expenses and other current assets 2,664 2,991
Deferred income taxes 5,871 5,871
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Total current assets 77,847 77,175
Marketable securities 16,837 18,198
Fixed assets, net 10,360 11,243
Deferred income taxes 9,864 2,939
Other assets 1,669 2,422
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$ 116,577 $ 111,977
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LIABILITIES
Current liabilities
Current portion of long term debt $ 1,437 $ 3,502
Accounts payable 4,814 894
Accrued liabilities 15,138 14,586
Deferred revenue 7,680 8,950
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Total current liabilities 29,069 27,932
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STOCKHOLDERS' EQUITY
Common stock, $.001 par value:
Authorized: 40,000,000 shares
Issued and outstanding: 17,532,455 shares in 1997;
16,526,904 shares in 1996 18 17
Additional paid-in capital 90,018 77,545
Cumulative translation adjustment (301) ---
Unrealized holding gain on marketable securities 78 10
Retained earnings (accumulated deficit) (1,682) 7,242
Deferred compensation (623) (769)
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Total stockholders' equity 87,508 84,045
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$ 116,577 $ 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>
Nine Months Ended
September 30,
--------------------------
1997 1996*
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (8,924) $ 9,606
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 6,075 5,872
Amortization of deferred compensation 146 ---
Write off of Arkos acquisition 18,031 ---
Changes in current assets and liabilities
Accounts receivable (3,763) 1,546
Inventories (4,199) (2,254)
Prepaid expenses and other current assets 327 (282)
Deferred tax asset (6,925) ---
Accounts payable and accrued liabilities 4,472 (1,340)
Deferred revenue (1,270) 6,328
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Net cash provided by operating activities 3,970 19,476
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (5,077) (4,537)
Sale of marketable securities 12,055 16,102
Purchase of marketable securities (16,235) (16,865)
Purchase of Arkos (5,000) ---
Increase (decrease) in other assets 1,279 1,510
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Net cash used in investing activities (12,978) (6,810)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long term debt (2,065) (3,072)
Proceeds from stock issuances 2,974 2,173
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Net cash provided by (used in) financing activities 909 (899)
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Effect of exchange rate changes on cash and cash equivalents (301) ---
Net increase (decrease) in cash and cash equivalents (8,400) 11,767
Cash and cash equivalents at beginning of period 25,790 17,658
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Cash and cash equivalents at end of period $ 17,390 $ 29,425
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 232 $ 355
Income taxes $ 2,494 $ 4,607
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Unrealized holding loss (gain) on marketable securities $ (68) $ 162
Increase in inventory reserves related to Arkos purchase $ 4,172 $ ---
Assets acquired in Arkos purchase $ 641 $ ---
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 nine months ended September 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)
September 30, December 31,
1997 1996
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(unaudited)
Raw materials $ 5,136 $ 8,431
Work in process 5,032 1,710
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$ 10,168 $ 10,141
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--------- ---------
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
approximately $1.2 million associated with the acquisition, which were
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, pursuant to 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 (the "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
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Common Stock. The exercise price of the warrants is $13.34 per share. The
acquisition was accounted for as a purchase. The Company recognized charges
of $18.0 million in the third quarter of 1997, which represented a write off
of the portion of the purchase price which was allocated to in-process
research and development and marketing rights, the accrual of certain
liabilities incurred in connection with the acquisition and other costs
related to the acquisition. The balance of the purchase price, consisting of
intellectual property of $541,000 and fixed assets of $100,000, will be
amortized over three to five 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, cash flows or
earnings per share.
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
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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.
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 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 third quarter revenue of $30.1 million represented a 4%
increase compared to the third quarter revenue in the prior fiscal year and a
14% increase compared to revenue in the second quarter of 1997. Revenue for
the first nine months of 1997 of $77.9 million was a decrease of 1% from the
first nine months of the prior year. The revenue increase in the third
quarter of the current year over the second quarter of the current year was
primarily attributable to increased total sales volume of emulation capacity,
as represented by the number of gates of verification capacity purchased by
the customer. The revenue decrease in the first nine months of the current
year compared to the same period last year was 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 purchase
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 in the Company's market. As compared to the
third quarter and first nine months of 1996, product revenue for the third
quarter and first nine months of 1997 decreased 4% and 11%, respectively, due
primarily to the delay of customer purchase decisions as discussed above.
Maintenance and engineering services revenue increased 40% and 41% over the
third quarter and first nine months of 1996, respectively. The increase in
maintenance and service revenue is primarily attributable to a larger number
of maintenance contracts on customers' installed systems and to increased
sales of the Company's custom engineering services. International sales
accounted for approximately 35% and 19% of total revenue in the third
quarters of the current and prior fiscal years, respectively. For the first
nine months of the current and prior fiscal years, international sales were
approximately 34% and 33% of total revenue, respectively. The increases in
international sales as a percentage of total revenue in the third quarter and
first nine months of 1997 were primarily due to increased volume of emulation
sales in Japan. 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.
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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.
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 58% of total revenue in the third quarters of both 1997 and 1996.
In the first nine months of 1997 and 1996, the top ten customers accounted
for 44% and 52% 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 71% and 68% in the third quarter and second quarter of the
current year, respectively, and were 71% in the third quarter of the prior
year. Gross margins associated with product revenues were 71% and 61% in the
third quarter and second quarter of the current year, respectively, and 71%
in the third quarter of the prior year. The increase in product gross
margins in the third quarter as compared to the second quarter was due
primarily to a larger revenue base in the quarter over which to spread fixed
manufacturing costs. There can be no assurance that this increase can be
maintained as the Company expects competitive pressures to increase in its
market from existing companies and new entrants. Maintenance and service
gross margins were 70% and 88% in the third and second quarter of the current
year, respectively, compared to 71% in the third quarter of the prior year.
The decrease in maintenance and service gross margins in the third quarter
was due mainly to an increase in field support required to service new and
existing contracts. 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 14% in the third quarter of
1997 compared to the third 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
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total revenue, research and development expenses were approximately 20% for
the third quarter of the current year and 18% for the third quarter of the
previous year. For the nine month periods in the current and prior fiscal
years, research and development expenses were 23% and 18% of total revenue,
respectively. The Company expects to continue to invest a significant amount
of its resources in research and development.
SALES AND MARKETING
Sales and marketing expenses increased 13% in the third quarter of 1997
compared to the third 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 31% and 29% in the third quarters of the current and prior
fiscal years, respectively. For the nine month periods in the current and
prior year, sales and marketing expenses were 34% and 30% of total revenue,
respectively. The Company expects that sales and marketing expenses will
continue to increase in dollar amounts as the Company expands its sales and
marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 69% in the third quarter of
1997 compared to the third quarter 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 10% and 11% for the third quarter
and the first nine months of the current year, respectively, and 6% for the
third quarter and first nine months of the prior year. The Company expects
general and administrative expenses to increase in 1997 due primarily to
continued legal costs.
ACQUISITION AND MERGER RELATED COSTS
In connection with its merger with 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
incurred charges of $18.0 million in the third quarter of 1997 representing
the allocation of the purchase price and the accrual of certain liabilities
and other costs. The balance of the purchase price will be amortized over
three to five years. See Note 5 of the Notes to Condensed Consolidated
Financial Statements.
OTHER INCOME, NET
Other income, net increased by $103,000 in the third quarter and by $214,000
in the first nine months of 1997 compared to the third quarter and nine month
periods in 1996, respectively, due primarily to reduced interest expenses
related to the decreased level of debt associated with maturing equipment
leases.
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PROVISION FOR INCOME TAXES
The effective tax rates of 48% and 46% for the three and nine months ended
September 30, 1997, respectively, reflect a tax benefit in excess of the
federal statutory rate of 35% primarily because of federal and state general
business credits and interest income on investments in tax-exempt
obligations. The effective tax rate of 31% for both the three and nine
months ended September 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.
NET INCOME (LOSS) AND QUARTERLY RESULTS
Net loss in the third quarter of 1997 was $7.5 million which included
one-time charges for the Arkos Acquisition. Net income in the third quarter
without the charges for the Arkos Acquisition and its related income tax
benefit was $2.5 million, compared to net income of $3.9 million in the third
quarter of 1996. This decrease in net income without the charges for the
Arkos Acquisition was due primarily to an increase in operating expenses.
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
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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 and other
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.
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 merged companies. 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 the $18.0 million charge recognized 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.
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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.
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 $8.4 million from December 31, 1996 to
September 30, 1997. Net cash provided by operations was $4.0 million, due
primarily to $18.0 million write off of the Arkos acquisition, net of income
taxes and $6.0 million of depreciation and amortization, partially offset by
a net loss of $8.9 million, increased deferred tax asset of $6.9 million and
increased inventories of $4.2 million. Net cash used in investing activities
was $13.0 million due primarily to purchases of marketable securities of
$16.2 million, the cash paid for the purchase of fixed assets of $5.1 million
and the purchase of Arkos assets of $5.0 million, offset by sales of
marketable securities of $12.1 million. Net cash provided by financing
activities was $909,000 due to proceeds from stock issuance of $3.0 million,
offset by payments of capital lease obligations of $2.1 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 1998.
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.
- 13 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. On August 15, 1997, the Federal Circuit Court of Appeals
affirmed the ITC's decision granting temporary relief to the Company and
adopted the patent claim interpretation of the ITC as being correct and
derived in accordance with the Federal Circuit's case law. 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. The Administrative Law Judge 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. On October 2,
1997, the ITC ratified the Administrative Law Judge's Initial Determination.
The ITC has until December 1, 1997, to act upon the Administrative Law
Judge's recommendations, after which President Clinton 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. In August 1997, the Oregon District
Court entered its preliminary injunction order against Mentor and Meta.
- 14 -
<PAGE>
In August 1997, a preliminary injunction sought by Mentor Graphics' German
subsidiary, Mentor Graphics (Deutschland) GmbH, was issued by a regional
court in Munich, enjoining agents of the Company from making certain
statements concerning U.S. litigation matters between the Company and Mentor
Graphics. The Company has retained counsel in Germany and expects to resolve
this matter in the near future. On October 17, 1997, the Company filed a
complaint alleging infringement of the German part of the Company's European
patent No. 0 437 491 81 against Mentor Graphics (Deutschland) GmbH, in the
District Court of Dusseldorf. The Company has not yet received a response to
its complaint.
Aptix Corporation ("Aptix") also filed a suit against the Company alleging
various violations of the antitrust laws and unfair competition. This case is
currently in the discovery phase.
The Company has mounted vigorous defenses against Mentor's defamation and
tortious interference claims and the antitrust and unfair competition claims
by Aptix. 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.
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
No reports on Form 8-K were filed in the quarter ended September 30, 1997.
- 15 -
<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 November 10, 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)
- 16 -
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1997 1996* 1997 1996*
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Common stock 17,462 16,312 16,954 16,203
Common stock equivalents --- 1,655 --- 1,553
--------- ---------- --------- ----------
Weighted average common shares and
equivalents 17,462 17,967 16,954 17,756
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Net income (loss) ($7,526) $3,872 ($8,924) $9,606
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Net income (loss) per share (1) ($0.43) $0.22 ($0.53) $ 0.54
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</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 (loss)
per share.
- 17 -
<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 September 30, 1997, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,390
<SECURITIES> 16,223
<RECEIVABLES> 27,371
<ALLOWANCES> 1,840
<INVENTORY> 10,168
<CURRENT-ASSETS> 77,847
<PP&E> 35,329
<DEPRECIATION> 24,969
<TOTAL-ASSETS> 116,577
<CURRENT-LIABILITIES> 29,069
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 87,490
<TOTAL-LIABILITY-AND-EQUITY> 116,577
<SALES> 77,904
<TOTAL-REVENUES> 77,904
<CGS> 24,039
<TOTAL-COSTS> 24,039
<OTHER-EXPENSES> 71,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> (16,476)
<INCOME-TAX> (7,552)
<INCOME-CONTINUING> (8,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,924)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
