<PAGE>
Filed Pursuant to
Rule 424(b) (1)
3,550,000 Shares
[LOGO OF ANSYS INC.]
Common Stock
--------
Of the 3,550,000 shares of Common Stock (the "Common Stock") offered hereby,
3,500,000 shares are being sold by ANSYS, Inc. (the "Company") and 50,000
shares are being sold by a stockholder of the Company (the "Selling
Stockholder"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder. Prior
to this offering, there has been no public market for the Common Stock. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq Stock Market (National Market) upon
completion of this offering under the trading symbol "ANSS."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 7 HEREOF.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS TO SELLING
PUBLIC AND COMMISSIONS COMPANY(1) STOCKHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $13.00 $.91 $12.09 $12.09
- --------------------------------------------------------------------------------
Total(2).................... $46,150,000 $3,230,500 $42,315,000 $604,500
================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $850,000.
(2) Certain stockholders of the Company have granted to the Underwriters a 30-
day option to purchase up to 532,500 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $53,072,500, $3,715,075 and $7,042,425, respectively.
See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
June 25, 1996.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
WESSELS, ARNOLD & HENDERSON
PARKER/HUNTER
INCORPORATED
THE DATE OF THIS PROSPECTUS IS JUNE 20, 1996
<PAGE>
Behind it all, there's ANSYS/(R)/
[GRAPHIC DEPICTING ANSYS PRODUCTS] ANSYS products help
reduce the time and cost
of development as well
as improve product
design and quality. The
family of ANSYS
products ranges from
ANSYS/AutoFEA for
design optimization to
ANSYS/Multiphysics
for advanced design
verification.
Biomedical
[PHOTO OF MEDICAL IMPLANTS]
DePuy Inc. engineers use ANSYS
technology to develop reliable and
durable medical implants and the
surgical instruments used to install
them. The software also allows
DePuy to shorten its new product
development cycle by reducing the
number of prototypes required for
testing.
Marine Habitats
[PHOTO OF UNDERSEA MARINE EXHIBIT]
Reynolds Polymer is a global
provider of aquarium systems and
acrylic components for undersea
habitats and marine parks.
Reynolds engineers build attractive
and interactive exhibits using
developments in glass and acrylics,
combined with the use of ANSYS
analysis software to ensure product
safety and cost effectiveness.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE; SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
THE COMPANY
ANSYS, Inc. (the "Company") develops, markets and supports software solutions
for design analysis and optimization. Engineering analysts and design engineers
use the Company's software to accelerate product time to market, reduce
production costs, improve engineering processes and optimize product quality
and safety for a variety of manufactured products, ranging from basic consumer
goods to satellite tracking systems. The ANSYS product family features open,
flexible architecture that permits easy integration into its customers'
enterprise-wide engineering systems and facilitates effective implementation of
process-centric engineering.
Since its founding in 1970 as Swanson Analysis Systems, Inc. ("Swanson
Analysis"), the Company has become a technology leader in the market for
computer-aided engineering ("CAE") analysis software. The Company has long-
standing relationships with customers in many industries, including automotive,
aerospace and electronics. Using the Company's products, engineers can
construct computer models of structures, compounds, components or systems to
simulate performance conditions and physical responses to varying levels of
stress, pressure, temperature and velocity. This helps reduce the time and
expense of physical prototyping and testing.
The Company's software has been developed and enhanced to help customers meet
several of the major challenges faced by businesses today, including increasing
global competition and the need and ability to solve more complex product
design problems. The Company believes that these factors, combined with the
decreasing cost of computer hardware, are accelerating the demand for design
analysis software solutions and have created an expanding marketplace,
described by the Company as the design analysis and optimization market. This
market includes a base of engineering analysts who use the Company's CAE
analysis software to validate product design, as well as the broader group of
design engineers who use analysis tools integrated within their computer-aided
design ("CAD") systems to optimize and evaluate products much earlier in the
development cycle.
The Company's objectives are to increase market share among the traditional
base of engineering analysts, to extend its product line to meet the demands of
the broader group of design engineers and to increase the adoption of its
products by new users, such as engineers in the biomedical and food processing
industries. The Company's strategy focuses on maintaining and enhancing its
technology leadership; offering an open and flexible software product family;
pursuing a customer driven sales, services and marketing approach; capitalizing
on its established global distribution and support network; and leveraging
strategic relationships with leading CAD suppliers and third party providers of
complementary hardware and software.
The Company's product line ranges from ANSYS/Multiphysics, a sophisticated
multi-disciplinary CAE tool for engineering analysts, to AutoFEA, a CAD-
integrated design optimization product for design engineers. The Company's
product family features a unified database, a wide range of analysis
functionality, a consistent, easy-to-use graphical user interface, support for
multiple hardware platforms and operating systems (including Windows 95,
Windows NT and Unix), effective user customization tools and integration with
leading CAD systems. The Company's products are developed using the Company's
ISO 9001-certified quality system.
The Company markets its products principally through its global network of 35
independent regional ANSYS Support Distributors, which have 68 offices in 27
countries. More than 4,000 companies throughout the world use ANSYS products,
including 61 of the Global Fortune Industrial 100 companies and each of the
top 10.
3
<PAGE>
On March 14, 1994, the Company acquired substantially all of the assets of
Swanson Analysis for approximately $48.0 million in cash (the "1994
Acquisition"). The 1994 Acquisition was funded through the incurrence of $28.0
million of senior secured indebtedness (the "1994 Loan") and $15.0 million of
10% Subordinated Notes (the "Subordinated Notes") and the issuance of $4.0
million of 10% Redeemable Preferred Stock (the "Redeemable Preferred Stock")
and approximately $1.0 million of Common Stock. The equity and subordinated
indebtedness funding was contributed principally by investment funds associated
with TA Associates, Inc., a private equity firm based in Boston, Massachusetts
(the "TA Investors"), Chestnut III Limited Partnership and Chestnut Capital
International III L.P. (collectively the "Chestnut Investors"), and Dr. John A.
Swanson, the founder of the Company. See "Certain Transactions." The
indebtedness and preferred stock issued to finance the 1994 Acquisition will be
repaid and redeemed with the net proceeds from this offering, and the goodwill
and capitalized software resulting from the 1994 Acquisition will be fully
amortized in March 1997. As a result, the Company's interest and amortization
expenses will decrease substantially.
The Company was incorporated under the laws of the State of Delaware on
January 12, 1994. The Company's principal executive offices are located at 201
Johnson Road, Houston, Pennsylvania 15342-1300, and its telephone number is
(412) 746-3304.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............... 3,500,000 shares
Common Stock offered by the Selling Stockholder... 50,000 shares
Common Stock to be outstanding after the offering. 16,152,760 shares(1)
Use of proceeds................................... To repay all existing senior secured and
subordinated indebtedness, to redeem all
outstanding shares of redeemable preferred
stock and for general corporate purposes.
Nasdaq National Market symbol..................... ANSS
</TABLE>
- --------
(1) Excludes (i) 868,110 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of
approximately $4.36 per share, substantially all of which are not
exercisable as of the date of this Prospectus, and (ii) 2,250,000 and
210,000 additional shares of Common Stock reserved for future issuance
under the Company's 1996 Stock Option and Grant Plan (the "1996 Stock
Plan") and 1996 Employee Stock Purchase Plan (the "Purchase Plan"),
respectively. See "Management--Employee Stock and Other Benefit Plans--1996
Stock Option and Grant Plan" and "--1996 Employee Stock Purchase Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
PREDECESSOR COMPANY(1) THE COMPANY COMBINED THE COMPANY
----------------------------------- ------------ ------------ --------------------------------
PERIOD FROM
MARCH 14,
PERIOD FROM 1994
JANUARY 1, (DATE OF
1994 ACQUISITION) THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED YEAR ENDED -------------------
----------------------- MARCH 13, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1991 1992 1993 1994 1994 1994 1995 1995 1996
------- ------- ------- ----------- ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue................. $27,900 $30,458 $31,604 $6,569 $26,254 $32,823 $39,616 $ 8,226 $10,733
Cost of sales........... 4,498 5,196 6,103 945 3,743 4,688 4,903 1,229 1,195
------- ------- ------- ------ ------- ------- ------- ------- -------
Gross profit............ 23,402 25,262 25,501 5,624 22,511 28,135 34,713 6,997 9,538
Operating expenses:
Selling and marketing.. 2,800 3,262 3,763 673 3,836 4,509 7,526 1,649 2,169
Research and
development.......... 3,573 6,400 5,972 1,349 5,410 6,759 8,329 2,019 2,330
Amortization........... 132 528 937 300 8,420 8,720 10,641 2,660 2,719
General and
administrative....... 6,000 5,369 7,181 1,234 4,606 5,840 6,857 1,493 1,850
------- ------- ------- ------ ------- ------- ------- ------- -------
Total operating
expenses............ 12,505 15,559 17,853 3,556 22,272 25,828 33,353 7,821 9,068
------- ------- ------- ------ ------- ------- ------- ------- -------
Operating income (loss). 10,897 9,703 7,648 2,068 239 2,307 1,360 (824) 470
Interest expense and
other income, net...... 962 769 472 (22) (2,945) (2,967) (3,733) (956) (797)
------- ------- ------- ------ ------- ------- ------- ------- -------
Income (loss) before
income tax benefit..... 11,859 10,472 8,120 2,046 (2,706) (660) (2,373) (1,780) (327)
Income tax benefit (2).. -- -- -- -- 917 917 793 595 126
------- ------- ------- ------ ------- ------- ------- ------- -------
Net income (loss)....... $11,859 $10,472 $ 8,120 $2,046 $(1,789) $ 257 $(1,580) $(1,185) $ (201)
======= ======= ======= ====== ======= ======= ======= ======= =======
Net income (loss)
applicable to common
stock.................. $(2,025) $(1,286) $ (303)
======= ======= =======
Net income (loss) per
common share (3)....... $ (0.17) $ (0.11) $ (0.02)
======= ======= =======
Shares used in computing
per common share
amounts (3)............ 12,261 12,279 12,457
======= ======= =======
Pro forma data (4):
Pro forma net income
per common share....... $ 0.08 $ 0.02
======= =======
Pro forma shares used
in computing per
common share amounts... 15,451 15,647
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(5)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................................ $ 5,577 $ 5,577
Working capital.................................................................................. 4,194 9,176
Total assets..................................................................................... 41,998 41,607
Long-term debt, less current portion............................................................. 31,704 --
Redeemable preferred stock....................................................................... 4,994 --
Total stockholders' equity (deficit)............................................................. (9,869) 31,205
</TABLE>
(FOOTNOTES ON NEXT PAGE)
5
<PAGE>
- --------
(1) Presents consolidated financial data of the Company's predecessor for the
periods prior to the Company's acquisition of substantially all of the
assets and the assumption of certain liabilities of the predecessor,
effective March 14, 1994. See "Certain Transactions." Because of such
transactions, certain aspects of the consolidated results of operations for
periods prior to the period beginning March 14, 1994 are not comparable
with those for subsequent periods. Net income (loss) per share data are
presented only for the year ended December 31, 1995 and the three months
ended March 31, 1995 and 1996. Net income (loss) per common share for the
year ended December 31, 1995 and the three months ended March 31, 1995 and
1996 has been computed after deducting $446,000, $102,000 and $102,000,
respectively, from net income (loss), which deductions represent preferred
stock dividend accumulations.
(2) The Company's predecessor was an S Corporation and accordingly was not
subject to federal or state income tax.
(3) For a description of the computation of the number of shares and the net
income (loss) per share, see Note 2 of Notes to Consolidated Financial
Statements.
(4) The pro forma data give effect to the sale of 3,500,000 shares of Common
Stock offered by the Company hereby as if it occurred at January 1, 1995 or
at January 1, 1996 for the three months ended March 31, 1996, and include
(i) elimination of dividends resulting from the redemption of all
Redeemable Preferred Stock; (ii) elimination of interest expense resulting
from the repayment of the 1994 Loan and all Subordinated Notes; (iii)
elimination of amortization of deferred loan fees and an interest rate cap;
and (iv) adjustments to income taxes to reflect the tax effects of the
items listed in (ii) and (iii) above.
(5) Adjusted to give effect to the issuance of the 3,500,000 shares of Common
Stock offered by the Company hereby and the use of the net proceeds
therefrom as set forth in "Use of Proceeds."
------------
Except as otherwise indicated, information in this prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
reflect a 10-for-1 stock split, effected in the form of a stock dividend on
April 30, 1996, and the conversion of all outstanding shares of non-voting
Class A Common Stock into an equal number of shares of Common Stock upon
completion of this offering. See "Description of Capital Stock" and Notes 9 and
18 of Notes to Consolidated Financial Statements. Unless the context otherwise
requires, all references to the "Company" shall mean ANSYS, Inc., its
predecessor and all of its direct and indirect subsidiaries.
------------
ANSYS, ANSYS/AutoFEA, ANSYS/ProFEA, COMPUFLO and FLOTRAN are registered
trademarks of the Company. DesignSpace, ANSYS/Multiphysics, ANSYS/Mechanical,
ANSYS/Thermal, ANSYS/LinearPlus, ANSYS/Emag, ANSYS/LS-DYNA, ANSYS/PrepPost and
ANSYS/ED are trademarks of the Company. All other trademarks, trade names or
service marks referred to in this Prospectus are the property of their
respective owners.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
in evaluating an investment in the shares of Common Stock offered hereby.
Dependence on Core ANSYS Products. The Company currently derives
substantially all of its revenues from sales and maintenance of a core group
of analysis products derived primarily from its comprehensive
ANSYS/Multiphysics product. As a result, any factor adversely affecting sales
of the Company's core multiphysics products would have a materially adverse
effect on the Company. The Company's future performance will depend upon the
successful development, introduction and customer acceptance of new or
enhanced versions of its existing products and broader market acceptance of
these products. There can be no assurance that the Company will continue to be
successful in marketing the ANSYS family of products or any new or enhanced
products the Company may develop in the future. In addition, competitive
pressures or other factors may result in price erosion that could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Products."
Sales of the Company's more recently introduced design optimization/CAD
integrated products represented less than 4% of revenue in 1995. The Company's
growth strategy emphasizes maintenance and growth of its market position
within its traditional base of engineering analysts while seeking increased
penetration of the broader group of design engineers by offering products that
are integrated directly within CAD products and facilitate design optimization
earlier in the development cycle. The Company's design products have been
introduced only recently, however, and no assurance can be given as to whether
they will achieve significant market penetration. Failure to execute the
Company's strategy successfully, particularly with respect to the introduction
of new design products, would adversely affect the Company's growth and cause
it to remain reliant upon the more traditional CAE market.
Dependence on Proprietary Technology. The Company's success is highly
dependent upon its proprietary technology. The Company does not have patents
on any of its technology and relies on contracts and the laws of copyright and
trade secrets to protect its technology. Although the Company maintains a
trade secrets program, enters into confidentiality agreements with its
employees and distributors and limits access to and distribution of its
software, documentation and other proprietary information, there can be no
assurance that the steps taken by the Company to protect its proprietary
technology will be adequate to prevent misappropriation of its technology by
third parties, or that third parties will not be able to develop similar
technology independently. Although the Company is not aware that any of its
technology infringes upon the rights of third parties, there can be no
assurance that other parties will not assert technology infringement claims
against the Company, or that, if asserted, such claims will not prevail. See
"Business--Proprietary Rights and Licenses."
Rapidly Changing Technology; New Products; Risk of Product Defects. The
markets for the Company's products are generally characterized by rapidly
changing technology and frequent new product introductions that can render
existing products obsolete or unmarketable. A major factor in the Company's
future success will be its ability to anticipate technological changes and to
develop and introduce in a timely manner enhancements to its existing products
and new products to meet those changes. If the Company is unable to introduce
new products and respond to industry changes on a timely basis, its business,
financial condition and results of operations could be materially adversely
affected. The introduction and marketing of new or enhanced products require
the Company to manage the transition from existing products in order to
minimize disruption in customer purchasing patterns. There can be no assurance
that the Company will be successful in developing and marketing, on a timely
basis, new products or product enhancements, that its new products will
adequately address the changing needs of the marketplace, or that it will
successfully manage the transition from existing products. Software products
as complex as those offered by the Company may contain undetected errors or
failures when first introduced or as new versions are released, and the
likelihood of errors is increased as a result of the Company's commitment to
accelerating the frequency of its product releases. There can be no assurance
that
7
<PAGE>
errors will not be found in new or enhanced products after commencement of
commercial shipments. Any of these problems may result in the loss of or delay
in market acceptance, diversion of development resources, damage to the
Company's reputation, or increased service or warranty costs, any of which
could have a materially adverse effect upon the Company's business, financial
condition and results of operations. See "Business--Products," "--Product
Development" and "--Competition."
Dependence on Distributors. The Company distributes its products principally
through its global network of 35 independent, regional ANSYS Support
Distributors ("ASDs"), and 96.9% of the Company's revenue in 1995 resulted
from sales of ANSYS products by ASDs. The ASDs sell ANSYS products and other
noncompeting products to new and existing customers, expand installations
within their existing customer base, offer consulting services and provide the
first line of ANSYS technical support. The ASDs have more immediate contact
with most customers who use ANSYS software than does the Company.
Consequently, the Company is highly dependent on the efforts of the ASDs.
Difficulties in ongoing relationships with ASDs, such as delays in collecting
accounts receivable, ASDs' failure to meet performance criteria or to promote
the Company's products as aggressively as the Company expects, and differences
in the handling of customer relationships, could adversely affect the
Company's performance. The six largest ASDs accounted for approximately 48.1%
of the Company's revenue in 1995. The loss of any major ASD for any reason,
including an ASD's decision to sell competing products rather than ANSYS
products, could have a materially adverse effect on the Company. Moreover, the
Company's future success will depend substantially on the ability and
willingness of its ASDs to continue to dedicate the resources necessary to
promote the Company's products and to support a larger installed base of the
Company's products. If the ASDs are unable or unwilling to do so, the Company
may be unable to sustain revenue growth. See "Business--Sales and Marketing"
and "--Customer Support and Services."
Competition. The CAD, CAE and computer-aided manufacturing ("CAM") market is
intensely competitive. In the traditional CAE market, the Company's primary
competitors include MacNeal-Schwendler Corporation, Hibbitt, Karlsson and
Sorensen, Inc. and MARC Analysis Research Corporation. The Company also faces
competition from smaller vendors of specialized analysis applications in
fields such as computational fluid dynamics. In addition, certain integrated
CAD suppliers such as Parametric Technology Corporation and Structural
Dynamics Research Corporation provide varying levels of design analysis and
optimization and verification capabilities as part of their product offerings.
The entrance of new competitors would be likely to intensify competition in
all or a portion of the overall CAD, CAE and CAM market. Some of the Company's
current and possible future competitors have greater financial, technical,
marketing and other resources than the Company, and some have well established
relationships with current and potential customers of the Company. It is also
possible that alliances among competitors may emerge and rapidly acquire
significant market share or that competition will increase as a result of
software industry consolidation. Increased competition may result in price
reductions, reduced profitability and loss of market share, any of which would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Competition."
Increased Reliance on Perpetual Licenses. The Company has historically
maintained stable recurring revenue from the sale of time-based licenses for
its software products. Recently, the Company has experienced an increase in
customer preference for perpetual licenses that involve payment of a single
up-front fee and that are more typical in the computer software industry.
Although lease license revenue currently represents a majority of the
Company's software license fee revenue, to the extent that perpetual license
revenue increases as a percent of total software license fee revenue, the
Company's revenue in any period will increasingly depend on sales completed
during that period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
New Management Team and Strategies; Management of Growth. Since March 1994,
the Company has recruited and hired Peter J. Smith as its Chief Executive
Officer and most other key members of management, particularly in the areas of
sales, marketing and administration. The new management team has initiated a
series
8
<PAGE>
of strategies designed to accelerate the Company's growth. See "Business--
Strategy" and "Management." There can be no assurance that such new
initiatives will be successful. The Company has recently experienced a period
of revenue growth and a substantial increase in the number of orders,
customers and employees. This growth has placed, and will continue to place,
strains on the Company's management, operations and systems. The Company's
ability to compete effectively will depend, in large part, upon its ability to
expand, improve and effectively utilize its operating, management, marketing,
sales and financial systems as necessitated by changes in the Company's
business. Any failure by the Company's management to anticipate effectively,
implement and manage the changes required to sustain the Company's growth
would have a material adverse effect on the Company.
International Activities. Revenues from international operations represented
54.7% and 53.6% of the Company's total revenue during 1995 and the three
months ended March 31, 1996, respectively. Risks inherent in the Company's
international business activities include imposition of government controls,
export license requirements, restrictions on the export of critical
technology, political and economic instability, trade restrictions, changes in
tariffs and taxes, difficulties in staffing and managing international
operations, longer accounts receivable payment cycles, and the burdens of
complying with a wide variety of foreign laws and regulations. Effective
copyright and trade secret protection may not be available in every foreign
country in which the Company sells its products. The Company's business,
financial condition and results of operations could be materially adversely
affected by any of these risks.
Potential Fluctuations in Quarterly Results. The Company may experience
significant fluctuations in future quarterly operating results. Fluctuations
may be caused by many factors, including the timing of new product releases or
product enhancements by the Company or its competitors; the size and timing of
individual orders; software errors or other product quality problems;
competition and pricing; customer order deferrals in anticipation of new
products or product enhancements; reduction in demand for the Company's
products; changes in operating expenses; mix of software license and
maintenance and service revenue; personnel changes; and general economic
conditions. For example, the expected release of ANSYS 5.3, an updated version
of the Company's core multiphysics product, scheduled for the second half of
1996, may result in delayed sales of existing ANSYS products prior to such
release, even though customers receive updated versions of the Company's
software as part of their lease, warranty or maintenance agreements. A
substantial portion of the Company's operating expenses is related to
personnel, facilities and marketing programs. The level of personnel and
personnel expenses cannot be adjusted quickly and is based, in significant
part, on the Company's expectation of future revenues. The Company does not
typically experience significant order backlog. Further, the Company has often
recognized a substantial portion of its revenue in the last month of a
quarter, with these revenues frequently concentrated in the last weeks or days
of a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in the latter part of that quarter, and
revenues for any future quarter are not predictable with any significant
degree of accuracy. Also, the Company may experience lower first quarter
revenue relative to revenue in the prior quarter due in part to the effect of
incentive programs which the Company has in place to encourage overachievement
of annual dollar revenue goals by ASDs and the Company's internal sales
support personnel. For these reasons, the Company believes that period-to-
period comparisons of its prior results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Dependence Upon Senior Management and Key Technical Employees. The Company
is highly dependent upon the ability and experience of its senior executives,
Peter J. Smith and Dr. John A. Swanson, and its key technical and other
management employees. Although the Company has entered into employment
agreements with Mr. Smith and Dr. Swanson, the loss of either of these senior
executives or a number of the Company's other key employees could adversely
affect the Company's ability to conduct its operations. The Company maintains
"key executive" life insurance policies on Dr. Swanson and Mr. Smith in the
amounts of $5 million and $2 million, respectively. See "Management--Employee
Stock and Other Benefit Plans--Key Executive Life Insurance" and "--Employment
Agreements."
9
<PAGE>
Losses; Accumulated Deficit. The Company acquired its business from Swanson
Analysis on March 14, 1994 and incurred net losses of $1.8 million and $1.6
million for the period from March 14, 1994 through December 31, 1994 and for
1995, respectively. The Company had a deficit in stockholders' equity of $6.0
million upon completion of the 1994 Acquisition, and net losses since then
have resulted in an accumulated deficit of $4.4 million and a deficit in total
stockholders' equity of $9.9 million at March 31, 1996. See "Capitalization"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Uncertainties Regarding Realization of Deferred Tax Assets. At March 31,
1996, the Company had recorded net deferred tax assets totaling $7.7 million,
reflecting differences between the financial statement and the tax basis of
assets and liabilities, principally related to the amortization of goodwill
and capitalized software costs. The realization of the net deferred tax assets
principally depends on the existence of future taxable income. Although the
Company incurred net losses for the period from March 14, 1994 through
December 31, 1994 and for 1995, the Company had taxable income during these
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Material Benefit to Insiders. In March 1994, the Company acquired Swanson
Analysis in a leveraged buy-out for an aggregate cash purchase price of
approximately $48.0 million. In connection with the 1994 Acquisition, the TA
Investors, the Chestnut Investors and Dr. Swanson purchased from the Company
an aggregate $3.8 million of Redeemable Preferred Stock and $14.3 million of
Subordinated Notes. As required by the terms of the respective instruments,
the Company will redeem all of the Redeemable Preferred Stock (including
accumulated dividends) and repay all of the Subordinated Notes held by the TA
Investors, the Chestnut Investors and Dr. Swanson (including accrued and
unpaid interest through the date of payment) upon completion of this offering.
Of the net proceeds from the sale of the shares of Common Stock offered by the
Company hereby, 43.7% ($18.1 million) will be used for such purpose. In
connection with the organization of the Company and the 1994 Acquisition, the
TA Investors, the Chestnut Investors and Dr. Swanson purchased Common Stock of
the Company at effective purchase prices of approximately $.09 and $.14 per
share. See "Certain Transactions."
Effective Control by Principal Stockholders. After giving effect to the sale
of the shares of Common Stock offered hereby, the TA Investors, the Chestnut
Investors and members of management and employees of the Company will
beneficially own in the aggregate approximately 43.0%, 3.2% and 26.0%,
respectively, of the outstanding Common Stock. As a result, these stockholders
will have the ability to control or exert significant influence over the
outcome of fundamental corporate transactions requiring stockholder approval,
including mergers and sales of assets and the election of the members of the
Company's Board of Directors. See "Certain Transactions," "Principal and
Selling Stockholders" and "Shares Eligible for Future Sale."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the
market price of the Common Stock and could impair the Company's ability to
obtain additional capital through an offering of its equity securities. In
addition to the 3,550,000 shares of Common Stock offered hereby, up to
approximately 10,095,780 shares of Common Stock owned by current stockholders
of the Company will be eligible for sale in accordance with Rule 144 beginning
90 days after the date of this Prospectus. However, holders of substantially
all of these shares have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock owned by them for 180 days from the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. The holders of approximately 10,412,000 shares of Common Stock
have the right in certain circumstances to require the Company to register
their shares under the Securities Act of 1933, as amended (the "Securities
Act"), for resale to the public and holders of approximately 11,971,860 shares
have the right to include their shares in a registration statement filed by
the Company. See "Shares Eligible for Future Sale."
Absence of Public Market; Offering Price; Possible Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active market will
10
<PAGE>
develop upon consummation of this offering. Consequently, the offering price
of the Common Stock has been determined by negotiations among the Company, the
Selling Stockholder and the Representatives of the Underwriters. See
"Underwriting" for a description of the factors considered in determining the
initial public offering price. In addition, the stock market historically has
experienced volatility which has particularly affected the market prices of
securities of many companies in the software industry and which sometimes has
been unrelated to the operating performance of such companies.
Anti-takeover Provisions. Certain provisions of the Company's Restated
Certificate of Incorporation and Amended and Restated By-laws, certain
sections of the Delaware General Corporation Law and the ability of the Board
of Directors to issue shares of preferred stock and to establish the voting
rights, preferences and other terms thereof, may have an anti-takeover effect
and may discourage takeover attempts not first approved by the Board of
Directors (including takeovers which certain stockholders may deem to be in
their best interests). These provisions and the ability of the Board of
Directors to issue preferred stock without further action by stockholders
could delay or frustrate the removal of incumbent directors or the assumption
of control by stockholders, even if such removal or assumption of control
might be beneficial to stockholders. These provisions also could discourage or
make more difficult a merger, tender offer or proxy contest, even if such
events would be beneficial, in the short term, to the interests of
stockholders. Such provisions include, among other things, a classified Board
of Directors serving staggered three-year terms, the elimination of
stockholder voting by consent, the removal of directors only for cause, the
vesting of exclusive authority in the Board of Directors to determine the size
of the Board and (subject to certain limited exceptions) to fill vacancies
thereon, the vesting of exclusive authority in the Board of Directors (except
as otherwise required by law) to call special meetings of stockholders, and
certain advance notice requirements for stockholder proposals and nominations
for election to the Board of Directors. The Company will be subject to Section
203 of the Delaware General Corporate Law which, in general, imposes
restrictions upon certain acquirors (including their affiliates and
associates) of 15% or more of the Company's Common Stock. See "Description of
Capital Stock--Certain Provisions of Certificate and By-laws" and "--Statutory
Business Combination Provision."
Dilution. Purchasers of Common Stock in this offering will incur immediate
and substantial dilution in the net tangible book value per share of their
Common Stock. At the initial public offering price of $13.00 per share,
investors in this offering will incur dilution of $11.80 per share. See
"Dilution."
11
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 3,500,000 shares of Common Stock
offered by the Company hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) will be approximately $41.5
million. The Company intends to use the net proceeds as follows: (i)
approximately $18.5 million will be used to repay the 1994 Loan, including
accrued and unpaid interest; (ii) approximately $17.5 million will be used to
repay all Subordinated Notes, including accrued and unpaid interest; (iii)
approximately $5.1 million will be used to redeem all Redeemable Preferred
Stock, including accumulated dividends; and (iv) approximately $400,000 will
be used for general corporate purposes. See "Certain Transactions." Pending
such uses, the Company intends to invest the net proceeds of this offering
received by it in short-term, investment grade, interest-bearing obligations.
The 1994 Loan matures in quarterly installments through March 1999 and bears
interest at a fluctuating rate based on the prime rate plus 1.0% or the
Eurodollar rate plus 3.0%. The Company has an interest rate cap agreement that
provides for a fixed rate of 9.0% on $14.0 million of the principal amount of
the 1994 Loan through March 31, 1997. The interest rate on the remaining
principal amount of the 1994 Loan at March 31, 1996 was approximately 8.4%.
One-half of the initial principal amount of the Subordinated Notes, plus
accrued and unpaid interest thereon to the date of repayment, is payable on
each of April 14, 1999 and April 14, 2000. The Subordinated Notes bear
interest at 10.0% per annum and are required to be redeemed upon completion of
this offering. Holders of the Redeemable Preferred Stock are entitled to
dividends in an amount per share equal to $1,000 per annum, payable annually
in arrears on January 1 of each year and accumulated for later payment if not
then paid. The Company is required to redeem all of the outstanding shares of
Redeemable Preferred Stock upon completion of this offering at a redemption
price per share equal to $10,000, together with any accumulated and unpaid
dividends.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholder.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs.
12
<PAGE>
CAPITALIZATION
The following table sets forth the actual short-term debt and the
capitalization of the Company at March 31, 1996 and as adjusted to give effect
to the sale of the 3,500,000 shares of Common Stock offered by the Company
hereby and application of the net proceeds as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current
portion of long-term debt)............................. $ 5,250 $ 483
------- -------
Long-term debt:
1994 Loan............................................. $14,500 $ --
Subordinated notes.................................... 17,204 --
------- -------
Total long-term debt................................. 31,704 --
------- -------
Redeemable Preferred Stock, $.01 par value, 800 shares
authorized and 412 shares issued and outstanding; none
authorized, issued or outstanding, as adjusted......... 4,994 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 2,000,000 shares
authorized and none issued and outstanding........... -- --
Common Stock, $.01 par value, 17,000,000 shares
authorized and 12,652,760 shares issued and
outstanding; 50,000,000 shares authorized and
16,152,760 shares issued and outstanding, as
adjusted(1).......................................... 127 162
Additional paid-in capital............................ 1,761 36,181
Adjustment for predecessor basis...................... (7,010) --
Retained earnings (deficit)........................... (4,444) (4,835)(2)
Notes receivable from stockholders.................... (303) (303)
------- -------
Total stockholders' equity (deficit).................. (9,869) 31,205
------- -------
Total capitalization................................ $32,079 $31,688
======= =======
</TABLE>
- --------
(1) Excludes (i) 868,110 shares of Common Stock issuable upon exercise of
outstanding stock options granted at a weighted average exercise price of
approximately $4.36 per share, substantially all of which are not
exercisable at the date of this Prospectus, and (ii) 2,250,000 and 210,000
additional shares of Common Stock reserved for future issuance under the
1996 Stock Plan and the Purchase Plan, respectively. See "Management--
Employee Stock and Other Benefit Plans--1996 Stock Option and Grant Plan"
and "--1996 Employee Stock Purchase Plan."
(2) Reflects the anticipated write-off of unamortized loan fees and interest
rate cap of $391,000, net of the related tax effect.
13
<PAGE>
DILUTION
The deficit in net tangible book value of the Company's Common Stock at
March 31, 1996 was $22.1 million, or $(1.75) per share. Deficit in net
tangible book value per share represents the amount of the excess of total
liabilities over total tangible net assets, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale of 3,500,000 shares
of Common Stock offered by the Company hereby (after deducting underwriting
discounts and commissions and estimated offering expenses) and application of
the net proceeds therefrom as set forth in "Use of Proceeds," the net tangible
book value of the Company at March 31, 1996 would have been $19.3 million, or
$1.20 per share, representing an immediate increase in the net tangible book
value of $2.95 per share to existing stockholders and an immediate dilution of
$11.80 per share to new investors purchasing shares in this offering. The
following table illustrates the resulting per share dilution with respect to
the shares of Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $13.00
Deficit in net tangible book value per share before the
offering.................................................. $(1.75)
Increase per share attributable to new investors........... 2.95
------
Net tangible book value per share after the offering......... 1.20
------
Dilution per share to new investors.......................... $11.80
======
</TABLE>
The table below summarizes the difference, at March 31, 1996, between the
existing stockholders and the new investors with respect to the number of
shares purchased from the Company, the total consideration paid and the
average price per share paid (before deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 12,652,760 78.3% $1,888,154 4.0% $ 0.15
New investors........... 3,500,000 21.7 45,500,000 96.0 13.00
---------- ----- ----------- -----
Total................. 16,152,760 100.0% $47,388,154 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The sale by the Selling Stockholder in this offering will cause the number
of shares held by existing stockholders to be reduced to 12,602,760
shares, or 78.0% of the total number of shares of Common Stock to be
outstanding after this offering, and will increase the number of shares
held by new investors to 3,550,000, or 22.0% of the total number of shares
of Common Stock to be outstanding after this offering. See "Principal and
Selling Stockholders."
The foregoing tables assume no exercise of any outstanding stock options or
the Underwriters' over- allotment options. As of June 15, 1996, there were
outstanding options to purchase 868,110 shares of Common Stock at a weighted
average exercise price of approximately $4.36 per share, substantially all of
which are not exercisable as of the date of this Prospectus. See
"Underwriting" for information concerning the Underwriters' over-allotment
option. To the extent that the outstanding options, or any options granted in
the future, are exercised, there will be further dilution to new investors.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statements of operations data and balance sheet
data of the Company as of December 31, 1994 and 1995 and for the period March
14, 1994 (date of acquisition) through December 31, 1994 and the year ended
December 31, 1995 and of the Company's predecessor for the year ended December
31, 1993 and the period from January 1, 1994 through March 13, 1994 are
derived from the audited consolidated financial statements of the Company and
the Company's predecessor included elsewhere in this Prospectus. The selected
consolidated statements of operations data and balance sheet data of the
Company as of and for the three months ended March 31, 1995 and 1996 are
derived from the unaudited interim consolidated financial statements of the
Company included elsewhere in this Prospectus and, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the results of the
interim periods. The selected consolidated balance sheet data of the Company
as of December 31, 1993 and the selected consolidated statements of operations
data and balance sheet data of the Company's predecessor as of and for the
years ended December 31, 1991 and 1992 are derived from audited consolidated
financial statements of the Company's predecessor not included in this
Prospectus. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The pro forma combined statements of operations data for 1994
combine the audited results of operations of the Company's predecessor for the
period January 1, 1994 to March 13, 1994 and of the Company for the period
March 14, 1994 (date of acquisition) to December 31, 1994. The pro forma
combined statements of operations data for the year ended December 31, 1994 do
not purport to represent what the Company's consolidated results of operations
would have been if the 1994 Acquisition had actually occurred on January 1,
1994. The following selected consolidated statements of operations data and
balance sheet data should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. All figures below are in thousands except per share data.
15
<PAGE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR COMPANY(1) THE COMPANY COMBINED
-------------------------------------- ------------ ------------
PERIOD FROM
MARCH 14,
PERIOD FROM 1994
JANUARY 1, (DATE OF
1994 ACQUISITION)
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
------------------------- MARCH 13, DECEMBER 31, DECEMBER 31,
1991 1992 1993 1994 1994 1994
------- ------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Software licenses....... $26,315 $28,437 $27,495 $5,984 $22,310 $28,294
Maintenance and
service................ 1,585 2,021 4,109 585 3,944 4,529
------- ------- ------- ------ ------- -------
Total revenue.......... 27,900 30,458 31,604 6,569 26,254 32,823
Cost of sales:
Software licenses....... 3,372 3,913 4,772 761 3,034 3,795
Maintenance and
service................ 1,126 1,283 1,331 184 709 893
------- ------- ------- ------ ------- -------
Total cost of sales.... 4,498 5,196 6,103 945 3,743 4,688
------- ------- ------- ------ ------- -------
Gross profit............ 23,402 25,262 25,501 5,624 22,511 28,135
Operating expenses:
Selling and marketing... 2,800 3,262 3,763 673 3,836 4,509
Research and
development............ 3,573 6,400 5,972 1,349 5,410 6,759
Amortization............ 132 528 937 300 8,420 8,720
General and
administrative......... 6,000 5,369 7,181 1,234 4,606 5,840
------- ------- ------- ------ ------- -------
Total operating
expenses.............. 12,505 15,559 17,853 3,556 22,272 25,828
------- ------- ------- ------ ------- -------
Operating income (loss). 10,897 9,703 7,648 2,068 239 2,307
Interest expense........ (239) (318) (306) (62) (3,091) (3,153)
Other income............ 1,201 1,087 778 40 146 186
------- ------- ------- ------ ------- -------
Income (loss) before
income tax benefit..... 11,859 10,472 8,120 2,046 (2,706) (660)
Income tax benefit (2).. -- -- -- -- 917 917
------- ------- ------- ------ ------- -------
Net income (loss)....... $11,859 $10,472 $ 8,120 $2,046 $(1,789) $ 257
<CAPTION> ======= ======= ======= ====== ======= =======
THE COMPANY
--------------------------------
THREE MONTHS ENDED
-------------------
YEAR ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ --------- ---------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Software licenses....... $32,604 $ 7,104 $ 8,385
Maintenance and
service................ 7,012 1,122 2,348
--------- -------- --------
Total revenue.......... 39,616 8,226 10,733
Cost of sales:
Software licenses....... 3,331 956 666
Maintenance and
service................ 1,572 273 529
--------- -------- --------
Total cost of sales.... 4,903 1,229 1,195
--------- -------- --------
Gross profit............ 34,713 6,997 9,538
Operating expenses:
Selling and marketing... 7,526 1,649 2,169
Research and
development............ 8,329 2,019 2,330
Amortization............ 10,641 2,660 2,719
General and
administrative......... 6,857 1,493 1,850
--------- -------- --------
Total operating
expenses.............. 33,353 7,821 9,068
--------- -------- --------
Operating income (loss). 1,360 (824) 470
Interest expense........ (3,983) (995) (888)
Other income............ 250 39 91
--------- -------- --------
Income (loss) before
income tax benefit..... (2,373) (1,780) (327)
Income tax benefit (2).. 793 595 126
--------- -------- --------
Net income (loss)....... $(1,580) $(1,185) $ (201)
========= ======== ========
Net income (loss) appli-
cable to common stock.. $(2,025) $(1,286) $ (303)
========= ======== ========
Net income (loss) per
common share (3)....... $ (0.17) $ (0.11) $ (0.02)
========= ======== ========
Shares used in computing
per common share
amounts (3)............ 12,261 12,279 12,457
========= ======== ========
Pro forma data (4):
Pro forma net income
per common share....... $ 0.08 $ 0.02
========= ========
Pro forma shares used
in computing per com-
mon share amounts...... 15,451 15,647
========= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1) THE COMPANY
----------------------- ----------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
----------------------- ----------------- ---------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash
equivalents............. $11,408 $ 8,650 $ 1,216 $ 4,300 $ 8,091 $ 5,577
Working capital.......... 14,432 13,999 16,135 1,822 3,196 4,194
Total assets............. 30,174 32,719 26,205 44,669 42,921 41,998
Long-term debt, less
current portion......... 2,694 2,694 3,401 37,696 33,204 31,704
Redeemable preferred
stock................... -- -- -- 4,447 4,892 4,994
Total stockholders'
equity (deficit)........ 24,845 25,919 19,515 (7,985) (10,029) (9,869)
</TABLE>
(FOOTNOTES ON NEXT PAGE)
16
<PAGE>
- --------
(1) Presents consolidated financial data of the Company's predecessor for the
periods prior to the Company's acquisition of substantially all of the
assets and the assumption of certain liabilities of the predecessor
effective March 14, 1994. See "Certain Transactions." Because of such
transactions, certain aspects of the consolidated results of operations
for periods prior to the period beginning March 14, 1994 are not
comparable with those for subsequent periods. Net income (loss) per share
data are presented only for the year ended December 31, 1995 and the three
months ended March 31, 1995 and 1996. Net income (loss) per common share
for the year ended December 31, 1995 and the three months ended March 31,
1995 and 1996 has been computed after deducting $446,000, $102,000 and
$102,000, respectively, from net income (loss) attributable to preferred
stock dividend accumulation.
(2) The Company's predecessor was an S Corporation and accordingly was not
subject to federal or state income tax.
(3) For a description of the computation of the number of shares and the net
income (loss) per share, see Note 2 of Notes to Consolidated Financial
Statements.
(4) The pro forma data give effect to the sale of 3,500,000 shares of Common
Stock offered by the Company hereby as if it occurred at January 1, 1995
or at January 1, 1996 for the three months ended March 31, 1996, and
include (i) elimination of dividends resulting from the redemption of all
Redeemable Preferred Stock; (ii) elimination of interest expense resulting
from the repayment of the 1994 Loan and all Subordinated Notes; (iii)
elimination of amortization of deferred loan fees and an interest rate
cap; and (iv) adjustments to income taxes to reflect the tax effects of
the items listed in (ii) and (iii) above.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company develops, markets and supports software solutions for design
analysis and optimization. More than 4,000 companies throughout the world use
ANSYS products, with no customer accounting for more than 3% of the Company's
revenue for 1995. In 1995, international revenue accounted for 54.7% of the
Company's revenue. Substantially all of the Company's revenue is denominated
in United States dollars.
The Company derives its revenue principally from fees for licenses of its
software products and for maintenance, customer support and training services.
Software license revenue is derived from two types of license fees: paid-up
perpetual licenses and lease (time-based) licenses. Historically, software
lease revenue has comprised a substantial portion of the Company's software
license revenue. Although the Company expects revenue from the sale of lease
licenses to be relatively stable, the Company has experienced an increase in
customer preference for perpetual licenses of its products. Lease license
revenue is recognized on a monthly basis. Perpetual license revenue is
recognized in the period the sale is completed. Although lease license revenue
currently represents a majority of the Company's software license revenue, to
the extent that perpetual license revenue increases as a percent of total
software license revenue, the Company's revenue in any period will
increasingly depend on sales completed during that period. In addition,
revenue from maintenance contracts will increase to the extent that holders of
perpetual licenses purchase maintenance contracts in order to receive product
updates and support. The Company currently derives substantially all of its
revenue from products sold by its global network of 35 independent,
regionally-based ASDs. Both software license revenue and maintenance and
service revenue, which includes maintenance, program customization and
training revenue, are presented net of any applicable ASD commission.
The Company licenses its software products using a per task pricing
structure, fixed to an individual computer or residing on a network, subject
to negotiated discounts on larger volume orders. The Company recognizes
revenue from software licenses after shipment of product, fulfillment of
acceptance terms, if any, and receipt of a signed contractual obligation. The
Company historically offered one year warranties in connection with its
domestic and international perpetual license sales. In the second half of
1995, the Company reduced its domestic warranties to 90 days and its
international warranties to 180 days. The Company is currently reviewing its
warranty policy regarding international sales. Reduction in warranty periods
results in a lesser amount of initial paid-up license fees being deferred to
future periods.
Payments received in advance of delivery of products or services are
initially recorded as customer prepayments and recognized as revenue upon
shipment or fulfillment of significant contractual obligations. Consulting
services are priced by project, and customer training is priced by course.
Revenue from training, support and other services is recognized as the
services are performed. Maintenance revenue is recognized ratably over the
contract term, typically one year.
Deferred revenue is recorded in connection with the Company's maintenance
contracts with customers and the warranty portion of paid-up licenses.
Deferred revenue increased in 1994 and 1995 and in the first quarter of 1996,
and the Company anticipates that it will continue to increase as a result of
increased sales of paid-up licenses and maintenance contracts.
The Company's expenses consist principally of cost of sales for software
license revenue and maintenance and service revenue, operating expenses
including general and administrative, selling and marketing, research and
development and amortization, and interest expense. The Company's cost of
sales for software license revenue consists of costs associated with the
media, packaging, documentation and final porting of the Company's products,
and any applicable royalty expense for licensed software. The Company has
agreements with several software vendors to resell those vendors' products.
See "Business--Strategic Alliances and Marketing Relationships." The Company
expects to pay ongoing royalties in connection with these software licenses
and others the Company may choose to license in the future. Royalties payable
by the Company under these arrangements, which would constitute part of the
Company's cost of software license revenue, may adversely affect the Company's
gross profit. The Company's cost of sales for maintenance and services revenue
18
<PAGE>
includes personnel and related operating costs allocated to maintenance and
other customer support and training services. Selling and marketing expenses
consist primarily of personnel costs and include salaries, commissions paid to
internal sales and marketing personnel, promotional costs and related
operating expenses. Research and development expenses consist primarily of
personnel costs, as well as all costs associated with the development of new
products and enhancements to existing products. General and administrative
expenses consist primarily of personnel costs for finance, administrative and
general management personnel, as well as accounting and legal expenses.
The Company's amortization and interest expenses since March 1994 have
resulted principally from the 1994 Acquisition. Amortization primarily relates
to intangible assets acquired in the 1994 Acquisition, including goodwill, the
ANSYS trade name and a non-competition agreement, which are being amortized on
the straight-line method over the estimated useful lives of these assets, as
described in the table below. Interest expense consists principally of
interest accruing on the 1994 Loan and the Subordinated Notes, which were
incurred to finance the 1994 Acquisition and will be repaid with net proceeds
from this offering.
In connection with the 1994 Acquisition, the Company capitalized $925,000 of
debt issuance costs and $179,000 associated with an interest rate cap
agreement, the unamortized portion of which was $587,000 in the aggregate at
April 30, 1996. As a result of the early repayment of the 1994 Loan with a
portion of the net proceeds of this offering, the Company will write-off the
unamortized balance as an extraordinary non-cash charge in the quarter in
which the offering is closed.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes software development costs once the
technological feasibility of the product has been established and until the
product is available for commercial release. The amounts of software
development costs capitalized by the Company in 1994 and 1995 and the first
quarter of 1996 were immaterial. See Note 2 of Notes to Consolidated Financial
Statements.
The 1994 Acquisition. The Company was formed in January 1994 and acquired
the assets of Swanson Analysis on March 14, 1994 for a cash purchase price of
approximately $48.0 million, the assumption of certain liabilities totaling
$4.9 million and acquisition costs of $273,000. The cash payment was financed
through the issuance of preferred and common stock, borrowings under the 1994
Loan and the issuance of Subordinated Notes. See "Certain Transactions." The
1994 Acquisition was accounted for using the purchase method of accounting. In
accounting for the 1994 Acquisition, the aggregate consideration was adjusted
downward to reflect the carryover of the 1994 basis of the seller's owner in
the net assets acquired, in accordance with generally accepted accounting
principles. The effect of this adjustment was to reduce, on the date of 1994
Acquisition, the value of the Company's stockholders' equity by approximately
$7.0 million and to preclude a write-up of a proportionate amount of the
assets acquired. Cost in excess of the fair value of the net tangible assets
was allocated to intangible assets. The following table sets forth the amounts
allocated, the asset lives (in years) assigned, and the resulting annual
amortization (also included in the table is the capitalized debt issuance
costs):
<TABLE>
<CAPTION>
AMOUNT ASSET ANNUAL
ALLOCATED LIFE AMORTIZATION
--------- ----- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Capitalized software......................... $15.4 3 $ 5.1
Goodwill..................................... 14.7 3 4.9
Other intangible assets...................... 3.9 3-10 0.6
----- -----
$34.0 $10.6
===== =====
</TABLE>
The 1994 Acquisition resulted in significant increases in amortization and
interest expense, starting in the second quarter of 1994. This has resulted in
net losses being recorded in most subsequent periods. Goodwill and capitalized
software resulting from the 1994 Acquisition will be fully amortized in March
1997.
Following the 1994 Acquisition, the Company's new senior management team
initiated a series of new strategies designed to accelerate the Company's
growth and effectively anticipate, respond to and capitalize on the
opportunities presented by the changing marketplace. Among other initiatives,
the new management team (i)
19
<PAGE>
established a sales management structure to work with the ASDs and to bring a
more focused sales approach to the market; (ii) improved operating
efficiencies and customer service; and (iii) developed and began to implement
a strategy to enhance and extend the Company's product line to meet the
demands of existing and new markets. The Company believes that these efforts
have contributed significantly to the increases in revenue and results of
operations since the 1994 Acquisition.
RESULTS OF OPERATIONS
For purposes of the following discussion and analysis, the results of
operations of Swanson Analysis for the two and one-half months ended March 13,
1994 have been combined with the results of operations of the Company for the
nine and one-half months ended December 31, 1994, by adding corresponding
items without adjustment. This computation was done to permit useful
comparison between the results for 1993, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------------------
1993 1994 1995 MARCH 31, 1995 MARCH 31, 1996
---------------- ---------------- ---------------- ---------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses..... $27,495 87.0% $28,294 86.2% $32,604 82.3% $7,104 86.4% $8,385 78.1%
Maintenance and
service............. 4,109 13.0 4,529 13.8 7,012 17.7 1,122 13.6 2,348 21.9
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total revenue........ 31,604 100.0 32,823 100.0 39,616 100.0 8,226 100.0 10,733 100.0
Cost of sales:
Software
licenses(/1/)....... 4,772 17.4 3,795 13.4 3,331 10.2 956 13.5 666 7.9
Maintenance and
service(/1/)........ 1,331 32.4 893 19.7 1,572 22.4 273 24.3 529 22.5
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total cost of sales.. 6,103 19.3 4,688 14.3 4,903 12.4 1,229 14.9 1,195 11.1
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Gross profit........... 25,501 80.7 28,135 85.7 34,713 87.6 6,997 85.1 9,538 88.9
Operating expenses:
Selling and marketing. 3,763 11.9 4,509 13.7 7,526 19.0 1,649 20.1 2,169 20.2
Research and
development......... 5,972 18.9 6,759 20.6 8,329 21.0 2,019 24.6 2,330 21.8
Amortization.......... 937 3.0 8,720 26.6 10,641 26.9 2,660 32.3 2,719 25.3
General and
administrative...... 7,181 22.7 5,840 17.8 6,857 17.3 1,493 18.1 1,850 17.2
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total operating
expenses............ 17,853 56.5 25,828 78.7 33,353 84.2 7,821 95.1 9,068 84.5
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Operating income
(loss)................ 7,648 24.2 2,307 7.0 1,360 3.4 (824) (10.0) 470 4.4
Interest expense....... (306) (1.0) (3,153) (9.6) (3,983) (10.1) (995) (12.1) (888) (8.3)
Other income........... 778 2.5 186 0.6 250 0.7 39 0.5 91 0.8
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Income (loss) before
income tax benefit... 8,120 25.7 (660) (2.0) (2,373) (6.0) (1,780) (21.6) (327) (3.1)
Income tax benefit..... -- -- 917 2.8 793 2.0 595 7.2 126 1.2
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Net income (loss)...... $ 8,120 25.7% $ 257 0.8% $(1,580) (4.0)% $(1,185) (14.4)% $ (201) (1.9)%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
- --------
(1)Computed as a percentage of the corresponding revenue category.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Revenue. The Company's revenue increased 30.5% for the 1996 quarter to $10.7
million from $8.2 million for the 1995 quarter. This increase was attributable
principally to increased domestic and international sales of paid-up licenses
and increased maintenance and services revenue, both of which resulted
primarily from the Company's increased marketing emphasis, market acceptance
of new product releases and broader customer usage of maintenance and support
services in response to accelerated frequency of product releases and the
Company's increased emphasis on marketing its maintenance services.
20
<PAGE>
Software license revenue increased 18.0% for the 1996 quarter to $8.4
million from $7.1 million for the 1995 quarter, resulting principally from
increased sales of paid-up licenses in domestic and international markets.
Revenue from sales of paid-up licenses increased 29.2% for the 1996 quarter to
$3.6 million from $2.8 million for the 1995 quarter. The Company also
experienced a 10.8% increase in lease license revenue to $4.8 million for the
1996 quarter from $4.3 million for the 1995 quarter. Maintenance and service
revenue increased 109.3% for the 1996 quarter to $2.3 million from $1.1
million for the 1995 quarter, as a result of a substantial increase in the
sale of paid-up licenses, reduction in the warranty period, and broader
customer usage of maintenance and support services.
Of the Company's total revenue for the 1996 quarter, approximately 48.4% and
51.6%, respectively, were attributable to domestic and international sales, as
compared to 45.0% and 55.0%, respectively, for the 1995 quarter.
Cost of Sales and Gross Profit. The Company's total cost of sales remained
relatively stable at $1.2 million for the 1996 and 1995 quarters, representing
11.1% and 14.9% of total revenue, respectively. The Company's cost of sales
for software license revenue decreased 30.3% for the 1996 quarter to $666,000,
or 7.9% of software license revenue, from $956,000, or 13.5% of software
license revenue, for the 1995 quarter. The decrease was due primarily to a
reduction of expenses through lower headcount and cost controls and
implementation of a more efficient multi-platform development environment for
the Company's product releases.
The Company's cost of sales for maintenance and service revenue was $529,000
and $273,000, or 22.5% and 24.3% of maintenance and service revenue, for the
1996 and 1995 quarters, respectively, reflecting the substantial increase in
maintenance and service revenue in the 1996 quarter.
As a result of the foregoing, the Company's gross profit increased 36.3% to
$9.5 million for the 1996 quarter from $7.0 million for the 1995 quarter.
Selling and Marketing. Selling and marketing expenses increased 31.5% for
the 1996 quarter to $2.2 million, or 20.2% of total revenue, from $1.6
million, or 20.1% of total revenue, for the 1995 quarter. This growth was
attributable principally to increased personnel costs, including costs
associated with increased headcount and compensation expenses related to
building a sales and marketing organization, as well as increased commissions
associated with increased revenue.
Research and Development. Research and development expenses increased 15.4%
for the 1996 quarter to $2.3 million, or 21.8% of total revenue, from $2.0
million, or 24.6% of total revenue, for the 1995 quarter. This increase
resulted primarily from employment of additional staff and independent
contractors to develop and enhance the Company's products, including a
dedicated team working on the development of the Company's DesignSpace product
(see "Business--Product Development"), costs associated with quality
assurance, and equipment costs to implement an enhanced multi-platform
development environment.
Amortization. Amortization expense was $2.7 million in the first quarter in
both 1996 and 1995. Goodwill and capitalized software acquired in connection
with the 1994 Acquisition will be fully amortized in the first quarter of
1997.
General and Administrative. General and administrative expenses increased
23.9% to $1.9 million, or 17.2% of total revenue, for the 1996 quarter from
$1.5 million, or 18.1% of total revenue, for the 1995 quarter. The Company has
maintained a relatively stable headcount while adding administrative support
services, such as computerized order fulfilment and corporate-wide information
technology systems, to support its future operations.
Interest. Interest expense decreased 10.8% for the 1996 quarter to $888,000
from $995,000 for the 1995 quarter. This decrease was attributable to a
reduction in the outstanding principal of the 1994 Loan, as well as a
reduction in the effective interest rate from period to period. Interest
expense will decrease substantially upon completion of this offering as a
result of the repayment of the 1994 Loan and the Subordinated Notes as
described under "Use of Proceeds."
21
<PAGE>
Income Tax Benefit. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The Company's income tax benefit consists principally of deferred
income tax benefit, net of current federal, state and foreign taxes. The
Company's effective rate of taxation was 38.5% for the 1996 quarter, as
compared to 33.4% for the 1995 quarter. These percentages are less than the
federal and state combined statutory rate of approximately 39.0% due primarily
to the utilization of research and experimentation credits.
At March 31, 1996, the Company had recorded net deferred tax assets totaling
$7.7 million resulting from temporary differences in the recognition of
expenses for income tax and financial statement purposes, principally related
to goodwill and capitalized software cost. No valuation allowance was
established against the net deferred tax assets because management believes it
is more likely than not that the deferred tax assets will be fully realized
through future taxable income, taking into account, among other factors,
anticipated reductions in future interest and amortization expenses as
described herein, as well as the various risks inherent in the Company's
business as described under "Risk Factors."
Net Loss. As a result of the foregoing, the Company's net loss decreased in
the first quarter of 1996 to $.2 million from a net loss of $1.2 million in
the 1995 quarter.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
1994
Revenue. The Company's revenue increased 20.7% for 1995 to $39.6 million
from $32.8 million for 1994. This increase was attributable principally to
increased domestic and international sales of paid-up licenses, offset
partially by lower sales of lease licenses, and to increased maintenance and
service revenue. These increases resulted primarily from the Company's
increased marketing emphasis, market acceptance of new product releases and
related broader customer usage of maintenance and support services in response
to accelerated frequency of product releases and the Company's increased
emphasis on marketing its maintenance services.
Software license revenue increased 15.2% for 1995 to $32.6 million from
$28.3 million for 1994. Revenue from sales of paid-up licenses increased 52.6%
for 1995 to $14.5 million from $9.5 million for 1994, while lease license
revenue declined 3.7% for 1995 to $18.1 million from $18.8 million for 1994. A
portion of the growth in revenue from paid-up licenses was due to a reduction
in the warranty period, effective in the second half of 1995. This reduction
in the warranty period resulted in a lesser amount of the initial paid-up
license fees being deferred to future periods. Maintenance and service revenue
increased 54.8% for 1995 to $7.0 million from $4.5 million for 1994, as a
result of a substantial increase in the sale of paid-up licenses, reduction in
the warranty period, and broader customer usage of maintenance and support
services. A substantial portion of this increase was due to increased
maintenance revenue.
Of the Company's total revenue for 1995, approximately 47.3% and 52.7%,
respectively, were attributable to domestic and international sales, as
compared to 47.2% and 52.8%, respectively, for 1994.
Cost of Sales and Gross Profit. The Company's total cost of sales increased
4.6% for 1995 to $4.9 million, or 12.4% of total revenue, from $4.7 million,
or 14.3% of total revenue, for 1994. The Company's cost of sales for software
license revenue decreased 12.2% for 1995 to $3.3 million, or 10.2% of software
license revenue, from $3.8 million, or 13.4% of software license revenue, for
1994. This decrease was primarily due to a reduction in expenses through lower
headcount and cost controls and implementation of a more efficient multi-
platform development environment for the Company's product releases.
The Company's cost of sales for maintenance and service revenue increased
76.0% for 1995 to $1.6 million, or 22.4% of maintenance and service revenue,
from $893,000, or 19.7% of maintenance and service revenue, for 1994. This
increase resulted primarily from increased staffing to support anticipated
demand for customer services.
As a result of the foregoing, the Company's gross profit increased 23.4% to
$34.7 million for 1995 from $28.1 million for 1994.
Selling and Marketing. Selling and marketing expenses increased 66.9% for
1995 to $7.5 million, or 19.0% of total revenue, from $4.5 million, or 13.7%
of total revenue, for 1994. The increase in selling and marketing expenses
resulted primarily from increased personnel costs, including costs associated
with increased headcount and compensation expenses related to the
establishment of a sales force to support the Company's distribution network,
as well as increased commissions associated with increased revenue.
22
<PAGE>
Research and Development. Research and development expenses increased 23.2%
for 1995 to $8.3 million, or 21.0% of total revenue, from $6.8 million, or
20.6% of total revenue, for 1994. This increase resulted primarily from
employment of additional staff and independent contractors to develop and
enhance the Company's products, including a dedicated team working on the
development of the Company's DesignSpace product, costs associated with
quality assurance and equipment costs to implement an enhanced multi-platform
development environment.
Amortization. Amortization expense was $10.6 million for 1995 and $8.7
million for 1994. This amortization expense resulted from the 1994 Acquisition
and relates primarily to intangible assets, including goodwill, which are
being amortized from the date of the 1994 Acquisition, March 14, 1994. The
unamortized portion of the goodwill and capitalized software acquired in
connection with the 1994 Acquisition will be fully amortized in the first
quarter of 1997.
General and Administrative. General and administrative expenses increased
17.4% for 1995 to $6.9 million, or 17.3% of total revenue, from $5.8 million,
or 17.8% of total revenue, for 1994. This increase resulted primarily from the
employment of additional staff as well as an increase in accounting and legal
expenses in support of the Company's increased level of operations. The
Company has maintained a relatively stable headcount while adding
administrative support services, such as computerized order fulfillment and
corporate-wide information technology systems, to support its future
operations.
Interest. Interest expense increased 26.3% for 1995 to $4.0 million from
$3.2 million for 1994. This increase resulted from interest on indebtedness
incurred to finance the 1994 Acquisition for the full year of 1995 as compared
to nine and one-half months in 1994, as well as an increase in the weighted
average interest rate to 9.6% for 1995 from 8.4% for 1994. Interest expense
will substantially decrease upon completion of this offering as a result of
the repayment of the 1994 Loan and the Subordinated Notes as described under
"Use of Proceeds."
Income Tax Benefit. The income tax benefit decreased to $793,000 for 1995
from $917,000 for 1994. For the portion of 1994 prior to the 1994 Acquisition,
the Company's predecessor was taxed as an S Corporation and as such was not
subject to federal or state income taxes. Excluding this period, the effective
tax rates were 33.4% for 1995 and 33.9% for 1994. These percentages are less
than the federal and state combined statutory rate of approximately 39.0% due
primarily to the utilization of research and experimentation credits.
Net Loss. As a result of the foregoing, the Company reported a net loss of
$1.6 million in 1995, compared to net income of $257,000 in 1994.
PRO FORMA YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31,
1993
Revenue. Revenue increased 3.9% for 1994 to $32.8 million from $31.6 million
for 1993. This increase resulted primarily from an increase in the number of
customers licensing the Company's software products and an increase in the
number of paid-up software licenses purchased.
Software license revenue increased 2.9% for 1994 to $28.3 million from $27.5
million for 1993. Revenues from sales of paid-up licenses increased 43.9% for
1994 to $9.5 million for 1994 from $6.6 million for 1993, while lease license
revenue decreased 10.0% during the same year to $18.8 million from $20.9
million for 1993. Maintenance and service revenue increased 10.2% for 1994 to
$4.5 million from $4.1 million for 1993. This increase resulted from an
increase in the customer maintenance base.
Of the Company's total revenues for 1994, approximately 47.2% and 52.8%,
respectively, were attributable to domestic and international sales, as
compared to 48.8% and 51.2%, respectively, for 1993.
Cost of Sales and Gross Profit. The Company's cost of sales for software
license revenue decreased 20.5% for 1994 to $3.8 million, or 13.4% of software
license revenue, from $4.8 million, or 17.4% of software license revenue for
1993. The decrease was due to decreased documentation and media expenses
incurred in 1993 in
23
<PAGE>
connection with a major software product release as well as an internal
reorganization that resulted in the transfer of a number of employees to a
newly created order fulfillment department, the expenses of which have been
subsequently included in general and administrative expenses. The primary
responsibilities of this new department include all ASD and contract related
administration, as well as data entry of contract information.
The Company's cost of sales for maintenance and service revenue decreased
32.9% for 1994 to $893,000, or 19.7% of maintenance and service revenue, from
$1.3 million, or 32.4% of maintenance and service revenue, for 1993. This
increase resulted primarily from the transfer of several employees, primarily
to the research and development area.
As a result of the foregoing, the Company's gross profit increased 10.3% to
$28.1 million for 1994 from $25.5 million for 1993.
Selling and Marketing. Selling and marketing expenses increased 19.8% for
1994 to $4.5 million, or 13.7% of total revenue, from $3.8 million, or 11.9%
of total revenue, for 1993. The increase in selling and marketing expenses
resulted primarily from increased personnel costs, including costs associated
with increased headcount, compensation expenses related to the establishment
of a sales force to support the Company's distribution network, increased
commissions associated with increased revenue and expenses associated with the
Company's 1994 bi-annual users' conference.
Research and Development. Research and development expenses increased 13.2%
for 1994 to $6.8 million, or 20.6% of total revenue, from $6.0 million, or
18.9% of revenue, for 1993. The increase resulted primarily from employment of
additional staff and independent contractors to develop and enhance the
Company's products and provide quality assurance.
Amortization. Amortization expense was $8.7 million for 1994 as compared to
$937,000 for 1993. This increase resulted primarily from the 1994 Acquisition
and the related intangible assets, including goodwill, which are being
amortized over the estimated useful lives of the assets. Goodwill and
capitalized software acquired in connection with the 1994 Acquisition will be
fully amortized in March 1997.
General and Administrative. General and administrative expenses decreased
18.7% for 1994 to $5.8 million, or 17.8% of total revenue, from $7.2 million,
or 22.7% of total revenue, for 1993. This decrease in general and
administrative expenses resulted primarily from the settlement of a legal
dispute amounting to approximately $1.6 million in legal fees and related
costs in 1993, partially offset by expenses related to the transfer of a
number of employees into a newly created department, the expenses of which
have been subsequently included in general and administrative expenses.
Interest. Interest expense increased 930.4% to $3.2 million for 1994 from
$306,000 for 1993. The increase resulted from the Company's incurrence of
indebtedness in connection with the 1994 Acquisition.
Income Tax Benefit. The Company's income tax benefit was $917,000 for 1994.
Because the predecessor company was taxed as an S Corporation, there was no
income tax provision or benefit for 1993.
Net Income. As a result of the foregoing, the Company's net income decreased
to $257,000 in 1994 from $8.1 million in 1993.
QUARTERLY INFORMATION
The following table presents unaudited quarterly operating results for each
of the Company's last eight quarters as well as the percentage of the
Company's revenue represented by each item. This information has been prepared
by the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) that management considers necessary for a fair presentation of
the data. These quarterly results are not necessarily indicative of future
results of operations. This information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
--------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... $7,043 $ 6,612 $7,549 $ 7,104 $7,883 $8,536 $ 9,081 $ 8,385
Maintenance and
service............... 1,285 1,167 1,245 1,122 1,455 1,987 2,448 2,348
------ ------- ------ ------- ------ ------ ------- -------
Total revenue........ 8,328 7,779 8,794 8,226 9,338 10,523 11,529 10,733
Cost of sales:
Software licenses...... 1,032 896 918 956 1,015 726 634 666
Maintenance and
service............... 238 217 217 273 334 342 623 529
------ ------- ------ ------- ------ ------ ------- -------
Total cost of sales.. 1,270 1,113 1,135 1,229 1,349 1,068 1,257 1,195
Gross profit............ 7,058 6,666 7,659 6,997 7,989 9,455 10,272 9,538
Operating expenses:
Selling and marketing.. 1,218 1,172 1,231 1,649 1,713 1,738 2,426 2,169
Research and
development........... 1,687 1,684 1,740 2,019 2,045 1,982 2,283 2,330
Amortization........... 2,659 2,660 2,660 2,660 2,660 2,663 2,658 2,719
General and
administrative........ 1,431 1,393 1,566 1,493 1,502 1,660 2,202 1,850
------ ------- ------ ------- ------ ------ ------- -------
Total operating
expenses............ 6,995 6,909 7,197 7,821 7,920 8,043 9,569 9,068
Operating income (loss). 63 (243) 462 (824) 69 1,412 703 470
Interest expense........ (932) (975) (996) (995) (1,021) (978) (989) (888)
Other income............ 22 59 56 39 46 82 83 91
------ ------- ------ ------- ------ ------ ------- -------
Income (loss) before
income tax benefit
(provision)............ (847) (1,159) (478) (1,780) (906) 516 (203) (327)
Income tax benefit
(provision)............ 287 393 162 595 302 (173) 69 126
------ ------- ------ ------- ------ ------ ------- -------
Net income (loss)....... $ (560) $ (766) $ (316) $(1,185) $ (604) $ 343 $ (134) $ (201)
====== ======= ====== ======= ====== ====== ======= =======
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
--------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... 84.6% 85.0% 85.8% 86.4% 84.4% 81.1% 78.8% 78.1%
Maintenance and
service............... 15.4 15.0 14.2 13.6 15.6 18.9 21.2 21.9
------ ------- ------ ------- ------ ------ ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Software licenses (1).. 14.7 13.6 12.2 13.5 12.9 8.5 7.0 7.9
Maintenance and
service (1)........... 18.5 18.6 17.4 24.3 23.0 17.2 25.4 22.5
------ ------- ------ ------- ------ ------ ------- -------
Total cost of sales.. 15.2 14.3 12.9 14.9 14.4 10.2 10.9 11.1
Gross profit............ 84.8 85.7 87.1 85.1 85.6 89.8 89.1 88.9
Operating expenses:
Selling and marketing.. 14.6 15.1 14.0 20.1 18.3 16.5 21.0 20.2
Research and
development........... 20.3 21.6 19.8 24.6 21.9 18.8 19.8 21.8
Amortization........... 31.9 34.2 30.2 32.3 28.5 25.3 23.1 25.3
General and
administrative........ 17.2 17.9 17.8 18.1 16.1 15.8 19.1 17.2
------ ------- ------ ------- ------ ------ ------- -------
Total operating
expenses........... 84.0 88.8 81.8 95.1 84.8 76.4 83.0 84.5
Operating income (loss). 0.8 (3.1) 5.3 (10.0) 0.8 13.4 6.1 4.4
Interest expense........ (11.2) (12.5) (11.3) (12.1) (10.9) (9.3) (8.6) (8.3)
Other income............ 0.3 0.8 0.6 0.5 0.5 0.8 0.7 0.8
------ ------- ------ ------- ------ ------ ------- -------
Income (loss) before
income tax benefit
(provision)............ (10.1) (14.8) (5.4) (21.6) (9.6) 4.9 (1.8) (3.1)
Income tax benefit
(provision)............ 3.4 5.1 1.8 7.2 3.2 (1.6) 0.6 1.2
------ ------- ------ ------- ------ ------ ------- -------
Net income (loss)....... (6.7)% (9.7)% (3.6)% (14.4)% (6.4)% 3.3% (1.2)% (1.9)%
====== ======= ====== ======= ====== ====== ======= =======
</TABLE>
- --------
(1)Computed as a percentage of the corresponding revenue category.
The Company believes that decreases in first quarter revenues in 1995 and
1996 relative to the immediately preceding quarter resulted in part from
incentive programs which the Company has in place to encourage overachievement
of annual dollar revenue goals by ASDs and the Company's internal sales
support personnel.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since the 1994 Acquisition, the Company has financed its operations,
including increases in accounts receivable, capital equipment acquisitions and
principal repayments on the senior secured indebtedness, primarily through
cash generated from operations.
As of March 31, 1996, the Company had cash and cash equivalents of $5.6
million and working capital of $4.2 million, as compared to cash and cash
equivalents of $8.1 million and working capital of $3.2 million at December
31, 1995. The Company also has available to it a $1.0 million revolving line
of credit with a commercial bank under a credit facilities agreement, which is
available through June 1, 1997 and bears interest at the bank's prime rate
plus 1.0%. The Company has not initiated any borrowing to date under the line
of credit.
The Company's operating activities provided cash of $9.7 million for 1993,
$9.1 million for 1994 and $10.8 million for 1995, and used cash of $1.6
million for the three months ended March 31, 1996. The Company's cash flow
from operations decreased in 1994 as compared to 1993 due to slightly lower
earnings before the effect of amortization. The increase in cash flow from
operations in 1995 as compared to 1994 is the result of increased earnings
before the effect of amortization and improved management of working capital.
The use of cash flow from operations for the 1996 quarter was due to increased
working capital requirements, primarily relating to an increase in accounts
receivable, resulting from the renewal of maintenance contracts, a significant
portion of which were renewed in the first quarter of the calendar year, and
an increase in the number of days of outstanding software license revenue
primarily attributable to transitional issues encountered with the conversion
to a new billing system implemented in the fourth quarter of 1995, as well as
the payment of 1995 management and employee bonuses and contributions to the
Company's pension and profit sharing plans. The transitional issues in
connection with the conversion to the new billing system primarily related to
the generation and distribution of invoices to the ASDs at a later time than
in prior periods, as well as a lack of familiarity with the new invoice format
on the part of the ASDs. These factors contributed to payments being received
later than in prior periods, thereby causing an increase in the number of days
of outstanding software license revenue. Management does not believe that
these issues will have a material adverse impact on the Company's future cash
flows or the collectability of its accounts receivable balances. In addition,
because a significant portion of maintenance contracts was received in the
first quarter, accounts receivable--maintenance and service at December 31,
1994 and 1995 were insignificant and, accordingly, not shown separately in the
Company's consolidated balance sheets for those dates.
Cash used in investing activities was $5.2 million for 1993, $48.2 million
for 1994, $2.0 million for 1995 and $79,000 for the 1996 quarter. The use of
cash in 1993 was due to the purchase of marketable securities and capital
expenditures. The use of cash in 1994 was primarily to fund the 1994
Acquisition, and to a lesser extent for capital expenditures. The Company's
use of cash in 1995 and the 1996 quarters was substantially related to capital
expenditures. The Company expects to spend approximately $2.0 million for
capital equipment in 1996, principally for the acquisition of computer
hardware, software and equipment.
Financing activities used cash of $11.9 million for 1993, provided cash of
$42.6 million for 1994 and used cash of $5.0 million and $819,000 for 1995 and
the 1996 quarter, respectively. Cash used in 1993 was substantially
attributable to distributions to the stockholder of the Company's predecessor.
Cash provided for financing activities for 1994 was due primarily to bank
borrowings and the issuance of debt and equity securities related to the 1994
Acquisition. Cash used for 1995 and the 1996 quarter was the result of
principal repayments made on the 1994 Loan.
The net proceeds from this offering will enable the Company to repay the
1994 Loan and the Subordinated Notes, including accrued and unpaid interest,
and retire all of the Redeemable Preferred Stock, including accumulated
dividends. The Company believes that the remaining net proceeds from this
offering, together with cash and cash generated from operations and available
borrowings, will be sufficient to fund its operations for at least the next
twelve months.
26
<PAGE>
In connection with the Company's planned relocation (see "Business--
Facilities"), the Company expects to incur approximately $1.2 million in
capital expenditures, which is expected to be funded from cash from
operations. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
The new standard is effective for fiscal year 1996. Management believes that
the implementation of the new standard will not have a material effect on its
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard, which is effective for fiscal year 1996,
requires the Company to adopt either a recognition method or a disclosure-only
approach of accounting for stock based employee compensation plans. Management
intends to adopt the disclosure-only approach and, as such, does not believe
that the implementation of the standard will have a material effect on its
consolidated financial statements.
27
<PAGE>
BUSINESS
ANSYS, Inc. (the "Company") develops, markets and supports software
solutions for design analysis and optimization. Engineering analysts and
design engineers use the Company's software to accelerate product time to
market, reduce production costs, improve engineering processes and optimize
product quality and safety for a variety of manufactured products, ranging
from basic consumer goods to satellite tracking systems. The ANSYS product
family features open, flexible architecture that permits easy integration into
its customers' enterprise-wide engineering systems and facilitates effective
implementation of process-centric engineering.
The Company's software has been developed and enhanced to help customers
meet several of the major challenges faced by businesses today, including
increasing global competition and the need and ability to solve more complex
product design problems. The Company believes that these factors, combined
with the decreasing cost of computer hardware, are accelerating the demand for
design analysis software solutions and have created an expanding marketplace,
described by the Company as the design analysis and optimization market. This
market includes a base of engineering analysts who use the Company's CAE
analysis software to validate product design, as well as the broader group of
design engineers who use analysis tools integrated within their CAD systems to
optimize and evaluate products much earlier in the development cycle.
The Company's objectives are to increase market share among the traditional
base of engineering analysts, to extend its product line to meet the demands
of the broader group of design engineers and to increase the adoption of its
products by new users, such as engineers in the biomedical and food processing
industries. The Company's strategy focuses on maintaining and enhancing its
technology leadership; offering an open and flexible software product family;
pursuing a customer driven sales, services and marketing approach;
capitalizing on its established global distribution and support network; and
leveraging strategic relationships with leading CAD suppliers and third party
providers of complementary hardware and software.
INDUSTRY BACKGROUND
The market for software tools that automate the product development process
is evolving in response to the needs of manufacturers facing more intense
global competition to bring products to market quickly, at lower cost and with
higher quality. In addition, continuing technology advances in computing and
the associated reduction in the cost of computer hardware have made
engineering analysis solutions increasingly affordable and allow customers to
solve ever-larger analysis problems. The global CAD, CAE and CAM market for
software and services to support this automation is estimated at over $3.5
billion in 1996, with the Company's traditional CAE market estimated at over
$500 million. The Company believes that the broader functionality of design
analysis and optimization, which includes the Company's traditional CAE
market, represents a growing portion of this overall market.
The traditional product design process can be characterized as sequential
and iterative. Each step in the product development process is discrete, with
design engineers performing conceptual and detailed design, and engineering
analysts performing testing and analysis after creation of a physical
prototype. The results of this analysis are then returned to the design
engineers so that modifications can be made and another physical prototype
built for testing. This design and analysis loop continues until the physical
prototype has been successfully tested, at which time the product is sent to
be manufactured. This process often results in substantial changes to product
design late in the process after significant investment has been made in up-
front product design. The resulting time and expense have led many
manufacturers to delay critical analysis until production has commenced and
design flaws have surfaced.
Starting in the 1970s, software tools were introduced to automate the
traditional product design process. These early tools targeted discrete
functions in the process, with CAD tools for conceptual and detailed product
design, CAE tools for analysis and design verification and CAM tools to assist
in the automation of manufacturing. These tools have succeeded in enhancing
the productivity of individual engineers, but have
28
<PAGE>
important limitations. For example, these tools often produce data that are
incompatible with other steps in the design process, thereby limiting their
effectiveness. Of potentially greater significance, these tools did not change
the fundamentally sequential and iterative nature of the traditional product
design process.
[GRAPHIC DEPICTING TRADITIONAL PRODUCT DESIGN PROCESS]
Limitations in the traditional product design process and associated tools
have led manufacturers during the 1990s increasingly to adopt an approach
known as process-centric engineering. Process-centric engineering involves
interdisciplinary teams of design, analysis and manufacturing engineers
working together in a highly collaborative and interactive way throughout the
product design-to-manufacturing process. To be effective, process-centric
engineering requires common data models and integrated, compatible software
tools. In this process, analysis tools are used earlier in the product design
cycle and are integrated with CAD software. Therefore, the traditional CAE
tools are evolving into what the Company describes more broadly as design
analysis and optimization. Parametric design has also emerged as a requirement
of process-centric engineering in order to allow for rapid, intuitive
modification of the product model without corruption of basic design concepts.
The parametric foundation of software that supports process-centric
engineering facilitates the integration of analysis and CAD software to enable
dynamic product design analysis and optimization.
[GRAPHIC DEPICTING PROCESS-CENTRIC ENGINEERING]
29
<PAGE>
CAD, CAE and CAM software tools that were developed for the traditional
sequential product development process do not adequately support the
requirements of process-centric engineering. The tools are difficult to
integrate into enterprise-wide engineering solutions, are generally too
complex for all but dedicated users, require too large an investment in
training and specialization and cannot support a sufficiently broad range of
hardware platforms and operating systems. In short, they do not provide users
with the degree of flexibility needed to automate the process-centric
engineering process. Traditional CAE tools have been too focused on specific
disciplines, such as structural analysis, and most vendors who offer broader
functionality typically do not provide compatibility of data structures or
user interfaces across their product lines. In addition, most existing
analysis tools do not provide "coupled-field" analysis capabilities to permit
simultaneous analysis of the effects of two or more physical forces (for
example, structural and thermal).
The Company believes that the increasing adoption of process-centric
engineering in the 1990s has resulted in accelerating demand for design
analysis software by both the historical base of engineering analysts solving
design verification problems and the broader group of design engineers who
require analysis tools that are integrated within their CAD systems for up-
front design optimization.
THE ANSYS SOLUTION
The Company anticipated the change from sequential design to process-centric
engineering and recognized that this change would require a new generation of
CAE tools. The Company is a leading supplier of open, flexible design analysis
and optimization software that allows manufacturers to implement effectively
the process-centric engineering process. The Company's strategy emphasizes
maintaining market leadership in the traditional analysis sector while
leveraging its technology to address the evolving design optimization and CAD
integration requirements of process-centric engineering systems. The Company's
technology approach is to provide an integrated product family with a unified
database, a wide range of analysis functionality, a consistent, easy-to-use
graphical user interface, support for multiple hardware platforms and
operating systems, effective user customization tools and integration with
leading CAD systems.
The ANSYS solution includes the following key elements:
Integrated Product Family/Consistent User Interface. The Company has
developed and owns the core technologies that form the foundation for its
unified database and integrated product family. The Company's unified database
ensures data compatibility throughout its product family and is the foundation
for its coupled-field multiphysics analysis solutions. The Company provides a
single, consistent, easy-to-use graphical user interface across the entire
ANSYS product family. As a result, the Company is able to offer enterprise-
wide, process-centric engineering solutions in contrast to CAE suppliers of
point solutions that address only narrow market niches.
Breadth and Depth of Product Line. The Company believes it is important to
offer customers both breadth and depth of analysis solutions. The ANSYS
product family offers solutions ranging from design optimization to
sophisticated design verification and virtual prototyping for multiple
engineering disciplines, and product capabilities ranging from simple linear
structural solvers to complex, non-linear multiphysics solvers. This allows
the Company to provide sole source analysis solutions to a wide range of
customers.
Openness and Flexibility. The Company believes its product architecture
provides flexible support to manufacturers seeking to implement enterprise-
wide engineering systems comprised of "best-of-class" software from multiple
vendors. The Company's software products support industry data format
standards such as IGES and STEP for geometry transfer, support multiple
hardware platforms and operating systems, such as UNIX, Windows 95 and Windows
NT, and provide direct interfaces to many leading CAD systems. The Company
allows its customers to purchase only the level of functionality they require
on a per task basis.
30
<PAGE>
Adaptability. The Company offers its customers the ability to customize
ANSYS products for their specific requirements through a set of user
customization tools including macros and an application procedural interface
("API") delivered as part of each ANSYS product. Sophisticated software
customization services are also available through the Company's Customer
Services Group and its global network of ASDs. The ASD network enables the
Company to provide localized, multilingual consulting and customization
services, which the Company believes is especially important in supporting
customers with multinational operations.
CAD Integration. In 1993, the Company released ProFEA, the first independent
design analysis software to be fully integrated inside the user interface of
Parametric Technology's Pro/ENGINEER CAD product. In 1995, the Company
introduced AutoFEA, integrated inside the AutoCAD package from AutoDesk. In
1996, the Company introduced a service whereby ANSYS analysis software can be
integrated inside Computervision's CADDS application.
STRATEGY
The Company has historically focused on providing superior analysis and
optimization technology within a broad, data compatible product family. Since
the 1994 Acquisition, the new management team has added a more customer and
market driven approach to the Company's technology focus. The Company's
objectives are to be the leading global supplier of design analysis software
solutions and to accelerate its growth by:
. increasing market share among the traditional base of engineering
analysts,
. extending its product line to meet the demands of the broader group of
design engineers, and
. increasing the adoption of its products by new users, such as engineers
in the biomedical and food processing industries, where global
competition is increasing pressure on design and development functions
and where analysis tools have not been widely employed.
The Company's strategy for achieving these objectives emphasizes the
following key elements:
Maintain and Enhance Technology Leadership. The Company has been a
technology leader in analysis software throughout its 26 year history. It was
the first to offer analysis software for personal computers and the first to
offer independent design analysis software integrated within a CAD package.
The Company's high speed solvers and parallel processing capabilities, as well
as its coupled-field multiphysics capabilities, unified database and graphical
user interface, enable it to maintain leadership in providing coupled-field
multiphysics solutions. The Company is making significant investments in
research and development and is continuing its recent history of accelerated
new product releases. The Company's product development strategy also focuses
on extensions of the product family with new functional modules, further
integration with CAD products and the development of a new generation of
products based on object-oriented technology derived from the Company's core
multiphysics technology base.
Maintain and Enhance Customer Services. The Company has a 26-year history of
providing its customers with high level technical support, training and
regular product releases. The Company is increasing its investment in service
personnel and support systems to enhance its customer service, support the
increasing frequency of product releases and improve coordination with its ASD
network.
Maintain and Enhance Openness and Flexibility. The Company believes that
open and flexible software products allow customers to protect their
investments in engineering system hardware and software. The Company therefore
intends to remain a leading supplier of open and flexible design analysis
solutions that can be fully integrated into the enterprise-wide process-
centric engineering systems of its customers as they evolve. The Company is
continuing to produce products and provide services to directly integrate its
products with leading CAD systems. The Company's products support multiple
hardware and software systems while maintaining a unified database across all
platforms and products. The Company participates in industry standards
committees such as those for IGES, STEP and OLE for Design and Modeling.
31
<PAGE>
Expand Sales and Marketing Activities. The Company continues to strengthen
its domestic and international sales and marketing efforts. The Company's new
management team has added professionals in sales, marketing, product
management, public relations and communications, including regional sales
managers to work with the ASDs as part of a coordinated effort to increase
sales and marketing effectiveness, and account executives to coordinate global
and strategic accounts. The Company has recently deployed advanced marketing
tools, including database marketing systems, proactive Internet marketing and
multimedia sales tools.
Continue Focus on Indirect Distribution Channels. The Company believes its
network of 35 ASDs allows it to provide superior support and service to
customers as well as more cost-effective sales and marketing of its core
products than could be achieved through a direct sales force. The Company's
ASDs have a direct knowledge of customer needs and provide a strong, local
presence when marketing and supporting the Company's product line.
In addition to the ASD network, in 1995 the Company began to establish a
dealer channel for its CAD integrated products because these products are sold
primarily to design engineers rather than engineering analysts. The Company
believes that this dealer channel will complement the ASD network by
establishing a broader user base for its CAD integrated products, which the
Company expects will create new demand for its multiphysics products. As of
April 30, 1996, the Company had signed agreements with 27 dealers.
Pursue Strategic Alliances and Marketing Relationships. The Company has
established strategic alliances with advanced technology suppliers and
marketing relationships with hardware vendors, specialized application
developers and CAD providers. The Company believes these relationships allow
it to accelerate the incorporation of advanced technology into the ANSYS
product family, gain access to important new markets, expand the Company's
sales channel, develop specialized product applications and provide direct
integration with leading CAD systems. For example, the Company has licensed
LS/DYNA, an advanced software program for explicit dynamics, which is used for
crash test simulation in the automotive and other industries. The Company also
has arrangements with leading CAD vendors, such as Parametric Technology,
Autodesk and Computervision, to provide direct linkages between their CAD
packages and the ANSYS product family.
32
<PAGE>
CUSTOMERS
The Company's products have an estimated installed base of 8,200 licenses at
commercial sites and 8,100 licenses at university sites worldwide. The
Company's products are utilized by organizations ranging in size from small
consulting firms to the world's largest industrial companies. ANSYS customers
include 61 of the Global Fortune Industrial 100 companies, including the top
10. No customer accounted for more than 3% of the Company's revenue in 1995.
The following are examples of the wide range of companies using ANSYS
products:
<TABLE>
<S> <C>
AEROSPACE COMPUTERS, OFFICE EQUIPMENT
AlliedSignal Canon
Lockheed Martin Fujitsu
United Technologies IBM
Seagate Technology
CONSUMER GOODS ELECTRONICS, ELECTRICAL
Black & Decker GEC
Corning General Electric
Pellerin Milnor Motorola
Snap-On Tools Siemens
Whirlpool Westinghouse Electric
AUTOMOTIVE GOVERNMENT, DEFENSE
Ford Bharat
General Motors Bofors
SAAB Harris
Toyota Raytheon
Volvo U.S. Department of the Army
BIOMEDICAL, PHARMACEUTICALS HEAVY EQUIPMENT
Carbomedics Cummins
DePuy Ishikawajiama-Harima
Johnson & Johnson John Deere
Showa Denko Komatsu
Mannesmann
CHEMICALS METALS
Akzo Nobel Kobe
BASF Preussag
Bayer Reynolds
Ciba-Geigy Sumitomo
Hoechst Thyssen
SCIENTIFIC, PHOTOGRAPHY
3M
Eastman Kodak
Fuji
</TABLE>
The following case studies illustrate various uses of the Company's
products.
Motorola
A division of Motorola designs and manufactures high-current semiconductor
units to efficiently control electric motors in industrial drives, commercial
products and electric vehicles. Motorola has adopted a product development
strategy that uses ANSYS, among other tools, to continuously analyze and
refine design concepts and product configuration. This coordinated approach,
which utilizes ANSYS products for coupled-field analysis, improves product
quality and shortens development times compared to the traditional sequential
product design process.
33
<PAGE>
Black & Decker
Black & Decker uses ANSYS technology in the design of its commercial and
household appliances, such as its SurgeXpress steam iron. Black & Decker
engineers used ANSYS design analysis capabilities to increase the steam rate
of the iron by 40% while reducing material costs by 20%, thereby creating a
lighter weight and more efficient product.
Pratt & Whitney
Pratt & Whitney engineers use ANSYS products to analyze the flight-
worthiness of critical components of NASA's Space Shuttle. Using ANSYS, Pratt
& Whitney engineers simulate the thermal response of parts throughout an
entire Space Shuttle flight mission, from pre-launch to shut down. For
example, using the results of heat transfer analysis, engineers simulated the
structural response of the Space Shuttle's oxygen turbo pump at five different
times. The analysis was completed within two months, a substantial time
savings compared to the time to build and test physical prototypes. Pratt &
Whitney's oxygen turbo pump made its first flight on the Space Shuttle
Discovery in July 1995 when it was installed on one of the three main engines.
Rolls-Royce
Rolls-Royce specializes in the design, development and manufacture of
aircraft engines and industrial power equipment. ANSYS collaborated with
Rolls-Royce and Computervision in the development of "ANSYS for CADDS," a
direct CAD software interface to Computervision's CADDS software that provides
designers and mechanical engineers with up-front design analysis tools
integrated inside the CADDS program.
DePuy
DePuy, a manufacturer of orthopedic implants and the surgical instruments
used to install them, uses ANSYS to help develop more reliable and durable
knee and hip prosthetic devices. ANSYS software is used to analyze individual
patient data from CAT scans to customize these devices to the specific needs
of individual patients.
Although the Company believes that the foregoing case studies are
representative of the uses of the Company's products by its customers and the
types of results that may be achieved, there can be no assurance that each
customer using the Company's products will achieve the same types of results
as those described above.
PRODUCTS
The ANSYS family of products consists of flexible, integrated analysis
software tools that address enterprise-wide engineering requirements. The
Company believes that ANSYS/Multiphysics, the Company's flagship program, is
the most comprehensive coupled-field multiphysics software currently
available. In addition, the Company's individual design and analysis software
programs, all of which are included in the ANSYS/Multiphysics program, are
available as subsets or stand-alone programs. All of the capabilities of the
ANSYS/Multiphysics program are available on a single CD. An authorization file
provided to customers at the time of purchase unlocks modules based on the
level of functionality purchased by the user. The Company's multiphysics
products comprise the core of its business and accounted for substantially all
of the Company's revenue in 1995 and the three months ended March 31, 1996.
See "Risk Factors--Dependence on Core ANSYS Products."
The Company's CAD integration products provide design optimization tools for
use directly within a particular CAD product. CAD integration products are
accessed from the graphical user interface of, and operate directly on the
geometry produced within, the CAD product. The output from these programs may
be read into any of the products in the ANSYS product family. In addition to
the two products listed below, the Company has arrangements with many leading
CAD suppliers to provide direct linkages between the vendors' CAD packages and
the Company's products.
Multiphysics Products
ANSYS/Multiphysics. ANSYS/Multiphysics is the Company's most comprehensive,
parametric based, coupled-field, multidisciplinary analysis program. It
enables users to conduct simultaneous, interactive analysis
34
<PAGE>
across a range of engineering disciplines, including structural, thermal,
fluid flow, acoustics and electromagnetics. This sophisticated design and
analysis software provides the design optimization capabilities necessary to
simulate and solve complex engineering problems in industries such as
aerospace, automotive, biomedical and consumer electronics.
ANSYS/Mechanical. ANSYS/Mechanical provides a wide range of engineering
design, analysis and optimization capabilities. It includes all of the
functionality of ANSYS/Multiphysics except fluid flow and electromagnetics.
This design verification software enables users to determine displacements,
stresses, forces, temperature and pressure distributions, such as the combined
structural and thermal characteristics of a printed circuit board.
ANSYS/Thermal. ANSYS/Thermal is used for steady state and transient thermal
analyses, including conduction, convection, radiation and heat transfer. This
comprehensive thermal program is used for analysis in applications ranging
from electronic cooling to induction furnace start-up.
ANSYS/LinearPlus. ANSYS/LinearPlus is a low-cost structural analysis product
designed for linear static, dynamic and buckling analyses. This product is
used to solve engineering problems such as those in the automotive, bridge
building, hand tools and office equipment industries. ANSYS/LinearPlus is
used, for example, to determine the vibrations and natural frequencies of an
automobile chassis.
ANSYS/FLOTRAN. ANSYS/FLOTRAN is a computational fluid dynamics ("CFD")
program that solves a variety of fluid flow problems, including laminar,
turbulent, compressible and incompressible flow. ANSYS/FLOTRAN is the only CFD
program with design optimization capabilities. A typical use of this product
is to calculate the lift and drag on an airplane wing.
ANSYS/Emag. ANSYS/Emag simulates electromagnetic fields, electrostatics,
circuits and current conduction. It is typically used with other ANSYS
products to study the interaction of flow, electromagnetic fields and
structural mechanics, such as the calculation of the torque and efficiency of
an electric motor.
ANSYS/LS-DYNA. ANSYS/LS-DYNA solves highly nonlinear structural dynamic
problems. This program models dynamic physical scenarios such as material
forming, large deformation impacts, nonlinear material behavior and multibody
contact. This product will be used in applications such as crash test
simulations and metal and glass forming analysis. ANSYS/LS-DYNA is in beta
testing and is scheduled for release in the second half of 1996.
ANSYS/PrepPost. ANSYS/PrepPost is used to prepare a design for analysis and
to display the results of the analysis upon completion. It provides extensive,
fully parametric features in the preprocessing stage of engineering analysis,
thereby allowing users to quickly and easily create finite element models. The
postprocessor enables users to examine results from all ANSYS analysis
programs.
ANSYS/ED. ANSYS/ED is a fully functional design simulation program
possessing the capabilities of the ANSYS/Multiphysics program with limits on
problem size. This inexpensive, self-contained package is used primarily for
training and educational purposes and has been widely distributed to
engineering and technical departments at universities worldwide.
CAD Integration Products
ANSYS/ProFEA. ANSYS/ProFEA is a design analysis software program with a
streamlined version of ANSYS/Mechanical capabilities to allow design engineers
to perform analysis and optimization throughout the design phase from within
Parametric Technology's Pro/ENGINEER user interface.
ANSYS/AutoFEA. ANSYS/AutoFEA, an integrated design analysis program running
completely inside AutoCAD release 13 and Mechanical Desktop, allows design
engineers to assess the integrity of their designs during the
conceptualization stage using AutoDesk's AutoCAD user interface. The Company
released a 2D version of AutoFEA in 1995 and will release the 3D version in
the second half of 1996.
35
<PAGE>
Product Data
The following table indicates the suggested retail price as of March 31,
1996 for a paid-up, per seat license of each of the Company's products, the
date of the latest product release and the date of the first release since the
introduction of ANSYS 5.0 in 1992. ANSYS 5.0 was the first release of the
Company's flagship product with the newly architected data structures to
support CFD and electromagnetics.
<TABLE>
<CAPTION>
SUGGESTED LATEST INITIAL
PRODUCT U.S. RETAIL PRICE RELEASE RELEASE
- ------- ----------------- ------- -------
<S> <C> <C> <C>
Multiphysics:
ANSYS/Multiphysics*.......................... $ 35,000 Mar. 96 Dec. 92
ANSYS/Mechanica1............................. 25,000 Mar. 96 Dec. 92
ANSYS/Thermal................................ 10,000 Mar. 96 Feb. 94
ANSYS/LinearPlus............................. 10,000 Mar. 96 Feb. 94
ANSYS/FLOTRAN................................ 18,000 Mar. 96 Feb. 94
ANSYS/Emag................................... 18,000 Mar. 96 Feb. 94
ANSYS/LS-DYNA................................ 30,000 ** **
ANSYS/PrepPost............................... 12,500 Mar. 96 Dec. 92
ANSYS/ED..................................... 250 Mar. 96 Mar. 93
CAD Integrated:
ANSYS/ProFEA................................. 8,000 Oct. 95 Nov. 93
ANSYS/AutoFEA 2D............................. 1,500 Mar. 95 Mar. 95
ANSYS/AutoFEA 3D ............................ 3,800 ** **
</TABLE>
- --------
* Originally marketed as ANSYS 5.0.
** Scheduled for release in the second half of 1996.
TECHNOLOGY
The Company's software products allow users to construct computer models (or
transfer computer models from CAD programs) of structures, products,
components or systems. The analyst may then simulate operating loads or other
design performance conditions and study the model's physical responses, such
as stress levels, temperature distributions or the impact of electromagnetic
fields. The Company's products can also be used to optimize a design early in
the product development process to reduce production costs. These processes
help customers shorten the cycle of prototype building, testing and rebuilding
and reduce expensive product overdesign. The Company believes its technology
and products are differentiated from those of its competitors by a combination
of its high speed solvers, its superior parallel processing, the breadth of
its product line, its coupled-field multiphysics capabilities and its
compatible, unified database.
All ANSYS products are based on classical engineering concepts. Through
proven numerical techniques, these concepts can be formulated into matrix
equations that are suitable for finite element analysis ("FEA"). In preparing
for an analysis, a technique known as finite element meshing is used to
subdivide a complex product or part into discrete regions known as elements
connected at a finite number of points known as nodes. The primary unknowns in
an analysis are the degrees of freedom for each node in the finite element
model. Degrees of freedom may include displacements, rotations, temperatures,
pressures, velocities, voltages or magnetic potentials and are defined by the
elements attached to the node. Corresponding to the degrees of freedom,
matrices are generated as appropriate for each element in the model. These
matrices are then assembled to form sets of simultaneous equations that can be
processed by one of the program's several solvers.
An ANSYS analysis comprises three phases: the preprocessing phase, the
solution phase and the postprocessing phase. In the preprocessing or model
generation phase, the data needed to perform an analysis solution are
specified. The user builds a model of the object or system to be analyzed. The
user can select coordinate systems and element types, define real constants
and material properties, create solid models and mesh
36
<PAGE>
them, manipulate elements and nodes, define coupling and constraint equations
and define the applied loads. Coordinate systems are used in the ANSYS program
to assist the user during the preprocessing stage in locating geometry in
space, specifying degree of freedom directions at certain points in the model,
defining material property directions and changing graphics displays.
Graphical displays and data selection and list utilities are available to
support the user in preparing the model.
After a model is built in the preprocessing phase, the results of the
analysis are obtained in the solution phase. The user can specify the analysis
type, analysis options, load data and load step options and then initiate the
finite element solution. The analysis type specified by the user indicates to
the program which governing equations should be used to solve the problem. The
general categories of available analyses include structural, thermal,
acoustic, electromagnetic field, electric field, electrostatic, fluid and
coupled-field. The user can further define the analysis type by specifying
analysis options, such as linear static or non-linear transient dynamic. ANSYS
incorporates many advanced solver technologies for use during this phase, such
as the PowerSolver, a recently added, high speed, iterative equation solver.
The solution phase is computationally intensive, and ANSYS therefore
incorporates advanced parallel processing capabilities to reduce solution
times for all of its solvers.
In the postprocessing phase, the user views (in graphical or tabular form)
and interprets the results calculated in the solution phase. These results may
include displacements, temperatures, stresses, strains, velocities and heat
flows. Because the postprocessing phase is fully integrated with the ANSYS
preprocessing and solution phases, the user can examine results immediately
and can test alternative solutions by modifying the parameters set in the
preprocessing phase.
SALES AND MARKETING
The Company distributes its multiphysics products and services primarily
through its global ASD network. This network, developed over the last decade,
provides the Company with a cost-effective, highly specialized channel of
distribution and technical support. Of the Company's revenue in 1995 and the
three months ended March 31, 1996, 96.9% and 98.4% was derived through the
ASDs. The six largest ASDs accounted for approximately 48.1% of the Company's
revenue in 1995. See "Risk Factors--Dependence on Distributors." All software
licenses for the Company's products are directly between the Company and the
end user.
The ASD network consists of 35 distributors in 68 locations in 27 countries,
including 16 in North America, nine in Europe, nine in the Asia Pacific Region
and one in Brazil. The ASDs sell ANSYS products to new customers, expand
installations within the existing customer base, offer consulting services and
provide the first line of ANSYS technical support. The Company has instituted
an ASD certification process to help ensure that each ASD has the capacity on
an ongoing basis to adequately represent the Company's product line and
provide an acceptable level of services and consultation.
Under the Company's new management, substantially all of the ASDs have
entered into new contracts with the Company. These contracts establish minimum
performance criteria and include provisions relating to product discounts,
payment terms, customer support and training. ASDs are typically granted
exclusive geographic territories for the sale and support of ANSYS core
products (but not for CAD integrated products) and may not market products
which are competitive with ANSYS products. In order to maintain its exclusive
rights, each ASD is required to perform satisfactorily in the areas of sales
volume, payments, customer support and customer satisfaction, as determined
reasonably by the Company. Most ASD contracts are for a term of three years
with automatic renewals for additional one-year terms, unless terminated by
either party. The average ASD has been affiliated with the Company for eight
years, and the Company has only replaced three ASDs since the 1994
Acquisition, none of which represented a significant portion of the Company's
revenue.
The Company's new management team has established a sales management
structure to work with the ASDs to develop a more focused sales approach and
to implement a worldwide major account strategy. The Company's sales
management organization consists of a North American Vice President of Sales,
supported by four Regional Sales Directors and two Major Account
Representatives, and an International Vice President of
37
<PAGE>
Sales, supported by a European Managing Director and two Regional Sales
Directors. The Company's sales organization also has application support
engineers to represent the Company at exhibitions and conferences worldwide
and to provide backup support to the ASDs. The Company believes that its new
sales management infrastructure contributed significantly to the increase in
its 1995 revenue growth rate.
In 1995, the Company began to establish a dealer channel for its CAD
integrated products because these products are sold primarily to design
engineers rather than engineering analysts. The Company believes that this
dealer channel will complement the ASD network by establishing a broader user
base for its CAD integrated products, which the Company expects will create
new demand for its multiphysics products. As of April 30, 1996 the Company had
signed agreements with 27 dealers. All dealers are required to meet the
Company's standards for sales and customer support by ensuring they have
trained appropriate marketing and technical personnel.
The Company refocused its marketing activities in 1995 to more effectively
support to its sales management and distribution network. The Company has
recently deployed advanced marketing technology including database marketing
systems, proactive Internet marketing and multimedia sales tools.
In addition to marketing to manufacturers, the Company has traditionally
marketed its products to the engineering departments of universities. There
are now approximately 8,100 ANSYS multiphysics licenses at universities
worldwide that are used both for teaching and research. In addition, the
Company has licensed ANSYS/ED to individual engineering students. As a result,
many engineering students are trained on ANSYS prior to entering the work
force. The Company believes that this facilitates the sale of ANSYS products
to manufacturers.
CUSTOMER SUPPORT AND SERVICES
The Company's Customer Services Group provides software maintenance, support
and custom programming services to customers. The Company recently reorganized
this Group in an effort to increase the percentage of customers on maintenance
contracts and improve customer problem resolution. The Customer Services Group
consists of 23 employees, 13 of whom are high-level technical support
engineers, four of whom are software developers focused on program
customization services and four of whom are training and education
professionals.
The Company provides two levels of support under its standard maintenance
contract. The ASDs provide local phone support, post sales assistance and
professional services, such as consulting and training. The Company provides
second level technical support, with direct access to development and
technical resources. The technical support effort utilizes an advanced global
help desk and problem tracking software that provide a centralized database
for all customer support issues and product enhancement requests. Customers on
the Company's standard maintenance and lease contracts automatically receive
new releases of the Company's products.
The Company and the ASDs provide customization of ANSYS programs on a fee-
for-services basis. Examples of such services include the integration of a
customer-specific application or technology within an ANSYS program and the
integration of a specific CAD system with the ANSYS program.
STRATEGIC ALLIANCES AND MARKETING RELATIONSHIPS
The Company has established strategic alliances with advanced technology
suppliers and marketing relationships with hardware vendors, specialized
application developers and CAD providers. The Company believes these
relationships allow it to accelerate the incorporation of advanced technology
into the ANSYS product family, gain access to important new markets, expand
the Company's sales channel, develop specialized product applications and
provide direct integration with leading CAD systems.
38
<PAGE>
In July 1995, the Company entered into a software license agreement with
Livermore Software Corporation under which Livermore has agreed to provide
LS/DYNA software for explicit dynamics solutions used in applications such as
crash test simulation in the automotive and other industries. Under this
arrangement, Livermore assists in the integration of the LS/DYNA software with
the Company's pre- and postprocessing capabilities and will provide updates
and problem resolution in return for a share of revenue from sales of
ANSYS/LS-DYNA, which is scheduled for release in the second half of 1996. In
December 1995, the Company entered into an arrangement with Spatial
Technology, Inc. for the ACIS Geometric Modeler, which will provide a
foundation for data file conversion for several CAD products. The Company also
has technology transfer agreements with Computational Applications and Systems
Integration, Inc. for the PowerSolver, a high speed iterative solver, and with
XOX, Inc. for the Shapes Geometric Modeler, which is used to support the
Company's parametric solid modeling capability.
The Company has technical and marketing relationships with leading CAD
vendors, such as Parametric Technology, Autodesk, Computervision, Intergraph,
EDS/Unigraphics, SolidWorks and Dassault Systeme, to provide direct links
between the vendors' CAD packages. These links facilitate the transfer of
electronic data models between the CAD system and ANSYS products.
The Company has established relationships with leading suppliers of computer
hardware, including Hewlett-Packard, Silicon Graphics/Cray, Sun Microsystems,
Intergraph, Digital, IBM and Intel. The relationships typically provide the
Company with joint marketing and advertising, Internet links with the hardware
partner's home page and reduced equipment costs.
The Company's Enhanced Solution Provider Program actively encourages
specialized developers of niche software solutions to use ANSYS as a
development platform for their applications. For example, Silverado Software
and Consulting uses the Company's API to develop Silverado's vertical drop
shock application that simulates the dropping of products onto an unyielding
surface, such as an electronic appliance onto concrete. Other Enhanced
Solution Providers include COMET Acoustics, which uses ANSYS/PrepPost to run
its acoustic solver for the automobile industry, and AC Technologies, which
provides an interface to ANSYS in connection with its plastic injection mold
flow analysis product. In many cases, the sale of the Enhanced Solution
Providers' products is accompanied by the sale of an ANSYS product.
PRODUCT DEVELOPMENT
The Company intends to maintain its technology leadership by making
significant investments in research and development and continuing its recent
policy of accelerated new product releases. The Company's product development
strategy centers on ongoing development and innovation of new technologies to
increase productivity and provide solutions that customers can integrate into
enterprise-wide engineering systems. The Company's product development efforts
focus on extensions of the ANSYS product family with new functional modules,
further integration with CAD products and the development of new products
based on object-oriented technology. The Company's products run on the most
widely used engineering computing platforms and operating systems, including
Windows 95, Windows NT and most UNIX workstations, as well as on
supercomputers such as the Cray.
The Company's total research and development expense was $6.0 million, $6.8
million and $8.3 million in 1993, 1994 and 1995, or 18.9%, 20.6% and 21.0% of
total revenue, respectively. As of March 31, 1996, the Company's product
development staff consisted of 88 employees, most of whom hold advanced
degrees and have industry experience in engineering, mathematics, computer
science or related disciplines.
For 1996, the Company plans the following major product development
activities:
. The release of ANSYS 5.3, a new version of the Company's flagship
multiphysics product, and all component products, scheduled for the
second half of 1996. Major enhancements in this release will include two
new solvers, improved meshing facilities, explicit dynamics solution
capability and enhanced graphics and animation functions. ANSYS 5.3 is
currently in the customer testing phase.
39
<PAGE>
. ANSYS/ProFEA and ANSYS Connection for Pro/ENGINEER are scheduled for
enhancement releases in 1996, approximately 60 days after Parametric
Technology releases its new versions of Pro/ENGINEER. These products will
enable users to access Pro/ENGINEER geometry directly from ANSYS
products.
. The Company is developing AutoFEA 3D. This product is based on ANSYS
DesignSpace, a C++ object-oriented product development environment
evolved from existing ANSYS technology. The commercial release of AutoFEA
3D is planned for the second half of 1996.
The Company uses multi-functional teams to develop its products and develops
them simultaneously on multiple platforms to reduce subsequent porting costs.
In addition to developing source code, these teams create and perform highly
automated software verification tests; develop on-line documentation and help
for the products; implement development enhancement tools, software
configuration management and product licensing processes; and conduct
regression tests of ANSYS products for all supported platforms.
PRODUCT QUALITY
In 1995, the Company achieved ISO 9001 certification for its quality system.
This standard applies to all of the Company's commercial software products and
covers all product-related activities, from establishing product requirements
to customer service practices and procedures.
In accordance with its ISO 9001 certification, the Company's employees
perform all product development and support tasks according to predefined
quality plans, procedures and work instructions. These plans define for each
project the methods to be used, the responsibilities of project participants
and the quality objectives to be met. To ensure that the Company meets or
surpasses the IS0 9001 standards, the Company establishes quality plans for
all products, subjects product designs to multiple levels of testing and
verification, and selects development subcontractors in accordance with
processes established under the Company's quality system.
COMPETITION
The CAD, CAE and CAM market is intensely competitive. In the traditional CAE
market, the Company's primary competitors include MacNeal-Schwendler
Corporation, Hibbitt, Karlsson and Sorensen, Inc. and MARC Analysis Research
Corporation. The Company also faces competition from smaller vendors of
specialized analysis applications in fields such as computational fluid
dynamics. In addition, certain integrated CAD suppliers such as Parametric
Technology and Structural Dynamics Research Corporation provide varying levels
of design analysis and optimization and verification capabilities as part of
their product offerings.
The entrance of new competitors would be likely to intensify competition in
all or a portion of the overall CAD, CAE and CAM market. Some of the Company's
current and possible future competitors have greater financial, technical,
marketing and other resources than the Company, and some have well established
relationships with current and potential customers of the Company. It is also
possible that alliances among competitors may emerge and rapidly acquire
significant market share or that competition will increase as a result of
software industry consolidation. Increased competition may result in price
reductions, reduced profitability and loss of market share, any of which would
materially adversely affect the Company's business, financial condition and
results of operations.
The Company believes that the principal competitive factors affecting its
market include product features and functionality, such as ease of use;
flexibility; quality; ease of integration into CAD systems; file compatibility
across computer platforms; range of supported computer platforms; performance;
price and cost of ownership; customer service and support; company reputation
and financial viability; and effectiveness of sales and marketing efforts.
Although the Company believes that it currently competes effectively with
respect to such factors, there can be no assurance that the Company will be
able to maintain its competitive position against current and potential
competitors. There also can be no assurance that CAD software companies will
not develop
40
<PAGE>
their own analysis software, acquire analysis software from companies other
than the Company or otherwise discontinue their relationships with the
Company. If any of these events occurred, the Company's business, financial
condition and results of operations could be materially adversely affected.
See "--Products" and "--Strategic Alliances and Marketing Relationships."
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies on a combination
of trade secret, copyright and trademark laws, license agreements,
nondisclosure and other contractual provisions and technical measures to
protect its proprietary rights in its products. The Company distributes its
ANSYS software under software license agreements that grant customers
nonexclusive licenses to use of the Company's products, which are typically
nontransferable. Although the Company distributes its products primarily
through the ASDs, licenses of the Company's products are directly between the
Company and end users. Use of the licensed software is usually restricted to
the customer's internal operations on designated computers at specified sites
unless the client obtains a site license for the client's use of the software.
Software and hardware security measures are also employed to prevent
unauthorized use of the Company's software, and the licensed software is
subject to terms and conditions prohibiting unauthorized reproduction of the
software. Customers may either purchase a paid-up perpetual license of the
technology with the right to purchase annually ongoing maintenance, support
and updates, or may lease the product on an annual basis for a fee which
includes the license, maintenance, support and upgrades.
For certain software such as AutoFEA and ANSYS/ED, the Company primarily
relies on "shrink-wrapped" licenses that are not signed by licensees and
therefore may be unenforceable under the laws of certain jurisdictions.
The Company also seeks to protect the source code of its software as a trade
secret and as unpublished copyrighted work. The Company has obtained a federal
trademark protection for ANSYS and a number of other trademarks and logos. The
Company has also obtained trademark registrations of ANSYS in a number of
foreign countries and is in the process of seeking such registration in other
foreign countries.
Most employees of the Company have signed a Covenant Agreement under which
they have agreed not to disclose trade secrets or confidential information or
to engage in or become connected with any business which is competitive with
the Company anywhere in the world while employed by the Company (and in some
cases for specified periods thereafter), and that any products or technology
created by them during their term of employment is the property of the
Company. In addition, the Company requires all ASDs to enter into agreements
not to disclose the Company's trade secrets and other proprietary information.
Despite these precautions, there can be no assurance that misappropriation
of the Company's technology will not occur. Further, there can be no assurance
that copyright and trade secret protection will be available for the Company's
products in certain countries, or that restrictions on competition will be
enforceable.
The software development industry is characterized by rapid technological
change. Therefore, the Company believes that factors such as the technological
and creative skills of its personnel, new product developments, frequent
product enhancements, name recognition and reliable product maintenance are
more important to establishing and maintaining a technology leadership
position than the various legal protections of its technology which may be
available.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third
parties will not claim in the future such infringement by the Company or its
licensors or licensees with respect to current or future products. The Company
expects that software product developers will increasingly be subject to such
claims as the number of products and competitors in the Company's market
segment grows and the functionality of products in different market segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company.
41
<PAGE>
EMPLOYEES
As of March 31, 1996, the Company had 200 full time employees. At that date,
there were also approximately 30 contract personnel and co-op students
providing development services and technical support on an ongoing basis. The
Company believes that its relationship with its employees is good.
FACILITIES
The Company is headquartered in Houston, Pennsylvania, where it leases
approximately 66,000 square feet under a lease agreement which terminates in
March 1997. See "Certain Transactions." In January 1996, the Company entered
into a 10-year lease agreement for a nearby corporate office facility of
approximately 107,000 square feet to be constructed by the landlord. The
Company anticipates moving into the new facility in February 1997. In
addition, the Company leases field offices in Detroit, Michigan and the United
Kingdom.
LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is currently not party to any material litigation.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their positions with
the Company and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Peter J. Smith............. 51 Chairman of the Board, President and
Chief Executive Officer
Dr. John A. Swanson........ 56 Chief Technologist and Director
John M. Sherbin II......... 46 Chief Financial Officer, Vice President, Finance
and Administration, Secretary and Treasurer
R. Bruce Morgan............ 44 Vice President, Marketing
Leonard Zera............... 44 Vice President, North American Sales
Mark C. Imgrund............ 39 Vice President, Corporate Quality
James C. Tung.............. 62 Vice President, International Sales
Paul A. Chilensky.......... 38 Vice President, Customer Services
Dr. Shah M. Yunus.......... 41 Corporate Fellow
David L. Conover........... 38 Manager of Product Development
Gary B. Eichhorn(1)........ 41 Director
Roger J. Heinen, Jr.(1).... 45 Director
Roger B. Kafker(1)......... 34 Director
Jacqueline C. Morby(2)..... 59 Director
John F. Smith(2)........... 61 Director
</TABLE>
- --------
(1) Member of the Audit and Ethics Committee.
(2) Member of the Compensation and Option Committee.
Mr. Peter Smith has been the President and Chief Executive Officer of the
Company since March 1994 and Chairman of the Board of Directors since July
1995. Prior to joining the Company, Mr. Smith was Vice President of European
Operations for Digital Equipment Corporation ("Digital"), a computer company,
from November 1991 to March 1994. Previously, he managed Digital's worldwide
applications development and marketing activities, including its engineering
systems group which focused on CAD and CAM graphics and general engineering
market business. Mr. Smith holds a B.S. degree in electrical engineering from
Northeastern University and an M.B.A. from the University of Notre Dame.
Dr. Swanson founded Swanson Analysis Systems, Inc., the Company's
predecessor, in 1970, and served as its President and Chief Executive Officer
until March 1994, when he became Chief Technologist and a director of the
Company following the 1994 Acquisition. Dr. Swanson holds B.S. and M.S.
degrees in mechanical engineering from Cornell University and a Ph.D. in
applied mechanics from the University of Pittsburgh. Dr. Swanson is a Fellow
of the American Society of Mechanical Engineers and a member of the Institute
of American Entrepreneurs.
Mr. Sherbin has been the Company's Chief Financial Officer, Vice President,
Finance and Administration, Secretary and Treasurer since May 1994. Prior to
joining the Company, Mr. Sherbin was Chief Financial Officer
43
<PAGE>
and Treasurer of II-VI, Incorporated, an infrared materials and electro-
components manufacturer, from February 1986 to May 1994. Mr. Sherbin holds a
B.S. degree in management and accounting from Pennsylvania State University
and an M.B.A. from the University of Pittsburgh.
Mr. Morgan has been the Company's Vice President, Marketing since June 1995.
Prior to joining the Company, Mr. Morgan was Vice President, Sales and
Marketing at Spatial Technology, Inc., a supplier of engineering systems
software, from February 1991 to June 1995. Mr. Morgan holds a B.A. degree in
economics from Carleton University.
Mr. Zera has been the Company's Vice President, North American Sales since
May 1994. Prior to joining the Company, Mr. Zera held sales, sales management
and marketing positions at Digital from January 1978 to April 1994. Mr. Zera
holds a B.A. degree in marketing from Michigan State University and an M.B.A.
from Wayne State University.
Mr. Imgrund has been the Company's Vice President, Corporate Quality since
September 1994 and was the Company's Quality Assurance Manager from March 1987
to September 1994. Mr. Imgrund holds a B.S. degree in civil engineering from
Cornell University and an M.S. degree in mechanical engineering from the
University of Pittsburgh.
Mr. Tung has been the Company's Vice President, International Sales since
March 1995. Prior to joining the Company, Mr. Tung was Vice President of
International Operations and International Sales and Marketing for PDA
Engineering, Inc., a software company, from January 1994 to February 1995.
From December 1992 to December 1993, he was President of Pacific Ventures, a
computer application software consulting company, and from 1989 to December
1992 he was the Vice President--Asia/Pacific Operations of Infotron Systems
Corporation, a communications hardware company. Mr. Tung holds a B.S. degree
in physics from Columbia University and an M.B.A. from the University of Santa
Clara.
Mr. Chilensky was the Company's Manager of Customer Services from January
1995 to March 1996, when he became Vice President, Customer Services. Prior to
joining the Company, Mr. Chilensky was regional manager of professional
services for Legent Corporation, a software company, from May 1991 to December
1994.
Dr. Yunus has been a Corporate Fellow of the Company with responsibility for
product architecture since September 1994, and was a research engineer and
senior project leader for the Company since March 1984. Dr. Yunus holds a B.S.
degree in civil engineering and an M.S. degree in structural engineering from
the Bangladesh University of Engineering and Technology and a Ph.D. in
computational mechanics from Rensselaer Polytechnic Institute.
Mr. Conover joined the Company in 1980 and has served as its Manager of
Product Development since August 1994. Mr. Conover holds B.S. and M.S. degrees
in civil engineering from Carnegie Mellon University.
Mr. Eichhorn has served as a director of the Company since September 1994.
Mr. Eichhorn has been the President and Chief Executive Officer and a director
of Open Market, Inc., an Internet software company, since December 1995. From
September 1991 to November 1995, Mr. Eichhorn worked at Hewlett-Packard
Company, a computer company, most recently serving as Vice President and
General Manager of Hewlett Packard's Medical Systems Group. From 1975 to 1991,
Mr. Eichhorn held various sales and management positions at Digital.
Mr. Heinen has served as a director of the Company since April 1996. Mr.
Heinen was a Senior Vice President of Microsoft Corporation, a software
company, from January 1993 through March 1996. Prior to that time, he was a
Senior Vice President of Apple Computer, Inc., a computer company, from
January 1989 to January 1993.
44
<PAGE>
Mr. Kafker has served as a director of the Company since February 1994. He
has been associated with TA Associates, Inc. or its predecessor since 1989 and
became a Principal of that firm in 1994 and a Managing Director in 1995.
Ms. Morby has served as a director of the Company since February 1994. She
has been Managing Director or a partner of TA Associates, Inc. or its
predecessor since 1982. Ms. Morby is also a director of Axent Technologies,
Inc., a computer software company, and Pacific Mutual Life Insurance Co., a
life insurance company.
Mr. John Smith has served as a director of the Company since December 1995.
Mr. Smith served as Chief Operating Officer and Senior Vice President of
Digital from 1986 through 1993, when he retired. Mr. Smith also serves on the
Board of Directors of Sequoia Systems, Inc., a software company, Instron Inc.,
a material testing company, Perseptive Biosystems, Inc., a life sciences
company, and Hadco Inc., an interconnect technology company.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at seven.
Following this offering, the Company's Board of Directors will be divided into
three classes, with the members of each class of directors serving for
staggered three-year terms. The Board will consist of two Class I Directors
(Mr. Peter Smith and Dr. Swanson), three Class II Directors (Messrs. Heinen
and Kafker and Ms. Morby) and two Class III Directors (Messrs. Eichhorn and
John Smith), whose initial terms will expire at the 1997, 1998 and 1999 annual
meetings of stockholders, respectively.
Dr. Swanson was elected to the Board of Directors in accordance with the
terms of an Investment and Stockholders' Agreement entered into in connection
with the 1994 Acquisition (the "Stockholders' Agreement"). See "Certain
Transactions."
The Board of Directors has established an Audit and Ethics Committee (the
"Audit Committee") and a Compensation and Option Committee (the "Compensation
Committee"). The Audit Committee recommends the firm to be appointed as
independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent
accountants the Company's annual operating results, considers the adequacy of
the internal accounting procedures, considers the effect of such procedures on
the accountants' independence and establishes policies for business values,
ethics and employee relations. The Compensation Committee reviews and
recommends the compensation arrangements for officers and other senior level
employees, reviews general compensation levels for other employees as a group,
determines the options or stock to be granted to eligible persons under the
1996 Stock Plan and takes such other action as may be required in connection
with the Company's compensation and incentive plans.
Nonemployee directors other than Ms. Morby and Mr. Kafker (the "Independent
Directors") receive fees of $1,000 and $500, respectively, for each meeting of
the Board of Directors or Board committee they attend, and each director is
reimbursed for travel and other expenses incurred in attending meetings. Also,
under the 1996 Stock Plan, each Independent Director is entitled to receive an
annual grant of options to purchase Common Stock as described under "--
Employee Stock and Other Benefit Plans--1996 Stock Option and Grant Plan--
Independent Director Options."
45
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company during 1995 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)(2)
- ------------------------------ ---------- ---------- ------------ ------------------
<S> <C> <C> <C> <C>
Peter J. Smith.......... 245,792 224,139 -- 42,940(3)
Chief Executive Officer
Dr. John A. Swanson..... 239,000 76,825 -- 32,460(3)
Chief Technologist
John M. Sherbin II ..... 97,084 38,368 6,000 30,000
Chief Financial Officer
Leonard Zera............ 100,000 104,758(4) -- 36,000(3)
Vice President, North
American Sales
Mark C. Imgrund......... 112,500 20,000 4,000 30,000
Vice President,
Corporate Quality
</TABLE>
- --------
(1) Two executive officers, Messrs. Morgan and Tung, joined the Company on
June 30, 1995 and March 9, 1995, respectively, and would have appeared in
the table above had they been employed by the Company for a full fiscal
year.
(2) Includes $30,000 contributed by the Company to its Pension and Profit-
Sharing Plans on behalf of each of the Named Executive Officers. See "--
Employee Stock and Other Benefit Plans--Pension and Profit-Sharing Plans."
(3) Includes premiums on life insurance of $5,740 paid by the Company on
behalf of Mr. Smith, a car allowance for Mr. Smith and Mr. Zera paid at
the rates of $600 and $500 per month, respectively, and $205 per month
paid toward the maintenance of a Company car provided to Dr. Swanson.
(4) Represents bonus paid in 1996 on account of the Company's 1995 sales
performance.
Option Grants. The following table sets forth information concerning the
individual grant of options to purchase Common Stock to the Named Executive
Officers during 1995. No stock appreciation rights ("SARs") have been granted.
OPTION GRANTS DURING 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
-------------------------------------------- RATES OF STOCK PRICE
APPRECIATION FOR OPTION
OPTIONS % OF TOTAL EXERCISE TERM (2)
GRANTED OPTIONS GRANTED PRICE EXPIRATION ------------------------
NAME (#)(1) TO EMPLOYEES PER SHARE DATE 5% 10%
- ---- ------- --------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Smith.......... -- -- -- -- -- --
Dr. John A. Swanson..... -- -- -- -- -- --
John M. Sherbin II...... 6,000 1.9% $.40 7/15/2005 $1,509 $3,825
Leonard Zera............ -- -- -- -- -- --
Mark C. Imgrund......... 4,000 1.3% $.40 7/15/2005 $1,006 $2,550
</TABLE>
- --------
(1) The options set forth above become exercisable in four equal annual
installments, commencing on the first anniversary of the grant date. All
options are subject to the employee's continued employment and terminate
ten years after the grant date, subject to earlier termination in
accordance with the Company's 1994 Stock Option and Grant Plan (the "1994
Stock Plan") and the applicable option agreement. All options were granted
at fair market value as determined by the Option Committee of the Board of
Directors of the Company on the date of the grant. See "--Employee Stock
and other Benefit Plans--1994 Stock Option and Grant Plan."
(2) This column shows the hypothetical gains or "option spreads" of the
options granted based on both the fair market value of the Common Stock
for financial reporting purposes and assumed annual compound stock
appreciation rates of 5% and 10% over the terms of the options. The 5% and
10% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the option or the sale
of the underlying shares, or reflect nontransferability, vesting or
termination provisions. The actual gains, if any, on the exercises of
stock options will depend on the future performance of the Common Stock.
46
<PAGE>
Option Exercises and Holdings. The following table sets forth information
concerning the number and value of unexercised options to purchase Common
Stock held by the Named Executive Officers at the end of 1995. None of the
Named Executive Officers exercised any stock options during 1995.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR END YEAR END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter J. Smith.............. -- -- -- --
Dr. John A. Swanson......... -- 960,000(2) -- $11,424,000
John M. Sherbin II.......... -- 6,000 -- $ 54,000
Leonard Zera................ -- -- -- --
Mark C. Imgrund............. -- 4,000 -- $ 36,000
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, these values have been calculated on the basis of the
initial public offering price less the applicable exercise price.
(2) These options became exercisable on March 14, 1996 and Dr. Swanson
exercised all of them on that date. The shares that Dr. Swanson received
upon such exercise are restricted shares subject to repurchase by the
Company in certain circumstances. See "--Employment Agreements."
EMPLOYEE BONUS PLAN
The Company has adopted an employee bonus plan for 1996 on terms similar to
those in effect for previous years. The plan is administered by the
Compensation Committee, which determines the amount and timing of payments as
recommended by the Company's Chief Executive Officer in all cases other than
with respect to the Chief Executive Officer. Awards under the plan are
determined on the basis of the Company's performance in relation to certain
pre-determined financial and operating goals. All awards are paid in full, in
cash, following the period of performance.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1994 Stock Option and Grant Plan. In February 1994, the Company's Board of
Directors adopted and the stockholders subsequently approved the 1994 Stock
Plan under which 868,110 shares of Common Stock have been reserved for
issuance upon exercise of currently outstanding options. The Company does not
intend to make grants under the 1994 Stock Plan after the effective date of
this offering. The 1994 Stock Plan permits (i) the grant of options to
purchase shares of Common Stock intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") ("Incentive Options"), (ii) the grant of options that do not so
qualify ("Non-Qualified Options"), and (iii) the issuance or sale of Common
Stock with or without restrictions ("Restricted Stock"). As of June 15, 1996,
under the 1994 Stock Plan 1,342,760 shares of Restricted Stock had been issued
and remained outstanding and subject to repurchase by the Company at the
original purchase price, 960,000 shares of Common Stock had been issued
pursuant to the exercise of Incentive Options, and 800,610 Incentive Options
and 67,500 Non-Qualified Options were outstanding. The weighted average
exercise price of the outstanding options is approximately $4.36 per share,
and options generally vest in equal installments over a four-year period.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1994 Stock Plan may be exercised or vest. In the event of a merger,
liquidation or sale of substantially all of the assets of the Company, the
Board of Directors has the discretion to accelerate the vesting of options
granted under the 1994 Stock Plan, except that 40,000 Non-Qualified Options
held by Independent Directors vest automatically in such circumstances. In
addition, the 1994
47
<PAGE>
Stock Plan and the grants issued thereunder terminate upon the effectiveness
of any such transaction or event, unless provision is made in connection with
such transaction for the assumption of grants theretofore made.
1996 Stock Option and Grant Plan. The 1996 Stock Plan, adopted by the Board
of Directors on April 19, 1996 and subsequently approved by the Company's
stockholders, will become effective upon completion of this offering. The 1996
Stock Plan permits (i) the grant of Incentive Options, (ii) the grant of Non-
Qualified Options, (iii) the issuance or sale of Common Stock with or without
vesting or other restrictions ("Stock Grants") (iv) the grant of Common Stock
upon the attainment of specified performance goals ("Performance Share
Awards"), and (v) the grant of the right to receive cash dividends with the
holders of the Common Stock as if the recipient held a specified number of
shares of the Common Stock ("Dividend Equivalent Rights"). These grants may be
made to officers and other employees, consultants and key persons of the
Company and its subsidiaries. In addition, Independent Directors will
automatically be eligible for certain grants under the 1996 Stock Plan, as
described below. The 1996 Stock Plan provides for the issuance of 2,250,000
shares of Common Stock, of which no more than 300,000 shares may be issued to
Independent Directors. On and after the date the 1996 Stock Plan becomes
subject to Section 162(m) of the Code, options with respect to no more than
300,000 shares of Common Stock may be granted to any one individual in any
calendar year. No options or other grants have been granted under the 1996
Stock Plan.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan (i) the individuals to whom grants will be granted, (ii) the
combination of grants to participants and (iii) the specific terms of each
grant. Incentive Options may be granted only to officers or other employees of
the Company or its subsidiaries including members of the Board of Directors
who are also employees of the Company or its subsidiaries.
The option exercise price of each option granted under the 1996 Stock Plan
is determined by the Compensation Committee but, in the case of Incentive
Options may not be less than 100% of the fair market value of the underlying
shares on the date of grant and may not be exercisable more than ten years
from the date the option is granted. If any employee of the Company or any
subsidiary owns or is deemed to own at the date of grant shares of stock
representing in excess of 10% of the combined voting power of all classes of
stock of the Company or any subsidiary, the exercise price for options granted
to such employee may not be less than 110% of the fair market value of the
underlying shares on that date and the option may not be exercisable more than
five years from the date the option is granted. No option may be exercised
subsequent to the termination of the optionee's employment or other business
relationship with the Company unless otherwise determined by the Compensation
Committee or provided in the option agreement. At the discretion of the
Compensation Committee, any option may include a "reload" feature, pursuant to
which an optionee exercising an option receives in addition to the number of
shares of Common Stock due on the exercise of such an option an additional
option with an exercise price equal to the fair market value of the Common
Stock on the date such additional option is granted. Upon the exercise of
options, the option exercise price must be paid in full either in cash or, in
the sole discretion of the Compensation Committee, by delivery of shares of
Common Stock already owned by the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards and
grants of Dividend Equivalent Rights. Stock Grants and Performance Share
Awards may be made to persons eligible under the 1996 Stock Plan, subject to
such conditions and restrictions as the Compensation Committee may determine.
Prior to the vesting of shares, recipients of Stock Grants generally will have
all the rights of a stockholder with respect to the shares, including voting
and dividend rights, subject only to the conditions and restrictions set forth
in the 1996 Stock Plan or in any agreement. In the case of Performance Share
Awards, the issuance of shares of Common Stock will occur only after the
recipient has satisfied the conditions and restrictions set forth in the 1996
Stock Plan or in any agreement. The Compensation Committee may also make Stock
Grants to persons eligible under the 1996 Stock Plan in recognition of past
services or other valid consideration, or in lieu of cash compensation. In
addition, the Compensation Committee may grant Dividend Equivalent Rights in
conjunction with any other grant made pursuant to the 1996 Stock Plan or as a
free standing grant. Dividend Equivalent
48
<PAGE>
Rights may be paid currently or deemed to be reinvested in additional shares
of Common Stock, which may thereafter accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1996 Stock Plan may be exercised or vest. In the event of a merger,
liquidation or sale of substantially all of the assets of the Company, the
Board of Directors has the discretion to accelerate the vesting of options
granted under the 1996 Stock Plan, except that options granted to Independent
Directors as described below automatically accelerate in such circumstances.
The 1996 Stock Plan and the grants issued thereunder terminate upon the
effectiveness of any such transaction or event, unless provision is made in
connection with such transaction for the assumption of grants theretofore
made.
Independent Director Options. The 1996 Stock Plan provides for the automatic
grant of Non-Qualified Options to Independent Directors. Under such
provisions, options to purchase that number of shares of Common Stock
determined by dividing $200,000 by the Option Exercise Price (as defined
below) will be granted to each individual who first becomes a member of the
Board of Directors after the closing date of this offering and who is not then
an employee of the Company or any subsidiary of the Company. In addition, on
the date five business days following each annual meeting of stockholders of
the Company commencing with the meeting to be held in 1997, each Independent
Director who is then serving will be granted an option to purchase that number
of shares of Common Stock determined by dividing $75,000 by the Option
Exercise Price. The Option Exercise Price of options granted to Independent
Directors under the 1996 Stock Plan will equal the lesser of (i) the last
reported sale price per share of Common Stock on the date of grant (or if no
such price is reported on such date, such price on the nearest preceding date
on which such a price is reported) or (ii) the average of the last reported
sales price per share of Common Stock as published in The Wall Street Journal
for a period of ten consecutive days prior to such date. Options granted to
Independent Directors under the foregoing provisions will vest in annual
installments over four years commencing with the date of grant and will expire
ten years after grant, subject to earlier termination if the optionee ceases
to serve as a director. The exercisability of these options will be
accelerated upon the occurrence of a merger, liquidation or sale of
substantially all of the assets of the Company.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan was adopted by the Board of Directors on April 19, 1996 and was
subsequently approved by the Company's stockholders. Up to 210,000 shares of
Common Stock may be issued under the Purchase Plan. The Purchase Plan is
administered by the Compensation Committee.
The first offering under the Purchase Plan will begin on August 1, 1996 and
end on January 31, 1997. Subsequent offerings will commence on each February 1
and August 1 thereafter and will have a duration of six months. Generally, all
employees who are customarily employed for more than 20 hours per week as of
the first day of the applicable offering period are eligible to participate in
the Purchase Plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of
stock of the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his cash compensation
during the offering period. The maximum number of shares which may be
purchased by any participating employee during any offering period is limited
to 960 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his
accumulated payroll deductions will be used to purchase Common Stock on the
last business day of the period at a price equal to 85% of the fair market
value of the Common Stock on the first or last day of the offering period,
whichever is lower. Under applicable tax rules, an employee may purchase no
more than $25,000 worth of Common Stock in any calendar year. No Common Stock
has been issued to date under the Purchase Plan.
Key Executive Life Insurance. The Company currently maintains, and is the
sole beneficiary of, life insurance policies on each of Dr. Swanson and Mr.
Peter Smith in the face amounts of $5.0 million and $2.0 million,
respectively.
49
<PAGE>
Pension and Profit-Sharing Plans. The Company maintains both a money
purchase pension plan and a profit-sharing plan for all qualifying full-time
employees. The plans are noncontributory. The pension plan requires the
Company to contribute 20% of each participant's compensation annually. The
profit-sharing contribution is determined annually by the Board of Directors,
subject to a maximum limitation of 5% of eligible compensation. The Company's
pension and profit sharing expenses in 1995 were $1.5 million and $345,700,
respectively.
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement with Dr. Swanson in
connection with the 1994 Acquisition under which Dr. Swanson serves as Chief
Technologist of the Company. The Agreement has a five-year term ending in
March 1999. The Agreement provides for (i) an annual salary of $228,000,
subject to specified cost of living increases, (ii) continuation of base
salary payments until the later of March 14, 1999 or six months following
termination of Dr. Swanson's employment in the event such employment is
terminated by the Company without cause (as defined) or by Dr. Swanson in the
event of a material default by the Company, and (iii) a restriction on
competitive activities for three years following any termination of Dr.
Swanson's employment with the Company. In connection with his employment by
the Company, Dr. Swanson was granted Incentive Options to purchase 960,000
shares of Common Stock at an exercise price of $.11 a share, or 110% of the
fair market value of the Common Stock at the time of grant. Dr. Swanson
exercised these options on March 14, 1996, and the shares acquired upon
exercise are subject to repurchase by the Company at the exercise price until
they vest in March 1998 and 1999. See "Principal and Selling Stockholders."
The Company has also entered into an Employment Agreement with Mr. Peter
Smith, its Chief Executive Officer. Mr. Smith's Employment Agreement (i)
provides that he shall serve as Chief Executive Officer, (ii) provides for an
annual base salary of at least $235,000 and participation in the Company's
executive bonus program, (iii) is for an indefinite term unless terminated by
either party, (iv) provides for severance at the annual rate of $300,000 in
the event Mr. Smith's employment is terminated by the Company without cause or
in the event of a constructive termination (as defined) until the later of one
year after termination or Mr. Smith's acceptance of other employment and (v)
restricts competitive activities by Mr. Smith for one year following
termination of his employment other than for cause or in the event of a
constructive termination. The Company provided Mr. Smith with $309,058 at the
time of his employment to purchase an annuity that will result in payments to
Mr. Smith beginning at age 62 as well as a $2.0 million term life insurance
policy.
In connection with his employment by the Company, Mr. Smith purchased
626,000 shares of restricted Common Stock in July 1994 for a cash purchase
price of $250,000 (approximately $.40 per share). Mr. Smith funded the
purchase price for the shares with a loan from the Company evidenced by a
promissory note which bears interest at the annual rate of 8.23%, matures on
July 12, 2006, is secured by a pledge of the shares purchased with the
proceeds of the loan and permits recourse against Mr. Smith's other assets
only to the extent of one-fourth of the principal amount of the note. The
Company also agreed to pay Mr. Smith annual bonuses in the amount of the
required interest payments. The shares purchased by Mr. Smith are subject to
repurchase by the Company at the purchase price, with such restrictions
lapsing on a monthly basis over a five-year period. As of June 15, 1996,
407,080 of such shares are no longer subject to this restriction.
In February 1996 Mr. Smith was granted the right to purchase an additional
135,860 shares of restricted Common Stock and was granted Incentive Options to
purchase 135,860 shares of Common Stock. The purchase price for the restricted
stock was $326,064 ($2.40 per share) and was paid in cash by Mr. Smith. The
shares are subject to repurchase by the Company at the purchase price, with
such restrictions lapsing on February 28, 2001, subject to earlier lapsing in
the event of a sale of the Company or the attainment of specified valuations
for the Company's Common Stock. Mr. Smith's Incentive Options have a $2.40 per
share exercise price and are subject to vesting provisions that are the same
as those applicable to the concurrently granted restricted stock.
50
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since February 1994, all executive officer compensation decisions have been
made by the Compensation Committee. The Compensation Committee reviews and
makes recommendations to the Board of Directors regarding the compensation for
top management and key employees of the Company, including salaries and
bonuses. The current members of the Compensation Committee are Ms. Morby and
Mr. John Smith, neither of whom is an executive of the Company.
51
<PAGE>
CERTAIN TRANSACTIONS
On March 14, 1994, the Company acquired the assets of Swanson Analysis for a
cash purchase price of approximately $48.0 million. In connection with the
1994 Acquisition, the following transactions occurred:
(i) the Company incurred $28.0 million of indebtedness under the 1994 Loan,
approximately $19.8 million of which remained outstanding at March 31,
1996;
(ii) the Company assumed certain liabilities of Swanson Analysis totalling
approximately $4.9 million;
(iii) the TA Investors invested $12.6 million to acquire (i) Subordinated
Notes in the aggregate principal amount of $9.2 million, (ii) shares
of Redeemable Preferred Stock having an aggregate liquidation
preference of $2.8 million plus accumulated dividends and (iii)
6,943,481 shares of Common Stock at an aggregate purchase price of
$630,000 (approximately $.09 per share);
(iv) the Chestnut Investors invested $930,000 to acquire (i) Subordinated
Notes in the aggregate principal amount of $680,000, (ii) shares of
Redeemable Preferred Stock having an aggregate liquidation preference
of $210,000 plus accumulated dividends and (iii) 509,319 shares of
Common Stock at an aggregate purchase price of $46,500 (approximately
$.09 per share);
(v) Dr. Swanson, the founder of Swanson Analysis, invested $5.4 million to
acquire (i) a Subordinated Note in the principal amount of $4.3
million, (ii) shares of Redeemable Preferred Stock having an aggregate
liquidation preference of $800,000 plus accumulated dividends and (iii)
1,999,200 shares of Common Stock at an aggregate purchase price of
$280,000 (approximately $.14 per share); and
(vi) Dr. Swanson and the Company entered the employment and stock option
arrangements described under "Management--Employment Agreements."
Subsequently, in July 1994, Samuel P. Geisberg, Louis J. Volpe and Steven C.
Walske, current or former affiliates of Parametric Technology, each invested
$200,000 in the Company to acquire (i) a Subordinated Note in the aggregate
principal amount of $150,000, (ii) shares of Redeemable Preferred Stock having
an aggregate liquidation preference of $40,000 plus accumulated dividends and
(iii) 100,000 shares of Common Stock at an aggregate purchase price of $10,000
($.10 per share).
The Subordinated Notes and Redeemable Preferred Stock described above will
be repaid or redeemed upon completion of this offering. See "Use of Proceeds."
Pursuant to the Stockholders' Agreement among the Company and the TA
Investors, the Chestnut Investors, Dr. Swanson and Marcia S. Morton (the
former Secretary and Treasurer of Swanson Analysis) entered into in connection
with the 1994 Acquisition, to which Messrs. Geisberg, Volpe and Walske became
parties at the time of their investment in the Company (collectively the
"Investors"), (i) each Investor received "piggy back" registration rights, and
the TA Investors, the Chestnut Investors and Dr. Swanson received demand
registration rights, (ii) each Investor granted to and received from the other
Investors rights (the "Co-sale Rights") to participate on a pro rata basis in
certain resales of Common Stock and agreed to restrictions on transfers of
shares, (iii) each Investor was granted preemptive rights with respect to
future issuances of securities by the Company, (iv) each Investor agreed to
elect Dr. Swanson to the Board of Directors, (v) Dr. Swanson granted the
Company rights of repurchase with respect to the shares of Common Stock he
acquired in connection with the 1994 Acquisition in the event his employment
is terminated for "cause," as defined in the Stockholders' Agreement, and (vi)
the Company agreed to pay the fees and expenses of the TA Investors and the
Chestnut Investors incurred in connection with their investment in the
Company. Mr. Kafker and Ms. Morby, directors of the Company, are Managing
Directors of TA Associates, Inc.
52
<PAGE>
Effective upon and subject to the closing of this offering, the preemptive
rights and provisions relating to Dr. Swanson's election to the Board will
expire in accordance with their original terms. The Company and the Investors
have agreed that the Co-sale Rights and restrictions on transfers of shares
under the Stockholders' Agreement will also terminate at that time.
Mr. Peter Smith, the Company's Chief Executive Officer, acquired Common
Stock with proceeds from a loan from the Company in connection with his
initial employment by the Company and has received subsequent grants of
restricted stock and Incentive Options as described under "Management--
Employment Agreements." Mr. Smith is entitled to "piggyback" registration
rights under the Stockholders' Agreement on the same terms as the other
Investors.
The Company leases a 66,000 square foot facility from a joint venture in
which Dr. Swanson holds an interest of approximately 50%. The Company leases
these facilities under a lease agreement terminating in March 1997 and will
move to a new corporate headquarters in February 1997. See "Business--
Facilities." The Company incurred $838,700, $837,300 and $805,900 in rental
expense in 1995, 1994 and 1993, respectively.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's Board of Directors and
by a majority of the disinterested members of the Company's Board of Directors
and be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as to the beneficial ownership of
the Company's Common Stock as of June 15, 1996 and as adjusted to reflect the
sale of the shares of Common Stock offered hereby by (i) each person known by
the Company to own beneficially five percent or more of the outstanding shares
of Common Stock, (ii) each director and the Named Executive Officers of the
Company, (iii) all directors and the Named Executive Officers of the Company
as a group, (iv) the Selling Stockholder and (v) certain other stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES OFFERED OWNED AFTER OFFERING(3)
---------------------------- -------------- ----------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
- --------------------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
TA Associates
Group(3)(4)............ 6,943,481 54.9% -- 6,943,481 43.0%
Dr. John A.
Swanson(3)(5).......... 2,884,200 22.8 -- 2,884,200 17.9
Peter J. Smith(6)....... 661,860 5.2 -- 661,860 4.1
Marcia S. Morton........ 548,000 4.3 50,000 498,000 3.1
Chestnut Group(3)(7).... 509,319 4.0 -- 509,319 3.2
Samuel P. Geisberg...... 100,000 * -- 100,000 *
Louis J. Volpe.......... 100,000 * -- 100,000 *
Steven C. Walske........ 100,000 * -- 100,000 *
Leonard Zera(8)......... 100,000 * -- 100,000 *
John M. Sherbin II(9)... 61,500 * -- 61,500 *
Mark C. Imgrund(10)..... 16,000 * -- 16,000 *
Gary B. Eichhorn(11).... 30,000 * -- 30,000 *
Roger J. Heinen,
Jr.(12)................ -- * -- -- *
Roger B. Kafker(13)..... 13,482 * -- 13,482 *
Jacqueline C. Morby(14). 5,759 * -- 5,759 *
John F. Smith(15)....... 20,000 * -- 20,000 *
All Named Executive
Officers and directors
as a group (10
persons)............... 3,792,801 30.0 -- 3,792,801 23.5
</TABLE>
- --------
* Less than 1%.
(1) The address of each of the stockholders in the TA Associates Group is c/o
TA Associates, Inc., High Street Tower, Suite 2500, 125 High Street,
Boston, MA 02110-2720. The address of each of the stockholders in the
Chestnut Group is c/o MVP Ventures, 45 Milk Street, Boston, MA 02109. The
address of Mr. Kafker and Ms. Morby is c/o TA Associates, Inc., High
Street Tower, Suite 2500, 125 High Street, Boston, MA 02110-2720. The
address of Messrs. Geisberg, Volpe and Walske is c/o Parametric Technology
Corporation, 128 Technology Drive, Waltham, MA 02154. The address of all
other listed stockholders is c/o ANSYS, Inc., 201 Johnson Road, Houston,
PA 15342-1300.
(2) All percentages have been determined as of June 15, 1996 in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of this table, a person or group of persons
is deemed to have "beneficial ownership" of any shares of Common Stock
which such person has the right to acquire within 60 days after the date
of this Prospectus. For purposes of computing the percentage of
outstanding shares of Common Stock held by each person or group of persons
named above, any security which such person or persons has or have the
right to acquire within 60 days after the date of this Prospectus is
deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. As of
June 15, 1996, a total of 12,652,760 shares of Common Stock were issued
and outstanding; upon completion of this offering and on July 15, 1996,
options to acquire 27,500 and 67,500 shares of Common Stock will become
exercisable, respectively.
(3) The stockholders comprising the TA Associates Group, the stockholders
comprising the Chestnut Group, Mr. Peter Smith and Dr. Swanson have
granted the underwriters a thirty-day option to purchase up to 532,500
additional shares of Common Stock solely to cover over allotments, if any.
If the underwriters exercise this option in full, stockholders in the TA
Associates Group will sell 336,162 shares, stockholders
54
<PAGE>
within the Chestnut Group will sell 24,655 shares, Mr. Peter Smith will
sell 32,046 shares and Dr. Swanson will sell 139,637 shares, resulting in
reductions in the percentages of the shares beneficially owned by them
after the offering to 40.9%, 3%, 3.9% and 17%, respectively.
(4) Includes (i) 4,968,533 shares of Common Stock owned by Advent VII L.P.,
(ii) 1,009,726 shares of Common Stock owned by Advent Atlantic and Pacific
II Limited Partnership, (iii) 364,029 shares of Common Stock owned by
Advent Industrial II Limited Partnership, (iv) 496,854 shares of Common
Stock owned by Advent New York L.P. and (v) 104,339 shares of Common Stock
owned by TA Venture Investors, L.P. Advent VII L.P., Advent Atlantic and
Pacific II Limited Partnership, Advent Industrial II Limited Partnership,
Advent New York L.P. and TA Venture Investors, L.P. are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Associates Group. The general partner of Advent VII, L.P. is TA
Associates VII, L.P. The general partner of each of Advent New York L.P.
and Advent Industrial II Limited Partnership is TA Associates VI, L.P. The
general partner of Advent Atlantic and Pacific II Limited Partnership is
TA Associates AAP II Partners, L.P. The general partner of each of TA
Associates VII, L.P., TA Associates VI, L.P. and TA Associates AAP II
Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates,
Inc. exercises sole voting and investment power with respect to all of the
shares held of record by the named investment partnerships, with the
exception of those shares held by TA Venture Investors, L.P.; individually
no stockholder, director or officer of TA Associates, Inc. is deemed to
have or share such voting or investment power. Principals and employees of
TA Associates, Inc. (including Ms. Morby and Mr. Kafker, directors of the
Company) comprise the general partners of TA Venture Investors, L.P. In
such capacity, Ms. Morby and Mr. Kafker may be deemed to share voting and
investment power with respect to the 104,339 shares held of record by TA
Venture Investors, L.P. Ms. Morby and Mr. Kafker disclaim beneficial
ownership of such shares, except in the case of Mr. Kafker to the extent
of the 13,482 shares as to which he holds a pecuniary interest.
(5) Includes 591,840 and 223,680 shares which become vested on March 14, 1997
and 1998, respectively, under terms giving the Company the right to
purchase unvested shares at a price of approximately $.14 per share upon
any termination of Dr. Swanson's employment for cause prior to the
relevant vesting date, and 368,160 and 591,840 shares which vest on March
14, 1998 and 1999, respectively, under terms giving the Company the right
to purchase unvested shares at a price of $.11 per share upon any
voluntary termination or termination for cause of Dr. Swanson's employment
prior to the relevant vesting date. Also includes 25,000 shares held by
Janet L. Swanson, Dr. Swanson's wife, as to which shares Dr. Swanson
disclaims beneficial ownership. Excludes 25,000 shares held by each of
Daniel S. Swanson, Andrew C. Swanson and Eric H. Swanson, Dr. Swanson's
adult children, as to which shares Dr. Swanson disclaims beneficial
ownership. Excludes unvested options to purchase 10,000 shares.
(6) Includes 218,920 shares of restricted stock which will become vested in
equal monthly installments through March 1998 under terms giving the
Company the right to purchase and Mr. Smith the right to sell to the
Company unvested shares at a price of $.40 per share upon any termination
of Mr. Smith's employment prior to the relevant vesting date and 135,860
shares of restricted stock which will become vested on February 28, 2001,
subject to acceleration in certain circumstances as described under
"Management--Employment Agreements," under terms giving the Company the
right to purchase and Mr. Smith the right to sell to the Company unvested
shares at a price of $2.40 per share upon any termination of Mr. Smith's
employment prior to the relevant vesting date. Excludes unvested options
to purchase 135,860 shares as described under "Management--Employment
Agreements" and 100,000 shares beneficially owned by a trust for the
benefit of Mr. Smith's adult children, as to which latter shares Mr. Smith
disclaims beneficial ownership.
(7) Includes 381,909 shares held by Chestnut III Limited Partnership and
127,410 shares held by Chestnut Capital International III L.P. Messrs.
Jonathan J. Fleming, Michael F. Schiavo, Peter A. Schober and John G.
Turner are the general partners of Chestnut III Management Limited
Partnership ("CMLP") and MVP Capital Limited Partnership ("MVP"). CMLP has
voting and investment power to act for Chestnut III Limited Partnership.
MVP has voting and investment power to act for Chestnut Capital
International III L.P.
55
<PAGE>
(8) Includes 80,000 shares of restricted stock held by Mr. Zera which will
become vested in equal annual installments of 20,000 shares on each of
November 15, 1996, 1997, 1998 and 1999 and are subject to repurchase at a
price of $.40 per share upon any termination of Mr. Zera's employment
prior to the relevant vesting date. Excludes unvested options to purchase
10,000 shares.
(9) Includes 48,000 shares of restricted stock held by Mr. Sherbin which will
become vested in equal annual installments of 12,000 shares on each of
November 20, 1996, 1997, 1998 and 1999 and are subject to repurchase at a
price of $.40 per share upon any termination of Mr. Sherbin's employment
prior to the relevant vesting date. Excludes unvested options to purchase
34,500 shares.
(10) Includes 12,000 shares of restricted stock held by Mr. Imgrund which will
become vested in equal annual installments of 3,000 shares on each of
July 15, 1996, 1997, 1998 and 1999 and are subject to repurchase at a
price of $.10 per share upon any termination of Mr. Imgrund's employment
prior to the relevant vesting date. Excludes unvested options to purchase
33,000 shares.
(11) Includes 16,000 and 10,000 shares of restricted stock held by Mr.
Eichhorn which will become vested in equal annual installments of 4,000
and 2,000 shares, respectively, on each of November 15, 1996, 1997, 1998
and 1999 and each of December 29, 1996, 1997, 1998, 1999 and 2000,
respectively, and are subject to repurchase at a price of $.01 and $.40
per share, respectively, upon any termination of Mr. Eichhorn's service
as a director prior to the relevant vesting date. Excludes unvested
options to purchase 10,000 shares.
(12) Excludes unvested options to purchase 20,000 shares.
(13) Includes 13,482 shares beneficially owned by Mr. Kafker through TA
Venture Investors, L.P., all of which shares are included in the
6,943,481 shares described in footnote (4) above. Does not include any
shares beneficially owned by Advent VII L.P., Advent Atlantic and Pacific
II Limited Partnership, Advent Industrial II Limited Partnership or
Advent New York L.P., of which Mr. Kafker disclaims beneficial ownership.
(14) Includes 5,759 shares held by Ms. Morby's husband through TA Venture
Investors, L.P., all of which shares are included in the 6,943,481 shares
described in footnote (4) above, as to which shares Ms. Morby disclaims
beneficial ownership. Excludes 5,759 shares beneficially owned through TA
Venture Investors, L.P., by a trust for the benefit of Ms. Morby's adult
children, as to which shares Ms. Morby disclaims beneficial ownership;
all of such shares are included in the 6,943,481 shares described in
footnote (4) above. Does not include any shares beneficially owned by
Advent VII L.P., Advent Atlantic and Pacific II Limited Partnership,
Advent Industrial II Limited Partnership or Advent New York L.P., of
which Ms. Morby disclaims beneficial ownership.
(15) Includes 20,000 shares of restricted stock owned by a trust primarily for
the benefit of Mr. Smith's adult children and of which Mr. Smith's wife
is a trustee. Such shares will become vested in equal annual installments
of 4,000 shares on each of December 28, 1996, 1997, 1998, 1999 and 2000
and are subject to repurchase at a price of $.40 per share upon any
termination of Mr. Smith's service as a director prior to the relevant
vesting date. Excludes unvested options to purchase 10,000 shares held by
Mr. Smith.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company upon completion of this offering
will consist of 50,000,000 shares of Common Stock, of which 16,152,760 shares
will be issued and outstanding, and 2,000,000 shares of undesignated preferred
stock issuable in one or more series by the Board of Directors ("Preferred
Stock"), of which no shares will be issued and outstanding.
Common Stock. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred
Stock with a dividend preference over Common Stock could adversely affect the
dividend rights of holders of Common Stock. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to any voting rights of the holders of any
then outstanding Preferred Stock. The holders of Common Stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to the Common Stock, except
for contractual repurchase arrangements relative to unvested restricted stock
held by employees and directors upon termination of their employment or
service. All outstanding shares of Common Stock, including the shares offered
hereby, are, or will be upon completion of this offering, fully paid and non-
assessable.
The Company's Amended and Restated By-laws (the "By-laws"), which will be
effective upon completion of this offering, provide, subject to the rights of
the holders of any Preferred Stock then outstanding, that the number of
directors shall be fixed by the Board of Directors. The directors, other than
those who may be elected by the holders of any Preferred Stock, are divided
into three classes, as nearly equal in number as possible, with each class
serving for a three-year term. Subject to any rights of the holders of any
Preferred Stock to elect directors, and to remove any director whom the
holders of any Preferred Stock had the right to elect, any director of the
Company may be removed from office only with cause and by the affirmative vote
of at least two-thirds of the total votes which would be eligible to be cast
by stockholders in the election of such director.
Undesignated Preferred Stock. The Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences and the relative participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereon. Any such Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding
Common Stock.
CERTAIN PROVISIONS OF CERTIFICATE AND BY-LAWS
A number of provisions of the Company's Restated Certificate of
Incorporation (the "Certificate") and By-laws which will be effective upon
completion of this offering concern matters of corporate governance and the
rights of stockholders. Certain of these provisions, as well as the ability of
the Board of Directors to issue shares of Preferred Stock and to set the
voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved
by the Board of Directors, including takeovers which stockholders may deem to
be in their best interests. To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Company's Common Stock,
which may result from actual or rumored takeover attempts, may be inhibited.
These provisions, together with the classified Board of Directors and the
ability of the Board of Directors to issue Preferred Stock without further
stockholder action,
57
<PAGE>
also could delay or frustrate the removal of incumbent directors or the
assumption of control by stockholders, even if such removal or assumption
would be beneficial to stockholders of Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest,
even if favorable to the interests of stockholders, and could depress the
market price of the Common Stock. The Board of Directors believes that these
provisions are appropriate to protect the interests of the Company and all of
its stockholders. The Board of Directors has no present plans to adopt any
other measures or devices which may be deemed to have an "anti-takeover
effect."
Meetings of Stockholders. The By-laws provide that a special meeting of
stockholders may be called only by the Board of Directors unless otherwise
required by law. The By-laws provide that only those matters set forth in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law. In addition, the By-laws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new proposal which a stockholder wishes to make
at an annual meeting of stockholders.
No Stockholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the stockholders of the Company at
an annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders
in lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of Directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence
or gross negligence in business combinations, unless the director has breached
his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. The Company has also entered into indemnification
agreements with each of its directors reflecting the foregoing and requiring
the advancement of expenses in proceedings involving the directors in most
circumstances.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and
(with certain exceptions) thereafter approved by a majority (or 80% in the
case of any proposed amendment to the provisions of the Certificate relating
to the composition of the Board or amendments of the Certificate) of the total
votes eligible to be cast by holders of voting stock with respect to such
amendment.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an
annual meeting of stockholders or a special meeting called for such purpose
unless the Board of Directors recommends that the stockholders approve such
amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal.
Ability to Adopt Shareholder Rights Plan. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares, to implement a shareholder rights plan which creates voting or other
impediments or under which shares are distributed to a third-party investor,
to a group of investors or
58
<PAGE>
stockholders or to an employee stock ownership plan to discourage persons
seeking to gain control of the Company by means of a merger, tender offer,
proxy contest or otherwise if such change in control is not in the best
interest of the Company and its stockholders. The Board of Directors has no
present intention of adopting a shareholder rights plan and is not aware of
any attempt to obtain control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person, or an affiliate or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting
in a person becoming an interested stockholder, or the business combination,
is approved by the board of directors of the corporation before the person
becomes an interested stockholder; (ii) the interested stockholder acquired
85% or more of the outstanding voting stock of the corporation in the same
transaction that makes it an interested stockholder (excluding shares owned by
persons who are both officers and directors of the corporation, and shares
held by certain employee stock ownership plans); or (iii) on or after the date
the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined (with certain limited
exceptions) as any person that is (i) the owner of 15% or more of the
outstanding voting stock of the corporation or (ii) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person
is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 12 months after the date
it is adopted. Neither the Certificate nor the By-laws contains any such
exclusion.
TRANSFER AGENT AND REGISTRAR
The Company has selected ChemicalMellon Shareholder Services, L.L.C. as the
transfer agent and registrar for the Common Stock.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of 16,152,760
shares of Common Stock outstanding. Of these shares, the 3,550,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of
the Company, as defined in the Securities Act, who would be required to sell
such shares under Rule 144 under the Securities Act. The remaining 12,602,760
shares of Common Stock outstanding will be "restricted securities" as that
term is defined by Rule 144 (the "Restricted Shares"). The Restricted Shares
were issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act.
Of the Restricted Shares, 10,095,780 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144, certain of which may be sold
under Rule 144 in accordance with Rule 701 under the Securities Act as
described below, beginning 90 days after the date of this Prospectus.
Substantially all of such shares are subject to the lock-up agreements
described below. The remaining 2,506,980 Restricted Shares are subject to
vesting provisions and will become eligible for sale in the public market
under Rule 144 at various times as they become vested.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 161,527 shares upon completion
of the offering) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at the time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at
least three years (including the holding period of any prior owner except an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. Rule 144 also provides that
affiliates who are selling shares that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement. The Securities and
Exchange Commission has recently proposed to reduce the two- and three-year
holding periods under Rule 144 to one- and two-year holding periods. If
adopted such amendment will permit earlier resales of shares of Common Stock.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of outstanding options or the grant of
Common Stock pursuant to written compensation plans or contracts prior to this
offering may be resold by persons other than affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its two-year
minimum holding period.
The Company's executive officers and directors, the Selling Stockholder and
certain other stockholders of the Company (who in the aggregate hold
substantially all of the 10,095,780 Restricted Shares upon completion of the
offering) have agreed not to sell or offer to sell or otherwise dispose of any
shares of Common Stock currently held by them, any right to acquire any shares
of Common Stock or any securities exercisable for or convertible into any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. In addition, the Company has agreed that for a period of 180
days after the date of this Prospectus it will not, without the prior written
consent of Alex. Brown & Sons Incorporated, offer, sell or otherwise dispose
of any shares of Common Stock or options, warrants or securities convertible
into or exchangeable for shares of Common Stock except for the shares of
Common Stock offered hereby, shares issued and options granted pursuant to the
1994 Stock Plan, the 1996 Stock Plan and the Purchase Plan and shares issued
or to be issued in acquisitions, if any.
60
<PAGE>
As of June 15, 1996, options to purchase 868,110 shares of Common Stock were
outstanding, none of which were exercisable. An additional 2,250,000 and
210,000 shares of Common Stock are reserved for future issuance under the 1996
Stock Plan and the Purchase Plan, respectively. See "Management--Employee
Stock and Other Benefit Plans--1996 Stock Option and Grant Plan" and "--1996
Employee Stock Purchase Plan." The Company intends to file a registration
statement on Form S-8 under the Securities Act to register all shares of
Common Stock issuable pursuant to the 1996 Stock Plan or the Purchase Plan.
The Company expects to file this registration statement approximately 90 days
following the date of this Prospectus, and such registration statement will
become effective upon filing. Shares covered by this registration statement
will thereupon be eligible for sale in the public markets, subject to Rule 144
limitations applicable to affiliates and the lock-up agreements described
above.
The holders of 10,412,000 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public and holders of 11,971,860 shares have
the right to include their shares in a registration statement filed by the
Company under the terms of the Stockholders' Agreement. See "Certain
Transactions."
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale."
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives
Alex. Brown & Sons Incorporated, Cowen & Company, Wessels, Arnold & Henderson,
L.L.C. and Parker/Hunter Incorporated (the "Representatives"), have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated....................................... 632,500
Cowen & Company....................................................... 632,500
Wessels, Arnold & Henderson, L.L.C.................................... 632,500
Parker/Hunter Incorporated............................................ 632,500
Hambrecht & Quist LLC................................................. 90,000
Montgomery Securities................................................. 90,000
Morgan Stanley & Co. Incorporated..................................... 90,000
Oppenheimer & Co., Inc................................................ 90,000
Prudential Securities Incorporated.................................... 90,000
Robertson, Stephens & Company L.P..................................... 90,000
Adams, Harkness & Hill, Inc........................................... 60,000
First Albany Corporation.............................................. 60,000
Furman Selz LLC....................................................... 60,000
Josephthal Lyon & Ross Incorporated................................... 60,000
Needham & Company, Inc................................................ 60,000
Piper Jaffray Inc..................................................... 60,000
Soundview Financial Group, Inc........................................ 60,000
Van Kasper & Company.................................................. 60,000
---------
Total............................................................. 3,550,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of the Common Stock offered hereby if any shares
are purchased.
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.52 per share. See "Principal and Selling
Stockholders." The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After
commencement of the offering, the offering price and other selling terms may
be changed by the Representatives.
Certain stockholders of the Company have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 532,500 additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commission set forth
on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to
3,550,000 and the stockholders will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 3,550,000 shares are
being offered.
62
<PAGE>
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Company, the Selling Stockholder and the
stockholders providing the over-allotment shares regarding certain
liabilities, including liabilities under the Securities Act.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or options, warrants or securities convertible into or
exchangeable for Common Stock for a period of 180 days from the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated, except for the shares of Common Stock offered hereby, shares
issued and options granted pursuant to the 1994 Stock Plan, the 1996 Stock
Plan and Purchase Plan and shares issued or to be issued in acquisitions, if
any. The Company's executive officers, directors and stockholders who hold
substantially all of the 10,095,780 Restricted Shares have agreed not to sell,
offer to sell or otherwise dispose of any Common Stock for a period of 180
days from the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
has been determined by negotiations among the Company, the Representatives and
the Selling Stockholder. Among the factors considered in such negotiations
were prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company, the Representatives and the Selling Stockholder
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development and other
factors deemed relevant by the Company, the Representatives and the Selling
Stockholder.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar llp, Boston, Massachusetts.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995 and the consolidated statements of operations, stockholders' equity
(deficit) and cash flows of the Company for the period March 14, 1994 (date of
acquisition) through December 31, 1994 and the year ended December 31, 1995
and of the Company's Predecessor for the year ended December 31, 1993 and the
period from January 1, 1994 through March 13, 1994, included in this
Prospectus have been included herein in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given on their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement on Form S-1 under the Securities
Act with respect to the Common Stock being offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information about the Company and the securities offered by this
Prospectus, reference is made to the registration statement and to the
financial statements, schedules and exhibits filed as a part of it. Statements
contained in this Prospectus about the contents of any contract or any other
documents are not necessarily complete, and in each instance, reference is
made to the copy of the contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
63
<PAGE>
A copy of the registration statement may be inspected by anyone without
charge and may be obtained at prescribed rates at the Commission at the Public
Reference Section of the Commission, maintained by the Commission at its
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549,
the New York Regional Office located at Seven World Trade Center, New York,
New York 10048, and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by its independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................................ F-2
Report of Independent Accountants........................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March
31, 1996 (unaudited)..................................................... F-4
Consolidated Statements of Operations for the year ended December 31,
1993 and for the period from January 1, 1994 through March 13, 1994, and
for the period from March 14, 1994 (date of acquisition) through December
31, 1994, for the year ended December 31, 1995 and for the three months
ended March 31, 1995 and 1996 (unaudited)................................ F-6
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1993 and for the period January 1, 1994 through March 13,
1994..................................................................... F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from March 14, 1994 (date of acquisition) through December 31, 1994 and
for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited)............................................... F-8
Consolidated Statements of Cash Flows for the year ended December 31,
1993 and for the period from January 1, 1994 through March 13, 1994, and
for the period from March 14, 1994 (date of acquisition) through December
31, 1994, for the year ended December 31, 1995 and for the three months
ended March 31, 1995 and 1996 (unaudited)................................ F-9
Notes to Consolidated Financial Statements............................... F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
ANSYS, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ANSYS, Inc.
(formerly SAS Holdings, Inc.) and Subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the period from March 14, 1994 (date of
acquisition) through December 31, 1994 and for the year ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ANSYS, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for the period
from March 14, 1994 (date of acquisition) through December 31, 1994 and for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
April 19, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Swanson Analysis Systems, Inc.:
We have audited the accompanying combined statements of operations,
stockholder's equity and cash flows of Swanson Analysis Systems, Inc.
(described in Note 1) for the year ended December 31, 1993 and for the period
from January 1, 1994 through March 13, 1994. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Swanson Analysis Systems, Inc. for the year ended December 31, 1993 and for
the period from January 1, 1994 through March 13, 1994, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
April 19, 1996
F-3
<PAGE>
ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 4,299,712 $ 8,091,305 $ 5,576,765
Accounts receivable, less allowance for
doubtful accounts of $650,000 in
1994, $700,000 in 1995 and $712,500
in 1996:
Software licenses..................... 5,734,648 7,665,862 9,304,299
Maintenance and service............... -- -- 2,107,048
Due from predecessor stockholder...... 565,287 -- --
Due from officers..................... -- -- 431,664
Refundable and prepaid income taxes..... 1,046,759 1,496,662 1,133,238
Other current assets.................... 407,569 438,802 461,342
Deferred income taxes................... 279,000 356,000 348,000
----------- ----------- -----------
Total current assets................... 12,332,975 18,048,631 19,362,356
Property and equipment, net............... 2,043,317 3,163,405 2,985,451
Capitalized software costs, net of
accumulated amortization of $4,055,037
in 1994, $9,178,692 in 1995 and
$10,460,802 in 1996...................... 11,311,421 6,206,416 4,924,306
Goodwill, net of accumulated amortization
of $3,871,412 in 1994, $8,761,616 in
1995 and $9,984,167 in 1996.............. 10,799,182 5,908,978 4,686,427
Other intangibles......................... 3,434,577 2,807,368 2,650,593
Deferred income taxes..................... 4,748,000 6,786,000 7,389,000
----------- ----------- -----------
Total assets........................... $44,669,472 $42,920,798 $41,998,133
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable..................... $ 539,859 $ 639,108 $ 109,978
Accrued bonuses...................... 1,005,897 1,951,723 614,548
Accrued pension and profit sharing... 815,365 387,544 926,949
Other accrued expenses and
liabilities......................... 1,109,247 1,752,729 1,257,610
Accrued interest payable on
subordinated debt................... -- 1,154,809 1,582,566
Customer prepayments................. 79,579 972,102 1,432,432
Deferred revenue..................... 1,961,081 2,994,911 3,994,386
Current portion of long-term debt.... 5,000,000 5,000,000 5,250,000
----------- ----------- -----------
Total current liabilities.......... 10,511,028 14,852,926 15,168,469
Long-term debt, less current portion,
including amounts due to related
parties of $16,696,356, $17,204,301
and $17,204,301 in 1994, 1995 and
1996, respectively.................... 37,696,356 33,204,301 31,704,301
----------- ----------- -----------
Total liabilities.................. 48,207,384 48,057,227 46,872,770
Redeemable preferred stock, $.01 par
value, 800 shares authorized; 412
shares issued and outstanding; at
liquidation value, including accrued
dividends of $326,882, and $772,388
and $873,977 in 1994, 1995 and 1996,
respectively.......................... 4,446,882 4,892,388 4,993,977
Stockholders' equity (deficit):
Common stock, $.01 par value;
15,000,000 shares authorized;
10,626,000 shares issued and
outstanding at December 31,
1994 and 1995; 11,721,860 shares
issued and outstanding at
March 31, 1996...................... 106,260 106,260 117,219
Class A common stock, $.01 par value;
nonvoting, 2,000,000 shares
authorized; 963,750 shares issued at
December 31, 1994 and 993,750 shares
issued at December 31, 1995 and
March 31, 1996...................... 9,638 9,938 9,938
Additional paid-in capital........... 1,339,677 1,351,377 1,772,082
Adjustment for predecessor basis..... (7,010,000) (7,010,000) (7,010,000)
Less treasury stock, at cost: 54,850
shares of Class A common stock
held at December 31, 1995 and
62,850 shares held at
March 31, 1996...................... -- (10,285) (11,085)
Retained earnings (deficit).......... (2,116,369) (4,141,607) (4,444,268)
Notes receivable from stockholders... (314,000) (334,500) (302,500)
----------- ----------- -----------
Total stockholders' equity
(deficit)......................... (7,984,794) (10,028,817) (9,868,614)
----------- ----------- -----------
Total liabilities, preferred and
common stockholders' equity
(deficit)....................... $44,669,472 $42,920,798 $41,998,133
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
PERIOD
JANUARY 1,
TO MARCH 13,
1993 1994
----------- -------------
<S> <C> <C>
Revenue:
Software licenses.......................... $27,495,022 $5,984,237
Maintenance and service.................... 4,109,060 584,962
----------- ----------
Total revenue............................ 31,604,082 6,569,199
----------- ----------
Cost of sales:
Software licenses.......................... 4,772,051 761,060
Maintenance and service.................... 1,330,750 183,856
----------- ----------
Total cost of sales...................... 6,102,801 944,916
----------- ----------
Gross profit................................ 25,501,281 5,624,283
Operating expenses:
Selling and marketing...................... 3,762,964 672,980
Research and development................... 5,972,026 1,349,498
Amortization............................... 936,839 300,000
General and administrative................. 7,181,472 1,234,049
----------- ----------
Total operating expenses................. 17,853,301 3,556,527
----------- ----------
Operating income (loss)..................... 7,647,980 2,067,756
Interest expense............................ (305,883) (61,670)
Other income................................ 778,179 39,592
----------- ----------
Income (loss) before income tax benefit..... 8,120,276 2,045,678
Income tax benefit.......................... -- --
----------- ----------
Net income (loss)........................... $ 8,120,276 $2,045,678
=========== ==========
Redeemable preferred stock dividends........
Net income (loss) applicable to common
stock......................................
Net income (loss) per common share.........
Shares used in computing per common share
amounts....................................
<CAPTION>
THE COMPANY
----------------------------------------------------
PERIOD
MARCH 14, TO MARCH 31
DECEMBER 31, -------------------------
1994 1995 1995 1996
------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software licenses.......................... $22,309,661 $32,604,044 $ 7,104,177 $ 8,385,166
Maintenance and service.................... 3,943,995 7,011,891 1,121,774 2,348,243
------------- ------------ ------------ ------------
Total revenue............................ 26,253,656 39,615,935 8,225,951 10,733,409
------------- ------------ ------------ ------------
Cost of sales:
Software licenses.......................... 3,033,816 3,331,250 955,589 666,284
Maintenance and service.................... 708,802 1,571,615 272,973 528,768
------------- ------------ ------------ ------------
Total cost of sales...................... 3,742,618 4,902,865 1,228,562 1,195,052
------------- ------------ ------------ ------------
Gross profit................................ 22,511,038 34,713,070 6,997,389 9,538,357
Operating expenses:
Selling and marketing...................... 3,835,694 7,525,908 1,648,960 2,168,724
Research and development................... 5,410,301 8,328,703 2,019,292 2,329,774
Amortization............................... 8,420,088 10,641,123 2,659,700 2,719,639
General and administrative................. 4,606,084 6,856,953 1,492,922 1,850,446
------------- ------------ ------------ ------------
Total operating expenses................. 22,272,167 33,352,687 7,820,874 9,068,583
------------- ------------ ------------ ------------
Operating income (loss)..................... 238,871 1,360,383 (823,485) 469,774
Interest expense............................ (3,091,293) (3,983,177) (994,848) (888,163)
Other income................................ 145,935 250,062 38,797 91,317
------------- ------------ ------------ ------------
Income (loss) before income tax benefit..... (2,706,487) (2,372,732) (1,779,536) (327,072)
Income tax benefit.......................... 917,000 793,000 595,000 126,000
------------- ------------ ------------ ------------
Net income (loss)........................... (1,789,487) (1,579,732) (1,184,536) (201,072)
Redeemable preferred stock dividends........ (326,882) (445,506) (101,589) (101,589)
------------- ------------ ------------ ------------
Net income (loss) applicable to common
stock...................................... $(2,116,369) $(2,025,238) $(1,286,125) $ (302,661)
============= ============ ============ ============
Net income (loss) per common share.......... $ (.19) $ (.17) $ (.11) $ (.02)
============= ============ ============ ============
Shares used in computing per common share
amounts.................................... 11,459,000 12,261,000 12,279,000 12,457,000
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PREDECESSOR
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO MARCH 13, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 500,000 $500,000 $2,270,033 $ 23,149,180 $ 25,919,213
Distributions to
stockholder.......... -- -- -- (15,958,688) (15,958,688)
Contribution from
stockholder.......... -- -- 1,434,070 -- 1,434,070
Net income for year... -- -- -- 8,120,276 8,120,276
------- -------- ---------- ------------ ------------
Balance, December 31,
1993................... 500,000 500,000 3,704,103 15,310,768 19,514,871
Distributions to
stockholder.......... -- -- (729,486) (13,811,849) (14,541,335)
Contribution from
stockholder.......... -- -- 61,670 -- 61,670
Net income for period. -- -- -- 2,045,678 2,045,678
------- -------- ---------- ------------ ------------
Balance, March 13, 1994. 500,000 $500,000 $3,036,287 $ 3,544,597 $ 7,080,884
======= ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A ADJUSTMENT NOTES
COMMON STOCK COMMON STOCK ADDITIONAL FOR RETAINED RECEIVABLE TREASURY STOCK
------------------- -------------- PAID-IN PREDECESSOR EARNINGS/ FROM ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL BASIS (DEFICIT) STOCKHOLDERS SHARES AMOUNT
---------- -------- ------- ------ ---------- ----------- ----------- ------------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
14, 1994........ -- -- -- -- -- -- -- -- -- --
Initial company
capitalization.. 10,000,000 $100,000 -- -- $ 900,000 -- -- -- -- --
Adjustment for
predecessor
basis........... -- -- -- -- -- $(7,010,000) -- -- -- --
Issuance of
Class A common
stock........... -- -- 300,000 $3,000 27,000 -- -- -- --
Issuance of
Restricted
stock........... 626,000 6,260 663,750 6,638 412,677 -- -- -- -- --
Dividends
accrued on
redeemable
preferred
stock........... -- -- -- -- -- -- $ (326,882) -- -- --
Loans to
facilitate
purchase of
restricted
stock........... -- -- -- -- -- -- -- $(314,000) -- --
Net loss for the
period.......... -- -- -- -- -- -- (1,789,487) -- -- --
---------- -------- ------- ------ ---------- ----------- ----------- --------- ------ --------
Balance,
December 31,
1994............ 10,626,000 106,260 963,750 9,638 1,339,677 (7,010,000) (2,116,369) (314,000) -- --
Treasury stock
acquired........ -- -- -- -- -- -- -- -- 54,850 $(10,285)
Issuance of
Class A common
stock........... -- -- 30,000 300 11,700 -- -- -- -- --
Dividends
accrued on
redeemable
preferred
stock........... -- -- -- -- -- -- (445,506) -- -- --
Loans to
facilitate
purchase of
restricted
stock........... -- -- -- -- -- -- -- (20,500) -- --
Net loss for the
year............ -- -- -- -- -- -- (1,579,732) -- -- --
---------- -------- ------- ------ ---------- ----------- ----------- --------- ------ --------
Balance,
December 31,
1995............ 10,626,000 106,260 993,750 9,938 1,351,377 (7,010,000) (4,141,607) (334,500) 54,850 (10,285)
Unaudited
information:
Treasury stock
acquired........ -- -- -- -- -- -- -- -- 8,000 (800)
Issuance of
restricted
stock........... 135,860 1,359 -- -- 324,705 -- -- -- -- --
Exercise of
stock options... 960,000 9,600 -- -- 96,000 -- -- -- -- --
Dividends
accrued on
redeemable
preferred stock. -- -- -- -- -- -- (101,589) -- -- --
Repayment of
stockholder
loan............ -- -- -- -- -- -- -- 32,000 -- --
Net income for
the period...... -- -- -- -- -- -- (201,072) -- -- --
---------- -------- ------- ------ ---------- ----------- ----------- --------- ------ --------
Balance, March
31, 1996
(unaudited)..... 11,721,860 $117,219 993,750 $9,938 $1,772,082 $(7,010,000) $(4,444,268) $(302,500) 62,850 $(11,085)
========== ======== ======= ====== ========== =========== =========== ========= ====== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
--------------
<S> <C>
Balance, March
14, 1994........ --
Initial company
capitalization.. $ 1,000,000
Adjustment for
predecessor
basis........... (7,010,000)
Issuance of
Class A common
stock........... 30,000
Issuance of
Restricted
stock........... 425,575
Dividends
accrued on
redeemable
preferred
stock........... (326,882)
Loans to
facilitate
purchase of
restricted
stock........... (314,000)
Net loss for the
period.......... (1,789,487)
--------------
Balance,
December 31,
1994............ (7,984,794)
Treasury stock
acquired........ (10,285)
Issuance of
Class A common
stock........... 12,000
Dividends
accrued on
redeemable
preferred
stock........... (445,506)
Loans to
facilitate
purchase of
restricted
stock........... (20,500)
Net loss for the
year............ (1,579,732)
--------------
Balance,
December 31,
1995............ (10,028,817)
Unaudited
information:
Treasury stock
acquired........ (800)
Issuance of
restricted
stock........... 326,064
Exercise of
stock options... 105,600
Dividends
accrued on
redeemable
preferred
stock........... (101,589)
Repayment of
stockholder
loan............ 32,000
Net income for
the period...... (201,072)
--------------
Balance, March
31, 1996
(unaudited)..... $ (9,868,614)
==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------- --------------------------------------------------
PERIOD PERIOD
JANUARY 1, MARCH 14 TO MARCH 31,
TO MARCH 13, DECEMBER 31, -----------------------
1993 1994 1994 1995 1995 1996
----------- ------------ ------------ ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $8,120,276 $ 2,045,678 $(1,789,487) $(1,579,732) $(1,184,536) $(201,072)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................ 1,626,016 427,496 8,605,999 11,458,053 2,784,315 2,950,712
Deferred income tax benefit.................. -- -- (1,491,000) (2,115,000) (719,000) (595,000)
Provision for bad debts...................... 1,339,630 -- 150,000 50,031 -- 12,500
Capital gains and dividends reinvested....... (585,949) (8,499) -- -- -- --
Unrealized loss on foreign exchange.......... 120,873 -- 5,367 -- -- --
Deferred compensation expense................ 18,232 3,596 -- -- -- --
Write-down of inventory...................... 46,734 -- -- -- -- --
Change in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable......................... (1,184,143) (717,508) 57,684 (1,981,245) (758,669) (3,757,985)
Refundable and prepaid income taxes......... -- -- (920,206) (449,903) (1,118) 363,424
Other current assets........................ 63,948 71,785 1,108,620 534,054 602,733 (454,204)
Other assets................................ 39,780 21,839 -- -- -- --
Accounts payable, accrued expenses and
liabilities and customer prepayments....... 89,755 918,883 523,317 3,816,013 (556,108) (933,932)
Deferred revenue............................ (30,766) (9,874) 82,399 1,033,830 647,274 999,475
----------- ----------- ----------- ----------- ----------- ----------
Net cash provided by operating activities.. 9,664,386 2,753,396 6,332,693 10,766,101 814,891 (1,616,082)
----------- ----------- ----------- ----------- ----------- ----------
Cash flows from investing activities:
Purchase of Swanson Analysis Systems, Inc.,
including related acquisition costs of
$273,000, net of cash acquired of $42,744... -- -- (46,845,552) -- -- --
Purchase of marketable securities............ (2,850,000) -- -- -- -- --
Capital expenditures......................... (1,658,386) (91,254) (795,004) (1,937,073) (441,775) (111,322)
Capitalization of internally developed
software costs.............................. (280,392) -- -- (18,650) -- --
Payments for software products acquired...... (600,000) (300,200) -- -- (110,000) --
Other assets................................. -- -- (179,000) -- -- --
Notes receivable from stockholders........... 185,913 -- -- (20,500) -- 32,000
----------- ----------- ----------- ----------- ----------- ----------
Net cash used in investing activities......... (5,202,865) (391,454) (47,819,556) (1,976,223) (551,775) (79,322)
----------- ----------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Proceeds from long-term debt................. 706,663 -- 28,000,000 -- -- --
Payments on long-term debt................... -- -- (2,000,000) (5,000,000) (2,000,000) (1,250,000)
Proceeds from issuance of restricted stock .. -- -- 111,575 12,000 -- 326,064
Proceeds from issuance of preferred and
common stock................................ -- -- 5,150,000 -- -- --
Proceeds from exercise of stock options...... -- -- -- -- -- 105,600
Proceeds from issuance of subordinated notes. -- -- 15,450,000 -- -- --
Debt issuance costs.......................... -- -- (925,000) -- -- --
Purchase of treasury stock................... -- -- -- (10,285) -- (800)
Cash distributions to stockholder............ (13,306,908) (3,212,027) -- -- -- --
Contributions by stockholder................. 704,583 61,670 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
Net cash (used in) provided by financing
activities................................ (11,895,662) (3,150,357) 45,786,575 (4,998,285) (2,000,000) (819,136)
----------- ----------- ----------- ----------- ----------- ----------
Net (decrease) increase in cash and cash
equivalents.................................. (7,434,141) (788,415) 4,299,712 3,791,593 (1,736,884) (2,514,540)
Cash and cash equivalents, beginning of
period....................................... 8,650,004 1,215,863 -- 4,299,712 4,299,712 8,091,305
----------- ----------- ----------- ----------- ----------- ----------
Cash and cash equivalents, end of period...... $1,215,863 $ 427,448 $4,299,712 $8,091,305 $2,562,828 $5,576,765
=========== =========== =========== =========== =========== ==========
</TABLE>
continued
F-9
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------- -----------------------------------------
PERIOD PERIOD MARCH 31,
JANUARY 1, MARCH 14 TO -----------------
TO MARCH 13, DECEMBER 31,
1993 1994 1994 1995 1995 1996
--------- ------------ ------------ ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosures
of cash flow
information:
Cash paid during the
period for:
Interest............... -- -- $1,676,666 $2,567,979 $613,889 $457,611
Income taxes........... -- -- 1,544,759 1,826,100 -- --
Supplemental noncash
investing and financing
activities:
Deferred interest notes
issued for interest in
arrears on
subordinated notes.... -- -- 1,246,356 507,945 -- --
Restricted stock
purchased with notes
to stockholders....... -- -- 314,000 -- -- --
Marketable securities
distributed to
Predecessor
stockholder........... -- 11,329,308 -- -- -- --
Purchased capitalized
software included in
accounts payable...... -- 212,600 -- -- -- --
Note receivable and
accrued interest
exchanged for partial
payment of a software
license included in
capitalized software
costs................. 1,055,483 -- -- -- -- --
Notes receivable from
Predecessor
stockholder
distributed to
Predecessor
stockholder........... 2,651,780 -- -- -- -- --
Notes payable to
Predecessor
stockholder forgiven
by Predecessor
stockholder and
accounted for as
additional paid-in
capital............... 729,486 -- -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND BASIS OF PRESENTATION:
ANSYS, Inc. (the Company), formerly SAS Holdings, Inc., is a holding company
incorporated on January 12, 1994 for the purpose of acquiring through its
subsidiary, SAS Acquisition Corp. (Acquisition), substantially all of the
assets and technology of Swanson Analysis Systems, Inc. (SASI or Predecessor)
for approximately $48 million in cash, the assumption of certain liabilities
totaling $4.9 million and acquisition costs of $273,000. The Company, through
its operating subsidiaries, develops, markets and supports a family of
mechanical computer-aided engineering software products.
The acquisition was effective and the Company commenced business on March
14, 1994. The acquisition was financed through the issuance of preferred and
common stock, borrowings under a $28 million term loan with a bank and the
issuance of subordinated notes (see Note 6). The acquisition of SASI was
accounted for using the purchase method of accounting. In recording the
acquisition, in accordance with generally accepted accounting principles, the
aggregate consideration was adjusted downward to reflect the carryover of the
seller's basis in the net assets acquired. The effect of this adjustment was
to reduce, on the date of acquisition, the value of stockholders' equity and
the purchased net assets by $7,010,000 and to preclude a write-up of a
proportionate amount of the assets acquired.
The accompanying financial statements present the Company's consolidated
operations and cash flows from the acquisition date of March 14, 1994 through
December 31, 1994 and for the year ended December 31, 1995, and the combined
operations and cash flows of SASI for the year ended December 31, 1993 and for
the period January 1, 1994 through March 13, 1994.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, SAS Acquisition Corp., ANSYS
Operating Corp. and SAS IP, Inc. In addition, the accompanying combined
financial statements include the accounts of SASI, Compuflo, Inc., a company
owned by the sole stockholder of SASI, which merged with SASI on April 1,
1993, and a joint venture between the sole stockholder of SASI and a corporate
officer of SASI, which owns the buildings leased by the Company (see Note 14).
The accounts of the joint venture are not included in the accompanying
consolidated financial statements of the Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition:
The Company's revenue recognition policy is in conformance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
"Software Revenue Recognition."
The Company's products are sold primarily through distributors, who are
resellers with respect to its products. Revenue is derived principally from
the licensing of computer software products, either on a monthly lease or
perpetual basis, and from related maintenance contracts. Revenue from product
licensing for perpetual licenses is recognized upon delivery of the product,
acceptance by the customer and receipt of a signed contractual obligation
provided that no significant Company obligations remain and collection of the
receivable is probable. Revenue for monthly lease licenses is recognized
monthly as earned because the lease license agreements can be cancelled by the
customers with 30 days' notice. The portion of the perpetual license fee
associated with providing the initial warranty is unbundled from the perpetual
license fee and deferred and recognized ratably over the warranty period.
Maintenance billed separately is recognized ratably over the term of the
agreement. Costs related to maintenance obligations are expensed as incurred.
F-11
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Revenue from training, support and other service is recognized as the
services are performed.
Cash Equivalents:
For the purposes of the consolidated statements of cash flows, the Company
considers highly liquid deposits in money market funds to be cash equivalents.
Cash equivalents are recorded at cost, which approximates fair value.
Marketable Securities:
Marketable securities distributed to the Predecessor's sole stockholder
during the period from January 1, 1994 through March 13, 1994 were carried at
the lower of cost or market. Gains and losses on marketable securities were
determined by specific identification.
Property and Equipment:
Property and equipment is carried at cost which includes the allocated
purchase price for the acquisition described in Note 1. Depreciation is
computed by the straight-line method over the estimated useful lives of the
various classes of assets, which range from three to ten years for the related
assets of the Company, and three to forty years for the Predecessor. Repairs
and maintenance are charged to expense as incurred. Gains or losses from the
sale or retirement of property and equipment are included in the results of
operations.
Capitalized Software:
Internally developed computer software costs and costs of product
enhancements are capitalized subsequent to the determination of technological
feasability; such capitalization continues until the product becomes available
for general release. Amortization of capitalized software costs, both for
internally developed as well as for purchased software products, is computed
on a product-by-product basis over the estimated economic life of the product
which ranges from three years to five years. Amortization is the greater of
the amount computed using (1) the ratio of the current year's gross revenue to
the total current and anticipated future gross revenue for that product or (2)
the straight-line method over the estimated life of the product.
The Company periodically reviews the carrying value of capitalized software
and impairments are recognized in the results of operations when the expected
future undiscounted operating cash flow derived from the capitalized software
is less than its carrying value.
Research and Development Costs:
Research and development costs are expensed as incurred.
General and Administrative Expenses:
Included in general and administrative expenses for the year ended December
31, 1993 is approximately $1.6 million in legal fees and related costs to
settle a legal dispute.
Goodwill and Other Intangible Assets:
Intangible assets consist of the excess of the purchase cost over the fair
value of net assets acquired (goodwill), the ANSYS trade name and a noncompete
agreement, which are being amortized on the straight-line method over the
estimated useful lives of these assets. The Company periodically evaluates the
carrying value of goodwill, which is being amortized over three years, based
on whether the goodwill is recoverable from expected future undiscounted
operating cash flows of the related business. Additionally, the Company
periodically reviews the carrying value of other intangible assets and will
recognize impairments when the expected future operating cash flow derived
from such intangible assets is less than their carrying value.
F-12
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Debt Issuance Costs:
Debt issuance costs, which were incurred by the Company in connection with
the borrowings under the credit facilities agreement (see Note 6), are
deferred and amortized over the term of the related debt. Debt issuance costs
have been included in other intangibles on the consolidated balance sheet.
Concentrations of Credit Risk:
The Company invests its cash primarily in deposits and money market funds
with commercial banks. The Company has not experienced any losses to date on
its invested cash.
The Company has a concentration of credit risk with respect to trade
receivables because of the limited number of distributors through which the
Company sells its products. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral.
During 1995, sales by distributors comprised approximately 97% of the
Company's total revenue, with two distributors accounting for approximately
15% and 10% of total revenue.
Income Taxes:
The Company and its wholly-owned subsidiaries are "C" corporations. Deferred
tax assets and liabilities are determined based on temporary differences
between the financial statement and the tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
SASI and Compuflo, Inc., prior to its merger with SASI, were "S"
corporations. These entities and the limited partnership, which owns the
building leased by the Company, were not subject to federal and state income
tax. Accordingly, the federal and state income tax liabilities were borne by
the respective stockholders or partners.
Foreign Currency Transactions:
Certain of the Company's sales transactions are denominated in foreign
currencies. These transactions are translated to U.S. dollars at the exchange
rate on the transaction date. Accounts receivable in foreign currencies at
year-end are translated at the effective exchange rate on that date. The
unrealized exchange loss or gain resulting from the translation as of year-end
is included in the results of operations.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the amounts of revenues and expenses during
the reported periods. Actual results could differ from the estimates.
Net Income (Loss) Per Share:
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during each period. Common
equivalent shares are not included in the per share calculations where their
inclusion would be antidilutive, except that, in accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, common
and common equivalent shares issued within 12 months of the initial filing
date of this registration statement have been included in the calculation as
if they were outstanding for all prior periods presented, using the treasury
stock method and the anticipated initial public offering (IPO) price. Such
shares totaled 690,680 and are included in the shares used in computing per
common
F-13
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
share amounts for all periods presented. Common equivalent shares consist of
the common shares issuable upon the exercise of stock options (using the
treasury stock method). Primary and fully diluted net income (loss) per share
are the same for all periods presented. All references in the accompanying
consolidated financial statements to the number of shares of common stock have
been retroactively restated to reflect the stock split discussed in Note 18.
As the proceeds of the IPO (see Note 18) will be used to repay the Company's
senior term loan, subordinated notes and associated deferred interest notes,
and redeemable preferred stock, the following pro forma information for the
year ended December 31, 1995 and for the three month period ended March 31,
1996 is presented:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss.................................. $(1,579,732) $ (201,072)
Pro forma adjustments to reflect repayment
of long term debt and redeemable
preferred stock from proceeds on January
1, 1995.................................. 2,815,856 583,838
----------- -----------
Pro forma net income...................... $ 1,236,124 $ 382,766
=========== ===========
Pro forma weighted average shares
outstanding.............................. 12,261,000 12,457,000
Add: Additional pro forma shares required
to repay long-term debt and redeemable
preferred stock (assuming an IPO price of
$13 per share)........................... 3,190,000 3,190,000
----------- -----------
Total pro forma shares.................. 15,451,000 15,647,000
=========== ===========
Pro forma income per share................ $0.08 $0.02
===== =====
</TABLE>
New Accounting Pronouncements:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
The new standard is effective for fiscal year 1996. Management believes that
the implementation of the standard will not have a material effect on its
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard, which is effective for fiscal year 1996,
requires the Company to adopt either a recognition method or a disclosure-only
approach of accounting for stock based employee compensation plans. Management
intends to adopt the disclosure-only approach and, as such, does not believe
that the implementation of the standard will have a material effect on its
consolidated financial statements.
Interim Consolidated Financial Statements (Unaudited):
The unaudited consolidated balance sheet as of March 31, 1996 and the
unaudited consolidated statements of operations and cash flows for the three
months ended March 31, 1995 and 1996, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements
and include all significant adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the consolidated financial
statements for these periods are also unaudited. Operating results for the
three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996.
F-14
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment................................. $ 987,897 $1,721,174 $ 1,787,497
Computer equipment and software........... 470,263 1,557,117 1,602,116
Furniture................................. 256,259 265,751 265,751
Leasehold improvements.................... 515,797 530,073 530,073
---------- ---------- -----------
2,230,216 4,074,115 4,185,437
Less: accumulated depreciation and
amortization............................. (186,899) (910,710) (1,199,986)
---------- ---------- -----------
$2,043,317 $3,163,405 $ 2,985,451
========== ========== ===========
</TABLE>
Depreciation expense was approximately $690,000 for the year ended December
31, 1993; $127,000 for the period January 1, 1994 through March 13, 1994;
$186,000 for the period March 14, 1994 through December 31, 1994; $877,000 for
the year ended December 31, 1995; and $125,000 and $231,000 for the three
months ended March 31, 1995 and 1996, respectively.
During January 1996, the Company approved plans to move into new corporate
office facilities on or about February 15, 1997 (see Note 14). Accordingly,
the Company reduced the estimated useful life of the leasehold improvements
maintained on its existing facilities through the anticipated move date. This
resulted in an increase in depreciation expense of $108,000 for the year ended
December 31, 1995 and $32,000 for the three months ended March 31, 1996.
4.OTHER INTANGIBLE ASSETS:
The components of other intangible assets were as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL ----------------------- MARCH 31,
LIVES 1994 1995 1996
--------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Trade names............. 10 $1,824,268 $ 1,824,268 $ 1,824,268
Noncompete agreement.... 5 1,000,000 1,000,000 1,000,000
Debt issuance costs..... 5 925,000 925,000 925,000
Other................... 3 179,000 179,000 179,000
---------- ----------- -----------
3,928,268 3,928,268 3,928,268
Less: accumulated
amortization........... (493,691) (1,120,900) (1,277,675)
---------- ----------- -----------
$3,434,577 $ 2,807,368 $ 2,650,593
========== =========== ===========
</TABLE>
5.LINE OF CREDIT:
The Company has a $1,000,000 revolving line of credit with a bank under a
credit facilities agreement, which is available through June 1, 1997.
Borrowings under the revolving line of credit bear interest at the bank's
prime rate (8.5% at December 31, 1995) plus 1%. There were no borrowings
outstanding under this line of credit during 1994, 1995 and 1996.
F-15
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior term loan............................ $26,000,000 $21,000,000 $19,750,000
Subordinated notes.......................... 15,450,000 15,450,000 15,450,000
Deferred interest notes..................... 1,246,356 1,754,301 1,754,301
----------- ----------- -----------
42,696,356 38,204,301 36,954,301
Less current portion........................ 5,000,000 5,000,000 5,250,000
----------- ----------- -----------
Long-term Debt.............................. $37,696,356 $33,204,301 $31,704,301
=========== =========== ===========
</TABLE>
The Company's bank credit facilities agreement includes a $28,000,000 term
loan which is payable in quarterly principal installments through December 31,
1998. The term loan agreement also provides for additional principal payments
based on 75% of the Company's excess cash flow, as defined in the loan
agreement. No such payment was required for 1994. For 1995, the required
payment of $890,000 was waived by the bank.
As part of the credit facilities agreement, all of the Company's assets have
been pledged as collateral. The agreement contains covenants which, among
other matters, restrict or limit the ability of the Company to pay dividends,
incur indebtedness, merge, acquire or sell assets and make capital
expenditures. The Company must also maintain certain financial ratios
regarding interest coverage, leverage and net worth, among other restrictions.
The Company can elect to change the interest rate on the term loan from the
bank's prime rate plus 1% to the bank's Eurodollar rate plus 3% on a 30, 60 or
90 day basis. At December 31, 1995, the interest rate in effect was the bank's
Eurodollar rate (5.67% at December 31, 1995) plus 3%. The term loan had a
weighted average interest rate during 1994 of 8.36% and during 1995 of 9.56%.
The Company entered into an interest rate cap agreement with a bank to
mitigate the fluctuations of variable rates. This agreement resulted in a
fixed interest rate of 9% on $14,000,000 of the principal through March 31,
1997.
The Company issued $15,000,000 of subordinated notes to certain stockholders
in connection with the acquisition described in Note 1. In July 1994, the
Company issued an additional $450,000 of subordinated notes to other
stockholders. The notes are subordinated to the senior term loan and bear
interest at 10%, with interest payable annually in arrears on May 1 of each
year with the first such payment due on May 1, 1995. One-half of the initial
principal amount of the notes and accrued but unpaid interest are due on April
14, 1999 with the remaining principal and accrued but unpaid interest due on
April 14, 2000. The notes are subject to mandatory repayment in the event of a
change in control or a qualified IPO, both as defined in the related
agreements. To the extent the Company is prohibited from making subordinated
note interest payments by the terms of its bank credit facilities agreement,
the Company is required to issue deferred interest notes, subject to the same
terms as the subordinated notes. At December 31, 1994 and 1995, in accordance
with such payment provisions, accrued interest on the subordinated notes in
the amounts of $1,246,356 and $1,754,301 was converted into deferred interest
notes.
F-16
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.LONG-TERM DEBT, CONTINUED:
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. Based on interest rates
currently available, management believes that the carrying amount of the long-
term debt is a reasonable estimation of fair value. The carrying value of the
interest rate cap is not materially different than fair value.
The scheduled aggregate maturities of total long-term debt are $5,000,000 in
1996, $6,000,000 in 1997, $10,000,000 in 1998, $8,602,000 in 1999 and
$8,602,000 in 2000.
7.INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -------------------
1994 1995 1995 1996
----------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal........................ $ 86,000 $ 680,000 -- $ 339,000
State.......................... -- 5,000 -- 25,000
Foreign........................ 488,000 637,000 $124,000 105,000
Deferred:
Federal........................ (1,491,000) (2,115,000) (719,000) (595,000)
----------- ----------- -------- ---------
Total........................ $ (917,000) $ (793,000) (595,000) $(126,000)
=========== =========== ======== =========
</TABLE>
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- ------------
1994 1995 1995 1996
------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal statutory tax rate........................ 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........ -- 0.5 -- 4.7
Research and experimentation credit............... (0.1) (1.1) (0.6) (0.2)
------ ------ ----- -----
33.9% 33.4% 33.4% 38.5%
====== ====== ===== =====
</TABLE>
F-17
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7.INCOME TAXES, CONTINUED:
The components of net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Goodwill.................................... $1,560,000 $2,854,000 $3,178,000
Capitalized software........................ 2,595,000 3,884,000 4,206,000
Other intangible assets..................... 270,000 320,000 333,000
Allowance for doubtful accounts............. 221,000 238,000 242,000
Accrued expenses and liabilities............ 57,000 118,000 116,000
Tax credits................................. 420,000 -- --
---------- ---------- ----------
5,123,000 7,414,000 8,075,000
---------- ---------- ----------
Deferred tax liability:
Property and equipment...................... 24,000 202,000 200,000
Other....................................... 72,000 70,000 138,000
---------- ---------- ----------
96,000 272,000 338,000
---------- ---------- ----------
Net deferred tax asset.................... $5,027,000 $7,142,000 $7,737,000
========== ========== ==========
</TABLE>
Based upon the Company's current and historical taxable income and the
anticipated level of future taxable income, management believes it is more
likely than not that all of the deferred tax assets will be realized.
Accordingly, no valuation allowance has been established against the deferred
tax assets.
8.REDEEMABLE PREFERRED STOCK:
The Company is authorized to issue 10% cumulative redeemable preferred
stock. There are no voting rights associated with this class of stock. The
preferred stock is redeemable at the option of the Company or upon a change of
control or a qualified IPO, both as defined in the preferred stock
instruments, at $10,000 per share plus all accumulated but unpaid dividends.
Each share of preferred stock is subject to annual cumulative dividend
requirements of $1,000 per share, which began to accumulate on the date of
issuance and are payable in arrears as of January 1 of each year, beginning
January 1, 1995.
Dividends accumulated, but unpaid, accumulate additional dividends at 10%
per annum. All unpaid dividends compound semi-annually on January 1 and July 1
of each year, until such dividends are paid. At December 31, 1994, 1995 and
March 31, 1996, accumulated but unpaid dividends amounted to $326,882,
$772,388 and $873,977, respectively. The preferred shares have a liquidation
preference equal to $10,000 per share plus all accumulated and unpaid
dividends.
9.COMMON STOCK:
The Company is authorized to issue shares of $.01 par value voting common
stock and shares of $.01 par value nonvoting Class A common stock. Shares of
common stock and Class A common stock, apart from voting rights, have equal
rights in liquidation and with respect to dividends. Upon the closing of an
IPO of the Company's common stock, each Class A share automatically converts
into one share of common stock.
Certain holders of the Company's common stock have entered into transfer
restrictions and co-sale agreements with the Company. Among other provisions,
the agreements restrict the transfer of common stock and allow for repurchase
by the Company at the original purchase price, in the event that the
restricted shares are offered for sale or upon cessation of employment of the
holder with the Company. Effective upon the closing of the proposed IPO (see
Note 18), these co-sale rights and the transfer restrictions terminate.
F-18
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10.PENSION AND PROFIT-SHARING PLANS:
The Company maintains and the Predecessor maintained both a money purchase
pension plan and a profit-sharing plan for all qualifying full-time employees.
The plans are noncontributory. The pension plan requires the Company to
contribute 20% of each participant's compensation annually while the profit-
sharing contribution is determined annually by the Board of Directors, subject
to a maximum limitation of 5% of eligible compensation.
Pension expense was $1,747,000 for the year ended December 31, 1993;
$317,000 for the period January 1, 1994 through March 13, 1994; $1,318,200 for
the period March 14, 1994 through December 31, 1994; $1,500,400 for the year
ended December 31, 1995 and $420,600 and $519,200 for the three-month periods
ended March 31, 1995 and 1996, respectively. Additionally, profit-sharing
expense was $380,000 for the year ended December 31, 1993; $85,000 for the
period January 1, 1994 through March 13, 1994; $322,000 for the period March
14, 1994 through December 31, 1994; $345,700 for the year ended December 31,
1995 and $105,200 and $109,700 for the three-month periods ended March 31,
1995 and 1996, respectively.
11.DEFERRED COMPENSATION:
The Predecessor had a deferred compensation agreement with two executives.
One agreement provided for the payment of $52,500 per year for 10 years upon
the executive's retirement at age 65. The other agreement provided for the
payment of $26,300 per year for 10 years upon the executive's retirement at
age of 65. The Predecessor expensed the present value of the payments at the
time of retirement equally over the employment period in which the
compensation is expected to be earned. The deferred compensation expense was
$18,232 for the year ended December 31, 1993 and $3,596 for the period from
January 1, 1994 through March 13, 1994. The liability associated with the
deferred compensation agreement was not assumed by the Company in connection
with the acquisition described in Note 1.
12.NONCOMPETE AND EMPLOYMENT AGREEMENTS:
The Company has entered into noncompete agreements with certain holders of
the Company's common stock, including the sole stockholder of SASI. The
agreements preclude the stockholders from competing either directly or
indirectly with the company for a period ranging from one to three years
subsequent to termination.
The Company has entered into employment agreements with the chief executive
officer and another senior executive (who was the sole stockholder of SASI).
The terms of the agreements are substantially similar except with respect to
minimum annual base salary. In the event the chief executive officer is
terminated without cause, his employment agreement provides for severance at
the annual rate of $300,000 for the later of a period of one year after
termination or when he accepts other employment. In the event the other senior
executive is terminated without cause, his employment agreement provides that
the Company will continue to pay his base salary of $228,000, subject to
specified cost of living increases, through the later of March 14, 1999 or six
months from the date of termination. The chief executive officer and the other
senior executive are subject to one and three-year restrictions on
competition, respectively, with the Company following termination of
employment under the circumstances described in each contract.
13.STOCK OPTION AND GRANT PLAN:
In February 1994, the Company's Board of Directors adopted and the
stockholders subsequently approved the 1994 Stock Option and Grant Plan (1994
Stock Plan) under which 868,110 shares of common stock have been reserved for
issuance upon exercise of currently outstanding options. Under the 1994 Stock
Plan, the Company may issue or sell shares of common stock with or without
restrictions (restricted stock) and grant either incentive stock options
(Incentive Options) or nonqualified stock options (Non-Qualified Options). The
1994
F-19
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13.STOCK OPTION AND GRANT PLAN, CONTINUED:
Stock Plan provides that (i) the exercise price of an Incentive Option must be
no less than the fair value of the relevant stock at the date of grant, and
(ii) the exercise price of an optionee who possesses more than 10% of the
total combined voting power of all classes of stock must be no less than 110%
of the fair market value of the stock at the time of grant. The Board of
Directors has the authority to set expiration dates no longer than ten years
from the date of grant (or five years for an optionee who meets the 10%
criteria), payment terms and other provisions of each grant. Shares associated
with unexercised options or repurchased shares of common stock become
available for options or issuances under the Plan. The Compensation Committee
of the Board of Directors may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1994 Stock Plan may be exercised or vest. In the event of a merger of the
Company, or the sale of substantially all of the assets of the Company, the
Board of Directors has the discretion to accelerate the vesting of the options
granted under the 1994 Stock Plan, except that 40,000 Non-Qualified Options
held by independent directors (Independent Directors) vest automatically in
such circumstances. In addition, the 1994 Stock Plan and the grants issued
thereunder terminate upon the effectiveness of any such transaction or event,
unless provision is made in connection with such transaction for the
assumption of grants theretofore made. No options or issuances may be granted
or made after March 14, 2004. In addition, the Company does not intend to make
any further grants or issuances under the 1994 Plan after the effective date
of the planned initial public offering (see Note 18).
During 1994, the Company issued 1,289,750 shares of restricted common stock
to certain officers, employees and a member of the Board of Directors. In
addition, during 1995 and for the three months ended March 31, 1996, the
Company issued 30,000 and 135,860 shares, respectively, of restricted common
stock to an officer and members of the Board of Directors. Substantially all
shares of restricted stock and all of the options were issued at the estimated
market value of the Company's common stock at the time of issuance. The
recipients of the restricted stock are required to continue in the employment
or service of the Company for periods up to five years after the date of
issuance for ownership to vest and provide for repurchase by the Company at
the original purchase price in the event of the termination of employment
prior to vesting. In addition, 135,860 shares of restricted stock provide for
accelerated vesting in the event of a sale of the Company or the attainment of
specified valuations for the Company's common stock. Upon termination of
employment, the Company repurchased 54,850 shares of restricted stock from
employees in 1995 and 8,000 shares during the three month period ended March
31, 1996.
Restricted stock purchases, grants and option activity under the 1994 Stock
Plan, and the issuance of 50,000 shares of restricted stock to members of the
Board of Directors under separate agreements, are summarized as follows:
F-20
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13.STOCK OPTION AND GRANT PLAN, CONTINUED:
<TABLE>
<CAPTION>
RESTRICTED STOCK STOCK OPTIONS
------------------------ -----------------------
NUMBER OF RANGE OF NUMBER OF RANGE OF
SHARES ISSUE PRICE OPTIONS OPTION PRICE
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Outstanding at March 14,
1994 (date of acquisition). -- -- -- --
Issued/Granted.............. 1,289,750 $ .01-.40 960,000 $ .11
Exercised................... -- -- -- --
Repurchased/canceled........ -- -- -- --
--------- --------- --------- ----------
Outstanding at December 31,
1994....................... 1,289,750 .01-.40 960,000 .11
Issued/Granted.............. 30,000 .40 315,000 .40
Exercised................... -- -- -- --
Repurchased/canceled........ (54,850) .01-.40 -- --
--------- --------- --------- ----------
Outstanding at December 31,
1995....................... 1,264,900 .01-.40 1,275,000 .11 -.40
Issued/Granted.............. 1,095,860(1) .11-2.40(1) 234,110 1.28-2.40
Exercised................... -- -- (960,000) .11
Repurchased/canceled........ (8,000) .10 (1,000) .40
--------- --------- --------- ----------
Outstanding at March 31,
1996 (unaudited)........... 2,352,760 $.01-2.40 548,110 $ .11-2.40
========= ========= ========= ==========
Exercisable at:
December 31, 1994......... 219,160 --
========= =========
December 31, 1995......... 471,340 --
========= =========
March 31, 1996
(unaudited).............. 502,660 --
========= =========
</TABLE>
- --------
(1) Includes 960,000 options exercised by the sole stockholder of SASI at an
exercise price of $ .11 per share. The shares received upon such exercise
are restricted subject to repurchase by the Company in certain
circumstances and vest in March 1998 and 1999.
14.LEASES:
The Company operates from facilities it leases from a joint venture held by
the sole stockholder of SASI and a corporate officer of SASI. Due to the
common ownership with SASI, the accounts and results of operations of the
joint venture were combined with the financial statements of SASI prior to the
acquisition described in Note 1. As a result of the acquisition, the Company
accounts for the lease, which provides for monthly rentals of approximately
$69,000 through March 1997, as an operating lease.
The Company incurred lease rental expense related to this lease agreement of
$628,000 for the period March 14, 1994 through December 31, 1994, $838,700 for
the year ended December 31, 1995 and $209,700 for each of the three-month
periods ended March 31, 1995 and 1996, respectively.
In January 1996, the Company entered into a lease agreement with an
unrelated third party for a new corporate office facility. The Company
anticipates moving into its new facility on or about February 15, 1997. The
lease agreement is for ten years, with an option for five additional years,
and includes a rental acceleration at the end of the fifth and tenth years.
Future minimum lease payments under the facility lease are $1,226,500 per
annum for 1997 through 2001.
The Company and the Predecessor also entered into various noncancelable
operating leases for equipment. Lease rental expense related to these leases
totaled $698,000 for the year ended December 31, 1993; $138,000 for the period
January 1, 1994 to March 13, 1994; $656,900 for the period March 14, 1994
through December
F-21
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.LEASES, CONTINUED:
31, 1994 and $889,300 for the year ended December 31, 1995 and $196,700 and
$342,200 for the three months ended March 31, 1995 and 1996, respectively.
Future minimum lease payments under operating leases for equipment in effect
at December 31, 1995 are as follows: 1996-$1,226,000 and 1997-$154,000.
15.ROYALTY AGREEMENTS:
In 1995, the Company entered into various renewable nonexclusive license
agreements under which the Company has been granted access to the licensor's
patent technology and the right to sell the patent technology in the Company's
product line. Royalty fees, which are included in cost of sales, were
approximately $114,000 for the year ended December 31, 1995 and $15,000 for
the three months ended March 31, 1996.
16.RELATED PARTY TRANSACTIONS:
In 1993, the Predecessor paid $600,000 and exchanged a note receivable and
accrued interest in the amount of $1,055,483 for the purchase of a software
license agreement from a company in which the stockholder is a board member.
Due from Predecessor stockholder arising from the acquisition described in
Note 1 was collected in 1995.
In connection with his initial employment, the Company's Chief Executive
Officer purchased 626,000 restricted shares of common stock in July 1994 for a
cash purchase price of $250,000 with proceeds from a loan from the Company
evidenced by a promissory note bearing interest at 8.23% and maturing on July
8, 2006. The promissory note is collateralized by a pledge of the shares
purchased with the proceeds of the loan. The shares purchased by the Chief
Executive Officer vest on a monthly basis over a five-year period.
In addition, other officers of the Company purchased restricted shares of
common stock with proceeds from loans from the Company. The loans, which
totaled $64,000 in 1994 and $20,000 in 1995, have terms similar to the
promissory note described above.
Due from officers at March 31, 1996 of $431,664 relates to the purchase of
restricted shares of common stock in March 1996 which was collected in April
1996.
17.GEOGRAPHIC INFORMATION:
Revenue by geographic area based on sales to distributors is as follows:
<TABLE>
<CAPTION>
UNITED OTHER OTHER
STATES CANADA GERMANY EUROPE JAPAN INTERNATIONAL TOTAL
----------- -------- ---------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1993................... $14,627,312 $677,728 $3,052,954 $6,809,072 $4,945,013 $1,492,003 $31,604,082
Period from January 1,
1994 through March 13,
1994................... 3,018,889 134,327 640,497 1,724,415 656,920 394,151 6,569,199
Period from March 14,
1994 through
December 31, 1994...... 11,728,386 521,861 2,559,731 5,539,992 4,679,895 1,223,791 26,253,656
Year ended December 31,
1995................... 17,950,590 771,380 4,021,017 8,241,963 6,054,990 2,575,995 39,615,935
Three months ended March
31, 1995............... 3,491,733 214,597 830,821 1,741,102 1,145,052 802,646 8,225,951
Three months ended March
31, 1996............... 4,978,785 213,413 2,459,024 895,104 1,522,058 665,025 10,733,409
</TABLE>
F-22
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18.SUBSEQUENT EVENTS:
On April 19, 1996, the Board of Directors authorized management of the
Company to file a registration statement with respect to a proposed initial
public offering by the Company of up to 3,500,000 shares of common stock. The
net proceeds will be applied to repay outstanding senior secured indebtedness,
subordinated notes and redeemable preferred stock, including all associated
accrued or accumulated and unpaid interest and dividends.
In addition on April 19, 1996, the Board of Directors approved a ten-for-one
stock split of the Company's common stock, effected in the form of a stock
dividend, paid on or about April 30, 1996. All references in the accompanying
consolidated financial statements to the number of shares of common stock have
been retroactively restated to reflect this stock split. The Board of
Directors also, on April 19, 1996, authorized an increase of the number of
authorized shares of common stock to 50,000,000 shares and authorized
2,000,000 shares of undesignated preferred stock issuable in one or more
series by the Board of Directors.
On April 19, 1996, the Board of Directors granted 320,000 options to certain
officers, employees and directors of the Company. The options expire five or
ten years from the date of grant. 310,000 options are exercisable at $10 per
share and vest ratably over a period of four years, and the remaining 10,000
options are exercisable at $11 per share and vest ratably over a period of
four years.
The 1996 Stock Option and Grant Plan (1996 Stock Plan), adopted by the Board
of Directors on April 19, 1996 and subsequently approved by the Company's
stockholders, will become effective upon completion of the proposed offering.
The 1996 Stock Plan permits (i) the grant of Incentive Options, (ii) the grant
of Non-Qualified Options, (iii) the issuance or sale of common stock with or
without vesting or other restrictions (Stock Grants) (iv) the grant of common
stock upon the attainment of specified performance goals (Performance Share
Awards), and (v) the grant of the right to receive cash dividends with the
holders of the Common Stock as if the recipient held a specified number of
shares of the common stock (Dividend Equivalent Rights). These grants may be
made to officers and other employees, consultants and key persons of the
Company and its subsidiaries. In addition, Independent Directors will
automatically be eligible for certain grants under the 1996 Stock Plan, as
described below. The 1996 Stock Plan provides for the issuance of 2,250,000
shares of common stock, of which no more than 300,000 shares may be issued to
Independent Directors. On and after the date the 1996 Stock Plan becomes
subject to Section 162(m) of the Internal Revenue Code of 1986, as amended,
options with respect to no more than 300,000 shares of common stock may be
granted to any one individual in any calendar year. No options or other grants
have been granted under the 1996 Stock Plan.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan (i) the individuals to whom grants will be granted, (ii) the
combination of grants to participants and (iii) the specific terms of each
grant. Incentive Options may be granted only to officers or other employees of
the Company or its subsidiaries including members of the Board of Directors
who are also employees of the Company or its subsidiaries.
The option exercise price of each option granted under the 1996 Stock Plan
is determined by the Compensation Committee but, in the case of Incentive
Options may not be less than 100% of the fair market value of the underlying
shares on the date of grant and may not be exercisable more than ten years
from the date the option is granted. If any employee of the Company or any
subsidiary owns or is deemed to own at the date of grant shares of stock
representing in excess of 10% of the combined voting power of all classes of
stock of the Company or any subsidiary, the exercise price for options granted
to such employee may not be less than 110% of the fair market value of the
underlying shares on that date and the option may not be exercisable more than
five years from the date the option is granted. No option may be exercised
subsequent to the termination of the optionee's employment or other business
relationship with the Company unless otherwise determined by the
F-23
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. SUBSEQUENT EVENTS, CONTINUED:
Compensation Committee or provided in the option agreement. At the discretion
of the Compensation Committee, any option may include a "reload" feature,
pursuant to which an optionee exercising an option receives in addition to the
number of shares of common stock due on the exercise of such an option an
additional option with an exercise price equal to the fair market value of the
common stock on the date such additional option is granted. Upon the exercise
of options, the option exercise price must be paid in full either in cash or,
in the sole discretion of the Compensation Committee, by delivery of shares of
common stock already owned by the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards and
grants of Dividend Equivalent Rights. Stock Grants and Performance Share
Awards may be made to persons eligible under the 1996 Stock Plan, subject to
such conditions and restrictions as the Compensation Committee may determine.
Prior to the vesting of shares, recipients of Stock Grants generally will have
all the rights of a stockholder with respect to the shares, including voting
and dividend rights, subject only to the conditions and restrictions set forth
in the 1996 Stock Plan or in any agreement. In the case of Performance Share
Awards, the issuance of shares of common stock will occur only after the
recipient has satisfied the conditions and restrictions set forth in the 1996
Stock Plan or in any agreement. The Compensation Committee may also make Stock
Grants to persons eligible under the 1996 Stock Plan in recognition of past
services or other valid consideration, or in lieu of cash compensation. In
addition, the Compensation Committee may grant Dividend Equivalent Rights in
conjunction with any other grant made pursuant to the 1996 Stock Plan or as a
free standing grant. Dividend Equivalent Rights may be paid currently or
deemed to be reinvested in additional shares of common stock, which may
thereafter accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1996 Stock Plan may be exercised or vest. In the event of a merger,
liquidation or sale of substantially all of the assets of the Company, the
Board of Directors has the discretion to accelerate the vesting of options
granted under the 1996 Stock Plan, except that options granted to Independent
Directors as described below automatically accelerate in such circumstances.
The 1996 Stock Plan and the grants issued thereunder terminate upon the
effectiveness of any such transaction or event, unless provision is made in
connection with such transaction for the assumption of grants theretofore
made.
The 1996 Stock Plan provides for the automatic grant of Non-Qualified
Options to Independent Directors. Under such provisions, options to purchase
that number of shares of common stock determined by dividing $200,000 by the
Option Exercise Price (as defined below) will be granted to each individual
who first becomes a member of the Board of Directors after the closing date of
the proposed offering and who is not then an employee of the Company or any
subsidiary of the Company. In addition, on the date five business days
following each annual meeting of stockholders of the Company commencing with
the meeting to be held in 1997, each Independent Director who is then serving
will be granted an option to purchase that number of shares of common stock
determined by dividing $75,000 by the Option Exercise Price. The Option
Exercise Price of options granted to Independent Directors under the 1996
Stock Plan will equal the lesser of (i) the last reported sale price per share
of common stock on the date of grant (or if no such price is reported on such
date, such price on the nearest preceding date on which such a price is
reported) or (ii) the average of the last reported sales price per share of
common stock as published in The Wall Street Journal for a period of ten
consecutive days prior to such date. Options granted to Independent Directors
under the foregoing provisions will vest in annual installments over four
years commencing with the date of grant and will expire ten years after grant,
subject to earlier termination if the optionee ceases to serve as a director.
The exercisability of these options will be accelerated upon the occurrence of
a merger, liquidation or sale of substantially all of the assets of the
Company.
F-24
<PAGE>
ANSYS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18.SUBSEQUENT EVENTS, CONTINUED:
The Company's 1996 Employee Stock Purchase Plan (Purchase Plan) was adopted
by the Board of Directors on April 19, 1996 and was subsequently approved by
the Company's stockholders. Up to 210,000 shares of common stock may be issued
under the Purchase Plan. The Purchase Plan is administered by the Compensation
Committee. The first offering under the Purchase Plan will begin on August 1,
1996 and end on January 31, 1997. Subsequent offerings will commence on each
February 1 and August 1 thereafter and will have a duration of six months.
Generally, all employees who are customarily employed for more than 20 hours
per week as of the first day of the applicable offering period are eligible to
participate in the Purchase Plan. An employee who owns or is deemed to own
shares of stock representing in excess of 5% of the combined voting power of
all classes of stock of the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his cash compensation
during the offering period. The maximum number of shares which may be
purchased by any participating employee during any offering period is limited
to 960 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his
accumulated payroll deductions will be used to purchase common stock on the
last business day of the period at a price equal to 85% of the fair market
value of the common stock on the first or last day of the offering period,
whichever is lower. Under applicable tax rules, an employee may purchase no
more than $25,000 worth of common stock in any calendar year. No common stock
has been issued to date under the Purchase Plan.
F-25
<PAGE>
===============================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO,
OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 28
Management................................................................ 43
Certain Transactions...................................................... 52
Principal and Selling Stockholders........................................ 54
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 60
Underwriting.............................................................. 62
Legal Matters............................................................. 63
Experts................................................................... 63
Additional Information.................................................... 63
Index to Financial Statements............................................. F-1
</TABLE>
-----------
UNTIL JULY 15, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
3,550,000 Shares
[LOGO OF ANSYS INC.]
Common Stock
-----------
PROSPECTUS
-----------
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
WESSELS, ARNOLD & HENDERSON
PARKER/HUNTER
INCORPORATED
June 20, 1996
===============================================================================
