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PAGE 1 OF 17
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
of
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1996
Commission File Number 0-27692
ORCAD, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 93-1062832
9300 S.W. Nimbus Avenue Beaverton, OR 97008
Telephone: (503) 671-9500
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
On June 30, 1996, 6,561,104 shares of the registrant's common stock
were issued and outstanding.
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ORCAD, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations -- Three months
ended June 30, 1996 and 1995 and Six months ended
June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -- Six months
ended June 30, 1996 and 1995 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ORCAD, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1996
ASSETS 1995 (Unaudited)
--------------- ---------------
CURRENT ASSETS:
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 2,080 $ 19,162
SHORT TERM INVESTMENTS -- 5,850
TRADE ACCOUNTS RECEIVABLE, NET OF DOUBTFUL ACCOUNTS
AND SALES RETURN ALLOWANCES OF $422 AND $664 2,641 2,586
INVENTORY, NET 440 505
ROYALTY RECEIVABLE 406 298
DEFERRED TAXES 144 --
OTHER 451 651
--------------- ---------------
TOTAL CURRENT ASSETS 6,162 29,052
--------------- ---------------
MARKETABLE SECURITIES -- 2,115
FIXED ASSETS 2,203 2,569
LESS ACCUMULATED DEPRECIATION 1,236 1,497
--------------- ---------------
967 1,072
--------------- ---------------
PURCHASED SOFTWARE TECHNOLOGY, NET 12 193
ROYALTY RECEIVABLE 242 25
GOODWILL AND INTANGIBLE ASSETS 3,156 2,930
OTHER ASSETS 126 133
--------------- ---------------
TOTAL ASSETS $ 10,665 $ 35,520
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 942 $ 808
ACCRUED PAYROLL AND RELATED LIABILITIES 816 845
ACCRUED LIABILITIES 1,411 1,230
ACCRUED INCOME TAXES 104 325
DEFERRED REVENUE 1,159 1,032
CAPITAL LEASE OBLIGATIONS, CURRENT 119 43
--------------- ---------------
TOTAL LIABILITIES 4,551 4,283
--------------- ---------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK 81 --
COMMON STOCK 18 66
ADDITIONAL PAID-IN CAPITAL 12,312 35,629
ACCUMULATED DEFICIT (6,293) (4,435)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (4) (23)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 6,114 31,237
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,665 $ 35,520
=============== ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
PRODUCTS $ 2,671 $ 4,579 $ 4,747 $ 8,827
SERVICE 728 730 1,369 1,407
---------- ---------- ---------- ----------
TOTAL REVENUE 3,399 5,309 6,116 10,234
COST AND EXPENSES:
COST OF SALES -- PRODUCTS 330 395 779 842
COST OF SALES -- SERVICE 111 192 200 357
RESEARCH AND DEVELOPMENT 933 1,150 1,706 2,155
MARKETING AND SALES 1,232 1,813 2,169 3,508
GENERAL AND ADMINISTRATIVE 431 741 826 1,497
IN-PROCESS RESEARCH AND
DEVELOPMENT 971 -- 971 --
---------- ---------- ---------- ----------
TOTAL COST AND EXPENSES 4,008 4,291 6,651 8,359
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (609) 1,018 (535) 1,875
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
INTEREST INCOME 10 353 8 439
OTHER, NET -- 14 -- 38
---------- ---------- ---------- ----------
10 367 8 477
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (599) 1,385 (527) 2,352
INCOME TAXES -- 310 -- 494
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (599) $ 1,075 $ (527) $ 1,858
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE ($ 0.31) $ 0.15 ($ 0.27) $ 0.30
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,934 6,985 1,934 6,112
========== ========== ========== ==========
</TABLE>
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ORCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1995 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (527) $ 1,858
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 237 528
PROVISION FOR LOSSES ON TRADE ACCOUNTS RECEIVABLE (27) 242
PROVISION FOR INVENTORY RESERVES 13 11
DEFERRED INCOME TAXES -- 138
WRITE-OFF OF RESEARCH AND DEVELOPMENT COSTS ACQUIRED 971
CHANGES IN ASSETS AND LIABILITIES:
TRADE ACCOUNTS RECEIVABLE 108 (214)
INVENTORY (79) (84)
ROYALTY RECEIVABLE 18 115
OTHER, NET (2) (219)
ACCOUNTS PAYABLE 255 (122)
ACCRUED PAYROLL AND RELATED LIABILITIES 42 30
ACCRUED LIABILITIES (183) (143)
ACCRUED INCOME TAXES -- 228
DEFERRED REVENUE (261) (126)
---------- ----------
TOTAL ADJUSTMENTS 1,092 384
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 565 2,242
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF FIXED ASSETS (267) (381)
ACQUISITION OF SOFTWARE TECHNOLOGY (60) --
CASH ACQUIRED IN MERGER 81 --
PURCHASE OF SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES -- (7,965)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (246) (8,346)
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENTS ON CAPITAL LEASES (53) (76)
PROCEEDS FROM ISSUANCE OF COMMON STOCK 30 23,285
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (23) 23,209
---------- ----------
EFFECTS OF EXCHANGE RATE ON CASH -- (23)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 296 17,082
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 582 2,080
---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 878 $ 19,162
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID $ 11 $ 8
INCOME TAXES PAID $ -- $ 51
NONCASH INVESTING ACTIVITIES
EXCHANGE OF ROYALTY RECEIVABLE FOR
SOFTWARE TECHNOLOGY $ -- $ 210
NET ASSETS ACQUIRED IN MERGER $ 1.963 --
========== ==========
</TABLE>
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ORCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share amounts)
(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, 1995, as included
in the Company's Registration Statement on Form SB-2 (Registration No.
333-00198-LA) filed with the Securities and Exchange Commission.
2. Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
assumed to be outstanding during the period. Common equivalent shares
consist of options to purchase common stock.
3. Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies 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.
4. Revenue Recognition
Revenue primarily includes revenue from software product shipments and
revenue from training related services and product support agreements.
The Company recognizes revenue from software licenses after shipment of
product and when no significant contractual obligations remain
outstanding. When the Company receives payment prior to shipment or
fulfillment of a significant obligation to the customer, such payments
are recorded as deferred revenue and recognized as revenue upon
shipment or fulfillment of such obligation. A portion of revenue from
product sales is deferred and recognized ratably over the warranty
period, generally three months to one year. Revenue from training
related services is recognized as services are performed.
5. 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.
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6. 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 federal statutory rate primarily because of the
utilization of net operating loss carryforwards and the foreign tax
rate differential applicable to earnings of OrCAD Japan.
7. Stockholders' Equity
On March 1, 1996, the Company completed a public offering of 3,200,0000
shares of common stock which generated net proceeds of approximately
$19.4 million after deducting applicable issuance costs and expenses.
On April 8, 1996, the Company's underwriters' exercised their
over-allotment option resulting in the issuance of an additional
382,299 shares of common stock which generated net proceeds of
approximately $3.9 million after deducting applicable issuance costs
and expenses. The net proceeds are expected to be used for working
capital and general corporate purposes, including product development,
the expansion of international sales and possible future acquisitions.
8. Reclassifications
Certain reclassifications have been made to prior periods data to
conform with the June 30, 1996 presentation.
9. Cash Equivalents, Short-term Investments and Long-term Marketable
Securities
Cash equivalents consist of short-term highly liquid investments with
original maturities of ninety days or less. The carrying amount
approximates fair value due to the short-term nature of these
investments. Those instruments with original maturities greater than
ninety days and less than one year from the balance sheet date are
considered to be short-term investments. Instruments with scheduled
maturities greater than one-year from the balance sheet date are
considered to be long-term marketable securities. Short-term
investments and long-term marketable securities are composed
substantially of corporate debt securities which are carried at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and interest are included in
interest income. The Company purchases such debt securities with the
intention of holding them to maturity.
7
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
OrCAD was formed in September 1991 as the successor to prior entities
engaged in developing electronic design automation (EDA) tools. From its
inception, OrCAD has been engaged in the development and marketing of a broad
family of EDA products including schematic capture, digital simulation,
programmable logic design and printed circuit board layout. In 1995, the Company
introduced OrCAD Design Desktop for Windows, a new product family designed for
the 32-bit Windows operating system that includes OrCAD Capture for Windows,
OrCAD Simulate for Windows, OrCAD Layout for Windows, OrCAD Layout Ltd. for
Windows and OrCAD Layout Plus for Windows. From the Company's inception through
the first six months of 1995, OrCAD earned substantially all of its revenue from
its DOS-based EDA products.
In December 1995, the Company acquired Intelligent Systems Japan, K.K.
(ISJ), now OrCAD Japan, K.K. (OrCAD Japan) in a transaction accounted for as a
purchase. In June 1995, the Company acquired Massteck Ltd. (Massteck) in a
transaction accounted for as a purchase. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries, Massteck
and OrCAD Japan, from the dates of acquisition. All intercompany balances have
been eliminated in consolidation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
TOTAL REVENUES
The Company derives revenue from the licensing of its software products
and from the provision of maintenance and training 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 product support agreements that provide customers
access to product enhancements, telephone hot line support, Bulletin Board
Service and a subscription to OrCAD Desktop Quarterly, a newsletter produced by
the Company. Revenue from each product support agreement is deferred and
recognized ratably over the term of the product support agreement. Revenue from
customer training is recognized as services are performed.
Total revenue increased 56% from $3.4 million in the second quarter of
1995 to $5.3 million in the second quarter of 1996. The acquisition of OrCAD
Japan accounted for approximately $1.2 million of the $1.9 million increase in
total revenue. In addition, with the acquisition of Massteck the Company
acquired five value-added resellers which accounted for approximately $126,000
in additional revenue in the second quarter of 1996 over the same period in
1995. The remaining increase in total revenue was primarily due to growth in
product revenue. As a percentage of total revenue, product revenue increased
from 79% in the second quarter of 1995 to 86% in the second quarter of 1996.
Conversely, service revenue decreased as a percentage of total revenue from 21%
in the second quarter of 1995 to 14% in the second quarter of 1996.
Product revenue increased 71% from $2.7 million in the second quarter
of 1995 to $4.6 million in the second quarter of 1996. The acquisition of OrCAD
Japan accounted for approximately $1.2 million of the $1.9 million increase in
product revenue. The remaining increase in product revenue from the second
quarter of 1995 to the second quarter of 1996 was primarily attributable to
growth in sales of the OrCAD Design Desktop for Windows, particularly in the PCB
layout and simulation product lines.
8
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Service revenue remained relatively constant from the second quarter of
1995 to the second quarter of 1996 at $728,000 and $730,000, respectively. The
higher increase in product revenue as compared to service revenue is primarily
attributable to an increase in sales of Windows-based products, a higher
proportion of which is recognized as product revenue.
Total North American revenue increased 22% from $2.6 million in the
second quarter of 1995 to $3.1 million in the second quarter of 1996. Total
revenue generated outside of North America increased 162% from $830,000 in the
second quarter of 1995 to $2.2 million in the second quarter of 1996. As a
percentage of the Company's total revenue, revenue generated outside of North
America increased from 24% in the second quarter of 1995 to 41% in the second
quarter of 1996. The increase in the proportion of revenue generated outside of
North America was principally attributable to the acquisition of OrCAD Japan. In
the second quarter of 1995, the Company's sales to OrCAD Japan, which was the
Company's distributor at the time, amounted to approximately 5% of total
revenues. In the second quarter of 1996, sales by OrCAD Japan amounted to
approximately 27% of total revenue. This increase in revenue attributable to
OrCAD Japan in the second quarter of 1996 as a percentage of total revenue is
primarily the result of the Company recognizing the full selling price of
product's sold by OrCAD Japan, whereas in the second quarter of 1995, prior to
the acquisition, the Company's products were sold to OrCAD Japan at prices
reflecting a substantial discount from OrCAD Japan's selling prices.
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, shipping costs and royalties paid to
external developers. The cost of product revenue increased 20% from $330,000 in
the second quarter of 1995 to $395,000 in the second quarter of 1996. The
increase is primarily attributable to an increased level of product sales
partially offset by decreases in royalty costs resulting from the Company's
purchase of source code previously licensed from outside developers and the
Company's decision to develop its Windows-based products internally rather than
through outside developers. As a percentage of product revenue, cost of product
revenue decreased from 12% in the second quarter of 1995 to 9% in the second
quarter of 1996. This decrease is primarily the result of higher average selling
prices resulting from the sale of OrCAD Design Desktop for Windows, primarily in
the PCB layout and simulation product lines.
The cost of service revenue includes the costs of providing software
maintenance, such as hotline telephone support, software revision releases and
updated user documentation, and the costs of providing training. The cost of
service revenue increased 73% from $111,000 in the second quarter of 1995 to
$192,000 in the second quarter of 1996. This increase is primarily attributable
to increased training services and personnel costs relating to technical
support, including costs associated with increased headcount and compensation
expenses as a result of increased product, upgrade, and product support
agreement sales. As a percentage of service revenue, the cost of service revenue
increased from 15% in the second quarter of 1995 to 26% in the second quarter of
1996. This increase reflects the absorption of relatively fixed costs and costs
of increased technical support personnel in the second quarter of 1996 over a
relatively constant service revenue base.
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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 increased 23% from $933,000 in
the second quarter of 1995 to $1.2 million in the second quarter of 1996. The
increase in research and development expenses is attributable to increased
personnel costs, including costs associated with increased headcount resulting
from the acquisitions of OrCAD Japan and Massteck. As a percentage of total
revenue, research and development expenses decreased from 27% in the second
quarter of 1995 to 22% in the second quarter of 1996. The Company expects
research and development expenses to continue to increase in absolute terms.
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 47% from $1.2 million in the second quarter of 1995 to $1.8
million in the second quarter of 1996. The increase is principally attributable
to increased compensation expenses related to growth in the direct telesales
organization and increased headcount for marketing personnel, the acquisitions
of OrCAD Japan and Massteck, and greater marketing related activities in the
second quarter of 1996. The Company incurred approximately $92,000 in additional
expenses in the second quarter of 1996 related to the amortization of intangible
assets acquired in connection with the acquisition of OrCAD Japan. In addition,
the Company increased its sales and marketing headcount by four employees as a
result of the acquisition of Massteck. As a percentage of total revenue,
marketing and sales expenses decreased from 36% in the second quarter of 1995 to
34% in the second quarter of 1996. 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 72% from
$431,000 in the second quarter of 1995 to $741,000 in the second quarter of
1996. The increase in general and administrative expenses is attributable to the
acquisition of OrCAD Japan, increased personnel costs, including costs
associated with increased headcount to support the growth in operations and the
additional costs associated with being a public company. The acquisition of
OrCAD Japan resulted in approximately $99,000 of additional general and
administrative expenses in the second quarter of 1996. As a percentage of total
revenue, general and administrative expenses increased from 13% in the second
quarter of 1995 to 14% in the second quarter of 1996.
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OTHER INCOME, NET
Other income increased to $367,000 in the second quarter of 1996, as
compared to $10,000 in the second quarter of 1995. This improvement resulted
primarily from higher interest income earned on increased cash and cash
equivalents and investment balances resulting from the proceeds of the Company's
public offering completed in March 1996.
INCOME TAX EXPENSE
The effective tax rate for the quarter ended June 30, 1996 was 21.0%,
which differs from the combined federal and state statutory rate of
approximately 38.5% primarily due to the use of net operating loss
carryforwards, and the foreign tax rate differential applicable to earnings of
OrCAD Japan. Income tax expense for the quarter ended June 30, 1996 increased to
$310,000. The Company did not provide for income taxes in the second quarter of
1995 as a result of the availability of net operating loss carryforwards to
offset taxable income.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
TOTAL REVENUES
Total revenue increased 67% from $6.1 million in the first half of 1995
to $10.2 million in the first half of 1996. The acquisition of OrCAD Japan
accounted for approximately $2.2 million of the $4.1 million increase in total
revenue. In addition, with the acquisition of Massteck the Company acquired five
value-added resellers which accounted for approximately $246,000 in additional
revenue in the first half of 1996 over the same period in 1995. The remaining
increase in total revenue was primarily due to growth in product revenue. As a
percentage of total revenue, product revenue increased from 78% in the first
half of 1995 to 86% in the first half of 1996. Conversely, service revenue
decreased as a percentage of total revenue from 22% in the first half of 1995 to
14% in the first half of 1996.
Product revenue increased 86% from $4.7 million in the first half of
1995 to $8.8 million in the first half of 1996. The acquisition of OrCAD Japan
accounted for approximately $2.2 million of the $4.1 million increase in product
revenue. The remaining increase in product revenue from the first half of 1995
to the first half of 1996 was primarily attributable to growth in sales of the
OrCAD Design Desktop for Windows, particularly in the PCB layout and simulation
product lines.
Service revenue remained relatively constant from the first half of
1995 to the first half of 1996 at $1.4 million. The higher increase in product
revenue as compared to service revenue is primarily attributable to an increase
in sales of Windows-based products, a higher proportion of which is recognized
as product revenue.
Total North American revenue increased 36% from $4.3 million in the
first half of 1995 to $5.9 million in the first half of 1996. Total revenue
generated outside of North America increased 143% from $1.8 million in the first
half of 1995 to $4.4 million in the first half of 1996. As a percentage of the
Company's total revenue, revenue generated outside of North America increased
from 29% in the first half of 1995 to 43% in the first half of 1996. The
increase in the proportion of revenue generated outside of North America was
principally attributable to the acquisition of OrCAD Japan. In the first half of
1995, the Company's sales to OrCAD Japan, which was the Company's distributor at
the time, amounted to approximately 5% of total revenues. In the first half of
1996, sales by OrCAD Japan amounted to approximately 24% of total revenue. This
increase in revenue attributable to OrCAD Japan in the first half of 1996 as a
percentage of total revenue is primarily the result of the Company recognizing
the full selling price of product's sold by OrCAD Japan, whereas in the first
half of 1995, prior to the acquisition, the Company's products were sold to
OrCAD Japan at prices reflecting a substantial discount from OrCAD Japan's
selling prices.
COST OF REVENUE
The cost of product revenue increased 8% from $779,000 in the first
half of 1995 to $842,000 in the first half of 1996. The increase is primarily
attributable to an increased level of product sales partially offset by
decreases in royalty costs resulting from the Company's purchase of source code
previously licensed from outside developers and the Company's decision to
develop its Windows-based products internally rather than through outside
developers. As a percentage of product revenue, cost of product revenue
decreased from 16% in the first half of 1995 to 10% in the first half of 1996.
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This decrease is primarily the result of higher average selling prices resulting
from the sale of OrCAD Design Desktop for Windows, primarily in the PCB layout
and simulation product lines.
The cost of service revenue increased 79% from $200,000 in the first
half of 1995 to $357,000 in the first half of 1996. This increase is primarily
attributable to increased training services provided by the Company and
personnel costs relating to technical support, including costs associated with
increased headcount and compensation expenses as a result of increased product,
upgrade, and product support agreement sales. As a percentage of service
revenue, the cost of service revenue increased from 15% in the first half of
1995 to 25% in the first half of 1996. This increase reflects the absorption of
relatively fixed costs and costs of increased technical support personnel in the
first half of 1996 over a relatively constant service revenue base.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 26% from $1.7 million in
the first half of 1995 to $2.2 million in the first half of 1996. The increase
in research and development expenses is attributable to increased personnel
costs, including costs associated with increased headcount largely resulting
from the acquisition of Massteck, partially offset by reductions in costs for
engineering consultants in the first half of 1996 as compared to the same period
in 1995. As a percentage of total revenue, research and development expenses
decreased from 28% in the first half of 1995 to 21% in the first half of 1996.
The Company expects research and development expenses to continue to increase in
absolute terms.
MARKETING AND SALES
Marketing and sales expenses increased 62% from $2.2 million in the
first half of 1995 to $3.5 million in the first half of 1996. The increase is
principally attributable to increased compensation expenses related to growth in
the direct telesales organization and increased headcount for marketing
personnel, the acquisitions of OrCAD Japan and Massteck, and greater marketing
related activities in the first half of 1996. The Company incurred approximately
$184,000 in additional expenses in the first half of 1996 related to the
amortization of intangible assets acquired in connection with the acquisition of
OrCAD Japan. In addition, the Company increased its sales and marketing
headcount by four employees as a result of the acquisition of Massteck. As a
percentage of total revenue, marketing and sales expenses decreased from 35%
in the first half of 1995 to 34% in the first half of 1996. The Company expects
marketing and sales expenses to continue to increase in absolute terms.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 81% from $826,000 in the
first half of 1995 to $1.5 million in the first half of 1996. The increase in
general and administrative expenses is attributable to the acquisition of OrCAD
Japan, increased personnel costs, including costs associated with increased
headcount to support the growth in operations and the additional costs
associated with being a public company. The acquisition of OrCAD Japan resulted
in approximately $163,000 of additional general and administrative expenses in
the first half of 1996. As a percentage of total revenue, general and
administrative expenses increased from 14% in the first half of 1995 to 15% in
the first half of 1996.
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OTHER INCOME, NET
Other income increased to $477,000 in the first half of 1996, as
compared to $8,000 in the first half of 1995. This improvement resulted
primarily from higher interest income earned on increased cash and cash
equivalents and investment balances resulting from the proceeds of the Company's
public offering completed in March 1996.
INCOME TAX EXPENSE
The effective tax rate for the first half of 1996 was 21.0%, which
differs from the combined federal and state statutory rate of approximately
38.5% primarily due to the use of net operating loss carryforwards, and the
foreign tax rate differential applicable to earnings of OrCAD Japan. Income tax
expense for the first half of 1996 increased to $494,000. The Company did not
provide for income taxes in the first half of 1995 as a result of the
availability of net operating loss carryforwards to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The completion of the initial public offering of common stock in March
1996 and the exercise of the Company's underwriters' over-allotment option in
April 1996 resulted in net proceeds of $23.3 million which improved the
Company's current ratio to 6.8:1 at June 30, 1996 from 1.4:1 at December 31,
1995. Working capital increased to $24.8 million at June 30, 1996 from $1.6
million at December 31, 1995.
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.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1996 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock Based Compensation". This statement permits a company to
choose either a new fair value based method of accounting for its stock based
compensation arrangements or to comply with the current APB Opinion 25 intrinsic
value based method adding pro forma disclosures of net income and earnings per
share computed as if the fair value based method had been applied in the
financial statements. The Company has adopted SFAS No. 123 by retaining the APB
Opinion 25 method of accounting for stock-based compensation with annual pro
forma disclosures of net income and earnings per share.
14
<PAGE> 15
On January 1, 1996 the Company adopted the Financial Accounting
Standards Board's SFAS No. 121 "Accounting for the Impairment of Long-lived
assets and for Long-lived Assets to be Disposed Of". This statement specifies
when long-lived assets should be reviewed for impairment, how to determine if
such an asset is impaired, and how to measure an impairment loss. This statement
also requires that long-lived assets held for disposal be valued at the lower of
the carrying amount or fair value less the cost to sell the asset, except for
assets that constitute part of a discontinued operation. The Company currently
does not have any material assets held for disposal and does not believe that
the value of any of its long-lived assets are impaired.
VARIABILITY OF OPERATING RESULTS
The Company's quarterly operating results may vary significantly in the
future depending on factors such as increased competition, timing of new product
announcements, releases and pricing changes by the Company or its competitors,
length of sales cycles, market acceptance or delays in the introduction of new
or enhanced versions of the Company's products, timing of significant orders,
seasonal factors, mix of direct and indirect sales, product mix, and economic
conditions generally and in the EDA industry specifically.
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 small portion of the Company's expenses varies with its
revenue.
15
<PAGE> 16
PART II - OTHER INFORMATION
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, 1996.
16
<PAGE> 17
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 1, 1996 P. David Bundy
--------------
Vice President, Finance and Secretary
(Principal Financial and Accounting Officer)
17
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