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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER: 0-27752
ANALOGY, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0892014
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9205 SW GEMINI DRIVE
PORTLAND, OREGON 97008
(Address of principal executive offices and zip code)
503-626-9700
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
COMMON STOCK, NO PAR VALUE 8,359,664
(Class) (Shares outstanding at August 6, 1996)
ANALOGY, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1996
and March 31, 1996 .................................... 2
Consolidated Statements of Operations - Three Months
Ended June 30, 1996 and 1995 .......................... 3
Consolidated Statements of Cash Flows - Three Months
ended June 30, 1996 and 1995 .......................... 4
Notes to Consolidated Financial Statements ............ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................... 11
1
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, March 31,
1996 1996
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,510 $10,208
Marketable securities 5,910 -
Accounts receivable 5,216 5,831
Prepaid expenses and other assets 904 817
-------- --------
Total current assets 13,540 16,856
Furniture, fixtures and equipment, net 3,571 3,113
Library costs, net 2,102 2,116
Other assets 220 209
-------- --------
$19,433 $22,294
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,547 $ 2,124
Current portion of capital leases 550 537
Accrued expenses 1,135 1,427
Unearned revenue 4,654 5,208
Subordinated debt 160 929
-------- --------
Total current liabilities 8,046 10,225
Non-current portion of capital leases 489 423
Other liabilities 149 155
Shareholders' equity:
Common stock, no par value, authorized
35,000 shares; 14,122 14,180
8,319 and 8,293 shares issued and
outstanding at June 30, 1996 and
March 31, 1996
Foreign currency translation (53) (78)
Retained deficit (3,320) (2,611)
-------- --------
Total shareholders' equity 10,749 11,491
-------- --------
$19,433 $22,294
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
2
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended June 30,
--------------------------
1996 1995
--------- ----------
Revenue:
Product licenses $ 2,670 $ 4,059
Service and other 2,046 1,246
-------- --------
Total revenue 4,716 5,305
Cost of revenue:
Product licenses 377 336
Service and other 485 183
-------- --------
Total cost of revenue 862 519
-------- --------
Gross profit 3,854 4,786
Operating expenses:
Research and development 1,361 1,055
Sales and marketing 2,738 2,671
General and administrative 675 585
-------- --------
Total operating expenses 4,774 4,311
-------- --------
Operating (loss) income (920) 475
Other income (expense), net 9 (181)
-------- --------
(Loss) income before income taxes (911) 294
Income tax (benefit) expense (202) 75
-------- --------
Net (loss) income $ (709) $ 219
-------- --------
-------- --------
Net (loss) income per common share $(.09) $ .03
-------- --------
-------- --------
Weighted average common shares outstanding 8,311 6,814
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
3
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
Three months ended June 30,
---------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (709) $ 219
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 574 419
Changes in operating assets and liabilities:
Accounts receivable 578 867
Prepaid expenses and other assets (102) (145)
Accounts payable and accrued expenses (819) 633
Unearned revenue (536) (68)
-------- --------
Net cash (used in) provided
by operating activities (1,014) 1,925
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,910) -
Capital expenditures for furniture,
fixtures and equipment (553) (261)
Capital expenditures for library costs (210) (248)
-------- --------
Net cash used in investing activities (6,673) (509)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit - (1,710)
Payments on subordinated debt (769) -
Principal payments on capital leases (179) (157)
Common stock offering costs (68) -
Proceeds from sale of common stock 9 6
-------- --------
Net cash used in financing activities (1,007) (1,861)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (5) (5)
-------- --------
Net decrease in cash and cash
equivalents (8,699) (450)
Cash and cash equivalents at beginning
of period 10,208 1,179
-------- --------
Cash and cash equivalents at end of
period $ 1,510 $ 729
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 93 $ 169
Income taxes 41 3
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital
lease obligations $ 257 $ 16
The accompanying notes are an integral part of these
consolidated financial statements.
4
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and
for the three months ended June 30, 1996 and 1995 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of March 31, 1996 is derived from the Analogy, Inc. (the
"Company") consolidated financial statements included in the Annual Report on
Form 10-K for the year ended March 31, 1996. 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, 1996, as included in the Company's
Annual Report on Form 10-K for the year ended March 31, 1996.
Operating results for the three months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ending March 31, 1997, or any portion thereof.
2. FURNITURE, FIXTURES AND EQUIPMENT
June 30, March 31,
1996 1996
-------- ---------
Office furniture $ 800 $ 541
Computer equipment 2,947 2,782
Capital leases 3,462 3,206
Software 677 550
-------- --------
7,886 7,709
Less accumulated depreciation
and amortization (4,315) (3,966)
-------- --------
$ 3,571 $ 3,113
-------- --------
-------- --------
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 are classified as "available for sale" as the Company intends to
utilize its marketable securities for liquidity or operational purposes.
Accordingly, these securities are carried at market value, which is not
materially different from cost at June 30, 1996.
5
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 EDA 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 contract model development. 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, contract model development and other services
revenue is recognized as the services or portions thereof have been
completed. The Company has received a multi-year grant from the National
Institute of Standards and Technology ("NIST") and has entered into contracts
with other parties that provide funding to the Company for research and
development. These contracts generally contain cost sharing provisions.
The Company has focused substantial efforts on its international
business operations, particularly in Europe. The Company's international
operations accounted for 32% and 30% of the Company's total revenue for the
first quarter of fiscal year 1997 and 1996, respectively. The majority of the
Company's international operations are conducted through the Company's
wholly-owned subsidiaries in Europe.
FORWARD LOOKING STATEMENTS
All statements and trend analysis contained herein relative to future
size or degree of market penetration of the Company's products and
information relating to the rates of growth or decline of revenue or expenses
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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.
The Company's quarterly operating results have in the past and may in
the future vary significantly depending on factors such as 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, the timing of significant orders, seasonal
factors, the mix of direct and indirect sales and general economic conditions.
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 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
6
slowdowns and layoffs. No assurance can be given that the automotive industry
will experience economic growth, will not experience a downturn or that any
downturn will not be severe.
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.
7
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:
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995
-------------------- -------------------
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $2,670 56.6 % $4,059 76.5 %
Service and other 2,046 43.4 1,246 23.5
------ ----- ------ -----
Total revenue 4,716 100.0 5,305 100.0
Cost of revenue:
Product licenses 377 7.9 336 6.3
Service and other 485 10.3 183 3.5
------ ----- ------ -----
Total cost of revenue 862 18.2 519 9.8
------ ----- ------ -----
Gross profit 3,854 81.8 4,786 90.2
Operating expenses:
Research and development 1,361 28.8 1,055 19.9
Sales and marketing 2,738 58.1 2,671 50.3
General and administrative 675 14.3 585 11.0
------ ----- ------ -----
Total operating expenses 4,774 101.2 4,311 81.2
------ ----- ------ -----
Operating (loss) income (920) (19.4) 475 9.0
Other income (expense), net 9 .1 (181) (3.4)
------ ----- ------ -----
(Loss) income before income taxes (911) (19.3) 294 5.6
Income tax (benefit) expense (202) 4.2 75 (1.4)
------ ----- ------ -----
Net (loss) income $ (709) (15.1)% $ 219 4.2 %
------ ----- ------ -----
------ ----- ------ -----
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
REVENUE
Total revenue decreased 11% to $4.7 million in the first quarter of
fiscal year 1997 from $5.3 million in the first quarter of fiscal year 1996.
Product license revenue decreased 34% to $2.7 million in the first quarter of
fiscal year 1997 from $4.1 million in first quarter of fiscal year 1996. This
decrease is primarily attributable to the slippage of several key orders from
the first quarter of fiscal year 1997 to later in the year. Service and other
revenue increased 64% to $2.0 million in the first quarter of fiscal year
1997 from $1.2 million in the first quarter of fiscal year 1996, due to
increased maintenance revenue resulting from the growth in the Company's
installed base, billings to NIST under the grant awarded in fiscal year 1996
and billings to the U.S. Air Force under a new contract awarded during the
first quarter of fiscal year 1997.
Sales to Electronic Data Systems Corp. ("EDS"), which serves as a
distributor to certain automotive industry users, accounted for 12% of total
revenue in the first quarter of fiscal year 1996. Near term uncertainty
regarding capital spending by General Motors has resulted in reductions in
orders from EDS. The Company does not expect significant orders from EDS to
resume until the fourth quarter of fiscal year 1997 at the earliest. The loss
of or reduction in sales to EDS could have an adverse effect on the Company's
business, financial condition and results of operations. No one customer
accounted for 10% or more of total revenue in the first quarter of fiscal
year 1997.
Revenue from international operations was $1.5 million (32% of total
revenue) in the first quarter of fiscal year 1997 compared to $1.6 million
(30% of total revenue) in the first quarter of fiscal year 1996. Revenue from
international operations remained relatively constant in the first quarters
of fiscal years 1997 and 1996, but has
8
increased as a percentage of total revenue as revenue from United States
operations decreased during the same period.
COST OF REVENUE
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. Cost of product
license revenue increased to 7.9% of total revenue in the first quarter of
fiscal year 1997 from 6.3% of total revenue in the first quarter of fiscal
year 1996, primarily due to the decrease in product license revenue during
the same period, as 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.
The 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. Cost of service and other
revenue increased to 10.3% of total revenue in the first quarter of fiscal
1997 from 3.5% of total revenue in the first quarter of fiscal year 1996, due
primarily to the Company's increased installed product base, costs associated
with performance under the grant received from NIST and the costs associated
with the U.S. Air Force contract. The costs associated with service and other
revenue as a percentage of total revenue are typically higher than the costs
of product license revenue. It is anticipated that service and other revenue
will continue to increase as a percentage of total revenue for the remainder
of fiscal year 1997.
RESEARCH AND DEVELOPMENT
Research and development expense includes all costs associated with
development of new products and technology research. The costs classified in
this category primarily include such items as salaries, fringe benefits,
depreciation of capital equipment and an allocation of facilities and systems
support costs used in research and development. Research and development
expenses increased 29% to $1.4 million in the first quarter of fiscal year
1997 from $1.1 million in the first quarter of fiscal year 1996. The increase
primarily resulted from increased personnel and facilities and systems
support expenses relating to the Company's expansion of its research and
development programs. Research and development personnel increased 20% and
facilities to accomodate the increased personnel were expanded in the first
quarter of fiscal year 1997. As a percentage of total revenue, research and
development costs increased to 28.8% in the first quarter of fiscal year 1997
from 19.9% in the first quarter of fiscal year 1996, due to the above and the
decrease in revenue in the first quarter of fiscal year 1997. As a percentage
of total revenue, research and development expense is expected to decrease
during the remainder of fiscal year 1997.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries,
commissions and travel. Sales and marketing expense remained relatively
constant in the first quarter of fiscal year 1997 and 1996. As a percentage
of total revenue, sales and marketing expenses increased to 58.1% in the
first quarter of fiscal year 1997 from 50.3% in the first quarter of fiscal
year 1996, due primarily to the decrease in revenue in the first quarter of
fiscal year 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs associated with
the Company's executive staff, legal, accounting, corporate systems,
facilities and human resources departments. General and administrative
expenses increased 15% to $675,000 in the first quarter of fiscal year 1997
from $585,000 in the first quarter of fiscal year 1996. As a percentage of
total revenue, general and administrative expenses increased to 14.3% in the
first quarter of fiscal year 1997 from 11.0% in the first quarter of fiscal
1996, due in part to expansion of facilities,
9
and the increased costs of being a public company, including those related to
external reporting requirements, and legal and accounting costs.
OTHER INCOME (EXPENSE), NET
Other expense, net primarily consists of interest income on cash and
cash equivalents and marketable securities offset by interest expense
associated with short-term financing of accounts receivable, capital leases
and subordinated debt. Other expense, net was $9,000 (income) in the first
quarter of fiscal year 1997 and $181,000 (expense) in the first quarter of
fiscal year 1996. This change is primarily attributable to interest earned on
the investment of proceeds from the Company's initial public offering and the
reduction in interest expense resulting from reduced amounts outstanding
under the Company's line of credit arrangement and subordinated debt.
(BENEFIT FROM) PROVISION FOR INCOME TAXES
The Company provided for foreign withholding and income taxes of
$26,000 and $11,000, in the first quarter of fiscal year 1997 and 1996,
respectively. In the first quarter of fiscal year 1997 the Company recorded a
benefit from the utilization of net operating loss carryforwards of
$228,000, which it believes will be realized in the fiscal year. The
Company's effective income tax rate in the first quarter of fiscal year 1996
was approximately 25%, and the Company anticipates that its effective income
tax rate for fiscal year 1997 will be approximately 25%.
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 and accounts receivable financing. In March 1996 the
Company completed its initial public offering of common stock which resulted
in net proceeds to the Company of approximately $9.4 million.
Net cash used in operating activities was $1.0 million in the first
quarter of fiscal year 1997, primarily resulting from a net loss for the
period, adjustments for depreciation and amortization and the decrease in
unearned revenue, accounts payable and accrued expenses. The decrease in
unearned revenue represents recognition of revenue for maintenance and
library services and the decrease in accounts payable and accrued expenses
primarily represents payment of amounts outstanding at March 31, 1996,
including costs associated with the Company's initial public offering which
was completed in March 1996.
Net cash used in investing activities was $6.7 million in the first
quarter of fiscal year 1997, which primarily included the investment of cash
in marketable securities. Also included in net cash used in investing
activities are capital expenditures for furniture, fixtures and equipment and
capital expenditures associated with the investment in the Company's
component and template model libraries.
Net cash used in financing activities was $1.0 million in the first
quarter of fiscal year 1997, which primarily included payments of
subordinated debt and capital lease obligations.
At June 30, 1996, the Company had cash and cash equivalents of $1.5
million and marketable securities of $5.9 million. The Company also utilizes
lease financing arrangements to finance purchase of capital assets as a
source of liquidity. The Company believes that the net proceeds from its
initial public offering, together with lease financing arrangements,
available funds 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. Accordingly, the Company
currently has no outstanding borrowing facility.
10
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 Statement regarding computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 8, 1996
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)
12