-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WKjbVhvrIv5isPxrvssJ8ZgUjgK2LG1qcuyAHJcyHgvnZ3hApZG9xCN32VqG4mra G4IxQPfrycV0aHuEaTca7A== 0001047469-98-031073.txt : 19980814 0001047469-98-031073.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-031073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUICKTURN DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000914252 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770159619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22738 FILM NUMBER: 98685757 BUSINESS ADDRESS: STREET 1: 55 W TRIMBLE ROAD CITY: SAN JOSE STATE: CA ZIP: 951311013 BUSINESS PHONE: 4089146000 MAIL ADDRESS: STREET 1: 55 W TRIMBLE ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1013 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission File Number : 0-22738 QUICKTURN DESIGN SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0159619 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 W. Trimble Road, San Jose, California 95131 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (408) 914-6000 NO CHANGE --------------------------------------------------------- (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of July 31, 1998 there were 17,922,518 shares of the registrant's common stock outstanding. This quarterly report on Form 10-Q contains 23 pages, of which this is page 1. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUICKTURN DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Revenue Product revenue $ 14,859 $ 18,962 $ 29,741 $ 34,489 Maintenance and service revenue 9,088 7,476 17,771 13,351 --------- --------- --------- --------- Total revenue 23,947 26,438 47,512 47,840 Cost of revenue Cost of product revenue 10,575 7,492 15,666 12,773 Cost of maintenance and service revenue 2,981 900 5,994 2,453 --------- --------- --------- --------- Total cost of revenue 13,556 8,392 21,660 15,226 --------- --------- --------- --------- Gross profit 10,391 18,046 25,852 32,614 Operating expenses Research and development 6,479 5,884 12,464 11,671 Sales and marketing 9,833 8,787 19,104 17,321 General and administrative 3,699 2,849 6,656 5,357 Merger related charges --- --- --- 1,200 --------- --------- --------- --------- Total operating expenses 20,011 17,520 38,224 35,549 --------- --------- --------- --------- Operating income (loss) (9,620) 526 (12,372) (2,935) Other income, net 789 518 1,487 910 --------- --------- --------- --------- Net income (loss) before provision for (benefit from) income taxes (8,831) 1,044 (10,885) (2,025) Provision for (benefit from) income taxes (3,826) 324 (4,463) (627) --------- --------- --------- --------- Net income (loss) $ (5,005) $ 720 $ (6,422) $ (1,398) --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net income (loss) per share $ (0.28) $ 0.04 $ (0.36) $ (0.08) --------- --------- --------- --------- --------- --------- --------- --------- Number of shares used in basic earnings per share calculation 17,804 16,839 17,754 16,701 --------- --------- --------- --------- --------- --------- --------- --------- Number of shares used in diluted earnings per share calculation 17,804 18,025 17,754 16,701 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. -2- QUICKTURN DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (AMOUNTS IN THOUSANDS) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) $ (5,005) $ 720 $ (6,422) $ (1,398) Other comprehensive income (loss) Foreign currency translation adjustment (239) 487 (503) (75) -------- -------- -------- -------- Unrealized gain (loss) on securities Unrealized holding gain (loss) arising during period (9) 131 (16) (7) Less: reclassification adjustment for gain included in net loss --- --- (9) --- -------- -------- -------- -------- Net unrealized gain (loss) on securities (9) 131 (25) (7) -------- -------- -------- -------- Total other comprehensive income (loss) (248) 618 (528) (82) -------- -------- -------- -------- Comprehensive income (loss) $ (5,253) $ 1,338 $ (6,950) $ (1,480) -------- -------- -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. -3- QUICKTURN DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) June 30, December 31, 1998 1997 ---------- --------- ASSETS (unaudited) Current assets Cash and cash equivalents $ 18,034 $ 14,589 Marketable securities 18,995 18,219 Accounts receivable, net of allowance for doubtful accounts of $1,840 in 1998 and 1997 16,203 31,709 Inventories 5,008 10,899 Prepaid expenses and other current assets 4,134 4,324 Deferred income taxes 8,697 8,697 ---------- --------- Total current assets 71,071 88,437 Marketable securities 21,568 20,326 Fixed assets, net 14,034 11,118 Deferred income taxes 8,029 8,029 Other assets 1,344 1,282 ---------- --------- Total assets $ 116,046 $ 129,192 ---------- --------- ---------- --------- LIABILITIES Current liabilities Short term debt $ 715 $ 1,095 Accounts payable 3,672 6,231 Accrued liabilities 15,584 20,351 Deferred revenue 10,191 9,617 ---------- --------- Total current liabilities 30,162 37,294 ---------- --------- Total liabilities 30,162 37,294 ---------- --------- STOCKHOLDERS' EQUITY Common stock, $.001 par value: Authorized: 40,000,000 shares; Issued and outstanding: 17,903,336 shares in 1998; 17,606,006 shares in 1997 18 18 Additional paid-in capital 92,525 91,122 Deferred compensation (419) (573) Retained earnings (4,526) 1,896 Accumulated other comprehensive loss (1,093) (565) Treasury stock at cost (85,000 shares in 1998; none in 1997) (621) --- ---------- --------- Total stockholders' equity 85,884 91,898 ---------- --------- Total liabilities and stockholders' equity $ 116,046 $ 129,192 ---------- --------- ---------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- QUICKTURN DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Six Months Ended June 30, ------------------------ 1998 1997 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (6,422) $ (1,398) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 3,345 3,436 Amortization of deferred compensation 71 97 Gain on sale of marketable securities (9) --- Changes in current assets and liabilities Accounts receivable 15,506 1,332 Inventories 5,891 (4,593) Prepaid expenses and other current assets 190 589 Accounts payable and accrued liabilities (7,326) (1,591) Deferred revenue 574 241 ---------- --------- Net cash provided by (used in) operating activities 11,820 (1,887) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of fixed assets (6,161) (2,066) Sale of marketable securities 12,029 8,055 Purchase of marketable securities (14,063) (13,480) Purchase of Arkos --- (5,000) Increase (decrease) in other assets (162) 1,157 ---------- --------- Net cash used in investing activities (8,357) (11,334) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of debt (380) (1,062) Proceeds from stock issuances 1,486 1,593 Repurchase of treasury shares (621) --- ---------- --------- Net cash provided by financing activities 485 531 ---------- --------- Effect of exchange rates on cash and cash equivalents (503) (76) Net increase (decrease) in cash and cash equivalents 3,445 (12,766) Cash and cash equivalents at beginning of year 14,589 25,790 ---------- --------- Cash and cash equivalents at end of period $ 18,034 $ 13,024 ---------- --------- ---------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 32 $ 172 Income taxes $ 566 $ 2,384 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized holding losses on marketable securities $ 16 $ 7 Accrued costs related to Arkos purchase $ --- $ 2,000 Common stock and warrants issued in Arkos purchase $ --- $ 9,500
The accompanying notes are an integral part of these consolidated financial statements. -5- QUICKTURN DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated financial statements are unaudited (except for the balance sheet information as of December 31, 1997, which is derived from the Company's audited financial statements) and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1997 Annual Report to Stockholders. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results for the entire fiscal year ending December 31, 1998, or any future interim period. 2. INVENTORIES Inventories comprise:
June 30, December 31, (IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- (UNAUDITED) Raw materials $ 4,043 $ 6,780 Work in process 965 4,119 -------- --------- $ 5,008 $ 10,899 -------- --------- -------- ---------
In the second quarter of 1998, the Company incurred an inventory obsolescence charge of $5.7 million in connection with the introduction of its Mercury-TM- Design Verification System. 3. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year presentation. 4. RECENT ACCOUNTING PRONOUNCEMENT In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). This statement delineates the accounting for software product and maintenance revenues. It supersedes Statement of Position 91-1, "Software Revenue Recognition," and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company has evaluated the -6- requirements of SOP 97-2, as amended by Statement of Position 98-4, "Deferral of the Effective Date of Provisions of SOP 97-2, Software Revenue Recognition," and believes its current revenue recognition policy is in compliance with the terms of the pronouncements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheets and measure those instruments at fair value. This statement becomes effective for the Company for fiscal years beginning after December 15, 1999. The Company is evaluating the requirements of SFAS 133 and the effects, if any, on the Company's current reporting and disclosures. 5. STOCK REPURCHASE PROGRAM In April 1998, the Board of Directors authorized the repurchase of shares of the Company's common stock, at management's discretion, for total expenditures of up to $10 million. Shares repurchased under this program are expected to be used for issuance upon exercise of employee stock options previously granted or to be granted in the future under the Company's employee stock plans, thereby reducing the potential dilution that might otherwise result from such exercises. The Company's repurchases of shares of common stock are recorded as "Treasury stock at cost" and result in a reduction of "Stockholders' Equity." As of June 30, 1998, 85,000 shares of common stock at an average per share cost of $7.312 had been repurchased under this Stock Repurchase Program. 6. STOCK OPTION REPRICING In June 1998, the Company offered employees the right to cancel certain outstanding stock options at original exercise prices and receive new options with a new exercise price. The new exercise price is $7.438 per share, based on the closing price of the common stock on the last trading day prior to the date individual employees accepted the repricing offer. Options to purchase a total of 1,546,503 shares at original exercise prices ranging from $7.813 to $19.000 per share were cancelled and new options to purchase an equivalent number of shares were issued in June 1998. Vesting under the new options commences on the original vesting dates, and occurs over a new vesting period of five years. Furthermore, the Company amended its stock option plans to require stockholders' approval of future repricings of stock options. -7- 7. EARNINGS PER SHARE Basic and diluted earnings per share were calculated as follows:
Three Months Ended June 30, ---------------------------------------------------------------------------------- 1998 1997 (UNAUDITED) ------------------------------------------ -------------------------------------- (AMOUNTS IN THOUSANDS Net Per-share Net Per-share EXCEPT PER-SHARE DATA) Loss Shares Amount Income Shares Amount - --------------------------------------------------------------------------------------- -------------------------------------- Net income (loss) $ (5,005) $ 720 BASIC EPS Income (loss) available to ---------- -------- common stockholders (5,005) 17,804 (0.28) 720 16,839 0.04 EFFECT OF DILUTIVE SECURITIES Stock options --- 1,186 DILUTED EPS Income (loss) available to ---------- ------- -------- ------- common stockholders $ (5,005) 17,804 $ (0.28) $ 720 18,025 $0.04 ---------- ------- -------- -------- ------- ------ ---------- ------- -------- -------- ------- ------ Six Months Ended June 30, ---------------------------------------------------------------------------------- 1998 1997 (UNAUDITED) ------------------------------------------ -------------------------------------- (AMOUNTS IN THOUSANDS Net Per-share Net Per-share EXCEPT PER-SHARE DATA) Loss Shares Amount Loss Shares Amount - --------------------------------------------------------------------------------------- -------------------------------------- Net loss $ (6,422) $ (1,398) BASIC AND DILUTED EPS Loss available to ---------- --------- common stockholders $ (6,422) 17,754 $ (0.36) $ (1,398) 16,701 $ (0.08) ---------- ------- --------- --------- ------- --------- ---------- ------- --------- --------- ------- ---------
At June 30, 1998 and 1997, options to purchase 3,699,274 and 3,230,751 shares of common stock, respectively, and, warrants for 1,200,000 shares of common stock, were outstanding but not included in the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. -8- 8. COMPREHENSIVE INCOME Effective in the first quarter of 1998, the Company has adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The Company has reclassified earlier financial statements for comparative purposes. The adoption of this standard did not have a material impact on the Company's results of operations. There were no tax effects allocated to the components of other comprehensive loss for the six months ended June 30, 1998 and 1997. Changes in accumulated other comprehensive loss balances are as follows:
Foreign Net Unrealized Accumulated Currency Gain (Loss) on Other (UNAUDITED) Translation Marketable Comprehensive (IN THOUSANDS) Adjustments Securities Loss --------------------------------------------------------------------------------------------------- For the Six Months Ended June 30, 1998: Balance, December 31, 1997 $ (653) $ 88 $ (565) Current-period change (503) (25) (528) ---------- ------ -------- Balance, June 30, 1998 $ (1,156) $ 63 $(1,093) ---------- ------ -------- ---------- ------ --------
-9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS TOTAL REVENUE The Company's 1998 second quarter revenue of $23.9 million represented a 9% decrease compared to the second quarter revenue of the prior year. Revenue for the first six months of 1998 of $47.5 million decreased 1% compared to the first six months of the prior year. The decrease in revenue was attributable primarily to continued lower sales in the Asia-Pacific region, particularly in Japan, somewhat offset by increased North American and European sales. See "---Risk Factors: International Sales", "---Risk Factors: Potential Fluctuations in Quarterly Results", "---Risk Factors: Customer Concentration", "---Risk Factors: New Product Transition", "---Risk Factors: Software Revenue Recognition" and "---Risk Factors: Dependence Upon Certain Suppliers." Product revenue for the second quarter of the current year decreased by 22% from the second quarter of 1997. For the first six months of the current year, product revenue decreased by 14% from the first six months of the prior year. The decrease in product revenue was due primarily to the weakness in the Asia-Pacific market, as discussed above. Maintenance and service revenue for the second quarter of the current year increased by 22% over the second quarter of 1997. For the first six months of the current year, maintenance and service revenue increased by 33% over the first six months of the prior year. The increase in maintenance and service revenue was attributable primarily to a larger number of maintenance contracts on customers' installed systems and to increased sales of the Company's custom engineering services. International revenue accounted for approximately 21% and 41% of total revenue in the second quarters of the current and prior years, respectively. For the first six months of the current and prior years, international revenue was approximately 27% and 33% of total revenue, respectively. The decrease in international revenue as a percentage of total revenue was due primarily to the decreased volume of sales in the Asia-Pacific region, slightly offset by an increased volume of sales in Europe. Revenue in the Asia-Pacific region for the 1998 second quarter decreased by 78% from 1997 second quarter and decreased -10- by 52% in the first six months of 1998 from the first six months of 1997. See "---Risk Factors: International Sales." GROSS MARGINS Gross margins in the second quarter and the first six months of 1998 were 43% and 54%, respectively, which included an inventory obsolescence charge of $5.7 million in the second quarter of 1998. The inventory obsolescence charge resulted from the introduction of the Company's Mercury Design Verification System. Gross margins excluding the inventory obsolescence charge in the second quarter and the first six months of 1998 were 67% and 66%, respectively, as compared to 68% in both the second quarter and the first six months of 1997. The decrease in gross margins, excluding the inventory obsolescence charge, was attributable primarily to decreased maintenance and service gross margins due to increased field support requirements to service new and existing contracts. See "---Risk Factors: Gross Margins." RESEARCH AND DEVELOPMENT Research and development expenses increased by 10% in the second quarter of 1998 compared to the second quarter of the previous year. This increase was primarily attributable to increased staffing and prototype and equipment costs necessary to enhance current products and to develop the next generation emulation and cycle-based simulation products. As a percentage of total revenue, research and development expenses were approximately 27% and 22% for the second quarters of the current and previous years, respectively. For the first six months in the current and prior fiscal years, research and development expenses were 26% and 24% of total revenue, respectively. The Company expects to continue to invest a significant amount of its resources in research and development. SALES AND MARKETING Sales and marketing expenses increased 12% in the second quarter of 1998 compared to the second quarter of the previous year. This increase was largely due to headcount increases to support both domestic and foreign markets, and new product marketing efforts in the second quarter of 1998. As a percentage of total revenue, sales and marketing expenses were approximately 41% and 33% in the second quarters of the current and prior years, respectively. For the first six months in the current and prior years, sales and marketing expenses were 40% and 36% of total revenue, respectively. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts as the Company expands its sales and marketing efforts. -11- GENERAL AND ADMINISTRATIVE General and administrative expenses increased by 30% in the second quarter of 1998 compared to the second quarter of the previous year. This increase was due largely to increased legal costs related to a patent infringement lawsuit filed by the Company in January 1996, and various other legal proceedings. See "---Part II., Item 1. Legal Proceedings." As a percentage of total revenue, general and administrative expenses were approximately 15% and 11% for the second quarters of the current and prior years, respectively. For the first six months in the current and prior years, general and administrative expenses were 14% and 11% of total revenue, respectively. The Company expects general and administrative expenses to increase in 1998 due primarily to continued legal costs. MERGER RELATED CHARGES In connection with its merger with SpeedSim, Inc. (the "SpeedSim Merger"), the Company recorded one-time charges of $1.2 million in the first quarter of 1997 that included fees for investment banking, legal and accounting services and other costs of consolidating. OTHER INCOME, NET Other income, net increased by $271,000 in the second quarter and by $577,000 in the first six months of 1998 compared to the second quarter and first six months of 1997, respectively. The increases were due primarily to reduced interest expenses related to the decreased level of debt associated with maturing equipment leases, and increased interest income due to higher average balances of cash and marketable securities. PROVISION FOR (BENEFIT FROM) INCOME TAXES The tax benefits of 43% and 41% for the second quarter and first six months of 1998, respectively, are in excess of the federal statutory rate of 35% primarily because of federal and state general business credits and interest income on investments in tax-exempt obligations. The tax expense of 31% for both the second quarter and first six months of 1997 is less than the statutory federal rate of 35% primarily because of federal and state general business credits, interest income on investments in tax-exempt obligations and benefit from foreign sales corporation. NET INCOME (LOSS) AND QUARTERLY RESULTS Net loss in the second quarter of 1998 was $5.0 million, which included the inventory obsolescence charge of $5.7 million offset by the related income tax benefit of $2.5 million. Net loss in the second quarter of 1998 excluding the inventory obsolescence charge and its related income tax benefit was $1.8 -12- million, compared to net income of $720,000 in the second quarter of 1997. This decrease in net income excluding the inventory obsolescence charge was due primarily to a decrease in revenue and an increase in operating expenses. See "Gross Margins" above. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $3.4 million from December 31, 1997 to June 30, 1998. Net cash provided by operations was $11.8 million, due primarily to decreased accounts receivable of $15.5 million, decreased inventories of $5.9 million and depreciation and amortization of $3.3 million, partially offset by a net loss of $6.4 million and decreased accounts payable and accrued liabilities of $7.3 million. Net cash used in investing activities was $8.3 million, due primarily to purchases of marketable securities of $14.1 million and cash paid for the acquisition of fixed assets of $6.2 million, partially offset by sales of marketable securities of $12.0 million. Net cash provided by financing activities was $485,000, due primarily to proceeds from stock issuances of $1.5 million, partially offset by the repurchase of treasury shares of $621,000. The Company believes that its cash and cash equivalents, together with its existing credit facility and the cash flows expected to be generated by operations, will be sufficient to meet its anticipated cash needs for working capital, capital expenditures and marketing expansion through at least the next 12 months. 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. RISK FACTORS IN ADDITION TO OTHER INFORMATION IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IN THE DOCUMENTS INCORPORATED BY REFERENCE THEREIN, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Many of the Company's customers order on an as-needed basis and often delay delivery of firm purchase orders until the commencement dates of such customers' development projects are determined. Moreover, a significant portion of the Company's revenue in each quarter generally results from shipments in the last few weeks of the quarter; therefore, a delay in the shipment of a few orders can have a significant impact upon total revenue and results of operations in a given quarter. -13- CUSTOMER CONCENTRATION 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 56% and 53% of total revenue in the second quarters of 1998 and 1997, respectively. In the first six months of 1998 and 1997, the top ten customers accounted for 52% and 43% of total revenue, respectively. The Company expects that sales of its products to a relatively limited number of customers will continue to account for a high percentage of revenue for the foreseeable future. The loss of a major customer or any reduction in orders by such a customer could have an adverse effect on the Company's financial condition or results of operations. The Company believes that in the future its results of operations in a quarterly period could be impacted by the timing of customer development projects and related purchase orders for the Company's emulation systems, new product announcements and releases by the Company, and economic conditions generally and in the electronics industry specifically. NEW PRODUCT TRANSITION In June 1998, the Company announced its new Mercury Design Verification System, which is designed to replace certain of the Company's existing emulation product offerings. There can be no assurance that this announcement will not cause customers to defer purchases of the Company's existing emulation products, or that the transition to the new Mercury System will not be disrupted due to slow market acceptance or due to disruptions in manufacturing or component availability, all of which could materially adversely affect the Company's results of operations. SOFTWARE REVENUE RECOGNITION In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which is effective for transactions entered into in fiscal years beginning after December 15, 1997. SOP 97-2 was amended by Statement of Position 98-4, "Deferral of the Effective Date of Provisions of SOP 97-2, Software Revenue Recognition." Because of the uncertainties related to the outcome of these pronouncements, the impact on the future financial results of the Company is not currently determinable. -14- INTERNATIONAL SALES As a significant portion of the Company's total revenue and net income are derived 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. Revenue from most international customers is denominated in U.S. dollars. However, receivables from certain other international customers are denominated in local currencies. Such receivables are hedged, where practicable, by forward exchange contracts to minimize the impact of foreign exchange rate movements on the Company's operating results. There have been no material gains or losses associated with the Company's hedging program. However, there can be no assurance that fluctuations in the currency exchange rates in the future will not have a material adverse impact on the receivables derived from foreign currency denominated sales and thus the Company's operating results and financial condition. See Note 2 of the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Stockholders. The Company plans to continue to expand its international sales and distribution channels. However, there can be no assurance that the Company's products will achieve widespread commercial acceptance in international markets in the future. The Company is uncertain whether the recent weakness experienced in the Asia-Pacific markets will continue in the foreseeable future due to extreme currency devaluation and liquidity problems in this region. Additionally, Electronic Design Automation ("EDA") spending budgets of major Japanese electronics firms may be decreased; consequently, sales of the Company's design verification products in Japan may continue to be down in the foreseeable 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, which licenses may on occasion be delayed or difficult to obtain. DEPENDENCE UPON CERTAIN SUPPLIERS Certain key components and board assemblies 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 sources or to obtain sufficient quantities of these components or board assemblies could result in delays or reductions in product shipments which could adversely affect the Company's results of operations. In particular, the Company currently relies on Xilinx, Inc. ("Xilinx") for its supply of field programmable gate arrays ("FPGAs") and on General Dynamics ("GD") for its computer board assemblies. If for any reason -15- there were to be a reduction or interruption of FPGA supply or board assemblies to the Company, the Company's results of operations would be materially adversely affected. Although the Company believes that it can eventually obtain FPGAs and board assemblies from alternate sources in the event of a reduction or interruption of FPGA supply or board assemblies from Xilinx or GD, a significant amount of time and resources would be required to redesign the Company's emulation systems and software to accommodate an alternate FPGA supplier or board assembler. In such event, the Company's results of operations could be materially adversely affected. The Company currently mitigates this risk by maintaining inventory of these components in excess of its near-term forecasted requirements. However, there can be no assurance that these measures will be adequate to alleviate any future supply problems. GROSS MARGINS 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. COMPETITION The EDA industry is highly competitive and rapidly changing. The Company faces significant competition for emulation-based system-level verification and cycle-based simulation, in addition to competition from traditional design verification methodologies which rely on the approach of building and then testing complete system prototypes. Because of the growing demand for a design verification methodology which reduces the number of costly design iterations and improves product quality, the Company expects competition in the market for system-level verification and cycle-based simulation to increase as other companies attempt to introduce emulation and cycle-based simulation products and product enhancements, and as major new EDA technologies may emerge. 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 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 -16- 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. Several actions between the Company and Mentor were consolidated in the U.S. District Court for the District of Oregon, where six of the Company's patents are now involved in the disputes. The Company has filed counterclaims against Mentor and Mentor's French subsidiary, Meta Systems ("Meta"), for infringement and threatened infringement of those six patents. Mentor has also filed claims against the Company for defamation and tortious interference. In January 1996, the Company filed a complaint with the International Trade Commission, seeking to stop unfair importation of hardware logic emulation systems and components manufactured by Meta on the grounds that such systems infringe the Company's patents. The Company is also involved in litigation with Mentor's subsidiary in Germany and with Aptix Corporation and Meta in the U.S. District Court, the Northern District of California. See "---Part II., Item 1. 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. IMPACT OF THE YEAR 2000 ISSUE Many existing computer systems, applications and other control devices use computer programs that recognize only two digits rather than four digits to define an applicable year. Therefore, any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could result in a system failure or miscalculations causing disruptions of the Company's operations or in the ability of the Company's customers to effectively utilize the Company's design verification products. Based on recent assessments, the Company has determined that it will be required to modify or replace portions of its software so that its computer systems and design verification products will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications to existing software or conversion to new software, the Year 2000 Issue can be -17- mitigated. However, if such modifications and/or conversions are not made, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has initiated formal communications with its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remedy their own Year 2000 Issue. However, there can be no assurance that the systems of other companies on which the Company's systems rely will be converted in a timely fashion, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company will utilize both internal and external resources to reprogram or replace, and test software for Year 2000 Issue modifications. The costs and timing of the project to complete the Year 2000 Issue modifications are based on management's best estimates. Management currently estimates the total costs of the Year 2000 Issue project at $500,000. There can be no assurance that these estimates will be achieved and actual results could differ materially from these estimates. Specific factors that might cause such material difference include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer code, and similar uncertainties. OTHER RISK 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. 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. ITEM 3 IS NOT APPLICABLE AND HAS BEEN OMITTED. -18- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In January 1996, the Company filed a complaint with the International Trade Commission (the "ITC") in Washington, DC, seeking to stop unfair importation of logic emulation systems manufactured by Meta Systems ("Meta"), a French subsidiary of Mentor Graphics Corporation ("Mentor"). In the complaint, the Company alleges that Mentor's hardware logic emulation systems infringe the Company's patents. The Company sought and received in August 1996, temporary relief from the ITC in the form of Temporary Exclusion and Temporary Cease and Desist Orders. The Federal Circuit Court of Appeals affirmed the ITC's issuance of temporary relief in August 1997. In December 1997, the ITC issued: (1) a Permanent Limited Exclusion Order which permanently prohibits the importation of hardware logic emulation system, subassemblies or components manufactured by Mentor and/or Meta, and (2) a Permanent Cease and Desist Order permanently prohibiting Mentor from, among other things, selling, offering for sale or advertising the same hardware logic emulation devices. The ITC's two orders remain in effect until April 28, 2009, the latest expiration date of the Company's patents involved in the investigation. The Company is also engaged in a Federal District Court case with Mentor and Meta involving six of the Company's patents. Mentor and Meta are seeking a declaratory judgment of noninfringement, invalidity and unenforceability of the patents in dispute, and the Company has filed counteractions against Mentor and Meta for infringement and threatened infringement of the six patents. Mentor has also claimed in this Federal District Court case that press releases issued by the Company were defamatory and interfered with Mentor's prospective economic relations. In June 1997, Quickturn filed a motion for preliminary injunction, asking the District Court to prohibit Mentor from manufacturing, assembling, marketing, loaning or otherwise distributing emulation products and components in the United States, which products and components infringe certain claims in Quickturn's U.S. Patent No. 5,036,473. On August 1, 1997, the U.S. District Court in Oregon granted Quickturn's motion for a preliminary injunction against Mentor's domestic emulation activities. The Federal Circuit Court of Appeals affirmed the Oregon District Court's decision on August 5, 1998. The Oregon action is presently set for trial in December 1998. In August 1997, a preliminary injunction sought by Mentor's German subsidiary, Mentor Graphics (Deutschland) GmbH, was issued by a regional court in Munich, enjoining agents of the Company from making certain statements -19- concerning U.S. litigation matters between the Company and Mentor. In May 1998, the Munich District Court set aside the preliminary injunction based on the failure of Mentor's German subsidiary to advance its case within the six-month statutory limitation. In October 1997, the Company filed a complaint alleging infringement of the German part of the Company's European Patent No. 0 437 491 B1 against Mentor Graphics (Deutschland) GmbH, in the District Court of Dusseldorf. The main court hearing for this matter is set for March 1999. In November 1996, Aptix Corporation ("Aptix") filed a suit against the Company, in the U.S. District Court, the Northern District of California, alleging various violations of the antitrust laws and unfair competition. The discovery phase of this case was recently completed. The Company has mounted vigorous defenses against Mentor's defamation and tortious interference claims and the antitrust and unfair competition claims by Aptix, and recently argued six summary judgment motions against the Aptix claims before the court. The outcome of these actions cannot be predicted with certainty. In February 1998, Aptix and Meta filed a lawsuit against the Company, in the U.S. District Court, the Northern District of California, alleging infringement of a U.S. patent owned by Aptix and licensed to Meta. The Company is mounting a vigorous defense against this claim. The outcome of this action 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. -20- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on April 17, 1998, the following members were elected to the Board of Directors:
Votes Votes For Withheld ------------------------- Richard C. Alberding 14,619,283 562,549 Glen M. Antle 14,997,346 184,486 Michael R. D'Amour 14,997,428 184,404 Dr. Yen-Son (Paul) Huang 14,997,428 184,404 Dr. David K. Lam 14,999,083 182,749 Keith R. Lobo 14,976,420 205,412
The following proposal was approved at the Company's Annual Meeting:
Votes Votes Votes Abstained/ For Against Not Voted ----------------------------------- Ratification of appointment of PricewaterhouseCoopers LLP as independent accountants. 15,131,430 36,042 14,360
ITEM 5. OTHER INFORMATION On August 12, 1998 the Company announced, in response to Mentor Graphics Corporation's unsolicited tender offer for all outstanding shares of the Company, that the Company's board of directors will study the offer and make its recommendation to shareholders in due course. In the meantime, the Company urges all its shareholders to take no action with respect to the Mentor Graphics offer and any related activities until the Company's board of directors has made its recommendation. The press release announcing the response of the Board of Directors of the Company is attached hereto as Exhibit 99.1. -21- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 27: Financial Data Schedule Exhibit 99.1 Press Release of Quickturn Design Systems, Inc. dated August 12, 1998. (b) REPORT ON FORM 8-K No reports on Form 8-K were filed in the quarter ended June 30, 1998. ITEMS 2 AND 3 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. -22- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUICKTURN DESIGN SYSTEMS, Inc. ---------------------------------- (Registrant) Date: August 13, 1998 By: /s/ RAYMOND K. OSTBY ---------------------- ----------------------- Raymond K. Ostby, Vice President, Finance and Administration, Chief Financial Officer and Secretary (Principal Accounting Officer and Duly Authorized Officer) -23- EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 18,034 18,995 18,043 1,840 5,008 71,071 36,056 22,022 116,046 30,162 0 0 0 18 85,866 116,046 47,512 47,512 21,660 21,660 38,224 0 66 (10,885) (4,463) (6,422) 0 0 0 (6,422) (0.36) (0.36)
EX-99.1 3 EXHIBIT 99.1 EXHIBIT 99.1 Quickturn Board to Review Mentor Graphics' Unsolicited Tender Offer Advises Shareholders to Take No Action at Present Time SAN JOSE, Calif.--(BUSINESS WIRE)--August 12, 1998--Quickturn Design Systems, Inc. (NASDAQ: QKTN - news) announced today, in response to Mentor Graphics Corporation's (NASDAQ: MENT - news) unsolicited tender offer for all outstanding shares of Quickturn, that the Company's board of directors will study the offer and make its recommendation to shareholders in due course. In the meantime, Quickturn urges all its shareholders to take no action with respect to the Mentor Graphics offer and any related activities until Quickturn's board of directors has made its recommendation. Quickturn Design Systems, Inc. is the leading provider of verification products and time-to-market engineering (TtME(TM)) services for the design of complex ICs and electronic systems. The company's products are used worldwide by developers of high-performance computing, multimedia, graphics and communications systems. Quickturn is headquartered at 55 W. Trimble Road, San Jose, CA 95131-1013; Telephone: 408/914-6000. For more information, visit the Quickturn Web site at www.quickturn.com or send e-mail to info@quickturn.com. Contact: Quickturn Design Systems, Inc. Raymond K. Ostby Vice President Finance & Administration, CFO (408) 914-6633 or Abernathy MacGregor Frank Jim MacGregor/Matt Sherman (212) 371-5999 -----END PRIVACY-ENHANCED MESSAGE-----