<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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
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 9,192,801
(Class) (Shares outstanding at October 31, 1997)
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<PAGE>
ANALOGY, INC.
FORM 10-Q/A
INDEX
THIS REPORT ON FORM 10-Q/A CONSTITUTES AMENDMENT NO. 1 TO THE REGISTRANT'S
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997, AND AMENDS, IN ITS
ENTIRETY, PART I, ITEMS 1 AND 2, AND PART II, ITEM 6 OF SUCH REPORT AS
ORIGINALLY FILED NOVEMBER 12, 1997. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR A DISCUSSION OF THE BASIS FOR SUCH AMENDMENTS.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1997
and March 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Operations - Three Months and
Six Months ended September 30, 1997 and 1996. . . . . . . . . . . . . . . .3
Consolidated Statements of Cash Flows - Six Months
ended September 30, 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .14
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
--------------- ---------------
(As Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,113 $ 1,827
Marketable securities -- 1,697
Accounts receivable 6,812 9,161
Prepaid expenses 1,060 886
Other assets, net 554 455
------- -------
Total current assets 11,539 14,026
Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $6,872 and $5,833 4,109 4,280
Library costs, net 3,248 2,729
Other assets, net 919 1,095
------- -------
$ 19,815 $ 22,130
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 535 $ 1,482
Current portion of capital leases 334 566
Accrued salaries and benefits 1,931 2,095
Unearned revenue 5,483 5,812
------- -------
Total current liabilities 8,283 9,955
Non-current portion of capital leases 544 499
Other liabilities 347 359
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
9,192 and 9,118 shares issued and outstanding 17,355 17,124
Foreign currency translation (174) (155)
Accumulated deficit (6,540) (5,652)
------- -------
Total shareholders' equity 10,641 11,317
------- -------
$ 19,815 $ 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 Six months ended
September 30, September 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
-------------- -------------- ------------- ----------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 3,470 $ 2,882 $ 6,221 $ 5,553
Service and other 3,272 2,377 5,733 4,422
-------------- -------------- ------------- -------------
Total revenue 6,742 5,259 11,954 9,975
Cost of revenue:
Product licenses 429 374 980 751
Service and other 952 525 1,536 1,011
-------------- -------------- ------------- -------------
Total cost of revenue 1,381 899 2,516 1,762
-------------- -------------- ------------- -------------
Gross profit 5,361 4,360 9,438 8,213
Operating expenses:
Research and development 1,192 1,278 2,703 2,640
Sales and marketing 3,216 3,015 6,304 5,752
General and administrative 756 682 1,424 1,357
Amortization of intangibles 92 -- 184 --
-------------- -------------- ------------- -------------
Total operating expenses 5,256 4,975 10,615 9,749
-------------- -------------- ------------- -------------
Operating income (loss) 105 (615) (1,177) (1,536)
Other income (expense), net (31) (1) (6) 9
-------------- -------------- ------------- -------------
Income (loss) before income
taxes 74 (616) (1,183) (1,527)
Income tax expense (benefit) 19 316 (295) 114
-------------- -------------- ------------- -------------
Net income (loss) $ 55 $ (932) $ (888) $ (1,641)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net income (loss) per share $ 0.01 $ (0.11) $ (0.10) $ (0.20)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Shares used in per share calculations 9,808 8,356 9,149 8,334
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</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>
Six months ended September 30,
------------------------------
1997 1996
------------- -------------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (888) $ (1,641)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,845 1,225
Changes in operating assets and liabilities:
Accounts receivable 2,271 (134)
Prepaid expenses and other assets (216) (85)
Accounts payable and accrued expenses (1,181) (697)
Unearned revenue (264) (44)
-------- --------
Net cash provided by (used in) operating activities 1,567 (1,376)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (5,910)
Maturities of marketable securities 1,700 1,000
Capital expenditures for furniture, fixtures and equipment (819) (1,156)
Capital expenditures for library costs (1,131) (559)
-------- --------
Net cash used in investing activities (250) (6,625)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debt -- (829)
Principal payments on capital lease obligations (250) (353)
Common stock offering costs -- (75)
Proceeds from exercise of stock options and warrants 231 72
-------- --------
Net cash used in financing activities (19) (1,185)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (12) (7)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,286 (9,193)
Cash and cash equivalents at beginning of period 1,827 10,208
-------- --------
Cash and cash equivalents at end of period $ 3,113 $ 1,015
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 68 $ 116
Income taxes 158 138
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 63 $ 257
</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 six months ended
September 30, 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 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 year ended March 31, 1997, as included
in the Company's Annual Report on Form 10-K for the year ended March 31, 1997.
Operating results for the six months ended September 30, 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. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR PRIOR PERIODS
In April 1998, the Company determined that revenue from products sold to a
reseller previously recognized in the first and second quarters of fiscal 1998
of $774,000 and $400,000, respectively, should more appropriately be recognized
as revenue at the time the product is sold to the ultimate end user rather than
to recognize the revenue when it is sold to the reseller. Accordingly, the
results of operations for the first and second quarters of fiscal year 1998 have
been restated. The effect of this restatement was as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three months ended Six months ended
September 30, 1997 September 30, 1997
---------------------------------- ----------------------------------
As reported Restated As reported Restated
<S> <C> <C> <C> <C>
Total revenues $ 7,142 $ 6,742 $ 13,128 $ 11,954
Net income (loss) $ 317 $ 55 $ (93) $ (888)
Diluted income (loss) per share $ 0.03 $ 0.01 $ (0.01) $ (0.10)
Accumulated deficit at Sept. 30, 1997 $ (5,745) $ (6,540) $ (5,745) $ (6,540)
</TABLE>
3. CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less; marketable securities consist primarily of
government and corporate securities. The Company's marketable securities were
classified as "available for sale" and accordingly were carried at market value,
which was not materially different from cost at March 31, 1997.
4. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), which changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
5
<PAGE>
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods and requires
restatement of all prior-period EPS data presented.
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 128 or 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 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.
In April 1998, the Company determined that revenue from products sold to a
reseller previously recognized in the first and second quarters of fiscal 1998
of $774,000 and $400,000, respectively, should more appropriately be recognized
as revenue at the time the product is sold to the ultimate end user rather than
to recognize the revenue when it is sold to the reseller. Accordingly, the
results of operations for the first and second quarters of fiscal year 1998 have
been restated. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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
7
<PAGE>
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 aerospace, defense, 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 earned 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 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 aerospace and defense industries 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 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
STATEMENT OF OPERATIONS DATA: SEPTEMBER 30, SEPTEMBER 30,
1997 1996
--------------------------- ---------------------------
(AS RESTATED)
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 3,470 51.5 % $ 2,882 54.8 %
Service and other 3,272 48.5 2,377 45.2
------------ ------------ ------------ ------------
Total revenue 6,742 100.0 5,259 100.0
Cost of revenue:
Product licenses 429 6.4 374 7.1
Service and other 952 14.1 525 10.0
------------ ------------ ------------ ------------
Total cost of revenue 1,381 20.5 899 17.1
------------ ------------ ------------ ------------
Gross profit 5,361 79.5 4,360 82.9
Operating expenses:
Research and development 1,192 17.7 1,278 24.3
Sales and marketing 3,216 47.7 3,015 57.3
General and administrative 756 11.2 682 13.0
Amortization of intangibles 92 1.4 -- --
------------ ------------ ------------ ------------
Total operating expenses 5,256 78.0 4,975 94.6
------------ ------------ ------------ ------------
Operating income (loss) 105 1.5 (615) (11.7)
Other expense, net (31) (0.4) (1) --
------------ ------------ ------------ ------------
Income (loss) before income taxes 74 1.1 (616) (11.7)
Income tax expense 19 0.3 316 6.0
------------ ------------ ------------ ------------
Net income (loss) $ 55 0.8 % $ (932) (17.7)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
STATEMENT OF OPERATIONS DATA: SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---------------------------- ----------------------------
(AS RESTATED)
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 6,221 52.0 % $ 5,553 55.7 %
Service and other 5,733 48.0 4,422 44.3
------------- ------------ ------------ ------------
Total revenue 11,954 100.0 9,975 100.0
Cost of revenue:
Product licenses 980 8.2 751 7.5
Service and other 1,536 12.8 1,011 10.2
------------- ------------ ------------ ------------
Total cost of revenue 2,516 21.0 1,762 17.7
------------- ------------ ------------ ------------
Gross profit 9,438 79.0 8,213 82.3
Operating expenses:
Research and development 2,703 22.6 2,640 26.5
Sales and marketing 6,304 52.8 5,752 57.6
General and administrative 1,424 11.9 1,357 13.6
Amortization of intangibles 184 1.5 -- --
------------- ------------ ------------ ------------
Total operating expenses 10,615 88.8 9,749 97.7
------------- ------------ ------------ ------------
Operating loss (1,177) (9.8) (1,536) (15.4)
Other (expense) income, net (6) (0.1) 9 0.1
------------- ------------ ------------ ------------
Loss before income taxes (1,183) (9.9) (1,527) (15.3)
Income tax (benefit) expense (295) (2.5) 114 1.2
------------- ------------ ------------ ------------
Net loss $ (888) (7.4) % $ (1,641) (16.5)%
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL YEARS 1998 AND 1997
REVENUE
Total revenue increased 28.2% to $6.7 million in the second quarter of fiscal
year 1998 from $5.3 million in the second quarter of fiscal year 1997, and
increased 19.8% to $12.0 million in the first six months of fiscal year 1998
from $10.0 in the first six months of fiscal year 1997. No one customer
accounted for 10% or more of total revenue in the second quarter or first six
months of fiscal years 1998 and 1997. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
Product license revenue increased 20.4% to $3.5 million in the second quarter of
fiscal year 1998 from $2.9 million in the second quarter of fiscal year 1997,
and increased 12.0% to $6.2 million in the first six months of fiscal year 1998
from $5.6 million in the first six 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 and
continued broadening of the Company's customer base.
Service and other revenue increased 37.7% to $3.3 million in the second quarter
of fiscal year 1998 from $2.4 million in the second quarter of fiscal year 1997,
and increased 29.6% to $5.7 million in the first six months of fiscal year 1998
from $4.4 million in the first six months of fiscal year 1997. The increases
were due primarily to increased demand for the Company's maintenance and other
services, growth in the Company's installed base; and revenues from NIST under a
$2.0 million grant awarded in fiscal year 1996, 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.
10
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Revenues recognized under these contracts were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NIST $241 $173 $450 $414
U.S. Air Force 458 374 619 631
DARPA 378 120 515 120
</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 six months of fiscal
years 1998 and 1997. Total revenues from U.S. government-related sources,
including the previously mentioned specific awards, accounted for approximately
13.3% of total revenues in the first six months of fiscal year 1998, and
approximately 17.2% of total revenues in the first six months of fiscal year
1997. Revenues received under the DARPA contract in the second quarter of fiscal
year 1998 included a one time adjustment to the cost sharing provisions which
resulted in an increase in revenue of $250,000. 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.
International revenue was $5.4 million (45% of total revenue) in the first six
months of fiscal year 1998 compared to $4.3 million (43% of total revenue) in
the first six 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 the second quarter of fiscal year 1998. The Company sells its
products and services through its wholly-owned subsidiaries in Europe and
through distributors in Asia.
COST OF REVENUE
Total cost of revenue increased 53.6% to $1.4 million in the second quarter of
fiscal year 1998 from $899,000 in the second quarter of fiscal year 1997, and
increased 42.8% to $2.5 million in the first six months of fiscal year 1998 from
$1.8 million in the first six 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 12.4% of product license revenue in the second quarter of
fiscal year 1998 from 13.0% in the second quarter of fiscal year 1997, and
increased to 15.8% of product license revenue in the first six months of fiscal
year 1998 from 13.5% in the first six months 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), 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.
As a percentage of service and other revenue, cost of service and other revenue
increased to 29.1% of service and other revenue in the second quarter of fiscal
year 1998 from 22.1% in the second quarter of fiscal year 1997, and increased to
26.8% of service and other revenue in the first six months of fiscal year 1988
from 22.9% of service and other revenue in the first six months of fiscal year
1997. The increases were due primarily to allocation of expense from research
and development to cost of service and other revenue, for work performed under
government contracts during the second quarter of fiscal year 1998.
11
<PAGE>
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 decreased 6.7% to
$1.2 million in the second quarter of fiscal year 1998 from $1.3 million in the
second quarter of fiscal year 1997, and increased 2.4% to $2.7 million in the
first six months of fiscal year 1998, from $2.6 million in the first six months
of fiscal year 1997. As a percentage of total revenue, research and development
costs decreased to 17.7% in the second quarter of fiscal year 1998 from 24.3% in
the second quarter of fiscal year 1997, and decreased to 22.6% in the first six
months of fiscal year 1998 from 26.5% in the first six months of fiscal year
1998. The decreases were primarily due to allocation of expense from research
and development to cost of service and other revenue for work performed under
government contracts during the second quarter of fiscal year 1998, and due to
increased revenue in the second quarter and first six months of fiscal year
1998.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions and
travel. Sales and marketing expense increased 6.7% to $3.2 million in the second
quarter of fiscal year 1998 from $3.0 million in the second quarter of fiscal
year 1997, and increased 9.6% to $6.3 million in the first six months of fiscal
year 1998 from $5.8 million in the first six months of fiscal year 1997. The
increases primarily resulted from increases in sales commissions, personnel,
salaries, related benefits, travel and training. Additionally, in the first
quarter of fiscal year 1998 the Company established a new telemarketing
division. As a percentage of total revenue, sales and marketing expenses
decreased to 47.7% in the second quarter of fiscal year 1998 from 57.3% in the
second quarter of fiscal year 1997, and decreased to 52.8% in the first six
months of fiscal year 1998 from 57.6% in the first six months of fiscal year
1997, due to increased revenue in the second quarter and first six months of
fiscal year 1998.
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 10.9% to
$756,000 in the second quarter of fiscal year 1998 compared to $682,000 in the
second quarter of fiscal year 1997, and increased 4.9% to $1.4 million in the
first six months of fiscal year 1998 compared to $1.36 million in the first six
months of fiscal year 1997. The increases primarily resulted from expenses of
Symmetry Design Systems, Inc., which was acquired in November 1996. As a
percentage of total revenue, general and administrative expenses decreased to
11.2% in the second quarter of fiscal year 1998 from 13.0% in the second quarter
of fiscal year 1997, and decreased to 11.9% in the first six months of fiscal
year 1998 from 13.6% in the first six months of fiscal year 1997, primarily due
to increased revenue in the second quarter and first six months of fiscal year
1998.
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 $31,000 and $1,000 in the second quarter of fiscal years
1998 and 1997, respectively. Other expense, net was $6,000 in the first six
months of fiscal year 1998 and other income, net was $9,000 in the first six
months of fiscal year 1997. 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, and the effects of foreign
currency transaction gains and losses.
12
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
The Company provided for foreign income and withholding taxes of $158,000 and
$114,00 in the first six months of fiscal years 1998 and 1997, respectively. In
the first six months of fiscal year 1998 the Company recorded a benefit from the
utilization of net operating loss carryforwards of $453,000, which it believes
will be realized in the fiscal year. The Company's effective tax rate is
sensitive to shifts in income and losses among the various countries in which
the Company does business.
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 provided by operating activities was $1.6 million in the first six
months of fiscal year 1998. This primarily resulted from a decrease in accounts
receivable, representing the collection of billings to the U.S. government which
were outstanding at March 31, 1997, and adjustments for depreciation and
amortization. These changes were offset by a decrease in accounts payable and
accrued expenses as a result of timing of purchases and payments, and an
increase in prepaid expenses and other assets as a result of the timing of
payment of prepaid insurance and royalties.
Net cash used in investing activities was $250,000 in the first six months of
fiscal year 1998, which primarily included the maturities of investments in
marketable securities, offset by 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.
Net cash used in financing activities was $19,000 in the first six months of
fiscal year 1998, which included 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 $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 September 30, 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 $42,000 was
outstanding at September 30, 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 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.
13
<PAGE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), which changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period EPS data presented.
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 128 or SFAS 130.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO.
11 Computation of per share earnings, as restated
27 Financial Data Schedule, as restated
(b) Reports on Form 8-K
A Report on Form 8-K, containing the Company's earnings release for the quarter
ended June 30, 1997, under Item 5, was filed on July 22, 1997.
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: June 1, 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
<PAGE>
EXHIBIT 11
ANALOGY, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
IN THOUSANDS
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------- ----------- ------------- -----------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net income (loss) $ 55 $ (932) $ (888) $ (1,641)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Earnings (loss) per share $ 0.01 $ (0.11) $ (0.10) $ (0.20)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Weighted average shares outstanding:
Common stock 9,171 8,356 9,149 8,334
Common stock issuable upon exercise of
stock options 637 -- -- --
------------- ----------- ------------- -----------
Shares used in per share calculations 9,808 8,356 9,149 8,334
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
<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 10Q/A FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1997
<CASH> 3,113
<SECURITIES> 0
<RECEIVABLES> 6,812
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,539
<PP&E> 10,981
<DEPRECIATION> 6,872
<TOTAL-ASSETS> 19,815
<CURRENT-LIABILITIES> 8,283
<BONDS> 0
0
0
<COMMON> 17,355
<OTHER-SE> (6,714)
<TOTAL-LIABILITY-AND-EQUITY> 19,815
<SALES> 6,221
<TOTAL-REVENUES> 11,954
<CGS> 980
<TOTAL-COSTS> 2,516
<OTHER-EXPENSES> 10,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,183)
<INCOME-TAX> (295)
<INCOME-CONTINUING> (888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (888)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
