<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: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER: 0-27752
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
BEAVERTON, 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 9,384,698
(Class) (Shares outstanding at July 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 - June 30, 1998
and March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Operations - Three Months
ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Cash Flows - Three Months
ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . .4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . .7
Item 3. Quantitative and Qualitative Disclosure About Market Risk. . . 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 13
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,202 $ 8,130
Accounts receivable 4,506 3,946
Prepaid expenses 1,140 1,160
Other assets, net 1,608 1,394
------- -------
Total current assets 10,456 14,630
Furniture, fixtures and equipment, net of accumulated
Depreciation and amortization of $8,670 and $8,073 3,544 3,811
Library costs, net 4,091 3,924
Other assets, net 560 610
------- -------
$ 18,651 $ 22,975
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,580 $ 1,895
Current portion of capital leases 401 536
Accrued salaries and benefits 2,164 2,726
Unearned revenue 8,176 8,562
------- -------
Total current liabilities 12,321 13,719
Non-current portion of capital leases 508 454
Other liabilities 98 107
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
9,374 and 9,330 shares issued and outstanding 18,081 17,906
Other comprehensive loss - foreign currency translation (196) (205)
Accumulated deficit (12,161) (9,006)
------- -------
Total shareholders' equity 5,724 8,695
------- -------
$ 18,651 $ 22,975
------- -------
------- -------
</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 June 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Product licenses $ 2,834 $ 2,751
Service and other 2,578 2,461
------ ------
Total revenue 5,412 5,212
Cost of revenue:
Product licenses 520 551
Service and other 334 584
------ ------
Total cost of revenue 854 1,135
------ ------
Gross profit 4,558 4,077
Operating expenses:
Research and development 2,396 1,511
Sales and marketing 3,604 3,088
General and administrative 684 668
Amortization of intangibles 92 92
Restructuring charges 557 -
------ ------
Total operating expenses 7,333 5,359
------ ------
Operating loss (2,775) (1,282)
Other income (expense), net (202) 25
------ ------
Loss before income taxes (2,977) (1,257)
Income tax expense (benefit) 178 (314)
------ ------
Net loss $ (3,155) $ (943)
------ ------
------ ------
Basic and diluted net loss per common share $ (0.34) $ (0.10)
------ ------
------ ------
Shares used in basic and diluted per share
calculations 9,358 9,127
------ ------
------ ------
</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>
Three months ended June 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,155) $ (943)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,047 832
Changes in operating assets and liabilities:
Accounts receivable (528) 3,303
Prepaid expenses and other assets (235) (220)
Accounts payable and accrued expenses (919) (1,052)
Unearned revenue (451) (242)
------ ------
Net cash (used in) provided by operating activities (4,241) 1,678
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities - 1,700
Capital expenditures for furniture, fixtures and equipment (149) (427)
Capital expenditures for library costs (486) (544)
------ ------
Net cash (used in) provided by investing activities (635) 729
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (256) (101)
Proceeds from exercise of common stock options and warrants 175 36
------ ------
Net cash used in financing activities (81) (65)
------ ------
Effect of exchange rate changes on cash and cash equivalents 29 (14)
------ ------
Net (decrease) increase in cash and cash equivalents (4,928) 2,328
Cash and cash equivalents at beginning of period 8,130 1,827
------ ------
Cash and cash equivalents at end of period $ 3,202 $ 4,155
------ ------
------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 134 $ 34
Income taxes 304 9
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 175 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited financial information included herein for the three months ended
June 30, 1998 and 1997 was prepared in conformity with generally accepted
accounting principles. The financial information as of March 31, 1998 is derived
from the Analogy, Inc. (the "Company") consolidated financial statements
included in the Annual Report on Form 10-K for the year ended March 31, 1998.
Certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended March 31, 1998, as included
in the Company's Annual Report on Form 10-K for the year ended March 31, 1998.
Operating results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
March 31, 1999, or any portion thereof.
2. RECLASSIFICATIONS
The Company has reclassified certain prior period information to conform with
the current period presentation.
3. COMPREHENSIVE LOSS
On April 1, 1998, the Company adopted 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. Adoption of SFAS
130 did not impact the Company's consolidated financial position, results of
operations or cash flows for the three months ended June 30, 1998 and 1997. The
reconciliation of net loss to comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss $ (3,155) $ (943)
Foreign currency translation adjustments (9) 19
------ ----
Comprehensive loss $ (3,164) $ (924)
------ ----
------ ----
</TABLE>
4. NET LOSS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic
net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding for the period. Diluted net
loss per common share for all periods presented is the same as basic net loss
per share since all potential dilutive securities are excluded because they are
antidilutive.
5
<PAGE>
The dilutive effect of stock options outstanding for the purchase of
approximately 1,453,000 and 1,340,000 shares for the three months ended June 30,
1998 and 1997, respectively, and warrants outstanding for the purchase of
300,000 and 410,000 shares for three months ended June 30, 1998 and 1997,
respectively, were not included in loss per share calculations, because to do so
would have been antidilutive.
5. RESTRUCTURING
Results of operations for the first quarter of fiscal year 1999 included a
$557,000 charge for the costs associated with a restructuring plan undertaken to
improve profitability, consisting of a work force reduction primarily in the
marketing and research and development functions of the Company. All of the
restructuring charges were paid in the first quarter of fiscal year 1999.
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 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
sales to resellers is generally recognized upon shipment to the reseller. In the
case of certain long-term contracts, revenue is recognized on a subscription
basis over the life of the contract. 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 generally 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 provided funding to the Company for research and development. The DARPA
contract contains cost sharing provisions. The final models under the U.S. Air
Force contract were delivered in the fourth quarter of fiscal year 1998,
therefore, no further revenues will be received in fiscal year 1999 from this
source. In addition, revenues from the NIST grant concluded at the end of the
first quarter of fiscal year 1999 and revenues from the DARPA contract are
expected to be minimal in fiscal year 1999, as this award nears expiration.
There can be no assurance that revenues from the U.S. Air Force, DARPA or NIST
will be replaced.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements,
including, without limitation, the receipt and timing of orders for the
Company's products, the timing of sell-through by resellers, the lengthy sales
cycles for the Company's products, the effect of the Asian economic situation,
the impact of expense reductions on the Company, increased adoption of
behavioral modeling design methodologies for mixed-signal and mixed-technology
systems design, Analogy's ongoing ability to introduce new products and expand
its markets, seasonal fluctuations in the Analogy's order patterns and
competitive initiatives, unanticipated costs related to the Year 2000 issue, and
other risks listed from time to time in the Company's Securities and Exchange
Commission reports or otherwise disclosed by the Company.
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
7
<PAGE>
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 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 economic situation. 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,
including 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 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.
The Company 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. The Company also 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. 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.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets 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
STATEMENT OF OPERATIONS DATA: JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 2,834 52.4 % $ 2,751 52.8%
Service and other 2,578 47.6 2,461 47.2
------ ----- ------ -----
Total revenue 5,412 100.0 5,212 100.0
Cost of revenue:
Product licenses 520 9.6 551 10.6
Service and other 334 6.2 584 11.2
------ ----- ------ -----
Total cost of revenue 854 15.8 1,135 21.8
------ ----- ------ -----
Gross profit 4,558 84.2 4,077 78.2
Operating expenses:
Research and development 2,396 44.3 1,511 29.0
Sales and marketing 3,604 66.6 3,088 59.2
General and administrative 684 12.6 668 12.8
Amortization of intangibles 92 1.7 92 1.8
Restructuring charges 557 10.3 - -
------ ----- ------ -----
Total operating expenses 7,333 135.5 5,359 102.8
------ ----- ------ -----
Operating loss (2,775) (51.3) (1,282) (24.6)
Other income (expense), net (202) (3.7) 25 0.5
------ ----- ------ -----
Loss before income taxes (2,977) (55.0) (1,257) (24.1)
Income tax expense (benefit) 178 3.3 (314) (6.0)
------ ----- ------ -----
Net loss $ (3,155) (58.3)% $ (943) (18.1)%
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
FIRST QUARTER OF FISCAL YEAR 1999 COMPARED TO FIRST QUARTER OF FISCAL YEAR 1998
REVENUE
Total revenue increased 3.8% to $5.4 million in the first quarter of fiscal year
1999 from $5.2 million in the first quarter of fiscal year 1998. No one customer
accounted for 10% or more of total revenue in the first quarters of fiscal year
1999 and 1998.
Product license revenue was flat at approximately $2.8 million in the first
quarters of both fiscal year 1999 and 1998, resulting from reduced demand from
customers in Asia in the first quarter of fiscal year 1999, offset by increased
demand from customers in the automotive industry in the U.S. and Germany.
Service and other revenue increased 4.8% to $2.6 million in the first quarter of
fiscal year 1999 from $2.5 million in the first quarter of fiscal year 1998. The
change was due primarily to continued demand for the Company's maintenance and
other services and growth in the Company's installed base. The final models
under the U.S. Air Force contract were delivered in the fourth quarter of fiscal
year 1998, therefore, no further revenues will be received in fiscal year 1999
from this source. In addition, revenues from the NIST grant concluded at the end
of the first quarter of fiscal year 1999 and the revenues from the DARPA
contract are expected to be minimal in fiscal year 1999, as this award nears
expiration. There can be no assurance that revenues from the U.S. Air Force,
DARPA or NIST will be replaced.
9
<PAGE>
Revenues recognized under these contracts were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Three months
ended June 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
NIST $ 74 $ 209
U.S. Air Force - 161
DARPA 36 137
</TABLE>
Total revenues from U.S. government-related sources, including the previously
mentioned specific awards, were not significant as a percentage of total
revenues in the first quarter of fiscal year 1999, and were approximately 9.7%
of total revenues in the first quarter of fiscal year 1998. The cancellation or
reduction of projects being undertaken by the U.S. government requiring products
or services provided by the Company, or the Company's failure to obtain
additional awards of such projects, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company sells its products and services through its wholly-owned
subsidiaries in Europe and through distributors in Asia. International revenue
was $2.7 million (49% of total revenue) in the first quarter of fiscal year 1999
compared to $2.7 million (52% of total revenue) in the first quarter of fiscal
year 1998. The Company is continuing to monitor the Asian financial situation
and the potential impact on its customers.
COST OF REVENUE
Total cost of revenue decreased 24.8% to $854,000 in the first quarter of fiscal
year 1999 from $1.1 million in the first quarter of fiscal year 1998.
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 18.3% of product license revenue in the first quarter of
fiscal year 1999 from 20.0% in the first quarter of fiscal year 1998. 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), certain
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. Cost of service and other revenue decreased to 13.0% of
service and other revenue in the first quarter of fiscal year 1999 from 23.7%
of service and other revenue in the first quarter of fiscal year 1998. The
decrease was primarily attributable to decreased activity under the NIST, U.S.
Air Force and DARPA contracts and an increase in the Company's installed base in
fiscal year 1999. The final models under the U.S. Air Force contract were
delivered in the fourth quarter of fiscal year 1998, therefore, no further
costs will be incurred in fiscal year 1999 in connection with this contract. In
addition, the NIST grant concluded at the end of the first quarter of fiscal
year 1999 and the costs incurred under the DARPA contract are expected to be
minimal in fiscal year 1999, as this award nears expiration.
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 and an allocation of
facilities and systems support costs including depreciation of capital equipment
10
<PAGE>
used in research and development. Research and development expenses increased
58.6% to $2.4 million in the first quarter of fiscal year 1999 from $1.5 million
the first quarter of fiscal year 1998 and increased as a percentage of total
revenue to 44.3% in the first quarter of fiscal year 1999 from 29.0% in the
first quarter of fiscal year 1998. As discussed under "Revenue" and "Cost of
Revenue", above, the final models under the U.S. Air Force contract were
delivered in the fourth quarter of fiscal year 1998, the NIST grant concluded at
the end of the first quarter of fiscal year 1999 and the DARPA contract expires
in fiscal 1999. Accordingly, payroll and overhead related to research and
development personnel performing work under these contracts was matched with
related revenues and recorded as cost of service and other revenue in fiscal
year 1998; whereas similar costs in the first quarter of fiscal year 1999 are
recorded in research and development expense. Additionally, the increase was
attributable to increases in research and development personnel and increased
salaries in the first quarter of fiscal year 1999 as compared to the first
quarter of fiscal year 1998.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions, travel
and costs of promotional activities. Sales and marketing expense increased 16.7%
to $3.6 million in the first quarter of fiscal year 1999 from $3.1 million in
the first quarter of fiscal year 1998, and increased as a percentage of total
revenue to 66.6% in the first quarter of fiscal year 1999 from 59.2% in the
first quarter of fiscal year 1998. The increases primarily resulted from
increases in personnel, salaries, travel expenses and costs associated with the
Company's corporate image marketing campaign, which began in the fourth quarter
of fiscal year 1998.
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 slightly to
$684,000 in the first quarter of fiscal year 1999 from $668,000 in the first
quarter of fiscal year 1998, and decreased slightly as a percentage of total
revenue to 12.6% in the first quarter of fiscal year 1999 from 12.8% in the
first quarter of fiscal year 1998.
RESTRUCTURING CHARGES
Results of operations for the first quarter of fiscal year 1999 included a
$557,000 charge for the costs associated with a restructuring plan undertaken to
improve profitability, consisting of a work force reduction primarily in the
marketing and research and development functions of the Company. All of the
restructuring charges were paid in the first quarter of fiscal year 1999.
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) income, net was $(202,000) and $25,000 in the first quarter of
fiscal years 1999 and 1998, respectively. The change was primarily attributable
to amortization of finance charges related to the sale of approximately $4.0
million of accounts receivable to a financial institution in the fourth quarter
of fiscal year 1998, reduced interest income resulting from lower levels of cash
and cash equivalents held during the periods and the effect of foreign currency
transaction gains and losses.
INCOME TAX EXPENSE (BENEFIT)
The Company provided for foreign taxes of $178,000 and $30,000 in the first
quarters of fiscal years 1999 and 1998, respectively. In the first quarter of
fiscal year 1998 the Company also recorded a benefit from the utilization of net
operating loss carryforwards of $344,000. The Company's effective tax rate is
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.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.2 million in the first quarter of
fiscal year 1999. This primarily resulted from a net loss for the period,
adjustments for depreciation and amortization, decreases in accounts payable and
accrued expenses and accrued salaries and benefits as result of the timing of
payments, and an increase in accounts receivable. Accounts receivable increased
compared to the balance at March 31, 1998 which was net of a March 1998 sale of
approximately $4.0 million of accounts receivable to a financial institution.
Net cash used in investing activities was $635,000 in the first quarter of
fiscal year 1999, which primarily included expenditures associated with the
investment in the Company's component and template model libraries and capital
expenditures for the upgrade of corporate information systems.
Net cash used in financing activities was $81,000 in the first quarter of fiscal
year 1999, which included principal payments on capital lease obligations offset
by proceeds from the exercise of stock options and warrants.
The Company has an operating line of credit with a bank which allows the Company
to receive advances of up to $5.0 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
0.5%. The line of credit facility requires the Company to maintain certain
financial and other covenants and matures on March 4, 1999. The Company was in
compliance with all covenants at June 30, 1998. No amounts were outstanding
under this facility at June 30, 1998.
The Company has a lease line of credit, which allows for the lease of computers
and related equipment, under which approximately $502,000 was outstanding at
June 30, 1998. Amounts borrowed under the lease line of credit are to be repaid
over 36 months. The lease line of credit expires on March 31, 1999. In April
1997, 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 believes its existing cash and cash equivalents, combined with
amounts available under its operating 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.
YEAR 2000 ISSUE
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, as it affects the Company's systems, equipment and software
products. The Company also may be exposed to risks from computer systems of
parties with which the Company transacts business. In response to this, the
Company is taking steps, including contacting its major suppliers, to determine
the extent to which the Company may be vulnerable to those parties' failure to
remedy their own Year 2000 issues and to ascertain what actions, if any, need be
taken by the Company in response to such risks. There can be no assurance that
failure of the Company, or of parties with which the Company transacts business,
to identify and remedy Year 2000 issues will not have a material adverse effect
on the Company's business, financial condition or results of operations.
12
<PAGE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect SFAS No. 133 to have a material
impact on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO.
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 fiscal year ended March 31, 1998, was filed under Item 5, on May 15, 1998.
A Report on Form 8-K, containing the Company's press release disclosing
information about employment reductions and associated costs and an announcement
that the Company expected to report an operating loss for the quarter ended June
30, 1998, was filed under Item 5, on June 11, 1998.
No other Reports on Form 8-K were filed during the quarter ended June 30, 1998.
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 4, 1998
ANALOGY, INC.
By:/s/ Gary P. Arnold
-------------------------------
Gary P. Arnold
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
(Principal Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-Q FOR THE THREE
MONTHS ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,202
<SECURITIES> 0
<RECEIVABLES> 4,506
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,456
<PP&E> 12,214
<DEPRECIATION> 8,670
<TOTAL-ASSETS> 18,651
<CURRENT-LIABILITIES> 12,321
<BONDS> 0
0
0
<COMMON> 18,081
<OTHER-SE> (12,357)
<TOTAL-LIABILITY-AND-EQUITY> 18,651
<SALES> 2,834
<TOTAL-REVENUES> 5,412
<CGS> 520
<TOTAL-COSTS> 854
<OTHER-EXPENSES> 7,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,977)
<INCOME-TAX> 178
<INCOME-CONTINUING> (3,155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,155)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
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