15 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 March 31, 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 April 24, 1998 was 16,316,276 shares. ANSYS, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION --------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - 3 March 31, 1998 and December 31, 1997 Condensed Consolidated Statements of 4 Income and Comprehensive Income - Three Months Ended March 31, 1998 and March 31, 1997 Condensed Consolidated Statements of 5 Cash Flows - Three Months Ended March 31, 1998 and March 31, 1997 Notes to Condensed Consolidated 6 Financial Statements Review Report of Independent Accountants 7 Item 2. Management's Discussion and Analysis of 8-12 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15 Trademarks used in this Form 10-Q: ANSYSr and DesignSpacer 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) March 31, Dec. 31, 1998 1997 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 14,024 $ 13,990 Short-term investments 19,242 13,853 Accounts receivable, less allowance for doubtful accounts of $1,430 in 1998 and $2,080 in 1997 6,929 8,034 Other current assets 815 926 Deferred income taxes 125 125 --------- --------- Total current assets 41,135 36,928 Securities available for sale 287 182 Property and equipment, net 4,440 4,771 Capitalized software costs, net of accumulated amortization of $15,502 in 1998 and $15,471 in 1997 229 260 Other intangibles, net 2,247 2,374 Deferred income taxes 8,843 9,066 ----------- --------- Total assets $ 57,181 $ 53,581 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 272 $ 235 Accrued bonuses 770 2,133 Other accrued expenses and liabilities 2,839 2,562 Accrued income taxes payable 836 46 Customer prepayments 518 746 Deferred revenue 8,596 7,445 ----------- --------- Total liabilities 13,831 13,167 Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized - - Common stock, $.01 par value; 50,000,000 shares authorized; 16,359,134 shares issued in 1998 and 1997 164 164 Additional paid-in capital 36,186 36,089 Less treasury stock, at cost: 46,171 shares held in 1998 and 68,800 shares held in 1997 (10) (12) Retained earnings 7,094 4,327 Accumulated other comprehensive income 190 120 Notes receivable from stockholders (274) (274) ----------- --------- Total stockholders' equity 43,350 40,414 ----------- --------- Total liabilities and stockholders' equity $ 57,181 $ 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 share and per share data) (Unaudited) Three months ended March 31, March 31, 1998 1997 ---------- -------- Revenue: Software licenses $ 9,299 $ 9,105 Maintenance and service 4,928 2,908 ---------- -------- Total revenue 14,227 12,013 Cost of sales: Software licenses 891 621 Maintenance and service 650 570 ---------- -------- Total cost of sales 1,541 1,191 ---------- -------- Gross profit 12,686 10,822 Operating expenses: Selling and marketing 3,049 2,978 Research and development 3,093 2,770 Amortization 221 2,253 General and administrative 2,488 1,923 ---------- -------- Total operating expenses 8,851 9,924 ---------- -------- Operating income 3,835 898 Other income 357 147 ---------- -------- Income before income tax provision 4,192 1,045 Income tax provision 1,425 386 ---------- -------- Net income 2,767 659 ---------- -------- Other comprehensive income, net of tax expense of $36: Unrealized gains(losses) on securities 70 (20) ---------- -------- Other comprehensive income 70 (20) ---------- -------- Comprehensive income $2,837 $639 ========== ======== Net income per basic common share: Basic earnings per share $ 0.17 $ 0.04 Weighted average shares - basic 15,921 15,630 Net income per diluted common share: Diluted earnings per share $ 0.17 $ 0.04 Weighted average shares - diluted 16,701 16,571 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) Three months ended March 31, March 31, 1998 1997 --------- --------- Cash flows from operating activities: Net income $ 2,767 $ 659 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 660 2,577 Deferred income tax provision (benefit) 188 (10) Provision for bad debts 225 195 Change in operating assets and liabilities: Accounts receivable 880 329 Income taxes 790 - Other current assets 111 (202) Accounts payable, accrued expenses and liabilities and customer prepayments (1,277) (1,317) Deferred revenue 1,151 1,674 -------- -------- Net cash provided by operating activities 5,495 3,905 -------- -------- Cash flows from investing activities: Capital expenditures (170) (1,165) Capitalization of internally developed software costs - (70) Purchase of short-term investments (5,389) - -------- -------- Net cash used in investing activities (5,559) (1,235) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock under Employee Stock Purchase Plan 94 157 Proceeds from issuance of treasury stock 5 - Proceeds from exercise of stock options - 9 Repayment of stockholder notes - 28 -------- -------- Net cash provided by financing activities 99 194 -------- -------- Net increase in cash and cash equivalents 34 2,864 Cash and cash equivalents, beginning of period 13,990 17,069 -------- -------- Cash and cash equivalents, end of period $ 14,024 $ 19,933 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $265 $900 Supplemental non cash investing and financing activities: Increase (decrease) in securities available for sale 105 (30) The accompanying notes are an integral part of the condensed consolidated financial statements. ANSYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 months ended March 31, 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 ended March 31, 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." This 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 1997 quarter has been restated to reflect adoption of this Statement. The adoption of this standard did not materially impact previously reported earnings per share for the 1997 quarter. 3. ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES (in thousands) Accumulated Unrealized Other Gains on Comprehensive Securities Income Beginning balance $120 $120 Current-period change 70 70 Ending balance $190 $190 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 March 31, 1998, the related condensed consolidated statements of income and comprehensive income for the three-month periods ended March 31, 1998 and 1997, and condensed consolidated cash flows for the three-month periods ended March 31, 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/ Coopers & Lybrand L.L.P. - ----------------------------- Pittsburgh, Pennsylvania April 16, 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 DesignSpacer 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 DesignSpacer 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 periods ended March 31, 1998 and March 31, 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, 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 March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenue. The Company's total revenue increased 18.4% for the 1998 quarter to $14.2 million from $12.0 million for the 1997 quarter. This increase resulted from 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. The increase in revenue in the first quarter was also attributable to an increase in maintenance and service revenue, which resulted from broader customer usage of maintenance and support services and the Company's continued emphasis on marketing these services. These increases were partially offset by a decrease in monthly lease, as discussed in the paragraph below, as well as a decrease in the demand for paid- up licenses as compared to the 1997 quarter. Software license revenue increased 2.1% for the 1998 quarter to $9.3 million from $9.1 million for the 1997 quarter, resulting from a shift in existing monthly lease customers renewing as noncancellable annual leases, as well as sales of new noncancellable annual leases. Revenue from the sales of paid-up licenses, and the portion of noncancellable annual leases classified as paid-up revenue, increased 41.4% for the 1998 quarter to $7.6 million from $5.4 million for the 1997 quarter. 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 1998 quarter. The refinement, which management believes more accurately reflects the Company's current pricing and business practices, resulted in a net revenue increase of approximately $980,000 in the 1998 quarter. The Company also experienced a 54.6% decrease in monthly lease license revenue to $1.7 million for the 1998 quarter from $3.7 million for the 1997 quarter. This decrease was primarily attributable to an increase in the renewal of existing monthly leases as noncancellable annual leases, as well as the conversion of certain existing lease licenses to paid-up licenses during the course of the past year. Maintenance and service revenue increased 69.5% for the 1998 quarter to $4.9 million from $2.9 million for the 1997 quarter, as a result of both a broader customer usage of maintenance and support services and the Company's increased emphasis on marketing these services, as well as an increase in the renewal and sale of noncancellable annual leases. Of the Company's total revenue for the 1998 quarter, approximately 54.1% and 45.9%, 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 29.4% to $1.5 million, or 10.8% of total revenue, for the 1998 quarter from $1.2 million, or 9.9% of total revenue, for the 1997 quarter. The Company's cost of sales for software license revenue increased 43.5% for the 1998 quarter to $891,000, or 9.6% of software license revenue, from $621,000, or 6.8% of software license revenue, for the 1997 quarter. The increase was primarily due to increases in costs related to manuals, packing supplies and media, and to a lesser extent salaries and benefits. The Company's cost of sales for maintenance and service revenue totaled $650,000 and $570,000, or 13.2% and 19.6% of maintenance and service revenue, for the 1998 and 1997 quarters, respectively. The increase in the 1998 quarter was principally attributable to increases in salaries and benefits as additional staff 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 17.2% to $12.7 million for the 1998 quarter from $10.8 million for the 1997 quarter. Selling and Marketing. Total selling and marketing expenses remained relatively constant at $3.0 million for the 1998 and 1997 quarters, and represented 21.4% and 24.8% of total revenue, respectively. During the 1997 quarter, the Company made substantial initial investments in establishing strategic offices in the United Kingdom, Japan and Michigan. These offices continue as an important part of the Company's global sales and marketing strategy in fiscal 1998. The Company anticipates that it will continue to make significant investments throughout fiscal 1998 in its global sales and marketing organization to strengthen its competitive position and to support its worldwide sales channels and marketing strategies. Research and Development. Research and development expenses totaled $3.1 million and $2.8 million for the 1998 and 1997 quarters, or 21.7% and 23.1% of total revenue, respectively. The increase in the 1998 quarter as compared to the 1997 quarter was primarily related to increases in consulting fees and salaries and benefits, partially offset by a decrease in equipment lease expense. The Company has traditionally invested significant resources in research and development activities and intends to continue to make significant investments in fiscal 1998. Amortization. Amortization expense was $221,000 in the 1998 quarter as compared to $2.3 million in the 1997 quarter. This significant decrease was attributable to the full amortization of certain of the intangible assets which resulted from the acquisition of the Company from Swanson Analysis Systems, Inc. in 1994, including goodwill and capitalized software, in the first quarter of 1997. General and Administrative. General and administrative expenses increased 29.4% to $2.5 million, or 17.5% of total revenue, for the 1998 quarter from $1.9 million, or 16.0% of total revenue, for the 1997 quarter. The increase was primarily attributable to an increase in legal fees related to a dispute regarding the expiration of an ASD distribution agreement. Additionally, the Company has added internal resources to support the growth of the Company's operations and information systems. Income Tax Provision. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company's effective rate of taxation was 34.0% for the 1998 quarter as compared to 37.0% for the 1997 quarter. 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. Net Income. The Company's net income in the 1998 quarter was $2.8 million as compared to $660,00 in the 1997 quarter. Diluted earnings per share increased to $.17 in the 1998 quarter as compared to $.04 in the 1997 quarter as a result of the increase in net income. The weighted average shares used in computing net income per diluted common share amounts have increased to 16,701,000 in the 1998 quarter from 16,571,000 in the 1997 quarter. Liquidity and Capital Resources As of March 31, 1998, the Company had cash, cash equivalents and short-term investments totaling $33.3 million and working capital of $27.3 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 $5.5 million for the three months ended March 31, 1998 and $3.9 million for the three months ended March 31, 1997. The increase in the Company's cash flow from operations for the 1998 quarter as compared to the 1997 quarter 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 sales support network and continued investment in research and development activities for the 1998 quarter. Cash used in investing activities totaled $5.6 million for the three months ended March 31, 1998 and $1.2 million for the three months ended March 31, 1997. The use of cash in the 1998 quarter was primarily attributable to the purchase of short-term investments, while the use of cash in the 1997 quarter was primarily related to capital expenditures for the new corporate office facility. The Company currently plans additional capital spending of approximately $1.8 million 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 $99,000 and $194,000 for the three months ended March 31, 1998 and 1997, respectively. Cash provided from financing activities for the 1998 and 1997 quarters principally related to proceeds from the issuance of common stock under the Employee Stock Purchase Plan. The Company believes that existing cash, cash equivalent and short-term investment balances, together with cash generated from operations, will be sufficient to meet the Company's working capital and capital expenditure requirements through at least the remainder of fiscal 1998. The Company's cash requirements in the future may also be financed through additional equity or debt financings. There can be no assurance that such financing can be obtained on favorable terms, if at all. 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 January 1998 63 1 $80.33 February 1998 6,126 3 $5,185.65 March 1998 0 0 0.00 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: April 24, 1998 By: /s/ Peter J. Smith Peter J. Smith Chairman, President and Chief Executive Officer Date: April 24, 1998 By: /s/ John M. Sherbin II John M. Sherbin II Chief Financial Officer; Senior Vice President, Finance and Administration; Secretary 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