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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER: 0-27752
ANALOGY, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0892014
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9205 SW GEMINI DRIVE
BEAVERTON, OREGON 97008
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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, or any amendment to
this Form 10-K [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 1, 1999 was $22,498,959 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,
1999 was 9,536,357 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K 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 July 23, 1999.
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ANALOGY, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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Item 1 - Business 1
Item 2 - Properties 5
Item 3 - Legal Proceedings 6
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 16
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
PART III
Item 10 - Directors and Executive Officers of the
Registrant 17
Item 11 - Executive Compensation 17
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 17
Item 13 - Certain Relationships and Related
Transactions 17
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 17
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 typically 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.
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 Fusion.
In March 1999, the Company released the industry's first co-simulation product
available on the Windows-NT operating system. This product is based on the Saber
simulator and Model Technology Inc.'s ModelSim products. 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 the Saber
simulator.
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, hydraulic pumps, hoses and actuators. The Company
has a constantly growing set of component models, with over 20,000 parts in its
various component libraries.
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. SaberDesigner is a tool set intended
to provide the power and capabilities of Saber simulation to the average or
infrequent user. 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 the Saber simulator. These tools are tightly integrated to
enhance user convenience and the speed of the design process, and are available
on both the UNIX and Windows NT platforms.
SABERHARNESS DESIGN ENVIRONMENT. In March 1999, the Company introduced the
SaberHarness product line. SaberHarness is a suite of tools for the design of
complex wire harnesses such as are found in automobiles, aircraft or other large
systems. The SaberHarness product line includes the SaberHarness wire editor,
the SaberBundle editor, a basic simulator, and special component simulation
models for harness design. The system is unique in its single database approach
and simulation orientation. It is compatible with the Saber simulator for
evaluating the performance of an entire system. The SaberHarness environment
also includes interfaces to 3-D mechanical software such as the CATIA products
from Dassault Systems. It is available on both 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 UNIX-based 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. In March 1999, the Company introduced a Frameway for
Viewlogic's Workview Office products on the Windows NT platform.
2
TESTIFY. Testify is a product that automates the repetitive process of running
simulations and making performance measurements. It can be used in the top-down
design process to quickly compare the performance of a specific implementation
against a simulated specification. Testify can also be used for 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 AND SUPPORT
The Company provides services in training, on-site engineering, 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, ASICs and ICs, power supplies and control
systems.
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.
SALES AND MARKETING
The Company markets its products worldwide through a staff that, as of March 31,
1999, consisted of 73 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, 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 sells through distributors in Israel, India, Japan, Korea, the PRC and
Taiwan, and to the government sector in the U.S.
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, micro-electro-mechanical systems (MEMs), 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.
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 1999, 1998 and 1997 were
$8.8 million, $6.3 million and $5.4 million, respectively. SEE ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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
3
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 entered into model development
contracts with selected customers, including government and academic
organizations. As discussed in ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, the Company has completed its
performance under the grant and two contracts it had received from the U.S.
government and there can be no assurance that revenues from the U.S. government
grant and contracts will be replaced.
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. In the harness
design market, the Company competes against a small number of competitors as
well as customer's proprietary internally developed tools. One of the Company's
competitors, a division of a much larger EDA company, has been in the market for
several years. Some 3-D computer-aided design companies offer products that are
both complementary and competitive with the Company's SaberHarness products.
Many large EDA companies have significant operating histories 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 in the
near future.
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.
4
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 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, 1999, the Company had 185 employees, including 88 in marketing and
sales, 73 in research, development and engineering and 24 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.
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 two adjacent buildings in Beaverton, Oregon.
The lease for 11,000 square feet of space, which the Company does not plan to
replace, expires on December 31, 1999. The lease for 40,000 square feet expires
on August 31, 2001. The Company also leases office space for seven U.S. field
sales offices located in these metropolitan areas: Chicago, Dallas, Detroit, 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 Beijing.
5
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.
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, 1999.
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 high and low sales prices as reported on the Nasdaq
National Market System for fiscal years 1998 and 1999 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
1999
First Quarter 4 3/4 8
Second Quarter 2 1/2 6 1/2
Third Quarter 2 7/8 4 7/16
Fourth Quarter 3 4
There were 116 shareholders of record and approximately 2,200 beneficial
shareholders at June 1, 1999. The Company has never declared or paid cash
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.
There were no sales of unregistered securities by the Company during the fiscal
year ended March 31, 1999.
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 product license revenue consists of license fees for its software
products and template and component model library subscription fees. Service and
other revenue consists of software maintenance fees, training, consulting and
both commercial and governmental contract model development and research and
development contracts. The Company's software products are shipped only after
the Company has an executed software license agreement with a customer. Revenue
from software licenses is recognized upon shipment to the customer. Revenue from
sales to resellers is generally recognized upon shipment to the reseller. In the
case of certain long-term contracts, revenue is recognized on a subscription
basis over the life of the contract. Revenue from library subscription fees is
typically billed annually and the related revenue is recognized ratably over the
life of the contract, usually twelve months. Maintenance is normally billed in
advance and recognized ratably over the life of the contract, which is usually
twelve months. Training, consulting and certain other services revenue is
recognized as the services or portions thereof have been provided. Revenue from
contract model development is generally recognized upon shipment of the
underlying models, or upon compliance with acceptance criteria as agreed to with
the customer.
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 provided funding to the Company for research and development. The DARPA
contract contained cost sharing provisions. The final models under the U.S. Air
Force contract were delivered in the fourth quarter of fiscal year 1998,
therefore, no further revenues were received in fiscal year 1999 from this
source. In addition, revenues from the NIST grant concluded at the end of the
first quarter of fiscal year 1999 and revenues from the DARPA contract were
minimal in fiscal year 1999, as this contract expired at the end of fiscal year
1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including the following discussion and analysis of financial
condition and results of operations, contains certain statements, trend analysis
and other information that constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which may
involve risks and uncertainties. Such forward looking statements include, but
are not limited to, statements including the words "anticipate," "believe,"
"estimate," "expect," "plan," "intend" and other similar expressions. These
forward looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements,
including, without limitation, the receipt and timing of orders for the
Company's products, changes in capital spending plans by key customers, the
lengthy sales cycles for the Company's products, the effect of the Asian
economic situation, the impact of expense reductions on the Company, increased
adoption of behavioral modeling design methodologies for mixed-signal and
mixed-technology systems design, the Company's ongoing ability to introduce new
products and expand its markets, customer acceptance of new products, seasonal
fluctuations in the Company's order patterns and competitive initiatives,
unanticipated costs related to the Year 2000 issue, and other risks listed from
time to time in the Company's periodic reports filed with the Securities and
Exchange Commission, or otherwise disclosed by the Company.
Results of operations for the periods discussed below should not be considered
indicative of the results to be expected in any future period, and fluctuations
in operating results may also result in fluctuations in the market price of the
Company's common stock. Like most high technology companies, the Company faces
certain business risks that could have adverse effects on the Company's results
of operations, including those discussed below, and those discussed elsewhere in
this Report.
7
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future as a result of the large percentage of orders that are
not received by the Company until near the end of the quarter. The Company's
expense levels are based, in part, on its expectations as to future revenue. If
revenue levels are below expectations, results of operations may be
disproportionately affected because only a small portion of the Company's
expenses varies with its revenue. As a result, the Company may not learn of, or
be able to confirm, revenue or earnings shortfalls until late in the quarter or
following the end of the quarter. Seasonal factors, including decreases in
revenues in European markets in the second fiscal quarter resulting from
European holidays in July and August, and cyclical economic patterns in the
aerospace, defense, automotive or other end-user industries also contribute to
quarter-to-quarter fluctuations. Any shortfall in revenue or earnings from
expected levels or other failure to meet expectations of the financial markets
regarding results of operations could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
The Company has historically derived a significant portion of its revenue from
the automotive industry. The automotive industry is characterized by high
cyclicality, technological change, fluctuations in manufacturing capacity, labor
issues, and pricing and gross margin pressures. This industry has from time to
time experienced significant economic downturns characterized by decreased
product demand, production over-capacity, price erosion, work slowdowns and
layoffs. The Company has also historically derived a significant portion of its
revenue from the aerospace and defense industries, which have been characterized
by significant technological changes, high cyclicality and the potential for
significant downturns in business activity resulting from changes in economic
conditions or governmental resources and spending policies. No assurance can be
given that the industries served by the Company will experience economic growth,
will not experience a downturn or that any downturn will not be severe, or that
such conditions would not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's operating results have depended, and will continue to depend, upon
designers of mixed-signal and mixed-technology systems adopting methods of
design analysis and simulation which use behavioral modeling techniques. The
design analysis and simulation industry is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop or acquire new products that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers.
8
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,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Revenue:
Product licenses 60.8 % 55.4 % 60.5 %
Service and other 39.2 44.6 39.5
--------- --------- ---------
Total revenue 100.0 100.0 100.0
Cost of revenue:
Product licenses 7.2 6.9 6.9
Service and other 4.6 11.0 9.2
--------- --------- ---------
Total cost of revenue 11.8 17.9 16.1
--------- --------- ---------
Gross profit 88.2 82.1 83.9
Operating expenses:
Research and development 32.8 24.3 22.6
Sales and marketing 52.4 56.4 52.7
General and administrative 8.9 11.6 11.4
Amortization of intangibles 1.4 1.4 0.5
Restructuring charges 2.1 -- --
Acquired in-process research and development -- -- 7.9
--------- --------- ---------
Total operating expenses 97.6 93.7 95.1
--------- --------- ---------
Operating loss (9.4) (11.6) (11.2)
Other expense, net (1.2) (0.3) (0.1)
--------- --------- ---------
Loss before income taxes (10.6) (11.9) (11.3)
Income tax expense 1.7 1.1 1.4
--------- --------- ---------
Net loss (12.3)% (13.0)% (12.7)%
--------- --------- ---------
--------- --------- ---------
FISCAL YEARS 1999 AND 1998
Total revenue increased 3.9% to $26.8 million in fiscal year 1999 from $25.8
million in fiscal year 1998. No one customer accounted for 10% or more of total
revenue in fiscal year 1999 or 1998.
Product license revenue increased 14.2% to $16.3 million in fiscal year 1999
from $14.3 million in fiscal year 1998. Throughout fiscal year 1999, the Company
has experienced increased demand for its products from customers in Europe, and
to a lesser extent the U.S., offset by reduced demand from customers in Asia.
Service and other revenue decreased 8.8% to $10.5 million in fiscal year 1999
from $11.5 million in fiscal year 1998. The decrease was due primarily to
decreased revenues under the NIST grant and U.S. government contracts, offset by
increased demand for the Company's maintenance, consulting and other services
resulting from growth in the Company's installed base. The final models under
the U.S. Air Force contract were delivered in the fourth quarter of fiscal year
1998, therefore, no revenues were received in fiscal year 1999 from this source.
In addition, revenues from the NIST grant concluded at the end of the first
quarter of fiscal year 1999 and revenues from the DARPA contract were minimal in
fiscal year 1999, as this contract expired at the end of fiscal year 1999.
Revenues recognized under the NIST grant and the two contracts, in the
aggregate, were not significant in fiscal year 1999 and were approximately $2.8
million and $1.8 million fiscal years 1998 and 1997, respectively.
9
Total revenues from U.S. government-related sources, including the previously
mentioned specific awards, were not significant as a percentage of total
revenues in fiscal year 1999, and were approximately 10.9% and 18.1% of total
revenues during fiscal years 1998 and 1997, respectively
The Company sells its products and services through its wholly-owned
subsidiaries in Europe and through distributors in Asia. The Company's
international operations accounted for 54.8%, 42.5% and 41.0% of the Company's
total revenue for fiscal years 1999, 1998 and 1997, respectively. Throughout
fiscal year 1999 the Company has experienced reduced demand from customers in
Asia and is continuing to monitor the Asian financial situation and the impact
on its customers.
COST OF REVENUE
Total cost of revenue decreased 31.6% to $3.2 million in fiscal year 1999 from
$4.6 million in fiscal year 1998.
Cost of product license revenue consists primarily of documentation expense,
media manufacturing costs, supplies, shipping expense, amortization of component
and template model library costs and royalty payments. The Company does not
capitalize development costs for software products since the time between the
establishment of a working model of the software product and its
commercialization is typically of a short duration. Cost of product license
revenue decreased to 11.8% of product license revenue in fiscal year 1999 from
12.4% in fiscal year 1998. Costs such as documentation expense and supplies are
expensed as incurred, and development costs associated with creating the library
of component and template models are capitalized and amortized over the
estimated product life. These costs and amortization expenses may not
necessarily relate to the number of product licenses shipped during the period.
Cost of service and other revenue consists primarily of maintenance and customer
support expenses (including product enhancements and improvements, bug fixes,
telephone support, installation assistance and on-site support), certain
contract model development costs associated with the U.S. Air Force and DARPA
contracts and the NIST grant, and the direct cost of providing services such as
training and consulting. As a percentage of service and other revenue, cost of
service and other revenue decreased to 11.8 % in fiscal year 1999 from 24.6% in
fiscal year 1998. The decrease was primarily attributable to decreased activity
under the NIST grant, and the U.S. Air Force and DARPA contracts, which had
higher costs associated with them than the Company's other services. The final
models under the U.S. Air Force contract were delivered in the fourth quarter of
fiscal year 1998, therefore, no costs were incurred in fiscal year 1999 in
connection with this contract. In addition, the NIST grant concluded at the end
of the first quarter of fiscal year 1999 and costs incurred under the DARPA
contract were minimal in fiscal year 1999 as this contract expired at the end of
fiscal year 1999.
RESEARCH AND DEVELOPMENT
Research and development expense includes all costs associated with development
of new products and technology research. Costs classified in this category
primarily include such items as salaries, fringe benefits and an allocation of
facilities and systems support costs including depreciation of capital equipment
used in research and development. Research and development expenses increased
40.6% to $8.8 million in fiscal year 1999 from $6.3 million in fiscal year 1998.
As discussed under "Revenue" and "Cost of Revenue" above, the final models under
the U.S. Air Force contract were delivered in the fourth quarter of fiscal year
1998, the NIST grant concluded at the end of the first quarter of fiscal year
1999 and the DARPA contract expired in fiscal 1999. Accordingly, payroll and
overhead related to research and development personnel performing work under
these contracts was matched with related revenues and recorded as cost of
service and other revenue in fiscal year 1998, whereas similar costs in fiscal
year 1999 were recorded as research and development expense, which increased
research and development expense in fiscal year 1999. This increase was
partially offset by the work force reduction which occurred in the first quarter
of fiscal 1999. As a percentage of total revenue, research and development costs
increased to 32.8% in fiscal year 1999 from 24.3% in fiscal year 1998.
10
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries, commissions, travel
and costs of promotional activities. Sales and marketing expense decreased 3.5%
to $14.1 million in fiscal year 1999 from $14.6 million in fiscal year 1998.
Sales and marketing expenses decreased in fiscal year 1999 primarily as a result
of the work force reduction which occurred in the first quarter of fiscal 1999.
This decrease was offset by increased costs associated with the Company's
corporate image marketing campaign in first quarter of fiscal year 1999, and
costs associated with recruiting new sales employees in the U.S. in the fourth
quarter of 1999. As a percentage of total revenue, sales and marketing expenses
decreased to 52.4% in fiscal year 1999 from 56.4% in fiscal year 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs associated with the Company's
executive staff, legal, accounting, corporate systems, facilities and human
resources departments. General and administrative expenses decreased 20.4% to
$2.4 million in fiscal year 1999 from $3.0 million in fiscal year 1998. The
decreases primarily resulted from work force reductions implemented during the
first quarter of fiscal year 1999. As a percentage of total revenue, general and
administrative expenses decreased to 8.9% in fiscal year 1999 from 11.6% in
fiscal year 1998.
RESTRUCTURING CHARGES
Results of operations for fiscal year 1999 included a $557,000 charge for costs
associated with a restructuring plan undertaken to improve profitability. The
restructuring plan consisted primarily of work force reductions and other cost
control efforts. All of the restructuring charges were paid in fiscal year 1999.
OTHER EXPENSE, NET
Other expense, net primarily consists of interest expense, the effects of
foreign currency transaction gains and losses, and interest income on cash and
cash equivalents. Other expense, net was $340,000 in fiscal year 1999 and
$86,000 in fiscal year 1998. Interest expense increased due to amortization of
finance charges in fiscal year 1999, related to the sale of approximately $4.0
million of accounts receivable to a financial institution in the fourth quarter
of fiscal year 1998. Interest income decreased due to lower levels of cash and
cash equivalents held during the periods. The change in other income (expense)
primarily related to increased foreign currency transaction losses.
INCOME TAX EXPENSE
The Company provided for foreign income and withholding taxes and state income
taxes of $455,000 and $275,000 in the aggregate, in fiscal years 1999 and 1998,
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, 1999, the Company had federal net operating loss carryforwards of
approximately $11.4 million which expire at various dates beginning in 2009 and
ending in 2019, 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 8 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
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. In addition, revenues from the NIST grant
and the DARPA contract declined significantly in the fourth quarter of fiscal
year 1998 as these contracts neared expiration. Revenues recognized under these
contracts, in the aggregate, were approximately $2.8 million and $1.8 million in
fiscal year 1998 and 1997, 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 1998 and 1997. Total
revenues from U.S. government-related sources, including the previously
mentioned specific contracts, accounted for approximately 10.9% and 18.1% of
total revenues during fiscal year 1998 and 1997, respectively.
The Company's international operations accounted for 42.5% and 41.0% of the
Company's total revenue for fiscal years 1998 and 1997, respectively. The
majority of the Company's international operations are conducted through the
Company's wholly-owned subsidiaries in Europe. 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.
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 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 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, and the DARPA expired in October 1998.
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.
12
SALES AND MARKETING
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 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.1 million in fiscal year 1999,
which included a net loss for the period offset by an adjustment for
depreciation and amortization, as well as changes in operating assets and
liabilities. Accounts payable and accrued expenses decreased due to the timing
of payments. Unearned revenue decreased due to revenue recognized during the
period, partially offset by payments received. Accounts receivable increased
compared to the balance at March 31, 1998 which was net of a March 1998 sale of
approximately $4.0 million of accounts receivable to a financial institution.
Net cash used in investing activities was $2.5 million in fiscal year 1999,
which primarily included expenditures associated with the investment in the
Company's component and template model libraries and capital expenditures for
the upgrade of corporate information systems.
Net cash provided by financing activities was $488,000 in fiscal year 1999,
which included proceeds from the Company's operating line of credit and proceeds
from the exercise of stock options and warrants 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 80% of eligible domestic
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% (8.25% at March 31, 1999). The line of credit facility
requires the Company to maintain certain financial and other covenants including
minimum net worth, results of operations and the
13
ratio of current assets to current liabilities. The Company was in compliance
with all covenants at March 31, 1999. At March 31, 1999, the Company had
borrowings outstanding under the operating line of $400,000 and additional
borrowing capacity of approximately $1.4 million. The line of credit matures on
April 4, 2000.
In May 1999, to provide a further source of liquidity, the Company negotiated a
non-recourse receivables purchase agreement with a bank, for the sale of up to
$1.5 million of foreign accounts receivable. The agreement allows for the sale
of certain accounts receivable without recourse at a discount rate equal to the
bank's prime rate plus 3%. To date, the Company has not executed sales of
accounts receivable under this agreement.
The Company believes its existing cash and cash equivalents, combined with
amounts available under its operating line of credit and non-recourse
receivables purchase agreement, 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 twelve months. Depending on a
variety of factors which cannot be predicted with certainty, including the
Company's results of operations, receipt and timing of orders for the Company's
products, changes in capital spending plans by key customers, the impact of
expense reductions on the Company, the Company's ongoing ability to introduce
new products and expand its markets, seasonal fluctuations in the Company's
order patterns and unanticipated costs related to the Year 2000 issue, the
Company may need to raise additional funds. Such additional funding could be
more costly than the Company's current line of credit and non-recourse
receivables purchase agreement or, if equity, could be materially dilutive to
existing shareholders. There can be no assurance that additional financing would
be available and, if available, that the terms would be acceptable to the
Company or that such financing could be obtained in a timely manner. If adequate
funds are not available as required, the Company's ability to continue its
research and product development efforts, as well as the Company's financial
condition and results of operations will be adversely affected.
YEAR 2000 ISSUE
The Company is assessing its computer software programs and operating systems
used in its internal operations including development and accounting systems, to
determine their readiness for the Year 2000. The inability of computer software
programs and operating systems to accurately recognize, interpret and process
date data designating the Year 2000 and beyond could cause systems to yield
inaccurate results or encounter operating problems, including disruption of the
business operations these systems control. The Company has completed its
internal assessment but intends to continue to monitor Year 2000 compliance
matters on an ongoing basis.
The Company has completed contacting its major suppliers of products and
services to assess the Year 2000 compliance of each. The Company is in the
process of developing a plan to address any major deficiencies discovered with
respect to those suppliers contacted. As the majority of the Company's major
customers are "Fortune 100" companies, the Company has begun to review Year 2000
public disclosures made by its major customers to determine whether their
operations are Year 2000 compliant. If the Company's major suppliers of products
and services and its major customers are not Year 2000 compliant, their
noncompliance may cause a material disruption to their businesses which could
negatively impact the Company in many ways, including the inability to collect
payments from customers and the delay or cessation of deliveries of products or
services. Additionally, risks associated with parties located outside the U.S.
may be higher as it is generally believed than non-U.S. businesses may not be
addressing their Year 2000 issues on as timely a basis as U.S. businesses. There
can be no assurance that major suppliers of products and services and major
customers will adequately address their Year 2000 issues. The Company expects to
complete its assessment of its major customers by September 30, 1999.
Like all businesses, the Company will be at risk from other external
infrastructure failures that could arise from Year 2000 failures. It is not
clear that electrical power, telephone and computer networks, for example, will
be fully functional in the countries in which the Company does business in the
year 2000. Investigation and assessment of infrastructures, like national power
grids, transportation systems, communications systems
14
or major institutions such as government or banking systems is beyond the scope
and resources of the Company. Investors should use their own awareness of
potential problems regarding infrastructure issues and their potential impact on
the Company's performance.
The Company has assessed its products to determine their readiness for the Year
2000. The Company's products do not require date-specific calculations and
therefore the Company believes they will be unaffected by the Year 2000
transition. The Company believes that its 5.0 product version, released in March
1999, when used in combination with compliant operating systems and development
environment software of third parties, is Year 2000 compliant. To the extent
that a user of the Company's products does not have Year 2000 compliant
operating systems or development environments, the Company can give no assurance
as to Year 2000 compliance of its products used on such operating systems or
development environments.
The Company has not incurred, and does not expect to incur material incremental
costs to ensure Year 2000 compliance of its systems or products. Certain systems
have been targeted for replacement based on Year 2000 and other technology
considerations. The Company anticipates that affected systems will be replaced
prior to September 30, 1999. However, related expenditures are not anticipated
to be material. At this time, the Company foresees nominal incremental spending
for the Year 2000 issue.
Based on the Company's assessment to date, the Company currently believes that
Year 2000 issues will not pose significant risks for the Company. However, if
all Year 2000 issues are not properly identified, or assessment, remediation and
testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue will not have a
material adverse impact on the Company's business, financial condition or
results of operations, or adversely affect the Company's relationships with
customers, vendors or others.
The Company is in the process of developing a contingency plan for dealing with
the most likely worst-case scenario. The Company currently plans to complete
such contingency planning by November 30, 1999.
The costs of the Company's Year 2000 assessment, remediation and testing efforts
and the dates on which the Company believes it will complete such efforts and
the timing and effectiveness of the Company's future product releases are
forward-looking statements that are based upon management's best estimates. Such
estimates were derived using numerous assumptions regarding future events,
including the continued availability of certain resources, third party
remediation plans and compliance assurances, and other factors. There can be no
assurance that these estimates will prove to be accurate, and actual results
could differ materially from those currently anticipated.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. The Company does not expect SFAS No. 133 to have a material
impact on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not currently use derivative financial instruments for
speculative purposes which expose the Company to market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its outstanding debt. Information required by this item is set forth
in ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and in
Note 10 of Notes to Consolidated Financial Statements.
15
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 F-3
LLP
Consolidated Balance Sheets, March 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the years ended F-5
March 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended F-6
March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended F-7
March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
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 1999 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 1999 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 1999 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 1999 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
1999 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.
17
(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 1998 Definitive
Proxy Statement as filed with the Commission June 10, 1998 *
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 Trademark License Agreement between American Airlines, Inc. and
Analogy, Inc. incorporated by reference to Exhibits to the
Registration Statement
10.8 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
10.9 U.S. Department of Commerce Financial Assistance Award
incorporated by reference to Exhibits to the Registration
Statement
10.10 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*
10.11 Non-Recourse Receivables Purchase Agreement dated May 3, 1999
between Silicon Valley Bank and Analogy, Inc., filed herewith
18
EXHIBIT NO. DESCRIPTION
10.12 Loan and Security Agreement dated March 10, 1997 between Silicon
Valley Bank and Analogy, Inc., filed herewith
10.13 Loan Modification dated March 5, 1998 between Silicon Valley
Bank and Analogy, Inc., filed herewith
10.14 Loan Modification dated June 30, 1998 between Silicon Valley
Bank and Analogy, Inc., filed herewith
10.15 Loan Modification dated March 29, 1999 between Silicon Valley
Bank and Analogy, Inc., filed herewith
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
* 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, 1998, under Item 5, was filed on January 27,
1999. No other Reports on Form 8-K were filed during the quarter ended March 31,
1999.
19
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 18th day of June
1999.
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 18th day of June 1999.
Signature Title
- --------- -----
/s/ GARY P. ARNOLD Chairman of the Board, President and Chief
- ---------------------------- Executive Officer (Principal Executive
Gary P. Arnold Officer)
/s/ DUANE C. FROMHART Vice President and Corporate Controller
- ---------------------------- (Principal Financial Officer)
Duane C. Fromhart
/s/ DR. MARTIN VLACH Vice President, Chief Scientist and Director
- ----------------------------
Dr. Martin Vlach
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
20
ANALOGY, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue:
Product licenses $ 16,307 $ 14,278 $ 14,501 $ 15,562 $ 11,090
Service and other 10,498 11,512 9,459 6,176 5,165
---------- ---------- ---------- --------- -----------
Total revenue 26,805 25,790 23,960 21,738 16,255
Cost of revenue:
Product licenses 1,920 1,776 1,652 1,426 1,255
Service and other 1,234 2,833 2,202 994 511
---------- ---------- ---------- --------- -----------
Total cost of revenue 3,154 4,609 3,854 2,420 1,766
---------- ---------- ---------- --------- -----------
Gross profit 23,651 21,181 20,106 19,318 14,489
Operating expenses:
Research and development 8,802 6,260 5,413 4,518 3,735
Sales and marketing 14,055 14,559 12,622 10,708 9,332
General and administrative 2,378 2,987 2,728 2,373 2,345
Amortization of intangibles 368 368 136 -- --
Restructuring charges 557 -- -- -- --
Acquired in-process
research and development -- -- 1,896 -- --
---------- ---------- ---------- --------- -----------
Total operating expenses 26,160 24,174 22,795 17,599 15,412
---------- ---------- ---------- --------- -----------
Operating (loss) income (2,509) (2,993) (2,689) 1,719 (923)
Other expense, net (340) (86) (11) (523) (408)
---------- ---------- ---------- --------- -----------
(Loss) income before income taxes (2,849) (3,079) (2,700) 1,196 (1,331)
Income tax expense 455 275 341 370 196
---------- ---------- ---------- --------- -----------
Net (loss) income $ (3,304) $ (3,354) $ (3,041) $ 826 $ (1,527)
---------- ---------- ---------- --------- -----------
---------- ---------- ---------- --------- -----------
Basic net (loss) income per share $ (0.35) $ (0.37)$ (0.35) $ 0.17 $ (0.35)
---------- ---------- ---------- --------- -----------
---------- ---------- ---------- --------- -----------
Diluted net (loss) income per share $ (0.35) $ (0.37) $ (0.35) $ 0.11 $ (0.35)
---------- ---------- ---------- --------- -----------
---------- ---------- ---------- --------- -----------
Shares used in per share calculations:
Basic 9,426 9,188 8,584 4,816 4,378
Diluted 9,426 9,188 8,584 7,820 4,378
MARCH 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash, cash equivalents, marketable securities $ 2,008 $ 8,130 $ 3,524 $ 10,208 $ 1,179
Total assets 21,218 22,975 22,130 22,294 10,375
Long-term obligations, net of current portion 284 561 858 578 1,640
Shareholders' equity 5,990 8,695 11,317 11,491 27
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 1999
Total revenue $ 5,412 $ 6,417 $ 7,258 $ 7,718
Gross profit 4,558 5,804 6,330 6,959
Net (loss) income (3,155) (362) 53 160
Basic net (loss) income per share (0.34) (0.04) 0.01 0.02
Diluted net (loss) income per share (0.34) (0.04) 0.01 0.02
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)
(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 and $400, 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
May 7, 1999
F-3
ANALOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
-----------------------------------
1999 1998
----------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 2,008 $ 8,130
Accounts receivable 6,738 3,946
Prepaid expenses 1,033 1,160
Other assets, net 2,271 506
--------- ---------
Total current assets 12,050 13,742
Furniture, fixtures and equipment, net 2,416 3,811
Library costs, net 4,495 3,924
Other assets, net 2,257 1,498
--------- ---------
$ 21,218 $ 22,975
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit $ 400 $ --
Accounts payable and accrued expenses 1,320 1,895
Current portion of capital leases 403 536
Accrued salaries and benefits 2,709 2,726
Unearned revenue 8,657 7,254
--------- ---------
Total current liabilities 13,489 12,411
Non-current portion of capital leases 219 454
Deferred contract revenue 1,455 1,308
Other liabilities 65 107
Commitments
Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
shares issued and outstanding : 9,521 and 9,330
at March 31, 1999 and 1998, respectively 18,569 17,906
Accumulated other comprehensive loss -
foreign currency translation (269) (205)
Accumulated deficit (12,310) (9,006)
--------- ---------
Total shareholders' equity 5,990 8,695
--------- ---------
$ 21,218 $ 22,975
--------- ---------
--------- ---------
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,
----------------------------------------------
1999 1998 1997
------------- ----------- ------------
Revenue:
Product licenses $ 16,307 $ 14,278 $ 14,501
Service and other 10,498 11,512 9,459
---------- --------- ---------
Total revenue 26,805 25,790 23,960
Cost of revenue:
Product licenses 1,920 1,776 1,652
Service and other 1,234 2,833 2,202
---------- --------- ---------
Total cost of revenue 3,154 4,609 3,854
---------- --------- ---------
Gross profit 23,651 21,181 20,106
Operating expenses:
Research and development 8,802 6,260 5,413
Sales and marketing 14,055 14,559 12,622
General and administrative 2,378 2,987 2,728
Amortization of intangibles 368 368 136
Restructuring charges 557 -- --
Acquired in-process research
and development -- -- 1,896
---------- --------- ---------
Total operating expenses 26,160 24,174 22,795
---------- --------- ---------
Operating loss (2,509) (2,993) (2,689)
Other income (expense):
Interest income 46 103 302
Interest expense (253) (221) (191)
Other income (expense) (133) 32 (122)
---------- --------- ---------
Other expense, net (340) (86) (11)
---------- --------- ---------
Loss before income
taxes (2,849) (3,079) (2,700)
Income tax expense 455 275 341
---------- --------- ---------
Net loss $ (3,304) $ (3,354) $ (3,041)
---------- --------- ---------
---------- --------- ---------
Basic net loss per share $ (0.35) $ (0.37) $ (0.35)
---------- --------- ---------
---------- --------- ---------
Diluted net loss per share $ (0.35) $ (0.37) $ (0.35)
---------- --------- ---------
---------- --------- ---------
Shares used in per share calculations:
Basic 9,426 9,188 8,584
---------- --------- ---------
---------- --------- ---------
Diluted 9,426 9,188 8,584
---------- --------- ---------
---------- --------- ---------
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)
ACCUMULATED
COMMON STOCK OTHER ACCUM- TOTAL
-------------------------- COMPREHENSIVE ULATED SHAREHOLDERS'
SHARES AMOUNT LOSS DEFICIT EQUITY
--------- ------------ --------- -------------- ---------
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
Exercise of stock options
and warrants 191 663 -- -- 663
Net loss -- -- -- (3,304) (3,304)
Foreign currency translation -- -- (64) -- (64)
---------- ------------ --------- ------------ -----------
Balance at March 31, 1999 9,521 $ 18,569 $ (269) $ (12,310) $ 5,990
---------- ------------ --------- ------------ -----------
---------- ------------ --------- ------------ -----------
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,
--------------------------------------------
1999 1998 1997
---------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,304) $ (3,354) $ (3,041)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,987 3,802 2,983
Acquired in-process research and development -- -- 1,896
Changes in operating assets and liabilities (net of effects of
acquisition):
Accounts receivable (2,884) 5,076 (3,436)
Prepaid expenses and other assets (1,101) (1,140) (888)
Accounts payable and accrued expenses (626) 849 (6)
Unearned revenue (148) 2,920 667
---------- ---------- ----------
Net cash (used in) provided by operating activities (4,076) 8,153 (1,825)
---------- ---------- ----------
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 (597) (1,261) (2,094)
Capital expenditures for library costs (1,949) (2,379) (1,588)
Net cash acquired in acquisition -- -- 260
---------- ---------- ----------
Net cash used in investing activities (2,546) (1,940) (5,119)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 400 -- --
Payments on subordinated debt -- -- (929)
Principal payments on capital leases (575) (608) (734)
Proceeds from sale of common stock -- -- 56
Proceeds from exercise of stock options and warrants 663 782 207
---------- ---------- ----------
Net cash provided by (used in) financing activities 488 174 (1,400)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents 12 (84) (37)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (6,122) 6,303 (8,381)
Cash and cash equivalents at beginning of period 8,130 1,827 10,208
---------- ---------- ----------
Cash and cash equivalents at end of period $ 2,008 $ 8,130 $ 1,827
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 253 $ 132 $ 167
Income taxes 379 338 215
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 208 $ 532 $ 839
Recording of deferred and unearned contract revenue 4,288 -- --
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, 1999, 1998 AND 1997
(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, 1999 and
1998, European customers accounted for approximately 60% and 50%, 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 were not significant in fiscal year 1999, and were
approximately 10.9% and 18.1% of total revenues during fiscal years 1998 and
1997, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short term highly liquid
investments with remaining maturities of three months or less when purchased.
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 of furniture, fixtures and
equipment is calculated on the straight-line method over estimated useful lives
of five years for office furniture and fixtures and three years for computer
equipment and software. Assets 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 was 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 $129,000, $774,000 and $348,000 in
fiscal years 1999, 1998 and 1997, respectively. During fiscal year 1996, the
Company was awarded a research grant from NIST which covered a three year
period, pursuant to which the Company was 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 $74,000, $765,000 and $768,000,
in fiscal years 1999, 1998 and 1997, 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.
The Company recognized amortization expense of approximately $1,378,000,
$1,184,000 and $975,000 related to its capitalized library costs in fiscal years
1999, 1998 and 1997, respectively.
REVENUE RECOGNITION
The Company's software products are shipped only after the Company has an
executed software license agreement with a customer. Revenue from software
licenses is recognized upon shipment to the customer. Revenue from sales to
resellers is generally recognized upon shipment to the reseller. In the case of
certain long-term contracts, revenue is recognized on a subscription basis over
the life of the contract. Revenue from library subscription fees is typically
billed annually and the related revenue is recognized ratably over the life of
the contract, usually twelve months.
Maintenance is normally billed in advance and recognized ratably over the life
of the contract, which is usually twelve months. Training, consulting and
certain other services revenue is recognized as the services or portions thereof
have been provided. Revenue from contract model development is generally
recognized upon shipment of the underlying models, or upon acceptance criteria
as agreed to with the customer.
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 PER SHARE
Basic and diluted loss per share are computed using the weighted average number
of shares of common stock outstanding for the period, since all potential
dilutive securities are excluded from the calculation as they are antidilutive.
The dilutive effect of stock options outstanding for the purchase of
approximately 1.8 million, 1.5 million and 1.3 million shares for fiscal years
1999, 1998 and 1997, respectively, and warrants outstanding for the purchase of
10,000, 340,000 and 400,000 shares for fiscal years 1999, 1998 and 1997,
respectively were not included in loss per share calculations, because to do so
would have been anti-dilutive.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
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.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131") for the year ended March 31, 1999. Based
on definitions contained within SFAS 131, the Company has determined that it
operates in one segment.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the derivative's fair value
be recognized currently in results of operations unless specific hedge
accounting criteria are met. SFAS 133 is effective for fiscal years beginning
after June 15, 2000. The Company does not expect SFAS 133 to have a material
impact on its consolidated financial statements.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the fiscal
year 1999 presentation.
F-10
(2) COMPREHENSIVE LOSS
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes requirements
for disclosure of comprehensive income. The objective of SFAS 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive loss is the total of net loss and
all other non-owner changes in equity. The reconciliation of net loss to
comprehensive loss is as follows (in thousands):
Fiscal Year
----------------------------------------------------
1999 1998 1997
---------- ------------ ------------
Net loss $ (3,304) $ (3,354) $ (3,041)
Foreign currency translation adjustments (64) (50) (77)
---------- ------------ ------------
---------- ------------ ------------
Comprehensive net loss $ (3,368) $ (3,404) $ (3,118)
---------- ------------ ------------
---------- ------------ ------------
(3) RESTRUCTURING
Results of operations for fiscal year 1999 included a $557,000 charge for costs
associated with a restructuring plan undertaken to improve profitability. The
restructuring plan consisted primarily of work force reductions and other cost
control efforts. All of the restructuring charges were paid in fiscal year 1999.
(4) ACQUISITION
In November 1996, the Company acquired Symmetry Design Systems, Inc.,
("Symmetry") a 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. No warrants were outstanding at March 31, 1999.
F-11
(5) FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net consists of the following (in thousands):
March 31,
-----------------------------
1999 1998
---------- -----------
Office furniture $ 946 $ 940
Computer equipment 9,667 8,964
Software 1,818 1,605
Leasehold improvements 248 375
---------- -----------
12,679 11,884
Less: accumulated depreciation
and amortization (10,263) (8,073)
---------- -----------
$ 2,416 $ 3,811
---------- -----------
---------- -----------
(6) 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.
Furniture, fixtures and equipment, net include the following capital lease
amounts (in thousands):
March 31,
------------------------------
1999 1998
---------- ---------
Furniture and equipment $ 4,785 $ 4,577
Less accumulated amortization (3,752) (3,193)
---------- ---------
$ 1,033 $ 1,384
---------- ---------
---------- ---------
The Company also leases its office facilities and certain office equipment under
non-cancelable operating lease agreements.
F-12
Future minimum lease payments under these leases are as follows (in thousands):
Capital Operating
Leases Leases
----------- ------------
Year ending March 31,
2000 $ 443 $ 642
2001 225 383
2002 2 287
----------- ------------
Total minimum lease payments 670 $ 1,312
------------
------------
Less amount representing interest (48)
-----------
Present value of net minimum
capital lease payments 622
Less current portion of capital leases (403)
-----------
Non-current portion of capital leases $ 219
-----------
-----------
Rent expense under operating leases in fiscal years 1999, 1998 and 1997 was
approximately $1,404,000, $1,248,000 and $1,429,000, respectively.
(7) 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 257,189 shares as of March 31, 1999.
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 2,077,911 shares of common stock are reserved for
issuance. 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.
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.
F-13
The table below summarizes the Company's stock option activity:
Weighted
Number Average
of Exercise
Shares Price
------------ --------------
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
Granted 496,550 4.30
Exercised (33,067) 2.55
Canceled (175,131) 4.96
------------
Outstanding options, March 31, 1999 1,771,983 3.95
------------
------------
At March 31, 1999, stock options to purchase 1,036,858 shares of common stock,
at a weighted average exercise price of $3.45 per share, 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
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Risk-free interest rate 5.85% 5.65% 6.0%
Expected dividend yield 0% 0% 0%
Expected volatility 76.9% 66.7% 77.2%
Expected lives 7.56 years 9.72 years 9.96 years
The total value of options and warrants granted during fiscal years 1999, 1998
and 1997 was approximately $1,428,000, $1,076,000 and $4,929,000, 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 1999, 1998 and 1997 was $2.87,
$4.17 and $4.41 per share, respectively. The Company issued 117,276, 106,536 and
33,377 shares under its Company's Employee Stock Purchase Plan during fiscal
years 1999, 1998 and 1997. The related weighted average purchase price and
weighted average fair value of shares issued were $3.53 and $2.51, respectively
for fiscal year 1999; $3.88 and $2.00, respectively for fiscal year 1998; and
$4.30 and $1.15, respectively for fiscal year 1997.
F-14
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and net loss per share would
have approximated the pro forma amounts show below:
Fiscal Year
------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
Net loss (in thousands) $(3,304) $(4,532) $(3,354) $(5,434) $(3,041) $(4,131)
Diluted net loss per share $ (0.35) $ (0.49) $ (0.37) $ (0.59) $ (0.35) $ (0.48)
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, 1999:
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, 1999 Life (Years) Per Share March 31, 1999 Per Share
--------- -------------- ------------ --------- -------------- ---------
$0.30 - $1.20 18,500 1.5 1.15 18,500 1.15
1.40 310,687 3.7 1.40 310,687 1.40
2.40 134,824 4.6 2.40 134,824 2.40
3.00 - 4.00 523,075 7.7 3.69 187,859 4.00
4.01 - 5.00 82,235 7.2 4.79 50,580 4.83
5.01 - 6.00 684,512 7.7 5.49 319,358 5.29
7.50 28,150 4.6 7.50 25,050 7.50
--------------- ---------------
1,781,983 1,046,858
--------------- ---------------
--------------- ---------------
(8) INCOME TAXES
Loss before income taxes was as follows (in thousands):
Fiscal Year
------------------------------------------------
1999 1998 1997
---------- ----------- ------------
United States $ (4,512) $ (5,782) $ (5,880)
Foreign 1,663 2,703 3,180
---------- ----------- ------------
$ (2,849) $ (3,079) $ (2,700)
---------- ----------- ------------
---------- ----------- ------------
F-15
Income tax expense consists of the following (in thousands):
Fiscal Year
-----------------------------------------------
1999 1998 1997
--------- ---------- ------------
Current:
State $ 6 $ 49 $ --
Foreign 449 226 341
--------- ---------- ------------
$ 455 $ 275 $ 341
--------- ---------- ------------
--------- ---------- ------------
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 loss before
income taxes) as follows (in thousands):
Fiscal Year
-----------------------------------------
1999 1998 1997
-------- -------- ---------
Computed expected income tax
benefit $ (969) $(1,047) $ (918)
Increase (reduction) in income
tax benefit resulting from:
State income tax benefit (175) (124) (27)
Foreign income taxes and withholding 103 125 285
Research and experimentation credits (263) (92) --
Expired foreign tax credits 54 99 --
Increase in valuation allowance 1,697 1,347 323
In-process research and development -- -- 667
Other 8 (33) 11
-------- -------- ---------
-------- -------- ---------
Income tax expense $ 455 $ 275 $ 341
-------- -------- ---------
-------- -------- ---------
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
---------------------------------
1999 1998
------------- -------------
Deferred tax assets:
Unearned library and maintenance revenue $ 674 $ 652
Federal and state net operating loss carryforwards 4,367 2,783
Foreign net operating loss carryforwards 27 172
Research and experimentation credit carryforwards 540 277
Foreign tax credit carryforwards -- 54
Other 673 427
------------- -------------
Total gross deferred tax assets 6,281 4,365
Less valuation allowance (4,557) (2,860)
------------- -------------
Net deferred tax assets 1,724 1,505
Deferred tax liabilities:
Capitalized library costs (1,724) (1,505)
------------- -------------
Total deferred tax liabilities (1,724) (1,505)
------------- -------------
Net deferred taxes $ -- $ --
------------- -------------
------------- -------------
F-16
The valuation allowance for deferred tax assets as of March 31, 1999 was
approximately $4.5 million. The net change in the total valuation allowance in
fiscal years 1999, 1998 and 1997 was an increase of approximately $1,697,000
$1,258,000 and $323,000, respectively.
At March 31, 1999, 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 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 $ 11,351 2009 - 2019
State 11,540 1999 - 2019
Research and experimentation credits
(federal only) 540 2001 - 2019
In addition, the Company has foreign income tax net operating losses of
approximately $74,000, 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.
(9) 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 1999, 1998 and 1997 were $269,000, $202,000 and
$163,000 respectively.
(10) OPERATING LINE OF CREDIT AND NON-RECOURSE RECEIVABLES PURCHASE AGREEMENT
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 80% of eligible domestic
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% (8.25% at March 31, 1999). The line of credit facility
requires the Company to maintain certain financial and other covenants including
minimum net worth, results of operations and the ratio of current assets to
current liabilities. The Company was in compliance with all covenants at March
31, 1999. At March 31, 1999, the Company had borrowings outstanding under the
operating line of $400,000 and additional borrowing capacity of approximately
$1.4 million. The line of credit matures on April 4, 2000.
In May 1999, the Company negotiated a non-recourse receivables purchase
agreement for the sale of up to $1.5 million of foreign receivables to a bank.
The agreement allows for the sale of certain receivables without recourse at a
discount rate equal to the bank's prime rate plus 3%. To date, the Company has
not executed sales of receivables under this agreement.
F-17
(11) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company markets its products in North America and Europe through its direct
sales organization and in Asia through distributors. Revenue information is
based on the location of the customer. The Company's geographic information is
summarized as follows (in thousands):
Fiscal Year
-----------------------------------------
1999 1998 1997
--------- ---------- ---------
Revenues:
United States $ 12,120 $ 14,830 $ 13,737
Germany 5,209 3,549 3,337
France 2,709 1,585 1,846
United Kingdom 3,189 1,796 2,941
Other 3,578 4,030 2,099
--------- ---------- ---------
$ 26,805 $ 25,790 $ 23,960
--------- ---------- ---------
--------- ---------- ---------
Total assets (in thousands):
United States $ 11,460 $ 16,948
United Kingdom 4,365 1,412
Germany 2,182 1,303
France 2,377 2,556
Other 834 756
--------- ----------
$ 21,218 $ 22,975
--------- ----------
--------- ----------
No one customer accounted for more than 10% of total revenues for fiscal years
1999, 1998 or 1997.
F-18