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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 9,192,801
(Class) (Shares outstanding at October 31, 1997)
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ANALOGY, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1997
and March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations - Three Months and Six Months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows - Six Months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13
1
PART I - FINANCIAL INFORMATION
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, March 31,
1997 1997
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,113 $ 1,827
Marketable securities -- 1,697
Accounts receivable 8,138 9,161
Prepaid expenses 1,060 886
Other assets, net 554 455
--------- ---------
Total current assets 12,865 14,026
Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $6,872 and $5,833 4,109 4,280
Library costs, net 3,248 2,729
Other assets, net 919 1,095
--------- ---------
$ 21,141 $ 22,130
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 845 $ 1,301
Current portion of capital leases 334 566
Accrued salaries and benefits 2,001 2,095
Accrued expenses -- 181
Unearned revenue 5,634 5,812
--------- ---------
Total current liabilities 8,814 9,955
Non-current portion of capital leases 544 499
Other liabilities 347 359
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
9,192 and 9,118 shares issued and outstanding 17,355 17,124
Foreign currency translation (174) (155)
Accumulated deficit (5,745) (5,652)
--------- ---------
Total shareholders' equity 11,436 11,317
--------- ---------
$ 21,141 $ 22,130
--------- ---------
--------- ---------
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)
(Unaudited)
Three months ended Six months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
Revenue:
Product licenses $ 3,870 $ 2,882 $ 7,395 $ 5,553
Service and other 3,272 2,377 5,733 4,422
------- ------- ------- -------
Total revenue 7,142 5,259 13,128 9,975
Cost of revenue:
Product licenses 429 374 980 751
Service and other 952 525 1,536 1,011
------- ------- ------- -------
Total cost of revenue 1,381 899 2,516 1,762
------- ------- ------- -------
Gross profit 5,761 4,360 10,612 8,213
Operating expenses:
Research and development 1,192 1,278 2,703 2,640
Sales and marketing 3,267 3,015 6,416 5,752
General and administrative 756 682 1,424 1,357
Amortization of intangibles 92 -- 184 --
------- ------- ------- -------
Total operating expenses 5,307 4,975 10,727 9,749
------- ------- ------- -------
Operating income (loss) 454 (615) (115) (1,536)
Other income (expense), net (31) (1) (6) 9
------- ------- ------- -------
Income (loss) before income
taxes 423 (616) (121) (1,527)
------- ------- ------- -------
Income tax expense (benefit) 106 316 (28) 114
------- ------- ------- -------
Net income (loss) $ 317 $ (932) $ (93) $ (1,641)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share $ 0.03 $ (0.11) $ (0.01) $ (0.20)
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share calculations 9,808 8,356 9,149 8,334
------- ------- ------- -------
------- ------- ------- -------
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)
(Unaudited)
Six months ended September 30,
------------------------------
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (93) $ (1,641)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,845 1,225
Changes in operating assets and liabilities:
Accounts receivable 946 (134)
Prepaid expenses and other assets (216) (85)
Accounts payable and accrued expenses (803) (697)
Unearned revenue (112) (44)
-------- --------
Net cash provided by (used in) operating activities 1,567 (1,376)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (5,910)
Maturities of marketable securities 1,700 1,000
Capital expenditures for furniture, fixtures and equipment (819) (1,156)
Capital expenditures for library costs (1,131) (559)
-------- --------
Net cash used in investing activities (250) (6,625)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debt -- (829)
Principal payments on capital lease obligations (250) (353)
Common stock offering costs -- (75)
Proceeds from exercise of stock options and warrants 231 72
-------- --------
Net cash used in financing activities (19) (1,185)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (12) (7)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,286 (9,193)
Cash and cash equivalents at beginning of period 1,827 10,208
-------- --------
Cash and cash equivalents at end of period $ 3,113 $ 1,015
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 68 $ 116
Income taxes 158 138
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 63 $ 257
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 unaudited financial information included herein for the six months ended
September 30, 1997 and 1996 was prepared in conformity with generally
accepted accounting principles. The financial information as of March 31,
1997 is derived from the Analogy, Inc. (the "Company") consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 1997. Certain information or footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying consolidated financial statements
include all adjustments necessary (which are of a normal and recurring
nature) for the fair presentation of the results of the interim periods
presented. The accompanying consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements
for the year ended March 31, 1997, as included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1997.
Operating results for the six months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ending March 31, 1998, or any portion thereof.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less; marketable securities consist primarily
of government and corporate securities. The Company's marketable securities
were classified as "available for sale" and accordingly were carried at
market value, which was not materially different from cost at March 31, 1997.
3. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128), which changes the standards for computing and presenting earnings
per share (EPS) and supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share." SFAS 128 replaces the presentation of primary EPS with
a presentation of basic EPS, requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods and
requires restatement of all prior-period EPS data presented.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes
requirements for disclosure of comprehensive income. The objective of SFAS
130 is to report all changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income is
the total of net income and all other non-owner changes in equity. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of earlier financial statements for comparative purposes is
required.
The Company has not quantified the effect of adoption of SFAS 128 or SFAS 130.
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 electronic design
automation companies.
The Company's product license revenue consists of license fees for its
software products and template and component model library subscription fees.
Service and other revenue consists of software maintenance fees, training,
consulting and both commercial and governmental contract model development
and research and development contracts. The Company's software products are
shipped only after the Company has an executed software license agreement
with a customer. Revenue from software licenses is recognized upon shipment
to the customer. Revenue from library subscription fees is typically billed
annually and the related revenue is recognized ratably over the life of the
contract, usually twelve months. Maintenance is normally billed in advance
and recognized ratably over the life of the contract, which is usually twelve
months. Training, consulting and certain other services revenue is recognized
as the services or portions thereof have been provided. Revenue from contract
model development is recognized upon shipment of the underlying models, or
upon acceptance criteria as agreed to with the customer. The Company received
a modeling contract from the U.S. Air Force in fiscal year 1997. The Company
also received a contract from the Defense Advanced Research Projects Agency
("DARPA") in fiscal year 1997 and a multi-year grant from the National
Institute of Standards and Technology ("NIST") in fiscal year 1996 which
provide funding to the Company for research and development. The DARPA
contract contains cost sharing provisions.
FORWARD LOOKING STATEMENTS
This report, including the following discussion and analysis of financial
condition and results of operations, contains certain statements, trend
analysis and other information that constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which may involve risks and uncertainties. Such forward looking statements
include, but are not limited to, statements including the words "anticipate,"
"believe," "estimate," "expect," "plan," "intend" and other similar
expressions. These forward looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. Results of operations for the periods discussed below should not
be considered indicative of the results to be expected in any future period,
and fluctuations in operating results may also result in fluctuations in the
market price of the Company's common stock. Like most high technology
companies, the Company faces certain business risks that could have adverse
effects on the Company's results of operations, including those discussed
below and elsewhere in this Report.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as the receipt and timing
of significant orders, increased competition, the timing of new product
announcements, changes in pricing policies by the Company or its competitors,
lengthy sales cycles, lack of market acceptance or delays in the introduction
of new or enhanced versions of the Company's products, seasonal factors, the
mix of direct and indirect sales and general economic conditions. In
particular, the Company's quarterly operating results have in the past
fluctuated as a result of the large percentage of orders that are not
received by the Company until near the end of the quarter. Substantially all
of the Company's product licensing revenue in each quarter results from
orders booked in that quarter. The Company's expense levels are based, in
part, on its expectations as to future revenue. If revenue levels are below
expectations, results of operations may be disproportionately affected
because only a small portion of the Company's expenses varies with its
revenue. Seasonal factors, particularly
6
decreases in revenues in European markets in the second fiscal quarter
resulting from European holidays in July and August, and cyclical economic
patterns in the aerospace, defense, automotive or other end-user industries
also contribute to quarter-to-quarter fluctuations. Additionally, a
significant portion of the Company's revenue in a quarter typically is earned
in the last few weeks of that quarter. As a result, the Company may not learn
of, or be able to confirm, revenue or earnings shortfalls until late in the
quarter or following the end of the quarter. Any shortfall in revenue or
earnings from expected levels or other failure to meet expectations of the
financial markets regarding results of operations could have an immediate and
significant adverse effect on the trading price of the Company's Common Stock
in any given period.
The Company has historically derived a significant portion of its revenue
from the aerospace and defense industries, which have been characterized by
significant technological changes, high cyclicality and the potential for
significant downturns in business activity resulting from changes in economic
conditions or governmental resources and spending policies. No assurance can
be given that the aerospace and defense industries will experience economic
growth, will not experience a downturn or that any downturn will not be
severe, or that such conditions would not have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's operating results have depended, and will continue to depend,
upon designers of mixed-signal and mixed-technology systems adopting methods
of design analysis and simulation which use behavioral modeling techniques.
The design analysis and simulation industry is characterized by rapid
technological change, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current products and to develop or acquire new
products that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
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 (dollars in thousands):
--------------------------------------------------------------------------------------
Three months Three months
ended ended
STATEMENT OF OPERATIONS DATA: September 30, September 30,
1997 1996
----------------- ----------------
Revenue:
Product licenses $ 3,870 54.2 % $ 2,882 54.8 %
Service and other 3,272 45.8 2,377 45.2
------ ------ ------ ------
Total revenue 7,142 100.0 5,259 100.0
Cost of revenue:
Product licenses 429 6.0 374 7.1
Service and other 952 13.3 525 10.0
------ ------ ------ ------
Total cost of revenue 1,381 19.3 899 17.1
------ ------ ------ ------
Gross profit 5,761 80.7 4,360 82.9
Operating expenses:
Research and development 1,192 16.7 1,278 24.3
Sales and marketing 3,267 45.7 3,015 57.3
General and administrative 756 10.6 682 13.0
Amortization of intangibles 92 1.3 -- --
------ ------ ------ ------
Total operating expenses 5,307 74.3 4,975 94.6
------ ------ ------ ------
Operating income (loss) 454 6.4 (615) (11.7)
Other expense, net (31) (0.5) (1) --
------ ------ ------ ------
Income (loss) before income taxes 423 5.9 (616) (11.7)
Income tax expense 106 1.5 316 6.0
------ ------ ------ ------
Net income (loss) $ 317 4.4 % $ (932) (17.7) %
------ ------ ------ ------
------ ------ ------ ------
--------------------------------------------------------------------------------------
8
--------------------------------------------------------------------------------------
Six months Six months
ended ended
STATEMENT OF OPERATIONS DATA: September 30, September 30,
1997 1996
----------------- ----------------
Revenue:
Product licenses $ 7,395 56.3 % $ 5,553 55.7 %
Service and other 5,733 43.7 4,422 44.3
------ ------ ------ ------
Total revenue 13,128 100.0 9,975 100.0
Cost of revenue:
Product licenses 980 7.5 751 7.5
Service and other 1,536 11.7 1,011 10.2
------ ------ ------ ------
Total cost of revenue 2,516 19.2 1,762 17.7
------ ------ ------ ------
Gross profit 10,612 80.8 8,213 82.3
Operating expenses:
Research and development 2,703 20.6 2,640 26.5
Sales and marketing 6,416 48.9 5,752 57.6
General and administrative 1,424 10.8 1,357 13.6
Amortization of intangibles 184 1.4 -- --
------ ------ ------ ------
Total operating expenses 10,727 81.7 9,749 97.7
------ ------ ------ ------
Operating loss (115) (0.9) (1,536) (15.4)
Other (expense) income, net (6) -- 9 0.1
------ ------ ------ ------
Loss before income taxes (121) (0.9) (1,527) (15.3)
Income tax (benefit) expense (28) (0.2) 114 1.2
------ ------ ------ ------
Net loss $ (93) (0.7) % $ (1,641) (16.5) %
------ ------ ------ ------
------ ------ ------ ------
--------------------------------------------------------------------------------------
SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL YEARS 1998 AND 1997
REVENUE
Total revenue increased 35.8% to $7.1 million in the second quarter of fiscal
year 1998 from $5.3 million in the second quarter of fiscal year 1997, and
increased 31.6% to $13.1 million in the first six months of fiscal year 1998
from $10.0 in the first six months of fiscal year 1997. No one customer
accounted for 10% or more of total revenue in the second quarter or first six
months of fiscal years 1998 and 1997.
Product license revenue increased 34.3% to $3.9 million in the second quarter
of fiscal year 1998 from $2.9 million in the second quarter of fiscal year
1997, and increased 33.2% to $7.4 million in the first six months of fiscal
year 1998 from $5.6 million in the first six months of fiscal year 1997. The
increases were primarily attributable to continued customer acceptance of the
Company's new SaberDesigner suite of products for the Windows NT operating
system and continued broadening of the Company's customer base.
Service and other revenue increased 37.7% to $3.3 million in the second
quarter of fiscal year 1998 from $2.4 million in the second quarter of fiscal
year 1997, and increased 29.6% to $5.7 million in the first six months of
fiscal year 1998 from $4.4 million in the first six months of fiscal year
1997. The increases were due primarily to increased demand for the Company's
maintenance and other services, growth in the Company's installed base; and
revenues from NIST under a $2.0 million grant awarded in fiscal year 1996,
the U.S. Air Force under a $2.0 million modeling contract awarded during the
first quarter of fiscal year 1997, and DARPA under a $1.3 million contract
awarded in September 1996.
9
Revenues recognized under these contracts were as follows (dollars in
thousands):
Three months ended Six months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
NIST $241 $173 $450 $414
U.S. Air Force 458 374 619 631
DARPA 378 120 515 120
In addition to revenues received under the NIST grant, and under the
contracts with the U.S. Air Force and DARPA, the Company received other
revenues from the U.S. government or its subcontractors during the first six
months of fiscal years 1998 and 1997. Total revenues from U.S.
government-related sources, including the previously mentioned specific
awards, accounted for approximately 20.3% of total revenues in the first six
months of fiscal year 1998, and approximately 17.2% of total revenues in the
first six months of fiscal year 1997. Revenues received under the DARPA
contract in the second quarter of fiscal year 1998 included a one time
adjustment to the cost sharing provisions which resulted in an increase in
revenue of $250,000. The cancellation or reduction of projects being
undertaken by the U.S. government requiring products or services of the type
provided by the Company, or the Company's failure to obtain awards of such
projects, could have a material adverse effect on the Company's business,
financial condition and results of operations.
International revenue was $5.4 million (41% of total revenue) in the first
six months of fiscal year 1998 compared to $4.3 million (43% of total
revenue) in the first six months of fiscal year 1997. International revenue
decreased as a percentage of total revenue primarily as a result of increased
sales in the United States in the second quarter of fiscal year 1998. The
Company sells its products and services through its wholly-owned subsidiaries
in Europe and through distributors in Asia.
COST OF REVENUE
Total cost of revenue increased 53.6% to $1.4 million in the second quarter
of fiscal year 1998 from $899,000 in the second quarter of fiscal year 1997,
and increased 42.8% to $2.5 million in the first six months of fiscal year
1998 from $1.8 million in the first six months of fiscal year 1997.
Cost of product license revenue consists primarily of documentation expense,
media manufacturing costs, supplies, shipping expense and the amortization of
component and template model library costs and royalty payments. The Company
does not capitalize development costs for software products since the time
between the establishment of a working model of the software product and its
commercialization is typically of a short duration. Cost of product license
revenue decreased to 11.1% of product license revenue in the second quarter
of fiscal year 1998 from 13.0% in the second quarter of fiscal year 1997, and
decreased slightly to 13.3% of product license revenue in the first six
months of fiscal year 1998 from 13.5% in the first six months of fiscal year
1998. Costs such as documentation expense and supplies are expensed as
incurred, which may not necessarily relate to the number of product licenses
shipped during the period.
Cost of service and other revenue consists primarily of maintenance and
customer support expenses (including product enhancements and improvements,
bug fixes, telephone support, installation assistance and on-site support),
contract model development costs and the direct cost of providing services
such as training and consulting. The costs associated with service and other
revenue as a percentage of total revenue are typically higher than the costs
of product license revenue. As a percentage of service and other revenue,
cost of service and other revenue increased to 29.1% of service and other
revenue in the second quarter of fiscal year 1998 from 22.1% in the second
quarter of fiscal year 1997, and increased to 26.8% of service and other
revenue in the first six months of fiscal year 1988 from 22.9% of service and
other revenue in the first six months of fiscal year 1997. The increases were
due primarily to allocation of
10
expense from research and development to cost of service and other revenue,
for work performed under government contracts during the second quarter of
fiscal year 1998.
RESEARCH AND DEVELOPMENT
Research and development expense includes all costs associated with
development of new products and technology research. The costs classified in
this category primarily include such items as salaries, fringe benefits,
depreciation of capital equipment and an allocation of facilities and systems
support costs used in research and development. Research and development
expenses decreased 6.7% to $1.2 million in the second quarter of fiscal year
1998 from $1.3 million in the second quarter of fiscal year 1997, and
increased 2.4% to $2.7 million in the first six months of fiscal year 1998,
from $2.6 million in the first six months of fiscal year 1997. As a
percentage of total revenue, research and development costs decreased to
16.7% in the second quarter of fiscal year 1998 from 24.3% in the second
quarter of fiscal year 1997, and decreased to 20.6% in the first six months
of fiscal year 1998 from 26.5% in the first six months of fiscal year 1998.
The decreases were primarily due to allocation of expense from research and
development to cost of service and other revenue for work performed under
government contracts during the second quarter of fiscal year 1998, and due
to increased revenue in the second quarter and first six months of fiscal
year 1998.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions and
travel. Sales and marketing expense increased 8.4% to $3.3 million in the
second quarter of fiscal year 1998 from $3.0 million in the second quarter of
fiscal year 1997, and increased 11.5% to $6.4 million in the first six months
of fiscal year 1998 from $5.8 million in the first six months of fiscal year
1997. The increases primarily resulted from increases in sales commissions,
personnel, salaries, related benefits, travel and training. Additionally, in
the first quarter of fiscal year 1998 the Company established a new
telemarketing division. As a percentage of total revenue, sales and marketing
expenses decreased to 45.7% in the second quarter of fiscal year 1998 from
57.3% in the second quarter of fiscal year 1997, and decreased to 48.9% in
the first six months of fiscal year 1998 from 57.6% in the first six months
of fiscal year 1997, due to increased revenue in the second quarter and first
six months of fiscal year 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expense includes costs associated with the
Company's executive staff, legal, accounting, corporate systems, facilities
and human resources departments. General and administrative expenses
increased 10.9% to $756,000 in the second quarter of fiscal year 1998
compared to $682,000 in the second quarter of fiscal year 1997, and increased
4.9% to $1.42 million in the first six months of fiscal year 1998 compared to
$1.36 million in the first six months of fiscal year 1997. The increases
primarily resulted from expenses of Symmetry Design Systems, Inc., which was
acquired in November 1996. As a percentage of total revenue, general and
administrative expenses decreased to 10.6% in the second quarter of fiscal
year 1998 from 13.0% in the second quarter of fiscal year 1997, and decreased
to 10.8% in the first six months of fiscal year 1998 from 13.6% in the first
six months of fiscal year 1997, primarily due to increased revenue in the
second quarter and first six months of fiscal year 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net primarily consists of interest income on cash,
cash equivalents and marketable securities offset by interest expense
associated with capital leases and the effects of foreign currency
transaction gains and losses. Other expense, net was $31,000 and $1,000 in
the second quarter of fiscal years 1998 and 1997, respectively. Other
expense, net was $6,000 in the first six months of fiscal year 1998 and other
income, net was $9,000 in the first six months of fiscal year 1997. These
changes were primarily attributable to reduced interest income resulting from
a lower level of cash, cash
11
equivalents and marketable securities held during the periods, and the
effects of foreign currency transaction gains and losses.
INCOME TAX EXPENSE (BENEFIT)
The Company provided for foreign income and withholding taxes of $158,000 and
$114,00 in the first six months of fiscal years 1998 and 1997, respectively.
In the first six months of fiscal year 1998 the Company recorded a benefit
from the utilization of net operating loss carryforwards of $186,000, which
it believes will be realized in the fiscal year. The Company's effective tax
rate is sensitive to shifts in income and losses among the various countries
in which the Company does business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception with private equity
investments, cash from operations, subordinated debt, bank loans, capital
equipment leases, accounts receivable financing and in March 1996, with an
initial public offering of common stock which resulted in net proceeds to the
Company of approximately $9.4 million.
Net cash provided by operating activities was $1.6 million in the first six
months of fiscal year 1998. This primarily resulted from a decrease in
accounts receivable, representing the collection of billings to the U.S.
government which were outstanding at March 31, 1997, and adjustments for
depreciation and amortization. These changes were offset by a decrease in
accounts payable and accrued expenses as a result of timing of purchases and
payments, and an increase in prepaid expenses and other assets as a result of
the timing of payment of prepaid insurance and royalties.
Net cash used in investing activities was $250,000 in the first six months of
fiscal year 1998, which primarily included the maturities of investments in
marketable securities, offset by capital expenditures for the upgrade of
corporate information systems and capital expenditures associated with the
investment in the Company's component and template model libraries.
Net cash used in financing activities was $19,000 in the first six months of
fiscal year 1998, which included payments on capital lease obligations,
offset by proceeds from the exercise of stock options and warrants.
The Company has an operating line of credit with a bank which allows the
Company to receive advances of up to $3.0 million based on eligible accounts
receivable and is secured by accounts receivable, furniture, fixtures and
equipment and general intangibles. Interest is payable monthly at the bank's
prime rate plus 1%. The line of credit facility requires the Company to
maintain certain financial and other covenants and matures on March 9, 1998.
No amounts were outstanding under this facility at September 30, 1997.
The Company has a lease line of credit, which allows for the lease of up to
$1,000,000 of computers and related equipment, under which $42,000 was
outstanding at September 30, 1997. Amounts borrowed under the lease line of
credit are to be repaid over 36 months. The lease line of credit expires
March 31, 1998. In connection with the negotiation of the lease line of
credit the Company issued warrants to purchase 10,000 shares of its common
stock at $7.50 per share which expire on June 23, 2001.
The Company believes its existing cash, cash equivalents and marketable
securities, combined with amounts available under its operating line of
credit and lease line of credit, and cash flows expected to be generated by
operations, will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for the next 12 months.
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EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128), which changes the standards for computing and presenting earnings
per share (EPS) and supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share." SFAS 128 replaces the presentation of primary EPS with
a presentation of basic EPS, requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period EPS data presented.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes
requirements for disclosure of comprehensive income. The objective of SFAS
130 is to report all changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income is
the total of net income and all other non-owner changes in equity. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of earlier financial statements for comparative purposes is
required.
The Company has not quantified the effect of adoption of SFAS 128 or SFAS 130.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit No.
-----------
11 Computation of per share earnings
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 June 30, 1997, under Item 5, was filed on July 22, 1997.
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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: November 7, 1997
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)
14