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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27692
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OrCAD, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 93-1062832
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9300 S.W. Nimbus Avenue, Beaverton, Oregon 97008
(Address of principal executive offices, including zip code)
(503) 671-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 [_]
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. [_]
The aggregate market value of the voting shares held by non-affiliates of
the Registrant was $54,913,614 as of March 1, 1999 based upon the last sales
price as reported by Nasdaq.
The number of shares of the Registrant's Common Stock outstanding at March
1, 1999 was 9,391,896 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 4, 1999 are incorporated by reference into
Part III hereof.
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ORCAD, INC.
1998 FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 10
Item 6. Selected Consolidated Financial Data.......................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 21
Item 8. Financial Statements and Supplementary Financial Data......... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant............ 41
Item 11. Executive Compensation........................................ 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 41
Item 13. Certain Relationships and Related Transactions................ 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 42
Signatures.............................................................. II-1
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PART I
ITEM 1. BUSINESS
Overview
OrCAD, Inc. ("OrCAD," or the "Company") develops, markets and supports
software products that assist electronics designers in the management of
component data and in the design of field-programmable gate arrays ("FPGAs"),
including complex programmable logic devices ("CPLDs"), analog and mixed
analog-digital circuits, and printed circuit boards ("PCBs"). OrCAD operates
in a single business segment, comprising the electronic design automation
("EDA") industry and serves most segments of the electronics industry,
including aerospace, telecom, industrial control, military, medical equipment,
and consumer products. OrCAD's products enable electronics designers to reduce
time to market, improve product capability, and reduce design costs. OrCAD's
Windows-based EDA solutions support the design process for mainstream
components, from schematic capture to programmable logic design and
verification to circuit simulation and printed circuit board layout. To date,
over 250,000 products bearing the OrCAD name have been sold worldwide.
Recent Developments
In February 1999, OrCAD announced its intention to repurchase up to 500,000
shares of its outstanding common stock. Under the new repurchase program,
common stock may be purchased from time-to-time in the open market and
transactions may be negotiated based on market conditions. Pursuant to this
program, as of March 30, 1999, OrCAD had spent a total of $887,000 to
repurchase 125,000 shares at prices ranging from $7.08 to $7.12 per share.
In September 1998, OrCAD entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Summit Design, Inc.
("Summit"), a publicly held Delaware corporation, and Hood Acquisition Corp.,
a Delaware corporation and a wholly-owned subsidiary of Summit. Under the
terms of the Reorganization Agreement, each share of issued and outstanding
common stock of OrCAD was to be converted into the right to receive 1.05
shares of common stock of Summit. In addition, each outstanding option to
purchase shares of OrCAD Common Stock was to be assumed by Summit. On February
2, 1999, OrCAD and Summit announced that the Reorganization Agreement had been
terminated by mutual agreement. The Company expects to record a pre-tax charge
to earnings of approximately $1.0 million in the first quarter of 1999 in
connection with the termination of the Reorganization Agreement. This charge
represents investment banking, legal, travel, accounting and other expenses
OrCAD incurred during the merger process.
Industry Background
Advances in electronics technology have enabled the development of products
with significantly greater functionality, lower cost, and smaller size. The
electronic functionality of these products today is contained in multiple,
diverse integrated circuits ("ICs") combined into electronic subsystems on one
or more PCBs. While extremely complex components such as microprocessors,
memory, and custom digital signal processors are central to a number of these
subsystems, most subsystems are primarily composed of mainstream components.
Competitive pressures and the proliferation of programmable logic devices
("PLDs") and PCBs in product design have led to increasing demand for lower
cost, easier-to-use solutions for design engineers creating mainstream
components. The complexity of FPGAs and PCBs is continuously increasing as
electronics manufacturers seek to increase functionality and reduce product
cost and size. FPGAs are now full-scale systems on chips often encompassing
more than 100,000 gates and operating at 100 to 200 MHz and 3.3 volts.
Today's mainstream PCBs may be multi-layer boards containing up to a
thousand components and driven by high speed (>100MHz) microprocessors. OrCAD
believes that the majority of manufacturers' electronic design-starts today
involve these mainstream types of FPGAs, CPLDs, and PCBs. As an engineering
design platform, the latest personal computers ("PCs") running Microsoft's
Windows NT continue to offer increased processing power and ease of use. More
than ever, these machines are ideal for most of today's electronic design
activities.
Products
EDA software tools aid electronic engineers in the design of increasingly
complex products, and the tools provided by EDA suppliers must be periodically
upgraded to meet the needs of the engineering community.
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Although the core technology and functionality remain essentially the same for
the life of a product, EDA software tools undergo continual enhancements and
maintenance engineering for quality improvements. This continuous engineering
is provided to OrCAD's customers in the form of an upgrade.
OrCAD attempts to release upgrades for each of its major products on an
annual basis. The dates of the last upgrades of these major products are as
follows:
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Product Last Upgrade
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Capture...................................................... 12/98
Express...................................................... 12/98
Layout....................................................... 12/98
PSpice....................................................... 12/98
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The latest release of OrCAD products in December 1998 ("Release 9.0")
integrates the Company's entire product line through a new OrCAD Interchange
Architecture (the "Interchange Architecture"). The Interchange Architecture
features OrCAD Capture as the single interface and database for project
management and design entry. The OrCAD Capture interface connects engineers to
a choice of products for component information management; mixed
schematic/VHDL, FPGA and CPLD design; simulation and synthesis; analog/mixed-
signal design; and PCB layout. Release 9.0 permits a design to be easily
divided in its early stages and merged later for system integration, test and
implementation.
OrCAD's software products are designed as 32-bit applications, each of which
operates in an integrated fashion with other applications for Microsoft
Windows.
OrCAD Capture is a 32-bit schematic capture tool that enables the
acceleration of the engineer's overall design process for both FPGA and PCB
design. Its integrated design management tools allow design engineers to
browse their schematic database to find and edit objects, and to reuse
portions of their designs. OrCAD Capture includes: (i) a schematic editor
designed to speed the drawing of complex schematics; (ii) a part editor that
allows designers to modify any of the more than 20,000 included library parts
or to create new ones easily; (iii) an electrical rules checking program that
detects and flags common design errors on the schematic page; and (iv)
features to produce output such as net-lists, bills of material and design
documentation.
OrCAD Capture Component Information System ("OrCAD Capture CIS") adds to
OrCAD Capture a design data and library management tool. This tool links parts
placed in an OrCAD Capture design with the information in the manufacturers'
in-house part databases and a selection of those found on the Internet through
an Internet Component Assistant ("ICA"). The ICA enables users to access an
Internet-parts catalog of over 200,000 components, complete with data sheets
and schematic symbols. This increases the ease and efficiency of part
selection for the designer and transfers information to create correct bills
of material and net-lists to the schematics.
The OrCAD Layout family of products allows rapid completion of most
mainstream PCBs. OrCAD Layout's 16-layer autorouter applies proprietary "push-
and-shove" technology to enable high density routing. OrCAD's interactive
routing gives design engineers the power of "user-assisted" autorouting to
precisely control critical routes. OrCAD Layout Plus adds shape-based
autorouting, automatic cluster placement, component push-and-shove, auto-
interactive placement, auto-path completion and single-layer autorouting.
OrCAD Layout Engineers Edition is suitable for use by engineers, PCB designers
and technicians who do not require an autorouter.
OrCAD Express is an integrated design environment for the design of FPGAs
and CPLDs. Through OrCAD's Interchange Architecture, it extends OrCAD Capture
or OrCAD Capture CIS for designing programmable logic devices of every
complexity. OrCAD Express integrates Very High Speed Integrated Circuit
Hardware Description Language ("VHDL"), schematic, and mixed-mode design
entry, simulation, and synthesis from Exemplar Logic, targeted to vendor
place-and-route tools, into a single application. With OrCAD Express,
engineers can design board-level systems with FPGAs and CPLDs from OrCAD
Solution Partners such as Actel Corporation, Altera Corporation, Lattice
Semiconductor Corporation, Lucent Technologies, Inc., Philips Semiconductor,
Vantis Corporation, and Xilinx, Inc., as well as a variety of simple PLDs from
a number of vendors.
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OrCAD Express Component Information System ("OrCAD Express CIS") adds to
OrCAD Express a design data and library management tool. This tool links parts
placed in an OrCAD schematic design with the information in the manufacturers'
in-house part databases and a selection of those found on the Internet through
an Internet Component Assistant ("ICA"). The ICA enables users to access an
Internet-parts catalog of over 200,000 components, complete with data sheets
and schematic symbols. This increases the ease and efficiency of part
selection for the designer and transfers information to create correct bills
of material and net-lists to the schematics.
OrCAD Schematics is a graphical EDA front-end that speeds the process of
designing an electronic system. Engineers using OrCAD Schematics can create a
schematic, simulate it, and prepare it for PCB layout, all with the same 32-
bit Windows-standard user interface. Its "Design Journal" capability allows
engineers to explore alternative solutions simultaneously, enabling them to
create better designs faster. OrCAD Schematics includes (i) a schematic editor
that is integrated with OrCAD's other products; (ii) a design manager that
allows design engineers to browse their design workspace; (iii) a parts
library, containing more than 40,000 parts, together with a part editor and
wizard that allows designers to quickly modify existing parts or create new
ones; and (iv) features to create reports and send design data to other tools,
such as AutoCAD.
OrCAD PSpice A/D is an analog/digital simulator that offers the design
engineer close integration between analog and digital designs, and integrates
both simulation and waveform analysis for mixed analog and digital systems.
Many of today's electronic circuits combine both analog and digital
components. OrCAD PSpice A/D accelerates the design of these circuits by
providing simulation and analysis of the system before it is built. OrCAD
PSpice A/D is integrated with OrCAD Capture or OrCAD Capture CIS for design
entry through OrCAD's Interchange Architecture. OrCAD PSpice A/D includes (i)
a graphical waveform display and analysis program that allows engineers to
view and calculate circuit performance; (ii) a library of over 10,000 models
for analog and digital parts; and (iii) a graphical simulation model that
allows engineers to modify models and create new ones.
OrCAD PSpice is an analog only simulator that can be integrated with OrCAD
Capture or OrCAD Capture CIS to facilitate design entry through OrCAD's
Interchange Architecture and allows engineers to analyze and refine their
designs in a single Windows-based graphical environment. The analysis
capabilities (such as parametric analysis and Monte Carlo analysis) of OrCAD
PSpice give engineers an understanding of circuit performance that enables
them to create better designs. OrCAD PSpice is integrated with OrCAD Capture
and includes (i) a graphical waveform display and analysis program that allows
engineers to view and calculate circuit performance; (ii) a library containing
more then 8,500 analog part models; and (iii) a graphical simulation model
editor that allows engineers to modify models and create new ones.
OrCAD PSpice A/D Basics+ and OrCAD PSpice Basics are entry-level versions of
OrCAD PSpice A/D and OrCAD PSpice.
OrCAD PCBoards assists in the layout of printed circuit boards. It is
integrated with OrCAD Schematics and OrCAD PSpice A/D, allowing engineers to
do both circuit design and layout to improve overall circuit performance and
time-to-market. OrCAD PCBoards includes the industry leading Cadence (formerly
Cooper & Chyan Technology) SPECCTRA Shaped Based autorouter to provide fast
routes and high completion rates. OrCAD PCBoards also includes a library of
more than 1,400 footprints, and an interactive footprint editor that enables
designers to modify existing footprints or create new ones.
OrCAD DesignLab enables engineers to design in an integrated manner. Within
this integrated design environment engineers can move back and forth between
creating the schematic diagram, simulating both analog and digital circuits,
synthesizing both PLDs and CPLDs, designing and simulating systems containing
Xilinx FPGAs, and laying out PCBs. OrCAD DesignLab includes OrCAD Schematics,
OrCAD PSpice A/D and OrCAD PCBoards. It also includes additional features for
PLD, CPLD and FPGA design.
Since the completion of the MicroSim merger in January 1998, OrCAD has not
actively marketed OrCAD Schematics, OrCAD PCBoards, OrCAD DesignLab or OrCAD
PSpice A/D Basics.
OrCAD's integrated solutions address the entire process for designing PCBs
and programmable logic devices. OrCAD's products are intended to be intuitive
and relatively easy to use by a broad range of electronics
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designers. OrCAD's products include on-line help and tutorials to help design
engineers become productive quickly, often within just a few days. In
addition, OrCAD's products feature a familiar Windows user interface and can
be used with other Windows applications, such as Microsoft Word and Microsoft
Excel. This eliminates the need for separate platforms for design and office
automation applications. In addition, OrCAD software can be linked to place-
and-route software from the leading vendors of programmable logic devices.
OrCAD believes that the EDA market is trending toward greater use of the
Microsoft Windows NT operating system, and anticipates that the use of Windows
NT-based products in the EDA market will grow and expand. Accordingly, all of
the new products introduced by OrCAD (and its acquired companies) during its
preceding and current fiscal year, and all of the products OrCAD is currently
developing, are designed for use on Microsoft's Windows NT operating systems
and the PC platform. Any factor adversely affecting the demand for or use of
the Microsoft Windows operating systems or PCs, for EDA applications, could
result in a material adverse effect on OrCAD's business, financial condition
and results of operations.
Software products as complex as those offered by OrCAD may contain defects
or failures when introduced or when new versions are released. OrCAD has in
the past discovered software defects in certain of its products and may
experience delays or lost revenue to correct such defects in the future. There
can be no assurance that, despite testing by OrCAD, errors will not be found
in new products or versions after commencement of commercial shipments,
resulting in loss of market share or failure to achieve market acceptance. Any
such occurrence could have a material adverse effect upon OrCAD's business,
financial condition or results of operations.
Marketing and Sales
OrCAD markets and sells its products worldwide through a variety of
channels. In North America, OrCAD markets and sells its products directly
through its marketing and inside sales organizations which are supplemented by
a field sales force and application engineers. OrCAD designs its marketing
programs to reinforce the recognition of its brand through integrated
advertising, direct mail, electronic marketing, and other promotional
activities. OrCAD's sales effort is designed to stimulate, qualify and respond
effectively to the leads generated by the marketing programs. OrCAD also
generates leads through customer and consultant referrals. To effectively
target and measure all of these efforts, OrCAD has invested in an information
system that tracks contacts with customers and prospects. OrCAD's distribution
strategy is intended to address the mainstream electronic design market in a
productive, cost-effective manner. OrCAD believes that its direct field sales
force will allow it to better meet the unique buying requirements of
management in large organizations. OrCAD intends to use its penetration at the
individual and group level in large organizations to help achieve enterprise-
wide standardization on its products.
OrCAD maintains an ongoing program of market research based on industry
reports, customer input, surveys, and frequent communication with value added
resellers ("VARs"). This research helps OrCAD to set priorities for product
development, technical support, and other functional areas. Trade shows and
OrCAD's training, consulting, and implementation services provide additional
means of soliciting customer feedback.
Direct Sales. OrCAD's direct sales effort consists primarily of an inside
sales force supplemented with a field sales presence. Inside sales are
typically generated by inbound inquiries stimulated by OrCAD's marketing
programs, additional sales to existing customers, and references from
customers. OrCAD further believes inside sales has been a cost-effective means
of distributing its products and gaining customer acceptance. OrCAD believes
that its direct field sales force will allow it to better meet the unique
requirements of selling directly to management at large organizations.
Indirect Sales. OrCAD's VARs are key components of OrCAD's sales and
marketing strategy in international markets, outside of Japan and the United
Kingdom ("U.K."). VARs provide local technical support and sometimes local
language documentation, and run a variety of direct marketing programs that
build on materials developed for the North American direct marketing efforts.
OrCAD derived approximately $15.1 million, $16.7 million and $16.6 million, or
approximately 32%, 38% and 45% of its total revenue from international sales
for the years ended December 31, 1998, 1997 and 1996, respectively.
Substantially all of OrCAD's international revenue to date has been derived
from indirect sales made by its VARS and Japanese
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subsidiary. OrCAD acquired certain assets of its U.K. distributor in 1998 to
increase its direct presence in that country. Beyond North America, Japan and
the U.K., OrCAD distributes its products through leading EDA VARs.
Because OrCAD's products are used by professional engineers and other
technical personnel, effective VARs must possess sufficient technical,
marketing and sales resources and must devote these resources to sales
efforts, customer education, training, consulting and support. Only a limited
number of potential VARs possess these criteria. There can be no assurance
that OrCAD will be able to attract and retain a sufficient number of qualified
VARs to successfully market OrCAD's products, and the failure to do so would
have a material adverse effect on OrCAD's business, financial condition and
results of operations. OrCAD's relationship with its VARs is usually
established through a formal reseller agreement, which generally may be
terminated by either party without cause. There can be no assurance that any
VAR will continue to represent OrCAD's products, and the inability to retain
VARs could have a material adverse effect on OrCAD's business, financial
condition and results of operations.
Strategic Relationships. OrCAD has strategic relationships with and works
closely with other companies to develop and market their products and to
provide customers with application-specific solutions. In addition, OrCAD has
developed relationships with a number of FPGA and CPLD vendors such as Actel
Corporation, Altera Corporation, Lattice Semiconductor Corporation, Lucent
Technologies Inc., Philips Semiconductor, Vantis Corporation, and Xilinx, Inc.
for the purpose of marketing integrated solutions to joint prospects and
customers.
Service and Support
OrCAD believes that to compete in the desktop EDA marketplace, it must
provide a unique variety of support services, including customer service,
software implementation, technical support, training and consulting services.
Customers can also license OrCAD products on-line, as well as connect with
technical support services over the Internet through links built directly into
the Company's current software products.
OrCAD offers product support agreements that provide customers with 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. OrCAD has
created programs for both in-house and on-site training for all products. In
North America, OrCAD has developed a strong technical support capability
comprised primarily of electrical engineers who understand the customers'
design processes and OrCAD's products. Internationally, OrCAD Japan, OrCAD
U.K., independent VARs and distributors provide support to OrCAD customers. In
addition, OrCAD's domestic technical support resources are available to
support OrCAD's international markets.
Product Development
OrCAD's product development process is customer-centric and team-based. The
product development process integrates a product marketing group, which
researches customer requirements, with program management and is supported by
software development, quality assurance, and technical communications teams.
As of December 31, 1998, there was a total of 101 people in the aforementioned
groups. General technology directions for OrCAD's future product development
include productivity improvements for target applications; language-based
design and synthesis; design management; component-information systems
development; support for advanced PCB routing technology and integration of
the overall design process. OrCAD has a Windows C++ development environment,
in which it develops its products using Microsoft Foundation Class UI objects.
In 1998, 1997, and 1996, OrCAD invested 24%, 25% and 25% of revenue,
respectively, in product development. All software development costs are
expensed as incurred.
The EDA industry is characterized by rapid technological change, frequent
new product introductions, evolving industry standards, and changing customer
requirements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
un-marketable. OrCAD believes that it must continue to commit substantial
resources to product development and, that its future success will depend on
its continued ability to enhance its current products and to develop or
acquire new products that keep pace with emerging industry standards, changing
customer requirements, technological developments and Internet-based business
initiatives. There can be no assurance that OrCAD will be successful in
developing and
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marketing any such new products, product enhancements, or Internet-based
business initiatives, or that such new products, enhancements, or Internet-
based business initiatives will adequately meet the requirements of the
marketplace and achieve market acceptance. In the past, OrCAD has experienced
delays in its introduction of product enhancements and new products. If OrCAD
is unable, for technological or other reasons, to develop and introduce
products in a timely manner in response to changing market conditions or
customer requirements, OrCAD's business, financial condition and results of
operations will be materially and adversely affected.
COMPETITION
The EDA industry is highly competitive. OrCAD currently competes in the
Windows EDA market directly with Viewlogic Systems, Inc. ("Viewlogic") and a
number of other smaller, privately held companies. Viewlogic offers Windows
and UNIX-based products. OrCAD also faces competition from larger vendors of
traditional UNIX-based EDA products. Some of these companies, such as Cadence
Design Systems, Inc., Synopsys Inc., Mentor Graphics Corp., and others, have
announced or released Windows-based products. A number of OrCAD's competitors
have significantly greater financial, technical and marketing resources than
OrCAD, and strong name recognition. There can be no assurance that these
competitors will not use their superior resources and visibility, and
installed customer bases, to successfully develop better products and/or
market their products more effectively than those of OrCAD. In particular, as
a result of the wide acceptance of UNIX-based EDA tools, vendors of such tools
have established long-term relationships with many of OrCAD's current and
potential customers, and may have the ability to offer these customers a broad
suite of Windows and UNIX-based products to satisfy the entire range of their
design needs. Finally, in addition to competition from EDA software vendors,
OrCAD faces competition from the internal design groups of many of its
customers, who design and develop their own customized schematic capture,
simulation or synthesis tools for their own particular needs and therefore may
be reluctant to purchase products offered by OrCAD or other EDA vendors. There
can be no assurance that OrCAD will be able to convert such internal design
groups into users of OrCAD's products. More generally, there can be no
assurance that OrCAD will be able to compete successfully against current and
future competitors, both direct and indirect, or that competitive pressures or
generally adverse economic conditions faced by OrCAD will not materially
adversely affect its business, financial condition and results of operations.
PROPRIETARY RIGHTS
OrCAD's success is heavily dependent upon its proprietary software
technology. OrCAD currently relies on a combination of trade secret, copyright
and trademark laws, and contractual provisions to protect its proprietary
rights in its software products. OrCAD has historically shipped its software
with security devices to all customers outside of the United States and
Canada. With the first customer shipment of the Release 9.0 product line in
December 1998, OrCAD began locking its products sold in North America. OrCAD
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. OrCAD does not
license or release the source code for its proprietary software to its
customers, except in connection with OEM development agreements and a fraction
of the PSpice software, which is sold as a model development product. Despite
these precautions, there can be no assurance that a third party will not copy
or otherwise obtain and use OrCAD's products or technology without
authorization, or develop similar or superior technology independently. In
particular, OrCAD distributes its products pursuant to "shrink-wrap" licenses.
There can be no assurance that such licenses are enforceable.
In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. Although OrCAD believes
that its products do not infringe on the proprietary rights of third parties,
and although OrCAD has received no communications from third parties alleging
the infringement of the proprietary rights of such parties, there can be no
assurance that infringement claims will not be asserted against OrCAD in the
future and that any such claims will not require OrCAD to enter into costly
litigation. Irrespective of the validity or the successful assertion of such
claims, any such litigation could result in significant diversions of effort
by OrCAD's technical and management personnel, as well as OrCAD's incurrence
of significant costs with respect to the defense thereof, and could have a
material adverse effect on OrCAD's business, financial condition and results
of operations. In addition, if any claims or actions are asserted against
OrCAD, OrCAD may choose to or be required to obtain a license under a third
party's intellectual property rights. There can be no assurance that under
such circumstances a license would be available upon reasonable terms or at
all.
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EMPLOYEES
As of December 31, 1998, OrCAD had 261 employees, including 121 in marketing
and sales, 101 in research and development and 39 in general and
administrative capacities. Of these, 170 are located at the OrCAD headquarters
in Beaverton, Oregon, 44 are located in the Irvine, California office, 20 are
located at OrCAD Japan in Yokohama, Japan, 16 are located at OrCAD U.K. in
Basingstoke, England, and 11 are located throughout the United States and
Canada at field sales offices. None of OrCAD's employees is represented by a
labor union or is subject to a collective bargaining agreement. OrCAD believes
that its employee relations are good.
OrCAD's future success depends in significant part upon the continued
service of its key senior management, professional and technical personnel.
OrCAD's future success also depends on its continuing ability to attract, hire
and retain highly qualified technical, professional and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
OrCAD can retain its key employees or that it can attract, assimilate or
retain other highly qualified personnel in the future.
ITEM 2. PROPERTIES
OrCAD occupies approximately 39,000 square feet of space at its headquarters
in Beaverton, Oregon under a lease expiring in 2001, subject to OrCAD's right
to extend. In addition, OrCAD occupies approximately 43,000 square feet of
space at a product development facility in Irvine, California under a lease
expiring in 2004, subject to OrCAD's right to extend. OrCAD's subsidiary in
Japan leases approximately 4,141 square feet for its office in Yokohama.
OrCAD's subsidiary in the U.K. leases approximately 3,700 square feet for its
office in Basingstoke, England.
On February 20, 1998, OrCAD entered into an agreement expiring in 2009 to
lease approximately 79,000 square feet of space for a new headquarters in
Tigard, Oregon, which agreement was amended on April 2, 1998 to increase the
amount of leased space to a total of approximately 106,000 square feet. At the
time of entering into such lease agreement, OrCAD paid a non-refundable
deposit of $147,000, and at the time of entering into the amendment, paid an
additional $162,000 as a non-refundable deposit.
OrCAD expects to move into its new headquarters in Tigard, Oregon in July
1999. Thereafter, OrCAD plans to sub-lease approximately 20,000 square feet of
its new headquarters, as well as the 39,000 square feet of its current
headquarters in Beaverton, Oregon for the remainder of 1999. OrCAD believes
that its existing facilities, including the proposed new headquarters and
expansion options, are adequate for its current and foreseeable future needs
and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
OrCAD is currently a party to an arbitration proceeding instituted by
Deutsch Technology Research ("DTR") before the American Arbitration
Association. DTR seeks to recover more than $1.0 million in damages from OrCAD
in this arbitration. DTR's claims arise under an agreement OrCAD and DTR
entered into in March 1997 ("DTR Agreement"), pursuant to which OrCAD agreed
to market DTR's products and not to market competing products. In January
1998, OrCAD merged with MicroSim Corporation ("MicroSim"), a company which
sold products which competed with DTR's products. OrCAD's merger with MicroSim
breached the DTR Agreement. OrCAD has attempted, without success, to negotiate
a settlement with DTR. An arbitrator has been assigned for this dispute but no
hearing date has been set. In addition, DTR filed a lawsuit in March 1999
against MicroSim in Santa Clara County Superior Court alleging that MicroSim
tortiously interfered with DTR's contractual and prospective relationship with
OrCAD.
From time to time, OrCAD becomes involved in ordinary, routine or regulatory
legal proceedings incidental to the business of OrCAD. OrCAD is not presently
a party to any litigation, the outcome of which is expected to have a material
adverse effect on OrCAD's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
OrCAD's Common Stock commenced trading on the Nasdaq National Market System
under the symbol "OCAD" on March 1, 1996. As of March 3, 1999, there were
1,532 stockholders of record of OrCAD's Common Stock. OrCAD has never declared
or paid cash dividends on its Common Stock. OrCAD currently intends to retain
the earnings from operations for use in the operation and expansion of its
business and does not anticipate paying cash dividends with respect to the
Common Stock in the foreseeable future. The following table sets forth, for
the quarterly periods shown, the range of high and low closing prices for
OrCAD's Common Stock on the Nasdaq National Market System.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Common Stock Price Range:
High........................ $11.00 $11.38 $14.75 $14.88
Low......................... $ 6.38 $ 6.13 $10.25 $ 7.13
<CAPTION>
Quarters Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Common Stock Price Range:
High........................ $ 9.94 $12.25 $10.25 $ 9.50
Low......................... $ 8.00 $ 8.94 $ 6.63 $ 4.00
</TABLE>
During the three months ended December 31, 1998, OrCAD sold securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act") upon the exercise of stock options granted under OrCAD's
stock option plans. An aggregate of 13,032 shares of Common Stock were issued
at exercise prices ranging from $0.35 to $3.50. These transactions were
effective in reliance upon Rule 701 promulgated pursuant to the authority of
the Securities and Exchange Commission under Section 3(b) of the Securities
Act.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of OrCAD have
been derived from OrCAD's historical consolidated financial statements and
should be read in conjunction with such financial statements and the notes
thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Revenue:
Products.......................... $34,182 $35,385 $31,169 $23,142 $18,345
Service........................... 13,470 8,610 5,865 5,175 3,576
------- ------- ------- ------- -------
Total revenue....................... 47,652 43,995 37,034 28,317 21,921
Cost and expenses:
Cost of revenue--products......... 3,114 4,764 4,142 3,675 3,613
Cost of revenue--service.......... 2,611 1,692 1,503 1,109 973
Research and development.......... 11,508 11,238 9,350 7,249 6,599
Marketing and sales............... 18,767 15,416 11,877 8,793 6,835
General and administrative........ 5,365 4,810 4,793 3,507 2,735
Write-off of purchased software... -- -- -- 1,037 --
Merger and acquisition related
charges.......................... 4,081 2,203 -- 971 --
------- ------- ------- ------- -------
Total cost and expenses............. 45,446 40,123 31,665 26,341 20,755
------- ------- ------- ------- -------
Income from operations.............. 2,206 3,872 5,369 1,976 1,166
------- ------- ------- ------- -------
Other income (expense):
Interest income (expense), net.... 1,742 1,858 1,531 314 (29)
Other, net........................ 13 (17) 65 33 218
------- ------- ------- ------- -------
1,755 1,841 1,596 347 189
------- ------- ------- ------- -------
Income before income taxes.......... 3,961 5,713 6,965 2,323 1,355
Income tax expense.................. 978 1,809 1,699 690 263
------- ------- ------- ------- -------
Net income.......................... $ 2,983 $ 3,904 $ 5,266 $ 1,633 $ 1,092
======= ======= ======= ======= =======
Basic net income per share.......... $ 0.32 $ 0.43 $ 0.61 $ 0.41 $ 0.27
======= ======= ======= ======= =======
Diluted net income per share........ $ 0.31 $ 0.41 $ 0.58 $ 0.24 $ 0.27
======= ======= ======= ======= =======
Shares used in basic net income per
share calculation.................. 9,320 9,165 8,618 4,012 3,982
Shares used in diluted net income
per share calculation.............. 9,519 9,446 9,046 6,853 3,982
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $ 8,454 $31,618 $28,077 $ 8,942 $ 4,462
Working capital..................... 42,316 37,115 36,858 7,774 4,224
Total assets........................ 63,288 56,907 49,734 20,800 12,895
Long-term obligations............... -- 19 205 145 1,038
Total stockholders' equity.......... 50,109 46,154 41,687 12,782 6,250
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this report contain forward-looking
statements within the meaning of the Securities Litigation Reform Act of 1995
that involve risks and uncertainties. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and variations of such
words and similar expressions are intended to identify such forward-looking
statements. OrCAD's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Quarterly Results of
Operations," in this section and under the caption "Risk Factors," as well as
other risks detailed from time to time in OrCAD's SEC reports.
The industry in which OrCAD competes and the markets that it serves are
highly cyclical. OrCAD is dependent upon the semiconductor and, more
generally, the computer and electronics industries. Each of these industries
is characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and gross margin pressures.
Segments of these industries, in each of the United States, Europe and Asia,
have from time to time experienced significant economic downturns
characterized by decreased product demand, reductions in capital expenditures,
production over-capacity, price erosion, work slowdowns and layoffs. In
addition, portions of these industries have experienced downturns at different
times. Over the past few years, most of these electronic industries, excluding
the semiconductor industry more recently, have experienced an extended period
of economic growth in North America and some growth in Europe. A recession in
Japan and other far east nations and recent large fluctuations in the value of
Asian currencies in relation to the U.S. dollar have contributed to economic
slow downs in many Asian economies.
There can be no assurance that such economic growth in North America will
continue, and if it does not, any downturn could be especially severe. OrCAD's
operations may in the future reflect substantial fluctuations from period to
period as a consequence of such industry patterns, general economic conditions
affecting the timing of orders, and other factors affecting capital spending.
There can be no assurance that such factors will not have a material adverse
effect upon OrCAD's business, financial condition and results of operations.
Overview
OrCAD was formed in September 1991 as the successor to prior entities
engaged in developing 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, mixed analog/digital simulation,
programmable logic design and printed circuit board layout. In 1995, OrCAD
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. In 1997, OrCAD introduced OrCAD
Express for Windows, OrCAD Express Component Information System, OrCAD Capture
Component Information System, OrCAD Layout Engineers' Edition, and OrCAD
Enterprise Bridge. Through the acquisition of MicroSim Corporation, OrCAD
introduced the PSpice product family that includes OrCAD PSpice A/D, OrCAD
PSpice, OrCAD PSpice A/D Basics +, OrCAD PSpice Basics and OrCAD Optimizer.
From OrCAD's inception through the first six months of 1995, OrCAD earned
substantially all of its revenue from its DOS-based EDA products. For the year
ended December 31, 1996, and thereafter, Windows-based products have accounted
for more than 90% of OrCAD's product revenue.
In April 1997, OrCAD acquired certain technology and sales personnel from
TEAM Corporation for approximately $1.9 million. The cost of the acquisition
was allocated on the basis of the fair value of the assets acquired. This
allocation resulted in a charge for in-process research and development of
$1.8 million and goodwill of $126,000 at the purchase date. The charge for in-
process research and development resulted from allocating a portion of the
acquisition cost to TEAM's in-process product development that had not reached
technological feasibility. In addition, there are certain contingent amounts
payable annually over the three year period ending April 2000, based on the
achievement of specific revenue milestones. The Company is amortizing the
goodwill over a period of three years.
12
<PAGE>
In June 1997, OrCAD acquired certain technology and development personnel
from Q Point Technology for approximately $720,000. The cost of the
acquisition was allocated on the basis of the fair value of the assets
acquired. This allocation resulted in a charge for in-process research and
development of $433,000, purchased technology capitalization of $248,000 and
goodwill of $39,000 at the purchase date. The charge for in-process research
and development resulted from allocating a portion of the purchase price to Q
Point's in-process product development that had not reached technological
feasibility. OrCAD is amortizing the goodwill and purchased technology over
periods of three years and five years, respectively.
In October 1997, OrCAD entered into an Agreement and Plan of Merger with
MicroSim Corporation ("MicroSim"), a privately held California corporation,
providing for the merger of OCA Merger Corporation, a wholly-owned subsidiary
of OrCAD, with and into MicroSim. The MicroSim merger was consummated on
January 20, 1998, at which time all of the issued and outstanding shares of
MicroSim common stock and all of the outstanding options and other rights to
acquire MicroSim common stock were converted into and exchanged for 2,427,632
shares of OrCAD Common Stock. The MicroSim merger was accounted for as a
pooling-of-interests and accordingly, the results of MicroSim have been
included in the accompanying consolidated financial statements for all periods
presented.
As a result of the MicroSim merger, OrCAD incurred a one-time charge
totaling approximately $4.1 million in the first quarter of 1998, relating
primarily to financial advisory fees, legal and accounting services for both
parties, personnel severance costs, the cancellation and continuation of
contractual obligations and other integration costs.
On April 15, 1998, OrCAD U.K. Ltd., a wholly-owned subsidiary of OrCAD
formed in March 1998, purchased certain assets and assumed certain liabilities
of ARS Microsystems ("ARS") for approximately $1 million. ARS was previously
OrCAD's value added reseller in the U.K. The cost of the acquisition was
allocated on the basis of the estimated fair value of the assets acquired and
the liabilities assumed.
Results of Operations
The following table sets forth for the periods indicated selected items of
OrCAD's statements of operations as a percentage of its total revenue:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1998 1997 1996
---- ---- ----
(As a
percentage of
total revenue)
<S> <C> <C> <C>
Revenue:
Products.................................................. 72% 80% 84%
Service................................................... 28 20 16
--- --- ---
Total revenue.............................................. 100% 100% 100%
Cost and expenses:
Cost of revenue--products................................. 7 11 11
Cost of revenue--service.................................. 5 4 4
Research and development.................................. 24 25 25
Marketing and sales....................................... 39 35 32
General and administrative................................ 11 11 13
Merger and acquisition related charges.................... 9 5 --
--- --- ---
Total cost and expenses.................................... 95 91 85
--- --- ---
Income from operations..................................... 5 9 15
Other income, net.......................................... 3 4 4
--- --- ---
Income before income taxes................................. 8 13 19
Income tax expense......................................... 2 4 5
--- --- ---
Net income................................................. 6% 9% 14%
=== === ===
</TABLE>
13
<PAGE>
Years Ended December 31, 1998, 1997 and 1996
Revenue
OrCAD derives revenue from the licensing of its software products and from
the provision of maintenance, training, and consulting services to customers.
OrCAD 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 ODN which
includes the OrCAD Knowledge Base, the OrCAD Knowledge Exchange, OrCAD Tech
Tips and an electronic Technical Support Connection. Revenue from each product
support agreement is deferred and recognized ratably over the term of the
extended support agreement. Revenue from customer training and consulting is
recognized as services are performed.
Total revenue increased 8% in 1998 to $47.7 million from $44.0 million in
1997. Growth in service revenue, slightly offset by a decline in product
revenue, contributed to the total revenue increase in 1998. Total revenue
increased in 1997 by 19% from $37.0 million in 1996. In 1997, total revenue
increased as a result of growth in both product and service revenue. As a
percentage of total revenue, product revenue decreased to 72% in 1998 from 80%
in 1997 and decreased in 1997 from 84% in 1996. Conversely, service revenue
increased as a percentage of total revenue to 28% in 1998 from 20% in 1997 and
increased in 1997 from 16% in 1996.
Product revenue decreased 3% in 1998 to $34.2 million from $35.4 million in
1997. The decrease in product revenue in 1998 was attributable to increased
sales in the OrCAD Layout product family offset by decreased sales related to
the OrCAD PSpice and OrCAD Express product families. This decrease was
primarily due to decreased sales to Asian markets, reflecting the unfavorable
economic conditions in that region coupled with the fact that Release 9.0 of
the OrCAD product families did not begin shipping until mid-December 1998.
Product revenue increased 14% in 1997 to $35.4 million from $31.2 million in
1996. The increase in product revenue for 1997 was attributable to the
successful introduction of OrCAD Capture CIS, OrCAD Express, OrCAD Express
CIS, OrCAD Layout Engineer's Edition, OrCAD Enterprise Bridge and Release 8.0
of the OrCAD PSpice product family and the introduction of DesignLab. The
addition of a field sales and support organization acquired from TEAM
Corporation and the expansion of the inside sales organization also
contributed to product revenue growth in 1997.
Service revenue increased 56% in 1998 to $13.5 million from $8.6 million in
1997. The increase in service revenue in 1998 is primarily attributable to an
increased emphasis on the OrCAD PSpice product family maintenance revenue in
addition to an increased emphasis on training and consulting revenue, and
renewals of extended support agreements from a larger installed base. Prior to
the MicroSim merger, maintenance on the OrCAD PSpice product family had not
been actively marketed. Service revenue increased 47% in 1997 to $8.6 million
from $5.9 million in 1996. The increase in service revenue in 1997 is
primarily attributable to an increased emphasis on maintenance sales,
increased training and consulting revenue, and renewals of extended support
agreements from a larger installed base.
Total North American revenue increased 19% in 1998 to $32.5 million from
$27.3 million in 1997. Total revenue generated outside of North America
decreased 10% in 1998 to $15.1 from $16.7 million in 1997. As a percentage of
OrCAD's total revenue, North American revenue increased to 68% in 1998 from
62% in 1997 and revenue generated outside of North America decreased to 32% in
1998 from 38% in 1997. The increase in the proportion of revenue generated in
North America in 1998 is primarily attributable to decreased sales to Asian
markets reflecting the unfavorable economic conditions in that region. In
Japan, revenue decreased $1.8 million, or 24%, to $5.7 million in 1998 from
$7.5 million in 1997. Excluding Japan, revenue from the rest of Asia decreased
$526,000, or 23%, to $1.8 million in 1998 from $2.3 million in 1997. In
Europe, however, revenue increased $693,000, or 10%, to $7.6 million in 1998
from $6.9 million in 1997.
Total North American revenue increased 33% in 1997 to $27.3 million from
$20.4 million in 1996. Total revenue generated outside North America remained
relatively constant at $16.7 million and $16.6 million in 1997 and 1996,
respectively. As a percentage of OrCAD's total revenue, North American revenue
increased to 62% in 1997 from 55% in 1996. The increase in the proportion of
revenue generated in North America in 1997 is
14
<PAGE>
primarily attributable to the formation and integration of a field sales force
into the North American sales territory and the introduction of five new
products: OrCAD Capture CIS, OrCAD Express, OrCAD Express CIS, OrCAD Layout
Engineer's Edition, OrCAD Enterprise Bridge and Release 8.0 of the OrCAD
PSpice product family and the introduction of DesignLab. The decrease in the
proportion of revenue generated outside of North America during 1997 was due
in part to exchange rate fluctuations in Japan, slower rates of economic
growth in international economies relative to North America, and the typically
slower initial adoption rate for new products in Europe and Asia.
Cost of Revenue
The cost of product revenue represents the costs associated with the
licensing of OrCAD's products, such as the expenses of reproducing product
documentation, media, packaging, hardware locks, shipping costs and royalties
paid to external developers. The cost of product revenue decreased 35% in 1998
to $3.1 million from $4.8 million in 1997. The cost of product revenue
increased 15% in 1997 to $4.8 million from $4.1 million in 1996. The decrease
in cost of product revenue in 1998 was primarily the result of reduced
material and royalty costs and the consolidation of OrCAD's Irvine, California
shipping function into the Beaverton, Oregon operation, which accounted for
cost reductions of $938,000 and $474,000, respectively. The increase in cost
of product revenue in 1997 was primarily attributable to an increased level of
product sales, higher royalty costs prior to the acquisition of assets from Q
Point Technology, associated with OrCAD Capture CIS and OrCAD Express CIS
relative to other product lines and certain commissions paid to North American
VARs. This increase was slightly offset by reduced shipping costs. As a
percentage of product revenue, cost of product revenue decreased to 9% in 1998
and remained relatively constant at 13% in both 1997 and 1996.
The cost of service revenue includes the costs of providing software
maintenance, such as technical support, software revision releases, and the
costs of providing consulting and training. Cost of service revenue increased
54% in 1998 to $2.6 million from $1.7 million in 1997. Cost of service revenue
increased 13% in 1997 from $1.5 million in 1996. The increase in cost of
service revenue in 1998 is primarily attributable to increased sales of
maintenance contracts and the expansion of OrCAD's Enterprise Service
organization. The increase in cost of service revenue in 1997 reflected
increased service obligations resulting from increased training, product,
upgrade, extended support agreement, and consulting service sales. As a
percentage of service revenue, the cost of service revenue remained relatively
constant at 19% and 20% in 1998 and 1997, respectively, and decreased from 26%
in 1996. The decrease in cost of service revenue in 1997 reflects the
absorption of relatively fixed technical support costs over the increased
service revenue base.
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, as 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 2% to $11.5 million
in 1998 from $11.2 million in 1997 and increased 20% in 1997 to $11.2 million
from $9.4 million in 1996. The increase in research and development expenses
in 1998 reflects an increase in third-party consulting costs, slightly offset
by a decrease in personnel costs. The increase in third-party consulting costs
in 1998 primarily consists of contract engineering fees paid to a development
team in Bangalore, India for services related to the Company's development of
an Internet-parts catalog of component information. The number of employees in
the research and development function decreased to 101 in 1998 from 108 in
1997. The increase in research and development expenses in 1997 is
attributable to increased personnel costs, including costs associated with
increased headcount, recruiting, third party engineering and the engagement of
contract test engineers. The number of employees in the research and
development function increased to 108 in 1997 from 91 in 1996. The
implementation of a new product development process that placed a greater
emphasis on testing throughout the development cycle also contributed to the
increased research and development expense incurred in 1997. As a percentage
of total revenue, research and development expenses remained relatively
constant in 1998, 1997 and 1996 at 24%, 25%, and 25%, respectively. OrCAD
expects research and development expenses to continue to increase in absolute
terms.
15
<PAGE>
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 22% in 1998 to $18.8 million from $15.4 million in 1997 and
increased 30% in 1997 to $15.4 million from $11.9 million in 1996. Marketing
and sales expenses increased in 1998 as a result of increased promotional
activity and further expansion of OrCAD's sales and marketing organizations
after the MicroSim merger. The number of employees in the marketing and sales
departments increased to 121 in 1998 from 87 in 1997. Marketing and sales
expenses increased in 1997 as a result of the addition of a field sales staff,
increased personnel costs, including costs associated with increased
headcount, recruiting, and promotional expenses associated with the
introduction of OrCAD Capture CIS, OrCAD Express, OrCAD Express CIS, OrCAD
Layout Engineer's Edition, OrCAD Enterprise Bridge products, and Release 8.0
of the OrCAD PSpice family of products and the introduction of DesignLab. The
number of employees in the marketing and sales departments increased to 87 in
1997 from 81 in 1996. As a percentage of total revenue, marketing and sales
expenses increased in 1998 to 39% from 35% in 1997, and increased in 1997 from
32% in 1996. OrCAD expects marketing and sales expenses to continue to
increase in absolute terms.
General and Administrative
General and administrative expenses include the costs associated with
OrCAD's executive office, human resources, finance, and administration
functions. General and administrative expenses increased 12% to $5.4 million
in 1998 from $4.8 million in both 1997 and 1996. The increase in 1998 is
primarily the result of increased administrative costs associated with
investor relations, integration and organizational development, and OrCAD's
allowance for doubtful accounts. The number of personnel employed in
administrative functions decreased to 39 in 1998 from 43 in 1997 and decreased
in 1997 from 48 in 1996. As a percentage of total revenue, general and
administrative expenses remained relatively constant in 1998 and 1997 at 11%,
and decreased in 1997 from 13% in 1996. The percentage of total revenue
decrease in 1997 reflects the absorption of essentially unchanged general and
administrative costs in 1997 over a higher revenue base. OrCAD expects general
and administrative expenses to continue to increase in absolute terms.
Merger and Acquisition Related Charges
In 1998, OrCAD incurred merger-related charges of $4.1 million in connection
with the MicroSim merger relating primarily to financial advisory fees, legal
and accounting services, personnel severance costs and the cancellation and
continuation of contractual obligations. Personnel severance costs relate
primarily to the termination of approximately 35 employees, most of whom were
employed by MicroSim, in connection with the elimination and redirection of
certain of MicroSim's general, administrative, sales, and marketing related
functions to OrCAD's Beaverton, Oregon headquarters. OrCAD also recognized
certain costs for asset impairments and the cancellation and continuation of
contractual obligations related primarily to MicroSim's facility lease as a
result of the aforementioned elimination and redirection of operating
functions to Beaverton, Oregon. The cash outflows for each of the respective
merger and acquisition related charges in 1998 were as follows: personnel
severance--$1.6 million; legal, accounting, investment banking and investor
relations--$1.2 million; continuation and cancellation of contractual
obligations--$120,000; asset impairment--$114,000; and other--$325,000.
Payments related to the continuation and cancellation of contractual
obligations are being made in accordance with the terms of the agreements that
existed prior to the consummation of the MicroSim merger.
In connection with OrCAD's acquisition of certain software technology of
TEAM Corporation and Q Point Technology in the second quarter of 1997, OrCAD
expensed approximately $2.2 million of in-process research and development
costs associated with certain technology which had not yet reached
technological feasibility. There were no merger or acquisition related charges
incurred in 1996.
Income from Operations
Income from operations decreased 43% to $2.2 million in 1998 from $3.9
million in 1997. Excluding merger and acquisition related charges of $4.1
million and $2.2 million in 1998 and 1997, respectively, income from
operations increased 3% to $6.3 million in 1998 from $6.1 million in 1997. The
increase in income from
16
<PAGE>
operations in 1998, excluding merger and acquisition related charges, is the
result of lower cost of product revenue and reduced research and development
expenses measured as a percentage of total revenue, partially offset by
increases in marketing and sales, and general and administrative expenses
measured as a percentage of total revenue.
Income from operations decreased 28% in 1997 to $3.9 million from $5.4
million in 1996. Excluding merger and acquisition related charges of $2.2
million in 1997, income from operations increased 13% to $6.1 million in 1997.
The increase in income from operations in 1997, excluding merger and
acquisition related charges, is the result of higher revenue and lower general
and administrative expenses measured as a percentage of total revenue,
partially offset by increased marketing and sales expenses as a percentage of
total revenue.
Other Income, Net
Other income, net primarily consists of interest income, gains and losses on
the disposal of fixed assets, sublease income, royalty income and foreign
currency transaction gains and losses. Interest income consists primarily of
the earnings on available cash balances and marketable securities, which have
generally been invested in short-term money market investments, treasury bills
and corporate debt securities. Other income, net remained constant at $1.8
million in 1998 and 1997. During 1998, OrCAD moved certain of its investments
into securities that are generally exempt from Federal income tax and yield
interest at a lower rate than taxable investment securities.
Other income, net increased in 1997 to $1.8 million from $1.6 million in
1996. Other income, net increased in 1997 due primarily to higher interest
income earned on increased cash, cash equivalents and investment balances
resulting from cash generated from operations and the proceeds of OrCAD's
initial public offering completed in March 1996.
Income Taxes
OrCAD's effective tax rate for 1998 and 1997 was 25% and 32%, respectively.
This rate differs from the combined federal and state statutory rate of
approximately 38.5% primarily due to the benefit of OrCAD's foreign sales
corporation, utilization of research and experimentation tax credits, and
certain investment income which is exempt from Federal tax. Income tax expense
decreased 46% in 1998 to $978,000 from $1.8 million in 1997.
OrCAD's effective tax rate for 1996 was 24%. The increase in OrCAD's
effective tax rate during 1997 primarily resulted from the use of net
operating loss carryforwards in 1996. Income tax expense was $1.8 million in
1997 as compared to $1.7 million in 1996.
OrCAD has in the past and continues to reserve for certain non-current
deferred tax assets for which OrCAD believes, based on evaluation of negative
and positive evidence, it is more likely than not that such deferred tax
assets will not be realized due to continued volatility in earnings,
uncertainty surrounding domestic and international economic conditions,
especially lower than expected revenues in Asia, and risks inherent in
successfully integrating the operations of acquired companies.
At December 31, 1998 and 1997, OrCAD had reserved for a significant portion
of its non-current deferred tax assets and released substantially all of its
valuation allowance previously established for its current deferred tax
assets. The valuation allowance for deferred tax assets decreased in 1998 by
$96,000, from $1.6 million to $1.5 million, primarily due to a decrease in
non-current deferred tax assets attributable to net operating loss
carryforwards and acquired in-process research and development costs. The
valuation allowance for deferred tax assets decreased in 1997 by $239,000 from
$1.8 million to $1.6 million. The decrease in the valuation allowance was due
to the net operating loss carryforward utilization offset by the establishment
of a non-current deferred tax asset related to acquired in-process research
and development created in 1997 as a result of the Q Point Technology and TEAM
Corporation acquisitions.
17
<PAGE>
Quarterly Results of Operations
OrCAD's quarterly operating results have in the past varied and may in the
future vary significantly depending on factors such as increased competition,
timing of new product announcements, releases and pricing changes by OrCAD or
its competitors, length of sales cycles, market acceptance or delays in the
introduction of new or enhanced versions of OrCAD's products, timing of
significant orders, adoption rate of Internet-based business initiatives,
seasonal factors, mix of direct and indirect sales, product mix, changes in
tax rates, domestic and international economic conditions, and changes in the
financial condition of or the relationship with distributors, merger and
acquisition activities, and the integration of acquired entities in the EDA
industry specifically. In particular, OrCAD's quarterly operating results have
in the past fluctuated as a result of the timing of the introduction of new
products and new versions of existing products to the market, with customers
waiting to place orders until new or enhanced products became available and
met quality and performance levels required for widespread adoption. Quarterly
operating results have also fluctuated as a result of seasonality of customer
buying patterns. A substantial portion of OrCAD's revenue in each quarter
results from orders booked in that quarter, a significant portion of a
quarter's revenue is often booked in the final month of a quarter. Revenue
from quarter to quarter is difficult to forecast, as minimal backlog exists at
the end of any quarter because OrCAD's products typically are shipped and
revenue recognized promptly after receipt of customers' orders. OrCAD'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 expenses
vary with its revenue. OrCAD has recently experienced rapid growth and
expansion. There can be no assurance that OrCAD will be able to grow in future
periods, that it will be able to sustain its historical rate of revenue
growth, or that its operations will remain profitable. Due to the foregoing
factors, OrCAD believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Selected Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
Three-Month Periods Ended
---------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Mar.31 June 30 Sept.30 Dec.31 Mar.31 June 30 Sept.30 Dec.31
------- ------- ------- ------ ------ ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products............... $ 8,806 $8,697 $7,842 $8,837 $8,086 $8,842 $7,961 $10,496
Service................ 2,835 3,204 3,394 4,037 1,781 2,069 2,292 2,468
------- ------ ------ ------ ------ ------ ------ -------
Total revenue........... 11,641 11,901 11,236 12,874 9,867 10,911 10,253 12,964
Cost and expenses:
Cost of revenue-
products ............. 864 698 657 895 1,187 1,206 1,207 1,164
Cost of revenue-service
...................... 561 614 690 746 411 382 426 473
Research and
development........... 3,042 2,744 2,833 2,889 2,713 2,775 2,879 2,871
Marketing and sales.... 4,655 4,630 4,559 4,923 3,282 3,959 3,849 4,326
General and
administrative........ 1,361 1,273 1,410 1,321 1,133 1,157 1,209 1,311
Merger and acquisition
related charges....... 4,081 -- -- -- -- 2,203 -- --
------- ------ ------ ------ ------ ------ ------ -------
Total cost and
expenses............... 14,564 9,959 10,149 10,774 8,726 11,682 9,570 10,145
------- ------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations............. (2,923) 1,942 1,087 2,100 1,141 (771) 683 2,819
Other income, net....... 494 374 382 505 448 473 436 484
------- ------ ------ ------ ------ ------ ------ -------
Income (loss) before
income taxes........... (2,429) 2,316 1,469 2,605 1,589 (298) 1,119 3,303
Income tax expense
(benefit).............. (850) 810 474 544 609 (138) 405 933
------- ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... $(1,579) $1,506 $ 995 $2,061 $ 980 $ (160) $ 714 $ 2,370
Basic net income (loss)
per share.............. $ (0.17) $ 0.16 $ 0.11 $ 0.22 $ 0.11 $(0.02) $ 0.08 $ 0.26
======= ====== ====== ====== ====== ====== ====== =======
Diluted net income
(loss) per share....... $ (0.17) $ 0.16 $ 0.10 $ 0.22 $ 0.10 $(0.02) $ 0.08 $ 0.25
======= ====== ====== ====== ====== ====== ====== =======
</TABLE>
18
<PAGE>
Liquidity and Capital Resources
December 31, 1998 and 1997
Working capital was $42.3 million and $37.1 million at December 31, 1998 and
1997, respectively. OrCAD's current ratio at December 31, 1998 was 4.2:1.
OrCAD believes that current cash and investment balances and cash flows
generated from operations are sufficient to meet current and anticipated
future capital requirements for at least the next twelve months. OrCAD
currently has no significant capital commitments, other than commitments under
facility operating leases and purchases related to furniture, fixtures, and
equipment for the Company's new corporate headquarters in Tigard, Oregon. The
Company expects to move into its new headquarters in July of 1999. OrCAD has
from time to time evaluated and continues to evaluate opportunities for
acquisitions and expansion and, consistent with this practice, is currently
engaged in preliminary discussions with other parties regarding possible
acquisitions. Any such transactions, if consummated, may use a portion of
OrCAD's working capital or necessitate bank borrowings. No assurance can be
given that borrowing capacity will be available or that, if available, such
financing will be obtainable on terms favorable to OrCAD or its stockholders.
Increases and decreases in cash and cash equivalents are the result of the
generation or use of cash in operating, investing and financing activities.
Cash and cash equivalents decreased $23.2 million in 1998 to $8.5 million from
$31.6 million at December 31, 1997. Cash and cash equivalents increased $3.5
million in 1997 from $28.1 million in 1996. Cash provided by operating
activities increased $2.8 million to $8.8 million in 1998 from $5.9 million in
1997. Cash provided by operating activities decreased $232,000 in 1997 to $5.9
million from $6.2 million in 1996. Cash provided by operating activities
increased in 1998 primarily due to increases in depreciation and amortization
and deferred revenue partially offset by reductions in accounts receivable. An
increase in accounts receivable accounted for a substantial portion of the
decrease in cash provided by operating activities in 1997.
Cash used by investing activities in 1998 of $32.7 million was primarily due
to the purchases of investment securities and the acquisition of fixed assets,
partially offset by proceeds from matured investment securities. Cash used in
investing activities in 1997 of $2.5 million was primarily comprised of fixed
asset and software technology purchases offset by the net proceeds from the
maturity of investment securities.
Cash provided by financing activities in 1998 was $661,000 resulting from
issuance of common stock through the employee stock purchase plan and the
exercise of stock options. The issuance of common stock through the employee
stock purchase plan and the exercise of stock options, partially offset by
repurchases of common stock, accounted for the $172,000 of cash provided by
financing activities in 1997.
The functional currencies of OrCAD Japan and OrCAD U.K. are the Japanese yen
and the British pound, both of which must be translated into U.S. dollars for
consolidated financial reporting. Generally, Japanese sales are denominated in
the Japanese yen. During the year ended December 31, 1998 the U.S. dollar
weakened by approximately 15%. The weakening of the U.S. dollar in 1998
resulted in higher reported revenue and operating expenses due to translation
of the Japanese yen to U.S. dollars for consolidated financial reporting.
During the year ended December 31, 1997 the U.S. dollar strengthened by
approximately 13% against the Japanese yen. The strengthening of the U.S.
dollar in 1997 resulted in lower reported revenue and operating expenses due
to translation of the Japanese yen to U.S. dollars for consolidated financial
reporting. As such, OrCAD's business and operating results will be impacted by
the effects of future U.S. dollar and Japanese yen currency fluctuations. The
British pound has not fluctuated materially against the U.S. dollar since the
ARS acquisition in April 1998. However, significant fluctuations in the value
of the British pound against the U.S. dollar could have a material impact on
OrCAD's business, financial condition, and results of operations.
In February 1999, OrCAD announced its intention to repurchase up to 500,000
shares of its outstanding common stock. Under the new repurchase program,
common stock may be purchased from time-to-time in the open market and
transactions may be negotiated based on market conditions. Pursuant to this
program, as of March 30, 1999, OrCAD had spent a total of $887,000 to
repurchase 125,000 shares at prices ranging from $7.08 to $7.12 per share.
19
<PAGE>
Year 2000
OrCAD is aware of the potential inability of computer programs to adequately
process date information after December 31, 1999 (the year 2000 issue). OrCAD
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 OrCAD's product offering is not expected to have any
material adverse effect on OrCAD's business, financial condition or results of
operations.
In addition, OrCAD has implemented 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. OrCAD believes
that it will be able to complete its year 2000 compliance review and make any
necessary modifications prior to the end of 1999. OrCAD further believes that
such a review and modification, if necessary, will not require OrCAD to incur
any additional material expense. However, the compliance of systems acquired
from third parties is dependent on factors outside OrCAD's control. If key
systems, or a significant number of systems fail as a result of year 2000
problems, OrCAD could incur substantial expense and experience a disruption of
business operations, which would potentially have a material adverse effect on
OrCAD's business, financial condition and results of operations.
Furthermore, the purchasing patterns of customers and potential customers
may be affected by the year 2000 issue as companies may be required to devote
significant resources to correct or replace their current software systems for
year 2000 compliance. These expenditures may result in reduced funds available
to purchase OrCAD's software products which could have a materially adverse
effect on OrCAD'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 respect to OrCAD's computer systems
or in connection with the interface with OrCAD's major vendors or suppliers.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of position ("SOP") 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. This statement of position is
effective for fiscal years beginning after December 15, 1998. OrCAD does not
expect SOP 98-1 to have a material impact on its consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. OrCAD does not expect SAFS 133 to have a
material impact on its consolidated financial statements.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." This
statement of position amends certain paragraphs of SOP 97-2 to require
recognition of revenue using the residual method for certain transactions.
Under the residual method, revenue is recognized as follows: (1) the total
fair value of undelivered elements, as indicated by vendor specific objective
evidence, is deferred and subsequently recognized in accordance with the
relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. SOP 98-9 is effective
for fiscal years beginning after March 15, 1999. Also, the provisions of SOP
98-4 will continue to be deferred until the date SOP 98-9 becomes effective.
OrCAD does not expect SOP 98-9 to have a material impact on its consolidated
financial statements.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company mitigates its risk by
diversifying its investments among high credit quality securities in
accordance with the Company's investment policy. The Company does not hedge
any interest rate exposures.
Foreign Currency Risk
The Japanese yen is the functional currency of the Company's subsidiary in
Japan and the British pound is the functional currency of the Company's
subsidiary in the U.K. The Company occasionally enters into foreign exchange
forward contracts to hedge certain balance sheet exposures and inter-company
balances against future movements in foreign exchange rates. As of December
31, 1998, there were no forward contracts outstanding. The Company also
maintains cash balances denominated in currencies other than the U.S. dollar.
If foreign exchange rates were to weaken against the U.S. dollar, the Company
believes that the fair value of these foreign currency amounts would decline
by an immaterial amount.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
OrCAD, Inc.:
We have audited the accompanying consolidated balance sheets of OrCAD, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OrCAD,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations, and their cash flows for each of the years in the three year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
February 1, 1999, except for
Note 11 which is as of
February 22, 1999
22
<PAGE>
OrCAD, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................. $ 8,454 $31,618
Short-term investments..................................... 36,038 3,408
Trade accounts receivable, net of doubtful accounts and
sales return allowances of $1,018 and $793, respectively.. 7,990 8,800
Inventory, net............................................. 382 675
Other current assets....................................... 2,631 3,348
------- -------
Total current assets..................................... 55,495 47,849
------- -------
Investments, long-term....................................... -- 2,722
Fixed assets, net............................................ 3,616 3,360
Purchased software technology, net........................... 255 474
Goodwill and intangible assets, net.......................... 2,734 2,378
Other assets................................................. 1,188 124
------- -------
Total assets............................................. $63,288 $56,907
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................... $ 734 $ 661
Accrued payroll and related liabilities.................... 1,978 2,241
Accrued liabilities........................................ 2,683 1,870
Accrued income taxes....................................... 1,192 1,081
Deferred revenue........................................... 6,592 4,881
------- -------
Total current liabilities................................ 13,179 10,734
Deferred tax liabilities..................................... -- 19
------- -------
Total liabilities........................................ 13,179 10,753
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 2,000 shares authorized
and none issued and outstanding........................... -- --
Common stock, par value $.01; 16,000 shares authorized;
9,394 and 9,239 shares issued and outstanding,
respectively.............................................. 94 92
Additional paid-in capital................................. 38,476 37,583
Retained earnings.......................................... 11,587 8,604
Accumulated other comprehensive loss....................... (35) (78)
Notes receivable--employee stock purchases................. (13) (47)
------- -------
Total stockholders' equity............................... 50,109 46,154
------- -------
Total liabilities and stockholders' equity............... $63,288 $56,907
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
OrCAD, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Products........................................... $34,182 $35,385 $31,169
Service............................................ 13,470 8,610 5,865
------- ------- -------
Total revenue.................................... 47,652 43,995 37,034
Cost and expenses:
Cost of revenue--products ......................... 3,114 4,764 4,142
Cost of revenue--service .......................... 2,611 1,692 1,503
Research and development........................... 11,508 11,238 9,350
Marketing and sales................................ 18,767 15,416 11,877
General and administrative......................... 5,365 4,810 4,793
Merger and acquisition related charges............. 4,081 2,203 --
------- ------- -------
Total cost and expenses.......................... 45,446 40,123 31,665
------- ------- -------
Income from operations............................... 2,206 3,872 5,369
------- ------- -------
Other income (expense):
Interest income, net............................... 1,742 1,858 1,531
Other, net......................................... 13 (17) 65
------- ------- -------
Total other income............................... 1,755 1,841 1,596
------- ------- -------
Income before income taxes........................... 3,961 5,713 6,965
Income tax expense................................. 978 1,809 1,699
------- ------- -------
Net income........................................... $ 2,983 $ 3,904 $ 5,266
======= ======= =======
Basic net income per share........................... $ 0.32 $ 0.43 $ 0.61
======= ======= =======
Diluted net income per share......................... $ 0.31 $ 0.41 $ 0.58
======= ======= =======
Shares used in basic net income per share
calculation......................................... 9,320 9,165 8,618
Shares used in diluted net income per share
calculation......................................... 9,519 9,446 9,046
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
OrCAD, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumu-
Series A lated
Preferred Addi- Compre- Other Total
Stock Common Stock tional hensive Retained Compre- Notes Stock-
-------------- -------------- Paid-in Income Earnings hensive Receiv- holders'
Shares Amount Shares Amount Capital (Loss) (Deficit) Loss able Equity
------ ------ ------ ------ ------- ------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 8,076 $ 81 4,238 $ 43 $13,041 $ (362) $ (4) $ (17) $12,782
Stock repurchase........ -- -- (60) (1) (126) -- (127) -- -- (254)
Issuance of common stock
upon stock option
exercises.............. -- -- 195 2 81 -- -- -- (114) (31)
Issuance of common stock
under employee stock
purchase plan.......... -- -- 11 -- 88 -- -- -- -- 88
Issuance of common stock
from employee stock
purchase agreements.... -- -- 69 -- 330 -- -- -- -- 330
Issuance of common
stock, net of offering
costs of $2,951........ -- -- 2,382 24 23,230 -- -- -- -- 23,254
Issuance of common stock
upon exercise of stock
warrants............... -- -- 4 -- -- -- -- -- -- --
Issuance of common stock
upon conversion of
preferred stock........ (8,076) (81) 2,307 23 58 -- -- -- -- --
Payment of notes
receivable............. -- -- -- -- -- -- -- -- 59 59
Tax benefit from stock
option exercises....... -- -- -- -- 223 -- -- -- -- 223
Comprehensive income
Net income............. -- -- -- -- -- 5,266 5,266 -- -- 5,266
Foreign currency
translation
adjustment............ -- -- -- -- -- (39) -- -- -- (39)
Unrealized gain on
investments........... -- -- -- -- -- 9 -- -- -- 9
------
Other comprehensive
loss.................. -- -- -- -- -- (30) -- (30) -- --
------ ---- ----- ---- ------- ------ ------- ---- ----- -------
Comprehensive income.... -- -- -- -- -- $5,236 -- -- -- --
======
Balance, December 31,
1996................... -- -- 9,146 91 36,925 4,777 (34) (72) 41,687
Stock repurchase........ -- -- (58) (1) (173) -- (77) -- -- (251)
Issuance of common stock
upon stock option
exercises.............. -- -- 100 1 82 -- -- -- (29) 54
Issuance of common stock
under employee stock
purchase plan.......... -- -- 29 -- 207 -- -- -- -- 207
Issuance of common stock
from employee stock
purchase agreements.... -- -- 22 1 107 -- -- -- -- 108
Payment of notes
receivable............. -- -- -- -- -- -- -- -- 54 54
Tax benefit from stock
option exercises....... -- -- -- -- 435 -- -- -- -- 435
Comprehensive income
Net income............. -- -- -- -- -- 3,904 3,904 -- -- 3,904
Foreign currency
translation
adjustment............ -- -- -- -- -- (40) -- -- -- (40)
Unrealized loss on
investments........... -- -- -- -- -- (4) -- -- -- (4)
------
Other comprehensive
loss.................. -- -- -- -- -- (44) -- (44) -- --
------ ---- ----- ---- ------- ------ ------- ---- ----- -------
Comprehensive income.... -- -- -- -- -- $3,860 -- -- -- --
======
Balance, December 31,
1997................... -- -- 9,239 92 37,583 8,604 (78) (47) 46,154
Issuance of common stock
upon stock option
exercises.............. -- -- 95 1 176 -- -- -- -- 177
Issuance of common stock
under employee stock
purchase plan.......... -- -- 60 1 449 -- -- -- -- 450
Payment of notes
receivable............. -- -- -- -- -- -- -- -- 34 34
Unrealized gain on
investments............ -- -- -- -- -- -- -- -- -- --
Tax benefit from stock
option exercises....... -- -- -- -- 268 -- -- -- -- 268
Comprehensive income
Net income............. -- -- -- -- -- 2,983 2,983 -- -- 2,983
Foreign currency
translation
adjustment............ -- -- -- -- -- 36 -- -- -- 36
Unrealized gain on
investments........... -- -- -- -- -- 7 -- -- -- 7
------
Other comprehensive
income................ -- -- -- -- -- 43 -- 43 -- --
------ ---- ----- ---- ------- ------ ------- ---- ----- -------
Comprehensive income.... -- -- -- -- -- $3,026 -- -- -- --
======
Balance, December 31,
1998................... -- $-- 9,394 $ 94 $38,476 $11,587 $(35) $ (13) $50,109
====== ==== ===== ==== ======= ======= ==== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
OrCAD, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 2,983 $ 3,904 $ 5,266
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 2,246 1,797 1,506
Provision for losses on trade accounts
receivable and sales returns............. 246 36 285
Provision for inventory reserves.......... 2 21 9
Deferred income taxes..................... (242) (434) (32)
Write-off of research and development
costs acquired........................... -- 2,203 --
Loss on disposal of fixed assets.......... 121 19 45
Changes in assets and liabilities
Trade accounts receivable............... 517 (3,920) (487)
Inventory............................... 299 291 (338)
Other assets............................ (97) (1,329) (496)
Accounts payable........................ 177 (390) (380)
Accrued payroll and related
liabilities............................ (228) 684 42
Accrued liabilities..................... 699 503 (489)
Deferred revenue........................ 1,678 1,666 759
Accrued income taxes.................... 357 867 460
--------- --------- ---------
Total adjustments..................... 5,775 2,014 884
--------- --------- ---------
Net cash provided by operating activities... 8,758 5,918 6,150
--------- --------- ---------
Cash flows from investing activities:
Acquisition of fixed assets................. (1,851) (2,724) (1,008)
Acquisition of software technology.......... -- (2,450) (300)
Proceeds from sale of fixed assets.......... (3) -- 24
Intangible assets acquired.................. (925) (165) --
Proceeds from maturity of investment
securities................................. 130,198 194,825 241,148
Purchases of investment securities.......... (160,099) (191,996) (248,413)
--------- --------- ---------
Net cash used in investing activities..... (32,680) (2,510) (8,549)
--------- --------- ---------
Cash flows from financing activities:
Payments on capital leases.................. -- -- (174)
Repayment of notes receivable--employee
stock purchases, net....................... 34 54 59
Repurchase of common stock.................. -- (251) (254)
Proceeds from issuance of common stock,
net........................................ 627 369 23,641
--------- --------- ---------
Net cash provided by financing
activities............................... 661 172 23,272
--------- --------- ---------
Effects of exchange rate on cash.......... 97 (39) (39)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (23,164) 3,541 20,834
Cash and cash equivalents at the beginning of
period....................................... 31,618 28,077 7,243
--------- --------- ---------
Cash and cash equivalents at the end of
period....................................... $ 8,454 $ 31,618 $ 28,077
========= ========= =========
Supplemental disclosures of cash flow
information:
Income taxes paid........................... $ 1,026 $ 1,509 $ 1,405
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
OrCAD, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share and share amounts)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
OrCAD, Inc. ("OrCAD," or the "Company") develops, markets and supports
software products that assist electronics designers in the management of
component data and in the design of field-programmable gate arrays ("FPGAs"),
including complex programmable logic devices ("CPLDs"), analog and mixed
analog-digital circuits, and printed circuit boards ("PCBs"). OrCAD operates
in a single business segment, comprising the electronic design automation
industry and serves most segments of the electronics industry, including
aerospace, telecom, industrial control, military, medical equipment, and
consumer products.
Principles of Consolidation
The accompanying financial statements consolidate the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the accompanying consolidated statements of cash flows,
OrCAD considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents are stated at
cost and consist primarily of money market funds, commercial paper, municipal
bonds and municipal auction preferred stock. The carrying amount of cash and
cash equivalents approximates fair value.
Investments
Investments, which consist of debt securities, commercial paper, municipal
auction preferred stock, and U.S. Treasury Notes, 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 and unrealized gains and losses are reported as a component of
other comprehensive income (loss).
At December 31, 1998, the contractual maturities of available-for-sale
investments ranged from 5 days to 187 days.
Inventory
Inventory consists primarily of sales and packaging materials, diskettes,
compact disks, hardware locks, and printed documentation. Inventory is carried
at the lower of cost or market determined on a first-in, first-out basis.
Fixed Assets
Fixed asset acquisitions are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
generally three to seven years. Amortization of leasehold improvements is
calculated using the straight-line method over the shorter of the related
lease term or economic life of the leased asset.
Concentration of Credit Risk
Financial instruments which potentially subject OrCAD to concentrations of
credit risk consist principally of cash, cash equivalents, investments and
accounts receivable. Management believes the credit risk associated
27
<PAGE>
with cash, cash equivalents and investments is minimal. OrCAD sells its
products to customers who are primarily designers and manufacturers of
electronic components. OrCAD's accounts receivable are derived primarily from
customers located in North America, Europe and Japan. Management believes that
the risk of credit loss is substantially reduced due to the diversity of its
customers and their dispersion across many geographic areas and segments of
the electronics industry.
Revenue Recognition
Revenue primarily includes revenue from software product shipments and
revenue from extended support agreements. OrCAD recognizes revenue from
software licenses after shipment of product and when no significant
contractual obligations remain outstanding. When OrCAD 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 maintenance period,
generally three months. Deferred revenue on extended support agreements that
are sold separately from product sales is recognized ratably over the contract
period, generally one year. Revenue from customer training, support and other
services is recognized as the services are performed.
OrCAD sells its products internationally, exclusive of Japan and the United
Kingdom ("U.K."), through value-added resellers ("VARs") and recognizes
revenue from sales to VARs after shipment of product and when no significant
contractual obligations remain outstanding.
OrCAD provides a thirty-day right of return and a ninety-day warranty that
its products are free from defects. Estimated sales returns and estimated
warranty costs are recorded upon shipment of the product.
On January 1, 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.
Software Development Costs
Under Statement of Financial Accounting Standards (SFAS) No. 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.
Need for New Product Development
A substantial portion of the Company's revenue each year is generated from
the development and rapid release to market of computer software products
newly introduced during the year. In the extremely competitive industry
environment in which the Company operates, such product generation,
development and marketing processes are uncertain and complex, requiring
accurate prediction of market trends and demand as well as successful
management of various development risks inherent in such products.
Additionally, the Company's development strategy relies on certain key
suppliers' ability to deliver completed products and component computer
software products in time to meet critical development and distribution
schedules. In light of these dependencies, it is reasonably possible that
failure to successfully manage a significant product introduction or failure
of certain key suppliers to deliver as needed could have a severe near-term
impact on the Company's growth and results of operations.
28
<PAGE>
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising costs
aggregated $3,113, $2,971, and $2,696, for the years ended December 31, 1998,
1997, and 1996, respectively.
Purchased Software Technology
OrCAD has acquired technologies in connection with certain business
combinations, asset purchases, and licensing agreements. The cost of such
purchased technology is amortized using the straight-line method over its
estimated useful life, generally three to five years. Amortization expense for
the years ended December 31, 1998, 1997 and 1996 was $221, $203, and $92,
respectively.
Foreign Currency
The local currency of the Company's subsidiaries in Japan and the U.K. is
the functional currency. Assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars using exchange rates in effect
at the translation date, and revenue and expenses are translated into U.S.
dollars using average exchange rates. The effects of foreign currency
translation adjustments are included as a component of accumulated other
comprehensive income (loss). Gains or losses occurring on foreign currency
transactions, which have been insignificant, are included in the consolidated
statements of operations as other income (expense).
Goodwill and Intangible Assets
The Company has recorded goodwill and intangible assets in connection with
its business combinations and certain asset acquisitions. Goodwill and
intangible assets are being amortized over their estimated useful lives,
ranging from three to ten years. Goodwill and intangible asset amortization
was $585, $491, and $452 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Net Income Per Share
On January 1, 1997 the Company adopted SFAS No. 128 "Earnings Per Share".
Accordingly, "basic net income per share" and "diluted net income per share"
for the year ended December 31, 1998 and for all prior periods presented were
computed using the weighted average number of common shares outstanding during
each year, with diluted net income per share including the effect of
potentially dilutive common shares. The weighted average number of common
shares outstanding for basic net income per share computations for the years
ended December 31, 1998, 1997 and 1996 were 9,319,868, 9,164,272, and
8,617,871, respectively. For diluted net income per share 199,366, 280,997,
and 427,566 shares were added to the weighted average number of common shares
outstanding for 1998, 1997, and 1996, respectively, representing potential
dilution for stock options outstanding, calculated using the treasury stock
method.
Comprehensive Income (Loss)
On January 1, 1998, OrCAD adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in financial statements. Comprehensive
income (loss) consists of net income, net unrealized gains (losses) on
investment securities, and foreign currency translation adjustments and is
presented in the consolidated statements of stockholders' equity. SFAS No. 130
requires only additional disclosures in the consolidated financial statements;
it does not affect OrCAD's financial position or results of operations. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
29
<PAGE>
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short-term nature of these
instruments. The fair value of investments is based on current market values.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument when available. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
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.
Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1997 and 1996 to conform with the 1998 presentation.
Note 2. Acquisitions
In April 1998, OrCAD U.K. Ltd., a wholly-owned subsidiary of the Company
formed in March 1998, purchased certain assets and assumed certain liabilities
of ARS Microsystems ("ARS") for $999. 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. Intangible assets of $925 represents the estimated
fair value of the customer list acquired from ARS.
The fair values of assets and liabilities acquired are presented below:
<TABLE>
<S> <C>
Accounts receivable................................................. $ 618
Inventory........................................................... 195
Intangible assets................................................... 925
Other assets........................................................ 288
Accounts payable and accrued liabilities............................ (700)
Deferred revenue.................................................... (327)
-----
Net assets acquired................................................. $ 999
=====
</TABLE>
In October 1997, OrCAD entered into an Agreement and Plan of Merger (the
"Merger Agreement") with MicroSim Corporation ("MicroSim"), a privately held
California corporation. On January 20, 1998 OCA Merger Corporation, a wholly-
owned subsidiary of OrCAD, was merged with and into MicroSim and all of the
issued and outstanding shares of MicroSim Common Stock and all of the
outstanding options and other 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 and
accordingly, the results of MicroSim have been included in the accompanying
consolidated financial statements for all periods presented.
Upon consummation of the merger with MicroSim in January 1998, OrCAD
incurred $4,081 in merger and acquisition related charges. Following is a
summary of the major elements of the merger and acquisition related charges:
<TABLE>
<S> <C>
Personnel severance............................................... $1,561
Legal, accounting, investment banking, and investor relations
costs............................................................ 1,277
Cancellation and continuation of contractual obligations.......... 829
Asset impairment.................................................. 114
Other............................................................. 300
------
Total............................................................. $4,081
======
</TABLE>
30
<PAGE>
Personnel severance costs relate primarily to the termination of
approximately 35 employees, most of whom were employed by MicroSim in
connection with the elimination and redirection of certain of MicroSim's
general, administrative, sales, and marketing related functions to OrCAD's
Beaverton, Oregon headquarters. OrCAD also recognized certain costs for asset
impairments and the cancellation and continuation of contractual obligations
related primarily to MicroSim's facility lease as a result of eliminating and
redirecting operating functions from Irvine, California.
The cash outflows for each of the respective merger and acquisition related
charges in 1998 are as follows; personnel severance -$1,577; legal,
accounting, investment banking and investor relations -$1,182; continuation
and cancellation of contractual obligations -$120; asset impairment -$114; and
other -$325. Payments related to the continuation and cancellation of
contractual obligations are being made in accordance with the terms of the
agreements that existed prior to the consummation of the merger with MicroSim.
The results of operations previously reported separately by OrCAD and
MicroSim and the combined amounts presented in the accompanying financial
statements are summarized below.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
OrCAD............................................ $ 25,881 $ 20,907
MicroSim......................................... 18,114 16,127
----------- -----------
Combined......................................... $ 43,995 $ 37,034
=========== ===========
Net Income:
OrCAD............................................ $ 1,597 $ 4,202
MicroSim......................................... 2,312 1,071
Adjustments for intercompany eliminations (2).... (5) (7)
----------- -----------
Combined......................................... $ 3,904 $ 5,266
=========== ===========
Other Changes in Stockholders' Equity:
MicroSim repurchases of common stock under stock
purchase agreements............................. $ (251) $ (254)
=========== ===========
</TABLE>
- --------
(1) The accounting policies of OrCAD and MicroSim were substantially the same
and both entities reported results of operations on a calendar year basis.
Therefore, there have been no adjustments required to conform the
accounting policies of the combined company.
(2) Intercompany transactions, reflecting a license agreement between MicroSim
and Massteck Ltd., a former wholly-owned subsidiary of OrCAD, during the
years presented and the resulting interest income and interest expense,
are eliminated under the line "Adjustments for intercompany eliminations".
In June 1997, the Company acquired certain technology and development
personnel from Q Point Technology for approximately $720. The cost of the
acquisition was allocated on the basis of the fair value of the assets
acquired. This allocation resulted in a charge for in-process research and
development of $433, purchased technology capitalization of $248, and goodwill
of $39 at the purchase date. The charge for in-process research and
development resulted from allocating a portion of the purchase price to Q
Point's in-process product development that had not reached technological
feasibility. The Company is amortizing the goodwill and purchased technology
over a period of three years and five years, respectively.
In April 1997, the Company acquired certain technology and sales personnel
from TEAM Corporation for approximately $1,900. The cost of the acquisition
was allocated on the basis of the fair value of the assets acquired. This
allocation resulted in a charge for in-process research and development of
$1,800, and goodwill of $126 at the purchase date. The charge for in-process
research and development resulted from allocating a portion of the acquisition
cost to TEAM's in-process product development that had not reached
technological
31
<PAGE>
feasibility. In addition, there are certain contingent amounts up to $1,550
payable annually over the three year period ending April 2000, based on the
continuation of employment with OrCAD of sales personnel from TEAM Corporation
and their achievement of specific revenue milestones. These contingent amounts
are being expensed as incurred.
Note. 3. Balance Sheet Components
Other Current Assets
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets........................................... $ 908 $ 845
Prepaid expenses and other.................................... 1,723 2,503
------ ------
$2,631 $3,348
====== ======
</TABLE>
Fixed Assets, Net
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Vehicles................................................... $ 97 $ 43
Furniture and fixtures..................................... 1,801 1,678
Computer equipment......................................... 3,562 4,433
Leasehold improvements..................................... 652 469
Software................................................... 1,163 802
------- -------
7,275 7,425
Less accumulated depreciation and amortization............. (3,659) (4,065)
------- -------
$ 3,616 $ 3,360
======= =======
</TABLE>
Depreciation and amortization expense was approximately $1,440, $1,084, and
$945 for the years ended December 31, 1998, 1997, and 1996, respectively.
Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Accrued sales expenses....................................... $ 333 $ 593
Other........................................................ 2,350 1,277
------ ------
$2,683 $1,870
====== ======
</TABLE>
Note 4. Line of Credit
On September 5, 1996, OrCAD entered into a Business Loan Agreement with a
commercial bank for a $3,000 line of credit to be used for operating needs.
The line of credit bore interest at the bank's prime rate plus .50%. The
Agreement was secured by all assets of OrCAD. There were no outstanding
borrowings under the agreement at December 31, 1997. This Business Loan
Agreement was terminated in November 1998.
32
<PAGE>
Note 5. Taxes
Domestic and foreign pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Domestic operations................................... $4,353 $6,062 $5,955
Foreign subsidiaries.................................. (392) (349) 9
Foreign branch........................................ -- -- 1,001
------ ------ ------
Total................................................. $3,961 $5,713 $6,965
====== ====== ======
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $ 649 $2,035 $ 590
State.............................................. 210 177 149
Foreign............................................ 396 31 992
------ ------ ------
1,255 2,243 1,731
------ ------ ------
Deferred:
Federal............................................ 61 (378) (87)
State.............................................. 14 (63) (9)
Foreign............................................ (352) 7 64
------ ------ ------
(277) (434) (32)
------ ------ ------
Total................................................ $ 978 $1,809 $1,699
====== ====== ======
</TABLE>
The actual income tax expense for the years ended December 31, 1998, 1997 and
1996 differs from the expected tax expense computed by applying the U.S.
federal corporate income tax rate of 34% to net income before income taxes as
follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Expected income tax expense........................ $1,347 $1,942 $2,368
State income tax expense........................... 192 241 316
Decrease in the valuation allowance for deferred
tax assets........................................ (96) (239) (675)
Benefit of research and experimentation tax
credit............................................ (450) (470) (199)
Goodwill amortization and in-process research and
development costs................................. 134 154 154
Differences between financial and tax reporting for
common stock option exercises..................... -- 89 (646)
Foreign tax rate differential...................... 45 7 606
Foreign sales corporation benefit.................. (85) (163) (128)
Other.............................................. (109) 248 (97)
------ ------ ------
Actual expense..................................... $ 978 $1,809 $1,699
====== ====== ======
</TABLE>
33
<PAGE>
The income tax effects of temporary differences and carryforwards which give
rise to significant portions of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and inventory, due to allowance for
doubtful accounts and reserve for obsolescence.............. $ 192 $ 282
Accrued expenses............................................. 231 344
In-process research and development, due to amortization
differences................................................. 760 804
Tax credit carryforwards..................................... 507 583
Sales return allowances...................................... 154 91
Net operating loss carryforwards............................. 57 96
Merger costs, due to amortization differences................ 120 --
Deferred revenue............................................. 328 42
Other........................................................ 415 325
------ ------
Total gross deferred tax assets................................ 2,764 2,567
Less valuation allowances...................................... (1,474) (1,570)
------ ------
Net deferred tax assets........................................ 1,290 997
Deferred tax liabilities:
Other........................................................ 187 171
------ ------
Total gross deferred tax liabilities........................... 187 171
------ ------
Net deferred tax assets........................................ $1,103 $ 826
====== ======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$2,484. The net changes in the valuation allowance for the years ended
December 31, 1998, 1997 and 1996 were decreases of $96, $239, and $675,
respectively.
At December 31, 1998, the Company had unused tax credit carryforwards of
$507, which expire in 2011 through 2013, and a foreign net operating loss
carryforward of $270 which expires in 2001.
Note 6. Commitments and Contingencies
OrCAD leases office space under various noncancelable operating lease
agreements. Lease expense was $1,106, $969, and $885 for the years ended
December 31, 1998, 1997 and 1996, respectively.
In February 1998, the Company entered into a noncancelable operating lease
for a new facility. In April 1998, the Company exercised its option to lease
approximately 26,000 square feet of additional space at the new facility. The
Company intends to move into the new facility in the summer of 1999.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................ $ 2,217
2000............................................................ 2,841
2001............................................................ 2,529
2002............................................................ 2,432
2003............................................................ 2,599
Thereafter...................................................... 12,760
-------
Total........................................................... $25,378
=======
</TABLE>
The Company has entered into several license agreements that provide for
minimum and per copy royalty payments. Royalty expense for the years ended
December 31, 1998, 1997, and 1996 was $823, $1,660, and $840, respectively.
34
<PAGE>
In October 1998, the Company entered into a development and loan agreement
("Development Agreement") with an unaffiliated third-party developer
("Developer"), pursuant to which the Developer will develop certain technology
("Technology") over a 24-month period ending October 2000. In consideration of
such development, OrCAD will loan the Developer up to $1.6 million, advanced
in six equal quarterly installments ("Loan"). The Loan bears interest at the
"Prime Rate" as announced by Silicon Valley Bank from time to time, and is
secured by the Developer's assets, including the Technology. The Loan will be
repaid in three unequal installments during the period beginning 44 months
from the Loan origination date and ending 68 months from such date.
OrCAD is currently a party to an arbitration proceeding instituted by
Deutsch Technology Research ("DTR") before the American Arbitration
Association. DTR seeks to recover more than $1,000 in damages from OrCAD in
this arbitration. DTR's claims arise under an agreement OrCAD and DTR entered
into in March 1997 ("DTR Agreement"), pursuant to which OrCAD agreed to market
DTR's products and not to market competing products. In January 1998, OrCAD
merged with MicroSim Corporation ("MicroSim"), a company which sold products
which competed with DTR's products. OrCAD's merger with MicroSim breached the
DTR Agreement. OrCAD has attempted, without success, to negotiate a settlement
with DTR. An arbitrator has been assigned for this dispute but no hearing date
has been set. In addition, DTR filed a lawsuit in March 1999 against MicroSim
in Santa Clara County Superior Court alleging that MicroSim tortiously
interfered with DTR's contractual and prospective relationship with OrCAD.
From time to time, OrCAD becomes involved in ordinary, routine or regulatory
legal proceedings incidental to the business of OrCAD. OrCAD is not presently
a party to any litigation, the outcome of which is expected to have a material
adverse effect on OrCAD's business, financial condition, liquidity or results
of operations.
35
<PAGE>
Note 7. Foreign Operations and Geographic Information
The following table provides segmented financial data for OrCAD, Inc. and
each of its subsidiaries for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------
Consolidated
OrCAD OrCAD Elimination Financial
OrCAD, Inc. Japan U.K. Adjustments(1) Data
----------- ------ ------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Product revenue......... $31,911 $4,606 $1,152 $(3,487) $34,182
Service revenue......... 12,618 482 550 (180) 13,470
------- ------ ------ ------- -------
Total revenue........... 44,529 5,088 1,702 (3,667) 47,652
Income (loss) before
taxes.................. 4,462 (60) (291) (150) 3,961
Net income (loss)....... 3,533 (109) (291) (150) 2,983
Total assets............ 59,209 2,705 2,211 (837) 63,288
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------
Consolidated
OrCAD OrCAD Elimination Financial
OrCAD, Inc. Japan U.K. Adjustments(1) Data
----------- ------ ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
Product revenue......... $33,365 $5,376 $ -- $(3,356) $35,385
Service revenue......... 8,453 233 -- (76) 8,610
------- ------ ----- ------- -------
Total revenue........... 41,818 5,609 -- (3,432) 43,995
Income (loss) before
taxes.................. 6,063 (345) -- (5) 5,713
Net income (loss)....... 4,293 (384) -- (5) 3,904
Total assets............ 56,697 1,572 -- (1,362) 56,907
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------
Consolidated
OrCAD OrCAD Elimination Financial
OrCAD, Inc. Japan U.K. Adjustments(1) Data
----------- ------ ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
Product revenue......... $28,778 $4,523 $ -- $(2,132) $31,169
Service revenue......... 5,767 87 -- 11 5,865
------- ------ ----- ------- -------
Total revenue........... 34,545 4,610 -- (2,121) 37,034
Income (loss) before
taxes.................. 6,916 62 -- (13) 6,965
Net income (loss)....... 5,514 (235) -- (13) 5,266
Total assets............ 49,156 1,550 -- (972) 49,734
</TABLE>
- --------
(1) The elimination adjustments are necessary to eliminate intercompany
accounts and transactions in consolidation.
Revenue by geographical area is provided below for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States........................................ $30,973 $26,028 $19,188
Canada............................................... 1,556 1,242 1,249
------- ------- -------
North America........................................ 32,529 27,270 20,437
Europe............................................... 7,608 6,915 6,617
Japan................................................ 5,704 7,473 7,928
Other international.................................. 1,811 2,337 2,052
------- ------- -------
Total revenue........................................ $47,652 $43,995 $37,034
======= ======= =======
</TABLE>
36
<PAGE>
Note 8. Stockholders' Equity
Common Stock
On March 1, 1996, OrCAD completed a public offering of 3,200,000 shares of
common stock which generated net proceeds of approximately $19,400 after
deducting applicable issuance costs and expenses. On April 4, 1996, OrCAD'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 $3,900 after deducting applicable issuance costs and
expenses.
Preferred Stock
In connection with the completion of OrCAD's initial public offering in
March 1996, all of the outstanding Series A preferred stock was automatically
converted into 2,307,397 shares of OrCAD's common stock.
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. The Board of Directors has the authority to issue preferred stock in
one or more series and to fix the number of shares constituting any such
series, the voting powers, designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights, dividend
rate, terms of redemption, redemption price or prices, conversion and voting
rights and liquidation preferences of the shares constituting any series,
without any further vote or action by the stockholders of the Company.
Reserved Common Stock
At December 31, 1998, OrCAD had 2,800,832 shares of common stock reserved
for future issuance under all stock option plans.
Note 9. Stock Option Plans
1995 Stock Incentive Plan
Under the 1995 Stock Incentive Plan, OrCAD may sell shares of common stock
and grant either incentive stock options or non-qualified stock options to
certain employees and consultants at the discretion of the Board of Directors.
OrCAD has reserved 2,000,000 shares of common stock which may be optioned
and/or sold under the 1995 Stock Incentive Plan. The 1995 Stock Incentive Plan
provides that (i) the exercise price of an incentive stock option must be no
less than the fair market value of OrCAD's common stock at the date of grant,
and (ii) the exercise price of an incentive stock option granted to an
optionee who possesses more than 10% of the total combined voting power of all
classes of stock must be no less than 110% of the fair market value, all as
determined by the Board of Directors. The exercise price of a nonqualified
stock option is determined by the Board of Directors. The Board of Directors
has the authority to set expiration dates no longer than ten years from the
date of grant (or five years for an optionee who meets the 10% criteria),
payment terms and other provisions for each grant. Shares associated with
unexercised options are generally canceled no more than 90 days after
termination of employment and become available for grant under the 1995 Stock
Incentive Plan.
1995 Stock Option Plan
Under the 1995 Stock Option Plan, OrCAD may grant incentive stock options or
nonqualified stock options up to a maximum of 51,699 shares of common stock to
directors, officers, employees and consultants. Nonqualified stock options
must be granted at not less than 85% of the fair market value, and incentive
stock options must be granted at not less than the fair market value, at the
date of grant. The exercise price to an optionee who possesses more than 10%
of the total combined voting power of all classes of stock must be no less
than 110% of the fair market value at the date of grant. The Board of
Directors has authority to set expiration dates no longer than ten years from
the date of grant (or five years for an optionee who meets the 10% criteria),
payment terms and other provisions for each grant.
37
<PAGE>
1995 Stock Option Plan for Nonemployee Directors
Under the 1995 Stock Option Plan for Nonemployee Directors, OrCAD may grant
non-qualified stock options up to a maximum of 500,000 shares of common stock.
The exercise price of options granted may not be less than the fair market
value of common stock on the date of grant. All options granted under the 1995
Stock Option Plan for Nonemployee Directors will be non-qualified and expire
ten years from the date of grant. Shares that are associated with options that
are forfeited or terminated will again be available for grant.
1991 Non-Qualified Stock Option Plan
Under the 1991 Non-Qualified Stock Option Plan, OrCAD may grant non-
qualified stock options up to a maximum of 962,238 shares of common stock.
Options may be granted at the Board of Directors' discretion at not less than
85% of the fair market value of the common stock at the date of such grant.
Options shall expire on the date specified by the Board of Directors but this
date shall in no event exceed ten years from the date of grant.
Stock option activity under the foregoing plans is summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise
Option Price
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1995........................ 681,557 $1.36
Granted................................................. 128,427 11.70
Exercised............................................... (194,828) 0.42
Canceled................................................ (9,927) 1.94
---------
Outstanding at December 31, 1996........................ 605,229 3.86
---------
Granted................................................. 525,756 8.74
Exercised............................................... (99,657) 0.84
Canceled................................................ (97,231) 9.66
---------
Outstanding at December 31, 1997........................ 934,097 6.33
---------
Granted................................................. 639,900 9.05
Exercised............................................... (95,046) 1.86
Canceled................................................ (90,700) 7.87
---------
Outstanding at December 31, 1998........................ 1,388,251 $7.78
---------
</TABLE>
The weighted-average fair value of options granted during 1998, 1997 and
1996 was $7.04, $5.34 and $6.78, respectively.
38
<PAGE>
At December 31, 1998 OrCAD had four stock-based compensation plans, which
are described above and an employee stock purchase plan which is discussed in
note 10. OrCAD applies APB No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans and its stock purchase plan. For SFAS No. 123
purposes, the fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants and purchase rights in 1998, 1997 and
1996, respectively: dividend yield of 0% for all years; expected volatility of
83%, 76% and 49%; risk-free interest rate ranging from 4.20% to 5.36% in 1998;
5.3% to 5.8% in 1997 and from 5.3% to 6.4% in 1996 for all plans; and expected
lives of five years for all plans except the 1995 Stock Option Plan and the
1996 Employee Stock Purchase Plan, which are estimated at 2 years and .5
years, respectively. Had compensation expense been determined consistent with
SFAS No. 123, utilizing the assumptions detailed above, OrCAD's net income and
net income per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income:
As reported.......................................... $2,983 $3,904 $5,266
Pro forma............................................ $ 850 $3,411 $4,836
Basic net income per share:
As reported.......................................... $ 0.32 $ 0.43 $ 0.61
Pro Forma............................................ $ .09 $ 0.37 $ 0.56
Diluted net income per share
As reported.......................................... $ 0.31 $ 0.41 $ 0.58
Pro forma............................................ $ .09 $ 0.36 $ 0.53
</TABLE>
The resulting pro forma compensation costs may not be representative of that
expected in future years.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------- ------------------------
Number Weighted- Weighted- Number Weighted-
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Price 1998 Contractual Life Price 1998 Price
-------- -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.35 131,510 5.2 $ 0.35 129,958 $ 0.35
3.50 107,715 6.8 3.50 79,105 3.50
7.38-8.94 675,882 8.9 8.36 201,971 8.31
9.00-9.50 266,128 8.9 9.32 84,843 9.27
9.63-12.00 177,316 8.5 10.26 68,344 10.54
12.13-15.50 29,700 7.9 14.79 23,085 15.21
- ------------ --------- --- ------ ------- ------
$ 0.35-15.50 1,388,251 8.3 $ 7.78 587,306 $ 6.57
</TABLE>
Note 10. Employee Benefit Plans
401(k) Plan
OrCAD has a 401(k) retirement savings plan covering substantially all
employees, excluding employees of OrCAD Japan and OrCAD U.K. Contributions to
the plan were matched at the discretion of the Board of Directors. The
matching contributions amounted to $398, $199 and $151 for the years ended
December 31, 1998, 1997 and 1996, respectively.
39
<PAGE>
1996 Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan, which became effective May 1,
1996, eligible employees of OrCAD are permitted to purchase common stock
through payroll deductions at a price equal to 85% of the fair market value of
the common stock at the beginning of each offering period or the end of each
offering period, whichever is lower. No employee is entitled to purchase
shares of common stock having a value (determined on the first day of the
offering period) of more than $25,000 in any calendar year. At December 31,
1998, 99,207 of the 200,000 shares of OrCAD common stock originally reserved
for issuance under the plan remained available. There were 60,259, 29,848 and
10,686 shares issued under the plan for the years ended December 31, 1998,
1997 and 1996, respectively.
Note 11. Subsequent Events
On September 20, 1998, the Company entered into a definitive agreement
("Agreement") to merge with Summit Design, Inc. ("Summit"), a publicly-traded
software company headquartered in Beaverton, Oregon, under which the Company
was to be acquired by Summit. Each share of OrCAD Common Stock, including
shares reserved for issuance upon exercise of options to acquire shares of
OrCAD Common Stock, was to be assumed by Summit and exchanged for 1.05 shares
of Summit Common Stock, upon closing of the transaction. On February 2, 1999,
OrCAD and Summit announced that the Agreement had been terminated by mutual
agreement. The Company expects to record a pre-tax charge to earnings of
approximately $1.0 million in the first quarter of 1999 relating to the
termination of the Agreement. This charge represents investment banking,
legal, travel, accounting and other expenses OrCAD incurred during the merger
process.
In February 1999, OrCAD announced its intention to repurchase up to 500,000
shares of its outstanding common stock. Under the new repurchase program,
common stock may be purchased from time-to-time in the open market and
transactions may be negotiated based on market conditions. Pursuant to this
program, as of March 30, 1999, OrCAD had spent a total of $887,000 to
repurchase 125,000 shares at prices ranging from $7.08 to $7.12 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change of accountants nor any disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosure required to be reported under this Item.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included under the caption
"Election of Directors," "Management" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in OrCAD's Proxy Statement for its annual meeting of
stockholders to be held on June 4, 1999 and is incorporated by reference
herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the caption
"Executive Compensation" in OrCAD's Proxy Statement for its annual meeting of
stockholders to be held on June 4, 1999 and is incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption "Stock
Owned by Management and Principal Stockholders" in OrCAD's Proxy Statement for
its annual meeting of stockholders to be held on June 4, 1999 and is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions and Relationships" in OrCAD's Proxy Statement for its annual
meeting of stockholders to be held on June 4, 1999 and is incorporated by
reference herein.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. (1) Financial Statements
The following financial statements are set forth in Item 8 of this Annual
Report:
Report of Independent Auditors
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations, Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity, Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
A. (2) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
Form 10-K
Page No.
---------
<S> <C>
(a) VIII-Valuation and Qualifying Accounts S-1
(b) Report of Independent Auditors S-2
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
3. EXHIBITS
<TABLE>
<C> <S>
2.0 Agreement and Plan of Reorganization dated September 20, 1998 by
and among Summit Design, Inc., Hood Acquisition Corp. and OrCAD,
Inc.+
2.1 First Amendment dated as of December 16, 1998, by and among Summit
Design, Inc., Hood Acquisition Corp. and OrCAD, Inc.
2.2 Termination Agreement and Release dated as of February 1, 1999, by
and among Summit Design, Inc., Hood Acquisition Corp. and OrCAD,
Inc.++
2.3 Agreement and Plan of Merger dated as of October 13, 1997, by and
among OrCAD, Inc., OCA Merger Corporation and MicroSim
Corporation. **
3.1 Restated Certificate of Incorporation of OrCAD, Inc. *
3.2 Restated Bylaws of OrCAD, Inc. *
4.3 Rights Agreement dated September 18, 1992*
4.4 Restricted Stock and Registration Rights Agreement dated May 30,
1995*
4.5 Piggyback Registration Rights Agreement dated December 1, 1995*
10.1 Form of Indemnity Agreement between OrCAD, Inc. and each of its
executive officers and directors*
10.2 1991 Non-Qualified Stock Option Plan*
10.3 1995 Stock Option Plan*
10.4 1995 Stock Option Plan for Nonemployee Directors*
10.5 1995 Stock Incentive Plan*
10.6 Lease between Pen Nom I Corp. and OrCAD, Inc. dated May 21, 1993*
10.7 Lease Agreement dated as of January 31, 1995 by and between Kurian
Limited Partnership and Massteck Ltd.*
10.8 1996 Employee Stock Purchase Plan*
10.9 Lease between Magellan Irvine Oaks Limited Partnership and MicroSim
Corporation, dated February 5, 1997 ***
10.10 Lease between Tigard Triangle I, LLC and OrCAD, Inc., dated
February 20, 1998. ***
</TABLE>
42
<PAGE>
<TABLE>
<C> <S>
10.11 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and Michael F. Bosworth.+++
10.12 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and William E. Cibulsky.+++
10.13 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and Donald G. Tannenbaum.+++
10.14 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and Stuart A. Harrington.+++
10.15 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and James M. Plymale.+++
10.16 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and P. David Bundy.+++
10.17 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and Philip J. Kilcoin.+++
10.18 Employment Agreement effective September 17, 1998, between OrCAD,
Inc. and Graham K. Sheldon.+++
11.0 Statement regarding computation of per share earnings
21.0 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule for Fiscal Year Ended December 31, 1998
27.2 Financial Data Schedule for Fiscal Year Ended December 31, 1997
</TABLE>
- --------
+ Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 2, 1998.
++ Incorporated by reference to the Company's Current Report on Form 8-K filed
on February 3, 1999.
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
* Incorporated by reference to Exhibits of OrCAD's Registration Statement on
Form SB-2 as amended, effective March 1, 1996 (Commission Registration No.
333-00198-LA).
** Incorporated by reference to the Company's Registration Statement on Form
S-4 dated December 12, 1997, File No. 333-38395.
*** Incorporated by reference to the Company's Registration Statement on Form
10-KSB dated December 31, 1997, File No. 0-27692.
(b) Current Reports on Form 8-K filed by the Registrant during the fourth
quarter of calendar 1998:
On October 2, 1998, the Company filed a Current Report on Form 8-K reporting
that the Company had entered into an Agreement and Plan of Reorganization
dated September 20, 1998, with Summit Design, Inc. ("Summit") and Hood
Acquisition Corp. Pursuant to the Agreement and Plan of Reorganization, the
Company would become a wholly-owned subsidiary of Summit. No financial
statements were filed as part of this report.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated March 31, 1999
OrCAD, Inc.
/s/ Michael F. Bosworth
By: _________________________________
Michael F. Bosworth
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Financial Officer and
Director:
/s/ Michael F. Bosworth Chairman of the Board, March 31, 1999
______________________________________ Chief Executive Officer
Michael F. Bosworth and President
Principal Financial Officer and Accounting Officer:
/s/ P. David Bundy Vice-President of Finance March 31, 1999
______________________________________ and Chief Financial
P. David Bundy Officer
Directors:
/s/ Wolfram H. Blume Director March 31, 1999
______________________________________
Wolfram H. Blume
/s/ Stephen W. Director Director March 31, 1999
______________________________________
Stephen W. Director
/s/ Richard P. Magnuson Director March 31, 1999
______________________________________
Richard P. Magnuson
/s/ James B. Moon Director March 31, 1999
______________________________________
James B. Moon
/s/ John C. Savage Director March 31, 1999
______________________________________
John C. Savage
</TABLE>
II-1
<PAGE>
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------
Other
Charged to Changes
Balance, Charged to Other Add Balance,
Beginning Costs and Accounts (Deduct) End of
Year Description of Year Expenses (Describe) (Describe) Year
---- ------------------------ --------- ---------- ---------- ---------- --------
<C> <S> <C> <C> <C> <C> <C>
1998 Allowance for doubtful $793 $ 841 $ -- $ (616)(a) $1,018
accounts and sales
returns................
Allowance for obsolete 136 194 -- (199)(b) 131
inventory..............
1997 Allowance for doubtful 757 1,092 -- (1,056)(a) 793
accounts and sales
returns................
Allowance for obsolete 86 194 -- (144)(b) 136
inventory..............
1996 Allowance for doubtful 534 929 -- (706)(a) 757
accounts and sales
returns................
Allowance for obsolete 40 87 -- (41)(b) 86
inventory..............
</TABLE>
- --------
(a) Write-off of accounts receivable against allowance accounts.
(b) Write-off of obsolete inventory.
S-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
OrCAD, Inc.:
Under date of February 1, 1999, except for Note 11 which is as of February
22, 1999, we reported on the consolidated balance sheets of OrCAD, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which are included in
the Annual Report on Form 10-K for the year ended 1998. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
OrCAD, Inc.'s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
February 1, 1999, except for Note 11
which is as of February 22, 1999
S-2
<PAGE>
EXHIBIT 2.1
FIRST AMENDMENT
FIRST AMENDMENT, dated as of December 16, 1998 (the "First Amendment"), by
and among SUMMIT DESIGN, INC., a Delaware corporation ("Parent"), HOOD
ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary of Parent
("Merger Sub"), and ORCAD, INC., a Delaware corporation (the "Company" and
together with Parent and Merger Sub, the "Parties"),
WHEREAS, the Parties have entered into an Agreement and Plan of
Reorganization dated as of September 20, 1998 (the "Reorganization Agreement";
the terms defined in the Reorganization Agreement being used in this First
Amendment as so defined unless otherwise defined herein);
WHEREAS, the Parties desire to extend the expiration date of the
Reorganization Agreement without otherwise amending it or waiving any rights or
conditions contained in or based on it;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Parties hereby agree as follows:
1. First Amendment to Reorganization Agreement
-------------------------------------------
(a) Section 7.1 (b) of the Reorganization Agreement is hereby amended
to change the reference to "January 31, 1999" to "February 28, 1999".
(b) Except as expressly modified and amended above, the Reorganization
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
2. Execution in Counterparts. This First Amendment may be executed in one
-------------------------
or more counterparts, each of which when executed shall be deemed to be an
original but all of which taken together will constitute one and the same
agreement.
3. Governing Law. This First Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of law thereof.
<PAGE>
IN WITNESS WHEREOF, each of the Parties has executed this First Amendment
to the Reorganization Agreement as of the date first above written.
SUMMIT DESIGN, INC.
By: /s/ LARRY J. GERHARD
-----------------------------
Name: Larry J. Gerhard
Title: President and CEO
HOOD ACQUISITION CORP.
By: /s/ LARRY J. GERHARD
----------------------------
Name: Larry J. Gerhard
Title: President and CEO
ORCAD, INC.
By: /s/ MICHAEL F. BOSWORTH
----------------------------
Name: Michael F. Bosworth
Title: President and CEO
<PAGE>
Exhibit 11.0
OrCAD, Inc.
STATEMENT REGARDING COMPUTATION
OF EARNINGS PER SHARE
(in thousands, except per share data)
Earnings per share for the years ended December 31, 1998, 1997 and 1996
were computed based on the weighted average number of common and dilutive common
equivalent shares outstanding.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Basic earnings per share:
Net income ................................................... $2,983 $3,904 $5,266
Total weighted average number of common shares outstanding.... 9,320 9,165 8,618
Basic earnings per share ..................................... $ 0.32 $ 0.43 $ 0.61
Diluted earnings per share:
Net income ................................................... 2,983 3,904 5,266
Weighted average number of common shares outstanding ......... 9,320 9,165 8,618
Common stock equivalents:
Stock options .............................................. 199 281 428
------ ------ ------
Total weighted average number of common and common
equivalent shares outstanding .............................. 9,519 9,446 9,046
Diluted earnings per share ................................... $ 0.31 $ 0.41 $ 0.58
</TABLE>
<PAGE>
EXHIBIT 21.0
OrCAD, INC.
SUBSIDIARIES OF THE REGISTRANT
OrCAD Japan K.K., incorporated under the laws of Japan
OrCAD U.K. Ltd., incorporated under the laws of the United Kingdom
MicroSim Corporation, incorporated under the laws of the State of California
OrCAD Foreign Sales Corporation, incorporated under the laws of the Territory
of Guam
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
OrCAD, Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Nos. 333-04811, 333-15099 and 333-15145) or OrCAD, Inc. of our reports
dated February 1, 1999, except for note 11 which is as of February 22, 1999
relating to the consolidated balance sheets of OrCAD, Inc. as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows and related financial statement schedule
for each of the years in the three-year period ended December 31, 1998, which
reports appear in the December 31, 1998 Annual Report on Form 10-K of OrCAD,
Inc.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 8,454 31,618
<SECURITIES> 36,038 3,408
<RECEIVABLES> 9,008 9,593
<ALLOWANCES> 1,018 793
<INVENTORY> 382 675
<CURRENT-ASSETS> 55,495 47,849
<PP&E> 7,275 7,425
<DEPRECIATION> 3,659 4,065
<TOTAL-ASSETS> 63,288 56,907
<CURRENT-LIABILITIES> 13,179 10,734
<BONDS> 0 0
0 0
0 0
<COMMON> 94 92
<OTHER-SE> 50,015 46,062
<TOTAL-LIABILITY-AND-EQUITY> 63,288 56,907
<SALES> 47,652 43,995
<TOTAL-REVENUES> 47,652 43,995
<CGS> 5,725 6,456
<TOTAL-COSTS> 45,446 40,123
<OTHER-EXPENSES> 0 17
<LOSS-PROVISION> 225 36
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,961 5,713
<INCOME-TAX> 978 1,809
<INCOME-CONTINUING> 2,983 3,904
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,983 3,904
<EPS-PRIMARY> 0.32 0.43
<EPS-DILUTED> 0.31 0.41
</TABLE>
