1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20853
ANSYS, Inc.
(exact name of registrant as specified in its charter)
DELAWARE 04-3219960
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
275 Technology Drive, Canonsburg, PA 15317
(Address of principal executive offices) (Zip Code)
724-746-3304
(Registrant's telephone number, including area code)
Indicate by a 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
---- ----
The number of shares of the Registrant's Common Stock,
par value $.01 per share, outstanding as of November 6,
1998 was 16,381,458 shares.
ANSYS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION ---------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of
Income and Comprehensive Income - Three
and Nine Months Ended September 30, 1998
and September 30, 1997 3
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended September
30, 1998 and September 30, 1997 4
Notes to Condensed Consolidated
Financial Statements 5
Review Report of Independent Accountants 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-13
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
Trademarks used in this Form 10-Q: ANSYS(r) and DesignSpace(r) are
registered trademarks of SAS IP, Inc., a wholly-owned subsidiary
of ANSYS, Inc.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements:
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
Sept. 30, Dec. 31,
1998 1997
------------ ----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 4,751 $ 13,990
Short-term investments 35,275 13,853
Accounts receivable, less allowance for
doubtful accounts of $1,750 in 1998 and
$2,080 in 1997 7,326 8,034
Other current assets 832 926
Deferred income taxes 80 125
--------- ---------
Total current assets 48,264 36,928
Securities available for sale 182 182
Property and equipment, net 3,937 4,771
Capitalized software costs, net of
accumulated amortization of $15,562 in
1998 and $15,471 in 1997 491 260
Other intangibles, net 1,994 2,374
Deferred income taxes 8,524 9,066
----------- ---------
Total assets $ 63,392 $ 53,581
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 229 $ 235
Accrued bonuses 1,831 2,133
Other accrued expenses and liabilities 3,277 2,562
Accrued income taxes payable 248 46
Customer prepayments 474 746
Deferred revenue 8,329 7,445
----------- ---------
Total Current liabilities 14,388 13,167
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized - -
Common stock, $.01 par value; 50,000,000
shares authorized; 16,390,232 and
16,359,134 shares issued in 1998 and 1997 164 164
Additional paid-in capital 36,474 36,089
Less treasury stock, at cost: 11,874
shares held in 1998 and 68,800 shares
held in 1997 (5) (12)
Retained earnings 12,525 4,327
Accumulated other comprehensive income 120 120
Notes receivable from stockholders (274) (274)
----------- ---------
Total stockholders' equity 49,004 40,414
----------- ---------
Total liabilities and stockholders' equity $ 63,392 $ 53,581
=========== =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ANSYS, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
---------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
---------- ---------- --------- ----------
Revenue:
Software licenses $ 7,884 $ 7,309 $ 25,661 $ 25,249
Maintenance and service 5,623 4,180 15,635 10,811
---------- ---------- --------- ---------
Total revenue 13,507 11,489 41,296 36,060
Cost of sales:
Software licenses 818 669 2,552 2,024
Maintenance and service 697 595 1,987 1,757
--------- --------- --------- ---------
Total cost of sales 1,515 1,264 4,539 3,781
--------- --------- --------- ---------
Gross profit 11,992 10,225 36,757 32,279
Operating expenses:
Selling and marketing 3,225 2,746 9,448 8,470
Research and development 2,663 2,538 8,694 8,341
Amortization 218 177 661 2,607
General and administrative 2,309 2,260 6,990 6,124
--------- --------- --------- ---------
Total operating expenses 8,415 7,721 25,793 25,542
--------- --------- --------- ---------
Operating income 3,577 2,504 10,964 6,737
Other income 533 225 1,398 646
--------- --------- --------- ---------
Income before income tax provision 4,110 2,729 12,362 7,383
Income tax provision 1,400 1,010 4,165 2,730
--------- --------- --------- ---------
Net income 2,710 1,719 8,197 4,653
Other comprehensive income(loss),
net of tax:
Unrealized losses on securities - - - (200)
========== ========== ========= =========
Comprehensive income $ 2,710 $ 1,719 $ 8,197 $ 4,453
========== ========== ========= =========
Net income per basic common share:
Basic earnings per share $ 0.17 $ 0.11 $ 0.51 $ 0.30
Weighted average shares - basic 16,080 15,743 16,006 15,671
---------- ---------- ---------- ---------
Net income per diluted common share:
Diluted earnings per share $ 0.16 $ 0.10 $ 0.49 $ 0.28
Weighted average shares - diluted 16,672 16,838 16,634 16,681
---------- ---------- ---------- ---------
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
------------------
Sept 30, Sept 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 8,197 $ 4,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,012 3,600
Deferred income tax provision 587 150
Provision for bad debts 545 650
Change in operating assets and liabilities:
Accounts receivable 164 85
Income taxes 202 (685)
Other current assets 94 (644)
Accounts payable, accrued expenses and
liabilities and customer prepayments 135 (1,425)
Deferred revenue 884 3,305
--------- ---------
Net cash provided by operating activities 12,820 9,689
--------- ---------
Cash flows from investing activities:
Capital expenditures (707) (1,935)
Capitalization of internally developed software
costs (322) (229)
Proceeds from maturities of short-term
investments 6,248 -
Purchase of short-term investments (27,670) (10,442)
--------- ---------
Net cash used in investing activities (22,451) (12,606)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock under
employee stock purchase plan 168 125
Proceeds from issuance of treasury stock 201 -
Proceeds from exercise of stock options 28 206
Repayment of stockholder notes - 28
Purchase of Treasury stock (5) -
--------- ---------
Net cash provided by financing activities 392 359
--------- ---------
Net decrease in cash and cash equivalents (9,239) (2,558)
Cash and cash equivalents, beginning of period 13,990 17,069
--------- ---------
Cash and cash equivalents, end of period $ 4,751 $ 14,511
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 2,695 $ 3,380
Supplemental non cash investing and financing
activities:
Decrease in securities available for sale - (200)
The accompanying notes are an integral part of the condensed
consolidated financial statements.
ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements included herein have been prepared by ANSYS, Inc. (the
"Company") in accordance with generally accepted accounting
principles for interim financial information for commercial and
industrial companies and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. The financial statements as of and for
the three and nine months ended September 30, 1998 should be read
in conjunction with the Company's consolidated financial
statements (and notes thereto) included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
Accordingly, the accompanying statements do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a
fair presentation of the financial statements have been included,
and all adjustments are of a normal and recurring nature.
Operating results for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
2. NET INCOME PER SHARE
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No.128, "Earnings per Share." The
Statement requires the disclosure of basic and diluted earnings
per share and revises the method required to calculate these
amounts under previous standards. Earnings per share data for the
three and nine month periods ended September 30, 1997 have been
restated to reflect the adoption of this Statement. The adoption
of this standard did not materially impact previously reported
earnings per share for the three and nine months periods ended
September 30, 1997. The total shares issuable upon exercise of
dilutive stock options and outstanding shares of restricted
stock, which are included in the calculation of diluted earnings
per share, totaled 592,000 and 1,095,000 and 628,000 and
1,010,000 for the three and nine month periods ended September
30, 1998 and 1997, respectively.
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
ANSYS, Inc. and Subsidiaries:
We have reviewed the condensed consolidated balance sheet of
ANSYS, Inc. and Subsidiaries as of September 30, 1998, the
related condensed consolidated statements of income and
comprehensive income for the three-month and nine-month periods
ended September 30, 1998 and 1997, and condensed consolidated
cash flows for the nine-month periods ended September 30, 1998
and 1997. These financial statements are the responsibility of
ANSYS's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is an expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ANSYS, Inc.
and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein). In
our report dated January 29, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997, is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
- -----------------------------
Pittsburgh, Pennsylvania
October 20, 1998
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. A global network of
ANSYS Support Distributors ("ASDs") provides sales, support and
training for customers. Additionally, the Company distributes
its DesignSpace(r) products through its global network of ASDs, as
well as a network of independent distributors and dealers (value-
added resellers or "VARs") who support sales of DesignSpace(r)
products to end users throughout the world. The following
discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes
thereto for the three-month and nine-month periods ended
September 30, 1998 and September 30, 1997 and with the Company's
audited financial statements and notes thereto for the fiscal
year ended December 31, 1997.
This Form 10-Q 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 "anticipate", "intend", "believe",
"plan" and other similar expressions. The Company's actual
results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause
such a difference include uncertainties regarding customer
acceptance of new products, possible delays in developing,
completing or shipping new or enhanced products, potential
volatility of revenues and profit in any period due to, among
other things, lower than expected demand for or the ability to
complete large contracts, regional economies, Year 2000 readiness
status, as well as other risks and uncertainties that are
detailed in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section in the
1997 Annual Report to Shareholders , and in the statement of
"Certain Factors Affecting Future Results" included herein as
Exhibit 99 to this Form 10-Q.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months
Ended September 30, 1997
Revenue. The Company's total revenue for the 1998 quarter
increased 17.6% to $13.5 million from $11.5 million for the 1997
quarter. The increase was primarily related to an increase in
maintenance revenue, which resulted from broader customer usage
of maintenance and support services and the Company's continued
emphasis on marketing and promoting these services. The increase
in revenue for the 1998 quarter was also attributable, to a
lesser extent, to an increase in sales of paid-up licenses, as
discussed in further detail below.
Software license revenue totaled $7.9 million for the 1998
quarter as compared to $7.3 million for the 1997 quarter, a 7.9%
increase. This increase principally resulted from a 15.7%
growth in paid-up license revenue to $4.4 million for the 1998
quarter from $3.8 million for the 1997 quarter, primarily in
international markets. Total combined revenue from monthly and
noncancellable annual leases remained stable at $3.5 million for
each of the 1998 and 1997 quarters. While the Company
experienced a $1.3 million decrease in monthly lease revenue in
the 1998 third quarter as compared to the 1997 third quarter,
this was completely offset by a $1.3 million increase in revenue
attributable to the portion of noncancellable annual license fees
which are recognized as paid-up revenue upon renewal or inception
of the lease. The Company anticipates that revenue from monthly
leases will continue to decline as existing leases are renewed,
and new leases are sold, as noncancellable annual leases, and to
a lesser extent certain monthly leases are converted to paid-up
licenses.
Maintenance and service revenue increased 34.5% for the 1998
quarter to $5.6 million from $4.2 million for the 1997 quarter,
as a result of 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 for the 1998 quarter,
approximately 54.2% and 45.8%, respectively, were attributable to
international and domestic sales, as compared to 53.3% and 46.7%,
respectively, for the 1997 quarter.
Cost of Sales and Gross Profit. The Company's total cost of
sales increased 19.9% to $1.5 million, or 11.2% of total revenue,
for the 1998 quarter from $1.3 million, or 11.0% of total
revenue, for the 1997 quarter. The Company's cost of sales for
software license revenue increased 22.3% for the 1998 quarter to
$818,000, or 10.4% of software license revenue, from $669,000, or
9.2% of software license revenue, for the 1997 quarter. The
increase was principally attributable to additional headcount and
related costs. The Company's cost of sales for maintenance and
service revenue, which totaled $697,000 and $595,000, or 12.4%
and 14.2% of maintenance and service revenue, for the 1998 and
1997 quarters, respectively, also increased due to additional
headcount and related costs, and to a lesser extent due to
increased consulting fees in the 1998 third quarter.
As a result of the foregoing, the Company's gross profit
increased 17.3% to $12.0 million for the 1998 quarter from $10.2
million for the 1997 quarter.
Selling and Marketing. Selling and marketing expenses increased
17.4% for the 1998 quarter to $3.2 million from $2.7 million for
the 1997 quarter, or 23.9% of total revenue for both the 1998 and
1997 quarters. During the 1998 quarter, the Company experienced
an increase in expenses directly associated with its worldwide
users' conference, in addition to increased expenses associated
with strategic office locations in the United Kingdom, China and
Japan, as compared to the 1997 quarter.
Research and Development. Research and development expense
totaled $2.7 million and $2.5 million for the 1998 and 1997
quarters, or 19.7% and 22.1% of total revenue, respectively, and
exclude costs which are capitalized in accordance with Financial
Accounting Standards No.86. The increase in research and
development expense in the 1998 quarter was primarily
attributable to increased consulting fees and developers'
salaries as compared to the 1997 quarter. The 1998 and 1997
quarters exclude capitalized internal software costs of
approximately $280,000 and $90,000, respectively. The amount of
capitalized software development costs will vary among quarters
depending upon the stage of the development cycle which the
Company has reached in connection with future commercial product
releases.
Amortization. Amortization expense remained relatively
consistent at $218,000 and $177,000 in the 1998 and 1997 quarter,
respectively.
General and Administrative. General and administrative expenses
have remained stable at $2.3 million, or 17.1% and 19.7% of total
revenue for the 1998 and 1997 quarters, respectively.
Other Income. Other income increased 136.9% to $533,000 for the
1998 quarter as compared to $225,000 for the 1997 quarter. This
increase was attributable to higher interest-bearing cash and
short-term investment balances in the 1998 quarter.
Income Tax Provision. The Company's effective rate of taxation
was 34.1% for the 1998 quarter as compared to 37.0% for the 1997
quarter. This percentage is less than the federal and state
combined statutory rate 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 and is the primary reason for the decrease in the
Company's effective tax rate in the 1998 quarter.
Net Income. The Company's net income in the third quarter of
1998 was $2.7 million as compared to $1.7 million in the third
quarter of 1997. Diluted earnings per share increased to $0.16
in the 1998 quarter as compared to $0.10 in the 1997 quarter. The
increase in diluted earnings per share is attributable to the
increase in net income. The weighted average shares outstanding
used in computing net income per diluted common share totaled
16,672,000 and 16,838,000 in the 1998 and 1997 quarter,
respectively.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
Revenue. The Company's total revenue increased 14.5% for the
1998 nine months to $41.3 million from $36.1 million for the 1997
nine months. This increase was attributable principally to an
increase in revenue from renewals and sales of leases as
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.
This increase, which was partially offset by a decrease in
monthly lease revenue, as discussed in the paragraph below, was
due, in part, to the active sales and licensing of noncancellable
annual leases to existing and new lease customers. The increase
in revenue in the 1998 nine months 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 and promoting its
maintenance services.
Software license revenue totaled $25.7 million for the 1998 nine
months as compared to $25.2 million for the 1997 nine months, an
increase of 1.6 %. The increase resulted principally from an
increase in revenue from renewals and sales of leases as
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 35.0% for the 1998 nine months to $20.9 million from
$15.4 million for the 1997 nine months. 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, which occurred in the
first quarter of 1998. The refinement, which management believes
more accurately reflects the Company's current pricing and
business practices, resulted in a net revenue increase of
approximately $1.1 million in the 1998 nine months, of which
approximately $980,000 was recorded in the first quarter of 1998.
The increase discussed above was partially offset by a 51.0%
decrease in monthly lease license revenue to $4.8 million for the
1998 nine months from $9.8 million for the 1997 nine months. This
decrease was attributable to both an increase in the renewal of
existing monthly leases as noncancellable annual leases, and to a
lesser extent the conversion of certain existing lease licenses
to paid-up licenses throughout the course of the past year.
Maintenance and service revenue increased 44.6% for the 1998 nine
months to $15.6 million from $10.8 million for the 1997 nine
months, as a result of 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 for the 1998 nine months,
approximately 53.6% and 46.4%, respectively, were attributable to
international and domestic sales, as compared to 53.1% and 46.9%,
respectively, for the 1997 nine months.
Cost of Sales and Gross Profit. The Company's total cost of
sales increased 20.0% to $4.5 million, or 11.0% of total revenue,
for the 1998 nine months from $3.8 million, or 10.5% of total
revenue, for the 1997 nine months. The Company's cost of sales
for software license revenue increased 26.1% for the 1998 nine
months to $2.6 million, or 9.9% of software license revenue, from
$2.0 million, or 8.0% of software license revenue, for the 1997
nine months. The increase was due to the addition of headcount
and related expenses, as well as increased 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 $2.0 million and $1.8 million, or 12.7% and 16.3%
of maintenance and service revenue, for the 1998 and 1997 nine
months, respectively. The increase in the 1998 period was
principally attributable to increases in salaries, benefits and
consulting fees as additional staff and consultants have been
added to support the growth in global service revenue and related
customer and ASD support needs.
As a result of the foregoing, the Company's gross profit
increased 13.9% to $36.8 million for the 1998 nine months from
$32.3 million for the 1997 nine months.
Selling and Marketing. Selling and marketing expenses increased
11.5% for the 1998 nine months to $9.4 million, or 22.9% of total
revenue, from $8.5 million, or 23.5% of total revenue, for the
1997 nine months. The increase in selling and marketing expenses
resulted primarily from increased consulting and sales support
costs incurred in connection with supporting its global sales and
marketing infrastructure. Additionally, during the 1998 nine
month period the Company also 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, as compared to the 1997 nine
month period.
Research and Development. Research and development expenses
increased 4.2% for the 1998 nine months to $8.7 million, or 21.1%
of total revenue, from $8.3 million, or 23.1% of total revenue,
for the 1997 nine months. This increase resulted primarily from
a growth in computer software costs and hardware related
depreciation expense as the Company continues to invest in
software and hardware tools used to develop and enhance the
Company's products, as well as increased consulting costs
associated with the releases of ANSYS 5.5 and DesignSpace 4.1.
Amortization. Amortization expense totaled $661,000 for the 1998
nine months as compared to $2.6 million for the 1997 nine months.
The decrease was attributable to the full amortization of certain
intangible assets, including goodwill and capitalized software,
during the first quarter of 1997.
General and Administrative. General and administrative expenses
increased 14.1% for the 1998 nine months to $7.0 million, or
16.9% of total revenue, from $6.1 million, or 17.0% of total
revenue, for the 1997 nine months. The increase is primarily
attributable to an increase in headcount and related expenses as
the Company has added internal information technology, finance
and administrative resources to support its global operations and
infrastructure. In addition, during the 1998 nine months, the
Company experienced an increase in legal fees related to a
dispute regarding the expiration of an ASD distribution
agreement. These increases were partially offset by a decrease
in bad debt expense.
Other Income. Other income increased 116.4% to $1.4 million for
the 1998 nine month period as compared to $646,000 for the 1997
nine month period. This increase was attributable to higher
interest-bearing cash and short-term investment balances in 1998.
Income Tax Provision. The Company's effective rate of taxation
was 33.7% for the 1998 nine months, as compared to 37.0% for the
1997 nine months. These percentages are less than the federal and
state combined statutory rate 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 and is the primary reason for the decrease in the
Company's effective tax rate in the 1998 nine months.
Net Income. The Company's net income in the nine months of 1998
totaled $8.2 million as compared to net income of $4.7 million in
the 1997 nine months. Diluted earnings per share increased to
$0.49 in the 1998 nine months as compared to diluted earnings per
share of $0.28 in the 1997 nine months as a result of the
increase in net income. The weighted average shares used in
computing net income per diluted share totaled 16,634,000 in the
1998 nine month period and 16,681,000 in the 1997 nine month
period.
Liquidity and Capital Resources
As of September 30, 1998, the Company had cash, cash equivalents
and short-term investments totaling $40.0 million and working
capital of $33.9 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 Company's operating activities provided cash of $12.8 million
for the nine months ended September 30, 1998 and $9.7 million for
the nine months ended September 30, 1997. The increase in the
Company's cash flow from operations for the 1998 nine months as
compared to the 1997 nine months was a result of increased
earnings as well as improved management of working capital. 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 infrastructure and
continued investment in research and development activities for
the nine months ended September 30, 1998.
Cash used in investing activities totaled $22.5 million for the
nine months ended September 30, 1998 and $12.6 million for the
nine months ended September 30, 1997. The increase is principally
due to the purchase of short-term investments in the nine months
ended September 30, 1998. Capital expenditures in 1997 have been
primarily related to furniture and equipment for the new
corporate office facility, which the Company initially occupied
in February 1997, as well as computer hardware and software to
support the continued growth of the Company's development
activities and the expansion of its global sales and support
infrastructure. The Company currently plans additional capital
spending of approximately $250,000 throughout the remainder of
1998, however, the level of spending will be dependent upon
various factors, including growth of the business and general
economic conditions.
Financing activities provided net cash of $392,000 for the nine
months ended September 30, 1998 and $359,000 for the nine months
ended September 30, 1997. Cash provided from financing
activities for the 1998 and 1997 nine month periods primarily
included proceeds from issuance of treasury stock and common
stock under employee stock option and purchase plans.
Management's Assessment of Year 2000 Readiness.
The subsequent "Year 2000 ("Y2K")" discussion 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 "believe," "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; and the Company's belief that its internal
systems and equipment will be Year 2000 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 following section include "Year 2000
readiness disclosure" within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
The "Year 2000" 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.
Company's 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 Family of Products
and the DesignSpace products are Y2K Compliant, as defined below.
Management believes that essentially 100% of its year-to-date
1998 license and service revenue has been derived from the sale
of Y2K Compliant products and services. The Company defines
"Y2K Compliant" as meaning the ability to meet the British
Standards Institution DISC PD2000-1: 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 and after the year 2000.
The Company began shipping Y2K Compliant ANSYS Family of Products
beginning in 1997 with Release 5.4. The Company began shipping
Y2K Compliant DesignSpace products beginning in 1996 with Release
2.0. The Company believes that versions of the ANSYS Family of
Products shipped between 1993 through 1996 should work past
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 running 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 Family of Products shipped prior to 1993 will not work
after December 31, 1999 and ANSYS has continually advised its
customers to upgrade such products to newer versions.
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 or its operations.
Company's Internal Systems:
The Company has developed a Year 2000 Project Plan ("Y2K Plan")
that addresses both information technology systems ("IT") (i.e.
business systems and the software development environment) and
non-IT systems, ie. 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 testing.
Phases 1-3 are complete. Phase 4 (implementation) and Phase 5
(compliance 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 phase of the Y2K Plan.
[Graph of Compliance Status Determined]
A bar chart entitled "Compliance Status Determined" at the top
left of page 15 of the 10-Q shows that by 9/30/98, 12/31/98 and
3/31/99 (shown below each bar) the Company has determined
compliance status to be 87%, 97% and 100%, respectively.
[Graph of Remediation Complete]
A bar chart entitled "Remediation Complete" at the top middle of
page 15 of the 10-Q shows that by 9/30/98, 12/31/98, 3/31/99,
6/30/99 and 9/30/99 (shown below each bar) the Company has
determined remediation to be 63%, 80%, 95%, 99% and 100%
completed by the respective dates.
[Graph of Final Certification Testing Complete]
A bar chart entitled "Final Certification Testing Complete" at
the top right of page 15 of the 10-Q shows that by 9/30/98,
12/31/98, 3/31/99, 6/30/99, 9/30/99 and 12/31/99 (shown below
each bar) the Company has determined final certification testing
to be 21%, 40%, 60%, 80%, 99% and 100% completed by the
respective dates.
Company's Cost of Year 2000 Compliance Efforts:
The Company has funded its Y2K Plan from operating cash flows and
has not separately accounted for these 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 cost to
the Company for achieving Y2K compliance is approximately
$500,000 over three years (1997 - 2000), with about half 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 business results. There can be no assurance, however,
that there will not be a delay in the completion of the Y2K Plan
or that the cost of the Y2K Plan will not exceed present
estimates, either of which could have a material adverse effect
on future results of operations. The Company may experience
unforeseen material problems and costs with Y2K compliance that
could adversely affect the Company's business, results of
operations, and financial condition.
Company's 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.
Company's 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 the information provided by these independent
third parties and is still pursuing those key distributors and
vendors who may not yet have 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 software to address Y2K compliance problems,
the Company's business, results of operations, or financial
condition could be materially adversely affected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
(c)The following information is furnished in
connection with securities sold by the
Registrant during the period covered by this Form
10-Q which were not registered under the Securities
Act. The transactions constitute sales of the
Registrant's Common Stock, par value $.01 per
share, upon the exercise of vested options issued
pursuant to the Company's 1994 Stock Option and
Grant Plan, issued in reliance upon the exemption from
registration under Rule 701 promulgated under the
Securities Act and issued prior to the Registrant
becoming subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act of 1934, as
amended.
Number of Number of Aggregate
Month/Year Shares Employees Exercise Price
July 1998 9,500 3 $3,800.00
August 1998 10,750 5 $5,831.25
September 1998 126 1 $ 160.65
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other information
Not Applicable.
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits.
15 Independent Accountants' Letter Regarding
Unaudited Financial Information
27.1 Financial Data Schedule
99 Certain Factors Regarding Future Results
(b) Reports on Form 8-K.
Not Applicable.
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.
ANSYS, Inc.
Date: November 9, 1998 By: /s/ Peter J. Smith
Peter J. Smith
Chairman, President and
Chief Executive Officer
Date: November 9, 1998 By: /s/ Maria T. Shields
Maria T. Shields
Chief Financial Officer;
Vice President, Finance
and Administration; Treasurer
Item 6.
EXHIBIT INDEX
-----------------
Exhibit
No.
15 Independent Accountants' Letter
Regarding Unaudited Financial
Information
27.1 Financial Data Schedule
99 Certain Factors Regarding Future
Results
__________