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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1996
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: 0-27752
ANALOGY, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0892014
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9205 SW GEMINI DRIVE
PORTLAND, OREGON 97008
(Address of principal executive offices and zip code)
503-626-9700
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
COMMON STOCK, NO PAR VALUE 9,065,255
(Class) (Shares outstanding at January 31, 1997)
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ANALOGY, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1996
and March 31, 1996 .................................................... 2
Consolidated Statements of Operations - Three Months and Nine Months
Ended December 31, 1996 and 1995 ...................................... 3
Consolidated Statements of Cash Flows - Nine Months
Ended December 31, 1996 and 1995 ...................................... 4
Notes to Consolidated Financial Statements ............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 13
1
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ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,648 $ 10,208
Marketable securities 1,693 -
Accounts receivable 6,707 5,831
Prepaid expenses and other assets 1,236 817
------------- ---------
Total current assets 13,284 16,856
Furniture, fixtures and equipment, net 4,224 3,113
Library costs, net 2,306 2,116
Other assets 592 209
Goodwill, net 586 -
------------- ---------
$ 20,992 $ 22,294
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,286 $ 2,124
Current portion of capital leases 502 537
Accrued expenses 2,228 1,427
Unearned revenue 5,071 5,208
Subordinated debt 100 929
------------- ---------
Total current liabilities 9,187 10,225
Non-current portion of capital leases 642 423
Other liabilities 365 155
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares; 16,863 14,180
shares issued and outstanding : 9,026 at
December 31, 1996 and 8,293 at March 31, 1996
Foreign currency translation (138) (78)
Retained deficit (5,927) (2,611)
------------- ---------
Total shareholders' equity 10,798 11,491
------------- ---------
$ 20,992 $ 22,294
------------- ---------
------------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------------------------ -------------------------------------
1996 1995 1996 1995
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 4,434 $ 3,659 $ 9,987 $ 11,749
Service and other 2,382 1,774 6,804 4,312
------------- ------------ ------------- -------------
Total revenue 6,816 5,433 16,791 16,061
Cost of revenue:
Product licenses 409 308 1,160 937
Service and other 629 182 1,640 549
------------- ------------ ------------- -------------
Total cost of revenue 1,038 490 2,800 1,486
------------- ------------ ------------- -------------
Gross profit 5,778 4,943 13,991 14,575
Operating expenses:
Research and development 1,493 1,233 4,133 3,502
Sales and marketing 3,286 2,749 9,038 7,857
General and administrative 584 585 1,941 1,834
Amortization of intangibles 45 - 45 -
Acquired in-process research
and development 1,896 - 1,896 -
------------- ------------ ------------- -------------
Total operating expenses 7,304 4,567 17,053 13,193
------------- ------------ ------------- -------------
Operating (loss) income (1,526) 376 (3,062) 1,382
Other expense, net (38) (31) (29) (431)
------------- ------------ ------------- -------------
(Loss) income before income
taxes (1,564) 345 (3,091) 951
Income tax expense 111 88 225 243
------------- ------------ ------------- -------------
Net (loss) income $ (1,675) $ 257 $ (3,316) $ 708
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Net (loss) income per common share $ (0.19) $ 0.03 $ (0.39) $ 0.08
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Shares used in per share calculations 8,596 7,507 8,422 8,897
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,316) $ 708
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,097 1,312
Acquired in-process research and development 1,896 -
Foreign currency transaction loss, net 43 59
Changes in operating assets and liabilities:
Accounts receivable (784) 397
Prepaid expenses and other assets (735) (462)
Accounts payable and accrued expenses (132) 1,260
Unearned revenue (232) 14
------------- -------------
Net cash (used in) provided by operating activities (1,163) 3,288
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,910) -
Sales of marketable securities 3,017 -
Maturities of marketable securities 1,200 -
Capital expenditures for furniture, fixtures and equipment (1,741) (727)
Capital expenditures for library costs (900) (765)
Net cash acquired in acquisition 260 -
------------- -------------
Net cash used in investing activities (4,074) (1,492)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit - (1,910)
Payments on subordinated debt (829) -
Principal payments on capital leases (510) (471)
Common stock offering costs (82) -
Proceeds from exercise of common stock options 84 732
------------- -------------
Net cash used in financing activities (1,337) (1,649)
Effect of exchange rate changes on cash and cash equivalents 14 70
------------- -------------
Net increase (decrease) in cash and cash equivalents (6,560) 217
Cash and cash equivalents at beginning of period 10,208 1,179
------------- -------------
Cash and cash equivalents at end of period $ 3,648 $ 1,396
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 151 $ 364
Income taxes 62 -
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 693 $ 451
Preferred stock converted to common stock - 85
Acquisition of Symmetry Design Systems:
Assets acquired and liabilities assumed, net of
cash acquired $ (2,421) $ -
Issuance of common stock 2,681 -
------------- -------------
Net cash acquired in acquisition $ 260 $ -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for
the three month and nine month periods ended December 31, 1996 and 1995 have
been prepared in conformity with generally accepted accounting principles. The
financial information as of March 31, 1996 is derived from the Analogy, Inc.
(the "Company") consolidated financial statements included in the Annual Report
on Form 10-K for the year then ended. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments necessary (which are of a normal and recurring nature)
for the fair presentation of the results of the interim periods presented. The
accompanying consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
March 31, 1996 included in the Company's Annual Report on Form 10-K for the year
then ended.
Operating results for the three and nine month periods ended December 31,
1996 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending March 31, 1997, or any portion thereof.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
December 31, March 31,
1996 1996
------------ ---------
Office furniture $ 813 $ 541
Computer equipment 3,862 2,782
Capital leases 3,991 3,206
Software 980 550
------------ ---------
9,646 7,079
Less accumulated
depreciation and
amortization (5,422) (3,966)
------------ ---------
$ 4,224 $ 3,113
------------ ---------
------------ ---------
3. CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with maturities at
the date of purchase of 90 days or less; marketable securities consist primarily
of government and corporate securities. The Company's marketable securities are
classified as "available for sale" as the Company intends to utilize its
marketable securities for liquidity or operational purposes. Accordingly, these
securities are carried at market value, which is not materially different from
cost at December 31, 1996.
4. ACQUISITION
On November 28, 1996, the Company acquired Symmetry Design Systems, Inc.,
("Symmetry") a leading independent developer of analog and mixed-signal modeling
tools and model libraries. In consideration of this acquisition, all of the
issued and outstanding shares of common stock of Symmetry were canceled and
converted into 590,784 shares of the Company's common stock, and a contingent
contractual right to receive an additional 59,216 shares of the Company's common
stock upon resolution of any contingent liabilities of Symmetry or other matters
as defined in the Agreement and Plan of Merger by and among the Company, Analogy
Acquisition Corporation and Symmetry.
5
<PAGE>
The Company has accounted for the acquisition using the purchase method and
has valued the transaction at approximately $2.9 million. The purchase price was
determined through arms-length negotiations between the Company and Symmetry.
The excess of the acquisition cost over the fair value of the net assets
acquired is being amortized over three years using the straight-line method. The
accompanying financial statements include the results of operations of Symmetry
from the date of the acquisition.
In connection with the acquisition, the Company acquired the ongoing
research and development activities of Symmetry resulting in a one-time pre-tax
charge of $1.9 million related to the write off of certain in-process research
and development costs. The value assigned to the in-process research and
development represents those research and development efforts in process at the
acquisition date for which technological feasibility had not yet been
established and which had no alternative future uses. Accounting rules require
that such costs be charged to expense as incurred. The Company currently
believes that these research and development efforts will result in commercially
viable products over the next one to three years.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting standards No. 123, Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 requires that the Company either recognize in its
financial statements costs related to its employee stock-based compensation
plans, or make pro forma disclosures of such costs in a footnote to its
financial statements. The Company plans to continue to follow the provisions of
Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, and to
adopt only the disclosure requirements of SFAS 123, beginning with fiscal year
1997. Accordingly, SFAS 123 is not expected to have a material impact on the
Company's results of operations or financial position.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of".
Adoption of SFAS No. 121 on a prospective basis is required for fiscal years
beginning after December 15, 1995. The Company believes that implementation of
this statement will not have a material effect on its financial position or
results of operations.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, markets and supports high-performance software and
model libraries for the top-down design and behavioral simulation of
mixed-signal and mixed-technology systems. The Company's core simulator product,
Saber, was introduced in 1987. In addition to Saber, Analogy offers schematic
capture and analysis tools and framework integration products providing
interfaces to the design environments of major electronic design automation
companies.
The Company's product license revenue consists of license fees for its
software products and template and component model library subscription fees.
Service and other revenue consists of software maintenance fees, training,
consulting and contract model development. The Company's software products are
shipped only after the Company has an executed software license agreement with a
customer. Revenue from software licenses is recognized upon shipment to the
customer. Revenue from library subscription fees is typically billed annually
and the related revenue is recognized ratably over the life of the contract,
usually twelve months. Maintenance is normally billed in advance and recognized
ratably over the life of the contract, which is usually twelve months. Training,
consulting and certain other services revenue is recognized as the services or
portions thereof have been completed. Revenue from contract model development is
recognized upon shipment of the underlying models. The Company received a
multi-year grant from the National Institute of Standards and Technology
("NIST") in fiscal year 1996 and a contract with the Defense Advanced Research
Projects Agency ("DARPA") in fiscal year 1997 which provide funding to the
Company for research and development. The DARPA contract contains cost sharing
provisions.
The Company has focused substantial efforts on its international business
operations, particularly in Europe. The Company's international operations
accounted for 44% and 38% of the Company's total revenue for the first nine
months of fiscal year 1997 and 1996, respectively. The majority of the Company's
international operations are conducted through the Company's wholly-owned
subsidiaries in Europe.
FORWARD LOOKING STATEMENTS
All statements, trend analysis and other information contained herein
relative to future size or degree of market penetration of the Company's
products and information relating to growth or decline of revenue or expenses
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward looking statements
include, but are not limited to, statements including the words "anticipate,"
"believe," "estimate," "expect," "plan," "intend" and other similar expressions.
These forward looking statements are subject to the business and economic risks
faced by the Company and the Company's actual results of operations may differ
materially from those contained in the forward looking statements. Results of
operations for the periods discussed below should not be considered indicative
of the results to be expected in any future period, and fluctuations in
operating results may also result in fluctuations in the market price of the
Company's common stock. Like most high technology companies, the Company faces
certain business risks that could have adverse effects on the Company's results
of operations, including those discussed below.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as increased competition,
the timing of new product announcements, changes in pricing policies by the
Company or its competitors, lengthy sales cycles, lack of market acceptance or
delays in the introduction of new or enhanced versions of the Company's
products, the timing of significant orders, seasonal factors, the mix of direct
and indirect sales and general economic conditions.
The Company has historically derived a significant portion of its revenue
from the automotive industry. The automotive industry is characterized by high
cyclicality, technological change, fluctuations in manufacturing capacity and
pricing and gross margin pressures. This industry has from time to time
experienced significant economic downturns characterized by decreased product
demand, production over-capacity, price erosion, work slowdowns and layoffs. The
Company also has historically derived a significant portion of its revenue from
the
7
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aerospace and defense industries, which have been characterized by
significant technological changes, high cyclicality and the potential for
significant downturns in business activity resulting from changes in economic
conditions or governmental resources and spending policies. No assurance can
be given that the industries served by the Company will experience economic
growth, will not experience a downturn or that any downturn will not be
severe.
The Company's operating results have depended, and will continue to depend,
upon designers of mixed-signal and mixed-technology systems adopting methods of
design analysis and simulation which use behavioral modeling techniques. The
design analysis and simulation industry is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop or acquire new products that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated selected items of
the Company's consolidated statements of operations and such items expressed as
a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------------ -------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 4,434 65.1 % $ 3,659 67.3 %
Service and other 2,382 34.9 1,774 32.7
-------- ----- -------- -----
Total revenue 6,816 100.0 5,433 100.0
Cost of revenue:
Product licenses 409 6.0 308 5.7
Service and other 629 9.2 182 3.3
-------- ----- -------- -----
Total cost of revenue 1,038 15.2 490 9.0
-------- ----- -------- -----
Gross profit 5,778 84.8 4,943 91.0
Operating expenses:
Research and development 1,493 21.9 1,233 22.7
Sales and marketing 3,286 48.2 2,749 50.6
General and administrative 584 8.6 585 10.8
Amortization of intangibles 45 0.7 - -
Acquired in-process research
and development 1,896 27.8 - -
-------- ----- -------- -----
Total operating expenses 7,304 107.2 4,567 84.1
-------- ----- -------- -----
Operating (loss) income (1,526) (22.4) 376 6.9
Other expense, net (38) (0.5) (31) (0.6)
-------- ----- -------- -----
(Loss) income before income taxes (1,564) (22.9) 345 6.3
Income tax expense 111 1.7 88 1.6
-------- ----- -------- -----
Net (loss) income $ (1,675) (24.6) % $ 257 4.7 %
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------------ -------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 9,987 59.5 % $ 11,749 73.2 %
Service and other 6,804 40.5 4,312 26.8
-------- ----- --------- -----
Total revenue 16,791 100.0 16,061 100.0
Cost of revenue:
Product licenses 1,160 6.9 937 5.9
Service and other 1,640 9.8 549 3.4
-------- ----- --------- -----
Total cost of revenue 2,800 16.7 1,486 9.3
-------- ----- --------- -----
Gross profit 13,991 83.3 14,575 90.7
Operating expenses:
Research and development 4,133 24.6 3,502 21.8
Sales and marketing 9,038 53.8 7,857 48.9
General and administrative 1,941 11.6 1,834 11.4
Amortization of intangibles 45 0.3 - -
Acquired in-process research
and development 1,896 11.3 - -
-------- ----- --------- -----
Total operating expenses 17,053 101.6 13,193 82.1
-------- ----- --------- -----
Operating (loss) income (3,062) (18.2) 1,382 8.6
Other expense, net (29) (0.2) (431) (2.7)
-------- ----- --------- -----
(Loss) income before income taxes (3,091) (18.4) 951 5.9
Income tax expense 225 1.3 243 1.5
-------- ----- --------- -----
Net (loss) income $ (3,316) (19.7) % $ 708 4.4 %
-------- ----- --------- -----
-------- ----- --------- -----
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
Total revenue increased 25% to $6.8 million in the third quarter of fiscal
year 1997 from $5.4 million in the third quarter of fiscal year 1996. Total
revenue increased 5.0% to $16.8 million in the first nine months of fiscal year
1997 from $16.1 million in the first nine months of fiscal year 1996.
Product license revenue increased 21% to $4.4 million in the third quarter
of fiscal year 1997 from $3.7 million in the third quarter of fiscal year 1996,
and decreased 15% to $10.0 million in the first nine months of fiscal year 1997
from $11.7 million in the first nine months of fiscal year 1996. The increase in
the third quarter of fiscal year 1997 was primarily attributable to the shipment
of several orders which had been expected to ship in the previous quarter,
stronger U.S. sales and increases in international sales. The decrease in the
first nine months of fiscal year 1997 was primarily the result of lower overall
sales to customers in the automotive industry in the United States.
Service and other revenue increased 34% to $2.4 million in the third
quarter of fiscal year 1997 from $1.8 million in the third quarter of fiscal
year 1996, and increased 58% to $6.8 million in the first nine months of fiscal
year 1997 from $4.3 million in the first nine months of fiscal year 1996. The
increases were due primarily to increased maintenance revenue and increased
demand for the Company's services, growth in the Company's installed base,
revenues from NIST under the grant awarded in fiscal year 1996, revenues from
the U.S. Air
9
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Force under a modeling contract awarded during the first quarter of fiscal
year 1997, and revenues from DARPA under a contract awarded in September
1996.
Sales to Electronic Data Systems Corp. ("EDS"), which serves as a
distributor to certain automotive industry users, accounted for approximately
18% of total revenue in the first nine months of fiscal year 1996. Sales to EDS
were not significant in the third quarter or first nine months of fiscal year
1997. Reduced capital spending by General Motors has resulted in reductions in
orders from EDS.
During fiscal years 1997 and 1996, in the normal course of business and in
connection with certain modeling and research and development contracts, the
Company derived a significant portion of its revenues from the U. S.
government or its subcontractors related to certain projects being undertaken by
various government agencies. Revenues from such projects accounted for
approximately 17% of total revenues in both the third quarter and first nine
months of fiscal year 1997, and approximately 11% of total revenues in the first
nine months of fiscal year 1996. Such revenues were not significant in the third
quarter of fiscal year 1996. The cancellation or reduction of projects being
undertaken by the U.S. government requiring products or services of the type
provided by the Company, or the Company's failure to obtain awards of such
projects, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Revenue from international operations was $7.4 million (44% of total
revenue) in the first nine months of fiscal year 1997 compared to $6.1 million
(38% of total revenue) in the first nine months of fiscal year 1996. In the
first nine months of fiscal year 1997, revenue from international operations
increased as a percentage of total revenue, as revenue from United States
operations, in particular from the automotive industry, decreased during the
same period.
COST OF REVENUE
Total cost of revenue more than doubled to $1.0 million in the third
quarter of fiscal year 1997 from $490,000 in the third quarter of fiscal year
1996, and increased 88% to $2.8 million in the first nine months of fiscal year
1997 from $1.5 million in the first nine months of fiscal year 1996.
Cost of product license revenue consists primarily of documentation
expense, media manufacturing costs, supplies, shipping expense and the
amortization of component and template model library costs. Cost of product
license revenue increased to 9.2% of product license revenue in the third
quarter of fiscal year 1997 from 8.4% in the third quarter of fiscal year 1996,
and increased to 11.6% of product license revenue in the first nine months of
fiscal year 1997 from 8.0% in the first nine months of fiscal year 1996. Costs
such as documentation expense and supplies are expensed as incurred, which may
not necessarily relate to the number of product licenses shipped during the
period.
The cost of service and other revenue consists primarily of maintenance and
customer support expenses (including product enhancements and improvements, bug
fixes, telephone support, installation assistance and on-site support), contract
model development costs and the direct cost of providing services such as
training and consulting. The costs associated with service and other revenue as
a percentage of total revenue are typically higher than the costs of product
license revenue. Cost of service and other revenue increased to 26.4% of service
and other revenue in the third quarter of fiscal 1997 from 10.3% of service and
other revenue in the third quarter of fiscal year 1996, and increased to 24.1%
of service and other revenue in the first nine months of fiscal 1997 from 12.7%
of service and other revenue in the first nine months of fiscal year 1996. The
increases were due primarily to the Company's increased installed product base,
costs associated with performance under the grant received from NIST and the
costs associated with performance under the U.S. Air Force and DARPA contracts.
Increased engineering efforts, related to expanded testing and check-out
procedures, were expended in the third quarter of fiscal year 1997 on the U.S.
Air Force B-2 modeling contract.
10
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RESEARCH AND DEVELOPMENT
Research and development expense includes all costs associated with
development of new products and technology research. The costs classified in
this category primarily include such items as salaries, fringe benefits,
depreciation of capital equipment and an allocation of facilities and systems
support costs used in research and development. Research and development
expenses increased 21% to $1.5 million in the third quarter of fiscal year 1997
from $1.2 million in the third quarter of fiscal year 1996, and increased 18% to
$4.1 million in the first nine months of fiscal year 1997 from $3.5 million in
the first nine months of fiscal year 1996. The increases primarily resulted from
the increase in the number of research and development personnel throughout
fiscal year 1997 and ongoing facilities and systems support expenses to
accommodate the increased personnel. As a percentage of total revenue, research
and development costs increased to 24.6% in the first nine months of fiscal year
1997 from 21.3% in the first nine months of fiscal year 1996, due to the above.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions and
travel. Sales and marketing expense increased 20% to $3.3 million in the third
quarter of fiscal year 1997 from $2.7 million in the third quarter of 1996, and
increased 15% to $9.0 million in the first nine months of fiscal year 1997 from
$7.9 million in the first nine months of fiscal year 1996. As a percentage of
total revenue, sales and marketing expenses increased to 53.8% in the first nine
months of fiscal year 1997 from 48.9% in the first nine months of fiscal year
1996, due primarily to increases in personnel and salaries and related benefits,
travel and training, and expenses incurred to support the introduction of new
products released in November 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs associated with the
Company's executive staff, legal, accounting, corporate systems, facilities and
human resources departments. General and administrative expenses remained at
approximately the same level in the third quarter of fiscal year 1997 as in the
third quarter of fiscal year 1996, and increased 5.8% to $1.9 million in the
first nine months of fiscal year 1997 from $1.8 million in the first nine months
of fiscal year 1996. As a percentage of total revenue, general and
administrative expenses increased slightly to 11.6% in the first nine months of
fiscal year 1997 from 11.4% in the first nine months of fiscal 1996, due to
significant investment in application software and equipment related to updating
corporate information systems, and the increased costs of being a public
company, including those related to external reporting requirements and legal
and accounting costs.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Symmetry Design Systems, Inc. in November
1996, the Company acquired the ongoing research and development activities of
Symmetry resulting in a one-time pre-tax charge of $1.9 million related to the
write off of certain in-process research and development costs. The value
assigned to the in-process research and development represents those research
and development efforts in process at the acquisition date for which
technological feasibility had not yet been established and which had no
alternative future uses. Accounting rules require that such costs be charged to
expense as incurred. The Company currently believes that these research and
development efforts will result in commercially viable products over the next
one to three years. SEE NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
OTHER EXPENSE, NET
Other expense, net primarily consists of interest income on cash and cash
equivalents and marketable securities offset by interest expense associated with
short-term financing of accounts receivable, capital leases and subordinated
debt, and the effects of foreign currency transaction gains and losses. Other
expense, net was $38,000 and $31,000 in the third quarters of fiscal year 1997
and 1996, respectively. Other expense, net was $29,000 and $431,000 in the first
nine months of fiscal year 1997 and 1996, respectively. The change in the nine
month periods was primarily attributable to the reduction in interest expense
resulting from reduced amounts
11
<PAGE>
outstanding under the Company's line of credit arrangement and subordinated
debt; a result of the Company's initial public offering in March 1996. The
change in the three month periods was attributable to the aforementioned
reduction in interest expense and the effect of foreign currency transaction
gains and losses.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $225,000 and $243,000,
respectively in the first nine months of fiscal year 1997 and 1996. These
amounts consist primarily of foreign tax expense.
The Company's effective income tax rate for fiscal year 1997 will be
impacted by the mix of tax benefits available from utilization of net operating
loss carryforwards and tax expense for subsidiaries in certain countries where
the Company does business. Accordingly, the Company's income tax position and
resulting income tax rate is uncertain for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception with private equity
investments, cash from operations, subordinated debt, bank loans, capital
equipment leases, accounts receivable financing and in March 1996, with an
initial public offering of common stock which resulted in net proceeds to the
Company of approximately $9.4 million.
Net cash used in operating activities was $1.2 million in the first nine
months of fiscal year 1997, primarily resulting from a net loss for the period,
and the adjustments for depreciation and amortization, and in-process research
and development acquired in connection with the acquisition of Symmetry. (SEE
NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.) Additionally, accounts
receivable increased primarily due to increased revenue in the third quarter of
fiscal year 1997, and prepaid expenses and other assets increased primarily as a
result of payment of prepaid royalties, and the recording of a non-compete
agreement in conjunction with employment contracts with certain key employees in
the Symmetry transaction. A liability associated with this agreement is recorded
in accrued expenses and other liabilities.
Net cash used in investing activities was $4.1 million in the first nine
months of fiscal year 1997, which primarily included the net investment of cash
in marketable securities, capital expenditures for furniture, fixtures and
equipment, which were principally systems upgrades and improvements, and capital
expenditures associated with the investment in the Company's component and
template model libraries.
Net cash used in financing activities was $1.4 million in the first nine
months of fiscal year 1997, which primarily included payments of subordinated
debt and capital lease obligations.
The acquisition of Symmetry is reflected in cash flows from investing
activities and the supplemental disclosure of noncash information in the
accompanying Consolidated Statement of Cash Flows. The primary effects of this
acquisition on the Company's Consolidated Balance Sheet at the date of
acquisition were: cash increased $260,000, accounts receivable increased
$18,000, prepaid expenses and other assets increased $130,000, furniture,
fixtures and equipment, net increased $20,000 and accounts payable and accrued
expenses increased $159,000. (SEE NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.)
At December 31, 1996, the Company had cash and cash equivalents of
$3.6 million and marketable securities of $1.7 million. The Company also
utilizes lease financing arrangements to finance purchases of capital assets as
a source of liquidity.
The Company believes its existing cash, cash equivalents and marketable
securities, together with lease financing arrangements, and cash flows expected
to be generated by operations, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures for the next 12 months.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO.
-----------
11 Statement Regarding Computation of Per Share (Loss) Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated November 22, 1996 (which disclosed the
acquisition of Symmetry Design Systems, Inc.) was filed with the
Commission on December 5, 1996. No other reports on Form 8-K were
filed during the quarter ended December 31, 1996.
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 10, 1997
ANALOGY, INC.
By:/s/ GARY P. ARNOLD
--------------------------------
Gary P. Arnold
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ TERRENCE A. RIXFORD
--------------------------------
Terrence A. Rixford
Vice President, Finance and Administration
(Principal Financial Officer)
14
<PAGE>
EXHIBIT 11.0
ANALOGY, INC.
COMPUTATION OF PER SHARE (LOSS) EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Net (loss) income $ (1,675) $ 257 $ (3,316) $ 708
--------- ------ --------- -------
--------- ------ --------- -------
Net (loss) income per share (1) $ (0.19) $ 0.03 $ (0.39) $ 0.08
--------- ------ --------- -------
--------- ------ --------- -------
Weighted average shares outstanding:
Common stock 8,596 4,639 8,422 4,552
Dilutive common stock options and
warrants, using the treasury stock
method - 2,868 - 2,851
--------- ------ --------- -------
Shares used in per share calculations 8,596 7,507 8,422 7,403
--------- ------ --------- -------
--------- ------ --------- -------
</TABLE>
(1) Fully diluted earnings per share is not disclosed on the consolidated
statements of operations as it is not materially different from primary
earnings per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements found in the Company's Form 10Q for
the nine months ended December 31, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,648
<SECURITIES> 1,693
<RECEIVABLES> 6,707
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,284
<PP&E> 9,646
<DEPRECIATION> 5,422
<TOTAL-ASSETS> 20,992
<CURRENT-LIABILITIES> 9,187
<BONDS> 0
0
0
<COMMON> 16,863
<OTHER-SE> (6,065)
<TOTAL-LIABILITY-AND-EQUITY> 20,992
<SALES> 4,434
<TOTAL-REVENUES> 6,816
<CGS> 409
<TOTAL-COSTS> 1,038
<OTHER-EXPENSES> 7,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,564)
<INCOME-TAX> 111
<INCOME-CONTINUING> (1,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,675)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
