UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 Number)
55 W. Trimble Road, San Jose, CA 95131
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 914-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
27, 1998 on the Nasdaq National Market was approximately $171,682,000. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of
February 27, 1998 was 17,772,921.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997 are incorporated by reference in Parts II
and IV of this Form 10-K to the extent stated herein. Also, certain sections of
the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held on April 17, 1998 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT QUICKTURN'S INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN
ASSUMPTIONS MADE BY QUICKTURN'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF
SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH HEREIN UNDER "RISK FACTORS" ON PAGES 11 THROUGH 18, AS
WELL AS THOSE NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. UNLESS
REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON
FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports products that verify the design of
integrated circuits ("ICs") and electronic systems. The Company derives
substantially all of its revenue from its design verification products and
related maintenance and consulting services. The Company's principal design
verification products include System Realizer-TM- and CoBALT-TM- (Concurrent
Broadcast Array Logic Technology) emulators, and SpeedSim-TM- cycle-based
simulation software. Emulation systems are sold in modules of various system
capacities measured in "logic gates," which are measurement units that
describe the design elements created and verified by Quickturn's customers.
As system capacity increases, the selling price of these systems increases
correspondingly. Cycle-based simulation revenue is charged on a per-license
basis. Cycle-based simulation products, which complement the Company's
emulation products, can be used by customers to verify digital logic designs
early in the design process, particularly
-1-
when design changes occur several times per day. Later, when designs become
more stabilized, customers may use in-circuit emulation to test the entire
system that contains the design and to help identify system-level bugs, which
typically are more difficult to find at this stage in the design process.
Quickturn's products serve the needs of IC and systems design engineers in a
variety of markets including microprocessors, computers, workstations and
PCs, telecommunications and networking, multimedia, and graphics.
The Company was incorporated in California in July 1987 and
reincorporated in Delaware in December 1993. In January 1997, the Company
commenced shipment of its CoBALT emulation system which was co-developed with
IBM. In February 1997, the Company merged with SpeedSim, Inc. ("SpeedSim"),
a provider of cycle-based simulation software (the "SpeedSim Merger"). See
Note 3 of the Notes to Consolidated Financial Statements in the Company's
1997 Annual Report to Stockholders. In June 1997, the Company purchased from
Synopsys, Inc. ("Synopsys") certain assets relating to Synopsys's emulation
business of Arkos Design, Inc. (the "Arkos Acquisition"). See Note 3 of the
Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Stockholders. Also in June 1997, the Company extended its
relationship with IBM to develop the next generation of custom
processor-based emulation systems. In November 1997, Quickturn moved its
corporate headquarters to San Jose, California. Late in 1997, the Company
introduced release 5.1 of its Quest-TM- II emulation software, which is
designed to enable customers to more quickly and easily compile their IC
designs.
The Company's principal executive offices are located at 55 W. Trimble
Road, San Jose, California, 95131, and its telephone number is (408) 914-6000.
The Company's homepage can be located on the Web at http://www.quickturn.com/.
TECHNOLOGY AND PRODUCTS
CYCLE-BASED SIMULATION
The IC design process begins when electronic design engineers create an
initial description of an IC, typically using high level or register transfer
level ("RTL") languages such as VHDL or Verilog. This description is then
debugged using software simulation which creates a software mock-up of the IC's
logic flow based on the RTL description. Test inputs are then fed into the
mock-up to determine if the current design performs as desired.
-2-
Once an IC design is deemed reliable at the RTL level, the designer maps
out a physical layout of the transistors and gates. This is often
accomplished using synthesis software which transforms RTL designs into gate
level architecture. Once at the gate level, the design again must be tested
for critical operating functionality. Both RTL and gate level tests are
typically run on event-driven simulation software, which runs at speeds
substantially below the normal speed of a completed IC. The speed of most
event-driven simulation software is typically in the range of tens or
hundreds of cycles per second, while most complex ICs are designed to run in
the range of tens of millions to hundreds of millions of cycles per second.
Therefore, software simulation testing of a highly complex design with
hundreds of thousands of gates using event-driven simulation could take a
substantial period of time. Since a design may need to undergo dozens of
iterations, given the time-to-market demands in the electronics industry, the
delays associated with full event-driven simulation for complex IC designs
can be unacceptable to IC designers.
The Company's SpeedSim high performance simulation software uses
cycle-based simulation ("CBS") technology, which is an alternative to
traditional event-driven simulation. CBS is specifically designed to improve
on the verification speed limitations of event-driven simulation, and it may
also contribute to lower IC design costs by reducing the need for expensive
hardware simulation accelerators.
The Company's SpeedSim cycle-based simulator employs a proprietary
technology called Boolean Dataflow Engine ("BDE") to enhance verification
performance by having the cycle-based simulator examine results only at the
end of every clock cycle, therefore eliminating unnecessary calculations.
These unnecessary calculations are inherent to traditional event-driven
simulation, which examines every active signal that propagates through every
device during a clock cycle. Therefore, the Company believes that its CBS
approach may be five to ten times faster than event-driven simulation because
CBS focuses only on the primary task at hand, which is functional
verification of chip design logic. BDE further enhances performance by
employing fewer logic states, typically two (1s and 0s), while full
event-driven-simulation addresses from four to nine logic states.
Other enhancements related to BDE technology include:
* Minimal Memory Usage: The SpeedSim product enhances performance by
utilizing less memory than event-driven simulation. Using BDE, engineers
can fit a one million gate design into a 10MB image. Without BDE, the
computer memory requirements for the same image may be typically five to 50
times
-3-
larger. For very large chip designs, the reduced memory requirements made
possible by BDE are further enhanced by allowing a design team to speed up
verification by running different tests on all of their desktop workstations
in their network at once, instead of on just one large server.
* Simultaneous Test: This SpeedSim option allows for up to 32 different
tests to be run simultaneously on one image of a design model, using a single
workstation, which can result in a five-fold to ten-fold gain in performance
throughput.
* Symmetric MultiProcessing ("SMP"): This feature allows chip designers to
take a single design of one million gates or more and divide it into segments.
Each segment is then simulated on different CPUs within the SMP box, thereby
creating software simulation that is four to eight times faster across multiple
CPUs compared to having to simulate on a single CPU.
* Fast Design Iterations: After a design bug is located and fixed, this
feature provides for fast recompilation, typically within minutes for very large
designs, instead of hours using some event-driven simulation.
The platforms supported by the SpeedSim product include UNIX workstations
on SUN, HP, DEC, and IBM platforms and Intel-compatible PCs running LINUX or
Windows/NT.
EMULATION
Quickturn's System Realizer emulation system and CoBALT emulation system
are used by electronic design engineers to generate reprogrammable physical
prototypes, or "virtual silicon"-TM- representations, of their electronic
circuit designs. This enables designers to achieve concurrent verification
of the entire target system, including system software and applications, and
to perform iterative design changes prior to actual silicon fabrication.
System Realizer offers a versatile solution for synchronous and asynchronous
designs in the range of 150,000 to six million logic gates. CoBALT provides
verification capabilities for complex, synchronous designs of up to 8 million
logic gates. Both systems share the same software environment, which allows
designers to select the optimum emulation solution for any design style.
The emulation process begins with the Company's emulation products
automatically accepting logic designs created in the most widely used,
commercially available electronic design automation ("EDA") systems, as well as
those created in the proprietary design environments of selected large
customers.
-4-
These designs are then processed by the Company's proprietary software on a
commercial workstation. Using information provided by engineers as well as
by built-in proprietary algorithms, the software is used to partition designs
into different blocks of logic which are then automatically mapped into a
virtual silicon implementation. The user's gate or RTL description is mapped
into the programmable hardware of CoBALT or System Realizer. Optimization is
done during the mapping process to best utilize the programmable hardware.
Once the designs are partitioned, the software defines the interconnection
and logic routing of the various blocks of logic.
The designs are then downloaded from the commercial workstation to the
emulation system, thereby creating a virtual silicon implementation of the
designs. The virtual silicon is then cabled into the target system where the
fabricated silicon will ultimately reside. At this time, the target system can
be run just as it would if fabricated silicon were available. The target
system is then tested by running embedded software, operating systems and
application software. The verification of the target system will typically run
at speeds in the millions of cycles per second range, several orders of
magnitude faster than gate-level simulation, but typically slower than real
operating speeds.
The emulation system includes an integrated logic analyzer and software
debugging tools which enable the engineer to observe the details of the design
behavior at any location within a design. When design problems are discovered,
changes are made and then transferred by the emulation software to the virtual
silicon. The impact of the changes can be determined quickly in the target
system while the design can still be easily modified.
The Company's emulation products range in emulation capacities from
150,000 logic gates to 8 million logic gates and are priced at between $0.75
to $1.00 per logic gate.
Quickturn's products are based on the Company's patented technologies and
proprietary software algorithms that have produced the following core
technologies:
* LOGIC COMPILATION INCLUDING PARTITIONING: the complex software that
segments a large IC design into smaller units which are programmed into the
field programmable gate arrays ("FPGAs") for System Realizer or processor chips
for CoBALT, and programmable memories that constitute the core reprogrammable
components of Quickturn's emulation systems.
-5-
* INTERCONNECT ARCHITECTURE: in System Realizer, the patented
system-level schema for connecting reprogrammable components, which is
implemented with Quickturn's proprietary interconnect ICs and placement and
routing software.
* LOGIC MAPPING: the software which optimizes the mapping of the design to
be emulated into the basic cells of the FPGAs in the emulation system.
* MEMORY ARCHITECTURE MAPPING: the software which optimizes the use of
programmable memories in the emulation system to represent the memory
architecture of the IC to be emulated.
* INSTRUMENTATION: the fully integrated software and logic analyzer
technology which allows users of Quickturn's emulation systems to observe the
gate level behavior of the virtual silicon, allowing for the assessment of a
design's correctness at this level.
These core technologies maximize the cost effectiveness of the products by
optimizing emulation system capacity and performance and minimizing both the
user's time to emulation and the costs required to verify and debug designs.
See "---Risk Factors: Developing Market; Acceptance of the Company's
Products."
CUSTOMERS
The Company markets its products to customers who design complex ICs and
electronic systems. Early adopters represent the IC and system companies with
the largest design verification problems. As the technology has matured, a
broader range of customers has adopted the technology. Today, the Company's
customers include microprocessor, computer, workstation and PC,
telecommunications and networking, multimedia, and graphics companies. The
Company's customers are in industries characterized by rapid advances in
technology, competitive pressures to quickly develop and introduce new products
and the need for extensive system-level design verification and debugging prior
to design implementation.
Microprocessors and microcontrollers with complexity levels of hundreds of
thousands and even millions of logic gates are applications for which emulation
is considered a critical technology because of the requirement to verify design
compatibility with new and existing software. Typical new users of Quickturn's
design verification products are designers of custom ICs or
-6-
Application Specific Integrated Circuits ("ASICs") with 30,000 to 100,000 or
more logic gates.
See "---Risk Factors: Customer Concentration."
CUSTOMER SERVICE AND SUPPORT
The Company provides customers with technical support, training and design
consulting services. The Company believes that a high level of customer service
and support is critical to the adoption of the Company's design verification
technology by new users. During the early stages of a customer's first project,
the Company works closely with the customer's project team to ensure a smooth
integration of its design verification products into the design process.
Quickturn maintains a rapid response program which is designed to meet customer
support issues. For customers using the Company's design verification products
on mission-critical projects, the Company offers expert-user design consulting
services through its Time-to-Market-Engineering Services ("TtME") to provide
such expert assistance to customers. Additionally, substantially all of the
Company's customers currently have maintenance agreements with the Company. The
Company generally warrants its products to be free from defects and to
substantially conform to material specifications for a period of 90 days.
SALES AND MARKETING
The Company markets its products and services primarily through its direct
sales and service force. The Company employs a highly skilled sales force and
an application engineering team capable of serving the sophisticated needs of
prospective customers' engineering and management staffs. The sales process is
supported by a broad range of marketing programs which includes trade shows,
direct marketing, public relations and customer seminars. From time to time the
Company may enter into joint marketing agreements with EDA companies and other
technology partners to increase market acceptance of the Company's design
verification products. See "---Risk Factors: Potential Fluctuations in
Quarterly Results" and "---Risk Factors: Lengthy Sales Cycles."
As of February 28, 1998, the Company's direct sales and service force
consisted of 155 technical, administrative and management employees. The
Company has 14 sales and support offices throughout the United States located in
Arizona, California (Garden Grove, San Diego, San Jose), Colorado, Illinois,
Massachusetts (Marlborough and North Chelmsford), Minnesota, New Jersey, North
Carolina, Oregon and Texas (Austin and Dallas). Internationally, the
-7-
Company has six sales and support offices, one each in London, Munich, Osaka,
Paris, Stockholm and Yokohama. The Company plans to lease a sales office in
Tel Aviv by the second quarter of 1998.
In Japan, the Company serves its customers through its direct sales and
service offices in Osaka and Yokohama. Additionally in Japan, the Company has
a hardware maintenance agreement with D Scan Service Co., Ltd. The Company
utilizes manufacturer's representatives and other selected distributors in
Israel, Korea, Singapore and Taiwan.
International sales (sales outside of North America) accounted for
approximately 34%, 36% and 31% of the Company's revenue in 1997, 1996 and 1995,
respectively. See "---Risk Factors: International Sales."
RESEARCH AND DEVELOPMENT
To support its current leadership position in the design verification
market, the Company presently invests and will continue to invest in continued
innovation in the key technology areas of new products and existing products.
As of February 28, 1998, the Company's research and development group
consisted of 135 full-time employees. Within the research and development
organization, approximately 74% was involved in software development, with the
balance in hardware design. During 1997, 1996 and 1995, research and
development expenses were $23.5 million, $19.7 million and $15.4 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
See "---Risk Factors: New Products and Technological Change."
MANUFACTURING
The Company performs final assembly and test of its emulation products in
its San Jose, California facility. The Company utilizes subcontractors for all
major subassembly manufacturing, including all individual printed circuit boards
and custom integrated circuits. The Company has a testing and qualification
program to ensure that all subassemblies meet the Company's specifications
before going into final assembly and test.
Although the Company's customers often forecast projected requirements
considerably in advance of the proposed shipment date, actual orders are
typically not received until shortly before the desired shipment date. As a
result,
-8-
backlog at the beginning of a period may not represent a significant
percentage of the product sales anticipated for that period. Accordingly,
the Company does not consider backlog to be a significant measure of
anticipated sales for any future period. However, the Company partially
relies on forecasts to determine inventory levels and manufacturing
schedules.
See "---Risk Factors: Dependence Upon Certain Suppliers" and "---Risk
Factors: Manufacturing."
COMPETITION
The EDA industry is highly competitive and rapidly changing. The Company's
products are specifically targeted at the emerging portion of this industry
relating to advanced verification technology, and, to date, substantially all of
the Company's revenue has resulted from sales in this segment. The Company
faces significant competition for emulation-based system-level design
verification and cycle-based simulation, and also competition from traditional
design verification methodologies which rely on the approach of building and
then testing complete system prototypes, as well as from potentially new tools
such as formal verfication. The Company will continue to inform potential
customers of the benefits of emulation and cycle-based simulation in order for
such customers to adopt the Company's advanced design verification systems as a
complement to standard simulation tools. See "---Risk Factors: Competition."
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. In November 1996, Aptix Corporation filed a
suit against the Company alleging antitrust violations and unfair competition.
In August 1997, a preliminary injunction sought by Mentor's German subsidiary,
Mentor Graphics (Deutschland) GmbH, was issued by a
-9-
regional court in Munich, enjoining agents of the Company from making certain
statements concerning the U.S. litigation matters between Mentor and the
Company. In October 1997, the Company filed suit in Germany against Mentor's
German subsidiary, Mentor Graphics (Deutschland) GmbH, for infringement of
the Company's German patent. See Note 16 of the Notes to Consolidated
Financial Statements in the Company's 1997 Annual Report to Stockholders.
There can be no assurance as to the outcome of these matters. See "---Item
3. Legal Proceedings." Although patent and intellectual property disputes in
the EDA industry are often settled through licensing, cross-licensing or
similar arrangements, costs associated with such litigation and arrangements
may be substantial.
PROPRIETARY RIGHTS
The Company's success and ability to compete depend in part upon its
proprietary technology. While the Company relies on patent, trademark, trade
secret and copyright law to protect its technology, the Company also believes
that factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position.
The Company currently holds 22 U.S. patents, of which one is co-owned,
and has 24 patent applications on file at the U.S. Patent and Trademark
Office. The Company's U.S. patents expire between 2008 and 2014. The Company
also holds five corresponding foreign patents and 43 foreign patent
applications pending. The five foreign patents expire in 2009.
See "---Risk Factors: Proprietary Rights."
EMPLOYEES
As of February 28, 1998, the Company had a total of 388 employees, of
whom 350 were based in the United States and 38 were based overseas. Of the
total, 173 were engaged in sales, marketing and related customer support
services, 135 were in research and development, 55 were in manufacturing and
25 were in finance and administration.
See "---Risk Factors: Dependence Upon Key Personnel."
-10-
RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND IN
THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, 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 IN THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION.
DEVELOPING MARKET; ACCEPTANCE OF THE COMPANY'S PRODUCTS. Substantially
all of the Company's revenue has been derived from the sale of its design
verification products, and sales of such products are expected to continue to
account for substantially all of the Company's revenue in the foreseeable
future. To date, the Company's products have been sold to a limited number of
customers. See "---Risk Factors: Customer Concentration." Accordingly,
broad market acceptance of design verification products by existing and new
customers is critical to the Company's future success. The adoption of the
Company's design verification products in the design verification process by
IC and system designers, particularly those which have historically relied on
other methodologies, generally requires the designer to adopt an entirely new
method of design verification. While the Company believes that its design
verification products offer considerable advantages in the IC and system
design process, there can be no assurance that market acceptance of those
products will continue to grow. Moreover, there can be no assurance that
emulation products will be adopted beyond the high-end emulation market,
which is characterized by complex ICs of hundreds of thousands or, in some
cases, millions of logic gates. The adoption of the Company's design
verification products for designing ICs and systems will also depend on the
continued increased complexity of ICs designed into electronic systems,
integration of the Company's products with other tools for design and
verification, importance of the time-to-market benefits of the Company's
design verification products and industry acceptance of the need to close the
gap between high level design and silicon production. Because the market for
design verification products is new and evolving, it is difficult to predict
with any assurance whether the market for design verification products will
continue to expand.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as the timing of customer development projects and
related orders to purchase the Company's design verification products, new
product announcements and releases by the Company, and economic conditions
generally and in the electronics industry specifically. Other factors which
could
-11-
adversely affect the Company's quarterly operating results in the future
include the efficiencies achieved by the Company in managing inventories and
fixed assets, the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and shortages of product components or
labor. Many of the Company's customers order on an as-needed basis and often
delay delivery of firm purchase orders until their project commencement dates
are determined. As a result, backlog at the beginning of a quarter may not
represent a significant percentage of the product sales anticipated in that
quarter. Quarterly revenue and operating results will therefore depend on
the volume and timing of orders received during the quarter, which are
difficult to forecast. Moreover, a significant portion of the Company's
revenue in each quarter generally results from shipments during the last few
weeks of the quarter. The absence of significant backlog and the
concentration of sales at the end of the quarter limit the Company's ability
to plan operating expenses and production and inventory levels. In addition,
sales of individual systems make up a significant percentage of the Company's
quarterly revenue. Therefore, if anticipated shipments in any quarter do not
occur or are delayed, expenditure levels could be disproportionately high as
a percentage of revenue, and the Company's operating results for that quarter
would be adversely affected.
LENGTHY SALES CYCLES. Sales of the Company's products depend, in
significant part, upon the decision of a prospective customer to commence a
project for the design and development of complex ICs and systems. In view of
the significant amounts of both time and commitment of capital involved in the
design and development of complex ICs and systems, the Company may experience
delays following initial qualification of the Company's design verification
products as a result of delays in commencement of the project by a customer.
For this and other reasons, the Company's design verification products typically
have a lengthy sales cycle during which the Company may expend substantial funds
and management effort. Lengthy sales cycles subject the Company to a number of
significant risks, including inventory obsolescence and fluctuations in
operating results, over which the Company has little or no control.
CUSTOMER CONCENTRATION. A relatively limited number of customers has
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 ICs. 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 in the foreseeable future. The loss of a major customer
or any reduction in orders by such a customer, including reductions due to
market or competitive conditions in the electronics or EDA industry, could have
an
-12-
adverse effect on the Company's financial condition and results of
operations. Moreover, the Company's ability to increase its sales will
depend in part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers and the general
economy. There can be no assurance that such an increase will occur.
DEPENDENCE ON ELECTRONICS INDUSTRY. The Company is dependent upon the
state of the electronics industry, and in particular on new system and IC design
projects. The electronics industry is characterized by rapid technological
change, short product life cycles, fluctuations in manufacturing capacity and
pricing and margin pressures, which cause the industry to be volatile. As a
result, the electronics industry has historically experienced sudden and
unexpected downturns during which new system and IC design projects decrease.
Because most of the Company's sales occur upon the commencement of new projects
for system and IC products, the Company is dependent upon the rate of
commencement of new system and IC design projects. Accordingly, negative factors
affecting the electronics industry could have a material adverse effect on the
Company's financial condition or results of operations.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The EDA industry is
characterized by extremely rapid technological change in hardware and
software development, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current lines of verification products and to design,
develop and support its next-generation design verification products on a
timely basis that keep pace with technological developments and emerging
industry standards. Next-generation design verification products must address
increasingly sophisticated customer needs, all of which require a high level
of expenditures for research and development by the Company. Although the
Company is not currently aware of any material limitations on its ability to
develop new products which are capable of verifying the next generation of
ICs, there can be no assurance that the Company will successfully develop and
market product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological
or other reasons, to develop and introduce products in a timely manner in
response to changing market conditions or customer requirements, the
Company's business,
-13-
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products
or technologies that have the potential to replace the Company's existing
product offerings. There can be no assurance that the announcement of new
product offerings will not cause customers to defer purchases of existing
Company products, which could adversely affect the Company's results of
operations.
COMPETITION. Because of the 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 design
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 established EDA companies that have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger installed customer bases than the Company.
In addition, many of these competitors have established relationships with
current and potential customers of the Company. Increased competition could
result in price reductions, reduced margins and loss of market share, all of
which could materially adversely affect the Company. Further, the Company
competes with the design engineers of its existing and potential customers, who
sometimes develop customized prototyping solutions for their particular needs.
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.
INTERNATIONAL SALES. 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. 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
-14-
currency devaluation and liquidity problems in this region. Additionally,
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.
DEPENDENCE UPON CERTAIN SUPPLIERS. Certain key components used in the
Company's emulation products are presently available from sole or limited
sources. The inability to develop alternate sources for these sole or limited
source components or to obtain sufficient quantities of these components could
result in delays or reductions in product shipments which could adversely affect
the Company's operating results. In particular, the Company currently relies on
Xilinx, Inc. ("Xilinx") for its supply of field programmable gate arrays
("FPGAs"). The Company does not have a long-term supply agreement with Xilinx.
If for any reason there were to be a reduction or interruption of supply of
these FPGAs to the Company, the Company's results of operations would be
materially adversely affected. Although the Company believes that it can obtain
FPGAs from alternate sources in the event of a reduction or interruption of
supply from Xilinx, a significant amount of time would be required to redesign
the Company's emulation systems and software to accommodate an alternate FPGA
supplier. In such event, the Company's operating results could be materially
adversely affected. The Company currently mitigates this risk by maintaining a
supply of FPGAs in inventory in excess of its forecasted requirements; however,
there can be no assurance that this measure will be adequate to alleviate any
future supply problems.
The Company's design verification products also use a proprietary IC
that is currently manufactured solely by National Semiconductor Corporation.
The Company generally purchases this component pursuant to purchase orders
placed from time to time in the ordinary course of business and has no
guaranteed supply arrangements with this source supplier. Moreover, the
manufacture of this component is extremely complex, and the Company's
reliance on the supplier of this component exposes the Company to production
difficulties and quality variations that may be experienced by this supplier.
Therefore, the Company's reliance on this sole and limited source supplier
involves several risks, including a potential inability to obtain an adequate
supply of required components, reduced control over pricing, and timely
delivery and quality of acceptable components. While the timeliness and
quality of deliveries to date from this supplier have been acceptable, there
can be no assurance that problems will not occur in the future. Any
prolonged inability to obtain adequate
-15-
deliveries, or any other circumstances that would require the Company to seek
alternative sources of supply, could have a material adverse effect on the
Company's operating results and could damage the Company's relationships with
its customers.
DEPENDENCE UPON KEY PERSONNEL. The Company's performance is substantially
dependent on the performance of its executive officers, some of whom have worked
together for only a short period of time. Furthermore, the loss of the services
of any of its executive officers or other key employees could have a material
adverse effect on the Company. The Company does not maintain key person life
insurance policies on the lives of its key officers or key personnel, all of
whom are important to the Company's future success. The Company's future success
also depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
managerial and technical employees or that it will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability of the Company to attract and retain the necessary
technical personnel in the future could impair the development of new products
and have a material adverse effect upon the Company's business, operating
results and financial condition. None of the Company's employees is represented
by a labor union. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
MANUFACTURING. The Company's emulation systems are complex and are used by
the Company's customers in critical development projects which demand a high
level of quality and reliability. The Company invests substantial resources to
ensure the quality and reliability of its emulation systems and is required to
provide a high level of service to its customers to minimize downtime in the
event of a malfunction. There can be no assurance that the Company will be able
to meet customer requirements for quality and reliability in the future.
PROPRIETARY RIGHTS. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents owned by the Company. The
source code for the Company's proprietary software is protected both as a trade
secret and as an unpublished copyrighted work. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
-16-
Company generally enters into confidentiality or license agreements with its
employees, distributors and customers, and limits access to and distribution
of its software, documentation and other proprietary information.
Nevertheless, there can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology. In addition, litigation has
been necessary in the past to enforce the Company's patents and may be
necessary in the future to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. See "---Competition,"
"---Risk Factors: Competition" and "Item 3 ---Legal Proceedings." Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
patent applications, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe upon the proprietary
rights of any third parties, there can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against the Company or that any such assertions
will not materially adversely affect the Company's business, financial condition
or results of operations. Irrespective of the validity or the successful
assertion of such claims, the Company could incur significant costs with respect
to the defense thereof, which costs could have a material adverse effect on the
Company's business, financial condition or results of operations. If any claims
or actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that under such circumstances, a license would be available
under reasonable terms or at all.
The Company also relies on certain software which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's verification products to perform key
functions. There can be no assurance that these third party software licenses
will continue to be available to the Company on commercially reasonable terms.
The
-17-
loss of or inability to maintain any of these software licenses could result
in delays or reductions in product shipments until equivalent software were
identified, licensed and integrated, which would adversely affect the Company's
operating results.
VOLATILITY OF STOCK PRICE. The market for Quickturn's Common Stock is
highly volatile, and could be subject to wide fluctuations in response to
quarterly variations in operating and financial results, announcements of
technological innovations or new products by Quickturn or its competitors,
changes in prices of Quickturn's or its competitors' products and services,
changes in product mix, changes in revenue and revenue growth rates for
Quickturn as a whole or for individual geographic areas, product units,
products or product categories, as well as other events or factors.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market in which
Quickturn does business or relating to Quickturn specifically have resulted,
and could in the future result, in an immediate and adverse effect on the
market price of Quickturn's Common Stock. Statements by financial or industry
analysts regarding the extent of the dilution in Quickturn's net income per
share resulting from the SpeedSim Merger and the extent to which such
analysts expect potential business synergies to offset such dilution can be
expected to contribute to volatility in the market price of Quickturn's
Common Stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market price for the securities of many high-technology
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the
market price of Quickturn's Common Stock.
ANTI-TAKEOVER PROVISIONS. The Company has adopted a number of provisions
that could have antitakeover effects. In January 1996, the Company's Board of
Directors adopted a Preferred Shares Rights Agreement, commonly referred to as a
"poison pill." In addition, the Company's Board of Directors has the authority
to issue up to 2,000,000 shares of Preferred Stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. Furthermore,
Quickturn is subject to the provisions of Section 203 of the General Corporation
Law of Delaware, which has the effect of restricting changes of control of a
company.
-18-
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, marketing, manufacturing and
research and development facility is located in two buildings totaling 145,815
square feet in San Jose, California, which are subject to a lease that expires
in August 2004. The Company leases thirteen other domestic sales and service
offices throughout the United States. The Company also leases international
sales and service offices in London, Munich, Osaka, Paris, Stockholm and
Yokohama, and plans to lease a sales office in Tel Aviv by the second quarter of
1998. The Company expects that it will be able to renew its leases on
satisfactory terms. The Company believes that its existing facilities are
adequate for its current needs and that additional space will be available as
needed.
ITEM 3. 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 SimExpress 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 SimExpress systems and
components. The Administrative Law Judge further recommended that the ITC issue
a Cease and Desist Order prohibiting Mentor from distributing any SimExpress
software of non-U.S. origin in the United States. On October 2, 1997, the ITC
ratified the Administrative Law
-19-
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 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 August
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
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") also filed a suit against the
Company alleging various violations of the antitrust laws and unfair
competition. The discovery phase of this case was recently completed.
-20-
The Company has mounted vigorous defenses against Mentor's defamation and
tortious interference claims and the antitrust and unfair competition claims by
Aptix. The outcome of these actions cannot be predicted with certainty.
In February 1998, Aptix and Meta filed a lawsuit against the Company
alleging infringement of a U.S. patent owned by Aptix and licensed to Meta. The
Company is mounting 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
Executive Officers and Vice Presidents of the Company
- -----------------------------------------------------
The executive officers and vice presidents of the Company, and their ages
as of February 28, 1998, are as follows:
Name Age Position
- ---- --- --------
Keith R. Lobo . . . . . . . . . . 46 President, Chief Executive Officer
and Director
Raymond K. Ostby . . . . . . . . 50 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Donald J. McInnis . . . . . . . . 51 Senior Vice President, Advanced
Simulation Division
Dr. K. C. Chu . . . . . . . . . . 51 Vice President, Software Development
Bernard A. Gilbert . . . . . . . 41 Vice President, Engineering Operations,
Advanced Simulation Division
Jeffrey K. Jordan . . . . . . . . 53 Vice President, North American Sales
Kevin L. Ladd . . . . . . . . . . 35 Vice President and Chief Technologist,
Advanced Simulation Division
-21-
Harlen Ng. . . . . . . . . . . . 57 Vice President, Program Development
Stephen P. Sample . . . . . . . . 46 Vice President, Advanced Development
Dugald H. Stewart . . . . . . . . 45 Vice President, Manufacturing
Christopher J. Tice . . . . . . . 38 Vice President, World-Wide Support
Services
Tung-sun Tung . . . . . . . . . . 49 Vice President, Research and
Development
Dr. Ming Yang Wang . . . . . . . 53 Vice President, Advanced Technology
Solutions
Naeem Zafar . . . . . . . . . . . 40 Vice President, Marketing
The Company's executive officers and vice presidents are appointed by,
and serve at, the discretion of the Board of Directors. Each executive
officer and vice president is a full-time employee of the Company. There is
no family relationship among any executive officer, vice president or
director of the Company.
Keith R. Lobo joined the Company in November 1992 as President, Chief
Executive Officer and as a Director. From March 1992 to October 1992, Mr.
Lobo served as a consultant in the venture capital field and was a private
investor. From March 1988 to February 1992, he served as Executive Vice
President and Chief Operating Officer of Chips & Technologies, Inc., a
semiconductor supplier of microcomputer components to the personal computer
industry. From August 1981 to March 1988, he served in a variety of
positions, most recently as Vice President of Advanced Products and General
Manager of the RISC Microprocessor Group at LSI Logic Corporation, a supplier
of ASICs.
Raymond K. Ostby joined the Company in September 1993 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. From July
1991 to September 1993, he served as Vice President, Finance and
Administration and Chief Financial Officer at Force Computers, Inc., a
computer products company. From June 1985 to July 1991, he served as Vice
President, Finance and Administration and Chief Financial Officer of Atmel
Corporation, a manufacturer of semiconductor products.
Donald J. McInnis has served as Senior Vice President, Advanced
Simulation Division of the Company from February 1997. From June 1994 to
February 1997, he served as President and Chief Executive Officer of
SpeedSim, Inc. From May 1990 to February 1994, Mr. McInnis was Vice
President and General Manager, Software Business Unit of ComputerVision
Corporation, a provider of CAD/CAM software services.
-22-
Dr. K.C. Chu joined the Company in June 1995 as Vice President, Entry
Systems and HDL-ICE Development and has served as Vice President, Software
Development since January 1996. From July 1992 to June 1995, he served as
Director, Sunnyvale Research and Development Lab of Mitsubishi Electric
Research Labs, Inc., a research and development facility, and from May 1990
to June 1992, he served as Senior Manager, Research and Development at
Mitsubishi Electronics America, Inc., a supplier of semiconductor products.
Bernard A. Gilbert has served as Vice President, Engineering Operations
of the Advanced Simulation Division of the Company since February 1997. From
March 1996 to February 1997 he was Vice President, Engineering Operations at
SpeedSim, Inc., a provider of cycle-based simulation technology, and from
March 1985 to March 1996, he served as Director of Core Technology Research
and Development at ComputerVision Corp., a provider of CAD/CAM software
services.
Jeffrey K. Jordan has served as Vice President, North American Sales since
October 1996. From May 1994 to October 1996 he was Eastern Area Sales Director
and from April 1993 to May 1994 he served as Eastern Area Sales Manager. From
August 1989 to April 1993, Mr. Jordan served as Eastern Regional Sales Manager
at Integrated Measurement Systems, a provider of test station hardware and
software.
Kevin L. Ladd has served as Vice President and Chief Technologist of the
Advanced Simulation Division of the Company since February 1997. From June
1994 to February 1997 he served as Chairman and Vice President of Research
and Development of SpeedSim, Inc. Mr. Ladd was a consulting engineer for
ViewLogic Systems, Inc., a provider of software products used in IC design
and simulation, from August 1992 to December 1993. From May 1982 to August
1992 he served in a variety of positions most recently as Principal Engineer,
at Digital Equipment Corporation, a manufacturer of computer systems and
software.
Harlen Ng has served as Vice President, Program Development since August
1995. From January 1995 to August 1995, he was Vice President of Systems
Engineering Assurance, and from August 1991 to January 1995, he served as
Director, Engineering Operations for PiE Design Systems ("PiE"), a provider of
emulation systems for system-level verification. From November 1983 to July
1991, Mr. Ng served in a variety of positions at Cadence Design Systems, Inc., a
provider of automation tools used in IC design, most recently as Director,
Customer Support.
-23-
Stephen P. Sample co-founded the Company and served as Director, Hardware
Design from its inception in July 1987. In July 1993, he became Vice President,
Hardware Design, and since August 1994 he has served as Vice President, Advanced
Development.
Dugald H. Stewart joined the Company in January 1989 as Director of
Manufacturing, and has served as Vice President, Manufacturing since June 1993.
From August 1979 to January 1989, he served as Director of Manufacturing at KLA
Instruments, Inc., a semiconductor equipment manufacturer.
Christopher J. Tice has served as Vice President, World-Wide Support
Services since March 1995. Previously he was Director, World-Wide Support
Services from June 1993 to March 1995. From November 1991 to June 1993, Mr.
Tice served as Director, Support for PiE. From November 1985 to November
1991, he served as General Manager, Processor Business Group at Weitek, a
provider of enhancement processors and controllers.
Tung-sun Tung has served as Vice President, Research and Development since
January 1996, and as Vice President , Emulation System Development from October
1994 to January 1996. From June 1993 to October 1994, he was Director, Hardware
Design. From October 1991 to June 1993, he served as Director, Manufacturing at
PiE. From April 1988 to October 1991, he was Director, Engineering at NetFRAME
Systems, Inc., a designer and manufacturer of fault tolerant servers.
Dr. Ming Yang Wang has served as Vice President, Advanced Technology
Solutions from December 1996, and as Director, Solutions Development from July
1993 to December 1996. From April 1990 to July 1993, Dr. Wang was Program
Manager at PiE.
Naeem Zafar joined the Company in June 1988 and has served as Vice
President, Marketing since September 1995. From March 1995 to September 1995,
he was Vice President, Technology Strategy and Planning, from December 1994 to
March 1995, he was Director, Advanced Products, and from June 1993 to December
1994, Mr. Zafar was Director, Marketing. From April 1992 to June 1993, he was
Director, Product Marketing, from October 1990 to April 1992, he was Senior
Product Marketing Manager, from April 1989 to October 1990, he was Technical
Marketing Manager, and from June 1988 to April 1989, he was Senior Hardware
Engineer.
-24-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 17 of the
Company's 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference to the
section entitled "Financial Highlights" on page 2 of the Company's 1997 Annual
Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 18 through 22 of the Company's 1997 Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 17 of the
Company's 1997 Annual Report to Stockholders, the Consolidated Financial
Statements, the related notes thereto and Report of Independent Accountants on
pages 23 through 38 of the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOURE.
Not applicable.
With the exception of the information specifically incorporated by
reference from the 1997 Annual Report to Stockholders in Parts II and IV of this
Form 10-K, the Company's 1997 Annual Report to Stockholders is not to be deemed
filed as part of this Report.
-25-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the section entitled
"Proposal No. 1: Election of Directors" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders filed with the Commission on March 10,
1998 (the "1998 Proxy Statement"). The information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers and Vice
Presidents of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Officer Compensation" in the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Security Ownership
of Management and Certain Beneficial Owners" in the Company's 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
-26-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K.
1. FINANCIAL STATEMENTS. The following consolidated financial
statements of the Company and the Report of Independent
Accountants are incorporated by reference to pages 23
through 38 of the Company's 1997 Annual Report to Stockholders.
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial
statement schedule of the Company for the years ended
December 31, 1997, 1996 and 1995 is filed as part of this
Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto,
of the Company.
Schedule Title Page
-------- ----- ----
Report of Independent Accountants S-1
on Financial Statement Schedule
II Valuation and Qualifying Accounts S-2
-27-
Schedules other than those listed above have been omitted since
they are either not required, not applicable or the information
is otherwise included.
3. EXHIBITS: The exhibits listed on the accompanying index to
exhibits immediately following the financial statement schedule
are filed as part of, or incorporated by reference into, this
Form 10-K.
(b) REPORT ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended December 31, 1997.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 27th day of March
1998.
QUICKTURN DESIGN SYSTEMS, INC.
By: /s/ RAYMOND K. OSTBY
---------------------------
Raymond K. Ostby,
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on March 27, 1998 on behalf
of the Registrant and in the capacities indicated:
Signatures Title
----------------------------- ---------------------------------------
/s/ KEITH R. LOBO President and Chief Executive Officer
----------------------------- (Principal Executive Officer)
Keith R. Lobo
/s/ RAYMOND K. OSTBY Vice President, Finance and
----------------------------- Administration, Chief Financial Officer
Raymond K. Ostby and Secretary (Principal Financial and
Accounting Officer)
/s/ GLEN M. ANTLE Chairman of the Board
-----------------------------
Glen M. Antle
/s/ RICHARD C. ALBERDING Director
-----------------------------
Richard C. Alberding
/s/ MICHAEL R. D'AMOUR Director
-----------------------------
Michael R. D'Amour
/s/ DR. YEN-SON (PAUL) HUANG Director
-----------------------------
Dr. Yen-Son (Paul) Huang
/s/ DR. DAVID K. LAM Director
-----------------------------
Dr. David K. Lam
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Quickturn Design Systems,
Inc. has been incorporated by reference in this Form 10-K from page 38 of the
1997 Annual Report to Stockholders of Quickturn Design Systems, Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 27 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 20, 1998
S-1
SCHEDULE II - PURSUANT TO REGULATION S-X RULE 12-09
QUICKTURN DESIGN SYSTEMS, INC.
Valuation and Qualifying Accounts
(in thousands)
Deductions Balance
Balance at Additions (Charges at
Beginning (Charges to Against End
Description of Period Expenses) Reserves) of Period
- ------------------------------- --------- --------- --------- ---------
Year ended December 31, 1995
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended December 31, 1996
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended December 31, 1997
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
S-2
QUICKTURN DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated January 16, 1997 among the
Company, SpeedSim, Inc. and QT Corporation (which is incorporated
herein by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated February 7, 1997).
3.1 Certificate of Incorporation of the Registrant, as amended (which
is incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, Registration No.
33-71022 ("Registrant's 1993 Form S-1")).
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant, dated April 11, 1997.
3.3 Bylaws of the Registrant (which are incorporated herein by
reference to Exhibit 3.2 to the Registrant's 1993 Form S-1).
4.1 Form of Registrant's Common Stock certificate (which is incorporated
herein by reference to Exhibit 4.1 to the Registrant's 1993 Form S-1).
10.1 * Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers (which is incorporated herein
by reference to Exhibit 10.1 to the Registrant's 1993 Form S-1).
10.2 * 1988 Stock Option Plan and related agreements (which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's 1993
Form S-1).
10.3 * Key Executive Stock Option Plan and related agreements (which is
incorporated herein by reference to Exhibit 10.3 to the Registrant's
1993 Form S-1).
10.4 * 1993 Employee Qualified Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8, Registration
No. 333-25459 ("Registrant's 1997 Form S-8")).
10.5 Software License Agreement dated December 18, 1987 between Xilinx,
Inc. and Registrant (which is incorporated herein by reference to
Exhibit 10.8 to the Registrant's 1993 Form S-1).
-i-
QUICKTURN DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
10.6 Lease dated December 6, 1996 between San Jose Acquisition Co., L.L.C.
and Registrant.
10.8 * Offer letter dated November 4, 1992 between Keith R. Lobo and
Registrant, as amended (which is incorporated herein by reference to
Exhibit 10.18 to Registrant's 1993 Form S-1).
10.9 * 1994 Outside Director Stock Option Plan (which is incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8, Registration No. 33-82452).
10.10 * SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan
(which is incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8, Registration No. 333-21587).
10.11 * 1996 Supplemental Stock Plan (which is incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-18407).
10.12 * 1997 Stock Option Plan (which is incorporated herein by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Registration No. 33-25459).
13.1 Portions of 1997 Annual Report to Stockholders expressly incorporated
by reference herein.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
27.1 Financial Data Schedule for fiscal year of 1997 (EDGAR).
27.2 Restated Financial Data Schedule for fiscal year of 1996 and
quarters 1, 2, 3 of 1996 (EDGAR).
27.3 Restated Financial Data Schedule for fiscal year of 1995 (EDGAR).
- ----------------------------
* Indicates management compensatory plan, contract or arrangement.
-ii-