UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 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 April 30, 1998 there were 17,809,342 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q/A contains 21 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
March 31,
-----------------------
1998 1997
--------- ----------
(restated)
Revenue
Product revenue $ 14,882 $ 15,527
Maintenance and service revenue 8,683 5,875
---------- ----------
Total revenue 23,565 21,402
Cost of revenue
Cost of product revenue 5,091 5,281
Cost of maintenance and service revenue 3,013 1,553
---------- ----------
Total cost of revenue 8,104 6,834
---------- ----------
Gross profit 15,461 14,568
Operating expenses
Research and development 5,985 5,787
Sales and marketing 9,271 8,534
General and administrative 2,957 2,508
Amortization of goodwill 257 ---
Merger related charges --- 1,200
---------- ----------
Total operating expenses 18,470 18,029
---------- ----------
Operating loss (3,009) (3,461)
Other income, net 698 392
---------- ----------
Net loss before benefit from income taxes (2,311) (3,069)
Benefit from income taxes (717) (951)
---------- ----------
Net loss $ (1,594) $ (2,118)
========== ==========
Basic and diluted net loss per share $ (0.09) $ (0.13)
========== ==========
Number of shares used in per share calculation 17,704 16,562
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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QUICKTURN DESIGN SYSTEMS, Inc.
Consolidated Statements of Comprehensive Loss
(amounts in thousands)
(unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
--------- ---------
(restated)
Net loss $ (1,594) $ (2,118)
Other comprehensive loss
Foreign currency translation adjustment (264) (562)
--------- ---------
Unrealized loss on securities
Unrealized holding loss arising during period (7) (138)
Less: reclassification adjustment for gain
included in net loss (9) ---
--------- ---------
Net unrealized loss on securities (16) (138)
--------- ---------
Total other comprehensive loss (280) (700)
--------- ---------
Comprehensive loss $ (1,874) $ (2,818)
========= =========
The accompanying notes are an integral part of these 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,
1998 1997
----------- -------------
(restated)
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 17,437 $ 14,589
Marketable securities 22,967 18,219
Accounts receivable, net of allowance for doubtful
accounts of $1,840 in 1998 and 1997 17,907 31,709
Inventories 11,244 10,899
Prepaid expenses and other current assets 4,536 4,324
Deferred income taxes 8,697 8,697
----------- -------------
Total current assets 82,788 88,437
Marketable securities 18,922 20,326
Fixed assets, net 13,431 11,118
Deferred income taxes 5,770 5,770
Goodwill 4,370 4,627
Other assets 1,251 1,282
----------- -------------
Total assets $ 126,532 $ 131,560
=========== =============
Liabilities
Current liabilities
Short term debt $ 851 $ 1,095
Accounts payable 1,440 6,231
Accrued liabilities 17,222 20,351
Deferred revenue 13,328 9,617
----------- -------------
Total current liabilities 32,841 37,294
----------- -------------
Total liabilities 32,841 37,294
----------- -------------
Stockholders' Equity
Common stock, $.001 par value:
Authorized: 40,000,000 shares;
Issued and outstanding: 17,773,171 shares in 1998;
17,606,006 shares in 1997 18 18
Additional paid-in capital 92,311 91,122
Deferred compensation (463) (573)
Retained earnings 2,670 4,264
Accumulated other comprehensive loss (845) (565)
----------- -------------
Total stockholders' equity 93,691 94,266
----------- -------------
Total liabilities and stockholders' equity $ 126,532 $ 131,560
=========== =============
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)
(unaudited)
Three months ended
March 31,
-----------------------
1998 1997
---------- -----------
(restated)
Cash flows from operating activities
Net loss $ (1,594) $ (2,118)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 1,938 1,906
Amortization of deferred compensation 27 48
Gain on sale of marketable securities (9) ---
Changes in current assets and liabilities
Accounts receivable 13,802 100
Inventories (345) (4,022)
Prepaid expenses and other current assets (212) 365
Accounts payable and accrued liabilities (7,920) (13)
Deferred revenue 3,711 1,736
---------- -----------
Net cash provided by (used in) operating activities 9,398 (1,998)
---------- -----------
Cash flows from investing activities
Acquisition of fixed assets (3,944) (1,137)
Sale of marketable securities 5,469 5,040
Purchase of marketable securities (8,820) (12,875)
Increase (decrease) in other assets (19) 396
---------- -----------
Net cash used in investing activities (7,314) (8,576)
---------- -----------
Cash flows from financing activities
Payments of debts (244) (541)
Proceeds from stock issuances 1,272 350
---------- -----------
Net cash provided by (used in) financing activities 1,028 (191)
---------- -----------
Effect of exchange rates on cash and cash equivalents (264) (563)
Net increase (decrease) in cash and cash equivalents 2,848 (11,328)
Cash and cash equivalents at beginning of period 14,589 25,790
---------- -----------
Cash and cash equivalents at end of period $ 17,437 $ 14,462
========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 17 $ 116
Income taxes $ 376 $ 2,284
Supplemental disclosure of noncash investing and financing activities
Unrealized holding losses on marketable securities $ 7 $ 138
The accompanying notes are an integral part of these consolidated financial
statements.
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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 three months ended March 31, 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:
March 31, December 31,
(in thousands) 1998 1997
------------------------------------------------------------
(unaudited)
Raw materials $ 5,299 $ 6,780
Work in process 5,945 4,119
------------ ------------
$ 11,244 $ 10,899
============ ============
3. Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
4. Restatement
Quickturn has restated its accounting for the Arkos Acquisition as of
December 31, 1997 and the year then ended. The financial statements have
been restated to reflect a change in the allocation of the purchase price.
As a result of this restatement, the company recognized goodwill of $5.1
million, which is being amortized over a period of five years. These changes
resulted in a charge for the amortization of goodwill of $257,000 in the
first quarter of 1998 and a related income tax benefit of $80,000, or a
decrease in net income of $0.01 per share.
5. 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
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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
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.
-7-
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three months ended March 31,
---------------------------------------------------------------------------
(unaudited) 1998 1997
------------------------------------ ----------------------------------
(restated)
(amounts in thousands Per-share Per-share
except per-share data) Loss Shares Amount Loss Shares Amount
------------------------------------ ----------------------------------
Net Loss $ (1,594) $ (2,118)
Basic and Diluted EPS
Loss available to
common stockholders $ (1,594) 17,704 $ (0.09) $ (2,118) 16,562 $ (0.13)
========= ====== ======= ========= ====== ========
During the periods ended March 31, 1998 and 1997, options to purchase
3,149,482 and 3,160,788 shares of common stock, respectively, and warrants
for 1,200,000 and 474,059 shares of common stock, respectively, were
outstanding but not included in the calculation of diluted earnings per share
because their inclusion would have been anti-dilutive.
-8-
7. 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 three months ended March 31, 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
- ----------------------------------------------------------------------------------
Balance, December 31, 1997 $ (653) $ 88 $ (565)
Current-period change (264) (16) (280)
-------- ------- --------
Balance, March 31, 1998 $ (917) $ 72 $ (845)
======== ======= ========
-9-
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Total Revenue
The Company's 1998 first quarter revenue of $23.6 million represented a 10%
increase compared to the first quarter revenue of the prior year and a 27%
decrease compared to revenue in the fourth quarter of the prior year. The
revenue increase in the first quarter of the current year over the first quarter
of the prior year was primarily attributable to increased sales of maintenance
and engineering services. The revenue decrease in the first quarter of the
current year compared to the fourth quarter of the prior year was primarily
attributable to lower sales in the Asia-Pacific region and certain segments of
the U.S. market, particularly those that are heavily dependent on sales to the
Asia-Pacific region, somewhat offset by increased sales in the Europe region.
See "---Risk Factors: International Sales", "---Risk Factors: Potential
Fluctuations in Quarterly Results" and "---Risk Factors: Customer
Concentration."
Product revenue for the first quarter of the current year decreased by 4% from
the first quarter of 1997, and maintenance and service revenue for the first
quarter of the current year increased by 48% over the first quarter of 1997.
The increase in maintenance and service revenue was primarily attributable to a
larger number of maintenance contracts on customers' installed systems and to
increased sales of the Company's custom engineering services.
Product revenue for the quarter decreased 38% from the prior quarter, due mainly
to weakness in the Asia-Pacific market, as discussed above. Maintenance and
service revenue for the quarter increased 4% over the prior quarter.
International revenue was approximately 33% of total revenue in both the first
quarter of the current year and fourth quarter of the prior year, and was 23% of
total revenue in the first quarter of the prior year. The increase in
international revenue as a percentage of total revenue in the first quarter of
the current year over the first quarter of the prior year was primarily due to
increased volume of emulation sales in Europe, which was partially offset by
decreased volume of emulation sales in the Asia-Pacific region. See "---Risk
Factors: International Sales."
-10-
Gross Margins
Gross margins were 66% and 68% in the first quarters of the current year and the
prior year, respectively, and 73% in the fourth quarter of prior year. The
decrease in gross margins in the first quarter of the current year as compared
to the fourth quarter of the prior year was due primarily to decreased product
sales volume combined with relatively fixed manufacturing costs, somewhat offset
by an increase in maintenance and service gross margins due to decreased costs
of servicing certain service and maintenance contracts. See "---Risk Factors:
Gross Margins."
Research and Development
Research and development expenses increased by 3% in the first quarter of 1998
compared to the first 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 of emulation and
cycle-based simulation products. As a percentage of total revenue, research and
development expenses were approximately 25% and 27% for the first quarters of
the current year and the previous year, respectively, and 18% for the prior
quarter. 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 9% in the first quarter of 1998
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 total revenue, sales and marketing expenses were approximately 39%
and 40% in the first quarters of the current and prior fiscal years,
respectively, and 31% for the prior quarter. The Company expects that sales and
marketing expenses will continue to increase in dollar amounts as the Company
expands its sales and marketing efforts.
General and Administrative
General and administrative expenses increased by 18% in the first quarter of
1998 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 total revenue, general and administrative
expenses were approximately 13% and 12% for the first quarters of the current
year and the prior year, respectively, and 10% for the prior quarter. The
Company expects general and administrative expenses to increase in 1998 due
primarily to continued legal costs.
-11-
Amortization of goodwill
Quickturn restated its accounting for the Arkos Acquisition as of December 31,
1997 and the year then ended. This restatement included the recognition of $5.1
million in goodwill related to the purchase. The results for the first quarter
of 1998 include a charge of $257,000 for the amortization of the goodwill, which
is being amortized over a five year period.
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 $306,000 in the first quarter compared to the
first quarter in 1997, 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.
Benefit from Income Taxes
The effective tax rates of 31% for both the first quarters of 1998 and 1997,
respectively, were lower than the statutory federal rate of 35% primarily
because of federal and state general business credits, interest income on
investments in tax-exempt obligations and benefit from foreign sales
corporation.
Net Loss and Quarterly Results
Net loss in the first quarter of 1998 was $1.6 million, compared to net loss of
$2.1 million in the first quarter of 1997. The decrease in net loss was due
primarily to restructuring expenses of $1.2 million incurred in first quarter of
1997 related to the SpeedSim Merger, offset by a related reduction in income tax
benefit in the first quarter of 1998 over the first quarter of 1997. See
"Merger Related Charges" above.
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.
-12-
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.
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 69% and
64% of total revenue in the first quarters of 1998 and 1997, 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.
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.
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.
-13-
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 be flat or down. 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.
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
-14-
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 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. See "---Part I., 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
-15-
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 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 has determined that the costs of the
Year 2000 Issue project will not be material to the Company's results of
operations, liquidity or capital resources. 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
-16-
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 $2.8 million from December 31, 1997 to
March 31, 1998. Net cash provided by operations was $9.4 million, due primarily
to a decrease of $13.8 million in accounts receivable, and an increase of $3.7
million in deferred revenue, partially offset by a decrease of $7.9 million in
accounts payable and accrued liabilities. Net cash used in investing activities
was $7.3 million, due primarily to purchases of marketable securities of $8.8
million and cash paid for the acquisition of fixed assets of $3.9 million,
partially offset by sales of marketable securities of $5.5 million. Net cash
provided by financing activities was $1.0 million, due primarily to proceeds
from stock issuances of $1.3 million.
The Company believes that its cash and cash equivalents, together with its
existing credit facility and the cash flows expected to be generated by
operations, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and marketing expansion through at least 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.
-17-
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. In July 1996, an ITC Administrative Law Judge issued an
Initial Determination granting a Temporary Exclusion Order stopping the
importation of Mentor's emulation systems into the United States, absent the
posting of a bond by Mentor. The ITC Initial Determination included a Cease and
Desist Order against all sales activities regarding unbonded Mentor emulation
products imported into the United States. In August 1996, the ITC ratified the
judge's Initial Determination. Mentor and Meta appealed the Temporary Exclusion
Order to the Federal Circuit Court of Appeals, asking that the ITC's
Interpretation of Quickturn's patent claims be overturned. On August 15, 1997,
the Federal Circuit Court of Appeals affirmed the ITC's decision granting
temporary relief to the Company and adopted the patent claim interpretation of
the ITC as being correct and derived in accordance with the Federal Circuit's
case law. Meanwhile, on August 1, 1997, the ITC Administrative Law Judge issued
an Initial Determination that Mentor's various emulation systems and components,
including software components, infringe five of the Company's patents. The
Administrative Law Judge recommended that the ITC issue a Permanent Exclusion
Order prohibiting the importation of those systems and components. The
Administrative Law Judge further recommended that the ITC issue a Cease and
Desist Order prohibiting Mentor from distributing any related software of non-
U.S. origin in the United States. On October 2, 1997, the ITC ratified the
Administrative Law Judge's Initial Determination. On December 3, 1997, the ITC
issued a Permanent Limited Exclusion Order permanently prohibiting the
importation of hardware logic emulation systems, subassemblies or components
(including software) manufactured by Mentor and/or Meta. At the same time, the
ITC issued 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 period in which President Clinton had to
review the ITC's actions expired on February 2, 1998, and the two orders became
final by operation of law.
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
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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 Oregon action is presently set for
trial in September 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 concerning U.S.
litigation matters between the Company and Mentor. The Company has since filed
a motion with the regional court in Munich to dismiss this action based on the
failure of Mentor's German subsidiary to advance its case within the 6-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 filed six summary judgment motions against the Aptix claims.
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.
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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.
ITEMS 2, 3, 4 and 5 are not applicable and have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Report on Form 8-K
A Current Report on Form 8-K dated April 3, 1998 was filed with the Securities
and Exchange Commission by the Company to report preliminary financial results
for the first quarter of 1998.
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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.
------------------------------
(Registrant)
Date: April 14, 1999 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)
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