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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: March 31, 1998
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
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(Address of principal executive offices and zip code)
503-626-9700
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(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
--------------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A, or any amendment to
this Form 10-K/A. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 1, 1998 was $38,845,243 based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.
The number of shares outstanding of the Registrant's Common Stock as of June 1,
1998 was 9,373,357 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K/A by reference
portions of its Proxy Statement, to be used in connection with the Company's
Annual Meeting of Shareholders to be held on or about August 4, 1998.
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ANALOGY, INC.
1998 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1 - Business 1
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote
of Security Holders 6
PART II
Item 5 - Market for the Registrant's Common
Equity and Related Stockholder Matters 6
Item 6 - Selected Financial Data 6
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk 15
Item 8 - Financial Statements and Supplementary
Data 15
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10 - Directors and Executive Officers of the
Registrant 16
Item 11 - Executive Compensation 16
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 16
Item 13 - Certain Relationships and Related
Transactions 16
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 16
PART I
ITEM 1. BUSINESS
GENERAL
Analogy, Inc. (the "Company" or "Analogy") 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 Saber simulator supports top-down design of mixed-signal,
mixed-technology systems using the Company's proprietary analog hardware
description language, MAST. The Saber simulator and its accompanying MAST models
are used in the design of electronic, mechanical, hydraulic and optical
components and systems. This multi-functional simulator provides manufacturers
of products incorporating mixed-signal, mixed-technology systems with
productivity increases similar to those Integrated Circuit ("IC") designers
experienced through the adoption of digital simulators. The Saber simulator is
used in many industries for products as diverse as deep sub-micron ICs, video
recorders, hydraulic presses, engine controls in automobiles, anti-lock brake
systems and avionics systems.
The Company was founded in 1985 and is incorporated under the laws of the State
of Oregon. Its executive offices are located at 9205 SW Gemini Drive, Beaverton,
Oregon, 97008.
PRODUCTS
The Company's primary software products are licensed to customers. The Company's
model libraries are provided on an annual subscription basis, under which the
customer receives periodic updates as new models are generated. Support is
provided based on annual or other periodic contracts. A minimum, single-user
configuration would include Saber, SaberScope and either SaberSketch or a
Frameway Integration product. List price of such a minimum configuration for a
single user, plus a one-year subscription to the Company's model libraries,
would start at approximately $38,000. Options can increase the single user price
to over $80,000. Minimum configuration multi-user systems start at $85,000 for
three users.
SABER SIMULATOR. The Saber simulator is the core simulation engine for the
Company's product line. It solves the system of equations described in the MAST
models. This information provides the user with the ability to obtain
performance data on circuit or system operation in many areas. Saber runs
independently from the model library. It allows performance modeling from steady
state operating levels to operation over time, under stress, over frequency, and
in a wide variety of analytical modes. MAST is the Company's Hardware
Description Language ("HDL"), and it was the first behavioral modeling HDL
capable of handling both analog and digital components. MAST enables the
modeling of any physical device or technology that can be represented in
mathematical terms. Using MAST, complex mixed-signal, mixed-technology systems
can be modeled and analyzed in a top-down or bottom-up manner, enabling an
iterative design process. The models can be simple in content, as with those
used in a "proof of concept" high-level design, or highly detailed, as would be
required for new deep sub-micron devices developed in the IC industry.
CO-SIMULATION INTERFACES. The Company's co-simulation interface products provide
linkages to digital simulators widely used in the IC design market, such as
Cadence Design Systems, Inc.'s Verilog-XL, Model Technology Inc.'s ModelSim VHDL
and ModelSim PLUS, and Viewlogic Systems, Inc.'s Speedwave, ViewSim and VCS. The
Model technology interface is a new product available as of June, 1998. The
co-simulation interfaces allow customers requiring mixed-signal,
mixed-technology simulation to use models previously developed for one of these
digital simulators.
TEMPLATE MODEL LIBRARIES. The Company's template models are mathematical
descriptions of device behavior with built-in flexibility that allows designers
to characterize specific components. Such templates describe the behavior of
devices, such as transistors, hydraulic pumps, valves, motors or fiber optic
cable. Each new template model broadens the applicability of Saber.
1
COMPONENT MODEL LIBRARIES. The Company's component models are specific
mathematical descriptions of device behavior. Component models represent the
catalog of parts available to the simulator user, and include such things as
specific diodes, transistors, opamps, regulators, analog-to-digital converters,
pulse width modulators, motors, lamps, fuses and many non-electrical components
such as fiber optic devices. The Company has a constantly growing set of
component models, with over 8,000 parts in its component libraries.
To further strengthen the Company's modeling position, in November 1996 the
Company acquired Symmetry Design Systems, Inc. ("Symmetry") of Los Altos,
California. Through the acquisition of Symmetry's model library ("SymLib") which
includes over 12,000 specific devices, the Company now offers the most
comprehensive model library in the industry. In addition to this expanded model
library, the acquisition of Symmetry enables the Company to offer Symmetry's
MODPEX design tool which allows design engineers to create their own models.
Both MODPEX and SymLib are now sold through the Company's worldwide sales force.
The Company's internal model development team has developed and refined
techniques and special hardware and software that the Company uses to
characterize and to build component models which account for behavioral changes
caused by variations in temperature, frequency, power and by statistical
variation in manufacturing.
SABERDESIGNER ENVIRONMENT. SaberDesigner is a comprehensive graphical design
environment that provides a Windows-style integrated tool set and user interface
for design entry, simulation and analysis. The SaberDesigner tool set consists
of four basic elements: SaberGuide, a graphical user interface to access and
operate the simulator; SaberScope, a graphical post-processing and waveform
display program for analyzing and viewing simulation results; SaberBook, the
on-line documentation package for Saber that allows guided access to relevant
user information on-line and SaberSketch, a schematic entry and drawing package.
SaberGuide and SaberBook are included with Saber. These tools are tightly
integrated to enhance user convenience and the speed of the design process.
SaberDesigner is a tool set intended to provide the power and capabilities of
Saber simulation to the average or infrequent user. SaberDesigner is now
available on both the UNIX and Windows NT platforms.
INSPECS ANALYSIS PACKAGE. The InSpecs Analysis Package ("InSpecs") is a set of
tools that helps design engineers analyze the results of their simulations.
Using this package, designers can identify and choose the best combination of
component values, tolerances and ratings to optimize products, reduce costs and
increase yields. This tool set uses stress and sensitivity analyses to identify
the critical parts in the design, comprehensive measurements to acquire and
distill data to assess performance and statistical "Monte Carlo" analysis to
provide insight into the performance variations caused by component and
parameter tolerances experienced in manufacturing.
FRAMEWAY INTEGRATIONS. The Company's Frameway Integrations provide interfaces
to the design frameworks provided by Mentor Graphics Corporation, Cadence Design
Systems, Inc. and Viewlogic Systems, Inc. By using an Analogy Frameway
Integrations product, users of these other Electronic Design Automation ("EDA")
frameworks can obtain the benefits and capabilities of the Company's products
while using their standard design process and the accustomed look and feel of
their host EDA framework. These Frameway Integrations also give users of the
Company's simulation products the advantage of being able to move models,
designs and simulation data between different EDA vendor environments. If one
division or customer is using Mentor Graphics Corporation's tools and another
division or customer is using Cadence Design Systems, Inc.'s tools, they can
both use Saber and, through the Frameway Integrations, share models or designs
across environments. This interoperability is not otherwise easily accomplished
and enables the Company's products to provide a bridge between competing
frameworks.
EXPRESS PRODUCTS. In 1998, the Company introduced PowerExpress NT
("PowerExpress"), which is a customized version of the SaberDesigner environment
including Saber, targeted at power conversion applications. The PowerExpress
product line packaging differs from the Company's standard products in that it
is a completely bundled package that is sold on a version-based license instead
of a perpetual-based license.
2
Customers must pay an upgrade fee of approximately 40% of list price to purchase
new versions of the package. Additionally, the PowerExpress products are
supported with models via ModelExpress, an internet-based vehicle for selling
and licensing individual models from the Company's libraries. A minimal
PowerExpress package sells for approximately $20,000. Individual models are
licensed for prices ranging from $50 to $500. Special versions of InSpecs are
available, but no co-simulation options or Frameway integrations are available
for PowerExpress. Options can increase the single user price to over $35,000.
TESTIFY. Also in 1998, the Company delivered Testify, a software package which
uses Saber to automatically evaluate the behavior of circuits under fault
conditions. Testify is primarily focused at Test Program Set development by the
military. Testify can help test engineers improve the testability of designs,
which may reduce test development costs and improve Test Program Set quality.
Testify also has applications in other systems environments such as automotive
and industrial control.
CUSTOMER SERVICE. The Company provides services in training, on-site
engineering and consulting and contract model development. The Company maintains
six world-wide training centers: in Beaverton, Oregon; Ann Arbor, Michigan;
Frederick, Maryland; Swindon, England; Paris, France and Munich, Germany. A
seventh center is provided through the Company's distributor in Tokyo, Japan.
Classes are taught regularly at these facilities on the use of the simulation
products and on modeling in the MAST language. The Company also provides
specialized component characterization services to its customers. For large
class sizes, the Company will provide training at the customer's location.
Company-trained applications engineers help develop customer-proprietary models
and templates, and the Company maintains a staff of highly trained and
experienced applications engineers to consult on specialized design and modeling
applications in fields such as electrical, mechanical, ASIC and ICs, power
supplies and control systems.
SALES AND MARKETING
The Company markets its products worldwide through a staff that, as of March 31,
1998, consisted of 75 Company-employed field sales and support personnel. The
Company manages its worldwide sales operations from its Beaverton, Oregon
headquarters. The Company markets its products in North America and Europe
through a direct sales and support organization. U.S. sales offices are located
in these metropolitan areas: Chicago, Dallas, Detroit, Huntsville (Alabama), Los
Angeles, Rochester (New York), San Francisco, and Washington, D.C. as well as at
the Company's headquarters in Beaverton, Oregon. In Europe the Company
maintains, through wholly-owned subsidiaries, sales and support offices near
Paris, London, Munich and Stockholm, and through distributors in the Benelux
countries and Italy. The Company also maintains a direct sales office in
Singapore and sells through Asian distributors in India, Japan, Korea, the PRC
and Taiwan.
The Company also has a university program for purposes of increasing the number
of engineers trained in the use of the Saber simulator, MAST modeling language
and development of behavioral models. The Company has made its software
available to more than 109 universities worldwide, many of which are conducting
research in such areas as power device modeling, mixed-technology simulation and
design and failure mode analysis. The results of this research are then made
available to the industrial community, which enables Saber to be more readily
used by these customers.
CUSTOMER SUPPORT AND SERVICE
The Company maintains and supports products through its own operations, those of
its subsidiaries and through its distributors. The Company offers a technical
support hotline to customers and distributors. Support engineers answer the
technical support calls and generally provide same-day responses to questions
that cannot be resolved during the initial call. Support, service and revenues
under U.S. government grants and contracts accounted for 44.6%, 39.5% and 28.4%
of the Company's total revenue for the fiscal years 1998, 1997 and 1996,
respectively.
3
RESEARCH AND DEVELOPMENT
The Company focuses its research and development efforts in the areas of
simulator development, model development techniques and product accessibility.
Research and development expenditures for fiscal years 1998, 1997 and 1996 were
$6.3 million, $5.4 million and $4.5 million, respectively.
In modeling, the Company continues to expand its model libraries through
internal model development and research and development contracts. The Company
believes that continued enhancement of the depth, breadth and quality of its
model libraries will be critical to achieving and maintaining technological and
market leadership. To further its research and development efforts in modeling
techniques and model development consistent with its strategic objectives, the
Company pursues funded research and development from governmental entities and
corporations and has also entered into model development contracts with selected
customers, including government and academic organizations.
The Company is continuing to extend the applicability and accessibility of its
products by providing user interfaces that incorporate the vocabulary and
mathematical and display conventions of engineers working in a variety of
technologies. The Company continues to focus resources on maintaining its
framework integration and co-simulation tools, as the products to which these
tools are linked are updated.
No assurance can be given that current research and development efforts,
including those described above, will be successful, or will result in the
introduction of new or enhanced products on any particular timetable, or at all.
In the face of technological change, a failure to introduce new or enhanced
products or a failure to introduce them in a timely manner could have a material
adverse impact on the Company's business, financial condition and results of
operations.
COMPETITION
In the design of ICs, the Company faces competition from many vendors of
simulation tools. However, most available simulators are digital or SPICE-based
(Simulation Program with Integrated Circuit Emphasis) and are highly specialized
to ICs and are therefore not applicable to broader mixed-signal,
mixed-technology systems. In the broader systems markets, the Company does not
believe that it currently experiences significant competition. However, the
design environments of virtually all of the Company's major customers are based
on one or another of the major EDA vendors' design frameworks. This pattern
drives the need for and usefulness of the Company's Frameway Integration
products that permit data interchange between Saber and the products of other
vendors. Such other vendors typically have programs to encourage other companies
to integrate with the vendors' products and the Company participates in these
programs for frameworks it views as strategically important. Many of these large
EDA vendors have a significant operating history and significantly greater
financial, technical, and marketing resources, greater name recognition, larger
installed customer bases and longer relationships with many of the Company's key
existing and target customers than does the Company. In addition, most have
introduced simulation products (including some analog and mixed-signal
behavioral modeling simulation products) to serve the IC designer particularly.
In the past year there has been significant progress in the development of
analog and mixed-signal HDL standards based on the existing VHDL and Verilog
standards. The Company is heavily involved in the definition of these standards
and expects to offer products which support these standards. The Company also
expects competitors, including major EDA companies, to introduce analog and/or
mixed-signal simulation products based on one or more of these standards within
the next 12 months. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, results of operations and financial condition.
PROPRIETARY RIGHTS
The Company relies primarily on trade secret and ongoing development efforts to
protect its technology and augments those strategies with patents, copyrights
and trademarks where the Company believes it is useful to do so. The Company has
obtained six U.S. and two Canadian patents on various aspects of its products,
including
4
parameter extraction techniques, Calaveras synchronization techniques for mixed
mode simulation, waveform calculator and behavioral modeling. Other patent
applications are pending or in process. The Company's policy has been to enter
into confidentiality agreements with all employees and signed license agreements
that include nondisclosure provisions with all distributors and customers. The
Company limits access to and distribution of its software, applicable
documentation and other proprietary information. The Company's software is
protected as an unpublished copyrighted work and is shipped with a software
security lock that limits software access to authorized users. Additionally,
access to the software source code is only provided for interface products and
selected models and only to major customers pursuant to license agreements that
include nondisclosure provisions. The Company holds a worldwide, perpetual,
fully paid-up license to use the Saber trademark from its owner, American
Airlines, Inc. The Company has United States registrations for the following
trademarks: Analogy, Analogy HDL, Calaveras Algorithm, Frameway, Hypermodel,
PowerExpress, InSpecs, MODPEX and MAST. The Company has European and Japanese
registrations for certain of these and other trademarks. The Company asserts
other common law trademarks and has a number of registrations pending.
Despite the activities described above, no assurance can be given that the steps
taken by the Company will provide adequate protection of its technology or that
competitors will not be able to develop similar or functionally equivalent
technology. Additionally, copyright and trade secret protection may be limited
in certain foreign countries. The Company believes, however, that because of the
rapid pace of technological change in the EDA industry, the legal intellectual
property protection for its products is a less significant factor in the
Company's success than the knowledge, creative abilities and effectiveness of
its engineering and marketing staff and the timeliness and quality of its
support services. Although the Company does not believe that its products
infringe the proprietary rights of others and has not received any claims of
infringement of the proprietary rights of others, in the future the Company may
receive notice of claims of infringement of other parties' proprietary rights
and there can be no assurance that infringement or invalidity claims (or claims
for indemnification resulting from infringement claims against third parties,
such as customers) will not be asserted against the Company or that any such
assertions will not have a material adverse effect on the Company's business,
financial condition or results of operations.
EMPLOYEES
At March 31, 1998, the Company had 218 employees, including 101 in marketing and
sales, 87 in research, development and engineering and 30 in systems,
administration and finance. The Company believes its future success will depend
on its continued ability to attract and retain highly qualified technical,
management and sales and marketing personnel. The Company's employees are not
subject to a collective bargaining agreement and the Company believes that its
employee relations are good. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS -
SUBSEQUENT EVENT."
ITEM 2. PROPERTIES
The Company's executive offices, as well as its principal engineering and
marketing operations, are located in leased facilities consisting of a total of
approximately 51,000 square feet in Beaverton, Oregon. The leases expire
December 31, 1999 through August 31, 2001. The Company also leases office space
for eight U.S. field sales offices located in these metropolitan areas: Chicago,
Dallas, Detroit, Huntsville (Alabama), Los Angeles, Rochester (New York), San
Francisco, and Washington, D.C. Lease commitments for these facilities vary;
some are month to month, and the remainder have terms of 12 to 36 months. In
addition, the Company has leased office space near London, Munich, Paris and
Stockholm, and maintains an office in Singapore.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Report, there were no material legal proceedings to which
the Company or its subsidiaries is a party or to which any of their properties
are subject.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended March 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market System under
the symbol "ANLG." The Company's common stock commenced trading on March 22,
1996. The high and low sales prices as reported on the Nasdaq National Market
System for fiscal years 1998 and 1997 were as follows.
LOW HIGH
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1998
First Quarter $ 3 3/4 $ 4 3/4
Second Quarter 3 13/16 5 7/8
Third Quarter 5 1/2 7
Fourth Quarter 5 1/8 8 1/8
1997
First Quarter $ 6 3/4 $ 13 1/4
Second Quarter 4 5/8 7 1/4
Third Quarter 3 7/8 4 3/4
Fourth Quarter 4 6 1/4
There were approximately 109 shareholders of record and 1,849 beneficial
shareholders at June 1, 1998. The Company has never declared or paid dividends
on its common stock. The Company intends to retain earnings from operations for
use in the operation and expansion of its business and does not anticipate
paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The Company's Selected Consolidated Financial Data appears on page F-1 of this
Report.
6
ITEM 7. 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 fiscal year ends on March 31.
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 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. The final models under the U.S. Air
Force contract were delivered in the fourth quarter of fiscal year 1998,
therefore, the Company does not expect significant revenues beyond fiscal year
1998 from this source. In addition, revenues from the NIST grant and the DARPA
contract decreased significantly in the fourth quarter of fiscal year 1998 and
are expected to be minimal in the first quarter of fiscal year 1999 and beyond.
There can be no assurance that revenues from the U.S. Air Force, DARPA or NIST
will be replaced.
The Company has focused substantial efforts on its international business
operations, particularly in Europe. The Company's international operations
accounted for 42.5%, 41.0% and 43.5% of the Company's total revenue for fiscal
years 1998, 1997 and 1996, respectively. The majority of the Company's
international operations are conducted through the Company's wholly-owned
subsidiaries in Europe. SEE NOTE 9 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
FORWARD LOOKING STATEMENTS
This report, including the following discussion and analysis of financial
condition and results of operations, contains certain statements, trend analysis
and other information that constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which may
involve risks and uncertainties. Such forward looking statements include, but
are not limited to, statements including the words "anticipate," "believe,"
"estimate," "expect," "plan," "intend" and other similar expressions. These
forward looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements,
including, without limitation, 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,
seasonal fluctuations in the Company's order pattern including the timing of
significant orders, competitive initiatives, the Company's inability to predict
the timing of sell-through orders to resellers, the Company's lack of control
over the sell-through, the lengthy sales cycle, the significant percentage of
orders that are not received by the company until near the end of the
7
quarter, unanticipated costs related to the Year 2000 issue, and other risks
listed from time to time in the Company's Securities and Exchange Commission
reports 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 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, and the potential
effect of the Asian financial crisis. 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. The Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue levels are below expectations,
results of operations may be disproportionately affected because only a small
portion of the Company's expenses varies with its revenue. As a result, the
Company may not learn of, or be able to confirm, revenue or earnings shortfalls
until late in the quarter or following the end of the quarter. Seasonal factors,
particularly decreases in revenues in European markets in the second fiscal
quarter resulting from European holidays in July and August, and cyclical
economic patterns in the aerospace, defense, automotive or other end-user
industries also contribute to quarter-to-quarter fluctuations. 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. The Company also 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. No
assurance can be given that the industries served by the Company will experience
economic growth, will not experience a downturn or that any downturn will not be
severe, or that such conditions would not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's operating results have depended, and will continue to depend, upon
designers of mixed-signal and mixed-technology systems adopting methods of
design analysis and simulation which use behavioral modeling techniques. The
design analysis and simulation industry is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop or acquire new products that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers.
8
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of the
Company's consolidated statements of operations as a percentage of total
revenue:
Year Ended March 31,
--------------------
1998 1997 1996
---- ---- ----
Revenue:
Product licenses 55.4 % 60.5 % 71.6 %
Service and other 44.6 39.5 28.4
------ ------ ------
Total revenue 100.0 100.0 100.0
Cost of revenue:
Product licenses 6.9 6.9 6.5
Service and other 11.0 9.2 4.6
------ ------ ------
Total cost of revenue 17.9 16.1 11.1
------ ------ ------
Gross profit 82.1 83.9 88.9
Operating expenses:
Research and development 24.3 22.6 20.8
Sales and marketing 56.4 52.7 49.3
General and administrative 11.6 11.4 10.9
Amortization of intangibles 1.4 0.5 --
Acquired in-process research and development -- 7.9 --
------ ------ ------
Total operating expenses 93.7 95.1 81.0
------ ------ ------
Operating (loss) income (11.6) (11.2) 7.9
Other expense, net (0.3) (0.1) (2.4)
------ ------ ------
(Loss) income before income taxes (11.9) (11.3) 5.5
Income tax expense 1.1 1.4 1.7
------ ------ ------
Net (loss) income (13.0) % (12.7) % 3.8 %
------ ------ ------
------ ------ ------
FISCAL YEARS 1998 AND 1997
REVENUE
Total revenue increased 7.6% to $25.8 million in fiscal year 1998 from $24.0
million in fiscal year 1997. No one customer accounted for 10% or more of total
revenue in fiscal year 1998 or 1997.
Product license revenue decreased 1.5% to $14.3 million in fiscal year 1998 from
$14.5 million in fiscal year 1997.
Service and other revenue increased 21.7% to $11.5 million in fiscal year 1998
from $9.5 million in fiscal year 1997. The change was due primarily to increased
demand for the Company's maintenance and other services, growth in the Company's
installed base, greater revenues from the U.S. Air Force under a $2.0 million
modeling contract awarded during the first quarter of fiscal year 1997 and
greater revenues from DARPA under a $1.3 million contract awarded in September
1996. The final models under the U.S. Air Force contract were delivered in the
fourth quarter of fiscal year 1998, therefore, the Company does not expect
significant revenues beyond fiscal year 1998 from these sources. In addition,
revenues from the NIST grant and the DARPA contract declined significantly in
the fourth quarter of fiscal year 1998 and are expected to be minimal in the
first quarter
9
of fiscal year 1999 and beyond, as these awards near expiration. There can be no
assurance that revenues from the U.S. Air Force, DARPA or NIST will replaced.
Revenues recognized under these contracts were as follows (dollars in
thousands):
Fiscal Year
------------------
1998 1997
-------- -------
NIST $ 765 $ 768
U.S. Air Force 1,281 630
DARPA 774 348
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 fiscal years 1998 and 1997. Total
revenues from U.S. government-related sources, including the previously
mentioned specific awards, accounted for approximately 10.9% and 18.1% of total
revenues during fiscal year 1998 and 1997, respectively. The cancellation or
reduction of projects being undertaken by the U.S. government requiring products
or services provided by the Company, or the Company's failure to obtain awards
of such projects, could have an adverse effect on the Company's business,
financial condition and results of operations.
International revenue was $11.0 million (42.5% of total revenue) in fiscal year
1998 compared to $9.8 million (41.0% of total revenue) in fiscal year 1997.
International revenue increased as a percentage of total revenue primarily as a
result of decreased sales in the United States in fiscal year 1998. The Company
sells its products and services through its wholly-owned subsidiaries in Europe
and through distributors in Asia. The Company is monitoring the Asian financial
situation and the potential impact on its customers.
COST OF REVENUE
Total cost of revenue increased 19.6% to $4.6 million in fiscal year 1998 from
$3.9 million in 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 increased to 12.4% of product license revenue in fiscal year 1998 from
11.4% in fiscal year 1997, due primarily to increased amortization of model
library costs and royalty payments. In addition, 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), certain
contract model development costs associated with the U.S. Air Force and DARPA
contracts and the NIST grant, 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. Cost of service and other revenue increased to 24.6% of service
and other revenue in fiscal year 1998 from 23.3% of service and other revenue in
fiscal year 1997. The increase was primarily attributable to increased costs
associated with performance under the NIST, U.S. Air Force and DARPA contracts
in fiscal year 1998. In addition, maintenance revenue earned in fiscal year 1998
increased compared to maintenance revenue earned in fiscal 1997. The NIST grant
and the U.S. Air Force contract were nearing completion during the fourth
quarter of fiscal year 1998, accordingly costs of services related to these
contracts are not expected to be incurred beyond the first quarter of fiscal
year 1999. Costs related to revenue under the DARPA contract are also expected
to decrease significantly over the next two fiscal quarters, as the contract
expires in October 1998.
10
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 15.6%
to $6.3 million in fiscal year 1998 from $5.4 million in fiscal year 1997, and
increased as a percentage of total revenue to 24.3% in fiscal year 1998 from
22.6% in fiscal year 1997. The increase was primarily attributable to increases
in research and development personnel and increased salaries.
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions and
travel expenses for sales and marketing personnel, and advertising and public
relations expenses. Sales and marketing expense increased 15.3% to $14.6 million
in fiscal year 1998 from $12.6 million in fiscal year 1997, and increased as a
percentage of total revenue to 56.4% in fiscal year 1998 from 52.7% in fiscal
year 1997. The increases primarily resulted from increases in personnel, sales
commissions, salaries, travel, the establishment of a new telemarketing function
early in fiscal 1998, and costs associated with the Company's corporate image
advertising campaign, which began in the fourth quarter 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 9.5% to
$3.0 million in fiscal year 1998 from $2.7 million in fiscal year 1997, and
increased as a percentage of total of revenue to 11.6% in fiscal year 1998 from
11.4% in fiscal 1997. The increases primarily resulted from increased
depreciation expense related to the investment in application software and
equipment associated with updating corporate information systems in fiscal year
1997, increased salaries expense and the effects of a full year of increased
general and administrative expenses of Symmetry Design Systems, Inc., which was
acquired during fiscal year 1997.
OTHER 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 $86,000 and $11,000 in fiscal year 1998 and 1997,
respectively. The change was primarily attributable to reduced interest income
resulting from a lower level of cash, cash equivalents and marketable securities
held during the periods, offset by foreign currency transaction gains and
losses.
INCOME TAX EXPENSE
The Company provided for foreign income and withholding taxes of $275,000 and
$341,000 in fiscal years 1998 and 1997, respectively. The Company's effective
tax rate is sensitive to shifts in income and losses among the various countries
in which the Company does business, since in some countries the Company is in a
tax paying position while in other countries the Company has operating loss
carryforwards available to offset taxable income.
At March 31, 1998, the Company had federal net operating loss carryforwards of
approximately $7.2 million which expire at various dates beginning in 2009 and
ending in 2013, if not utilized. Utilization of $950,000 of federal net
operating losses is subject to annual limitations due to a change in the
Company's fiscal year in 1994. For financial reporting purposes the Company has
established a valuation allowance against its deferred tax assets because of the
uncertainty relating to the realization of such asset values. SEE NOTE 6 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
FISCAL YEARS 1997 AND 1996
REVENUE
Total revenue increased 10.2% to $24.0 million in fiscal year 1997 from $21.7
million in fiscal year 1996.
Product license revenue decreased 6.8% to $14.5 million in fiscal year 1997 from
$15.6 million in fiscal year 1996. The decrease was primarily attributable to a
decrease in sales to the automotive industry in the U.S. Sales to Electronic
Data Systems Corp. ("EDS"), which serves as a distributor to certain automotive
industry users, accounted for approximately 13.6% of total revenue in fiscal
year 1996. Sales to EDS were not significant in fiscal year 1997. Reduced
capital spending by General Motors has resulted in reductions in orders from
EDS.
Service and other revenue increased 53.2% to $9.5 million in fiscal year 1997
from $6.2 million in fiscal year 1996. The increase was due primarily to
increased demand for the Company's maintenance and other services, growth in the
Company's installed base, revenues from NIST under a $2.0 million grant awarded
in fiscal year 1996, revenues from the U.S. Air Force under a $2.0 million
modeling contract awarded during the first quarter of fiscal year 1997, and
revenues from DARPA under a $1.3 million contract awarded in September 1996. In
fiscal year 1997, the Company recognized revenues of $768,000, $630,000 and
$348,000, related to the NIST grant, the U.S. Air Force contract and the DARPA
contract, respectively.
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 fiscal years 1997 and 1996. Total
revenues from U.S. government-related sources, including the previously
mentioned specific awards, accounted for approximately 18.1% of total revenues
in fiscal year 1997, and approximately 9.7% of total revenues in fiscal year
1996. The cancellation or reduction of projects being undertaken by the U.S.
government requiring products or services 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.
COST OF REVENUE
Total cost of revenue increased 59.3% to $3.9 million in fiscal year 1997 from
$2.4 million in fiscal year 1996.
Cost of product license revenue increased to 11.4% of product license revenue in
fiscal year 1997 from 9.2% in fiscal year 1996, due primarily to increased
amortization of model library costs and royalty payments.
Cost of service and other revenue increased to 23.3% of service and other
revenue in fiscal year 1997 from 16.1% of service and other revenue in fiscal
year 1996. The increases were 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 performance under the U.S. Air Force and
DARPA contracts.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 19.8% to $5.4 million in fiscal year
1997 from $4.5 million in fiscal year 1996. The increase primarily resulted from
the increase in the number of research and development personnel throughout
fiscal year 1997 and ongoing facilities and systems support expenses to
accommodate the increased personnel. As a percentage of total revenue, research
and development costs increased to 22.6% in fiscal year 1997 from 20.8% in
fiscal year 1996, due to the above.
SALES AND MARKETING
Sales and marketing expense increased 17.9% to $12.6 million in fiscal year 1997
from $10.7 million in fiscal year 1996. The increase primarily resulted from
increases in personnel and salaries and related benefits, travel and training.
Additionally, marketing expenditures increased due to the launch of
SaberDesigner NT, and the
12
development and implementation of focused marketing plans. As a percentage of
total revenue, sales and marketing expenses increased to 52.7% in fiscal year
1997 from 49.3% in fiscal year 1996, due primarily to the above and to the
Company falling short of its sales goals in the U.S. automotive sector.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 15.0% to $2.7 million in fiscal
year 1997 from $2.4 million in fiscal year 1996. The increase was primarily
attributable to significant investment in application software and equipment
related to updating corporate information systems, increased costs of being a
public company, including those related to external reporting requirements and
legal and accounting costs, and increased administrative costs relating to the
acquisition of Symmetry in November 1996. As a percentage of total revenue,
general and administrative expenses increased slightly to 11.4% in fiscal year
1997 from 10.9% in fiscal 1996.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Symmetry in November 1996, the Company
acquired the ongoing research and development activities of Symmetry resulting
in a one-time pre-tax charge of $1.9 million related to the write off of certain
in-process research and development costs. The value assigned to the in-process
research and development represents those research and development efforts in
process at the acquisition date for which technological feasibility had not yet
been established and which had no alternative future uses. Accounting principles
require that such costs be charged to expense as incurred. The Company currently
believes that these research and development efforts will result in commercially
viable products over the next one to three years. SEE NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
OTHER EXPENSE, NET
Other expense, net was $11,000 and $523,000 in fiscal year 1997 and 1996,
respectively. The reduction in other expense, net resulted primarily from
decreased interest expense due to payments reducing the Company's short-term
accounts receivable financing arrangement and subordinated debt, as a result of
the Company's initial public offering in March 1996.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $341,000 and $370,000, respectively
in fiscal year 1997 and 1996. These amounts consist primarily of foreign tax
expense. For financial reporting purposes the Company has established a
valuation allowance against its deferred tax assets because of the uncertainty
relating to the realization of such asset values. SEE NOTE 6 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
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 $8.2 million in fiscal year 1998,
primarily resulting from a decrease in accounts receivable and an increase in
unearned revenue, offset by a net loss for the period, adjusted for depreciation
and amortization. The decrease in accounts receivable was primarily attributable
to the sale of approximately $4.0 million of accounts receivable to a financial
institution in the fourth quarter of fiscal year 1998. SEE NOTE 1 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The increase in unearned revenue was
attributable to growth in the Company's maintenance base and the receipt of a
$1.3 million contract in the fourth quarter of fiscal year 1998 which was
recorded as unearned revenue and will be recognized as revenue ratably over the
term of the contract.
13
Net cash used in investing activities was $1.9 million in the fiscal year 1998,
which primarily included expenditures associated with the investment in the
Company's component and template model libraries and capital expenditures for
the upgrade of corporate information systems, offset by maturities of
investments in marketable securities.
Net cash provided by financing activities was $174,000 in fiscal year 1998,
which included proceeds from the exercise of stock options, offset by principal
payments on capital lease obligations.
The Company has an operating line of credit with a bank which allows the Company
to receive advances of up to $5.0 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
0.5%. The line of credit facility requires the Company to maintain certain
financial and other covenants and matures on March 5, 1999. The Company was in
compliance with or had obtained waivers of all covenants at March 31, 1998. No
amounts were outstanding under this facility at March 31, 1998 and the
Company is currently in the process of renegotiating the credit line.
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 approximately
$466,000 was outstanding at March 31, 1998. Amounts borrowed under the lease
line of credit are to be repaid over 36 months. The lease line of credit expires
on March 31, 1999. In April 1997, 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 and cash equivalents, 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.
YEAR 2000 ISSUE
The Company has made an assessment of the effect of the Year 2000 issue on its
systems, equipment and software products. Based on this assessment, the Company
believes that its software applications, operational programs and its software
products will properly recognize calendar dates beginning in the Year 2000, and
accordingly does not currently expect to incur material costs in connection with
the Year 2000 issue, as it affects the Company's systems, equipment and software
products. The Company also may be exposed to risks from computer systems of
parties with which the Company transacts business. In response to this, the
Company is taking steps, including contacting its major suppliers, to determine
the extent to which the Company may be vulnerable to those parties' failure to
remedy their own Year 2000 issues and to ascertain what actions, if any, need be
taken by the Company in response to such risks. There can be no assurance the
failure of the Company's software or that of the parties with which the Company
transacts business will not have a material adverse effect on the Company's
business, financial condition or results of operations.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
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 130.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information"("SFAS No. 131") which requires public
companies to report certain information about their operating segments in a
complete set of financial statements to shareholders. It also requires reporting
14
of certain enterprise-wide information about the Company's products and
services, its activities in different geographic areas and its reliance on major
customers. The basis for determining the Company's operating segments is the
manner in which management operates the business. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company does not expect
implementation to have a significant impact on its consolidated financial
statements.
In October 1997, the AICPA issued Statement of Position 97-2 , "Software Revenue
Recognition,"("SOP 97-2"), which is effective for software transactions entered
into beginning January 1, 1998. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. The revenue allocated
to software products generally is recognized upon delivery of the products. The
revenue allocated to post-contract customer support generally is recognized
ratably over the term of the support and revenue allocated to service elements
generally is recognized as the services are performed. The Company does not
expect SOP 97-2 to have a significant impact on its consolidated financial
statements.
SUBSEQUENT EVENT
On June 5, 1998, the Company announced that it is taking steps to reduce
expenses to bring them in line with current sales levels. As a result, the
Company eliminated approximately 15% of its workforce during the first two
months of fiscal year 1999. A restructuring charge associated with the
employment reductions and associated costs, when determined, is expected to be
included in the Company's results of operations for the first quarter of fiscal
year 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included under QUARTERLY CONSOLIDATED
FINANCIAL DATA on page F-2 of this Report, and as listed below:
Page No.
--------
Report of KPMG Peat Marwick LLP F-3
Consolidated Balance Sheets, March 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the years ended F-5
March 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years F-6
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended F-7
March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions ELECTION OF
DIRECTORS and MANAGEMENT in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders and is incorporated herein by reference. The information
required by Item 405 of Regulation S-K is included under the caption SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in the Company's Proxy Statement
for its 1998 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption EXECUTIVE
COMPENSATION in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption STOCK OWNED
BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS in the Company's Proxy Statement for
its 1998 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS:
The information required by this item is included beginning on page
F-3 of this Report, and as listed in Part II, Item 8 of this Report.
(a) (2) FINANCIAL STATEMENT SCHEDULES:
Schedules not listed under this item have been omitted because the
information required to be set forth therein is not applicable.
16
(a) (3) EXHIBITS INCLUDED HEREIN:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger dated as of October 23, 1996, by and
among Analogy, Inc., Analogy Acquisition Corporation and Symmetry
Design Systems, Inc. , incorporated by reference to Exhibits to
the Company's Current Report on Form 8-K, dated November 22, 1996
(the "November 1996 8-K")
2.2 First Amendment to Agreement and Plan of Merger dated as of
November 22, 1996, by and among Analogy, Inc., Analogy Acquisition
Corporation and Symmetry Design Systems, Inc., incorporated by
reference to Exhibits to the November 1996 8-K
3.1 Third Restated Articles of Incorporation of Analogy, Inc.,
incorporated by reference to Exhibits to the Company's
Registration Statement on Form S-1, as amended, effective March
22, 1996, Commission Registration No. 333-00266 (the "Registration
Statement")
3.2 Second Restated Bylaws of Analogy, Inc., incorporated by reference
to Exhibits to the Registration Statement
4.1 Registration Rights Agreement dated as of November 22, 1996, by
and among Analogy, Inc., Alan B. Grebene, Martin G. Walker,
Chenmin Hu, Xinping He, Yu Liu, Andrew L. Hughes, Wenge Wu, Zheng
Shi, John A. Wilson, Qing Chang and E-Hui Xu incorporated by
reference to Exhibits to the November 1996 8-K
10.1 Form of Indemnity Agreement between Analogy, Inc. and each of its
executive officers and directors incorporated by reference to
Exhibits to the Registration Statement*
10.2 Analogy, Inc. 1986 Stock Option Plan incorporated by reference to
Exhibits to the Registration Statement *
10.3 Amended and Restated 1993 Stock Incentive Plan, as amended,
incorporated by reference to Exhibits to the 1997 Definitive Proxy
Statement as filed with the Commission June 27, 1997 *
10.4 1995 Stock Option Plan for Nonemployee Directors incorporated by
reference to Exhibits to the Registration Statement *
10.5 Form of Stock Option Agreement incorporated by reference to
Exhibits to the Registration Statement *
10.6 Control Change Agreement dated effective August 18, 1995 between
Analogy, Inc. and Gary P. Arnold incorporated by reference to
Exhibits to the Registration Statement *
10.7 Factoring Agreement dated September 20, 1995 between Silicon
Valley Financial Services and Analogy, Inc., Analogy, U.K. Ltd.
and Analogy GmbH incorporated by reference to Exhibits to the
Registration Statement
10.8 Conditional Assignment for Security Purposes and Security
Agreement dated September 20, 1995 between Silicon Valley
Financial Services and Analogy, Inc., Analogy, U.K. Ltd. and
Analogy GmbH incorporated by reference to Exhibits to the
Registration Statement
10.9 Trademark License Agreement between American Airlines, Inc. and
Analogy, Inc. incorporated by reference to Exhibits to the
Registration Statement
10.10 Business Park Lease dated August 30, 1993, between Analogy, Inc.
and Petula Associates Ltd. and Koll Creekside Associates II
incorporated by reference to Exhibits to the Registration
Statement
10.14 U.S. Department of Commerce Financial Assistance Award
incorporated by reference to Exhibits to the Registration
Statement
17
EXHIBIT NO. DESCRIPTION
----------- -----------
10.15 1996 Employee Stock Purchase Plan, incorporated by reference to
Exhibits to the Company's Annual Report on Form 10-K for its
fiscal year ended March 31, 1996*
21.0 Subsidiaries of Analogy, Inc., filed herewith
23.0 Consent of KPMG Peat Marwick LLP, filed herewith
27.0 Financial Data Schedule, filed herewith
27.1 Financial Data Schedule, as restated, for Fiscal Year 1996, filed
herewith
99.1 Press Release, incorporated by reference to Exhibits to the
Company's Current Report on Form 8-K, dated July 21, 1997
99.2 Press Release, incorporated by reference to Exhibits to the
Company's Current Report on Form 8-K, dated October 16, 1997
99.3 Press Release, incorporated by reference to Exhibits to the
Company's Current Report on Form 8-K, dated January 22, 1998
99.4 Press Release, incorporated by reference to Exhibits to the
Company's Current Report on Form 8-K, dated May 12, 1998
* Denotes management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K:
A Report on Form 8-K, containing the Company's earnings release for the quarter
and nine months ended December 31, 1997, under Item 5, was filed on January 27,
1998. No other Reports on Form 8-K were filed during the quarter ended March 31,
1998.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of June
1998.
ANALOGY, INC.
By /s/ GARY P. ARNOLD
------------------
Gary P. Arnold
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated, on the 30th day of June 1998.
Signature Title
- --------- -----
/s/ GARY P. ARNOLD Chairman of the Board, President
- ----------------------- and Chief Executive Officer
Gary P. Arnold (Principal Executive Officer)
/s/TERRENCE A. RIXFORD Vice President, Finance and Administration
- ----------------------- (Principal Financial Officer)
Terrence A. Rixford
Director
- -----------------------
Robert L. Cattoi
Director
- -----------------------
John H. Faehndrich
/s/ NEIL E. GOLDSCHMIDT Director
- -----------------------
Neil E. Goldschmidt
/s/ FRANK ROEHR Director
- -----------------------
Frank Roehr
Director
- -----------------------
Charles Sporck
/s/ DR. MARTIN VLACH Vice President, Chief Scientist
- ----------------------- and Director
Dr. Martin Vlach
19
ANALOGY, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 14,278 $ 14,501 $ 15,562 $ 11,090 $ 8,447
Service and other 11,512 9,459 6,176 5,165 3,459
-------- -------- -------- -------- --------
Total revenue 25,790 23,960 21,738 16,255 11,906
Cost of revenue:
Product licenses 1,776 1,652 1,426 1,255 1,341
Service and other 2,833 2,202 994 511 586
-------- -------- -------- -------- --------
Total cost of revenue 4,609 3,854 2,420 1,766 1,927
-------- -------- -------- -------- --------
Gross profit 21,181 20,106 19,318 14,489 9,979
Operating expenses:
Research and development 6,260 5,413 4,518 3,735 2,497
Sales and marketing 14,559 12,622 10,708 9,332 7,543
General and administrative 2,987 2,728 2,373 2,345 2,357
Amortization of intangibles 368 136 -- -- --
Acquired in-process
research and development -- 1,896 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 24,174 22,795 17,599 15,412 12,397
-------- -------- -------- -------- --------
Operating (loss) income (2,993) (2,689) 1,719 (923) (2,418)
Other expense, net (86) (11) (523) (408) (267)
-------- -------- -------- -------- --------
(Loss) income before income taxes (3,079) (2,700) 1,196 (1,331) (2,685)
Income tax expense 275 341 370 196 53
-------- -------- -------- -------- --------
Net (loss) income $ (3,354) $ (3,041) $ 826 $ (1,527) $ (2,738)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic net (loss) income per share $ (0.37) $ (0.35) $ 0.17 $ (0.35) $ (0.76)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted net (loss) income per share $ (0.37) $ (0.35) $ 0.11 $ (0.35) $ (0.76)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in per share calculations:
Basic 9,188 8,584 4,816 4,378 3,624
Diluted 9,188 8,584 7,820 4,378 3,624
MARCH 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash, cash equivalents, marketable securities $ 8,130 $ 3,524 $10,208 $ 1,179 $ 1,622
Working capital 911 4,071 6,631 (2,747) (1,228)
Total assets 22,975 22,130 22,294 10,375 8,997
Long-term obligations, net of current portion 561 858 578 1,640 1,415
Shareholders' equity 8,695 11,317 11,491 27 1,517
F-1
ANALOGY, INC. AND SUBSIDIARIES
QUARTERLY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
FISCAL YEAR 1998 As Restated (1)
--------------------------
Total revenue $ 5,212 $ 6,742 $ 7,846 $ 5,990
Gross profit 4,077 5,361 6,813 4,930
Net (loss) income (943) 55 347 (2,813)
Basic net (loss) income per share (0.10) 0.01 0.04 (0.30)
Diluted net (loss) income per share (0.10) 0.01 0.04 (0.30)
FISCAL YEAR 1997
Total revenue $ 4,716 $ 5,259 $ 6,816 $ 7,169
Gross profit 3,853 4,360 5,778 6,115
Net (loss)income (709) (932) (1,675) 275
Basic net (loss) income per share (0.09) (0.11) (0.19) 0.03
Diluted net (loss) income per share (0.09) (0.11) (0.19) 0.03
(1) In April 1998, the Company determined that revenue from products sold to a
reseller previously recognized in the first and second quarters of fiscal
1998 of $774,000 and $400,000, respectively, should more appropriately be
recognized as revenue at the time the product is sold to the ultimate end
user rather than to recognize the revenue when it is sold to the reseller.
Accordingly, the results of operations for the first and second quarters of
fiscal year 1998 have been restated.
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Analogy, Inc.:
We have audited the accompanying consolidated balance sheets of Analogy, Inc.
and subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Analogy, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
May 11, 1998
F-3
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31,
-----------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,130 $ 1,827
Marketable securities -- 1,697
Accounts receivable 3,946 9,161
Prepaid expenses 2,146 886
Other assets, net 408 455
-------- --------
Total current assets 14,630 14,026
Furniture, fixtures and equipment, net 3,811 4,280
Library costs, net 3,924 2,729
Other assets, net 610 1,095
-------- --------
$ 22,975 $ 22,130
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,895 $ 1,482
Current portion of capital leases 536 566
Accrued salaries and benefits 2,726 2,095
Unearned revenue 8,562 5,812
-------- --------
Total current liabilities 13,719 9,955
Non-current portion of capital leases 454 499
Other liabilities 107 359
Commitments
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
shares issued and outstanding : 9,330 and 9,118
at March 31, 1998 and 1997, respectively 17,906 17,124
Foreign currency translation (205) (155)
Accumulated deficit (9,006) (5,652)
-------- --------
Total shareholders' equity 8,695 11,317
-------- --------
$ 22,975 $ 22,130
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended March 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue:
Product licenses $ 14,278 $ 14,501 $ 15,562
Service and other 11,512 9,459 6,176
-------- -------- --------
Total revenue 25,790 23,960 21,738
Cost of revenue:
Product licenses 1,776 1,652 1,426
Service and other 2,833 2,202 994
-------- -------- --------
Total cost of revenue 4,609 3,854 2,420
-------- -------- --------
Gross profit 21,181 20,106 19,318
Operating expenses:
Research and development 6,260 5,413 4,518
Sales and marketing 14,559 12,622 10,708
General and administrative 2,987 2,728 2,373
Amortization of intangibles 368 136 --
Acquired in-process research
and development -- 1,896 --
-------- -------- --------
Total operating expenses 24,174 22,795 17,599
-------- -------- --------
Operating (loss) income (2,993) (2,689) 1,719
Other income (expense):
Interest income 103 302 33
Interest expense (221) (191) (669)
Foreign currency transaction
gain (loss) 32 (122) 113
-------- -------- --------
Other expense, net (86) (11) (523)
-------- -------- --------
(Loss) income before income
taxes (3,079) (2,700) 1,196
Income tax expense 275 341 370
-------- -------- --------
Net (loss) income $ (3,354) $ (3,041) $826
-------- -------- --------
-------- -------- --------
Basic net (loss) income per share $ (0.37) $ (0.35) $ 0.17
-------- -------- --------
-------- -------- --------
Diluted net (loss) income per share $ (0.37) $ (0.35) $ 0.11
-------- -------- --------
-------- -------- --------
Shares used in per share calculations:
Basic 9,188 8,584 4,816
-------- -------- --------
-------- -------- --------
Diluted 9,188 8,584 7,820
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Foreign Accum- Total
------------ Currency ulated Shareholders'
Shares Amount Translation Deficit Equity
------ ------ ----------- --------- -------
Balance at March 31, 1995 4,468 $ 1,609 $ 42 $ (3,437) $ 27
Preferred stock converted
to common stock 1,534 1,813 -- -- --
Exercise of stock options
and warrants 791 1,343 -- -- 1,343
Issuance of common stock
in initial public offering, net 1,500 9,415 -- -- 9,415
Net income -- -- -- 826 826
Foreign currency translation -- -- (120) -- (120)
-------- --------- -------- --------- ---------
Balance at March 31, 1996 8,293 14,180 (78) (2,611) 11,491
Exercise of stock options
and warrants 142 207 -- -- 207
Issuance of common stock
in connection with acquisition 650 2,681 -- -- 2,681
Issuance of common stock, net 33 56 -- -- 56
Net loss -- -- -- (3,041) (3,041)
Foreign currency translation -- -- (77) -- (77)
-------- --------- -------- --------- ---------
Balance at March 31, 1997 9,118 17,124 (155) (5,652) 11,317
Exercise of stock options
and warrants 212 782 -- -- 782
Net loss -- -- -- (3,354) (3,354)
Foreign currency translation -- -- (50) -- (50)
-------- --------- -------- --------- ---------
Balance at March 31, 1998 9,330 $ 17,906 $ (205) $ (9,006) $ 8,695
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
Year Ended March 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,354) $ (3,041) $ 826
Adjustments to reconcile net (loss) income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 3,802 2,983 1,849
Acquired in-process research and development -- 1,896 --
Changes in operating assets and liabilities (net of effects of
acquisition):
Accounts receivable 5,076 (3,436) (1,315)
Prepaid expenses and other assets (1,140) (888) (558)
Accounts payable and accrued expenses 849 (6) 1,067
Unearned revenue 2,920 667 1,369
-------- -------- --------
Net cash provided by (used in) operating activities 8,153 (1,825) 3,238
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (5,910) --
Sales of marketable securities -- 3,013 --
Maturities of marketable securities 1,700 1,200 --
Capital expenditures for furniture, fixtures and equipment (1,261) (2,094) (1,285)
Capital expenditures for library costs (2,379) (1,588) (1,016)
Net cash acquired in acquisition -- 260 --
-------- -------- --------
Net cash used in investing activities (1,940) (5,119) (2,301)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit -- -- (1,910)
Payments on subordinated debt -- (929) 50
Principal payments on capital leases (608) (734) (645)
Proceeds from sale of common stock -- 56 9,415
Proceeds from exercise of stock options and warrants 782 207 1,224
-------- -------- --------
Net cash provided by (used in) financing activities 174 (1,400) 8,134
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (84) (37) (42)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,303 (8,381) 9,029
Cash and cash equivalents at beginning of period 1,827 10,208 1,179
-------- -------- --------
Cash and cash equivalents at end of period $ 8,130 $ 1,827 $ 10,208
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 132 $ 167 $ 536
Income taxes 338 215 28
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 532 $ 839 $ 543
Subordinated debt applied to exercise of warrants -- -- 119
Preferred stock converted to common stock -- -- 1,813
Acquisition of Symmetry Design Systems, Inc.:
Assets acquired and liabilities assumed, net of cash acquired $ -- $ (2,421) $ --
Issuance of common stock -- 2,681 --
-------- -------- --------
Net cash acquired in acquisition $ -- $ 260 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Analogy, Inc. and subsidiaries (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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries, Analogy UK Ltd., Analogy GmbH,
Analogy France SARL, Analogy AB (Sweden) and Symmetry Design Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates during the year. Foreign currency
translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included as a
component of other income and expense.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to concentration of
credit risk consist primarily of accounts receivable. At March 31, 1998 and
1997, European customers accounted for approximately 50% and 31%, respectively,
of accounts receivable. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial condition. The Company does not
generally require collateral.
The Company historically has derived a significant portion of its revenue from
the automotive, aerospace and defense industries. Total revenues from U.S.
government-related sources accounted for approximately 10.9%, 18.1% and 9.7% of
total revenues during fiscal years 1998, 1997 and 1996, respectively.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and temporary overnight investments.
The Company accounts for marketable securities as "available for sale" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" as the Company intends to utilize these investments for
liquidity or operational purposes. Accordingly, these securities were carried at
market value, which was not materially different from cost at March 31, 1997.
These securities matured in fiscal year 1998.
F-8
ACCOUNTS RECEIVABLE
In March 1998, the Company sold approximately $4.0 million of accounts
receivable on a non-recourse basis. The carrying amount approximated the fair
value and as a result no gain or loss was recognized on the sale.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Furniture and equipment
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value of the leased
assets at the inception of the lease.
Depreciation on furniture, fixtures and equipment is calculated on the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Furniture and equipment held under capital
leases and leasehold improvements are amortized on the straight-line method over
the shorter of the related lease term or estimated useful life of the leased
assets.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred. The Company
does not capitalize software development costs after technological feasibility
has been established since the time period between product release and
establishment of technological feasibility is short.
During fiscal year 1997, the Company entered into a cost-sharing agreement with
DARPA for research and development covering a three year period, pursuant to
which the Company is obligated to provide matching direct and indirect support
costs up to $1.3 million and to deliver progress reports over the same period.
Reimbursed costs under this agreement were $774,000 and $348,000 in fiscal years
1998 and 1997, respectively. During fiscal year 1996, the Company was awarded a
research grant from NIST which covers a three year period, pursuant to which the
Company is obligated to provide matching indirect cost of support up to $400,000
and to deliver progress reports over the same period. Reimbursed costs under
this grant were $765,000, $768,000 and $373,000, in fiscal years 1998, 1997 and
1996, respectively.
LIBRARY COSTS
Development costs associated with creating the library of component and template
models are capitalized and amortized on a straight-line basis over the estimated
product life of five years, or on the ratio of current revenues to total
projected product revenues, whichever is greater.
The Company recognized amortization expense of approximately $1,184,000,
$975,000, and $841,000 related to its capitalized library costs in fiscal years
1998, 1997 and 1996, respectively.
REVENUE RECOGNITION
Software and license fee revenues are recognized at the time of shipment. In the
case of certain long-term contracts, revenue is recognized on a subscription
basis over the life of the contract. Revenue from sales to resellers is
generally recognized upon shipment to the reseller. Software maintenance and
library subscription agreements are billed in advance and recorded as unearned
revenue. Unearned maintenance and library subscription revenues are recognized
ratably over the contractual period. Contract modeling and nonrecurring
engineering project revenues are recognized on the completed contract method, or
upon acceptance criteria as agreed to with the customer. Revenues from training
and other services are billed separately and recognized as the services are
provided. Revenue related to original equipment manufacturer (OEM) contracts is
recognized upon receipt of the OEM sales information. Product licenses include a
limited initial term of product maintenance, the costs of which are
insignificant.
F-9
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
COMPUTATION OF NET (LOSS) INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128). This
Statement supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. The Company adopted
the provisions of SFAS 128 during fiscal year 1998. As it relates to the
Company, the principal differences between the provisions of SFAS 128 and
previous authoritative pronouncements are the exclusion of potential common
shares in the determination of basic earnings per share and the market price at
which potential common shares are calculated in the determination of diluted
earnings per share.
Basic earnings per common share is computed using the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per common
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.
The following is a reconciliation of the denominators of the basic and diluted
computations of net (loss) income per share. There are no reconciling items for
the numerators, which consist of net (loss) income for all periods presented.
Fiscal Year
---------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------- -------
Basic net (loss) income per share: 9,188 $(0.37) 8,584 $(0.35) 4,816 $0.17
------- ---------- ------- ---------- --------
------- ---------- ------- ---------- --------
Effect of dilutive securities:
Stock options 3,004
-------
Diluted net (loss) income per share: 9,188 $ (0.37) 8,584 $ (0.35) 7,820 $ 0.11
------- ---------- ------- ---------- ------- --------
------- ---------- ------- ---------- ------- --------
The dilutive effect of stock options outstanding for the purchase of
approximately 1.5 million and 1.3 million shares for fiscal years 1998 and 1997,
respectively, and warrants outstanding for the purchase of 340,000 and 400,000
shares for fiscal year 1998 and 1997, respectively were not included in loss per
share calculations, because to do so would have been anti-dilutive.
F-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments. The fair value of marketable securities is estimated using
quoted market rates for specific securities held and approximates carrying
value.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument when available. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," ("SFAS 121"), the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
An impairment loss would be recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. The Company has not identified any such impairment losses.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
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 130.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 requires public
companies to report certain information about their operating segments in a
complete set of financial statements to shareholders. It also requires
reporting of certain enterprise-wide information about the Company's products
and services, its activities in different geographic areas and its reliance
on major customers. The basis for determining the Company's operating
segments is the manner in which management operates the business. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
Company does not expect implementation to have a significant impact on its
consolidated financial statements.
In October 1997, the AICPA issued Statement of Position 97-2 , "Software Revenue
Recognition,"("SOP 97-2"), which is effective for software transactions entered
into beginning January 1, 1998. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. The revenue allocated
to software products generally is recognized upon delivery of the products. The
revenue allocated to post-contract customer support generally is recognized
ratably over the term of the support and revenue allocated to service elements
generally is recognized as the services are performed. The Company does not
expect SOP 97-2 to have a significant impact on its consolidated financial
statements.
F-11
(2) ACQUISITION
In November 1996, the Company acquired Symmetry Design Systems, Inc.,
("Symmetry") a leading independent developer of analog and mixed-signal modeling
tools and model libraries. The Company accounted for the acquisition using the
purchase method and valued the transaction at approximately $2.9 million. The
excess of the acquisition cost over the fair value of the net assets acquired is
being amortized over three years using the straight-line method. The
accompanying financial statements include the results of operations of Symmetry
from the date of the acquisition.
In connection with the acquisition, the Company acquired the ongoing research
and development activities of Symmetry resulting in a one-time pre-tax charge of
$1.9 million, in fiscal year 1997, related to the write off of certain
in-process research and development costs. The value assigned to the in-process
research and development represents those research and development efforts in
process at the acquisition date for which technological feasibility had not yet
been established and which had no alternative future uses. Accounting principles
require that such costs be charged to expense as incurred.
In connection with the acquisition and in consideration for non-compete
agreements entered into with certain key employees of Symmetry, the Company
issued warrants to purchase 400,000 shares of the Company's common stock at
$4.125 per share. The warrants are exercisable at the rate of 100,000 shares as
of the end of each six-month period from the date of acquisition and expire upon
termination of employment. At March 31, 1998, warrants to purchase 330,000
shares of common stock were outstanding and warrants to purchase 130,000 shares
of common stock were exercisable.
(3) FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net consists of the following (in thousands):
March 31,
------------------------
1998 1997
--------- ---------
Office furniture $ 940 $ 936
Computer equipment 8,964 7,568
Software 1,605 1,234
Leasehold improvements 375 375
--------- ---------
Less: accumulated depreciation 11,884 10,113
and amortization (8,073) (5,833)
--------- ---------
$ 3,811 $ 4,280
--------- ---------
--------- ----------
(4) LEASES
The Company has entered into various capital leases for certain furniture and
equipment that expire at various dates during the next three years. Several
capital leases require that the Company remit security deposits as collateral
for the lease. Security deposits are generally released by the leasing company
at the rate of one-half at twelve months and one-half at twenty-four months from
the date of lease inception. In April 1997, in connection with the negotiation
of a lease line of credit the Company issued warrants to purchase 10,000 shares
of its common stock at $7.50 per share which were immediately exercisable and
expire on June 23, 2001.
F-12
Furniture, fixtures and equipment, net include the following capital lease
amounts (in thousands):
March 31,
------------------------
1998 1997
--------- ---------
Furniture and equipment $ 4,577 $ 4,045
Less accumulated amortization (3,193) (2,558)
--------- ---------
$ 1,384 $ 1,487
--------- ---------
--------- ---------
The Company also leases its office facilities and certain office equipment under
non-cancelable operating lease agreements.
Future minimum lease payments under these leases are as follows (in thousands):
Capital Operating
Leases Leases
-------- ---------
Year ending March 31,
1999 $ 605 $ 834
2000 341 642
2001 142 383
2002 -- 287
-------- ---------
Total minimum lease payments 1,088 $ 2,146
---------
---------
Less amount representing interest (98)
Present value of net minimum --------
capital lease payments 990
Less current portion of capital leases (536)
--------
Non-current portion of capital leases $ 454
--------
--------
Rent expense under operating leases in fiscal years 1998, 1997 and 1996 was
approximately $1,248,000, $1,429,000 and $1,266,000, respectively.
(5) STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "ESPP") which allows
employees of the Company to purchase shares of the Company's common stock
through accumulated payroll deductions. Participating employees may elect to
contribute up to 10% of their eligible compensation during each pay period to
the ESPP. The ESPP provides for two semi-annual offering periods beginning
February 1 and August 1 of each year. Participant funds are accumulated during
the offering period and used to automatically purchase shares of the Company's
common stock at 85% of the lower of the fair market value of such stock at the
beginning of the offering period or the fair market value at the purchase date.
The Company has reserved 300,000 shares of common stock for issuance under the
ESPP and had issued 139,913 shares as of March 31, 1998.
STOCK OPTION PLANS
The Company has a 1986 Stock Option Plan under which 625,000 shares of common
stock are reserved for issuance, and a 1993 Stock Incentive Plan, as amended
(the "1993 Plan") under which 1,627,911 shares of common stock are reserved for
issuance. In January 1998, the Board of Directors of the Company reserved an
additional 450,000 shares of common stock for issuance under the 1993 Plan,
subject to approval by the shareholders of the Company at its 1998 Annual
Meeting. The 1993 Plan expires in 2003 unless terminated sooner by the Company
or options have been granted and exercised on all shares available under the
plan.
F-13
The Board of Directors may grant either incentive stock options with an exercise
price of not less than the fair market value of the common stock at the date of
grant or non-qualified stock options with an exercise price of not less than 85%
of the fair market value of the common stock at the date of grant. The Board of
Directors shall determine the period of each option and the time or times at
which options may be exercised and any restrictions on the transfer of stock
issued upon exercise of any options. The options generally vest over a period of
four years and are exercisable over a period of ten years.
The table below summarizes the Company's stock option activity:
Weighted
Number Average
of Exercise
Shares Price
------------ ------------
Outstanding options, March 31, 1995 765,477 $ 1.68
Granted 354,860 4.44
Exercised (45,957) 0.79
Canceled (29,948) 2.68
------------
Outstanding options, March 31, 1996 1,044,432 2.63
Granted 717,750 5.58
Exercised (142,263) 1.46
Canceled (293,311) 7.88
------------
Outstanding options, March 31, 1997 1,326,608 3.74
Granted 248,125 5.53
Exercised (34,647) 3.53
Canceled (56,455) 4.86
------------
Outstanding options, March 31, 1998 1,483,631 3.98
------------
------------
At March 31, 1998, stock options to purchase approximately 758,281 shares of
common stock were exercisable.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS 123 defines a fair value based method of accounting for employee stock
options and similar equity instruments. As permitted under SFAS 123, the
Company has elected to account for its stock-based compensation plans using APB
25. The Company has computed, for pro forma disclosure purposes, the value of
options granted during fiscal year 1998 and 1997 using the Black-Scholes pricing
model and the value of options granted during fiscal year 1996 using the minimum
value pricing model.
The following weighted average assumptions were used in the computations:
Fiscal Year
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Risk-free interest rate 5.65% 6.0% 6.0%
Expected dividend yield 0% 0% 0%
Expected volatility 66.7% 77.2% n/a
Expected lives 9.72 years 9.96 years 9.87 years
F-14
The total value of options and warrants granted during fiscal years 1998, 1997
and 1996 was $1,076,000, $4,929,000 and $294,000, respectively, which would be
amortized on a straight-line basis over the vesting period of the options or
warrants (typically four years). The weighted average fair value of options and
warrants granted during fiscal years 1998, 1997 and 1996 was $4.17, $4.41 per
share and $0.90 per share, respectively. The Company issued 106,536 and 33,377
shares under its Company's Employee Stock Purchase Plan during fiscal years 1998
and 1997. The related weighted average purchase price and weighted average fair
value of shares issued were $3.88 and $2.00, respectively for fiscal year 1998;
and $4.30 and $1.15, respectively for fiscal year 1997.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net (loss) income and net (loss) income
per share would have approximated the pro forma amounts show below:
Fiscal Year
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net (loss) income (in thousands) $ (3,354) $ (5,434) $ (3,041) $ (4,131) $ 826 $ 782
Diluted net (loss) income per share $ (0.37) $ (0.59) $ (0.35) $ (0.48) $ 0.11 $ 0.10
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to April 1, 1995.
Additional awards are anticipated in future years.
The following table summarizes the information about stock options and warrants
outstanding at March 31, 1998:
Options and
Options and Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding at Contractual Price Exercisable at Price
Per Share March 31, 1998 Life (years) Per Share March 31, 1998 Per Share
--------- -------------- ------------ --------- -------------- ---------
$ 0.32 - 0.80 3,375 1.2 $0.68 3,375 $0.68
1.20 - 1.40 328,687 4.6 1.39 328,687 1.39
2.40 161,841 6.2 2.40 123,393 2.40
4.00 - 4.50 625,875 8.2 4.08 277,912 4.06
4.75 - 5.40 435,503 8.3 5.09 125,928 5.09
5.63 - 5.88 234,450 9.4 5.86 14,536 5.87
7.50 33,900 6.4 7.50 24,450 7.50
------------ ----------
1,823,631 898,281
------------ ----------
------------ ----------
F-15
(6) INCOME TAXES
Income (loss) before income taxes was as follows (in thousands):
Fiscal Year
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
United States $ (5,782) $ (5,880) $ (1,336)
Foreign 2,703 3,180 2,532
----------- ----------- -----------
$ (3,079) $ (2,700) $ 1,196
----------- ----------- -----------
----------- ----------- -----------
Income tax expense consists of the following (in thousands):
Fiscal Year
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Current:
State $ 49 $ -- $ 28
Foreign 226 341 331
----------- ----------- -----------
275 341 359
Deferred:
Foreign -- -- 11
----------- ----------- -----------
$ 275 $ 341 $ 370
----------- ----------- -----------
----------- ----------- -----------
The actual income tax expense differs from the expected tax expense (computed
by applying the U.S. federal corporate income tax rate of 34% to net income
(loss) before income taxes) as follows (in thousands):
Fiscal Year
--------------------------------------
1998 1997 1996
------- ------- -------
Computed expected income tax
(benefit) expense $(1,047) $ (918) $ 407
Increase (reduction) in income
tax expense (benefit) resulting from:
State income tax (benefit) expense (124) (27) 39
Foreign income taxes and withholding 125 285 126
Increase (decrease) in valuation
allowance 1,347 323 (237)
In-process research and development -- 667 --
Other (26) 11 35
------- ------- -------
Income tax expense $ 275 $ 341 $ 370
------- ------- -------
------- ------- -------
F-16
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
Fiscal Year
---------------------
1998 1997
------- -------
Deferred tax assets:
Unearned library and maintenance revenue $ 652 $ 485
Federal and state net operating loss carryforwards 2,783 1,491
Foreign net operating loss carryforwards 172 73
Research and experimentation credit carryforwards 277 185
Foreign tax credit carryforwards 54 152
Other 427 281
------- -------
Total gross deferred tax assets 4,365 2,667
Less valuation allowance (2,860) (1,513)
------- -------
Net deferred tax assets 1,505 1,154
Deferred tax liabilities:
Furniture, fixtures and equipment, due to
differences in depreciation -- (107)
Capitalized library costs (1,505) (1,047)
------- -------
Total gross deferred tax liabilities (1,505) (1,154)
------- -------
Net deferred taxes $ -- $ --
------- -------
------- -------
The valuation allowance for deferred tax assets as of March 31, 1998 was
approximately $2.8 million. The net change in the total valuation allowance in
fiscal years 1998, 1997 and 1996 was an increase (decrease) of approximately
$1,258,000, $323,000 and $(237,000), respectively.
At March 31, 1998, the Company had net operating loss carryforwards for federal
and state income tax purposes which can be used to offset future income subject
to taxes. In addition, there are unused research and experimentation and foreign
tax credits which can be offset against future federal income taxes after the
loss carryforwards. Such loss carryforwards and tax credits are summarized
below (in thousands):
Expiration
Amount Dates
-------- -----------
Loss carryforwards:
Federal $7,236 2009-2013
State 7,343 1999-2013
Research and experimentation credits
(federal only) 277 2001-2013
Foreign tax credits (federal only) 54 1999
In addition, the Company has foreign income tax net operating losses of
approximately $172,000, which expire in various years. Due to the change in the
Company's fiscal year end, federal and state net operating losses of
approximately $950,000 are to be deducted ratably over the six year period from
March 31, 1995 to March 31, 2000.
F-17
(7) PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees. The
plan has 401(k) provisions whereby employees contribute to the plan through
payroll deductions. The Company may elect to make discretionary contributions
to the plan which are approved by the Board of Directors. The Company's
contributions for fiscal years 1998 and 1997 were $202,000 and $163,000,
respectively. The Company did not make discretionary contributions for fiscal
year 1996.
(8) OPERATING LINE OF CREDIT
The Company has an operating line of credit with a bank which allows the Company
to receive advances of up to $5.0 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
0.5%. The line of credit facility requires the Company to maintain certain
financial and other covenants and matures on March 5, 1999. The Company was in
compliance with or had obtained waivers of all covenants at March 31, 1998. No
amounts were outstanding under this facility at March 31, 1998 and the Company
is currently in the process of renegotiating the credit line.
(9) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment, comprising the
electronic design automation industry. The Company's geographic revenues and
operating (loss) income are summarized as follows (in thousands):
Fiscal Year
-------------------------------------
1998 1997 1996
------- ------- -------
Geographic revenues:
United States $16,610 $15,409 $14,188
Europe 9,180 8,551 7,550
------- ------- -------
$25,790 $23,960 $21,738
------- ------- -------
------- ------- -------
Export sales-Asia $ 2,525 $ 2,099 $ 2,265
------- ------- -------
------- ------- -------
Operating (loss) income:
United States $(6,010) $(5,885) $ (814)
Europe 3,017 3,196 2,533
------- ------- -------
$(2,993) $(2,689) $ 1,719
------- ------- -------
------- ------- -------
No one customer accounted for more than 10% of total revenues for fiscal year
1998 or 1997. Revenue from one customer accounted for 13.6% of total revenue for
fiscal year 1996.
Fiscal Year
----------------------
1998 1997
------- -------
Identifiable assets (in thousands):
United States $17,100 $18,118
Europe 5,875 4,012
------- -------
$22,975 $22,130
------- -------
------- -------
F-18