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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996 or
/ / Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________
to _______________.
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 Identification Number)
incorporation or organization)
310 NORTH MARY AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (408) 733-8080
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
November 15, 1996 as reported on the Nasdaq National Market System, was
approximately $201,224,952.00. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of November 15, 1996, registrant had outstanding 13,666,752 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held February 12, 1997.
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PART I.
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K (the "Report")
are forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth in the second and fourth paragraphs under "--Sales,
Marketing and Customers," "--Product Development," "--Competition,"
"--Proprietary Technology," "--Employees," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview," "--Factors
Affecting Future Operating Results" "--Liquidity and Capital Resources" and
elsewhere in this Report.
OVERVIEW
EPIC Design Technology, Inc. ("EPIC" or the "Company") develops,
markets and supports a family of simulation, analysis, extraction and physical
verification software tools that help integrated circuit (IC) designers better
manage the timing, power and reliability characteristics of IC designs. The
Company also develops, markets, and supports a set of technical services
intended for the characterization of transistors and interconnects fabricated on
silicon wafers. The Company's tools and services can be used by designers at
different stages of IC development to help identify flaws, enhance speed, reduce
power consumption and detect the causes of reliability failure. The Company
believes that by using EPIC products, IC designers can reduce development time,
lower the risk of design failure, avoid lengthy refabrication cycles and improve
an IC's performance and value. The Company's tools and services are particularly
focused on meeting deep submicron and nanometer IC designers' requirements for
(i) static and dynamic timing simulation, analysis, optimization and
verification, (ii) power simulation, analysis, optimization and verification,
(iii) physical layout extraction, analysis and verification and (iv) simulation,
analysis and correction of potential causes of reliability failure in complex
ICs.
EPIC(R) , PathMill(R) and TimeMill(R) are registered trademarks of the
Company and AMPS(TM), Arcadia(TM), PowerMill(TM), and Vertue(TM) are trademarks
of the Company. This Report also includes trade names and trademarks of
companies other than EPIC.
INDUSTRY BACKGROUND
There has been substantial growth in the market for sophisticated,
portable electronic products such as cellular telephones, laptop computers,
camcorders and pagers. Rapid growth in the Internet and multimedia arenas has
also fueled growth in the electronic systems necessary to support them. These
products have been enabled, in significant part, by improvements in silicon
process technologies which have made possible the design and manufacture of
increasingly complex, high performance and highly integrated ICs. In the 1970s,
a typical IC consisted of a few thousand transistors implemented in five-micron
technology. Today, designers are creating ICs consisting of millions of
transistors implemented in less than 0.6 micron (deep submicron) technology, and
the most advanced designers are creating ICs consisting of tens of millions of
transistors implemented in less than 0.35 micron (nanometer) technology. The
trends toward portability, multimedia and increased utilization of nanometer
technology have placed increasing demands on IC designers to develop ICs that
are low cost, low power, high speed and highly reliable. At the same time,
competitive pressures are forcing designers to shorten development cycles in
order to bring products to market more rapidly.
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Since the early 1970s, designers have used electronic design automation
(EDA) tools to assist in the IC development process. EDA vendors have provided
designers with methods, tools and services to develop, simulate and verify ICs.
As shown in the diagram below, the IC development cycle has five
stages:
- Architectural Design. Exploration of design alternatives;
- Functional Design. Specification of the desired functionality
of the IC;
- Logic Implementation. Development of gate and transistor level
descriptions that implement this functionality;
- Layout and Verification. Geometric layout of the individual
components that implement the logic design and verification of
the correctness of the design; and
- Production. Fabrication of the IC.
IC DEVELOPMENT PROCESS
Chart depicting the various stages of the IC development
process from Architectural Design to Functional Design to
Logic Implementation to Layout and Verification and to Production.
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While EDA products have brought greater efficiency and productivity to
the IC development process, advances in EDA software technology have not kept
pace with advances in semiconductor process technology. For example, an IC can
be described at different levels of detail or hierarchy, ranging from
transistors, to gates (which are comprised of several transistors), to
functional (i.e., behavioral) blocks (which can represent a large number of
gates). Existing EDA tools are primarily focused on providing simulation and
analysis capabilities at the gate or behavioral levels and generally do not
extend these capabilities down to the transistor level. However, deep submicron
and nanometer technologies each introduce new classes of problems in modeling
speed, power and other physical circuit behavior along with new problems in
managing the integration characteristics of an IC. These problems cannot be
addressed as efficiently or effectively at the gate and behavioral levels.
- Speed. Advanced technology enables an IC to operate at high speed,
but also introduces new challenges in modeling its behavior. At deep submicron
and nanometer levels, the physics of silicon leads to complicated electrical
phenomena (e.g., short channel effect, mobility saturation and cross-coupling)
that make transistor and interconnect behavior difficult to predict. These
phenomena cause significant problems in accurately modeling the timing delays
inherent in the interconnections between transistors (interconnect delay) and
the non-digital behavior of individual transistors on an IC.
- Power. Market demands for portability, higher speed and increased
levels of integration have placed greater importance on minimizing the power
consumed by an IC. Portable applications, which represent a significant market
for advanced silicon technology, require that IC power consumption be minimized
in order to increase battery life and decrease the cost, size and weight of the
system. Reducing power also contributes to increased life and reliability for an
IC.
- Integration. The dramatic increase in the number of transistors and
complexity of IC designs, along with the pressure to reduce design time, create
new problems in tracking the interaction between elements. For example, a design
group will generally work concurrently on different blocks at different levels
of hierarchy, after which the various blocks must be integrated. This
integration is more difficult in advanced IC design because of the large number
of blocks, gates and transistors and because interconnect delay has a greater
impact on the performance of the IC. Highly integrated, advanced silicon ICs
also create new problems in ensuring both their manufacturability and their
reliability. For example, constraints imposed by the physics involved in
characterizing and fabricating nanometer ICs require new solutions to achieve
satisfactory chip yields at process corners and to build in dependability by
identifying and correcting possible points of metal failure.
These design challenges have exposed certain limitations in established
EDA methods and tools. For example, traditional design tools do not accurately
analyze the power consumption characteristics of an IC prior to fabrication.
Therefore, while the designer may have certain power utilization objectives, the
power behavior of an IC is not accurately known until after fabrication. This
uncertainty may require redesign and refabrication, thereby increasing costs and
delaying time-to-market. Furthermore, existing gate level and circuit level
(e.g., SPICE) simulators have been used by designers to model the functionality
and timing characteristics of an IC. Gate level simulators are fast and have the
capacity to simulate an IC with a large number of gates, while SPICE provides
accurate results for small transistor level blocks. However, gate level
simulators cannot accurately simulate the non-digital behavior and complex
interconnect timing inherent in advanced silicon circuits, and SPICE cannot meet
the simulation speed and capacity requirements of most IC designers. Finally,
existing gate and circuit level EDA design tools do not allow designers to track
and manage effectively the interaction between blocks of complex ICs.
Consequently, designers need solutions that enable them to optimize speed and
power and manage integration in an efficient and accurate manner.
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EPIC SOLUTIONS
EPIC provides IC designers with a family of characterization, simulation,
analysis, extraction and physical verification software tools and services to
assist in meeting the design challenges created by deep submicron and nanometer
technology. The Company's six principal products -- AMPS, Arcadia, PathMill,
PowerMill, RailMill and TimeMill--utilize the Company's core technologies to
enable a designer to address timing, power and reliability requirements of an
IC. In addition, Vertue, a seventh product, enables PowerMill or TimeMill to
co-simulate with Verilog-XL, a widely used gate and behavioral level simulation
tool in the EDA industry.
The Company believes that its products can provide the following
benefits:
- Shorten time-to-market. The Company's tools have been shown to
provide accuracy to within five percent of the accuracy of
SPICE, to be significantly faster than SPICE in modeling ICs
and to possess the capacity to model circuits in excess of
four million transistors. These attributes of accuracy, speed
and capacity can shorten time-to-market by reducing the risk
of redesign and allowing designers to complete their tasks
more rapidly.
- Reduce power consumption. The Company believes that PowerMill
is uniquely able to detect and highlight design elements that
cause excessive power dissipation, thereby permitting
designers to modify the circuit to reduce overall power
consumption. The Company also believes that AMPS enables
designers to produce lower power ICs by handling the complex
tradeoffs between power, speed and area in advanced circuits.
- Increase levels of design integration. The Company believes
that the accuracy of its tools reduces design risk in
developing more highly integrated ICs. PathMill provides both
critical path analysis and full chip static timing
verification. Arcadia provides the capacitance and resistance
information necessary to model interconnect between blocks and
between individual elements. The ability for PowerMill and
TimeMill to simulate with Verilog-XL enables a designer to
track the interaction between blocks of a complex IC and to
manage them more effectively.
- Extend product life and enhance reliability. The Company
believes that the analysis capabilities of its products allow
designers to detect more causes of circuit failure than
existing gate level tools, resulting in improved IC
reliability. RailMill enables the designer to detect the
potential causes of voltage drop and electromigration (metal
migration) which can lead to unreliable operation and early
device failure.
- Reduce development costs. In addition to development cost
savings that may result from decreased design time and fewer
prototype iterations, the Company believes that interfaces
developed to run between the Company's products and the
frameworks from EDA suppliers can streamline the design flow
and potentially reduce the complexity and cost of IC design.
EPIC STRATEGY
The Company's strategy is to become the leading supplier of timing,
power and reliability management tools for the design of deep submicron and
nanometer ICs. The key elements of this strategy are to:
Capitalize On and Maintain Technological Leadership in Advanced IC
Design Analysis. The Company intends to continue to invest significant resources
to expand its set of core technologies and to enhance and support
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its products. During fiscal 1996, the Company unveiled several new capabilities
reflecting this strategy. The Company introduced AMPS which enables designers to
optimize circuit performance by automating the complex simultaneous tradeoff of
power, delay and area in the design space. The Company announced Synchronous
Matrix Solver technology, a third-generation dynamic simulation technology
targeted to provide the underlying "nanometer-ready" capability for all of
EPIC's next-generation dynamic simulation tools. The Company also announced
Direct Silicon Access, a service that generates technology files (characterized
transistor and interconnect data) directly from laboratory measurements of a
silicon test chip, enabling the EPIC tools to provide results closer to actual
silicon than when SPICE is used. In September 1996, the Company also acquired
CIDA Technology, Inc. ("CIDA"). The Company believes that technology from this
acquisition will form the foundation of the Company's next-generation
hierarchical physical verification tools. In addition, the Company plans to
develop new technologies to address future generations of silicon process
technology.
Provide Comprehensive Tools for Low Power Design. The Company expects
increasing demand for portable electronic products to require designers to
minimize IC power consumption. The Company has devoted significant effort to
meet the requirements of low power IC design. PowerMill provides power analysis
and diagnostics enabling designers to identify and reduce IC power consumption.
AMPS enables the development of circuits that are optimized for low power
performance. The Company intends to enhance its PowerMill and AMPS technology
base and to continue to develop tools targeted at the low power IC design
market.
Provide Open Architecture Design Tools and Support Industry Standards.
The Company has entered into major EDA supplier programs to provide more
integrated design solutions. The Company is a member of Cadence Design Systems'
Connections Program, Synopsys' in-Sync Program and Mentor Graphics Corporation's
OpenDoor program. The Company offers interfaces to these and other vendor
environments and designs its products to support various widely used EDA formats
such as SDF (Standard Delay Format), SPF (Standard Parasitic Format),
Verilog" and EDIF (Electronic Data Interchange Format). The Company believes
that this strategy will facilitate integration of EPIC tools into designers'
preferred development environments.
Establish Long-Term Customer Relationships with Major Accounts. The
Company will continue to focus its sales and marketing efforts on key accounts
worldwide in the consumer electronics, computer, communications and
semiconductor industries. The Company provides direct interaction of certain key
personnel with these key accounts to ensure successful adoption of the Company's
products. These strategic relationships act as highly visible references and
provide ongoing technical input into the development of future products and
enhancements to existing products.
Provide Products which Address the Needs of ASIC Designers. ASIC
designers have traditionally used gate level tools to meet their design needs.
The Company believes that existing gate level tools, particularly with respect
to power consumption and timing calculation, will become increasingly inadequate
as IC designs are implemented in nanometer technology and will need to be
supplemented with more accurate tools. The Company is currently developing
tools, expected to be introduced prior to the end of fiscal 1997, that it
believes will provide accurate power analysis and diagnostics and also delay
calculation for ASIC designs. Although the ASIC design market is highly
competitive, the Company believes that it presents a significant opportunity for
the Company.
Provide Products which Address the Requirements of Physical
Verification. Once a design is completed, it must be verified to assure that no
design rules have been broken. This process is called physical verification and
includes several procedures, including Design Rule Checking (DRC), Electrical
Rule Checking (ERC), Layout Versus Schematic (LVS) which determines whether the
circuit laid out actually matches the netlist (schematic), and Layout Parasitic
Extraction (LPE) to provide resistance, capacitance and inductance data. The
Company believes that existing physical verification tools will become
increasingly inadequate as IC designs are implemented in nanometer
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technology and will need to more fully accommodate hierarchical design methods.
Based on the CIDA technology, the Company is presently developing tools,
expected to be introduced prior to the end of fiscal 1997, that it believes will
provide faster operation, true hierarchy and lower memory requirements for
physical verification. Although the physical verification market is highly
competitive, the Company believes that it presents a significant opportunity for
the Company.
TECHNOLOGY AND PRODUCTS
The Company's AMPS, PathMill, PowerMill, RailMill and TimeMill products
all use the same input files, including netlist, control and technology files.
Arcadia uses compatible netlist and back annotation formats but has its own
technology file. These technology files can be generated based on data measured
directly from silicon using the Direct Silicon Access Laboratory, a new service
laboratory established by the Company in fiscal 1996. The Company's products
provide a breadth of timing, power and reliability analysis capabilities and are
enhanced by the availability of optional features for such specialty needs as
analog blocks.
Technology
The Company's products are based upon the following internally
developed and acquired proprietary technologies and innovative software
algorithms.
- Event driven transistor level simulation. The Company has
developed innovative algorithms that effectively partition the
design and accurately simulate the non-digital behavior of
transistor level circuits common in advanced IC designs.
- Mixed transistor models. The Company's products use complex
algorithms that analyze a circuit and automatically select the
appropriate transistor model in each instance in order to
maximize performance of the simulation while maintaining the
desired accuracy.
- Efficient creation, storage and retrieval of table look-up
MOSFET models. This proprietary method utilizes Direct Silicon
Access Laboratory data (or the output of SPICE) with
user-defined MOSFET models to efficiently create, store and
retrieve tabular device characteristics that are referenced
during the simulation process.
- Synchronous matrix solver and high-performance sparse matrix
circuit solver. The Company has developed innovative methods
for solving circuit equations to provide detailed and
numerically reliable circuit behavior modeling in complex ICs.
- Optimum transistor width solver. The Company has developed a
unique approach for determining optimum transistor widths in
order to meet power, delay and area constraints.
- Quasi-3D capacitance analysis. The Company has acquired
innovative topology analysis for parasitic capacitance
analysis that provides enhanced accuracy with minimized
performance degradation.
- Accurate resistance topology analysis. The Company has
acquired a unique approach to breaking down polygons to ensure
accurate parasitic resistance calculation.
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- Interconnect and transistor characterization from silicon. The
Company has invested in a laboratory furnished with
state-of-the-art measurement and test equipment which is
combined with advanced software technologies to create a
semi-automated characterization process.
Products
The Company's products can be utilized at various stages of the advanced silicon
IC development process and provide designers with the following functions and
capabilities to address speed, power and integration requirements:
Chart depicting the various stages of the IC development
process in relation to the Company's products.
SPEED POWER INTEGRATION
Vertue enables TimeMill
and Verilog-XL
co-simulation to explore
architecture options
PathMill identifies critical PowerMill or PowerMill PathMill ensures
timing paths that drive the with Vertue explores low timing budgets for each
design planning power alternatives for key block are consistent
design blocks with initial goals
PathMill and TimeMill PowerMill verifies that PathMill and TimeMill
analyze and improve timing pre-layout power meets power help designers optimize
constraints goals transistor level blocks
Arcadia provides accurate PowerMill prioritizes PathMill enables
post layout parasitics to critical power areas designers to perform full
help ensure the accuracy of chip static timing
analysis results verification
PathMill prioritizes AMPS obtains lowest power PathMill and TimeMill
critical timing areas while maintaining timing verify post-layout timing
specifications
PathMill and TimeMill PowerMill verifies and helps Vertue enables PowerMill
validate post-layout timing designers minimize power or TimeMill and
consumption Verilog-XL co-simulation
to verify the completed IC
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SPEED POWER INTEGRATION
RailMill identifies voltage RailMill identifies high Arcadia provides
drop problems that reduce currents that cause selective net extraction
performance electromigration problems. that increases accuracy
It can help designers select and reduces runtime to
the best network strategy improve the design
for optimized performance validation cycle
AMPS. AMPS simultaneously optimizes power, delay and area in digital
CMOS circuits. AMPS automatically resizes transistors, making them larger and/or
smaller to find the combination that will best meet user-defined power, speed
and area goals without changing the functionality of the design. The Company
believes that AMPS helps a designer manage the complex relationships between
power, speed and area in such a way as to meet or exceed design goals and
thereby add value to the design. AMPS can be used on full custom and standard
cell designs, and it runs on blocks of 100 to 30,000 transistors. At the back
end, AMPS serves as a verification tool, using parasitics extracted from layout
to determine whether design performance goals have actually been met and
allowing the designer to make further improvements if necessary. AMPS also
enables a designer to reuse blocks by automatically resizing the circuits to
make them run faster, consume less power and/or minimize area. AMPS carries a
list price in the United States of $90,000 for a floating license and was first
shipped to customers in January 1996. A floating license allows one use of the
product at any given time on any one computer on the customer's network.
ARCADIA. Arcadia provides full chip and net-by-net RC extraction. The
Company believes that Arcadia achieves a greater combination of accuracy and
fast run time than other existing tools. Arcadia is also easy to use and
supports a variety of formats that enable simple integration into existing
design flows. Arcadia provides the user with multiple extraction modes and
allows net-by-net extraction, so that designers can invest analysis time on
critical paths and spend less time on the segments that do not require in-depth
analysis. Arcadia is specifically designed for the advanced silicon designer
working on complex, high-performance custom, structured custom or ASIC projects.
Arcadia carries a list price in the United States ranging from $30,500 to
$109,500 for a floating license depending on features and functionality and was
first shipped to customers in March 1995.
PATHMILL. PathMill is a static timing tool that provides a detailed
critical path analysis and static timing verification capability. The Company
believes that PathMill provides accurate and flexible modeling for mixed level
static timing analysis. PathMill's behavioral, gate and transistor level models
allow accurate analysis at each level of the design hierarchy, allowing the user
to mix top-down design and bottom-up implementation. PathMill has the capability
of generating netlists of selected paths for several versions of SPICE. The user
can use the netlists directly to run SPICE simulations on the critical paths to
fine tune the paths or to verify the results from PathMill. PathMill carries a
list price in the United States ranging from $45,500 to $96,750 for a floating
license depending on features and was first shipped to customers in June 1989.
POWERMILL. PowerMill simulates block and full chip current and power
behavior, providing fast and accurate current and power analysis and power
diagnostics. PowerMill offers static and dynamic diagnostics to identify design
flaws that cause unnecessary power consumption. PowerMill also allows the
designer to accurately predict the power consumption of a block and explore
different alternatives for minimizing the power consumed by the block. In
addition, PowerMill helps to ensure that power problems are caught early in the
design cycle and to verify the design
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prior to layout. The results can then be used to help modify the layout to
facilitate minimum power dissipation and optimal power bus sizing. After layout,
PowerMill helps designers confirm that power consumption is acceptable before
committing the design to silicon. PowerMill carries a list price in the United
States ranging from $75,100 to $101,350 for a floating license depending on
features and was first shipped to customers in March 1992.
RAILMILL. RailMill is an IC reliability analysis tool to detect
electromigration and voltage drop problems before silicon. Leveraging the
Company's expertise in power and extraction, RailMill addresses problems related
to reliability in IC design and verification. RailMill is used during the
physical design phase and allows designers to detect and eliminate the causes of
intermittent failure and reduced lifetime due to voltage drop and
electromigration problems. RailMill brings reliability detection into the design
phase, eliminating silicon turns and reducing very expensive and time-consuming
post-silicon analysis. RailMill carries a list price in the United States
ranging from $166,000 to $236,250 for a floating license depending on features
and was first shipped to customers in May 1995.
TIMEMILL. TimeMill is a transistor level simulator and dynamic timing
analyzer that provides results significantly faster and with greater capacity
than SPICE and with more accuracy than gate level simulators. Used interactively
in the pre-layout phase, TimeMill helps designers optimize the performance of
transistor level blocks, memories and datapaths. TimeMill allows the designer to
quickly explore changes in voltage levels, temperature or process parameters to
improve design quality. After layout, TimeMill detects problems such as charge
sharing and race conditions which are more prevalent in advanced silicon IC
design. These problems may be missed by a logic simulator and are generally
impractical to find with SPICE. TimeMill provides an extra level of verification
which can detect errors or insufficient detail in the gate level library.
TimeMill's dynamic timing checks allow designers to specify design margin and
automatically flag violations which can be used to check the impact of layout on
the critical timing areas. TimeMill carries a list price in the United States
ranging from $55,800 to $103,050 for a floating license depending on features
and was first shipped to customers in August 1987.
VERTUE. Vertue uses technology developed by the Company with SimMatrix
developed by Precedence Incorporated ("Precedence") to enable co-simulation of
TimeMill or PowerMill with Verilog-XL. The Company has been granted a license to
use, market and distribute the interface developed by Precedence in return for
certain development fees and royalties. Vertue enables the concurrent use of
Verilog-XL and TimeMill or PowerMill allowing the designer to mix behavioral,
gate and transistor level blocks as needed. With the use of top-down design, the
creation of test sets ("test benches") and system level simulation vectors is
performed at the top level. Vertue enables the designer to use the Verilog test
benches to drive TimeMill or PowerMill directly, and therefore reduces the need
to create additional test vectors. Vertue extends the value of the Verilog
environment by enabling accurate timing, non-digital behavior and power to be
simulated from within the Verilog environment. Vertue carries a list price in
the United States of $24,000 for a floating license and was first shipped to
customers in March 1994.
OPTIONS. The Company offers a variety of product options. PowerMill and
TimeMill have extensions (MSX and BCX) that allow designers to directly simulate
mixed-signal and BiCMOS ICs. PathMill has options for dynamic analysis of clock
trees (DSX), writing custom routines for tailoring PathMill results directly
(PFX), and for writing and reading constraints and models within a Synopsys
design flow (SFX). BDC (Block Delay Calculator) works with TimeMill and extracts
the timing and drive loading information necessary for pin-to-pin block timing
characterization. SNX (Signal Net eXtension) works with RailMill to provide
signal net analysis in addition to power and ground nets. Arcadia has a range of
configuration options that allow the designer flexibility in using the tool at
various places in the design flow.
INTERFACES. The Company supports certain platforms available from Sun
Microsystems, Inc., Hewlett-Packard Company and IBM. The Company has developed
graphical interfaces for Arcadia, PathMill, PowerMill and RailMill and intends
to develop other interfaces during fiscal 1997. The Company's OEMs support
several products
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that ease the integration of the Company's products to other environments. The
following tables list the interfaces and tools supported by the Company:
Interfaces
CADENCE DESIGN VIEWLOGIC MENTOR GRAPHICS
SYSTEMS, INC. SYSTEMS, INC. CORPORATION
Framework Integration X X X
Schematic Capture Interface X X X
Waveform Display X X X
Co-simulation with Verilog-XL X
Tools
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Netlist integration Vector integration Waveform integration
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SPICE SPICE TurboWave
EDIF Verilog SimWave
LSIM Proprietary formats
Verilog
SALES, MARKETING AND CUSTOMERS
The Company markets its products in North America and Europe primarily
through a direct sales organization. EPIC uses a team of sales personnel and
field applications engineers working together from the Company's sales and
support offices to provide commercial and technical solutions for each customer.
Additionally, the Company has a team of product experts based at the Company's
headquarters to assist the applications engineers in certain situations where an
advanced level of product expertise is required. The Company has domestic sales
and support offices in Sunnyvale and Irvine, California, Austin and Dallas,
Texas, Framingham, Massachusetts, Upper Saddle River, New Jersey, Research
Triangle, North Carolina, Arvada, Colorado, Phoenix, Arizona, Vancouver,
Washington and Baltimore, Maryland. Internationally, the Company has sales and
support offices in Taipei, Taiwan, Grenoble, France and London, England. As of
September 30, 1996, the Company employed 34 sales personnel and 43 applications
engineers. The Company participates in industry trade shows and organizes
seminars to promote and further expand the adoption of its products and
technologies.
In Asia, EPIC markets its products primarily through a limited number
of independent distributors who license and service the Company's products in
this market. The Company also supports these distributors and their customers
with technical, sales and management personnel. Marubeni is the Company's
exclusive distributor in
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Japan. C&G Technology distributed the Company's products on a nonexclusive basis
in Korea until June 30, 1996. Beginning July 1, 1996, EPIC Associates, Inc.
became the Company's nonexclusive distributor in Korea. The Company is currently
negotiating with C&G Technology for a new nonexclusive distributor agreement
intended to be effective January 1, 1997 and intends to employ some of the
employees of EPIC Associates, Inc. to directly support the Company's Korean
customers starting January 1, 1997. Future Techno Design distributes the
Company's products on a nonexclusive basis in the ASEAN countries (Singapore,
Malaysia, Indonesia, Thailand and the Philippines) and in India. The Company has
no direct sales force and relies on a single distributor for licensing and
support of its products in each of Japan, Korea and the ASEAN countries and
India. Accordingly, the Company is dependent upon the continued viability and
financial stability of its distributors, and in particular, of Marubeni. Since
the Company's products are used by highly skilled professional engineers,
effective distributors must possess sufficient technical, marketing and sales
resources and must devote these resources to a lengthy sales cycle, customer
training and product service and support. Only a limited number of distributors
possess these resources. In addition, the Company's distributors generally offer
products of several different companies, including in some cases products that
are competitive with the Company's products. There can be no assurance that the
Company's current distributors will be able to continue to market or service and
support the Company's products effectively, that economic conditions or industry
demand will not adversely affect these or other distributors, that any
distributor that licenses the Company's products will choose to continue to
license such products or that these distributors will not devote greater
resources to licensing products of other companies. The loss of, or a
significant reduction in revenue from, one of the Company's distributors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In June 1996, the Company entered into a nonexclusive OEM agreement
with Cascade Design Automation Corp. ("Cascade"). Under such agreement, Cascade
is granted the nonexclusive right of distributing the Company's Arcadia product
by bundling it with Cascade's own product.
International license and service revenue accounted for 39.7%, 44.3%
and 48.5% of the total revenue in fiscal 1996, 1995 and 1994, respectively. The
Company expects that international license and service revenue will continue to
account for a significant portion of its revenues in the future. These revenues
involve a number of inherent risks, including the impact of recessionary
environments in economies outside the United States, generally longer receivable
collection periods, unexpected changes in regulatory requirements, reduced
protection for intellectual property rights in some countries, and tariffs and
other trade barriers. There can be no assurance that such factors will not have
a material adverse effect on the Company's future international license and
service revenue and, consequently, on the Company's business, financial
condition and results of operations. Although the Company has attempted to
reduce the risk of fluctuations in exchange rates associated with international
revenues by licensing its products for United States currency, the Company pays
the expenses of its international operations in local currencies and does not
engage in hedging transactions with respect to such obligations. Currency
exchange fluctuations in countries in which the Company licenses its products
could have a material adverse effect on the Company by resulting in pricing that
is not competitive with prices denominated in local currencies.
In fiscal 1996, 1995 and 1994, licensing and service revenue from
Marubeni accounted for 21.9%, 16.6% and 15.6%, respectively, of total revenue.
Advanced Micro Devices, Inc. accounted for 10.7% of licensing and service
revenue in fiscal 1996. Licensing and service revenue from the C&G Technology,
the Company's distributor in Korea, accounted for 11.0% of total revenue in
fiscal 1995. No other customer of the Company accounted for greater than 10% of
total revenue during fiscal 1996, 1995 or 1994.
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CUSTOMER SERVICE AND SUPPORT
The Company provides its customers with a wide range of support
services, including a support hot-line, on-site support and on-site and in-house
training for all products. The Company's customer service and support is
provided by application engineers who understand the design methodologies of the
Company's customers and generally have IC design backgrounds. Pre-sales support
is supplied in executing benchmarks, training and providing integration analysis
as needed. Post-sales support is provided pursuant to renewable annual
maintenance contracts. In addition, customers with maintenance agreements have
access to a hot-line and receive periodic product enhancement releases at no
additional cost. Initial training is currently included in the license fees,
however, customers are charged for specialist consulting or on-site training.
Most of the Company's customers currently have maintenance agreements.
PRODUCT DEVELOPMENT
The Company's future success is dependent in part upon its ability to
enhance its current products and to develop and introduce new products on a
timely and a cost-effective basis that keep pace with technological developments
and evolving industry standards, as well as address the increasingly
sophisticated needs of the Company's customers. The Company's research and
development staff focuses on the development, enhancement and support of a
particular product of the Company or the development and support of product
integration and graphical user interfaces. These groups also focus on releasing
improved versions of the Company's existing products and developing new products
and product options.
The Company's product development efforts are currently focused on
several new products that the Company currently expects to introduce in fiscal
1997 in the timing, power and reliability areas. With its recent acquisition of
CIDA, the Company is continuing the development efforts in the layout
verification area. In addition, the Company is modifying its products for the
ASIC design market segment. The Company is working with ASIC vendors and
designers to develop a tool designed to provide accurate power analysis and
diagnostics for ASIC applications. The EDA industry is characterized by
extremely rapid technological change, frequent new product introductions,
evolving industry standards and changing customer requirements. The Company's
future success will depend upon its ability to enhance its current products and
to develop and introduce new products on a timely and a cost-effective basis
that keep pace with technological developments and evolving industry standards
and methodologies, as well as address the increasingly sophisticated needs of
the Company's customers. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products that
respond to technological change, evolving industry standards and changing
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Failure of the Company, for technological or other reasons, to
develop and introduce new products and product enhancements in a timely and
cost-efficient manner would have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The EDA industry is highly competitive. In general, competition in the
EDA industry comes from major EDA vendors, each of which has a longer operating
history, significantly greater financial, technical and marketing resources,
greater name recognition and larger installed customer bases than the Company.
These companies also have established relationships with current and potential
customers of the Company. Market acceptance of the Company's products will
require that IC designers adopt modified methods of design simulation and
analysis, for example simulating and analyzing at the transistor level as
opposed to the gate level. Designers have historically
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relied on other methodologies implemented through products supplied by the major
EDA vendors, and there can be no assurance that they will be willing to change
these established methods of design simulation and analysis. If the market for
the Company's products develops, the Company expects competition from the major
EDA vendors to increase. In addition, a variety of small companies develop and
bring new products to the market, and any of these companies could become a
significant competitor in the EDA market in the future. The Company also
competes with the internal design groups of its existing and potential
customers, many of whom design and develop customized simulation and analysis
tools for their particular needs and therefore may be reluctant to purchase
products offered by independent vendors. In addition, increased competition
could result from vendors of SPICE simulation products which increase the
performance of their existing products to match that of the Company's products.
Each of the Company's products addresses a different aspect of IC
performance optimization and has different competitors. AMPS competes with a
tool that Cadence has licensed from Lucent Technology, Inc. Arcadia competes
with extraction tools offered by Cadence, Avant! Corp. ("Avant!") and High Level
Design Systems, Inc. ("HLDS"). PathMill competes with a static timing analysis
product offered by Cadence at the transistor level and there are several gate
level analyzers which have historically been used for static timing analysis.
Among the leading EDA vendors that currently offer gate level static timing
analyzers are Viewlogic, Synopsys, Cadence and Mentor Graphics Corporation
("Mentor"). In addition, the Company is aware of certain transistor level
products competitive with PathMill which are offered by smaller EDA companies.
PowerMill competes with transistor level products offered by Mentor and Avant!
and gate level products offered by Synopsys. TimeMill experiences competition
from product offerings of Avant!, Mentor and certain smaller EDA companies. To
date, the Company has faced little direct competition for RailMill and Vertue.
The Company has also recently established a silicon characterization service
laboratory which is competing with a similar service laboratory at Avant!. With
the Company entering into the market of physical verification through its
acquisition of CIDA, the Company will also be competing with layout verification
tools from Cadence, Mentor and Avant!.
Several recent consolidations in the EDA industry involving medium to
large EDA companies acquiring small technology companies have provided the
additional sales distribution channels and customer base access to these smaller
companies that otherwise would not have had such resources. For example, as a
result of Avant!'s acquisitions of Anagram, Inc., Meta-Software, Inc. and
Frontline Design Automation and Cadence's recent announcements of agreements to
acquire HLDS and Cooper & Chyan Technology, Inc., the Company believes that its
competitive environment has moved toward a small number of competitors with
increased competition coming from larger, more diversified EDA companies that
possess significantly greater financial, technical and marketing resources and
greater name recognition and larger installed customer bases than the Company.
The Company competes on the basis of certain factors, including
first-to-market product capabilities, product performance, price, support of
industry standards, ease of use and customer technical support and service. The
Company believes that it currently competes favorably overall with respect to
these factors, particularly time-to-market product features, technical support
and customer service. However, there can be no assurance that the Company will
be able to continue to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations. In particular, increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. In addition, there can be no assurance
that current competitors or other entities will not develop similar products
that have significant advantages over the Company's core technology which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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PROPRIETARY TECHNOLOGY
The Company relies primarily upon a combination of copyright and
trademark laws to establish and protect proprietary rights in its products. The
Company seeks to protect the source code for its products as an unpublished
copyrighted work. The Company generally enters into proprietary information and
confidentiality agreements with its employees and distributors, and limits
access to and distribution of its software, documentation and other proprietary
information. The Company does not license or release the source code for its
proprietary software to its customers, except in connection with source code
escrow arrangements. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use the Company's products or technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Because the EDA industry is characterized
by rapid technological change, the Company believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are also important to establishing and maintaining a technology leadership
position. The Company does not hold any patents and does not anticipate that it
will rely in the future on patents to protect its proprietary rights.
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. Although there are no such pending lawsuits against the Company or
notices that the Company is infringing intellectual property rights of others,
there can be no assurance that litigation or infringement claims will not occur
in the future. The Company could incur substantial costs and diversion of
management resources in defending itself and its customers against any such
claims. Furthermore, parties making such claims could secure substantial
damages, as well as injunctive or other equitable relief which could effectively
block the Company's ability to sell its products in the United States and
abroad. Such a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. If it appears necessary
or desirable, the Company may seek licenses under intellectual property that it
is allegedly infringing. There can be no assurance, however, that licenses could
be obtained on commercially reasonable terms, if at all, or that the terms of
any offered licenses will be acceptable to the Company. The failure to obtain
the necessary licenses or other rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of September 30, 1996, the Company had a total of 195 employees,
including 92 in research and development, 84 in sales, marketing and related
customer support services, and 19 in administration. Thirty-four of the
Company's employees hold Ph.D. degrees. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good. The Company is highly dependent upon the continued service
of, and on its ability to attract and retain, qualified technical, sales,
marketing and managerial personnel. The competition for qualified personnel is
intense, and the loss of any such persons, as well as the failure to recruit
additional key personnel in a timely manner, would have a material adverse
effect on the Company's business, financial condition and results of operations.
In particular, there are only a limited number of qualified EDA engineers, and
the competition for such individuals is especially intense. There can be no
assurance that the Company will be able to continue to attract and retain the
qualified technical and other personnel necessary for the development of its
business.
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ITEM 2. PROPERTIES
In December 1995, the Company relocated its principal administration,
sales, marketing and research and development operations to a facility occupying
approximately 53,000 square feet in Sunnyvale, California. The facility is
leased through November 2000, at which time the Company has two options to
extend the lease for additional periods of two and one-half years each. The
Company's lease on its former principal facility expired in February 1996. In
addition, the Company also leases sales offices in Irvine, California, Austin
and Dallas, Texas, Framingham, Massachusetts, Upper Saddle River, New Jersey,
Vancouver, Washington, Taipei, Taiwan, Grenoble, France and London, England. The
Company also leases an approximately 3,000 square feet facility in Santa Clara,
California, pursuant to a lease assumed in connection with the acquisition of
Archer. The Company subleases this facility to a third-party. Additionally,
pursuant to a lease assumed in connection with the acquisition of CIDA, the
Company leases approximately 2,500 square feet facility in Sunnyvale, California
and such lease expires on December 31, 1996. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of November 15,
1996 are as follows:
Name Age Position
- ---------------------------------- --- ----------------------------------------------------
Sang S. Wang, Ph.D. .............. 51 Chief Executive Officer and Chairman of the Board of
Directors
Bernard Aronson .................. 65 President and Director
Gary A. Larsen ................... 63 Vice President, Worldwide Sales
Tammy S. Liu ..................... 40 Chief Financial Officer and Secretary
Dr. Wang, a co-founder of the Company, has served as Chief Executive
Officer since August 1991 and as Chairman of the Board of Directors since
September 1993. From the Company's inception in October 1986, he served as
President until August 1991 and as Chief Financial Officer until March 1993.
Prior to founding the Company, Dr. Wang was a Manager of Computer Aided Design
at AMD, a manufacturer of integrated circuits, responsible for the development
of AMD's internal bipolar circuit simulation environment.
Mr. Aronson has served as President of the Company since August 1991
and as a Director since March 1992. From March 1990 to August 1991, Mr. Aronson
served as Executive Vice President of Zoran Corporation, a semiconductor
company. From 1987 to January 1990, he served as President of ICI Array
Technology, Inc., a contract assembly company. From 1976 to 1987, Mr. Aronson
served as President of Pico Design, Inc., a semiconductor chip design company
that he founded and which became a wholly-owned subsidiary of Motorola in 1979.
Mr. Larsen has served as Vice President, Worldwide Sales since joining
the Company in August 1994. From 1984 to April 1994, he served in a variety of
managerial positions at Cadence, most recently as Vice President of the ASIC
Solution Group.
Ms. Liu has served as Chief Financial Officer since joining the Company
in January 1994 and as Secretary since August 1994. From January 1990 to
September 1993, she served as Chief Financial Officer at PiE Design Systems,
Inc., a manufacturer of system level verification tools. From 1988 to December
1989, she served as Corporate Controller of Plexus Computers, Inc., a
manufacturer of image processing computers. Prior to that time, she served in a
variety of financial management positions at Cadence and Finnigan Corporation, a
manufacturer of mass spectrometers.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol EPIC since the Company's initial public offering on
October 26, 1994. Prior to that time, there was no public market for the
Company's Common Stock. The following table sets forth for the periods indicated
the high and low sale prices on the Common Stock.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 HIGH LOW
------- -------
Fourth Quarter $ 26.75 $ 17.50
Third Quarter $ 36.00 $ 24.00
Second Quarter $ 36.75 $ 20.50
First Quarter $ 24.25 $ 19.00
FISCAL YEAR ENDED SEPTEMBER 30, 1995 HIGH LOW
------- -------
Fourth Quarter $ 24.25 $ 15.75
Third Quarter $ 18.12 $ 12.63
Second Quarter $ 13.62 $ 9.00
First Quarter (From October 26, 1994) $ 12.37 $ 9.37
As of November 15, 1996, there were approximately 84 holders of record
of the Common Stock.
The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in the
operation of its business and does not anticipate paying any cash dividends in
the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and shall be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statement, related notes and other financial
information included elsewhere in this Report.
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
License $ 34,548 $20,732 $ 9,694 $4,808 $ 2,250
Service 9,371 4,271 1,645 724 452
-------- ------- ------- ------ -------
Total revenue 43,919 25,003 11,339 5,532 2,702
-------- ------- ------- ------ -------
Cost and expenses:
Cost of license 1,671 1,315 572 161 68
Cost of service 1,681 987 454 235 94
Sales and marketing 13,285 8,771 4,548 2,114 899
Research and development 10,566 5,886 2,908 1,668 1,252
General and administrative 3,380 2,325 1,027 545 362
Purchased in-process technology 18,806 3,261 -- -- --
-------- ------- ------- ------ -------
Total operating expenses 49,389 22,545 9,509 4,723 2,675
-------- ------- ------- ------ -------
Income (loss) from operations (5,470) 2,458 1,830 809 27
Interest income, net 1,153 822 82 24 13
-------- ------- ------- ------ -------
Income (loss) before income taxes (4,317) 3,280 1,912 833 40
Provision for income taxes 5,361 2,290 674 230 65
-------- ------- ------- ------ -------
Net income (loss) $ (9,678) $ 990 $ 1,238 $ 603 $ (25)
======== ======= ======= ====== =======
Net income (loss) per share (1) $ (0.77) $ 0.08 $ 0.13 $ 0.06 $ (0.01)
======== ======= ======= ====== =======
Shares used in per share computation(1) 12,625 13,198 9,864 9,520 4,922
======== ======= ======= ====== =======
Years Ended September 30,
-------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments $ 39,527 $27,918 $ 3,974 $ 872 $ 965
Working capital 30,763 23,584 1,862 1,521 1,335
Total assets 54,791 35,781 7,907 3,345 2,257
Total shareholders' equity 37,054 26,925 3,637 2,163 1,545
- -----------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income (loss) per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Report are
forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below in the second paragraph under "Overview,"
"Factors Affecting Future Operating Results" and "Liquidity and Capital
Resources." These forward-looking statements include the last sentence of the
first paragraph under "Overview," the statement relating to future international
license and service revenue in the fourth paragraph under "Research and
Development," the last sentence of the second paragraph under "Liquidity and
Capital Resources" and the statement relating to the period of time through
which the Company's resources will be adequate to finance its operations in the
last paragraph under "Liquidity and Capital Resources."
OVERVIEW
The Company develops, markets and supports a family of simulation and
analysis software tools that helps 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, in August 1987. The Company began
licensing PathMill in June 1989, PowerMill in March 1992, Vertue in March 1994,
RailMill in May 1995 and its latest product, AMPS, in January 1996. With the
acquisition of Archer Systems, Inc. ("Archer"), the Company also began licensing
Arcadia in November 1995. Substantially all of the Company's license revenue to
date has been derived from the licensing of Arcadia, PathMill, PowerMill 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. The Company has recently acquired CIDA Technology, Inc. ("CIDA")
which is developing a new technology in the area of layout verification. The
Company does not expect to generate any substantial revenue from these products
until they are formally released and receive market acceptance.
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 and the competitiveness of the products in an ever increasing
competitive environment are 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data of the Company expressed as a percentage of total
revenue.
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YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995 1994
---- ---- ----
Revenue:
License 78.7% 82.9% 85.5%
Service 21.3 17.1 14.5
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of license 3.8 5.3 5.0
Cost of service 3.8 3.9 4.1
Sales and marketing 30.2 35.1 40.1
Research and development 24.1 23.6 25.6
General and administrative 7.7 9.3 9.1
Purchased in-process technology 42.8 13.0 --
----- ----- -----
Total operating expenses 112.4 90.2 83.9
----- ----- -----
Income (loss) from operations (12.4) 9.8 16.1
Interest income, net 2.6 3.3 0.8
----- ----- -----
Income (loss) before income taxes (9.8) 13.1 16.9
Provision for income taxes 12.2 9.1 6.0
----- ----- -----
Net income (loss) (22.0)% 4.0% 10.9%
===== ===== =====
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 increased by 75.7% to
$43.9 million in fiscal 1996 from $25.0 million in fiscal 1995 and increased by
120.5% in fiscal 1995 from $11.3 million in fiscal 1994. The percentage of the
Company's total revenue attributable to license fees decreased to 78.7% in
fiscal 1996 from 82.9% and 85.5% in fiscal 1995 and 1994, respectively.
License revenue increased by 66.6% to $34.5 million in fiscal 1996 from
$20.7 million in fiscal 1995 and increased by 113.9% in fiscal 1995 from $9.7
million in fiscal 1994. The increase in revenue in fiscal 1996 was primarily due
to increases in number of licenses of Arcadia, PathMill, PowerMill, RailMill and
various options for such products. The increase in revenue in fiscal 1995 was
primarily due to increases in number of licenses of PathMill, PowerMill,
TimeMill and to a lesser extent, various options and third party software
products. In May 1995, the Company began licensing its reliability product,
RailMill. In July 1995, with the acquisition of Archer, the Company started
licensing Arcadia. To date, price increases have not been a material factor in
the Company's revenue growth.
Service revenue increased by 119.4% to $9.4 million in fiscal 1996 from
$4.3 million in fiscal 1995 and increased by 159.6% in fiscal 1995 from $1.6
million in fiscal 1994. The increases in service revenue in each fiscal year
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
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maintenance contracts on initial licenses and have renewed such contracts upon
expiration. The percentage of the Company's total revenue attributable to
service revenue increased to 21.3% in fiscal 1996 from 17.1% in fiscal 1995 and
from 14.5% in fiscal 1994. Service revenue as a percentage of total revenue
increased in fiscal 1996 as a result of the Company generating $1.8 million or
19.1% of service revenue from consulting and training revenues, which had
historically been minimal. Service revenue as a percentage of total revenue
increased in fiscal 1995 primarily due to the faster growth of maintenance
customer base compared to the growth rate of total revenue.
International license and service revenue accounted for 39.7%, 44.3%
and 48.5% of total revenue in fiscal 1996, 1995 and 1994, respectively. The
decreases of international license and service revenue as a percentage of total
revenue were primarily due to the increases of volume purchase agreements with
major domestic customers. 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 21.9%, 16.6% and 15.6% of total
revenue in fiscal 1996, 1995 and 1994, respectively. License and service revenue
from Advanced Micro Devices, Inc. accounted for 10.7% of total revenue in fiscal
1996. License and service revenue from C&G Technology, the Company's distributor
in Korea, accounted for 11.0% of total revenue in fiscal 1995. 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, 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 3.8% in fiscal 1996 from 5.3% in fiscal 1995 and from
5.0% in fiscal 1994. The decreases in cost of license revenue as a percentage of
total revenue were primarily due to the cost of license revenue increasing at a
slower rate than the growth in total revenue.
Cost of service revenue includes personnel and related operating costs
allocated to maintenance and other customer support services. Cost of service
revenue as a percentage of total revenue remained relatively constant at 3.8%,
3.9% and 4.1% in fiscal 1996, 1995 and 1994, respectively.
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 51.5% to $13.3 million in fiscal 1996 from $8.8
million in fiscal 1995 and increased by 92.9% in fiscal 1995 from $4.5 million
in fiscal 1994. Sales and marketing expenses increased in each period due to the
expansion of the Company's worldwide direct sales and marketing organization,
increased commissions associated with increased revenue and, to a lesser extent,
participation in domestic and international conferences and trade shows. During
the periods, the Company established direct sales and support offices in the
United States, Europe and Asia. The number of sales and marketing personnel also
increased to 84 persons at the end of fiscal 1996 from 57 and 34 persons at the
end of fiscal 1995 and 1994, respectively. As a percentage of total revenue,
sales and marketing expenses were 30.2%, 35.1% and 40.1% of total revenue in
fiscal 1996, 1995 and 1994, respectively. The decrease of sales and marketing
expenses as a percentage of total revenue in fiscal 1996 from fiscal 1995 and
1994 was primarily 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 79.5% to $10.6
million in fiscal 1996 from $5.9 million in fiscal 1995 and increased by 102.4%
in fiscal 1995 from $2.9 million in fiscal 1994. The increases in research and
development expenses in each period resulted primarily from the continued
investment in the number of research and development personnel, which grew to 92
persons at the end of fiscal 1996 from 58 and 33 persons at the end of fiscal
1995 and 1994, respectively, for the continued development of new software
products, as well as enhancements to existing products. As a percentage of
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total revenue, these expenses were 24.1%, 23.6% and 25.6% of total revenues in
fiscal 1996, 1995 and 1994, respectively. To maintain a competitive position in
the EDA market, the Company expects to increase its investment in research and
development, although such expenses as a percentage of total revenue may
fluctuate.
General and Administrative. General and administrative expenses
increased by 45.4% to $3.4 million in fiscal 1996 from $2.3 million in fiscal
1995 and increased by 126.4% in fiscal 1995 from $1.0 million in fiscal 1994.
The increases were primarily attributable to costs associated with new
administrative personnel, professional fees such as legal and accounting, and
increases in operating expenses associated with being a public company. As a
percentage of total revenue, general and administrative expenses were 7.7%, 9.3%
and 9.1% of total revenues in fiscal 1996, 1995 and 1994, respectively. The
decrease of general and administrative expenses as a percentage of total revenue
in fiscal 1996 was a result of total revenue increasing at a rate faster than
the increases in general and administrative expenses.
Purchased In-Process Technology. As of September 30, 1996, the Company
substantially completed its acquisition of CIDA, through a merger of CIDA with
and into a wholly-owned subsidiary of EPIC. The Company exchanged a total of
729,454 shares of Common Stock, options to purchase 101,000 shares of Common
Stock and cash of $3.4 million for all of the outstanding shares of the common
stock and options to purchase common stock of CIDA. The acquisition was
accounted for as a purchase. The purchase price of $17.9 million, as well as
costs directly attributable to the acquisition, have been allocated to the
assets acquired and liabilities assumed. Approximately $18.8 million of the
total purchase price represented the value of in-process technology that had not
reached technological feasibility and that had no alternative future use and was
charged to the Company's operations in the fourth quarter of fiscal 1996.
As of June 30, 1995, the Company substantially completed its
acquisition of Archer, through a merger of Archer with and into a wholly-owned
subsidiary of EPIC. The Company exchanged a total of 260,484 shares of its
common stock and options to purchase common stock of EPIC for all of the
outstanding shares of the common stock and options to purchase common stock of
Archer. The acquisition was accounted for as a purchase. The purchase price of
$3.6 million, as well as costs directly attributable to the acquisition, have
been allocated to the assets acquired and liabilities assumed. Approximately
$3.3 million of the total purchase price represented the value of in-process
technology that had not reached technological feasibility and that had no
alternative future use and was charged to the Company's operations in the third
quarter of fiscal 1995.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The provision of income taxes as a percentage of pre-tax income,
excluding purchased in-process technology which is not tax deductible since the
mergers with CIDA and Archer were tax-free reorganizations was 37.0%, 35.0% and
35.3% for fiscal 1996, 1995 and 1994, respectively. These percentages are less
than the federal and state combined statutory rate of approximately 40.0% due
primarily to tax exempt interest income, the utilization of research and
experimentation credits and the establishment of a Foreign Sales Corporation
(FSC). See Note 9 of Notes to Consolidated Financial Statements.
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 addition, in
October 1994, the Company completed its initial public offering raising
approximately $17.4 million of cash, net of expenses. Net cash provided by
operating activities was $13.3 million, $7.6 million and $4.4 million in fiscal
1996, 1995 and 1994, respectively, and resulted primarily from net income,
adjusted by non-cash activities, and increases in accrued liabilities and income
taxes payable. Accrued liabilities increased by approximately $6.8 million
-23-
24
as of September 30, 1996 from the previous fiscal year end primarily due to
costs associated with the mergers of Archer and CIDA, increases in accrued
compensation and accruals of various operating expenses as a result of increased
level of operations. Deferred revenue and customer deposits increased to $3.8
million at September 30, 1996 from $3.0 million at September 30, 1995 as a
result of an increase in the number of maintenance and service contracts, the
revenue from which is deferred and recognized ratably over the term of the
contract.
Cash used in investing activities resulted primarily from the net
purchases of short-term investments, additions to property and equipment and
increases in other assets. Purchases of short-term investments, net of proceeds
from maturity of short term investments, were $9.6 million and $15.4 million in
fiscal 1996 and 1995, respectively, and additions to property and equipment,
consisting primarily of computer equipment, were $3.9 million, $1.8 million and
$1.1 million in fiscal 1996, 1995 and 1994, respectively. As a result of the
acquisition of CIDA and Archer, which were accounted for as purchases, the
Company recorded a total of $1.1 million and $1.0 million, respectively, in
other assets for technology and goodwill which are being amortized over the
estimated useful lives of the assets ranging from three to five years. The
Company expects to make capital expenditures of approximately $8.0 million in
fiscal 1997.
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 September 30, 1996, the Company had working capital of $30.8
million including cash, cash equivalents and short-term investments of $39.5
million. As of September 30, 1996, the Company had no bank indebtedness and no
long term commitments other than minimum capital and operating lease
obligations. The Company believes that the existing cash, cash 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
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 variations 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's expense levels are based, in part, on
its expectations of future revenues. As a result, if anticipated revenue in any
quarter does not occur or is delayed, expenditure levels could be
disproportionately high as a percentage of revenues, and the Company's operating
results for that quarter would be adversely affected.
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
-24-
25
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.
Market for Company's Products is Highly Competitive. The EDA industry
is highly competitive. In general, competition in the EDA industry comes from
major EDA vendors, each of which has a longer operating history, significantly
greater financial, technical and marketing resources, greater name recognition
and larger installed customer bases than the Company. In addition, a variety of
small companies develop and bring new products to the market, and any of these
companies could become a significant competitor in the EDA market in the future.
The Company also competes with the internal design groups of its existing and
potential customers, many of whom design and develop customized simulation and
analysis tools for their particular needs and therefore may be reluctant to
purchase products offered by independent vendors. 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, financial condition and results of
operations. In particular, increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. In addition, there can be no assurance
that current competitors or other entities will not develop similar products
that have significant advantages over the Company's core technology which could
have a material adverse affect on the Company's business, financial condition
and results of operations.
Company's Markets are Subject to Rapid Technological Change. The EDA
industry is characterized by extremely rapid technological change, frequent new
product introductions, evolving industry standards and changing customer
requirements. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products on a
timely and a cost-effective basis that keep pace with technological development
and evolving industry standards and methodologies, as well as address the
increasingly sophisticated needs of the Company's customers. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
evolving industry standards and changing customer requirements, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products, or that its new
products and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Failure of the Company, for
technological or other reasons, to develop and introduce new products and
product enhancements in a timely and cost-efficient manner, would have a
material and adverse effect on the Company's business, financial conditions and
results of operations.
Reliance Upon International Distributors. A substantial portion of the
Company's international license and service revenue results from a limited
number of distributors. The Company has no direct sales force, and relies on a
single distributor for licensing and support of its products, in each of Japan,
Korea and the ASEAN countries in India. Accordingly, the Company is dependent
upon the continued viability and financial stability of its distributors and in
particular of Marubeni. Since the Company's products are used by highly skilled
professional engineers, effective distributors must possess sufficient
technical, marketing and sales resources and must devote these resources to a
lengthy sales cycle, customer training and product service and support. Only a
limited member of distributors possess these resources. In addition, the
Company's distributors generally offer products of several different companies,
including in some cases products that are competitive with the Company's
product. There can be no assurance that the Company's current distributors will
be able to continue to market or service and support the Company's products
effectively, that economic conditions or industry demand will not adversely
affect these or other distributors, that any distributor that licenses the
Company's products will choose to continue to license such products or that
these distributors will not devote greater resources to licensing products of
other companies. The loss of, or
-25-
26
a significant reduction in revenue from, one of the Company's distributors could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
Risks Associated with International Licensing. International license
and service revenue accounted for 39.7% of total revenue in fiscal 1996. The
Company expects that international license and service revenue will continue to
account for a significant portion of its revenues in the future. These revenues
involve a number of inherit risks, including the impact of recessionary
environments in economies outside the United States, generally longer receivable
collection periods, unexpected changes in regulatory requirements, reduced
protection of intellectual property rights in some countries, and tariffs and
other trade barriers. There can be no assurance that such factors will not have
a material adverse affect on the Company's future international license and
service revenue and, consequently, on the Company's business, financial
conditions and results of operations.
Company is Dependent Upon Proprietary Technology. Despite precautions
by the Company, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, effective intellectual
property protection may be unavailable or limited in certain foreign countries.
In addition, 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 which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, parties making such claims could secure
substantial damages, as well as injunctive or other equitable relief which could
effectively block the Company's ability to license its products in the United
States or abroad. Such a judgment could have a material adverse affect upon the
Company's business, financial condition and results of operations.
Future Acquisitions. During each fiscal 1996 and 1995, Company
completed acquisitions of other companies. The Company's management frequently
evaluates the strategic opportunities available to it and may in the near-term
or long-term pursue acquisitions of complimentary businesses, products or
technologies. Future acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operation of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Future
acquisitions by the Company have the potential to result in dilutive issuances
of equity securities, the incurrence of additional debt and amortization
expenses related to goodwill and other intangible assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the report of
independent auditors appear on pages F-1 through F-16 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held February 12, 1997, to be filed by the Company
with the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning executive
officers is set forth in Part I of this Report. The information required by this
item concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Record Date and Principal Share Ownership" contained in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions With Management" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements are filed as part of this Report:
Index to Consolidated Financial Statements ............................ F-1
Independent Auditors' Report .......................................... F-2
Consolidated Balance Sheets at September 30, 1996 and 1995 ............ F-3
Consolidated Statements of Operations for the years ended September
30, 1996, 1995 and 1994 ........................................ F-4
Consolidated Statement of Shareholders' Equity for the years ended
September 30, 1996, 1995 and 1994 ............................. F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 ............................. F-6
Notes to Consolidated Financial Statements ............................ F-7
-27-
28
(a)(2) Financial Statement Schedules
Valuation and Qualifying Accounts ...................................... S-1
Additional schedules are not required under the related schedule
instructions or are inapplicable, and therefore have been omitted.
(a)(3) Exhibits
3.1(2) Restated Articles of Incorporation of the Registrant, as amended.
3.2(1) Bylaws of the Registrant.
10.1(1) Form of Indemnification Agreement between the Registrant and its officers and directors.
10.2(1) 1990 Stock Option Plan and forms of agreement thereunder.
10.3(1) 1994 Employee Stock Purchase Plan and agreement thereunder.
10.4(1) 1994 Director Stock Option Plan and form of agreement thereunder.
10.5(1) Amended and Restated Registration Rights Agreement dated as of December 20, 1991 by and among
Registrant and certain individuals and entities named therein as amended by Amendment No. 1
thereto dated as of August 26, 1994.
10.6(2) Triple Net Lease Agreement between Registrant and ARGOSystems, Inc. dated September 21, 1995.
10.7(1) Exclusive Distributor Agreement between Registrant and Marubeni Hytech co. Ltd. dated January 25,
1988 and Amendments thereof.
10.8*(1) Motorola Corporate Agreement between Registrant and Motorola Semiconductor Products Sector dated
August 6, 1993 and related Motorola Software End-User License Agreement dated September 23,
1994 and Amendments thereof.
10.9 1995 Equity Incentive Plan of CIDA Technology, Inc. and form of agreement thereunder.
10.10*(1) Interface Development Agreement between Registrant and Precedence Incorporated dated as of
December 11, 1992.
10.11* AMD Volume Purchase Agreement between Registrant and Advanced Micro Devices, Inc. dated January 1,
1995 and Amendments thereof.
10.11.01* Addendum No. 1 effective as of March 30, 1996 and Addendum No. 2 effective as of September 30, 1996
to the AMD Volume Purchase Agreement.
11.1 Computation of net income per share.
22.1 List of subsidiaries of the Registrant.
23.1 Independent Auditors' Consent and Report on Schedule.
24.1 Power of Attorney (See Page 30).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been granted or is requested with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-83550) as declared
effective by the Commission on October 26, 1994.
(2) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995 filed
on December 20, 1995.
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(b) Reports on Form 8-K. The Company filed a Current Report on
Form 8-K on November 14, 1996. This Form 8-K was filed to
report the Company's acquisition of CIDA Technology, Inc.
("CIDA") consummated on November 7, 1996. The following
financial statements of CIDA were filed as part of the Form
8-K:
For the period ended September 30, 1995:
Independent Auditors' Report
Balance Sheet
Statement of Operations
Statement of Shareholders' Deficiency
Statement of Cash Flows
Notes to Financial Statements
For the periods ended June 30, 1996 and 1995:
Unaudited Condensed Balance Sheet
Unaudited Condensed Statements of Operations
Unaudited Condensed Statements of Cash Flows
Notes to Unaudited Condensed Financial Statements
The following pro forma financial information was filed as
part of the Form 8-K:
Unaudited Pro Forma Consolidated Balance Sheet
Unaudited Pro Forma Consolidated Statements of Operations
Notes to Pro Forma Consolidated Financial Information
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
-29-
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EPIC DESIGN TECHNOLOGY
By: /s/ SANG S. WANG, PH.D.
--------------------------
Sang S. Wang, Ph.D.
Chief Executive Officer and Chairman of the
Board of Directors
Date: November 27, 1996
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bernard Aronson and Tammy S. Liu, and
each of them, his or her true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SANG S. WANG, PH.D. Chief Executive Officer and Chairman of the Board November 27, 1996
- ----------------------------- of Directors (Principal Executive Officer)
(Sang S. Wang, Ph.D.)
/s/ BERNARD ARONSON President and Director November 27, 1996
- -----------------------------
(Bernard Aronson)
/s/ TAMMY S. LIU Chief Financial Officer and Secretary (Principal November 27, 1996
- ----------------------------- Financial and Accounting Officer)
(Tammy S. Liu)
Director November 27, 1996
- -----------------------------
(Yen-Son Huang, Ph.D.)
-30-
31
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HENRI A. JARRAT Director November 27, 1996
- -----------------------------
(Henri A. Jarrat)
/s/ JOSEPH A. PRANG Director November 27, 1996
- -----------------------------
(Joseph A. Prang)
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32
EPIC DESIGN TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......................................................................... F-2
Consolidated Balance Sheets at September 30, 1996 and 1995........................................... F-3
Consolidated Statements of Operations for the Years Ended September 30, 1996, 1995 and 1994.......... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1996,
1995 and 1994..................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994.......... F-6
Notes to Consolidated Financial Statements........................................................... F-7
F-1
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
EPIC Design Technology, Inc.:
We have audited the accompanying consolidated balance sheets of EPIC Design
Technology, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1996. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of EPIC Design Technology, Inc. and
subsidiaries at September 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
October 11, 1996
F-2
34
EPIC DESIGN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
SEPTEMBER 30,
-------------------------
1996 1995
-------- --------
Current assets:
Cash and equivalents ....................................................... $ 13,259 $ 11,247
Short-term investments ..................................................... 26,268 16,671
Accounts receivable (net of allowances of $216 in 1996 and $79 in 1995)..... 6,300 2,937
Prepaid expenses and other assets .......................................... 1,026 607
Deferred income taxes ...................................................... 1,647 978
-------- --------
Total current assets .............................................. 48,500 32,440
Property and equipment - net ................................................. 4,496 2,337
Other assets ................................................................. 1,795 1,004
-------- --------
TOTAL ........................................................................ $ 54,791 $ 35,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 1,091 $ 878
Income taxes payable ....................................................... 1,538 414
Accrued liabilities ........................................................ 11,336 4,529
Deferred revenue and customer deposits ..................................... 3,772 3,035
-------- --------
Total current liabilities ......................................... 17,737 8,856
-------- --------
Commitments (Note 7)
Shareholders' equity:
Preferred stock, no par value: 10,000 shares authorized; none outstanding - -
Common stock, no par value: 20,000 shares authorized;
shares outstanding: 1996 - 13,642; 1995 - 12,134 ......................... 44,608 24,864
Deferred stock compensation ................................................ (110) (203)
Retained earnings (accumulated deficit) .................................... (7,424) 2,254
Unrealized gain (loss) on investments, net ................................. (20) 10
-------- --------
Total shareholders' equity ........................................ 37,054 26,925
-------- --------
TOTAL ........................................................................ $ 54,791 $ 35,781
======== ========
See Notes to Consolidated Financial Statements.
F-3
35
EPIC DESIGN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
-------- -------- --------
Revenue:
License ......................................... $ 34,548 $ 20,732 $ 9,694
Service ......................................... 9,371 4,271 1,645
-------- -------- --------
Total revenue ............................. 43,919 25,003 11,339
-------- -------- --------
Costs and expenses:
Cost of license ................................. 1,671 1,315 572
Cost of service ................................. 1,681 987 454
Sales and marketing ............................. 13,285 8,771 4,548
Research and development ........................ 10,566 5,886 2,908
General and administrative ...................... 3,380 2,325 1,027
Purchased in-process technology ................. 18,806 3,261 -
-------- -------- --------
Total operating expenses .................. 49,389 22,545 9,509
-------- -------- --------
Income (loss) from operations ..................... (5,470) 2,458 1,830
Interest income, net .............................. 1,153 822 82
-------- -------- --------
Income (loss) before income taxes ................. (4,317) 3,280 1,912
Provision for income taxes ........................ 5,361 2,290 674
-------- -------- --------
Net income (loss) ................................. $ (9,678) $ 990 $ 1,238
======== ======== ========
Net income (loss) per common and equivalent share.. $ (0.77) $ 0.08 $ 0.13
======== ======== ========
Shares used in per share computation .............. 12,625 13,198 9,864
======== ======== ========
See Notes to Consolidated Financial Statements.
F-4
36
EPIC DESIGN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------ ------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
BALANCES, October 1, 1993 .............. 1,992 $ 1,815 3,641 $ 398
Exercise of stock options .............. 902 142
Deferred stock compensation ............ 365
Amortization of deferred stock
compensation..........................
Net income .............................
------ -------- ------ --------
BALANCES, September 30, 1994 ........... 1,992 1,815 4,543 905
Conversion of preferred stock to common
stock ................................ (1,992) (1,815) 3,984 1,815
Initial public offering, net of issuance
costs ................................ 3,000 17,380
Issuance of common stock and stock
options assumed in connection with
acquisition of Archer Systems ........ 184 3,617
Issuance of common stock under stock
purchase plan ........................ 79 436
Exercise of stock options .............. 344 288
Tax benefit from employee stock
transactions ......................... 423
Amortization of deferred stock
compensation .........................
Unrealized gain on investments, net ....
Net income .............................
------ -------- ------ --------
BALANCES, September 30, 1995 ........... - - 12,134 24,864
Issuance of common stock and stock
options assumed in connection with
acquisition of CIDA .................. 729 14,511
Issuance of common stock under stock
purchase plan ........................ 88 863
Exercise of stock options .............. 691 1,204
Tax benefit from employee stock
transactions ......................... 3,166
Amortization of deferred stock
compensation .........................
Unrealized loss on investments, net ....
Net loss ...............................
------ -------- ------ --------
BALANCES, September 30, 1996 ........... - $ - 13,642 $ 44,608
====== ======== ====== ========
UNREALIZED
DEFERRED RETAINED GAIN TOTAL
STOCK EARNINGS (LOSS) ON SHAREHOLDERS'
COMPENSATION (DEFICIT) INVESTMENTS EQUITY
------------ --------- ----------- ------
BALANCES, October 1, 1993 .............. $ (76) $ 26 $ - $ 2,163
Exercise of stock options .............. 142
Deferred stock compensation ............ (365)
Amortization of deferred stock
compensation.......................... 94 94
Net income ............................. 1,238 1,238
-------- -------- ------- --------
BALANCES, September 30, 1994 ........... (347) 1,264 - 3,637
Conversion of preferred stock to common
stock ................................ -
Initial public offering, net of issuance
costs ................................ 17,380
Issuance of common stock and stock
options assumed in connection with
acquisition of Archer Systems ........ 3,617
Issuance of common stock under stock
purchase plan ........................ 436
Exercise of stock options .............. 288
Tax benefit from employee stock
transactions ......................... 423
Amortization of deferred stock
compensation ......................... 144 144
Unrealized gain on investments, net .... 10 10
Net income ............................. 990 990
-------- -------- ------- --------
BALANCES, September 30, 1995 ........... (203) 2,254 10 26,925
Issuance of common stock and stock
options assumed in connection with
acquisition of CIDA .................. 14,511
Issuance of common stock under stock
purchase plan ........................ 863
Exercise of stock options .............. 1,204
Tax benefit from employee stock
transactions ......................... 3,166
Amortization of deferred stock
compensation ......................... 93 93
Unrealized loss on investments, net .... (30) (30)
Net loss ............................... (9,678) - (9,678)
-------- -------- ------- --------
BALANCES, September 30, 1996 ........... $ (110) $ (7,424) $ (20) $ 37,054
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
F-5
37
EPIC DESIGN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ........................................................... $ (9,678) $ 990 $ 1,238
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................. 2,111 997 358
Write-off of in-process technology ........................................ 18,806 3,261 -
Deferred income taxes ..................................................... (752) (518) (543)
Amortization of deferred stock compensation ............................... 93 144 94
Changes in assets and liabilities:
Accounts receivable ..................................................... (3,363) (1,280) 211
Prepaid expenses and other assets ....................................... (401) (64) (144)
Accounts payable ........................................................ 202 (95) 251
Income taxes payable .................................................... 4,290 (88) 857
Accrued liabilities ..................................................... 2,270 3,259 556
Deferred revenue and customer deposits .................................. (263) 956 1,521
-------- -------- --------
Net cash provided by operating activities .......................... 13,315 7,562 4,399
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments ......................................... (42,785) (48,430) (1,245)
Proceeds from maturity of short-term investments ............................ 33,158 33,014 -
Purchases of property and equipment ......................................... (3,896) (1,792) (1,107)
Cash acquired in business acquisition ....................................... 67 64 -
Other assets ................................................................ 86 - (318)
-------- -------- --------
Cash used in investing activities .................................. (13,370) (17,144) (2,670)
-------- -------- --------
Cash flows from financing activities:
Payments of capital lease obligations ....................................... - (4) (14)
Proceeds from sales of common stock ......................................... 2,067 18,104 142
-------- -------- --------
Net cash provided by financing activities ............................... 2,067 18,100 128
-------- -------- --------
Net increase in cash and equivalents .......................................... 2,012 8,518 1,857
Cash and equivalents, beginning of year ....................................... 11,247 2,729 872
-------- -------- --------
Cash and equivalents, end of year ............................................. $ 13,259 $ 11,247 $ 2,729
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest .................................................................... $ - $ 1 $ 1
Income taxes ................................................................ $ 806 $ 3,132 $ 345
Supplemental schedule of noncash investing and financing activities:
Conversion of preferred stock to common stock ............................... $ - $ 1,815 $ -
Tax benefit from employee stock transactions ................................ $ 3,166 $ 423 $ -
Unrealized gain (loss) on investments ....................................... $ (30) $ 10 $ -
Effect of acquisitions:
Fair value of assets acquired, including in-process technology ............ $ 20,142 $ 4,573 $ -
Common shares, stock options issued and cash to be paid in the acquisition (17,869) (3,617) -
-------- -------- --------
Liabilities assumed ....................................................... $ 2,273 $ 956 $ -
======== ======== ========
See Notes to Consolidated Financial Statements.
F-6
38
EPIC DESIGN TECHNOLOGY, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - EPIC Design Technology, Inc. (the Company) develops,
markets and supports advanced simulation and analysis software tools for the
design of integrated circuits.
Principles of Consolidation - 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 amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates,
and such differences may be material to the financial statements.
Cash Equivalents and Short-Term Investments - All highly liquid debt
investments purchased with a remaining maturity of three months or less are
classified as cash equivalents. Cash equivalents, consisting primarily of
municipal obligations, money market funds and bank savings accounts, are stated
at cost which approximates fair value. Short-term investments consist primarily
of highly liquid debt instruments purchased with a remaining maturity date of
greater than three months. The Company classifies its short-term investments as
"available-for-sale securities," and the carrying value of such securities is
adjusted to fair market value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. The fair
values of marketable debt instruments are based on quoted market prices. Cost is
determined by specific identification for purposes of computing realized gains
or losses.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
generally three to five years. Leasehold improvements are amortized over their
useful life or the lease term, whichever is shorter.
Other Assets - Other assets, including $2,113,000 and $1,033,000 at
September 30, 1996 and 1995, respectively, of purchased technologies, goodwill
and covenants not to compete acquired through acquisitions, are amortized on a
straight-line basis over a three- to five-year period. Accumulated amortization
equaled $379,000 and $76,000 at September 30, 1996 and 1995, respectively.
Revenue Recognition - Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
License Revenue - Revenue from software licenses is recognized 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.
Service 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.
F-7
39
Software Development Costs - Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs to complete the products or enhancements would be
capitalized. Because the Company believes its current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
Income Taxes - Income taxes are provided utilizing an asset and liability
approach which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and liabilities
and net operating loss and tax credit carryforwards.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
cash and equivalents, short-term investments and accounts receivable. The
Company licenses products primarily to customers and distributors in the
integrated circuit design industry in North America, Europe and the Far East. To
reduce credit risk, management performs ongoing credit evaluations of its
customers' financial condition. The Company maintains reserves for potential
credit losses, but historically has not experienced significant losses related
to individual customers or groups of customers in any particular geographic
area. The Company invests its excess cash balances in high-grade instruments
which it places for safekeeping with high quality financial institutions. The
Company has not experienced any material losses in any of the instruments it has
used for excess cash balances.
Foreign Currency Translation - The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. All monetary assets and liabilities are
translated at the current exchange rate at the end of the period, nonmonetary
assets and liabilities are translated at historical rates and revenues and
expenses are translated at average exchange rates in effect during the period.
Translation and transaction gains and losses, which are included in the
consolidated statements of operations, have not been material in any of the
periods presented.
Net Income (Loss) 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 outstanding
convertible preferred stock and common stock options. All common shares issued
and stock options granted by the Company at a price less than the initial public
offering price subsequent to September 1, 1993 and prior to the initial public
offering (using the treasury stock method for options) have been included in the
computation of common and common equivalent shares outstanding for all periods
presented prior to the initial public offering. Net loss per share is calculated
by dividing net loss by the weighted average number of common shares outstanding
as including common equivalent shares would be anti-dilutive.
Effect of New Accounting Standards - The Company accounts for its stock
option plan and its employee stock purchase plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees. In October 1995, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." SFAS 123 provides an alternative
accounting method to APB 25 and its disclosure requirements are effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, SFAS 123 is not expected to have any impact on the Company's
financial position or results of operations.
2. INVESTMENTS
The following is a summary of available-for-sale securities at September
30 (in thousands):
1996 1995
------------------------------------------ ------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED AMORTIZED GROSS UNREALIZED ESTIMATED
------------------- -------------------
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---- ----- ------ ---------- ---- ----- ------ ----------
Municipal
bonds... $26,288 $- $(20) $26,268 $16,661 $10 $- $16,671
F-8
40
At September 30, 1996 all available-for-sale securities have maturities
due in two years or less. Realized gains or losses from the sale of securities
were insignificant in fiscal years 1996, 1995 and 1994.
3. ACQUISITIONS
In fiscal 1995, the Company acquired Archer Systems, Inc., a company
engaged in the design, manufacturing and marketing of an integrated circuit
parameter extraction CAD tool. The Company exchanged a total of 184,208 shares
of its common stock and options to acquire 76,276 shares of its common stock for
all the outstanding shares of the common stock and options to purchase common
stock of Archer. The acquisition was accounted for as a purchase. The purchase
price of $3.6 million, as well as costs directly attributable to the
acquisition, have been allocated to the assets acquired and liabilities assumed.
Approximately $3.3 million of the total purchase price represented the value of
in-process technology that had not reached technological feasibility and that
had no alternative future use and was, therefore, charged to the Company's
operations in the third quarter of fiscal 1995.
In fiscal 1996, the Company acquired CIDA Technology, Inc. (CIDA), a
development stage company formed to develop and market IC verification and
extraction tools for use by IC design engineers. The Company exchanged a total
of 729,454 shares of its common stock, options to acquire 101,000 shares of its
common stock and cash of $3.4 million for all the outstanding shares of the
common stock and options to purchase common stock of CIDA. The acquisition was
accounted for as a purchase. The purchase price of $17.9 million, as well as
costs directly attributable to the acquisition, have been allocated to the
assets acquired and liabilities assumed. Approximately $18.8 million of the
total purchase price represented the value of in-process technology that had not
reached technological feasibility and that had no alternative future use and
was, therefore, charged to the Company's operations in the fourth quarter of
fiscal 1996.
The operating results of Archer and CIDA have been included in the
consolidated statements of operations since the dates of acquisition. Pro forma
results of operations, assuming the acquisitions had taken place at the
beginning of fiscal 1996 or 1995, would be as follows (in thousands):
1996 1995
---- ----
Revenues ........................................... $ 44,419 $25,483
Net income (loss) .................................. $(11,044) $ 76
Net income (loss) per common and equivalent share... $ (0.83) $ 0.01
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill as well as the
issuance of common shares as a result of the acquisition. The $18.8 million and
$3.3 million charge for purchased in-process technology from the CIDA and Archer
acquisitions, respectively, have been reflected in the pro forma results for the
years ended September 30, 1996 and 1995, respectively. The pro forma combination
of the companies is for presentation purposes only. Actual statements of
operations of the companies will be combined from the effective date of the
acquisition, with no retroactive restatement.
F-9
41
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
SEPTEMBER 30,
----------------
1996 1995
---- ----
Computers and related software .................. $7,083 $3,633
Other equipment ................................. 351 137
Furniture and fixtures .......................... 462 159
------ ------
7,896 3,929
Less accumulated depreciation and amortization... (3,400) (1,592)
------ ------
$4,496 $2,337
====== ======
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
SEPTEMBER 30,
---------------
1996 1995
---- ----
Accrued merger costs ....................... $ 4,433 $ -
Accrued compensation and related benefits... 2,979 1,583
Other ...................................... 3,924 2,946
------- ------
$11,336 $4,529
======= ======
6. SHAREHOLDERS' EQUITY
Employee Stock Purchase Plan - In fiscal 1994, the Company adopted the
1994 Employee Stock Purchase Plan, which permits eligible employees to purchase
up to an aggregate of 350,000 shares of common stock of the Company. Under the
Company's Employee Stock Purchase Plan, employees may purchase from the Company
a designated number of shares through payroll deductions at a price per share
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of each twelve-month offering period or the last day of each
six-month purchase period. In 1996 and 1995, approximately 88,000 and 79,000
shares, respectively, were issued under this plan. As of September 30, 1996, the
Company has approximately 183,000 shares of common stock available for future
purchases under this Plan.
Stock Option Plan - The Company's 1990 Stock Option Plan (the Plan)
authorizes the issuance of 4,000,000 shares of common stock for the grant of
incentive or nonstatutory stock options to employees, directors, contractors and
consultants. Under the Plan, options are generally granted at fair value at the
date of grant as determined by the Board of Directors. Such options become
exercisable generally over four years and expire up to ten years from the grant
date. Prior to the adoption of the 1990 Stock Option Plan, the Company granted
options to purchase 420,000 shares of common stock.
The Company has reserved 200,000 shares of common stock for issuance under
the 1994 Director Option Plan, which provides for each outside Director to be
granted an option to purchase 20,000 shares of common stock on the date on which
such person first becomes an outside Director following the effective date of
the Director Option Plan and, annually thereafter, an option to purchase 6,666
shares of common stock. The exercise price of such options will be the fair
market value at the date of grant. The initial options vest over four years
while the subsequent grants vest over twelve months from the date of grant.
Through September 30, 1996, approximately 53,000 shares have been granted under
this plan.
F-10
42
Stock option activity is summarized as follows (in thousands):
SHARES UNDER
OPTION PRICE RANGE
------------ ---------------
Outstanding, October 1, 1993 .... 1,838 $ .09 - $ .16
Granted ......................... 882 .16 - 5.00
Canceled ........................ (74) .16 - 5.00
Exercised ....................... (902) .09 - .16
-----
Outstanding, September 30, 1994 . 1,744 .16 - 5.00
Granted or assumed .............. 612 .00 - 22.38
Canceled ........................ (42) .16 - 12.22
Exercised ....................... (344) .16 - 12.63
-----
Outstanding, September 30, 1995 . 1,970 .00 - 22.38
Granted or assumed .............. 1,559 1.00 - 36.00
Canceled ........................ (740) .17 - 35.00
Exercised ....................... (691) .00 - 22.75
-----
Outstanding, September 30, 1996 . 2,098 $ .00 - $36.00
=====
At September 30, 1996, options to purchase 560,000 shares of common stock
were exercisable and options to purchase 163,000 and 147,000 shares of common
stock were available for future grant under the 1990 Stock Option Plan and the
1995 Director Option Plan, respectively.
Deferred Stock Compensation - In connection with the preparation of its
initial public offering, the Company determined that certain stock options
issued prior to the offering contained a compensatory element which should be
recorded for financial reporting purposes. These valuations resulted in a charge
to operations for the years ended September 30, 1996, 1995 and 1994 of $93,000,
$144,000 and $94,000, respectively, and will result in remaining charges in
future periods aggregating $110,000 to be amortized over the vesting period of
the related stock options.
7. LEASE COMMITMENTS
The Company leases facilities under operating lease agreements which
expire through calendar year 2001. Total rent expense for the years ended
September 30, 1996, 1995 and 1994 was approximately $696,000, $531,000,
$213,000, respectively.
Future minimum operating lease commitments as of September 30, 1996 are as
follows (in thousands):
YEAR ENDING
SEPTEMBER 30,
-------------
1997 .... $ 905
1998 .... 819
1999 .... 661
2000 .... 541
2001 .... 90
------
$3,016
======
F-11
43
8. EXPORT SALES AND MAJOR CUSTOMERS
The Company sells its products in North America, Asia and Europe. Export
revenues as a percentage of net revenues for the years ended September 30 are as
follows:
1996 1995 1994
---- ---- ----
Asia 29% 33% 41%
Europe 11 11 8
---- ---- ----
40% 44% 49%
==== ==== ====
Approximately 22%, 17% and 16% of revenues were made through a distributor
in Japan, which sells the Company's products to various end user customers, in
1996, 1995 and 1994, respectively, and another distributor in Korea accounted
for 11% of revenues in 1995. At September 30, 1996, accounts receivable from the
Japanese distributor was $728,000. At September 30, 1995, accounts receivable
from the two distributors were $922,000. One single end user customer accounted
for 11% of revenues in 1996 and had an accounts receivable balance at September
30, 1996 of $1,109,000.
9. INCOME TAXES
The provision for income taxes for the years ended September 30 consists
of (in thousands):
1996 1995 1994
---- ---- ----
Current:
Federal ...................... $4,002 $1,623 $ 656
State ........................ 1,067 547 216
Foreign ...................... 1,044 638 345
------ ------ ------
Total current ................. 6,113 2,808 1,217
------ ------ ------
Deferred:
Federal ....................... (582) (415) (451)
State ......................... (170) (103) (92)
------ ------ ------
Total deferred ................. (752) (518) (543)
------ ------ ------
Total provision for income taxes $5,361 $2,290 $ 674
====== ====== ======
Total income tax expense differs from the amounts computed by applying the
statutory federal income tax rate to income before income taxes as a result of
the following (in thousands):
1996 1995 1994
---- ---- ----
Provision (benefit) computed at federal statutory rate... $(1,511) $1,148 $669
Change in valuation allowance ........................... 115 67 34
Research and experimentation credit ..................... - (97) (100)
State income taxes, net of federal benefit .............. 580 293 81
Tax-exempt interest income .............................. (368) (261) -
Nondeductible purchased in-process technology ........... 6,582 1,109 -
Other ................................................... (37) 31 (10)
------- ------ ----
Total provision for income taxes ........................ $ 5,361 $2,290 $674
======= ====== ====
Loss before income taxes attributable to the Company's foreign subsidiary
was $330,000, $192,000 and $96,000 in 1996, 1995 and 1994, respectively.
F-12
44
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and credit carryforwards. Significant components of the Company's deferred
income tax assets and liabilities as of September 30 are as follows (in
thousands):
1996 1995
---- ----
Deferred tax assets:
Conversion to accrual from cash basis ..... $ 421 $ 547
Reserves not recognized for tax purposes... 1,144 486
Net operating loss carryforwards .......... 221 101
State taxes ............................... 40 87
Depreciation and amortization ............. 135 12
Other ..................................... 40 127
Valuation allowance ....................... (216) (101)
------ ------
1,785 1,259
Deferred tax liabilities -
Intangible assets ......................... (138) (281)
------ ------
Net deferred tax asset ...................... $1,647 $ 978
====== ======
The Company has net operating loss carryforwards as of September 30, 1996
and 1995 of approximately $619,000 and $288,000, respectively, related to its
French subsidiary that may be utilized to offset future taxable income of that
entity. The valuation allowance as of September 30, 1996 and 1995 of $216,000
and $101,000, respectively, related entirely to these net operating loss
carryforwards.
10. EMPLOYEE BENEFIT PLAN
Substantially all full-time employees are entitled to participate in the
Company's retirement savings plan (401(k) Plan). Employer contributions to the
401(k) Plan were $140,000 and $24,000 for the years ended September 30, 1996 and
1995, respectively (none in 1994).
11. RELATED PARTY TRANSACTION
In fiscal 1995 and 1994, the Company received royalties from a shareholder
under an OEM software license agreement. Revenues recognized under this
agreement were $544,000 and $365,000 for the years ended September 30, 1995 and
1994, respectively. During fiscal 1995, the shareholder sold its investment in
the Company and the OEM software license agreement was terminated.
* * * * *
F-13
45
SCHEDULE II
EPIC DESIGN TECHNOLOGY, INC.
---------------
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE
AT CHARGED TO BALANCE
ALLOWANCES FOR ACCOUNTS RECEIVABLE BEGINNING COSTS AND AT END
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
---------------------------------------- --------- ---------- ------------- ---------
1994 ................................ $ 32 $ 60 $ - $ 92
1995 ................................ 92 49 62 79
1996 ................................ 79 137 - 216
(1) Write-off of accounts, net of recoveries.
S-1
46
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.1(2) Restated Articles of Incorporation of the Registrant, as amended
3.2(1) Bylaws of the Registrant
10.1(1) Form of Indemnification Agreement between the Registrant and its
officers and directors
10.2(1) 1990 Stock Option Plan and forms of agreement thereunder
10.3(1) 1994 Employee Stock Purchase Plan and agreement thereunder
10.4(1) 1994 Director Stock Option Plan and form of agreement thereunder
10.5(1) Amended and Restated Registration Rights Agreement dated as of
December 20, 1991 by and among Registrant and certain individuals and
entities named therein as amended by Amendment No. 1 thereto dated as
of August 26, 1994
10.6(2) Triple Lease Net Agreement between Registrant and ARGOSystems, Inc.
dated September 21, 1995
10.7(1) Exclusive Distributor Agreement between Registrant and Marubeni
Hytech co. Ltd. dated January 25, 1998 and Amendments thereof
10.8(1) Motorola Corporate Agreement between Registrant and Motorola
Semiconductor Products Sector dated August 6, 1993 and related
Motorola Software End-User License Agreement dated September 23, 1994
and Amendments thereof
10.9 1995 Equity Incentive Plan of CIDA Technology, Inc. and form of
agreement thereunder
10.10*(1) Interface Development Agreement between Registrant and Precedence
Incorporated dated as of December 11, 1992
10.11* AMD Volume Purchase Agreement between Registrant and Advanced
Micro Devices, Inc. dated January 1, 1995 and Amendments thereof
10.11.01* Addendum No. 1 effective as of March 30, 1996 and Addendum No. 2
effective as of September 30, 1996 to the AMD Volume Purchase
Agreement
11.1 Computation of net income per share
22.1 List of subsidiaries of the Registrant
23.1 Independent Auditors' Consent and Report on Schedule
24.1 Power of Attorney (page 30)
27.1 Financial Data Schedule
- --------------
* Confidential treatment has been granted or is requested with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement in Form S-1 (Reg. No. 33-83550) as declared
effective by the Commission on October 26, 1994.
(2) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995 on
December 20, 1995.