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 March 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
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Commission File Number : 0-22738
QUICKTURN DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0159619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 Clyde Avenue, Mountain View, California 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 967-3300
NO CHANGE
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of May 5, 1996 there were 13,825,359 shares of the registrant's common stock
outstanding.
This quarterly report on Form 10-Q contains 13 pages, of which this is page 1.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
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1996 1995
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(UNAUDITED) (UNAUDITED)
Revenue $ 23,094 $ 18,000
Cost of revenue 7,131 5,547
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Gross profit 15,963 12,453
Operating expenses:
Research and development 4,077 3,264
Sales and marketing 7,011 5,782
General and administrative 1,466 1,064
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Total operating expenses 12,554 10,110
Operating income 3,409 2,343
Other income, net 303 153
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Net income before provision for income taxes 3,712 2,496
Provision for income taxes 1,223 624
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Net income $ 2,489 $ 1,872
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Net income per share $ 0.17 $ 0.13
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Number of shares used in per share calculations 14,832 14,390
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1996 1995
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(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 19,712 $ 17,216
Marketable securities 15,927 14,181
Accounts receivable, net of allowance for doubtful
accounts of $1,840 in 1996 and 1995 15,513 20,706
Inventories 9,284 7,805
Prepaid expenses and other current assets 7,498 7,285
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Total current assets 67,934 67,193
Marketable securities 9,427 9,110
Fixed assets, net 12,812 13,003
Other assets 4,746 3,478
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$ 94,919 $ 92,784
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LIABILITIES
Current liabilities
Note payable to stockholder $ 600 $ 600
Capital lease obligations 2,489 2,801
Accounts payable 914 869
Accrued liabilities 11,016 15,847
Deferred revenue 8,087 3,538
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Total current liabilities 23,106 23,655
Note payable to stockholder 1,200 1,200
Capital lease obligations, less current portion 1,763 2,302
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26,069 27,157
STOCKHOLDERS' EQUITY
Common stock, $.001 par value:
Authorized: 20,000,000 shares
Issued and outstanding: 13,801,784 shares in 1996;
13,596,060 shares in 1995 14 14
Additional paid-in capital 72,377 71,507
Unrealized holding gain (loss) on marketable securities (34) 102
Accumulated deficit (3,507) (5,996)
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Total stockholders' equity 68,850 65,627
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$ 94,919 $ 92,784
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,489 $ 1,872
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,846 1,833
Provision for doubtful accounts --- 200
Write down of inventories (2) 240
Changes in current assets and liabilities:
Accounts receivable 5,193 849
Inventories (1,851) (1,155)
Prepaid expenses and other current assets (213) (65)
Accounts payable and accrued liabilities (4,786) (5,300)
Deferred revenue 4,549 1,273
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Net cash provided by (used in) operating activities 7,225 (253)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (1,026) (630)
Sale of marketable securities 16,129 10,128
Purchase of marketable securities (18,328) (9,376)
Increase in other assets (1,523) (711)
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Net cash used in investing activities (4,748) (589)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equipment financing --- 1,500
Payments of capital lease obligations (851) (810)
Proceeds from stock issuances 870 621
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Net cash provided by financing activities 19 1,311
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Net increase in cash and cash equivalents 2,496 469
Cash and cash equivalents at beginning of period 17,216 6,897
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Cash and cash equivalents at end of period $ 19,712 $ 7,366
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 131 $ 136
Income taxes 3,993 29
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in unrealized holding loss
on marketable securities 136 (118)
Additions to fixed assets through capital lease obligations --- 995
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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QUICKTURN DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements are unaudited (except for
the balance sheet information as of December 31, 1995, 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 1995 Annual
Report to Stockholders. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 1996, or any future interim period.
2. Fiscal year-end: 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.
3. Inventories comprise: (in thousands)
MARCH 31, DECEMBER 31,
1996 1995
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(UNAUDITED)
Raw materials $ 6,018 $ 5,819
Work in process 3,266 1,986
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$ 9,284 $ 7,805
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE:
The Company's 1996 first quarter revenue of $23.1 million represented a 28%
increase over the first quarter revenue in the prior fiscal year and was a
slight increase over revenue in the prior quarter. The revenue increase was
primarily attributable to shipments of more emulation capacity, offset by a
slight decrease in the revenue per logic gate. International sales accounted
for approximately 42% and 32% of total revenue in the first quarters of the
current and prior fiscal years, respectively. The increase in international
sales was primarily due to increased sales in the Far Eastern markets. Many of
the Company's customers order on an as-needed basis and often delay delivery of
firm purchase orders until 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 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 53% and
61% of revenue in the first quarters of 1996 and 1995, respectively. The
Company expects that sales of its products to a relatively limited number of
customers will continue to account for a high percentage of revenue for the
foreseeable future. The loss of a major customer or any reduction in orders by
such a customer could have an adverse effect on the Company's financial
condition or results of operations.
The Company believes that in the future its results of operations in a quarterly
period could be impacted by the timing of customer development projects and
related purchase orders for the Company's emulation systems, new product
announcements and releases by the Company, and economic conditions generally and
in the electronics industry specifically.
GROSS MARGINS:
Gross margins were 69% in the first quarter of both the current year and the
prior year, and were also 69% in the prior quarter. The Company was able to
maintain its gross margins primarily due to a sufficiently large enough 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.
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RESEARCH AND DEVELOPMENT:
Research and development expenses increased by 25% in the first quarter of 1996
compared to the first quarter of the previous year. This increase was primarily
attributable to increased staffing and equipment costs necessary to enhance
current products and research and development activities for the next generation
emulation products. As a percentage of revenue, research and development
expenses were unchanged at approximately 18% for the first quarter of the
current and prior fiscal years. To maintain growth and market leadership in
emulation technology, the Company expects to continue to invest a significant
amount of its resources to research and development.
SALES AND MARKETING:
Sales and marketing expenses increased 21% in the first quarter of 1996 compared
to the first quarter of the previous year. This increase was largely due to
headcount increases to support both domestic and foreign markets. As a
percentage of revenue, sales and marketing expenses were approximately 30% in
the first quarter of 1996 compared to approximately 32% in the first quarter of
1995. 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 ADMINSTRATIVE:
General and administrative expenses increased by 38% in the first quarter of
1996 compared to the first quarter of the previous year. This increase was
largely due to increased legal costs related to a patent infringement lawsuit
filed by the Company in January 1996. See Part II., Item 1. Legal Proceedings.
As a percentage of revenue, general and administrative expenses were
approximately 6% for both the first quarter of the current year and the prior
year, respectively.
OTHER INCOME, NET:
Other income, net increased by $150,000 in the first quarter of 1966 compared to
the same period in 1995 due primarily to decreased interest expenses associated
with maturing lease lines used for the purchase of certain fixed assets.
PROVISION FOR INCOME TAXES:
The effective tax rates of 33% and 25% for the three months ended March 31, 1996
and March 31, 1995, respectively, are lower than the statutory federal rate of
35% primarily because of federal and state general business credits, interest
income on investments in tax-exempt obligations and benefit from foreign sales
corporation for the period ended March 31, 1996 and utilization of net operating
losses for the period ended March 31, 1995.
NET INCOME AND QUARTERLY RESULTS:
Net income increased by 33% to $2.5 million in the first quarter of 1996
compared to the first quarter of 1995. This increase in net income was due
primarily to an increase in revenue, partially offset by increased operating
expenses and increased taxes.
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
COMPETITION:
The EDA industry is highly competitive and rapidly changing. The Company has
begun to face 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 expects to compete
with companies which 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 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. For example, in 1995, Mentor Graphics
Corporation, ("Mentor") filed suit against the Company for declarative judgment
of noninfringement, invalidity and unenforceability of three of the Company's
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 Systems ("Meta") of France on the
grounds that such systems infringe the Company's patents. The complaint also
names Mentor, which recently announced that it was acquiring Meta and is
currently acting as a distributor for Meta's products. Although patent and
intellectual property disputes in the software area are often settled through
licensing, cross-licensing or similar arrangements, costs associated with such
litigation and arrangements may be substantial.
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, 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 European, Far
Eastern and other international markets could impact the Company's results of
operation and financial condition in a particular quarter.
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Due to the factors above, the Company's future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts has
had and could in the future have an immediate and significant adverse effect on
the trading price of the Company's common stock. Additionally, the Company may
not learn of such shortfalls until late in a fiscal quarter, which could result
in an even more immediate and adverse effect on the trading price of the
Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents increased by $2.5 million from December 31, 1995 to
March 31, 1996. Net cash provided by operations was $7.2 million, due primarily
to decreased accounts receivable of $5.2 million, increased deferred revenue of
$4.5 million, net income of $2.5 million and depreciation and amortization of
$1.8 million, partially offset by $4.8 million of decreased accounts payable and
accrued liabilities, and $1.9 million of increased inventories. Net cash used
in investments was $4.7 million due primarily to purchases of marketable
securities of $18.3 million, increased fixed assets of $1.0 million and
increased other assets of $1.5 million, offset by sales of marketable securities
of $16.1 million. Net cash provided by financing activities was $19,000 due to
proceeds from stock issuances of $870,000 offset by payments of capital lease
obligations of $851,000.
The Company believes that its current liquidity, together with its existing
credit facility and the cash flows expected to be generated by operations will
be sufficient to meet its cash needs for working capital, capital expenditures
and marketing expansion through at least 1996. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in certain 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.
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. The Company
believes that it has meritorious defenses to the claims remaining in the action
and intends to continue to contest it vigorously. While the outcome of the
action 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 in Washington, DC, seeking to stop unfair
importation of logic emulation systems manufactured by Meta Systems of France.
As explained in the complaint, Quickturn alleges that Meta hardware logic
emulation systems infringe Quickturn's patents. The complaint also names Mentor
Graphics Corporation, a stockholder of the Company, which recently announced
that it was acquiring Meta and is acting as the distributor for Meta's products.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share.
Exhibit 27: Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1996.
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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.
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(Registrant)
Date May 13, 1996 By: /s/ Raymond K. Ostby
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Raymond K. Ostby,
Vice-President, Finance and Administration,
Chief Financial Officer and Secretary
(Principal Accounting Officer and
Duly Authorized Officer)
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