p 2. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
FINANCIAL HIGHLIGHTS
(amounts in thousands of dollars except
per share and employee data) 1993 1994 1995(1) 1996(1) 1997
- ---------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR
Total revenue $ 54,865 $ 65,523 $ 82,442 $ 109,578 $ 110,404
Net income (loss) $ (5,356) $ 4,601 $ 12,478(2) $ 14,131(3) $ (5,346)(4)
Diluted net income (loss) per share $ (0.96)(5) $ 0.32 $ 0.74(2) $ 0.79(3) $ (0.31)(4)
Total revenue by geographic area
North America $ 40,872 $ 48,594 $ 56,702 $ 70,658 $ 73,186
Asia-Pacific 8,940 9,336 16,496 30,138 26,025
Europe 5,053 7,593 9,244 8,782 11,193
-----------------------------------------------------------
Total $ 54,865 $ 65,523 $ 82,442 $ 109,578 $ 110,404
-----------------------------------------------------------
-----------------------------------------------------------
AT YEAR END
Working capital $ 33,927 $ 34,998 $ 44,381 $ 49,243 $ 51,143
Total assets $ 56,199 $ 77,349 $ 94,240 $ 111,977 $ 129,192
Long-term debt $ 3,487 $ 3,819 $ 3,701 $ -- $ --
Stockholders' equity $ 38,296 $ 49,895 $ 66,337 $ 84,045 $ 91,898
Employees 177 244 285 363 382
(1) The 1995 and 1996 results have been restated to reflect the February 1997
merger of the Company with SpeedSim-TM-, Inc. which was accounted for as a
pooling of interests.
(2) The 1995 results include a net year-to-date tax benefit of $3.7 million
or $0.22 per share.
(3) The 1996 results include a net year-to-date tax benefit of $891,000 or
$0.05 per share.
(4) The 1997 results include one-time acquisition and merger related charges
of $19.2 million or ($0.61) per share, net of tax.
(5) Diluted net loss per share has been calculated in accordance with
application of Statement of Financial Accounting Standards No. 128, which
resulted in a restatement of diluted net loss per share for the fiscal
year 1993.
TOTAL REVENUE
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1993 $54,865
1994 $65,523
1995 $82,442
1996 $109,578
1997 $110,404
STOCKHOLDERS' EQUITY
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1993 $38,296
1994 $49,895
1995 $66,337
1996 $84,045
1997 $91,898
WORKING CAPITAL
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1993 $33,927
1994 $34,998
1995 $44,381
1996 $49,243
1997 $51,143
EMPLOYEES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1993 177
1994 244
1995 285
1996 363
1997 382
Financial Review
p 17. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
Quarter Ended
---------------------------------------------------------------------------------------------------
(amounts in thousands except Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
per share data) 1997 1997 1997 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 32,500 $ 30,064 $ 26,438 $ 21,402 $ 30,664 $ 28,787 $ 26,259 $ 23,868
Cost of revenue 8,841 8,813 8,392 6,834 9,124 8,482 7,913 7,144
---------------------------------------------------------------------------------------------------
Gross profit 23,659 21,251 18,046 14,568 21,540 20,305 18,346 16,724
Operating expenses
Research and development 5,944 5,884 5,884 5,787 5,600 5,158 4,681 4,267
Sales and marketing 10,065 9,389 8,787 8,534 8,511 8,318 7,966 7,187
General and administrative 3,094 3,034 2,849 2,508 2,146 1,790 1,755 1,563
Acquisition and merger
related charges -- 18,031 -- 1,200 -- -- -- --
---------------------------------------------------------------------------------------------------
Total operating expenses 19,103 36,338 17,520 18,029 16,257 15,266 14,402 13,017
---------------------------------------------------------------------------------------------------
Operating income (loss) 4,556 (15,087) 526 (3,461) 5,283 5,039 3,944 3,707
Interest and other, net 629 636 518 392 547 533 487 312
---------------------------------------------------------------------------------------------------
Net income (loss) before
provision for (benefit
from) income taxes 5,185 (14,451) 1,044 (3,069) 5,830 5,572 4,431 4,019
Provision for (benefit
from) income taxes 1,607 (6,925) 324 (951) 1,305 1,700 1,441 1,275
---------------------------------------------------------------------------------------------------
Net income (loss) $ 3,578 $ (7,526) $ 720 $ (2,118) $ 4,525 $ 3,872 $ 2,990 $ 2,744
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Diluted net income
(loss) per share $ 0.19 $ (0.43) $ 0.04 $ (0.13) $ 0.25 $ 0.22 $ 0.17 $ 0.16
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Number of shares used
in diluted per
share calculation 18,971 17,462 18,025 16,562 18,378 17,967 17,857 17,445
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Market price range
High $ 16.31 $ 16.63 $ 15.88 $ 21.00 $ 21.63 $ 15.13 $ 16.50 $ 11.50
Low $ 10.69 $ 12.13 $ 6.69 $ 15.00 $ 11.75 $ 11.88 $ 11.13 $ 9.00
Quarter Ended
---------------------------------------------------------------------------------------------------
(as a percentage of Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
total revenue) 1997 1997 1997 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 27.2% 29.3% 31.7% 31.9% 29.8% 29.5% 30.1% 29.9%
---------------------------------------------------------------------------------------------------
Gross profit 72.8% 70.7% 68.3% 68.1% 70.2% 70.5% 69.9% 70.1%
Operating expenses
Research and development 18.3% 19.6% 22.3% 27.0% 18.2% 17.9% 17.8% 17.9%
Sales and marketing 31.0% 31.2% 33.2% 39.9% 27.8% 28.9% 30.4% 30.1%
General and administrative 9.5% 10.1% 10.8% 11.7% 7.0% 6.2% 6.7% 6.6%
Acquisition and merger
related charges -- 60.0% -- 5.6% -- -- -- --
---------------------------------------------------------------------------------------------------
Total operating expenses 58.8% 120.9% 66.3% 84.2% 53.0% 53.0% 54.9% 54.6%
---------------------------------------------------------------------------------------------------
Operating income (loss) 14.0% (50.2%) 2.0% (16.1%) 17.2% 17.5% 15.0% 15.5%
Interest and other, net 2.0% 2.1% 1.9% 1.8% 1.8% 1.9% 1.9% 1.3%
---------------------------------------------------------------------------------------------------
Net income (loss) before
provision for (benefit
from) income taxes 16.0% (48.1%) 3.9% (14.3%) 19.0% 19.4% 16.9% 16.8%
Provision for (benefit from)
income taxes 5.0% (23.1%) 1.2% (4.4%) 4.2% 5.9% 5.5% 5.3%
---------------------------------------------------------------------------------------------------
Net income (loss) 11.0% (25.0%) 2.7% (9.9%) 14.8% 13.5% 11.4% 11.5%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
The 1996 quarterly results have been restated to reflect the February 1997
merger of the Company with SpeedSim, Inc. which was accounted for as a
pooling of interests.
The Company's common stock is traded on the Nasdaq National Market under the
symbol "QKTN." As of December 31, 1997, there were approximately 207
stockholders of record and an estimated 6,500 additional stockholders who held
stock in "street name."
p 18. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports products that verify the designs of complex
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 principal design verification
products include System Realizer and CoBALT emulators and SpeedSim cycle-based
simulators. Emulation systems are sold in modules of various capacities measured
in "logic gates," a unit describing the design elements created and verified by
Quickturn's customers. As system capacity increases, the selling price of these
systems increases correspondingly. Simulation revenue is charged on a
per-license basis. 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 began operations in 1987 and commenced product shipments in 1989. In
January 1997, the Company commenced shipments of its CoBALT emulation system
which resulted from the Company's technology relationship 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 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. 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 II software, designed to enable customers to
more quickly and easily compile their IC designs.
RESULTS OF OPERATIONS
The following table sets forth certain financial data from the Company's
consolidated statements of operations as a percentage of total revenue:
Year Ended December 31,
---------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0%
Cost of revenue 29.8% 29.8% 30.5%
--------------------------
Gross margin 70.2% 70.2% 69.5%
Operating expenses
Research and development 21.3% 18.0% 18.7%
Sales and marketing 33.3% 29.2% 31.3%
General and administrative 10.4% 6.6% 6.1%
Acquisition and merger related charges 17.4% -- --
--------------------------
Total operating expenses 82.4% 53.8% 56.1%
--------------------------
Operating income (loss) (12.2%) 16.4% 13.4%
Interest and other, net 2.0% 1.7% 1.0%
--------------------------
Net income (loss) before provision
for (benefit from) income taxes (10.2%) 18.1% 14.4%
Provision for (benefit from) income taxes (5.4%) 5.2% (0.7%)
--------------------------
Net income (loss) (4.8%) 12.9% 15.1%
--------------------------
--------------------------
TOTAL REVENUE
The Company derives its total revenue from the sales of its products,
maintenance and services. Product revenue consists primarily of sales of its
System Realizer and CoBALT emulation systems, and cycle-based simulation
software. Maintenance and service revenue consists of fees for maintenance and
support services, training and consulting.
Total revenue increased by $826,000, or 1%, to $110.4 million in 1997 over 1996
compared with an increase of $27.1 million, or 33%, in 1996 over 1995. The
relatively flat growth in total revenue in 1997 was attributable to an increase
in maintenance and service revenue due to a larger installed customer base,
partially offset by a decrease in product revenue. The decrease in product
revenue in 1997 was due to lower product volume somewhat offset by a higher mix
of emulation systems containing more emulation modules. The total revenue growth
in 1996 and 1995 was primarily attributable to an increase of product revenue
due to a higher mix of emulation systems containing more emulation modules.
Product revenue accounted for 73%, 80% and 83% of total revenue in 1997, 1996
and 1995, respectively, while maintenance and service revenue accounted for 27%,
20% and 17% of total revenue in 1997, 1996 and 1995, respectively. On a price
per logic gate basis, both product costs and the average price for an emulation
system with equivalent capacity decreased due to increased efficiency of repro-
grammable system components and lower component costs.
Domestic revenue (North American sales) grew by 4%, 25% and 17% in 1997, 1996
and 1995, respectively, while international revenue decreased by 4% in 1997,
and increased by 51% and 52% in 1996 and 1995, respectively. See Note 14 of the
Notes to Consolidated Financial Statements. International revenue (sales outside
of North America) accounted for approximately 34%, 36% and 31% of total revenue
in 1997, 1996 and 1995, respectively. The decrease in international revenue in
1997 in dollar amounts was largely due to lower revenue in the Asia-Pacific
markets, excluding Japan, which decreased by 64% to $2.9 million, somewhat
offset by higher revenue in Europe which increased 27% to $11.2 million. The
Company is uncertain whether the softness in the Asia-Pacific markets, excluding
Japan, will continue in the foreseeable future due to extreme currency
devaluation and liquidity problems in this region. The increase in international
revenue in 1996 and 1995 was largely due to revenue growth in the Asia-Pacific
markets which increased by 83% to $30.1 million in 1996 and by 77% to $16.5
million in 1995.
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
p 19. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
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.
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 total 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.
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 43%, 52%
and 48% of total revenue in 1997, 1996 and 1995, respectively. One customer,
Fujitsu, comprised 12% of the Company's total revenue in 1996, and no customer
individually comprised more than 10% of the Company's total revenue in 1997 and
1995. The Company expects that sales of its products to a relatively limited
number of customers will continue to account for a high percentage of total
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.
The Company recognizes revenue from sales of its design verification products
and services when all substantial conditions have been met, including shipment
to the customer, fulfillment of acceptance terms, if any, and completion of all
significant contractual terms. Maintenance revenue is deferred and recognized
ratably over the term of the maintenance agreement, which is typically twelve
months. Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the time
of sale.
GROSS MARGINS
Cost of revenue includes materials, labor and overhead incurred in the
manufacture of emulation systems and cycle-based simulation software as well as
the cost of providing service and maintenance. Total gross margins, which
consist of product, and maintenance and service gross margins, were 70% in each
of the three years 1997, 1996 and 1995. Product gross margins were
70% in each of the three years 1997, 1996 and 1995. Maintenance and service
gross margins were 70% in 1997 and 69% in 1996 and 1995. The Company was able to
maintain its gross margins primarily due to a sufficiently large revenue base
over which to spread fixed costs and to continued manufacturing efficiencies.
The Company expects competitive pressures to increase in its market from
existing companies and new entrants, which among other things could result in a
decreasing average sales price. Accordingly, there can be no assurance that the
Company will be able to sustain its recent gross margins. Furthermore, to the
extent that the Company's cost reduction goals are achieved, any resulting cost
savings that are passed on to the Company's customers may also have an adverse
effect on gross margins.
RESEARCH AND DEVELOPMENT
Research and development expenses were $23.5 million, $19.7 million and $15.4
million in 1997, 1996 and 1995, respectively. The increases in research and
development expenses were primarily attributable to increased staffing and
equipment costs necessary to enhance current products and carry out research and
development activities for the next generation emulation and cycle-based
simulation products. Research and development expenses as a percentage of total
revenue were approximately 21%, 18% and 19% in 1997, 1996 and 1995,
respectively. The Company expects to continue to invest a significant amount of
its resources in research and development.
SALES AND MARKETING
Sales and marketing expenses were $36.8 million, $32.0 million and $25.8 million
in 1997, 1996 and 1995, respectively. Sales and marketing expenses increased in
each period due to the expansion of the Company's sales and marketing
organizations. As a percentage of total revenue, sales and marketing expenses
were approximately 33%, 29% and 31% in 1997, 1996 and 1995, respectively. 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 were $11.5 million, $7.3 million and $5.0
million in 1997, 1996 and 1995, respectively. The increases in general and
administrative expenses in 1997 and 1996 were primarily attributable to
increased legal costs related to a patent infringement
p 20. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
lawsuit filed by the Company in January 1996. See Note 16 of the Notes to
Consolidated Financial Statements. The Company expects general and
administrative expenses to increase in 1998 due primarily to continued legal
costs. General and administrative expenses represented approximately 10%, 7%
and 6% of total revenue in 1997, 1996 and 1995, respectively.
ACQUISITION AND MERGER RELATED CHARGES
In connection with the SpeedSim Merger, the Company recorded a one-time charge
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.
In connection with the Arkos Acquisition, the Company incurred charges of $18.0
million in the third quarter of 1997 representing the portion of the purchase
price expensed. The balance of the purchase price will be amortized over three
to five years. The Company acquired certain in-process technology which was
expensed in accordance with Interpretation 4 to Statement of Financial
Accounting Standard No. 2, "Accounting for Research and Development Costs." Such
in-process technology was valued, along with other acquired net assets, in
accordance with valuation techniques commonly used in the technology industry.
See Note 3 of the Notes to Consolidated Financial Statements.
INTEREST INCOME AND EXPENSE
Interest income was $2.4 million, $2.2 million and $1.8 million in 1997, 1996
and 1995, respectively. The increases in interest income in 1997 and 1996 were
due primarily to a greater average balance of cash and cash equivalents and
marketable securities. Interest expense was $272,000, $429,000 and $750,000 in
1997, 1996 and 1995, respectively. The decreases in interest expense in 1997 and
1996 were due primarily to the payoff of lease lines used to purchase certain
fixed assets and the reduction of other debt.
PROVISION FOR INCOME TAXES
The provision for federal, state and foreign income taxes was a benefit of $5.9
million in 1997, an expense of $5.7 million in 1996 and a benefit of $612,000 in
1995, representing effective tax provision (benefit) rates of approximately
(53%), 29% and (5%), respectively. The effective income tax rate was impacted by
a reduction in the Company's valuation allowance against deferred tax assets of
none, $1.9 million and $6.8 million for 1997, 1996 and 1995, respectively. The
effective tax rate was also reduced by the tax benefit from the Company's
foreign sales corporation, and by utilization of federal and state tax credits
in all years presented.
At December 31, 1997, the Company had federal net operating loss carryforwards
of $5.7 million and federal and state tax credit carryforwards of $1.3 million
and $1.1 million, respectively. A portion of the Company's net operating loss
and tax credit carryforwards were acquired in a merger and are subject to an
annual limitation of approximately $1.2 million.
FACTORS AFFECTING OPERATING RESULTS
COMPETITION
The Electronic Design Automation ("EDA") industry is highly competitive and
rapidly changing. The Company faces significant competition for emulation-based
system-level verification and cycle-based simulation, in addition to competition
from traditional design verification methodologies which rely on the approach of
building and then testing complete system prototypes. Because of the growing
demand for a design verification methodology which reduces the number of costly
design iterations and improves product quality, the Company expects competition
in the market for system-level verification and cycle-based simulation to
increase as other companies attempt to introduce emulation and cycle-based
simulation products and product enhancements, and as major new EDA technologies
may emerge. Moreover, the Company competes with companies that have
significantly greater financial, technical and marketing resources, greater name
recognition and larger installed bases than the Company. In addition, many of
these competitors have established relationships with current and potential
customers of the Company. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. The Company believes that the principal
competitive factors in the EDA market are quality of results, the
mission-critical nature of the technology, technical support, product
performance, reputation, price and support of industry standards. The Company
believes that it currently competes favorably with respect to these factors.
However, there can be no assurance that the Company will be able to compete
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 a suit against the Company for declaratory judgment of noninfringement,
invalidity and unenforceability of several of the Company's patents. Several
actions between these parties 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
p 21. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
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 regional court in Munich, enjoining agents of the Company from
making certain statements concerning 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. Although patent, intellectual property and
related antitrust disputes in the EDA industry are often settled through
licensing, cross-licensing or similar arrangements, costs associated with
such litigation and arrangements may be substantial.
IMPACT OF THE YEAR 2000 ISSUE
Many existing computer systems, applications and other control devices use
computer programs that recognize only two digits rather than four digits to
define an applicable year. Therefore, any of the Company's computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000 (the "Year 2000 Issue"). This could result in a
system failure or miscalculations causing disruptions of the Company's
operations or in the ability of the Company's customers to effectively utilize
the Company's design verification products.
Based on recent assessments, the Company has determined that it will be required
to modify or replace portions of its software so that its computer systems and
design verification products will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications to existing
software or conversion to new software, the Year 2000 Issue can be 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 upon 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 on which the Company plans 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 and capital resources. There can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. 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 codes, and similar uncertainties.
OTHER FACTORS
Other factors which could adversely affect the Company's quarterly operating
results in the future include efficiencies as they relate to managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased revenue, customer product delivery requirements and shortages of
components or labor. Moreover, a significant portion of the Company's total
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. Additionally, since a significant portion of the Company's revenue and
net income is 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.
Due to the factors above, the Company's future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in total revenue or earnings from levels expected by securities
analysts has had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock. Additionally,
the Company may not learn of such shortfalls until late in a fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative
p 22. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions
by stockholders. The Company is evaluating alternative formats for presenting
this information, but does not expect this pronouncement to materially impact
the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supercedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated
to conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $53.1 million in cash, cash equivalents
and marketable securities. Additionally, the Company had $9.8 million in
unsecured revolving bank lines of credit. To date, no funds have been drawn from
the bank lines of credit. The Company's credit agreements contain certain
affirmative and restrictive covenants that are typical of such commercial
lending arrangements. The agreements require, among other things, that the
Company maintain a stipulated tangible net worth, meet certain financial ratios
(quick asset to current liability and debt to tangible net worth), achieve
annual profitability excluding the one-time write-off of the Arkos Acquisition
and maintain quarterly debt service. The agreements also prohibit, among other
things, the Company from paying cash dividends. See Note 8 of the Notes to
Consolidated Financial Statements.
Net cash provided by operating activities was $9.2 million, $22.4 million and
$10.2 million in 1997, 1996 and 1995, respectively. The decrease in cash
provided by operating activities in 1997 as compared to 1996 was primarily
attributable to a decrease in net income and increase in accounts receivable,
partially offset by the write-off of the Arkos Acquisition. Additionally, the
increase in cash provided by operations in 1996 as compared to 1995 was
primarily attributable to a significantly smaller decrease in deferred income
taxes and an increase in deferred revenue.
Net cash used in investing activities was $20.6 million, $13.3 million and
$171,000 in 1997, 1996 and 1995, respectively. Net cash used in investing
activities was related primarily to net purchases of marketable securities, and
to acquisitions of property and equipment. The increase in cash used in
investing activities in 1997 as compared to 1996 was primarily attributable to
the Arkos Acquisition, while the increase in 1996 against 1995 was primarily due
to an increase in net purchases of marketable securities. The Company expects
that investment levels and net cash used in investing activities will increase
in future periods.
Capital expenditures, including capital leases, were approximately $7.5 million,
$6.4 million and $7.8 million in 1997, 1996 and 1995, respectively. These
expenditures were primarily for the expansion of production capacity and the
addition of research and development equipment. While the Company has no
material capital commitments, the Company anticipates that its planned purchases
of capital equipment in 1998 will require additional expenditures of
approximately $9.0 million, a portion of which may be financed with cash and a
portion of which may be financed through capital leases.
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 1998.
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.
p 23. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------
(amounts in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Revenue
Product revenue $ 80,850 $ 88,090 $ 68,321
Maintenance and service revenue 29,554 21,488 14,121
--------------------------------------
Total revenue 110,404 109,578 82,442
Cost of revenue
Cost of product revenue 23,984 26,050 20,776
Cost of maintenance and service revenue 8,896 6,613 4,330
--------------------------------------
Total cost of revenue 32,880 32,663 25,106
--------------------------------------
Gross profit 77,524 76,915 57,336
Operating expenses
Research and development 23,499 19,706 15,436
Sales and marketing 36,775 31,982 25,809
General and administrative 11,485 7,254 5,006
Acquisition and merger related charges 19,231 -- --
--------------------------------------
Total operating expenses 90,990 58,942 46,251
--------------------------------------
Operating income (loss) (13,466) 17,973 11,085
Interest income 2,370 2,229 1,792
Interest expense (272) (429) (750)
Other income (expense), net 77 79 (261)
--------------------------------------
Net income (loss) before provision for
(benefit from) income taxes (11,291) 19,852 11,866
Provision for (benefit from) income taxes (5,945) 5,721 (612)
--------------------------------------
Net income (loss) $ (5,346) $ 14,131 $ 12,478
--------------------------------------
--------------------------------------
Basic net income (loss) per share $ (0.31) $ 0.87 $ 0.81
--------------------------------------
--------------------------------------
Number of shares used in basic per share
calculation 17,110 16,323 15,497
--------------------------------------
--------------------------------------
Diluted net income (loss) per share $ (0.31) $ 0.79 $ 0.74
--------------------------------------
--------------------------------------
Number of shares used in diluted per
share calculation 17,110 17,912 16,806
--------------------------------------
--------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
p 24. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
(amounts in thousands except share data) 1997 1996
- ----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 14,589 $ 25,790
Marketable securities 18,219 10,614
Accounts receivable, net of allowance
for doubtful accounts of $1,840 in
1997 and 1996 31,709 21,768
Inventories 10,899 10,141
Prepaid expenses and other current assets 4,324 2,991
Deferred income taxes 8,697 5,871
------------------------
Total current assets 88,437 77,175
Marketable securities 20,326 18,198
Fixed assets, net 11,118 11,243
Deferred income taxes 8,029 2,939
Other assets 1,282 2,422
------------------------
Total assets $ 129,192 $ 111,977
------------------------
------------------------
Liabilities
Current liabilities
Short term debt $ 1,095 $ 3,502
Accounts payable 6,231 894
Accrued liabilities 20,351 14,586
Deferred revenue 9,617 8,950
------------------------
Total current liabilities 37,294 27,932
------------------------
Total liabilities 37,294 27,932
------------------------
Commitments and contingencies
(Notes 10 and 16).
Stockholders' Equity
Preferred stock, $.001 par value: Authorized:
2,000,000 shares; Issued and outstanding:
no shares -- --
Common stock, $.001 par value: Authorized:
40,000,000 shares; Issued and outstanding:
17,606,006 shares in 1997; 16,526,904
shares in 1996 18 17
Additional paid-in capital 91,122 77,545
Cumulative translation adjustment (653) --
Unrealized holding gains on marketable
securities 88 10
Retained earnings 1,896 7,242
Deferred compensation (573) (769)
------------------------
Total stockholders' equity 91,898 84,045
------------------------
Total liabilities and stockholders' equity $ 129,192 $ 111,977
------------------------
------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
p 25. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Cumulative
------------------ Paid-in Translation
(amounts in thousands except share data) Shares Amount Capital Adjustment
- --------------------------------------------------------------------------------------
Balance, Dec 31, 1994 13,102,067 $ 13 $ 69,297 $ --
Issuance of common stock 2,399,039 2 1,601 --
Issuance of common stock,
employee stock purchase plan 158,488 -- 1,091 --
Exercise of stock options 335,505 1 574 --
Tax benefit from option exercises -- -- 545 --
Unrealized holding gains on
marketable securities -- -- -- --
Net income -- -- -- --
---------------------------------------------
Balance, Dec 31, 1995 15,995,099 16 73,108 --
Issuance of common stock,
employee stock purchase plan 198,117 -- 1,452 --
Exercise of stock options 333,688 1 1,161 --
Tax benefit from option exercises -- -- 999 --
SpeedSim issuance of stock options
in lieu of compensation -- -- 825 --
Unrealized holding losses on
marketable securities -- -- -- --
Amortization of deferred
compensation -- -- -- --
Net income -- -- -- --
---------------------------------------------
Balance, Dec 31, 1996 16,526,904 17 77,545 --
Issuance of common stock,
employee stock purchase plan 176,733 -- 1,812 --
Exercise of stock options
and warrants 402,369 -- 1,406 --
Tax benefit from option exercises -- -- 860 --
Issuance of common stock for
Arkos Acquisition 500,000 1 6,499 --
Issuance of warrants for
Arkos Acquisition -- -- 3,000 --
Unrealized holding gains on
marketable securities -- -- -- --
Cumulative translation adjustment -- -- -- (653)
Amortization of deferred
compensation -- -- -- --
Net loss -- -- -- --
---------------------------------------------
Balance, Dec 31, 1997 17,606,006 $ 18 $ 91,122 $ (653)
---------------------------------------------
---------------------------------------------
Unrealized
Holding Gains
(Losses) on Retained
Marketable Earnings Deferred
Securities (Deficit) Compensation Total
-----------------------------------------------
Balance, Dec 31, 1994 $ (336) $(19,367) $ -- $ 49,607
Issuance of common stock -- -- -- 1,603
Issuance of common stock,
employee stock purchase plan -- -- -- 1,091
Exercise of stock options -- -- -- 575
Tax benefit from option exercises -- -- -- 545
Unrealized holding gains on
marketable securities 438 -- -- 438
Net income -- 12,478 -- 12,478
-----------------------------------------------
Balance, Dec 31, 1995 102 (6,889) -- 66,337
Issuance of common stock,
employee stock purchase plan -- -- -- 1,452
Exercise of stock options -- -- -- 1,162
Tax benefit from option exercises -- -- -- 999
SpeedSim issuance of stock options
in lieu of compensation -- -- (825) --
Unrealized holding losses on
marketable securities (92) -- -- (92)
Amortization of deferred
compensation -- -- 56 56
Net income -- 14,131 -- 14,131
-----------------------------------------------
Balance, Dec 31, 1996 10 7,242 (769) 84,045
Issuance of common stock,
employee stock purchase plan -- -- -- 1,812
Exercise of stock options
and warrants -- -- -- 1,406
Tax benefit from option exercises -- -- -- 860
Issuance of common stock for
Arkos Acquisition -- -- -- 6,500
Issuance of warrants for
Arkos Acquisition -- -- -- 3,000
Unrealized holding gains on
marketable securities 78 -- -- 78
Cumulative translation adjustment -- -- -- (653)
Amortization of deferred
compensation -- -- 196 196
Net loss -- (5,346) -- (5,346)
-----------------------------------------------
Balance, Dec 31, 1997 $ 88 $ 1,896 $ (573) $ 91,898
-----------------------------------------------
-----------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
p 26. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
(amounts in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (5,346) $ 14,131 $ 12,478
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 7,820 8,524 7,902
Amortization of deferred compensation 196 56 --
Write-off of Arkos Acquisition 18,031 -- --
Write-down of inventories 1,551 719 244
Deferred income taxes (7,378) (782) (6,814)
Changes in current assets and liabilities
Accounts receivable (9,941) (710) (1,133)
Inventories (6,481) (3,055) (1,771)
Prepaid expenses and other current assets (1,871) (1,094) (1,243)
Accounts payable and accrued liabilities 11,962 (285) 56
Deferred revenue 667 4,912 464
-----------------------------------
Net cash provided by operating activities 9,210 22,416 10,183
-----------------------------------
Cash flows from investing activities
Acquisition of fixed assets (7,529) (6,413) (4,833)
Sale of marketable securities 16,173 20,527 28,926
Purchase of marketable securities (25,828) (25,544) (23,706)
Purchase of Arkos (5,000) -- --
Increase (decrease) in other assets 1,615 (1,868) (558)
-----------------------------------
Net cash used in investing activities (20,569) (13,298) (171)
-----------------------------------
Cash flows from financing activities
Proceeds from equipment financing -- -- 1,500
Payments of debts (2,407) (3,600) (4,020)
Proceeds from stock issuances 3,218 2,614 3,269
-----------------------------------
Net cash provided by (used in) financing activities 811 (986) 749
-----------------------------------
Effect of exchange rates on cash and cash equivalents (653) -- --
-----------------------------------
Net increase (decrease) in cash and cash equivalents (11,201) 8,132 10,761
Cash and cash equivalents at beginning of year 25,790 17,658 6,897
-----------------------------------
Cash and cash equivalents at end of year $ 14,589 $ 25,790 $ 17,658
-----------------------------------
-----------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 278 $ 417 $ 828
Income taxes $ 3,187 $ 5,112 $ 776
Supplemental disclosure of noncash investing
and financing activities
Additions to fixed assets through capital lease
obligations $ -- $ -- $ 2,994
Unrealized holding gains (losses) on marketable
securities $ 78 $ (92) $ 438
Tax benefit from stock option exercises $ 860 $ 999 $ 545
Assets acquired in Arkos Acquisition $ 641 $ -- $ --
Common stock and warrants issued in Arkos Acquisition $ 9,500 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
p 27. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports emulation and cycle-based simulation
system-level verification solutions for the design of integrated circuits and
electronic systems. The Company's development and manufacturing facilities are
located in San Jose, California, and additional development facilities are
located in North Chelmsford, Massachusetts. The Company's principal markets are
in North America, Asia-Pacific and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results could differ
from those estimates.
CERTAIN RISKS AND CONCENTRATIONS
The Company's products are concentrated in the Electronic Design Automation
("EDA") industry which is highly competitive and rapidly changing. Revenue is
concentrated with a relatively limited number of customers, and supplies for
certain components are concentrated among a few providers. The loss of a major
customer or any reduction in orders by such a customer, the interruption of
certain supplier relationships, significant technological changes in the
industry or customer requirements, the infringement or expropriation of
proprietary intellectual property rights or patents, or the emergence of a major
direct competitor could affect operating results adversely. In addition, a
significant portion of the Company's revenue is derived from international
sales; therefore, fluctuations of the U.S. dollar against foreign currencies or
local economic conditions could adversely affect operating results.
All marketable securities are classified as available-for-sale and are carried
at fair value. Unrealized gains and losses on marketable securities classified
as available-for-sale, when material, are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of all such investments
are reported in earnings and computed using the specific identification cost
method.
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash and cash equivalents, marketable
securities and accounts receivable.
The Company sells products to companies in the electronics industry in North
America, Asia-Pacific and Europe. To reduce credit risk, management performs
ongoing credit evaluations of its customers' financial condition. The Company
maintains reserves for potential credit losses on its trade accounts receivable
which are uncollateralized. The Company has not experienced any significant
losses related to individual customers or groups of customers in any particular
industry or geographic area.
The Company maintains its excess cash balances in a variety of financial
instruments such as money market securities in various financial institutions
and securities backed by the U.S. government. The Company has not experienced
any material losses in any of the instruments it has used for excess cash
balances.
The Company uses forward exchange contracts to hedge certain assets denominated
in foreign currencies. For these instruments, risk reduction is assessed on a
transaction basis and the instruments are designated and deemed effective as a
hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on these hedges are
included in the carrying amounts of the assets and are ultimately recognized in
income as part of those carrying amounts. If a hedging instrument ceases to
qualify as a hedge, any subsequent gains and losses are recognized currently in
income. The Company does not use any derivatives for trading or speculative
purposes. If a derivative ceases to qualify for hedge accounting, it is
accounted for on a mark to market basis.
p 28. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
TRANSLATION OF FOREIGN CURRENCIES
Effective in 1997, the Company's foreign subsidiary in Japan is considered an
independent operation having the local currency as its functional currency.
Accordingly, its net assets are translated at year-end exchange rates, while its
income and expense accounts are translated at average rates in effect during the
year. Adjustments resulting from these translations are reflected in the
Stockholders' Equity section titled "Cumulative translation adjustment."
Prior to 1997, all of the Company's foreign subsidiaries, including Japan, were
considered to be extensions of the U.S. operation having the U.S. dollar as
their functional currency.
The Company's foreign subsidiaries whose functional currency is the U.S. dollar
translate monetary assets and liabilities at year-end exchange rates while
non-monetary items are translated at historical rates. Income and expense
accounts are translated at average rates, except for depreciation and cost of
revenue which are translated at historical rates. Translation gains and losses
related to these subsidiaries are included in income.
REVENUE RECOGNITION
The Company recognizes revenue from sales of its design verification products
and services when all substantial conditions have been met, including shipment
to the customer, fulfillment of acceptance terms, if any, and completion of all
significant contractual terms. Maintenance revenue is deferred and recognized
ratably over the term of the maintenance agreement, which is typically twelve
months. Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the time
of sale.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as incurred.
CASH EQUIVALENTS
Investments and deposits with original maturities of three months or less at the
date of purchase are considered to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying values of the note payable and capital lease obligations
approximate fair value. Estimated fair values for marketable securities (See
Note 4) and forward exchange contracts (see Certain Risks and Concentrations,
above) are based on quoted market prices for the same or similar instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company's inventories include high technology parts and components
that may be specialized in nature or subject to rapid technological
obsolescence. While the Company has programs to minimize the required
inventories on hand and considers technological obsolescence when estimating
required reserves to reduce recorded amounts to market values, it is reasonably
possible that such estimates could change in the near term.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost and are depreciated generally based on a
straight-line method over the estimated useful lives of the assets, generally
one to three years. Leasehold improvements are amortized based on a straight-
line method over the shorter of the remaining lease term or the estimated useful
life of the asset, typically three to five years. Amortization of equipment
under capital leases is computed using the straight-line method over the shorter
of the remaining lease term or the estimated useful life of the related asset,
typically three years.
ACCRUED WARRANTY
The Company provides an accrual for future warranty costs based on the
historical relationship of revenue to warranty costs incurred.
INCOME TAXES
The Company provides for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No.109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, measured at the tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
NET INCOME (LOSS) PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." All prior-period earnings
per share data presented have been restated to comply with SFAS 128. The
adoption of this standard did not have a material impact on the Company's
earnings per share.
p 29. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding for the period. Diluted net income (loss)
per share is calculated using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of common stock issuable upon exercise of stock
options and warrants (using the treasury stock method).
Fiscal Year-end
Effective in 1997, the Company changed its fiscal year to December 31 from a
52-week or 53-week year, ending on the last Sunday in December. The change had
no significant impact on the current period results of operations. For purposes
of presentation, the Company has indicated that its fiscal year ended on
December 31 for 1995 and 1996, although it operated on a 52-week or 53-week
fiscal year for those years.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes requirements for disclosure of comprehensive income and
becomes effective for the Company for fiscal years beginning after December 15,
1997, with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
The Company is evaluating alternative formats for presenting this information,
but does not expect this pronouncement to materially impact the Company's
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supercedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
3. BUSINESS COMBINATIONS
In February 1997, the Company merged with SpeedSim, Inc. ("SpeedSim"), a
provider of cycle-based simulation software for the verification of digital
logic designs (the "SpeedSim Merger"), for 2.8 million shares of Quickturn
common stock. The merger was accounted for as a pooling of interests. The
Company incurred direct transaction costs of $1.2 million associated with the
merger, which were charged to operations during the quarter ended March
31, 1997. All financial information herein has been restated to include the
results of operations of SpeedSim.
Revenue and net income (loss) of the separate companies during the periods
preceding the SpeedSim Merger are presented below.
Year ended December 31,
------------------------
(in thousands) 1996 1995
- -----------------------------------------------------------------
Revenue
The Company $ 104,370 $ 81,800
SpeedSim 5,208 642
--------- --------
Combined $ 109,578 $ 82,442
--------- --------
--------- --------
Net income (loss)
The Company $ 12,639 $ 13,083
SpeedSim 1,492 (605)
--------- --------
Combined $ 14,131 $ 12,478
--------- --------
--------- --------
In June 1997, pursuant to an asset purchase agreement among the Company,
Synopsys, Inc. ("Synopsys") and Arkos Design, Inc. ("Arkos"), the Company
purchased from Synopsys certain assets relating to Synopsys's emulation
business, including all the outstanding capital stock of Arkos (the "Arkos
Acquisition"). The consideration paid by the Company was valued at $14.5 million
and consisted of $5.0 million cash, 500,000 shares of Quickturn common stock and
warrants to purchase 1.0 million shares of Quickturn common stock. The exercise
price of the warrants is $13.34 per share. The acquisition was accounted for as
a purchase. The Company recognized charges of $18.0 million in the third quarter
of 1997, which consisted of a $2.8 million write-off of the portion of the
purchase price which was allocated to in-process research and development and
marketing rights, and $15.2 million for the accrual of certain liabilities
incurred in connection with the acquisition and other costs related to the
acquisition. The balance of the purchase price, consisting of intellectual
property of $541,000 and fixed assets of $100,000, is being amortized over three
to five years.
p 30. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
4. MARKETABLE SECURITIES
At December 31, 1997 and 1996, all marketable securities are classified as
available-for-sale and are summarized as follows:
Marketable securities at December 31, 1997
Net
Unrealized
Market Cost Unrealized Unrealized Gains
(in thousands) Value Basis Gains Losses (Losses)
- ----------------------------------------------------------------------------------------------------------
U.S. government debt securities $ 14,562 $ 14,549 $ 21 $ (8) $ 13
Municipal debt securities 22,424 22,348 78 (2) 76
Corporate debt securities 1,559 1,560 2 (3) (1)
----------------------------------------------------------------
$ 38,545 $ 38,457 $ 101 $(13) $ 88
----------------------------------------------------------------
----------------------------------------------------------------
Marketable securities at December 31, 1996
Net
Unrealized
Market Cost Unrealized Unrealized Gains
(in thousands) Value Basis Gains Losses (Losses)
- ----------------------------------------------------------------------------------------------------------
U.S. government debt securities $ 6,655 $ 6,664 $ 6 $ (15) $ (9)
Municipal debt securities 17,815 17,800 39 (24) 15
Corporate debt securities 4,342 4,338 5 (1) 4
----------------------------------------------------------------
$ 28,812 $ 28,802 $ 50 $ (40) $ 10
----------------------------------------------------------------
----------------------------------------------------------------
At December 31, 1997 and 1996, all marketable debt securities classified as
current had scheduled maturities of less than one year. Marketable debt
securities classified as noncurrent had scheduled maturities of one to three
years.
5. INVENTORIES
Inventories comprise:
December 31,
---------------------
(in thousands) 1997 1996
- -----------------------------------------------------
Raw materials $ 6,780 $ 8,431
Work in process 4,119 1,710
---------------------
$ 10,899 $ 10,141
---------------------
---------------------
6. FIXED ASSETS
Fixed assets comprise:
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
Equipment $ 23,070 $ 24,731
Furniture, fixtures and
leasehold improvements 6,072 3,598
Demonstration and rental equipment 1,698 4,829
--------------------
30,840 33,158
Less accumulated depreciation
and amortization (19,722) (21,915)
--------------------
$ 11,118 $ 11,243
--------------------
--------------------
Depreciation and amortization expense amounted to $7,754,000, $8,238,000 and
$7,008,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Fixed assets include equipment under capital leases
as follows:
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
Cost $ 495 $ 2,302
Less accumulated amortization (389) (1,313)
---------------------
$ 106 $ 989
---------------------
---------------------
The equipment under capital leases is pledged as collateral for repayment of the
related lease obligations.
7. ACCRUED LIABILITIES
Accrued liabilities comprise:
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
Accrued payroll and related items $ 7,218 $ 5,466
Income taxes payable 5,789 6,298
Other accrued liabilities 7,344 2,822
--------------------
$20,351 $ 14,586
--------------------
--------------------
p 31. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
8. BANK BORROWING ARRANGEMENTS
The Company has unsecured revolving lines of credit totaling $9.8 million which
provide for borrowings through June 1, 1998. Borrowings under these agreements
bear interest at the banks' prime rate (8.5% at December 31, 1997). The
agreements are subject to certain restrictive covenants which include achieving
annual profitability, excluding the one-time write-off of the Arkos Acquisition,
and meeting certain financial ratios and minimum tangible net worth
requirements. The Company is currently in compliance with the agreement. The
agreements also prohibit the payment of cash dividends. To date, no funds have
been drawn against the lines of credit.
9. SHORT TERM DEBT
Capital Lease Obligations
The Company has equipment leases totaling $495,000 at interest rates varying
from 8.7% to 9.4%. Certain lease obligations were collateralized by restricted
deposits at December 31, 1997 and 1996 of $73,000 and $85,000, respectively,
which are included in other assets.
Minimum future lease payments for the year ending December 31, 1997, under all
equipment lease arrangements, are $510,000, of which $15,000 represents
interest.
Note Payable
At December 31, 1997, the Company had an uncollateralized note payable of
$600,000. The note had an original principal balance of $3.0 million and bears
interest at 4% per annum, payable quarterly.
10. COMMITMENTS
The Company leases its operating facilities under noncancellable operating
leases with terms greater than one year. At December 31, 1997, future minimum
rent payments under these leases are as follows:
(in thousands) Year ending December 31,
- ------------------------------------------------------------
1998 $ 4,806
1999 4,853
2000 3,924
2001 3,345
2002 3,436
Thereafter 5,262
--------
$ 25,626
--------
--------
Rent expense related to the facilities and various equipment leases was
$2,704,000, $1,615,000 and $1,359,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
11. STOCKHOLDERS' EQUITY
Stock Option Plans
As of December 31, 1997, the Company had reserved 4,743,060 shares of common
stock for issuance under various stock option plans. Except for the 1994 Outside
Director Stock Option Plan, which provides for automatic grants to non-employee
directors, the Board of Directors may, under these plans, issue incentive stock
options to employees and nonstatutory stock options to employees or paid
consultants of the Company at prices no less than fair market value for
incentive and 85% of fair market value for nonstatutory stock options. The
options are exercisable at times and in increments as specified by the Board of
Directors. Options generally vest over four years and expire ten years from date
of grant. Options are exercisable prior to vesting, however such unvested shares
are subject to repurchase by the Company at their original cost. At December 31,
1997, there were no shares subject to repurchase.
In accordance with Accounting Principles Board Opinion No.25 ("APB 25"), the
Company recognized $825,000 of deferred compensation which is amortized over the
vesting period of the options. The amortization expense for the years ended
December 31, 1997, 1996 and 1995 was $196,000, $56,000 and none, respectively.
Employee Stock Purchase Plan
As of December 31, 1997, the Company had reserved 579,302 shares of common stock
for issuance under the Employee Stock Purchase Plan ("ESPP"). Shares are
purchased through employees' payroll deductions at exercise prices equal to 85%
of the lesser of the fair market value of the Company's common stock at either
the first day of an offering period or the last day of such offering period.
Shares issued under the ESPP in 1997, 1996 and 1995 were 176,733, 198,117 and
158,488, respectively.
Warrants
At December 31, 1997, warrants to purchase 1.2 million shares of common stock
(of which 700,000 were exercisable) were outstanding which may be exercised at
prices ranging from $13.34 to $30.00 per share. The warrants expire over periods
ranging from 2 to 3 years.
p 32. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
Information with respect to activity under these stock option plans is set forth
below:
Outstanding Options
Shares ----------------------------------------------------------
(amounts in thousands, Available Options Number Price Aggregate Weighted Avg.
except share data) for Grant Exercised of Shares Per Share Price Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 207,025 677,346 2,194,188 $ 0.26 - $ 13.25 $ 8,519 $ 3.62
Additional shares reserved 1,428,164 -- -- -- -- --
Options granted (926,078) -- 926,078 $ 0.19 - $ 11.63 6,357 $ 6.86
Options exercised -- 336,401 (336,401) $ 0.26 - $ 10.38 (575) $ 1.71
Options terminated 314,217 -- (314,217) $ 0.30 - $ 11.63 (1,932) $ 6.15
Options repurchased 896 -- -- $ 0.30 - $ 0.50 -- $ 0.36
Options retired -- -- (13,497) $ 0.64 - $ 6.30 (38) $ 2.82
-------------------------------------- --------
Balance, December 31, 1995 1,024,224 1,013,747 2,456,151 $ 0.19 - $ 13.25 12,331 $ 5.02
Additional shares reserved 1,000,000 -- -- -- -- --
Options granted (1,436,110) -- 1,436,110 $ 0.19 - $ 19.00 15,206 $10.59
Options exercised -- 333,688 (333,688) $ 0.30 - $ 11.63 (1,166) $ 3.49
Options terminated 363,852 -- (363,852) $ 0.50 - $ 13.25 (3,302) $ 9.08
Options retired -- -- (117) $ 0.64 - $ 0.64 -- $ 0.64
-------------------------------------- --------
Balance, December 31, 1996 951,966 1,347,435 3,194,604 $ 0.19 - $ 19.00 23,069 $ 7.22
Additional shares reserved 1,000,000 -- -- -- -- --
Options granted (751,097) -- 751,097 $ 2.83 - $ 18.63 8,617 $11.47
Options exercised -- 389,156 (389,156) $ 0.19 - $ 13.50 (1,406) $ 3.61
Options terminated 267,791 -- (267,791) $ 6.13 - $ 19.00 (3,330) $12.44
Options retired -- -- (14,354) $ 0.19 - $ 6.30 (33) $ 2.30
-------------------------------------- --------
Balance, December 31, 1997 1,468,660 1,736,591 3,274,400 $ 0.19 - $ 19.00 $ 26,917 $ 8.22
-------------------------------------- --------
-------------------------------------- --------
At December 31, 1997 and 1996, vested options to purchase 1,657,860 and
1,251,457 shares, respectively, were unexercised.
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------
Number Weighted Average Weighted Average Number Weighted Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contractual Life (Years) Price at 12/31/97 Price
- -------------------------------------------------------------------------------------------------------------
$ 0.19 - $ 0.95 373,101 6.24 $ 0.49 322,696 $ 0.44
$ 1.42 - $ 6.13 825,675 5.68 $ 3.80 713,679 $ 3.77
$ 6.30 - $ 10.50 761,884 8.06 $ 8.45 318,484 $ 8.60
$ 11.50 - $ 13.13 741,065 8.67 $ 12.01 232,891 $ 11.97
$ 13.38 - $ 19.00 572,675 9.30 $ 14.41 70,110 $ 15.19
--------- ---------
$ 0.19 - $ 19.00 3,274,400 7.61 $ 8.22 1,657,860 $ 5.68
--------- ---------
--------- ---------
p 33. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
The Company accounts for its stock option and employee stock purchase plans in
accordance with APB 25 and related interpretations. The following information
concerning such plans is provided in accordance with Statement of Financial
Accounting Standards No.123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997:
Group A Group B
- -----------------------------------------------------
Risk-free interest rates 6.16% 6.16%
Expected life 5 years 4 years
Volatility 0.80 0.80
Dividend yield -- --
Similarly, the following weighted average assumptions were used for grants in
1996 and 1995:
Group A Group B
- -----------------------------------------------------
Risk-free interest rates 6.30% 6.22%
Expected life 5 years 4 years
Volatility 0.70 0.70
Dividend yield -- --
The weighted average expected life was calculated based on the exercise behavior
of each group. Group A represents officers and directors who are a smaller group
holding a greater average number of options than other option holders and who
tend to exercise later in the vesting period. Group B represents all other
option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average fair values of those options granted in 1997, 1996 and 1995
were $7.24, $8.43 and $5.84, respectively.
The Company has also estimated the fair value of the purchase rights issued
under the Company's Employee Stock Purchase Plan, using the Black-Scholes
valuation model with the following weighted average assumptions for all years
reported:
Risk-free interest rates 5.84%
Expected life 1.25 years
Volatility 0.72
Dividend yield --
The weighted average fair values of those purchase rights granted in 1997, 1996
and 1995 were $6.14, $5.15 and $3.74, respectively.
The following pro forma income information has been prepared in accordance with
the provisions of SFAS 123:
(amounts in thousands except
per share data) 1997 1996 1995
- ---------------------------------------------------------------------------
Net income (loss) -
pro forma $ (7,516) $ 12,430 $ 11,701
Basic net income (loss)
per share - pro forma $ (0.44) $ 0.76 $ 0.76
Diluted net income (loss)
per share - pro forma $ (0.44) $ 0.69 $ 0.70
The above pro forma effects on net income (loss) may not be representative of
the effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
p 34. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
12. INCOME TAXES
Income before taxes and details of the income tax provision consist of the
following:
Year Ended December 31,
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Domestic income (loss)
before taxes $ (11,813) $ 18,856 $ 11,530
Foreign income
before taxes 522 996 336
----------------------------------
Income (loss)
before taxes $ (11,291) $ 19,852 $ 11,866
----------------------------------
----------------------------------
Income tax provision (benefit)
Federal
Current payable (net of
benefit from utilization
of net operating loss
carryforwards of
$1,292 and $2,068
for 1996 and 1995,
respectively) $ 703 $ 5,235 $ 5,279
Deferred (6,155) (678) (5,579)
----------------------------------
(5,452) 4,557 (300)
State
Current payable 365 692 749
Deferred (1,223) (103) (1,235)
----------------------------------
(858) 589 (486)
Foreign
Current payable 365 575 174
Deferred -- -- --
----------------------------------
365 575 174
----------------------------------
Income tax
provision (benefit) $ (5,945) $ 5,721 $ (612)
----------------------------------
----------------------------------
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes are as follows:
Year Ended December 31,
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Income tax at statutory rate (35.0%) 35.0% 35.0%
State income taxes, net of
federal benefit (10.8%) 5.5% 6.2%
Change in valuation
allowance -- (9.5%) (55.0%)
Benefit of foreign sales
corporation (2.4%) (3.0%) (0.4%)
Nondeductible expenses -- 0.5% 2.1%
Foreign taxes 0.7% 1.4% 4.1%
Research and development
and business tax credits (7.6%) (3.7%) (2.0%)
Other 2.4% 2.6% 4.9%
----------------------------------
Effective tax provision
(benefit) rate (52.7%) 28.8% (5.1%)
----------------------------------
----------------------------------
The effective income tax provision (benefit) rate in 1997, 1996 and 1995 was
impacted by a reduction in the Company's valuation allowance against deferred
tax assets of none, $1.9 million and $6.8 million, respectively.
The components of the net deferred tax assets are:
December 31,
---------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------
Accrued vacation and bonus $ 391 $ 283
Reserve for inventories 4,386 1,793
Depreciation expense 1,806 1,864
Deferred revenue 1,129 970
Other liabilities and reserves 4,312 2,666
State taxes, net of federal benefit -- 118
Net operating loss carryforwards 2,049 767
Research and development and
business credits 2,653 350
-----------------------
Net deferred tax assets $ 16,726 $ 8,811
-----------------------
-----------------------
No provision has been made for federal, state or foreign taxes that may result
from future remittances of undistributed earnings of foreign subsidiaries
($806,000 at December 31, 1997) because it is expected that such earnings will
be reinvested in these foreign operations. It is not practical to estimate the
amount of taxes that might be payable on the eventual remittance of such
earnings.
The Company's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit derived from the disqualifying dispositions
of incentive stock options and the exercise of nonqualified stock options. The
benefit, which totaled $860,000 in 1997 and $999,000 in 1996 was credited
directly to additional paid-in capital.
At December 31, 1997, the Company had approximately $5.7 million of federal net
operating loss carryforwards and federal and state tax credit carryforwards of
$1.3 million and $1.1 million, respectively. The carryforwards expire in 2005
through 2011, if not utilized. A portion of the Company's net operating loss and
tax credit carryforwards is subject to an annual limitation of approximately
$1.2 million.
p 35. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
13. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
Year Ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
(amounts in thousands except Per share Net Per share Net Per share
per share amounts) Net Loss Shares Amount Income Shares Amount Income Shares Amount
- ------------------------------------------------------------- ---------------------------- ----------------------------
Net Income (loss) ($5,346) $14,131 $12,478
BASIC EPS
Net Income (loss) available to
common stockholders ($5,346) 17,110 ($0.31) $14,131 16,323 $0.87 $12,478 15,497 $0.81
------ ----- -----
------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Options -- -- -- 1,554 -- 1,303
Warrants -- -- -- 35 -- 6
---------------- ---------------- ---------------
-- -- -- 1,589 -- 1,309
DILUTED EPS
Income (loss) available to
common stockholders plus
assumed conversions ($5,346) 17,110 ($0.31) $14,131 17,912 $0.79 $12,478 16,806 $0.74
-------------------------- --------------------------- ---------------------------
-------------------------- --------------------------- ---------------------------
Options to purchase 1,547,522 shares and warrants for 50,802 shares were
outstanding during 1997 but were not included in the computation of diluted EPS
because their inclusion would have an anti-dilutive effect on the net loss per
share. During 1997, 1996 and 1995, options to purchase 174,118, 73,281 and
142,731 shares, respectively, at weighted average exercise prices of $17.25,
$14.64 and $11.31 per share, respectively, were outstanding, but were not
included in the computation of diluted EPS because the exercise price of the
options was greater than the average market price of the common shares. During
1997 and 1996, warrants for 200,000 shares at a weighted average exercise price
of $30.00 per share, and during 1995, warrants for 450,000 shares at a weighted
average exercise price of $20.00 per share were outstanding but were not
included in the computation of diluted EPS because the exercise price of the
warrants was greater than the average market price of the common shares. At the
end of 1997, anti-dilutive options for 174,118 shares and anti-dilutive warrants
for 200,000 shares were still outstanding.
p 36. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
14. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the development,
manufacture, sale and support of system-level verification solutions for the
design of integrated circuits and electronic systems.
The Company's top ten customers represented 43%, 52% and 48% of total revenue
for the years ended December 31, 1997, 1996 and 1995, respectively. In the year
ended December 31, 1996, one customer, Fujitsu, comprised 12% of the Company's
total revenue, and in the years ended December 31, 1997 and 1995, no customer
individually constituted more than 10% of the Company's total revenue.
The Company markets its products to customers in North America, Asia-Pacific and
Europe, and offers technical support, design consulting services, training,
hardware maintenance and software upgrades to its customers. Products and
services are marketed through a direct sales force in North America, Japan and
Europe. The Company also maintains distributorship relationships in Israel,
Korea, Singapore and Taiwan.
Revenue information by geographic region is as follows:
Year Ended December 31,
---------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
North America $ 73,186 $ 70,658 $ 56,702
Asia-Pacific 26,025 30,138 16,496
Europe 11,193 8,782 9,244
----------------------------------
$ 110,404 $ 109,578 $ 82,442
----------------------------------
----------------------------------
North America sales include sales to U.S. customers of $71.1 million, $69.4
million and $55.1 million in 1997, 1996 and 1995, respectively.
Identifiable assets of foreign operations are not significant. The net income
(loss) for all periods presented are derived primarily from the Company's North
American operations.
15. EMPLOYEE BENEFIT PLANS
The Company maintains 401(k) savings plans to provide retirement benefits
through tax deferred salary deductions for all its employees. The Company may
make discretionary contributions, as determined by the Board of Directors, which
cannot exceed a percentage of the annual aggregate salaries of those employees
eligible to participate. The Company made total contributions to the plans of
$497,000 and $394,000 for the years ended December 31, 1997 and 1996,
respectively, and none for the year ended December 31, 1995.
16. CONTINGENCIES
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, a French subsidiary of
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 infringing SimExpress
systems and components. The Administrative Law Judge further
p 37. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
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 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 also is 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.
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. On October 17, 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. A preliminary hearing in this case
is set for mid-February.
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.
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.
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.
p 38. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Quickturn Design Systems, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Quickturn Design
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of
Quickturn Design Systems, Inc. as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
January 20, 1998