EXHIBIT 13.1
2002 ANNUAL REPORT TO STOCKHOLDERS
1
ANSYS Inc. 2002 Annual Report
FINANCIAL HIGHLIGHTS
Year Ended December 31,
(in thousands, except per share data) 2002 2001 2000 1999 1998
- ------------------------------------- -------- -------- -------- ------- -------
Revenue $ 91,011 $ 84,836 $ 74,467 $63,139 $56,553
Operating income 27,074 18,548 19,579 17,243 15,206
Net income 18,959 13,692 16,310 14,751 11,349
Earnings per share - basic $ 1.30 $ .94 $ 1.03 $ .90 $ .71
Weighted average
Shares - basic 14,598 14,554 15,804 16,366 16,052
Earnings per share - diluted $ 1.22 $ .89 $ 1.00 $ .88 $ .68
Weighted average
Shares - diluted 15,594 15,438 16,269 16,689 16,581
Total assets $127,001 $117,762 $101,120 $89,174 $72,146
Working capital 56,883 40,033 40,046 52,655 38,049
Long-term obligations -- -- -- -- --
Stockholders' equity 91,393 74,393 69,364 65,631 52,367
Cash provided by operating activities 22,116 23,638 22,850 18,341 15,646
Return on stockholders' equity 23% 19% 24% 25% 24%
Return on total assets 15% 13% 17% 18% 17%
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ANSYS Inc. 2002 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
ANSYS Inc. (the "Company" or "ANSYS") develops and globally markets
engineering simulation software and technologies widely used by engineers and
designers across a broad spectrum of industries, including aerospace,
automotive, manufacturing, electronics and biomedical. Headquartered at
Southpointe in Canonsburg, Pennsylvania, the Company employs approximately 450
people and focuses on the development of open and flexible solutions that enable
users to analyze designs directly on the desktop, providing a common platform
for fast, efficient and cost-conscious product development, from design concept
to final-stage testing and validation.
The Company distributes its ANSYS(R), DesignSpace(R), AI*NASTRAN(TM) and
ICEM CFD suite of products through a network of channel partners in 37
countries, in addition to its own direct sales offices in 20 strategic locations
throughout the world, as well as through distribution arrangements with
developers of other design software products. The following discussion should be
read in conjunction with the audited consolidated financial statements and notes
thereto included elsewhere in this Annual Report. The Company's discussion and
analysis of its financial condition and results of operations are based upon
ANSYS' consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires ANSYS to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, ANSYS evaluates its estimates, including those related to bad
debts, investments, goodwill, intangible assets, income taxes, and contingencies
and litigation. ANSYS bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements which contain such words as
"anticipates," "intends," "believes," "plans" and other similar expressions. The
Company's actual results could differ materially from those set forth in the
forward-looking statements due to various risks and uncertainties which are
detailed in "Important Factors Regarding Future Results" beginning on page 18.
Acquisitions
In November 2001, ANSYS acquired CADOE, S.A. ("CADOE"), a company based in
Lyon, France. The acquisition of CADOE's stock included an up-front payment of
approximately $3.9 million in cash, $900,000 of which was placed in escrow. The
escrowed funds will be released upon the completion of certain product
development milestones and the resolution of any outstanding indemnification
claims. The total up-front purchase price was allocated to the assets and
liabilities of CADOE based upon their estimated fair market values. The
allocation of the purchase price was based on an independent valuation and
included an allocation of $2,480,000 to identifiable intangibles (including
$1,990,000 to the core technology and $490,000 to non-compete agreements) and
$1,289,000 to goodwill, which is not tax deductible. The identified intangibles
are being amortized over four to 10 years. In accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets," the goodwill is not being amortized. The acquisition agreement provides
for additional future cash payments if the acquired business achieves certain
performance criteria in 2002, 2003 and 2004. If the performance criteria are
achieved, the future cash payments could equal or exceed the up-front purchase
price. The amount paid in 2003 related to 2002 performance is approximately
$570,000 and has resulted in an increase in goodwill as of December 31, 2002
associated with this acquisition.
In August 2000, ANSYS acquired Pacific Marketing and Consulting, Inc., a
California corporation (hereafter "ICEM CFD"). The total up front purchase price
was allocated to the assets and liabilities of ICEM CFD based upon their
estimated fair market values. The allocation of the purchase price was based on
an independent valuation and included an allocation of $5,542,000 to
identifiable intangibles (including $2,345,000 to existing software, $1,790,000
to non-compete agreements and $1,407,000 to customer list) and $12,201,000 to
goodwill, which is not tax-deductible. The identified intangibles are being
amortized over three to five years. The acquisition agreement also provided for
additional future payments if the acquired business achieved certain performance
criteria. Such payments in 2002 included $2,591,000 in cash and 98,847 shares of
ANSYS Inc. common stock, and in 2001 included $183,000 in cash and 15,465 shares
of ANSYS Inc. common stock. The additional payments resulted in an increase in
goodwill associated with this acquisition. There are no future payments
required.
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ANSYS Inc. 2002 Annual Report
The acquisitions of CADOE and ICEM CFD were accounted for as purchases and,
accordingly, their operating results have been included in ANSYS Inc.'s
consolidated financial statements since the dates of acquisition.
On February 4, 2003, the Company signed a definitive agreement to acquire
CFX, a leading supplier of computational fluid dynamics software and services,
for a purchase price of approximately $21 million in cash. The acquisition was
completed in February 2003. The Company has not yet completed its identification
and valuation of the intangible assets acquired. After allocation to the
identifiable assets and liabilities, the remaining excess of the purchase price
over the value of net assets acquired will be attributed to goodwill.
Results of Operations
As previously discussed, the Company completed the acquisition of ICEM CFD
in August 2000. Accordingly, the results of operations for 2002 and 2001 reflect
a full year of activity for ICEM CFD versus only four months for 2000. The
acquisition of CADOE in November 2001 did not have a material impact on the
results of operations for 2001.
For purposes of the following discussion and analysis, the table below sets
forth certain consolidated financial data for the years 2002, 2001 and 2000.
Year Ended December 31,
---------------------------
(in thousands) 2002 2001 2000
- -------------- ------- ------- -------
Revenue:
Software licenses $48,177 $45,318 $43,528
Maintenance and service 42,834 39,518 30,939
Total revenue 91,011 84,836 74,467
Cost of sales:
Software licenses 3,897 4,726 4,278
Maintenance and service 7,863 6,627 4,407
Total cost of sales 11,760 11,353 8,685
Gross profit 79,251 73,483 65,782
Operating expenses:
Selling and marketing 20,089 19,726 17,950
Research and development 19,605 16,893 14,502
Amortization 2,289 5,271 2,234
General and administrative 10,194 13,045 11,517
Total operating expenses 52,177 54,935 46,203
Operating income 27,074 18,548 19,579
Other income 311 1,434 3,579
Income before income tax provision 27,385 19,982 23,158
Income tax provision 8,426 6,290 6,848
Net income $18,959 $13,692 $16,310
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ANSYS Inc. 2002 Annual Report
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
REVENUE: The Company's total revenue increased 7.3% from $84.8 million in 2001
to $91.0 million in 2002. Reported revenue for the prior year was affected by a
modification of the Company's revenue recognition policy related to
noncancellable annual software leases.
The Company currently recognizes revenue for annual software leases in
accordance with Technical Practice Aid ("TPA") 5100.53, "Fair Value of PCS in a
Short-Term Time-Based License and Software Revenue Recognition," issued by the
American Institute of Certified Public Accountants, which requires all revenue
from annual software lease licenses be recognized ratably over the lease period.
Prior to the revenue recognition modification, the Company recognized a portion
of the license fee from annual software leases upon inception or renewal of the
lease, while the remaining portion, representing maintenance, was recognized
ratably over the lease period.
Software license revenue totaled $48.2 million in 2002 as compared to $45.3
million in 2001, an increase of 6.3%. This revenue increase is primarily
attributable to an increase in license revenue from annual software leases,
which resulted from the adverse impact in 2001 of the revenue recognition policy
modification on reported revenue.
Maintenance and service revenue increased 8.4% from $39.5 million in 2001
to $42.8 million in 2002. This increase resulted primarily from maintenance
contracts sold in association with paid-up license sales in recent quarters and,
to a lesser extent, an increase in consulting revenue.
The Company has recently developed and introduced many new software
products. Certain of these products require a higher level of sales and support
expertise. The ability of the Company's sales channel, in particular the
indirect channel, to obtain this expertise and sell the new product offerings
could have an effect on the Company's sales in future periods. Additionally,
royalties and consulting engagements associated with the new software products
may result in the Company's cost of sales increasing as a percentage of revenue
in future periods.
As the Company has grown, it has become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. As a
result of the current economic slowdown, many companies are delaying or reducing
technology purchases. This has had an impact on the Company's visibility into
the closing of new business, as opposed to its recurring business. This slowdown
has also contributed to, and may continue to contribute to, reductions in sales,
longer sales cycles and increased price competition. Each of these items could
adversely affect the Company's sales in future periods.
Of the Company's total revenue in 2002 and 2001, approximately 56.5% and
43.5% were attributable to international and domestic sales, respectively, as
compared to 54.4% and 45.6% in 2001.
COSTS OF SALES AND GROSS PROFIT: The Company's total cost of sales increased
3.6% to $11.8 million, or 12.9% of total revenue, in 2002 from $11.4 million, or
13.4% of total revenue, in 2001. The increase was principally attributable to
contracted technical support costs in France, as well as service costs
associated with the Company's recently acquired CADOE subsidiary.
As a result of the changes in revenue and cost of sales, the Company's
gross profit increased 7.8% to $79.3 million in 2002 from $73.5 million in 2001.
SELLING AND MARKETING: Selling and marketing expenses increased 1.8% in 2002 to
$20.1 million, or 22.1% of total revenue, from $19.7 million, or 23.3% of total
revenue, in 2001. The increase primarily resulted from higher salaries and
related headcount costs associated with the addition of personnel within the
Company's direct sales and sales support organization. These additions include
personnel associated with the Company's recently established direct sales
offices in France and India. Also contributing were costs associated with the
Company's biennial worldwide users' conference. These increases were partially
offset by a reduction in discretionary advertising and promotion expenditures,
as well as reduced commissions related to major account sales.
RESEARCH AND DEVELOPMENT: Research and development expenses increased 16.1% in
2002 to $19.6 million, or 21.5% of total revenue, from $16.9 million, or 19.9%
of total revenue, in 2001. The increase primarily resulted from additional
headcount and related costs, including those associated with the CADOE
acquisition, related to the development and introduction of new and enhanced
products. These increases were partially offset by the capitalization of
approximately $624,000 of internal labor costs, compared with $457,000 in 2001,
a significant portion of which related to the releases of ANSYS 7.0 and
DesignSpace 7.0. The Company has traditionally invested significant resources in
research and development activities and intends to continue to make significant
investments in this area.
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ANSYS Inc. 2002 Annual Report
AMORTIZATION: Amortization expense decreased to $2.3 million in 2002 from $5.3
million in 2001. The reduction primarily related to the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This standard eliminates the amortization of goodwill and other intangible
assets with indefinite useful lives and requires at least an annual test for
impairment. Amortization expense related to goodwill was $3.4 million in 2001.
GENERAL AND ADMINISTRATIVE: General and administrative expenses decreased 21.9%
in 2002 to $10.2 million, or 11.2% of total revenue, as compared to $13.0
million, or 15.4% of total revenue, in 2001. The decrease was primarily related
to a $2.0 million non-recurring charge in the prior year related to the
settlement of a dispute with a former distributor.
OTHER INCOME: Other income decreased to $311,000 in 2002 as compared to $1.4
million in 2001. The decrease was primarily attributable to a declining interest
rate environment as compared to the prior year and, to a lesser extent, foreign
currency transaction losses and losses from an investment accounted for under
the equity method. In each of 2002 and 2001, other income includes a $500,000
impairment charge related to an investment accounted for under the cost method.
As of December 31, 2002, the net book value of this investment is zero.
INCOME TAX PROVISION: The Company's effective tax rate was 30.8% in 2002 as
compared to 31.5% in 2001. These rates are lower than the federal and state
combined statutory rate as a result of benefits related to export sales, as well
as the generation of research and experimentation credits.
In November 2000, the United States enacted the FSC Repeal and
Extraterritorial Income Exclusion Act (the "Act") in response to a challenge
from the World Trade Organization ("WTO") that the existing tax benefits
provided by foreign sales corporations were prohibited tax subsidies. The Act
generally repeals the foreign sales corporation and implements an
extraterritorial income ("ETI") tax benefit. Recently, the European Union stated
that it did not believe the ETI provisions bring U.S. tax law into
WTO-compliance and asked the WTO to rule on the matter. On August 30, 2002, the
WTO ruled that the European Union may impose up to $4 billion per year in
retaliatory duties against U.S. exports. As a result, there may be further
related changes to U.S. export tax law in connection with this ruling. In 2002
and 2001, export benefits reduced the Company's effective tax rate by 4.3% and
6.6%, respectively. Any such prospective changes regarding tax benefits
associated with the Company's export sales may adversely impact the Company's
effective tax rate and decrease its net income in future periods.
NET INCOME: The Company's net income increased 38.5% to $19.0 million, or $1.22
diluted earnings per share, in 2002 as compared to net income of $13.7 million,
or $0.89 diluted earnings per share, in 2001. The weighted average common and
common equivalent shares used in computing diluted earnings per share were 15.6
million in 2002 and 15.4 million in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
REVENUE: The Company's total revenue increased 13.9% from $74.5 million in 2000
to $84.8 million in 2001. As previously discussed, reported revenue in 2001 was
affected by a modification of the Company's revenue recognition policy related
to noncancellable annual software leases.
Software license revenue totaled $45.3 million in 2001 as compared to $43.5
million in 2000, an increase of 4.1%. This increase was primarily the result of
increased license sales of ICEM CFD products, which were partially offset by the
adverse impact of the revenue recognition policy modification.
Maintenance and service revenue increased 27.7% from $30.9 million in 2000
to $39.5 million in 2001. This increase primarily resulted from maintenance
contracts sold in association with the paid-up license sales of ANSYS and
DesignSpace products in both 2001 and 2000, as well as higher engineering
consulting and maintenance revenue from ICEM CFD.
Of the Company's total revenue in 2001, approximately 54.4% and 45.6% were
attributable to international and domestic sales, respectively, as compared to
53.9% and 46.1% in 2000.
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ANSYS Inc. 2002 Annual Report
COSTS OF SALES AND GROSS PROFIT: The Company's total cost of sales increased
30.7% to $11.4 million, or 13.4% of total revenue, in 2001 from $8.7 million, or
11.7% of total revenue, in 2000. The increase was principally attributable to
costs associated with engineering consulting services provided by ICEM CFD.
As a result of the changes in revenue and cost of sales, the Company's
gross profit increased 11.7% to $73.5 million in 2001 from $65.8 million in
2000.
SELLING AND MARKETING: Selling and marketing expenses increased 9.9% in 2001 to
$19.7 million, or 23.3% of total revenue, from $18.0 million, or 24.1% of total
revenue, in 2000. The increase was primarily the result of additional headcount
and facility costs associated with both the acquisition of ICEM CFD, as
well as the addition of personnel within the ANSYS direct sales organization.
Higher third-party commission costs associated with direct sales to certain of
the Company's major account customers also contributed to the increase.
RESEARCH AND DEVELOPMENT: Research and development expenses increased 16.5% in
2001 to $16.9 million, or 19.9% of total revenue, from $14.5 million, or 19.5%
of total revenue, in 2000. The increase in 2001 was principally the result of
higher salaries and related headcount costs associated with both the acquisition
of ICEM CFD, as well as the hiring of additional development personnel within
the ANSYS product creation organization. These increases were partially offset
by the capitalization of approximately $457,000 of internal labor costs, a
significant portion of which related to the releases of ANSYS 6.0 and
DesignSpace 6.0.
AMORTIZATION: Amortization expense increased to $5.3 million in 2001 from $2.2
million in 2000. The increase resulted from a full year of amortization of
goodwill and intangible assets, associated with the acquisition of ICEM CFD, as
compared with four months of amortization in 2000.
GENERAL AND ADMINISTRATIVE: General and administrative expenses increased 13.3%
in 2001 to $13.0 million, or 15.4% of total revenue, as compared to $11.5
million, or 15.5% of total revenue, in 2000. The increase was primarily the
result of a $2.0 million charge related to the settlement of a dispute with a
former distributor, as well as a full year of general and administrative costs
incurred by ICEM CFD. These increases were partially offset by reductions in
both consulting fees and bad debt expenses.
OTHER INCOME: Other income decreased to $1.4 million in 2001 as compared to $3.6
million in 2000. The decrease was primarily attributable to a declining interest
rate environment as compared to the year 2000, as well as a $500,000 impairment
charge related to an investment accounted for under the cost method.
INCOME TAX PROVISION: The Company's effective tax rate was 31.5% in 2001 as
compared to 29.6% in 2000. The effective rate increased from the prior year as a
result of non-deductible amortization expense associated with certain intangible
assets related to the acquisition of ICEM CFD. These effective tax rates are
less than the federal and state combined statutory rate as a result of benefits
related to export sales, as well as the generation of research and
experimentation credits. In 2001 and 2000, export benefits reduced the Company's
effective tax rate by 6.6% and 5.0%, respectively.
NET INCOME: The Company's net income decreased 16.1% to $13.7 million, or $0.89
diluted earnings per share, in 2001 as compared to net income of $16.3 million,
or $1.00 diluted earnings per share, in 2000. The weighted average common and
common equivalent shares used in computing diluted earnings per share were 15.4
million in 2001 and 16.3 million in 2000.
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ANSYS Inc. 2002 Annual Report
Liquidity and Capital Resources
As of December 31, 2002, the Company had cash, cash equivalents and
short-term investments totaling $61.1 million and working capital of $56.9
million, as compared to cash, cash equivalents and short-term investments of
$53.4 million and working capital of $40.0 million at December 31, 2001. The
short-term investments are generally investment grade and liquid, which allows
the Company to minimize interest rate risk and to facilitate liquidity in the
event an immediate cash need arises.
The Company's operating activities provided cash of $22.1 million in 2002,
$23.6 million in 2001 and $22.9 million in 2000. The decrease in cash generated
from operations in 2002 compared to 2001 was primarily the result of the payment
in 2002 of approximately $2.0 million associated with the settlement of a
dispute with a former distributor. This amount was fully accrued in 2001. The
increase in 2001 compared to 2000 was mainly the result of improved accounts
receivable collections. Net cash generated by operating activities provided
sufficient resources to fund increased headcount and capital needs, as well as
to sustain share repurchase activity under the Company's ongoing stock
repurchase program.
Cash provided by investing activities was $2.9 million in 2002 and $9.0
million in 2001. In 2000, investing activities used cash of $7.4 million. In
each of 2002 and 2001, net maturities of short-term investments were partially
offset by business acquisition payments and capital expenditures. The Company's
use of cash in 2000 primarily related to the acquisition of ICEM CFD and capital
expenditures, including hardware and software costs associated with the
Company's investment in a comprehensive customer relationship management system.
Financing activities used cash of $7.5 million in 2002, $10.4 million in
2001 and $19.6 million in 2000. In each of the three years, cash out-lays
related to the purchase of treasury stock were partially offset by proceeds from
the issuance of common stock under the employee stock purchase and option plans.
The Company believes that existing cash and cash equivalent balances,
together with cash generated from operations, will be sufficient to meet the
Company's working capital and capital expenditure requirements through at least
the next fiscal year. The Company's cash requirements in the future may also be
financed through additional equity or debt financings. There can be no assurance
that such financings can be obtained on favorable terms, if at all.
The Company does not have any special purpose entities or off-balance sheet
financing arrangements.
The Company's significant contractual obligations as of December 31, 2002
primarily include lease commitments for its corporate office facility, as well
as various noncancellable operating leases for equipment and sales offices. The
corporate office facility lease agreement includes a commitment through 2006,
with an option for five additional years. The committed lease payments through
2006 are $1,354,000 per annum. Future minimum lease payments under
noncancellable operating leases for equipment and sales offices in effect at
December 31, 2002 are $809,000 in 2003, $515,000 in 2004, $354,000 in 2005,
$106,000 in 2006 and $22,000 in 2007.
In addition to the contractual obligations related to facility and
equipment leases, the Company had an outstanding irrevocable standby letter of
credit for $1,524,000 at December 31, 2002. This letter of credit was issued as
a guarantee for damages that could be awarded related to a legal matter in which
the Company was involved. The fair value of the letter of credit approximates
the contract value based on the nature of the fee arrangements with the issuing
bank. No material losses on this commitment have been incurred, nor are any
anticipated.
On February 4, 2003, the Company signed a definitive agreement to acquire
CFX, a leading supplier of computational fluid dynamics software and services,
for a purchase price of approximately $21 million in cash. Upon closing of the
transaction, the purchase price will be paid from the Company's existing cash
and short-term investment balances.
Critical Accounting Policies
ANSYS believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. ANSYS recognizes revenue in accordance with SOP 97-2,
"Software Revenue Recognition," and related interpretations. Revenue from
perpetual licenses is recognized upon delivery of the licensed product and the
utility which enables the customer to request authorization keys, provided that
acceptance has occurred and a signed contractual obligation has been received,
the price is fixed and determinable, and collectibility of the receivable is
probable. Revenue for software lease licenses is recorded ratably over the
period of the lease contract. Revenue is recorded net of the distributor fee for
sales through the ANSYS distribution network. The Company estimates the value of
post-contract customer support sold together with perpetual licenses by
reference to published price lists which generally represent the prices at which
customers could purchase renewal contracts for such services. Revenue from
maintenance contracts is recognized ratably over the term of the contract.
Revenue from training, support and other services is recognized as the services
are performed.
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ANSYS Inc. 2002 Annual Report
ANSYS maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Management specifically analyzes accounts receivable, historical bad debts,
credit concentrations and customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts.
ANSYS capitalizes internal labor costs associated with the development of
product enhancements subsequent to the determination of technological
feasibility. Amortization of capitalized software costs, both for internally
developed as well as for purchased software products, is computed on a
product-by-product basis over the estimated economic life of the product, which
is generally three years. The Company periodically reviews the carrying value of
capitalized software and an impairment will be recognized in the results of
operations if the expected future undiscounted operating cash flow derived from
the capitalized software is less than its carrying value.
The Company tests goodwill for impairment at least annually by comparing
the fair value of the goodwill to its carrying value. Fair value is estimated
using the discounted cash flow and other valuation methodologies that are based
on projections of the amounts and timing of future revenues and cash flows.
Recently Issued and Adopted Accounting Pronouncements
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," for existing goodwill and other intangible assets.
This standard eliminates the amortization of goodwill and intangible assets with
indefinite useful lives and requires at least an annual test for impairment.
This standard also requires the assignment of assets acquired and liabilities
assumed, including goodwill, to reporting units for purposes of the annual
impairment test. As of December 31, 2002 and 2001, ANSYS had goodwill of $18.6
and $16.4 million, respectively. The Company completed the required transitional
goodwill impairment test during 2002 and determined that goodwill had not been
impaired as of the transitional test date, January 1, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption encouraged. The adoption of this
Statement will not have an impact on the Company's financial position, results
of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The Company is currently evaluating the provisions of this
Interpretation on its financial position, results of operations and cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risks and rewards of ownership
among their owners and other parties involved. The provisions of Interpretation
No. 46 are effective immediately to all variable interest entities created after
January 1, 2003 and variable interest entities in which an enterprise obtains an
interest after that date. For variable interest entities created before this
date, the provisions are effective July 31, 2003. The Company is currently
evaluating the provisions of this Interpretation on its financial position,
results of operations and cash flows.
On February 7, 2003, the American Institute of Certified Public Accountants
issued Technical Practice Aid ("TPA") 5100.75, "Fair Value of PCS Renewals Based
on Users Deployed and Software Revenue Recognition" and TPA 5100.76, "Fair Value
in Multiple-Element Arrangements that Include Contingent Usage-Based Fees and
Software Revenue Recognition." The Company is currently evaluating the effects
of these accounting pronouncements on its financial position, results of
operations and cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." The Company has adopted the
disclosure provisions of this Statement. These disclosures have been included in
the notes to the consolidated financial statements.
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ANSYS Inc. 2002 Annual Report
Important Factors Regarding Future Results
Information provided by the Company or its spokespersons, including
information contained in this Annual Report to Shareholders, may from time to
time contain forward-looking statements concerning projected financial
performance, market and industry segment growth, product development and
commercialization or other aspects of future operations. Such statements will be
based on the assumptions and expectations of the Company's management at the
time such statements are made. The Company cautions investors that its
performance (and, therefore, any forward-looking statement) is subject to risks
and uncertainties. Various important factors including, but not limited to, the
following may cause the Company's future results to differ materially from those
projected in any forward-looking statement.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS: The Company may experience
significant fluctuations in future quarterly operating results. Fluctuations may
be caused by many factors, including the timing of new product releases or
product enhancements by the Company or its competitors; the size and timing of
individual orders, including a fluctuation in the demand for and the ability to
complete large contracts; software errors or other product quality problems;
competition and pricing changes; customer order deferrals in anticipation of new
products or product enhancements; reduction in demand for the Company's
products; changes in operating expenses; changes in the mix of software license
and maintenance and service revenue; personnel changes; and general economic
conditions. A substantial portion of the Company's operating expenses is related
to personnel, facilities and marketing programs. The level of personnel and
related expenses cannot be adjusted quickly and is based, in significant part,
on the Company's expectation for future revenue. The Company does not typically
experience significant order backlog. Further, the Company has often recognized
a substantial portion of its revenue in the last month of a quarter, with this
revenue frequently concentrated in the last weeks or days of a quarter. During
certain quarterly periods, the Company has been dependent upon receiving large
orders of perpetual licenses involving the payment of a single up-front fee and,
more recently, has shifted the business emphasis of its products to provide a
collaborative solution to the Company's customers. This emphasis has increased
the Company's average order size and increased the related sales cycle time for
the larger orders. This shift, therefore, may have the effect of increasing the
volatility of the Company's revenue and profit from period to period. As a
result, product revenue in any quarter is substantially dependent on sales
completed in the latter part of that quarter, and revenue for any future quarter
is not predictable with any significant degree of accuracy.
STOCK MARKET AND STOCK PRICE VOLATILITY: Market prices for securities of
software companies have generally been volatile. In particular, the market price
of the Company's common stock has been, and may continue to be, subject to
significant fluctuations as a result of factors affecting the Company, the
software industry or the securities markets in general. Such factors include,
but are not limited to, declines in trading price that may be triggered by the
Company's failure to meet the expectations of securities analysts and investors.
The Company cannot provide assurance that in such circumstances the trading
price of the Company's common stock will recover or that it will not experience
a further decline. Moreover, the trading price could be subject to additional
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements made by the Company or its
competitors, conditions in the software industry generally or other events and
factors, many of which are beyond the Company's control.
RAPIDLY CHANGING TECHNOLOGY; NEW PRODUCTS; RISK OF PRODUCT DEFECTS: The markets
for the Company's products are generally characterized by rapidly changing
technology and frequent new product introductions that can render existing
products obsolete or unmarketable. A major factor in the Company's future
success will be its ability to anticipate technological changes and to develop
and introduce, in a timely manner, enhancements to its existing products and new
products to meet those changes. If the Company is unable to introduce new
products and to respond quickly to industry changes, its business, financial
condition, results of operations and cash flows could be materially adversely
affected. The introduction and marketing of new or enhanced products require the
Company to manage the transition from existing products in order to minimize
disruption in customer purchasing patterns.
There can be no assurance that the Company will be successful in developing
and marketing, on a timely basis, new products or product enhancements, that its
new products will adequately address the changing needs of the marketplace or
that it will successfully manage the transition from existing products. Software
products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released, and
the likelihood of errors is increased as a result of the Company's commitment to
accelerating the frequency of its product releases. There can be no assurance
that errors will not be found in new or enhanced products after commencement of
commercial shipments. Any of these problems may result in the loss of or delay
in market acceptance, diversion of development resources, damage to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
19
ANSYS Inc. 2002 Annual Report
DEPENDENCE ON DISTRIBUTORS: The Company continues to distribute a majority of
its products through its global network of 30 independent, regional ASDs. The
ASDs sell the Company's software products to new and existing customers, expand
installations within their existing customer base, offer consulting services and
provide the first line of technical support. The ASDs have more immediate
contact with most customers in their territories who use ANSYS software than
does the Company. Consequently, the Company is highly dependent on the efforts
of the ASDs. Difficulties in ongoing relationships with ASDs, such as delays in
collecting accounts receivable, failure to meet performance criteria or to
promote the Company's products as aggressively as the Company expects and
differences in the handling of customer relationships could adversely affect the
Company's performance. Additionally, the loss of any major ASD for any reason,
including an ASD's decision to sell competing products rather than the Company's
products, could have a material adverse effect on the Company. Moreover, the
Company's future success will depend substantially on the ability and
willingness of its ASDs to continue to dedicate the resources necessary to
promote the Company's products and to support a larger installed base of the
Company's products. If the ASDs are unable or unwilling to do so, the Company
may be unable to sustain revenue growth.
COMPETITION: The CAD, CAE and computer-aided manufacturing ("CAM") markets are
intensely competitive. In the traditional CAE market, the Company's primary
competitors include MSC.Software Corporation and ABAQUS, Inc. (formerly Hibbitt,
Karlsson and Sorensen, Inc.) The Company also faces competition from smaller
vendors of specialized analysis applications in fields such as computational
fluid dynamics. In addition, certain integrated CAD suppliers such as Parametric
Technology Corporation, Electronic Data Systems Corporation and Dassault
Systemes provide varying levels of design analysis, optimization and
verification capabilities as part of their product offerings. The entrance of
new competitors would likely intensify competition in all or a portion of the
overall CAD, CAE and CAM markets. Some of the Company's current and possible
future competitors have greater financial, technical, marketing and other
resources than the Company, and some have well established relationships with
current and potential customers of the Company. It is also possible that
alliances among competitors may emerge and rapidly acquire significant market
share or that competition will increase as a result of software industry
consolidation. Increased competition may result in price reductions, reduced
profitability and loss of market share, any of which would materially adversely
affect the Company's business, financial condition, results of operations and
cash flows.
DEPENDENCE ON SENIOR MANAGEMENT AND KEY TECHNICAL PERSONNEL: The Company is
highly dependent upon the ability and experience of its senior executives and
its key technical and other management employees. Although the Company has
employment agreements with two executives, the loss of these employees, or any
of the Company's other key employees, could adversely affect the Company's
ability to conduct its operations.
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES: A significant portion of the
Company's business comes from outside the United States of America. Risks
inherent in the Company's international business activities include imposition
of government controls, export license requirements, restrictions on the export
of critical technology, political and economic instability, trade restrictions,
changes in tariffs and taxes, difficulties in staffing and managing
international operations, longer accounts receivable payment cycles and the
burdens of complying with a wide variety of foreign laws and regulations.
Effective patent, copyright and trade secret protection may not be available in
every foreign country in which the Company sells its products. The Company's
business, financial condition, results of operations and cash flows could be
materially adversely affected by any of these risks.
Additionally, countries in certain international regions have continued to
experience weaknesses in their currency, banking and equity markets. These
weaknesses could adversely affect consumer demand for the Company's products and
ultimately the Company's financial condition, results of operations and cash
flows.
In November 2000, the United States enacted the FSC Repeal and
Extraterritorial Income Exclusion Act (the "Act") in response to a challenge
from the World Trade Organization ("WTO") that the existing tax benefits
provided by foreign sales corporations were prohibited tax subsidies. The Act
generally repeals the foreign sales corporation and implements an
extraterritorial income ("ETI") tax benefit. Recently, the European Union stated
that it did not believe the ETI provisions bring U.S. tax law into WTO
compliance and asked the WTO to rule on the matter. On August 30, 2002, the WTO
ruled that the European Union may impose up to $4 billion per year in
retaliatory duties against U.S. exports. As a result, there may be further
related changes to U.S. export tax law in connection with this ruling. In 2002,
export benefits reduced the Company's effective tax rate by 4.3%. Any such
prospective changes regarding tax benefits associated with the Company's export
sales, or other tax-planning vehicles, may adversely impact the Company's
effective tax rate and decrease its net income in future periods.
20
ANSYS Inc. 2002 Annual Report
DEPENDENCE ON PROPRIETARY TECHNOLOGY: The Company's success is highly dependent
upon its proprietary technology. Although the Company was awarded a patent by
the U.S. Patent and Trademark Office for its Web-based reporting technology, the
Company generally relies on contracts and the laws of copyright and trade
secrets to protect its technology. Although the Company maintains a trade
secrets program, enters into confidentiality agreements with its employees and
distributors and limits access to and distribution of its software,
documentation and other proprietary information, there can be no assurance that
the steps taken by the Company to protect its proprietary technology will be
adequate to prevent misappropriation of its technology by third parties, or that
third parties will not be able to develop similar technology independently.
Although the Company is not aware that any of its technology infringes upon the
rights of third parties, there can be no assurance that other parties will not
assert technology infringement claims against the Company, or that, if asserted,
such claims will not prevail.
INCREASED RELIANCE ON PERPETUAL LICENSES: Although the Company has historically
maintained stable recurring revenue from the sale of monthly lease licenses and
noncancellable annual leases for its software products, it has relied
increasingly on sales of perpetual licenses that involve payment of a single
up-front fee and that are more typical in the computer software industry. While
revenue generated from monthly lease licenses and noncancellable annual leases
currently represents a portion of the Company's software license revenue, to the
extent that perpetual license revenue continues to represent a significant
percentage of total software license revenue, the Company's revenue in any
period will depend increasingly on sales completed during that period.
RISKS ASSOCIATED WITH ACQUISITIONS: The Company has consummated and may continue
to consummate certain strategic acquisitions in order to provide increased
capabilities to its existing products, enter new product and service markets or
enhance its distribution channels. The ability of the Company to integrate the
acquired businesses, including delivering sales and support, ensuring continued
customer commitment, obtaining further commitments and challenges associated
with expanding sales in particular markets and retaining key personnel, will
impact the success of these acquisitions. If the Company is unable to properly
and timely integrate the acquired businesses, there could be a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
GENERAL CONTINGENCIES: The Company is subject to various investigations, claims
and legal proceedings from time to time that arise in the ordinary course of its
business activities. These proceedings currently include customary audit
activities by various taxing authorities. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters may be
resolved unfavorably to the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: The Company is
exposed to certain market risks, primarily foreign currency exchange rates,
which arise from transactions entered into in the normal course of business. The
Company seeks to minimize these risks through its normal operating and financing
activities. The Company does not use derivative financial instruments to hedge
these risks.
21
ANSYS Inc. 2002 Annual Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of ANSYS Inc.
We have audited the accompanying consolidated balance sheet of ANSYS Inc.
and subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of income, cash flows and stockholders' equity for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
as of December 31, 2001 and for the two years in the period ended December 31,
2001 were audited by other auditors whose report, dated January 30, 2002,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2002, and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 6 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 29, 2003 (February 4, 2003 as to the last paragraph of Note 3)
22
ANSYS Inc. 2002 Annual Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ANSYS Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of ANSYS Inc. and its
subsidiaries at December 31, 2001, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 30, 2002
23
ANSYS Inc. 2002 Annual Report
CONSOLIDATED BALANCE SHEETS
December, 31, December 31,
(in thousands, except share data) 2002 2001
- --------------------------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,198 $ 28,545
Short-term investments 14,934 24,903
Accounts receivable, less allowance for doubtful
accounts of $1,560 and $1,610, respectively 15,875 15,352
Other receivables and current assets 13,737 12,803
Deferred income taxes 1,747 1,799
Total current assets 92,491 83,402
Long-term investment 486 500
Property and equipment, net 4,302 4,915
Capitalized software costs, net 971 817
Goodwill, 18,615 16,412
Other intangibles, net 5,098 6,499
Deferred income taxes 5,038 5,217
Total assets $127,001 $117,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 627 $ 624
Accrued bonuses 2,941 4,578
Other accrued expenses and liabilities 5,645 13,047
Deferred revenue 26,395 25,120
Total current liabilities 35,608 43,369
Commitments and Contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,584,758 shares issued 166 166
Additional paid-in capital 41,416 37,822
Retained earnings 79,388 60,429
Treasury stock, at cost: 2,014,999 and 2,071,123 shares,
respectively (30,337) (23,953)
Accumulated other comprehensive income (loss) 760 (71)
Total stockholders' equity 91,393 74,393
Total liabilities and stockholders' equity $127,001 $117,762
The accompanying notes are an integral part of the consolidated financial
statements.
24
ANSYS Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) 2002 2001 2000
- ------------------------------------- ------- ------- -------
Revenue:
Software licenses $48,177 $45,318 $43,528
Maintenance and service 42,834 39,518 30,939
Total revenue 91,011 84,836 74,467
Cost of sales:
Software licenses 3,897 4,726 4,278
Maintenance and service 7,863 6,627 4,407
Total cost of sales 11,760 11,353 8,685
Gross profit 79,251 73,483 65,782
Operating expenses:
Selling and marketing 20,089 19,726 17,950
Research and development 19,605 16,893 14,502
Amortization 2,289 5,271 2,234
General and administrative 10,194 13,045 11,517
Total operating expenses 52,177 54,935 46,203
Operating income 27,074 18,548 19,579
Other income 311 1,434 3,579
Income before income tax provision 27,385 19,982 23,158
Income tax provision 8,426 6,290 6,848
Net income $18,959 $13,692 $16,310
Earnings per share - basic:
Basic earnings per share $ 1.30 $ .94 $ 1.03
Weighted average shares - basic 14,598 14,554 15,804
Earnings per share - diluted:
Diluted earnings per share $ 1.22 $ .89 $ 1.00
Weighted average shares - diluted 15,594 15,438 16,269
The accompanying notes are an integral part of the consolidated financial
statements.
25
ANSYS Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands) 2002 2001 2000
- -------------- -------- --------- ---------
Cash flows from operating activities:
Net income $ 18,959 $ 13,692 $ 16,310
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,525 7,631 4,333
Deferred income tax provision (benefit) 231 (800) (69)
Provision for bad debts 506 368 739
Impairment of investment 500 500 --
Equity in loss of investment 114 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,029) (1,602) (2,574)
Other receivables and current assets (934) (3,483) (1,417)
Accounts payable, accrued expenses and liabilities (2,031) 2,009 2,279
Deferred revenue 1,275 5,323 3,249
Net cash provided by operating activities 22,116 23,638 22,850
Cash flows from investing activities:
Business and territory acquisition payments, net of cash acquired (4,277) (4,314) (7,881)
Acquisition-related loan -- -- (1,366)
Capital expenditures (1,612) (2,070) (3,173)
Capitalization of internally developed software costs (624) (457) (213)
Purchases of short-term investments (98,536) (144,194) (121,058)
Maturities of short-term investments 108,505 160,518 126,561
Repayment of stockholder loan -- -- 250
Purchase of long-term investments (600) (500) (500)
Net cash provided by (used in) investing activities 2,856 8,983 (7,380)
Cash flows from financing activities:
Proceeds from issuance of common stock under Employee Stock Purchase
Plan 333 205 163
Proceeds from exercise of stock options 4,131 5,090 1,814
Purchase of treasury stock (11,919) (15,715) (21,588)
Net cash used in financing activities (7,455) (10,420) (19,611)
Effect of exchange rate fluctuations 136 31 53
Net increase (decrease) in cash and cash equivalents 17,653 22,232 (4,088)
Cash and cash equivalents, beginning of year 28,545 6,313 10,401
Cash and cash equivalents, end of year $ 46,198 $ 28,545 $ 6,313
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 4,632 $ 5,235 $ 4,615
The accompanying notes are an integral part of the consolidated financial
statements.
26
ANSYS Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
--------------- -----------------
Additional Paid-in
(in thousands) Shares Amount Capital Shares Amount
------ ------ ------------------ ------ --------
Balance, January 1, 2000 16,585 $166 $37,543 339 $ (2,375)
Treasury stock acquired -- -- -- 2,010 (21,588)
Acquisition of ICEM CFD
Engineering -- -- (106) (619) 6,644
Exercise of stock options,
net of tax benefit of $313 -- -- 124 (259) 2,056
Issuance of common stock
under Employee Stock Purchase
Plan -- -- 27 (19) 136
Repayment of note receivable
from stockholder -- -- -- -- --
Net income for the year -- -- -- -- --
Other comprehensive income
(loss) -- -- -- -- --
Balance, December 31, 2000 16,585 166 37,588 1,452 (15,127)
Treasury stock acquired -- -- -- 1,241 (15,715)
Acquisition of ICEM CFD
Engineering -- -- 29 (15) 161
Exercise of stock options,
net of tax benefit of $1,637 -- -- 256 (584) 6,472
Issuance of common stock
under Employee Stock Purchase
Plan -- -- (51) (23) 256
Net income for the year -- -- -- -- --
Other comprehensive income
(loss) -- -- -- -- --
Balance, December 31, 2001 16,585 166 37,822 2,071 (23,953)
Treasury stock acquired -- -- -- 505 (11,919)
Acquisition of ICEM CFD
Engineering -- -- 1,380 (99) 950
Exercise of stock options,
net of tax benefit of $2,134 -- -- 2,075 (443) 4,391
Issuance of common stock
under Employee Stock Purchase
Plan -- -- 139 (19) 194
Net income for the year -- -- -- -- --
Other comprehensive income -- -- -- -- --
Balance, December 31, 2002 16,585 $166 $41,416 2,015 $(30,337)
27
ANSYS Inc. 2002 Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Notes Total Total
Retained Comprehensive Receivable from Stockholders' Comprehensive
(in thousands) Earnings income Stockholders Equity Income
- -------------- -------- ------------- --------------- ------------- -------------
Balance, January 1, 2000 $30,427 $ 120 $(250) $ 65,631
Treasury stock acquired -- -- -- (21,588)
Acquisition of ICEM CFD
Engineering -- -- -- 6,538
Exercise of stock options,
net of tax benefit of $313 -- -- -- 2,180
Issuance of common stock
under Employee Stock Purchase
Plan -- -- -- 163
Repayment of note receivable
from stockholder -- -- 250 250
Net income for the year 16,310 -- -- 16,310 16,310
Other comprehensive income
(loss) -- (120) -- (120) (120)
Balance, December 31, 2000 46,737 -- -- 69,364 16,190
Treasury stock acquired -- -- -- (15,715)
Acquisition of ICEM CFD
Engineering -- -- -- 190
Exercise of stock options,
net of tax benefit of $1,637 -- -- -- 6,728
Issuance of common stock
under Employee Stock Purchase
Plan -- -- -- 205
Net income for the year 13,692 -- -- 13,692 13,692
Other comprehensive income
(loss) -- (71) -- (71) (71)
Balance, December 31, 2001 60,429 (71) -- 74,393 13,621
Treasury stock acquired -- -- -- (11,919) --
Acquisition of ICEM CFD
Engineering -- -- -- 2,330 --
Exercise of stock options,
net of tax benefit of $2,134 -- -- -- 6,466 --
Issuance of common stock
under Employee Stock Purchase
Plan -- -- -- 333 --
Net income for the year 18,959 -- -- 18,959 18,959
Other comprehensive income -- 831 -- 831 831
Balance, December 31, 2002 $79,388 $ 760 $ -- $ 91,393 $19,790
The accompanying notes are an integral part of the consolidated financial
statements.
28
ANSYS Inc. 2002 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
ANSYS Inc. (the "Company" or "ANSYS") develops and globally markets
engineering simulation software and technologies widely used by engineers and
designers across a broad spectrum of industries, including aerospace,
automotive, manufacturing, electronics and biomedical. The Company operates as
one segment, as defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. 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. Estimates also affect the amounts of revenue and expenses during the
reported periods. Actual results could differ from these estimates.
REVENUE RECOGNITION: Revenue is derived principally from the licensing of
computer software products and from related maintenance contracts. ANSYS
recognizes revenue in accordance with SOP 97-2, "Software Revenue Recognition,"
and related interpretations. Revenue from perpetual licenses is recognized upon
delivery of the licensed product and the utility which enables the customer to
request authorization keys, provided that acceptance has occurred and a signed
contractual obligation has been received, the price is fixed and determinable,
and collectibility of the receivable is probable. Revenue is recorded net of the
distributor fee for sales through the ANSYS distribution network. The Company
estimates the value of post-contract customer support sold together with
perpetual licenses by reference to published price lists which generally
represent the prices at which customers could purchase renewal contracts for
such services. Revenue from monthly leases is recognized monthly as earned.
Revenue from maintenance contracts is recognized ratably over the term of the
contract. Costs related to maintenance obligations are expensed as incurred.
Revenue from training, support and other services is recognized as the services
are performed.
The Company recognizes revenue for annual software leases in accordance
with Technical Practice Aid ("TPA") 5100.53, "Fair Value of PCS in a Short-Term
Time-Based License and Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants, which requires all revenue from
annual software lease licenses to be recognized ratably over the lease period.
Prior to the revenue recognition modification to comply with the TPA, the
Company recognized a portion of the license fee from annual leases upon
inception or renewal of the lease, while the remaining portion, representing
maintenance, was recognized ratably over the lease period.
CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, the
Company considers highly liquid deposits in money market funds to be cash
equivalents. Cash equivalents are recorded at cost, which approximates fair
value.
SHORT-TERM INVESTMENTS: The Company considers investments backed by government
agencies or U.S. financial institutions and which have a maturity or renewal
option between 30 days and up to one year from the date of purchase to be
short-term investments. Short-term investments are recorded at fair value, which
approximates amortized cost. The Company uses the specific identification method
to determine the realized gain or loss upon the sale of such securities. As of
the balance sheet date, there were no significant unrealized gains or losses on
the investments, all of which had maturities of less than one year.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed on the straight-line method over the estimated useful lives of the
various classes of assets, which range from one to seven years. Repairs and
maintenance are charged to expense as incurred. Gains or losses from the sale or
retirement of property and equipment are included in the results of operations.
29
ANSYS Inc. 2002 Annual Report
RESEARCH AND DEVELOPMENT COSTS: Research and development costs, other than
certain software development costs discussed below, are expensed as incurred.
CAPITALIZED SOFTWARE: Internally developed computer software costs and costs of
product enhancements are capitalized subsequent to the determination of
technological feasibility; such capitalization continues until the product
becomes available for general release. Amortization of capitalized software
costs, both for internally developed as well as for purchased software products,
is computed on a product-by-product basis over the estimated economic life of
the product, which is generally three years. Amortization is the greater of the
amount computed using: (i) the ratio of the current year's gross revenue to the
total current and anticipated future gross revenue for that product or (ii) the
straight-line method over the estimated life of the product. Amortization
expense related to capitalized software was $383,000, $368,000 and $333,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
The Company periodically reviews the carrying value of capitalized software
and impairments are recognized in the results of operations when the expected
future undiscounted operating cash flow derived from the capitalized software is
less than its carrying value. No charges for impairment have been required to
date.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of the
purchase price over the fair value of net assets acquired. Intangible assets
consist of the ANSYS trademark, non-compete agreements, customer lists and
acquired software and technology.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," for existing goodwill and other intangible assets.
This standard eliminates the amortization of goodwill and intangible assets with
indefinite useful lives and requires annual testing for impairment. This
standard also requires the assignment of assets acquired and liabilities
assumed, including goodwill, to reporting units for purposes of the annual
impairment test.
The Company evaluates at least annually the realizability of the carrying
value of goodwill by comparing the carrying value to its estimated fair value.
The Company completed the required transitional goodwill impairment test during
2002 and determined that goodwill had not been impaired as of the transitional
test date, January 1, 2002.
The Company periodically reviews the carrying value of other intangible
assets and will recognize impairments when the expected future discounted
operating cash flow derived from such intangible assets is less than their
carrying value.
CONCENTRATIONS OF CREDIT RISK: The Company invests its excess cash primarily in
deposits, money market funds and commercial paper with commercial banks. The
Company has not experienced any losses to date on its invested cash.
The Company has a concentration of credit risk with respect to trade
receivables because of the limited number of distributors through which the
Company sells its products. The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral.
During 2002, sales by distributors comprised approximately 51% of the
Company's total revenue, with two distributors accounting for approximately 11%
and 7% of total revenue. During 2001, sales by distributors comprised
approximately 57% of the Company's total revenue, with two distributors
accounting for approximately 13% and 9% of total revenue. During 2000, sales by
distributors comprised approximately 62% of the Company's total revenue, with
two distributors accounting for approximately 11% and 10% of total revenue.
INCOME TAXES: Deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
30
ANSYS Inc. 2002 Annual Report
FOREIGN CURRENCIES: Certain of the Company's sales transactions are denominated
in foreign currencies. These transactions are translated to U.S. Dollars at the
exchange rate on the transaction date. Accounts receivable in foreign currencies
at year-end are translated at the effective exchange rate on the balance sheet
date. Gains and losses resulting from foreign exchange transactions are included
in the results of operations.
The financial statements of the Company's foreign subsidiaries are
translated from the functional currency, generally the local currency, to U.S.
Dollars. Assets and liabilities are translated at the exchange rates on the
balance sheet date. Results of operations are translated at average exchange
rates. The resulting exchange difference is recorded as a component of
accumulated other comprehensive income in the accompanying consolidated
statements of stockholders' equity.
STOCK-BASED COMPENSATION: The Company applies Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock options and employee stock purchase
plans. APB No. 25 requires the use of the intrinsic value method, which measures
compensation cost as the excess, if any, of the quoted market price of the stock
at the measurement date over the amount the employee must pay to acquire the
stock. The Company makes disclosures of pro forma net earnings per share as if
the fair-value-based method of accounting had been applied as required by
SFAS No. 123, "Accounting for Stock-Based Compensation" and as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure." The Company has applied the transitional disclosure required by
SFAS No. 148. See Note 10.
EARNINGS PER SHARE: Basic earnings per share is computed using the weighted
average number of common shares outstanding during each period. Diluted earnings
per share is computed using the weighted average number of common and common
equivalent shares outstanding during each period. Common equivalent shares are
not included in the per share calculations where their inclusion would be
anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 2002, the FASB issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption encouraged. The adoption of this Statement will not have an impact on
the Company's financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The Company is currently evaluating the provisions of this
Interpretation on its financial position, results of operations and cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risk and rewards of ownership among
their owners and other parties involved. The provisions of Interpretation No. 46
are effective immediately to all variable interest entities created after
January 1, 2003 and variable interest entities in which an enterprise obtains an
interest after that date. For variable interest entities created before this
date, the provisions are effective July 31, 2003. The Company is currently
evaluating the provisions of this Interpretation on its financial position,
results of operations and cash flows.
On February 7, 2003, the American Institute of Certified Public Accountants
issued Technical Practice Aid ("TPA") 5100.75, "Fair Value of PCS Renewals Based
on Users Deployed and Software Revenue Recognition" and TPA 5100.76, "Fair Value
in Multiple-Element Arrangements that Include Contingent Usage-Based Fees and
Software Revenue Recognition." The Company is currently evaluating the effects
of these accounting pronouncements on its financial position, results of
operations and cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." The Company has adopted the
disclosure provisions of this Statement. These disclosures have been included in
the notes to the consolidated financial statements. See Note 10.
RECLASSIFICATIONS: Certain reclassifications have been made to the 2001 and 2000
financial statements to conform to the 2002 presentation.
31
ANSYS Inc. 2002 Annual Report
3. Acquisitions
In November 2001, ANSYS acquired CADOE, S.A. ("CADOE"), a company based in
Lyon, France. The acquisition of CADOE's stock included an up-front payment of
approximately $3.9 million in cash, $900,000 of which was placed in escrow. The
escrowed funds will be released upon the completion of certain product
development milestones and the resolution of any outstanding indemnification
claims. The total up-front purchase price was allocated to the assets and
liabilities of CADOE based upon their estimated fair market values. The
allocation of the purchase price was based on an independent valuation and
included an allocation of $2,480,000 to identifiable intangibles (including
$1,990,000 to the core technology and $490,000 to non-compete agreements) and
$1,289,000 to goodwill, which is not tax-deductible. The identified intangibles
are being amortized over four to ten years. In accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets" (see Note 6), the goodwill is not being amortized. The acquisition
agreement provides for additional future cash payments if the acquired business
achieves certain performance criteria in 2002, 2003 and 2004. If the performance
criteria are achieved, the future cash payments could equal or exceed the
up-front purchase price. The amount paid in 2003 related to 2002 performance is
approximately $570,000 and has resulted in an increase in goodwill as of
December 31, 2002 associated with this acquisition.
In August 2000, ANSYS acquired Pacific Marketing and Consulting, Inc., a
California corporation (hereafter "ICEM CFD"). The total up-front purchase price
was allocated to the assets and liabilities of ICEM CFD based upon their
estimated fair market values. The allocation of the purchase price was based on
an independent valuation and included an allocation of $5,542,000 to
identifiable intangibles (including $2,345,000 to existing software, $1,790,000
to non-compete agreements and $1,407,000 to customer list) and $12,201,000 to
goodwill, which is not tax-deductible. The identified intangibles are being
amortized over three to five years. The acquisition agreement also provided for
additional future payments if the acquired business achieved certain performance
criteria. Such payments in 2002 included $2,591,000 in cash and 98,847 shares of
ANSYS Inc. common stock, and in 2001 included $183,000 in cash and 15,465 shares
of ANSYS Inc. common stock. The additional payments resulted in an increase in
goodwill associated with this acquisition. There are no future payments
required.
The acquisitions of CADOE and ICEM CFD were accounted for as purchases and,
accordingly, their operating results have been included in ANSYS Inc.'s
consolidated financial statements since the dates of acquisition. On a pro forma
basis, the results of operations as if the acquisition of CADOE had occurred on
January 1, 2001 and 2000, are not materially different from the reported
amounts.
The following unaudited pro forma information presents the results of
operations of the Company as if the ICEM CFD acquisition had occurred on January
1, 2000. The unaudited pro forma consolidated results are not necessarily
indicative of results that would have occurred had the acquisition been in
effect for the year presented.
(in thousands) Year Ended December 31, 2000
- -------------- ----------------------------
Total Revenue $80,405
Net Income 13,837
Earnings Per Share:
Basic .85
Diluted .83
On February 4, 2003, the Company signed a definitive agreement to acquire CFX, a
leading supplier of computational fluid dynamics software and services, for a
purchase price of approximately $21 million in cash. The acquisition was
completed in February 2003. The Company has not yet completed its identification
and valuation of the intangible assets acquired. After allocation to the
identifiable assets and liabilities, the remaining excess of the purchase price
over the value of net assets acquired will be attributed to goodwill.
32
ANSYS Inc. 2002 Annual Report
4. Other Current Assets
The Company reports accounts receivable related to the portion of annual lease
licenses and software maintenance that has not yet been recognized as revenue as
a component of other current assets. These amounts totaled $11.5 million and
$10.3 million as of December 31, 2002 and 2001, respectively.
5. Property and Equipment
Property and equipment consists of the following:
(in thousands) Estimated Useful Lives December 31, 2002 December 31, 2001
- -------------- ---------------------- ----------------- -----------------
Equipment 2-5 years $ 10,369 $ 9,048
Computer software 1-5 years 4,296 4,275
Furniture 5-7 years 1,072 1,057
Leasehold improvements 5-7 years 885 873
16,622 15,253
Less: accumulated depreciation and amortization (12,320) (10,338)
$ 4,302 $ 4,915
Depreciation and amortization expense related to property and equipment was
approximately $2,262,000, $2,360,000 and $1,994,000 for the years ended December
31, 2002, 2001, and 2000, respectively.
6. Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses. Identifiable intangible
assets acquired in business combinations are recorded based upon fair market
value at the date of acquisition.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets." This standard changes the
accounting for goodwill and certain other intangible assets from the
amortization method to an impairment only approach. The standard also requires a
reassessment of the useful lives of identifiable intangible assets other than
goodwill and at least an annual test for impairment of goodwill and intangibles
with indefinite lives.
In accordance with the requirements of SFAS No. 142, the Company tested the
goodwill attributable to each of its reporting units for impairment as of
January 1, 2002 and concluded that its goodwill was not impaired. Fair value was
estimated using discounted cash flow methodologies and market comparable
information. The Company will test goodwill for impairment annually in
connection with its strategic planning process.
In addition, the Company reassessed the useful lives of its identifiable
intangible assets and determined that the lives were appropriate other than for
the Company's acquired trademark, which was concluded to have an indefinite
useful life. As a result, the Company ceased amortization of the cost of this
trademark as of January 1, 2002. Also, in accordance with the requirements of
SFAS No. 142, the Company tested the trademark for impairment by comparing the
fair value of the trademark to its carrying value as of January 1, 2002.
Prior to the adoption of the provisions of SFAS No. 142, substantially all
of the Company's goodwill and acquired trademarks were amortized on a
straight-line basis, over a period of five to ten years. Prior to the adoption
of SFAS No. 142, the Company had separately identified and valued the assembled
workforce associated with the acquisition of ICEM CFD as an intangible asset. In
accordance with the guidance in SFAS No. 142, the net unamortized balance of
$1,500,000 was reclassified to goodwill.
33
ANSYS Inc. 2002 Annual Report
The following table sets forth the condensed consolidated pro forma results
of operations for the years ended December 31, 2002, 2001 and 2000 as if SFAS
No. 142 had been in effect for all periods:
Year Ended December 31,
---------------------------
(in thousands) 2002 2001 2000
- -------------- ------- ------- -------
Net income:
Reported net income $18,959 $13,692 $16,310
Add back: Goodwill and trademark amortization, net -- 2,626 964
Adjusted net income 18,959 16,318 17,274
Earnings per share - basic:
Reported earnings per share - basic 1.30 .94 1.03
Add back: Goodwill and trademark amortization, net -- .18 .06
Adjusted earnings per share - basic 1.30 1.12 1.09
Earnings per share - diluted:
Reported earnings per share - diluted 1.22 .89 1.00
Add back: Goodwill and trademark amortization, net -- .17 .06
Adjusted earnings per share - basic $ 1.22 $ 1.06 $ 1.06
The changes in goodwill during the years ended 2002 and 2001 are as follows:
Year Ended December 31,
-----------------------
(in thousands) 2002 2001
- -------------- ------- -------
Beginning balance $16,412 $12,529
ICEM CFD acquisition payment -- 4,660
CADOE acquisition payment 570 1,289
Sales territory acquisitions 1,527 1,191
Foreign exchange translation 266 4
Other (160) 90
Amortization expense -- (3,351)
Ending balance $18,615 $16,412
34
Identifiable intangible assets with finite lives continue to be amortized
on a straight-line basis over their estimated useful lives (2 to 10 years) and
are reviewed for impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable.
Other intangible assets consists of the following:
(in thousands) Estimated Useful Lives December 31, 2002 December 31, 2001
- -------------- ---------------------- ----------------- -----------------
Amortized intangible assets:
Non-compete agreements 2-5 years $ 2,367 $ 2,280
Less: accumulated amortization (880) (400)
Customer list 5 years 1,407 1,407
Less: accumulated amortization (657) (376)
Acquired software/core technology 3-10 years 4,675 4,335
Less: accumulated amortization (2,171) (1,104)
$ 4,741 $ 6,142
Unamortized intangible assets:
Trademarks 357 357
$ 5,098 $ 6,499
Amortization expense for amortized intangible assets was $1,743,000,
$1,649,000 and $1,090,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, and is expected to be approximately $1,482,000, $961,000, $738,000
and $199,000 for the years ending December 31, 2003, 2004, 2005 and 2006,
respectively.
7. Income Taxes
Income before income tax provision includes the following:
(in thousands) December 31, 2002 December 31, 2001 December 31, 2000
- -------------- ----------------- ----------------- -----------------
Domestic $26,058 $18,497 $21,763
Foreign 1,327 1,485 1,395
Total $27,385 $19,982 $23,158
The provision for income taxes is comprised of the following:
(in thousands) December 31, 2002 December 31, 2001 December 31, 2000
- -------------- ----------------- ----------------- -----------------
Current:
Federal $6,912 $5,562 $5,701
State 582 318 246
Foreign 701 1,210 942
Deferred:
Federal 212 (696) (34)
State 19 (104) (7)
Total $8,426 $6,290 $6,848
35
ANSYS Inc. 2002 Annual Report
The reconciliation of the U.S. federal statutory tax rate to the consolidated
effective tax rate is as follows:
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.1 1.0 0.7
Research and experimentation credit (1.5) (1.5) (1.7)
Non-deductible goodwill -- 3.5 1.0
Export benefits (4.3) (6.6) (5.0)
Other (0.5) 0.1 (0.4)
30.8% 31.5% 29.6%
The components of deferred tax assets and liabilities are as follows:
(in thousands) December 31, 2002 December 31, 2001
- -------------- ----------------- -----------------
Deferred tax assets:
Goodwill $ 2,789 $ 3,259
Other intangible assets 835 459
Acquired software 2,610 3,170
Allowance for doubtful accounts 420 515
Deferred revenue 1,523 1,213
Other 748 529
8,925 9,145
Deferred tax liabilities:
Property and equipment (125) (91)
Other (2,015) (2,038)
(2,140) (2,129)
Net deferred tax assets $ 6,785 $ 7,016
Based upon the Company's current and historical taxable income and the
anticipated level of future taxable income, management believes it is more
likely than not that all of the deferred tax assets will be realized.
Accordingly, no valuation allowance has been established against the deferred
tax assets.
The Company currently intends that taxable undistributed earnings of its
foreign subsidiaries will be permanently reinvested outside of the United
States. As such, a deferred tax liability has not been provided on the
unremitted earnings of the Company's foreign subsidiaries.
8. Pension and Profit-Sharing Plans
The Company maintains both a money purchase pension plan (the "Pension
Plan") and a 401(k) / profit-sharing plan (the "Profit-Sharing Plan") for all
qualifying full-time employees. The Pension Plan is a noncontributory plan and
requires the Company to contribute 5% of each participant's eligible
compensation. The 401(k) feature of the Profit-Sharing Plan permits employee
contributions up to 10% of eligible compensation. The Company makes matching
contributions on behalf of each participant in an amount equal to 100% of the
employee contribution up to a maximum of 5% of employee compensation. There is a
five year graduated vesting schedule for employer contributions. Under the
profit-sharing provisions of the plan, the Company contribution is determined
annually by the Board of Directors, subject to a maximum limitation of 5% of
eligible compensation.
Total expense related to the Pension and Profit-Sharing plans was
$1,889,000 in 2002, $2,121,000 in 2001 and $1,712,000 in 2000.
36
ANSYS Inc. 2002 Annual Report
9. Non-Compete and Employment Agreements
In accordance with the acquisition of ICEM CFD (see Note 3), the existing
stockholders of ICEM CFD agreed to non-competition clauses restricting certain
competitive business activities for periods of two or five years, depending on
the involvement of each stockholder in the daily operations of the business.
Additionally, the existing CADOE stockholders agreed to similar non-competition
clauses for a period of four years in connection with the acquisition of CADOE
by ANSYS.
The Company has entered into an employment agreement with the Chairman of
its Board of Directors. In the event the Chairman is terminated without cause,
his employment agreement provides for severance at the annual rate of $300,000
for the later of a period of one year after termination or when he accepts other
employment. The Chairman is subject to a one-year restriction on competition
following termination of employment under the circumstances described in the
contract.
The Company also has an agreement with the Chief Executive Officer. This
agreement provides for, among other things, severance payments totaling
$300,000, in equal semi-monthly installments, through the first anniversary of
the termination date if the Chief Executive Officer is terminated without cause.
The Company is currently negotiating a more comprehensive employment contract
with its Chief Executive Officer.
10. Stock Option and Grant Plans
The Company has two stock option and grant plans -- the 1994 Stock Option
and Grant Plan ("1994 Stock Plan") and the 1996 Stock Option and Grant Plan
("1996 Stock Plan"). The 1994 and 1996 Stock Plans, as amended, authorize the
grant of up to 868,110 and 4,250,000 shares, respectively, of the Company's
common stock in the form of: (i) incentive stock options ("ISOs"), (ii)
nonqualified stock options or (iii) the issuance or sale of common stock with or
without vesting or other restrictions. Additionally, the 1996 Stock Plan permits
the grant of common stock upon the attainment of specified performance goals and
the grant of the right to receive cash dividends with the holders of the common
stock as if the recipient held a specified number of shares of the common stock.
No further grants may be made under the 1994 Stock Plan.
The 1994 and 1996 Stock Plans provide that: (i) the exercise price of an
ISO must be no less than the fair value of the stock at the date of grant and
(ii) the exercise price of an ISO held by an optionee who possesses more than
10% of the total combined voting power of all classes of stock must be no less
than 110% of the fair market value of the stock at the time of grant. The Board
of Directors has the authority to set expiration dates no later than ten years
from the date of grant (or five years for an optionee who meets the 10%
criteria), payment terms and other provisions for each grant. Shares associated
with unexercised options or reacquired shares of common stock become available
for options or issuances under the 1996 Stock Plan. The Compensation Committee
of the Board of Directors may, at its sole discretion, accelerate or extend the
date or dates on which all or any particular award or awards granted under the
1994 and 1996 Stock Plans may vest or be exercised. In the event of a merger,
liquidation or sale of substantially all of the assets of the Company, the Board
of Directors has the discretion to accelerate the vesting of the options granted
under the 1994 and 1996 Stock Plans, except that options granted to Independent
Directors vest automatically. Under certain scenarios, other optionees may also
automatically vest upon the occurrence of such an event. In addition, the 1994
and 1996 Stock Plans and the grants issued thereunder terminate upon the
effectiveness of any such transaction or event, unless a provision is made in
connection with such transaction for the assumption of grants theretofore made.
Under the 1996 Stock Plan, at the discretion of the Compensation Committee, any
option may include a "reload" feature. Such feature allows an optionee
exercising an option to receive, in addition to the number of shares of common
stock due on the exercise, an additional option with an exercise price equal to
the fair market value of the common stock on the date such additional option is
granted.
In addition, the 1996 Stock Plan provides for the automatic grant of
non-qualified options to Independent Directors. Under such provisions, options
to purchase that number of shares of common stock determined by dividing
$200,000 by the option exercise price will be granted to each individual when he
or she first becomes a member of the Board of Directors, provided that he or she
is not an employee of the Company. In addition, in 1998 the Board of Directors
amended the 1996 Stock Plan to provide that on the date five business days
following each annual meeting of stockholders of the Company, each Independent
Director who is then serving will be granted an option to purchase 12,000 shares
of common stock at the option exercise price. Options granted to Independent
Directors under the foregoing provisions will vest in annual installments over
four years, commencing with the date of grant, and will expire ten years after
the grant, subject to earlier termination if the optionee ceases to serve as a
director. The exercisability of these options will be accelerated upon the
occurrence of a merger, liquidation or sale of substantially all of the assets
of the Company.
37
ANSYS Inc. 2002 Annual Report
Information regarding stock option transactions is summarized below:
Year Ended December 31,
------------------------------------------------------------
2002 2001 2000
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(options in thousands) Options Price Options Price Options Price
- ---------------------- ------- -------- ------- -------- ------- --------
Outstanding, Beginning of Year 2,852 $11.60 2,763 $ 9.18 2,467 $ 8.30
Granted 443 $21.16 774 $17.53 805 $10.53
Exercised (442) $ 9.33 (582) $ 8.87 (259) $ 7.12
Cancelled (83) $14.33 (103) $ 7.56 (250) $ 9.21
Outstanding, end of year 2,770 $13.10 2,852 $11.60 2,763 $ 9.18
Exercisable, end of year 1,304 $ 9.71 1,117 $ 8.83 1,131 $ 8.84
Information regarding stock options outstanding as of December 31, 2002 is
summarized below:
(options in thousands) Options Outstanding Options Exercisable
- ---------------------- ------------------------------------------- --------------------------
Weighted Average
Remaining Weight Average Weighted Average
Range of Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- ------------------------ ------- ---------------- -------------- ------- ----------------
$ .40 - $ 2.40 75 2.75 years $ 1.90 75 $ 1.90
$ 6.00 - $10.00 889 5.62 years $ 8.24 757 $ 8.27
$10.00 - $14.08 816 7.21 years $10.98 335 $10.87
$18.70 - $26.56 990 9.09 years $20.00 137 $19.06
The Company has elected to account for stock-based compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock-Based Compensation." The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense has been recognized for
options which have been issued under the 1994 and 1996 Stock Plans. Had
compensation cost for the Company's two stock option and grant plans been
determined based upon the fair value at the grant date for the option awards in
2002, 2001 and 2000, consistent with the provisions of SFAS No. 123, the
Company's net income and basic and diluted earnings per share would have been
reduced to the pro forma amounts indicated below:
(in thousands, except per share data) 2002 2001 2000
- ------------------------------------- ------- ------- -------
Net income - as reported $18,959 $13,692 $16,310
Net income - pro forma 15,898 11,295 14,132
Basic earnings per share - as reported $ 1.30 $ .94 $ 1.03
Basic earnings per share - pro forma 1.09 .78 .89
Diluted earnings per share - as reported 1.22 .89 1.00
Diluted earnings per share - pro forma 1.02 .73 .87
The weighted-average fair value of options granted was $11.85 per share in
2002, $10.13 per share in 2001 and $6.22 per share in 2000.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the risk-free interest rates ranging
from 3.23%-4.50% for 2002, 3.80%-5.01% for 2001 and 5.22%-6.79% for 2000. The
interest rates used were determined by using the five-year Treasury Note rate at
the date of grant. The following assumptions were also used to determine the
fair value of each option grant: dividend yields of 0%; expected volatility of
62%, 64% and 63% for 2002, 2001 and 2000, respectively, and expected term of
five years.
38
ANSYS Inc. 2002 Annual Report
11. Stock Repurchase Program
On October 25, 2001, the Company announced that its Board of Directors had
amended its common stock repurchase program to acquire up to an additional one
million shares, or four million shares in total under the program that was
initially announced in February 2000. Under this program, ANSYS repurchased
504,900 and 374,700 shares in 2002 and 2001, respectively. In addition to the
repurchases under this program, the Company also purchased 866,300 shares in a
privately negotiated transaction during 2001. As of December 31, 2002, 1.1
million shares remained authorized for repurchase under the program.
12. Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on April 19, 1996 and was subsequently
approved by the Company's stockholders. Up to 210,000 shares of common stock may
be sold under the Purchase Plan. The Purchase Plan is administered by the
Compensation Committee. Offerings under the Purchase Plan commence on each
February 1 and August 1, and have a duration of six months. An employee who owns
or is deemed to own shares of stock representing in excess of 5% of the combined
voting power of all classes of stock of the Company may not participate in the
Purchase Plan.
During each offering, an eligible employee may purchase shares under the
Purchase Plan by authorizing payroll deductions of up to 10% of his cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 960 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his accumulated
payroll deductions will be used to purchase common stock on the last business
day of the period at a price equal to 85% of the fair market value of the common
stock on the first or last day of the offering period, whichever is lower. Under
applicable tax rules, an employee may purchase no more than $25,000 worth of
common stock in any calendar year. At December 31, 2002, 145,125 shares of
common stock had been issued under the Purchase Plan of which 125,658 were
issued as of December 31, 2001.
13. Leases
In January 1996, the Company entered into a lease agreement with an
unrelated third party for a new corporate office facility, which the Company
occupied in February 1997. The lease agreement is for ten years, with an option
for five additional years, and includes scheduled rent increases at the end of
the fifth year and tenth year, if the option is exercised. The Company incurred
lease rental expense related to this facility of $1,354,000 in 2002 and
$1,227,000 in 2001 and 2000. Future minimum lease payments for the next four
years under the facility lease are $1,354,000 per annum in 2003 through 2006.
The Company has also entered into various noncancellable operating leases
for equipment and sales offices. Lease rental expense related to these leases
totaled $1,394,000, $1,232,000 and $908,000 for the years ended December 31,
2002, 2001 and 2000, respectively. Future minimum lease payments under
noncancellable operating leases for equipment and sales offices in effect at
December 31, 2002 are $809,000 in 2003, $515,000 in 2004, $354,000 in 2005,
$106,000 in 2006 and $22,000 in 2007.
14. Royalty Agreements
The Company has entered into various renewable, nonexclusive license
agreements under which the Company has been granted access to the licensor's
patent technology and the right to sell the patent technology in the Company's
product line. Royalties are payable to developers of the software at various
rates and amounts generally based upon unit sales or revenue. Royalty fees,
which are included in cost of sales, were approximately $1,041,000, $939,000 and
$884,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
39
ANSYS Inc. 2002 Annual Report
15. Geographic Information
Revenue by geographic area is as follows:
United Other Other
(in thousands) States Canada Germany Europe Japan International Total
- -------------- ------- ------ ------- ------- ------- ------------- -------
Year ended December 31, 2002 $39,577 $1,863 $ 8,743 $21,179 $10,380 $9,269 $91,011
Year ended December 31, 2001 38,693 1,659 10,434 15,094 11,000 7,956 84,836
Year ended December 31, 2000 34,304 1,757 8,595 14,752 8,843 6,216 74,467
Long-lived assets (excluding deferred tax assets) by geographic area is as
follows:
United Other
(in thousands) States Europe International Total
- ------------- ------- ------ ------------- -------
As of December 31, 2002 $24,238 $5,002 $232 $29,472
As of December 31, 2001 24,773 4,080 290 $29,143
16. Contingencies
The Company had an outstanding irrevocable standby letter of credit for
$1,524,000 at December 31, 2002. This letter of credit was issued as a guarantee
for damages that could be awarded related to a legal matter in which the Company
was involved. The fair value of the letter of credit approximates the contract
value based on the nature of the fee arrangements with the issuing bank. No
material losses on this commitment have been incurred, nor are any anticipated.
From time to time the Company is involved in various legal proceedings,
lawsuits and claims, including employment and contract matters considered normal
to its business. Management believes, after consulting with legal counsel, that
the ultimate liabilities, if any, resulting from such lawsuits and claims will
not materially affect the Company's financial position, liquidity or results of
operations.
17. Earnings Per Share
Basic earnings per share ("EPS") amounts are computed by dividing earnings
by the average number of common shares outstanding during the period. Diluted
EPS amounts assume the issuance of common stock for all potentially dilutive
equivalents outstanding.
The details of basic and diluted earnings per share are as follows:
(in thousands, except per share data) 2002 2001 2000
- ------------------------------------- ------- ------- -------
Net income $18,959 $13,692 $16,310
Weighted average shares outstanding - basic 14,598 14,554 15,804
Basic earnings per share $ 1.30 $ .94 $ 1.03
Effect of dilutive securities:
Shares issuable upon exercise of dilutive
outstanding restricted stock and stock options 996 884 465
Weighted average shares outstanding - diluted 15,594 15,438 16,269
Diluted earnings per share $ 1.22 $ .89 $ 1.00
Anti-dilutive shares/options 177 541 201
40
ANSYS Inc. 2002 Annual Report
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal Quarter Ended
---------------------------------------------------
December 31, September 30, June 30, March 31,
(in thousands, except per share data) 2002 2002 2002 2002
- ------------------------------------- ------------ ------------- -------- ---------
Revenue $25,267 $21,745 $22,734 $21,265
Gross profit 22,188 18,724 19,925 18,414
Operating income 9,301 5,800 6,468 5,505
Net income 6,269 4,082 4,720 3,888
Earnings per share - basic .43 .28 .32 .27
Earnings per share - diluted .41 .26 .30 .25
Common stock price per share(1):
High 21.50 23.99 29.12 27.28
Low 14.01 16.90 18.36 21.90
Fiscal Quarter Ended
---------------------------------------------------
December 31, September 30, June 30, March 31,
(in thousands, except per share data) 2001 2001 2001 2001
- ------------------------------------- ------------ ------------- -------- ---------
Revenue $25,073 $20,610 $ 20,931 $18,222
Gross profit 22,040 17,899 17,985 15,559
Operating income 7,662 3,367 4,705 2,814
Net income 5,098 2,654 3,569 2,371
Earnings per share - basic .35 .18 .25 .16
Earnings per share - diluted .33 .17 .24 .15
Common stock price per share(1):
High 27.73 19.15 18.72 13.63
Low 16.80 14.65 11.70 10.13
(1) The company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol: ANSS. The common stock prices shown
are based on the Nasdaq daily closing stock price.
The Company has not paid cash dividends on its common stock as it has
retained earnings for use in its business. The Company intends to review its
policy with respect to the payment of dividends from time to time; however,
there can be no assurance that any dividends will be paid in the future.
On February 8, 2003, there were 247 shareholders of record and
approximately 4,500 beneficial shareholders of the Company's common stock.
41
ANSYS Inc. 2002 Annual Report
CORPORATE INFORMATION
Shareholder Information
Requests for information about the Company should be directed to:
Mark A. Dozzo, Treasurer, ANSYS Inc., Southpointe
275 Technology Drive, Canonsburg, PA 15317, U.S.A.
Telephone: 724.514.1782
Report on Form 10-K
Stockholders may obtain additional financial information about ANSYS Inc. from
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Copies are available from the Company without charge upon written
request.
Stock Listing
ANSS
Counsel
Goodwin Procter LLP, Boston, MA
Annual Meeting
The Annual Meeting of Stockholders will be held on May 8, 2003 at 2:00 p.m. at
the Southpointe Club, 360 Southpointe Blvd., Canonsburg, PA 15317, U.S.A.
Transfer Agent
Mellon Investor Services, Ridgefield Park, NJ
Independent Accountants
Deloitte & Touche LLP, Pittsburgh, PA
Headquarters
ANSYS Inc.
Southpointe
275 Technology Drive
Canonsburg, PA 15317
U.S.A.
1.866.ANSYS.AI
http://www.ansys.com
ANSYS Inc. is an Equal Opportunity Employer. As such, it is the Company's
policy to promote equal employment opportunity and to prohibit discrimination on
the basis of race, color, religion, sex, age, national origin, disability or
status as a veteran in all aspects of employment including recruiting, hiring,
training or promoting personnel. In fulfilling this commitment, the Company
shall comply with the letter and spirit of the laws, regulations and Executive
Orders governing equal opportunity in employment; including the Civil Rights Act
of 1964, Executive Order 11246, Revised Order Number 4 and amendments thereto.
ANSYS, AI*NASTRAN, AI*Environment and DesignSpace are Trademarks or
registered Trademarks of ANSYS Inc. and its subsidiaries located in the United
States or other countries. NASTRAN is a registered trademark of the National
Aeronautics Space Administration. All other trademarks and registered trademarks
are the property of their respective owners.