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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-24756
EPIC DESIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0135608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
310 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices)
TELEPHONE NUMBER (408) 988-2997
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and, (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of March 31, 1996 there were 12,686,205 shares of the Registrant's
Common Stock outstanding.
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EPIC DESIGN TECHNOLOGY, INC.
FORM 10-Q
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3
March 31, 1996 and September 30, 1995
Condensed Consolidated Statements of Operations 4
For the three months and six months ended
March 31, 1996 and 1995
Condensed Consolidated Statement of Cash Flows 5
For the six months ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6 - 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 13
PART 11 - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Index of Exhibit 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EPIC DESIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
MARCH 31, SEPTEMBER 30,
1996 1995(1)
---- ------
ASSETS
Current assets:
Cash and equivalents $10,409 $11,247
Short-term investments 23,208 16,671
Accounts receivable (net of allowances of $121 and $79) 4,206 2,937
Prepaid expenses and other assets 993 607
Deferred income taxes 978 978
------- -------
Total current assets 39,794 32,440
Property and equipment - net 3,151 2,337
Other assets 872 1,004
------- -------
Total assets $43,817 $35,781
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 588 $ 878
Income taxes payable 111 414
Accrued liabilities 4,926 4,529
Deferred revenue and customer deposits 3,925 3,035
------- -------
Total current liabilities 9,550 8,856
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Shareholders' equity:
Convertible preferred stock, no par value: 5,000,000 shares
authorized; none outstanding -- --
Common stock, no par value :20,000,000 shares authorized; 12,686,205
and 12,133,589 shares issued and outstanding 28,056 24,864
Unrealized gain (loss) on investments (4) 10
Deferred stock compensation (156) (203)
Retained earnings 6,371 2,254
------- -------
Total shareholders' equity 34,267 26,925
------- -------
Total liabilities and shareholders' equity $43,817 $35,781
======= =======
See accompanying notes to Condensed Consolidated Financial Statements
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of September 30, 1995.
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EPIC DESIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenue:
License $ 8,532 $ 4,431 $15,820 $ 8,200
Service 1,990 1,017 4,141 1,770
------- ------- ------- -------
Total revenue 10,522 5,448 19,961 9,970
------- ------- ------- -------
Costs and expenses:
Cost of license 306 281 760 537
Cost of service 431 209 801 408
Sales and marketing 3,252 2,006 6,377 3,630
Research and development 2,465 1,251 4,530 2,298
General and administrative 776 511 1,520 1,068
------- ------- ------- -------
Total operating expenses 7,230 4,258 13,988 7,941
------- ------- ------- -------
Income from operations 3,292 1,190 5,973 2,029
Interest income - net 280 210 562 341
------- ------- ------- -------
Income before income taxes 3,572 1,400 6,535 2,370
Provision for income taxes 1,322 490 2,418 830
------- ------- ------- -------
Net income $ 2,250 $ 910 $ 4,117 $ 1,540
======= ======= ======= =======
Net income per share $ 0.16 $ 0.07 $ 0.30 $ 0.12
======= ======= ======= =======
Shares used in per share computation 13,882 13,116 13,830 12,694
======= ======= ======= =======
See accompanying notes to Condensed Consolidated Financial Statements
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EPIC DESIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
SIX MONTHS ENDED
MARCH 31,
----------------
1996 1995
---- ----
Cash Flows from Operating Activities:
Net income $ 4,117 $ 1,540
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 846 375
Amortization of deferred stock compensation 47 100
Deferred rent
Changes in assets and liabilities:
Accounts receivable (1,269) (539)
Prepaid expenses and other assets (386) (692)
Accounts payable (290) 118
Income taxes payable (303) (754)
Accrued liabilities 397 1,241
Deferred revenue and customer deposits 890 680
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Net cash provided by operating activities 4,049 2,069
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Cash Flows from Investing Activities:
Purchases of short-term investments (26,055) (16,152)
Maturities of short-term investments 19,504 714
Purchases of property and equipment, net (1,508) (622)
Other assets (20) 317
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Net cash used in investing activities (8,079) (15,743)
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Cash Flows from Financing Activities:
Principal payments under capital lease obligations -- (1)
Proceeds from sales of common stock, net 3,192 17,439
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Net cash provided by financing activities 3,192 17,438
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Net increase (decrease) in cash and equivalents (838) 3,764
Cash and equivalents, beginning of period 11,247 2,729
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Cash and equivalents, end of period $ 10,409 $ 6,493
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Supplemental disclosure of cash flow information -
Cash paid during the period for :
Income taxes $ 125 $ 1,584
See accompanying notes to Condensed Consolidated Financial Statements
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EPIC DESIGN TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information or footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The statements reflect all adjustments (only of a
normal and recurring nature) which are, in the opinion of management, necessary
to a fair statement of the results for the interim periods presented. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Annual Report on
Form 10-K for fiscal year 1995 as filed with the Commission on December 20,
1995. The interim results presented herein are not necessarily indicative of the
results of operations that may be expected for the full fiscal year ending
September 30, 1996, or any other future periods.
2. Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The new standard defines a fair value method of
accounting for stock options and other equity instruments, such as stock
purchase plans. Under this method, compensation cost is measured based on the
fair value of the stock award when granted and is recognized as an expense over
the service period, which is usually the vesting period. This standard will be
effective for the Company beginning October 1, 1996 and requires measurement of
awards made beginning October 1, 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the Company had applied the new method of accounting.
The Company intends to implement these disclosure requirements for its employee
stock option plans for the fiscal year beginning October 1, 1996. Based on the
Company's current use of equity instruments, adoption of the new standard will
not impact reported net income or net income per share, and will have no effect
on the Company's cash flow.
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3. Net Income Per Share
Net income per share is based on the weighted average number of common
and dilutive common equivalent shares outstanding during the periods. Common
equivalent shares include convertible preferred stock and common stock options.
On September 13, 1995, the Board of Directors approved a two-for-one stock split
of the Company's common stock effective November 15, 1995. All references in the
consolidated financial statements with regard to shares, per share amounts and
share prices have been adjusted for the stock split.
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EPIC DESIGN TECHNOLOGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports a family of simulation and
analysis software tools that helps integrated circuit (IC) designers better
manage the timing, reliability and power characteristics of IC designs. The
Company was founded in 1986 and licensed its first product, TimeMill(TM), in
August 1987. The Company began licensing PathMill(TM) in June 1989,
PowerMill(TM) in March 1992, Vertue(TM) in March 1994, RailMill(TM) in May 1995,
Arcadia(TM) in July 1995, and its latest product, AMPS(TM), in January 1996.
Substantially all of the Company's license revenue to date has been derived from
the licensing of Arcadia, PathMill, PowerMill, RailMill and TimeMill. The
Company also derives service revenue primarily from maintenance agreements which
provide customers access to product enhancements, training and customer support.
Most of the Company's customers have purchased annual maintenance contracts on
initial licenses and have renewed such contracts upon expiration.
Most of the Company's products are based upon a single set of core
software technologies, and the licensing and support of all products are
expected to account for substantially all of the Company's revenue for the
foreseeable future. Market acceptance of the Company's products by existing and
new customers is critical to the Company's future success. There can be no
assurance that the markets for which the Company's products are best suited will
develop or, if such markets do develop, that the Company's products will achieve
the market acceptance required to maintain revenue growth and continued
profitability in the future.
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Results of Operations
The following table sets forth, for the periods indicated, certain
statement of income data of the Company expressed as a percentage of total
revenue.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1995 1996 1995
---- ---- ---- ----
Revenue:
License 81.1% 81.3% 79.3% 82.2%
Service 18.9 18.7 20.7 17.8
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of license 2.9 5.2 3.8 5.4
Cost of service 4.1 3.8 4.0 4.1
Sales and marketing 30.9 36.8 32.0 36.4
Research and development 23.4 23.0 22.7 23.0
General and administrative 7.4 9.4 7.6 10.7
----- ----- ----- -----
Total operating expenses 68.7 78.2 70.1 79.6
----- ----- ----- -----
Income from operations 31.3 21.8 29.9 20.4
Interest income 2.7 3.9 2.8 3.4
----- ----- ----- -----
Income before income taxes 34.0 25.7 32.7 23.8
Provision for income taxes 12.6 9.0 12.1 8.4
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Net income 21.4% 16.7% 20.6% 15.4%
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Revenue. Revenue consists primarily of fees for licenses of the
Company's software products, maintenance and customer support. The Company
recognizes revenue from software licenses after shipment of the products and
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding. When the Company receives payment prior to
shipment or fulfillment of significant vendor obligations, such payments are
recorded as deferred revenue and customer deposits and are recognized as revenue
upon shipment or fulfillment of significant vendor obligations. Costs related to
insignificant vendor obligations for post-contract customer support are accrued
upon recognition of the license revenue. Maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement, which is
typically one year. Revenue from customer training, support and other services
is recognized as the service is performed. Total revenue in the three months
ended March 31, 1996 increased by 93.1% to $10.5 million from $5.4 million in
the three months ended March 31, 1995. Total revenue in the six months ended
March 31, 1996 increased by 100.2% to $20.0 million from $10.0 million in the
six months ended March 31, 1995.
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License revenue in the three months ended March 31, 1996 increased by
92.6% to $8.5 million from $4.4 million in the three months ended March 31,
1995. The increase in license revenue was primarily due to increases in number
of licenses of Arcadia, AMPS and RailMill, which accounted for 30.1% of license
revenue, and to a lesser extent, PowerMill. License revenue in the six months
ended March 31, 1996 increased by 92.9% to $15.8 million from $8.2 million in
the six months ended March 31, 1995. The increase in license revenue for the six
month period was primarily due to increases in the number of licenses of
Arcadia, AMPS, PowerMill and RailMill. To date, price increases have not been a
material factor in the Company's revenue growth.
Service revenue for the three months ended March 31, 1996 increased by
95.7% to $2.0 million from $1.0 million in the three months ended March 31,
1995. Service revenue in the six months ended March 31, 1996 increased by 134.0%
to $4.1 million from $1.8 million in the six months ended March 31, 1995. The
increases in service revenue were primarily attributable to maintenance
contracts in connection with the continued growth of the installed base of
customers licensing the Company's products. Most of the Company's customers have
purchased annual maintenance contracts on initial licenses and have renewed such
contracts upon expiration. The Company also generated $477,000 or 24.0% of
service revenue in the three months ended March 31, 1996 and $916,000 or 22.1%
in the six months ended March 31, 1996 from consulting and training revenues
which had historically been minimal. As a result, service revenue as a
percentage of total revenue increased to 20.7% in the six months ended March 31,
1996 from 17.8% in the six months ended March 31, 1995.
International license and service revenue accounted for 37.2% and 49.3%
of total revenue in the three months ended March 31, 1996 and 1995,
respectively. The decrease in international revenue as a percentage of total
revenue in the three months ended March 31, 1996 was primarily attributable to
the volatility of the European market and personnel changes which effected
revenue performance in Europe. International license and service revenue
accounted for 40.9% and 39.1% of total revenue in the six months ended March 31,
1996 and 1995, respectively. The Company expects that international license and
service revenues will continue to account for a significant portion of its
revenues in the future. License and service revenue from Marubeni, the Company's
exclusive distributor in Japan, accounted for 23.0% and 18.2% of the total
revenue in the three months ended March 31, 1996 and 1995, respectively. For the
six months ended March 31, 1996 and 1995, Marubeni accounted for 23.9% and 25.5%
of the total revenue, respectively. Motorola Corporation accounted for 10.3% of
the total revenue in the three months ended March 31, 1996. No other customer or
distributor accounted for more than 10% of total revenue during any of these
periods.
Cost of Revenue. Cost of license revenue includes third party software
license royalties, warranty, documentation and other production costs related to
the licensing of the Company's products. Cost of license revenue as a percentage
of total revenue decreased to 2.9% in the three months ended March 31, 1996 from
5.2% in the three months ended March 31, 1995. Cost of license revenue as a
percentage of total
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revenue decreased to 3.8% in the six months ended March 31, 1996 from 5.4% in
the six months ended March 31, 1995. The decreases in cost of license revenue as
a percentage of total revenue was primarily due to lower third party software
license royalties as a result of lower revenue generated from third party
software during the periods.
Cost of service revenue as a percentage of total revenue increased to
4.1% in the three months ended March 31, 1996 compared to 3.8% in the three
months ended March 31, 1995 as personnel and related operating costs allocated
to maintenance and other customer support services increased at a faster rate
than the total revenue. Cost of service revenue as a percentage of total revenue
was 4.0% in the six months ended March 31, 1996 compared to 4.1% in the six
months ended March 31, 1995.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions paid to internal sales and marketing personnel and certain
distributors, promotional costs and related operating expenses. Sales and
marketing expenses increased by 62.1% to $3.3 million in the three months ended
March 31, 1996 from $2.0 million in the three months ended March 31, 1995. Sales
and marketing expenses increased by 75.7% to 6.4 million in the six months ended
March 31, 1996 from $3.6 million in the six months ended March 31, 1995. Sales
and marketing expenses increased as the Company continued to expand its
worldwide direct sales and support organization, increased efforts in various
marketing activities, and incurred higher commissions associated with increased
revenue. The number of sales and marketing personnel increased from 65 at March
31, 1995 to 74 at March 31, 1996. As a percentage of total revenue, sales and
marketing expenses decreased to 30.9% in three months ended March 31, 1996 from
36.8% in the three months ended March 31, 1995; and decreased to 32.0% in the
six months ended March 31, 1996 from 36.4% in the six months ended March 31,
1995. The decreases were due to total revenues increasing at a rate faster than
the increases in sales and marketing expenses.
Research and Development. Research and development expenses include all
costs associated with the development of new products and enhancements to
existing products. Research and development expenses increased by 97.0% to $2.5
million in the three months ended March 31, 1996 from $1.3 million in the three
months ended March 31, 1995. Research and development expenses increased by
97.1% to $4.5 million in the six months ended March 31, 1996 from $2.3 million
in the six months ended March 31, 1995. The increases in expenses resulted from
the continued investment in the number of research and development personnel
which grew from 42 at March 31, 1995 to 67 at March 31, 1996. As a percentage of
total revenue, research and development expenses were relatively constant at
23.4% and 23.0% in the three months ended March 31, 1996 and 1995, respectively;
and 22.7% and 23.0% in the six months ended March 31, 1996 and 1995,
respectively. To maintain a competitive position in the EDA market, the Company
expects to continue to increase its investment in research and development.
General and Administrative. General and administrative expenses
increased by 51.9% to $776,000 in the three months ended March 31, 1996 from
$511,000 in the three
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months ended March 31, 1995. General and administrative expenses increased by
42.3% to $1.5 million in the six months ended March 31, 1996 from $1.1 million
in the six months ended March 31, 1995. The increases were primarily
attributable to costs associated with new administrative personnel, professional
fees such as legal and accounting, and increases in general operating expenses.
As a percentage of total revenue, general and administrative expenses decreased
to 7.4% in the three months ended March 31, 1996 from 9.4% in the three months
ended March 31, 1995; and decreased to 7.6% in the six months ended March 31,
1996 from 10.7% in the six months ended March 31, 1995.
Income Taxes. The provision for income taxes as a percentage of income
increased to 37.0% in the three months and six months ended March 31, 1996 from
35.0% in the three months and six months ended March 31, 1995. The increases
were primarily due to the expiration of federal research and experimentation
credits. These percentages are less than the federal and state combined
statutory rate of approximately 40.0% primarily due to tax exempt interest
income and the establishment of a Foreign Sales Corporation (FSC) and, for
fiscal 1995, research and experimentation credits.
Quarterly Operating Results May Fluctuate; Dependence on Semiconductor
Industry. The Company's quarterly results may in the future vary significantly
due to a number of factors, including the timing of customer design and
development projects; the timing of significant orders; the timing of
expenditures in anticipation of product releases or increased revenue; the
timing of new product announcements by the Company and its competitors;
competition and pricing in the semiconductor industry; market acceptance of new
and enhanced versions of the Company's products; variations in the mix of
products the Company licenses; and variation in product development or operating
expenditures. Any unfavorable changes in these or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is dependent upon the semiconductor industry and, in
particular, new IC design projects. The semiconductor industry is highly
volatile due to rapid technological change, short product life cycles,
fluctuations in manufacturing capacity, and pricing and gross margin pressures.
The semiconductor industry periodically has experienced significant downturns,
often in connection with, or in anticipation of, declines in general economic
conditions during which the number of new design projects often decreases. The
Company's business, financial condition and results of operations may in the
future reflect substantial fluctuations from period-to-period as a consequence
of semiconductor industry patterns and general economic conditions.
Liquidity and Capital Resources
The Company has financed its operations to date through private and
public sales of equity securities and with cash from operations. Private sales
of equity securities have yielded approximately $2.1 million in cash. In
addition, on October 25, 1994, the
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Company completed its initial public offering raising approximately $17.4
million of cash, net of expenses. Net cash provided by operating activities was
$4.0 million in the six months ended March 31, 1996 which resulted primarily
from net income and increases in accrued liabilities and deferred revenue and
customer deposits, offset by increases in accounts receivable and prepaid
expenses.
Cash used in investing activities resulted primarily from the net
purchases of short-term investments and additions to property and equipment.
Although the Company does not believe its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement claims will not be asserted against the Company or its customers in
the future. The Company could incur substantial costs and diversion of
management resources with respect to the defense of such claims and parties
making such claims could secure substantial damages, each of which could have a
material adverse effect on the Company's financial condition and results of
operations.
As of March 31, 1996, the Company had working capital of $30.2 million
and cash and equivalents and short-term investments of $33.6 million. As of
March 31, 1996, the Company had no bank indebtedness and no long term
commitments other than minimum operating lease obligations. The Company believes
that the existing cash and equivalents and short-term investments and funds
generated from operations will provide the Company with sufficient funds to
finance its operations through at least the next 12 months. Thereafter, the
Company may require additional funds to support its working capital requirements
or for other purposes and may seek to raise such additional funds through public
or private equity financing or from other sources. No assurance can be given
that additional financing will be available or that, if available, such
financing will be obtainable on terms favorable to the Company or its
shareholders.
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PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibit
11.1 Statement regarding computation of per share earnings
(b) Reports on Form 8-K
The Company did not file any reports on form 8-K during the
three months ended March 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1996
EPIC DESIGN TECHNOLOGY, INC.
(Registrant)
----------------------------------
Tammy Liu
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT PAGE
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11.1 Statement regarding computation of per share earnings 17
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