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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Clyde Avenue, Mountain View, California 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 967-3300
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 1997 on the Nasdaq National Market was approximately $225,056,000. Shares
of Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1997 was 16,571,067.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference in Parts II
and IV of this Form 10-K to the extent stated herein. Also, certain sections
of the Registrant's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on April 11, 1997 are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Quickturn Design Systems, Inc. ("Quickturn" or the "Company") designs,
manufactures, sells and supports system-level verification solutions for the
design of integrated circuits ("ICs") and electronic systems. The Company's
cycle-based simulation and emulation technologies are designed to improve design
quality and to reduce time-to-market and prototype development costs compared to
traditional verification methodologies. The cycle-based simulation products,
which complement the Company's emulation products, can be used by customers to
verify digital logic designs early in the design process, particularly when
design changes occur several times per day. Later in the design process, when
designs become more stabilized, customers use in-circuit emulation to test the
entire system containing the design and to help identify system-level bugs,
which typically are more difficult to find. The Company was incorporated in
California in July 1987 and reincorporated in Delaware in December 1993. The
Company's principal executive offices are located at 440 Clyde Avenue, Mountain
View, California, 94043, and its telephone number is (415) 967-3300. The
Company's homepage can be located on the Web at http://www.quickturn.com/.
SPEEDSIM MERGER
On February 7, 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 estimates that it will incur direct transaction costs of at least $1.2
million associated with the acquisition, which will be charged to operations
during the quarter ending March 31, 1997. See Note 15 of the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders.
TECHNOLOGY AND PRODUCTS
CYCLE-BASED SIMULATION
The IC design process begins when electronic design engineers create an
initial description of an IC, typically using high level or register transfer
level ("RTL") languages such as VHDL or Verilog. This description is then
debugged using software simulation on standard desktop workstations. The
simulation software creates a mock-up of the logic flow of an IC based on the
RTL description, which is then fed test inputs to determine if the current
design executes instructions as desired.
Once an IC design is deemed reliable at the RTL level, the designer maps
out a physical layout of the transistors and gates comprising the IC. This is
often accomplished using synthesis software which transforms RTL designs into
gate level architecture. Also at the gate level, the design must be tested for
critical operating functionality. Such RTL and gate level tests are typically
run on event-based simulation software, which runs at speeds substantially
below the normal speed of a completed IC. The speed of most event-based
simulation software is typically in the range of tens or hundreds of cycles per
second, while most complex ICs are
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designed to run in the range of one million to hundreds of millions of cycles
per second. Therefore, software simulation testing of a highly complex
design with hundreds of thousands of gates using event-based simulation could
take a substantial period of time. Since a design may need to undergo dozens
of iterations, given the time-to-market urgency in the electronics industry,
the delays associated with event-based simulation for complex IC designs can
be unacceptable to IC designers.
The Company's SpeedSim high performance simulation software uses cycle-
based simulation ("CBS") technology, which is an alternative to traditional
event-based simulation. CBS is specifically designed to overcome the
verification speed limitations of event-based simulation, and may also help
reduce IC design costs by reducing the need for expensive hardware simulation
accelerators.
The Company's SpeedSim cycle-based simulator employs a proprietary
technology called Boolean Dataflow Engine ("BDE") to enhance verification
performance. This performance enhancement is accomplished by having the
cycle-based simulator examine results only at the end of every clock cycle,
therefore eliminating unnecessary calculations. These unnecessary
calculations are inherent in traditional event-based simulation, which is
programmed to examine every active signal that propagates through every
device during a clock cycle. Therefore, the Company's CBS approach may be ten
to one hundred times faster than event-based simulation because CBS focuses
only on the primary task at hand, which is functional verification of chip
design logic. BDE further enhances performance by employing fewer logic
states, typically two (1s and 0s), while full event-based-simulation supports
from four to 28 logic states.
Other enhancements related to BDE technology include:
* Minimal Memory Usage: The SpeedSim product further enhances performance
by utilizing less memory than event-based simulation. Using BDE, engineers can
fit a one million gate design into a 10MB image. Without BDE, the same image
may be typically five to 50 times larger. For very large chip designs, the
reduced memory requirements would allow a design team to speed up verification
by simulating a design running different tests on all of their desktop
workstations in their network at once, instead of on one large server.
* Simultaneous Test: This SpeedSim option allows for up to 32 different
tests to be run simultaneously on one image of a design model using a single
workstation, which can result in a five-fold to ten-fold gain in performance.
* Symmetric MultiProcessing ("SMP"): This feature allows chip designers to
take a single design and divide it into segments. Each segment is then
simulated on different CPUs within the SMP box, thereby creating a much faster
simulation across multiple CPUs compared to a simulation on a single CPU.
* Fast Design Iterations: After a design bug is located and fixed, this
feature provides for fast recompilation, typically within minutes for very large
designs, instead of hours using event-based simulation.
The platforms supported by the SpeedSim product include UNIX workstations
on SUN, HP, DEC, IBM and Intel-compatible PCs running LINUX or Windows/NT.
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EMULATION
Quickturn's System Realizer (TM) emulation system and the new CoBALT
(TM) (Concurrent Broadcast Array Logic Technology) emulation system are used
by electronic design engineers to generate reprogrammable physical
prototypes, or "virtual silicon" (TM) representations, of their electronic
circuit designs. This enables designers to achieve concurrent verification of
the entire target system, including system software and applications, and to
perform iterative design changes prior to actual silicon fabrication. System
Realizer offers a versatile solution for synchronous and asynchronous designs
in the range of 150,000 to six million logic gates. CoBALT provides
verification capabilities for ultracomplex, synchronous designs of up to 8
million logic gates. Both systems share the same software environment,
allowing designers to select the optimum emulation solution for any design
style.
The emulation process begins by the Company's products automatically
accepting logic designs created in the most widely used, commercially
available electronic design automation ("EDA") systems, as well as those
created in the proprietary design environments of selected large customers.
These designs are then processed by the Company's proprietary software on a
commercial workstation. Using information provided by engineers as well as
built-in proprietary algorithms, the software partitions designs into
different blocks of logic which are then automatically mapped into a virtual
silicon implementation. The software also performs logic optimization to best
utilize the available programmable resources in the emulation system. Once
the designs are partitioned, the software defines the interconnection of the
various blocks of logic and the specific routing through the programmable
architecture of the emulation system.
The designs are then downloaded from the commercial workstation to the
emulation system, thereby creating a virtual silicon implementation of the
designs. The virtual silicon is then cabled into the target system in which
the fabricated silicon will ultimately reside. At this time, the target
system can be run just as it would if a fabricated silicon were available.
The target system is then tested by running embedded software, operating
systems and application software. The verification of the target system will
typically run at speeds in the millions of cycles per second range, several
orders of magnitude faster than gate-level simulation, but typically slower
than real operating speeds.
The emulation system includes an integrated logic analyzer and software
debugging tools which enable the engineer to observe the details of the
design behavior at any location within a design. These observation points
may be moved interactively under software control to any other location.
When design problems are discovered, changes are made to the original design.
These design changes are then implemented by the emulation software as
changes to the virtual silicon. The impact of the changes can be determined
quickly in the target system operating environment while the design can still
be easily modified.
Quickturn's products are based on the Company's patented technologies and
proprietary software algorithms which have produced the following core
technologies:
* LOGIC COMPILATION INCLUDING PARTITIONING: the complex software that
segments a large IC design into smaller units which are programmed into the
field programmable gate arrays
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("FPGAs") and programmable memories that constitute the core reprogrammable
components of Quickturn's emulation systems.
* INTERCONNECT ARCHITECTURE: the patented system-level schema for
connection of the reprogrammable components, which is implemented with
Quickturn's proprietary interconnect ICs and placement and routing software.
* LOGIC MAPPING: the software which optimizes the mapping of the design to
be emulated into the basic cells of the FPGAs in the emulation system.
* MEMORY ARCHITECTURE MAPPING: the software which optimizes the use of
programmable memories in the emulation system to represent the memory
architecture of the IC to be emulated.
* INSTRUMENTATION: the fully integrated software and logic analyzer
technology which allows users of Quickturn's emulation systems to observe the
gate level behavior of the virtual silicon, allowing for the assessment of a
design's correctness at this level.
These core technologies maximize the cost effectiveness of the products by
optimizing emulation system capacity and performance and minimizing both the
user's time to emulation and the costs required to verify and debug designs.
Substantially all of the Company's revenue has been derived from the sale
of its verification products, and sales of such products are expected to
continue to account for substantially all of the Company's revenue for the
foreseeable future. To date, the Company's products have been sold to a limited
number of customers. See "---Customers." Accordingly, broad market acceptance
of verification products by existing and new customers is critical to the
Company's future success. The adoption of the Company's verification products
in the design verification process by IC and system designers, particularly
those which have historically relied on other methodologies, generally requires
the adoption of an entirely new method of design verification. While the
Company believes that its verification products offer considerable advantages in
the IC and system design process, there can be no assurance that market
acceptance of those products will continue to grow. Moreover, there can be no
assurance that emulation products will be adopted beyond the high-end emulation
market, which is characterized by complex ICs of hundreds of thousands or, in
some cases, millions of logic gates. The adoption of the Company's verification
products for designing ICs and systems will also depend on the continued
increase in complexity of ICs designed into electronic systems, integration of
the Company's products with other tools for design and verification, importance
of the time-to-market benefits of verification products and industry acceptance
of the need to close the time gap between high level design and silicon
production. Because the market for verification products is new and evolving,
it is difficult to predict with any assurance whether the market for
verification products will continue to expand.
CUSTOMERS
The Company markets its products to customers who design complex ICs and
electronic systems. Early adopters represent the IC and system companies with
the largest verification problems. As the technology has matured, a broader
range of customers has begun to adopt the
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technology, and now the Company's customers include computer, semiconductor,
telecommunications, consumer electronics, networking and multimedia
companies. The Company's customers are in industries characterized by rapid
advances in technology, competitive pressures to develop and introduce new
products in less time and the need for extensive system-level verification
and debugging prior to design implementation.
Microprocessors and microcontrollers with complexity levels of hundreds of
thousands and even millions of gates are applications for which emulation is
considered a critical technology because of the requirement to verify design
compatibility with new and existing software. Typical new users of Quickturn's
verification products are designing custom integrated circuits or ASICs with
30,000 to 100,000 or more logic gates.
A relatively limited number of customers have historically accounted for a
substantial portion of the Company's revenue. The Company expects that sales of
its products to a 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 customers, including reductions due
to market or competitive conditions in the electronics or EDA industry, would
have an adverse effect on the Company's financial condition and results of
operations. Moreover, the Company's ability to increase its sales will depend
in part upon its ability to obtain orders from new customers, as well as the
financial condition and success of its customers and the general economy; there
can be no assurance that such an increase will occur.
CUSTOMER SERVICE AND SUPPORT
The Company provides customers with technical support, training and design
consulting services. The Company believes that a high level of customer service
and support is critical to the adoption of the Company's verification technology
by new users. During the early stages of a customer's first project, the
Company works closely with the project team to ensure a smooth integration of
its verification products into the design process. Quickturn maintains a rapid
response program which is designed to meet customer support issues. For
customers using the Company's verification products on mission-critical
projects, the Company offers expert-user design consulting services through its
Time-to-Market-Engineering Services ("TtME") to provide such expert assistance
to customers. Additionally, substantially all of the Company's customers
currently have maintenance agreements with the Company. The Company generally
warrants its products to be free from defects and to substantially conform to
material specifications for a period of 90 days.
SALES AND MARKETING
The Company markets its products and services primarily through its direct
sales and service force. The Company employs a highly skilled sales force and
application engineering team capable of serving the sophisticated needs of
prospective customers' engineering and management staffs. The sales process is
supported with a broad range of marketing programs which include trade shows,
direct marketing, public relations and customer seminars. From time to time the
Company may enter into joint marketing agreements with EDA companies and other
technology partners to increase market acceptance of the Company's verification
products.
Sales of the Company's products depend, in significant part, upon the
decision of a prospective customer to commence a project for the design and
development of complex ICs and
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systems. In view of the significant amount of time and commitment of capital
involved in the design and development of complex ICs and systems, the
Company may experience delays following initial qualification of the
Company's verification products as a result of delays in commencement of the
project by a customer. For this and other reasons, the Company's
verification products typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort. Lengthy sales
cycles subject the Company to a number of significant risks, including
inventory obsolescence and fluctuations in operating results, over which the
Company has little or no control.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as the timing of customer
development projects and related orders to purchase the Company's verification
products, new product announcements and releases by the Company, and economic
conditions generally and in the electronics industry specifically. Other
factors which could adversely affect the Company's quarterly operating results
in the future include the efficiencies achieved by the Company in managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased sales, customer product delivery requirements and shortages of
components or labor. Many of the Company's customers order on an as-needed
basis and often delay delivery of firm purchase orders until their project
commencement dates are determined, and as a result, backlog at the beginning of
a quarter may not represent a significant percentage of the product sales
anticipated in that quarter. Quarterly revenue and operating results will
therefore depend on the volume and timing of orders received during the quarter,
which are difficult to forecast. Moreover, a significant portion of the
Company's revenue in each quarter generally results from shipments during the
last few weeks of the quarter. The absence of significant backlog and the
concentration of sales at the end of the quarter limit the Company's ability to
plan operating expenses and production and inventory levels. In addition, sales
of individual systems make up a significant percentage of the Company's
quarterly revenue. Therefore, if anticipated shipments in any quarter do not
occur or are delayed, expenditure levels could be disproportionately high as a
percentage of revenue, and the Company's operating results for that quarter
would be adversely affected.
As of February 28, 1997, the Company's direct sales and service force
consisted of 147 technical, administrative and management employees. The
Company has 16 sales and support offices throughout the United States located in
Arizona, Colorado, California (three locations), Florida, Georgia, Illinois,
Massachusetts (two locations), Minnesota, New Jersey, North Carolina, Oregon and
Texas (two locations). Internationally, the Company has six sales and support
offices in London, Munich, Osaka, Paris, Stockholm and Yokohama.
In Japan, the Company serves its customers through its direct sales and
service offices in Yokohama and Osaka. Additionally in Japan, the Company has
a hardware maintenance agreement with D Scan Service Co., Ltd. The Company
utilizes manufacturer's representatives and other selected distributors in
Israel, Japan, Korea, Singapore, Sweden, Taiwan and the U.K.
International sales accounted for approximately 37%, 31% and 26% of the
Company's revenue in 1996, 1995 and 1994, respectively. 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 foreign exchange contracts to
minimize the impact of foreign exchange rate movements on the Company's
operating results. The Company plans to continue to expand its international
sales and distribution channels. However, there can be no assurance that the
Company's products
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will achieve widespread commercial acceptance in international markets in the
future. The Company's future international sales may be subject to
additional risks associated with international operations, including currency
exchange fluctuations, tariff regulations and requirements for export
licenses, which licenses may on occasion be delayed or difficult to obtain.
RESEARCH AND DEVELOPMENT
The Company will continue to invest in research and development to allow
continued innovation in key technology areas, to develop new products and
improve existing products to support its current leadership position in the
verification market.
As of February 28, 1997, the Company's research and development group
consisted of 127 full-time employees. Within the research and development
organization there were 88 employees with advanced degrees, including 17 with
PhD's. Among the technical staff, approximately 70% were involved in software
development and the balance in hardware design. During 1996, 1995 and 1994,
research and development expenses were $18.6 million, $14.9 million and $12.4
million, respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
The EDA industry is characterized by extremely rapid technological change
in both hardware and software development, frequent new product introductions
and evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. The Company's future success will depend
upon its ability to enhance its current lines of verification products and to
design, develop and support its next-generation verification products on a
timely basis that keep pace with technological developments and emerging
industry standards. Next-generation verification products must address
increasingly sophisticated customer needs, all of which require a high level of
expenditures for research and development by the Company. Although the Company
is not currently aware of any material limitations on its ability to develop new
products which are capable of verifying the next generation of ICs, there can be
no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. Moreover,
from time to time, the Company may announce new products or technologies that
have the potential to replace the Company's existing product offerings. There
can be no assurance that the announcement of new product offerings will not
cause customers to defer purchases of existing Company products, which could
adversely affect the Company's results of operations.
MANUFACTURING
The Company's verification products are complex and are used by the
Company's customers in critical development projects which demand a high level
of quality and reliability.
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The Company invests substantial resources to assure the quality and
reliability of its verification products and is required to provide a high
level of service to its customers in the event of a malfunction to minimize
downtime. There can be no assurance that the Company will be able to meet
customer requirements for quality and reliability in the future.
The Company performs final assembly and test of its emulation products in
its Mountain View, California facility. The Company utilizes subcontractors for
all major subassembly manufacturing, including all individual printed circuit
boards and custom integrated circuits. The Company has a testing and
qualification program to ensure that all subassemblies meet the Company's
specifications before going into final assembly and test.
Certain key components used in the Company's emulation products are
presently available from sole or limited sources. The inability to develop
alternate sources for these sole or limited source components or to obtain
sufficient quantities of these components could result in delays or reductions
in product shipments which could adversely affect the Company's operating
results. In particular, the Company currently relies on Xilinx Inc. ("Xilinx")
for its supply of field programmable gate arrays ("FPGAs"). The Company does
not have a long-term supply agreement with Xilinx. If for any reason there were
to be a reduction or interruption of supply of these FPGAs to the Company, the
Company's results of operations would be materially adversely affected.
Although the Company believes that it can obtain FPGAs from alternate sources in
the event of a reduction or interruption of supply from Xilinx, a significant
amount of time would be required to redesign the Company's emulation systems and
software to accommodate an alternate FPGA supplier. In such event, the
Company's operating results could be materially adversely affected. The Company
currently mitigates this risk by maintaining a supply of FPGAs in inventory in
excess of its forecasted requirements; however, there can be no assurance that
this measure will be adequate to alleviate any future supply problems.
The Company's verification products also use a proprietary IC that is
currently manufactured solely by National Semiconductor Corporation, circuit
boards that are currently assembled by two outside contractors and subassemblies
that are manufactured by several third-party vendors. The Company generally
purchases these components pursuant to purchase orders placed from time to time
in the ordinary course of business and has no guaranteed supply arrangements
with any of these source suppliers. Moreover, the manufacture of these
components is extremely complex, and the Company's reliance on the suppliers of
these components exposes the Company to production difficulties and quality
variations that may be experienced by these suppliers. Therefore, the Company's
reliance on its sole and limited source suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, reduced control over pricing, and timely delivery and quality of
acceptable components. While the timeliness and quality of deliveries to date
from such suppliers have been acceptable, there can be no assurance that
problems will not occur in the future. Any prolonged inability to obtain
adequate deliveries, or any other circumstances that would require the Company
to seek alternative sources of supply, could have a material adverse effect on
the Company's operating results and could damage the Company's relationships
with its customers.
Although the Company's customers often forecast projected requirements
considerably in advance of the proposed shipment date, actual orders are
typically not received until shortly before the desired shipment date. As a
result, backlog at the beginning of a period may not represent a significant
percentage of the product sales anticipated for that period. Accordingly, the
Company does not consider backlog to be a significant measure of anticipated
sales for any
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future period. However, the Company partially relies on forecasts to
determine inventory levels and manufacturing schedules.
COMPETITION
The EDA industry is highly competitive and rapidly changing. The Company's
products are specifically targeted at the emerging portion of this industry
relating to advanced verification technology, and to date substantially all of
the Company's revenue has resulted from sales in this segment. The Company
faces significant competition in advanced verification, in addition to
competition from traditional design verification methodologies which rely on the
approach of building and then testing complete system prototypes. The Company
must continue to educate potential customers with respect to the benefits of
emulation and cycle-based simulation in order for such customers to adopt the
Company's advanced verification systems as a complement to standard simulation
tools.
Further, because of the requirement 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 advanced verification
to increase as other companies attempt to introduce their products and product
enhancements. Moreover, the Company competes with established EDA companies
that have longer operating histories, 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. Further, the
Company competes with the design engineers of its existing and potential
customers, who sometimes develop customized prototyping solutions for their
particular needs. 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 declaratory judgment of
noninfringement, invalidity and unenforceability of several of the Company's
patents. Six of the Company's patents are now involved in the dispute, 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. There can be no assurance as to the
outcome of these matters. See "---Item 3. Legal Proceedings." 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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PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on patent, trademark, trade
secret and copyright law to protect its technology, the Company also believes
that factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position.
The Company currently holds 15 U.S. patents, of which one is co-owned,
and has 18 patent applications on file at the U.S. Patent and Trademark
Office. The Company's U.S. patents expire between 2008 and 2014. The Company
also holds six corresponding foreign patents and 24 foreign patent
applications pending. The six foreign patents expire in 2009, except for
one patent that expires in 2105. However, there can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
patent applications, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology, or design around the patents owned by the Company.
The source code for the Company's proprietary software is protected both as a
trade secret and as an unpublished copyrighted work. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
Company generally enters into confidentiality or license agreements with its
employees, distributors and customers, and limits access to and distribution of
its software, documentation and other proprietary information. Nevertheless,
there can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. In addition, litigation has been necessary
in the past to enforce the Company's patents and may be necessary in the future
to enforce the Company's patents and other intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. See "---Competition" and "---Item 3, Legal Proceedings." Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe the proprietary rights
of any third parties, there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) will
not be asserted against the Company or that any such assertions will not
materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company
10
<PAGE>
could incur significant costs with respect to the defense thereof which could
have a material adverse effect on the Company's business, financial condition
or results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms or at
all.
The Company also relies on certain software which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's verification products to perform key
functions. There can be no assurance that these third party software licenses
will continue to be available to the Company on commercially reasonable terms.
The loss of or inability to maintain any of these software licenses could result
in delays or reductions in product shipments until equivalent software could be
identified, licensed and integrated, which would adversely affect the Company's
operating results.
EMPLOYEES
As of February 28, 1997, the Company had a total of 369 employees, of whom
330 were based in the United States and 39 were based overseas. Of the total,
164 were engaged in sales, marketing and related customer support services, 127
were in research and development, 54 were in manufacturing and 24 were in
finance and administration. The Company's performance is substantially
dependent on the performance of its executive officers, some of whom have worked
together for only a short period of time. Furthermore, the loss of the services
of any of its executive officers or other key employees could have a material
adverse effect on the Company. The Company does not maintain key person life
insurance policies on the lives of its key officers or key personnel, all of
whom are important to the Company's future success. The Company's future success
also depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
managerial and technical employees or that it will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability of the Company to attract and retain the necessary
technical personnel in the future could impair the development of new products
and have a material adverse effect upon the Company's business, operating
results and financial condition. None of the Company's employees is represented
by a labor union. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, marketing, manufacturing and
research and development facility is located in five buildings totaling
approximately 126,000 square feet in Mountain View, California that have leases
expiring at various times from November 1998 through June 2002. The Company has
fifteen other domestic sales and service offices throughout the United States.
The Company also leases international sales and service offices in London,
Munich, Osaka, Paris, Stockholm and Yokohama. The Company expects that it will
be able to renew its leases on satisfactory terms. The Company believes that
its existing facilities are adequate for its current needs and that additional
space will be available as needed. However, the Company anticipates moving its
headquarters in late 1997 to larger facilities located in San Jose, California.
11
<PAGE>
ITEM 3. 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. The complaint seeks unspecified damages
and related fees and costs. 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. While the
Company believes that it has meritorious defenses to the claims remaining in the
action, the Company has entered into a Stipulation of Settlement with plaintiffs
in order to conserve legal expenses and management resources. The Company's
contribution to the proposed $2.75 million settlement, net of insurance
proceeds, is not material. The proposed settlement has been preliminarily
approved by the Court but remains subject to the Court's final approval. There
can be no assurance that the Company will in fact succeed in obtaining final
Court approval of the proposed settlement with the plaintiffs. In the event the
Court does not grant final approval of the settlement, the Company will continue
to contest this action vigorously. While the outcome of the action in the
absence of the proposed settlement cannot be predicted with certainty,
management does not believe the outcome will have a material adverse impact on
the Company's financial position or results of operations.
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 of the Mentor emulation products into the U.S. In August 1996,
the ITC ratified the judges's Initial Determination. The Company is
continuing its legal efforts with the ITC to obtain a permanent Exclusion
Order prohibiting the importation of Mentor's emulation products into the
U.S. 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 business advantage. Additionally, Aptix
Corporation recently filed a suit against the Company alleging various
violations of the antitrust laws and unfair competition. The Company does
not believe that these claims are meritorious and plans to mount a vigorous
defense 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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
EXECUTIVE OFFICERS AND VICE PRESIDENTS OF THE COMPANY
The executive officers and vice presidents of the Company and their ages as
of March 1, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Keith R. Lobo . . . . . . . . . . . . . 45 President, Chief Executive Officer and Director
Raymond K. Ostby . . . . . . . . . . . . 49 Vice President, Finance and Administration,
Chief Financial Officer and Secretary
K. C. Chu. . . . . . . . . . . . . . . . 50 Vice President, Software Development
Bernard A. Gilbert . . . . . . . . . . . 40 Vice President, Engineering Operations,
Advanced Simulation Division
Jeffrey K. Jordan . . . . . . . . . . . 52 Vice President, North American Sales
Kevin L. Ladd. . . . . . . . . . . . . . 34 Vice President and Chief Technologist,
Advanced Simulation Division
Alexander M. Levi. . . . . . . . . . . . 39 Vice President, Asia-Pacific Sales
Donald J. McInnis . . . . . . . . . . . 50 Senior Vice President,
Advanced Simulation Division
Harlen Ng. . . . . . . . . . . . . . . . 56 Vice President, Program Development
Stephen P. Sample. . . . . . . . . . . . 45 Vice President, Advanced Development
Dugald H. Stewart. . . . . . . . . . . . 44 Vice President, Manufacturing
Christopher J. Tice. . . . . . . . . . . 37 Vice President, World-Wide Support Services
Tung-sun Tung. . . . . . . . . . . . . . 48 Vice President, Research and Development
Ming Yang Wang . . . . . . . . . . . . . 52 Vice President, Advanced Technology Solutions
Naeem Zafar. . . . . . . . . . . . . . . 39 Vice President, Marketing
</TABLE>
The Company's executive officers and vice presidents are appointed by, and
serve at the discretion of the Board of Directors. Each executive officer and
vice president is a full time employee of the Company. There is no family
relationship among any executive officer, vice president or director of the
Company.
Keith R. Lobo joined the Company in November 1992 as President, Chief
Executive Officer and as a Director. From March 1992 to October 1992, Mr. Lobo
served as a consultant in the venture capital field and was a private investor.
From March 1988 to February 1992, he served as Executive Vice President and
Chief Operating Officer of Chips & Technologies, Inc., a semiconductor supplier
of microcomputer components to the personal computer industry. From August 1981
to March 1988, he served in a variety of positions, most recently as Vice
President of Advanced Products and General Manager of the RISC Microprocessor
Group at LSI Logic Corporation, a supplier of ASICs.
13
<PAGE>
Raymond K. Ostby joined the Company in September 1993 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. From July
1991 to September 1993, he served as Vice President, Finance and Administration
and Chief Financial Officer at Force Computers, Inc., a computer products
company. From June 1985 to July 1991, he served as Vice President, Finance and
Administration and Chief Financial Officer of Atmel Corporation, a manufacturer
of semiconductor products.
K.C. Chu joined the Company in June 1995 as Vice President, Entry
Systems and HDL-ICE Development and has served as Vice President, Software
Development since January 1996. From July 1992 to June 1995, he served as
Director, Sunnyvale Research and Development Lab of Mitsubishi Electric
Research Labs, Inc., a research and development facility, and from May 1990
to June 1992, he served as a Senior Manager, Research and Development at
Mitsubishi Electronics America, Inc., a supplier of semiconductor products.
Bernard A. Gilbert has served as Vice President, Engineering Operations of
the Advanced Simulation Division of the Company from February, 1997. From March
1996 to February 1997 he was Vice President, Engineering Operations at SpeedSim,
Inc., a provider of cycle-based simulation technology, and from March 1985 to
March 1996, he served as Director of Core Technology Research and Development at
ComputerVision Corp., a provider of CAD/CAM software services.
Jeffrey K. Jordan has served as Vice President, North American Sales
since October 1996. From May 1994 to October 1996 he was Eastern Area Sales
Director and from April 1993 to May 1994 he served as Eastern Area Sales
Manager. From August 1989 to April 1993, Mr. Jordan served as Regional
Service Manager at Integrated Measurement Systems, a provider of test station
hardware and software.
Kevin L. Ladd has served as Vice President and Chief Technologist of the
Advanced Simulation Division of the Company from February 1997. From June 1994
to February 1997 he served as Chairman and Vice President of Research and
Development of SpeedSim, Inc. Mr. Ladd was a consulting engineer for ViewLogic
Systems, Inc., a provider of software products used in IC design and simulation
from August 1992 to December 1993. From May 1982 to August 1992 he served in a
variety of positions most recently as Principal Engineer, at Digital Equipment
Corporation, a manufacturer of computer systems and software.
Alexander M. Levi has served as Vice President, Asia-Pacific Sales from
November 1996. Previously, he was Director, Asia Sales from January 1995 to
November 1996. Mr. Levi joined the Company in February 1991 and served as
Account Manager until December 1994.
Donald J. McInnis has served as Senior Vice President, Advanced Simulation
Division of the Company from February, 1997. From June 1994 to February 1997,
he served as President and Chief Executive Officer of SpeedSim, Inc. From May
1990 to February 1994, Mr. McInnis was Vice President and General Manager,
Software Business Unit of ComputerVision Corporation, a provider of CAD/CAM
software services.
Harlen Ng has served as Vice President, Program Development since August
1995. From January 1995 to August 1995, he was Vice President of Systems
Engineering Assurance, and from August 1991 to January 1995, he served as
Director, Engineering Operations for PiE Design Systems ("Pie"), a provider of
emulation systems for system-level verification. From November
14
<PAGE>
1983 to July 1991, Mr. Ng served in a variety of positions at Cadence Design
Systems, Inc., a provider of automation tools used in IC design, most
recently as Director, Customer Support.
Stephen P. Sample co-founded the Company and served as Director, Hardware
Design from its inception in July 1987. In July 1993, he became Vice President,
Hardware Design, and since August 1994 he has served as Vice President, Advanced
Development.
Dugald H. Stewart joined the Company in January 1989 as Director of
Manufacturing, and has served as Vice President, Manufacturing since June 1993.
From August 1979 to January 1989, he served as Director of Manufacturing at KLA
Instruments, Inc., a semiconductor equipment manufacturer.
Christopher J. Tice has served as Vice President, World-Wide Support
Services since March 1995. Previously he was Director, World-Wide Support
Services from June 1993 to March 1995. From November 1991 to June 1993, Mr.
Tice served as Director, Support for PiE. From November 1985 to November
1991, he served as General Manager, Processor Business Group at Weitek, a
provider of enhancement processors and controllers.
Tung-sun Tung has served as Vice President, Research and Development from
January 1996, and as Vice President , Emulation System Development from October
1994 to January 1996. From June 1993 to October 1994, he was Director, Hardware
Design. From October 1991 to June 1993, he served as Director, Manufacturing at
PiE. From April 1988 to October 1991, he was Director, Engineering at NetFRAME
Systems, Inc., a designer and manufacturer of fault tolerant servers.
Ming Yang Wang has served as Vice President, Advanced Technology Solutions
from December 1996, and as Director, Solutions Development from July 1993 to
December 1996. From April 1990 to July 1993, Mr. Wang was Program Manager at
PiE.
Naeem Zafar joined the Company in June 1988 and has served as Vice
President, Marketing since September 1995. From March 1995 to September 1995,
he was Vice President, Technology Strategy and Planning, from December 1994 to
March 1995, he was Director, Advanced Products, and from June 1993 to December
1994, Mr. Zafar was Director, Marketing. From April 1992 to June 1993, he was
Director, Product Marketing, from October 1990 to April 1992, he was Senior
Product Marketing Manager, from April 1989 to October 1990, he was Technical
Marketing Manager, and from June 1988 to April 1989, he was Senior Hardware
Engineer.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 17 of the
Company's 1996 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference to the
section entitled "Financial Highlights" on page 1 of the Company's 1996 Annual
Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 18 through 22 of the Company's 1996 Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated by reference to the
Consolidated Financial Statements, related notes thereto and Report of
Independent Accountants on pages 23 through 37 of the Company's 1996 Annual
Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
With the exception of the information incorporated by reference from the
1996 Annual Report to Stockholders in Parts II and IV of this Form 10-K, the
Company's Annual Report to Stockholders is not to be deemed filed as part of
this Report.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the section entitled
"Proposal No. 1: Election of Directors" in the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders filed with the Commission on March 4,
1997 (the "1997 Proxy Statement"). The information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers and Vice
Presidents of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Officer Compensation" in the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Security Ownership of
Management and Certain Beneficial Owners" in the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this Form 10-K.
1. FINANCIAL STATEMENTS. The following consolidated financial
statements of the Company and the Report of Independent
Accountants are incorporated by reference to pages 23 through
37 of the Company's 1996 Annual Report to Stockholders.
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994
Notes to the Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial
statement schedules of the Company for the years ended
December 31, 1996, 1995 and 1994 are filed as part of this
Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto,
of the Company.
Schedule Title Page
-------- ----- ----
Report of Independent Accountants on S-1
Financial Statement Schedule
II Valuation and Qualifying Accounts S-2
Schedules other than those listed above have been omitted
since they are either not required, not applicable, or the
information is otherwise included.
3. EXHIBITS: The exhibits listed on the accompanying index to
exhibits immediately following the financial statement
schedule are filed as part of, or incorporated by reference
into, this Form 10-K.
(b) REPORT ON FORM 8-K. No reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year ended December 31,
1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 25th day
of March 1997.
QUICKTURN DESIGN SYSTEMS, INC.
By: /s/ RAYMOND K. OSTBY
-------------------------------------------
Raymond K. Ostby,
Vice President, Finance and Administration,
Chief Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Keith R. Lobo and Raymond K. Ostby and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- --------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ KEITH R. LOBO President and Chief Executive Officer March 25, 1997
- --------------------------- (Principal Executive Officer)
Keith R. Lobo
/s/ RAYMOND K. OSTBY Vice President, Finance and March 25, 1997
- --------------------------- Administration, Chief Financial
Raymond K. Ostby Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ GLEN M. ANTLE Chairman of the Board March 25, 1997
- ---------------------------
Glen M. Antle
/s/ RICHARD C. ALBERDING Director March 25, 1997
- ---------------------------
Richard C. Alberding
/s/ FRANK J. CAUFIELD Director March 25, 1997
- ---------------------------
Frank J. Caufield
/s/ MICHAEL R. D'AMOUR Director March 25, 1997
- ---------------------------
Michael R. D'Amour
/s/ YEN-SON (PAUL) HUANG Director March 25, 1997
- ---------------------------
Yen-Son (Paul) Huang
/s/ DR. DAVID K. LAM Director March 25, 1997
- ---------------------------
Dr. David K. Lam
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Quickturn Design
Systems, Inc. has been incorporated by reference in this Form 10-K from page
37 of the 1996 Annual Report to Stockholders of Quickturn Design Systems,
Inc. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index on
page 18 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 16, 1997
S-1
<PAGE>
SCHEDULE II - PURSUANT TO REGULATION S-X RULE 12-09
QUICKTURN DESIGN SYSTEMS, INC.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Deductions Balance
Balance at Additions (Charges at
Beginning (Charges to Against End
Description of Period Expenses) Reserves) of Period
- ----------------------------------------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $ 730 $ 1,110 $ ---- $ 1,840
------- -------- -------- --------
------- -------- -------- --------
Year ended December 31, 1995
Allowance for doubtful accounts $ 1,840 $ ----- $ ---- $ 1,840
------- -------- -------- --------
------- -------- -------- --------
Year ended December 31, 1996
Allowance for doubtful accounts $ 1,840 $ ----- $ ---- $ 1,840
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
S-2
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated January 16, 1997 among the
Company, SpeedSim, Inc. and QT Corporation. (4)
3.1 Certificate of Incorporation of Registrant, as amended. (1)
3.2 Bylaws of Registrant. (1)
4.1 Form of Registrant's Common Stock certificate. (1)
10.1 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers. (1) (2)
10.2 1988 Stock Option Plan and related agreements. (1) (2)
10.3 Key Executive Stock Option Plan and related agreements. (1) (2)
10.4 1993 Employee Qualified Stock Purchase Plan and related agreements.
(1) (2)
10.5 Software License Agreement dated December 18, 1987 between Xilinx, Inc.
and Registrant. (1)
10.6 Leases dated March 17, 1993 between MV 440, Inc. and Registrant. (1)
10.7 Revolving Credit Loan Agreement dated November 30, 1995 between
Comerica Bank-California and Registrant. (6)
10.8 Offer letter dated November 4, 1992 between Keith R. Lobo and
Registrant, as amended. (1) (2)
10.9 1994 Outside Director Stock Option Plan. (3)
10.10 SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan.
(2) (5)
10.11 1996 Supplemental Stock Plan (2) (7)
-i-
<PAGE>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------
11.1 Statement of computation of earnings per share.
13.1 Portions of 1996 Annual Report to Stockholders expressly incorporated
by reference herein.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
24.1 Power of Attorney (see page 19).
27.1 Data Schedule (EDGAR)
__________________________________
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-71022), which became effective on
December 15, 1993. Except as noted, each exhibit listed in this
index is incorporated by reference to the exhibit of the same
number.
(2) Indicates management compensatory plan, contract or arrangement.
(3) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (Reg. No. 33-82452), which became effective on August 5,
1994.
(4) Incorporated by reference from the Registrant's Current Report on Form
8-K filed February 21, 1997.
(5) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (Reg. No. 333-21587), which became effective on
February 11, 1997.
(6) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(7) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (Reg. No. 333-18407), which became effective on
December 20, 1996.
-ii-
<PAGE>
Exhibit 11.1
QUICKTURN DESIGN SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
(in thousands, except per share amount)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Weighted average shares outstanding:
Common stock 13,872 13,359 12,816
Common stock equivalents 1,332 1,246 1,534
--------- -------- --------
Weighted average common shares and equivalents 15,204 14,605 14,350
--------- -------- --------
--------- -------- --------
Net income (loss) $ 12,639 $ 13,083 $ 4,601
--------- -------- --------
--------- -------- --------
Net income (loss) per share (2) $ 0.83 $ 0.90 $ 0.32
--------- -------- --------
--------- -------- --------
</TABLE>
________________
(1) This schedule should be read with Notes 2 and 10 of the Notes to
Consolidated Financial Statements.
(2) There is no difference between primary and fully diluted net income
(loss) per share.
<PAGE>
EXHIBIT 13.1
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AND EMPLOYEE DATA)
<TABLE>
<CAPTION>
For the Fiscal Year 1992 1993 1994 1995 1996
- ------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue $ 25,779 $ 54,865 $ 65,523 $ 81,800 $ 104,370
Net income (loss) (5,467) (5,356) 4,601 * 13,083 ** 12,639
Net income (loss) per share (1.07) (0.63) 0.32 * 0.90 ** 0.83
Total revenue by geographic area
North America 21,858 40,872 48,594 56,107 65,716
Asia-Pacific 3,852 8,940 9,336 16,449 29,920
Europe 69 5,053 7,593 9,244 8,734
--------- --------- --------- --------- ----------
Total $ 25,779 $ 54,865 $ 65,523 $ 81,800 $ 104,370
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
At Year End
- -----------
Working capital $ 11,632 $ 33,927 $ 34,998 $ 43,538 $ 47,205
Total assets $ 25,352 $ 56,199 $ 77,349 $ 92,784 $ 108,853
Long-term debt $ 938 $ 3,487 $ 3,819 $ 3,502 ---
Stockholders' equity $ 15,368 $ 38,296 $ 49,895 $ 65,627 $ 81,786
Employees 122 177 244 272 333
</TABLE>
* The 1995 results include a net year-to-date tax benefit of $3.7 million or
$0.26 per share.
** The 1996 results include a net year-to-date tax benefit of $542,000 or $0.03
per share.
TOTAL REVENUES STOCKHOLDERS' EQUITY WORKING CAPITAL EMPLOYEES
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
1992 $ 25,779 1992 $ 15,368 1992 $ 11,632 1992 122
1993 $ 54,865 1993 $ 38,296 1993 $ 33,927 1993 177
1994 $ 65,523 1994 $ 49,895 1994 $ 34,998 1994 244
1995 $ 81,800 1995 $ 65,627 1995 $ 43,538 1995 272
1996 $104,370 1996 $ 81,786 1996 $ 47,205 1996 333
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
1996 1996 1996 1996 1995 1995 1995 1995
--------- ------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $28,786 $27,151 $25,339 $23,094 $23,000 $21,200 $19,600 $18,000
Cost of revenue 8,934 8,464 7,854 7,131 7,012 6,510 6,013 5,547
--------- ------- ------- -------- -------- -------- ------- -------
Gross profit 19,852 18,687 17,485 15,963 15,988 14,690 13,587 12,453
Operating expenses
Research & development 5,226 4,837 4,408 4,077 4,152 3,872 3,576 3,264
Sales & marketing 8,069 7,987 7,627 7,011 7,004 6,512 6,141 5,782
General & administrative 1,751 1,655 1,604 1,466 1,216 1,232 1,169 1,064
--------- ------- ------- -------- -------- -------- ------- -------
Total operating expenses 15,046 14,479 13,639 12,554 12,372 11,616 10,886 10,110
Operating income 4,806 4,208 3,846 3,409 3,616 3,074 2,701 2,343
Interest and other, net 505 510 467 303 192 225 167 153
--------- ------- ------- -------- -------- -------- ------- -------
Net income before provision
for (benefit from)
income taxes 5,311 4,718 4,313 3,712 3,808 3,299 2,868 2,496
Provision for (benefit from)
income taxes 1,216 1,555 1,421 1,223 (2,778) 825 717 624
--------- ------- ------- -------- -------- -------- ------- -------
Net income $4,095 $3,163 $2,892 $2,489 $6,586 $2,474 $2,151 $1,872
--------- ------- ------- -------- -------- -------- ------- -------
--------- ------- ------- -------- -------- -------- ------- -------
Net income per share $0.26 $0.21 $0.19 $0.17 $0.45 $0.17 $0.15 $0.13
--------- ------- ------- -------- -------- -------- ------- -------
--------- ------- ------- -------- -------- -------- ------- -------
Number of shares used
in per share calculations 15,583 15,228 15,171 14,832 14,735 14,741 14,552 14,390
--------- ------- ------- -------- -------- -------- ------- -------
--------- ------- ------- -------- -------- -------- ------- -------
Market price range:
High $21.63 $15.13 $16.50 $11.50 $11.13 $12.00 $10.38 $12.75
Low $11.75 $11.88 $11.13 $ 9.00 $ 9.00 $8.88 $ 7.88 $ 6.50
- ------------------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF TOTAL REVENUE) Quarter Ended
-----------------------------------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
1996 1996 1996 1996 1995 1995 1995 1995
--------- ------- ------- -------- -------- -------- ------- -------
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 31.0% 31.2% 31.0% 30.9% 30.5% 30.7% 30.7% 30.8%
--------- ------- ------- -------- -------- -------- ------- -------
Gross profit 69.0% 68.8% 69.0% 69.1% 69.5% 69.3% 69.3% 69.2%
Operating expenses
Research & development 18.2% 17.8% 17.4% 17.7% 18.0% 18.3% 18.2% 18.2%
Sales & marketing 28.0% 29.4% 30.1% 30.3% 30.5% 30.7% 31.3% 32.1%
General & administrative 6.1% 6.1% 6.3% 6.3% 5.3% 5.8% 6.0% 5.9%
--------- ------- ------- -------- -------- -------- ------- -------
Total operating expenses 52.3% 53.3% 53.8% 54.3% 53.8% 54.8% 55.5% 56.2%
Operating income 16.7% 15.5% 15.2% 14.8% 15.7% 14.5% 13.8% 13.0%
Interest and other, net 1.7% 1.9% 1.8% 1.3% 0.8% 1.1% 0.8% 0.9%
--------- ------- ------- -------- -------- -------- ------- -------
Net income before provision
for (benefit from)
income taxes 18.4% 17.4% 17.0% 16.1% 16.5% 15.6% 14.6% 13.9%
Provision for (benefit from)
income taxes 4.2% 5.8% 5.6% 5.3% (12.1%) 3.9% 3.6% 3.5%
--------- ------- ------- -------- -------- -------- ------- -------
Net income 14.2% 11.6% 11.4% 10.8% 28.6% 11.7% 11.0% 10.4%
--------- ------- ------- -------- -------- -------- ------- -------
--------- ------- ------- -------- -------- -------- ------- -------
</TABLE>
The Company's common stock is traded on the over-the-counter market on
the Nasdaq National Market under the symbol "QKTN." As of December 31, 1996
there were approximately 209 stockholders of record and an estimated 6,000
additional stockholders who held stock in "street name."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Quickturn Design Systems, Inc. (the "Company") designs, manufactures, sells
and supports products that provide system-level verification solutions for
the design of integrated circuits and electronic systems. The Company
currently derives a substantial majority of its revenue from its System
Realizer product and related maintenance and consulting services. Quickturn's
products serve the needs of IC and systems design engineers in a variety of
markets including computers, workstations and PCs, telecommunications,
semiconductor, microprocesser and multimedia graphics. The Company began
operations in 1987 and commenced shipments in 1989. In 1996, the Company
introduced two new software products, Quest II and HDL-ICE 2.0 to enable
customers to more quickly and easily compile their IC designs.
On February 7, 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 estimates that it will incur direct transaction costs of at
least $1.2 million associated with the acquisition, which will be charged to
operations during the quarter ending March 31, 1997. See Note 15 of the
Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain financial data from the Company's
consolidated statements of operations as a percentage of revenue:
Year Ended December 31,
-----------------------------
1996 1995 1994
-----------------------------
Total revenue 100.0% 100.0% 100.0%
Cost of revenue 31.0% 30.7% 30.9%
-----------------------------
Gross margin 69.0% 69.3% 69.1%
Operating expenses
Research and development 17.8% 18.2% 18.9%
Sales and marketing 29.4% 31.1% 32.4%
General and administrative 6.2% 5.7% 11.6%
-----------------------------
Total operating expenses 53.4% 55.0% 62.9%
Operating income 15.6% 14.3% 6.2%
Interest and other, net 1.7% 0.9% 1.4%
-----------------------------
Net income before provision
for (benefit from) income taxes 17.3% 15.2% 7.6%
Provision for (benefit from) income taxes 5.2% (0.8%) 0.6%
-----------------------------
Net income 12.1% 16.0% 7.0%
-----------------------------
-----------------------------
<PAGE>
TOTAL REVENUE
Total revenue increased by $22.6 million, or 28%, to $104.4 million in 1996
over 1995 compared with an increase of $16.3 million, or 25%, in 1995 over
1994. The total revenue growth in both 1996 and 1995 was primarily
attributable to increased sales of greater emulation capacity. System
Realizer product revenue accounted for 71% and 66% of total revenue in 1996
and 1995, respectively, while previous generation emulation products
accounted for 65% of total revenue in 1994. Maintenance revenue for all
products accounted for 16%, 14% and 13% of total revenue in 1996, 1995 and
1994, respectively. On a price per logic gate basis, both product costs and
the average price for an emulation system with equivalent capacity decreased
due to increased efficiency of reprogrammable system components and lower
component costs.
18
<PAGE>
Domestic revenue (North American sales) grew by 17%, 15% and 19%, while
international revenue grew by 50%, 52% and 21% in 1996, 1995 and 1994,
respectively. International sales accounted for approximately 37%, 31% and
26% of total revenue in 1996, 1995 and 1994, respectively. The increase in
international sales was largely due to revenue growth in the Asia-Pacific
markets, which increased by 82% to $29.9 million in 1996, and by 76% to
$16.4 million in 1995. 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. See Note 2 of the Notes to Consolidated Financial Statements.
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.
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 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.
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 51%, 48% and 46% of total revenue in 1996, 1995 and 1994,
respectively. One customer, Fujitsu, comprised 13% of the Company's total
revenue in 1996, and no customer individually comprised more than 10% of the
Company's total revenue in 1995 and 1994. 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.
The Company recognizes revenue from sales of its emulation products and
services when all
<PAGE>
substantial conditions have been met, including shipment to the customer,
fulfillment of acceptance terms, if any, and completion of all significant
contractual terms. Maintenance revenue is deferred and recognized ratably
over the term of the maintenance agreement, which is typically twelve months.
Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the
time of sale.
GROSS MARGINS
Cost of revenue includes materials, labor and overhead incurred in the
manufacture of emulation systems as well as the cost of providing service and
maintenance. Gross margins were approximately 69% of total revenue in each of
the fiscal years 1996, 1995 and 1994. The Company was able to maintain its
gross margins primarily due to a sufficiently large revenue base over which
to spread fixed costs, and to continued manufacturing efficiencies, somewhat
offset by a decreasing average price 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. Accordingly, 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 to $18.5 million in 1996 compared
to $14.9 million in 1995 and $12.4 million in 1994. These increases were
primarily attributable to increased staffing and equipment costs necessary to
enhance current products and research and development activities for the next
generation emulation products. Research and development expenses as a
percentage of total revenue were approximately 18%, 18% and 19% in 1996, 1995
and 1994, respectively. The Company expects to continue to invest a
significant amount of its resources in research and development.
19
<PAGE>
SALES AND MARKETING
Sales and marketing expenses were $30.7 million in 1996 compared to $25.4
million in 1995 and $21.2 million in 1994. Sales and marketing expenses
increased in each period due to the expansion of the Company's marketing and
sales organizations and higher sales commissions associated with increased
revenue. As a percentage of total revenue, sales and marketing expenses were
approximately 29%, 31% and 32% in 1996, 1995 and 1994, 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 were $6.5 million in 1996 compared to
$4.7 million in 1995 and $7.6 million in 1994. The increase in general and
administrative expenses in 1996 was primarily attributable to increased legal
costs related to a patent infringement lawsuit filed by the Company in
January 1996. See Note 14 of the Notes to Consolidated Financial Statements.
The Company expects general and administrative expenses to increase in 1997
due primarily to continued legal costs associated with the lawsuit. General
and administrative expenses in 1994 included a $3.7 million write-off for bad
debts, consisting of a one-time charge attributed to two customers that
advised the Company in the quarter ended December 31, 1994 of their inability
to meet financial obligations. See Note 2 of the Notes to Consolidated
Financial Statements. General and administrative expenses represented
approximately 6%, 6% and 12% of total revenue in 1996, 1995 and 1994,
respectively.
<PAGE>
OTHER INCOME AND EXPENSE
Interest income increased by $392,000 in 1996 over 1995 due primarily to a
greater average balance of cash and cash equivalents and marketable
securities. Interest expenses decreased $316,000 in 1996 over 1995 due to the
payoff of lease lines used to purchase certain fixed assets and the reduction
of other debt.
PROVISION FOR INCOME TAXES
The provision for federal, state and foreign income taxes was an expense of
$5.4 million in 1996, a benefit of $612,000 in 1995 and an expense of
$401,000 in 1994, representing effective tax rates of 30%, (4.9%) and 8%,
respectively. The effective income tax rate in each year was impacted by a
reduction in the Company's valuation allowance against deferred tax assets of
$1.6 million, $6.8 million and $1.1 million for 1996, 1995 and 1994,
respectively. The effective tax rate was also reduced by the tax benefit
from the Company's foreign sales corporation in 1996 and 1995, and by
utilization of federal and state tax credits in all years.
At December 31, 1996, the Company had federal net operating loss
carryforwards of $2.1 million and federal and state tax credit carryforwards
of $300,000 and $50,000, respectively. A significant portion of the Company's
net operating loss and tax credit carryforwards were acquired in a merger and
are subject to an annual limitation of approximately $1.2 million.
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,
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 to increase as other companies attempt to introduce
emulation 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 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
20
<PAGE>
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 declaratory
judgment of noninfringement, 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
<PAGE>
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 Note 14
of the Notes to Consolidated Financial Statements. 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 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 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 will, in the near term, greatly exceed
any associated increases in revenue which will have an adverse impact on
operating results.
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
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
As of December 31, 1996, the Company had $52.4 million in cash, cash
equivalents and marketable securities. Additionally, the Company had $9.8
million in unsecured revolving bank lines of credit. To date, no funds have
been drawn from the bank lines of credit. The Company's credit agreements
contain certain affirmative and restrictive covenants that are typical of
such commercial lending arrangements. The agreements require, among other
things, that the Company maintain a stipulated tangible net worth, meet
certain financial ratios (quick asset to current liability and debt to
tangible net
<PAGE>
worth), achieve annual profitability targets and maintain quarterly debt
service. The agreements also prohibit, among other things, the Company from
paying cash dividends. See Note 7 of the Notes to Consolidated Financial
Statements.
21
<PAGE>
Net cash provided by operating activities was $20.9 million in 1996, $10.9
million in 1995 and $2.7 million in 1994. The increase in cash provided by
operating activities in 1996 as compared to 1995 was primarily attributable
to an increase in deferred revenue and a significantly smaller increase in
deferred income taxes offset by an increase in inventories. Additionally,
the increase in cash provided by operations in 1995 as compared to 1994 was
primarily attributable to greater net income from operations and a
significantly smaller increase in accounts receivable and inventories in 1995
compared to the increase in accounts receivable and inventories in 1994,
offset by a decrease in accounts payable and accrued liabilities in 1995
compared to an increase in accounts payable and accrued liabilities in 1994.
Net cash used in investing activities was $13.4 million in 1996, as compared
with $500,000 provided by investing activities in 1995, and $32.4 million
used in investing activities in 1994. Net cash used in investing activities
was related primarily to net purchases of marketable securities, and to
acquisitions of property and equipment. The Company expects that investment
levels and net cash used in investing activities will increase in future
periods.
Capital expenditures, including capital leases, were approximately $6.2
million, $7.7 million and $9.3 million in 1996, 1995 and 1994, respectively.
These expenditures were primarily for the expansion of production capacity
and the addition of research and development equipment. While the Company has
no material capital commitments, the Company anticipates that its planned
purchases of capital equipment in 1997 will require additional expenditures
of approximately $11.0 million, a portion of which may be financed with cash
and a portion of which may be financed through capital leases.
The Company believes that its current 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.
22
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
-----------------------------
1996 1995 1994
--------- ---------- --------
Revenue
Product revenue $ 83,259 $ 67,679 $ 55,170
Maintenance and service revenue 21,111 14,121 10,353
--------- ---------- --------
Total revenue 104,370 81,800 65,523
Cost of revenue
Cost of product revenue 25,833 20,752 17,049
Cost of maintenance and service revenue 6,550 4,330 3,199
--------- ---------- --------
Total cost of revenue 32,383 25,082 20,248
--------- ---------- --------
Gross profit 71,987 56,718 45,275
Operating expenses
Research and development 18,548 14,864 12,414
Sales and marketing 30,694 25,439 21,195
General and administrative 6,476 4,681 7,612
--------- ---------- --------
Total operating expenses 55,718 44,984 41,221
Operating income 16,269 11,734 4,054
Interest income 2,126 1,734 1,368
Interest expense (420) (736) (437)
Other, net 79 (261) 17
--------- ---------- --------
Net income before provision
for (benefit from) income taxes 18,054 12,471 5,002
Provision for (benefit from) income taxes 5,415 (612) 401
--------- ---------- --------
Net income $ 12,639 $ 13,083 $ 4,601
--------- ---------- --------
--------- ---------- --------
Net income per share $ 0.83 $ 0.90 $ 0.32
--------- ---------- --------
--------- ---------- --------
Number of shares used in per
share calculations 15,204 14,605 14,350
--------- ---------- --------
--------- ---------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
December 31,
------------------
ASSETS 1996 1995
--------- --------
Current assets
Cash and cash equivalents $ 23,911 $17,216
Marketable securities 10,314 14,181
Accounts receivable, net of allowance for
doubtful accounts of $1,840 in 1996 and 1995 21,537 20,706
Inventories 10,141 7,805
Prepaid expenses and other current assets 2,770 1,895
Deferred income taxes 5,599 5,390
--------- --------
Total current assets 74,272 67,193
Marketable securities 18,198 9,110
Fixed assets, net 11,032 13,003
Deferred income taxes 2,939 2,639
Other assets 2,412 839
--------- --------
Total assets $108,853 $92,784
--------- --------
--------- --------
LIABILITIES
Current liabilities
Current portion of long term debt $ 3,502 $ 3,401
Accounts payable 873 869
Accrued liabilities 14,541 15,847
Deferred revenue 8,151 3,538
--------- --------
Total current liabilities 27,067 23,655
Long term debt -- 3,502
--------- --------
Total liabilities 27,067 27,157
--------- --------
Commitments and contingencies (Notes 9 and 14).
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: Authorized:
2,000,000 shares; Issued and outstanding: no shares -- --
Common stock, $.001 par value: Authorized: 20,000,000
shares; Issued and outstanding: 14,122,558 shares in
in 1996; 13,596,060 shares in 1995 14 14
Additional paid-in capital 75,119 71,507
Unrealized holding gain on marketable securities 10 102
Retained earnings (deficit) 6,643 (5,996)
--------- --------
Total stockholders' equity 81,786 65,627
--------- --------
Total liabilities and stockholders' equity $108,853 $92,784
--------- --------
--------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
24
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Holding Gain (Loss) Retained
----------------------- Paid-in on Marketable Earnings
Shares Amount Capital Securities (Deficit) Total
------------ -------- ----------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1993 12,118,020 $12 $61,964 -- $(23,680) $38,296
Issuance of common stock, less
issuance costs 510,000 1 5,691 -- -- 5,692
Issuance of common stock,
employee stock purchase plan 87,360 -- 598 -- -- 598
Exercise of stock options and warrants 386,687 -- 344 -- -- 344
Tax benefit from option exercises -- -- 700 -- -- 700
Unrealized holding loss on marketable
securities -- -- -- $(336) -- (336)
Net income -- -- -- -- 4,601 4,601
------------ -------- ----------- ------------------- ----------- --------
BALANCES, DECEMBER 31, 1994 13,102,067 13 69,297 (336) (19,079) 49,895
Issuance of common stock,
employee stock purchase plan 158,488 -- 1,091 -- -- 1,091
Exercise of stock options 335,505 1 574 -- -- 575
Tax benefit from option exercises -- -- 545 -- -- 545
Unrealized holding gain on marketable
securities -- -- -- 438 -- 438
Net income -- -- -- -- 13,083 13,083
------------ -------- ----------- ------------------- ----------- --------
BALANCES, DECEMBER 31, 1995 13,596,060 14 71,507 102 (5,996) 65,627
Issuance of common stock,
employee stock purchase plan 198,117 -- 1,452 -- -- 1,452
Exercise of stock options 328,381 -- 1,161 -- -- 1,161
Tax benefit from option exercises -- -- 999 -- -- 999
Unrealized holding loss on marketable
securities -- -- -- (92) -- (92)
Net income -- -- -- -- 12,639 12,639
------------ -------- ----------- ------------------- ----------- --------
BALANCES, DECEMBER 31, 1996 14,122,558 $14 $75,119 $ 10 $ 6,643 $81,786
------------ -------- ----------- ------------------- ----------- --------
------------ -------- ----------- ------------------- ----------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
25
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,639 $ 13,083 $ 4,601
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 8,455 7,880 5,016
Provision for doubtful accounts -- -- 1,110
Write down of inventories 719 244 130
Deferred income taxes (509) (6,814) (1,215)
Changes in current assets and liabilities
Accounts receivable (831) (781) (11,270)
Inventories (3,055) (1,771) (4,472)
Prepaid expenses and other current assets (875) (955) (189)
Accounts payable and accrued liabilities (303) 8 8,915
Deferred revenue 4,613 (35) 65
----------- -------- --------
Net cash provided by operating activities 20,853 10,859 2,691
----------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (6,197) (4,747) (6,133)
Sale of marketable securities 19,931 27,530 44,958
Purchase of marketable securities (25,244) (21,714) (69,993)
Increase in other assets (1,860) (556) (1,269)
----------- -------- --------
Net cash provided by (used in)
investing activities (13,370) 513 (32,437)
----------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from equipment financing -- 1,500 784
Payments of long term debt (3,401) (4,219) (2,697)
Proceeds from stock issuances 2,613 1,666 6,634
----------- -------- --------
Net cash provided by (used in)
financing activities (788) (1,053) 4,721
----------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,695 10,319 (25,025)
Cash and cash equivalents at beginning of period 17,216 6,897 31,922
----------- -------- --------
Cash and cash equivalents at end of period $ 23,911 $ 17,216 $ 6,897
----------- -------- --------
----------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 408 $ 827 $ 421
Income taxes $ 4,338 $ 776 $ 1,044
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITY
Additions to fixed assets through capital
lease obligations $ -- $ 2,994 $ 3,184
Unrealized holding loss (gain) on
marketable securities $ 92 $ (438) $ 336
Tax benefit from stock option exercises $ 999 $ 545 $ 700
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS OF THE COMPANY
Quickturn Design Systems, Inc. (the "Company") designs, manufactures, sells
and supports system-level verification solutions for the design of integrated
circuits and electronic systems. The Company's development and manufacturing
facilities are located in Mountain View, California. The Company's principal
markets are in North America, Asia-Pacific and Europe.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results
could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS
The Company's products are concentrated in the electronic design automation
industry which is highly competitive and rapidly changing. Revenue is
concentrated with a relatively limited number of customers, and supplies for
certain components are concentrated among a few providers. The loss of a
major customer or any reduction in orders by such a customer, the
interruption of certain supplier relationships, significant technological
changes in the industry or customer requirements, the infringement or
expropriation of proprietary intellectual property rights or patents, or the
emergence of a major direct competitor could affect operating results
adversely. In addition, a significant portion of the Company's revenue is
derived from international sales; therefore, fluctuations of the U.S. dollar
against foreign currencies or local economic conditions could adversely
affect operating results.
All marketable securities are classified as available-for-sale and are
carried at fair value. Unrealized gains and losses on marketable securities
classified as available-for-sale, when material, are reported as a separate
component of stockholders' equity. Realized gains and losses on sales of all
such investments are reported in earnings and computed using the specific
identification cost method.
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash
equivalents, marketable securities and accounts receivable.
<PAGE>
The Company sells products to companies in the electronics industry in North
America, Asia-Pacific and Europe. To reduce credit risk, management performs
ongoing credit evaluations of its customers' financial condition. The
Company maintains reserves for potential credit losses on its trade accounts
receivable which are uncollateralized. Historically, except for the quarter
ended December 31, 1994, the Company has not experienced any significant
losses related to individual customers or groups of customers in any
particular industry or geographic area. In addition to the increase of
reserves for doubtful accounts, the Company recorded a $3.7 million write-off
of bad debts related to two customers in the quarter ended December 31, 1994.
The Company maintains its excess cash balances in a variety of financial
instruments such as money market securities in various financial institutions
and securities backed by the United States government. The Company has not
experienced any material losses in any of the instruments it has used for
excess cash balances.
The Company enters into foreign exchange forward contracts to hedge certain
foreign currency denominated receivable balances against changes in foreign
currency exchange rates. Gains and losses on the contracts are included
together with the gains or losses from revaluation of the related
receivables. These contracts require the Company to exchange foreign
currencies for U.S. dollars and generally mature within six months. At
December 31, 1996, the Company had forward exchange contracts outstanding
with a notional value of $2,597,000 and an estimated fair value of $2,602,000.
TRANSLATION OF FOREIGN CURRENCIES
The Company's foreign consolidated subsidiaries are considered to be
extensions of the U.S. operation and the functional currency of the
subsidiaries is the U.S. dollar. Accordingly, foreign entities translate
monetary assets and liabilities at year-end exchange rates while
27
<PAGE>
nonmonetary items are translated at historical rates. Translation gains and
losses related to these subsidiaries are included in income. Income and
expense accounts are translated at the average rates in effect during the
year, except for depreciation and cost of revenue which are translated at
historical rates.
REVENUE RECOGNITION
The Company recognizes revenue from sales of its emulation products and
services when all substantial conditions have been met, including shipment to
the customer, fulfillment of acceptance terms, if any, and completion of all
significant contractual terms. Maintenance revenue is deferred and recognized
ratably over the term of the maintenance agreement, which is typically twelve
months. Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the
time of sale.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as incurred.
<PAGE>
CASH EQUIVALENTS
Investments and deposits with original maturities of three months or less at
the date of purchase are considered to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the note payable and capital lease
obligations approximates fair value. Estimated fair values for marketable
securities (See Note 3) and forward exchange contracts (see Certain Risks and
Concentrations, above) are based on quoted market prices for the same or
similar instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company's inventories include high technology parts and
components that may be specialized in nature or subject to rapid
technological obsolescence. While the Company has programs to minimize the
required inventories on hand and considers technological obsolescence when
estimating required reserves to reduce recorded amounts to market values, it
is reasonably possible that such estimates could change in the near term.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost and are depreciated on a straight-line method
over the estimated useful lives of the assets, typically one to five years.
Leasehold improvements are amortized on a straight-line method over the
shorter of the remaining lease term or the estimated useful life of the
asset, typically three to five years. Amortization of equipment under
capital leases is computed using the straight-line method over the shorter of
the remaining lease term or the estimated useful life of the related asset,
typically three to five years.
ACCRUED WARRANTY
The Company provides an accrual for future warranty costs based on the
historical relationship of revenue to warranty costs incurred.
RECLASSIFICATION
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation. These reclassifications had no impact
on previously reported working capital, operating income or net income.
INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No.109, (SFAS
109), "Accounting for Income Taxes." Under this method, deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, measured at the tax rates
that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
<PAGE>
NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of common stock issuable upon
exercise of stock options and warrants (using the treasury stock method).
FISCAL YEAR-END
Since 1995, for purposes of presentation, the Company has indicated that its
fiscal year ends on December 31, although the Company operates on a 52-week
or 53-week fiscal year, ending on the last Sunday in December. Both 1995 and
1996 were 52-week years.
28
<PAGE>
3 MARKETABLE SECURITIES
At December 31, 1996 and 1995, all marketable securities are classified as
available-for-sale and are summarized as follows:
<TABLE>
<CAPTION>
Marketable securities at December 31, 1996
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Market Cost Unrealized Unrealized Net Unrealized
Value Basis Gains Losses Gains(Losses)
-------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
United States government debt securities $ 6,355 $ 6,364 $ 6 $ (15) $ (9)
Municipal debt securities 17,815 17,800 39 (24) 15
Corporate debt securities 4,342 4,338 5 (1) 4
-------- -------- ---------- ---------- ---------------
$ 28,512 $ 28,502 $ 50 $ (40) $ 10
-------- -------- ---------- ---------- ---------------
-------- -------- ---------- ---------- ---------------
<CAPTION>
Marketable securities at December 31, 1995
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Market Cost Unrealized Unrealized Net Unrealized
Value Basis Gains Losses Gains
-------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
United States government debt securities $ 2,369 $ 2,345 $ 24 $ --- $ 24
Municipal debt securities 11,002 10,987 34 (19) 15
Corporate debt securities 9,920 9,857 74 (11) 63
-------- -------- ---------- ---------- ---------------
$ 23,291 $ 23,189 $ 132 $ (30) $ 102
-------- -------- ---------- ---------- ---------------
-------- -------- ---------- ---------- ---------------
</TABLE>
At December 31, 1996, all marketable debt securities classified as current
have scheduled maturities of less than one year. Marketable debt securities
classified as noncurrent have scheduled maturities of one to three years.
4 INVENTORIES
Inventories comprise:
- ------------------------------------------------------------------------
(IN THOUSANDS) December 31,
-----------------------------
1996 1995
-----------------------------
Raw materials $ 8,431 $ 5,819
Work in process 1,710 1,986
--------- ----------
$ 10,141 $ 7,805
--------- ----------
--------- ----------
<PAGE>
5 FIXED ASSETS
Fixed assets comprise:
- ------------------------------------------------------------------------
(IN THOUSANDS) December 31,
-----------------------------
1996 1995
-----------------------------
Equipment $ 24,429 $ 20,843
Furniture, fixtures and
leasehold improvements 3,598 2,725
Demonstration and rental
equipment 4,829 3,241
--------- ----------
32,856 26,809
Less accumulated depreciation
and amortization (21,824) (13,806)
--------- ----------
$ 11,032 $ 13,003
--------- ----------
--------- ----------
Depreciation and amortization expense amounted to $8,168,000, $6,989,000 and
$4,493,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Fixed assets include equipment under capital leases as follows:
- ------------------------------------------------------------------------
(IN THOUSANDS) December 31,
-----------------------------
1996 1995
-----------------------------
Cost $ 2,302 $ 5,102
Less accumulated amortization (1,313) (2,021)
--------- ---------
$ 989 $ 3,081
--------- ---------
--------- ---------
The equipment under capital leases is pledged as collateral for repayment of
the related lease obligations.
29
<PAGE>
6 ACCRUED LIABILITIES
Accrued liabilities comprise:
- ------------------------------------------------------------------------
(IN THOUSANDS) December 31,
-----------------------------
1996 1995
-----------------------------
Accrued payroll and related
items $ 5,465 $ 5,643
Income taxes payable 6,298 5,702
Other accrued liabilities 2,778 4,502
--------- --------
$ 14,541 $ 15,847
--------- --------
--------- --------
7 BANK BORROWING ARRANGEMENTS
The Company has unsecured revolving lines of credit totaling $9,800,000 which
provide for borrowings through June 1, 1997. Borrowings under these
agreements bear interest at the banks' prime rate (8.25% at December 31,
1996). The agreements are subject to certain restrictive covenants which
include achieving annual profitability, and meeting certain financial ratios
and minimum tangible net worth requirements. The agreements also prohibit the
payment of cash dividends. To date, no funds have been drawn against the
lines of credit.
<PAGE>
8 LONG TERM DEBT
CAPITAL LEASE OBLIGATIONS
The Company has leases totaling $2,302,000 at interest rates varying from
8.4% to 9.8%. The Company's lease obligations under the leases were
collateralized by restricted deposits at December 31, 1996 and 1995 of
$85,000 and $106,000, respectively, which are included in other assets.
Minimum future lease payments for the year ending December 31, 1997, under
all equipment lease arrangements, are $2,441,000, of which $139,000
represents interest.
NOTE PAYABLE
At December 31, 1996, the Company had an uncollateralized note payable of
$1,200,000. The note had an original principal balance of $3,000,000 and
bears interest at 4% per annum, payable quarterly.
9 COMMITMENTS
The Company leases its operating facilities under noncancellable operating
leases with terms greater than one year. At December 31, 1996, future
minimum rent payments under these leases are as follows:
Year ending December 31,
- ------------------------------------------------------------------
(IN THOUSANDS)
1997 $ 2,614
1998 4,075
1999 3,840
2000 3,368
2001 3,157
Thereafter 8,310
---------
$ 25,364
---------
---------
Rent expense related to the facility and various equipment leases was
$1,561,000, $1,337,000 and $1,118,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
<PAGE>
10 STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
As of December 31, 1996 the Company has reserved 3,723,713 common shares for
issuance under various stock option plans. Except for the 1994 Outside
Director Stock Option Plan, which provides for automatic grants to
non-employee directors, the Board of Directors may, under these plans, issue
incentive stock options to employees and nonstatutory stock options to
employees or paid consultants of the Company at prices no less than fair
market value for incentive and 85% of fair market value for nonstatutory
stock options. The options are exercisable at times and in increments as
specified by the Board of Directors. Options generally vest over four years
and expire ten years from date of grant. Options are exercisable prior to
vesting, however such unvested shares are subject to repurchase by the
Company at their original cost. At December 31, 1996, there were 375 shares
subject to repurchase.
30
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 450,000 shares of common stock for issuance under
the Employee Stock Purchase Plan ("ESPP"). Shares are purchased through
employees' payroll deductions at exercise prices equal to 85% of the lesser
of the fair market value of the Company's common stock at either the first
day of an offering period or the last day of such offering period. Shares
issued under the ESPP in 1996, 1995 and 1994 were 198,117, 158,488 and 87,360
respectively.
WARRANTS
At December 31, 1996, warrants to purchase 474,059 shares of common stock
were outstanding which may be exercised at prices ranging from $6.98 to
$30.00 per share. The warrants expire over periods ranging from 1 to 5 years.
<PAGE>
<TABLE>
<CAPTION>
Information with respect to activity under these plans is set forth below:
- ----------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Outstanding Options
-----------------------------------------------------------------------------
Shares
Available Options Number Price Aggregate Weighted Avg
for Grant Exercised of Shares Per Share Price Exercise Price
----------- --------- --------- ------------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 446,856 295,350 2,119,953 $ 0.26 - $ 12.00 $ 6,351 $ 3.00
Additional shares reserved 250,000 --- --- --- --- ---
Options granted (1,161,900) --- 1,161,900 $ 6.13 - $ 14.75 9,372 $ 7.89
Options exercised --- 381,996 (381,996) $ 0.26 - $ 9.00 (344) $ 0.90
Options terminated 672,069 --- (672,069) $ 0.30 - $ 14.75 (6,737) $ 10.03
Options retired --- --- (33,600) $ 0.64 - $ 6.30 (123) $ 3.66
----------- --------- --------- ----------
Balance, December 31, 1994 207,025 677,346 2,194,188 $ 0.26 - $ 13.25 8,519 $ 3.62
Additional shares reserved 1,000,000 --- --- --- --- ---
Options granted (742,585) --- 742,585 $ 7.00 - $ 11.63 6,314 $ 8.76
Options exercised --- 336,401 (336,401) $ 0.26 - $ 10.38 (575) $ 1.73
Options terminated 314,217 --- (314,217) $ 0.30 - $ 11.63 (1,932) $ 6.15
Options repurchased 896 --- --- $ 0.30 - $ 0.50 --- $ 0.36
Options retired --- --- (13,497) $ 0.64 - $ 6.30 (38) $ 2.82
----------- --------- --------- ----------
Balance, December 31, 1995 779,553 1,013,747 2,272,658 $ 0.30 - $ 13.25 12,288 $ 5.40
Additional shares reserved 1,000,000 --- --- --- --- ---
Options granted (1,199,400) --- 1,199,400 $ 9.25 - $ 19.00 15,006 $ 12.53
Options exercised --- 328,381 (328,381) $ 0.30 - $ 11.63 (1,161) $ 3.54
Options terminated 355,891 --- (355,891) $ 0.50 - $ 13.25 (3,294) $ 9.51
Options retired --- --- (117) $ 0.64 - $ 0.64 --- $ 0.64
----------- --------- --------- ----------
Balance, December 31, 1996 936,044 1,342,128 2,787,669 $ 0.30 - $ 19.00 $22,839 $ 8.19
----------- --------- --------- ------------------ ---------- ---------------
----------- --------- --------- ------------------ ---------- ---------------
</TABLE>
At December 31, 1996 and 1995, vested options to purchase 1,183,030 and
1,016,615 shares respectively were unexercised.
In July 1994, the Board of Directors offered to all employees the opportunity
to cancel outstanding stock options with exercise prices in excess of $6.13
per share (the fair market value of the common stock at that time) in
exchange for options exercisable at $6.13 per share which were otherwise
identical to the cancelled options except for a one-year extension of the
original vesting term. Options to purchase 562,025 shares of common stock at
original exercise prices ranging from $8.00 to $14.75 per share were
exchanged and are included above as 1994 grants and terminations.
31
<PAGE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------
Number Weighted Average Weighted Average Number Weighted Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life (Years) Price at 12/31/96 Price
- ------------------- ----------- ------------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - $ 4.00 687,581 5.57 $ 1.58 687,543 $ 1.58
$ 6.00 - $ 9.00 645,320 7.44 $ 6.65 366,050 $ 6.57
$ 9.25 - $ 11.63 591,068 8.86 $10.37 113,604 $ 9.90
$ 12.13 - $ 19.00 863,700 9.70 $13.12 15,833 $13.27
----------- -----------
$ 0.30 - $ 19.00 2,787,669 7.98 $ 8.19 1,183,030 $ 4.08
----------- -----------
----------- -----------
</TABLE>
The following information concerning the Company's stock option and employee
stock purchase plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company accounts for such plans in
accordance with APB No. 25 and related interpretations.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995:
Group A Group B
------------- -----------
Risk-free interest rates 6.30% 6.22%
Expected life 5 years 4 years
Volatility 0.70 0.70
Dividend yield --- ---
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B
represents all other option holders, virtually all of whom are employees.
This group tends to exercise earlier in the vesting period.
The weighted average fair value of those options granted in 1996 and 1995 was
$7.73 and $5.18, respectively.
<PAGE>
The Company has also estimated the fair value for the purchase rights issued
under the Company's Employee Stock Purchase Plan, under the Black-Scholes
valuation model using the following assumptions for 1996 and 1995:
Risk-free interest rates 5.74% - 6.01%
Expected life 1.25 years
Volatility 0.70
Dividend yield ---
The weighted average fair value of those purchase rights granted in 1996 and
1995 was $5.15 and $3.74, respectively.
The following proforma income information has been prepared following the
provisions of SFAS No. 123:
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995
---------- ----------
Net income - proforma $ 10,953 $ 12,313
Net income per share - proforma $ 0.72 $ 0.84
The above proforma effects on income may not be representative of the effects
on net income for future years as option grants typically vest over several
years and additional options are generally granted each year.
32
<PAGE>
11 INCOME TAXES
Income before taxes and details of the income tax provision consist of the
following:
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- -------- ---------
Domestic income before taxes $17,058 $12,135 $ 4,731
Foreign income before taxes 996 336 271
--------- -------- ---------
Income before taxes $18,054 $12,471 $ 5,002
--------- -------- ---------
--------- -------- ---------
Income tax provision:
Federal:
Current payable (net of benefit
from utilization of net operating
loss carryforwards of $1,292,
$1,753 and $2,975 for 1996, 1995
and 1994, respectively) $ 4,749 $ 5,279 $ 1,251
Deferred (464) (5,579) (1,129)
--------- -------- ---------
4,285 (300) (122)
State:
Current payable 600 749 160
Deferred (45) (1,235) (86)
--------- -------- ---------
555 (486) (74)
Foreign:
Current payable 575 174 205
Deferred --- --- ---
--------- -------- ---------
575 174 205
--------- -------- ---------
Income tax provision (benefit) $ 5,415 $ (612) $ 401
--------- -------- ---------
--------- -------- ---------
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes are as follows:
- -------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
Income tax at statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal benefit 5.9% 5.9% 3.0%
Change in valuation allowance (8.8%) (54.3%) (27.4%)
Benefit of foreign sales corporation (3.3%) (0.4%) ---
Nondeductible expenses 0.6% 2.0% 1.4%
Foreign taxes 1.5% 3.9% 0.5%
Research and development and business
tax credits (3.8%) (1.9%) (6.1%)
Other 2.9% 4.9% 2.6%
-------- -------- --------
Effective tax rate 30.0% (4.9%) 8.0%
-------- -------- --------
-------- -------- --------
The effective income tax rate in each year was impacted by a reduction in the
Company's valuation allowance against deferred tax assets of $1.6 million,
$6.8 million and $1.1 million for 1996, 1995 and 1994, respectively.
33
<PAGE>
The components of the net deferred tax assets are:
- -------------------------------------------------------------------------------
(IN THOUSANDS)
December 31,
------------------------
1996 1995
--------- ---------
Accrued vacation and bonus $ 283 $ 499
Reserve for inventories 1,793 1,422
Depreciation expense 1,864 1,367
Deferred revenue 970 305
Other liabilities and reserves 2,393 3,741
State taxes, net of federal benefit 118 154
Net operating loss carryforward 767 1,710
Research and development and business credits 350 419
Valuation allowance --- (1,588)
--------- ---------
Net deferred tax asset $ 8,538 $ 8,029
--------- ---------
--------- ---------
No provision has been made for federal, state or foreign taxes that may
result from future remittances of undistributed earnings of foreign
subsidiaries ($649,000 at December 31, 1996) because it is expected that such
earnings will be reinvested in these foreign operations. It is not practical
to estimate the amount of taxes that might be payable on the eventual
remittance of such earnings.
The Company's income taxes currently payable for both federal and state
purposes have been reduced by the tax benefit derived from the disqualifying
dispositions of incentive stock options and the exercise of nonqualified
stock options. The benefit, which totalled $999,000 in 1996 and $545,000 in
1995 was credited directly to additional paid-in capital.
At December 31, 1996, the Company had approximately $2,100,000 of combined
net operating losses and federal and state tax credit carryforwards of
$300,000 and $50,000, respectively. The carryforwards expire in 2005 through
2010, if not utilized. A significant portion of the Company's net operating
loss and tax credit carryforwards is subject to an annual limitation of
approximately $1,200,000.
<PAGE>
12 BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the
development, manufacture, sales and support of system-level verification
solutions for the design of integrated circuits and electronic systems.
The Company's top ten customers represented 51%, 48% and 46% of total revenue
for the years ended December 31, 1996, 1995 and 1994, respectively. In the
year ended December 31, 1996, one customer, Fujitsu, comprised 13% of the
Company's total revenue, and in the years ended December 31, 1995 and 1994,
no customer individually comprised more than 10% of the Company's total revenue.
The Company markets its products to customers in North America, Asia-Pacific
and Europe and offers technical support, design consulting services,
training, hardware maintenance and software upgrades to its customers.
Products and services are marketed through a direct sales force in North
America, Japan and Europe. The Company also maintains distributorship
relationships in Israel, Korea, Singapore and Taiwan.
Revenue information by geographic region is as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Year Ended December 31,
----------------------------------------
1996 1995 1994
--------- --------- ---------
North America $ 65,716 $ 56,107 $ 48,594
Asia-Pacific 29,920 16,449 9,336
Europe 8,734 9,244 7,593
--------- --------- ---------
$104,370 $ 81,800 $ 65,523
--------- --------- ---------
--------- --------- ---------
Identifiable assets of foreign operations are not significant. The net
income for all periods presented are derived primarily from the Company's
North American operations.
34
<PAGE>
13 EMPLOYEE BENEFIT PLANS
The Company maintains 401(k) savings plans to provide retirement benefits
through tax deferred salary deductions for all its employees. The Company
may make discretionary contributions as determined by the Board of Directors,
which cannot exceed a percentage of the annual aggregate salaries of those
employees eligible to participate. The Company has made total contributions
to the plans of $394,000 for the year ended December 31, 1996, and none for
the years ended December 31, 1995 and 1994.
<PAGE>
14 CONTINGENCIES
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. The complaint seeks unspecified
damages and related fees and costs. 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. While the Company believes that it has meritorious defenses to the
claims remaining in the action, the Company has entered into a Stipulation of
Settlement with plaintiffs in order to conserve legal expenses and management
resources. The Company's contribution to the proposed $2.75 million
settlement, net of insurance proceeds, is not material. The proposed
settlement has been preliminarily approved by the Court but remains subject
to the Court's final approval. There can be no assurance that the Company
will in fact succeed in obtaining final Court approval of the proposed
settlement with the plaintiffs. In the event the Court does not grant final
approval of the settlement, the Company will continue to contest this action
vigorously. While the outcome of the action in the absence of the proposed
settlement cannot be predicted with certainty, management does not believe
the outcome will have a material adverse impact on the Company's financial
position or results of operations.
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
("Meta") of France, a subsidiary of Mentor Graphics Corporation ("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 Graphic's emulation products 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
of the Mentor emulation products into the U.S. In August 1996, the ITC
ratified the judge's Initial Determination. The Company is continuing its
legal efforts with the ITC to obtain a Permanent Exclusion Order stopping the
importation of Mentor's emulation products into the U.S. The Company also is
engaged in a Federal District Court case 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 business advantage.
Additionally, Aptix Corporation recently filed a suit against the Company
alleging various violations of the antitrust laws and unfair competition.
The Company does not believe these claims are meritorious and plans to mount
a vigorous defense against them. The outcome of these actions cannot be
predicted with certainty.
<PAGE>
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.
35
<PAGE>
15 SUBSEQUENT EVENT
On February 7, 1997, the Company acquired SpeedSim, Inc. ("SpeedSim"), a
provider of cycle-based simulation software for the verification of digital
logic designs (the "SpeedSim Merger"). The Company purchased all of the
outstanding capital stock and assumed all of the outstanding stock options of
SpeedSim, a privately held company, for an aggregate of approximately 2.8
million shares of Quickturn common stock. The Company estimates that it will
incur direct transaction costs of at least $1.2 million associated with the
acquisition, which will be charged to operations during the quarter ending
March 31, 1997. The acquisition was accounted for as a pooling of interests,
and accordingly, historical financial data in future reports of the Company
will be restated to include SpeedSim data. The following unaudited pro forma
data summarizes the combined results of operations of the Company and
SpeedSim for the years presented except for 1994, which had an immaterial pro
forma impact on results of operations and net income per share:
Year Ended December 31,
(unaudited pro forma)
(AMOUNTS IN THOUSANDS EXCEPT
PER SHARE DATA)
----------------------------
1996 1995
-------- --------
Total revenue $109,578 $ 82,442
Net income $ 14,131 $ 12,478
Net income per common share: $ 0.79 $ 0.74
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Quickturn Design Systems, Inc.
Mountain View, California
We have audited the accompanying consolidated balance sheets of Quickturn
Design Systems, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the consolidated financial position
of Quickturn Design Systems, Inc. as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
January 16, 1997
37
<PAGE>
Exhibit 21.1
QUICKTURN DESIGN SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
The following companies are subsidiaries of the Registrant:
1. Quickturn Design Systems GmbH
2. Quickturn Design Systems S.A.R.L.
3. Quickturn Design Systems Ltd.
4. Quickturn Design Systems K.K.
5. QDS Sweden AB
6. SpeedSim, Inc. (the Company's Advanced
Simulation Division)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8, No. 33-72970, No. 33-82452, No. 33-93092, No. 333-18407 and No.
333-21587) pertaining to the 1988 Stock Option Plan, 1990 Stock Option Plan,
1993 Employee Qualified Stock Purchase Plan, 1992 Key Executive Stock Option
Plan, 1994 Outside Director Stock Option Plan, 1996 Supplemental Stock Plan
and SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan, and in
the Registration Statement (Form S3, No. 333-22907) of our report dated
January 16, 1997, on our audits of the consolidated financial statements and
financial statement schedule of Quickturn Design Systems, Inc. as of December
31, 1996 and 1995, and for the three years in the period ended December 31,
1996, which report is incorporated by reference in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
March 26, 1997
<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-K FOR THE
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