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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: March 31, 1997
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes / X / No / /
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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. / X /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 30, 1997 was $27,041,796 based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.
The number of shares outstanding of the Registrant's Common Stock as of May 30,
1997 was 9,134,737 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement, to be used in connection with the Company's Annual
Meeting of Shareholders to be held on or about July 22, 1997.
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ANALOGY, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1 - Business 1
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote
of Security Holders 5
PART II
Item 5 - Market for the Registrant's Common
Equity and Related Stockholder Matters 5
Item 6 - Selected Financial Data 6
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6
Item 8 - Financial Statements and Supplementary
Data 13
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10 - Directors and Executive Officers of the
Registrant 14
Item 11 - Executive Compensation 14
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 14
Item 13 - Certain Relationships and Related
Transactions 14
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 14
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Analogy, Inc. (the "Company" or "Analogy") 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 Saber simulator supports top-down design of mixed-signal,
mixed-technology systems using the Company's proprietary analog hardware
description language, MAST. The Saber simulator and its accompanying MAST models
are used in the design of electronic, mechanical, hydraulic and optical
components and systems. This multi-functional simulator provides manufacturers
of products incorporating mixed-signal, mixed-technology systems with
productivity increases similar to those Integrated Circuit ("IC") designers
experienced through the adoption of digital simulators. The Saber simulator is
used in many industries for products as diverse as deep sub-micron ICs, video
recorders, hydraulic presses, engine controls in automobiles, anti-lock brake
systems and avionics systems.
The Company was founded in 1985 and is incorporated under the laws of the
State of Oregon. Its executive offices are located at 9205 SW Gemini Drive,
Beaverton, Oregon, 97008.
PRODUCTS
The Company's software products are licensed to customers. The Company's
model libraries are provided on an annual subscription basis, under which the
customer receives periodic updates as new models are generated. Support is
provided based on annual or other periodic contracts. A minimum, single-user
configuration would include Saber, SaberScope and either SaberSketch or a
Frameway Integration product. List price of such a minimum configuration for a
single user, plus a one-year subscription to the Company's model libraries,
would start at approximately $38,000. Options can increase the single user price
to over $80,000. Minimum configuration multi-user systems start at $85,000 for
three users.
SABER SIMULATOR. The Saber simulator is the core simulation engine for the
Company's product line. It solves the system of equations described in the MAST
models. This information provides the user with the ability to obtain
performance data on circuit or system operation in many areas. Saber runs
independently from the model library. It allows performance modeling from steady
state operating levels to operation over time, under stress, over frequency, and
in a wide variety of analytical modes. MAST is the Company's Hardware
Description Language ("HDL"), and it was the first behavioral modeling HDL
capable of handling both analog and digital components. MAST enables the
modeling of any physical device or technology that can be represented in
mathematical terms. Using MAST, complex mixed-signal, mixed-technology systems
can be modeled and analyzed in a top-down or bottom-up manner, enabling an
iterative design process. The models can be simple in content, as with those
used in a "proof of concept" high-level design, or highly detailed, as would be
required for new deep sub-micron devices developed in the IC industry.
CO-SIMULATION INTERFACES. The Company's co-simulation interface products
provide linkages to digital simulators widely used in the IC design market, such
as Cadence Design Systems' Verilog-XL, Mentor Graphics' QuickSim II and Quick
HDL and Viewlogic's Speedwave and VCS. The co-simulation interfaces allow
customers requiring mixed-signal, mixed-technology simulation to use models
previously developed for one of these digital simulators. Saber's co-simulation
capabilities, combined with Saber's bridging capability through its Frameway
Integrations, has led to support by the leading application specific integrated
circuit ("ASIC") manufacturers for the Company's products, as it has meant that
ASIC vendors could support all the leading electronic design automation ("EDA")
design solutions with one set of analog and mixed-signal component models.
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TEMPLATE MODEL LIBRARIES. The Company's template models are mathematical
descriptions of device behavior with built-in flexibility that allows designers
to characterize specific components. Such templates describe the behavior of
devices, such as transistors, hydraulic pumps, valves, motors or fiber optic
cable. Each new template model broadens the applicability of Saber.
COMPONENT MODEL LIBRARIES. The Company's component models are specific
mathematical descriptions of device behavior. Component models represent the
catalog of parts available to the simulator user, and include such things as
specific diodes, transistors, opamps, regulators, analog-to-digital converters,
pulse width modulators, motors, lamps, fuses and many non-electrical components
such as fiber optic devices. The Company has a constantly growing set of
component models, with over 8,000 parts in its component libraries.
To further strengthen the Company's modeling position, in November 1996 the
Company acquired Symmetry Design Systems, Inc. ("Symmetry") of Los Altos,
California. Through the acquisition of Symmetry's model library ("SymLib") which
includes over 12,000 specific devices, the Company now offers the most
comprehensive model library in the industry. In addition to this expanded model
library, the acquisition of Symmetry enables the Company to offer Symmetry's
MODPEX design tool which allows design engineers to create their own models.
Both MODPEX and SymLib are now sold through the Company's worldwide sales force.
The Company's internal model development team has developed and refined
techniques and special hardware and software that the Company uses to
characterize and to build component models which account for behavioral changes
caused by variations in temperature, frequency, power and by statistical
variation in manufacturing.
SABERDESIGNER ENVIRONMENT. SaberDesigner is a comprehensive graphical
design environment that provides a Windows-style integrated tool set and user
interface for design entry, simulation and analysis. The SaberDesigner tool set
consists of four basic elements: SaberGuide, a graphical user interface to
access and operate the simulator; SaberScope, a graphical post-processing and
waveform display program for analyzing and viewing simulation results;
SaberBook, the on-line documentation package for Saber that allows guided access
to relevant user information on-line and SaberSketch, a schematic entry and
drawing package. SaberGuide and SaberBook are included with Saber. These tools
are tightly integrated to enhance user convenience and the speed of the design
process. SaberDesigner is a tool set intended to provide the power and
capabilities of Saber simulation to the average or infrequent user.
SaberDesigner is now available on both the UNIX and Windows NT platforms.
INSPECS ANALYSIS PACKAGE. The InSpecs analysis package is a set of tools
that helps design engineers analyze the results of their simulations. Using this
package, designers can identify and choose the best combination of component
values, tolerances and ratings to optimize products, reduce costs and increase
yields. This tool set uses stress and sensitivity analyses to identify the
critical parts in the design, comprehensive measurements to acquire and distill
data to assess performance and statistical "Monte Carlo" analysis to provide
insight into the performance variations caused by component and parameter
tolerances experienced in manufacturing.
FRAMEWAY INTEGRATIONS. The Company's Frameway Integrations provide
interfaces to the design frameworks provided by Mentor Graphics, Cadence Design
Systems and Viewlogic. By using an Analogy Frameway Integrations product, users
of these other EDA frameworks can obtain the benefits and capabilities of the
Company's products while using their standard design process and the accustomed
look and feel of their host EDA framework. These Frameway Integrations also give
users of the Company's simulation products the advantage of being able to move
models, designs and simulation data between different EDA vendor environments.
If one division or customer is using Mentor Graphics tools and another division
or customer is using Cadence tools, they can both use Saber and, through the
Frameway Integrations, share models or designs across environments. This
interoperability is not otherwise easily accomplished and enables the Company's
products to provide a bridge between competing frameworks.
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CUSTOMER SERVICE. The Company provides services in training, on-site
engineering and consulting and contract model development. The Company maintains
six world-wide training centers: in Beaverton, Oregon; Ann Arbor, Michigan;
Frederick, Maryland; Swindon, England; Paris, France and Munich, Germany. A
seventh center is provided through the Company's distributor in Tokyo, Japan.
Classes are taught regularly at these facilities on the use of the simulation
products and on modeling in the MAST language. The Company also provides
specialized component characterization services to its customers. For large
customers, classes are also provided at the customer's location. Company-trained
applications engineers help develop customer-proprietary models and templates,
and the Company maintains a staff of highly trained and experienced applications
engineers to consult on specialized design and modeling applications in fields
such as electrical, mechanical, ASIC and ICs, power supplies and control
systems.
SALES AND MARKETING
The Company markets its products worldwide through a staff that, as of
March 31, 1997, consisted of 62 Company-employed field sales and support
personnel. The Company manages its worldwide sales operations from its
Beaverton, Oregon headquarters. The Company markets its products in North
America and Europe through a direct sales and support organization. U.S.
sales offices are located in these metropolitan areas: Boston, Chicago,
Detroit, Huntsville (Alabama), Los Angeles, Rochester (New York), San
Francisco, and Washington, D.C. as well as at the Company's headquarters in
Beaverton, Oregon. In Europe the Company maintains, through wholly-owned
subsidiaries, sales and support offices near Paris, London, Munich and
Stockholm. The Company also maintains a direct sales office in Singapore and
sells through distributors in Japan and Korea.
The Company also has a university program for purposes of increasing the
number of engineers trained in the use of the Saber simulator, MAST modeling
language and development of behavioral models. The Company has made its software
available to more than 84 universities worldwide, many of which are conducting
research in such areas as power device modeling, mixed-technology simulation and
design and failure mode analysis. The results of this research are then made
available to the industrial community, which enables Saber to be more readily
used by these customers.
CUSTOMER SUPPORT AND SERVICE
The Company maintains and supports products through its own operations,
those of its subsidiaries and through its distributors. The Company offers a
technical support hotline to customers and distributors. Support engineers
answer the technical support calls and generally provide same-day responses to
questions that cannot be resolved during the initial call. The Company's product
licenses include a limited initial term of product maintenance. Support and
service accounted for 39.5%, 28.4%, and 31.8% of the Company's total revenue for
the fiscal years 1997, 1996, and 1995, respectively.
RESEARCH AND DEVELOPMENT
The Company focuses its research and development efforts in the areas of
simulator development, model development techniques and product accessibility.
Research and development expenditures for fiscal years 1997, 1996, and 1995 were
$5.4 million, $4.5 million, and $3.7 million, respectively.
In modeling, the Company continues to expand its model libraries through
internal model development, research and development contracts and strategic
business acquisitions. The Company believes that continued enhancement of the
depth, breadth and quality of its model libraries will be critical to achieving
and maintaining technological and market leadership. To further its research and
development efforts in modeling techniques and model development consistent with
its strategic objectives, the Company pursues funded research and development
from governmental entities and corporations and has also entered into model
development contracts with selected customers.
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The Company is continuing to extend the applicability and accessibility of
its products by providing user interfaces that incorporate the vocabulary and
mathematical and display conventions of engineers working in a variety of
technologies. The Company continues to focus resources on maintaining its
framework integration and co-simulation tools, as the products to which these
tools are linked evolve.
No assurance can be given that current research and development efforts,
including those described above, will be successful, or will result in the
introduction of new or enhanced products on any particular timetable, or at all.
In the face of technological change, a failure to introduce new or enhanced
products or a failure to introduce them in a timely manner could have a material
adverse impact on the Company's business, financial condition and results of
operations.
COMPETITION
In the design of ICs, the Company faces competition from many vendors of
simulation tools. However, most available simulators are digital or SPICE-based
(Simulation Program with Integrated Circuit Emphasis) and are highly specialized
to ICs and are therefore not applicable to broader mixed-signal,
mixed-technology systems. In the broader systems markets, the Company does not
believe that it currently experiences significant competition. However, the
design environments of virtually all of the Company's major customers are based
on one or another of the major EDA vendors' design frameworks. This pattern
drives the need for and usefulness of the Company's Frameway Integration
products that permit data interchange between Saber and the products of other
vendors. Such other vendors typically have programs to encourage other companies
to integrate with the vendors' products and the Company participates in these
programs for frameworks it views as strategically important. Many of these large
EDA vendors have a significant operating history and significantly greater
financial, technical, and marketing resources, greater name recognition, larger
installed customer bases and longer relationships with many of the Company's key
existing and target customers than does the Company. In addition, most have
introduced simulation products (including some analog and mixed-signal
behavioral modeling simulation products) to serve the IC designer particularly.
These major EDA companies or other companies may develop and introduce new
products which create significant competition for the Company and its products.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not have a material adverse effect on its business, results of
operations and financial condition.
PROPRIETARY RIGHTS
The Company relies primarily on trade secret and ongoing development
efforts to protect its technology and augments those strategies with patents,
copyrights and trademarks where the Company believes it is useful to do so. The
Company has obtained six U.S. and two Canadian patents on various aspects of its
products, including parameter extraction techniques, Calaveras synchronization
techniques for mixed mode simulation, waveform calculator and behavioral
modeling. Other patent applications are pending or in process. The Company's
policy has been to enter into confidentiality agreements with all employees and
signed license agreements that include nondisclosure provisions with all
distributors and customers. The Company limits access to and distribution of its
software, applicable documentation and other proprietary information. The
Company's software is protected as an unpublished copyrighted work and is
shipped with a software security lock that limits software access to authorized
users. Additionally, access to the software source code is only provided for
interface products and selected models and only to major customers pursuant to
license agreements that include nondisclosure provisions. The Company holds a
worldwide, perpetual, fully paid-up license to use the Saber trademark from its
owner, American Airlines, Inc. The Company has United States registrations for
the following trademarks: Analogy, Analogy HDL, Calaveras Algorithm, Frameway,
Hypermodel and MAST. The Company has European and Japanese registrations for
certain of these and other trademarks. The Company asserts other common law
trademarks and has a number of registrations pending.
Despite the activities described above, no assurance can be given that the
steps taken by the Company will provide adequate protection of its technology or
that competitors will not be able to develop similar or functionally equivalent
technology. Additionally, copyright and trade secret protection may be limited
in certain
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foreign countries. The Company believes, however, that because of the rapid pace
of technological change in the EDA industry, the legal intellectual property
protection for its products is a less significant factor in the Company's
success than the knowledge, creative abilities and effectiveness of its
engineering and marketing staff and the timeliness and quality of its support
services. Although the Company does not believe that its products infringe the
proprietary rights of others and has not received any claims of infringement of
the proprietary rights of others, in the future the Company may receive notice
of claims of infringement of other parties' proprietary rights and there can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims against third parties, such
as customers) will not be asserted against the Company or that any such
assertions will not have a material adverse effect on the Company's business,
financial condition or results of operations.
EMPLOYEES
At March 31, 1997, the Company had 181 employees, including 87 in marketing
and sales, 68 in research, development and engineering and 26 in systems,
administration and finance. The Company believes its future success will depend
on its continued ability to attract and retain highly qualified technical,
management and sales and marketing personnel. The Company's employees are not
subject to a collective bargaining agreement and the Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices, as well as its principal manufacturing,
engineering and marketing operations, are located in a leased building of
approximately 40,400 square feet in Beaverton, Oregon. The lease expires on
August 31, 2001. The Company has leased office space for eight U.S. field sales
offices located in these metropolitan areas: Boston, Chicago, Detroit,
Huntsville (Alabama), Los Angeles, Rochester (New York), San Francisco, and
Washington, D.C. Lease commitments for these facilities are short term, several
being month to month and the remainder having terms of 12 months or less. In
addition, the Company has leased office space near London, Munich, Paris and
Stockholm, and maintains an office in Singapore.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Report, there were no material legal proceedings to
which the Company or its subsidiaries is a party or to which any of their
properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended March 31, 1997.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market System
under the symbol "ANLG." The Company's common stock commenced trading on March
22, 1996. The high and low sales prices as reported on the Nasdaq National
Market System for the period from March 22, 1996 to March 31, 1997 were as
follows.
LOW HIGH
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1996
Fourth Quarter (since March 22, 1996) $ 7 1/2 $ 8 3/4
1997
First Quarter $ 6 3/4 $ 13 1/4
Second Quarter 4 5/8 7 1/4
Third Quarter 3 7/8 4 3/4
Fourth Quarter 4 6 1/4
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There were approximately 115 shareholders of record and 2,100 beneficial
shareholders at June 6, 1997. The Company has never declared or paid dividends
on its common stock. The Company intends to retain earnings from operations for
use in the operation and expansion of its business and does not anticipate
paying cash dividends in the foreseeable future.
During the period from April 1, 1996 through March 31, 1997, the Company
sold an aggregate of 142,263 shares of Common Stock for an aggregate purchase
price of $207,121 to various persons pursuant to the exercise of options granted
under the Company's Amended and Restated 1993 Stock Incentive Plan in reliance
on Rule 701 promulgated under the Securities Act of 1933.
In connection with the acquisition of Symmetry, on November 22, 1996, the
Company issued 590,784 shares of the Company's Common Stock to the 12
shareholders of Symmetry together with a contingent contractual right of such
shareholders to receive 59,216 additional shares of the Company's Common Stock.
In addition, in connection with the acquisition, the Company issued Stock
Purchase Warrants to three Symmetry shareholders to purchase an aggregate of
400,000 additional shares of the Company's Common Stock at an exercise price of
$4.125 per share. Each of the offers and sales made in connection with the
Symmetry acquisition were made in reliance on Section 4(2) of the Securities Act
of 1933. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 6. SELECTED FINANCIAL DATA
The Company's Selected Consolidated Financial Data appears on page F-1 of
this Report.
ITEM 7. 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 both commercial and governmental contract model development and
research and development contracts. 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, or upon acceptance criteria
as agreed to with the customer. The Company received a multi-year grant from the
National Institute of Standards and Technology ("NIST") in fiscal year 1996 and
a contract from 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 41.0%, 43.5% and 51.1% of the Company's total revenue for fiscal
years 1997, 1996 and 1995, respectively. The majority of the Company's
international operations are conducted through the Company's wholly-owned
subsidiaries in Europe. SEE NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
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FORWARD LOOKING STATEMENTS
This report, including the following discussion and analysis of financial
condition and results of operations, contains certain statements, trend analysis
and other information that constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which may
involve risks and uncertainties. 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 and elsewhere in this Report.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as the receipt and timing of
significant orders, 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, seasonal factors, the mix of
direct and indirect sales and general economic conditions. In particular, the
Company's quarterly operating results have in the past fluctuated as a result of
the large percentage of orders that are not received by the Company until near
the end of the quarter. Substantially all of the Company's product licensing
revenue in each quarter results from orders booked in that quarter. The
Company's expense levels are based, in part, on its expectations as to future
revenue. If revenue levels are below expectations, results of operations may be
disproportionately affected because only a small portion of the Company's
expenses varies with its revenue. Seasonal factors, particularly decreases in
revenues in European markets in the second fiscal quarter resulting from
European holidays in July and August, and cyclical economic patterns in the
automotive or other end-user industries also contribute to quarter-to-quarter
fluctuations. Additionally, a significant portion of the Company's revenue in a
quarter typically is received in the last few weeks of that quarter. As a
result, the Company may not learn of, or be able to confirm, revenue or earnings
shortfalls until late in the quarter or following the end of the quarter. Any
shortfall in revenue or earnings from expected levels or other failure to meet
expectations of the financial markets regarding results of operations could have
an immediate and significant adverse effect on the trading price of the
Company's Common Stock in any given period.
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, labor
issues, 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 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, or that
such conditions would not have a material adverse effect on the Company's
business, financial condition and results of operations.
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.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's consolidated statements of operations as a percentage of total
revenue:
YEAR ENDED MARCH 31,
--------------------
1997 1996 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses................ 60.5% 71.6% 68.2%
Service and other............... 39.5 28.4 31.8
------ ----- -----
Total revenue................ 100.0 100.0 100.0
Cost of revenue:
Product licenses................ 6.9 6.5 7.7
Service and other............... 9.2 4.6 3.2
------ ----- -----
Total cost of revenue........ 16.1 11.1 10.9
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Gross profit..................... 83.9 88.9 89.1
Operating expenses:
Research and development........ 22.6 20.8 23.0
Sales and marketing............. 52.7 49.3 57.4
General and administrative...... 11.4 10.9 14.4
Amortization of intangibles..... 0.5 -- --
Acquired in-process research
and development................ 7.9 -- --
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Total operating expenses..... 95.1 81.0 94.8
------ ----- -----
Operating (loss) income.......... (11.2) 7.9 (5.7)
Other expense, net............... (0.1) (2.4) (2.5)
------ ----- -----
(Loss) income before income
taxes............................ (11.3) 5.5 (8.2)
Income tax expense............... 1.4 1.7 1.2
------ ----- -----
Net (loss) income................ (12.7)% 3.8% (9.4)%
------ ----- -----
------ ----- -----
FISCAL YEARS 1997 AND 1996
REVENUE
Total revenue increased 10.2% to $24.0 million in fiscal year 1997 from
$21.7 million in fiscal year 1996.
Product license revenue decreased 6.8% to $14.5 million in fiscal year 1997
from $15.6 million in fiscal year 1996. The decrease was primarily attributable
to a decrease in sales to the automotive industry in the U.S. Sales to
Electronic Data Systems Corp. ("EDS"), which serves as a distributor to certain
automotive industry users, accounted for approximately 13.6% of total revenue in
fiscal year 1996. Sales to EDS were not significant in fiscal year 1997. Reduced
capital spending by General Motors has resulted in reductions in orders from
EDS.
Service and other revenue increased 53.2% to $9.5 million in fiscal year
1997 from $6.2 million in fiscal year 1996. The increase was due primarily to
increased demand for the Company's maintenance and other services, growth in the
Company's installed base, revenues from NIST under a $2.0 million grant awarded
in fiscal year 1996, revenues from the U.S. Air Force under a $2.0 million
modeling contract awarded during the first quarter of fiscal year 1997, and
revenues from DARPA under a $1.3 million contract awarded in September 1996. In
fiscal year 1997, the Company recognized revenues of $768,000, $630,000 and
$348,000, related to the NIST grant, the U.S. Air Force contract and the DARPA
contract, respectively.
8
<PAGE>
In addition to revenues received under the NIST grant, and under the
contracts with the U.S. Air Force and DARPA, the Company received other revenues
from the U.S. government or its subcontractors during fiscal years 1997 and
1996. Total revenues from U.S. government-related sources, including the
previously mentioned specific awards, accounted for approximately 18.1% of total
revenues in fiscal year 1997, and approximately 9.7% of total revenues in 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.
COST OF REVENUE
Total cost of revenue increased 59.3% to $3.9 million in fiscal year 1997
from $2.4 million in 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 and royalty payments.
Cost of product license revenue increased to 11.4% of product license revenue in
fiscal year 1997 from 9.2% in fiscal year 1996, due primarily to increased
amortization of model library costs and royalty payments. In addition, 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 Company does not capitalize development costs for software products
since the time between the establishment of a working model of the software
product and its commercialization is typically of a short duration.
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 23.3% of service
and other revenue in fiscal year 1997 from 16.1% of service and other revenue in
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.
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 19.8% to $5.4 million in fiscal year 1997 from $4.5 million
in fiscal year 1996. The increase 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 22.6% in fiscal year 1997 from 20.8% in 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 17.9% to $12.6 million in fiscal
year 1997 from $10.7 million in fiscal year 1996. The increase primarily
resulted from increases in personnel and salaries and related benefits, travel
and training. Additionally, marketing expenditures increased due to the launch
of SaberDesigner NT, and the development and implementation of focused marketing
plans. As a percentage of total revenue, sales and marketing expenses increased
to 52.7% in fiscal year 1997 from 49.3% in fiscal year 1996, due primarily to
the above and to the Company falling short of its sales goals in the U.S.
automotive sector.
9
<PAGE>
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 increased 15.0%
to $2.7 million in fiscal year 1997 from $2.4 million in fiscal year 1996. The
increase was primarily attributable to significant investment in application
software and equipment related to updating corporate information systems,
increased costs of being a public company, including those related to external
reporting requirements and legal and accounting costs, and increased
administrative costs relating to the acquisition of Symmetry in November 1996.
As a percentage of total revenue, general and administrative expenses increased
slightly to 11.4% in fiscal year 1997 from 10.9% in fiscal 1996.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Symmetry 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 principles 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 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
OTHER EXPENSE, NET
Other expense, net primarily consists of interest income on cash, cash
equivalents and marketable securities offset by interest expense associated with
capital leases and subordinated debt, and the effects of foreign currency
transaction gains and losses. Other expense, net was $11,000 and $523,000 in
fiscal year 1997 and 1996, respectively. The reduction in other expense, net
resulted primarily from decreased interest expense due to payments reducing the
Company's short-term accounts receivable financing arrangement and subordinated
debt, as a result of the Company's initial public offering in March 1996.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $341,000 and $370,000,
respectively in fiscal year 1997 and 1996. These amounts consist primarily of
foreign tax expense. At March 31, 1997, the Company had federal net operating
loss carryforwards of $3.9 million which expire at various dates beginning in
2002 and ending in 2011, if not utilized. Utilization of $950,000 of federal net
operating losses is subject to annual limitations due to a change in the
Company's fiscal year in 1994. For financial reporting purposes the Company has
established a valuation allowance against its deferred tax assets because of the
uncertainty relating to the realization of such asset values. SEE NOTE 7 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FISCAL YEARS 1996 AND 1995
REVENUE
Total revenue increased 33.7% from $16.3 million in fiscal year 1995 to
$21.7 million in fiscal year 1996. This increase reflected the effect of the
Company's decision to expand its direct sales force in fiscal year 1995, an
increased level of experience with the Company's products and markets by sales
personnel and a larger installed base. Product license revenue increased 40.3%
from $11.1 million in fiscal year 1995 to $15.6 million in fiscal year 1996.
Product license revenue increased largely due to an increase in unit sales of
product licenses, larger average order sizes, a relative change in the product
mix to include more comprehensive product configurations and an increased number
of licenses of the Company's newer, higher priced products. Service and other
revenue increased 19.6% from $5.2 million in fiscal year 1995 to $6.2 million in
fiscal year 1996, due to increased
10
<PAGE>
maintenance revenue resulting from the growth in the Company's installed base
and billings to NIST under the grant awarded in fiscal year 1996.
Sales to Electronic Data Systems Corp., which serves as a distributor to
certain automotive industry users, accounted for 13.6% of total revenue in
fiscal year 1996. The loss of or reduction in sales to Electronic Data Systems
Corp. could have a material adverse effect on the Company's financial condition
and results of operations. The Company does not expect significant revenue
growth in the first half of fiscal year 1997 as compared to the first half of
fiscal year 1996, due to near term uncertainty regarding capital spending by
General Motors, through Electronic Data Systems Corp.
Revenue from international operations was $9.4 million (43.5% of total
revenue) in fiscal year 1996 compared to $8.3 million (51.1% of total revenue)
in fiscal year 1995. Although revenue from international operations increased,
in absolute dollars, in fiscal year 1996, revenue from international operations
decreased as a percentage of total revenue. This was primarily due to a
significantly higher growth rate of 46.0% in revenue from United States
operations during the same period.
COST OF REVENUE
Cost of product licenses revenue decreased to 6.5% of total revenue in
fiscal year 1996 from 7.7% in fiscal year 1995, primarily due to the 40.3%
increase in product license revenue during the same period and the resulting
economies of scale.
Cost of service and other revenue increased 94.5% to $994,000 in fiscal
1996, from $511,000 in fiscal year 1995, due primarily to the Company's
increased installed product base, increased investment in training and the costs
associated with the performance under the grant received from NIST.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 20.9% to $4.5 million in fiscal
year 1996 from $3.7 million in fiscal year 1995. The increase primarily resulted
from increased personnel and systems support expenses related to expansion of
the Company's research and development efforts. As a percentage of total
revenue, research and development costs decreased to 20.8% in fiscal year 1996,
from 23.0% in fiscal year 1995, primarily due to a higher growth rate in revenue
than in research and development expense.
SALES AND MARKETING
Sales and marketing expenses increased 14.7% to $10.7 million in fiscal
year 1996, from $9.3 million in fiscal year 1995. The increase primarily
resulted from the Company's field sales force expansion. As a percentage of
total revenue, sales and marketing expenses decreased to 49.3% in fiscal year
1996, from 57.4% in fiscal year 1995, due primarily to the increased efficiency
and experience of the expanded sales force and due to a higher growth rate in
revenue than in sales and marketing expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses remained relatively flat at
approximately $2.3 million in both fiscal year 1996 and 1995. As a percentage of
total revenue, general and administrative expenses decreased to 10.9% in fiscal
year 1996, from 14.4% in fiscal year 1995, primarily due to a higher growth rate
in revenue than in general and administrative expense.
11
<PAGE>
OTHER EXPENSE, NET
Other expense, net increased 28.2% to $523,000 in fiscal year 1996, from
$408,000 in fiscal year 1995. The majority of this increase was attributable to
interest expense associated with the Company's financing of accounts receivable
under a bank agreement during fiscal year 1996. The increase in interest expense
was partially offset by a net foreign currency transaction gain of approximately
$113,000 in fiscal year 1996.
PROVISION FOR INCOME TAXES
For fiscal years 1996 and 1995, the Company provided for foreign
withholding and income taxes of $331,000 and $187,000, respectively. Because of
its tax loss carryforwards the Company did not make a provision for U.S. federal
income tax expense for fiscal year 1996.
As of March 31, 1996, the Company had federal net operating loss
carryforwards of $2.3 million. The federal net operating loss carryforwards will
expire at various dates beginning in 2002 and ending in 2010, if not utilized.
Utilization of $950,000 of federal net operating losses is subject to annual
limitations due to a change in the Company's 1994 fiscal year. For financial
reporting purposes the Company has established a valuation allowance against its
deferred tax assets because of the uncertainty relating to the realization of
such asset values.
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 $1.8 million in fiscal year 1997,
primarily resulting from a net loss for the period, offset by adjustments for
depreciation, amortization and in-process research and development acquired in
connection with the acquisition of Symmetry. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS. Additionally, accounts receivable increased primarily due
to increased revenue in the fourth quarter of fiscal year 1997, and increased
billings to the U.S. government which typically have a longer payment cycle.
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 $5.1 million in the fiscal year
1997, which primarily included the net investment of cash in marketable
securities, capital expenditures for computer application software and hardware
to upgrade corporate information systems, 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 fiscal year
1997, which primarily included payments on subordinated debt and capital lease
obligations.
At March 31, 1997, the Company had cash and cash equivalents of
$1.8 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. During fiscal year 1997, the Company negotiated an
operating line of credit facility with a bank. The facility allows the Company
to receive advances up to $3 million based on eligible accounts receivable and
is secured by accounts receivable, furniture, fixtures and equipment and general
intangibles. Payment terms require interest to be paid monthly calculated at the
bank's prime rate plus 1%. The line of credit facility requires the Company to
maintain certain financial and other covenants and matures on March 9, 1998.
There were no borrowings outstanding under this facility at March 31, 1997.
12
<PAGE>
The Company believes its existing cash, cash equivalents and marketable
securities, combined with the borrowing arrangements described above, 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.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), which are effective for the
quarters ending after December 15, 1997 and the fiscal years ending after
December 15, 1997, respectively. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included under QUARTERLY CONSOLIDATED
FINANCIAL DATA on page F-2 of this Report, and as listed below:
PAGE NO.
Report of KPMG Peat Marwick LLP F-3
Consolidated Balance Sheets, March 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the years ended
March 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions
ELECTION OF DIRECTORS and MANAGEMENT in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders and is incorporated herein by reference. The
information required by Item 405 of Regulation S-K is included under the caption
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
EXECUTIVE COMPENSATION in the Company's Proxy Statement for its 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.
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 SHAREHOLDERS in the Company's Proxy Statement
for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS:
The information required by this item is included beginning on page F-3 of
this Report, and as listed in Part II, Item 8 of this Report.
(a) (2) FINANCIAL STATEMENT SCHEDULES:
Schedules not listed under this item have been omitted because the
information required to be set forth therein is not applicable.
14
<PAGE>
(a) (3) EXHIBITS INCLUDED HEREIN:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger dated as of October 23,
1996, by and among Analogy, Inc., Analogy Acquisition
Corporation and Symmetry Design Systems, Inc. (C)
2.2 First Amendment to Agreement and Plan of Merger dated
as of November 22, 1996, by and among Analogy, Inc.,
Analogy Acquisition Corporation and Symmetry Design
Systems, Inc. (C)
3.1 Third Restated Articles of Incorporation of
Analogy, Inc. (A)
3.2 Second Restated Bylaws of Analogy, Inc. (A)
4.1 Registration Rights Agreement dated as of November 22,
1996, by and among Analogy, Inc., Alan B. Grebene,
Martin G. Walker, Chenmin Hu, Xinping He, Yu Liu,
Andrew L. Hughes, Wenge Wu, Zheng Shi, John A. Wilson,
Qing Chang and E-Hui Xu (C)
10.1 Form of Indemnity Agreement between Analogy, Inc. and
each of its executive officers and directors (A)
10.2 Analogy, Inc. 1986 Stock Option Plan (A) (E)
10.3 Amended and Restated 1993 Stock Incentive Plan (A) (E)
10.4 1995 Stock Option Plan for Nonemployee Directors (A)
(E)
10.5 Form of Stock Option Agreement (A)
10.6 Control Change Agreement dated effective August 18,
1995 between Analogy, Inc. and Gary P. Arnold (A) (E)
10.7 Factoring Agreement dated September 20, 1995 between
Silicon Valley Financial Services and Analogy, Inc.,
Analogy, U.K. Ltd. and Analogy GmbH (A)
10.8 Conditional Assignment for Security Purposes and
Security Agreement dated September 20, 1995 between
Silicon Valley Financial Services and Analogy, Inc.,
Analogy, U.K. Ltd. and Analogy GmbH (A)
10.9 Trademark License Agreement between American
Airlines, Inc. and Analogy, Inc. (A)
10.10 Business Park Lease dated August 30, 1993, between
Analogy, Inc. and Petula Associates Ltd. and Koll
Creekside Associates II (A)
10.14 U.S. Department of Commerce Financial Assistance Award
(A)
10.15 1996 Employee Stock Purchase Plan (B) (E)
11.0 Statement re: computation of per share earnings (D)
21.0 Subsidiaries of Analogy, Inc. (A)
23.0 Consent of KPMG Peat Marwick LLP (D)
27.0 Financial Data Schedule (D)
99.1 Press Release (C)
(A) Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1, as amended, effective March 22, 1996, Commission
Registration No. 333-00266.
(B) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for its fiscal year ended March 31, 1996.
(C) Incorporated by reference to Exhibits to the Company's Current Report
on Form 8-K dated November 22, 1996.
(D) Filed herewith.
(E) Denotes management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended March
31, 1997.
15
<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, on the 13th day of
June 1997.
ANALOGY, INC.
By /s/ GARY P. ARNOLD
------------------
Gary P. Arnold
Chairman of the Board, President
and Chief Executive Officer
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 in the capacities indicated, on the 13th day of June 1997.
SIGNATURE TITLE
/s/ GARY P. ARNOLD Chairman of the Board, President
- ----------------------- and Chief Executive Officer
Gary P. Arnold (Principal Executive Officer)
/s/TERRENCE A. RIXFORD Vice President, Finance and Administration
- ----------------------- (Principal Financial Officer)
Terrence A. Rixford
Director
- -----------------------
Robert L. Cattoi
Director
- -----------------------
John H. Faehndrich
/s/ NEIL E. GOLDSCHMIDT Director
- -----------------------
Neil E. Goldschmidt
/s/ FRANK ROEHR Director
- -----------------------
Frank Roehr
Director
- -----------------------
Charles Sporck
/s/ DR. MARTIN VLACH Vice President, Chief Scientist
- ----------------------- and Director
Dr. Martin Vlach
16
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 14,501 $ 15,562 $ 11,090 $ 8,447 $ 8,275
Service and other 9,459 6,176 5,165 3,459 2,415
--------- --------- --------- -------- --------
Total revenue 23,960 21,738 16,255 11,906 10,690
Cost of revenue:
Product licenses 1,652 1,426 1,255 1,341 764
Service and other 2,202 994 511 586 424
--------- --------- --------- -------- --------
Total cost of revenue 3,854 2,420 1,766 1,927 1,188
--------- --------- --------- -------- --------
Gross profit 20,106 19,318 14,489 9,979 9,502
Operating expenses:
Research and development 5,413 4,518 3,735 2,497 2,283
Sales and marketing 12,622 10,708 9,332 7,543 5,247
General and administrative 2,728 2,373 2,345 2,357 2,006
Amortization of intangibles 136 -- -- -- --
Acquired in-process
research and development 1,896 -- -- -- --
--------- --------- --------- -------- --------
Total operating expenses 22,795 17,599 15,412 12,397 9,536
--------- --------- --------- -------- --------
Operating (loss) income (2,689) 1,719 (923) (2,418) (34)
Other expense, net (11) (523) (408) (267) (17)
--------- --------- --------- -------- --------
(Loss) income before income taxes (2,700) 1,196 (1,331) (2,685) (51)
Income tax expense (benefit) 341 370 196 53 (42)
--------- --------- --------- -------- --------
Net (loss) income $ (3,041) $ 826 $ (1,527) $ (2,738) $ (9)
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
Net (loss) income per share $ (0.35) $ 0.11 $ (0.30) $ (0.63) $ --
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
Shares used in per share calculations 8,584 7,820 5,088 4,334 4,183
MARCH 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities $ 3,524 $ 10,208 $ 1,179 $ 1,622 $ 1,069
Working capital 4,071 6,631 (2,747) (1,228) 998
Total assets 22,130 22,294 10,375 8,997 7,196
Long-term obligations, net of current
portion 858 578 1,640 1,415 294
Shareholders' equity 11,317 11,491 27 1,517 3,368
</TABLE>
F-1
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
QUARTERLY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL YEAR 1997
Total revenue $ 4,716 $ 5,259 $ 6,816 $ 7,169
Gross profit 3,853 4,360 5,778 6,115
Net (loss) income (709) (932) (1,675) 275
FISCAL YEAR 1996
Total revenue $ 5,305 $ 5,323 $ 5,433 $ 5,677
Gross profit 4,786 4,846 4,943 4,743
Net income 219 232 257 118
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Analogy, Inc.:
We have audited the accompanying consolidated balance sheets of Analogy, Inc.
and subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997. 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 Analogy, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
May 9, 1997
F-3
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,827 $ 10,208
Marketable securities 1,697 --
Accounts receivable 9,161 5,831
Prepaid expenses 886 692
Other assets, net 455 125
--------- ----------
Total current assets 14,026 16,856
Furniture, fixtures and equipment, net 4,280 3,113
Library costs, net 2,729 2,116
Other assets, net 1,095 209
--------- ----------
$ 22,130 $ 22,294
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,301 $ 2,124
Current portion of capital leases 566 537
Accrued salaries and benefits 2,095 1,043
Accrued expenses 181 384
Unearned revenue 5,812 5,208
Subordinated debt -- 929
--------- ----------
Total current liabilities 9,955 10,225
Non-current portion of capital leases 499 423
Other liabilities 359 155
Commitments
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
shares issued and outstanding : 9,118 and 8,293
at March 31, 1997 and 1996, respectively 17,124 14,180
Foreign currency translation (155) (78)
Accumulated deficit (5,652) (2,611)
--------- ----------
Total shareholders' equity 11,317 11,491
--------- ----------
$ 22,130 $ 22,294
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenue:
Product licenses $ 14,501 $ 15,562 $ 11,090
Service and other 9,459 6,176 5,165
--------- --------- ---------
Total revenue 23,960 21,738 16,255
Cost of revenue:
Product licenses 1,652 1,426 1,255
Service and other 2,202 994 511
--------- --------- ---------
Total cost of revenue 3,854 2,420 1,766
--------- --------- ---------
Gross profit 20,106 19,318 14,489
Operating expenses:
Research and development 5,413 4,518 3,735
Sales and marketing 12,622 10,708 9,332
General and administrative 2,728 2,373 2,345
Amortization of intangibles 136 -- --
Acquired in-process research
and development 1,896 -- --
--------- --------- ---------
Total operating expenses 22,795 17,599 15,412
--------- --------- ---------
Operating (loss) income (2,689) 1,719 (923)
Other income (expense):
Interest income 302 33 28
Interest expense (191) (669) (436)
Foreign currency transaction
(loss) gain (122) 113 --
--------- --------- ---------
Other expense, net (11) (523) (408)
--------- --------- ---------
(Loss) income before income
taxes (2,700) 1,196 (1,331)
Income tax expense 341 370 196
--------- --------- ---------
Net (loss) income $ (3,041) $ 826 $ (1,527)
--------- --------- ---------
--------- --------- ---------
Net (loss) income per share $ (0.35) $ 0.11 $ (0.30)
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculations 8,584 7,820 5,088
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK FOREIGN ACCUM- TOTAL
----------------- ------------------- CURRENCY ULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT TRANSLATION DEFICIT EQUITY
------ ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 5 $ 2,625 3,763 $ 728 $ 74 $(1,910) $ 1,517
Preferred stock converted
to common stock (1) (812) 630 812 -- -- --
Exercise of stock options
and warrants -- -- 75 69 -- -- 69
Net loss -- -- -- -- -- (1,527) (1,527)
Foreign currency translation -- -- -- -- (32) -- (32)
------ -------- ------ ------- ------- ------- -------
Balance at March 31, 1995 4 1,813 4,468 1,609 42 (3,437) 27
Preferred stock converted
to common stock (4) (1,813) 1,534 1,813 -- -- --
Exercise of stock options
and warrants -- -- 791 1,343 -- -- 1,343
Issuance of common stock
in initial public offering, net -- -- 1,500 9,415 -- -- 9,415
Net income -- -- -- -- -- 826 826
Foreign currency translation -- -- -- -- (120) -- (120)
------ -------- ------ ------- ------- ------- -------
Balance at March 31, 1996 -- -- 8,293 14,180 (78) (2,611) 11,491
Exercise of stock options
and warrants -- -- 142 207 -- -- 207
Issuance of common stock
in connection with acquisition -- -- 650 2,681 -- -- 2,681
Issuance of common stock, net -- -- 33 56 -- -- 56
Net loss -- -- -- -- -- (3,041) (3,041)
Foreign currency translation -- -- -- -- (77) -- (77)
------ -------- ------ ------- ------- ------- -------
Balance at March 31, 1997 -- $ -- 9,118 $17,124 $ (155) $(5,652) $11,317
------ -------- ------ ------- ------- ------- -------
------ -------- ------ ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,041) $ 826 $ (1,527)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,983 1,849 1,643
Acquired in-process research and development 1,896 -- --
Changes in operating assets and liabilities (net of effects of
the acquisition of Symmetry):
Accounts receivable (3,436) (1,315) (1,597)
Prepaid expenses and other assets (888) (558) 40
Accounts payable and accrued expenses (6) 1,067 372
Unearned revenue 667 1,369 1,404
-------- -------- ---------
Net cash (used in) provided by operating activities (1,825) 3,238 335
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,910) -- --
Sales of marketable securities 3,013 -- --
Maturities of marketable securities 1,200 -- --
Capital expenditures for furniture, fixtures and equipment (2,094) (1,285) (543)
Capital expenditures for library costs (1,588) (1,016) (898)
Net cash acquired in acquisition of Symmetry 260 -- --
-------- -------- ---------
Net cash used in investing activities (5,119) (2,301) (1,441)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- -- 12,088
Payments on line of credit -- (1,910) (11,178)
Payments on subordinated debt (929) 50 338
Principal payments on capital leases (734) (645) (533)
Proceeds from sale of common stock 56 9,415 --
Proceeds from exercise of stock options and warrants 207 1,224 69
-------- -------- ---------
Net cash (used in) provided by financing activities (1,400) 8,134 784
-------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents (37) (42) (121)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents (8,381) 9,029 (443)
Cash and cash equivalents at beginning of period 10,208 1,179 1,622
-------- -------- ---------
Cash and cash equivalents at end of period $ 1,827 $ 10,208 $ 1,179
-------- -------- ---------
-------- -------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 167 $ 536 $ 375
Income taxes 215 28 --
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 839 $ 543 $ 363
Subordinated debt applied to exercise of warrants -- 119 --
Preferred stock converted to common stock -- 1,813 812
Acquisition of Symmetry:
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.
F-7
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Analogy, Inc. and subsidiaries (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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries, Analogy UK Ltd., Analogy GmbH, and
Analogy France SARL. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates during the year. Foreign currency
translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to concentration of
credit risk consist primarily of accounts receivable. At March 31, 1997 and
1996, European customers accounted for approximately 31% and 53%, respectively,
of accounts receivable. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial condition. The Company does not
generally require collateral.
The Company historically has derived a significant portion of its revenue from
the automotive, aerospace and defense industries.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and temporary overnight investments.
The Company accounts for marketable securities as "available for sale" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" as the Company intends to utilize these investments for
liquidity or operational purposes. Accordingly, these securities are carried at
market value, which is not materially different from cost at March 31, 1997.
These securities mature in fiscal year 1998.
F-8
<PAGE>
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Furniture and equipment
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value of the leased
assets at the inception of the lease.
Depreciation on furniture, fixtures and equipment is calculated on the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Furniture and equipment held under capital
leases and leasehold improvements are amortized on the straight-line method over
the shorter of the related lease term or estimated useful life of the leased
assets.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred. The Company
does not capitalize software development costs after technological feasibility
has been established since the time period between product release and
establishment of technological feasibility is short.
During fiscal year 1997, the Company entered into a cost-sharing agreement with
DARPA for research and development covering a three year period, pursuant to
which the Company is obligated to provide matching direct and indirect support
costs up to $1.3 million and to deliver progress reports over the same period.
Reimbursed costs under this agreement were $348,000 during fiscal year 1997.
During fiscal year 1996, the Company was awarded a research grant from NIST
which covers a three year period, pursuant to which the Company is obligated to
provide matching indirect cost of support up to $400,000 and to deliver progress
reports over the same period. Reimbursed costs under this grant in fiscal year
1997 and 1996 were $768,000 and $373,000, respectively.
LIBRARY COSTS
Expenses consisting of development costs associated with creating the library
of component and template models are capitalized and amortized on a
straight-line basis over the estimated product life of five years, or on the
ratio of current revenues to total projected product revenues, whichever is
greater.
The Company recognized amortization expense of approximately $975,000, $841,000,
and $813,000 related to its capitalized library costs during the years ended
March 31, 1997, 1996 and 1995, respectively.
REVENUE RECOGNITION
Software and license fee revenues are recognized at the time of shipment.
Software maintenance and library subscription agreements are billed in advance
and recorded as unearned revenue. Unearned maintenance and library subscription
revenues are recognized ratably over the contractual period. Contract modeling
and nonrecurring engineering project revenues are recognized on the completed
contract method, or upon acceptance criteria as agreed to with the customer.
Revenues from training and other services are billed separately and recognized
as the services are provided. Revenue related to original equipment manufacturer
(OEM) contracts is recognized upon receipt of the OEM sales information.
Product licenses include a limited initial term of product maintenance, the
costs of which are insignificant.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. 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.
F-9
<PAGE>
COMPUTATION OF NET (LOSS) INCOME PER SHARE
Net (loss) income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding. Common
equivalent shares from stock options, warrants and preferred stock are excluded
from the computation if their effect is antidilutive, except that, pursuant to
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued at prices below the public offering price during the
twelve months immediately preceding the Company's initial public offering (March
1996) are included in the calculation of common equivalent shares, as if they
were outstanding for fiscal year 1996 and prior periods presented (using the
treasury stock method and the initial public offering price).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments. The fair value of marketable securities is estimated using
quoted market rates for specific securities held. The fair value of subordinated
debt was estimated by discounting expected future cash flows using market
interest rates and did not differ significantly from the carrying value
reflected in the consolidated balance sheet at March 31, 1996.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
established criteria for and requires recognition of impairment losses on
long-lived assets. SFAS 121 also prescribes the accounting for long-lived assets
that are expected to be disposed of in future periods. The Company adopted SFAS
121 in fiscal year 1997. The adoption of this standard did not have a material
effect on the financial statements of the Company.
ADVERTISING COSTS
The costs of advertising are expensed the first time the advertisement takes
place. Advertising expense for fiscal years 1997, 1996 and 1995 was
approximately $57,000, $147,000, and $310,000, respectively.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), which are effective for the
quarters ending after December 15, 1997 and the fiscal years ending after
December 15, 1997, respectively. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
(2) 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
F-10
<PAGE>
matters as defined in the Agreement and Plan of Merger by and among the Company,
Analogy Acquisition Corporation and Symmetry. In connection with the acquisition
and in consideration for non-compete agreements entered into with certain key
employees of Symmetry, the Company issued warrants to purchase 400,000 shares of
the Company's common stock at $4.125 per share. The warrants are exercisable at
the rate of 100,000 shares as of the end of each six-month period from the date
of acquisition and expire upon termination of employment. No compensation
expense was recorded related to the warrants as the exercise price approximated
the fair market value of the underlying stock at the date the warrants were
issued.
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 principles require that such costs be
charged to expense as incurred.
The Company accounted for the acquisition using the purchase method and
valued the transaction at approximately $2.9 million. 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. Pro forma results of operations of the Company as if
the acquisition had occurred at the beginning of fiscal years 1997 and 1996
are not presented as the pro forma effect is not material.
(3) FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net consists of the following (in thousands):
March 31,
-----------------------
1997 1996
------- --------
Office furniture $ 936 $ 541
Computer equipment 7,568 5,988
Software 1,234 550
Leasehold improvements 375 --
-------- --------
Less: accumulated depreciation 10,113 7,079
and amortization (5,833) (3,966)
-------- --------
$ 4,280 $ 3,113
-------- --------
-------- --------
(4) LEASES
The Company has entered into various capital leases for certain furniture and
equipment that expire at various dates during the next three years. Several
capital leases require that the Company remit security deposits as collateral
for the lease. Security deposits are generally released by the leasing company
at the rate of one-half at twelve months and one-half at twenty-four months from
the date of lease inception.
Furniture, fixtures and equipment, net include the following capital lease
amounts (in thousands):
March 31,
-----------------------
1997 1996
-------- --------
Furniture and equipment $ 4,045 $ 3,206
Less accumulated amortization (2,558) (1,819)
-------- --------
$ 1,487 $ 1,387
-------- --------
-------- --------
F-11
<PAGE>
The Company also leases its office facilities and certain office equipment under
non-cancelable operating lease agreements.
Future minimum lease payments under these leases are as follows (in thousands):
Capital Operating
Leases Leases
---------- ----------
Year ending March 31,
1998 $ 689 $ 843
1999 401 658
2000 141 540
2001 -- 383
Thereafter -- 288
---------- ----------
Total minimum lease payments 1,231 $ 2,712
----------
----------
Less amount representing interest (166)
----------
Present value of net minimum
capital lease payments 1,065
Less current portion of capital leases (566)
----------
Non-current portion of capital leases $ 499
----------
----------
Rent expense under operating leases for the years ended March 31, 1997, 1996 and
1995 was approximately $1,429,000, $1,266,000, and $1,167,000, respectively.
(5) SUBORDINATED DEBT
At March 31, 1996, the Company had $929,000 of subordinated debt, due to certain
shareholders, two of whom were directors of the Company. The debt was paid in
full during fiscal year 1997.
In connection with the subordinated debt, certain lenders obtained rights to
receive stock purchase warrants. During fiscal year 1996 all stock purchase
warrants held by these lenders were exercised.
(6) STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK PURCHASE PLAN
During fiscal year 1997, the Company's shareholders approved adoption of the
Analogy, Inc. 1996 Employee Stock Purchase Plan (the "ESPP") which allows
employees of the Company to purchase shares of the Company's Common Stock
through accumulated payroll deductions. Participating employees may elect to
contribute up to 10% of their eligible compensation during each pay period to
the ESPP. The ESPP provides for two semi-annual offering periods beginning
February 1 and August 1 of each year. Participant funds are accumulated during
the offering period and used to automatically purchase shares of the Company's
Common Stock at 85% of the lower of the fair market value of such stock at the
beginning of the offering period or the fair market value at the purchase date.
The Company has reserved 300,000 shares of Common Stock for issuance under the
ESPP and has issued 33,377 shares as of March 31, 1997.
F-12
<PAGE>
STOCK OPTION PLANS
In September 1986, the Company adopted the 1986 Stock Option Plan and reserved
625,000 shares for issuance. In January 1993, the Company simultaneously
adopted the 1993 Stock Incentive Plan and reserved 535,005 shares for issuance.
In June 1994, an additional 392,906 shares were reserved for the 1993 Stock
Incentive Plan. The 1993 Stock Incentive Plan is scheduled to expire in 2003
unless terminated sooner by the Company or options have been granted and
exercised on all shares available under the Plan. The Board of Directors may
grant either incentive stock options with an exercise price of not less than the
fair market value of the common stock at the date of grant or non-qualified
stock options with an exercise price of not less than 85% of the fair market
value of the common stock at the date of grant. The Board of Directors shall
determine the period of each option and the time or times at which options may
be exercised and any restrictions on the transfer of stock issued upon exercise
of any options. The options generally vest over a period of four years and are
exercisable over a period of ten years.
The table below summarizes the Company's stock option activity:
Number Price
of Shares Range
------------- --------------
Outstanding options, March 31, 1994 693,819 $ 0.10 - 2.40
Granted 203,975 2.40 - 4.00
Exercised (107,262) 0.10 - 2.40
Canceled (25,055) 1.20 - 2.40
---------- --------------
Outstanding options, March 31, 1995 765,477 0.10 - 4.00
Granted 354,860 4.00 - 7.50
Exercised (45,957) 0.12 - 2.40
Canceled (29,948) 1.20 - 2.40
---------- --------------
Outstanding options, March 31, 1996 1,044,432 0.10 - 7.50
Granted 717,750 4.75 - 9.00
Exercised (142,263) 0.10 - 4.00
Canceled (293,311) 1.40 - 9.00
---------- --------------
Outstanding options, March 31, 1997 1,326,608 $ 0.16 - 7.50
---------- --------------
---------- --------------
At March 31, 1997, approximately 586,538 of the options outstanding were
exercisable.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all employee stock-based compensation plans. However, SFAS 123
also allows an entity to continue to measure compensation cost for such plans
using the method of accounting prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"). Entities electing to remain with the accounting as prescribed
by APB 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans using
APB 25. The Company has computed, for pro forma disclosure purposes, the value
of options granted during fiscal year 1997 using the Black-Scholes pricing model
and the value of options granted during fiscal year 1996 using the minimum value
pricing model.
F-13
<PAGE>
The following weighted average assumptions were used in the computations for
fiscal years 1997 and 1996:
Fiscal Year
-------------------------
1997 1996
---------- ----------
Risk-free interest rate 6.0% 6.0%
Expected dividend yield 0% 0%
Expected volatility 77.2% n/a
Expected lives 9.96 years 9.87 years
The total value of options and warrants granted during fiscal years 1997 and
1996 was $4,929,000 and $294,000, respectively, which would be amortized on a
straight-line basis over the vesting period of the options or warrants
(typically four years). The weighted average fair value of options and warrants
granted during fiscal years 1997 and 1996 was $4.41 per share and $0.90 per
share, respectively. The Company issued 33,377 shares under its Company's
Employee Stock Purchase Plan during fiscal year 1997. The related weighted
average purchase price and weighted average fair value of shares issued were
$4.30 and $1.15, respectively for fiscal year 1997.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net (loss) income and net (loss) income
per share would have approximated the pro forma amounts show below:
Fiscal Year
---------------------------------------
1997 1996
------------------ -------------------
As Pro As Pro
Reported Forma Reported Forma
-------- ----- -------- -----
Net (loss) income (in thousands) $ (3,041) $ (4,131) $ 826 $ 782
Net (loss) income per share $ (0.35) $ (0.48) $ 0.11 $ 0.10
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to April 1, 1995.
Additional awards are anticipated in future years.
The following table summarizes the information about stock options and warrants
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options and
Options and Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding at Contractual Price Exercisable at Price
Per Share March 31, 1997 Life (Years) Per Share March 31, 1997 Per Share
- --------------- -------------- ------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.16 - $0.80 9,312 1.4 $0.43 9,312 $0.43
$1.20 - $1.40 329,249 5.6 $1.40 329,249 $1.40
$2.40 188,312 7.1 $2.40 102,495 $2.40
$4.00 251,900 8.2 $4.00 95,847 $4.00
$4.13 400,000 9.6 $4.13 0 --
$4.75 - $5.88 522,135 9.3 $5.18 39,460 $5.08
$7.50 25,700 8.8 $7.50 10,175 $7.50
--------- -------
1,726,608 586,538
--------- -------
--------- -------
</TABLE>
F-14
<PAGE>
(7) INCOME TAXES
Income (loss) before income taxes was as follows (in thousands):
Fiscal Year
----------------------------------------
1997 1996 1995
---------- ---------- ----------
United States $ (5,880) $ (1,336) $ (3,580)
Foreign 3,180 2,532 2,249
---------- ---------- ----------
$ (2,700) $ 1,196 $ (1,331)
---------- ---------- ----------
---------- ---------- ----------
Income tax expense consists of the following (in thousands):
Fiscal Year
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Current:
Federal $ -- $ -- $ (6)
State -- 28 15
Foreign 341 331 187
---------- ---------- ----------
341 359 196
Deferred:
Federal -- -- --
State -- -- --
Foreign -- 11 --
---------- ---------- ----------
$ 341 $ 370 $ 196
---------- ---------- ----------
---------- ---------- ----------
The actual income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net income (loss)
before income taxes) as follows (in thousands):
Fiscal Year
----------------------------------
1997 1996 1995
------ ------ ------
Computed expected income tax
(benefit) expense $ (918) $ 407 $ (453)
Increase (reduction) in income
tax expense (benefit) resulting from:
State income tax (benefit) expense (27) 39 (35)
Foreign income taxes and withholding 285 126 118
Benefit of tax credits -- -- (33)
Increase (decrease) in valuation
allowance 323 (237) 547
In-process research and development 667 -- --
Other 11 35 52
------ ------ ------
Income tax expense $ 341 $ 370 $ 196
------ ------ ------
F-15
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
Fiscal Year
----------------------
1997 1996
--------- ---------
Deferred tax assets:
Unearned library and maintenance revenue $ 485 $ 496
Federal and state net operating loss carryforwards 1,491 881
Foreign net operating loss carryforwards 73 310
Research and experimentation credit carryforwards 185 185
Foreign tax credit carryforwards 152 152
Other 281 220
--------- ---------
Total gross deferred tax assets 2,667 2,244
Less valuation allowance (1,513) (1,190)
--------- ---------
Net deferred tax assets 1,154 1,054
Deferred tax liabilities:
Furniture, fixtures and equipment, due to
differences in depreciation (107) (242)
Capitalized library costs (1,047) (812)
Total gross deferred tax liabilities (1,154) (1,054)
--------- ---------
Net deferred taxes $ -- $ --
--------- ---------
--------- ---------
The valuation allowance for deferred tax assets as of March 31, 1997 was
approximately $1.5 million. The net change in the total valuation allowance for
the years ended March 31, 1997, 1996 and 1995 was an increase (decrease) of
approximately $323,000, $(237,000), and $547,000, respectively.
At March 31, 1997, the Company had net operating loss carryforwards for federal
and state income tax purposes which can be used to offset future income subject
to taxes. In addition, there are unused research and experimentation and foreign
tax credits which can be offset against future federal income taxes after the
loss carryforwards. Such loss carryforwards and tax credits are summarized
below (in thousands):
Expiration
Amount Dates
-------- ----------
Loss carryforwards:
Federal $ 3,856 2002-2011
State 4,093 1998-2011
Research and experimentation credits
(federal only) 185 2001-2011
Foreign tax credits (federal only) 152 1998-1999
In addition, the Company has foreign income tax net operating losses of
approximately $73,000, which expire in various years. Due to the change in the
Company's fiscal year end, federal and state net operating losses of
approximately $950,000 are to be deducted ratably over the six year period from
March 31, 1995 to March 31, 2000.
F-16
<PAGE>
(8) PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees. The
plan has 401(k) provisions whereby employees contribute to the plan through
payroll deductions. The Company may elect to make discretionary contributions
to the plan which are approved by the Board of Directors. The Company's
contribution for the fiscal year ended March 31, 1997 was $163,000. The Company
did not make discretionary contributions for the fiscal years ended March 31,
1996 or 1995.
(9) OPERATING LINE OF CREDIT
During fiscal year 1997, the Company negotiated an operating line of credit with
a bank. The facility allows the Company to receive advances up to $3 million
based on eligible accounts receivable and is secured by accounts receivable and
furniture and equipment. Payment terms require interest to be paid monthly
calculated at the bank's prime rate plus 1%. The line of credit facility
requires the Company to maintain certain financial and other covenants and
matures on March 9, 1998. There were no borrowings outstanding under this
facility at March 31, 1997.
(10) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment, comprising the
electronic design automation industry. The Company's geographic revenues and
operating (loss) income are summarized as follows (in thousands):
Fiscal Year
----------------------------------------
1997 1996 1995
---------- ---------- ---------
Geographic revenues:
United States $ 15,409 $ 14,188 $ 9,717
Europe 8,551 7,550 6,538
---------- ---------- ----------
$ 23,960 $ 21,738 $ 16,255
---------- ---------- ----------
---------- ---------- ----------
Export sales $ 1,271 $ 1,911 $ 1,766
---------- ---------- ----------
---------- ---------- ----------
Operating (loss) income:
United States $ (5,885) $ (814) $ (3,174)
Europe 3,196 2,533 2,251
---------- ---------- ----------
$ (2,689) $ 1,719 $ (923)
---------- ---------- ----------
---------- ---------- ----------
Revenue from one customer accounted for 13.6% of total revenue for the year
ended March 31, 1996. There were no revenues from one customer which accounted
for more than 10% of total revenues for fiscal year 1997 or 1995.
Fiscal Year
---------------------
1997 1996
--------- ---------
Identifiable assets (in thousands):
United States $ 18,118 $ 17,877
Europe 4,012 4,417
--------- ---------
$ 22,130 $ 22,294
--------- ---------
--------- ---------
F-17
<PAGE>
EXHIBIT 11.0
ANALOGY, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
YEAR ENDED MARCH 31,
--------------------------------------
1997 1996 1995
----------- ------------ -------------
Net (loss) income $ (3,041) $ 826 $ (1,527)
--------- ------- ----------
--------- ------- ----------
Net (loss) income per share (1) $ (0.35) $ 0.11 $ (0.30)
--------- ------- ----------
--------- ------- ----------
Weighted average shares outstanding:
Common Stock 8,584 4,816 4,378
Dilutive stock options and
warrants, using the treasury
stock method
-- 3,004 710
--------- ------- ----------
Shares used in per share
calculations 8,584 7,820 5,088
--------- ------- ----------
--------- ------- ----------
(1) Fully diluted earnings per share is not disclosed on the consolidated
statements of operations as it is not more than three percent different from
primary earnings per share.
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Analogy, Inc.
We consent to the incorporation by reference in the registration statements on
Forms S-8 (File Numbers 333-27513, 333-27515 and 333-09351) of Analogy, Inc. of
our report dated May 9, 1997 relating to the consolidated balance sheets of
Analogy, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1997, which report
appears in the March 31, 1997 Annual Report on Form 10-K.
KPMG Peat Marwick, LLP
Portland, Oregon
June 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements found in the Company's Annual Report on Form
10K for the year ended March 31, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,827
<SECURITIES> 1,697
<RECEIVABLES> 9,161
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,026
<PP&E> 10,113
<DEPRECIATION> 5,833
<TOTAL-ASSETS> 22,130
<CURRENT-LIABILITIES> 9,955
<BONDS> 0
0
0
<COMMON> 17,124
<OTHER-SE> (5,807)
<TOTAL-LIABILITY-AND-EQUITY> 22,130
<SALES> 23,960
<TOTAL-REVENUES> 23,960
<CGS> 3,854
<TOTAL-COSTS> 3,854
<OTHER-EXPENSES> 22,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (2,700)
<INCOME-TAX> 341
<INCOME-CONTINUING> (3,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,041)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
