UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended January 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-27874
ANSOFT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-1001909
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
225 West Station Square, Suite 200
Pittsburgh, Pennsylvania 15219-1119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 261-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
The number of shares of the registrant's Common Stock outstanding as of the
close of business on January 31, 2005 was 11,583,198.
ANSOFT CORPORATION
FORM 10-Q
INDEX
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - January 31, 2005 and
April 30, 2004 1
Consolidated Statements of Operations - Three and
nine months ended January 31, 2005 and 2004 2
Consolidated Statements of Cash Flows - Nine months
ended January 31, 2005 and 2004 3
Notes to the Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Item 4. Controls and Procedures 16
Part II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 6. Exhibits 18
Signatures 19
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANSOFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands) (unaudited)
January 31, April 30,
2005 2004
-------- --------
Assets
Current assets
Cash and cash equivalents $ 7,357 $ 15,218
Accounts receivable, net 12,087 10,179
Deferred income taxes 657 343
Prepaid expenses and other assets 1,115 675
-------- --------
Total current assets 21,216 26,415
Equipment and furniture, net 3,186 3,598
Marketable securities 25,888 25,502
Other assets 151 383
Deferred income taxes 5,085 5,158
Goodwill 1,239 1,239
Intangible assets, net 4,211 5,341
-------- --------
Total assets $ 60,976 $ 67,636
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued expenses $ 3,298 $ 4,015
Deferred revenue 15,410 11,935
Short term line of credit 2,000 --
-------- --------
Total current liabilities 20,708 15,950
Long term line of credit -- 10,000
-------- --------
Total liabilities 20,708 25,950
Stockholders' equity
Preferred stock , par value $0.01 per share; 1,000
shares authorized, no shares outstanding -- --
Common stock , par value $0.01 per share; 25,000 shares
authorized; issued 13,350 and 12,778 shares, respectively
and outstanding 11,583 and 11,744, respectively 135 129
Additional paid-in capital 64,223 58,562
Treasury stock, 1,767 and 1,034 shares, respectively (20,533) (9,090)
Accumulated other comprehensive income, net 344 691
Accumulated deficit (3,901) (8,606)
-------- --------
Total stockholders' equity 40,268 41,686
-------- --------
Total liabilities and stockholders' equity $ 60,976 $ 67,636
======== ========
See accompanying notes to the unaudited consolidated financial statements.
Page 1
ANSOFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended January 31, Nine months ended January 31,
2005 2004 2005 2004
-------- -------- -------- --------
Revenue
License $ 10,182 $ 8,024 $ 25,012 $ 20,258
Service and other 7,198 5,958 20,992 16,633
-------- -------- -------- --------
Total revenue 17,380 13,982 46,004 36,891
Costs of revenue
License 141 171 363 477
Service and other 355 285 1,015 805
-------- -------- -------- --------
Total cost of revenue 496 456 1,378 1,282
-------- -------- -------- --------
Gross profit 16,884 13,526 44,626 35,609
Operating Expenses
Sales and marketing 7,424 6,803 22,522 19,462
Research and development 4,204 3,806 12,230 11,402
General and administrative 1,199 1,148 3,592 3,445
Amortization 415 761 1,208 2,379
-------- -------- -------- --------
Total costs and expenses 13,242 12,518 39,552 36,688
-------- -------- -------- --------
Income (loss) from operations 3,642 1,008 5,074 (1,079)
Net realized gain on sale of securities -- -- 732 --
Other income, net 374 247 975 715
-------- -------- -------- --------
Income (loss) before income taxes 4,016 1,255 6,781 (364)
Income tax expense (benefit) 1,232 314 2,076 (90)
-------- -------- -------- --------
Net income (loss) $ 2,784 $ 941 $ 4,705 $ (274)
======== ======== ======== ========
Basic net income (loss) per share $ 0.24 $ 0.08 $ 0.41 $ (0.02)
======== -------- ======== --------
Diluted net income (loss) per share $ 0.21 $ 0.07 $ 0.35 $ (0.02)
======== ======== ======== ========
Weighted average shares used
in calculation
Basic 11,490 11,640 11,574 11,650
======== -------- ======== ========
Diluted 13,390 13,306 13,342 11,650
======== ======== ======== ========
See accompanying notes to the unaudited consolidated financial statements.
Page 2
ANSOFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended January 31,
2005 2004
-------- --------
Cash flows from operating activities
Net income (loss) $ 4,705 $ (274)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation 1,076 1,162
Amortization 1,437 2,485
Deferred taxes -- (121)
Net realized gain on sale of securities (732) --
Changes in assets and liabilities
Accounts receivable (1,411) 4,740
Prepaid expenses and other assets (446) 166
Other long-term assets 202 32
Accounts payable and accrued expenses 723 (397)
Deferred revenue 2,930 (776)
-------- --------
Net cash provided by operating activities 8,484 7,017
-------- --------
Cash flows from investing activities
Purchases of equipment and furniture (633) (940)
Proceeds from the sale of marketable securities 17,264 8,974
Purchases of marketable securities (17,758) (11,255)
-------- --------
Net cash used in investing activities (1,127) (3,221)
-------- --------
Cash flows from financing activities
Repayment of line of credit, net (8,000) --
Purchase of treasury stock (11,443) (2,464)
Proceeds from the issuance of common stock, net 3,771 1,181
-------- --------
Net cash used in financing activities (15,672) (1,283)
-------- --------
Net increase (decrease) in cash and cash equivalents (8,315) 2,513
Effect of exchange rate changes 454 443
Cash and cash equivalents at beginning of period 15,218 7,173
-------- --------
Cash and cash equivalents at end of period $ 7,357 $ 10,129
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest $ 85 $ 151
======== ========
Cash paid for income taxes $ 853 $ 56
======== ========
See accompanying notes to the unaudited consolidated financial statements.
Page 3
ANSOFT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (in thousands, except per share amounts)
(1) Basis of Presentation
The unaudited consolidated financial statements include the accounts of Ansoft
Corporation ("Ansoft" or the "Company") and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations have been made. Operating results for interim periods are not
necessarily indicative of results which may be expected for a full year. The
information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the April 30, 2004 consolidated financial statements and notes
thereto included in Ansoft's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
The preparation of consolidated financial statements in conformity with US
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosure of contingent assets and liabilities. The
estimates and assumptions used in the accompanying unaudited consolidated
financial statements are based on management's evaluation of the relevant facts
and circumstances as of the date of the unaudited consolidated financial
statements. Actual results may differ from those estimates.
(2) Comprehensive income (loss)
"Comprehensive income (loss)" includes foreign currency translation gains and
losses and other unrealized gains and losses, net of tax. A summary of
comprehensive income (loss) follows:
Three months ended Nine months ended
January 31, January 31,
2005 2004 2005 2004
------- ------- ------- -------
Net income (loss) $ 2,784 $ 941 $ 4,705 $ (274)
Unrealized gain (loss) on marketable securities (133) 1,227 60 1,590
Reclassification adjustment for (gain) loss
on sale of marketable securities included in
net income (loss) -- -- (732) --
Foreign currency translation adjustments 158 192 325 443
------- ------- ------- -------
Comprehensive income (loss) $ 2,809 $ 2,360 $ 4,358 $ 1,759
======= ======= ======= =======
(3) Net income per share
Basic net income per share is calculated using the weighted-average number of
common shares outstanding during the period. The weighted-average basic shares
were 11,490 and 11,574 for the three and nine month periods ended January 31,
2005, respectively. Diluted net income per share is computed using the
weighted-average number of common shares and potentially dilutive common shares
outstanding during the period. The weighted-average dilutive shares were 13,390
and 13,342 for the three and nine month periods ended January 31, 2005,
respectively. Potentially dilutive common shares consist of the incremental
common shares issuable upon the exercise of employee stock options, and are
computed using the treasury stock method. Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive. Since there was a
net loss for the nine month period ended January 31, 2004, stock options
totaling 1,498 were excluded from the diluted earnings per share calculation
because their inclusion would have been anti-dilutive. All unexercised stock
options for the three and nine month periods ended January 31, 2005 are included
in the computation of diluted earnings per share. Unexercised stock options of
201 shares for the three month period ended January 31, 2004 are not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price, and therefore their inclusion would
have been anti-dilutive.
Page 4
(4) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
Financial Accounting Standards Board's ("FASB") SFAS No. 123 "Accounting for
Stock-Based Compensation." This statement permits a company to choose either a
fair value based method of accounting for its stock-based compensation
arrangements or to comply with the Accounting Principles Board ("APB") Opinion
No. 25 intrinsic value based method, adding pro forma disclosures of net income
and earnings per share computed as if the fair value based method had been
applied in the financial statements. The Company has adopted SFAS No. 123 by
retaining the APB Opinion No. 25 method of accounting for stock-based
compensation with pro forma disclosures of net income and earnings per share.
The pro forma effects of stock options on the Company's net income (loss) for
those periods may not be representative of the pro forma effect for future
periods due to the impact of vesting and potential awards. Pursuant to APB
Opinion No. 25 the Company did not recognize compensation expense in its
statements of operations for the three and nine-month periods ending January 31,
2005 and 2004.
The Company's pro forma information follows:
Three months ended Nine months ended
January 31, January 31,
2005 2004 2005 2004
------- ------- ------- -------
Net income (loss) as reported $ 2,784 $ 941 $ 4,705 $ (274)
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of tax 506 576 1,744 1,861
------- ------- ------- -------
Pro forma net income (loss) $ 2,278 $ 365 $ 2,961 $(2,135)
======= ======= ======= =======
Pro forma net income (loss) per basic common share $ 0.20 $ 0.03 $ 0.26 $ (0.18)
======= ======= ======= =======
Pro forma net income (loss) per diluted common share $ 0.17 $ 0.03 $ 0.22 $ (0.18)
======= ======= ======= =======
(5) Line of Credit
On October 21, 2004, the Company entered into a one year secured credit
facility, with an aggregate commitment of up to $30 million, with a domestic
financial institution (the "Bank"). The facility replaced the Company's $20
million secured facility which was terminated during the first quarter. At the
Company's option, borrowings under the credit facility bear interest at either
the Bank's prime lending rate or the LIBOR rate plus a margin of 50 basis
points. The facility is secured by the Company's marketable securities.
The ability of the Company to borrow under the credit facility is subject to our
ongoing compliance with certain financial and other covenants, including a
covenant as to our tangible net worth. As of January 31, 2005, the Company was
in compliance with its covenants under the credit facility.
As of January 31, 2005, the Company had borrowed $2 million under the credit
facility.
(6) Commitments and Contingencies
The Company sells software licenses and services to its customers under
proprietary software license agreements. Each license agreement contains the
relevant terms of the contractual arrangement with the customer, and generally
includes certain provisions for indemnifying the customer against losses,
expense and liabilities from damages that may be incurred by or awarded against
the customer in the event the Company's software or services are found to
infringe upon a patent, copyright, or other proprietary right of a third party.
Page 5
To date, the Company has not had to reimburse any of its customers for any
losses related to these indemnification provisions and no material claims
asserted under these indemnification provisions are outstanding as of January
31, 2005. For several reasons, including the lack of prior indemnification
claims, the Company cannot determine the maximum amount of potential future
payments, if any, related to such indemnification provisions.
(7) Recent Accounting Pronouncements
On December 16, 2004, the FASB issued FASB Statement No. 123R "Share-Based
Payment". The Company will transition to the new requirements of the Statement
by using the modified prospective transition method. This method requires
compensation cost to be recognized on the date of adoption for any outstanding
unvested share-based payments, based on the grant date fair value as calculated
under SFAS No. 123. Based on a preliminary analysis using option data as of
January 31, 2005, the fiscal 2006 full-year impact on earnings per share related
to the adoption of SFAS No. 123R is estimated to be approximately 11 cents per
share. The Company is required to adopt the provisions of the Statement as of
August 1, 2005 but may elect to early adopt effective the first day of any
quarter prior to that date.
(8) Intangible Assets
The following is a summary of Intangible Assets as of January 31, 2005:
Purchased Technology $ 2,230
Non-Compete 2,500
Trademark 212
Customer list 18,488
-------
Total $23,430
=======
Total accumulated amortization as of January 31, 2005 was $19,219.
These intangible assets are amortized over their estimated useful lives, ranging
between three and seven years. There are no expected residual values related to
these intangible assets. Estimated fiscal year amortization as of January 31,
2005 is as follows: 2005 - $333; 2006 - $1,435; 2007 - $1,272; and 2008 -
$1,171.
(9) Stockholders' Equity
The Company has consistently repurchased its common stock in public market
transactions over the past several years. During the nine-month period ending
January 31, 2005, the Company purchased a total of 733 shares of common stock at
an average price of $15.61. The Company utilized $11.4 million in cash to affect
these common stock purchases. The Company may choose to continue purchases of
its common stock in the future.
In October 2004, the Company's Board of Directors increased the authorized share
repurchase amount by 1.0 million shares to 3.0 million.
The Company currently has two stock option plans (1988 Plan and 1995 Plan).
Under the terms of both plans, options to purchase common stock are granted at
no less than the stock's estimated fair market value at the date of the grant
and may be exercised during the specified future periods as determined by the
Board of Directors. Both plans provide that the options shall expire no more
than ten years after the date of the grant. During the first nine months of the
fiscal year 2005, 104 shares were granted at an average exercise price of
$13.60. At January 31, 2005 options to purchase 2,051 shares of common stock
were exercisable at an average exercise price of $7.06.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-Q, the words
"anticipate," "plan," "believe," "estimate," "expect" and similar expressions as
they relate to Ansoft or its management are intended to identify such
forward-looking statements. Ansoft's actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include (1) the degree and rate of growth of the markets in which
Ansoft competes and the accompanying demand for Ansoft's products, (2) the level
of product and price competition, (3) the ability of Ansoft to develop and
market new products and to control costs, (4) the ability to expand its direct
sales force, and (5) the ability to attract and retain key personnel.
Overview
Ansoft is a developer of electronic design automation ("EDA") software used in
high technology products and industries. Ansoft's software is used by electrical
engineers in the design of state of the art technology products, such as
cellular phones, internet networking, satellite communications systems, computer
chips and circuit boards, and electronic sensors and motors. Engineers use our
software to maximize product performance, eliminate physical prototypes, and
reduce time-to-market.
During the third quarter of fiscal 2005, revenues increased by 24% from the
previous fiscal year's third quarter. New license revenue increased by 27% and
maintenance revenue increased 21%. The Company experienced growth in both our
domestic and international markets for the quarter ended January 31, 2005.
Net income for the quarter was $2.8 million compared to $0.9 million net income
during the third fiscal quarter of 2004.
Page 7
RESULTS OF OPERATIONS
Three months ended January 31, Nine months ended January 31,
Percentage Percentage
2005 2004 Change 2005 2004 Change
-------- -------- ---------- -------- -------- ----------
Revenue $ 17,380 $ 13,982 24.3% $ 46,004 $ 36,891 24.7%
Cost of revenue 496 456 8.8% 1,378 1,282 7.5%
-------- -------- -------- --------
Gross profit 16,884 13,526 24.8% 44,626 35,609 25.3%
-------- -------- -------- --------
Sales and marketing 7,424 6,803 9.1% 22,522 19,462 15.7%
Research and development 4,204 3,806 10.5% 12,230 11,402 7.3%
General and administrative 1,199 1,148 4.4% 3,592 3,445 4.3%
Amortization 415 761 (45.5%) 1,208 2,379 (49.2%)
-------- -------- -------- --------
Total operating expenses 13,242 12,518 5.8% 39,552 36,688 7.8%
-------- -------- -------- --------
Income (loss) from
operations 3,642 1,008 261.3% 5,074 (1,079) 570.3%
Net realized gain on sale of
securities -- -- N/A 732 -- N/A
Other income, net 374 247 51.4% 975 715 36.4%
-------- -------- -------- --------
Income (loss) before income
taxes 4,016 1,255 220.0% 6,781 (364) 1,962.9%
Income tax expense (benefit) 1,232 314 292.4% 2,076 (90) 2,406.7%
-------- -------- -------- --------
Net income (loss) $ 2,784 $ 941 195.9% $ 4,705 $ (274) 1,817.2%
======== ======== ======== ========
Comparison of the Three and Nine Months Ended January 31, 2005 and 2004
REVENUE. Total revenue in the three and nine-month period ended January 31, 2005
increased 24.3% and 24.7% to $17.4 million and $46 million, respectively.
License revenue during the three-month period ended January 31, 2005 increased
26.9% to $10.2 million from $8 million during the comparable period in the prior
fiscal year. License revenue during the nine-month period ended January 31, 2005
increased 23.5% to $25 million from $20.3 million during the comparable period
in the prior fiscal year. The increases are attributed to an improving economy,
particularly an improvement in the technology sectors resulting in an increased
demand for our software products worldwide. Growth occurred in both our high
performance electronics and EM product lines for the nine month period. Service
and other revenue in the three and nine-month periods ended January 31, 2005
increased 20.8% and 26.2%, respectively, due to the continued growth of the
installed base of customers under annual maintenance agreements.
Page 8
International revenue accounted for 56% and 57% of the Company's total revenue
in the three-month periods ended January 31, 2005 and 2004, respectively.
International revenue accounted for 57% and 56% of the Company's total revenue
in the nine-month periods ended January 31, 2005 and 2004, respectively.
Generally, the Company believes international sales are subject to additional
risks associated with international operations, including currency exchange
fluctuations, tariff regulations and requirements for export.
Exchange rates will fluctuate throughout the fiscal year. When comparing the
percentage of international revenues to total revenues for the three and
nine-month periods, using current year exchange rates for the prior year
revenues, the international revenue as a percentage of total revenue would be
57% and 59% of total revenue for the three and nine-month periods ended January
31, 2004.
COST OF REVENUE. Cost of revenue consists primarily of software materials,
personnel and other expenses related to providing licenses and upgrades to
customers. Cost of revenue for the three-month period ended January 31, 2005
increased 8.8% to $0.5 million from the comparable period in the prior fiscal
year. Cost of revenue for the nine-month period ended January 31, 2005 increased
7.5% to $1.4 million from the comparable period in the prior fiscal year. The
increases were primarily attributed to providing more licenses in the current
year periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of salaries;
commissions paid to internal sales and marketing personnel, promotional costs
and related operating expenses. Sales and marketing expenses in the three and
nine-month periods ended January 31, 2005 increased 9.1% and 15.7% to $7.4
million and $22.5 million, respectively, due to the increased sales volume.
Sales and marketing expenses represented 43% and 49% of total revenue in the
three-month periods ended January 31, 2005 and 2004, respectively. Sales and
marketing expenses represented 49% and 53% of total revenue in the nine-month
periods ended January 31, 2005 and 2004, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses include all
costs associated with the development of new products and enhancements to
existing products. Total research and development expenses for the three and
nine-month period ended January 31, 2005 increased 10.5% and 7.3% to $4.2
million and $12.2 million, respectively. Total research and development
increased primarily due to the additional personnel to meet software development
requirements. Research and development expenses represented 24% and 27% of total
revenue in the three-month periods ended January 31, 2005 and 2004,
respectively. Research and development expenses represented 27% and 31% of total
revenue in the nine-month periods ended January 31, 2005 and 2004, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three and nine-month periods ended January 31, 2005 increased 4.4% and 4.3% to
$1.2 million and $3.6 million, respectively. The increase is due to general
operating costs related to the increase in personnel. General and administrative
expenses represented 7% and 8% of total revenue in the three-month periods ended
January 31, 2005 and 2004, respectively. General and administrative expenses
represented 8% and 9% of total revenue in the nine-month periods ended January
31, 2005 and 2004, respectively.
AMORTIZATION EXPENSE. Amortization expense for the three and nine-month periods
ended January 31, 2005 decreased 45.5% and 49.2% to $0.4 million and $1.2
million, respectively. The decrease is due to various intangible assets being
fully amortized in the prior fiscal year.
Page 9
NET REALIZED GAIN (LOSS) ON SALE OF SECURITIES. There were no net realized gains
or losses for the three-month periods ended January 31, 2005 and 2004. Net
realized gain for the nine-month period ended January 31, 2005 was $0.7 million
compared to $0 for the same period in the previous fiscal year. There were no
sales of securities for the three and nine month periods ending January 31,
2004.
OTHER INCOME, NET. Other income for the three-month period ended January 31,
2005 was $0.4 million, an increase from the $0.2 million reported for the same
period in the previous fiscal year. Other income for the nine-month period ended
January 31, 2005 was $1.0 million, an increase from the $0.7 million reported in
the same period in the previous fiscal year. The increase is primarily due to
income from marketable securities and foreign currency transaction gains.
INCOME TAX EXPENSE (BENEFIT). In the three-month period ended January 31, 2005,
the Company recorded tax expense of $1.2 million compared to $0.3 million for
the same period in the previous fiscal year. In the nine-month period ended
January 31, 2005, the Company recorded tax expense of $2.1 million compared to a
$(0.1) million tax benefit for the same period in the previous fiscal year. The
estimated effective tax rate of 30.7% has been favorably impacted by
approximately 8% as a result of the expected research and experimentation credit
that is available to the Company.
Liquidity and Capital Resources
As of January 31, 2005, Ansoft had $7.4 million in cash and cash equivalents,
$25.9 million of marketable securities and working capital of $0.5 million. Net
cash provided by operating activities in the nine-month periods ended January
31, 2005 and 2004 was $8.5 million and $7.0 million, respectively.
Net cash used in investing activities in the nine-month periods ended January
31, 2005 and 2004 was $1.1 million and $3.2 million, respectively. Capital
expenditures were $0.6 million and $0.9 million in the nine-month periods ended
January 31, 2005 and 2004, respectively. Proceeds from the sale of marketable
securities were $17.3 million and $9.0 million in the nine-month periods ended
January 31, 2005 and 2004, respectively. Purchases of marketable securities were
$17.8 million and $11.3 million in the nine-month periods ended January 31, 2005
and 2004, respectively. The increase in purchases of marketable securities was
due to increased cash resulting from cash flows from operations and financing.
Net cash used in financing activities was $15.7 million and $1.3 million in the
nine-month periods ended January 31, 2005 and 2004, respectively. Proceeds from
the issuance of common stock were $3.8 million and $1.2 million in the
nine-month periods ended January 31, 2005 and 2004, respectively. Funds used for
the repurchase of common stock were $11.4 million and $2.5 million in the
nine-month periods ended January 31, 2005 and 2004, respectively. The Company
continues to purchase common stock under its share repurchase plan.
Ansoft had available a $30.0 million secured line of credit from a domestic
financial institution at an interest rate equal to LIBOR plus 50 basis points or
the Bank's prime lending rate, at the Company's option. The line of credit was
secured in October 2004. As of January 31, 2005, the outstanding balance was $2
million. Ansoft believes that the net cash provided by operating activities will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for the foreseeable future. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's liquidity requirements,
Ansoft may seek additional funds through equity or debt financing. There can be
no assurance that additional financing will be available or that, if available,
such financing will be on terms favorable to Ansoft. Ansoft does hold marketable
securities that are available for liquidation to pay on the line of credit.
Page 10
A summary of Ansoft's significant contractual obligations and commitments as of
January 31, 2005 is as follows (in thousands and for fiscal year):
Debt Operating Leases
------- ----------------
2005 $ 2,000 $ 374
2006 - 1,367
2007 - 806
2008 - 663
2009 - 398
2010 - 4
For fiscal year 2005, the balance of $374 represents the remaining payments due
as of January 31, 2005. For fiscal year 2010, the balance of $4 represents the
payments through June 30, 2009.
Critical Accounting Policies
Ansoft's critical accounting policies are as follows:
o Revenue Recognition
o Valuation of Accounts Receivable
o Impairment of Long-Lived Assets
o Impairment of Marketable Securities Available for Sale
o Deferred Tax Asset Valuation Allowance
REVENUE RECOGNITION. Revenue consists of fees for licenses of software products
and service and other revenue. Ansoft recognizes revenue in accordance with SOP
97-2, "Software Revenue Recognition," and related interpretations. Accordingly,
revenue is recognized when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the vendor's fee is
fixed or determinable, and collectibility is probable.
License revenue. Ansoft licenses its software on a perpetual basis with no right
to return or exchange the licensed software. License revenue is recognized based
on the residual method.
Postcontract customer support ("PCS") for an initial three month period is
bundled with the perpetual license fee. Revenue related to the three-month PCS
is deferred and recognized ratably over the three-month term. Ansoft's
vendor-specific objective evidence of fair value, or VSOE, for the three-month
PCS is based upon the pricing for comparable transactions when the element is
sold separately. Ansoft's VSOE for the three-month PCS is based upon one fourth
of the customer's annual maintenance contract renewal rates.
Service and other revenue consists primarily of PCS revenue. Following the
initial three month PCS period, Ansoft offers customers one-year maintenance
contracts generally at 15% of the list price of the respective software
products. Ansoft recognizes all maintenance revenue ratably over the respective
maintenance period. Customers typically renew maintenance agreements annually.
Revenue from customer training, support and other services is recognized as the
service is performed.
Valuation of Accounts Receivable. Management reviews accounts receivable to
determine which are doubtful of collection. In making the determination of the
appropriate allowance for doubtful accounts, management considers Ansoft's
history of write-offs, relationships with its customers, and the overall credit
worthiness of its customers. The allowance for doubtful accounts as of January
31, 2005 and 2004 was $639 and $903 respectively. The decrease in the allowance
from the prior fiscal year was primarily due to uncollectible customer balances
written off during the nine-month period ending January 31, 2005. We had no
significant changes in our collection policies or payment terms during the
nine-month period ended January 31, 2005.
Page 11
Impairment of Long-Lived Assets. The Company reviews assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. A determination of impairment is made based
on estimates of future cash flows. If such assets are considered to be impaired
the amount of the impairment is based on the excess of the carrying value over
the fair value of the assets.
Goodwill and purchased intangibles with indefinite lives are reviewed annually
for impairment. A determination of impairment is based on the estimated fair
value of the reporting entity.
Impairment of Marketable Securities Available for Sale. An impairment charge is
recorded if a decline in the market value of any available for sale security
below cost is deemed to be other than temporary. The impairment is charged to
earnings and a new cost basis for the security is established.
Deferred Tax Asset Valuation Allowance. Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards. To the extent that is it more likely than not that some portion
or all of the deferred tax asset will not be realized, a valuation allowance is
established. The company considers projected future taxable income and tax
planning strategies in making this assessment.
The judgments used in applying the above policies are based on management's
evaluation of the relevant facts and circumstances as of the date of the
financial statements. Actual results may differ from those estimates.
Additional Risk Factors that may affect Future Results
Our Future Operating Results Are Uncertain.
Ansoft has incurred net losses in three of the past five fiscal years. There can
be no assurance that Ansoft's revenue and net income will grow or be sustained
in future periods or that Ansoft will be profitable in any future period. Future
operating results will depend on many factors, including the degree and the rate
of growth of the markets in which Ansoft competes and the accompanying demand
for Ansoft's products, the level of product and price competition, the ability
of Ansoft to develop and market new products and to control costs, the ability
of Ansoft to expand its direct sales force and the ability of Ansoft to attract
and retain key personnel.
Our Quarterly Operating Results Are Difficult To Predict.
We are unable to accurately forecast our future revenues primarily because of
the emerging nature of the market in which we compete. Our revenues and
operating results generally depend on the size, timing and structure of
significant licenses. These factors have historically been, and are likely to
continue to be, difficult to forecast. In addition, our current and future
expense levels are based largely on our operating plans and estimates of future
revenues and are, to an extent, fixed. We may be unable to adjust spending
sufficiently or quickly enough to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures would seriously harm our business, financial condition and
results of operations. Such shortfalls in our revenue or operating results from
levels expected by public market analysts and investors could seriously harm the
trading price of our common stock. Additionally, we may not learn of such
revenue shortfalls, earnings shortfalls or other failure to meet market
expectations until late in a fiscal quarter, which could result in an even more
immediate and serious harm to the trading price of our common stock.
Page 12
Our quarterly operating results have varied, and it is anticipated that our
quarterly operating results will vary, substantially from period to period
depending on various factors, many of which are outside our control. Due to the
foregoing factors, we cannot predict with any significant degree of certainty
our quarterly revenue and operating results. Further, we believe that
period-to-period comparisons of our operating results are not necessarily a
meaningful indication of future performance.
Our Stock Price Is Extremely Volatile.
The trading price of our common stock has fluctuated significantly in the past,
and the trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to such factors as:
- - Actual or anticipated fluctuations in our operating results;
- - Announcements of technological innovations and new products by us or
our competitors;
- - New contractual relationships with strategic partners by us or
our competitors;
- - Proposed acquisitions by us or our competitors; and
- - Financial results that fail to meet public market analyst expectations of
performance.
In addition, the stock market in general, The Nasdaq National Market and the
market for technology companies in particular has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. These broad market and industry factors
may seriously harm the market price of our common stock in future periods.
Businesses Or Assets We Acquire May Not Perform As Projected.
We have acquired or merged with a number of technologies, assets and companies
in recent years, including the Agilent Technologies' HFSS product line within
the past five years. As part of our efforts to increase revenue and expand our
product and services offerings we may acquire additional companies in the
future. In addition to direct costs, acquisitions pose a number of risks,
including potential dilution of earnings per share, delays and other problems of
integrating the acquired products and employees into our business, the failure
to realize expected synergies or cost savings, the failure of acquired products
to achieve projected sales, the drain on management time for acquisition-related
activities, possible adverse effects on customer buying patterns due to
uncertainties resulting from an acquisition, and assumption of unknown
liabilities. The foregoing factors could seriously harm our business, financial
condition and results of operations.
We May Lose Competitive Advantages If Our Proprietary Rights Are Inadequately
Protected.
Ansoft's success depends, in part, upon its proprietary technology. We rely on a
combination of trade secrets, copyrights, trademarks and contractual commitments
to protect our proprietary rights in our software products. We generally enter
into confidentiality or license agreements with our employees, distributors and
customers, and limit access to and distribution of our software, documentation
and other proprietary information. Despite these precautions, a third party may
still copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In addition,
effective patent, copyright and trade secret protection may be unavailable or
limited in certain foreign countries. It is possible that we may fail to
adequately protect our proprietary rights. This would seriously harm Ansoft's
business, operating results and financial condition.
Page 13
We May Be Unable To Attract And Retain The Key Management And Technical
Personnel That We Need To Succeed.
Ansoft's future operating results depend in large part upon the continued
services of its key technical and management personnel. Ansoft does not have
employment contracts with any executive officer. Ansoft's future success will
also depend in large part on its ability to continue to attract and retain
highly skilled technical, marketing and management personnel. The competition
for such personnel, as well as for qualified EDA engineers, is intense. If
Ansoft is unable to attract, hire and retain qualified personnel in the future,
the development of new products and the management of Ansoft's increasingly
complex business would be impaired. This could seriously harm Ansoft's business,
operating results and financial condition.
We Depend On International Sales for a Significant Percentage Of Our Revenue.
International revenue, principally from Asian customers, accounted for
approximately 57% and 56% of our total revenue in the years ended April 30, 2004
and 2003, respectively. We expect that international license and service revenue
will continue to account for a significant portion of our total revenue for the
foreseeable future. Our international business activities are subject to a
variety of potential risks, including:
- - The impact of recessionary environments in foreign economies;
- - Longer receivables collection periods and greater difficulty in accounts
receivable collection;
- - Difficulties in staffing and managing foreign operations;
- - Political and economic instability;
- - Unexpected changes in regulatory requirements;
- - Reduced protection of intellectual property rights in
some countries; and
- - Tariffs and other trade barriers.
Currency exchange fluctuations in countries in which we license our products
could also seriously harm our business, financial condition and results of
operations. In addition, the laws of certain countries do not protect our
products and intellectual property rights to the same extent, as do the laws of
the United States. Moreover, it is possible that we may fail to sustain or
increase revenue derived from international licensing and service or that the
foregoing factors will seriously harm our future international license and
service revenue, and, consequently, seriously harm our business, financial
condition and results of operations.
We Need To Successfully Manage Our Expanding Operations.
Revenues have grown from $8.7 million in fiscal 1996 to $54.7 million in fiscal
year 2004, and the number of employees has grown from 69 in April 1996 to 276 as
of April 30, 2004. Ansoft's ability to manage growth effectively will require it
to continue to improve its operational and financial systems, hire and train new
employees and add additional space, both domestically and internationally.
Ansoft may not be successful in addressing such risks, and the failure to do so
would seriously harm Ansoft's business, financial condition and results of
operations.
We Depend On The Growth Of The Communications, Semiconductor And Electronics
Industries.
Ansoft is dependent upon the communications and semiconductor industry and, more
generally, the electronics industry. These industries are characterized by rapid
technological change, short product life cycles, fluctuations in manufacturing
capacity and pricing and gross margin pressures. Segments of these industries
have from time to time experienced significant economic downturns characterized
by decreased product demand, production over-capacity, price erosion, work
slowdowns and layoffs. Any significant downturn could be especially severe on
Ansoft. During such downturns, the number of new integrated circuit design
projects often decreases. Because acquisitions of new licenses from Ansoft are
largely dependent upon the commencement of new design projects, any slowdown in
these industries could seriously harm Ansoft's business, financial condition and
results of operations.
Page 14
We Are Controlled By Our Principal Stockholders And Management Which May Limit
Your Ability To Influence Stockholder Matters.
Our executive officers, directors and principal stockholders own approximately
43% of the outstanding shares of Ansoft common stock. As a result, they have the
ability to effectively control us and direct our affairs, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership also may have the effect of delaying, deferring or
preventing a change in control of our company and may make some transactions
more difficult or impossible without the support of these stockholders. The
interests of these stockholders may conflict with those of other stockholders.
Anti-Takeover Provisions in Ansoft's Certificate Of Incorporation, Bylaws, And
Under Delaware Law Could Prevent An Acquisition.
We have adopted a number of provisions that could have anti-takeover effects.
The Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock without any further vote or action by Ansoft's stockholders.
This and other provisions of Ansoft's Certificate of Incorporation, Bylaws and
Delaware Law may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management, including transactions in which the
stockholders of Ansoft might otherwise receive a premium for their shares over
then current market prices.
Seasonal Effects.
Traditionally, sales in the first quarter will decrease from the fourth quarter
of the prior fiscal year. Traditionally, revenues will sequentially increase
over the next three quarters of the fiscal year. The fourth quarter is typically
the highest revenue quarter for the fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Company since April 30, 2004. The majority of our foreign currency transactions
are denominated in the yen or the euro, which are the functional currencies of
Japan and Europe, respectively. As a result of transactions being denominated
and settled in such functional currencies, the risks associated with currency
fluctuations are primarily associated with foreign currency translation
adjustments. We do not currently hedge against foreign currency translation
risks and do not currently believe that foreign currency exchange risk is
significant to our operations due to the short term nature of assets and
liabilities denominated in foreign currencies.
The average foreign exchange rates used to translate the 2004 and 2005
statements of operations were as follows:
Nine months ended Nine months ended
Foreign Currency January 31, 2005 January 31, 2004
- ----------------- ----------------- -----------------
Yen 109.3 116.0
Euro 1.22 1.12
Page 15
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q, and, based on their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that these disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls over financial reporting during the period covered
by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Page 16
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, the repurchases of common stock for the quarter
ended January 31, 2005:
Total number of Maximum number
shares of shares that
repurchased as may yet be
Total number Average part of publicly repurchased
of shares price paid announced plans under the plans
Period repurchased per share or programs or programs (a)
- ----------------------------------- -------------- -------------- ------------------ -----------------
Nov. 1, 2004 - Nov. 30, 2004 62,700 $17.49 2,078,721 921,279
Dec. 1, 2004 - Dec. 31, 2004 76,000 $18.93 2,154,721 845,279
Jan. 1, 2005 - Jan. 31, 2005 57,266 $19.94 2,211,987 788,013
------- ------
Total 195,966 $18.77
======= ======
(a) On October 7, 2004, the Company's Board of Directors increased the
authorized share repurchase amount by 1.0 million shares to 3.0 million
(increase in authorization was publicly announced in a Current Report on Form
8-K filed on October 12, 2004). The Company's share repurchase program was
publicly announced in 1998 and amended in 2002. Unless terminated earlier by
resolution of our Board of Directors, the share repurchase program will expire
when we have repurchased all shares authorized for repurchase thereunder.
Page 17
ITEM 6. EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference from Registration Statement No. 333-40189)
3.2 Certificate of Amendment to the Company's Amended and Restated
Certificate of Incorporation (incorporated by reference from the
Registration Statement No. 333-40189).
3.3 Bylaws of the Company (incorporated by reference from Registration
Statement No. 333-1398).
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes Oxley Act of 2002---Filed herewith.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes Oxley Act of 2002---Filed herewith.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002---Filed herewith.
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 18, 2005 ANSOFT CORPORATION
By: /s/ Nicholas Csendes
-----------------------------
Nicholas Csendes
President and Chief Executive Officer
By: /s/ Thomas A.N. Miller
-----------------------------
Thomas A.N. Miller
Chief Financial Officer
Page 19