<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999
REGISTRATION NO. 333-72665
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ANSYS DIAGNOSTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2835 33-0316510
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
25200 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92630
(949) 770-9381
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN K. SCHULTHEIS
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
ANSYS DIAGNOSTICS, INC.
25200 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92630
(949) 770-9381
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
PATRICK ARRINGTON, ESQ. RODD M. SCHREIBER, ESQ.
ELLEN S. BANCROFT, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
MATTHEW L. STEIMEL, ESQ. 333 W. WACKER DRIVE, SUITE 2100
MARRIE K. STONE, ESQ. CHICAGO, ILLINOIS 60606
BROBECK, PHLEGER & HARRISON LLP (312) 407-0700
38 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(949) 790-6300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 31, 1999
2,500,000 SHARES
ANSYS LOGO
COMMON STOCK
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This is the initial public offering of ANSYS Diagnostics, Inc., and we are
offering 2,500,000 shares of our common stock. We anticipate that the initial
public offering price will be between $10.00 and $12.00 per share. We have
applied to list our common stock on the Nasdaq National Market under the symbol
"ASDI."
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Initial public offering price............................ $ $
Underwriting discounts and commissions................... $ $
Proceeds to ANSYS........................................ $ $
</TABLE>
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
ANSYS Diagnostics, Inc. has granted the underwriters the right to purchase up to
375,000 additional shares of common stock to cover any over-allotments.
---------------------
Vector Securities International, Inc. Sutro & Co. Incorporated
PROSPECTUS DATED , 1999
<PAGE> 3
[INSIDE FRONT COVER]
In this prospectus, "ANSYS," "we," "us" and "our" refer to ANSYS
Diagnostics, Inc. The use of the term "our" in phrases such as "our products" is
not intended to infer that we hold any intellectual property or other ownership
rights to the TesTcup, TesTstik, Xtra AMP and SCIP product lines. Unless
otherwise indicated, all information in this prospectus assumes that:
- the initial public offering price will be $11.00 per share;
- we will redeem all of our outstanding Series A redeemable preferred
stock;
- we will convert all of our outstanding Series B convertible preferred
stock into 3,641,328 shares of our common stock;
- we will effect a 1.2-for-1 stock split of our common stock in April 1999;
- we will reincorporate ANSYS in Delaware in April 1999; and
- the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding options.
ANSYS(R), DRUGSTAT(TM), DRUGSTAT RA(TM), LTD-Opiate(TM), ON-SITE(R),
ON-SITE Alcohol(R), SPEC(R), SPEC-NEWS(TM), TOXI-LAB(R) and TOXI-NEWS(TM) are
trademarks of ANSYS. TesTcup(R), TesTcup ER(TM) and TesTstik(TM) are trademarks
of Roche Diagnostic Systems, Inc. XtraAMP(TM) and SCIP(TM) are registered
trademarks of Molecular Innovations, Inc. This prospectus also refers to
trademarks of other companies.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus
carefully. You should consider the information under "Risk Factors" and in our
financial statements and the notes relating to these financial statements,
together with the information included elsewhere in this prospectus, before
deciding to invest in the shares of our common stock.
OUR BUSINESS
We develop, manufacture and market drug testing products and specialty
laboratory and research products. Our drug testing products detect the presence
of drugs of abuse and alcohol, primarily in on-site testing applications. Our
specialty laboratory and research products are used in the preparation of
experimental samples for further analysis, as well as for the separation and
detection of nucleic acids (DNA and RNA). In addition to our current products,
we also have several products under development, both internally and in
conjunction with third parties. All of our products utilize our core
competencies in product design, engineering and manufacturing.
We currently manufacture ten on-site drug testing products, all of which
are self-contained, disposable and easy to use. These products are designed to
yield highly accurate results in less than five minutes and are intended to be
cost-effective. Applications for these products include pre-employment
screening, random employee testing, government mandated testing, parole and
probation monitoring and hospital-based testing. We also offer a
laboratory-based drug testing product that detects more than 500 drugs and drug
byproducts in urine, blood, tissue and other specimens. In addition, we are
developing additional drug testing products that will enable physicians to
monitor their patients' compliance with a prescribed therapeutic drug regimen.
Our on-site and laboratory drug testing products address the market for
products that analyze blood, urine, saliva and other specimens to detect the
presence of and monitor certain substances, to diagnose diseases and other
medical conditions, or to determine the chemical and microbiological
constituents of the specimen. The United States drugs of abuse testing segment
of this market was approximately $628 million in 1996, and is estimated to grow
to approximately $900 million by 2002.
We have collaborated with Roche Diagnostic Systems, Inc. for more than six
years, and we continue to work with Roche both contractually and informally on
developing new on-site drug testing products. For the on-site drug testing
market, we manufacture TesTcup, TesTstik, and ON-SITE Alcohol. We have an
exclusive manufacturing relationship with Roche, under which we manufacture the
TesTcup and TesTstik product lines for them. Roche owns all rights to and is
responsible for selling and marketing the TesTcup and TesTstik product lines.
In the specialty laboratory and research products market, we manufacture
and sell solid phase extraction products and nucleic acid separation products.
Solid phase extraction is a technique for removal of a target substance from a
liquid onto a solid surface and the subsequent release of that substance for
analysis. Nucleic acid separation involves isolating nucleic acids from other
soluble contaminants. Nucleic acids, including DNA and RNA, are the fundamental
regulatory molecules of life. We are currently co-developing rapid nucleic acid
separation and detection products to expand our product line. Our specialty
laboratory and research products are marketed primarily to clinical and
environmental testing laboratories, pharmaceutical and biotechnology companies,
and DNA testing and research organizations.
ANSYS was incorporated in 1988 in California and will be reincorporated in
Delaware in April 1999. Our executive offices are located at 25200 Commercentre
Drive, Lake Forest, California 92630, and our telephone number is (949)
770-9381.
3
<PAGE> 5
THE OFFERING
Common stock offered....................... 2,500,000 shares
Common stock to be outstanding after this
offering................................... 8,016,512 shares(1)
Use of proceeds............................ For redemption of preferred stock
and payment of cumulative
dividends; for repayment of
indebtedness; for the acquisition
of complementary businesses,
products and technologies; and
for working capital and other
general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol..... ASDI
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $6,589 $6,447 $8,126 $10,698 $18,964
Gross profit................................ 4,588 4,178 5,068 5,599 9,261
Operating expenses.......................... 3,117 3,364 3,204 3,649 4,749
Operating income............................ 1,471 814 1,864 1,950 4,512
Net income.................................. $ 971 $ 494 $1,201 $ 1,206 $ 2,691
Earnings per share(2):
Basic..................................... $ 0.34 $ 0.14 $ 0.46 $ 0.54 $ 1.33
Diluted................................... $ 0.15 $ 0.08 $ 0.19 $ 0.20 $ 0.45
Weighted average shares outstanding(2):
Basic..................................... 2,307 2,307 2,230 1,901 1,890
Diluted................................... 6,039 6,076 6,057 5,864 5,942
Pro forma earnings per share(2):
Basic..................................... $ 0.47
Diluted................................... $ 0.44
Pro forma weighted average shares
outstanding(2):
Basic..................................... 5,737
Diluted................................... 6,147
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,176 $ 916 $24,047
Working capital........................................... 5,053 2,793 26,148
Total assets.............................................. 11,891 9,631 32,762
Total long-term debt...................................... 1,894 1,894 --
Total stockholders' equity................................ 7,664 5,404 30,429
</TABLE>
- -------------------------
(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of January 31, 1999, and
does not include 1,000,980 shares of common stock issuable upon the exercise
of options outstanding as of January 31, 1999, at a weighted average
exercise price of $1.65 per share.
(2) See Notes 10 and 11 of Notes to Consolidated Financial Statements for
information regarding the determination of per share calculations.
(3) Pro forma to give effect to: (a) the payment of all undeclared cumulative
dividends on our preferred stock; (b) the redemption of all of our
outstanding Series A redeemable preferred stock; and (c) the conversion of
all of our outstanding Series B convertible preferred stock, all of which
will occur upon consummation of this offering.
(4) Pro forma as described in footnote (3) and as adjusted to give effect to the
receipt and application of the estimated net proceeds from the sale of the
2,500,000 shares offered by this prospectus. See "Use of Proceeds."
4
<PAGE> 6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY READ AND CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN
TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
WE DEPEND ON REVENUES FROM SALES TO ROCHE AND OUR OPERATING RESULTS WOULD BE
ADVERSELY AFFECTED IF SALES TO ROCHE WERE TO DECLINE.
We derive a substantial portion of our revenues and earnings from the sale
of TesTcup, TesTstik and ON-SITE Alcohol to Roche. These products together
accounted for approximately 17% of our net sales during 1996, 42% of our net
sales during 1997 and 65% of our net sales during 1998. If Roche were to stop
purchasing any of these products from us, either due to lack of consumer demand
or otherwise, our business, financial condition and results of operations would
be adversely affected. We expect our revenues and profitability in the
foreseeable future to depend substantially on our relationship with Roche.
Roche owns or has licensed from other parties all patent, intellectual
property and other ownership rights to the TesTcup and TesTstik product lines.
We have no rights to these product lines except our right to manufacture these
products for Roche under our exclusive manufacturing agreements, which expire
commencing in 2002. Roche may use another vendor to manufacture the TesTcup
and/or TesTstik product lines if we do not produce a sufficient quantity of
products which meets their specifications. Roche also owns the rights to any new
versions of TesTcup and TesTstik which we may develop in the future. If Roche
terminates or decides not to renew or extend our manufacturing agreements, our
revenues will decline significantly and our business would be adversely
affected.
ROCHE CONTROLS THE MARKETING OF THE TESTCUP AND TESTSTIK PRODUCT LINES, AND WE
DEPEND ON THEIR EFFORTS FOR THE SUCCESS OF THESE PRODUCTS.
Our agreements with Roche give Roche complete control over all aspects of
marketing the TesTcup and TesTstik product lines, including product pricing,
sales force composition and promotional activities. Under our agreements with
Roche, we must offer Roche the first opportunity to exclusively market any and
all new antibody-based drugs of abuse products which we develop. Roche has full
responsibility for and complete control over the introduction and launch of
TesTcup ER, a version of TesTcup designed for use in hospital emergency rooms.
As a result, the successful introduction of TesTcup ER and a number of other new
products will depend on the efforts of Roche and is beyond our effective
control. We cannot be certain that: (1) Roche will continue to devote sufficient
5
<PAGE> 7
resources to market and sell the TesTcup and TesTstik products effectively; (2)
that Roche will devote sufficient resources in the future to market and sell
TesTcup ER, either due to a lack of consumer demand or otherwise; or (3) that
Roche will market any of these products at prices that can achieve market
acceptance. Roche is not required to purchase any minimum amounts of our
products, and we do not have the right to sell or market these products directly
or indirectly. Our business, financial condition and results of operations will
be materially and adversely affected if Roche does not devote sufficient
resources to marketing TesTcup, TesTstik, ON-SITE Alcohol or TesTcup ER.
THE FAILURE OF SOLE SOURCE SUPPLIERS TO PROVIDE KEY RAW MATERIALS COULD
ADVERSELY AFFECT THE PRODUCTION OF OUR PRODUCTS AND COULD HARM OUR CUSTOMER
RELATIONSHIPS.
We use certain essential raw materials in our manufacturing processes which
are currently available only from approved sole source suppliers. These raw
materials include nitrocellulose membranes, glass fiber membranes and certain
liquid reagents. We have experienced a shortage of nitrocellulose membranes in
the past and the shortage of any of our key raw materials could disrupt our
production and reduce our sales. We do not have any long-term supply agreements
with any of these suppliers, and we have not qualified alternative suppliers for
any of these raw materials. If we were to lose any of our current suppliers of
these materials, we would have to qualify a new supplier for that material. We
would also have to repeat product testing using the raw materials from the new
supplier and may have to seek additional regulatory approvals. It is possible
that these raw materials may not continue to be available on acceptable terms,
or at all, or that alternative suppliers will be available. Any delays or
reductions in product shipments by our suppliers could damage our relationships
with our customers. Further, a significant increase in the price of one or more
of these raw materials could adversely affect our gross margins or operating
results.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR FINANCIAL PERFORMANCE COULD BE
ADVERSELY AFFECTED.
Over the past few years, our business has grown rapidly and we have
significantly expanded our operations to accommodate this growth. This expansion
has placed a significant strain on our limited personnel, management, operating
systems and other resources. Our net sales increased 77.3% over the past year,
from $10.7 million in 1997 to $19.0 million in 1998. This rapid growth has:
- made it difficult to forecast supply requirements accurately;
- required us to implement new and upgraded operational and financial
systems, procedures and controls; and
- increased the responsibilities of management personnel.
To manage growth effectively, we must continue to implement and improve our
operational, financial and management information systems. We must also hire,
train and manage additional employees, especially the highly skilled employees
needed to operate our manufacturing facility, especially as it becomes
increasingly automated. Our future financial performance could be adversely
affected if we are unable to manage our growth effectively.
6
<PAGE> 8
WE DEPEND ON KEY PERSONNEL WHO ARE INSTRUMENTAL TO OUR BUSINESS AND ARE NOT
SUBJECT TO EMPLOYMENT AGREEMENTS.
Due to the specialized nature of our business, we are highly dependent on
the continued service of our executive officers and other key management,
scientific and technical personnel, particularly Stephen K. Schultheis, our
Chairman, President and Chief Executive Officer, Steven P. Sidwell, our
Executive Vice President -- Operations, and Dr. Dennis D. Blevins, our Vice
President -- Research and Development. We do not have employment agreements with
any of our officers or key employees. The loss of any of these persons could
adversely affect our manufacturing operations, efficiency, product quality, and
research and development efforts. Our future success will also depend in large
part upon our ability to continue to attract, retain and motivate qualified
scientific and technical personnel with advanced degrees, and technical research
and manufacturing skills. The competition for qualified personnel is intense. If
we cannot attract, retain and motivate such qualified personnel, our business
will be adversely affected.
OUR CONTINUING EFFORTS TO INCREASE AUTOMATION MAY BE COSTLY, TIME-CONSUMING AND
UNSUCCESSFUL.
We are currently automating certain portions of our assembly lines. This
automation is expensive and may not ultimately improve our operating
efficiencies or manufacturing capacity. This automation involves a number of
risks, including:
- automation is costly because much of our equipment must be custom made
and delays are beyond our control;
- automation is likely to increase responsibilities for management
personnel;
- automation can result in quality control issues; and
- necessary qualification and validation processes may delay the
implementation of automation.
We may not succeed in automating our manufacturing facility in a timely
manner, at a commercially reasonable cost, or at all. Any resulting delays or
increased down time could adversely affect our business, financial condition and
results of operations.
THE LOSS OF OUR PRINCIPAL FACILITY COULD ADVERSELY AFFECT OUR BUSINESS.
We manufacture all of our products at a single facility in Lake Forest,
California. A disaster such as an earthquake or fire that damages this facility
could interrupt our manufacturing process, disrupt our business and adversely
affect our revenues and profitability. Any damage to our facility could also
cause significant delays and require re-certification of our facility under the
FDA's Quality System Regulations and under state regulations. Such certification
could be time-consuming and costly, without any guarantee of obtaining
recertification.
7
<PAGE> 9
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK.
Our quarterly operating results have fluctuated and are likely to continue
to fluctuate due to a number of factors. Many of these factors are not within
our control. These fluctuations could cause our future operating results to be
below the expectations of securities analysts and/or investors. If that happens,
our business and the trading price of our common stock could be adversely
affected.
Factors that could affect our operating results include the following:
- the resources Roche dedicates to the marketing of products we develop and
manufacture for Roche;
- ANSYS' and Roche's ability to develop, introduce, market and gain market
acceptance for new products and product enhancements in a timely manner;
- changes in pricing policies by us, Roche, suppliers or competitors;
- the availability of raw materials used to manufacture our products;
- our ability to accurately forecast demand and inventory requirements;
- the timing of sales to key customers or a decline in sales to a key
customer;
- the introduction of new products or product enhancements or technical
innovations by competitors;
- our ability to expand capacity or achieve further manufacturing
efficiencies;
- the timing and increased costs associated with increased sales and
marketing, and research and development activities;
- changes in government regulation of our products or the legal status or
procedural requirements for employment drug testing;
- international economic conditions and currency fluctuations; and
- general economic and market conditions.
THE EFFECTS OF COMPETITION COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL
CONDITION.
We compete with numerous companies that manufacture disposable tests that
can be conducted on-site, such as in the workforce. We also compete with
companies that manufacture products used in clinical settings, such as hospitals
and reference laboratories. We expect competition to increase due to the
increased acceptance of drug testing and technological advancements. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. We believe independent reference and hospital laboratories
currently perform the majority of diagnostic tests. We expect that these
laboratories will compete vigorously to maintain their competitive position. To
achieve broad market acceptance for the products we manufacture, we, together
with Roche, will need to demonstrate that our products are an attractive
alternative to laboratory testing. Some of our competitors may:
- have larger, more established sales and marketing, distribution and
service organizations;
- offer broader product lines and test for more substances;
8
<PAGE> 10
- have greater name recognition;
- offer discounts as a competitive tactic; and
- have invested in competing technologies that may be more effective or
more commercially attractive than our technologies.
As a result, we may experience increased competition, reduced sales,
declining margins and slower growth in the future. We cannot be certain that we
will have the technical expertise, or the financial, marketing or distribution
resources to compete effectively in the future.
THE LOSS OF ANY KEY DISTRIBUTOR COULD AFFECT OUR REVENUES AND THE MARKET
ACCEPTANCE OF OUR PRODUCTS.
We rely upon third party distributors, as well as our own sales force, to
distribute and market many of our new and existing products. If we lose one or
more of our key distributors and cannot arrange suitable alternatives, our sales
will likely decline. We may not be able to enter into new distribution or
marketing agreements on satisfactory terms, or at all. We cannot be certain that
our distributors will devote sufficient resources to effectively market and sell
the products we manufacture, that they will devote sufficient resources in the
future to market and sell any new products we manufactured, or that they will
market these products at prices that can achieve market acceptance. In addition,
our distributors may give higher priority to the products of similar suppliers
or their own products, thus reducing their efforts to sell products we
manufacture. If any of our distributors become unwilling or unable to promote,
market and sell products we manufacture, our business could be adversely
affected.
OUR FUTURE SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO DEVELOP, INTRODUCE AND
GAIN MARKET ACCEPTANCE OF NEW PRODUCTS.
We believe our revenue growth and future operating results will depend, in
part, on our ability to complete the development of new products and
successfully introduce them. To do this, we must, among other things:
- undertake time-consuming and costly development, manufacturing and other
activities;
- obtain necessary regulatory clearance or approvals in a timely manner;
- establish and maintain reliable, cost-efficient, high-volume
manufacturing capacity for these products;
- ensure that our products comply with government and regulatory testing
guidelines;
- develop new products or modify existing products to detect the presence
of new substances; and
- obtain approval from our strategic partners.
Each stage of this process involves inherent difficulties. We have recently
invested significant resources into the development of TesTstik 2 and TesTstik
3. We cannot be sure that any of these products will achieve broad market
acceptance. It is possible that Roche may decide not to launch, market or sell
these products, and we have no right to market or sell these products ourselves.
9
<PAGE> 11
WE MUST COMPLY WITH VARIOUS GOVERNMENT REGULATIONS AND CANNOT BE ASSURED OF
OBTAINING FURTHER REGULATORY APPROVALS.
We cannot market or commercially sell new products unless the FDA has
exempted them from its market clearance requirements or, if the products are not
exempt, until the FDA either clears a notification under Section 510(k) of the
Federal Food, Drug and Cosmetic Act or approves an application for premarket
approval. The process of obtaining either 510(k) clearance or premarket approval
can be lengthy, expensive and uncertain. All of our drug testing products and
some of our specialty laboratory and research products are currently marketed
pursuant to 510(k) notifications. It is also possible that modifications or
enhancements to existing products will require clearance of new 510(k)
notifications, which we or our strategic partners may not be able to obtain.
Some new products may, however, require the more time consuming and costly
premarket approval. Government regulations typically depend heavily on
interpretation and could be applied retroactively. Future interpretations by the
FDA or other regulatory bodies could adversely affect our business. If
previously unknown problems with a cleared or approved product are discovered,
we or our strategic partners may be required to restrict the product's marketing
or withdraw the product from the market entirely. Our business could be
adversely affected by the loss of previously obtained clearances or the failure
to comply with existing or future regulatory requirements.
We are also subject to the FDA's Quality System Regulations because we
manufacture medical devices marketed in the United States. We are subject to
routine inspection by the FDA and other federal and state regulatory agencies
for compliance with Quality System Regulations, Medical Device Reporting
requirements and other applicable regulations. We cannot be certain that we will
remain in compliance with all of such regulations. Noncompliance with applicable
requirements can result in, among other things:
- warning letters;
- fines;
- injunctions;
- civil penalties;
- recall or seizure of products;
- total or partial suspension of production;
- failure of the government to grant 510(k) clearance or premarket approval
for devices;
- withdrawal of marketing clearances or approvals; and
- criminal prosecution.
We are also subject to various other federal and state regulations, and
numerous environmental and safety laws and regulations, including those
governing the use and disposal of hazardous materials. We may incur significant
costs in the future in complying with FDA mandates and other governmental
regulations.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS.
Our ability to compete effectively depends in part upon our ability to
develop and maintain the proprietary aspects of our technology and to operate
without infringing the proprietary rights of others. We are currently pursuing
two pending patent applications for other new products, but we cannot be certain
that we will receive the patents. In addition,
10
<PAGE> 12
even if patents are issued, our existing or future patents may not protect us
from competitors with similar technology. Our existing or future patents could
still be challenged, invalidated or circumvented. In addition, protection of our
intellectual property may be unavailable or limited in a number of foreign
countries. If we are not able to adequately protect our technology, our
competitors can more easily offer similar products. Notwithstanding our attempts
to protect our intellectual property, it may be possible for a third party to:
- copy or otherwise obtain and use our products, services or technology
without authorization;
- develop similar technology independently; or
- design around our intellectual property or the intellectual property of
our strategic partners.
Because of these possibilities, we cannot be certain that we can achieve
meaningful protection of our proprietary technology.
Roche, the owner of all of the intellectual property and other ownership
rights to the TesTcup and TesTstik product lines, including certain
modifications to these products, may not aggressively protect its patents or
licenses to these product lines.
We may be required to litigate to enforce our or our strategic partners'
intellectual property rights or protect our trade secrets. We may also need to
litigate to determine the validity and scope of proprietary rights of others,
including our customers. Any time we are involved in litigation, we will likely
incur significant costs. Litigation can also divert management's efforts and
other resources from our business. In addition, litigation could result in the
issuance of an injunction which could require us or our strategic partners to
withdraw certain products from the market or redesign certain products currently
offered for sale or under development. We may also be required to obtain a
license to continue producing a product, which may not be available on
reasonable terms, or at all.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS, OR AT ALL.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. Our future
capital requirements will depend on many factors, including:
- market acceptance of our products;
- increased research and development funding;
- increased sales and marketing expenses;
- potential acquisitions of businesses and product lines;
- inventory levels; and
- progress of our planned automation.
Additional financing may not be available on acceptable terms, or at all.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, expand our sales and marketing
programs, take advantage of future opportunities or respond to competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our
11
<PAGE> 13
stockholders will be reduced. In addition, the new equity securities may have
rights, preferences and privileges senior to our common stock.
WE DO NOT HAVE SIGNIFICANT DIRECT SALES CAPABILITIES WHICH COULD IMPACT OUR
ABILITY TO EXPAND OUR BUSINESS.
We may consider expanding our direct sales force to market future products
ourselves. We currently have limited resources in direct sales, and in the
marketing and distribution of our products. If we decide to distribute new
products directly, we will have to invest in additional sales and marketing
resources, particularly to add more field sales personnel. Our direct sales,
marketing and distribution efforts may not be successful, and revenue from these
efforts may not exceed our increased expenses.
WE MAY HAVE PRODUCT LIABILITY EXPOSURE NOT COVERED BY INSURANCE.
The manufacture and sale of medical diagnostic devices entails an inherent
risk of product liability claims. We face financial exposure to product
liability claims if the use of our products results in an improper diagnosis.
Potential product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy. Product
liability insurance is expensive, and we cannot be certain that our existing
insurance can be renewed at an acceptable cost, or at all, or that it would
adequately protect us against these types of claims.
WE MAY EXPERIENCE UNANTICIPATED WARRANTY EXPOSURE FOR WHICH WE DO NOT HAVE
RESERVES.
We may face warranty exposure which could adversely affect our results of
operations. Our products typically carry a one year warranty against defects in
materials and workmanship. For the TesTcup and TesTstik product lines, we are
responsible for all costs, expenses and consequential damages under our
contracts with Roche for all product recalls, returns and defects attributable
to manufacturing. Based on our prior warranty experience, we have not
established any reserves for the liability associated with product warranties.
Accordingly, any unforeseen warranty exposure could adversely affect our
operating results.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED AND WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These systems and
software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies may need to be upgraded to comply with such year
2000 requirements or risk system failure or miscalculations, potentially causing
disruptions of normal business activities. We rely on our systems and
applications to operate and monitor all major aspects of our business, including
our financial, information and manufacturing systems. Although we believe our
internal infrastructure is year 2000 compliant, we cannot know for certain all
of the problems that may arise until the turn of the century. Any disruption in
our internal infrastructure could cause shipment errors, make it difficult to
forecast adequately, harm our customer relationships and in general, adversely
affect our business. We also rely on computer systems of other entities, both
domestic and international, for the accurate
12
<PAGE> 14
exchange of data. These entities include our customers, suppliers, creditors and
financial organizations. Even if our internal systems are not affected by the
year 2000 issue, our business could be materially disrupted by year 2000
problems within these other entities. We have not determined what costs will be
incurred in connection with our third party relationships, but such costs could
be substantial. We do not currently have any contingency plans for unforeseen
year 2000 issues.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK.
There has been no public market for our common stock prior to this
offering. We cannot predict the extent to which investor interest in our common
stock will lead to the development of an active trading market or how liquid
that market might become. The market price of our common stock may decline below
the initial public offering price. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us, and may not be indicative of prices that prevail in the market following
this offering.
THE TRADING PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The stock markets have experienced extreme price and volume fluctuations
trading volume volatility in the past, particularly in the diagnostic and
specialty laboratory and research products markets. The trading prices of
securities of many companies in these markets have been especially volatile,
often for reasons unrelated to the operating performance of the specific
companies. These broad market and industry factors may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. If the market price of our common stock declines, we may be subject
to costly and time consuming securities class action litigation. Any such
litigation could have a material adverse effect on our business, financial
condition and results of operations.
13
<PAGE> 15
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
If our stockholders sell a substantial amount of our common stock,
including shares issuable upon exercise of outstanding options, in the public
market following this offering, the market price of our common stock could
decline. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have 8,016,512 shares of
common stock outstanding. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradeable in the public market. In addition, 18,400
shares will be available for sale in the public market 90 days following the
date of this prospectus. All of the remaining 5,498,112 shares will be eligible
for future sale in the public market 180 days from the date of this prospectus,
upon expiration of lock-up agreements between the stockholders and the
underwriters.
The holders of 5,498,112 shares of our common stock have certain rights
with respect to registration of those shares for sale in the public market. We
also intend to file a registration statement covering the sale of 1,329,780
shares of our common stock granted or authorized for grant under our option
plans. See "Shares Eligible For Future Sale."
ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
Certain provisions of our certificate of incorporation, bylaws and Delaware
law could make it difficult for a third party to acquire us, even though an
acquisition might be beneficial to our stockholders. These provisions of our
certificate of incorporation and bylaws and of Delaware law may have the effect
of:
- delaying, deterring or preventing a change in control;
- discouraging bids for our common stock at a premium over the market
price;
- adversely affecting the market price of our common stock; and
- adversely affecting voting and other rights of our stockholders.
See "Description of Capital Stock" for a more complete discussion of these
provisions.
OUR INSIDERS WILL STILL HAVE CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER
VOTE UPON COMPLETION OF THIS OFFERING.
Following this offering, Ronald J. Hall, one of our directors, and his
affiliates, will beneficially own an aggregate of 47.5% of our common stock. Our
directors, executive officers and their affiliates as a group will beneficially
own approximately 65.9% of our common stock upon completion of this offering, or
approximately 63.1% if the underwriters' over-allotment option is exercised in
full. As a result of this concentration of ownership, our directors, executive
officers and their affiliates can significantly influence our company and our
affairs and business, including the election of a majority of the Board of
Directors and approval of significant corporate transactions. As a result,
certain transactions may not be possible or may be delayed without the approval
of these stockholders, including:
- proxy contests or tender offers;
- mergers;
14
<PAGE> 16
- open market stock purchase programs or other purchases of our common
stock; and
- other transactions that could give our stockholders the opportunity to
realize a premium over the then prevailing market price of our common
stock.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in the pro forma net tangible book value of their shares of
approximately $7.22 per share from the initial public offering price. Investors
will experience further dilution upon the exercise of outstanding options or in
the event we issue additional common stock in connection with future
acquisitions or other financing needs.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify
forward-looking statements. These statements include, but are not limited to,
statements concerning:
- our ability to maintain or expand strategic relationships;
- our ability to achieve cost reductions and automate our manufacturing
processes;
- our ability to develop, introduce and gain market acceptance of new
products in a timely manner;
- the timing and availability of products under development;
- our ability to commercialize new products;
- our ability to provide sufficient customer support;
- the adequacy of our capital resources;
- our ability to address year 2000 issues adequately;
- future fluctuations in our operating expenses;
- our future capital expenditures and cash resources; and
- the use of the net proceeds from this offering.
Our actual results could differ materially from those expressed or implied
by these forward-looking statements as a result of various factors, including
the risk factors described above and elsewhere in this prospectus. We undertake
no obligation to update publicly any such forward-looking statements for any
reason, or to update the reasons actual results could differ materially from
those anticipated in such forward-looking statements, even if new information
becomes available in the future.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to ANSYS from the sale of the 2,500,000 shares of common
stock offered by ANSYS are estimated to be approximately $25.0 million ($28.9
million if the underwriters exercise their over-allotment option in full),
assuming an initial public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by ANSYS.
We intend to use approximately $2.3 million of the net proceeds of this
offering to redeem all of our outstanding Series A redeemable preferred stock
and to pay all cumulative dividends that have accrued on all of the outstanding
shares of our preferred stock through the closing of this offering. We also plan
to use approximately $1.9 million of the net proceeds of this offering to repay
our bank debt, which was used for tenant improvements associated with our
relocation to our new facilities in February 1998. Interest on the bank debt
accrues at a fixed rate of 8.42% and the bank debt matures on June 30, 2005.
We may use a portion of the net proceeds of this offering to acquire
businesses, products and technologies that are complementary to ours. As of the
date of this prospectus, we are not engaged in any agreements or negotiations
regarding any material acquisition. We intend to use the balance of the net
proceeds of this offering for general corporate purposes, including the funding
of working capital requirements, increasing research and development
expenditures and investing in automation equipment for our manufacturing
facility. We currently have an option to purchase our facility in February 2000
for an aggregate purchase price of $5.6 million. We may use a portion of the net
proceeds of this offering to purchase this facility.
Pending the use of the net proceeds of this offering, we intend to invest
the net proceeds in short-term, investment grade, interest bearing securities.
Other than as described above, we have no specific plans for the net proceeds of
this offering. Our management will have broad discretion concerning the
allocation and use of a significant portion of the net proceeds of this offering
which we receive. The principal purposes for conducting this offering are to
create a public market for our common stock and to increase our financial
flexibility and working capital.
The foregoing represents our best estimate of the allocation of the net
proceeds from the sale of the common stock offered by this prospectus, based
upon the current state of our business operations, our current plans for
expansion and the current economic and industry conditions. This estimate is
subject to reallocation among the categories stated above. The amount or timing
of actual expenditures will depend on numerous factors, including our
profitability, the availability of alternative financing, our business
development activities and competition.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to finance the growth and
development of our business. Therefore, we do not anticipate that we will
declare or pay any cash dividends on our common stock in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our
Board of Directors and will be dependent upon our financial condition, results
of operations, capital requirements, restrictions under any existing
indebtedness and such other factors as the Board of Directors deems relevant. In
addition, our bank debt contains restrictions on the payment of cash dividends
without the lender's prior written consent.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of ANSYS at December 31,
1998. The Pro Forma column gives effect to the payment of all undeclared
cumulative dividends on our preferred stock, the redemption of our outstanding
Series A redeemable preferred stock and the conversion of our outstanding Series
B convertible preferred stock into shares of our common stock. The Pro Forma As
Adjusted column additionally reflects the issuance of 2,500,000 shares of common
stock offered by this prospectus and the receipt and application of the
estimated net proceeds of this offering, assuming an initial public offering
price of $11.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses payable by ANSYS. This table should
be read in conjunction with our Consolidated Financial Statements and the Notes
thereto included elsewhere in this prospectus. See "Use of Proceeds" and
"Description of Capital Stock."
<TABLE>
<CAPTION>
DECEMBER 31, 1998(1)
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total long-term debt.......................... $1,894 $1,894 $ --
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000
shares authorized; 18,000 shares issued
and outstanding, actual; no shares issued
and outstanding, pro forma and pro forma
as adjusted.............................. -- -- --
Common stock, $.0001 par value; 30,000,000
shares authorized; 1,875,184 shares
issued and outstanding, actual; 5,516,512
shares issued and outstanding, pro forma;
8,016,512 shares issued and outstanding,
pro forma as adjusted.................... -- -- --
Additional paid-in capital.................. 1,834 1,434 26,459
Retained earnings........................... 5,830 3,970 3,970
------ ------ -------
Total stockholders' equity............... 7,664 5,404 30,429
------ ------ -------
Total capitalization................ $9,558 $7,298 $30,429
====== ====== =======
</TABLE>
- -------------------------
(1) Excludes 1,000,980 shares of common stock issuable upon the exercise of
options outstanding as of January 31, 1999, at a weighted average exercise
price of $1.65 per share. See "Management -- Stock Options" and Notes 9 and
11 of Notes to Consolidated Financial Statements.
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<PAGE> 19
DILUTION
The net tangible book value of ANSYS as of December 31, 1998 was
approximately $7.6 million, or $4.04 per share of common stock. Net tangible
book value per share represents the amount of ANSYS' total tangible assets less
total liabilities divided by the number of shares of common stock outstanding as
of December 31, 1998. After giving effect to the transactions described in Note
11 of Notes to Consolidated Financial Statements, the pro forma net tangible
book value of ANSYS as of December 31, 1998 was approximately $5.3 million, or
$0.96 per share of common stock. Without taking into account any other changes
in pro forma net tangible book value other than to give effect to the sale by
ANSYS of the 2,500,000 shares of common stock offered by this prospectus and the
receipt and application of the net proceeds of this offering, the pro forma net
tangible book value of ANSYS as of December 31, 1998, would have been $30.3
million, or $3.78 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $2.82 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$7.22 per share to investors purchasing common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...... $11.00
Net tangible book value per share as of December
31, 1998........................................ $ 4.04
Pro forma effect of the transactions referenced
above........................................... (3.08)
------
Pro forma net tangible book value per share as of
December 31, 1998............................... 0.96
Increase per share attributable to new investors... 2.82
------
Pro forma net tangible book value per share after
this offering...................................... 3.78
------
Dilution per share to new investors.................. $ 7.22
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the difference between the number of shares of common stock purchased from
ANSYS, the total consideration paid and the average price per share paid by
existing stockholders and by new investors, assuming an initial public offering
price of $11.00 per share and before deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by ANSYS:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders.............. 5,516,512 68.8% $ 1,850,000 6.3% $ 0.34
New investors.......... 2,500,000 31.2 27,500,000 93.7 11.00
--------- ----- ----------- -----
Total............. 8,016,512 100.0% $29,350,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options. As of January 31, 1999, options
to purchase 1,000,980 shares of our common stock were outstanding at a weighted
average exercise price of $1.65 per share. To the extent that these options are
exercised, new investors will experience further dilution. See
"Management -- Stock Option Plans" and Note 9 of Notes to Consolidated Financial
Statements.
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<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1997
and 1998 and for each of the years ended December 31, 1996, 1997 and 1998 was
derived from, and should be read in conjunction with, ANSYS' Consolidated
Financial Statements and Notes thereto audited by McGladrey & Pullen, LLP,
independent auditors, included elsewhere herein. Selected consolidated financial
data as of December 31, 1994, 1995 and 1996 and for the years ended December 31,
1994 and 1995 has been derived from ANSYS' unaudited consolidated financial
statements not included herein. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 6,589 $ 6,447 $ 8,126 $10,698 $18,964
Cost of goods sold......................... 2,001 2,269 3,058 5,099 9,703
------- ------- ------- ------- -------
Gross profit............................... 4,588 4,178 5,068 5,599 9,261
Operating expenses:
Research and development................. 663 561 434 773 700
Selling, general and administrative...... 2,454 2,803 2,770 2,876 4,049
------- ------- ------- ------- -------
Total operating expenses................. 3,117 3,364 3,204 3,649 4,749
------- ------- ------- ------- -------
Operating income........................... 1,471 814 1,864 1,950 4,512
Interest income (expense).................. (100) 20 55 59 (46)
------- ------- ------- ------- -------
Income before income taxes................. 1,371 834 1,919 2,009 4,466
Provision for income taxes................. 400 340 718 803 1,775
------- ------- ------- ------- -------
Net income................................. $ 971 $ 494 $ 1,201 $ 1,206 $ 2,691
======= ======= ======= ======= =======
Earnings per share(1):
Basic.................................... $ 0.34 $ 0.14 $ 0.46 $ 0.54 $ 1.33
Diluted.................................. $ 0.15 $ 0.08 $ 0.19 $ 0.20 $ 0.45
Weighted average shares outstanding(1):
Basic.................................... 2,307 2,307 2,230 1,901 1,890
Diluted.................................. 6,039 6,076 6,057 5,864 5,942
Pro forma earnings per share(1):
Basic.................................... $ 0.47
Diluted.................................. $ 0.44
Pro forma weighted average shares
outstanding(1):
Basic.................................... 5,737
Diluted.................................. 6,147
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
DECEMBER 31, ------------------------------------------
----------------------------------------------------- PRO PRO FORMA
1994 1995 1996 1997 ACTUAL FORMA(2) AS ADJUSTED(3)
----------- ----------- ----------- ----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $1,535 $1,247 $1,784 $1,515 $ 3,176 $ 916 $24,047
Working capital........... 1,553 2,242 3,120 3,002 5,053 2,793 26,148
Total assets.............. 4,041 3,668 4,855 6,893 11,891 9,631 32,762
Total long-term debt...... -- -- -- -- 1,894 1,894 --
Total stockholders'
equity.................. 2,609 3,083 3,973 4,957 7,664 5,404 30,429
</TABLE>
- -------------------------
(1) See Notes 10 and 11 of Notes to Consolidated Financial Statements for
information regarding the determination of per share calculations.
(2) Pro forma to give effect to: (a) the payment of all undeclared cumulative
dividends on our preferred stock; (b) the redemption of our outstanding
Series A redeemable preferred stock; and (c) the conversion of our
outstanding Series B convertible preferred stock, all of which will occur
upon consummation of this offering.
(3) Pro forma as described in footnote (2) and as adjusted to give effect to the
receipt and application of the estimated net proceeds from the sale of the
2,500,000 shares offered by this prospectus. See "Use of Proceeds."
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND THE
NOTES RELATING TO THESE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
ANSYS was organized in 1988 to acquire the Analytical Systems division of
Marion Laboratories, Inc. Since our inception, we have financed our working
capital requirements primarily from cash provided by operations. In 1995, we
completed the repayment of indebtedness incurred in connection with the
acquisition from Marion Laboratories.
We commenced our collaborative relationship with Roche in 1992, and began
developing products for the on-site drug testing markets. We believe on-site
testing represents the principal opportunity for growth in the drug testing
market. In 1991, we introduced our first on-site product, ON-SITE Alcohol, a
self-contained, disposable, pocket-sized test for the detection of ethanol in
urine or saliva. TesTcup, introduced in 1995, and TesTstik, introduced in 1997,
were developed in collaboration with Roche as disposable, rapid screening tests
for certain drugs of abuse in urine. We manufacture both of these products for
Roche under exclusive agreements. During 1996, 1997 and 1998, our sales of
on-site diagnostic products (including our proprietary product, ON-SITE Alcohol,
which is also distributed by Roche) accounted for 17%, 42% and 65% of our total
net sales, respectively. TOXI-LAB, our first laboratory-based drug testing
product, was introduced by our predecessor in 1978. TOXI-LAB is a broad spectrum
drug screening system that uses our proprietary membranes.
Roche paid us development fees in the aggregate amount of $96,000 in 1993
in connection with the development of the initial TesTcup product and an
aggregate of $60,000 in 1996 and $20,000 in 1997, in connection with the
development of the initial TesTstik product. We accounted for these fees as
development revenue. No further development fees are due under our agreements
with Roche. While we perform substantially all of our own research and
development, we have, from time to time, engaged third parties to conduct
discrete research and development projects.
We introduced SPEC, our first specialty laboratory and research product, in
1990. In addition, we began manufacturing nucleic acid isolation products for
Promega in 1996. Since 1997, we have also been developing rapid nucleic acid
separation and detection products in conjunction with Molecular Innovations.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain income statement items expressed as
a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
----- ----- -----
Gross profit........................................... 62.3 52.3 48.8
Operating expenses:
Research and development............................. 5.3 7.2 3.7
Selling, general and administrative.................. 34.1 26.9 21.3
Total operating expenses............................... 39.4 34.1 25.0
Operating income....................................... 22.9 18.2 23.8
Interest income (expense).............................. 0.7 0.6 (0.2)
Income before income taxes............................. 23.6 18.8 23.6
Provision for income taxes............................. 8.8 7.5 9.4
Net income............................................. 14.8 11.3 14.2
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales for the year ended December 31, 1998 were $19.0
million compared to $10.7 million for 1997, representing an increase of 77.3%.
The increase in net sales of $8.3 million was predominately attributable to unit
volume increases in on-site products, primarily higher unit sales of TesTstik,
which was introduced in October 1997, and to a lesser extent, due to increased
unit sales of TesTcup.
GROSS PROFIT. Gross profit for the year ended December 31, 1998 was $9.3
million compared to $5.6 million for 1997, representing an increase of 65.4%. As
a percentage of net sales, gross profit decreased to 48.8% in the year ended
December 31, 1998 compared to 52.3% for 1997. The decrease as a percentage of
net sales reflects an increasing percentage of total net sales of on-site
products, which generally carry lower gross margins than our laboratory
products.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
primarily consists of payroll and related expenses, material expenses and
facility costs associated with our development of new technologies and products.
Research and development expense for the year ended December 31, 1998 was
$700,000 compared to $773,000 for 1997, representing a decrease of 9.4%. As a
percentage of net sales, research and development expense decreased to 3.7% for
the year ended December 31, 1998 from 7.2% for 1997. We anticipate that research
and development expense will increase significantly in future periods, both in
dollar amount and as a percentage of net sales, as we begin to implement a more
active product development strategy. We anticipate that initial increases in
research and development expense will consist primarily of increased labor costs
and supplies to enhance and expand our current product lines. Substantially all
of the anticipated increases in research and development expense are at
management's discretion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense primarily consists of compensation and related expenses
for sales and marketing, technical support, executive, accounting and
administrative personnel, travel expenses, advertising and product promotion
costs, insurance costs, facilities costs, and accounting, legal and other
general corporate expenses. Selling, general and administrative expense for
21
<PAGE> 23
the year ended December 31, 1998 was $4.0 million compared to $2.9 million for
1997, representing an increase of 40.8%. The increase in selling, general and
administrative expense was due to increased compensation expense associated with
the growth of our workforce. As a percentage of net sales, selling, general and
administrative expense decreased to 21.3% for the year ended December 31, 1998
from 26.9% for 1997. The decrease as a percentage of net sales was due to the
effective use of our infrastructure to support higher volumes of net sales, the
realization of improved operating efficiencies and proportionately lower selling
expenses associated with increased sales of products marketed by Roche.
INTEREST INCOME (EXPENSE). Interest expense for the year ended December 31,
1998 was $46,000 compared to interest income of $59,000 for 1997, reflecting our
increased borrowings during 1998 for the purchase of equipment and leasehold
improvements in our new corporate headquarters and manufacturing facility, in
which we occupied in February 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes for the year ended
December 31, 1998 was $1.8 million compared to $803,000 for 1997. The increase
in provision for income taxes was due to our increased profitability.
NET INCOME. Net income for the year ended December 31, 1998 was $2.7
million compared to $1.2 million for 1997, representing an increase of 123.1%.
As a percentage of net sales, net income increased to 14.2% for the year ended
December 31, 1998 from 11.3% for 1997.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales for the year ended December 31, 1997 were $10.7
million compared to $8.1 million for 1996, representing an increase of 31.7%.
The increase in net sales of $2.6 million was predominantly attributable to unit
volume increases in on-site products, primarily associated with higher unit
sales of TesTcup and initial sales of TesTstik, which was introduced in October
1997.
GROSS PROFIT. Gross profit for the year ended December 31, 1997 was $5.6
million compared to $5.1 million for 1996, representing an increase of 10.5%. As
a percentage of net sales, gross profit decreased to 52.3% in the year ended
December 31, 1997 compared to 62.3% for 1996. The decrease as a percentage of
net sales reflects an increasing percentage of total net sales of on-site
products, which generally carry lower gross margins than our laboratory
products. The decrease as a percentage of net sales also reflects certain raw
material and production process problems that occurred in the second quarter of
1997. These problems related to greater than expected variability in our
nitrocellulose membranes for our TesTcup and TesTstik product lines, as well as
production problems associated with the early ramp-up of the TesTcup
manufacturing process. Although the quality of nitrocellulose membranes is
inherently inconsistent, we implemented quality control procedures in 1997,
which have enabled us to detect these inconsistencies earlier in the
manufacturing process and to implement any necessary adjustments.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for the
year ended December 31, 1997 was $773,000 compared to $434,000 for 1996,
representing an increase of 78.1%. As a percentage of net sales, research and
development expense increased to 7.2% for the year ended December 31, 1997 from
5.3% for 1996. The increase
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<PAGE> 24
in research and development expenses was due to expense associated with the
development of the TesTstik product that was introduced in October 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the year ended December 31, 1997 was $2.9 million
compared to $2.8 million for 1996, representing an increase of 3.8%. As a
percentage of net sales, selling, general and administrative expense decreased
to 26.9% for the year ended December 31, 1997 from 34.1% for 1996. The decrease
as a percentage of net sales was due to the effective use of our infrastructure
to support higher volumes of net sales, the realization of improved operating
efficiencies, and proportionately lower selling expenses associated with
increased sales of products marketed by Roche.
INTEREST INCOME (EXPENSE). Interest income for the year ended December 31,
1997 was $59,000 compared to $55,000 for 1996, representing an increase of 7.3%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the year ended
December 31, 1997 was $803,000 compared to $718,000 for 1996. The increase in
the provision for income taxes was due to our increased profitability.
NET INCOME. Net income for each of the years ended December 31, 1997 and
1996 was $1.2 million. As a percentage of net sales, net income decreased to
11.3% for the year ended December 31, 1997 from 14.8% for 1996.
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<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present quarterly results of operations, in dollar
amounts and as a percentage of net sales, for the last eight quarters, that have
been derived from the consolidated financial statements of ANSYS. The
information has been prepared by us on a basis consistent with our audited
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the information for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
1997 1998
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................... $2,400 $2,395 $2,551 $3,352 $4,427 $4,597 $4,883 $5,057
Gross profit................ 1,426 1,087 1,356 1,730 2,263 2,307 2,471 2,220
Operating expenses:
Research and
development............ 173 178 215 207 174 163 179 184
Selling, general and
administrative......... 732 705 694 745 902 991 1,216 940
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 905 883 909 952 1,076 1,154 1,395 1,124
------ ------ ------ ------ ------ ------ ------ ------
Operating income............ 521 204 447 778 1,187 1,153 1,076 1,096
Interest income (expense)... 18 26 7 8 (4) (14) (14) (14)
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes..................... 539 230 454 786 1,183 1,139 1,062 1,082
Provision for income
taxes..................... 214 99 181 309 467 482 417 409
------ ------ ------ ------ ------ ------ ------ ------
Net income.................. $ 325 $ 131 $ 273 $ 477 $ 716 $ 657 $ 645 $ 673
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share:
Basic..................... $ 0.14 $ 0.05 $ 0.12 $ 0.23 $ 0.36 $ 0.32 $ 0.32 $ 0.33
Diluted................... $ 0.05 $ 0.02 $ 0.05 $ 0.08 $ 0.12 $ 0.11 $ 0.10 $ 0.11
AS A PERCENTAGE OF NET SALES:
Net sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................ 59.4 45.4 53.2 51.6 51.1 50.2 50.6 43.9
Operating expenses:
Research and
development............ 7.2 7.4 8.4 6.2 3.9 3.5 3.7 3.6
Selling, general and
administrative......... 30.5 29.5 27.3 22.2 20.4 21.6 24.9 18.6
Total operating
expenses............. 37.7 36.9 35.7 28.4 24.3 25.1 28.6 22.2
Operating income............ 21.7 8.5 17.5 23.2 26.8 25.1 22.0 21.7
Interest income (expense)... 0.8 1.1 0.3 0.2 (0.1) (0.3) (0.3) (0.3)
Income before income
taxes..................... 22.5 9.6 17.8 23.4 26.7 24.8 21.7 21.4
Provision for income
taxes..................... 9.0 4.1 7.1 9.2 10.5 10.5 8.5 8.1
Net income.................. 13.5 5.5 10.7 14.2 16.2 14.3 13.2 13.3
</TABLE>
Our quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future based on a number of factors, not all of
which are in our control. For example, during the second quarter of 1997, we
experienced a decline in gross profit largely as a result of raw material and
production process problems. See "Risk Factors -- The Failure of Sole Source
Suppliers to Provide Key Raw Materials Could Adversely Affect the Production of
Our Products and Could Harm Our Customer Relationships" and "Risk
Factors -- Fluctuations In Our Quarterly Operating Results Could Adversely
Affect the Price of Our Common Stock."
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<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity for ANSYS has been cash generated from
operations and borrowings under our revolving credit facility and secured term
note payable.
Cash flows from operating activities were $1.1 million, $625,000 and $3.1
million for the years ended December 31, 1996, 1997 and 1998, respectively. Our
accounts receivable and inventory have increased in each of 1996, 1997 and 1998,
primarily due to increased product sales. Cash inflows from net income plus
noncash expenses and the effect of increased accounts payable have been adequate
to fund this growth. During the year ended December 31, 1998, expenditures for
equipment and leasehold improvements at our new manufacturing and corporate
headquarters facility, where we commenced occupancy in February 1998, were $2.4
million. Expenditures for leasehold improvements were financed by a seven-year
term loan in the principal amount of $2.0 million, which bears interest at the
rate of 8.42% per annum and is secured by our accounts receivable, inventories,
equipment and intangible assets. We also have a revolving line of credit of $1.0
million to provide for short-term financing. At December 31, 1998, we were in
violation of one of the debt covenants under the line of credit which relates to
the stock redemptions effected by the Company. However, this violation has been
subsequently waived by the lender. We had no outstanding balance under this line
of credit at December 31, 1998. Our current line of credit expires in May 1999,
and we are currently in discussions with this lender to extend this line of
credit for an additional year. It is possible that we may not be able to extend
this line of credit on terms acceptable to us, or at all.
Working capital at December 31, 1998 amounted to $5.1 million, compared to
$3.0 million at December 31, 1997. Cash and cash equivalents amounted to $3.2
million at December 31, 1998, compared to $1.5 million at December 31, 1997.
These increases were primarily due to the $3.1 million of cash provided by
operating activities in 1998.
Our primary short-term capital requirements are for increasing the level of
automation of our production lines and increased research and development
activity. The aggregate maturities on our term loan are expected to be $224,000
in 1999 and $245,000 in 2000. We currently plan to spend approximately $1.0
million annually over the next several years for the expansion and development
of our manufacturing capabilities. We also expect our research and development
expenses to increase significantly over the next several years as we expand our
product development activity. Our future liquidity and capital funding
requirements will depend on numerous factors. We believe that the net proceeds
of this offering, together with existing cash and cash generated from
operations, will be sufficient to satisfy our capital requirements for at least
the next twelve months. To the extent our capital requirements are materially
different from those planned, we may seek to raise additional funds through the
issuance of equity or debt securities. It is possible that additional funds may
not be available on terms acceptable to us, or at all. See "Risk Factors -- We
May Need to Raise Additional Capital, Which May Not Be Available on Acceptable
Terms, or at All."
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes.
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<PAGE> 27
We do not engage in trading activities, do not have significant foreign
currency transactions and do not utilize derivative financial instruments. At
December 31, 1998, our exposure to market risk is primarily related to our bank
debt and our investment in Molecular Innovations, an unrelated company.
Our bank debt consists of a term note and a revolving line of credit. The
term loan requires monthly installments of $32,000 and bears a fixed interest
rate. If the rate of interest on this note differed from the fair value rate of
interest by 1%, based on the balance outstanding as of December 31, 1998 of
$1,894,000, the fair value of the note payable would be approximately
$1,840,000. Borrowings under the line of credit bear interest at a variable rate
based on prime; however, there was no balance outstanding at December 31, 1998.
Accordingly, a change in interest rates would not have any effect on our
operating results unless we borrow under this line of credit. See Note 4 of
Notes to Consolidated Financial Statements.
As of December 31, 1998, our investment in Molecular Innovations totaled
$125,000, which is considered to be representative of the fair value. If the
value of the unrelated company were to decline, we could experience a loss of
this investment.
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, as well as other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000. We are continuing to
assess the impact of the year 2000 issue. While our products do not include any
software or embedded computer circuitry that could be impacted by these issues,
we have identified two key areas of our business that may be affected by the
year 2000 issue:
Internal Infrastructure. We rely on our systems and applications in
operating and monitoring all major aspects of our business, including our
financial reporting, information and manufacturing systems. The year 2000 issue
could impact all of the systems and computer applications used in all aspects of
our business, including our general and subsidiary ledgers, networking and
telecommunication systems, production, planning and scheduling, manufacturing
equipment and customer service. While we believe our internal systems are year
2000 compliant, we will not know the full extent of the impact of those issues
until the turn of the century. Any disruption in our internal infrastructure
could cause shipment errors, make it more difficult to obtain certain raw
materials or to forecast adequately, cause business interruptions, harm our
customer relationships, and in general, adversely affect our business. In 1997,
we developed a three-phase program for year 2000 internal infrastructure systems
compliance. Phase I identified those systems with which we have exposure to the
year 2000 issue. Phase II involved the development and implementation of action
plans to be year 2000 compliant. Phase III, which is expected to be completed by
mid-1999, involves the final testing of each major area of exposure to ensure
compliance.
In accordance with Phase I of this program, we have conducted an internal
review of all of our systems and have contacted all software suppliers to
determine our major areas of exposure to the year 2000 issue. In our financial
reporting, information and manufacturing systems area, a number of applications
have been identified as being year
26
<PAGE> 28
2000 compliant due to their recent implementation. We believe that our financial
reporting, information and manufacturing systems are year 2000 compliant.
Third Party Relationships. We also rely, directly and indirectly, on the
external systems of our customers, suppliers, creditors and financial
organizations, both domestic and international, for the accurate exchange of
data. Even if the year 2000 issue does not affect our internal infrastructure,
we could be affected through disruptions in the operations of the enterprises
with which we interact. Despite our efforts to address the impact of the year
2000 issue on our own internal systems, the impact of the year 2000 issue on
other enterprises could adversely affect our business.
We are currently in the process of contacting most of the entities with
which we have a material third party relationship. To date, those who have
responded, including Roche, have represented to us that they either are or
intend to be year 2000 compliant by the year 2000. We have not yet determined
what costs may be incurred in connection with our third party relationships, but
such costs could be substantial.
To date, we believe our expenses to address the year 2000 issue have
totaled less than $100,000. We believe there will be no additional material
expenditures necessary to replace our core financial, reporting and
manufacturing systems. We currently have no contingency plans to address any
unforeseen year 2000 problems. We believe our most reasonably likely worse case
scenario for our internal infrastructure would be that our business would be
disrupted, and all of our accounting, customer service, manufacturing,
purchasing and production planning processes would have to revert back to the
prior manual systems to record transactions, causing delays and significant time
investments. Our customers and suppliers may require additional attention to
meet our schedules. Our most reasonably likely worse case scenario for our third
party relationships with our suppliers and vendors could be that our vendors
will not be able to supply our raw materials, which would prohibit us from
shipping product and recognizing revenue, or our customers will not be able to
pay the amounts due us in a timely manner. Our business could be adversely
affected by disruptions in our operations if either of our internal
infrastructure or that of our key suppliers and customers is not year 2000
compliant. Any such disruption could cause shipment errors, harm our customer
relationships and cause serious business interruptions and production delays. We
could also be affected by general widespread problems or economic crisis
resulting from noncompliant year 2000 systems.
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<PAGE> 29
BUSINESS
GENERAL
ANSYS develops, manufactures and markets drug testing products for both
on-site and laboratory settings, as well as specialty laboratory and research
products. Our on-site drug testing products are self-contained, easy to use,
disposable tests which detect the presence of drugs of abuse and alcohol, and
provide highly accurate results in less than five minutes. These products are
used in a variety of applications, including pre-employment screening, random
employee testing, government mandated testing and parole and probation
monitoring, as well as in other applications that require rapid, accurate
results. Our laboratory-based drug testing product line, sold under the name
TOXI-LAB, can accurately detect more than 500 drugs and drug byproducts in
urine, blood, tissue and other specimens. TOXI-LAB is primarily used by hospital
and forensic laboratories.
ANSYS also develops, manufactures and markets specialty laboratory and
research products. Our SPEC products are used for a variety of analytical
applications, including drugs of abuse confirmation testing, therapeutic drug
monitoring and sample preparation in drug discovery and drug metabolism studies.
Our nucleic acid separation and detection products are used by clinical and
environmental testing laboratories, pharmaceutical and biotechnology companies
and DNA testing and research organizations.
STRATEGY
We seek to strengthen our competitive position in the drug testing and
specialty laboratory and research markets by pursuing the following strategies:
EMPLOY MARKET DRIVEN PRODUCT DEVELOPMENT. Our product development strategy
is to adapt and enhance our diagnostic testing technologies, our engineering,
production and chemistry capabilities and our product formats in response to
customer demands. To accomplish this, we monitor existing markets, maintain a
continuing dialogue with our current customers through workshops and technical
consultation hotlines, and assist our customers in identifying new needs as they
develop.
FOCUS ON STRATEGIC RELATIONSHIPS. We seek to enhance our present
relationships with companies such as Roche and Molecular Innovations, as well as
to develop new strategic relationships. We have collaborated with Roche for more
than six years, and continue to work with Roche both contractually and
informally in developing new products, such as TesTcup ER, for the drug testing
markets. In addition, we have formed a strategic relationship with Molecular
Innovations to develop rapid nucleic acid separation and detection products. We
believe we are in a position to attract and develop additional strategic
relationships because of our innovative design and development expertise and
efficient manufacturing capability. We intend to target licensing and
distribution partners whose strong sales and marketing capabilities will enable
them to promote and sell our products more effectively.
ACCELERATE DEVELOPMENT OF NEW DRUG TESTING PRODUCTS. We emphasize
innovation in the design and development of products that address the needs of
our target markets. We intend to accelerate new drug testing product development
by hiring additional scientific and technical personnel, investing additional
resources in research and development, and pursuing joint research and
development arrangements with companies that offer complementary resources.
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<PAGE> 30
INCREASE EMPHASIS ON SPECIALTY LABORATORY AND RESEARCH PRODUCTS. We intend
to focus a significant portion of our product development effort on expanding
our specialty laboratory and research product line. We believe a substantial
market exists for these products in a variety of diagnostic applications. We
plan to develop additional nucleic acid purification and separation products, as
well as complete kits for performing the laboratory work required to isolate and
purify nucleic acids. We also plan to expand our sample preparation product line
to accommodate a wider variety of automated sample processing equipment.
ACHIEVE MANUFACTURING EFFICIENCIES THROUGH AUTOMATION. We are currently
incorporating sophisticated automation equipment into our manufacturing facility
in order to automate certain portions of our production processes. We are
continually evaluating our manufacturing processes to identify additional
automation opportunities. By installing custom-designed, state of the art
manufacturing systems, we believe we can further enhance productivity and
improve cost-efficiency while maintaining our high level of product quality.
PURSUE STRATEGIC ACQUISITIONS. We intend to examine opportunities to
acquire, license or enter into supply arrangements to obtain innovative
diagnostic testing technologies, product formats and products that complement
our existing operations and address the needs of our target customer base. We
regularly identify and review strategic acquisition opportunities through our
industry contacts and recognized position in the industry, as well as through
dialogue with our strategic partners.
THE DRUG TESTING MARKET
According to an independent research company, the market for drugs of abuse
testing products in the United States was approximately $628 million in 1996,
and will increase to approximately $900 million by 2002. Drug testing has
historically consisted primarily of urine-based screening performed in reference
laboratories. Specimens are collected and sent to these laboratories, where
skilled technicians process the specimens and document test procedures and
results. Laboratory testing is typically carried out on sophisticated analyzers,
which use automated liquid handling mechanisms for the addition of chemical
solutions and rely on absorption or fluorescence of light, or other detection
methods to determine the presence and amount of substances in the specimen.
Laboratory instruments are generally capable of detecting multiple
substances from a large number of specimens, and provide accurate and highly
sensitive test results. Laboratory testing, however, has several limitations.
Laboratory instruments are generally large, complex and costly. They require
high specimen throughput to justify the required investment in equipment,
training and staffing, as well as the costs required to operate and support
these instruments. Generally, the turnaround time for test results in reference
laboratories is measured in hours and days. In addition, laboratory testing in
which a large number of samples must be handled creates special challenges in
meeting chain of custody requirements. Chain of custody refers to the
documentation of the transportation and handling of the specimen from the time
of collection until the specimen is analyzed in a laboratory and ultimately
discarded. Chain of custody requirements are primarily designed to ensure that a
specimen is correctly associated with a given individual and has not been
adulterated. All specimens must be accompanied by chain of custody forms and be
in specially sealed, tamper-evident containers.
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<PAGE> 31
The limitations of laboratory testing, combined with technological advances
permitting accurate testing outside the laboratory, have resulted in a
continuing shift to simple, rapid, self-contained, disposable diagnostic tests
that can be performed in a variety of on-site settings. On-site tests have been
developed in a number of formats, including lateral flow and flow-through
membrane devices, dipsticks and test tubes. These tests are intended to generate
accurate results that provide either a yes/no answer or a quantitative result,
primarily through a color change. When an on-site drug test indicates the
presence of a drug, the samples are routinely subjected to confirmation testing,
typically performed in an off-site laboratory. We believe that the on-site
segment of the drug testing market has experienced substantially higher growth
in recent years than the traditional laboratory-based market segment. While we
believe that laboratory testing will continue to play an important role in drug
testing, particularly confirmation testing, we also believe that on-site testing
will be increasingly used in the following applications:
WORKPLACE DRUG TESTING. Drugs of abuse testing in the workplace includes
pre-employment screening, random employee testing and government mandated
testing. According to the United States Substance Abuse Mental Health Services
Administration, over 13 million people in the United States in 1996 were illicit
drug users. The U.S. Department of Labor estimates that over 70% of illegal drug
users are employed. In addition, the Society for Human Resources Management
estimates that approximately 95% of Fortune 500 companies conduct pre-employment
drug screening. Corporations are using drug screening in the workplace with the
intention of reducing workers' compensation claims, absenteeism, employee
turnover, accidents, health care costs and generally creating a safer workplace.
Drugs of abuse testing in the workplace has experienced significant growth in
recent years due to various factors, including: (1) government regulations which
mandate testing in certain job categories; (2) the Federal Drug-Free Workplace
Act of 1988; (3) court decisions recognizing a private sector employer's right
to test both employees and job applicants; (4) efforts by insurance carriers to
reduce accident liability and control health care costs; and (5) corporate
requirements that vendors and contractors certify that their workplaces are drug
free.
Historically, workplace drug testing has been performed primarily in
reference laboratories or hospital-based laboratories. Recently, however, an
increasing portion of workplace drug testing has been performed using tests that
can be easily administered on-site. The SmithKline Beecham Drug Testing Index
indicated that only 5% of the nearly five million workplace drug tests performed
in 1997 by SmithKline's clinical laboratories were positive for illegal
substances. On-site drug tests are particularly valuable in settings like this
because they enable employers to permit the large number of employees whose test
results are negative to enter or return to the workforce without undue delay.
GOVERNMENT MANDATED DRUG TESTING. Several government agencies screen their
workers for drugs of abuse, while others mandate drug testing of certain persons
subject to monitoring. For example, the United States Department of
Transportation has established mandatory guidelines for random drug testing of
workers involved in the transportation industry, including airline pilots, truck
drivers and rail employees. The Department of Transportation's regulations
currently require 50% of its regulated workers, or approximately four million
persons, to be randomly tested for drugs each year. State parole and probation
agencies test subjects for suspected drug and alcohol abuse if there is
behavioral evidence of abuse. According to the U.S. Department of Justice,
approximately 3.8 million people are on parole or probation in the United
States, and one-third of them are subject to mandatory drug testing.
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<PAGE> 32
Other government agencies have implemented extensive pre-employment drug
screening programs. For example, the United States Postal Service has
implemented a pilot drug screening program using TesTcup that will require
approximately 250,000 on-site drug tests. The United States military also
routinely performs drug screens on all recruits, as well as random tests and
testing for cause.
HOSPITAL/EMERGENCY ROOM DRUG TESTING. Drug abuse plays a role in many
emergency room visits, either as a primary cause such as an overdose, or as a
contributing factor such as in an accident. When an emergency room physician
receives a patient with symptoms that may or may not be drug related, that
physician must quickly determine the presence of drugs in order to prescribe the
correct treatment. Currently, most emergency room drugs of abuse testing
procedures are performed away from the patient at the hospital laboratory, a
process which can take several hours to produce a result. Tests have also been
developed for on-site use in the emergency room, but most of these tests require
multiple steps, are time-sensitive and are cumbersome to use. We believe that a
diagnostic test that could be easily performed by nontechnical personnel in
order to rapidly diagnose drugs of abuse in the emergency room would be of
substantial benefit in determining the appropriate course of treatment.
THERAPEUTIC DRUG MONITORING. We believe that a significant opportunity
exists for rapid, easy to use on-site diagnostic products in therapeutic drug
monitoring, an area also traditionally addressed by laboratory testing products.
Many therapeutic drugs require complicated dosing regimens in order for the drug
to be effective. The failure of patients to take their medications as prescribed
could lead physicians to improperly prescribe treatment in an effort to achieve
the desired effect. As a result, physicians may desire to periodically monitor
their patients to validate compliance with prescribed treatment. Currently, most
physicians monitor therapeutic drugs by sending a urine or blood sample to a
central laboratory for analysis. This process can be time consuming and can add
significant cost to the overall treatment. Thus, physicians may be unable to
employ monitoring as frequently as they might desire. The ability to rapidly
monitor the presence of therapeutic drugs or their byproducts while the patient
is in the physician's office would provide the physician with real-time
information that could improve patient treatment.
OTHER DRUG TESTING APPLICATIONS. We believe there is a growing demand for
rapid, accurate, easy to use drug testing products in drug treatment centers. We
also believe there is a substantial over-the-counter market for rapid drug
screening devices that will be used by small employers, academic institutions,
private counselors, physicians and concerned parents.
THE SPECIALTY LABORATORY AND RESEARCH PRODUCTS MARKET
Clinical and environmental testing laboratories, pharmaceutical and
biotechnology companies and DNA testing and research organizations frequently
conduct research on samples that must be isolated and purified prior to
analysis. This isolation and purification process is known as sample
preparation. Sample preparation is important in these specialty laboratory and
research settings because impurities in a sample can cause test results that are
inaccurate, unreliable or cannot be reproduced. Historically, sample preparation
has been a labor and time-intensive process. In recent years, however,
traditional sample preparation methods have begun to be replaced with reliable,
fast and high quality technologies and products. Two important segments of the
specialty laboratory and research products market are solid phase extraction and
nucleic acid separation.
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<PAGE> 33
SOLID PHASE EXTRACTION. Sample preparation products are used to separate
both solid and liquid components using various techniques including filtration,
chromatography (chemical separation), centrifugation (physical separation by
rotational force), solid phase extraction and liquid extraction techniques.
Solid phase extraction is a technique for removal of a target substance from a
liquid onto a solid surface and the subsequent release of the substance for
analysis. Solid phase extraction techniques are employed for sample preparation
in drug discovery and drug metabolism studies in the pharmaceutical and clinical
laboratory industries. Biomedical laboratories use solid phase extraction to
prepare samples for drugs of abuse confirmation, therapeutic drug monitoring and
other applications. Environmental testing laboratories also use solid phase
extraction for sample preparation of drinking water and waste water analysis
under the guidelines of the EPA. Biotechnology laboratories also use solid phase
extraction for isolating DNA from biological matrices.
NUCLEIC ACID SEPARATION. Nucleic acid separation involves isolating nucleic
acids from other soluble contaminants. Nucleic acids, including DNA and RNA, are
the fundamental regulatory molecules of life. Over the past 20 years, an
increased understanding of nucleic acid structure and function has led to the
use of nucleic acids in a broad array of therapeutic and diagnostic
applications. All of these applications require highly purified nucleic acids.
Pure nucleic acids are essential for reliability and reproducibility of
molecular biology experiments in both academic and industrial research
laboratories, as well as for the accuracy of results in nucleic acid-based
clinical diagnostics. Most nucleic acid separation and purification occurs in
laboratories using specialized equipment. In addition, because the results of
nucleic acid testing can be compromised due to contamination of the testing
environment, and because handling requirements must be strictly followed,
individuals specially trained in molecular biology typically conduct these
procedures. In addition to a need for improved nucleic acid separation products
in the laboratory, we believe there are a number of potential applications for
on-site nucleic acid testing. For example, on-site nucleic acid tests could be
used to detect microorganisms in drinking water and other liquids, or viral or
bacterial contamination in environmental samples.
ANSYS PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
DRUG TESTING PRODUCTS
We develop products that we believe address many of the limitations of
traditional laboratory and on-site testing products. We have applied our core
competencies in product design, engineering and manufacturing to bring to market
products for drugs of abuse and alcohol testing and are developing new products
for these applications as well as for new applications such as therapeutic drug
monitoring. We intend to continue to develop, manufacture and sell products
which are designed to meet the changing needs of the diagnostic testing markets
and offer some or all of the following attributes:
- EASE OF USE. TesTcup, TesTstik, ON-SITE Alcohol and the on-site products
under development are designed to be easy to use, read and interpret.
These tests are portable, self-contained and disposable, and eliminate
the need to handle the specimen and/or mix and dispense chemical
solutions. Test results from these products are provided in a
"positive/negative" color change format that is designed to be clear and
easy to read and interpret. In addition, TesTcup features specimen
collection and testing in a single, integrated device, which effectively
addresses strict chain of custody requirements.
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- IMMEDIATE RESULTS. TesTcup, TesTstik, ON-SITE Alcohol and the on-site
products under development are designed to offer complete test results in
less than five minutes, allowing employers, government testing
administrators, health care professionals and other customers to take
appropriate action immediately. By contrast, processing of tests in
reference or hospital laboratories can require hours or days to obtain
results. In addition, our products do not require refrigeration and
remain stable at room temperature, making them immediately available for
use. TesTcup ER, a version of TesTcup designed specifically for the
hospital emergency room, is intended to be a cost-effective means to
shorten time to medical intervention and to minimize the need for
additional patient follow-up.
- ANALYTICAL ACCURACY. The on-site products developed by ANSYS are
designed to provide accurate and reproducible results, comparable to
results obtained in a reference or hospital laboratory using complex
laboratory analyzers. In addition, our TOXI-LAB system is designed to
provide high analytical accuracy and identifying power similar to
instrument based methods.
- MULTI-SUBSTANCE TESTING CAPABILITY. TesTcup and TOXI-LAB, as well as
certain other products under development, are designed to measure
multiple target substances simultaneously without sacrificing the quality
of the individual analysis. Our products that test for multiple
substances can identify the presence of one substance while
simultaneously indicating the absence of other substances. We believe
that when multiple substance screening is required, simultaneous
detection capability provides significant time and cost savings. TesTcup
offers simultaneous testing for amphetamines, cocaine, morphine, THC and
PCP. TesTcup ER is designed to simultaneously detect the presence of
amphetamines, cocaine, morphine, barbiturates and benzodiazepines. The
TOXI-LAB system has the ability to detect over 500 drugs and drug
byproducts.
- QUALITY. We endeavor to maintain high standards of quality in all aspects
of our operations. All of the products developed by ANSYS incorporate
high quality biological and chemical solutions. Our manufacturing
facility is designed to comply with Quality System Regulations and other
government guidelines. In addition, we employ extensive quality control
procedures at all stages of the manufacturing process, from receipt of
raw materials to shipping of finished products. We continuously monitor
compliance with our quality standards in order to ensure product
reliability.
- COST-EFFECTIVENESS. TesTcup, TesTstik, ON-SITE Alcohol and the on-site
products under development are designed to eliminate the need for highly
trained technicians and significant outlays for laboratory equipment,
making them cost-effective alternatives to laboratory analyzers. Unlike
automated sample processing instruments, TOXI-LAB does not require
significant capital expenditures.
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Our drug testing products and products under development include the
following:
<TABLE>
- -------------------------------------------------------------------------------
OUR DRUG TESTING PRODUCTS
- -------------------------------------------------------------------------------
PRODUCT
OWNERSHIP
PRODUCT DESCRIPTION/USE STATUS RIGHTS
- ----------------- --------------------------------- ------------ -----------
<S> <C> <C> <C>
TesTcup 4/5 Collection and testing device for Commercial Roche
simultaneous screening of
multiple drugs of abuse:
amphetamines, cocaine, morphine,
THC (marijuana metabolite) and
PCP (TesTcup5 version only)
TesTcup ER Hospital emergency room version Commercial Roche
of TesTcup configured to
simultaneously screen for
amphetamines, cocaine, morphine,
barbiturates and benzodiazepines
TesTcup 5 M2K Version of TesTcup 5 which has a Launch Roche
higher detection level for
morphine.
TesTstik Family of products in a dipstick
format that each test for a
single abused drug:
- Amphetamines, cocaine, Commercial Roche
morphine, THC, PCP, Barbiturates,
benzodiazepines
TesTstik 2 Version of TesTstik configured to Prototype Roche
test for two substances (cocaine Stage
and THC) simultaneously
TesTstik 3 Version of TesTstik configured to Prototype Roche
test for three substances Stage
(cocaine, THC and either
amphetamines or morphine)
simultaneously
ON-SITE Alcohol Pocket-sized device that screens Commercial ANSYS
for alcohol (ethanol) in saliva
or urine
TOXI-LAB Drug Bench-top system that detects Commercial ANSYS
Screening over 500 drugs and drug
System byproducts, with built-in quality
control
TOXI-LAB THC II Extension of the TOXI-LAB system Commercial ANSYS
System used to test for evidence of
marijuana usage
TOXI-LAB LTD- Extension of the TOXI-LAB system Commercial ANSYS
Opiate(TM) used to test for evidence of
System opiate usage
DRUGSTAT RA(TM) Lateral flow device designed to Early ANSYS
monitor the ritalinic acid Development
metabolite of Ritalin, a
therapeutic drug used to treat
attention deficit disorder
- -------------------------------------------------------------------------------
</TABLE>
For a description of our manufacturing and development agreements with
Roche, see "Business -- Agreements with Roche."
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TESTCUP 4/5. TesTcup is a self-contained, disposable urine collection and
testing device designed to detect the presence of up to five drugs of abuse
simultaneously. TesTcup provides easily interpreted results in approximately
five minutes and is designed to be simple to use. Once the urine specimen is
collected in the TesTcup, the lid is secured to the cup and the cup is tilted
forward for ten seconds, allowing urine to flow through a valve into a sample
reservoir in the cup. The cup is righted and left undisturbed for approximately
three minutes, until distinct blue lines appear on the side of the cup in the
"TEST VALID" windows indicating that results are ready. At that point, a cover
label is peeled off to reveal the test results. A white plus (+) sign indicates
the presence of a drug and a blue minus (-) sign indicates the absence of a
drug.
By integrating sample collection, detection and storage features into one
device, TesTcup eliminates the need to handle samples, mix chemical solutions,
calibrate and maintain instruments, and other aspects of most drug testing
methods. We believe that TesTcup provides enhanced convenience and exceptional
testing flexibility and reliability. When test results are negative, immediate
action can be taken without the need to wait for laboratory results. In the
workplace setting, these immediate results enable employees to return to or
enter the workforce without delay. When test results are positive, the TesTcup
device acts as a shipping container to transport the specimen to the laboratory
for confirmation testing. TesTcup's innovative sealing mechanism and labeling
system ensure that all chain of custody requirements are met in the event any
disputes arise regarding the integrity of the test.
TesTcup is used primarily in pre-employment screening, random employee
testing, criminal justice testing and clinical applications. For example, the
United States Postal Service is using TesTcup exclusively for its recently
implemented pilot drug screening program.
TESTCUP ER. ANSYS and Roche co-developed TesTcup ER, a new version of the
TesTcup product specifically designed to meet the requirements of hospital
emergency rooms. TesTcup ER tests for five substances simultaneously, including
barbiturates and benzodiazepines, substances which are often encountered in drug
related emergency room visits. We believe that TesTcup ER will offer a number of
advantages in the emergency room setting, including ease of use, rapid, accurate
results and cost-effectiveness. Roche has begun advertising and is currently
taking orders for TesTcup ER. We commenced shipments of TesTcup ER to Roche in
the first quarter of 1999.
TESTCUP 5 M2K. ANSYS and Roche co-developed TesTcup 5 M2K, a new version
of the TesTcup product specifically designed to meet the new SAMHSA guidelines,
which use a higher detection level for morphine. TesTCup 5 M2K tests for five
substances simultaneously and is equivalent to the TesTcup 5 product, except for
the higher detection level for morphine. The product was developed to support
the requirements of Roche's new contract within the United States Postal
Service. We anticipate that TesTcup 5 M2K will be offered through Roche to other
customers who request a higher morphine detection level.
TESTSTIK. TesTstik is a self-contained, easy to use, disposable dipstick
designed to detect the presence of a single drug of abuse in approximately three
minutes. We currently manufacture separate versions of TesTstik for five common
drugs of abuse, and we began shipping to Roche new versions for detection of
barbiturates and benzodiazepines in the first quarter of 1999. The test is
conducted by submersing the sample pad in the urine specimen for five to seven
seconds, after which the slide cover is closed. Once the distinct
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<PAGE> 37
blue line appears indicating "TEST VALID," a plastic tab is broken off and
results can be read. A white plus (+) sign indicates the presence of a drug and
a blue minus (-) sign indicates the absence of a drug. TesTstik requires no
mixing or dispensing of chemical solutions, no pipetting of urine and no
refrigeration. TesTstik is used primarily for parole and probation testing,
workplace testing and drug treatment programs.
TESTSTIK 2 AND TESTSTIK 3. ANSYS and Roche are currently developing
TesTstik 2 and TesTstik 3, new versions of the TesTstik product designed
primarily to meet the requirements of parole and probation agencies and drug
treatment programs. TesTstik 2 is designed to test for two substances
simultaneously and TesTstik 3 is designed to test for three substances
simultaneously. We believe that these products, if successfully developed, could
offer a number of advantages in parole and probation settings, including ease of
use, rapid, accurate results and cost-effectiveness. We have produced prototypes
of these products for Roche and Roche is currently conducting marketing
evaluations of the products.
ON-SITE ALCOHOL. ON-SITE Alcohol is a self-contained, easy to use,
disposable, pocket-sized device designed to test for ethanol in urine or saliva.
Using a small pipette included in the test kit, a drop of reagent is transferred
from the built-in reagent well to the detection pad. A drop of the specimen is
transferred to the sample well using either the kit's pipette or its saliva
swab, and the result appears in approximately two minutes. A purple plus (+)
sign indicates the presence of ethanol while no color change indicates the
absence of ethanol. ON-SITE Alcohol is primarily used for parole and probation
testing, workplace testing and drug treatment programs. ON-SITE Alcohol
qualifies under the Department of Transportation's regulations for mandatory
random testing of transportation industry workers, including airline pilots,
truck drivers and rail employees.
TOXI-LAB DRUG SCREENING SYSTEM. The TOXI-LAB drug screening system is a
unique, bench-top, thin layer chromatography system that detects over 500 drugs
and drug byproducts. TOXI-LAB uses a comprehensive, standardized set of
reference materials and offers built-in quality control, and consistent and
reproducible procedures. TOXI-LAB incorporates disposable extraction and
evaporation components which prevent cross-contamination and eliminates the
spraying of hazardous chemical solutions, thus creating a safer working
environment for the technician. TOXI-LAB is primarily used by small or mid-sized
hospitals and forensic laboratories. In emergency room applications, TOXI-LAB is
used to detect or rule out many drugs quickly in suspected poisoning cases, and
to substantiate drug overdoses or drug interactions. TOXI-LAB is used prior to
hospital admission or surgery to guard against harmful drug interactions.
TOXI-LAB is also used to monitor patient and employee compliance in substance
abuse programs, psychiatric centers, employee assistance programs and in
geriatric medicine. Law enforcement agencies, forensic laboratories and prisons
use TOXI-LAB to monitor compliance with probation and parole requirements, as
well as to analyze certain types of contraband.
TOXI-LAB THC II SYSTEM. The TOXI-LAB THC II System is an extension of the
TOXI-LAB drug screening system, and is designed to be a rapid, easy to use urine
test to detect for evidence of marijuana usage. THC II is primarily used in
reference laboratories. THC II allows the laboratory to process multiple samples
simultaneously and incorporates our SPEC solid phase extraction columns, which
provide rapid and selective substance extraction and a reduction in sample
preparation time. The level of sensitivity achieved with THC II satisfies the
most stringent drug screening and confirmation requirements.
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TOXI-LAB LTD-OPIATE SYSTEM. The TOXI-LAB LTD-Opiate System is an extension
of the TOXI-LAB drug screening system designed to be a rapid, easy to use test
for screening or confirmation of opiates in urine. LTD-Opiate is primarily used
in reference laboratories to detect low levels of opiate alkaloids and their
byproducts. This system differentiates each of the opiates, providing a specific
analytical result without the need for sophisticated instrumentation. LTD-Opiate
also includes our SPEC solid phase extraction columns, which provide rapid and
selective substance extraction and a reduction in sample preparation time.
DRUGSTAT RA. We are in the early stage of development of a lateral flow
immunoassay device for the detection of ritalinic acid in urine. Ritalinic acid
is a metabolite of Ritalin, which is a prescription drug used to treat attention
deficit disorder. Currently, dosage compliance by the patient is not frequently
monitored. DRUGSTAT RA would be used outside a laboratory setting to detect the
presence of ritalinic acid and would provide a noninvasive alternative to a
blood test so that patient compliance could be monitored quickly and appropriate
treatments could be prescribed immediately.
SPECIALTY LABORATORY AND RESEARCH PRODUCTS
Our specialty laboratory and research products include products for solid
phase extraction and for nucleic acid separation and detection. The specialty
laboratory and research products and products under development by ANSYS include
the following:
<TABLE>
- ----------------------------------------------------------------------------
OUR SPECIALTY LABORATORY AND RESEARCH PRODUCTS
- ----------------------------------------------------------------------------
PRODUCT
OWNERSHIP
PRODUCT DESCRIPTION/USE STATUS RIGHTS
- ----------------- ------------------------------ ------------ -----------
<S> <C> <C> <C>
SPEC Solid Phase Family of sample preparation Commercial ANSYS
Extraction products marketed in four
Products primary formats: SPEC Columns,
SPEC 96-Well Plates, SPEC
Pipette Tips and SPEC
Extraction Discs
Nucleic Acid Sample preparation products Commercial Promega
Isolation that isolate nucleic acids
Products
XtraAMP Sample preparation tubes Beta Testing Molecular
incorporating DNA binding Innovations
material for rapid isolation
of nucleic acids
SCIP DNA testing cartridge that Research Molecular
integrates isolation, Innovations
amplification and detection to
screen for environmental
toxins and microorganisms
- ----------------------------------------------------------------------------
</TABLE>
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SPEC SOLID PHASE EXTRACTION PRODUCTS. Our SPEC solid phase extraction
products use proprietary membrane technology for preparing samples for trace
analysis. The SPEC products isolate substances of interest from urine, blood,
plasma or any other liquid sample. Unlike conventional solid phase extraction
products, our SPEC products use a proprietary small extraction disc, thereby
reducing solvent usage and hazardous waste generation, and reducing sample size
requirements for more efficient laboratory sample preparation. We currently
market the SPEC products in four primary formats: SPEC Columns, SPEC 96-Well
Plates, SPEC Pipette Tips and SPEC Extraction Discs. We believe that these four
formats satisfy the needs of various types of laboratories with respect to
sample size, number of samples processed and compatibility with existing
laboratory instrumentation. The primary markets for our SPEC products are
pharmaceutical companies and clinical testing laboratories performing drug
discovery and drug metabolism studies and confirmations, as well as
biotechnology companies engaged in DNA testing.
NUCLEIC ACID ISOLATION PRODUCTS. We exclusively manufacture two custom
nucleic acid isolation products for Promega using our proprietary membrane
technology. These products are packaged into kits by Promega and sold through
their biological research catalog.
XTRAAMP. In collaboration with Molecular Innovations, we are finalizing the
development of XtraAMP, which incorporates DNA binding material into sample
preparation tubes. The resulting XtraAMP tube is intended to be used for the
rapid extraction of DNA prior to amplification and detection. We have the
exclusive worldwide right to manufacture XtraAMP. We also have the exclusive
worldwide right to market and distribute XtraAMP to the bloodbanking market, and
the non-exclusive right to market and distribute XtraAMP in other markets.
SCIP. ANSYS, in conjunction with Molecular Innovations, is conducting late
stage research of an on-site DNA testing device known as the SCIP
(Self-Contained Isothermal Particle) cartridge. This device integrates sample
preparation, DNA amplification and lateral flow detection into a single
cartridge. Incorporation of the multiple steps into an individual cartridge
simplifies the process and reduces the potential for contamination. We believe
potential applications for SCIP include testing environmental samples for viral
contamination or the presence of other microorganisms.
TECHNOLOGY
Our technology integrates creative scientific concepts with innovative
product designs. Our research and development program applies our core
technology expertise to research projects and is currently performed in
accordance with the Quality System Regulations. We have expertise in several
core scientific disciplines, including membrane technologies, surface
chemistries and molecular interactions, all of which have enabled us to develop
innovative devices for both on-site and laboratory testing applications.
MEMBRANE TECHNOLOGIES. All of our products rely upon specialized membranes.
We have significant expertise in the manufacturing and processing of both
inorganic and organic membranes. Our inorganic membranes are used as the
separation media in our TOXI-LAB system, and the SPEC solid phase extraction
membranes are an extension of the TOXI-LAB membrane technology. We also have
expertise in processing organic membranes, such as the nitrocellulose-based
membranes used in the TesTcup and TesTstik product lines.
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SURFACE CHEMISTRIES AND MOLECULAR INTERACTIONS. Our technical expertise
includes the chemical modification of surfaces. By changing the surface
characteristics of the membrane through chemical modifications and other
techniques, we can control interactions between the membrane and the substance
of interest. We have developed 15 surface chemistries targeted at specific
product separations. We apply our understanding of surface chemistries and
molecular interactions between the substance and the surface of the membrane to
customize membranes for specific applications.
RESEARCH AND DEVELOPMENT
We principally focus our research and development efforts on responding to
market demands through the integration of creative scientific concepts with
innovative product designs. As of January 31, 1999, we had ten employees in
research and development, all of whom are dedicated to the development of new
drug testing products and specialty laboratory and research testing products, as
well as new applications for our current products. Our scientific personnel
utilize expertise in several core scientific disciplines, including membrane
technologies, surface chemistries and molecular interactions. We also have a
core competency in design engineering. The engineering staff uses computer aided
design and rapid prototype techniques for the design and development of new
diagnostic devices and manufacturing processes which incorporate biological and
chemical solutions into our products. Our engineering abilities enable us to
design products rapidly. For example, we provided Roche with working prototypes
of TesTstik 2 and TesTstik 3, each in approximately two weeks. While we
currently fund substantially all of our own research and development, we
received development fees from Roche in the amount of $60,000 in the fourth
quarter of 1996 and in the amount of $20,000 in the first quarter of 1997 to
co-develop the initial TesTstik product. We have also engaged third parties from
time to time to conduct discrete research and development projects.
SALES AND MARKETING
As of January 31, 1999, we employed 11 persons in various sales and
marketing functions, including technical support. We sell our on-site drug
testing products primarily to Roche. Roche has the exclusive right to market and
distribute the TesTcup and TesTstik product lines as well as any modifications
and improvements to these products. Roche also markets and distributes ON-SITE
Alcohol in the United States and Canada. In addition, Roche has the right of
first refusal to exclusively market any and all new antibody based drugs of
abuse products that we developed.
We sell our laboratory drug testing products direct in the United States to
hospitals, laboratories and universities, and through independent distributors
internationally. We sell our specialty laboratory and research products through
a combination of direct sales and distributors.
Our Technical Support department operates a customer hotline 24 hours a
day, seven days a week in order to assist our customers in the use of our
products. Technical Support also publishes the SPEC-NEWS and TOXI-NEWS product
newsletters. These newsletters keep our customers informed of new developments
in areas of interest relevant to their industries. We also conduct numerous
TOXI-LAB customer training workshops throughout the year, and participate in
annual product trade shows and technical presentations.
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MANUFACTURING
As of January 31, 1999, we had 205 employees involved in manufacturing,
assembly, process engineering, quality control and materials management. We
believe we comply with all aspects of the Quality System Regulations in the
production of our products and we maintain strict quality control regimens in
order to ensure high standards of quality.
Several of our manufacturing processes are automated. We are currently in
the process of automating additional manufacturing processes. We expect the
implementation of these manufacturing changes to allow for increased production
volumes while reducing per unit cost of goods sold. Our new automated equipment
is custom designed by manufacturers working closely with our engineering
department to ensure that our high quality standards are maintained. See "Risk
Factors -- Our Continuing Efforts to Increase Automation May Be Costly,
Time-Consuming and May Not Be Successful."
We obtain all raw materials for the manufacture of our products from
outside sources. The key raw materials used in our products include the
nitrocellulose membranes and liquid reagents used in our TesTcup and TesTstik
products, and the glass fiber membranes used in our TOXI-LAB and SPEC products.
All of these raw materials are currently only available from approved sole
source suppliers. We also use custom injection molded plastic parts which
comprise the packaging for our products. While the plastic pellets used in these
parts are readily available, Roche owns the custom molds for TesTcup and
TesTstik parts. We endeavor to keep a three-month supply of critical raw
materials and component parts on hand to avoid manufacturing interruptions. See
"Risk Factors -- The Failure of Sole Source Suppliers to Provide Key Raw
Materials Could Adversely Affect the Production of Our Products and Could Harm
Customer Relationships." Our quality control department inspects and tests all
raw materials, subassemblies and finished goods against established acceptance
standards.
COMPETITION
Our target markets are intensely competitive. We believe the principal
factors for competition include accuracy, reproducibility, ease of use,
distribution capabilities and price. Our competitors include diagnostic
companies that manufacture on-site and laboratory-based drug testing products,
as well as those that manufacture specialty laboratory and research products.
Some of our competitors have substantially greater financial, technical,
research and other resources and larger, more established sales, marketing,
distribution and service organizations than we have. Moreover, a number of these
competitors offer broader product lines, have greater name recognition than we
do and offer discounts as a competitive tactic. In addition, several smaller
companies are currently making or developing products that compete with or will
compete with our products.
We believe independent reference and hospital-based laboratories perform
the majority of diagnostic tests. We expect that these laboratories will compete
vigorously to maintain their position in our target markets. To achieve broad
market acceptance for our products, we, together with Roche, will be required to
demonstrate that our products are an attractive alternative to testing performed
by reference and hospital-based laboratories, which may require changes to their
established means of testing. Our products may not be able to compete with the
testing services provided by these laboratories.
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Our competitors may develop or market technologies or products that are
more effective or commercially attractive than our current or future products or
that would render our technologies and products obsolete. These technologies may
limit or interfere with our ability to make, use or sell our products. In
addition, we may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in the
future. See "Risk Factors -- The Effects of Competition Could Adversely Affect
Our Business and Financial Condition."
AGREEMENTS WITH ROCHE
TesTcup Agreement. In April 1993, we entered into a commercial agreement
(the "TesTcup Agreement") with Roche. Pursuant to this agreement, Roche paid us
a $96,000 development fee to develop, in collaboration with Roche, a multiple
substance drugs of abuse testing device that ultimately became TesTcup. No
further development fees have been received under this agreement. Under the
TesTcup agreement, we assigned to Roche in perpetuity all of our ownership
rights to TesTcup and to any modifications and improvements of these products,
such as TesTcup ER. In exchange for this assignment, we were given the exclusive
right to manufacture and supply TesTcup to Roche for the term of the agreement.
Roche also has the right of first refusal to exclusively market any and all new
antibody-based drugs of abuse products developed by us. The initial TesTcup
Agreement terminates on December 31, 1999 and gives Roche an option to renew for
additional three-year periods. In May 1998, the TesTcup Agreement was amended to
extend the termination date to January 1, 2003. The TesTcup Agreement also
provides that any patentable inventions relating to TesTcup, whether developed
by us or by Roche, or jointly, are the sole and exclusive property of Roche.
Roche agreed to pay or reimburse all reasonable costs and expenses we incur
related to the filing of patent applications concerning TesTcup. Roche also
agreed to pay for all equipment and supply all reagents and other materials
necessary to manufacture TesTcup, and owns all such equipment and reagents.
Roche's proprietary reagents are used in TesTcup. We have the right to use such
equipment and reagents during the term of the TesTcup Agreement and are required
to return all such equipment and reagents to Roche upon expiration or
termination of the agreement.
The TesTcup Agreement provides that we will manufacture TesTcup according
to defined specifications, subject to modification of quality control
specifications at Roche's sole discretion, and in accordance with all applicable
laws. Roche may use another vendor to manufacture TesTcup if Roche gives us
notice that the TesTcup products we are manufacturing do not meet the
specifications of the agreement, or that we are not providing sufficient
quantities of TesTcup on a timely basis, and we are unable to promptly cure the
problem or manufacture a sufficient quantity of products. We are responsible for
all costs, expenses and consequential damages under our contract with Roche for
all product recalls, returns and defects attributable to our manufacturing.
Production of TesTcup is based upon a "rolling forecast" of four three-calendar
month periods provided to us on a quarterly basis. Roche is not required to
forecast a minimum number of units, provided that the number of units for the
initial three-calendar month period of any rolling forecast may not vary in
excess of 20%. The agreement provides maximum order limitations, subject to the
our maximum production capacity. Orders for TesTcup are based upon written
purchase orders delivered by Roche. We currently invoice Roche only for products
actually shipped, based upon predetermined contractual unit prices. The unit
price of TesTcup is determined by a formula derived in part from our cost of
production.
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The TesTcup Agreement provides that Roche will offer to license TesTcup to
us in those markets or market segments in which Roche has determined that it
will not sell the product. In such event, we have no right to sublicense, assign
or transfer our rights under any such license without the prior written approval
of Roche. If we do not accept such an offer within the time period allotted
under the TesTcup Agreement, then Roche may offer such license to third parties
without any further obligation to us. The TesTcup Agreement also gives Roche a
right of first refusal to exclusively market any and all new antibody-based
drugs of abuse products we develop. The TesTcup Agreement also provides that we
and Roche each indemnify the other against damages resulting from our respective
performances under the agreement and certain other matters.
The TesTcup Agreement allows either party to terminate the agreement upon
certain breaches by the other party, or the bankruptcy or insolvency of the
other party, and allows Roche to terminate the agreement upon the occurrence of
certain FDA actions or objections. In the event that Roche does not renew its
agreement with us at the end of its term for reasons other than as a result of a
breach by us, Roche will pay us a fee to be negotiated by the parties, not to
exceed 3% of the net sales price of TesTcup, for each unit sold by Roche
following such termination. Neither Roche nor ANSYS may assign its rights under
the TesTcup Agreement to a third party without the prior written consent of the
other.
TesTstik Agreement. In September 1996, we entered into a development and
manufacturing agreement with Roche (the "TesTstik Agreement"). Pursuant to this
agreement, Roche paid us an $80,000 development fee to develop, in collaboration
with Roche, a single substance drug of abuse testing device that ultimately
became TesTstik. No further development fees have been received under this
agreement. The TesTstik Agreement terminates in October 2002, and gives Roche an
option to extend the agreement for additional three-year terms, or portions
thereof. The TesTstik Agreement contains material terms substantially identical
to the TesTcup Agreement, including:
- terms relating to Roche's ownership of all rights to TesTstik, including
rights to related patents, and the equipment and reagents used to
manufacture TesTstik;
- payment by Roche of patent related fees and expenses;
- our exclusive manufacturing and supply rights;
- forecasting, ordering and licensing provisions;
- specifications; and
- quality control.
The TesTstik Agreement also contains certain terms which differ from those
of the TesTcup Agreement, including:
- Roche will receive product discounts based upon volume of purchases and
levels of automation;
- Roche does not have to pay us any fee in respect of Roche's net sales of
TesTstik if Roche does not renew its agreement with us after the end of
its term;
- Roche has a right of first refusal to exclusively market any and all new
products we develop using Roche's reagent technology during the term of
the agreement;
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- Our financial liability is limited for certain breaches of the TesTstik
Agreement to the price Roche pays us for the TesTstik products;
- Roche and ANSYS each have equitable remedies in the event of a breach by
the other;
- We must pay Roche a license fee not to exceed ten percent (10%) of our
net sales in markets where Roche licenses TesTstik to us for sale because
Roche has decided not to sell TesTstik in that market;
- Roche or ANSYS has the right to assign their rights to an affiliate or a
successor in interest to substantially all of the assigning party's
assets without obtaining the other party's consent, provided that all
other assignments require the prior written consent of the non-assigning
party; and
- Pricing disputes following a modification by Roche of TesTstik
specifications shall be submitted to binding arbitration.
RELATIONSHIP WITH MOLECULAR INNOVATIONS
We have been collaborating with the scientific staff at Molecular
Innovations since 1995 to develop new products such as SCIP and XtraAMP. We are
designing and developing these finished diagnostic products, as well as the
related manufacturing processes for these products. Molecular Innovations has
been focused on developing the nucleic acid chemistries for these products.
Under existing agreements with Molecular Innovations, we have the exclusive
right to manufacture and the non-exclusive right to market and distribute SCIP
until February 2002. We have the exclusive right to manufacture XtraAMP, the
exclusive right to market and distribute XtraAMP in the bloodbanking markets,
and the non-exclusive right to market and distribute XtraAMP in all other
markets, for five years from the launch of XtraAMP. In exchange for these
rights, we will pay a royalty to Molecular Innovations for XtraAMP and SCIP
products we sell. We have not paid any royalties to date to Molecular
Innovations. We are not obligated to pay any research and development fees to
Molecular Innovations. Under our agreements, Molecular Innovations holds all
intellectual property and other ownership rights to SCIP and XtraAMP. In 1998,
we purchased less than a 5% equity interest in, and in March 1999 have provided
convertible debt financing to, Molecular Innovations. In addition, we have
designated a representative to the board of directors of Molecular Innovations.
INTELLECTUAL PROPERTY
Our ability to compete effectively will depend in part upon our ability to
develop and maintain the proprietary aspects of our technology and to operate
without infringing the proprietary rights of others. We hold two United States
patents which expire in 2009 relating to our ON-SITE Alcohol product and are
currently pursuing two pending patent applications. We cannot be certain that
our pending patent applications will result in the issuance of any patents. Even
if any patents are issued, they may not adequately protect our intellectual
property rights against competitors with similar technology. In addition, any
existing or future patents could be challenged, invalidated or circumvented, and
any right granted under the patents may not provide meaningful protection to us.
The failure of any patents to protect our technology would make it easier for
our competitors to offer similar products.
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<PAGE> 45
These products also incorporate reagent technologies owned by Roche. Roche
holds all of the intellectual property and other ownership rights of two of the
largest volume products we sell, TesTcup and TesTstik. Pursuant to development
and manufacturing agreements with Roche, we have the exclusive manufacturing
rights to the TesTstik product line until October 2002 and to TesTcup until
January 2003. If during the term of these agreements, or any renewals of these
agreements, an invention is made relating to TesTcup or TesTstik that results in
additional patentable rights to these products, all of those patentable rights
will belong to Roche. Roche may not aggressively protect its patents or licenses
on the products we manufacture. Roche's failure to protect its rights could
adversely affect our business.
We rely principally upon trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position, particularly with
respect to our membrane technologies. We generally enter into confidentiality
agreements with our employees and strategic partners, and attempt to control
access to and distribution of our confidential documentation and other
proprietary information. Notwithstanding these precautions, it may be possible
for a third party to copy or otherwise obtain and use our products, services or
technology without authorization, develop similar technology independently or
design around our and Roche's intellectual property. Accordingly, we may not be
able to protect our proprietary technology adequately, and our failure or
inability to do so could adversely affect our business. In addition, effective
copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries. Moreover, litigation may be necessary in the
future to enforce either our or our strategic partners' intellectual property
rights, to protect their respective trade secrets or to determine the validity
and scope of proprietary rights of others, including its customers. Irrespective
of the validity or success of litigation, we would likely incur significant
costs and that litigation could divert management's efforts and other resources.
In addition, the litigation could result in the issuance of an injunction
against us, requiring us or our strategic partners to withdraw certain products
from the market, redesign certain products currently offered for sale or under
development, or require them to obtain licenses, which may not be available on
reasonable terms, or at all. Any of the foregoing could adversely affect our
business. See "Risk Factors -- We May Not Be Able to Adequately Protect or
Enforce Our Intellectual Property Rights."
GOVERNMENT REGULATION
PREMARKET CLEARANCE AND APPROVAL. Unless an exemption applies, each
medical device that we and our strategic partners wish to market in the United
States must receive either 510(k) clearance or PMA approval in advance from the
FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k)
clearance process usually takes from four to twelve months, but it can last
longer. The process of obtaining PMA approval is much more costly, lengthy and
uncertain. The FDA's PMA approval process generally requires from one to three
years or even longer. It is possible that we may not be able to obtain either
510(k) clearance or PMA approval for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination of whether the product is within a type of device that is similar
to devices that are already legally marketed. Those devices deemed to pose
relatively less risk are placed in either class I or II, which require the
manufacturer to submit a premarket notification requesting 510(k)
44
<PAGE> 46
clearance unless an exemption applies. The premarket notification must
demonstrate that the proposed device is "substantially equivalent" in intended
use and in safety and effectiveness to a legally marketed "predicate device"
that is either in class I, class II, or is a "preamendments" class III device
(i.e., one that was in commercial distribution before May 28, 1976) for which
the FDA has not yet decided to require PMA approval. In contrast, devices the
FDA deems to pose the greatest risk, or to be novel devices lacking a legally
marketed predicate, are placed in class III and are required to undergo the PMA
approval process. This process requires the manufacturer to file a premarket
approval application presenting extensive testing data and other information to
prove the safety and effectiveness of the device to the FDA's satisfaction. To
date, our diagnostic tests and those of our collaborative partners, such as
TOXI-LAB, SPEC, ON-SITE Alcohol, TesTcup and TesTstik, have been considered
class II devices eligible for 510(k) clearance or exempt class I devices. We
believe that most of our products in development will receive similar treatment.
However, one or more of our future products, including potential line extensions
to include new analytes, may be deemed class III devices and required to undergo
the time consuming and costly PMA approval process.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in the intended use of the device, requires a new 510(k) clearance.
The FDA requires each manufacturer to make this determination in the first
instance, but the FDA can review any such decision. If the FDA disagrees with a
manufacturer's decision not to seek a new 510(k) clearance, the agency can
retroactively require the manufacturer to submit a premarket notification
requiring 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance is obtained.
We and/or our collaborative partners have modified some of our marketed devices,
including TesTcup, TesTstik, TOXI-LAB, SPEC and ON-SITE Alcohol, but have
determined that, in our view, new 510(k) clearances are not required for certain
products. No assurance can be given that the FDA would agree with any of our
decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k)
clearance for any modification, the FDA also may require us to cease marketing
and/or recall the modified device until we obtain a new 510(k) clearance.
RESEARCH AND INVESTIGATIONAL USE. In vitro diagnostic products can be
distributed for "research use only," commonly referred to as RUO, or
"investigational use only," commonly referred to as IUO, under conditions
prescribed in FDA's regulations, before they receive 510(k) clearance or
premarket approval. The FDA requires manufacturers to include results from
testing with specimens taken from humans to support a 510(k) clearance or a PMA
approval for most diagnostic tests, including tests that we are developing.
Investigational use clinical studies of most other types of medical devices
require the FDA's prior approval of an investigational device exemption
application, commonly known as an IDE. Clinical studies of in vitro diagnostic
tests, however, are exempt from the IDE requirements, provided that the testing
is noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into the subject, and
is not used as a diagnostic procedure without confirmation by another, medically
established, test or procedure. In vitro diagnostic products distributed for
clinical studies under this exemption from the IDE requirement must be labeled,
"For Investigational Use Only. The performance characteristics of this product
have not been established," and products that are in the laboratory research
phase of development and meet the exemption criteria described in this paragraph
must be labeled "For Research Use Only. Not for use in diagnostic procedures."
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<PAGE> 47
Both RUO and IUO products must be distributed in a controlled manner to
assure that the products are not improperly used for purposes other than
research or investigation. In addition, all IUO clinical studies must comply
with the FDA's informed consent requirements and other requirements designed to
protect the integrity of the data and the health and welfare of patients. The
FDA has announced an intent to exercise heightened enforcement with respect to
RUO and IUO tests that are improperly commercialized prior to receipt of 510(k)
clearance or PMA approval.
We and/or our collaborative partners may distribute tests on an RUO or IUO
basis in order to gather clinical or other data to support 510(k) clearance or
PMA approval for products that we are developing. It is possible that the FDA
would not agree that our RUO or IUO distribution meets the requirements for the
IDE exemption or fails to comply with the prohibition against improper
commercialization and other requirements for RUO and IUO studies. Failure by us,
our collaborative partners or the recipients of the RUO or IUO tests to comply
with these regulatory limitations could cause the FDA to take enforcement
action, including revocation of the IDE exemption and/or the imposition of
restrictions on our distribution of RUO or IUO tests. Any such enforcement
action would adversely affect our ability to conduct the clinical studies
necessary to support marketing clearance or approval of our products in
development and our ability to recover costs for product research and/or
investigation. In any event, it is possible that we may not be able to complete
any research or clinical study that we initiate or, if completed, that such
study will provide data and information that will support a 510(k) clearance or
PMA approval.
PERVASIVE AND CONTINUING REGULATION. After the FDA grants a manufacturer
approval to bring a device to market, a host of postmarket regulatory
requirements apply, including:
- labeling regulations;
- Quality System Regulations, which requires manufacturers to follow
elaborate design, testing, control, documentation and other quality
assurance procedures;
- Medical Device Reporting regulations, which requires that
manufacturers report to the FDA certain types of adverse events
involving their products; and
- the FDA's general prohibition against promoting products for
unapproved or "off-label" uses.
Class II devices can be subject to additional special controls such as
performance standards, postmarket surveillance, patient registries and FDA
guidelines, that do not apply to class I devices.
We are subject to inspection by the FDA to determine compliance with
regulatory requirements. If we fail to comply with the FDA's requirements, the
agency can institute a wide variety of enforcement actions. The FDA sometimes
issues a public warning letter, which could have an adverse impact on our
business. The FDA also can pursue more drastic remedies, such as:
- refusing our requests for 510(k) clearance or PMA approval of new
products;
- withdrawing product approvals already granted;
- requiring us to recall products; or
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<PAGE> 48
- asking a court to require us to pay civil penalties or criminal
fines, adhere to operating restrictions, or close down our
operations. Ultimately, criminal prosecution is available to FDA as
punishment for egregious offenses. Any FDA enforcement action could
have an adverse effect on our business, financial condition and
results of operation.
We are also subject to various state, local and foreign regulatory
requirements in the various jurisdictions in which we do business. For example,
the California Department of Health must license and inspect our manufacturing
facility in California. The California Department of Health has a broad range of
enforcement options, some of which are not available to FDA. Moreover, state,
local and foreign regulatory agencies will work together on certain enforcement
issues. Any adverse action by state, local or foreign regulatory agencies could
have an adverse effect on our business, financial condition and results of
operations.
THE CLINICAL LABORATORY IMPROVEMENT AMENDMENTS OF 1988 AND RELATED
REGULATIONS. The use of our products is also affected by the Clinical Laboratory
Improvement Amendments of 1988, commonly referred to as CLIA and related federal
and state regulations which provide for regulation of laboratory testing. The
scope of these regulations includes quality control, proficiency testing,
personnel standards and federal inspections. CLIA categorizes tests as "waived,"
"moderately complex" or "highly complex" on the basis of specific criteria. Any
future amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing may adversely affect our business.
OTHER REGULATIONS. We also are subject to numerous other federal, state and
local laws relating to matters such as: (1) safe working conditions; (2)
manufacturing practices; (3) environmental protection; (4) fire hazard control;
and (5) disposal of hazardous or potentially hazardous substances. We may incur
significant costs to comply with these laws and regulations in the future.
EMPLOYEES
As of January 31, 1999, we had 241 full-time employees, including ten
employees engaged in research and development, 11 engaged in sales and
marketing, 205 engaged in manufacturing operations and 15 engaged in general and
administrative activities. Our employees are not represented by any collective
bargaining agreement, and we have never experienced a work stoppage. We believe
our employee relations are good.
FACILITIES
Our administrative, engineering and manufacturing facilities are located in
an 84,000 square foot facility in Lake Forest, California. We believe our
existing facility will be sufficient for our needs for the foreseeable future.
We have a fixed-price option to purchase this facility in February 2000 for $5.6
million.
LEGAL PROCEEDINGS
We are not involved in any material litigation and are not aware of any
claims which would give rise to material liability.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides certain information with respect to our
executive officers and directors as of January 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------
<S> <C> <C>
Stephen K. Schultheis.......... 53 Chairman of the Board, President and
Chief Executive Officer
Steven P. Sidwell.............. 58 Executive Vice President -- Operations
Dennis D. Blevins, Ph.D. ...... 45 Vice President -- Research and
Development
Suzanne M. David............... 32 Chief Financial Officer and Secretary
Darrell J. Adams............... 50 Vice President -- Technical Support
Wilford C. Downs............... 47 Vice President of Operations --
Laboratory Products
Jeffrey G. Uding............... 44 Director of Operations -- On-Site
Products
Ronald J. Hall(1)(2)........... 58 Director
George D. Holmes(1)(2)......... 67 Director
John M. Morris(2).............. 50 Director
C. Michael O'Donnell, Ph.D..... 59 Director
William C. Shepherd............ 60 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
STEPHEN K. SCHULTHEIS has served as our President and Chief Executive
Officer since 1995, and Chairman of the Board since July 1998. Mr. Schultheis
joined ANSYS in 1990 as Director of Research and Development. He was promoted to
Vice President -- Research and Development in 1992 and promoted to Chief
Operating Officer in 1994. From 1986 to 1990, Mr. Schultheis was a professional
Consulting Engineer designing and developing products for various medical
diagnostic and commercial companies. From 1979 to 1986, he was Vice
President -- Engineering and Operations for Orangematic, Inc., a manufacturer of
food processing equipment. From 1974 to 1979, Mr. Schultheis was Vice
President -- Research and Development of Bennett Industries, a manufacturer of
commercial plastic products. From 1968 to 1973, he was a research engineer with
the United States Naval Undersea Center, engaged in weapons development. Mr.
Schultheis currently serves on the Board of Directors of Molecular Innovations,
Inc. Mr. Schultheis received a B.S. from California State University at San Jose
in 1968, and a M.S. in Mechanical Engineering from the University of Southern
California in 1972.
STEVEN P. SIDWELL has served as our Executive Vice President -- Operations
since 1998. From 1990 to 1998, Mr. Sidwell held a variety of positions with
Sensormedics Corporation, which is engaged in pulmonary function, exercise,
nutrition and metabolic function diagnosis, most recently as its Executive Vice
President of Operations. Prior to joining Sensormedics, Mr. Sidwell served as
President of National Service Concepts, a consumer electronics production
company, from 1988 to 1989. Mr. Sidwell received a B.S. in Chemical Engineering
from Purdue University in 1964 and a M.B.A. from the University of Pennsylvania
in 1968. Mr. Sidwell also serves on the board of directors of IOMED, Inc., a
publicly-traded drug delivery company.
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<PAGE> 50
DENNIS D. BLEVINS, PH.D. has served as our Vice President -- Research and
Development since 1997. Dr. Blevins joined ANSYS in 1992, and served as Senior
Scientist from 1992 to 1994. From 1994 to 1996, Dr. Blevins served as SPEC
Division Manager. From 1996 to 1997 he served as Director of Research and
Development. From 1990 to 1992, Dr. Blevins was employed by S-CUBED, the
environmental laboratory division of Maxwell Laboratories. Prior to 1990, Dr.
Blevins held a number of research and development positions for laboratory
products and pharmaceutical companies. Dr. Blevins received a Ph.D. in
Analytical Chemistry in 1982 from the University of Arizona.
SUZANNE M. DAVID has served as our Chief Financial Officer and Secretary
since July 1998. Ms. David joined ANSYS in March 1996 as Controller. From 1991
to 1996, Ms. David served as the Accounting Manager for Corona Clipper, a
manufacturer of garden products where she was responsible for the preparation of
all financial reporting documents. Prior to 1991, Ms. David held a number of
finance positions with various manufacturing companies. Ms. David received a
B.A. in Business Administration from California State University Fullerton in
1992.
DARRELL J. ADAMS has served as our Vice President -- Technical Support
since 1988. Mr. Adams joined ANSYS in 1976 as a Technical Representative. From
1977 to 1981, Mr. Adams worked as Chief Technologist and Supervisor and
developed ANSYS' reanalysis and technical consultation services. From 1981 to
1988 Mr. Adams worked as Director of Technical Support. Mr. Adams received a
B.S. in Microbiology from Idaho State University in 1973.
WILFORD C. DOWNS has served as our Vice President of Operations --
Laboratory Products since 1988. From 1981 to 1988, Mr. Downs was Manufacturing
and Distribution Manager for Marion Laboratories, Inc., a pharmaceutical
company. From 1974 to 1981, Mr. Downs served as Production Manager for
Analytical Systems, Inc., a manufacturer of diagnostic products. Mr. Downs
received a B.S. in Business Administration from the University of La Verne,
California in 1987.
JEFFREY G. UDING has served as our Director of Operations -- On-Site
Products since July 1997. Mr. Uding joined ANSYS in March 1996 as Manager of
On-Site Products. Prior to joining ANSYS, Mr. Uding held management positions
for Pacesetter Systems, a division of St. Jude Medical, and was Group Manager at
Mallinckrodt Medical (formerly Sorin Biomedical). Prior to that, Mr. Uding was
employed at Baxter Healthcare for approximately 12 years, holding positions in
manufacturing and research and development for medical, respiratory, parenterals
and kidney dialysis products. Mr. Uding received a B.S. from Roosevelt
University in Chicago in 1983. He received a M.S. in Management from University
of LaVerne, California in 1988 and a M.B.A. from Pepperdine University in 1991.
RONALD J. HALL has served as a director of ANSYS since 1991. Since 1990,
Mr. Hall has also been the Managing General Partner of Hall Capital Management,
the General Partner of Hall, Morris & Drufva II, L.P., an institutional venture
capital fund. From 1986 to 1990, Mr. Hall was Senior Vice President of First
Interstate Venture Capital Corporation, the venture capital subsidiary of First
Interstate Bank. From 1973 to 1983, Mr. Hall was also a General Partner of
Weiss, Peck & Greer, a New York and San Francisco-based venture capital and
money management firm. Mr. Hall is a director of Encad, Inc., a publicly-traded
manufacturer of wide format color ink-jet printers. He is also a director of
five privately-held companies which are part of the Hall, Morris & Drufva II,
L.P. portfolio.
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<PAGE> 51
GEORGE D. HOLMES has served as a director of ANSYS since 1988. Mr. Holmes
is a retired medical industry executive with 22 years of medical systems
management experience. From 1987 to 1996, Mr. Holmes was Chief Executive Officer
of Sensormedics Corporation. From 1984 to 1985, Mr. Holmes was Executive Vice
President of ADAC Laboratories, a manufacturer in nuclear medicine diagnostic
systems. From 1980 to 1984, Mr. Holmes served as the President of Squibb
Vitatek, Inc., a manufacturer of portable patient monitoring systems. Mr. Holmes
also served as the Chairman of the St. Joseph Hospital Foundation and a director
of the Oregon State March of Dimes. He was also Chairman of the Advisory Board
of the University of Southern California School of Medicine, Department of
Physical Therapy and Biokinesiology. He is currently a director of the American
Pulmonary Medicine Institute.
JOHN M. MORRIS has served as a director of ANSYS since 1988. Mr. Morris has
been a Managing Director in the Corporate Finance Department of Sutro & Co.
Incorporated since 1996. From 1995 to 1996, Mr. Morris was a Managing Director
in the Investment Banking Department of Wedbush Morgan Securities. From 1992 to
1995, Mr. Morris was a Principal at NewCap Partners, a private investment bank.
From 1988 to 1992, he was a partner in Hall, Morris and Drufva Capital
Management, the successor to First Interstate Venture Capital Corporation. From
1984 to 1988, Mr. Morris served in various investment banking capacities with
PaineWebber, Inc. and with Wedbush Morgan Securities. Mr. Morris is a founding
director of the Forum of Corporate Directors in Orange County and served as its
President in 1994.
C. MICHAEL O'DONNELL, PH.D. has served as a director of ANSYS since 1988.
Since 1996, Dr. O'Donnell has been President and Chief Executive Officer of EMS,
Inc., a manufacturer of electronic monitoring devices for parole and probation.
Prior to joining EMS, Dr. O'Donnell served in various capacities with ANSYS,
most recently as our Chairman of the Board, from 1994 to 1998. Prior to that he
served as President and Chief Executive Officer from 1988 to 1994, and served as
our Operations Manager from 1984 to 1988. During 1984, Dr. O'Donnell was a
private consultant. From 1982 to 1984, Dr. O'Donnell was President and Chief
Executive Officer of Clinetics Corporation, a manufacturer of immunodiagnostic
reagents.
WILLIAM C. SHEPHERD has served as a director of ANSYS since 1998. Mr.
Shepherd was previously Chairman of the board of Allergan, Inc., a leading
provider of eye care and specialty pharmaceutical products throughout the world
from January 1, 1996 to January 1, 1998. He was President and Chief Executive
Officer of Allergan from 1992 to 1996, and prior to that, served as the
President and Chief Operating Officer of Allergan from 1984 to 1991. Currently,
Mr. Shepherd serves as Chief Executive Officer and President of Allergan
Specialty Therapeutics Inc., a pharmaceutical research and development company.
In addition, Mr. Shepherd serves on the board of directors of Furon Company, a
leading international manufacturer of engineered polymer components serving both
the industrial and healthcare markets, and Techniclone Corporation, a
biotechnology company engaged in the research and development of unique
therapeutics for the treatment of cancer.
There are no family relationships among any of our directors or executive
officers. All directors hold office until the next annual meeting of the
stockholders and until their successors have been elected and qualified or until
their earlier resignation or removal. Executive officers are appointed to serve
at the discretion of the Board of Directors.
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<PAGE> 52
COMMITTEES OF THE BOARD
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. The Audit Committee consists of Ronald
J. Hall and George D. Holmes. The Audit Committee recommends the appointment of
independent public accountants for the annual audit of our financial statements
to the Board of Directors. The Audit Committee reviews the scope of the annual
audit and other services the auditors are asked to perform. This committee also
reviews the report on our financial statements prepared by the auditors
following the audit, and our accounting and financial policies in general. The
Audit Committee also reviews management's procedures and policies with respect
to our internal accounting controls.
The Compensation Committee consists of Ronald J. Hall, George D. Holmes and
John M. Morris. The Compensation Committee reviews and approves salaries,
benefits and bonuses for all executive officers. It reviews and recommends to
the Board of Directors on matters relating to employee compensation and benefit
plans. The Compensation Committee also administers our 1990 Stock Option Plan
and the 1997 Stock Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board of Directors or
Compensation Committee and the board of directors of any other company.
DIRECTOR COMPENSATION
We currently pay our nonemployee directors $1,000 per board meeting
attended and reimburse out-of-pocket expenses incurred by our directors in
connection with attendance of board and committee meetings.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
We do not currently have any employment contracts with any of our executive
officers. Accordingly, the Board of Directors may terminate the employment of
any executive officer at any time in its discretion. We provide incentives such
as salary, benefits and option grants (which are typically subject to a three to
five year vesting schedule) to attract and retain executive officers and other
key employees. The Compensation Committee has the authority to provide for an
accelerated vesting of any outstanding options if an individual's employment is
terminated following an acquisition or certain hostile changes in control of
ANSYS.
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<PAGE> 53
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION. The following table summarizes the
compensation earned by, and paid to, our Chief Executive Officer and our four
most highly compensated executive officers, other than the Chief Executive
Officer, who received compensation in excess of $100,000 for the year ended
December 31, 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
------------------------------------- SHARES OF
OTHER ANNUAL COMMON STOCK
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) UNDERLYING OPTIONS(#)
- --------------------------------- --------- ------- --------------- ---------------------
<S> <C> <C> <C> <C>
Stephen K. Schultheis............ $180,909 $51,923 $4,609 60,000
Chairman, President and Chief
Executive Officer
Dennis D. Blevins, Ph.D.......... 92,259 21,037 2,580 --
Vice President -- Research and
Development
Darrell J. Adams................. 92,683 21,218 3,449 --
Vice President -- Technical
Support
Wilford C. Downs................. 88,470 20,254 840 --
Vice President of Operations --
Laboratory Products
Jeffrey G. Uding................. 89,690 19,846 2,714 --
Director of Operations --
On-Site Products
</TABLE>
- -------------------------
(1) We provide our officers with certain non-cash group life and health benefits
generally available to all salaried employees. These benefits are not
included in the above table pursuant to applicable Securities and Exchange
Commission rules. No Named Executive Officer received aggregate personal
benefits or perquisites that exceed the lesser of $50,000 or 10% of his
total annual salary and bonus.
(2) Represents our matching contribution under our 401(k) Plan to the respective
accounts of the Named Executive Officers.
52
<PAGE> 54
STOCK OPTION GRANTS. The following table sets forth certain information
regarding options granted to the Named Executive Officers during 1998. We have
not granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET
UNDERLYING GRANTED TO EXERCISE PRICE ON
OPTIONS EMPLOYEES IN PRICE PER DATE OF EXPIRATION
NAME GRANTED(#)(2) 1998(3) SHARE GRANT(4) DATE
- -------------------------- ------------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Stephen K. Schultheis..... 60,000 34.2% $3.83 $4.74 04/08/08
Dennis D. Blevins, Ph.D... -- -- -- -- --
Darrell J. Adams.......... -- -- -- -- --
Wilford C. Downs.......... -- -- -- -- --
Jeffrey G. Uding.......... -- -- -- -- --
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM($)(1)
--------------------------------------
NAME 0% 5% 10%
- -------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Stephen K. Schultheis..... $54,600 $233,458 $507,860
Dennis D. Blevins,
Ph.D. .................. -- -- --
Darrell J. Adams.......... -- -- --
Wilford C. Downs.......... -- -- --
Jeffrey G. Uding.......... -- -- --
</TABLE>
- -------------------------
(1) The potential realizable value is calculated by assuming that (a) the stock
option price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire ten year term of the options, and (b) the
option is exercised and the underlying common stock sold on the last day of
its term for the appreciated stock price. The potential realizable value of
each option at 0% is based on the fair market value of the common stock on
the date of grant, $4.74 per share, minus the exercise price times the
number of shares underlying the option. The potential realizable value of
each option at 5% and 10% are based on the term of the option at its time of
grant (ten years). Each is calculated by assuming that the stock price on
the date of the grant appreciates at 5% or 10%, as applicable, compounded
annually for the entire term of the option, and that the option is exercised
and sold on the last day of its term for the appreciated stock price. Actual
gains, if any, on stock option exercises will depend on the future
performance of the common stock and the date at which the options are
exercised. Upon completion of this offering, the value of these options will
be $430,200, which is derived by subtracting the exercise price of the
option from the assumed initial public price per share of $11.00.
(2) All options were granted under the 1997 Plan. Options granted in 1998 vest
over three years in 36 equal monthly installments.
(3) Based on an aggregate of 175,200 options granted to employees in 1998,
including the Named Executive Officers.
(4) The exercise price of the options was equal to the fair market value of the
underlying common stock on the grant date, as determined in good faith by
our Board of Directors. Notwithstanding this determination, we have recorded
compensation expense with respect to these options based upon the difference
between the exercise price and $4.74. This value was derived from a
combination of discounted cash flow methods, comparisons to publicly-traded
companies and book value. See Note 1 of Notes to Consolidated Financial
Statements for the determination of market value on the date of grant.
YEAR-END OPTION HOLDINGS. The following table sets forth certain aggregated
option information for the Named Executive Officers for the year ended December
31, 1998. None of our named executive officers exercised stock options in 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS(1) OPTIONS(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen K. Schultheis......................... 351,600 76,800 $3,616,800 $633,400
Dennis D. Blevins, Ph.D. ..................... 44,000 4,000 $ 464,971 $ 39,729
Darrell J. Adams.............................. -- -- -- --
Wilford C. Downs.............................. -- -- -- --
Jeffrey G. Uding.............................. 17,600 18,400 $ 175,071 $183,129
</TABLE>
- -------------------------
(1) The value of unexercised options represents the difference between the
exercise price of the options and an assumed initial public offering price
of $11.00 per share.
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<PAGE> 55
STOCK OPTION PLANS
1990 STOCK OPTION PLAN. Our Stock Option Plan for Employees was adopted by
the Board of Directors and approved by the stockholders on October 10, 1990. A
total of 780,000 shares of common stock have been authorized for issuance under
the 1990 Plan. As of January 31, 1999, options for 639,780 shares were
outstanding under the 1990 Plan, and no shares remained available for future
option grant.
Option grants under the 1990 Plan are made at the discretion of the plan
administrator. Eligible individuals (including officers and directors), in the
case of nonqualified stock options, may be granted options to purchase shares of
common stock at an exercise price not less than 85% of the fair market value of
the common stock, determined by the plan administrator on the grant date. Option
grants have a maximum term of ten years, subject to earlier termination if the
optionee's service with us ends.
The Compensation Committee administers the 1990 Plan. This committee has
complete discretion, within the scope of its administrative jurisdiction, to
determine: (1) which eligible individuals are to receive option grants; (2) the
time or times when such option grants are to be made; (3) the number of shares
subject to each such grant; (4) the fair market value of the option at the date
it is granted provided that the common stock is not publicly traded; (5) the
exercise or vesting schedule to be in effect for the option grant; (6) the
maximum term for which any granted option is to remain outstanding; and (7) the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the Federal tax laws.
Optionees may pay the exercise price for their options in cash or with the
consent of the Compensation Committee, in shares of common stock. If the
exercise price is paid in shares of common stock, those shares are valued at
fair market value on the exercise date.
The plan administrator may cancel options outstanding under the 1990 Plan
in return for the grant of new options for the same or different number of
option shares. In that case, the exercise price per share is based on the fair
market value per share of common stock on the new grant date.
If we are acquired by merger or asset sale, each outstanding option under
the 1990 Plan not otherwise assumed by the successor company will immediately
vest. Such options will then be exercisable for all of the shares subject to
that option at the time, unless the option is assumed by the successor
corporation in the acquisition.
The Board of Directors may amend, modify or terminate the 1990 Plan at any
time. The 1990 Plan will terminate on October 11, 2000, unless sooner terminated
by the Board of Directors. No options may be granted under the 1990 Plan after
it is terminated.
1997 STOCK INCENTIVE PLAN. Our 1997 Stock Incentive Plan was adopted by the
Board of Directors and approved by the stockholders on January 23, 1998. A total
of 600,000 shares of common stock have been authorized for issuance under the
1997 Plan, and as of January 31, 1999 that 328,800 option shares remained
available for grant under the 1997 Plan.
The 1997 Plan is divided into two separate components: the Option Grant
Program and the Stock Issuance Program. Under the Option Grant Program, eligible
individuals (including officers, non-employee Board members and consultants) may
be granted options to purchase shares of common stock at an exercise price not
less than 100% of their fair
54
<PAGE> 56
market value on the grant date as determined by the plan administrator. Under
the Stock Issuance Program, these individuals may be issued shares of common
stock directly. The individual may purchase the shares at a price not less than
100% of their fair market value at the time of issuance; however, the purchase
price per share issued to a 10% stockholder may not be less than 110% of the
fair market value of the underlying common stock. Shares of common stock may
also be granted as a bonus tied to the performance of services.
The Compensation Committee administers the 1997 Plan. The plan
administrator has complete discretion to determine: (1) which eligible
individuals are to receive option grants or stock issuances under those
programs; (2) the time or times when such option grants or stock issuances are
to be made; (3) the number of shares subject to each such grant or issuance; (4)
the fair market value of the option at the date it is granted provided that the
common stock is not publicly traded; (5) the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws; (6) the vesting schedule to be in effect for the option grant
or stock issuance; and (7) the maximum term for which any granted option is to
remain outstanding.
Optionees may pay the exercise price for their options in cash or in shares
of common stock. If the exercise price is paid in shares of common stock, those
shares are valued at fair market value on the exercise date.
Once the common stock subject to the 1997 Plan has been registered under
Section 12 of the Securities Exchange Act of 1934, as amended, the options may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the plan administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares. The plan administrator may allow these
optionees to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price. The note would also cover any associated
withholding taxes incurred in connection with such exercise or purchase.
If we are acquired by merger or asset sale, options outstanding under the
Option Grant Program which are not to be assumed by the successor corporation or
otherwise continued will automatically accelerate. All unvested shares under the
Option Grant and Stock Issuance Programs will immediately vest, unless our
repurchase rights with respect to those shares will be assigned to the successor
corporation. The plan administrator may grant options under the Option Grant
Program which accelerate upon an acquisition of ANSYS, whether or not those
options are assumed or continued. The plan administrator may also grant options
which accelerate if the optionee's service terminates within the 18 months
following an acquisition in which (1) those options are assumed or otherwise
continued and (2) the applicable repurchase rights do not terminate. The vesting
of outstanding shares under the Stock Issuance Program may be accelerated on
similar terms and conditions.
The Board of Directors may amend or modify the 1997 Plan at any time.
However, certain amendments to the 1997 Plan may require shareholder approval.
The 1997 Plan will terminate on the earliest of: (1) January 22, 2008; (2) the
date on which all shares available for issuance under the 1997 Plan have been
issued as fully-vested shares; or (3) the termination of all outstanding options
in connection with an acquisition of ANSYS.
OTHER OPTIONS. In December 1996, Stephen K. Schultheis, our Chairman,
President and Chief Executive Officer, was granted options to purchase 90,000
shares of common
55
<PAGE> 57
stock at an exercise price of $1.07 per share. These options were nonqualified
stock options and were not granted pursuant to the 1990 Plan or the 1997 Plan.
401(k) PLAN
We have an employee savings and retirement plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The 401(k) Plan allows eligible employees to defer up to 15% of their pre-tax
earnings, subject to the Internal Revenue Service annual contribution limit
($10,000 in 1998). Eligible employees must be 20 1/2 years of age and have
worked at least 1,000 hours in a 12 consecutive month period. Employees may
first participate on the first day of the month following three months of
service.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in these
capacities, including liabilities under the Securities Act. Our bylaws provide
that we will indemnify our directors and officers to the fullest extent
permitted by law. The bylaws require ANSYS to advance litigation expenses, but
the director or officer must agree to repay such advances if he or she is not
entitled to indemnification. These rights do not exclude any other right such
persons may have or acquire under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
Our certificate of incorporation provides that, pursuant to Delaware Law,
directors are not liable for money damages for breach of their fiduciary duty of
care to ANSYS and its stockholders. This provision does not eliminate the duty
of care. In certain circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will still be subject to liability for (1) breach of the
duty of loyalty to ANSYS or its stockholders, (2) acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, (3)
actions leading to improper personal benefit to the director, and (4) payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware Law. The provision also does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or federal environmental laws.
In addition to the indemnification provided for in our bylaws, we have
entered into agreements to indemnify our executive officers and all of our
directors. This indemnification includes indemnity for certain expenses,
including attorneys' fees. It also includes indemnity for judgments, fines and
settlement amounts incurred in any action or proceeding. The indemnification
includes: (1) actions by or for ANSYS; (2) actions on account of services as an
executive officer or a director of ANSYS; and (3) actions on account of services
as an officer or a director of another company or enterprise if the services
were provided at our request.
The Securities and Exchange Commission is of the opinion that
indemnification of directors, officers and persons controlling ANSYS for
violations of the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.
We have also obtained directors' and officers' liability insurance for our
directors and executive officers.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of January 31, 1999
regarding the ownership of our common stock by: (a) each person whom we know to
own more than 5% of such shares of common stock; (b) each Named Executive
Officer; (c) each of our directors; and (d) all of our directors and executive
officers as a group.
The number of shares beneficially owned and the percentage of shares
beneficially owned are based on (1) 5,516,512 shares of common stock outstanding
as of January 31, 1999, and (2) 8,016,512 shares of common stock outstanding
upon consummation of this offering. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. Shares subject to options that are exercisable currently or within
60 days following January 31, 1999 are deemed to be outstanding and beneficially
owned by the optionee for the purpose of computing share and percentage
ownership of that optionee. They are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except (1) as
indicated in the footnotes to this table, and (2) as affected by applicable
community property laws, all persons listed have sole and voting investment
power with for all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
--------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Ronald J. Hall(2)(3)....................... 3,808,844 69.0% 47.5%
Hall, Morris & Drufva II, L.P.(3).......... 3,616,620 65.6 45.1
C. Michael O'Donnell, Ph.D. ............... 509,808 9.2 6.4
Stephen K. Schultheis(4)................... 450,150 7.7 5.4
Darrell J. Adams........................... 345,516 6.3 4.3
Wilford C. Downs........................... 345,516 6.3 4.3
George D. Holmes(5)........................ 54,000 * *
Dennis D. Blevins, Ph.D.(5)................ 44,660 * *
Jeffrey G. Uding(5)........................ 22,400 * *
John M. Morris(6).......................... -- * *
William C. Shepherd........................ -- * *
All executive officers and directors as a
group (12 persons)(7).................... 5,623,200 93.2 65.9
</TABLE>
- -------------------------
* Less than one percent.
(1) The address for each of Messrs. O'Donnell, Schultheis, Adams and Downs is
c/o ANSYS at 25200 Commercentre Drive, Lake Forest, California 92630.
(2) Includes (a) 3,616,620 shares of common stock held by Hall, Morris & Drufva
II, L.P. and (b) 192,224 shares of common stock held by Mr. Hall's IRA. Mr.
Hall is the Managing General Partner of Hall Capital Management, which is
the General Partner of Hall, Morris & Drufva II, L.P. Mr. Hall disclaims
beneficial ownership of all of the shares held by Hall, Morris & Drufva II,
L.P.
(3) The address for Hall, Morris & Drufva II, L.P. and Mr. Hall is 26161 La Paz
Road, Suite E, Mission Viejo, California 92691.
(4) Includes 356,550 shares of common stock issuable upon exercise of vested
stock options.
(5) Consists solely of shares of common stock issuable upon exercise of vested
stock options.
(6) Excludes the shares of common stock that Mr. Morris may have a right to
receive in the event of the dissolution of Hall, Morris & Drufva II, L.P.
See "Underwriting."
(7) Includes 519,916 shares of common stock issuable upon exercise of vested
stock options.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
The following summary of the capital stock of ANSYS and certain provisions
of our certificate of incorporation and bylaws does not purport to be complete.
It is qualified in its entirety by the provisions of the certificate and bylaws.
Copies of the certificate and bylaws have been filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
ANSYS is authorized to issue 30,000,000 shares of common stock. At December
31, 1998, 5,516,512 shares of common stock were deemed outstanding and held of
record by approximately 12 holders. Under the certificate and bylaws, holders of
common stock will not have cumulative voting rights after the common stock is
listed for trading on the Nasdaq National Market. Holders of shares representing
a majority of the voting power of common stock can elect all of the directors.
The holders of the remaining shares will not be able to elect any directors. The
shares of common stock offered pursuant to this offering, when issued, will be
fully paid and nonassessable and will not be subject to any redemption or
sinking fund provisions. Holders of common stock do not have any preemptive,
subscription or conversion rights.
Holders of common stock are entitled to receive those dividends the Board
of Directors declares, subject to the rights of preferred stockholders and the
terms of any existing or future agreements between ANSYS and its debtholders.
Since its inception, we have not declared or paid any cash dividends on our
common stock. We presently intend to retain future earnings, if any, for use in
the operation and expansion of our business. We do not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of ANSYS, common stockholders are
entitled to share ratably in all assets legally available for distribution (1)
after payment of all debts and other liabilities and (2) subject to the prior
rights of any holders of outstanding shares of preferred stock.
PREFERRED STOCK
Our certificate of incorporation authorizes 5,000,000 shares of preferred
stock. The preferred stock may be issued in series from time to time as the
Board of Directors determines. The Board of Directors determines the
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions of the preferred stock, unless they are fixed in
our certificate of incorporation. The characteristics of different series of
preferred stock may differ with respect to: (1) dividend rates; (2) amounts
payable on liquidation; (3) voting rights; (4) conversion rights; (5) redemption
provisions; (6) sinking fund provisions; and (7) other matters. The Board of
Directors may authorize preferred stock senior to the common stock with respect
to dividends and the distribution of assets on liquidation. The Board of
Directors may also set limitations and restrictions on payment of common stock
dividends while any shares of preferred stock are outstanding. No stockholder
approval is required for the Board of Directors to issue preferred stock with
voting and conversion rights which could adversely affect the voting power of
the holders of common stock.
We believe that the ability to issue preferred stock without the expense
and delay of a special stockholders' meeting will provide us with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. This also permits the Board of
Directors to issue preferred stock containing
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<PAGE> 60
terms which could impede the completion of a takeover attempt, subject to
certain limitations imposed by the securities laws. The Board of Directors will
make any determination to issue such shares based on its judgment as to the best
interests of ANSYS and its stockholders at the time of issuance. This could
discourage an acquisition attempt or other transaction which stockholders might
believe to be in their best interests or in which they might receive a premium
for their stock over the then market price of the stock.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and bylaws contain provisions that may
make it more difficult to acquire control of ANSYS by various means. These
provisions could deprive the stockholders of opportunities to realize a premium
on the shares of common stock owned by them. In addition, they may adversely
affect the prevailing market price of the stock. These provisions are intended
to: (1) enhance the likelihood of continuity and stability in the composition of
the Board of Directors and in the policies formulated by the Board of Directors;
(2) discourage transactions which may involve an actual or threatened change in
control of ANSYS; (3) discourage tactics that may be used in proxy fights; (4)
encourage persons seeking to acquire control of ANSYS to consult first with the
Board of Directors to negotiate the terms of any proposed business combination
or offer; and (5) reduce our vulnerability to an unsolicited proposal for a
takeover that does not contemplate the acquisition of all outstanding shares of
ANSYS or that is otherwise unfair to our stockholders.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL; FILLING VACANCIES AND
AMENDMENT. Our certificate of incorporation provides that the Board of Directors
will consist of between five and nine members, the exact number to be fixed from
time to time by resolution adopted by a majority of the directors then in
office. Currently, the number is set at six. The certificate and bylaws provide
for the Board of Directors to be divided into three classes of directors serving
staggered, three-year terms. The classification of the Board of Directors has
the effect of requiring at least two annual stockholder meetings, instead of
one, to replace a majority of members of the Board of Directors. Subject to the
rights of the holders of any outstanding series of preferred stock, the
certificate authorizes only the Board of Directors to fill vacancies, including
newly created directorships. Accordingly, this provision could prevent a
stockholder from obtaining majority representation on the Board of Directors by
enlarging the Board of Directors and filling the new directorships with its own
nominees. The certificate also provides that directors may be removed by
stockholders only for cause and only by the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock.
SPECIAL STOCKHOLDER MEETINGS. The certificate of incorporation provides
that special meetings of the stockholders for any purpose or purposes, unless
required by law, shall be called by: (1) the President or Secretary pursuant to
a request in writing of the President; (2) a majority of the entire Board of
Directors; or (3) stockholders owning not less than 50% of the entire voting
stock of ANSYS then issued and outstanding. A special meeting may not be held
absent such a written request. The request shall state the purpose or purposes
of the proposed meeting. This limitation on the right of stockholders to call a
special meeting could make it more difficult for stockholders to initiate
actions that are opposed by the Board of Directors. These actions could include
the removal of an incumbent director or the election of a stockholder nominee as
a director. They could also include the implementation of a rule requiring
stockholder ratification of specific defensive
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<PAGE> 61
strategies that have been adopted by the Board of Directors with respect to
unsolicited takeover bids. In addition, the limited ability of the stockholders
to call a special meeting of stockholders may make it more difficult to change
the existing board and management.
WRITTEN CONSENT; SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of
incorporation prohibits the taking of stockholder action by written consent
without a meeting. These provisions will make it more difficult for stockholders
to take action opposed by the Board of Directors.
AMENDMENT OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION. Our
certificate of incorporation generally requires the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock in order to amend
any provisions of the certificate concerning: (1) the removal or appointment of
directors; (2) the authority of stockholders to act by written consent; (3) the
required vote to amend the certificate; (4) calling a special meeting of
stockholders; (5) procedure and content of stockholder proposals concerning
business to be conducted at a meeting of stockholders; and (6) director
nominations by stockholders. These voting requirements will make it more
difficult for minority stockholders to make changes in the certificate that
could be designed to facilitate the exercise of control over ANSYS. On the other
hand, the requirement for approval by at least a two-thirds stockholder vote
will enable minority stockholders to prevent the majority stockholders from
amending these provisions of the certificate. Following the completion of this
offering, our present directors and executive officers and their respective
affiliates will beneficially own approximately 65.9% of our common stock. This
gives them veto power with respect to any stockholder action or approval
requiring either a two-thirds vote or a simple majority.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 5,498,112 shares of
common stock (the "Registrable Securities") will be entitled to rights with
respect to the registration of their shares under the Securities Act. If ANSYS
proposes to register securities under the Securities Act, either for its own
account or the account of other securityholders, it must give notice of the
registration to the holders of Registrable Securities. These holders are
entitled to include their Registrable Securities in the registration, subject to
certain marketing and other limitations. We generally must bear the expenses,
other than underwriting discounts and sales commissions, of these registrations.
We may in certain circumstances defer such registrations. The underwriters have
the right, subject to certain limitations, to limit the number of Registrable
Securities included in such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
60
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, ANSYS will have 8,016,512 shares of common
stock outstanding (8,391,512 shares if the underwriter's over-allotment option
is exercised in full), assuming no exercise of options after January 31, 1999.
Of this amount, the 2,500,000 shares offered by this prospectus will be
available for immediate sale in the public market as of the date of this
prospectus. All of the remaining 5,516,512 shares are "restricted securities" as
that term is defined by Rule 144 of the Securities Act. Our directors, executive
officers and certain other stockholders who collectively hold an aggregate of
5,498,112 shares of common stock, together with ANSYS, have agreed pursuant to
the underwriting agreement and other agreements that they will not sell any
common stock without the prior written consent of Vector Securities
International, Inc. for a period of 180 days from the date of this prospectus
except that we may, without this consent, grant options and sell shares pursuant
to the 1997 Plan. Following the 180 day period, 332,764 shares of common stock
will be eligible for sale in the public market without restriction, including
shares eligible for sale under Rule 144(k). An additional 5,165,348 shares will
be eligible for sale under Rule 144, subject to certain volume, manner of sale
and other restrictions of Rule 144. In addition, 18,400 shares will be available
for sale in the public market 90 days following the date of this prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of (1) 1% of the then outstanding shares of common stock (approximately 80,165
shares immediately after this offering) or (2) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of ANSYS at any time
during the 90 days immediately preceding the sale and who has beneficially owned
his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after this offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
Any employee or consultant who purchased his or her shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of January 31, 1999, the holders of options to purchase
approximately 1,000,980 shares of common stock will be eligible to sell their
shares upon the expiration of the 180-day Lockup Period, subject in certain
cases to vesting of such options.
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<PAGE> 63
We intend to file a registration statement on Form S-8 under the Securities
Act as soon as practicable after the completion of this offering to register
1,329,780 shares of common stock subject to outstanding stock options or
reserved for issuance under our 1990 Plan and our 1997 Plan. This registration
will permit the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act, upon completion of the 180-day
Lockup Period. Shares held by affiliates registered under such registration
statement will be subject to Rule 144 volume limitations. See "Management --
Executive Compensation" and "-- Stock Option Plans."
In addition, some stockholders have registration rights with respect to
5,498,112 shares of common stock. Registration of these securities would render
them freely tradeable without restriction under the Securities Act. See "Risk
Factors -- Future Sales of Our Common Stock Could Cause the Price of Our Common
Stock to Decline."
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<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom Vector Securities International, Inc. and
Sutro & Co. Incorporated are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to the underwriters, the following
respective number of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Vector Securities International, Inc...................
Sutro & Co. Incorporated...............................
---------
Total........................................ 2,500,000
=========
</TABLE>
John M. Morris, a director of ANSYS, is a Managing Director of Sutro & Co.
Incorporated, one of the representatives of the underwriters. Mr. Morris has an
equity interest in Hall, Morris & Drufva II, L.P. which, upon its liquidation
will result in Mr. Morris receiving approximately 125,000 shares of ANSYS common
stock.
The underwriting agreement makes the obligations of the underwriters
subject to a number of conditions, including the absence of any material adverse
change in our business and the receipt of certificates, opinions and letters
from us, our counsel and our experts. If any of the shares are purchased, the
underwriters must purchase all shares of common stock being offered. If any
underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the defaulting underwriters do not exceed 10% of the shares
offered, some or all of the remaining underwriters must assume the obligations
of the defaulting underwriters.
The underwriters propose to offer the shares of common stock directly to
the public at the offering price set forth on the cover page of this prospectus.
They propose to offer shares to certain dealers at that price less a concession
not in excess of $ per share. The underwriters may allow to selected dealers
and the dealers may reallow a concession not in excess of $ per share to
other dealers. After the initial public offering of the shares, the offering
price and other selling terms may be changed by the representatives of the
underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 375,000 additional
shares of common stock at the public offering price, less underwriting discounts
and commissions. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
Subject to a number of conditions, if this option is exercised, each underwriter
must purchase approximately the same percentage of over-allotment shares as the
number of shares set forth next to each underwriter's name in the preceding
table bears to the total number of shares listed in this table. We must sell
these shares to the underwriters if the option is exercised.
The following table summarizes the compensation we will pay to the
underwriters:
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Total underwriting discounts and
commissions..................... $ $ $
</TABLE>
63
<PAGE> 65
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may sell shares in excess of the
offering size, creating a syndicate short position. In addition, the
underwriters may bid for and purchase shares of common stock in the open market
to cover syndicate short positions or to stabilize the price of the common
stock. Finally, the underwriting syndicate may reclaim selling concessions from
syndicate members in this offering if the syndicate repurchases previously
distributed common stock in syndicated covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make with respect to these
liabilities.
The officers, directors and certain other of our stockholders have agreed
that they will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of: (1) any shares of our
common stock; (2) options or warrants to acquire shares of our common stock; or
(3) securities exchangeable for or convertible into shares of common stock owned
by them for a period of 180 days after the date of this prospectus subject to
certain exceptions. We have agreed not to offer, sell or otherwise dispose of
any of the above securities for a period of 180 days after the date of this
prospectus. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares of common
stock included in this offering will be determined by negotiations between us
and the representatives of the underwriters. Among the factors considered in
determining the price will be:
- the history of, and the prospects for, our business and the industry in
which we compete;
- an assessment of our management and the present state of our development;
- our past and present revenues and earnings;
- the prospects for growth of our revenues and earnings;
- the current state of the economy in the United States;
- the current level of economic activity in the industry in which we
compete and in related or comparable industries; and
- currently prevailing conditions in the securities markets, including
current market valuations of publicly-traded companies that are
comparable to ANSYS.
We have applied to list our common stock on the Nasdaq National Market
under the symbol "ASDI."
64
<PAGE> 66
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for ANSYS by Brobeck, Phleger & Harrison LLP,
Irvine, California. Certain legal matters relating to this offering will be
passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois.
EXPERTS
The consolidated financial statements of ANSYS as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
included in this prospectus and the registration statement have been audited by
McGladrey & Pullen, LLP, independent auditors, as set forth in their report
appearing on page F-2 of this prospectus and in the registration statement. The
financial statements are included in reliance upon that report given upon the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
ANSYS has filed a registration statement on Form S-1 with the Securities
and Exchange Commission under the Securities Act with respect to the common
stock offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to ANSYS and the common
stock, please see the registration statement and the exhibits and schedules
filed with the registration statement. Statements contained in this prospectus
concerning the contents of any contract of other document referred to are not
necessarily complete. Please refer to the copy of such contract or other
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by such reference. The registration statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission in Washington, D.C. Copies of all or any
part of the registration statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Such copies may also be inspected and copied
at the Commission's Regional Offices located at:
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and
- 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may be obtained at prescribed rates by mail from
the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Securities and Exchange Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including ANSYS, that file electronically.
65
<PAGE> 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 68
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
ANSYS Diagnostics, Inc.
Lake Forest, California
We have audited the accompanying consolidated balance sheets of ANSYS
Diagnostics, Inc. and subsidiary as of December 31, 1997 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of ANSYS
Diagnostics, Inc. and subsidiary as of December 31, 1997 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
The above form of auditor's report represents the form of report that
McGladrey & Pullen, LLP would be willing to issue assuming the consummation of
the reorganization as described in Note 1 had taken place. The reorganization is
expected to occur prior to the effective date of the Company's planned offering
of 2,500,000 shares of common stock.
McGladrey & Pullen, LLP
Anaheim, California
March 30, 1999
F-2
<PAGE> 69
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- DECEMBER 31, 1998
1997 1998 (NOTE 11)
---------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 4)
Current Assets
Cash and cash equivalents......................... $1,515,000 $ 3,176,000 $ 916,000
Accounts receivable, less allowance for doubtful
accounts 1997 $20,000; 1998 $20,000 (Note 8)... 1,707,000 2,093,000 2,093,000
Income taxes receivable........................... -- 420,000 420,000
Inventories (Note 2).............................. 1,528,000 1,581,000 1,581,000
Prepaid expenses.................................. 99,000 40,000 40,000
Deferred income taxes (Note 7).................... 89,000 120,000 120,000
---------- ----------- ----------
Total current assets......................... 4,938,000 7,430,000 5,170,000
Equipment and Leasehold Improvements, net (Note
3)................................................ 1,567,000 4,199,000 4,199,000
Intangibles and Other Assets........................ 160,000 262,000 262,000
Deferred Income Taxes (Note 7)...................... 228,000 -- --
---------- ----------- ----------
Total assets................................. $6,893,000 $11,891,000 $9,631,000
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank line of credit (Note 4)...................... $ 733,000 $ -- $ --
Current maturities of long-term debt (Note 4)..... -- 224,000 224,000
Accounts payable.................................. 553,000 1,439,000 1,439,000
Accrued liabilities............................... 121,000 433,000 433,000
Accrued compensation.............................. 311,000 281,000 281,000
Income taxes payable.............................. 218,000 -- --
---------- ----------- ----------
Total current liabilities.................... 1,936,000 2,377,000 2,377,000
---------- ----------- ----------
Deferred Income Taxes (Note 7)...................... -- 180,000 180,000
---------- ----------- ----------
Long-term Debt, net of current maturities (Note
4)................................................ -- 1,670,000 1,670,000
---------- ----------- ----------
Commitments and Contingencies (Notes 6 and 8)
Stockholders' Equity (Notes 4, 5, 9 and 11)
Preferred stock, par value $.0001 per share;
5,000,000 shares authorized: 18,000 issued and
outstanding in 1997 and 1998, none outstanding
pro forma ($3,600,000 aggregate liquidation
preference including $1,800,000 of undeclared
cumulative dividends at December 31, 1998
amounting to $100 per share)................... -- -- --
Common stock, par value $.0001 per share;
30,000,000 shares authorized: issued and
outstanding 1,880,784 shares in 1997; 1,875,184
shares in 1998; 5,516,512 shares pro forma..... -- -- --
Additional paid-in capital........................ 1,818,000 1,834,000 1,434,000
Retained earnings................................. 3,139,000 5,830,000 3,970,000
---------- ----------- ----------
Total stockholders' equity................... 4,957,000 7,664,000 5,404,000
---------- ----------- ----------
Total liabilities and stockholders' equity... $6,893,000 $11,891,000 $9,631,000
========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 70
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Net sales (Note 8)..................... $8,126,000 $10,698,000 $18,964,000
Cost of goods sold..................... 3,058,000 5,099,000 9,703,000
---------- ----------- -----------
Gross profit.................... 5,068,000 5,599,000 9,261,000
---------- ----------- -----------
Operating expenses:
Research and development............. 434,000 773,000 700,000
Selling, general and administrative
(Notes 6 and 9)................... 2,770,000 2,876,000 4,049,000
---------- ----------- -----------
3,204,000 3,649,000 4,749,000
---------- ----------- -----------
Operating income....................... 1,864,000 1,950,000 4,512,000
Interest income (expense).............. 55,000 59,000 (46,000)
---------- ----------- -----------
Income before income taxes............. 1,919,000 2,009,000 4,466,000
Provision for income taxes (Note 7).... 718,000 803,000 1,775,000
---------- ----------- -----------
Net income (Note 9)............. $1,201,000 $ 1,206,000 $ 2,691,000
========== =========== ===========
Less preferred stock dividends (Note
5)................................... 180,000 180,000 180,000
---------- ----------- -----------
Income available to common
stockholders................. $1,021,000 $ 1,026,000 $ 2,511,000
========== =========== ===========
Earnings per share (Note 9):
Basic................................ $ 0.46 $ 0.54 $ 1.33
========== =========== ===========
Diluted (Note 10).................... $ 0.19 $ 0.20 $ 0.45
========== =========== ===========
Weighted average shares outstanding:
Basic................................ 2,230,408 1,900,951 1,890,204
========== =========== ===========
Diluted (Note 10).................... 6,057,018 5,863,517 5,941,534
========== =========== ===========
Pro forma earnings per share (Note 11):
Basic................................ $ 0.47
===========
Diluted.............................. $ 0.44
===========
Pro forma weighted average shares
outstanding (Note 11):
Basic................................ 5,736,987
===========
Diluted.............................. 6,146,989
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 71
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL
NUMBER NUMBER PAID-IN RETAINED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS
--------- ------ --------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995..... 18,000 $ -- 2,307,408 $ -- $$2,011,000 $1,072,000
Exercise of stock options.... -- -- 4,080 -- 1,000 --
Common stock purchased for
retirement................ -- -- (250,704) -- (195,000) (117,000)
Net income................... -- -- -- -- -- 1,201,000
------ ------ --------- ------ ---------- ----------
Balance, December 31, 1996..... 18,000 -- 2,060,784 -- 1,817,000 2,156,000
Common stock purchased for
retirement................ -- -- (180,000) -- (1,000) (223,000)
Compensation expense related
to stock options (Note
9)........................ -- -- -- -- 2,000 --
Net income................... -- -- -- -- -- 1,206,000
------ ------ --------- ------ ---------- ----------
Balance, December 31, 1997..... 18,000 -- 1,880,784 -- 1,818,000 3,139,000
Exercise of stock options.... -- -- 18,400 -- 19,000 --
Common stock purchased for
retirement................ -- -- (24,000) -- (111,000) --
Compensation expense related
to stock options (Note
9)........................ -- -- -- -- 108,000 --
Net income................... -- -- -- -- -- 2,691,000
------ ------ --------- ------ ---------- ----------
Balance, December 31, 1998..... 18,000 $ -- 1,875,184 $ -- $1,834,000 $5,830,000
====== ====== ========= ====== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 72
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income............................... $1,201,000 $ 1,206,000 $ 2,691,000
Depreciation and amortization............ 328,000 315,000 395,000
Deferred taxes........................... (42,000) (17,000) 377,000
Noncash compensation (Note 9)............ -- 2,000 108,000
Changes in operating assets and
liabilities:
Accounts receivable................... (371,000) (626,000) (386,000)
Income taxes receivable............... -- -- (420,000)
Inventories........................... (279,000) (513,000) (53,000)
Prepaid expenses...................... (18,000) (63,000) 59,000
Accounts payable and accrued
liabilities......................... 328,000 148,000 541,000
Income taxes payable.................. (29,000) 173,000 (218,000)
---------- ----------- -----------
Net cash provided by operating
activities....................... 1,118,000 625,000 3,094,000
---------- ----------- -----------
Cash Flows from Investing Activities
Purchase of equipment and leasehold
improvements.......................... (270,000) (1,231,000) (2,377,000)
Purchase of intangibles and other
assets................................ -- (172,000) (125,000)
---------- ----------- -----------
Net cash (used in) investing
activities....................... (270,000) (1,403,000) (2,502,000)
---------- ----------- -----------
Cash Flows from Financing Activities
Borrowings on line of credit............. -- 883,000 --
Payments on line of credit............... -- (150,000) (733,000)
Common stock purchased for retirement.... (312,000) (224,000) (111,000)
Common stock issued...................... 1,000 -- 19,000
Long-term borrowings..................... -- -- 2,000,000
Payments on long-term debt............... -- -- (106,000)
---------- ----------- -----------
Net cash provided by (used in)
financing activities............. (311,000) 509,000 1,069,000
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents................. 537,000 (269,000) 1,661,000
Cash and Cash Equivalents
Beginning of period...................... 1,247,000 1,784,000 1,515,000
---------- ----------- -----------
End of period............................ $1,784,000 $ 1,515,000 $ 3,176,000
========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 73
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
ANSYS Diagnostics, Inc. and its wholly owned subsidiary, ANSYS
International, Inc., a foreign sales corporation (together, the "Company"),
develops, manufactures and markets drug testing products and specialty
laboratory and research products. The Company's drug testing products are used
for pre-employment screening, random employee testing, government mandated
testing, parole and probation monitoring and hospital-based testing. The
Company's specialty laboratory and research products are used for sample
preparation, including solid phase extraction and nucleic acid isolation. The
Company's products are subject to approval and regulation by the Food and Drug
Administration (FDA) and other state and foreign regulatory agencies.
Reorganization:
In connection with a planned public offering of its common stock, the
Company is undertaking a restructuring and reorganization. As a result of the
restructuring and reorganization, the Company will (1) reincorporate in
Delaware, (2) increase the number of authorized common shares to 30,000,000
shares, (3) increase the number of authorized preferred shares to 5,000,000
shares, (4) reduce the par value of the common and preferred stock to $.0001 per
share and (5) effect a 1.2-for-one stock split. This proposed reorganization has
been accounted for as if it occurred as of the beginning of the earliest period
presented in these consolidated financial statements.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
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 and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All material intercompany balances
and transactions are eliminated in consolidation.
Cash and cash equivalents:
The Company classifies all highly liquid investments with original
maturities of less than 90 days at the time of purchase as cash and cash
equivalents.
The Company, periodically throughout the year, has amounts on deposit that
exceed the insured limit.
F-7
<PAGE> 74
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable:
Most of the Company's business activity is with distributors of medical
products who are primarily located in the United States. The Company grants
normal trade credit to creditworthy customers without requiring collateral or
other security.
Inventories:
Inventories are stated at the lower of average cost or market.
Inventory quantities in excess of one year's usage, based upon the
preceding twelve months' usage, are appropriately reserved in order to
approximate their net realizable values. In addition, management reviews the
remaining inventory for potential reserves.
Equipment and leasehold improvements:
Equipment and leasehold improvements are carried at cost. Depreciation and
amortization are provided on a straight-line method over (1) five to ten years
for manufacturing equipment, (2) five years for office equipment, and (3) the
lesser of (a) the asset life, (b) ten years, or (c) the remaining term of the
facility lease for leasehold improvements. Amortization of leasehold
improvements is included in depreciation expense.
Intangibles and other assets:
Intangibles and other assets consist primarily of a licensing agreement and
an investment in an unrelated company. The licensing agreement is being
amortized on a straight-line basis over its estimated useful life of five years.
The investment in an unrelated company represents less than five percent of that
company's outstanding stock and is accounted for at its historical cost of
$125,000.
Revenue recognition:
The Company recognizes revenue when goods are shipped to the customer.
Research and development:
The Company expenses research and development costs as they are incurred.
The Company incurs research and development costs in developing new products.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets and liabilities are recognized for deductible temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets
F-8
<PAGE> 75
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Stock-based compensation:
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to fair value at the measurement date. Nonemployee stock-based
transactions are accounted for under the requirements of the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock Based Compensation, which requires
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable. The Company
estimates market value at the measurement date by utilizing a combination of the
discounted cash flows method, comparison to comparable publicly traded companies
and book value. In addition, the Company periodically uses an outside valuation
specialist to validate its estimation of fair value.
Earnings per share:
Basic earnings per share is computed as net income available to common
stockholders divided by the weighted average number of common shares outstanding
for the period.
Diluted earnings per share is computed as net income available to common
stockholders plus dividends on Series B convertible preferred stock divided by
the weighted average number of common shares outstanding for the period plus
potential dilutive common shares issuable through convertible preferred stock
and stock options.
Fair value of financial instruments:
The Company's financial instruments consist primarily of cash, the bank
line of credit and long term debt. The carrying value of these instruments is
considered to be representative of their fair value.
Determining impairment on long-term assets:
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Segment information:
In accordance with FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company has determined the products are
all
F-9
<PAGE> 76
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
classified as in vitro diagnostic products that are produced using similar
methods and are regulated by the FDA. In addition, the Company has analyzed the
type and class of customers, and the product distribution methods, and has
determined that the Company has one reportable segment.
NOTE 2. INVENTORIES
Inventories consisted of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Raw materials......................................... $ 633,000 $ 754,000
Work in process....................................... 363,000 433,000
Finished goods........................................ 532,000 394,000
---------- ----------
$1,528,000 $1,581,000
========== ==========
</TABLE>
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at December
31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Manufacturing equipment............................. $ 989,000 $ 1,045,000
Office equipment.................................... 985,000 1,134,000
Leasehold improvements.............................. 1,302,000 2,181,000
----------- -----------
3,276,000 4,360,000
Depreciation and amortization....................... (2,796,000) (1,850,000)
----------- -----------
480,000 2,510,000
Construction in progress............................ 1,087,000 1,689,000
----------- -----------
$ 1,567,000 $ 4,199,000
=========== ===========
</TABLE>
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended December 31, 1996, 1997 and 1998 was $328,000,
$303,000 and $370,000, respectively.
NOTE 4. BANK LINE OF CREDIT AND LONG-TERM DEBT
Bank line of credit:
The Company has a revolving credit agreement with a bank to provide for
short-term financing. Under the terms of this agreement, the Company may borrow
up to $1,000,000. Borrowings under this line are restricted to a certain
percentage of accounts receivable and inventories and bear interest at the
bank's prime rate plus 0.125% (totaling 7.875% as of December 31, 1998). There
were no borrowings under this line of credit agreement at December 31, 1998.
Borrowings under the agreement at December 31, 1997 totaled $733,000. The
agreement is secured by the Company's accounts receivable, inventories,
F-10
<PAGE> 77
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
equipment and intangibles. It also contains certain financial covenants,
restricts the payment of dividends and redemption of stock, and expires in May
1999. The Company was in violation of the covenant relating to stock
redemptions. However, this violation has been waived by the bank. As of December
31, 1998, the Company had approximately $1,000,000 in availability under this
credit facility.
Long-term debt:
At December 31, 1998, the Company has an 8.42% term loan that is secured by
inventory, equipment and intangibles and is due in monthly installments of
$32,000 through June 2005. Aggregate future annual maturities on this debt as of
December 31, 1998 are as follows: 1999 $224,000; 2000 $245,000; 2001 $266,000;
2002 $290,000; 2003 $316,000; 2004 $345,000; and 2005 $208,000 (total
$1,894,000).
NOTE 5. CAPITAL STOCK
The following summarizes the capitalization of the Company as of December
31, 1998:
<TABLE>
<CAPTION>
ISSUED AND ADDITIONAL
AUTHORIZED OUTSTANDING PAID-IN
CAPITAL STOCK SHARES SHARES PAR VALUE CAPITAL
------------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Preferred Series A.................. 4,000 4,000 $.0001 $ 400,000
Preferred Series B.................. 14,000 14,000 .0001 1,400,000
Preferred, undesignated............. 4,982,000 -- -- --
Common.............................. 30,000,000 1,875,184 .0001 34,000
----------
$1,834,000
==========
</TABLE>
Preferred dividends on the Series A and B preferred stock are cumulative at
a rate of $10 per annum and are payable, if declared, on a quarterly basis. No
dividends shall be paid to common stockholders until the preferred stockholders
have received all unpaid accumulated dividends. The Company has not declared any
preferred stock dividends. Such accumulated dividends totaled $1,800,000 ($100
per share) at December 31, 1998 and $1,620,000 ($90 per share) at December 31,
1997.
In the event of liquidation, the holders of the Series A and Series B
preferred stock are entitled to receive an amount per share equal to $100
(carrying value is also $100 per share) plus any unpaid accumulated dividends,
prior to any distribution of the assets of the Company to the common
stockholders.
Series A Redeemable Preferred Stock -- Upon consent of the holders of the
majority of common shares, the Company may redeem the outstanding shares of
Series A redeemable preferred stock at a per share price of $100 plus all unpaid
accumulated dividends.
Series B Convertible Preferred Stock -- Each share of Series B convertible
preferred stock is convertible, at the option of the holder, into a number of
common shares
F-11
<PAGE> 78
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. CAPITAL STOCK (CONTINUED)
determined by dividing $100 by the conversion price as defined. The conversion
price at December 31, 1998 is $0.384475 per common share. Each share of Series B
convertible preferred stock shall automatically be converted into common shares,
at the then effective conversion price, in the event of a public offering.
Series B convertible preferred stock carries full voting rights and powers, with
the exception of voting on the redemption of Series A redeemable preferred
stock. Each holder of Series B convertible preferred stock is entitled to 164.7
votes per share held. The Company has reserved 3,641,328 shares of common stock
for issuance upon conversion of Series B preferred stock.
The Company is prohibited from repurchasing any common stock (other than
the shares originally issued to employees of the Company, of which 1,262,904
shares are outstanding as of December 31, 1998, which the Company has the right
to repurchase at the original issuance price or the fair market value, under
certain circumstances) prior to redeeming all the Series A preferred stock and
paying all accumulated dividends. Holders of the Series A preferred stock have
no voting rights or powers except in certain circumstances as defined in the
Company's articles of incorporation.
Preferred stock, undesignated -- The Board of Directors has the authority,
without action by the stockholders, to designate and issue any authorized but
unissued shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each such series.
NOTE 6. OPERATING LEASE
The Company leases its facilities under the terms of an operating lease
agreement that expires in December 2007. The agreement calls for initial monthly
lease payments of approximately $48,000 plus the payment of insurance, property
tax and normal maintenance. The Company has the option to purchase these
facilities for $5,578,000 in February 2000.
The approximate future minimum annual lease payments as of December 31,
1998 are as follows: 1999 $575,000; 2000 $605,000; 2001 $634,000; 2002 $634,000;
2003 $699,000; thereafter $2,976,000 (total $6,123,000).
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$557,000, $580,000 and $697,000, respectively.
F-12
<PAGE> 79
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The income tax provision for the years ended December 31, 1996, 1997 and
1998 consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Federal
Current................................. $590,000 $623,000 $1,820,000
Deferred................................ (37,000) (13,000) (315,000)
-------- -------- ----------
553,000 610,000 1,505,000
-------- -------- ----------
State
Current................................. 170,000 197,000 332,000
Deferred................................ (5,000) (4,000) (62,000)
-------- -------- ----------
165,000 193,000 270,000
-------- -------- ----------
Total income tax provision........... $718,000 $803,000 $1,775,000
======== ======== ==========
</TABLE>
A reconciliation of income tax expense recorded to the amount of income tax
expense that would result from applying the federal statutory rate to income
before income taxes for the years ended December 31, 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate................. 35% 35% 35%
State taxes, net of federal benefit............... 6 6 6
Foreign sales corporation benefit................. (1) (1) (1)
Benefit of income taxed at lower rates............ (1) (1) (1)
Other............................................. (2) 1 1
-- -- --
Effective tax rate........................... 37% 40% 40%
== == ==
</TABLE>
The major components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets
Equipment and leasehold improvements.......... $228,000 $ --
State taxes................................... 65,000 63,000
Inventories................................... 19,000 58,000
Accounts receivable reserves.................. 8,000 8,000
Other......................................... (3,000) (9,000)
-------- ---------
Total deferred tax assets.................. $317,000 $ 120,000
======== =========
Deferred tax liabilities
Equipment and leasehold improvements.......... $ -- $(180,000)
======== =========
</TABLE>
F-13
<PAGE> 80
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheets as of December 31 as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Current assets.................................. $ 89,000 $ 120,000
Noncurrent assets............................... 228,000 --
Noncurrent liabilities.......................... -- (180,000)
</TABLE>
NOTE 8. FOREIGN SALES, MAJOR CUSTOMERS AND DEPENDENCE ON SUPPLIERS
Foreign sales:
Net sales for 1996, 1997 and 1998 included sales to customers located
outside the United States. The sales to foreign customers are primarily
denominated in U.S. dollars, and the Company has not experienced any significant
foreign currency gains or losses.
Net foreign sales for 1996, 1997 and 1998 by country are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Australia........................ $ 227,000 $ 349,000 $ 323,000
Canada........................... 169,000 158,000 147,000
China............................ 173,000 107,000 108,000
England.......................... 165,000 150,000 217,000
Germany.......................... 166,000 235,000 210,000
Other............................ 355,000 262,000 222,000
---------- ---------- ----------
$1,255,000 $1,261,000 $1,227,000
========== ========== ==========
</TABLE>
Major customers:
Net sales for 1996, 1997 and 1998 include sales to the following customers:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Customer A...................... $1,387,000 $4,503,000 $12,276,000
Customer B...................... 1,560,000 * *
</TABLE>
Accounts receivable balance due from these customers as of December 31,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Customer A...................... $ 224,000 $1,169,000 $ 889,000
Customer B...................... -- * *
</TABLE>
- -------------------------
* Net sales to this customer are less than 10% of the total net sales for 1997
and 1998.
F-14
<PAGE> 81
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. FOREIGN SALES, MAJOR CUSTOMERS AND DEPENDENCE ON SUPPLIERS (CONTINUED)
Dependence on Roche Diagnostic Systems, Inc.:
The Company is highly dependent on its arrangement with Roche Diagnostic
Systems, Inc. ("Roche") (Customer A above) for the distribution and marketing of
three of its principal products, which accounted for 17%, 42% and 65% of the
Company's net sales during the years ended December 31, 1996, 1997 and 1998,
respectively. Two of these three products were jointly developed by the Company
in collaboration with Roche. The Company's agreements with Roche, which expire
in 2002 and 2003 by their terms, provide that the Company has exclusive
manufacturing rights to the products. These agreements do not require Roche to
purchase any minimum amounts of product, and the Company does not have the
ability to sell or market these products directly. Roche holds all intellectual
property and other ownership rights to these products, and has no obligation to
renew or extend the Company's manufacturing rights upon expiration of the
Company's agreements with Roche.
Dependence on suppliers:
The Company currently relies on several third party suppliers for the
manufacture of certain key components used in its products. In particular, the
Company receives all of its requirements for the nitrocellulose membranes used
in the TesTcup and TesTstik products from a single approved supplier. Under the
Roche agreements, Roche provides all of the Company's requirements for certain
liquid reagents in the TesTcup and TesTstik products. Such components are custom
made biomaterials manufactured specifically for the Company's products. The
Company does not have any long-term supply agreements with either of these
suppliers or an alternate approved supplier for these components. In addition,
the Company also has additional single source suppliers for other components
used in the manufacture of certain products.
NOTE 9. STOCK OPTION PLANS
During 1998 the Company adopted the 1997 Stock Option Plan (the "1997
Plan"). The Company has reserved 1,329,780 shares of common stock for issuance
under the 1997 Stock Incentive Plan, the Stock Option Plan for Employees of
ANSYS, Inc. (1990) (the "1990 Plan") and certain officer and employee
nonqualified stock options. The options vest immediately or over a three- to
five-year period.
The 1997 Plan is divided into two separate components; the Option Grant
Program and the Stock Issuance Program. Under the Option Grant Program, eligible
individuals (including officers, non-employee board members and consultants) may
be granted options to purchase shares of common stock at an exercise price not
less than 100% of their fair market value on the grant date as determined by the
plan administrator. Under the Stock Issuance Program, these individuals may be
issued shares of common stock directly. The individual may purchase the shares,
at a price not less than 100% of their fair market value as determined by the
plan administrator at the time of issuance; however, the purchase price per
share issued to a 10% stockholder may not be less than 110% of the fair market
value of the underlying common stock. Shares may also be granted as a bonus tied
to the
F-15
<PAGE> 82
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCK OPTION PLANS (CONTINUED)
performance of services. A total of 600,000 shares of common stock have been
authorized for issuance under the 1997 Plan. At December 31, 1998, there were
388,800 remaining options available under the 1997 Plan.
The 1990 Plan was adopted during 1990 and a total of 780,000 shares of
common stock have been authorized for issuance under the 1990 Plan. Options
granted under the 1990 Plan are made at the discretion of the plan
administrator. Option grants have a maximum term of ten years, subject to
earlier termination if the optionee's service with the Company is discontinued.
Options granted under the 1990 Plan vested over three to five years. At December
31, 1998, there were no remaining options available under the 1990 Plan.
In addition, during 1996, the Company granted options to purchase 90,000
shares of common stock to an officer that are nonqualified stock options and
were not granted pursuant to the 1990 Plan or the 1997 Plan. These options vest
over three years.
A summary of the status of the 1990 Plan, the 1997 Plan and certain officer
and employee nonqualified stock options and changes during the years ended
December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------- --------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period............... 483,180 $0.43 723,780 $0.64 777,780 $0.74
Granted.............. 244,800 1.05 54,000 2.13 211,200 3.97
Exercised............ (4,080) 0.29 -- -- (18,400) 1.05
Forfeited............ (120) 0.29 -- -- (29,600) 1.05
------- ----- ------- ----- ------- -----
Outstanding at end of
period............... 723,780 $0.64 777,780 $0.74 940,980 $1.45
======= ===== ======= ===== ======= =====
Exercisable at end of
period............... 332,969 $0.38 486,186 $0.51 688,920 $0.94
======= ===== ======= ===== ======= =====
Remaining options
available under the
Plans................ 75,744 21,744 388,800
======= ======= =======
Weighted average
minimum value per
option granted during
the period:
At market price...... 244,800 $0.68 -- $ -- -- $ --
======= ===== ======= ===== ======= =====
Below market price... -- $ -- 54,000 $1.29 211,200 $2.22
======= ===== ======= ===== ======= =====
</TABLE>
F-16
<PAGE> 83
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCK OPTION PLANS (CONTINUED)
A further summary of options outstanding at December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.29 318,780 3.32 years 318,780
0.52 40,200 2.10 years 40,200
0.75 120,000 6.50 years 120,000
1.04 36,000 7.20 years 17,600
1.07 160,800 7.91 years 107,202
2.13 54,000 8.96 years 18,003
3.83 175,200 9.32 years 49,135
4.64 36,000 9.83 years 18,000
------- -------
940,980 688,920
======= =======
</TABLE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations to account for the stock options issued
to employees and directors. Had compensation cost for the stock option plans
been determined based on the fair value at the date consistent with the method
of FASB Statement No. 123, Accounting for Stock-Based Compensation, the
Company's net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.................... $1,201,000 $1,206,000 $2,691,000
Pro forma...................... 1,178,000 1,153,000 2,451,000
Basic earnings per share:
As reported.................... 0.46 0.54 1.33
Pro forma...................... 0.45 0.51 1.20
Diluted earnings per share:
As reported.................... 0.19 0.20 0.45
Pro forma...................... 0.19 0.19 0.41
</TABLE>
The minimum value of options granted under the Company's Stock Option Plan
was estimated on the date of grant with the following assumptions: no dividend
yield, risk-free interest 6.4% to 6.5% in 1996, 6.6% in 1997 and 6.3% 1998, and
expected lives of ten years. The effects of applying SFAS No. 123 are not
indicative of future amounts since, among other reasons, the requirements of the
Statement have been applied only to options granted after December 1994.
The 54,000 stock options granted by the Company in 1997 and the 211,200
stock options granted by the Company in 1998 were granted at an exercise price
that was less than the fair value of common stock per share. The Company
recorded related compensation expense during the years ended December 31, 1997
and 1998 of $2,000 and $108,000, respectively, based on an estimated fair value
per share of $2.98 for 54,000 shares $4.74 for 175,200 shares and $7.38 for
36,000 shares.
F-17
<PAGE> 84
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCK OPTION PLANS (CONTINUED)
In January 1999, the Company issued an additional 60,000 stock options with
an option price of $4.97 per share to employees of the Company.
NOTE 10. DILUTED EARNINGS PER SHARE
Diluted earnings per share is computed as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Income available to common
stockholders........................... $1,021,000 $1,026,000 $2,511,000
Plus impact of assumed conversion of
Series B preferred stock............... 140,000 140,000 140,000
---------- ---------- ----------
Income available to common stockholders
plus assumed conversion................ $1,161,000 $1,166,000 $2,651,000
========== ========== ==========
Weighted average shares outstanding...... 2,230,408 1,900,951 1,890,204
Plus incremental shares from Series B
preferred stock conversion............. 3,641,328 3,641,328 3,641,328
Stock options............................ 185,282 321,238 410,002
---------- ---------- ----------
Diluted weighted average shares
outstanding............................ 6,057,018 5,863,517 5,941,534
========== ========== ==========
</TABLE>
NOTE 11. PRO FORMA INFORMATION
The Company plans to redeem the Series A preferred stock, convert the
Series B preferred stock into common stock and pay the cumulative dividends on
the preferred stock in connection with a planned public stock offering. The
objective of the pro forma financial information included in these financial
statements is to show what the significant effects might have been on the
historical stockholders' equity and earnings per share.
Pro forma balance sheet at December 31, 1998:
The following pro forma balance sheet adjustments have been made assuming
the following transactions occurred as of December 31, 1998:
- Series A preferred stock has been redeemed for $400,000 in cash.
- Series B preferred stock has been converted into 3,641,328 shares of
common stock.
- An estimated $1,860,000 in cumulative dividends on the Series A and B
preferred stock is paid in cash.
Pro forma earnings per share:
Pro forma basic earnings per share is computed as net income divided by the
pro forma weighted average number of common shares outstanding for the period.
Pro forma common shares outstanding for all periods presented in the computation
of pro forma basic earnings per share include (1) the number of shares of common
stock that the Series B
F-18
<PAGE> 85
ANSYS DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. PRO FORMA INFORMATION (CONTINUED)
preferred stock will be converted into upon the completion of the initial public
offering and (2) the number of equivalent common shares to be issued in the
initial public offering necessary to redeem the Series A preferred stock and pay
the cumulative dividends on the Series A and B preferred stock through the
estimated effective date of the initial public offering at the assumed public
offering price per share.
Pro forma diluted earnings per share is computed as net income divided by
the pro forma weighted average number of common shares outstanding for the
period as computed above plus dilutive potential common shares that could occur
from common shares issuable through stock options. Pro forma basic and diluted
shares for the year ended December 31, 1998 is computed as follows:
<TABLE>
<S> <C>
Basic:
Weighted average shares outstanding....................... 1,890,204
Pro forma conversion of Series B preferred
stock.................................................. 3,641,328
Pro forma common shares to be issued necessary to:
Redeem Series A preferred stock........................ 36,364
Pay cumulative dividends on preferred stock............ 169,091
---------
Pro forma weighted average shares outstanding............. 5,736,987
=========
Diluted:
Pro forma weighted average shares outstanding............. 5,736,987
Stock options............................................. 410,002
---------
Pro forma diluted weighted average shares outstanding..... 6,146,989
=========
</TABLE>
NOTE 12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest.................................. $ -- $ 16,000 $ 148,000
======== ======== ==========
Income taxes.............................. $618,000 $646,000 $2,002,000
======== ======== ==========
Supplemental disclosures of non-cash
investing and financing activities:
Accounts payable incurred for purchase of
equipment and leasehold improvements... $ -- $ -- $ 627,000
======== ======== ==========
</TABLE>
F-19
<PAGE> 86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS DATED , 1999
ANSYS LOGO
2,500,000 SHARES
COMMON STOCK
Vector Securities International, Inc. Sutro & Co. Incorporated
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 5
Forward-Looking Statements................... 15
Use of Proceeds.............................. 16
Dividend Policy.............................. 16
Capitalization............................... 17
Dilution..................................... 18
Selected Consolidated Financial Data......... 19
Management's Discussion and Analysis of
Financial Condition and Results
of Operations.............................. 20
Business..................................... 28
Management................................... 48
Principal Stockholders....................... 57
Description of Capital Stock................. 58
Shares Eligible for Future Sale.............. 61
Underwriting................................. 63
Legal Matters................................ 65
Experts...................................... 65
Additional Information....................... 65
Index to Consolidated Financial Statements... F-1
</TABLE>
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON
STOCK IN JURISDICTIONS WHERE IT IS UNLAWFUL TO DO SO. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS.
-------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by ANSYS.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Registration fee............................................ $ 9,591
NASD filing fee............................................. 3,950
Nasdaq National Market listing fee.......................... 70,000
Blue sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 100,000
Transfer Agent and Registrar fees........................... 30,000
Miscellaneous............................................... 51,459
--------
Total............................................. $550,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our bylaws provide that we will indemnify our directors
and officers to the fullest extent permitted by law and require us to advance
litigation expenses upon our receipt of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
or officer is not entitled to indemnification. Our bylaws further provide that
rights conferred under such bylaws do not exclude any other right such persons
may have or acquire under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Our certificate of incorporation provides that, pursuant to Delaware law,
our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to ANSYS and our stockholders. This provision
in the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemption's that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
In addition, our certificate of incorporation (Exhibit 3.1 to this
registration statement) provides that we shall indemnify our directors and
officers if such persons acted: (1) in good faith; (2) in a manner reasonably
believed to be in or not opposed to our best interests; and
II-1
<PAGE> 88
(3) with respect to any criminal action or proceeding, with reasonable cause to
believe such conduct was lawful. The certificate of incorporation also provides
that, pursuant to Delaware law, our directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to our company and
our stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to ANSYS for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemption's that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The certificate of
incorporation further provides that we are authorized to indemnify our directors
and officers to the fullest extent permitted by law through the bylaws,
agreement, vote of stockholders or disinterested directors, or otherwise. We
intend to obtain directors' and officers' liability insurance in connection with
this offering.
In addition, we have has entered or, concurrently with this offering, will
enter, into agreements to indemnify our directors and certain of our officers in
addition to the indemnification provided for in the certificate of incorporation
and bylaws. These agreements will, among other things, indemnify our directors
and certain of our officers for certain expenses (including attorneys fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in our right, on account of services by
that person as a director or officer of ANSYS or as a director or officer of any
subsidiary of ANSYS, or as a director or officer of any other company or
enterprise that the person provides services to at the request of ANSYS.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the underwriters of ANSYS and its officers and directors, and
by ANSYS of the underwriters, for certain liabilities arising under the
Securities Act or otherwise.
II-2
<PAGE> 89
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by ANSYS since January 1, 1996
involving sales of our securities that were not registered under the Securities
Act of 1933, as amended.
Since January 1, 1996, the Registrant has issued stock options under its
1990 Plan and 1997 Plan to certain eligible officers, directors and employees to
purchase an aggregate of 480,000 shares of Common Stock. In addition, on
December 12, 1996 the Registrant issued options to purchase 90,000 shares of
Common Stock to Stephen K. Schultheis, then its President and Chief Executive
Officer, which options were not granted pursuant to any plan.
None of the optionees paid any cash consideration for such options. Such
options did not involve a "sale" of securities; and, accordingly, registration
was not required. The following table sets forth the grant date, number of
options, current exercise price and class of optionees for all of such options.
<TABLE>
<CAPTION>
GRANT DATE NO. OF OPTIONS EXERCISE PRICE CLASS OF OPTIONEES
---------- -------------- -------------- ------------------
<S> <C> <C> <C>
01/01/96 to 05/31/96 72,000 $1.04 Employee
03/01/96 to 12/31/96 82,800 $1.07 Employee
12/12/96 90,000 $1.07 Officer
12/18/97 54,000 $2.13 Employee
04/08/98 108,000 $3.83 Employee
07/01/98 67,200 $3.83 Officer
10/16/98 18,000 $4.64 Director
11/16/98 18,000 $4.64 Director
01/22/99 60,000 $4.97 Employee
</TABLE>
In addition, in April 1998, the Registrant issued 18,400 shares to a former
employee upon exercise of his vested stock options. In April 1996 the Registrant
issued 4,080 shares to another former employee upon exercise of his vested stock
options.
The sale and issuance of securities in the above transactions were deemed
to be exempt from registration under the Securities Act by virtue of Section
4(2) or Rule 701 thereof, or Regulation D, as transactions by an issuer not
involving a public offering. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to such information.
II-3
<PAGE> 90
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Certificate of Incorporation of ANSYS to be filed with the
Delaware Secretary of State in March 1999
3.2** Bylaws of ANSYS
4.1** Specimen certificate representing shares of common stock of
the Company
5.1 Form of Opinion of Brobeck Phleger & Harrison LLP
10.1** Form of Indemnification Agreement
10.2* Stock Option Plan for Employees of ANSYS, together with form
of Stock Option Agreement (and related Notice of Grant of
Option), Stock Purchase Agreement and Stock Issuance
Agreement
10.3* 1997 Stock Incentive Plan, together with form of Stock
Option Agreement (and related Notice of Grant of Option),
Stock Purchase Agreement and Stock Issuance Agreement
10.4+* Commercial Agreement dated as of April 1, 1993 by and
between Roche Diagnostic Systems, Inc. and ANSYS
10.5* Amendment to Commercial Agreement between Roche Diagnostic
Systems, Inc. and ANSYS dated May 1, 1998
10.6+* Development and Manufacturing Agreement dated as of
September 1, 1996 by and between Roche Diagnostic Systems,
Inc. and ANSYS
10.7+* First Amendment to Development and Manufacturing Agreement
between Roche Diagnostic Systems, Inc. and ANSYS dated as of
September 25, 1998
10.8* Standard Industrial Commercial Single-Tenant Lease -- Net
dated November 1, 1996 between Makena Properties and ANSYS
10.9* Form of International Distributorship Agreement for ANSYS
10.10* Form of Distributorship Agreement for ANSYS
10.11* Registration Rights Agreement dated December 12, 1988
between ANSYS and certain stockholders of ANSYS
10.12* Management Subscription Agreement dated December 12, 1988
between ANSYS and certain stockholders of ANSYS
10.13* $2,000,000 Promissory Note Change in Terms Agreement dated
June 1, 1998 between ANSYS and Southern California Bank
10.14* $1,000,000 Promissory Note Change in Terms Agreement dated
May 28, 1998 between ANSYS and Southern California Bank
21.1* List of Subsidiaries
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
II-4
<PAGE> 91
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Lake
Forest, State of California, on the 29th day of March, 1999.
ANSYS DIAGNOSTICS, INC.
By: /s/ STEPHEN K. SCHULTHEIS
-----------------------------------
Stephen K. Schultheis,
Chairman of the Board, President
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN K. SCHULTHEIS Chairman of the Board, March 29, 1999
- ------------------------------------------ President and Chief Executive
Stephen K. Schultheis Officer (principal executive
officer)
/s/ SUZANNE M. DAVID Chief Financial Officer March 29, 1999
- ------------------------------------------ (principal financial and
Suzanne M. David accounting officer)
/s/ RONALD J. HALL Director March 29, 1999
- ------------------------------------------
Ronald J. Hall
* Director March 29, 1999
- ------------------------------------------
George D. Holmes
* Director March 29, 1999
- ------------------------------------------
John M. Morris
* Director March 29, 1999
- ------------------------------------------
C. Michael O'Donnell, Ph.D.
* Director March 29, 1999
- ------------------------------------------
William C. Shepherd
</TABLE>
*By: /s/ STEPHEN K. SCHULTHEIS
- --------------------------------
Stephen K. Schultheis,
Attorney-in-fact
II-6
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
1.1** Form of Underwriting Agreement..............................
3.1** Certificate of Incorporation of ANSYS to be filed with the
Delaware Secretary of State in March 1999...................
3.2** Bylaws of ANSYS.............................................
4.1** Specimen certificate representing shares of common stock of
the Company.................................................
5.1 Form of Opinion of Brobeck Phleger & Harrison LLP...........
10.1** Form of Indemnification Agreement...........................
10.2* Stock Option Plan for Employees of ANSYS, together with form
of Stock Option Agreement (and related Notice of Grant of
Option), Stock Purchase Agreement and Stock Issuance
Agreement...................................................
10.3* 1997 Stock Incentive Plan, together with form of Stock
Option Agreement (and related Notice of Grant of Option),
Stock Purchase Agreement and Stock Issuance Agreement.......
10.4+* Commercial Agreement dated as of April 1, 1993 by and
between Roche Diagnostic Systems, Inc. and ANSYS............
10.5* Amendment to Commercial Agreement between Roche Diagnostic
Systems, Inc. and ANSYS dated May 1, 1998...................
10.6+* Development and Manufacturing Agreement dated as of
September 1, 1996 by and between Roche Diagnostic Systems,
Inc. and ANSYS..............................................
10.7+* First Amendment to Development and Manufacturing Agreement
between Roche Diagnostic Systems, Inc. and ANSYS dated as of
September 25, 1998..........................................
10.8* Standard Industrial Commercial Single-Tenant Lease -- Net
dated November 1, 1996 between Makena Properties and
ANSYS.......................................................
10.9* Form of International Distributorship Agreement for ANSYS...
10.10* Form of Distributorship Agreement for ANSYS ................
10.11* Registration Rights Agreement dated December 12, 1988
between ANSYS and certain stockholders of ANSYS.............
10.12* Management Subscription Agreement dated December 12, 1988
between ANSYS and certain stockholders of ANSYS.............
10.13* $2,000,000 Promissory Note Change in Terms Agreement dated
June 1, 1998 between ANSYS and Southern California Bank.....
10.14* $1,000,000 Promissory Note Change in Terms Agreement dated
May 28, 1998 between ANSYS and Southern California Bank.....
21.1* List of Subsidiaries........................................
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors....
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1)................................................
24.1* Power of Attorney...........................................
27.1* Financial Data Schedule.....................................
</TABLE>
- -------------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 5.1
March 31, 1999
Ansys Diagnostics, Inc.
25200 Commercentre Drive
Lake Forest, California 92630
Re: Ansys Diagnostics, Inc. Registration Statement on Form S-1 for
2,875,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Ansys Diagnostics, Inc. (the
"Company") in connection with the proposed issuance and sale by the Company of
up to 2,875,000 shares of the Company's Common Stock (the "Shares") pursuant to
the Company's Registration Statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act").
This opinion is being furnished in accordance with the
requirements of Item 16(a) of Form S-1.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus which is part of the Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act,
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.
<PAGE> 2
Ansys Diagnostics, Inc.
Page 2
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1
(No. 333-72665) of our report, dated March 30, 1999, relating to the
consolidated financial statements of Ansys Diagnostics, Inc. and Subsidiary.
We also consent to the reference to our Firm under the caption "Experts" and
"Selected Consolidated Financial Data" in the Prospectus.
McGladrey & Pullen, LLP
Anaheim, California
March 30, 1999
