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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, 1999
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 9,624,186
(Class) (Shares outstanding at August 2, 1999)
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ANALOGY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1999
and March 31, 1999........................................................................................2
Consolidated Statements of Operations - Three Months
ended June 30, 1999 and 1998..............................................................................3
Consolidated Statements of Cash Flows - Three Months
ended June 30, 1999 and 1998..............................................................................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.......................................14
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.............................................15
Item 6. Exhibits and Reports on Form 8-K.................................................................15
</TABLE>
1
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PART I - FINANCIAL INFORMATION
------------------------------
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 755 $ 2,008
Accounts receivable 5,231 6,738
Prepaid expenses 1,210 1,033
Other assets, net 2,083 2,271
--------- ----------
Total current assets 9,279 12,050
Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $10,663 and $10,263
at June 30, 1999 and March 31, 1999, respectively 2,066 2,416
Library costs, net 4,534 4,495
Other assets, net 1,995 2,257
--------- ----------
$ 17,874 $ 21,218
========= ==========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit $ 200 $ 400
Current portion of capital leases 347 403
Accounts payable and accrued expenses 1,568 1,320
Accrued salaries and benefits 2,114 2,709
Unearned revenue 7,413 8,657
--------- ----------
Total current liabilities 11,642 13,489
Non-current portion of capital leases 148 219
Deferred contract revenue 1,272 1,455
Other liabilities 65 65
Commitments - -
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
shares issued and outstanding : 9,540 and 9,521
at June 30, 1999 and March 31, 1999, respectively 18,617 18,569
Accumulated other comprehensive loss -
foreign currency translation (299) (269)
Accumulated deficit (13,571) (12,310)
--------- ----------
Total shareholders' equity 4,747 5,990
========= ==========
$ 17,874 $ 21,218
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Product licenses $ 2,987 $ 2,834
Service and other 2,476 2,578
-------- ---------
Total revenue 5,463 5,412
Cost of revenue:
Product licenses 541 520
Service and other 168 334
-------- ---------
Total cost of revenue 709 854
-------- ---------
Gross profit 4,754 4,558
Operating expenses:
Research and development 1,927 2,396
Sales and marketing 3,309 3,604
General and administrative 587 684
Amortization of intangibles 92 92
Restructuring charges - 557
-------- ---------
Total operating expenses 5,915 7,333
-------- ---------
Operating loss (1,161) (2,775)
Other income (expense), net 17 (202)
-------- ---------
Loss before income taxes (1,144) (2,977)
Income tax expense 117 178
-------- ---------
Net loss $ (1,261) $ (3,155)
======== =========
Basic and diluted net loss per share $ (0.13) $ (0.34)
======== =========
Shares used in basic and diluted per share
calculations 9,530 9,358
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,261) $ (3,155)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 913 1,047
Changes in operating assets and liabilities:
Accounts receivable 1,379 (528)
Prepaid expenses and other assets 81 (235)
Accounts payable and accrued expenses (273) (919)
Unearned revenue (1,260) (451)
--------- ----------
Net cash used in operating activities (421) (4,241)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for furniture, fixtures and equipment (73) (149)
Capital expenditures for library costs (444) (486)
--------- ----------
Net cash used in investing activities (517) (635)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (127) (256)
Net payments (proceeds) on line of credit (200) -
Proceeds from exercise of common stock options and warrants 48 175
--------- ----------
Net cash used in financing activities (279) (81)
--------- ----------
Effect of exchange rate changes on cash and cash equivalents (36) 29
--------- ----------
Net decrease in cash and cash equivalents (1,253) (4,928)
Cash and cash equivalents at beginning of period 2,008 8,130
--------- ----------
Cash and cash equivalents at end of period $ 755 $ 3,202
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 34 $ 134
Income taxes 85 304
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
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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, 1999 and 1998 was prepared in conformity with generally
accepted accounting principles. The financial information as of March 31,
1999 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, 1999. 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, 1999, as included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1999.
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, 2000, or any portion thereof.
2. COMPREHENSIVE LOSS
The Company has 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. The reconciliation
of net loss to comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss $ (1,261) $ (3,155)
Foreign currency translation adjustments (30) (9)
---------- ---------
Comprehensive loss $ (1,291) $ (3,164)
========== =========
</TABLE>
3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of shares of common stock outstanding for the period, since all
potential dilutive securities are excluded from the calculation as they are
antidilutive. The dilutive effect of stock options outstanding for the
purchase of approximately 1,618,000 and 1,453,000 shares for the three months
ended June 30, 1999 and 1998, respectively, and warrants outstanding for the
purchase of 10,000 and 300,000 shares for three months ended June 30, 1999
and 1998, respectively, were not included in net loss per share calculations,
because to do so would have been antidilutive.
5
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4. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). Based on definitions contained within SFAS 131, the Company has
determined that it operates in one segment.
The Company markets its products in North America and Europe through its
direct sales organization and in Asia through distributors. Revenue
information is based on the location of the customer. The Company's
geographic information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Revenues:
United States $ 2,535 $ 2,762
Germany 700 1,065
Sweden 870 154
United Kingdom 698 542
Other 660 889
-------------- -------------
$ 5,463 $ 5,412
============= =============
</TABLE>
One customer accounted for approximately 13% of total revenue in the first
quarter of fiscal year 2000. No one customer accounted for more than 10% of
total revenue in the first quarter of fiscal 1999.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, markets and supports high-performance software and
model libraries for the top-down design and behavioral simulation of
mixed-signal and mixed-technology systems.
The Company's 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 compliance with acceptance criteria as agreed to with the customer.
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, timely collections from customers, changes in
capital spending plans by key customers, 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,
the Company's ongoing ability to introduce new products and expand its
markets, customer acceptance of new products, seasonal fluctuations in the
Company's order patterns and competitive initiatives, ability to execute
financing strategies, ability to continue to comply with financing agreement
covenants, unanticipated costs related to the Year 2000 issue, and other
risks listed from time to time in the Company's periodic reports filed with
the Securities and Exchange Commission, 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 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 fluctuated in the past and may
fluctuate in the future 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
7
<PAGE>
expected levels or other failure to meet expectations of the financial
markets regarding results of operations could have an immediate and
significant adverse effect on the trading price of the Company's common stock
in any given period.
The Company has historically derived a significant portion of its revenue
from the automotive industry. The automotive industry is characterized by
high cyclicality, technological change, fluctuations in manufacturing
capacity, labor issues, and pricing and gross margin pressures. This industry
has from time to time experienced significant economic downturns
characterized by decreased product demand, production over-capacity, price
erosion, work slowdowns and layoffs. The Company has also historically
derived a significant portion of its revenue from the aerospace and defense
industries, which have been characterized by significant technological
changes, high cyclicality and the potential for significant downturns in
business activity resulting from changes in economic conditions or
governmental resources and spending policies. No assurance can be given that
the industries served by the Company will experience economic growth, will
not experience a downturn or that any downturn will not be severe, or that
such conditions would not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's operating results have depended, and will continue to depend,
upon designers of mixed-signal and mixed-technology systems adopting methods
of design analysis and simulation which use behavioral modeling techniques.
The design analysis and simulation industry is characterized by rapid
technological change, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current products and to develop or acquire new
products that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
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, 1999 JUNE 30, 1998
--------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 2,987 54.7 % $ 2,834 52.4 %
Service and other 2,476 45.3 2,578 47.6
-------- ------- -------- -------
Total revenue 5,463 100.0 5,412 100.0
Cost of revenue:
Product licenses 541 9.9 520 9.6
Service and other 168 3.1 334 6.2
-------- ------- -------- -------
Total cost of revenue 709 13.0 854 15.8
-------- ------- -------- -------
Gross profit 4,754 87.0 4,558 84.2
Operating expenses:
Research and development 1,927 35.3 2,396 44.3
Sales and marketing 3,309 60.6 3,604 66.6
General and administrative 587 10.7 684 12.6
Amortization of intangibles 92 1.7 92 1.7
Restructuring charges - - 557 10.3
-------- ------- -------- -------
Total operating expenses 5,915 108.3 7,333 135.5
-------- ------- -------- -------
Operating loss (1,161) (21.3) (2,775) (51.3)
Other income (expense), net 17 0.4 (202) (3.7)
-------- ------- -------- -------
Loss before income taxes (1,144) (20.9) (2,977) (55.0)
Income tax expense 117 2.2 178 3.3
-------- --------- -------- -------
Net loss $(1,261) (23.1) % $(3,155) (58.3) %
======== ========= ======== =======
</TABLE>
FIRST QUARTER OF FISCAL YEAR 2000 COMPARED TO FIRST QUARTER OF FISCAL YEAR 1999
REVENUE
Total revenue increased 0.9% to $5.5 million in the first quarter of fiscal
year 2000 from $5.4 million in the first quarter of fiscal year 1999. The
Company sells its products and services through its wholly-owned subsidiaries
in Europe and through distributors in Asia. International revenue was $2.9
million (53.6% of total revenue) in the first quarter of fiscal year 2000
compared to $2.7 million (49% of total revenue) in the first quarter of
fiscal year 1999. One customer accounted for approximately 13% of total
revenue in the first quarter of fiscal year 2000. No one customer accounted
for 10% or more of total revenue in the first quarter of fiscal year 1999.
Product license revenue increased 5.4% to $3.0 million in the first quarter
of fiscal year 2000 from $2.8 million in the first quarters of fiscal year
1999.
Service and other revenue decreased 4.0% to $2.5 million in the first quarter
of fiscal year 2000 from $2.6 million in the first quarter of fiscal year
1999. The decrease was the result of decreased revenues under the National
Institute of Standards and Technology ("NIST") grant and Defense Advanced
Research Projects Agency ("DARPA") contract and decreased consulting revenue,
offset by increased demand for the Company's maintenance resulting from
growth in the Company's installed base. Revenues from the NIST grant
concluded at the end of the first quarter of fiscal year 1999 and revenues
from the DARPA contract were minimal in fiscal year 1999, as this contract
expired at the end of fiscal year 1999. There were no revenues from the DARPA
contract or the NIST grant in the first quarter of fiscal year 2000.
9
<PAGE>
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 quarters of fiscal year 2000 and 1999.
COST OF REVENUE
Total cost of revenue decreased 17.0% to $709,000 in the first quarter of
fiscal year 2000 from $854,000 in the first quarter of fiscal year 1999.
Cost of product license revenue consists primarily of documentation expense,
media manufacturing costs, supplies, shipping expense, 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 18.1% of product license revenue in the first quarter of
fiscal year 2000 from 18.3% in the first quarter of fiscal year 1999. Costs
such as documentation expense and supplies are expensed as incurred, and
development costs associated with creating the library of component and
template models are capitalized and amortized over the estimated product
life, generally five years. These costs and amortization expenses 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 DARPA contract
and the NIST grant in fiscal year 1999, and the direct cost of providing
services such as training and consulting. Cost of service and other revenue
decreased to 6.8% of service and other revenue in the first quarter of fiscal
year 2000 from 13.0% of service and other revenue in the first quarter of
fiscal year 1999. The decrease was attributable to decreased activity under
the NIST grant, and the DARPA contract, which had higher costs associated
with them than the Company's other services, and the work force reduction
which occurred in the first quarter of fiscal year 1999. There were no costs
incurred under the DARPA contract or the NIST grant in the first quarter of
fiscal year 2000.
RESEARCH AND DEVELOPMENT
Research and development expense includes all costs associated with
development of new products and technology research. 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 used in research and development. Research and development
expenses decreased 19.6% to $1.9 million in the first quarter of fiscal year
2000 from $2.4 million the first quarter of fiscal year 1999 and decreased as
a percentage of total revenue to 35.3% in the first quarter of fiscal year
2000 from 44.3% in the first quarter of fiscal year 1999. The decrease was
primarily attributable to the work force reduction which occurred in fiscal
year 1999 and ongoing cost containment efforts, partially offset by an
increase resulting from costs included in research and development which were
previously recorded as cost of service and other revenue under the NIST grant
and the DARPA contract.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions,
travel and costs of promotional activities. Sales and marketing expense
decreased 8.2% to $3.3 million in the first quarter of fiscal year 2000 from
$3.6 million in the first quarter of fiscal year 1999, and decreased as a
percentage of total revenue to 60.6% in the first quarter of fiscal year 2000
from 66.6% in the first quarter of fiscal year 1999. The decrease was
primarily the result of the work force reduction which occurred in fiscal
year 1999.
10
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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
decreased 14.2% to $587,000 in the first quarter of fiscal year 2000 from
$684,000 in the first quarter of fiscal year 1999, and decreased as a
percentage of total revenue to 10.7% in the first quarter of fiscal year 2000
from 12.6% in fiscal year 1999. The decrease was primarily attributable to
the work force reduction which occurred in the first quarter of fiscal 1999
and ongoing cost containment efforts.
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 expense, net primarily consists of interest expense and the effects of
foreign currency transaction gains and losses. Other income (expense), net
was $17,000 and $(202,000) in the first quarters of fiscal years 2000 and
1999, respectively. The change was primarily a result of increased interest
expense in the first quarter of fiscal year 1999 related to the amortization
of finance charges from the sale of approximately $4.0 million of accounts
receivable to a financial institution.
INCOME TAX EXPENSE
The Company provided for foreign taxes of $117,000 and $178,000 in the first
quarters of fiscal years 2000 and 1999, respectively. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $421,000 in the first quarter of
fiscal year 2000. This resulted primarily from a net loss for the period,
adjustments for depreciation and amortization, and decreases in accounts
receivable and deferred revenue. Accounts receivable and deferred revenue
decreased as a result of lower levels of product sales and related
maintenance revenues in the first quarter of fiscal year 2000.
Net cash used in investing activities was $517,000 in the first quarter of
fiscal year 2000, 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 $279,000 in the first quarter of
fiscal year 2000, which included principal payments on the line of credit and
capital lease obligations.
The Company has an operating line of credit with a bank which allows the
Company to receive advances based on 80% of eligible foreign and domestic
accounts receivable, up to a maximum of $5.0 million. Advances under the line
of credit are secured by accounts receivable, furniture, fixtures and
equipment and general intangibles, and matures on April 4, 2000. Interest is
payable monthly at the bank's prime rate plus .5% (8.25% at June 30, 1999).
At June 30, 1999, the Company had borrowings outstanding under the line of
credit of $200,000 and additional borrowing capacity of approximately $1.1
million. At July 31, 1999, the Company had borrowings outstanding under the
line of credit of $1.3 million and no additional borrowing capacity. The line
of credit requires the Company to maintain certain financial
11
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and other covenants including minimum net worth, results of operations and
the ratio of current assets to current liabilities. As of June 30, 1999, the
Company was not in compliance with the covenants which specify minimum net
worth, results of operations and the ratio of current assets to current
liabilities. The Company is currently involved in negotiations with the bank
to obtain a waiver of the existing covenant violations. Based on discussions
with the bank, the Company believes it will obtain such a waiver. In
addition, the Company believes that the existing credit facility will be
renegotiated in the form of a new accounts receivable factoring arrangement,
however, specific borrowing capacity and terms have not yet been determined
nor has the Company received a binding commitment for such a facility as of
the date of this filing.
The Company expects that it will require additional funding, although it is
unable to predict the precise amount or date that such funding may be
required. However, the Company believes additional funding may be needed as
soon as during the second quarter of fiscal year 2000. In addition to the
factoring arrangement discussed above, the Company is considering alternative
sources for future funding requirements, including equity financing. There
can be no assurance that additional financing would be available and, if
available, that the terms would be acceptable to the Company or that such
financing could be obtained in a timely manner. Such additional funding could
be more costly than the Company's current line of credit and other borrowing
agreements or, if equity, could be materially dilutive to existing
shareholders. If adequate funds are not available as required, the Company's
ability to continue its research and product development efforts, as well as
the Company's financial condition and results of operations will be adversely
affected. In particular, the Company could be required to significantly
reduce its operations, seek a merger partner or sell additional securities on
terms that are highly dilutive to existing shareholders. Further, there can
be no assurance that the Company will not require funding earlier than
anticipated. The Company's future capital needs and the timing of such needs
will depend upon numerous factors which cannot be predicted with certainty,
including the Company's results of operations, the amount of revenues
generated from operations, receipt and timing of orders for the Company's
products, timely collections from customers, changes in capital spending
plans by key customers, the impact of expense reductions on the Company, the
Company's ongoing ability to introduce new products and expand its markets,
seasonal fluctuations in the Company's order patterns, ability to execute
financing strategies, ability to continue to comply with financing agreement
covenants, ability to access cash balances of its foreign operations in a
timely manner, and unanticipated costs related to the Year 2000 issue.
12
<PAGE>
YEAR 2000 ISSUE
The Company is assessing its computer software programs and operating systems
used in its internal operations including development and accounting systems,
to determine their readiness for the Year 2000. The inability of computer
software programs and operating systems to accurately recognize, interpret
and process date data designating the Year 2000 and beyond could cause
systems to yield inaccurate results or encounter operating problems,
including disruption of the business operations these systems control. The
Company has completed its internal assessment but intends to continue to
monitor Year 2000 compliance matters on an ongoing basis.
The Company has completed contacting its major suppliers of products and
services to assess the Year 2000 compliance of each. The Company has not
discovered any material deficiencies with respect to those suppliers
contacted. As the majority of the Company's major customers are "Fortune 100"
companies, the Company has begun to review Year 2000 public disclosures made
by its major customers to determine whether their operations are Year 2000
compliant. If the Company's major suppliers of products and services and its
major customers are not Year 2000 compliant, their noncompliance may cause a
material disruption to their businesses which could negatively impact the
Company in many ways, including the inability to collect payments from
customers and the delay or cessation of deliveries of products or services to
its customers. Additionally, risks associated with parties located outside
the U.S. may be higher as it is generally believed than non-U.S. businesses
may not be addressing their Year 2000 issues on as timely a basis as U.S.
businesses. There can be no assurance that major suppliers of products and
services and major customers will adequately address their Year 2000 issues.
The Company expects to complete its assessment of its major customers by
September 30, 1999.
Like all businesses, the Company will be at risk from other external
infrastructure failures that could arise from Year 2000 failures. It is not
clear that electrical power, telephone and computer networks, for example,
will be fully functional in the countries in which the Company does business
in the year 2000. Investigation and assessment of infrastructures, like
national power grids, transportation systems, communications systems or major
institutions such as government or banking systems is beyond the scope and
resources of the Company. Investors should use their own awareness of
potential problems regarding infrastructure issues and their potential impact
on the Company's performance.
The Company has assessed its products to determine their readiness for the
Year 2000. The Company's products do not require date-specific calculations
and therefore the Company believes they will be unaffected by the Year 2000
transition. The Company believes that its 5.0 product version, released in
March 1999, when used in combination with compliant operating systems and
development environment software of third parties, is Year 2000 compliant. To
the extent that a user of the Company's products does not have Year 2000
compliant operating systems or development environments, the Company can give
no assurance as to Year 2000 compliance of its products used on such
operating systems or development environments.
The Company has not incurred, and does not expect to incur material
incremental costs to ensure Year 2000 compliance of its systems or products.
Certain systems have been targeted for replacement based on Year 2000 and
other technology considerations. The Company anticipates that affected
systems will be replaced prior to September 30, 1999. However, related
expenditures are not anticipated to be material. At this time, the Company
foresees nominal incremental spending for the Year 2000 issue.
Based on the Company's assessment to date, the Company currently believes
that Year 2000 issues will not pose significant risks for the Company.
However, if all Year 2000 issues are not properly identified, or assessment,
remediation and testing are not effected timely with respect to Year 2000
problems that are identified, there can be no assurance that the Year 2000
issue will not have a material adverse impact on the Company's business,
financial condition or results of operations, or adversely affect the
Company's relationships with customers, vendors or others.
The Company is in the process of developing a contingency plan for dealing
with the most likely worst-case scenario. The Company currently plans to
complete such contingency planning by November 30, 1999.
13
<PAGE>
The costs of the Company's Year 2000 assessment, remediation and testing
efforts and the dates on which the Company believes it will complete such
efforts and the timing and effectiveness of the Company's future product
releases are forward-looking statements that are based upon management's best
estimates. Such estimates were derived using numerous assumptions regarding
future events, including the continued availability of certain resources,
third party remediation plans and compliance assurances, and other factors.
There can be no assurance that these estimates will prove to be accurate and
actual results could differ materially from those currently anticipated.
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, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. 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
The Company does not currently use derivative financial instruments for
speculative purposes which expose the Company to market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates
with respect to its outstanding debt. Information required by this item is
set forth in ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION.
14
<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 23, 1999 The
following matters were submitted to shareholders for their consideration:
1. With respect to the three nominees for director identified in the
Company's Proxy Statement; Gary P. Arnold received 7,515,311 votes and
466,531 votes were withheld, Neil E. Goldschmidt received 7,674,056
votes and 307,786 votes were withheld and Charles E. Sporck received
7,669,556 votes and 312,286 votes were withheld.
2. The appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the year ending March 31, 2000 was ratified as
follows: 7,725,049 shares were voted in favor, 222,428 shares were
voted in opposition and 34,365 votes 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 fiscal year ended March 31, 1999, was filed under Item 5, on May 14, 1999.
No other Reports on Form 8-K were filed during the quarter ended June 30, 1999.
15
<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.
ANALOGY, INC.
Dated: August 13, 1999
/s/ GARY P. ARNOLD Chairman of the Board, President
- --------------------- and Chief Executive Officer
Gary P. Arnold (Principal Executive Officer)
/s/ DUANE C. FROMHART Vice President and Corporate Controller
- --------------------- (Principal Financial Officer)
Duane C. Fromhart
16
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<PAGE>
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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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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