FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------
Pro Forma
Combined(1)
(in thousands, except per share data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 56,553 $ 50,547 $ 47,066 $ 39,616 $ 32,823
Operating income 15,206 10,731 3,674 1,360 2,307
Net income (loss) 11,349 7,400 1,304 (1,580) 257
Net income (loss)
per basic share after
extraordinary item(2) .71 .47 .08 (.18) --
Weighted average
shares - basic(2) 16,052 15,742 14,000 11,354 --
Net income (loss) per
diluted share after
extraordinary item(2) .68 .45 .07 (.17) --
Weighted average
shares - diluted(2) 16,581 16,518 14,906 12,204 --
Total assets $ 67,998 $ 54,566 $ 43,431 $ 42,921 $ 44,669
Working capital 38,049 23,761 14,691 3,196 1,822
Long-term obligations -- -- -- 33,204 37,696
Redeemable preferred stock -- -- -- 4,892 4,447
Stockholders' equity 52,367 40,414 32,974 (10,028) (7,985)
- ----------------------------------------------------------------------------------------------------------------
(1) The results of operations of the Predecessor Company for the two and one-
half months ended March 13, 1994 have been combined with the results of
operations of the Company for the nine and one-half months ended December
31, 1994 by adding corresponding items without adjustment. This
computation, which is reflected as Pro Forma Combined for 1994, was done to
permit useful comparison between the years presented.
(2) The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," issued in February 1997. This Statement requires
the disclosure of basic and diluted earnings per share and revises the
method to calculate these amounts. Earnings per share data for periods
prior to 1997 have been restated to reflect adoption of this Statement.
[GRAPH OF CASH, CASH EQUIVALENTS
[GRAPH OF TOTAL REVENUE] AND SHORT-TERM INVESTMENTS]
(in millions of dollars) (in milions of dollars)
ANSYS, Inc. 1998 Annual Report
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ANSYS, Inc. (the "Company") is a leading international supplier of analysis
and engineering software for optimizing the design of new products. The Company
is committed to providing the most open and flexible analysis solutions to suit
customer requirements for engineering software in today's competitive
marketplace. In addition, the Company partners with leading design software
suppliers to develop state-of-the-art computer-aided design ("CAD") integrated
products. Sales, support and training for customers are provided primarily
through the Company's global network of ANSYS Support Distributors ("ASDs"). The
Company distributes its ANSYS(R) and DesignSpace(R) product lines through its
ASDs, certain direct sales offices, as well as a network of independent
distributors and dealers (value-added resellers or "VARs"). The following
discussion should be read in conjunction with the audited consolidated financial
statements and notes thereto included elsewhere in this report.
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 the "Important Factors Regarding Future Results" beginning on page
17.
For purposes of the following discussion and analysis, the following table
sets forth certain consolidated financial data for the years 1998, 1997 and
1996.
- ----------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
Revenue:
Software licenses $35,463 $35,083 $37,013
Maintenance and service 21,090 15,464 10,053
- ----------------------------------------------------------------------------------------
Total revenue 56,553 50,547 47,066
- ----------------------------------------------------------------------------------------
Cost of sales:
Software licenses 3,404 2,833 3,051
Maintenance and service 2,661 2,365 2,337
- ----------------------------------------------------------------------------------------
Total cost of sales 6,065 5,198 5,388
- ----------------------------------------------------------------------------------------
Gross profit 50,488 45,349 41,678
Operating expenses:
Selling and marketing 13,137 11,834 9,722
Research and development 11,627 11,004 9,796
Amortization 884 2,797 10,774
General and administrative 9,634 8,983 7,712
- ----------------------------------------------------------------------------------------
Total operating expenses 35,282 34,618 38,004
- ----------------------------------------------------------------------------------------
Operating income 15,206 10,731 3,674
Interest expense -- (1) (1,669)
Other income 1,931 912 611
- ----------------------------------------------------------------------------------------
Income before income tax provision and extraordinary item 17,137 11,642 2,616
Income tax provision 5,788 4,242 969
- ----------------------------------------------------------------------------------------
Net income before extraordinary item 11,349 7,400 1,647
Extraordinary item, net -- -- (343)
- ----------------------------------------------------------------------------------------
Net income $11,349 $ 7,400 $ 1,304
- ----------------------------------------------------------------------------------------
ANSYS, Inc. 1998 Annual Report
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
REVENUE. The Company's total revenue increased 11.9% in 1998 to $56.6 million
from $50.5 million in 1997. The increase in total revenue in 1998 as compared to
1997 was attributable principally to an increase in revenue from renewals and
sales of noncancellable annual leases, for which a portion of the annual license
fee is recognized as paid-up revenue upon renewal or inception of the lease,
while the remaining portion is recognized ratably over the remaining lease
period. This increase, which was partially offset by a decrease in monthly lease
license revenue, as described below, was due, in part, to the active sales and
licensing of noncancellable annual leases to existing and new lease customers.
The increase in total revenue in 1998 was also attributable to increased
maintenance and service revenue, which resulted from broader customer usage of
maintenance and support services and the Company's continued emphasis on the
marketing and promotion of these services.
Software license revenue totaled $35.5 million in 1998 as compared to $35.1
million in 1997, an increase of 1.1%. The increase resulted principally from an
increase in revenue from renewals and sales of noncancellable annual leases and,
to a lesser extent, an increase in sales of paid-up licenses in international
markets. Revenue from the sale of paid-up licenses and the portion of
noncancellable annual leases classified as paid-up revenue increased 29.6% in
1998 to $29.2 million from $22.6 million in 1997. This increase was partially
attributable to a refinement of management's estimate relative to the allocation
of noncancellable annual lease revenue between paid-up and maintenance revenue.
The refinement, which management believes more accurately reflects the Company's
current pricing and business practices, resulted in a net revenue increase of
approximately $1.3 million during 1998. The increase in software license revenue
was substantially offset by a 50.3% decrease in monthly lease license revenue to
$6.2 million in 1998 from $12.5 million in 1997. This decrease was attributable
to both an increase in the renewal of existing monthly leases as noncancellable
annual leases and, to a much lesser extent, the conversion of certain existing
leases to paid-up licenses.
Maintenance and service revenue increased from $15.5 million in 1997 to $21.1
million in 1998. Contributing to the increase were broader customer usage of
maintenance and support services and the Company's increased emphasis on
marketing and promoting these services, as well as an increase in the renewal
and sale of noncancellable annual leases.
Of the Company's total revenue in 1998, approximately 54.4% and 45.6%,
respectively, were attributable to international and domestic sales, as compared
to 53.2% and 46.8%, respectively, in 1997.
COST OF SALES AND GROSS PROFIT. The Company's total cost of sales increased
16.7% to $6.1 million, or 10.7% of total revenue, in 1998 from $5.2 million, or
10.3% of total revenue, in 1997. The Company's cost of sales for software
license revenue increased 20.2% in 1998 to $3.4 million, or 9.6% of software
license revenue, from $2.8 million, or 8.1% of software license revenue, in
1997. The increase was due to additional headcount and related expenses,
increased salaries and higher costs associated with the printing of manuals,
packing supplies, media and royalty fees. The Company's cost of sales for
maintenance and service revenue totaled $2.7 million and $2.4 million, or 12.6%
and 15.3% of maintenance and service revenue, in 1998 and 1997, respectively.
The increase was primarily attributable to increases in salaries, benefits and
consulting fees as additional staff and consultants were added to support the
growth in global service revenue and related customer and ASD support needs. The
increases in cost of sales for both licenses and maintenance and services
discussed above were partially offset by lower pension and profit-sharing costs
resulting from plan amendments in fiscal 1998.
As a result of the foregoing, the Company's gross profit increased 11.3% to
$50.5 million in 1998 from $45.3 million in 1997.
SELLING AND MARKETING. Selling and marketing expenses increased 11.0% in 1998 to
$13.1 million, or 23.2% of total revenue, from $11.8 million, or 23.4% of total
revenue, in 1997. The increase was principally the result of increased
consulting and sales support costs incurred in connection with supporting a
global sales and marketing infrastructure. Additionally, during 1998 the Company
experienced an increase in expenses directly associated with its worldwide
users' conference and increased expenses associated with strategic office
locations in the United Kingdom, China and Japan. The Company anticipates that
it will continue to make significant investments in its global sales and
marketing organization to strengthen its competitive position and to support its
worldwide sales channels and marketing strategies. These increases were
partially offset by lower sales commissions and pension and profit-sharing
costs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 5.7% in
1998 to $11.6 million, or 20.6% of total revenue, from $11.0 million, or 21.8%
of total revenue, in 1997. The increase resulted primarily from additional
headcount and related expenses, higher salaries and increased consulting costs
associated with the releases of ANSYS 5.5 and DesignSpace 4.0, as well as
increased computer software costs and hardware-related depreciation expense as
the Company continued to invest in software and hardware tools used to develop
and enhance the Company's products. These increases were partially offset by a
reduction in pension and profit-sharing costs. The Company has traditionally
invested significant resources in research and development activities and
intends to continue to make significant investments in the future.
ANSYS, Inc. 1998 Annual Report
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AMORTIZATION. Amortization expense was $884,000 in 1998 and $2.8 million in
1997. The decrease was attributable to certain intangible assets, including
goodwill and capitalized software, becoming fully amortized during the first
quarter of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 7.2%
in 1998 to $9.6 million, or 17.0% of total revenue, from $9.0 million, or 17.8%
of total revenue, in 1997. The increase was primarily attributable to an
increase in salaries and headcount and related expenses, as well as higher
depreciation expense attributable to computer hardware and software. These
increases resulted as the Company continued to add internal information
technology, financial and administrative resources to support its global
operations and infrastructure. These increases were partially offset by
decreases in both pension and profit-sharing costs, as well as bad debt expense.
OTHER INCOME. Other income increased to $1.9 million in 1998 as compared to
$912,000 in 1997. The increase was primarily attributable to higher interest-
bearing cash and short-term investment balances in 1998.
INCOME TAX PROVISION. The Company's effective rate of taxation was 33.8% in 1998
as compared to 36.4% in 1997. The lower 1998 rate is primarily the result of a
full year of benefit related to the use of a foreign sales corporation that was
established in the fourth quarter of 1997. The effective rates in both 1998 and
1997 are less than the federal and state combined statutory rates due primarily
to the utilization of research and experimentation credits as well as the impact
of the foreign sales corporation.
NET INCOME. The Company's net income increased 53.4% to $11.3 million, or $.68
diluted earnings per share, in 1998 as compared to net income of $7.4 million,
or $.45 diluted earnings per share, in 1997. The weighted average common and
common equivalent shares used in computing diluted earnings per share were 16.6
million in 1998 compared with 16.5 million in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. The Company's total revenue increased 7.4% in 1997 to $50.5 million
from $47.1 million in 1996. The increase in total revenue in 1997 as compared to
1996 was attributable principally to an increase in revenue from renewals and
sales of noncancellable annual leases. The increase, which was partially offset
by decreases in monthly lease license revenue and paid-up license revenue, was
due, in part, to the active sales and licensing of noncancellable annual leases
to existing and new lease customers during 1997. The increase in total revenue
in 1997 was also attributable to increased maintenance revenue, which resulted
from broader customer usage of maintenance and support services and the
Company's continued emphasis on marketing its maintenance services.
The comparison of the Company's revenue in 1997 and 1996 is affected by the
Company's change in licensing and sales practices as they related to leases.
Beginning in the third quarter of 1996, the Company began to promote sales and
renewals of noncancellable annual leases, for which a portion of the annual
license fee is recognized as paid-up revenue upon renewal or inception of the
lease, while the remaining portion is recognized as maintenance revenue ratably
over the remaining lease period. Prior to the third quarter of 1996, the Company
recorded all revenue from lease licenses as license revenue, as earned, because
the underlying lease agreements contained provisions which allowed the customer
to cancel the lease with 30 days notice. The effect of this change generally was
to increase paid-up revenue attributable to sales and renewals of leases and to
increase maintenance revenue for 1997 relative to 1996, while resulting in a
corresponding decrease in monthly lease license revenue. Had this change not
been initiated, software license revenue would have been reported as $37.9
million in 1997 as compared to $37.4 million in 1996, while maintenance and
service revenue would have been reported as $12.3 million and $9.6 million in
1997 and 1996, respectively.
Software license revenue decreased 5.2% in 1997 to $35.1 million from $37.0
million in 1996, resulting principally from existing monthly lease customers
shifting to noncancellable annual leases in connection with the renewals of
their leases, thereby reducing the portion of their lease fees characterized as
license revenue, as described above. The decrease was also due to a decrease in
the sale of paid-up licenses in the domestic market as compared to the prior
year, as paid-up license revenue for 1996 reflected the recognition of
substantial revenue from several large contracts. The foregoing decreases in
monthly lease and paid-up revenue were partially offset by an increase in
revenue from renewals and sales of leases as noncancellable annual leases, as
described above. Revenue from the sale of paid-up licenses, excluding the
portion of noncancellable annual leases classified as paid-up revenue, decreased
4.2% in 1997 to $18.6 million from $19.4 million in 1996. The Company also
experienced a 27.9% decrease in monthly lease license revenue to $12.5 million
in 1997 from $17.4 million in 1996. This decrease was attributable to an
increase in the renewal of existing leases as noncancellable annual leases, as
well as the conversion of certain existing lease licenses to paid-up licenses in
1997. The total revenue recognized from monthly and noncancellable annual leases
was $19.3 million and $18.0 million in 1997 and 1996, respectively, of which
$2.8 million and $400,000 were classified as maintenance revenue in 1997 and
1996, respectively. Maintenance and service revenue, excluding the portion of
noncancellable annual leases recognized as maintenance revenue, increased 31.6%
in 1997 to $12.7 million from $9.6 million in 1996 as a result of broader
customer usage of maintenance and support services, the Company's increased
emphasis on marketing these services as well as an increase in the renewal and
sale of noncancellable annual leases.
Of the Company's total revenue in 1997, approximately 53.2% and 46.8%,
respectively, were attributable to international and domestic sales as compared
to 49.4% and 50.6%, respectively, in 1996.
ANSYS, Inc. 1998 Annual Report
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COST OF SALES AND GROSS PROFIT. The Company's total cost of sales decreased 3.5%
to $5.2 million in 1997 from $5.4 million in 1996, representing 10.3% and 11.4%
of total revenue, respectively. The Company's cost of sales for software license
revenue decreased 7.1% in 1997 to $2.8 million, or 8.1% of software license
revenue, from $3.1 million, or 8.2% of software license revenue, in 1996. The
decrease was due primarily to a reduction in costs related to manuals, packing
supplies and media. The Company's cost of sales for maintenance and service
revenue remained relatively stable at $2.4 million and $2.3 million, or 15.3%
and 23.2% of maintenance and service revenue, for 1997 and 1996, respectively.
As a result of the foregoing, the Company's gross profit increased 8.8% to
$45.3 million in 1997 from $41.7 million in 1996.
SELLING AND MARKETING. Selling and marketing expenses increased 21.7% in 1997 to
$11.8 million, or 23.4% of total revenue, from $9.7 million, or 20.7% of total
revenue, in 1996. This planned growth was attributable principally to increased
personnel costs, including costs associated with increased headcount and
compensation expenses related to the ongoing establishment of a global sales and
marketing organization, as well as the establishment of strategic offices in the
United Kingdom, Michigan and Japan in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 12.3% in
1997 to $11.0 million, or 21.8% of total revenue, from $9.8 million, or 20.8% of
total revenue, in 1996. This increase resulted primarily from employment of
additional staff and independent contractors to develop and enhance the
Company's products, including a dedicated team working on the development of the
Company's DesignSpace products. The increase was partially offset by a decrease
in equipment lease expense.
AMORTIZATION. Amortization expense was $2.8 million in 1997 and $10.8 million in
1996. The decrease was attributable to the full amortization of certain of the
intangible assets which resulted from the acquisition of the Company in 1994
("1994 Acquisition"), including goodwill and capitalized software, which became
fully amortized in the first quarter of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 16.5%
in 1997 to $9.0 million, or 17.8% of total revenue, from $7.7 million, or 16.4%
of total revenue, in 1996. The increase is primarily attributable to expenses
incurred to increase the allowance for doubtful accounts and an increase in
legal fees related to a dispute regarding the expiration of an ASD distribution
agreement. Additionally, the Company added internal legal and financial
resources to support the operations of a publicly owned company, which were
offset by a significant reduction in outside labor and consulting fees.
INTEREST. Interest expense, which was $1,000 in 1997, totaled $1.7 million in
1996. This decrease was attributable to the early repayment of all outstanding
debt related to the 1994 Acquisition with the net proceeds from the Company's
initial public offering in June 1996.
OTHER INCOME. Other income increased in 1997 to $912,000 as compared to $611,000
for 1996. This increase was primarily attributable to higher interest-bearing
cash and investment balances in 1997.
INCOME TAX PROVISION. The Company's effective rate of taxation was 36.4% in
1997, as compared to 37.0% in 1996. These percentages are less than the federal
and state combined statutory rates due primarily to the utilization of research
and experimentation credits as well as the use of a foreign sales corporation
which was established in the fourth quarter of 1997.
NET INCOME. The Company's net income totaled $7.4 million in 1997 as compared to
net income before extraordinary item of $1.6 million in 1996. The Company's net
income including the extraordinary item in 1996 was $1.3 million. Diluted
earnings per share was $.45 in 1997 as compared to diluted earnings per share,
after extraordinary item, of $.07 in 1996. The increase in diluted earnings per
share was attributable to the increase in net income, as well as the elimination
of the preferred stock dividends due to the redemption of the redeemable
preferred stock, which occurred at the time of the Company's initial public
offering in June 1996. The weighted average shares used in computing net income
per diluted common share amounts increased to 16.5 million in 1997 from 14.9
million in 1996 primarily as a result of the initial public offering.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," issued in February 1997, and
has restated prior periods in accordance with this pronouncement.
ANSYS, Inc. 1998 Annual Report
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents and short-term
investments totaling $42.7 million and working capital of $38.0 million, as
compared to cash, cash equivalents and short-term investments of $27.8 million
and working capital of $23.8 million at December 31, 1997. The short-term
investments are generally investment grade and liquid-type, 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 $15.6 million in 1998,
$12.7 million in 1997 and $13.5 million in 1996. The increase in cash generated
from operations in 1998 as compared to 1997 is primarily the result of increased
earnings after the effect of non-cash expenses such as depreciation,
amortization and deferred income taxes. The decrease in cash generated from
operations in 1997 as compared to 1996 is the result of fluctuations within the
individual components of working capital, as well as a decrease in earnings
after the effect of depreciation and amortization. Net cash generated by
operating activities provided sufficient resources to fund increased headcount
and capital needs to support the Company's expansion of its global sales support
network, its continued investment in research and development activities and the
addition of financial and administrative resources during 1998.
Cash used in investing activities was $23.5 million in 1998, $16.1 million in
1997 and $2.6 million in 1996. The Company's use of cash for investing
activities in 1998 and 1997 was primarily related to the purchase of short-term
investments, and to a lesser extent the purchase of computer software, hardware
equipment and furniture for the corporate office facility, while the use of cash
in 1996 was substantially related to capital expenditures. The Company expects
to spend approximately $2.2 million for capital expenditures in 1999,
principally for the acquisition of computer hardware and software to support the
continued growth of the Company's development activities and expansion of its
global sales and support infrastructure.
Financing activities provided cash of $453,000 in 1998 and $336,000 in 1997,
and used cash of $1.9 million in 1996. Cash provided from financing activities
in 1998 and 1997 was substantially related to proceeds from the issuance of
common stock under employee stock purchase and option plans and the reissuance
of treasury shares. Cash provided from financing activities in 1996 was due
primarily to the net proceeds of $41.0 million received from the Company's
initial public offering on June 25, 1996. These proceeds were more than offset
by the repayment of the indebtedness incurred to finance the acquisition of the
Company in 1994, payment of related unpaid interest, the redemption of
redeemable preferred stock and accumulated dividends thereon, issued in
connection with such acquisition.
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.
MANAGEMENT'S ASSESSMENT OF THE YEAR 2000
The year 2000 ("Y2K") problem refers to the inability of software to process
date information later than December 31, 1999. Date codes in many software
programs are abbreviated to allow only two digits for the year. Software with
date-sensitive functions that is not year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. When that happens, some software
will not work at all and other software will suffer critical calculation and
other processing errors. Hardware and other products with embedded chips may
also experience problems.
SOFTWARE PRODUCTS. The Company provides analysis and engineering software for
optimizing the design of new products. The functionality offered by these
products is generally not date dependent and consequently the Company's software
products have minimal date sensitivities or dependencies.
The current releases of the Company's ANSYS and DesignSpace product lines are
Y2K Compliant, as defined below. Management believes that essentially 100% of
its 1998 license and service revenue has been derived from the sale of Y2K
Compliant products and services. The Company defines "Y2K Compliant" as the
ability to meet the British Standards Institution DISC PD 2000-1: Year 2000
conformity requirements. This definition provides that Year 2000 conformity
shall mean that neither performance nor functionality is affected by dates prior
to, during or after the year 2000.
The Company began shipping Y2K Compliant ANSYS products beginning in 1997 with
Release 5.4. The Company believes that versions of the ANSYS products shipped
between 1993 and 1996 should function after December 31, 1999. However, the
Company cannot make a definitive statement regarding these products because they
have not been tested on all platforms or on all versions of operating systems.
Consequently, the Company has advised its customers who may still be using these
older versions to (a) upgrade to later releases of the Company's software, and
(b) verify that their platforms and operating systems support the transition to
the year 2000. ANSYS products shipped prior to 1993 will not function after
December 31, 1999 and the Company has continually advised its customers to
upgrade such products to newer versions.
ANSYS, Inc. 1998 Annual Report
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company began shipping Y2K Compliant DesignSpace products beginning in
1996 with release 2.0, with the exception that the report generator utility
contained in the DesignSpace product may or may not be Y2K Compliant. The report
generator extensively utilizes many Microsoft components whose Y2K compliance
has not yet been determined; consequently, the DesignSpace report generator
utility may or may not be Y2K Compliant.
Some commentators have predicted significant litigation regarding Y2K
compliance issues, and the Company is aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether, or to what extent, the Company may be affected. However, at
this time the Company believes that the existence of earlier versions of its
products that are not Y2K Compliant is not likely to have a material adverse
effect on the Company's financial position or results of operations.
INTERNAL SYSTEMS. The Company has developed a Year 2000 Project Plan ("Y2K
Plan") that addresses both information technology ("IT") systems (i.e., business
systems and the software development environment) and other systems such as
elevators, building security and HVAC systems.
The Y2K Plan includes five phases: 1) raising Company awareness, 2) a company-
wide system inventory, 3) criticality assessment, 4) implementation (including
remediation, upgrading and/or replacement of certain systems) and 5) compliance
certification testing. Phases 1-3 are complete. Phase 4 (implementation) and
Phase 5 (compliance certification testing) are underway in an iterative process
dependent on what may be found during compliance testing. The following graphs
present information on the Company's current overall status of the
implementation and compliance phases of the Y2K Plan, as well as information
regarding expected final testing completion dates. This information, provided in
these graphs, specifically relates to internal systems which have been
identified as high or critical importance during the criticality assessment of
the Y2K Plan.
COMPLIANCE
STATUS
ESTABLISHED
(in percent)
[GRAPH APPEARS HERE]
REMEDIATION
COMPLETE
(in percent)
[GRAPH APPEARS HERE]
FINAL
CERTIFICATION
TESTING
COMPLETE
(in percent)
[GRAPH APPEARS HERE]
COST OF YEAR 2000 COMPLIANCE EFFORTS. The Company has funded its Y2K Plan from
operating cash flows and has not separately accounted for related costs in the
past, partly because the responsibilities and costs are distributed throughout
the organization and represent a small percentage of total operating costs. The
Company's current estimate of total costs to the Company for achieving Y2K
compliance is approximately $500,000 over three years (1997 -- 2000), with about
two-thirds of those costs estimated to already have been incurred. Implementing
the Y2K Plan has caused some delays in other planned IT initiatives; however,
these delays have not had a material effect on the Company's operations. There
can be no assurance, however, that there will not be a delay in the completion
of the Y2K Plan. Such a delay could have a material adverse effect on future
results of operations. The Company may experience unforeseen problems and costs
related to Y2K compliance that could materially adversely affect the Company's
business, results of operations and financial condition.
ANSYS, Inc. 1998 Annual Report
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RISKS AND CONTINGENCIES. The Company has initiated the development of a
comprehensive Y2K contingency plan to address situations that may result if the
Company is unable to achieve Y2K readiness of its critical systems. The
contingency plan is expected to be completed during the second quarter of 1999.
THIRD PARTY RELATIONSHIPS. The Company has contacted its distributors and key
vendors regarding their Y2K compliance efforts. Although the Company has
received information from some of its distributors and vendors regarding their
Y2K compliance efforts, there can be no assurance that the Company will not
experience disruptions in its ability to conduct business because of Y2K
problems experienced by the Company's distributors or vendors. The Company has
no practical means to verify Y2K compliance of independent vendors who have not
yet responded. To the extent that its key distributors or vendors experience
problems relative to achieving Y2K compliance, the Company could suffer
unanticipated revenue losses.
In addition, the Company does not currently have meaningful information
concerning the Y2K compliance status of its customers. As is the case with other
software companies, if significant numbers of the Company's current or future
customers fail to achieve Y2K compliance, or if they divert technology
expenditures away from those that were reserved for computer-aided engineering
("CAE") software to address Y2K compliance problems, the Company's business,
results of operations or financial condition could be materially adversely
affected.
QUALIFICATION. The Year 2000 discussion above contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates" and other similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it and its significant
distributors, customers and suppliers will complete the implementation and
compliance phases of the Y2K Plan, as well as its Year 2000 contingency plans;
its estimated costs related to the Y2K Plan; the effect of earlier versions of
the Company's products or Y2K problems experienced by key distributors, vendors
or customers; and the Company's belief that its internal systems and equipment
will be Y2K Compliant in a timely manner. All forward-looking statements involve
a number of risks and uncertainties that could cause the actual results to
differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources, the ability to identify
and remediate all date-sensitive lines of code or to replace embedded chips in
affected systems or equipment, unanticipated delays or expenses related to
remediation and the actions of independent third parties with respect to Year
2000 problems.
The statements in the previous section include "Year 2000 Readiness
Disclosures" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
CONVERSION TO THE EURO
On January 1, 1999, eleven of the member countries of the European Union
established fixed conversion rates between their existing currencies and one
common currency, the euro. The legacy currencies will remain legal currency in
the participating countries during a transition period through January 1, 2002.
Beginning on this date, new euro-denominated currency will be issued and the
legacy currencies will be withdrawn from circulation.
The Company is currently in the early stages of identifying and addressing
issues that may result from the euro conversion such as changes to information
systems to accommodate euro-denominated transactions, long-term competitive
implications and the exposure to market risk with respect to financial
instruments. Although our assessment of the impact of the euro conversion is not
yet complete, we do not currently believe that the conversion will have a
material adverse impact on the Company's financial position or results of
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires that all
derivatives be carried at fair value and provides for hedge accounting when
certain conditions are met. The Standard is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is currently in the
process of evaluating the prospective impact of Statement No. 133 on its
financial position and results of operations.
ANSYS, Inc. 1998 Annual Report
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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; 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,
which could increase the volatility of the Company's revenue and profit from
period to period. More recently, the Company has also experienced an increase in
renewals and sales of noncancellable annual leases, for which a portion of the
annual license fee is recognized as paid-up revenue upon renewal or inception of
the lease. 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 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.
In addition, a large percentage of the Company's common stock is held by TA
Associates, Inc. and various institutional investors. Consequently, actions with
respect to the Company's common stock by either TA Associates, Inc. or certain
of these institutional investors could have a significant impact on the market
price for the stock.
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 respond quickly to industry changes, its business, financial
condition and results of operations 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 or warranty
costs, any of which could have a materially adverse effect on the Company's
business, financial condition and results of operations.
ANSYS, Inc. 1998 Annual Report
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEPENDENCE ON DISTRIBUTORS. The Company distributes its products principally
through its global network of 35 independent, regional ASDs. The ASDs sell ANSYS
and DesignSpace products to new and existing customers, expand installations
within their existing customer base, offer consulting services and provide the
first line of ANSYS technical support. The ASDs have more immediate contact with
most customers 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 materially
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 MacNeal-Schwendler Corporation, Hibbitt, Karlsson and
Sorenson, Inc. and MARC Analysis Research Corporation. 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, Structural Dynamics
Research Corporation and Dassault Systemes provide varying levels of design
analysis and 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 and
results of operations.
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
entered into employment agreements with two executives, the loss of these, 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 and growing
portion of the Company's business comes from outside the United States. 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 and results of operations could be materially
adversely affected by any of these risks.
Additionally, countries in the Asia-Pacific region, including Japan, 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 position or results of
operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is highly dependent
upon its proprietary technology. The Company does not have patents on any of its
technology and 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.
ANSYS, Inc. 1998 Annual Report
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCREASED RELIANCE ON NONCANCELLABLE ANNUAL LEASES AND PERPETUAL LICENSES. The
Company has historically maintained stable recurring revenue from the sale of
monthly lease licenses for its software products. During certain periods in the
past, the Company experienced an increase in customer preference for perpetual
licenses that involve payment of a single up-front fee and that are more typical
in the computer software industry. Most recently it has experienced an increase
in customer preference for noncancellable annual leases. While monthly lease
license revenue currently represents a portion of the Company's software license
fee revenue, to the extent that noncancellable annual lease license and
perpetual license revenue continue to increase as a percentage of total software
license fee revenue, the Company's revenue in any period will increasingly
depend 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 materially
adverse effect on the Company's business, financial condition and results of
operations.
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 include a current Internal Revenue
Service examination of the Federal income tax return for the fiscal year ended
December 31, 1996. 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.
ANSYS, Inc. 1998 Annual Report
19
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ANSYS, INC. AND SUBSIDIARIES
In our opinion, the accompanying consolidated balance sheets 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
consolidated 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 generally accepted auditing standards 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 28, 1999
ANSYS, Inc. 1998 Annual Report
20
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,589 $13,990
Short-term investments 36,138 13,853
Accounts receivable, less allowance for doubtful
accounts of $1,900 in 1998 and $2,080 in 1997 8,943 8,034
Other current assets 1,848 1,911
Deferred income taxes 162 125
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 53,680 37,913
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale 182 182
Property and equipment, net 3,748 4,771
Capitalized software costs, net of accumulated
amortization of $15,627 in 1998 and $15,471 in 1997 426 260
Goodwill, net of accumulated amortization of
$14,678 in 1998 and $14,671 in 1997 424 --
Other intangibles, net 1,866 2,374
Deferred income taxes 7,672 9,066
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $67,998 $54,566
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 205 $ 235
Accrued bonuses 2,449 2,133
Other accrued expenses and liabilities 3,437 2,608
Customer prepayments 168 746
Deferred revenue 9,372 8,430
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 15,631 14,152
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,395,938 and 16,359,134 shares issued in 1998 and 1997 164 164
Additional paid-in capital 36,657 36,089
Less treasury stock, at cost: 0 shares held in 1998 and 68,800 shares held in 1997 (12)
Retained earnings 15,676 4,327
Accumulated other comprehensive income 120 120
Notes receivable from stockholders (250) (274)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 52,367 40,414
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $67,998 $54,566
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
ANSYS, Inc. 1998 Annual Report
21
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Software licenses $35,463 $35,083 $37,013
Maintenance and service 21,090 15,464 10,053
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 56,553 50,547 47,066
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of sales:
Software licenses 3,404 2,833 3,051
Maintenance and service 2,661 2,365 2,337
- -----------------------------------------------------------------------------------------------------------------------------------
Total cost of sales 6,065 5,198 5,388
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 50,488 45,349 41,678
Operating expenses:
Selling and marketing 13,137 11,834 9,722
Research and development 11,627 11,004 9,796
Amortization 884 2,797 10,774
General and administrative 9,634 8,983 7,712
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 35,282 34,618 38,004
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 15,206 10,731 3,674
Interest expense -- (1) (1,669)
Other income 1,931 912 611
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision and extraordinary item 17,137 11,642 2,616
Income tax provision 5,788 4,242 969
- -----------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item 11,349 7,400 1,647
Extraordinary item, net -- -- (343)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $11,349 $ 7,400 $ 1,304
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock:
Net income $11,349 $ 7,400 $ 1,304
Redeemable preferred stock dividends -- -- (236)
- -----------------------------------------------------------------------------------------------------------------------------------
$11,349 $ 7,400 $ 1,068
Net income per basic common share:
Net income before extraordinary item $ .71 $ .47 $ .10
Extraordinary item -- -- (.02)
Basic earnings per share $ .71 $ .47 $ .08
Weighted average shares - basic 16,052 15,742 14,000
Net income per diluted common share:
Net income before extraordinary item $ .68 $ .45 $ .09
Extraordinary item -- -- (.02)
Diluted earnings per share $ .68 $ .45 $ .07
Weighted average shares - diluted 16,581 16,518 14,906
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
ANSYS, Inc. 1998 Annual Report
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,349 $ 7,400 $ 1,304
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,710 4,170 11,911
Extraordinary item -- -- 553
Deferred income tax provision (benefit) 1,357 725 (2,836)
Provision for bad debts 1,309 1,130 250
Changes in operating assets and liabilities:
Accounts receivable (2,151) (2,857) 108
Other current assets 63 (576) 89
Accounts payable, accrued expenses and liabilities and
customer prepayments 265 (870) 1,232
Deferred revenue 744 3,580 870
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,646 12,702 13,481
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (917) (2,063) (2,544)
Capitalization of internally developed software costs (322) (229) (117)
Purchases of short-term investments (28,533) (13,853) --
Maturities of short-term investments 6,248 -- --
Notes receivable from stockholders 24 28 32
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,500) (16,117) (2,629)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term debt -- -- (21,000)
Proceeds from issuance of restricted stock -- -- 326
Proceeds from issuance of common stock under
Employee Stock Purchase Plan 168 283 --
Proceeds from exercise of stock options 54 50 119
Repayment of subordinated notes -- -- (17,204)
Redemption of preferred stock and accumulated dividends -- -- (5,128)
Proceeds from initial public offering, net of issuance costs of $1,300 -- -- 41,015
Purchase of treasury stock (5) (1) (2)
Proceeds from issuance of treasury stock 236 4 --
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 453 336 (1,874)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (7,401) (3,079) 8,978
Cash and cash equivalents, beginning of year 13,990 17,069 8,091
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,589 $ 13,990 $ 17,069
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 3,245 $ 4,148 $ 2,311
Interest -- -- 2,848
Supplemental noncash investing and financing activities:
Exercise of option for non-compete agreement -- 1,000 --
(Decrease) increase in securities available for sale -- (491) 673
Acquisition of assets net of liabilities assumed of $198 400 -- --
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
ANSYS, Inc. 1998 Annual Report
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Common Stock Class A Common Additional
-------------- --------------- Paid-in
(in thousands) Shares Amount Shares Amount Capital
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 10,626 $106 994 $ 10 $ 1,351
Treasury stock acquired -- -- -- -- --
Issuance of restricted stock 136 1 -- -- 325
Conversion of Class A shares into common stock 994 10 (994) (10) --
Issuance of common stock 3,500 35 -- -- 40,980
Reinstatement of adjustment for predecessor basis -- -- -- -- (7,010)
Exercise of stock options 973 10 109
Dividends accrued on redeemable preferred stock -- -- -- -- --
Repayment of note receivable from stockholder -- -- -- -- --
Net income for the year -- -- -- -- --
Other comprehensive income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 16,229 162 -- -- 35,755
Treasury stock acquired -- -- -- -- --
Treasury stock sold -- -- -- -- 3
Exercise of stock options 92 1 -- -- 49
Issuance of common stock under Employee
Stock Purchase Plan 38 1 -- -- 282
Repayment of note receivable from stockholder -- -- -- -- --
Net income for the year -- -- -- -- --
Other comprehensive income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 16,359 164 36,089
Treasury stock acquired -- -- -- -- --
Treasury stock sold -- -- -- -- 221
Exercise of stock options 27 -- -- -- 180
Issuance of common stock under Employee
Stock Purchase Plan 10 -- -- -- 167
Repayment of note receivable from stockholder -- -- -- -- --
Net income for the year -- -- -- -- --
Other comprehensive income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 16,396 $164 -- $ -- $36,657
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
ANSYS, Inc. 1998 Annual Report
24
- ------------------------------------------------------------------------------------------------------
Adjustment Accumulated Notes
for Treasury Stock Retained Other Receivable Total Total
Predecessor --------------- Earnings Comprehensive from Stockholders' Comprehensive
Basis Shares Amount (Deficit) Income Stockholders Equity Income
- ------------------------------------------------------------------------------------------------------ ---------------
$(7,010) 55 $(10) $(4,141) -- $(334) $(10,028)
-- 17 (2) -- -- -- (2)
-- -- -- -- -- -- 326
-- -- -- -- -- -- --
-- -- -- -- -- -- 41,015
7,010 -- -- -- -- -- --
-- -- -- -- -- -- 119
-- -- -- (236) -- -- (236)
-- -- -- -- -- 32 32
-- -- -- 1,304 -- -- 1,304 $ 1,304
-- -- -- -- $ 444 -- 444 444
- ------------------------------------------------------------------------------------------------------ ---------------
-- 72 (12) (3,073) 444 (302) 32,974 1,748
- ------------------------------------------------------------------------------------------------------ ---------------
-- 4 (1) -- -- -- (1)
-- (7) 1 -- -- -- 4
-- -- -- -- -- -- 50
-- -- -- -- -- -- 283
-- -- -- -- -- 28 28
-- -- -- 7,400 -- -- 7,400 7,400
-- -- -- -- (324) -- (324) (324)
- ------------------------------------------------------------------------------------------------------ ---------------
-- 69 (12) 4,327 120 (274) 40,414 7,076
- ------------------------------------------------------------------------------------------------------ ---------------
-- 15 (5) -- -- -- (5)
-- (70) 15 -- -- -- 236
-- -- -- -- -- -- 180
-- (14) 2 -- -- -- 169
-- -- -- -- -- 24 24
-- -- -- 11,349 -- -- 11,349 11,349
-- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------ ---------------
$ -- -- $ -- $15,676 $ 120 $(250) $ 52,367 $11,349
- ------------------------------------------------------------------------------------------------------ ---------------
ANSYS, Inc. 1998 Annual Report
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
ANSYS, Inc. (the "Company"), formerly SAS Holdings, Inc., is a holding company
incorporated on January 12, 1994 for the purpose of acquiring substantially all
of the assets and technology, and assuming certain liabilities of Swanson
Analysis Systems, Inc. (the "1994 Acquisition"). The Company develops, markets
and supports a family of mechanical computer-aided engineering software
products. The Company's products are marketed and sold to companies throughout
the world which operate in many industries, including automotive, aerospace and
electronics.
Effective June 20, 1996, the Company completed an initial public offering
("IPO") of 3,500,000 shares of Common Stock at $13.00 per share. The net
proceeds (after deducting underwriting discounts and commissions and offering
expenses) totaled $41.0 million and were used as follows: (i) the repayment of
approximately $18.5 million of senior secured indebtedness (the "1994 Loan"),
including accrued and unpaid interest; (ii) the repayment of $17.5 million of
10% Subordinated Notes (the "Subordinated Notes"), including accrued and unpaid
interest; and (iii) the redemption of $5.1 million of Redeemable Preferred
Stock, including accumulated dividends.
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, ASN
Systems Limited, SAS IP, Inc. and ANSYS Foreign Sales Corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION: In October 1997, the Financial Accounting Standards Board
approved the American Institute of Certified Public Accountants Statement of
Position ("SOP") 97-2, "Software Revenue Recognition." This SOP provides
guidance on when revenue should be recognized and in what amounts for licensing,
selling, leasing or otherwise marketing computer software. This SOP supersedes
SOP 91-1, "Software Revenue Recognition." Beginning in December 1997, the
Company has adopted the provisions of SOP 97-2 and its current revenue
recognition policies are in conformance with the guidelines of the Statement.
The Company's products are sold primarily through distributors, who are
resellers with respect to the Company's products. Revenue is derived principally
from the licensing of computer software products, either on an annual lease,
monthly lease or perpetual basis, and from related maintenance contracts.
Revenue from product licensing for perpetual licenses is recognized upon
delivery of the product, acceptance by the customer and receipt of a signed
contractual obligation provided that no significant Company obligations remain
and collection of the receivable is probable. A portion of the license fees from
noncancellable annual leases is recognized as paid-up revenue upon inception of
the lease. The remaining portion is recognized ratably over the remaining lease
period. Revenue for monthly lease licenses is recognized monthly, as earned,
because the lease license agreements can be cancelled by the customers with 30
days notice. 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.
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 thirty days and up to one year from the date of purchase to be
short-term investments. Short-term investments are recorded at cost, which
approximates fair value.
SECURITIES AVAILABLE FOR SALE: The Company follows the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," which addresses the classification, accounting
and disclosure of investments in debt and equity securities. In accordance with
Statement No. 115, the Company has investments in marketable equity securities
that have been classified as available-for-sale, and accordingly are carried at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity.
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.
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
ANSYS, Inc. 1998 Annual Report
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS: Intangible assets consist of the excess of
the purchase cost over the fair value of net assets acquired ("goodwill"), the
ANSYS trade name and non-compete agreements. These assets are being amortized on
the straight-line method over their estimated useful lives. The Company
periodically evaluates the carrying value of goodwill based on whether the
goodwill is recoverable from expected future undiscounted operating cash flows
of the related business. The Company periodically reviews the carrying value of
other intangible assets and will recognize impairments when the expected future
operating cash flow derived from such intangible assets is less than their
carrying value.
DEBT ISSUANCE COSTS: Debt issuance costs, which were incurred by the Company in
connection with the 1994 Acquisition, were deferred and amortized over the term
of the related debt. Debt issuance costs had been included in other intangibles
on the consolidated balance sheets. As a result of the early repayment of the
1994 Loan with a portion of the net proceeds from the IPO, the Company wrote off
the unamortized balance of the debt issuance cost, which was reflected as an
extraordinary item, net of income taxes, in the Consolidated Statement of Income
for the year ended December 31, 1996.
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 1998, sales by distributors comprised approximately 82% of the
Company's total revenue, with two distributors accounting for approximately 13%
and 10% of total revenue. During 1997, sales by distributors comprised
approximately 97% of the Company's total revenue, with two distributors
accounting for approximately 14% and 10% of total revenue. During 1996, sales by
distributors comprised approximately 96% of the Company's total revenue, with
two distributors accounting for approximately 13% and 9% 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.
FOREIGN CURRENCY TRANSACTIONS: 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
that date. Gains and losses resulting from foreign exchange transactions are
included in the results of operations.
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 the estimates.
EARNINGS PER SHARE: Effective December 31, 1997, the Company has adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
issued in February 1997. This Statement requires the disclosure of basic and
diluted earnings per share and revises the method to calculate these amounts
under previous standards. Earnings per share data for periods prior to 1997 have
been restated to reflect adoption of this Statement. The adoption of this
standard did not materially impact previously reported earnings per share
amounts. Net income per basic common share is computed using the weighted
average number of common shares outstanding during each period. Net income per
diluted common 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.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1997 and 1996
financial statements to conform to the 1998 presentation.
ANSYS, Inc. 1998 Annual Report
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
- -----------------------------------------------------------------------------------------
(in thousands) December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------
Equipment $ 4,815 $ 3,977
Computer software 2,340 2,199
Furniture 877 839
Leasehold improvements 824 824
- -----------------------------------------------------------------------------------------
8,856 7,839
Less: accumulated depreciation and amortization (5,108) (3,068)
- -----------------------------------------------------------------------------------------
$ 3,748 $ 4,771
- -----------------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment was
approximately $2,040,000, $1,626,000 and $1,374,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
4. OTHER INTANGIBLE ASSETS
Other intangible assets consists of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) Estimated Useful Lives December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Trade name 10 $ 1,824 $ 1,824
Non-compete agreements 5-8 2,000 2,000
- -----------------------------------------------------------------------------------------------------------------------------------
3,824 3,824
Less: accumulated amortization (1,958) (1,450)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,866 $ 2,374
- -----------------------------------------------------------------------------------------------------------------------------------
5. OTHER COMPREHENSIVE INCOME
Other comprehensive income is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) December 31, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities $ -- $ (491) $ 673
Tax effect -- 167 (229)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ -- $ (324) $ 444
- -----------------------------------------------------------------------------------------------------------------------------------
6. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) December 31, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 3,357 $ 2,699 $ 2,886
State 220 73 244
Foreign 854 745 675
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 1,235 725 (2,836)
State 122 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 5,788 $ 4,242 $ 969
- -----------------------------------------------------------------------------------------------------------------------------------
ANSYS, Inc. 1998 Annual Report
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 0.8 0.4 6.1
Research and experimentation credit (1.2) (0.9) (3.8)
Other 0.2 2.9 0.7
- -----------------------------------------------------------------------------------------------------------------------------------
33.8% 36.4% 37.0%
- -----------------------------------------------------------------------------------------------------------------------------------
The components of deferred tax assets and liabilities are as follows:
- ----------------------------------------------------------------------------------------------------------------------
(in thousands) December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Goodwill $ 4,145 $ 4,553
Capitalized software 4,483 5,071
Other intangible assets 473 426
Allowance for doubtful accounts 675 733
Accrued expenses and liabilities 159 146
- ----------------------------------------------------------------------------------------------------------------------
9,935 10,929
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accounts receivable mark-to-market 585 707
Property and equipment 169 286
Other 1,347 745
- ----------------------------------------------------------------------------------------------------------------------
2,101 1,738
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 7,834 $ 9,191
- ----------------------------------------------------------------------------------------------------------------------
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.
7. STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 50,000,000 shares of $.01 par value
voting common stock. Upon the closing of the Company's IPO, each Class A share
was converted into one share of common stock. Subsequently, the Class A common
stock was cancelled.
On April 19, 1996, the Board of Directors authorized 2,000,000 shares of
undesignated preferred stock issuable in one or more series by the Board of
Directors. At December 31, 1998 and 1997, there were no shares of preferred
stock issued or outstanding.
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
required the Company to contribute 20% of each participant's compensation
annually in 1997 and 1996. A plan amendment, effective January 1, 1998, reduced
the Company contribution to 5% of each participant's salary.
In 1997 and 1996, the Profit-Sharing Plan was noncontributory. An amendment to
this plan, effective January 1, 1998, invoked the 401(k) feature of the plan,
thereby permitting 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. The employee vesting period was also amended to 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 $1,144,000
in 1998, $2,566,000 in 1997 and $1,882,000 in 1996.
ANSYS, Inc. 1998 Annual Report
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NON-COMPETE AND EMPLOYMENT AGREEMENTS
The Company has entered into non-compete agreements with certain holders of
the Company's common stock. The agreements preclude the stockholders from
competing either directly or indirectly with the Company for a period ranging
from one to three years subsequent to termination. Additionally, during 1997,
the Company exercised an option for a non-compete agreement related to
activities in the Company's United Kingdom and Netherlands territories. The
agreement precludes the former ASD from engaging in any competitive business
activities previously undertaken pursuant to the former ASD agreement.
The Company has entered into employment agreements with the Chief Executive
Officer and another senior executive. The terms of the agreements are
substantially similar except with respect to minimum annual base salary. In the
event the Chief Executive Officer 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. In
the event the other senior executive is terminated without cause, his employment
agreement provides that the Company will continue to pay his base salary of
$256,000, subject to specified cost of living increases, through the later of
March 14, 1999 or six months from the date of termination. The Chief Executive
Officer and the other senior executive are subject to one and three-year
restrictions on competition, respectively, following termination of employment
under the circumstances described in each contract.
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 authorize the grant of up to 868,110
and 3,250,000 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 repurchased 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 the Chief
Executive Officer and 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
nonqualified 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.
During 1994, the Company issued 1,289,750 shares of restricted common stock to
certain officers, employees and members of the Board of Directors. In addition,
during 1996 the Company issued 135,860 shares of restricted common stock to an
officer and during 1995 issued 30,000 shares of restricted common stock to
members of the Board of Directors. Substantially all shares of restricted stock
and all of the options under both the 1994 and 1996 Stock Plans were issued at
the estimated market value of the Company's common stock at the time of
issuance. The recipients of the restricted stock are required to continue in the
employment or service of the Company for periods of up to five years after the
date of issuance for ownership to vest and provide for repurchase of unvested
restricted stock by the Company at the original purchase price in the event of
the termination of employment prior to vesting. Upon termination of employment,
the Company repurchased 14,950, 3,950 and 16,750 shares of restricted stock from
employees in 1998, 1997 and 1996, respectively.
ANSYS, Inc. 1998 Annual Report
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock purchases, grants and option activity under the 1994 and 1996
Stock Plans, and the issuance of restricted stock to members of the Board of
Directors under separate agreements, are summarized as follows:
1994 Stock Option and Grant Plan Restricted Stock Stock Options
- ----------------------------------------------------------------------------------------------------------------------------
Number of Range of Number of Range of
(in thousands, except for range of issue price) Shares Issue Price Options Issue Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 1,265 $ .01-.40 1,275 $ .11-.40
Issued/granted 1,096/(1)/ .11-2.40/(1)/ 553 1.275-11.00
Exercised (769) -- (973)/(1)/ .11-1.275/(1)/
Repurchased/cancelled (17) .10 (16) .40-10.00
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 1,575 .01-2.40 839 .40-11.00
Issued/granted -- -- -- --
Exercised (204) .10-.40 (99) .40-1.275
Repurchased/cancelled (4) .10 (86) .40-10.00
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31,1997 1,367 .01-2.40 654 .40-11.00
Issued/granted -- -- -- --
Exercised (507) .01-.40 (56) .40-1.275
Repurchased/cancelled (23) .10-.40 (72) .40-10.00
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31,1998 837 $.01-2.40 526 $ .40-11.00
- ----------------------------------------------------------------------------------------------------------------------------
Exercisable at:
December 31, 1996 11 91
December 31, 1997 53 156
December 31, 1998 90 292
- ----------------------------------------------------------------------------------------------------------------------------
/(1)/Includes 960,000 options exercised by a stockholder at an exercise price of
$.11 per share. The shares received upon such exercise were restricted
subject to repurchase by the Company in certain circumstances. Of the total
shares, 368,160 shares became vested in March 1998 and were issued to the
holder; the remaining 591,840 will vest in March 1999.
1996 Stock Option and Grant Plan Stock Options
- ------------------------------------------------------------------------------
Number of Range of
(in thousands, except for range of issue price) Options Issue Price
- ------------------------------------------------------------------------------
Issued/granted 415 $11.75-$13.125
Exercised -- --
Repurchased/cancelled (1) 11.75
- ------------------------------------------------------------------------------
Outstanding at December 31, 1996 414 11.75-13.125
Issued/granted 759 6.25-9.625
Exercised -- --
Repurchased/cancelled (146) 6.25-13.125
- ------------------------------------------------------------------------------
Outstanding at December 31, 1997 1,027 6.25-13.125
- ------------------------------------------------------------------------------
Issued/granted 919 6.00-11.313
Exercised (40) 6.25-9.625
Repurchased/cancelled (157) 6.25-13.00
- ------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,749 $ 6.00-13.13
- ------------------------------------------------------------------------------
Exercisable at:
December 31, 1997 95
December 31, 1998 270
- ------------------------------------------------------------------------------
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 Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation expense has been
recognized for restricted stock or 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 1998, 1997 and 1996 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 on the following page:
ANSYS, Inc. 1998 Annual Report
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION AND GRANT PLANS (CONTINUED)
- -----------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------
Net income - as reported $11,349 $7,400 $1,304
Net income - pro forma 10,947 7,048 927
Net income per basic common share - as reported $ 0 .71 $ 0.47 $ 0.08
Net income per basic common share - pro forma 0.68 0.45 0.05
Net income per diluted common share - as reported 0.68 0.45 0.07
Net income per diluted common share - pro forma 0.66 0.43 0.05
- -----------------------------------------------------------------------------
The weighted-average fair value of options granted was $8.83 per share in
1998, $6.65 per share in 1997 and $9.03 per share in 1996.
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 a low of 4.25% to a high of 5.63%. 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 66% and expected term of five
years.
11. 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 issued under the Purchase Plan. The Purchase Plan is administered by the
Compensation Committee. The first offering under the Purchase Plan commenced on
August 1, 1996 and closed on January 31, 1997. Subsequent offerings commence on
each February 1 and August 1 thereafter, 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, 1998, 61,926 shares of common
stock had been issued under the Purchase Plan of which 37,877 were issued as of
December 31, 1997.
12. 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 a rental acceleration at the end of the fifth and
tenth years. The Company incurred lease rental expense related to this facility
of $1,227,000 and $1,022,000 in 1998 and 1997, respectively. Future minimum
lease payments under the facility lease are $1,227,000 per annum through 2001.
Prior to February 1997, the Company had operated from facilities which it had
leased from a joint venture held by a corporate officer. The Company incurred
lease rental expense related to this lease agreement of $138,000 for the year
ended December 31, 1997 and $839,000 for the year ended December 31, 1996.
The Company has also entered into various noncancellable operating leases for
equipment and sales offices. Lease rental expense related to these leases
totaled $1,136,000, $1,125,000 and $1,211,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Future minimum lease payments under
noncancellable operating leases for equipment and sales offices in effect at
December 31, 1998 are $616,000 in 1999, $189,000 in 2000 and $79,000 in 2001.
13. 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 $489,000, $422,000 and $450,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
14. RELATED PARTY TRANSACTIONS
In connection with his initial employment, the Company's Chief Executive
Officer purchased 626,000 restricted shares of common stock in July 1994 for a
cash purchase price of $250,000 with proceeds from a loan from the Company
evidenced by a promissory note bearing interest at 8.23% and maturing on July 8,
2006. The promissory note is collateralized by a pledge of the shares purchased
with the proceeds of the loan. The shares purchased by the Chief Executive
Officer became fully vested during 1998.
ANSYS, Inc. 1998 Annual Report
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GEOGRAPHIC INFORMATION
Revenue by geographic area is as follows:
- -----------------------------------------------------------------------------------------------------------------
Other Other
(in thousands) United States Canada Germany Europe Japan International Total
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 $24,282 $1,509 $5,704 $13,986 $7,565 $3,507 $56,553
Year ended December 31, 1997 22,881 771 5,113 11,258 6,878 3,646 50,547
Year ended December 31, 1996 22,624 1,196 4,674 9,124 6,248 3,200 47,066
- -----------------------------------------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
The Company had an outstanding irrevocable standby letter of credit for
$1,577,000 at December 31, 1998. This letter of credit, which expires on April
8, 1999, was issued as a guarantee for court-awarded damages related to
litigation initiated by the Company. 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.
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 include a current Internal Revenue Service examination of the
Federal income tax return for the fiscal year ended December 31, 1996. 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. The Company has
established accruals for matters that are probable and reasonably estimable.
Management believes that any liability that may ultimately result from the
resolution of these matters in excess of the amounts provided will not have a
material adverse effect on the financial position or results of operations of
the Company.
17. EARNINGS PER SHARE
Basic earnings per common share ("EPS") amounts are computed by dividing
earnings after the deduction of preferred stock dividends by the average number
of common shares outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding.
The details of basic and diluted earnings per common share are as follows:
- ---------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------
Net income $11,349 $ 7,400 $ 1,304
Redeemable preferred stock dividends -- -- (236)
Income available to common stockholders $11,349 $ 7,400 $ 1,068
Weighted average shares outstanding - basic/(1)/ 16,052 15,742 14,000
Basic earnings per share after extraordinary item $ 0.71 $ 0.47 $ 0.08
Effect of dilutive securities:
Shares issuable upon exercise of dilutive
outstanding restricted stock and stock options 529 776 906
Weighted average shares outstanding - diluted 16,581 16,518 14,906
Diluted earnings per share after extraordinary item $ 0.68 $ 0.45 $ 0.07
Anti-dilutive shares/options 1,200 642 720
- ---------------------------------------------------------------------------------
/(1)/Weighted average shares outstanding - basic excludes unvested restricted
stock.
18. LITIGATION
The Company is currently the plaintiff in litigation related to the expiration
of an ASD distribution agreement. However, the action has not progressed
sufficiently for the Company to estimate a range of possible gain, if any,
should it prevail in its pursuit of damages related to this action.
19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires that all
derivatives be carried at fair value and provides for hedge accounting when
certain conditions are met. The Standard is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is currently in the
process of evaluating the prospective impact of Statement No. 133 on its
financial position and results of operations.
ANSYS, Inc. 1998 Annual Report
33
QUARTERLY FINANCIAL INFORMATION, (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) December 31, 1998 September 30, 1998 June, 30 1998 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $15,257 $13,507 $13,562 $14,227
Gross profit 13,730 11,992 12,079 12,686
Operating income 4,241 3,577 3,552 3,835
Net income 3,152 2,710 2,720 2,767
Net income per basic share .20 .17 .17 .17
Net income per diluted share .19 .16 .16 .17
Common stock price per share/(1)/:
High 11.50 11.25 11.75 10.44
Low 5.75 6.25 9.00 7.00
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) December 31, 1997 September 30, 1997 June, 30 1997 March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $14,487 $11,489 $12,557 $12,014
Gross profit 13,070 10,225 11,231 10,822
Operating income 3,993 2,504 3,335 890
Net income 2,748 1,719 2,274 659
Net income per basic share .17 .11 .15 .04
Net income per diluted share .17 .10 .14 .04
Common stock price per share/(1)/:
High 11.00 11.25 9.25 13.25
Low 6.31 7.00 5.38 7.63
- ------------------------------------------------------------------------------------------------------------------------------------
/(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 11, 1999, there were 396 shareholders of record and approximately
3,799 beneficial shareholders of the Company's common stock.
ANSYS, Inc. 1998 Annual Report
34
CORPORATE INFORMATION
OFFICERS AND SENIOR MANAGEMENT SHAREHOLDER INFORMATION
HEADQUARTERS Requests for information about the Company
ansysinfo@ansys.com Peter J. Smith should be directed to: Investor Relations,
T 724.746.3304 Chairman of the Board of ANSYS, Inc., Southpointe, 275 Technology Drive,
F 724.514.9494 Directors, President and Chief Canonsburg, PA 15317. Telephone: 724.514.1782.
Toll Free USA and Canada Executive Officer
1.800.WE.R.FEA.1 Report on Form 10-K
Toll Free Mexico: Dr. John A. Swanson Stockholders may obtain additional financial
95.800.9373321 Chief Technologist information about ANSYS, Inc. from the
Company's Report on Form 10-K filed with
REGIONAL OFFICES James E. Cashman III the Securities and Exchange Commission. Copies
Senior Vice President, Operations are available from the Company without charge
North America upon written request.
na.sales@ansys.com Paul A. Johnson
T 724.746.3304 Senior Vice President, Product Stock Listing
F 724.514.9494 Development Nasdaq National Market Symbol: ANSS
International Maria T. Shields Counsel
int.sales@ansys.com Chief Financial Officer Goodwin, Procter, & Hoar L.L.P., Boston, MA
T 724.514.3086
F 724.514.3115 Dr. Joseph S. Solecki Annual Meeting
Corporate Fellow The Annual Meeting of Stockholders will be held
Europe on May 5, 1999 at 2:00 p.m. at the law offices
eu.sales@ansys.com Dr. Shah M. Yunus of Buchanan Ingersoll, One Oxford Centre,
T 44.118.9880229 Corporate Fellow 301 Grant Street, Pittsburgh, PA 15219.
F 44.118.9880925
Paul Bemis Transfer Agent
http://www.ansys.com Vice President, Marketing Chase Mellon Shareholder Services,
Ridgefield Park, NJ
Brian Butcher
Managing Director, European Independent Accountants
Operations PricewaterhouseCoopers LLP, Pittsburgh, PA
Paul A. Chilensky
Vice President, Customer ANSYS, Inc. is an Equal Opportunity Employer.
Service As such, it is the Company's policy to promote
equal employment opportunity and to prohibit
David Conover discrimination on the basis of race, color,
Manager, Product religion, sex, age, national origin, disability
Development or status as a veteran in all aspects of employment
including recruiting, hiring, training or promoting
Karen C. Harker personnel. In fulfilling this commitment, the Company
Director, Human Resources shall comply with the letter and spirit of the laws,
regulations and Executive Orders governing equal
Mark C. Imgrund opportunity in employment; including the Civil Rights
Vice President, Corporate Act of 1964, Executive Order 11246, Revised Order
Quality Number 4 and amendments thereto.
David S. Secunda ANSYS and DesignSpace are registered in the U.S.
Corporate Counsel and Patent and Trademark Office. DesignSpace Expert
Secretary is a trademark of SAS IP, Inc., a wholly owned
subsidiary of ANSYS, Inc. All other trademarks
James C. Tung and registered trademarks are the property of
Vice President, International their respective owners.
Operations
[RECYCLED LOGO] This entire report is printed on recycled paper.
ANSYS Inc. 1998 Annual Report
35