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, 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
(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
------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of August 2, 1996 there were 13,870,109 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q contains 14 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)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenue $ 25,339 $ 19,600 $ 48,433 $ 37,600
Cost of revenue 7,854 6,013 14,985 11,560
-------- -------- -------- --------
Gross profit 17,485 13,587 33,448 26,040
Operating expenses:
Research and development 4,408 3,576 8,485 6,840
Sales and marketing 7,627 6,141 14,638 11,923
General and administrative 1,604 1,169 3,070 2,233
-------- -------- -------- --------
Total operating expenses 13,639 10,886 26,193 20,996
Operating profit 3,846 2,701 7,255 5,044
Other income, net 467 167 770 320
-------- -------- -------- --------
Net income before provision
for income taxes 4,313 2,868 8,025 5,364
Provision for income taxes 1,421 717 2,644 1,341
-------- -------- -------- --------
Net income $ 2,892 $ 2,151 $ 5,381 $ 4,023
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ 0.19 $ 0.15 $ 0.36 $ 0.28
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculations 15,171 14,552 15,001 14,471
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated
statements.
- 2 -
QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
June 30, December 31,
1996 1995
----------- ------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 21,292 $ 17,216
Marketable securities 15,109 14,181
Accounts receivable, net of allowance for doubtful
accounts of $1,840 in 1996 and 1995 21,175 20,706
Inventories 10,055 7,805
Prepaid expenses and other current assets 7,935 7,285
--------- ---------
Total current assets 75,566 67,193
Marketable securities 9,895 9,110
Fixed assets, net 13,085 13,003
Other assets 4,718 3,478
--------- ---------
$ 103,264 $ 92,784
--------- ---------
--------- ---------
LIABILITIES
Current liabilities
Note payable to stockholder $ 600 $ 600
Capital lease obligations 2,190 2,801
Accounts payable 3,201 869
Accrued liabilities 14,309 15,847
Deferred revenue 8,156 3,538
--------- ---------
Total current liabilities 28,456 23,655
Note payable to stockholder 1,200 1,200
Capital lease obligations, less current portion 1,241 2,302
--------- ---------
30,897 27,157
STOCKHOLDERS' EQUITY
Common stock, $.001 par value:
Authorized: 20,000,000 shares
Issued and outstanding: 13,864,217 shares in 1996;
13,596,060 shares in 1995 14 14
Additional paid-in capital 73,060 71,507
Unrealized holding gain (loss) on marketable
securities (92) 102
Accumulated deficit (615) (5,996)
--------- ---------
Total stockholders' equity 72,367 65,627
--------- ---------
$ 103,264 $ 92,784
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
QUICKTURN DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
----------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,381 $ 4,023
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,910 3,660
Provision for doubtful accounts 0 200
Write down of inventories 396 111
Changes in current assets and liabilities:
Accounts receivable (469) 1,440
Inventories (4,038) (3,702)
Prepaid expenses and other current assets (651) (32)
Accounts payable and accrued liabilities 793 (3,869)
Deferred revenue 4,618 1,340
--------- ---------
Net cash provided by operating activities 9,940 3,171
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (2,323) (786)
Sale of marketable securities 17,667 14,656
Purchase of marketable securities (19,574) (14,280)
Increase in other assets (1,517) (707)
--------- ---------
Net cash used in investing activities (5,747) (1,117)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equipment financing --- 1,500
Payments of capital lease obligations (1,671) (1,766)
Proceeds from stock issuances 1,554 953
--------- ---------
Net cash provided by (used in) financing
activities (117) 687
--------- ---------
Net increase in cash and cash equivalents 4,076 2,741
Cash and cash equivalents at beginning of period 17,216 6,897
--------- ---------
Cash and cash equivalents at end of period $ 21,292 $ 9,638
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 240 $ 364
Income taxes 4,400 531
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in unrealized holding loss
on marketable securities 194 (342)
Additions to fixed assets through capital lease
obligations --- 2,593
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 -
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 six months ended June 30, 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) June 30, December 31,
1996 1995
----------- ------------
(unaudited)
Raw materials $ 3,831 $ 5,819
Work in process 6,224 1,986
--------- ---------
$ 10,055 $ 7,805
--------- ---------
--------- ---------
- 5 -
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE:
The Company's 1996 second quarter revenue of $25.3 million represented a 29%
increase over the second quarter revenue in the prior fiscal year and was a 10%
increase over revenue in the prior quarter. Revenue for the first six months
of 1996 was $48.4 million, which was a 29% increase over the revenue of the
first six months of the prior year. The revenue increase in each of the three
and six month periods was primarily attributable to shipments of more emulation
capacity. International sales accounted for approximately 41% and 37% of total
revenue in the second quarters of the current and prior fiscal years,
respectively. For the first six months of the current and prior fiscal years,
international sales were approximately 42% and 35% of the total revenue,
respectively. The increase in international sales as a percentage of revenue
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 74% of
revenue in both the second quarters of 1996 and 1995. In the first six months
of 1996 and 1995, the top ten customers represented approximately 64% and 53% of
total revenue, respectively. The Company expects that sales of its products to
a relatively limited number of customers will continue to account for a high
percentage of revenue for the foreseeable future. The loss of a major customer
or any reduction in orders by such a customer could have an adverse effect on
the Company's financial condition or results of operations.
The Company believes that in the future its results of operations in a quarterly
period could be impacted by the timing of customer development projects and
related purchase orders for the Company's emulation systems, new product
announcements and releases by the Company, and economic conditions generally and
in the electronics industry specifically.
GROSS MARGINS:
Gross margins were 69% in the second 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 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.
- 6 -
RESEARCH AND DEVELOPMENT:
Research and development expenses increased by 23% in the second quarter of 1996
compared to the second 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 approximately 17% and 18% for the second quarter of
the current and prior fiscal years, respectively, and were approximately 18% for
both the first six months of the current and prior years. To maintain growth
and market leadership in emulation technology, 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 by 24% in the second quarter of 1996
compared to the second quarter of the previous year. For the first six months
of 1996, sales and marketing expenses increased by 23% compared to the first six
months of the prior year. The increase in each of the three and six month
periods 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% and 31% in the second quarter of the current year and the
prior year, respectively, and were approximately 30% and 32% in the first six
months of the current year and prior year, respectively. The Company expects
that sales and marketing expenses will continue to increase in absolute dollar
amounts as the Company expands its sales and marketing efforts.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses increased by 37% in the second quarter of
1996 compared to the second quarter of the previous year. For the first six
months of 1996, general and administrative expenses increased by 37% compared to
the first six months of the prior year. This increase in each of the three and
six month periods 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% in both the second quarter of the current year
and the prior year, and also were approximately 6% in both the first six months
of the current and prior fiscal years.
OTHER INCOME, NET:
Other income, net increased by $300,000 and $450,000 in the second quarter and
first six months of 1996, respectively, over the same periods in 1995 due
primarily to decreased interest expenses associated with maturing lease lines
used for the purchase of certain fixed assets, and an increase in interest
income associated with a greater average quarterly balance of cash and cash
equivalents and marketable securities.
PROVISION FOR INCOME TAXES:
The effective tax rates of 33% for the three and six month periods ended June
30, 1996 and 25% for the three and six month periods ended June 30, 1995 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 June
30, 1996 and utilization of net operating losses for the period ended June 30,
1995.
- 7 -
NET INCOME AND QUARTERLY RESULTS:
Net income increased by 34% to $2.9 million in the second quarter of 1996
compared to the second quarter of 1995. Net income for the first six months of
1996 was $5.4 million which was a 34% increase over net income of $4.0 million
in the first six months of the prior year. This increase in each of the three
and six month periods was due primarily to an increase in revenue, partially
offset by increased operating expenses and increased taxes.
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 Mentor's French subsidiary, Meta Systems
("Meta") on the grounds that such systems infringe the Company's patents.
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.
- 8 -
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.
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 $4.1 million from December 31, 1995 to
June 30, 1996. Net cash provided by operations was $9.9 million, due primarily
to net income of $5.4 million, increased deferred revenue of $4.6 million and
depreciation and amortization of $3.9 million, partially offset by $4.0 million
of increased inventories. Net cash used in investments was $5.7 million due
primarily to purchases of marketable securities of $19.6 million and increased
fixed assets of $2.3 million, partially offset by sales of marketable securities
of $17.7 million. Net cash used in financing activities was $117,000 due to
payments of capital lease obligations of $1,671,000, offset by proceeds from
stock issuances of $1,554,000.
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 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.
- 9 -
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. While the
Company believes that it has meritorious defenses to the claims remaining in the
action, the Company has reached an agreement in principle with plaintiff's
counsel to settle this action in order to conserve legal expenses and management
resources. This agreement in principle is subject to completion of a formal
settlement agreement with plaintiffs, as well as preliminary and final approval
of that agreement by the Court. There can be no assurance that the Company will
in fact succeed in completing the final settlement with the plaintiffs, or that
the Court will ultimately approve any such settlement agreement. The Company's
contribution to the contemplated settlement will not be material. In the event
that the settlement is not completed and approved by the Court, the Company will
continue to contest this action vigorously. While the outcome of the action in
the absence of the comtemplated 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 in Washington, DC, seeking to stop unfair
importation of logic emulation systems manufactured by Meta Systems of France, a
subsidiary of Mentor Graphics Corporation. As explained in the complaint,
Quickturn alleges that Mentor's hardware logic emulation systems infringe
Quickturn's patents. In July 1996, the ITC issued an Initial Determination
granting a Temporary Exclusion Order stopping the importation of Mentor
Graphic's emulation products into the U.S. The ITC also issued a Cease and
Desist Order against all sales activities of the Mentor emulation products in
the U.S.
- 10 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on April 12, 1996, the
following members were elected to the Board of Directors:
Votes Votes
For Withheld
------------------------
Richard C. Alberding 11,647,376 27,543
Glen M. Antle 11,648,076 26,843
Frank J. Caufield 11,648,476 26,443
Michael R. D'Amour 11,648,476 26,443
Yen-Son (Paul) Huang 11,553,776 121,143
Keith R. Lobo 11,633,838 41,081
The following proposal was approved at the Company's Annual Meeting:
Votes
Votes Votes Abstained/
For Against Not Voted
------------------------------
1. Ratification of appointment of
Coopers & Lybrand L.L.P. as
independent auditors. 11,648,398 7,760 18,761
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 June 30, 1996.
- 11 -
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 9, 1996 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)
- 12 -