<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
-------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
COMMON STOCK, NO PAR VALUE 9,252,535
(Class) (Shares outstanding at January 30,1998)
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<PAGE>
ANALOGY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1997
and March 31, 1997 ........................................ 2
Consolidated Statements of Operations - Three Months and
Nine Months Ended December 31, 1997 and 1996 .............. 3
Consolidated Statements of Cash Flows - Nine Months
Ended December 31, 1997 and 1996 .......................... 4
Notes to Consolidated Financial Statements ................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders ........... 14
Item 6. Exhibits and Reports on Form 8-K .............................. 14
</TABLE>
1
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,001 $ 1,827
Marketable securities -- 1,697
Accounts receivable 10,835 9,161
Prepaid expenses 1,249 886
Other assets, net 483 455
-------- --------
Total current assets 14,568 14,026
Furniture, fixtures and equipment, net of
accumulated depreciation and amortization
of $7,499 and $5,833 3,960 4,280
Library costs, net 3,549 2,729
Other assets, net 826 1,095
--------- ---------
$ 22,903 $ 22,130
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 818 1,301
Current portion of capital leases 310 566
Accrued salaries and benefits 2,181 2,095
Accrued expenses 259 181
Unearned revenue 6,750 5,812
--------- ---------
Total current liabilities 10,318 9,955
Non-current portion of capital leases 722 499
Other liabilities 117 359
Shareholders' equity:
Common stock, no par value, authorized
35,000 shares; 9,194 and 9,118 shares
issued and outstanding 17,367 17,124
Foreign currency translation (223) (155)
Accumulated deficit (5,398) (5,652)
--------- ---------
Total shareholders' equity 11,746 11,317
--------- ---------
$ 22,903 $ 22,130
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
---------------------- -------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 4,511 $ 4,434 $ 11,906 $ 9,987
Service and other 3,335 2,382 9,068 6,804
-------- -------- -------- -------
Total revenue 7,846 6,816 20,974 16,791
Cost of revenue:
Product licenses 364 409 1,344 1,160
Service and other 669 629 2,205 1,640
-------- -------- -------- -------
Total cost of revenue 1,033 1,038 3,549 2,800
-------- -------- -------- -------
Gross profit 6,813 5,778 17,425 13,991
Operating expenses:
Research and development 1,587 1,493 4,290 4,133
Sales and marketing 3,868 3,286 10,284 9,038
General and administrative 727 584 2,151 1,941
Amortization of intangibles 92 45 276 45
Acquired in-process research
and development -- 1,896 -- 1,896
-------- -------- -------- ------
Total operating expenses 6,274 7,304 17,001 17,053
-------- -------- -------- ------
Operating income (loss) 539 (1,526) 424 (3,062)
Other expense, net (77) (38) (83) (29)
-------- -------- -------- -------
Income (loss) before income
taxes 462 (1,564) 341 (3,091)
Income tax expense 115 111 87 225
-------- -------- -------- ------
Net income (loss) $ 347 $ (1,675) $ 254 $(3,316)
-------- -------- -------- -------
-------- -------- -------- -------
Basic and diluted net income (loss)
per share $ 0.04 $ (0.19) $ 0.03 $ (0.39)
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average shares outstanding:
Basic 9,193 8,596 9,164 8,422
-------- -------- -------- -------
-------- -------- -------- -------
Diluted 9,834 8,596 9,639 8,422
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 254 $ (3,316)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,843 2,097
Acquired in-process research and development - 1,896
Foreign currency transaction loss, net 10 43
Changes in operating assets and liabilities:
Accounts receivable (1,803) (784)
Prepaid expenses and other assets (404) (735)
Accounts payable and accrued expenses (567) (132)
Unearned revenue 1,029 (232)
-------- -------
Net cash provided by (used in) operating activities 1,362 (1,163)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities - (5,910)
Sales of marketable securities - 3,017
Maturities of marketable securities 1,700 1,200
Capital expenditures for furniture, fixtures and equipment (1,042) (1,741)
Capital expenditures for library costs (1,712) (900)
Net cash acquired in acquisition - 260
-------- -------
Net cash used in investing activities (1,054) (4,074)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debt - (829)
Principal payments on capital leases (352) (510)
Common stock offering costs - (82)
Proceeds from exercise of common stock options 243 84
-------- --------
Net cash used in financing activities (109) (1,337)
Effect of exchange rate changes on cash and cash equivalents (25) 14
-------- --------
Net increase (decrease) in cash and cash equivalents 174 (6,560)
Cash and cash equivalents at beginning of period 1,827 10,208
-------- --------
Cash and cash equivalents at end of period $ 2,001 $ 3,648
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 103 $ 151
Income taxes 125 62
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 319 $ 693
Acquisition of Symmetry Design Systems:
Assets acquired and liabilities assumed, net of cash acquired $ - $ (2,421)
Issuance of common stock - 2,681
-------- --------
Net cash acquired in acquisition $ - $ 260
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION
The unaudited financial information included herein for the nine months ended
December 31, 1997 and 1996 was prepared in conformity with generally accepted
accounting principles. The financial information as of March 31, 1997 is
derived from the Analogy, Inc. (the "Company") consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997. Certain information or footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying consolidated
financial statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. The accompanying consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements for the fiscal year ended March 31, 1997, as included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
Operating results for the nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending March 31, 1998, or any portion thereof.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less; marketable securities consist primarily of
government and corporate securities. The Company's marketable securities were
classified as "available for sale" and accordingly were carried at market value,
which was not materially different from cost at March 31, 1997.
3. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128). This
Statement supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. The Company was
required to adopt the provisions of SFAS 128 for the quarter ended December 31,
1997. As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are the
exclusion of common stock equivalents in the determination of Basic Earnings Per
Share and the market price at which common stock equivalents are calculated in
the determination of Diluted Earnings Per Share.
Basic earnings per common share is computed using the weighted average number
of shares of common stock outstanding for the period. Diluted earnings per
common share is computed using the weighted average number of shares of common
stock and dilutive common equivalent shares related to stock options and
warrants outstanding during the period.
5
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted computations of earnings per share (in thousands, except for
per share amounts).
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Income Per Share Income Per Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income (loss) available to
shareholders $347 9,193 $0.04 $(1,675) 8,596 $(0.19)
-------
-------
Effect of dilutive securities
Stock options and warrants -- 641 -- --
------ ------ ------- ------
Diluted earnings per share
Income (loss) available to
shareholders $347 9,834 $0.04 $(1,675) 8,596 $(0.19)
------ ------ ------- ------- ------ -------
------ ------ ------- ------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------------
December 31, 1997 December 31, 1996
--------------------------- ----------------------------
Income Per Share Income Per Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income (loss) available to
shareholders $254 9,164 $0.03 $(3,316) 8,422 $(0.39)
-------
-------
Effect of dilutive securities
Stock options and warrants -- 475 -- --
------ ------ ------- ------
Diluted earnings per share
Income (loss) available to
shareholders $254 9,639 $0.03 $(3,316) 8,422 $(0.39)
------ ------ ------- ------- ------ ---------
------ ------ ------- ------- ------ ---------
</TABLE>
The adoption on SFAS 128 had no effect on previously reported loss per share
amounts for the three and nine month periods ended December 31, 1996. In
those periods, primary loss per share was the same as basic loss per share
and fully diluted loss per share was the same as diluted loss per share.
Losses were reported in both periods, and accordingly the denominator was
equal to the weighted average outstanding shares with no consideration for
common stock equivalents as they were anti-dilutive.
4. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes
requirements for disclosure of comprehensive income. The objective of SFAS
130 is to report all changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income is
the total of net income and all other non-owner changes in equity. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of earlier financial statements for comparative purposes is
required. The Company has not quantified the effect of adoption of SFAS 130.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, markets and supports high-performance software and
model libraries for the top-down design and behavioral simulation of
mixed-signal and mixed-technology systems. The Company's core simulator
product, Saber, was introduced in 1987. In addition to Saber, Analogy offers
schematic capture and analysis tools and framework integration products
providing interfaces to the design environments of major electronic design
automation companies. The Company's fiscal year ends on March 31.
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 provided. 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 modeling contract from the U.S. Air Force in fiscal year 1997. The Company
also received a contract from the Defense Advanced Research Projects Agency
("DARPA") in fiscal year 1997 and a multi-year grant from the National
Institute of Standards and Technology ("NIST") in fiscal year 1996 which
provide funding to the Company for research and development. The DARPA
contract contains cost sharing provisions.
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, those discussed in the Company's Annual Report on Form 10-K and those
discussed 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, and the
potential effect of the Asian financial crisis. 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. 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. 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. Seasonal factors, particularly decreases in revenues in
European markets in the second
7
<PAGE>
fiscal quarter resulting from European holidays in July and August, and
cyclical economic patterns in the aerospace, defense, automotive or other
end-user industries also contribute to quarter-to-quarter fluctuations. 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.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated selected items of
the Company's consolidated statements of operations and such items expressed
as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------------ -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 4,511 57.5% $ 4,434 65.1%
Service and other 3,335 42.5 2,382 34.9
-------- ----- -------- -----
Total revenue 7,846 100.0 6,816 100.0
Cost of revenue:
Product licenses 364 4.7 409 6.0
Service and other 669 8.5 629 9.2
-------- ----- -------- -----
Total cost of revenue 1,033 13.2 1,038 15.2
-------- ----- -------- -----
Gross profit 6,813 86.8 5,778 84.8
Operating expenses:
Research and development 1,587 20.2 1,493 21.9
Sales and marketing 3,868 49.3 3,286 48.2
General and administrative 727 9.3 584 8.6
Amortization of intangibles 92 1.2 45 0.7
Acquired in-process research
and development -- -- 1,896 27.8
-------- ----- -------- -----
Total operating expenses 6,274 80.0 7,304 107.2
-------- ----- -------- -----
Operating income (loss) 539 6.8 (1,526) (22.4)
Other expense, net (77) (0.9) (38) (0.5)
-------- ----- -------- -----
Income (loss) before income taxes 462 5.9 (1,564) (22.9)
Income tax expense 115 1.5 111 1.7
-------- ----- -------- -----
Net income (loss) $ 347 4.4% $ (1,675) (24.6)%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------------ -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 11,906 56.8% $ 9,987 59.5%
Service and other 9,068 43.2 6,804 40.5
--------- ----- -------- -----
Total revenue 20,974 100.0 16,791 100.0
Cost of revenue:
Product licenses 1,344 6.4 1,160 6.9
Service and other 2,205 10.5 1,640 9.8
--------- ----- -------- -----
Total cost of revenue 3,549 16.9 2,800 16.7
--------- ----- -------- -----
Gross profit 17,425 83.1 13,991 83.3
Operating expenses:
Research and development 4,290 20.5 4,133 24.6
Sales and marketing 10,284 49.1 9,038 53.8
General and administrative 2,151 10.2 1,941 11.5
Amortization of intangibles 276 1.3 45 0.3
Acquired in-process research
and development -- -- 1,896 11.3
--------- ----- -------- -----
Total operating expenses 17,001 81.1 17,053 101.5
--------- ----- -------- -----
Operating income (loss) 424 2.0 (3,062) (18.2)
Other expense, net (83) (0.4) (29) (0.2)
--------- ----- -------- -----
Income (loss) before income taxes 341 1.6 (3,091) (18.4)
Income tax expense 87 0.4 225 1.3
--------- ----- -------- -----
Net income (loss) $ 254 1.2% $ (3,316) (19.7)%
--------- ----- -------- -----
--------- ----- -------- -----
</TABLE>
THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL YEARS 1998 AND 1997
REVENUE
Total revenue increased 15.1% to $7.8 million in the third quarter of fiscal
year 1998 from $6.8 million in the third quarter of fiscal year 1997, and
increased 24.9% to $20.9 million in the first nine months of fiscal year 1998
from $16.8 million in the first nine months of fiscal year 1997. One customer
accounted for 13% of total revenue in the third quarter of fiscal year 1998. No
one customer accounted for 10% or more of total revenue in the first nine months
of fiscal year 1998 and the third quarter or first nine months of fiscal years
1997.
Product license revenue increased 1.7% to $4.5 million in the third quarter of
fiscal year 1998 from $4.4 million in the third quarter of fiscal year 1997, and
increased 19.2% to $11.9 million in the first nine months of fiscal year 1998
from $10.0 million in the first nine months of fiscal year 1997. The increases
were primarily attributable to continued customer acceptance of the Company's
new SaberDesigner suite of products for the Windows NT operating system,
increased penetration of products into the mixed-signal integrated circuit
market and continued broadening of the Company's customer base.
Service and other revenue increased 40.0% to $3.3 million in the third quarter
of fiscal year 1998 from $2.4 million in the third quarter of fiscal year 1997,
and increased 33.3% to $9.1 million in the first nine months of fiscal year 1998
from $6.8 million in the first nine months of fiscal year 1997. The increases
were due
9
<PAGE>
primarily to increased demand for the Company's maintenance and other
services, growth in the Company's installed base; and revenues from the U.S.
Air Force under a $2.0 million modeling contract awarded during the first
quarter of fiscal year 1997 and DARPA under a $1.3 million contract awarded
in September 1996. The final models under the U.S. Air Force contract are
expected to be delivered in the fourth quarter of fiscal year 1998,
therefore, the Company does not expect significant revenues in the fourth
quarter of fiscal year 1998 or beyond from this source. In addition, revenues
from the NIST grant and the DARPA contract are expected to decline
significantly in the fourth quarter of fiscal year 1998 and the first quarter
of fiscal year 1999, as these awards near expiration. The Company expects to
continue to grow its maintenance revenues and continues to seek additional
modeling contracts to replace the U.S. Air Force contract. However, there can
be no assurance that revenues from the U.S. Air Force, DARPA or NIST will
replaced.
Revenues recognized under these contracts were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ------ ------
<S> <C> <C> <C> <C>
NIST $130 $139 $ 579 $ 553
U.S. Air Force 625 -- 1,244 631
DARPA 228 118 743 238
---- ---- ------ ------
Totals $983 $257 $2,566 $1,422
---- ---- ------ ------
---- ---- ------ ------
</TABLE>
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 the first nine
months of fiscal years 1998 and 1997. Total revenues from U.S.
government-related sources, including the previously mentioned specific
awards, accounted for approximately 12.5% of total revenues in the first nine
months of fiscal year 1998, and approximately 18.2% of total revenues in the
first nine months of fiscal year 1997. While 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 an adverse effect on the Company's
business, financial condition and results of operations; the Company
continues to broaden its customer base which it believes will lessen the
effect of such project cancellations or reductions.
International revenue was $8.1 million (39% of total revenue) in the first
nine months of fiscal year 1998 compared to $7.4 million (44% of total
revenue) in the first nine months of fiscal year 1997. International revenue
decreased as a percentage of total revenue primarily as a result of increased
sales in the United States in fiscal year 1998. The Company sells its
products and services through its wholly-owned subsidiaries in Europe and
through distributors in Asia. The Company is monitoring the Asian financial
situation and the potential impact on its customers, and does not currently
anticipate a significant impact from such crisis on its results of operations
for fiscal year 1998.
COST OF REVENUE
Total cost of revenue was approximately $1.0 million in the third quarters of
fiscal year 1998 and 1997, and increased 26.8% to $3.5 million in the first
nine months of fiscal year 1998 from $2.8 million in the first nine months of
fiscal year 1997.
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. 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. Cost of product license
revenue decreased to 8.1% of product license revenue in the third quarter of
fiscal year 1998 from 9.2% in the third quarter of fiscal year 1997, and
decreased slightly to 11.3% of product license revenue in the first nine
months of fiscal year 1998 from 11.6% in the first nine months of fiscal year
10
<PAGE>
1997. 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.
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 associated with the U.S. Air Force and DARPA
contracts and the NIST grant, 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 decreased to
20.1% of service and other revenue in the third quarter of fiscal year 1998
from 26.4% in the third quarter of fiscal year 1997. This decrease was
primarily attributable to increased engineering efforts, related to expanded
testing and check-out procedures, expended in the third quarter of fiscal
year 1997 on the U.S. Air Force B-2 modeling contract, which were not
incurred during the third quarter of fiscal year 1998. In addition,
maintenance revenue earned in the third quarter of fiscal year 1998 increased
compared to maintenance revenue earned in the third quarter of fiscal 1997.
Cost of service and other revenue increased slightly to 24.3% of service and
other revenue in the first nine months of fiscal year 1998 from 24.1% of
service and other revenue in the first nine months of fiscal year 1997. The
NIST grant and the U.S. Air Force contract will be completed during the
fourth quarter of fiscal year 1998 and the first quarter of fiscal year 1999,
accordingly costs of services related to these contracts are not expected to
be incurred beyond the first quarter of fiscal year 1999. Costs related to
revenue under the DARPA contract are also expected to decrease significantly
over the next three fiscal quarters, as the contract expires in October 1998.
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 6.3% to $1.6 million in the third quarter of fiscal year
1998 from $1.5 million in the third quarter of fiscal year 1997, and
increased 3.8% to $4.3 million in the first nine months of fiscal year 1998,
from $4.1 million in the first nine months of fiscal year 1997. The increases
were primarily attributable to increases in research and development
personnel and increased salaries. As a percentage of total revenue, research
and development costs decreased to 20.2% in the third quarter of fiscal year
1998 from 21.9% in the third quarter of fiscal year 1997, and decreased to
20.5% in the first nine months of fiscal year 1998 from 24.6% in the first
nine months of fiscal year 1998, primarily as a result of increased revenue
in fiscal year 1998.
The NIST grant and the U.S. Air Force contract will be completed during the
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999, and the
DARPA contract will expire in October 1998. These contracts and grant have
provided contract modeling and research and development revenue to the
Company, as described above under the headings "General" and "Revenue."
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions and
travel expenses for sales and marketing personnel, and advertising and public
relations expenses. Sales and marketing expense increased 17.7% to $ 3.9
million in the third quarter of fiscal year 1998 from $3.3 million in the
third quarter of fiscal year 1997, and increased 13.8% to $10.3 million in
the first nine months of fiscal year 1998 from $9.0 million in the first nine
months of fiscal year 1997. The increases primarily resulted from increases
in sales commissions, personnel, salaries, travel, and the establishment of
a new telemarketing function early in fiscal 1998. As a percentage of total
revenue, sales and marketing expenses increased to 49.3% in the third quarter
of fiscal year 1998 from 48.2% in the third quarter of fiscal year 1997, and
decreased to 49.0% in the first nine months of fiscal year 1998 from 53.8% in
the first nine months of fiscal year 1997, due to increased revenue in fiscal
year 1998.
11
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expense includes costs associated with the
Company's executive staff, legal, accounting, corporate systems, facilities
and human resources departments. General and administrative expenses
increased 24.5% to $727,000 in the third quarter of fiscal year 1998 compared
to $584,000 in the third quarter of fiscal year 1997, and increased 10.8% to
$2.2 million in the first nine months of fiscal year 1998 compared to $1.9
million in the first nine months of fiscal year 1997. The increases primarily
resulted from increased depreciation related to the investment in application
software and equipment associated with updating corporate information systems
in fiscal year 1997 and general and administrative expenses of Symmetry
Design Systems, Inc., which was acquired in November 1996. As a percentage of
total revenue, general and administrative expenses increased to 9.3% in the
third quarter of fiscal year 1998 from 8.6% in the third quarter of fiscal
year, and decreased to 10.2% in the first nine months of fiscal year 1998
from 11.5% in the first nine months of fiscal year 1997, primarily due to
increased revenue in fiscal year 1998. These changes were primarily as result
of the above explanations, offset by increased revenue in fiscal year 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Symmetry Design Systems, Inc. in
November 1996, the Company acquired the ongoing research and development
activities of Symmetry resulting in a one-time pre-tax charge of $1.9 million
related to the write off of certain in-process research and development
costs. The value assigned to the in-process research and development
represents those research and development efforts in process at the
acquisition date for which technological feasibility had not yet been
established and which had no alternative future uses. Accounting rules
require that such costs be charged to expense as incurred. The Company
currently believes that these research and development efforts will result in
commercially viable products over the next one to three years.
OTHER INCOME (EXPENSE), NET
Other income (expense), net primarily consists of interest income on cash,
cash equivalents and marketable securities offset by interest expense
associated with capital leases and the effects of foreign currency
transaction gains and losses. Other expense, net was $77,000 and $38,000 in
the third quarter of fiscal years 1998 and 1997, respectively. Other expense,
net was $83,000 and $29,000 in the first nine months of fiscal years 1998 and
1997, respectively. These changes were primarily attributable to reduced
interest income resulting from a lower level of cash, cash equivalents and
marketable securities held during the periods, offset by the effect of other
individually insignificant items.
INCOME TAX EXPENSE (BENEFIT)
The Company provided for foreign income and withholding taxes of $161,000 and
$225,000 in the first nine months of fiscal years 1998 and 1997,
respectively. During fiscal year 1998 the Company recorded a benefit from the
utilization of net operating loss carryforwards, which it believes will be
realized in the fiscal year. The Company's effective tax rate is very
sensitive to shifts in income and losses among the various countries in which
the Company does business, since in some countries the Company is in a tax
paying position while in other countries the Company has operating loss
carryforwards available to offset taxable income.
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.
12
<PAGE>
Net cash provided by operating activities was $1.4 million in the first nine
months of fiscal year 1998. This primarily resulted from net income for the
period, adjustments for depreciation and amortization, and an increase in
unearned revenue offset by an increase in accounts receivable, primarily
attributable to increased sales levels.
Net cash used in investing activities was $1.1 million in the first nine
months of fiscal year 1998, which primarily included capital expenditures for
the upgrade of corporate information systems and capital expenditures
associated with the investment in the Company's component and template model
libraries, offset by maturities of investments in marketable securities.
Net cash used in financing activities was $109,000 in the first nine months
of fiscal year 1998, which included payments on capital lease obligations,
offset by proceeds from the exercise of stock options.
The Company has an operating line of credit with a bank which allows the
Company to receive advances of up to $3.0 million based on eligible accounts
receivable and is secured by accounts receivable, furniture, fixtures and
equipment and general intangibles. Interest is payable monthly 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.
No amounts were outstanding under this facility at December 31, 1997.
The Company has a lease line of credit, which allows for the lease of up to
$1,000,000 of computers and related equipment, under which $281,000 was
outstanding at December 31, 1997. Amounts borrowed under the lease line of
credit are to be repaid over 36 months. The lease line of credit expires
March 31, 1998. In connection with the negotiation of the lease line of
credit the Company issued warrants to purchase 10,000 shares of its common
stock at $7.50 per share which expire on June 23, 2001.
The Company has made an assessment of the effect of the Year 2000 issue on
its systems, equipment and software products. Based on this assessment, the
Company believes that its software applications, operational programs and its
software products will properly recognize calendar dates beginning in the
Year 2000, and accordingly does not currently expect to incur material costs
in connection with the Year 2000 issue.
The Company believes its existing cash, cash equivalents and marketable
securities, combined with amounts available under its operating line of
credit and lease line of credit, 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 June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes
requirements for disclosure of comprehensive income. The objective of SFAS
130 is to report all changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income is
the total of net income and all other nonowner changes in equity. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of earlier financial statements for comparative purposes is
required. The Company has not quantified the effect of adoption of SFAS 130.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 22, 1997. The
following matters were submitted to shareholders for their consideration:
1. With respect to the two nominees for three-year terms as director
identified in the Company's Proxy Statement; John H. Faehndrich received
6,506,138 votes and 875,093 votes were withheld and Martin Vlach received
6,069,649 votes and 1,311,582 votes were withheld.
2. The amendments to the Company's Amended and Restated 1993 Stock
Incentive Plan Incentive Plan were approved as follows: 6,235,499 shares
were voted in favor, 1,084,771 shares were voted in opposition and 26,761
shares abstained.
3. The appointment of KPMG Peat Marwick, LLP as the Company's independent
auditors for the fiscal year ending March 31, 1998 was ratified as follows:
7,369,480 shares were voted in favor, 3,226 shares were voted in opposition
and 8,525 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit No.
-----------
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K, containing the Company's earnings release for the quarter
and nine months ended December 31, 1997, under Item 5, was filed on January 27,
1998.
14
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 10, 1998
ANALOGY, INC.
By: /s/ GARY P. ARNOLD
-------------------
Gary P. Arnold
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ TERRENCE A. RIXFORD
-----------------------
Terrence A. Rixford
Vice President, Finance and Administration
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10Q FOR
THE NINE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,001
<SECURITIES> 0
<RECEIVABLES> 10,835
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,568
<PP&E> 11,459
<DEPRECIATION> 7,499
<TOTAL-ASSETS> 22,903
<CURRENT-LIABILITIES> 10,318
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0
0
<COMMON> 17,367
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<TOTAL-LIABILITY-AND-EQUITY> 22,903
<SALES> 20,974
<TOTAL-REVENUES> 20,974
<CGS> 3,549
<TOTAL-COSTS> 3,549
<OTHER-EXPENSES> 17,001
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 341
<INCOME-TAX> 87
<INCOME-CONTINUING> 254
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