<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 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 9,697,260
(Class) (Shares outstanding at February 1, 2000)
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<PAGE>
ANALOGY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1999
and March 31, 1999.............................................................................2
Consolidated Statements of Operations - Three Months and Nine Months
ended December 31, 1999 and 1998...............................................................3
Consolidated Statements of Cash Flows -Nine Months
ended December 31, 1999 and 1998...............................................................4
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................17
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,385 $ 2,008
Accounts receivable 6,357 6,738
Prepaid expenses 987 1,033
Other assets, net 2,132 2,271
------------- --------------
Total current assets 10,861 12,050
Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $11,349 and $10,263
at December 31, 1999 and March 31, 1999, respectively 1,550 2,416
Library costs, net 4,434 4,495
Other assets, net 1,328 2,257
------------- --------------
$ 18,173 $ 21,218
------------- --------------
------------- --------------
Liabilities and shareholders' equity
Current liabilities:
Note payable $ 2,000 $ -
Line of credit - 400
Advances under accounts receivable purchase agreement 385 -
Current portion of capital leases 288 403
Accounts payable and accrued expenses 1,588 1,320
Accrued salaries and benefits 1,991 2,709
Unearned revenue 7,190 8,657
------------- --------------
Total current liabilities 13,442 13,489
Non-current portion of capital leases 87 219
Deferred contract revenue 649 1,455
Other liabilities 46 65
Commitments - -
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
shares issued and outstanding : 9,697 and 9,521
at December 31, 1999 and March 31, 1999, respectively 18,936 18,569
Accumulated other comprehensive loss -
foreign currency translation (307) (269)
Accumulated deficit (14,680) (12,310)
------------- --------------
Total shareholders' equity 3,949 5,990
------------- --------------
$ 18,173 $ 21,218
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 3,656 $ 4,316 $ 9,497 $ 11,196
Service and other 2,296 2,942 7,453 7,891
------------- ----------- ------------ -------------
Total revenue 5,952 7,258 16,950 19,087
Cost of revenue:
Product licenses 511 478 1,563 1,407
Service and other 163 450 497 988
------------- ----------- ------------ -------------
Total cost of revenue 674 928 2,060 2,395
------------- ----------- ------------ -------------
Gross profit 5,278 6,330 14,890 16,692
Operating expenses:
Research and development 1,831 2,081 5,688 6,773
Sales and marketing 2,948 3,383 9,400 10,066
General and administrative 395 586 1,478 1,892
Amortization of intangibles 86 92 270 276
Restructuring charges - - - 557
------------- ----------- ------------ -------------
Total operating expenses 5,260 6,142 16,836 19,564
------------- ----------- ------------ -------------
Operating income (loss) 18 188 (1,946) (2,872)
Other expense, net (20) (15) (91) (246)
------------- ----------- ------------ -------------
(Loss) income before income
taxes (2) 173 (2,037) (3,118)
Income tax expense 141 120 333 346
------------- ----------- ------------ -------------
Net (loss) income $ (143) $ 53 $ (2,370) $ (3,464)
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
Basic net (loss) income per share $ (0.01) $ 0.01 $ (0.25) $ (0.37)
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
Diluted net (loss) income per share $ (0.01) $ 0.01 $ (0.25) $ (0.37)
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
Shares used in per share calculations:
Basic 9,639 9,437 9,617 9,404
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
Diluted 9,639 9,674 9,617 9,404
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,370) $ (3,464)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,598 3,050
Changes in operating assets and liabilities:
Accounts receivable 207 (2,427)
Prepaid expenses and other assets 795 (449)
Accounts payable and accrued expenses (381) (1,014)
Unearned revenue (2,112) (751)
----------- -----------
Net cash used in operating activities (1,263) (5,055)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for furniture, fixtures and equipment (153) (597)
Capital expenditures for library costs (1,163) (1,367)
----------- -----------
Net cash used in investing activities (1,316) (1,964)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under note payable 2,000 --
Advances under accounts receivable purchase agreement 385 --
Net payments on line of credit (400) --
Principal payments on capital lease obligations (340) (431)
Proceeds from exercise of stock options and warrants 367 441
----------- -----------
Net cash provided by financing activities 2,012 10
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (56) 105
----------- -----------
Net decrease in cash and cash equivalents (623) (6,904)
Cash and cash equivalents at beginning of period 2,008 8,130
----------- -----------
Cash and cash equivalents at end of period $ 1,385 $ 1,226
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 149 $ 176
Income taxes 313 348
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 93 $ 78
Recording of deferred and unearned contract revenue -- 2,560
</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 and nine
months ended December 31, 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 and nine months ended December 31, 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 INCOME (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 December 31,
--------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net (loss) income $ (143) $ 53
Foreign currency translation adjustments (111) (16)
--------- ---------
Comprehensive (loss) income $ (254) $ 37
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31,
--------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss $ (2,370) $ (3,464)
Foreign currency translation adjustments (38) 17
--------- ---------
Comprehensive loss $ (2,408) $ (3,447)
--------- ---------
--------- ---------
</TABLE>
5
<PAGE>
3. NET (LOSS) INCOME 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. All potential
dilutive securities are excluded from the calculation of diluted net loss per
share, as they are antidilutive.
Diluted net income per share is computed using the weighted average number of
shares of common stock and potential common shares related to stock options and
warrants outstanding during the period. Potential common shares of 237,000 were
used in the calculation of diluted earnings per share for the quarter ended
December 31, 1998.
The dilutive effect of stock options outstanding for the purchase of 1,669,000
shares for the three and nine months ended December 31, 1999, and 1,778,000
shares for the nine months ended December 31, 1998; and warrants outstanding for
the purchase of 10,000 shares for the three and nine months ended December 31,
1999, and 200,000 shares for the nine months ended December 31, 1998 were not
included in loss per share calculations, because to do so would have been
antidilutive.
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 primarily through
its direct sales organization and in Asia primarily 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 Nine Months Ended
December 31, December 31,
----------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
United States $ 2,501 $ 3,195 $ 7,564 $ 8,996
Germany 1,166 1,437 2,917 3,756
Sweden 590 326 1,814 1,002
United Kingdom 806 855 2,198 1,927
France 490 917 1,377 2,131
Other 399 528 1,080 1,275
---------- ---------- --------- ----------
$ 5,952 $ 7,258 $ 16,950 $ 19,087
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
5. MERGER WITH AVANT! CORPORATION
In November 1999, the Board of Directors of the Company approved the merger of
the Company into a wholly owned subsidiary of Avant! Corporation (the "Merger").
Pursuant to an Agreement of Merger dated December 2, 1999 (the "Merger
Agreement"), each outstanding share of the Company's Common Stock will be
converted into the right to receive approximately $2.48 per share in cash,
subject to the ultimate amount of certain fees and expenses related to the
Merger and subject to the number of the Company's shares outstanding at the
effective date of the Merger. The Merger must be approved by the affirmative
vote of the holders of at least sixty-seven percent (67%) of the outstanding
shares of the Company's Common Stock, and is subject to other conditions
including certain regulatory approvals. FOR ADDITIONAL DISCLOSURE SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
6
<PAGE>
6. BRIDGE LOAN AND SECURITY AGREEMENT
In October 1999, the Company entered into a $2.0 million Bridge Loan and
Security Agreement and a related Promissory Note (the "Loan Agreement") with
Avant! Corporation. As of December 31, 1999, $2.0 million was outstanding under
the Loan Agreement, and is included in the accompanying balance sheet under the
caption "Note Payable." Amounts outstanding under the Loan Agreement bear
interest at 10% per annum (13% per annum on any past due payments) and are
collateralized by substantially all of the assets of the Company. All
outstanding principal and interest are due upon the earlier of 180 days from the
date of the Loan Agreement or upon an event of default under the Loan Agreement.
FOR ADDITIONAL DISCLOSURE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
7
<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 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 approval of the proposed acquisition of the
Company by Avant! by 67% of the outstanding shares of the Company's Common
Stock, the failure to satisfy conditions necessary to consummate the proposed
acquisition of the Company by Avant! Corporation including those which are
outside of the Company's and Avant!'s control, including certain regulatory
approvals, the Company's ability to meet its future capital needs if the
acquisition of the Company by Avant! Corporation is not consummated, (SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS LIQUIDITY AND CAPITAL RESOURCES"), 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 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 comply with financing
agreement covenants, 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
8
<PAGE>
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 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.
9
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated selected items of the
Company's consolidated statements of operations and such items expressed as a
percentage of total revenue (dollars in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 3,656 61.4 % $ 4,316 59.5 %
Service and other 2,296 38.6 2,942 40.5
-------- -------- -------- --------
Total revenue 5,952 100.0 7,258 100.0
Cost of revenue:
Product licenses 511 8.6 478 6.6
Service and other 163 2.7 450 6.2
-------- -------- -------- --------
Total cost of revenue 674 11.3 928 12.8
-------- -------- -------- --------
Gross profit 5,278 88.7 6,330 87.2
Operating expenses:
Research and development 1,831 30.8 2,081 28.7
Sales and marketing 2,948 49.6 3,383 46.6
General and administrative 395 6.6 586 8.1
Amortization of intangibles 86 1.4 92 1.2
-------- -------- -------- --------
Total operating expenses 5,260 88.4 6,142 84.6
-------- -------- -------- --------
Operating income 18 0.3 188 2.6
Other expense, net (20) (0.3) (15) (0.2)
-------- -------- -------- --------
(Loss) income before income taxes (2) - 173 2.4
Income tax expense 141 2.4 120 1.7
-------- -------- -------- --------
Net (loss) income $ (143) (2.4) % $ 53 0.7 %
-------- -------- -------- --------
-------- -------- -------- --------
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</TABLE>
10
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
STATEMENT OF OPERATIONS DATA: DECEMBER 31, DECEMBER 31,
1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 9,497 56.0 % $ 11,196 58.7 %
Service and other 7,453 44.0 7,891 41.3
-------- -------- --------- -------
Total revenue 16,950 100.0 19,087 100.0
Cost of revenue:
Product licenses 1,563 9.2 1,407 7.4
Service and other 497 2.9 988 5.2
-------- -------- --------- -------
Total cost of revenue 2,060 12.1 2,395 12.6
-------- -------- --------- -------
Gross profit 14,890 87.9 16,692 87.4
Operating expenses:
Research and development 5,688 33.6 6,773 35.5
Sales and marketing 9,400 55.5 10,066 52.7
General and administrative 1,478 8.7 1,892 9.9
Amortization of intangibles 270 1.6 276 1.4
Restructuring charges - - 557 2.9
-------- -------- --------- -------
Total operating expenses 16,836 99.4 19,564 102.4
-------- -------- --------- -------
Operating loss (1,946) (11.5) (2,872) (15.0)
Other expense, net (91) (0.5) (246) (1.3)
-------- -------- --------- -------
Loss before income taxes (2,037) (12.0) (3,118) (16.3)
Income tax expense 333 2.0 346 1.8
-------- -------- --------- -------
Net loss $ (2,370) (14.0) % $ (3,464) (18.1) %
-------- -------- --------- -------
-------- -------- --------- -------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL YEARS 1999 AND 1998
REVENUE
Total revenue decreased 18.0% to $6.0 million in the third quarter of fiscal
year 2000 from $7.3 million in the third quarter of fiscal year 1999, and
decreased 11.2% to $17.0 million in the first nine months of fiscal year 2000
from $19.1 in the first nine months 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 $9.4 million (55% of
total revenue) in the first nine months of fiscal year 2000 compared to $10.1
million (53% of total revenue) in the first nine months of fiscal year 1999. No
one customer accounted for 10% or more of total revenue in the third quarter or
first nine months of fiscal years 2000 or 1999.
Product license revenue decreased 15.3% to $3.7 million in the third quarter of
fiscal year 2000 from $4.3 million in the third quarter of fiscal year 1999, and
decreased 15.2% to $9.5 million in the first nine months of fiscal year 2000
from $11.2 million in the first nine months of fiscal year 1999. The Company
recently reorganized its U.S. sales force and hired new employees in sales
positions. This combined with the long sales cycle for the Company's products,
resulted in decreased product license revenue in the fiscal year 2000 periods.
Additionally, the pending acquisition of the Company by Avant! Corporation,
which was announced in early December 1999, has created some short-term
uncertainty in the Company's customer base.
Service and other revenue decreased 22.0% to $2.3 million in the third quarter
of fiscal year 2000 from $2.9 million in the third quarter of fiscal year 1999,
and decreased 5.6% to $7.5 million in the first nine months of
11
<PAGE>
fiscal year 2000 from $7.9 million in the first nine months of fiscal year 1999.
The decrease in the third quarter of fiscal year 2000 is primarily attributable
to a decrease in consulting revenue. In the third quarter of fiscal year 1999,
there was increased consulting revenue in connection with certain contracts
included in service and other revenue. The decrease in the first nine months of
fiscal year 2000 was the result of the decrease in consulting revenue previously
described and decreased revenues under the National Institute of Standards and
Technology ("NIST") grant and Defense Advanced Research Projects Agency
("DARPA") contract. The NIST grant concluded at the end of the first quarter of
fiscal year 1999 and the DARPA contract expired at the end of fiscal year 1999.
There were no revenues from the DARPA contract or the NIST grant in the first
nine months of fiscal year 2000.
COST OF REVENUE
Total cost of revenue decreased 27.4% to $674,000 in the third quarter of fiscal
year 2000 from $928,000 in the third quarter of fiscal year 1999, and decreased
14.0% to $2.1 million in the first nine months of fiscal year 2000 from $2.4
million in the first nine months 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 increased to 14.0% of product license revenue in the third quarter of
fiscal year 2000 from 11.1% in the third quarter of fiscal year 1999, and
increased to 16.5% of product license revenue in the first nine months of fiscal
year 2000 from 12.6% in the first nine months of fiscal year 1999. The
increases, as a percentage of product license revenue, were primarily a result
of lower product license revenue in the fiscal year 2000 periods. 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. As a percentage of service and other revenue, cost of
service and other revenue decreased to 7.1% of service and other revenue in the
third quarter of fiscal year 2000 from 15.3% in the third quarter of fiscal year
1999, and decreased to 6.7% of service and other revenue in the first nine
months of fiscal year 2000 from 12.5% of service and other revenue in the first
nine months of fiscal year 1999. The decrease in third quarter of fiscal year
2000 was primarily a result of a decrease in outside consulting in connection
with certain contracts, work force reductions and attrition, and continued
efforts to reduce operating costs. In the third quarter of fiscal year 1999,
there was an increased amount of outside consulting included in cost of service
and other revenue. The decrease in the first nine months of fiscal year 2000 was
attributable to the decrease in outside consulting previously described,
decreased activity under the NIST grant, and the DARPA contract, which had
higher costs associated with them than the Company's other services, the work
force reduction which occurred in the first quarter of fiscal year 1999 and the
Company's ongoing cost containment efforts. There were no costs incurred under
the DARPA contract or the NIST grant in the first nine months of fiscal year
2000.
12
<PAGE>
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
12.0% to $1.8 million in the third quarter of fiscal year 2000 from $2.1 million
in the third quarter of fiscal year 1999, and decreased 16.0% to $5.7 million in
the first nine months of fiscal year 2000, from $6.8 million in the first nine
months of fiscal year 1999. The decreases were primarily attributable to the
work force reduction which occurred in fiscal year 1999 and ongoing cost
containment efforts, partially offset in the first quarter of fiscal year 2000
by costs included in research and development expense which were previously
recorded as cost of service and other revenue under the NIST grant and the DARPA
contract. As a percentage of total revenue, research and development costs
increased to 30.8% in the third quarter of fiscal year 2000 from 28.7% in the
third quarter of fiscal year 1999, and decreased to 33.6% in the first nine
months of fiscal year 2000 from 35.5% in the first nine months of fiscal year
1999. The increase as a percentage of total revenue in the third quarter of
fiscal year 2000 was a result of lower revenue in that period, as compared to
the same period of fiscal year 1999.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions, travel
and costs of promotional activities. Sales and marketing expense decreased 12.9%
to $2.9 million in the third quarter of fiscal year 2000 from $3.4 million in
the third quarter of fiscal year 1999, and decreased 6.6% to $9.4 million in the
first nine months of fiscal year 2000 from $10.1 million in the first nine
months of fiscal year 1999. The decreases in sales and marketing expense in the
fiscal year 2000 periods were primarily the result of the work force reduction
that occurred in the first quarter of fiscal year 1999 and decreased variable
selling costs resulting from a decrease in the level of sales. As a percentage
of total revenue, sales and marketing expenses increased to 49.6% in the third
quarter of fiscal year 2000 from 46.6% in the third quarter of fiscal year 1999,
and increased to 55.5% in the first nine months of fiscal year 2000 from 52.7%
in the first nine months of fiscal year 1999. The increases as a percentage of
total revenue in the fiscal year 2000 periods were a result of a decrease in
revenues in those periods.
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 32.6% to
$395,000 in the third quarter of fiscal year 2000 from $586,000 in the third
quarter of fiscal year 1999, and decreased 21.9% to $1.5 million in the first
nine months of fiscal year 2000 from $1.9 million in the first nine months of
fiscal year 1999. The decreases were primarily attributable to declining
depreciation of corporate information systems, the work force reduction which
occurred in the first quarter of fiscal 1999 and attrition. As a percentage of
total revenue, general and administrative expenses decreased to 6.6% in the
third quarter of fiscal year 2000 from 8.1% in the third quarter of fiscal year
1999, and decreased to 8.7% in the first nine months of fiscal year 2000 from
9.9% in the first nine months of fiscal year 1999.
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.
13
<PAGE>
OTHER EXPENSE, NET
Other expense, net primarily consists of interest expense and the effects of
foreign currency transaction gains and losses. Other expense, net was $20,000
and $15,000 in the third quarters of fiscal years 2000 and 1999, respectively.
Other expense, net was $91,000 and $246,000 in the first nine months of fiscal
years 2000 and 1999, respectively. Other expense, net in the first quarter of
fiscal year 1999 included amortization of finance charges from the sale of
approximately $4.0 million of accounts receivable to a financial institution.
Interest expense (other than amortization of finance charges) has increased in
fiscal year 2000 due to increased borrowings.
INCOME TAX EXPENSE
The Company provided for foreign income and withholding taxes of $333,000 and
$346,000 in the first nine months 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 carry forwards available to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.3 million in the first nine months
of fiscal year 2000. This resulted primarily from a net loss for the period and
a decrease in unearned revenue, offset by adjustments for depreciation and
amortization. Unearned revenue decreased as a result of lower levels of product
license revenue in the first nine months of fiscal year 2000.
Net cash used in investing activities was $1.3 million in the first nine months
of fiscal year 2000, and was primarily associated with the investment in the
Company's component and template model libraries.
Net cash provided by financing activities was $2.0 million in the first nine
months of fiscal year 2000, which included proceeds from a note payable to
Avant! Corporation, advances under an accounts receivable purchase agreement and
proceeds from the exercise of stock options, offset by payments on capital lease
obligations and a line of credit.
On October 1, 1999, the Company entered into an accounts receivable purchase
agreement with a bank under which the Company may sell, from time to time, up to
$2.5 million of accounts receivable, with recourse. The agreement allows for
advances to the Company of 80% of accounts receivable (as approved by the bank),
with a monthly finance charge of 1.75%, computed on outstanding purchased
accounts receivable. Advances under the agreement are collateralized by
substantially all of the assets of the Company. As of December 31, 1999,
outstanding advances under the agreement were $385,000, and the bank has
informed the Company that further advances cannot be made under the agreement
until such time as the Company's liquidity position improves.
On October 19, 1999, the Company entered into a $2.0 million Bridge Loan and
Security Agreement and a related Promissory Note with Avant! Corporation, under
which $2.0 million was outstanding at December 31, 1999. On January 14, 2000,
the Company entered into a Second Bridge Loan and Security Agreement and a
related Promissory Note under which an additional $600,000 in the aggregate can
be borrowed from Avant! (These agreements are collectively referred to as the
"Loan Agreements.") As of the date of this filing, $2.5 million was outstanding
under the Loan Agreements. Amounts outstanding under the Loan Agreements bear
interest at 10% per annum (13% per annum on any past due payments) and are
collateralized by substantially all of the assets of the Company. All
outstanding principal and interest are due upon the earlier of 180 days from the
date of the Loan Agreements or upon an event of default under the Loan
Agreements.
14
<PAGE>
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
approval by the Company's shareholders of the Merger and the satisfaction of
other conditions required to complete the Merger, 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, and ability to access cash balances of its foreign
operations in a timely manner.
MERGER WITH AVANT! CORPORATION
On November 17, 1999, the Board of Directors of the Company approved the merger
of the Company into a wholly owned subsidiary of Avant! Corporation (the
"Merger"). Pursuant to an Agreement of Merger dated December 2, 1999 (the
"Merger Agreement"), each outstanding share of the Company's Common Stock will
be converted into the right to receive approximately $2.48 per share in cash,
subject to the ultimate amount of certain fees and expenses related to the
Merger and subject to the number of the Company's shares outstanding at the
effective date of the Merger. The Merger must be approved by the affirmative
vote of the holders of at least sixty-seven percent (67%) of the outstanding
shares of the Company's Common Stock, and is subject to other conditions
including certain regulatory approvals. A vote of the Company's Shareholders
will be held at a special meeting of shareholders in March 2000. Provided Avant!
Corporation is not in material default under the terms of the Merger Agreement,
it may terminate any further obligations under the Merger Agreement if any
condition of the closing provided for in the Merger Agreement is not satisfied
on or before March 31, 2000.
If the Merger is not consummated for any reason, including if the Company's
shareholders do not approve the Merger, or if other conditions required to
complete the Merger are not satisfied, certain of which are outside the
Company's and Avant!'s control, due to the Company's current financial situation
and the capital requirements necessary to continue operation of the business,
the viability of the Company's ongoing business operations will be seriously
jeopardized. In particular, the Company could be required to significantly
reduce its operations, seek additional financing, sell additional securities on
terms that are highly dilutive to existing shareholders or search for an
alternative merger partner. There can be no assurance that additional financing
or sales of additional securities would be available alternatives and, if
available, that the terms would be acceptable to the Company. Additionally,
there can be no assurance that the Company could find an alternative merger
partner. Further, there can be no assurance that any of these strategies could
be executed in a timely manner.
YEAR 2000 ISSUE
During 1999, the Company assessed 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
replaced certain systems, including its security system, that were determined to
be deficient. The cost associated with replacing such systems was not
significant.
During 1999, the Company contacted its major suppliers of products and services
to assess the Year 2000 compliance of each. As the majority of the Company's
major customers are "Fortune 100" companies, the Company reviewed Year 2000
public disclosures made by its major customers to determine whether their
operations are Year 2000 compliant. The Company did not discover any material
deficiencies with respect to its major suppliers or its major customers based on
its contact and review procedures. As of the date of this filing, the Company
has not experienced any Year 2000 disruptions with its major suppliers of
products and services or with its major customers.
15
<PAGE>
During 1999, the Company 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 believed they would be unaffected by the Year 2000
transition. To the extent that a user of the Company's products does not have
Year 2000 compliant operating systems or development environments, the Company
gives no assurance as to Year 2000 compliance of its products used on such
operating systems or development environments. As of the date of this filing,
the Company is not aware of any effects on its products as a result of the Year
2000.
The Company believed its most reasonably likely worst-case Year 2000 scenario
would relate to problems with the systems of third party infrastructure
suppliers, e.g., electricity supply, water and sewer service and
telecommunications. As of the date of this filing, the Company has not
experienced disruptions from its suppliers of electricity, water, sewer or
telecommunications.
The Company has not incurred material incremental costs to ensure Year 2000
compliance of its systems or products. The Company does not expect to incur
additional costs in addressing Year 2000 issues.
While the Company believes its risk is low, it is early in the year 2000 and
there is a possibility that a software program or system Year 2000 compliance
failure related to products, its internal systems and software or those of its
major suppliers and customers could still occur. Lost revenues or the inability
of the Company to operate for any significant period of time that would result
from a software program or system Year 2000 compliance failure, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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 AND
RESULTS OF OPERATIONS.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report:
Exhibit 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
ended September 30, 1999, and announcing that the Company was engaged in
negotiations regarding the acquisition of the Company was filed under Item 5, on
November 16, 1999.
A Report on Form 8-K, containing Avant! Corporation's press release announcing a
definitive agreement under which Avant! Corporation will acquire the Company was
filed under Item 5, on December 6, 1999.
No other Reports on Form 8-K were filed during the quarter ended December 31,
1999.
17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 8, 2000
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)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10Q FOR
THE NINE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
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