10-Q 1 d10q.txt FORM 10-Q UNITED STATES- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-20853 ANSYS, Inc. (exact name of registrant as specified in its charter) DELAWARE 04-3219960 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 275 Technology Drive, Canonsburg, PA 15317 (Address of principal executive offices) (Zip Code) 724-746-3304 (Registrant's telephone number, including area code) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding as of August 7, 2002 was 14,578,894 shares. 1 ANSYS, INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6-8 Independent Accountants' Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk - No Significant Changes PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports Filed on Form 8-K 18 SIGNATURES 19 EXHIBIT INDEX 20
Trademarks used in this Form 10-Q: ANSYS(R) and DesignSpace(R) are registered trademarks of SAS IP, Inc., a wholly-owned subsidiary of ANSYS, Inc. 2 PART I - FINANCIAL INFORMATION Item 1. - Financial Statements: ANSYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share information) (Unaudited)
June 30, Dec. 31, 2002 2001 ------------- ----------- ASSETS Current assets: Cash and cash equivalents $ 22,803 $ 28,545 Short-term investments 27,834 24,903 Accounts receivable, less allowance for doubtful accounts of $1,630 and $1,610, respectively 13,523 15,352 Other current assets 12,195 12,803 Deferred income taxes 1,905 1,799 ----------- --------- Total current assets 78,260 83,402 ----------- --------- Long-term investments 1,083 500 Property and equipment, net 4,916 4,915 Capitalized software costs, net 827 817 Goodwill, net 17,807 16,937 Other intangibles, net 5,598 6,499 Deferred income taxes 4,747 4,692 ----------- --------- Total assets $ 113,238 $ 117,762 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 666 $ 624 Accrued bonuses 2,097 4,578 Other accrued expenses and liabilities 5,587 13,047 Deferred revenue 25,736 25,120 ----------- --------- Total current liabilities 34,086 43,369 ----------- --------- Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized - - Common stock, $.01 par value; 50,000,000 shares authorized; 16,584,758 shares issued 166 166 Additional paid-in capital 39,022 37,822 Less treasury stock, at cost: 1,979,720 and 2,071,123 shares, respectively (29,075) (23,953) Retained earnings 69,037 60,429 Accumulated other comprehensive income (loss) 2 (71) ----------- --------- Total stockholders' equity 79,152 74,393 ----------- --------- Total liabilities and stockholders' equity $ 113,238 $ 117,762 =========== =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 ANSYS, INC. AND SUBIDARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)
Three months ended Six months ended -------- -------- -------- -------- June 30, June 30, June 30, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- Revenue: Software licenses $ 11,778 $ 11,078 $ 23,108 $ 20,560 Maintenance and service 10,956 9,853 20,891 18,593 -------- -------- -------- -------- Total revenue 22,734 20,931 43,999 39,153 Cost of sales: Software licenses 915 1,333 1,952 2,443 Maintenance and service 1,894 1,613 3,708 3,166 -------- -------- -------- -------- Total cost of sales 2,809 2,946 5,660 5,609 -------- -------- -------- -------- Gross profit 19,925 17,985 38,339 33,544 Operating expenses: Selling and marketing 5,241 5,112 10,402 10,046 Research and development 4,938 4,298 9,757 8,213 Amortization 568 1,318 1,167 2,643 General and administrative 2,710 2,552 5,040 5,123 -------- -------- -------- -------- Total operating expenses 13,457 13,280 26,366 26,025 -------- -------- -------- -------- Operating income 6,468 4,705 11,973 7,519 Other income 323 467 494 1,111 -------- -------- -------- -------- Income before income tax provision 6,791 5,172 12,467 8,630 Income tax provision 2,071 1,603 3,859 2,690 -------- -------- -------- -------- Net income $ 4,720 $ 3,569 $ 8,608 $ 5,940 ======== ======== ======== ======== Earnings per share - basic: Basic earnings per share $ 0.32 $ 0.25 $ 0.59 $ 0.41 Weighted average shares - basic 14,670 14,342 14,629 14,628 Earnings per share - diluted: Diluted earnings per share $ 0.30 $ 0.24 $ 0.55 $ 0.39 Weighted average shares - diluted 15,829 15,171 15,776 15,310
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 ANSYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six months ended ---------------- June 30, June 30, 2002 2001 -------- -------- Cash flows from operating activities: Net income $ 8,608 $ 5,940 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,309 3,864 Deferred income tax provision 363 127 Provision for bad debts 159 270 Changes in operating assets and liabilities: Accounts receivable 1,670 2,432 Other current assets 768 1,795 Accounts payable, accrued expenses and liabilities (4,820) (3,164) Deferred revenue 616 1,876 -------- -------- Net cash provided by operating activities 9,673 13,140 -------- -------- Cash flows from investing activities: Capital expenditures (1,124) (1,549) Capitalization of internally developed software costs (241) (97) Acquisition payments (1,686) (150) Net (purchases) maturities of short-term investments (2,931) 11,349 ICEM CFD acquisition (2,591) (183) Purchase of long-term investment (600) - -------- -------- Net cash (used in) provided by investing activities (9,173) 9,370 -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock under Employee Stock Purchase Plan 136 86 Purchase of treasury stock (10,151) (11,199) Proceeds from exercise of stock options 3,764 2,316 -------- -------- Net cash used in financing activities (6,251) (8,797) -------- -------- Effect of exchange rate changes on cash 9 (240) -------- -------- Net (decrease) increase in cash and cash equivalents (5,742) 13,473 Cash and cash equivalents, beginning of period 28,545 6,313 -------- -------- Cash and cash equivalents, end of period $ 22,803 $ 19,786 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 3,561 $ 2,073 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 ANSYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements included herein have been prepared by ANSYS, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements as of and for the three and six months ended June 30, 2002 should be read in conjunction with the Company's consolidated financial statements (and notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Accordingly, the accompanying statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 2. Accumulated Other Comprehensive Income As of June 30, 2002 and December 31, 2001, accumulated other comprehensive income, as reflected on the condensed consolidated balance sheets, was comprised of foreign currency translation adjustments. Comprehensive income for the three and six month periods ended June 30, 2002 and 2001 was as follows: Three months ended Six months ended -------- -------- -------- -------- June 30, June 30, June 30, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- Comprehensive Income $ 5,088 $ 3,525 $ 8,681 $ 5,700 3. Other Current Assets The Company reports accounts receivable related to the portion of annual lease licenses and software maintenance that has not yet been recognized as revenue as a component of other current assets. These amounts totaled $8.3 million and $10.3 million as of June 30, 2002 and December 31, 2001, respectively. 6 4. Recently Issued Accounting Pronouncements Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142 (Statement 142), "Goodwill and Other Intangible Assets," for existing goodwill and other intangible assets, including the non-amortization provisions of this standard arising from business combinations after June 30, 2001. This standard eliminates the amortization of goodwill and intangible assets with indefinite useful lives and requires annual testing for impairment. This standard also requires the assignment of assets acquired and liabilities assumed, including goodwill, to reporting units for purposes of the annual impairment test. As of June 30, 2002 and December 31, 2001, ANSYS had goodwill of $17.8 million and $16.9 million, respectively. The Company completed the required transitional goodwill impairment test during the quarter ended June 30, 2002 and determined that goodwill had not been impaired as of the date of the transitional test, January 1, 2002. The following table sets forth the condensed consolidated pro forma results of operations for the three and six month periods ended June 30, 2002 and 2001 as if Statement 142 had been in effect for both periods:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Reported net income $4,720 $3,569 $ 8,608 $ 5,940 Add back: Goodwill and trademark amortization, net of tax - 656 - 1,289 Adjusted net income $4,720 $4,225 $ 8,608 $ 7,229 Earnings per share- basic: Reported earnings per share $ 0.32 $ 0.25 $ 0.59 $ 0.41 Goodwill and trademark amortization - .04 - .08 Adjusted earnings per share $ 0.32 $ 0.29 $ 0.59 $ 0.49 Earnings per share-diluted: Reported earnings per share $ 0.30 $ 0.24 $ 0.55 $ 0.39 Goodwill and trademark amortization - .04 - .08 Adjusted earnings per share $ 0.30 $ 0.28 $ 0.55 $ 0.47
7 As of June 30, 2002, the Company's intangible assets are classified as follows: Gross Carrying Accumulated (in thousands) Amount Amortization Amortized intangible assets: Core technology $4,335 $ (1,632) Non-compete agreements 2,280 (633) Customer List 1,407 (516) --------- ------------ Total $8,022 $ (2,781) ========= ============ Unamortized intangible assets: Trademark $ 357 ========= Prior to the adoption of Statement 142, the Company had separately identified and valued the assembled workforce associated with the acquisition of ICEM CFD Engineering as an intangible asset. In accordance with the guidance in Statement 142, the net unamortized balance of $1,050,000 was reclassified to goodwill. The increase in goodwill from December 31, 2001 to June 30, 2002 primarily relates to a territory acquisition payment in France. Amortization expense for the amortized intangible assets reflected above is expected to be approximately $1,743,000, $1,482,000, $961,000, $738,000 and $199,000 for the years ending December 31, 2002, 2003, 2004, 2005 and 2006, respectively. 5. Reclassifications Certain reclassifications have been made to the 2001 condensed consolidated financial statements to conform to the 2002 presentation. 8 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of ANSYS, Inc. Canonsburg, Pennsylvania We have reviewed the accompanying condensed consolidated balance sheet of ANSYS, Inc. and subsidiaries (the "Company") as of June 30, 2002, and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements as of June 30, 2002, and for the three-month and six-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States of America. The accompanying condensed financial information as of December 31, 2001, and for the three-month and six-month periods ended June 30, 2001, were not audited or reviewed by us and, accordingly, we do not express an opinion or any other form of assurance on them. /s/ Deloitte & Touche LLP ----------------------------- Pittsburgh, Pennsylvania July 12, 2002 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANSYS, Inc. (the "Company") develops and globally markets engineering simulation software and technologies widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics and biomedical. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company employs approximately 460 people and focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS(R), DesignSpace(R), AI*Solutions, ICEM CFD Engineering and CADOE products and services through a network of channel partners in 37 countries, in addition to its own direct sales offices in 18 strategic locations throughout the world. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three-month and six-month periods ended June 30, 2002 and 2001, and with the Company's audited financial statements and notes thereto for the year ended December 31, 2001 filed in Form 10-K with the Securities and Exchange Commission. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements below concerning future trends regarding the Company's intentions related to continued investments in sales and marketing and research and development, plans related to future capital spending, the sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements, estimates of tax rates in future periods, as well as statements which contain such words as "anticipates", "intends", "believes", "plans" and other similar expressions. The Company's actual results could differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the 2001 Annual Report to Shareholders and in "Certain Factors Regarding Future Results" included herein as Exhibit 99 to this Form 10-Q. Results of Operations Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Revenue. The Company's total revenue increased 8.6% in the 2002 second quarter to $22.7 million from $20.9 million in the 2001 second quarter. Reported revenue for the prior year was affected by a modification of the Company's revenue recognition policy related to noncancellable annual software leases. 10 As previously disclosed, in 2001 the Company modified its revenue recognition policy for annual software leases to comply with Technical Practice Aid ("TPA") 5100.53 "Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition," issued by the American Institute of Certified Public Accountants. Prior to the revenue recognition modification, the Company recognized a portion of the license fee from annual software leases upon inception or renewal of the lease, while the remaining portion was recognized ratably over the lease period. The TPA requires all revenue from noncancellable annual software lease licenses to be recognized ratably over the lease term. Had this revenue recognition policy modification been initially made in January 2002, second quarter 2002 revenue would have been approximately $21.6 million. Software license revenue increased 6.3% in the 2002 quarter to $11.8 million from $11.1 million in the 2001 quarter. The prior year quarter included approximately $2.0 million in software license revenue related to a major account sale, which had at that time represented the second largest deal in the Company's history. The quarterly revenue increase in 2002 was primarily the result of an increase in license revenue related to annual software leases, which resulted from the adverse impact of the revenue recognition policy modification discussed above on reported revenue in the second quarter of 2001. Also contributing to the increase in the 2002 quarter was higher license revenue from the Company's ICEM CFD Engineering and DesignSpace product lines. Maintenance and service revenue increased 11.2% in the 2002 quarter to $11.0 million from $9.9 million in the 2001 quarter. This increase was primarily the result of maintenance contracts sold in association with increased paid-up license sales in recent quarters. Of the Company's total revenue in the 2002 quarter, approximately 53.5% and 46.5%, respectively, were attributable to international and domestic sales, as compared to 51.1% and 48.9%, respectively, in the 2001 quarter. Cost of Sales and Gross Profit. The Company's total cost of sales decreased 4.7% to $2.8 million, or 12.4% of total revenue, in the 2002 second quarter from $2.9 million, or 14.1% of total revenue, in the 2001 second quarter. The decrease in the 2002 quarter was principally attributable to lower headcount-related costs and a reduction in third party royalty expenses. As a result of the foregoing, the Company's gross profit increased 10.8% to $19.9 million in the 2002 quarter from $18.0 million in the 2001 quarter. Selling and Marketing. Total selling and marketing expenses increased from $5.1 million, or 24.4% of total revenue in the 2001 quarter, to $5.2 million, or 23.1% of total revenue in the 2002 quarter. The increase primarily resulted from costs associated with the Company's biennial worldwide users' conference, which was last held in the third quarter of 2000. Also contributing to the increase were higher salaries and related headcount costs associated with the addition of personnel within the Company's direct sales and sales support organization. 11 These additions include personnel associated with the Company's recently established direct sales offices in India and France. These increases were partially offset by a reduction in discretionary advertising and promotion expenditures, as well as reduced third party commissions. The Company anticipates that it will continue to make significant investments throughout the remainder of 2002 in its global sales and marketing organization to strengthen its competitive position, to enhance major account sales activities and to support its worldwide sales channels and marketing strategies. Research and Development. Research and development expenses increased 14.9% in the 2002 second quarter to $4.9 million, or 21.7% of total revenue, from $4.3 million, or 20.5% of total revenue, in the 2001 quarter. The increase primarily resulted from additional headcount and related costs related to the development and introduction of new and enhanced products. These increases were partially offset by the capitalization of $241,000 in labor costs associated with development of the Company's ANSYS 6.1 and DesignSpace 6.1 products. The Company has traditionally invested significant resources in research and development activities and intends to continue to make significant investments in this area. Amortization. Amortization expense decreased to $568,000 in the 2002 second quarter from $1.3 million in the prior year quarter. The reduction primarily related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This standard eliminates the amortization of goodwill and other intangible assets with indefinite useful lives and requires annual testing for impairment. Had this standard been in effect for the second quarter of 2001, amortization expense in that quarter would have been approximately $477,000. General and Administrative. General and administrative expenses increased from $2.6 million, or 12.2% of total revenue in the 2001 quarter, to $2.7 million, or 11.9% of total revenue in the 2002 quarter. The increase was primarily the result of higher legal expenses in the 2002 quarter. Other Income. Other income decreased to $323,000 in the 2002 second quarter from $467,000 in the prior year quarter. The decrease was primarily attributable to a reduced interest rate environment in the 2002 second quarter as compared to that in the 2001 second quarter. Income Tax Provision. The Company's effective rates of taxation were 30.5% in the 2002 quarter and 31.0% in the 2001 quarter. These rates are lower than the federal and state combined statutory rate as a result of the utilization of a foreign sales corporation, as well as the generation of research and experimentation credits. The Company expects that the effective tax rate will remain in the range of 29.5% - 30.5% for the remainder of the year. Net Income. The Company's net income in the 2002 quarter was $4.7 million as compared to $3.6 million in the 2001 quarter. Diluted earnings per share increased to $.30 in the 2002 quarter as compared to $.24 in the 2001 quarter as a result of the increase in net income. The weighted average shares used in computing diluted 12 earnings per share were 15.8 million in the 2002 quarter and 15.2 million in the 2001 quarter. Excluding acquisition-related amortization, net income increased 12.8% to $5.0 million, or diluted earnings per share of $0.32. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Revenue. The Company's total revenue increased 12.4% for the 2002 six months to $44.0 million from $39.2 million for the 2001 six months. Reported revenue for the first six months of 2001 was affected by a modification of the Company's revenue recognition policy related to noncancellable annual software leases. As previously disclosed, in 2001 the Company modified its revenue recognition policy for annual software leases to comply with Technical Practice Aid ("TPA") 5100.53 "Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition," issued by the American Institute of Certified Public Accountants. Prior to the revenue recognition modification, the Company recognized a portion of the license fee from annual software leases upon inception or renewal of the lease, while the remaining portion was recognized ratably over the lease period. The TPA requires all revenue from noncancellable annual software lease licenses to be recognized ratably over the lease term. Had this revenue recognition policy modification been initially made in January 2002, revenue for the first six months of 2002 would have been approximately $41.2 million. Software license revenue totaled $23.1 million in the 2002 six months as compared to $20.6 million in the 2001 six months, an increase of 12.4%. The revenue increase was primarily the result of an increase in license revenue related to annual software leases, which resulted from the adverse impact of the revenue recognition policy modification discussed above on reported revenue during 2001. Maintenance and service revenue increased 12.4% for the six months ended June 30, 2002 to $20.9 million from $18.6 million in the comparable 2001 period. This increase was primarily the result of maintenance contracts sold in association with increased paid-up license sales in recent quarters, as well as an increase in consulting revenue. Of the Company's total revenue in the 2002 six months, approximately 54.7% and 45.3%, respectively, were attributable to international and domestic sales, as compared to 53.6% and 46.4%, respectively, in the 2001 six months. Cost of Sales and Gross Profit. The Company's total cost of sales remained flat at $5.7 million, or 12.9% of total revenue, for the 2002 six months as compared to $5.6 million, or 14.3% of total revenue, for the 2001 six months. As a result of the foregoing, the Company's gross profit increased 14.3% to $38.3 million in the 2002 six-month period from $33.5 million in the comparable 2001 period. 13 Selling and Marketing. Selling and marketing expenses increased 3.5% in the six months ended June 30, 2002 to $10.4 million, or 23.6% of total revenue, from $10.0 million, or 25.7% of total revenue, in the comparable 2001 period. The increase primarily resulted from higher salaries and related headcount costs associated with the addition of personnel within the Company's direct sales and sales support organization. These additions include personnel associated with the Company's recently established direct sales offices in India and France. Also contributing were costs associated with the Company's biennial worldwide users' conference, which was last held in the third quarter of 2000. These increases were partially offset by a reduction in discretionary advertising and promotion expenditures. The Company anticipates that it will continue to make significant investments throughout the remainder of 2002 in its global sales and marketing organization to strengthen its competitive position, to enhance major account sales activities and to support its worldwide sales channels and marketing strategies. Research and Development. Research and development expenses increased 18.8% in the 2002 six months to $9.8 million, or 22.2% of total revenue, from $8.2 million, or 21.0% of total revenue, in the 2001 six months. The increase primarily resulted from additional headcount and related costs related to the development and introduction of new and enhanced products. These increases were partially offset by the capitalization of $241,000 in labor costs associated with development of the Company's ANSYS 6.1 and DesignSpace 6.1 products. The Company has traditionally invested significant resources in research and development activities and intends to continue to make significant investments in this area. Amortization. Amortization expense decreased to $1.2 million in the 2002 six-month period from $2.6 million in the comparable prior year period. The reduction primarily related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This standard eliminates the amortization of goodwill and other intangible assets with indefinite useful lives and requires annual testing for impairment. Had this standard been in effect for the first half of 2001, amortization expense in that period would have been approximately $990,000. General and Administrative. General and administrative expenses remained relatively flat at $5.0 million, or 11.5% of total revenue, in the 2002 six months, as compared to $5.1 million, or 13.1% of total revenue, in the 2001 six months. Other Income. Other income decreased from $1.1 million in the 2001 six-month period to $500,000 in the comparable 2002 period. The decrease was primarily attributable to a declining interest rate environment. Income Tax Provision. The Company's effective rates of taxation were 31.0% for the 2002 six months and 31.2% for the 2001 six months. These rates are lower than the federal and state combined statutory rate as a result of the utilization of a foreign sales corporation, as well as the generation of research 14 and experimentation credits. The Company expects that the effective tax rate will be in the range of 29.5% - 30.5% for the remainder of the year. Net Income. The Company's net income in the 2002 six months was $8.6 million as compared to $5.9 million in the 2001 six months. Diluted earnings per share increased to $.55 in the 2002 period as compared to $.39 in the 2001 period as a result of the increase in net income. The weighted average shares used in computing diluted earnings per share were 15.8 million and 15.3 million in the 2002 and 2001 six-month periods, respectively. Excluding acquisition-related amortization, net income increased 19.4% to $9.2 million, or diluted earnings per share of $0.58. Liquidity and Capital Resources As of June 30, 2002, the Company had cash, cash equivalents and short-term investments totaling $50.6 million and working capital of $44.2 million, as compared to cash, cash equivalents and short-term investments of $53.4 million and working capital of $40.0 million at December 31, 2001. The short-term investments are generally investment grade and liquid, which allows the Company to minimize interest rate risk and to facilitate liquidity in the event an immediate cash need arises. The Company's operating activities provided cash of $9.7 million for the six months ended June 30, 2002 and $13.1 million for the six months ended June 30, 2001. The decrease in the Company's cash flow from operations in the 2002 six-month period as compared to the comparable 2001 period was primarily a result of the payment of approximately $2.0 million associated with the settlement of a dispute with a former distributor. This amount was fully accrued in the third quarter of 2001. Also contributing to the reduction in cash generated from operating activities were higher income tax payments and less favorable accounts receivable collection activity. Net cash generated by operating activities provided sufficient resources to fund increased headcount and capital needs, as well as to sustain share repurchase activity under the Company's ongoing stock repurchase program. The Company's investing activities used cash of $9.2 million in the six months ended June 30, 2002 and provided cash of $9.4 million in the six months ended June 30, 2001. In the 2002 six-month period, cash outlays primarily related to net purchases of short-term investments and a final payment of $2.6 million related to the 2000 acquisition of ICEM CFD Engineering. In the 2001 six-month period, cash was primarily generated from net maturities of short-term investments. The Company currently plans additional capital spending of approximately $1.3 million throughout the remainder of 2002; however, the level of spending will be dependent upon various factors, including growth of the business and general economic conditions. Financing activities used cash of approximately $6.3 million and $8.8 million in the six months ended June 30, 2002 and 2001, respectively. In both periods, cash outlays related to the Company's share repurchase program were partially offset by proceeds from the issuance of common stock under employee stock purchase and 15 option plans. The Company repurchased 418,700 shares during the first six months of 2002. The Company believes that existing cash and cash equivalent balances, together with cash generated from operations, will be sufficient to meet the Company's working capital and capital expenditure requirements through the remainder of fiscal 2002. The Company's cash requirements in the future may also be financed through additional equity or debt financings. There can be no assurance that such financings can be obtained on favorable terms, if at all. Critical Accounting Policies ANSYS believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. ANSYS recognizes revenue in accordance with SOP 97-2, Software Revenue Recognition, and related interpretations. Revenue for perpetual licenses is recognized upon delivery of the utility which enables the customer to request authorization keys, acceptance by the customer and receipt of a signed contractual obligation, provided that no significant Company obligations remain and collection of the receivable is probable. Revenue for software lease licenses is recognized ratably over the period of the lease contract. Revenue is recorded at the net price to ANSYS for sales through the ANSYS distribution network. The Company estimates the value of post-contract customer support sold together with perpetual licenses by reference to published price lists which generally represent the prices at which customers could purchase renewal contracts for such services. ANSYS maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of ANSYS customers, including ANSYS distributors, were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. ANSYS capitalizes internal labor costs associated with the development of product enhancements subsequent to the determination of technological feasibility. Amortization of capitalized software costs, both for internally developed as well as for purchased software products, is computed on a product-by-product basis over the estimated economic life of the product, which is generally three years. The Company periodically reviews the carrying value of capitalized software and impairments will be recognized in the results of operations if the expected future undiscounted operating cash flow derived from the capitalized software is less than its carrying value. 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to various legal proceedings from time to time that arise in the ordinary course of business. Each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Item 2. Changes in Securities (c) The following information is furnished in connection with securities sold by the Registrant during the period covered by this Form 10-Q which were not registered under the Securities Act. The transactions constitute sales of the Registrant's Common Stock, par value $.01 per share, upon the exercise of vested options issued pursuant to the Company's 1994 Stock Option and Grant Plan, issued in reliance upon the exemption from registration under Rule 701 promulgated under the Securities Act and issued prior to the Registrant becoming subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934, as amended. Number of Number of Aggregate Month/Year Shares Individuals Exercise Price ---------- --------- ----------- -------------- April 2002 8,000 1 $ 80,000.00 May 2002 2,000 1 $ 800.00 Item 3. Defaults upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of the Company held on May 9, 2002, the stockholders of the Company elected James E. Cashman, III and John F. Smith as Class III directors of the Company to hold office until the 2005 Annual Meeting of Stockholders and until such Directors' successors are duly elected and qualified. The votes were as follows: James E. Cashman, III Votes For: 10,275,480 Votes Withheld: 2,613,424 John F. Smith Votes For: 12,593,423 Votes Withheld: 295,481 17 Item 5. Other information At its July 2002 meeting, the Company's Board of Directors formed a Nominating and Corporate Governance Committee (the "Committee"). The Committee is comprised of three independent directors, Patrick J. Zilvitis, Bradford C. Morley and John F. Smith. The purpose of the committee is to oversee the qualification and nomination process for potential director candidates, as well as review the continued qualification of existing directors. The Committee also has responsibility for corporate governance oversight. Item 6. Exhibits and Reports Filed on Form 8-K (a) Exhibits. 15 Independent Accountants' Letter Regarding Unaudited Financial Information 99.1 Certain Factors Regarding Future Results 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 99.3 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. Not Applicable. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANSYS, Inc. Date: August 12, 2002 By: /s/ James E. Cashman, III ----------------------------- James E. Cashman, III President and Chief Executive Officer Date: August 12, 2002 By: /s/ Maria T. Shields ------------------------ Maria T. Shields Chief Financial Officer 19 Item 6. EXHIBIT INDEX Exhibit No. 15 Independent Accountants' Letter Regarding Unaudited Financial Information 99.1 Certain Factors Regarding Future Results 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 99.3 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 20