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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 0-27692
ORCAD, INC.
(Exact name of registrant as specified in its charter)
Incorporated in the State of Delaware
(State or other jurisdiction of incorporation or registration)
93-1062832
(I.R.S. Employer Identification No.)
9300 S.W. Nimbus Avenue, Beaverton, Oregon 97008
(Address of principal executive offices, including zip code)
Telephone: (503) 671-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of the Company's Common Stock ($.01 par value)
as of June 30, 1998 was 9,337,169 shares.
1
OrCAD, Inc.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations - Three months and
six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 5
Notes to consolidated financial statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------------
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Stockholders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
OrCAD, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Assets
Current assets:
Cash and cash equivalents $ 15,905 $ 31,618
Short-term investments 20,303 3,408
Trade accounts receivable, net of doubtful accounts
and sales return allowances of $913 and $793 7,734 8,800
Inventory, net 371 675
Deferred taxes 845 845
Other current assets 2,052 2,503
----------- -----------
Total current assets 47,210 47,849
----------- -----------
Investments, long-term 2,376 2,722
Fixed assets, net 3,715 3,360
Purchased software technology, net 365 474
Goodwill and intangible assets, net 3,035 2,378
Other assets 697 124
----------- -----------
Total assets $ 57,398 $ 56,907
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 580 $ 661
Accrued payroll and related liabilities 1,576 2,241
Accrued liabilities 2,922 1,870
Accrued income taxes 527 1,081
Deferred revenue 5,446 4,881
----------- -----------
Total current liabilities 11,051 10,734
Deferred taxes 19 19
Stockholders' equity:
Common stock 93 92
Additional paid-in capital 37,922 37,583
Retained earnings 8,531 8,604
Other comprehensive income (117) (78)
Notes receivable - employee stock purchases (101) (47)
----------- -----------
Total stockholders' equity 46,328 46,154
----------- -----------
Total liabilities and stockholders' equity $ 57,398 $ 56,907
=========== ===========
See notes to Consolidated Financial Statements.
3
OrCAD, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three-months ended Six-months ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Revenue: ---------- ---------- ---------- ------------
Product $ 8,697 $ 8,842 $ 17,503 $ 16,928
Service 3,204 2,069 6,039 3,850
----------- ---------- ----------- -----------
Total revenue 11,901 10,911 23,542 20,778
Cost and expenses:
Cost of revenue - product 698 1,206 1,562 2,393
Cost of revenue - service 614 382 1,175 793
Research and development 2,744 2,775 5,786 5,488
Marketing and sales 4,630 3,959 9,285 7,241
General and administrative 1,273 1,157 2,634 2,290
Merger and acquisition related charges -- 2,203 4,081 2,203
----------- ---------- ----------- -----------
Total cost and expenses 9,959 11,682 24,523 20,408
----------- ---------- ----------- -----------
Income (loss) from operations 1,942 (771) (981) 370
----------- ---------- ----------- -----------
Other income (expense):
Interest income (expense), net 410 449 911 903
Other, net (36) 24 (43) 18
----------- ---------- ----------- -----------
374 473 868 921
----------- ---------- ----------- -----------
Income (loss) before income taxes 2,316 (298) (113) 1,291
Income tax expense (benefit) 810 (138) (40) 471
----------- ---------- ----------- -----------
Net income (loss) $ 1,506 $ (160) $ (73) $ 820
=========== ========== =========== ===========
Basic net income (loss) per share $ 0.16 $ (0.02) $ (0.01) $ 0.09
=========== ========== =========== ===========
Diluted net income (loss) per share $ 0.16 $ (0.02) $ (0.01) $ 0.09
=========== ========== =========== ===========
Shares used in basic net income (loss) per share calculation 9,305 9,154 9,279 9,134
=========== ========== =========== ===========
Shares used in diluted net income (loss) per share calculation 9,598 9,154 9,279 9,388
=========== ========== =========== ===========
See notes to Consolidated Financial Statements.
4
OrCAD, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six-months Ended
----------------------------
June 30, June 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $ (73) $ 820
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 998 834
Provision for losses on trade accounts receivable and sales returns 104 96
Provision for inventory reserves 1 45
Deferred income taxes (5) 2
Write-off of research and development costs acquired - 2,203
(Gain) loss on disposal of assets 12 -
Changes in assets and liabilities:
Trade accounts receivable 1,900 (1,830)
Inventory 299 255
Other current assets (124) (831)
Accounts payable (907) 34
Accrued payroll and related liabilities (625) 236
Accrued liabilities 964 106
Deferred revenue 594 262
Accrued income taxes (570) (425)
-------- -------
Total adjustments 2,641 987
-------- -------
Net cash provided by operating activities 2,568 1,807
-------- -------
Cash flows from investing activities:
Acquisition of fixed assets (979) (1,435)
Acquisition of software technology (2,450)
Acquisition of intangible assets (949) (165)
Proceeds from maturity (purchase) of investments, net (16,561) 6,827
-------- -------
Net cash provided (used) by investing activities (18,489) 2,777
-------- -------
Cash flows from financing activities:
Repayment (issuance) of notes receivable - employee stock purchases, net (54) 8
Issuance of common stock, net 341 67
-------- -------
Net cash provided by financing activities 287 75
-------- -------
Effects of exchange rate on cash (79) 4
-------- -------
Net increase (decrease) in cash and cash equivalents (15,713) 4,663
Cash and cash equivalents at the beginning of period 31,618 23,103
-------- -------
Cash and cash equivalents at the end of period $ 15,905 $27,766
======== =======
Supplemental Disclosures of Cash Flow Information:
Income taxes paid $ 729 $ 1,103
See notes to Consolidated Financial Statements.
5
OrCAD, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year
ended December 31, 1997, as included in the Company's Annual Report on Form
10-KSB, and the unaudited pro forma condensed financial statements included
in the Company's Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission on December 12, 1997.
2. Acquisitions
------------
On January 20, 1998 OCA Merger Corporation, a wholly-owned subsidiary of
OrCAD, was merged with and into MicroSim Corporation (MicroSim) and all of
the issued and outstanding shares of MicroSim Common Stock and all of the
rights to acquire MicroSim Common Stock were converted into and exchanged
for 2,427,632 shares of OrCAD Common Stock (the "Merger"). The Merger was
accounted for as a pooling of interests in 1998. The combined financial
statements of OrCAD and MicroSim are included in this report and prior
periods presented have been restated to reflect the Merger.
On April 15, 1998, OrCAD U.K. Ltd., a wholly-owned subsidiary of the
Company formed in March of 1998, purchased certain assets and assumed
certain liabilities of ARS Microsystems Ltd. (ARS) for approximately $1.1
million. Of that amount, $1 million was allocated to goodwill and is being
amortized over a five-year estimated life. ARS was previously the Company's
value added reseller in the United Kingdom. The cost of the acquisition was
allocated on the basis of the estimated fair value of the assets acquired
and the liabilities assumed.
3. Basic and Diluted Net Income (Loss) Per Share
---------------------------------------------
Basic net income (loss) per share was computed using the weighted average
number of common shares outstanding during the period. Diluted net income
per share was computed using the weighted average number of common shares
outstanding and common equivalent shares from stock options, when dilutive,
using the treasury stock method. Excluded from the computation of diluted
net income (loss) per share for the six months ended June 30, 1998 and
three months ended June 30, 1997 are options to acquire 249,206 shares and
243,905 shares, respectively, of common stock options because their effect
would be anti-dilutive.
6
4. Use of Estimates
----------------
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
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 periods. Actual results could differ from
those estimates.
5. Revenue Recognition
-------------------
During the first quarter of 1998, the Company adopted Statement of Position
(SOP) 97-2, "Software Revenue Recognition." The provisions of SOP 97-2 have
been applied to transactions entered into beginning January 1, 1998. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative
fair values of the elements. The revenue allocated to software products is
generally recognized upon the delivery of the products. The revenue
allocated to extended support agreements is recognized ratably over the
term of the maintenance agreement and revenue allocated to service elements
is recognized as the services are performed.
6. Software Development Costs
--------------------------
Under Statement of Financial Accounting Standards No. 86 (SFAS 86),
software development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. To date, the establishment
of technological feasibility of the Company's products has occurred shortly
before general release, and accordingly no costs have been capitalized.
7. Income Taxes
------------
The provision for income taxes has been recorded based on the Company's
current estimate of the Company's annual effective tax rate. This rate
differs from the combined federal and state statutory rate of approximately
38.5% primarily due to the benefit of the Company's foreign sales
corporation and the utilization of research and experimentation tax
credits.
8. Cash Equivalents and Investments
--------------------------------
Cash equivalents consist of highly liquid investments with original
maturity dates of three months or less. Cash equivalents are stated at cost
and consist primarily of money market funds, municipal bonds and municipal
notes. The carrying amount approximates fair value due to the short-term
nature of these investments. Those instruments with original maturity dates
greater than three months and less than one year from the balance sheet
date are considered to be short-term investments. Investments with original
maturity dates greater than one year from the balance sheet date are
considered to be long-term investments. Investments, which primarily
consist of corporate debt securities, auction rate receipts, market auction
preferred notes, and municipal bonds, are reported at fair value, and are
classified as available-for-sale securities. The cost of securities sold is
determined using the specific identification method when computing realized
gains and losses. Fair value is determined using available market
information.
7
9. Comprehensive Income (Loss)
---------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" on January 1, 1998. This statement
establishes standards for reporting comprehensive income (loss) and its
components in the consolidated financial statements. The objective of SFAS
130 is to report changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income
(loss) is the total of net income and all other non-owner changes in
equity. Adoption of SFAS 130 did not have a material effect on OrCAD's
consolidated financial position, results of operations or cash flows for
the three and six months ended June 30, 1998 and 1997. The reconciliation
of net income (loss) to comprehensive income (loss) is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ---------------
1998 1997 1998 1997
------- ----- -------- -----
Net income (loss) $1,506 $(160) $ (73) $ 820
Unrealized gain (loss) on investments, net (6) 1 (12) 4
Foreign currency translation adjustment - 30 (27) 6
------ ----- ----- -----
Comprehensive income (loss) $1,500 $(129) $(112) $ 830
====== ===== ===== =====
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
OrCAD develops, markets, and supports software products that assist
electronics designers in designing integrated circuits ("ICs"), printed circuit
boards ("PCBs"), field-programmable gate arrays ("FPGAs"), and complex
programmable logic devices ("CPLDs"). ICs, PCBs, FPGAs and CPLDs are found in a
majority of today's electronic products, and are often referred to as
"mainstream" components. OrCAD's products enable electronics designers working
on personal computers to reduce time to market, improve product capability and
reduce design costs. The Company operates primarily in one business segment,
comprising the electronic design automation industry.
On January 20, 1998 OCA Merger Corporation, a wholly-owned subsidiary of
OrCAD, was merged with and into MicroSim Corporation (MicroSim) and all of the
issued and outstanding shares of MicroSim common stock and all of the rights to
acquire MicroSim common stock were converted into and exchanged for 2,427,632
shares of OrCAD common stock (the "Merger"). The Merger was accounted for as a
pooling of interests in 1998.
The financial statements of OrCAD and its wholly owned subsidiary,
MicroSim, are included in this report and all prior periods have been restated
to reflect the Merger. Results of operations of all acquisitions accounted for
as purchases are included in the Company's Consolidated Financial Statements
only from the date of acquisition forward. All intercompany balances have been
eliminated in consolidation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
TOTAL REVENUES
The Company derives revenue from the licensing of its software products and
from the provision of maintenance, training and consulting services to
customers. The Company recognizes revenue from software licenses after shipment
of product and when no significant contractual obligations remain outstanding.
Service revenue is derived primarily from extended support agreements that
provide customers access to product enhancements, technical support, and the
OrCAD Design Network (ODN) which includes the OrCAD Knowledge Base, the OrCAD
Knowledge Exchange, OrCAD Tech Tips and an electronic Technical Support
Connection. Revenue from each extended support agreement is deferred and
recognized ratably over the term of the support agreement. Revenue from customer
training and consulting is recognized as services are performed.
Total revenue increased 9% to $11.9 million in the second quarter of 1998
from $10.9 million in the second quarter of 1997. The increase in total revenue
was due to growth in service revenue offset by a slight decrease in product
revenue. As a percentage of total revenue, product revenue decreased to 73% in
the second quarter of 1998 from 81% in the second quarter of 1997. Conversely,
service revenue increased as a percentage of total revenue to 27% in the second
quarter of 1998 from 19% in the second quarter of 1997.
9
Product revenue decreased 2% to $8.7 million in the second quarter of 1998
from $8.8 million in the second quarter of 1997. Unfavorable economic conditions
in Asia and a weaker Japanese yen offset by increases in North American and
European product revenue accounted for this decline.
Service revenue increased 55% to $3.2 million in the second quarter of 1998
from $2.1 million in the second quarter of 1997. The increase in service revenue
from the second quarter of 1997 to the second quarter of 1998 was primarily
attributable to increased sales of extended support agreements, training and
consulting services.
Total North American revenue increased 22% to $8.6 million in the second
quarter of 1998 from $7.1 million in the second quarter of 1997. Total revenue
generated outside of North America decreased 14% to $3.3 million in the second
quarter of 1998 from $3.8 million in the second quarter of 1997. As a percentage
of the Company's total revenue, North American revenue increased to 72% in the
second quarter of 1998 from 65% in the second quarter of 1997. The increase in
the proportion of revenue generated within North America was primarily
attributable to decreased sales to Asian markets and a weaker Japanese yen.
COST OF REVENUE
The cost of product revenue represents the costs associated with the
licensing of the Company's products, such as expenses of reproducing product
documentation, disks and packaging, hardware locks and royalties paid to
external developers. The cost of product revenue decreased 42% to $698,000 in
the second quarter of 1998 from $1.2 million in the second quarter of 1997. The
decreased cost of product revenue was the result of reduced royalty payments,
the elimination of North American reseller commissions and the consolidation of
the Company's shipping operations to its Beaverton headquarters. As a percentage
of product revenue, cost of product revenue decreased to 8% in the second
quarter of 1998 from 14% in the second quarter of 1998.
The cost of service revenue includes the costs of providing software
maintenance, such as technical support, and the costs of providing consulting
and training services. The cost of service revenue increased 61% to $614,000 in
the second quarter of 1998 from $382,000 in the second quarter of 1997. This
increase was primarily attributable to the expansion of the Company's Enterprise
Services group, which provides software consulting, implementation, conversion,
training and technical support services. As a percentage of service revenue, the
cost of service revenue remained relatively flat increasing 1% to 19% in the
second quarter of 1998 from 18% in the first quarter of 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses include the costs of developing new
products and enhancements to existing products. Software development costs are
generally expensed as incurred, in that technological feasibility is generally
not established until shortly before the release of a new product and no
material development costs are incurred after establishment of technological
feasibility. Research and development expenses remained relatively constant
decreasing 1% to $2.7 million in the second quarter of 1998 from $2.8 million in
the second quarter of 1997. As a percentage of total revenue, research and
development expenses decreased to 23% in the second quarter of 1998 from 25% in
the second quarter of 1997. The Company expects research and development
expenses to increase in absolute terms.
10
MARKETING AND SALES
Marketing and sales expenses include salaries, commissions and related
personnel costs, and other sales and promotional expenses. Marketing and sales
expenses increased 17% to $4.6 million in the second quarter of 1998 from $4
million in the second quarter of 1997. Total marketing and sales expenses
increased as a result of continued expansion of the Company's sales and
marketing organizations, and increased promotional activity. As a percentage of
total revenue, marketing and sales expenses increased to 39% in the second
quarter of 1998 from 36% in the second quarter of 1997. The Company expects
marketing and sales expenses to continue to increase in absolute terms.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs associated with the
Company's executive office, human resources, finance, information systems and
operations functions. General and administrative expenses increased 10% to $1.3
million in the second quarter of 1998 from $1.2 million in the second quarter of
1997. The increase was primarily due to a general increase in personnel costs.
As a percentage of total revenue, general and administrative expenses remained
constant at 11% in the second quarter of 1998 and the second quarter of 1997.
MERGER AND ACQUISITION RELATED CHARGES
There were no merger or acquisition related charges in the second quarter
of 1998. In the second quarter of 1997 the Company charged $2.2 million of in-
process research and development costs associated with certain technology which
had not yet reached technological feasibility related to the acquisition of
certain assets of TEAM Corporation and Q Point Technology.
OTHER INCOME, NET
Other income decreased to $374,000 in the second quarter of 1998 from
$473,000 in the second quarter of 1997. This decrease was primarily attributable
to lower interest and sublease income.
INCOME TAX EXPENSE (BENEFIT)
The effective tax rate for the second quarter of 1998 was 35.0%. This rate
differs from the combined federal and state statutory rate of approximately
38.5% primarily due to the benefit of the Company's foreign sales corporation
and the utilization of research and experimentation tax credits. Income tax
expense (benefit) for the second quarter of 1998 was $810,000 as compared to
($138,000) for the second quarter of 1997. The income tax benefit in the second
quarter of 1997 is due primarily to the pre-tax loss incurred largely as a
result of in-process research and development charges arising from the
acquisition of certain assets of TEAM Corporation and Q Point Technology during
that period.
11
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
TOTAL REVENUES
Total revenue increased 13% to $23.5 million in the first half of 1998 from
$20.8 million in the first half of 1997. The increase in total revenue was due
to growth in both product and service revenue. As a percentage of total revenue,
product revenue decreased to 74% in the first half of 1998 from 81% in the first
half of 1997. Conversely, service revenue increased as a percentage of total
revenue to 26% in the first half of 1998 from 19% in the first half of 1997.
Product revenue increased 3% to $17.5 million in the first half of 1998
from $17 million in the first half of 1997. Increased North American and
European revenue was largely offset by unfavorable economic conditions in Asia
and a weaker Japanese yen.
Service revenue increased 57% to $6 million in the first half of 1998 from
$3.9 million in the first half of 1997. The increase in service revenue from the
first half of 1997 to the first half of 1998 was primarily attributable to the
increased sales of extended support agreements, training and consulting.
Total North American revenue increased 27% to $16.5 million in the first
half of 1998 from $13 million in the first half of 1997. Total revenue generated
outside of North America decreased 10% to $7 million in the first half of 1998
from $7.7 million in the first half of 1997. As a percentage of the Company's
total revenue, North American revenue increased to 70% in the first half of 1998
from 63% in the first half of 1997. The increase in the proportion of revenue
generated within North America was attributable to decreased sales to Asian
markets reflecting the unfavorable economic conditions in that region evidenced
by a weaker Japanese yen.
COST OF REVENUE
The cost of product revenue decreased 35% to $1.6 million in the first half
of 1998 from $2.4 million in the first half of 1997. The decreased cost of
product revenue was the result of reduced royalty payments, the elimination of
North American reseller commissions and the consolidation of the Company's
shipping operations to its Beaverton headquarters. As a percentage of product
revenue, cost of product revenue decreased to 9% in the first half of 1998 from
14% in the first half of 1997.
The cost of service revenue increased 48% to $1.2 million in the first half
of 1998 from $793,000 in the first half of 1997. This increase was primarily
attributable to the expansion of the Company's Enterprise Services. As a
percentage of service revenue, the cost of service revenue decreased 2% to 19%
in the first half of 1998 from 21% in the first half of 1997.
12
RESEARCH AND DEVELOPMENT
Research and development expenses increased 5% to $5.8 million in the first
half of 1998 from $5.5 million in the first half of 1997. The increase in
research and development expenses was primarily attributable to increased third-
party consulting costs. As a percentage of total revenue, research and
development expenses remained relatively flat at 25% in the first half of 1998
as compared to 26% in the first half of 1997. The Company expects research and
development expenses to continue to increase in absolute terms.
MARKETING AND SALES
Marketing and sales expenses increased 28% to $9.3 million in the first
half of 1998 from $7.2 million in the first half of 1997. Total marketing and
sales expenses increased as a result of continued expansion of the Company's
sales and marketing organizations, and increased promotional activity. As a
percentage of total revenue, marketing and sales expenses increased to 39% in
the first half of 1998 from 35% in the first half of 1997. The Company expects
marketing and sales expenses to continue to increase in absolute terms.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 15% to $2.6 million in the
first half of 1998 from $2.3 million in the first half of 1997. The increase was
due to an overall increase in administrative and overhead costs associated with
the continued growth of the Company. As a percentage of total revenue, general
and administrative expenses remained constant at 11% in the first half of 1998
and the first half of 1997.
MERGER AND ACQUISITION RELATED CHARGES
In the first half of 1998, the Company incurred merger-related charges of
$4.1 million in connection with the Merger with MicroSim relating primarily to
financial advisory fees, legal and accounting services, personnel severance
costs and the cancellation and continuation of contractual obligations. In the
first half of 1997 the Company incurred $2.2 million of in-process research and
development costs associated with certain technology which had not yet reached
technological feasibility related to the acquisitions of certain assets from
TEAM Corporation and Q Point Technology.
OTHER INCOME, NET
Other income decreased to $868,000 in the first half of 1998 from $921,000
in the first half of 1997. The Company shifted certain of its investment
securities into securities that are generaly exempt from federal tax and yield
interest at a lower rate than taxable investment securities in which the Company
previously invested. As a result of this change, other income for the first half
of 1998 decreased from the same period in the prior year.
13
INCOME TAX EXPENSE (BENEFIT)
The effective tax rate for the first half of 1998 was 35.0%. This rate
differs from the combined federal and state statutory rate of approximately
38.5% primarily due to the benefit of the Company's foreign sales corporation
and the utilization of research and experimentation tax credits. Income tax
expense (benefit) for the first half of 1998 was ($40,000) as compared to
$471,000 for the first half of 1997. The income tax benefit in the first half of
1998 is due primarily to the pre-tax loss incurred largely as a result of
merger-related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents were $15.9 million at June 30, 1998 as
compared to $31.6 million at December 31, 1997. Cash provided by operations was
$2.6 million for the first half of 1998 as compared to $1.8 million for the
first half of 1997. The increase in cash provided by operations from the first
half of 1998 to the first half of 1997 was primarily due to a decrease in
accounts receivable and an increase in accrued liabilities partially offset by a
decrease in trade payables and accrued payroll. Cash used in investing
activities was $18.5 million for first half of 1998 as compared to $2.8 million
provided by investing activities in the first half of 1997. The increase in cash
used in investing activities from the first half of 1997 as compared to the
first half of 1998 was due primarily to purchases of investment securities. Cash
provided by financing activities was $287,000 for first half of 1998 as compared
to $75,000 in the first half of 1997. The increase in cash provided by financing
activities from the first half of 1997 as compared to the first half of 1998 was
primarily due to proceeds from the issuance of common stock upon the exercise of
stock options partially offset by the issuance of notes receivable related to
employee stock purchases.
The Company has available borrowing capacity consisting of a commitment for
a $3.0 million line of credit from a commercial bank. The Company believes that
current cash and investment balances, cash flows from operations and the unused
line of credit are sufficient to meet current and anticipated future capital
requirements for at least the next twelve months. The Company currently does not
have any material commitments for capital expenditures. OrCAD has from time to
time evaluated and continues to evaluate opportunities for acquisitions and
expansion. Any such transactions, if consummated, may use a portion of the
Company's working capital or necessitate additional bank borrowings. No
assurance can be given that additional borrowing capacity will be available or
that if available, such financing will be obtainable on terms favorable to the
Company or its stockholders.
DISCLOSURE OF YEAR 2000 ISSUES
The Company is aware of the potential inability of computer programs to
adequately process date information after December 31, 1999 (the year 2000
issue). The Company has anticipated problems surrounding the year 2000 issue and
modified its product offerings as necessary to make them year 2000 compliant.
The year 2000 issue with regard to the Company's product offerings is not
expected to have any material adverse effect.
14
In addition, the Company will be implementing a program to review the year
2000 compliance status of computer software programs licensed from third parties
and used in its internal business processes to obtain appropriate assurances of
year 2000 compliance from manufacturers of these products. The Company believes
that it will be able to complete its year 2000 compliance review and make any
necessary modifications prior to the end of 1999. The Company further believes
that such a review and modification, if necessary, will not require the Company
to incur any additional material expense. However, the compliance of systems
acquired from third parties is dependent on factors outside the Company's
control. If key systems, or a significant number of systems fail as a result of
year 2000 problems, the Company could incur substantial expense and experience a
disruption of business operations, which would potentially have a material
adverse effect on the Company's business.
Furthermore, the purchasing patterns of customers and potential customers
may be affected by year 2000 issues as companies may be required to devote
significant resources to correct or patch their current software systems for
year 2000 compliance. These expenditures may result in reduced funds available
to purchase the Company's software products that could have a materially adverse
effect on the Company's financial condition and results of operation. There can
be no assurance that there will not be any year 2000 related operating problems
or material expenses that will occur with the Company's computer systems or in
connection with the interface with the Company's major vendors or suppliers.
VARIABILITY OF OPERATING RESULTS
The Company's quarterly operating results may vary significantly in the
future depending on factors such as demand for the company's products, the
timely development and market acceptance of new products and upgrades to
existing products, the impact of competitive products and pricing, length of
sales cycles, timing of significant orders, seasonal factors, mix of direct and
indirect sales, product mix, domestic and international economic conditions,
changes in the financial condition of or the relationship with distributors,
changes in tax rates, merger and acquisition activities, the integration of
acquired entities, and market conditions in the EDA industry.
A substantial portion of the Company's revenue in each quarter results from
orders booked in that quarter. The Company's expense levels are based, in part,
on its expectations as to future revenue. If revenue levels are below
expectations, operating results are likely to be adversely affected. In
particular, net income may be disproportionately affected by a reduction in
revenue because only a certain portion of the Company's expenses varies with its
revenue.
The Company sells its software products and provides services to customers
throughout the world. Managing global operations presents challenges associated
with organizational alignment, cultural and language differences. Moreover, each
region in the global EDA market exhibits unique characteristics that can cause
purchasing patterns to differ significantly from period to period. Although
international markets provide the Company with significant revenue
opportunities, periodic downturns, trade balance issues, political instability
and fluctuations in interest and foreign currency exchange rates are all risks
that could affect global product and service demand. Many countries are
currently experiencing banking and currency difficulties that could lead to
economic recession in those countries which could result in a decline in the
purchasing power of the Company's customers in Asia. This turn could result in
the cancellation or delay of orders for the Company's products from Asian
customers, thus adversely affecting the Company's operations.
15
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support, technical, and service personnel. The Company has
recently increased its focus on the offering of professional services to its
customers, the growth of which is directly dependent upon the attraction and
retention of personnel. The market for highly skilled employees is intensely
competitive. To the extent that the Company is not able to retain, train,
attract and motivate highly skilled employees who are able to provide EDA and
other design services that satisfy customers' expectations, the Company's
business, operating results, and financial condition could be materially
adversely affected.
Acquisitions of complimentary businesses are an integral part of the
Company's overall business strategy. There are several risks associated with
this strategy including, but not limited to, integration of sales channels,
training and education of sales forces for new product offerings, integration of
product development efforts, retention of key employees, retention of systems of
internal controls, and integration of information systems. All of these factors
can impair the Company's ability to forecast, to meet quarterly revenue and
earnings targets, and effectively manage the business for long-term growth.
While the Company is aware of and is addressing such issues, there can be no
assurance that these challenges will be effectively met.
OrCAD's success is dependent, in part, upon its proprietary technology. The
Company generally relies on patents, copyrights, trademarks, and trade secret
laws to establish and maintain its proprietary rights in its technology and
products. OrCAD has been issued a number of patents. There can be no assurance
that any of these patents will not be challenged, invalidated or circumvented,
or that any rights granted thereunder will provide competitive advantages to the
Company. In addition, the laws of some foreign countries may not permit the
protection of OrCAD's proprietary rights to the same extent as the laws of the
United States.
Because of the existence of a large number of patents in the EDA industry
and the rapid rate of issuance of new patents, there can be no assurance that
OrCAD products or any of their components infringe on the patent rights of
others. If a third party were to allege infringement, OrCAD believes that, based
on industry practice, any necessary license or rights under such patents may be
obtained on terms that would not have a material adverse effect on the Company's
business, operating results or financial condition. Nevertheless, there can be
no assurance that the necessary licenses would be available on acceptable terms,
or at all, or that the Company would prevail in any such challenge. Some of the
Company's products are designed to include software or other intellectual
property licensed from third parties. It may be necessary in the future to seek
or renew such licenses. The inability to obtain certain licenses or other rights
on favorable terms could have a material adverse effect on the Company's
business, operating results, or financial condition.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The standard also requires that changes in the derivatives' fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after June
15, 1999. The Company does not expect SAFS 133 to have a material impact on its
consolidated financial statements.
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PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
During the second quarter of 1998, the Company sold securities without
registration under the Securities Act of 1933 (the "Securities Act") upon the
exercise of stock options granted under the Company's stock option plans. An
aggregate of 38,420 shares of Common Stock were issued at exercise prices
ranging from $.35 to $3.50. These transactions were effected in reliance upon
Rule 701 promulgated pursuant to the authority of the Securities and Exchange
Commission under Section 3(b) of the Securities Act.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company's annual stockholder's meeting was held on Thursday, May 22,
1998, at which the following actions were taken by a vote of shareholders:
1. At the annual meeting Wolfram H. Blume was initially elected and the
remaining five persons were re-elected to the Board of Directors by the
votes and for the terms indicated:
Vote
------------------------
Withhold Term
Director For Authority Ending
--------- --------- ------
Michael F. Bosworth 8,063,043 56,292 1999
Wolfram H. Blume 8,055,506 63,829 1999
John C. Savage 8,060,843 58,492 1999
Stephen W. Director 8,062,000 57,335 1999
Richard P. Magnuson 8,060,843 58,492 1999
James B. Moon 8,050,843 68,492 1999
2. By a vote of 8,113,673 to 2,895 (with 2,767 abstentions) the Company's
selection of KPMG Peat Marwick LLP as the Company's independent auditors
for the year ending December 31, 1998 was ratified.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the three months ended June
30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OrCAD, Inc.
Dated: August 14, 1998 /s/ P. David Bundy
--------------------------------
Vice President, Finance and Secretary
(Principal Financial and Accounting
Officer)
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