Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-K

 


(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

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

incorporation or organization)

 

(I.R.S. Employer

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)

 


Securities registered pursuant to Section 12(b) of the Act:

 

None   None
(Title of each class)   (Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share

(Title of class)

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x     No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K, or any amendment to this Form 10-K.  x

Indicate by a check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes  x    No  ¨

Indicate by a check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).     Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on June 30, 2005 as reported on the NASDAQ National Market, was approximately $950,000,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of February 28, 2006 was 32,161,968 shares.

 



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2005 are incorporated by reference into Parts I, II and IV. Portions of the Proxy Statement for the Registrant’s 2006 Annual Meeting of Stockholders are incorporated by reference into Part III.

Important Factors Regarding Future Results

Information provided by ANSYS, Inc. (the “Company”), including information contained in this Annual Report on Form 10-K, or by its spokespersons may from time to time contain forward-looking statements concerning such matters as projected financial performance, market and industry segment growth, product development and commercialization, acquisitions or other aspects of future operations. Such statements, made pursuant to the safe harbor established by the securities laws, are based on the assumptions and expectations of the Company’s management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to those discussed herein, may cause the Company’s future results to differ materially from those projected in any forward-looking statement. Important information about the basis for those assumptions is contained in “Important Factors Regarding Future Results” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” incorporated by reference to pages 13 through 31 of the Company’s 2005 Annual Report to Stockholders. All information presented is as of December 31, 2005, unless otherwise indicated.

PART I

ITEM 1: BUSINESS

ANSYS, Inc. 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, biomedical and defense. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company employs approximately 600 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®, ANSYS WorkbenchTM, CFX®, DesignSpace®, ICEM CFDTM and AUTODYN® products through a global network of channel partners, in addition to its own direct sales offices in strategic, global locations. It is the Company’s intention to continue to maintain this mixed sales and distribution model.

The Company operates as one segment, as defined by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Given the integrated approach to the problem-solving needs of the Company’s customers, a single sale of software may contain components from multiple product areas and include combined technologies. There is no means by which the Company can provide accurate historical (or current) reporting among its various product-line segmentations. Disclosure of such information is impracticable.

The Company’s product lines are used to produce solutions in the following primary areas:

ANSYS Multiphysics™ Solutions

ANSYS Multiphysics solutions provides the analysis industry’s most advanced coupled physics technology, combining structural, thermal, computational fluid dynamics (CFD), acoustic and electromagnetic simulation capabilities in a single software product. With the ANSYS Multiphysics solutions, users receive the core physics of the entire ANSYS simulation suite in one convenient package. Applications involve everything from rotating machines (motors and alternators), sensors and actuators, power generators and transformer systems, and micro electro mechanical systems (MEMS).

ANSYS Mechanical™ Solutions

ANSYS Mechanical solutions offer best-in-class simulation tools for product design and optimization which increase productivity, minimize physical prototyping and help deliver better and innovative products in less time. They offer solutions to tackle real world analysis problems by making product development less costly and more reliable. The ANSYS family of core products offers a full depth of analysis tools from concept simulation to advanced analysis, and breadth of simulation capabilities from linear to nonlinear coupled physics analysis. They provide simulation tools for users from designers to advanced analysts, providing a full complement of nonlinear analysis and linear dynamics solutions and the most comprehensive set of solvers available to tackle real world problems.

 

2


ANSYS Fluid Dynamics Solutions

Computational fluid dynamics has become an integral part of the engineering design and analysis environment of many companies who desire the ability to predict the performance of new designs or processes before they are ever manufactured or implemented. CFD solutions from ANSYS, Inc. are based on the proven technology of ANSYS CFX software. Fluid dynamics is used in industries including aerospace, automotive, chemical processing, power generation, heating, ventilation, air conditioning, biomedical, oil and gas, marine and many others. From ventilation comfort in large buildings to the tiniest scale in micro-pumps and nanotechnology, a wide range of problems can be addressed due to the diverse nature of fluid dynamics. Expertise in assisting companies increase performance through simulation-driven design for pumps, fans, turbines, compressors and other rotating machinery has been incorporated in all elements of ANSYS CFX software making it a leader in this field. Variations for combustion, reacting flows and radiation, among others, help provide the insight into equipment and processes required to increase production, improve longevity and decrease waste.

ANSYS Electromagnetics Solutions

Electromagnetic simulations are critical to electrical and electronic product designs across many industries. ANSYS Electromagnetics solutions address the analysis needs of two broad, but distinct, electromagnetic market segments: high frequency and low frequency. ANSYS Electromagnetics solutions are included in the ANSYS Multiphysics and ANSYS Emag products. ANSYS Multiphysics “contains” ANSYS Emag and provides the most complete electromagnetics solution available on the market today. It addresses the analysis needs of both low and high frequency electromagnetic markets.

ANSYS Design for Six Sigma Solutions

Design for Six Sigma (DFSS) is an analysis technique used in determining the extent to which uncertainties in the model affect the results of an analysis. Based on a probabilistic characterization, DFSS enables users to quantify the quality of their product, addressing issues such as minimizing warranty costs and quantifying the reliability of the product.

ANSYS Fluid Structure Interaction Solutions

The ANSYS Fluid Structure Interaction solution provides the analysis industry’s most flexible and advanced coupled structural-fluid physics analysis tool. Fluid-structure interaction (FSI) is required for many industry applications such as biomedical (e.g. elastic artery modeling for stent design), aerofoil flutter and civil engineering (e.g. wind loading of structures). The ANSYS Fluid Structure Interaction solution consists of two levels of fluid-structure coupling: basic FSI and advanced FSI. Basic FSI consists of entry level coupling between structural, electromagnetic and fluids suitable for steady state analysis. The coupling is file based, uni-directional and involves using the result of one simulation as a load or boundary condition for a second simulation. Advanced FSI uses the ANSYS Multi-field™ solver to provide a true bi-directional FSI capability for time transient or steady state analysis with moving / deforming geometry.

ANSYS Meshing Solutions

Meshing is an integral part of the computer-aided engineering analysis process. The mesh influences the accuracy, convergence and speed of the solution. More importantly, the time it takes to create a mesh model is often a significant portion of the time it takes to get results from a computer-aided engineering solution. From automatic to highly crafted meshing, ANSYS, Inc. provides powerful pre- and post-processing tools for mesh generation from any geometry source.

ANSYS Explicit Dynamics Solutions

Explicit Dynamics Solutions are addressed by ANSYS AUTODYN and ANSYS LS-DYNA. Simulations within this solution involve extremely short time durations, high deformations, large strains, and fracture or complete material failure. Applications of explicit dynamics using ANSYS AUTODYN include defense, homeland security, space (hypervelocity impact) and other fast transient fluid-structure interactions. Applications for ANSYS LS-DYNA include metal forming, drop testing and other consumer product testing.

 

3


BUSINESS ACQUISITION

On February 26, 2003, the Company acquired 100% of the shares in certain entities and assets (hereinafter collectively referred to as “CFX”) for a purchase price of approximately $21.7 million in cash. CFX is a leading supplier of CFD software and services. By acquiring CFX, ANSYS broadened the scope of engineering physics solutions it could offer to its customers and gained access to new customers and geographic territories.

On January 5, 2005, the Company signed a definitive agreement to acquire Century Dynamics, Inc. (hereinafter referred to as “CDI”), a leading provider of sophisticated simulation software for solving linear, nonlinear and explicit, as well as multi-body hydro-dynamics problems, for an initial purchase price of approximately $5.1 million in cash. In addition, the agreement provided for a future cash payment contingent upon the attainment of certain performance criteria, which is to be paid no later than March 22, 2006. This payment is estimated to be approximately $4.5 million and was accounted for as an addition to both goodwill and other accrued expenses and liabilities in 2005. The acquisition of CDI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive solution to its customers.

In October 2005, the Company acquired substantially all of the assets of Harvard Thermal, Inc. (hereafter “HTI”), a leader in thermal analysis software tools, for an up-front purchase price of approximately $1.3 million in cash and stock. In addition, the acquisition agreement provides for future payments of up to $400,000, contingent upon the attainment of certain performance criteria. The acquisition of HTI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive simulation solution to its customers.

On February 16, 2006, the Company announced a definitive agreement to acquire Fluent, Inc. (“Fluent”), a global provider of CFD-based computer-aided engineering software and services. Under the terms of the merger agreement, the Company will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash to acquire Fluent, subject to certain adjustments at closing. The Company will use a combination of existing cash and approximately $200 million from committed bank financing to fund the transaction. The acquisition of Fluent is expected to enhance the breadth, functionality, usability and interoperability of the ANSYS portfolio of simulation solutions. This will increase operational efficiency and lower design and engineering costs for customers, and accelerate development and delivery of new and innovative products to the marketplace. Subject to customary closing conditions and the expiration or termination of the waiting periods under the Hart-Scott-Rodino Act, the transaction is anticipated to close in the second quarter of 2006.

 

4


PRODUCT DEVELOPMENT

The Company makes significant investments in research and development and emphasizes accelerated new integrated product releases. The Company’s product development strategy centers on ongoing development and innovation of new technologies to increase productivity and provide engineering simulation solutions that customers can integrate into enterprise-wide product lifecycle management systems. The Company’s product development efforts focus on extensions of the full product line with new functional modules, further integration with computer-aided design (CAD) and Product Lifecycle Management (PLM) products, and the development of new products. The Company’s products run on the most widely used engineering computing platforms and operating systems, including Windows, Linux and most UNIX workstations.

During 2005, the Company completed the following major product development activities and releases (in chronological order):

 

  The release of AUTODYN 6.0, which offers major gains in performance, ease-of-use, interoperability and fluid structure interaction (FSI) technology. AUTODYN 6.0 has increased levels of flexibility through a new generation of finite element solvers, allowing shorter runtimes, larger models, and better accessibility to third-party finite element and CAD software. In addition, within this version, the multi-material CFD solvers have been significantly enhanced, providing robustness and accuracy for an even wider range of complex applications.

 

  The release of ANSYS 10.0, featuring integrated flexibility and design process enhancements, including performance upgrades and improved coupled physics technology in fluid structure interaction. In addition to offering superior capabilities for complex FSI problems, ANSYS 10.0 features ANSYS BladeModeler, an efficient 3-D rotating machinery design tool for bladed components and ANSYS TurboGrid, a high quality hexahedral meshing tool for blade design. Other developments within this version include thermal transients related to mechanical application, a new modal port definition related to high frequency electromagnetic, and the addition of gyroscopic effects that enhance the performance for application of rotating structures.

 

  The release of ANSYS CFX 10.0, which continues to build on integration within the ANSYS product family to provide superior analysis capabilities within an integrated engineering environment. This release provides simultaneous, bi-directional transient coupling between the ANSYS and CFX solvers to allow the simulation of advanced fluid structure interaction. Development and release of core CFD technology also continued on a range of new physical models, including the first-ever availability of a predictive transitional turbulence model in commercial CFD analysis software.

 

  The release of ANSYS ICEM CFD / AI*Environment 10.0, featuring improved integration of meshing tools of ANSYS ICEM CFD / AI*Environment 5.0 and 5.1. This release brings advantages to the ANSYS family of users by providing common meshing tools within the Workbench integration framework. Recent enhancements in the 10.0 version provide time-saving techniques to quickly simplify underhood models through shrinkwrapping, which allows a user to generate a mesh on these complicated models in days rather than weeks. Additionally, the midsurfacing and welding tools have been greatly extended to help users quickly mesh large assemblies of sheet metal components.

 

  The release of ASAS 14, which is structural finite element software for the offshore industry. ASAS introduces many new features, including a simple method for defining internal tank loading for vessels. Additionally, the unique, nonlinear coupled wave-structure interaction facility has been enhanced with the addition of effective tension for curved tubular elements.

 

5


  The release of AQWA 5.6, a hydrodynamic assessment software product. AQWA 5.6 introduces a number of ground breaking new features, including the ability to handle up to 50 interconnected structures, user defined multi-directional wave spectra and improved handling of irregular frequencies, as well as standing waves.

The Company’s total research and development expenses were $30.7 million, $26.3 million and $23.8 million in 2005, 2004 and 2003, or 19.4%, 19.5% and 21.0% of total revenue, respectively. As of December 31, 2005, the Company’s product development staff consisted of approximately 230 full time employees, most of whom hold advanced degrees and have industry experience in engineering, mathematics, computer science or related disciplines.

The Company uses multi-functional teams to develop its products and develops them simultaneously on multiple platforms to reduce subsequent porting costs. In addition to developing source code, these teams create and perform highly automated software verification tests; develop on-line documentation and support for the products; implement development enhancement tools, software configuration management and product licensing processes; and conduct regression tests of ANSYS products for all supported platforms.

PRODUCT QUALITY

The Company’s employees perform all product development and support tasks according to predefined quality plans, procedures and work instructions. These plans define for each project the methods to be used, the responsibilities of project participants and the quality objectives to be met. The majority of software products are developed under a quality system which is certified to the ISO 9001:2000 standard. The Company establishes quality plans for all products and services, subjects product designs to multiple levels of testing and verification, and selects development subcontractors in accordance with processes established under the Company’s quality system.

SALES AND MARKETING

The Company distributes and supports its products through a global network of channel partners, as well as through its own direct sales offices. This network provides the Company with a cost-effective, highly specialized channel of distribution and technical support. Approximately 42% of the Company’s total revenue in 2005 was derived through the indirect sales channel.

The channel partners sell ANSYS products to new customers, expand installations within the existing customer base, offer training and consulting services and provide the first line of ANSYS technical support. The Company’s channel partner certification process helps to ensure that each channel partner has the ongoing capacity to adequately represent the Company’s expanding product lines and to provide an acceptable level of training, consultation and customer support.

The Company also has a direct sales management infrastructure in place to develop an enterprise-wide, focused sales approach and to implement a worldwide major account strategy. The sales management organization also functions as a focal point for requests to ANSYS from the independent channel partners and provides additional support in strategic locations through the presence of direct sales offices. A Vice President of Sales and Support heads the Company’s sales management organization.

During 2005, the Company continued to invest in its existing domestic and international strategic sales offices. In total, the Company’s direct sales offices employ approximately 130 persons, who are responsible for the sales, marketing initiatives and administrative activities in those geographic areas designed to support the Company’s overall revenue growth and expansion strategies.

During 2005, the Company also continued to expand its independent channel partner network, including its reseller network. The reseller network complements the larger ANSYS channel partners by establishing a broader user base for the Company’s products and services. The resellers are required to have appropriately trained marketing, sales and technical personnel.

The Company’s products are utilized by organizations ranging in size from small consulting firms to the world’s largest industrial companies. No single customer accounted for more than 10% of the Company’s revenue in 2005.

 

6


Information with respect to foreign and domestic revenue may be found in Note 15 to the Consolidated Financial Statements and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report to Stockholders for the year ended December 31, 2005 (“2005 Annual Report to Stockholders”), which financial statements are included in Exhibit 13.1 to this Annual Report on Form 10-K and incorporated herein by reference.

STRATEGIC ALLIANCES AND MARKETING RELATIONSHIPS

The Company has established and continues to pursue strategic alliances with advanced technology suppliers and marketing relationships with hardware vendors, specialized application developers and CAD and PLM providers. The Company believes these relationships allow accelerated incorporation of advanced technology into the Company’s products, provide access to important new customers, expand the Company’s sales channels, develop specialized product applications and provide direct integration with leading CAD, product data management (PDM) and PLM systems.

The Company has technical and marketing relationships with leading CAD vendors, such as Autodesk, Dassault Systemes, Parametric Technology Corporation, Solid Edge, Solid Works and UGS Corporation, to provide direct links between products. These links facilitate the transfer of electronic data models between the CAD systems and ANSYS products.

The Company has established relationships with leading suppliers of computer hardware, including Hewlett-Packard, SGI, Sun Microsystems, IBM, Dell, Intel, Fujitsu America and various graphics card vendors. These relationships typically provide the Company with joint marketing opportunities such as advertising, events and internet links with the hardware partner’s home page. In addition, the Company receives reduced equipment costs and software porting support to ensure that the Company’s software products are certified to run on various hardware platforms.

The Company’s Enhanced Solution Partner Program actively encourages specialized developers of niche software solutions to use ANSYS technology as a development platform for their applications. In most cases, the sale of the Enhanced Solution Partners’ products is accompanied by the sale of an ANSYS product. Mathsoft and RoboBAT have worked with ANSYS in the past year to seamlessly integrate their products with ANSYS Workbench. In both partnerships, the solutions enable a myriad of new possibilities, such as streamlined calculation and simulation with Mathsoft, and expanded access to structural engineering applications with RoboBAT. The end result is increased productivity for customers.

The Company has a software license agreement with Livermore Software Technology Corporation (“LSTC”) under which LSTC has provided LS-DYNA software for explicit dynamics solutions used in applications such as crash test simulation in the automotive and other industries. Under this arrangement, LSTC assists in the integration of the LS-DYNA software with the Company’s pre- and post-processing capabilities and provides updates and problem resolution in return for a share of revenue from sales of the ANSYS/LS-DYNA combined product.

The Company has an agreement with Autodesk, Inc. (“Autodesk”) under which Autodesk licenses ANSYS part-level stress and resonant frequency simulation technologies and packages them as an integral part of the Autodesk Inventor Professional product.

The Company has an agreement with Le Centre Technique des Industries Mecaniques (“CETIM”) of Senlis, France, under which CETIM licenses ANSYS Workbench and simulation technologies and packages them as an integral part of their current DesignSpace PE products and future releases.

 

7


COMPETITION

The Company believes that the principal factors affecting sales of its software include ease of use, breadth and depth of functionality, flexibility, quality, ease of integration with other software systems, file compatibility across computer platforms, range of supported computer platforms, performance, price and cost of ownership, customer service and support, company reputation and financial viability, and effectiveness of sales and marketing efforts. Although the Company believes that it currently performs effectively with respect to these factors, there can be no assurance that the Company will be able to continue to perform effectively with respect to all or any of these factors. There also can be no assurance that other software suppliers and customers will not develop their own software, or acquire software from suppliers other than the Company, or otherwise discontinue their relationships with the Company. If any of these events occur, the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected.

The Company continues to experience intense competition across all markets for its products and services. Some of the Company’s current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well established relationships with current and potential customers of the Company. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.

PROPRIETARY RIGHTS AND LICENSES

The Company regards its software as proprietary and relies on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions, and technical measures to protect its proprietary rights in its products. The Company distributes its software under software license agreements that grant customers nonexclusive licenses for the use of the Company’s products, which are typically nontransferable. License agreements for the Company’s products are directly between the Company and end users. Use of the licensed software is restricted to designated computers at specified sites, unless the customer obtains a multi-site license for its use of the software. Software security measures are also employed to prevent unauthorized use of the Company’s software and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction of the software. Customers may either purchase a perpetual license of the technology with the right to annually purchase ongoing maintenance, technical support and updates, or may lease the product on an annual basis for a fee which includes the license, maintenance, technical support and upgrades.

For certain software products, the Company primarily relies on “click-wrapped” licenses. The enforceability of these types of agreements under the laws of some jurisdictions is uncertain.

The Company also seeks to protect the source code of its software as a trade secret and as unpublished copyrighted work. The Company has obtained federal trademark registration protection for ANSYS, CFX, DesignSpace, and AUTODYN in the U.S. and in foreign countries. Additionally, the Company was awarded a patent by the U.S. Patent and Trademark Office for its Web-based reporting technology and has a patent pending for its simulation wizard technology.

Employees of the Company have signed covenant agreements under which they have agreed not to disclose trade secrets or confidential information, and where legally permitted, which restrict engagement in or connection with any business which is competitive with the Company anywhere in the world, while employed by the Company (and, in some cases, for specified periods thereafter), and that any products or technology created by them during their term of employment are the property of the Company. In addition, the Company requires all channel partners and resellers to enter into agreements not to disclose the Company’s trade secrets and other proprietary information.

Despite these precautions, there can be no assurance that misappropriation of the Company’s technology will not occur. Further, there can be no assurance that copyright, trademark, patent and trade secret protection will be available for the Company’s products in certain countries, or that restrictions on the ability of employees and channel partners to engage in activities competitive with the Company will be enforceable.

The software development industry is characterized by rapid technological change. Therefore, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections of its technology which may be available.

 

8


The Company does not believe that any of its products infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim in the future such infringement by the Company or its licensors or licensees with respect to current or future products. The Company expects that software product developers will increasingly be subject to such claims as the number of products and competitors continue to expand and the functionality of products continues to increase. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company.

SEASONAL VARIATIONS

The Company’s business has experienced significant seasonality, including quarterly reductions in software sales resulting from the slowdown in Europe during the summer months, as well as from the seasonal purchasing and budgeting patterns of the Company’s customers.

BACKLOG

The Company generally ships its products within 30 days after acceptance of an order and execution of a software license agreement. Accordingly, the Company does not believe that its backlog at any particular point in time is indicative of future sales levels.

EMPLOYEES

As of December 31, 2005, the Company and its subsidiaries had approximately 600 full-time employees. At that date, there were also contract personnel and co-op students providing ongoing development services and technical support. The Company believes that its relationship with its employees is good.

AVAILABLE INFORMATION

The Company’s website is www.ansys.com. The Company makes available on its website Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission. In addition, the Company has posted the charters for its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as the Company’s Code of Business Conduct and Ethics and Standard Business Practices. Information posted on the Company’s website is not incorporated by reference in this Annual Report on Form 10-K.

 

9


ITEM 1A: RISK FACTORS

The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors including, but not limited to, the following may cause the Company’s future results to differ materially from those projected in any forward-looking statement.

Potential Fluctuations in Operating Results. The Company may experience significant fluctuations in future quarterly operating results. Fluctuations may be caused by many factors, including the timing of new product releases or product enhancements by the Company or its competitors; the size and timing of individual orders, including a fluctuation in the demand for and the ability to complete large contracts; software errors or other product quality problems; competition and pricing changes; customer order deferrals in anticipation of new products or product enhancements; changes in demand for the Company’s products; changes in operating expenses; changes in the mix of software license and maintenance and service revenue; personnel changes; and general economic conditions. A substantial portion of the Company’s operating expenses is related to personnel, facilities and marketing programs. The level of personnel and related expenses cannot be adjusted quickly and is based, in significant part, on the Company’s expectation for future revenue. The Company does not typically experience significant order backlog. Further, the Company has often recognized a substantial portion of its revenue in the last month of a quarter, with this revenue frequently concentrated in the last weeks or days of a quarter. During certain quarterly periods, the Company has been dependent upon receiving large orders of perpetual licenses involving the payment of a single up-front fee and, more recently, has shifted the business emphasis of its products to provide a collaborative solution to the Company’s customers. This emphasis has increased the Company’s average order size and increased the related sales cycle time for the larger orders. This shift may have the effect of increasing the volatility of the Company’s revenue and profit from period to period. As a result, product revenue in any quarter is substantially dependent upon sales completed in the latter part of that quarter, and revenue for any future quarter is not predictable with any significant degree of accuracy.

Seasonal Variations. The Company’s business has experienced significant seasonality, including quarterly reductions in software sales resulting from the slowdown in Europe during the summer months, as well as from the seasonal purchasing and budgeting patterns of the Company’s customers.

Economic Slowdown in Certain Sectors. The Company’s sales are based significantly on end user demand for products in key industrial sectors. Many of these sectors periodically experience economic declines. These economic declines may be exacerbated by other economic factors, such as the recent increase in global energy prices. These economic factors may adversely affect the Company’s business by extending sales cycles and reducing revenue.

The Company has customers who supply a wide spectrum of goods and services in virtually all of the world’s major economic regions. The Company’s performance is materially impacted by general economic conditions and the performance of its customers. The Company’s management team forecasts macroeconomic trends and developments and integrates them through long-range planning into budgets, research and development strategies and a wide variety of general management duties. When forecasting future economic trends and technological developments, management does not have a comparative advantage. To the extent that the Company’s forecasts are in error by being overly optimistic or overly pessimistic about the performance of an economy or sector, the Company’s performance may be hindered because of a failure to properly match corporate strategy with economic conditions.

Terrorist attacks, other increased global hostilities and natural disasters have, at times, contributed to widespread uncertainty and speculation in the world financial markets. This uncertainty and speculation may result in further economic contraction, resulting in the suspension or delay of purchasing by the Company’s customers.

Stock Market and Stock Price Volatility. Market prices for securities of software companies have generally been volatile. In particular, the market price of the Company’s common stock has been, and may continue to be, subject to significant fluctuations as a result of factors affecting the Company, the software industry or the securities markets in general. Such factors include, but are not limited to, declines in trading price that may be triggered by the Company’s failure to meet the expectations of securities analysts and investors. The Company cannot provide assurance that in such circumstances the trading price of the Company’s common stock will recover or that it will not experience a further decline. Moreover, the trading price could be subject to additional fluctuations in response to quarter-to-quarter variations in the Company’s operating results, material announcements made by the Company or its competitors, conditions in the software industry generally or other events and factors, many of which are beyond the Company’s control.

 

10


Rapidly Changing Technology; New Products; Risk of Product Defects. The Company operates in an industry generally characterized by rapidly changing technology and frequent new product introductions that can render existing products obsolete or unmarketable. A major factor in the Company’s future success will be its ability to anticipate technological changes and to develop and introduce, in a timely manner, enhancements to its existing products and new products to meet those changes. If the Company is unable to introduce new products and to respond quickly to industry changes, its business, financial condition, results of operations and cash flows could be materially adversely affected.

The introduction and marketing of new or enhanced products require the Company to manage the transition from existing products in order to minimize disruption in customer purchasing patterns. There can be no assurance that the Company will be successful in developing and marketing, on a timely basis, new products or product enhancements, that its new products will adequately address the changing needs of the marketplace or that it will successfully manage the transition from existing products. Software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released, and the likelihood of errors is increased as a result of the Company’s commitment to accelerating the frequency of its product releases. There can be no assurance that errors will not be found in new or enhanced products after commencement of commercial shipments. Any of these problems may result in the loss of or delay in customer acceptance, diversion of development resources, damage to the Company’s reputation or increased service and warranty costs, any of which could have a material, adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Sales of New Products. The Company continues to develop and introduce new software products. Certain of these products require a higher level of sales and support expertise. The ability of the Company’s sales channel, particularly the indirect channel, to obtain this expertise and to sell the new product offerings effectively could have an impact on the Company’s sales in future periods. Additionally, royalties and engineering service engagements associated with the new software products may result in the Company’s cost of sales increasing as a percentage of revenue in future periods.

Dependence on Channel Partners. The Company continues to distribute a substantial portion of its products through its global network of independent, regional channel partners. The channel partners sell the Company’s software products to new and existing customers, expand installations within the existing customer base, offer consulting services and provide the first line of technical support. Consequently, the Company is highly dependent upon the efforts of the channel partners. Difficulties in ongoing relationships with channel partners, such as delays in collecting accounts receivable, failure to meet performance criteria or to promote the Company’s products as aggressively as the Company expects and differences in the handling of customer relationships could adversely affect the Company’s performance. Additionally, the loss of any major channel partner for any reason, including a channel partner’s decision to sell competing products rather than the Company’s products, could have a material adverse effect on the Company. Moreover, the Company’s future success will depend substantially on the ability and willingness of its channel partners to continue to dedicate the resources necessary to promote the Company’s products and to support a larger installed base of the Company’s products. If the channel partners are unable or unwilling to do so, the Company may be unable to sustain revenue growth.

Currently the Company is partially protected from exchange rate fluctuations among the U.S. Dollar and other currencies as a result of its indirect sales channel, which generally pays the Company in U.S. Dollars. The revenues and expenses associated with the Company’s international direct sales channel are subject to foreign currency exchange fluctuations and, as a result, the Company’s future financial results may be impacted by fluctuations in exchange rates. Additionally, any future changes to the Company’s sales channel involving proportionally higher direct sales from international locations could result in additional exposure to the foreign currency exchange fluctuations. This exposure could adversely impact the Company’s financial position and results of operations in future periods.

Competition. The Company continues to experience intense competition across all markets for its products and services. Some of the Company’s current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well established relationships with current and potential customers of the Company. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.

 

11


Dependence on Senior Management and Key Technical Personnel. The Company is highly dependent upon the ability and experience of its senior executives and its key technical and other management employees. Although the Company has employment agreements with certain employees, the loss of these employees, or any of the Company’s other key employees, could adversely affect the Company’s ability to conduct its operations.

Risks Associated with International Activities. A majority of the Company’s business comes from outside the United States of America. Risks inherent in the Company’s international business activities include imposition of government controls, export license requirements, restrictions on the export of critical technology, products and services, political and economic instability, trade restrictions, changes in tariffs and taxes, difficulties in staffing and managing international operations, longer accounts receivable payment cycles and the burdens of complying with a wide variety of foreign laws and regulations. Effective patent, copyright and trade secret protection may not be available in every foreign country in which the Company sells its products and services. The Company’s business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks.

As the Company continues to expand its direct sales presence in international regions, the portion of its revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, changes in currency exchange rates from time to time may affect the Company’s financial position, results of operations and cash flows.

Additionally, countries in certain international regions have continued to experience weaknesses in their currency, banking and equity markets. These weaknesses could adversely affect consumer demand for the Company’s products and ultimately the Company’s financial condition, results of operations and cash flows.

As the Company has grown, it has become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. As a result of the current economic slowdown, many companies are delaying or reducing technology purchases, which has had an impact on the Company’s visibility into the closing of new business, as opposed to its recurring business. This slowdown has also contributed to, and may continue to contribute to, reductions in sales, longer sales cycles and increased price pressure. Each of these items could adversely affect the Company’s sales in future periods.

The Company has historically received significant tax benefits related to its export activities. In October 2004, the American Jobs Creation Act of 2004 was signed into law and included replacement legislation for existing export benefits. This bill retains certain export benefits for transactions in the ordinary course of business under binding contracts with unrelated persons in effect on September 17, 2003. The phase-out of the existing export benefits associated with the legislation is summarized as follows:

Export Benefit Phase-out

 

2004

   No effect

2005

   80% of otherwise-applicable benefits

2006

   60% of otherwise-applicable benefits

2007 - beyond

   Export benefits fully eliminated

In addition to repealing the export tax benefits, the American Jobs Creation Act of 2004 provides significant tax relief for domestic manufacturers. Effective for taxable years beginning after December 31, 2004, qualifying entities may deduct a certain percentage (as defined below) of the lesser of their qualified production activities income or their taxable income for a taxable year. The deduction, however, is limited to 50% of an employer’s W-2 wages for the tax year. Beginning in 2010, when the 9% deduction is fully phased in, corporations facing a marginal tax rate of 35% would be subject to an effective tax rate of 31.85% on qualifying income.

Manufacturing Income Deduction Phase-in

 

2004

   No effect

2005 - 2006

   3% applicable deduction for qualified income

2007 - 2009

   6% applicable deduction for qualified income

2010 - beyond

   9% applicable deduction for qualified income

 

12


In 2005, export benefits reduced the Company’s effective tax rate by approximately 2.9%. The impact of the above legislation on the Company’s effective tax rate in 2005 was not significant. The Company expects the above legislation to adversely impact the effective tax rate by 1.0% in 2006. Any other prospective changes regarding tax benefits associated with the Company’s export sales or other federal and state tax planning vehicles may adversely impact the Company’s effective tax rate and decrease its net income in future periods.

Dependence on Proprietary Technology. The Company’s success is highly dependent upon its proprietary technology. Although the Company was awarded a patent by the U.S. Patent and Trademark Office for its Web-based reporting technology, the Company generally relies on contracts and the laws of copyright and trade secrets to protect its technology. Although the Company maintains a trade secrets program, enters into confidentiality agreements with its employees and distributors, and limits access to and distribution of its software, documentation and other proprietary information, there can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties, or that third parties will not be able to develop similar technology independently. Although the Company is not aware that any of its technology infringes upon the rights of third parties, there can be no assurance that other parties will not assert technology infringement claims against the Company or that, if asserted, such claims will not prevail.

Increased Reliance on Perpetual Licenses. Although the Company has historically maintained stable recurring revenue from the sale of software lease licenses, software maintenance subscriptions and third party royalties, it also has relied on sales of perpetual licenses that involve payment of a single up-front fee and that are more typical in the computer software industry. While revenue generated from software lease licenses, software maintenance subscriptions and third party royalties currently represents a portion of the Company’s software license revenue, to the extent that perpetual license revenue continues to represent a significant percentage of total software license revenue, the Company’s revenue in any period will depend increasingly on sales completed during that period.

Risks Associated with Acquisitions. The Company has consummated and may continue to consummate certain strategic acquisitions in order to provide increased capabilities to its existing products, supply new products and services or enhance its distribution channels. In the future, the Company may not be able to identify suitable acquisition candidates or, if suitable candidates are identified, the Company may not be able to complete the business combination on commercially acceptable terms. Business acquisitions may result in devotion of significant management and financial resources. The ability of the Company to integrate the acquired businesses, including delivering sales and support, ensuring continued customer commitment, obtaining further commitments and challenges associated with expanding sales in particular markets and retaining key personnel, will impact the success of these acquisitions. If the Company is unable to properly and timely integrate the acquired businesses, there could be a material, adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Disruption of Operations or Infrastructure Failures. A significant portion of the Company’s software development personnel, source code and computer equipment is located at operating facilities in the United States, Canada and Europe. The occurrence of a natural disaster or other unforeseen catastrophe at any of these facilities could cause interruptions in the Company’s operations, services and product development activities. Additionally, if the Company experiences problems that impair its business infrastructure, such as a computer virus, telephone system failure or an intentional disruption of its information technology systems by a third party, these interruptions could have a material, adverse effect on the Company’s business, financial condition, results of operations, cash flows and the ability to meet financial reporting timelines. Further, because the Company’s sales are not generally linear during any quarterly period, the potential adverse effects resulting from any of the events described above or any other disruption of the Company’s business could be accentuated if it occurs close to the end of a fiscal quarter.

Periodic Reorganization of Sales Force. The Company relies heavily on its direct sales force. From time to time, the Company reorganizes and makes adjustments to its sales force in response to such factors as management changes, performance issues, market opportunities and other considerations. These changes may result in a temporary lack of sales production and may adversely impact revenue in future quarters. There can be no assurance that the Company will not restructure its sales force in future periods or that the transition issues associated with such a restructuring will not recur.

Third Party Royalty Agreements. The Company has agreements with third parties whereby it receives royalty revenues in return for the right of the third party to utilize the Company’s technology or embed the Company’s technology in the third party’s products. To the extent that the Company is unable to maintain these third party relationships, or that the third party is unsuccessful in selling the embedded products, there could be a material, adverse impact on the Company’s business, financial condition, results of operations and cash flows.

 

13


Sales Forecasts. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts. The Company’s sales personnel continually monitor the status of all proposals, including the estimated closing date and the value of the sale, in order to forecast quarterly sales. These forecasts are subject to significant estimation and are impacted by many external factors. For example, a slowdown in information technology spending or economic factors could cause purchasing decisions to be delayed. A variation in actual sales activity from that forecasted could cause the Company to plan or to budget incorrectly and, therefore, could adversely affect the Company’s business, financial condition, results of operations and cash flows.

Income Tax Estimates. The Company makes significant estimates in determining its worldwide income tax provision. These estimates involve complex tax regulations in a number of jurisdictions across the Company’s global operations and are subject to many transactions and calculations where the ultimate tax outcome is uncertain. Although the Company believes that its estimates are reasonable, the final outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the period in which such determination is made.

Regulatory Compliance. Like all other public companies, the Company is subject to the rules and regulations of the Securities and Exchange Commission (“SEC”), including those that require the Company to report on and receive a certification from its independent accounting firm regarding the Company’s internal controls. Compliance with these requirements causes the Company to incur additional expenses and causes management to divert time from the day-to-day operations of the Company. While the Company anticipates being able to fully comply with these internal control requirements, if it is not able to comply with the Sarbanes-Oxley reporting or certification requirements relating to internal controls, the Company may be subject to sanction by the SEC or NASDAQ.

The Company’s stock is listed on The NASDAQ National Market; thus, the Company is subject to the ongoing financial and corporate governance requirements of NASDAQ. While the Company anticipates being able to fully comply with these requirements, if it is not able to comply, the Company’s name may be published on NASDAQ’s daily Non-Compliant Companies list until NASDAQ determines that it has regained compliance or the Company no longer trades on NASDAQ.

The Company’s sales to the Government of the United States must comply with the regulations set forth in the Federal Acquisition Regulations. Failure to comply with these regulations could result in penalties being assessed against the Company or an order preventing the Company from making future sales to the United States Government. Further, the Company’s international activities must comply with the export control laws of the United States, the Foreign Corrupt Practices Act and a variety of other laws and regulations of the United States of America and other countries in which the Company operates. Failure to comply with any of these laws and regulations could adversely affect the Company’s business, financial position, results of operation and cash flows.

Contingencies. The Company is involved in various investigations, claims and legal proceedings from time to time that arise in the ordinary course of its business activities. These proceedings currently include customary audit activities by various taxing authorities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company.

Changes in Existing Financial Accounting Standards or Taxation Rules. Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on the Company’s results of operations or the manner in which the Company conducts its business. Further, such changes could potentially affect the Company’s reporting of transactions completed before such changes are effective. For example, the Company is not currently required to record stock-based compensation charges to earnings in connection with stock option grants to its employees. However, the FASB issued Statement No. 123(R) which will require the Company to record stock-based compensation charges to earnings commencing in the first quarter of fiscal 2006. Such charges will negatively impact the Company’s earnings.

Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to certain market risks, primarily foreign currency exchange rates, that arise from transactions entered into in the normal course of business. The Company seeks to minimize these risks primarily through its normal operating and financing activities.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

 

14


ITEM 2: PROPERTIES

The Company’s executive offices and those related to domestic product development, marketing, production and administration are located in a 107,000 square foot office facility in Canonsburg, Pennsylvania, leased in January 1996. In May 2004, the Company entered into the first amendment to this lease agreement, effective January 1, 2004. The lease was extended from an original period of ten years, with an option for five additional years, to a period of 18 years from the inception date, with an option for five additional years. The Company and its subsidiaries also lease office space in various locations throughout the world. The Company owns substantially all equipment used in its facilities. Management believes that its facilities allow for sufficient space to support not only its present needs, but also allow for expansion and growth as the business may require in the foreseeable future.

In the opinion of management, the Company’s properties and its equipment are in good operating condition and are adequate for the Company’s current needs. The Company does not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

ITEM 3: LEGAL PROCEEDINGS

The Company is subject to various legal proceedings from time to time that arise in the ordinary course of business. These proceedings currently include customary audit activities by various taxing authorities. Each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such legal proceedings will not materially affect the Company’s financial position, liquidity or results of operations.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2005.

 

15


PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Equity Compensation Plan Information as of December 31, 2005 is as follows:

 

     (a)     (b)     (c)

Plan Category

  

Number of Securities to

Be Issued Upon Exercise

of Outstanding Options,

Warrants and Rights

   

Weighted Average Exercise

Price of Outstanding

Options, Warrants and

Rights

   

Number of Securities

Remaining Available for

Future Issuance Under

Equity Compensation

Plans (excluding securities

reflected in column (a))

Equity Compensation Plans Approved
By Security Holders

      

1994 Stock Option and Grant Plan

   18,000     $ 5.00     0

1996 Stock Option and Grant Plan

   3,604,418     $ 14.10     1,995,834

1996 Employee Stock Purchase Plan

   (1 )     (2 )   392,629

Equity Compensation Plans Not
Approved By Security Holders

      

None

      
            

Total

   3,622,418       2,388,463
            

(1) The number of shares issuable with respect to the current offering period is not determinable until the end of the period.
(2) The per share purchase price of shares issuable with respect to the current offering period is not determinable until the end of the offering period.

(b) Unregistered Sale of Equity Securities and Use of Proceeds

The following information is furnished in connection with securities sold by the Registrant during the period covered by this Form 10-K 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.

 

Month/Year

   Number of Shares   

Number of

Individuals

   Aggregate Exercise Price

October 2005

   14,000    1    $ 16,800

November 2005

   9,500    3    $ 14,356

December 2005

   27,000    3    $ 81,800

(c) Issuer Purchases of Equity Securities

None.

Other information required by this Item is incorporated by reference to page 54 and the section captioned “Corporate Information” appearing in the Company’s 2005 Annual Report to Stockholders.

ITEM 6: SELECTED FINANCIAL DATA

The information required by this Item is incorporated by reference to page 3 of the Company’s 2005 Annual Report to Stockholders.

 

16


ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this Item is incorporated by reference to pages 13 through 31 of the Company’s 2005 Annual Report to Stockholders, including the “Important Factors Regarding Future Results.”

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Changes in the overall level of interest rates affect the interest income that is generated from the Company’s investments. For the year ended December 31, 2005, total interest income was $4.3 million. Cash and cash equivalents consist primarily of highly liquid investments such as time deposits held at major banks, money market mutual funds and other securities with remaining maturities of three months or less. The Company considers investments backed by government agencies or U.S. financial institutions to be highly liquid and, accordingly, classifies such investments as short-term investments.

Foreign Currency Transaction Risk. As the Company continues to expand its direct sales presence in international regions, the portion of its revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, changes in currency exchange rates from time to time may affect the Company’s financial position, results of operations and cash flows. On average, for the year ended December 31, 2005, the U.S. Dollar was 0.5% stronger, when measured against the Company’s primary foreign currencies, than for the year ended December 31, 2004. The U.S. Dollar strengthened against the British Pound, the Japanese Yen and the Euro while it weakened against the Indian Rupee and the Canadian Dollar. As a result of these fluctuations, the net adverse impact on revenue and operating income during 2005, as compared with 2004, was $300,000 and $600,000, respectively.

Based on the nature of the Company’s business, it has no direct exposure to commodity price risk.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is incorporated by reference to pages 32 through 54 of the Company’s 2005 Annual Report to Stockholders, which is attached hereto as Exhibit 13.1.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within the Company and its consolidated subsidiaries during the period covered by this report.

The Company has a Disclosure Review Committee to assist in the quarterly evaluation of the Company’s internal disclosure controls and procedures and in the review of the Company’s periodic filings under the Exchange Act. The membership of the Disclosure Review Committee consists of the Company’s Chief Executive Officer, Chief Financial Officer, Controller, General Counsel, Treasurer, Vice President of Sales and Suppport, Vice President of Human Resources and Business Unit General Managers. This committee is advised by external counsel, particularly on SEC-related matters. Additionally, other members of the Company’s global management team advise the committee with respect to disclosure via a sub-certification process.

 

17


The Company believes, based on its knowledge, that the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. The Company cannot provide assurance that new problems will not be found in the future, nor does it expect that its disclosure controls and procedures, or its internal controls, will prevent all errors and all fraud because no system can provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud within ANSYS have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some person or by collusion of two or more people. The Company is committed to both a sound internal control environment and to good corporate governance.

From time to time, the Company reviews the disclosure controls and procedures, and may make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

As of the end of the period covered by this report, an evaluation was performed of the effectiveness of the design and operation of ANSYS’ disclosure controls and procedures by the Company. Based on that evaluation, the Company has concluded that its disclosure controls and procedures are effective.

Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s internal control over financial reporting was effective at December 31, 2005.

Management’s assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm. Deloitte & Touche LLP has issued an attestation report on the Company’s controls over financial reporting. The report is included in Item 8 of this Form 10-K.

Changes in Internal Controls. There were no changes in the Company’s internal controls or in other factors that could materially affect the Company’s internal controls over financial reporting during the quarter ended December 31, 2005.

ITEM 9B: OTHER INFORMATION

None.

 

18


PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company’s directors and executive officers required by this Item is incorporated by reference to the Company’s 2006 Proxy Statement and is set forth under “Compliance with Section 16(a) of the Exchange Act” therein.

CODE OF BUSINESS CONDUCT AND ETHICS

The Company has adopted the ANSYS Code of Business Conduct and Ethics, which applies to all employees, officers and directors. This Code of Business Conduct and Ethics meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K and applies to the Company’s Board of Directors, Chief Executive Officer, Chief Financial Officer and other employees, as indicated above. This document also meets certain requirements under the listing standards of NASDAQ. The ANSYS Code of Business Conduct and Ethics is posted on the Company’s website at www.ansys.com. The Company intends to disclose on its website any amendments to its Code of Business Conduct and Ethics, as well as any waivers for executive officers or directors.

ITEM 11: EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the Company’s 2006 Proxy Statement and is set forth under “Executive Compensation” therein.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the Company’s 2006 Proxy Statement and is set forth under “Principal and Management Stockholders” therein.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the Company’s 2006 Proxy Statement and is set forth under “Certain Transactions” therein.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference to the Company’s 2006 Proxy Statement and is set forth under “Independent Registered Public Accounting Firm” therein.

 

19


PART IV

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Documents Filed as Part of this Annual Report on Form 10-K:

 

  1. Financial Statements: The following consolidated financial statements and reports of independent registered public accounting firm are incorporated by reference to pages 32 through 53 of the Company’s 2005 Annual Report to Stockholders:

 

    Reports of Independent Registered Public Accounting Firm

 

    Management’s Assessment of Internal Control

 

    Consolidated Balance Sheets as of December 31, 2005 and 2004

 

    Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003

 

    Consolidated Statements of Cash Flow for the years ended December 31, 2005, 2004 and 2003

 

    Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003

 

    Notes to Consolidated Financial Statements

 

  2. Financial Statement Schedules: The following financial statement schedule and report of independent registered public accounting firm are filed on pages 22 through 23 of this Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements.

Report of Independent Registered Public Accounting Firm

Schedule II - Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not applicable, or are not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

 

  3. Exhibits:

The Exhibits listed on the accompanying Exhibit Index immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

 

(b) Exhibits

The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the attached Exhibit Index on pages 24 and 25 of this Annual Report.

 

  a. Financial Statement Schedules

The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) as set forth above.

 

20


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 9, 2006   By:  

/s/ James E. Cashman III

    James E. Cashman III
    President and Chief Executive Officer
Date: March 9, 2006   By:  

/s/ Maria T. Shields

    Maria T. Shields
   

Chief Financial Officer,

Vice President, Finance and Administration

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. Cashman III, his or her attorney-in-fact, with the power of substitution, for such person in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.

 

Signature

  

Title

 

Date

/s/ James E. Cashman III

James E. Cashman III

  

President and Chief Executive Officer

(Principal Executive Officer)

  March 9, 2006

/s/ Maria T. Shields

Maria T. Shields

   Chief Financial Officer, Vice President, Finance and Administration; (Principal Financial Officer and Accounting Officer)   March 9, 2006

/s/ Peter J. Smith

Peter J. Smith

   Chairman of the Board of Directors   March 9, 2006

/s/ Jacqueline C. Morby

Jacqueline C. Morby

   Director   March 9, 2006

/s/ Roger J. Heinen, Jr.

Roger J. Heinen, Jr.

   Director   March 9, 2006

/s/ John F. Smith

John F. Smith

   Director   March 9, 2006

/s/ Patrick J. Zilvitis

Patrick J. Zilvitis

   Director   March 9, 2006

/s/ Bradford C. Morley

Bradford C. Morley

   Director   March 9, 2006

 

21


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

ANSYS, Inc.

Canonsburg, Pennsylvania

We have audited the consolidated financial statements of ANSYS, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and have issued our reports thereon dated March 1, 2006; such consolidated financial statements and reports are included in your 2005 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania
March 1, 2006

 

22


SCHEDULE II

ANSYS, INC.

Valuation and Qualifying Accounts

 

Description

  

Balance at

Beginning

of Year

  

Additions –

Charges to Costs

and Expenses

   

Deductions -

Returns and

Write-Offs

  

Balance

at End

of Year

Year ended December 31, 2005 Allowance for doubtful accounts

   $ 1,890,000    $ 570,000     $ 229,000    $ 2,231,000

Year ended December 31, 2004 Allowance for doubtful accounts

   $ 2,110,000    $ 153,000     $ 373,000    $ 1,890,000

Year ended December 31, 2003 Allowance for doubtful accounts

   $ 1,560,000    $ 1,131,000 (1)   $ 581,000    $ 2,110,000

(1) Amount includes $684,000 related to the acquisition date balance sheet of CFX.

 

23


EXHIBIT INDEX

 

Exhibit No.  

Exhibit

3.1   Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 and incorporated herein by reference).
3.2   By-laws of the Company (filed as Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference).
10.1   1994 Stock Option and Grant Plan, as amended (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference). *
10.2   1996 Stock Option and Grant Plan, as amended (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 and incorporated herein by reference). *
10.3   ANSYS, Inc. Employee Stock Purchase Plan, as amended (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 and incorporated herein by reference). *
10.4   First Amendment to ANSYS, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference). *
10.5   Employment Agreement between a subsidiary of the Registrant and Peter J. Smith dated as of March 28, 1994 (filed as Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference). *
10.6   Lease between National Build to Suit Washington County, L.L.C. and the Registrant for the Southpointe property (filed as Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference).
10.7   First Amended Lease Agreement between Southpointe Park Corp. and ANSYS, Inc. (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004 and incorporated herein by reference).
10.8   Registrant’s Pension Plan and Trust, as amended (filed as Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference). *
10.9   Form of Director Indemnification Agreement (filed as Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference). *
10.10   Agreement and Plan of Merger among ANSYS, Inc., GenesisOne Acquisition Corporation, Pacific Marketing and Consulting, Inc. (PMAC) and the PMAC stockholders (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated September 13, 2000 and incorporated herein by reference).
10.11   Agreement between ANSYS, Inc. and AEA Technology PLC (“AEA”) relating to the Registrant’s acquisition from AEA of the capital stock of certain AEA subsidiaries and of related assets constituting the CFX business of AEA (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated March 12, 2003 and incorporated herein by reference).
10.12   Employment Agreement between the Registrant and J. Christopher Reid dated as of February 20, 2003 (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). *
10.13   Employment Agreement between the Registrant and James E. Cashman III dated as of March 29, 2001 (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference). *
10.14   Employment Agreement between the Registrant and James E. Cashman III dated as of April 21, 2003 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference). *

 

24


10.15   Description of Executive Bonus Plan, Director Stock Option Program and Officer Stock Option Program, Including Forms of Option Agreements for Option Grants to Directors and Officers (filed as Exhibits 99.1 – 99.5 to the Company’s Current Report on Form 8-K, dated February 5, 2005, and incorporated herein by reference).*
10.16   Options Granted to Independent Directors Related to the 2005 Annual Meeting of Stockholders on May 10, 2005 (filed as disclosure in the Company’s Current Report on Form 8-K, dated May 10, 2005, and incorporated herein by reference). *
10.17   Indemnification Agreement, dated February 9, 2006, between ANSYS, Inc. and Sheila S. DiNardo (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 9, 2006, and incorporated herein by reference).
10.18   Amendment to Non-Affiliate Independent Director Compensation on February 9, 2006 (filed as disclosure in the Company’s Current Report on Form 8-K, dated February 9, 2006, and incorporated herein by reference). *
10.19   Agreement and Plan of Merger, dated February 15, 2006, among ANSYS, Inc., ANSYS XL, LLC, BEN I, Inc., HINES II, Inc., Heat Holdings Corp., Aavid Thermal Technologies, Inc., TROY III, Inc., Fluent, Inc., and, for certain limited purposes described therein, the Principal Stockholders listed therein and the Stockholders’ Representative (excluding exhibits and schedules, which the Registrant agrees to furnish supplementally to the Commission upon request) (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated February 15, 2006, and incorporated herein by reference).
10.20   Registration Rights Agreement among ANSYS, Inc. and the Holders listed therein, dated February 15, 2006 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated February 15, 2006, and incorporated herein by reference).
10.21   Voting Agreement among ANSYS, Inc. and the Principal Stockholders listed therein, dated February 15, 2006 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 15, 2006, and incorporated herein by reference).
10.22   Employment Agreement between ANSYS, Inc. and Dr. Ferit Boysan, dated February 15, 2006 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated February 15, 2006, and incorporated herein by reference). *
10.23   Amended and Restated ANSYS, Inc. Cash Bonus Plan, adopted on March 2, 2006 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated March 2, 2006, and incorporated herein by reference). *
10.24   First Amendment to the Second Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan; filed herewith. *
13.1   Annual Report to Stockholders for the fiscal year ended December 31, 2005 (which is not deemed to be “filed” except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K); filed herewith.
14.1   Code of Business Conduct and Ethics (filed as Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference).
21   Subsidiaries of the Registrant; filed herewith.
23.1   Consent of Deloitte & Touche LLP, independent registered public accounting firm.
24.1   Powers of Attorney. Contained on page 21 of this Annual Report on Form 10-K and incorporated herein by reference.
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management contract or compensatory plan, contract or arrangement.

 

25

1st Admt to the 2nd Amended & Restated ANSYS Inc. 1996 Stock Option & Grant Plan

Exhibit 10.24

FIRST AMENDMENT TO THE

SECOND AMENDED AND RESTATED

ANSYS, INC.

1996 STOCK OPTION AND GRANT PLAN

Pursuant to the powers reserved to it in Section 12 of the Second Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan (the “Plan”), ANSYS, Inc. (the “Company”) hereby amends the Plan, effective as of February 9, 2006, as follows:

1. The definition of “Award” or “Awards” in Section 1 of the Plan is amended by adding the phrase, “Deferred Stock Awards” between the words “Performance Share Awards” and “and” in the third line thereof.

2. Paragraph (c) of Section 5 of the Plan is amended by deleting such section in its entirety and replacing it with the following:

“(c) Grants to Directors.

(i) Automatic Grant.

(A) The Chairman of the Board of Directors (the “Chairman”), provided he or she is not an officer of the Company, and each non-affiliate Independent Director who is serving as a director of the Company on the fifth business day after each annual meeting of stockholders shall automatically be granted on such day either (1) a Deferred Stock Award for 3,600 deferred stock units; or (2) a Non-Qualified Stock Option to acquire 12,000 shares of Stock.

(B) The parties receiving an Award under Section 5(c)(i)(A) shall elect in advance whether to receive the automatic grant as either a Deferred Stock Award or Non-Qualified Stock Option. Such election shall be made at the time and in the form as required by the Committee.

(ii) Terms.

(A) Deferred Stock Award. The Deferred Stock Award granted under this Section 5(c) shall be fully vested upon grant and shall be paid to the recipient in the form of shares of Stock as soon as reasonably practicable following his or her cessation of service as a director of the Company, but in no event shall such Deferred Stock Award be paid more than two and one-half months after the end of the year in which such cessation of service occurs.

(B) Non-Qualified Stock Option.

(1) The Option Exercise Price per share for the Stock covered by a Stock Option granted under this Section 5(c) shall be equal to the Fair Market Value of the Stock on the date of grant.

(2) Each Stock Option granted under this Section 5(c) shall be exercisable as specified by the Committee. No such Option shall be exercisable after the tenth anniversary of the date it was granted.

(3) If an optionee ceases to be a director for any reason, each Stock Option granted to such optionee under this Section 5(c) shall terminate immediately with respect to all shares of Stock for which it is not then exercisable. With respect to the remaining shares, such Option shall terminate 60 days after the date the optionee ceases to be a director or at the expiration of the stated term of the Option, if earlier; provided, however, that (1) if the optionee dies while a director, such Option may be exercised for such remaining shares by the personal representative or legatee of the optionee for a period of one year from the date of death or until the expiration of the stated term of the Option, if earlier; or (2) if the optionee ceases to be a director by reason of disability, such Option may be exercised for such remaining shares by the director for six months after the date the optionee ceases to be a director or until the expiration of the stated term of the Option, if earlier.

(4) A Stock Option granted under this Section 5(c) may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by one or more of the methods specified in Section 5(a)(v). An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of an Option and not as to unexercised Options.

(iii) Limited to Chairman and Independent Directors. The provisions of this Section 5(c) shall apply only to Deferred Stock Awards and Stock Options automatically granted or to be automatically granted under Section 5(c)(i)(A), and shall not be deemed to modify, limit or otherwise apply to any other provision of this Plan or to any Award issued


under this Plan to a participant who is not granted an Award under Section 5(c)(i)(A). To the extent that they are inconsistent with any other provisions of the Plan, the provisions of this Section 5(c) shall govern the rights and obligations of the Company and the Chairman and Independent Directors respecting Deferred Stock Awards and Options automatically granted or to be automatically granted to the Chairman and Independent Directors.”

3. The following shall be added to the Plan immediately following Section 16 thereof:

“SECTION 17. DEFERRED STOCK AWARDS

(a) Nature of Deferred Stock Awards. A Deferred Stock Award is an Award of phantom stock units to a grantee, subject to restrictions and conditions as the Committee may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Deferred Stock Award is contingent on the grantee executing the Deferred Stock Award agreement. The terms and conditions of each such agreement shall be determined by the Committee, and such terms and conditions may differ among individual Awards and grantees. At the end of the deferral period, the Deferred Stock Award, to the extent vested, shall be paid to the grantee in the form of shares of Stock.

(b) Election to Receive Deferred Stock Awards in Lieu of Compensation. The Committee may, in its sole discretion, permit a grantee to elect to receive a portion of future cash compensation otherwise due to such grantee in the form of a Deferred Stock Award. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Committee and in accordance with Section 409A of the Code and such other rules and procedures established by the Committee. The Committee shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Committee deems appropriate. Any such deferred compensation shall be converted to a fixed number of phantom stock units based on the Fair Market Value of Stock on the date the compensation would otherwise have been paid to the grantee but for the deferral.

(c) Rights as a Stockholder. During the deferral period, a grantee shall have no rights as a stockholder; provided, however, that the grantee may be credited with Dividend Equivalent Rights with respect to the phantom stock units underlying his Deferred Stock Award, subject to such terms and conditions as the Committee may determine.

(d) Termination. Except as may otherwise be provided by the Committee either in the Award agreement or, subject to Section 12 below, in writing after the Award agreement is issued, a grantee’s right in all Deferred Stock Awards that have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.”

Annual Report to Stockholders

Exhibit 13.1

ANSYS, Inc. 2005 Annual Report 3

FINANCIAL HIGHLIGHTS

 

 

     Year Ended December 31,  
(in thousands, except per share data)    2005     2004     2003     2002     2001  

Total revenue

   $ 158,036     $ 134,539     $ 113,535     $ 91,011     $ 84,836  

Operating income

     58,840       45,978       30,317       27,074       18,548  

Net income

     43,903       34,567       21,313       18,959       13,692  

Earnings per share – basic

   $ 1.38     $ 1.12     $ 0.71     $ 0.65     $ 0.47  

Weighted average shares – basic

     31,749       30,955       29,916       29,196       29,108  

Earnings per share – diluted

   $ 1.30     $ 1.05     $ 0.67     $ 0.61     $ 0.44  

Weighted average shares – diluted

     33,692       32,978       31,876       31,188       30,876  

Total assets

   $ 305,509     $ 239,646     $ 180,559     $ 127,001     $ 117,762  

Working capital

     161,954       120,077       69,074       56,883       40,033  

Long-term liabilities

     —         —         —         —         —    

Stockholders’ equity

     224,977       175,469       127,074       91,393       74,393  

Cash provided by operating activities

     67,825       51,366       38,806       22,116       23,638  

Cash dividends declared per share

     —         —         —         —         —    

Return on average stockholders’ equity

     22 %     23 %     20 %     23 %     19 %

Return on average total assets

     16 %     16 %     14 %     15 %     13 %


ANSYS, Inc. 2005 Annual Report 12

 

FINANCIAL CONTENT

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   13

Reports of Independent Registered Public Accounting Firm

   32, 33

Management’s Report on Internal Control Over Financial Reporting

   33

Consolidated Balance Sheets

   34

Consolidated Statements of Income

   35

Consolidated Statements of Cash Flow

   36

Consolidated Statements of Stockholders’ Equity

   37

Notes to Consolidated Financial Statements

   38

Quarterly Financial Information (Unaudited)

   54

Corporate Information

   55


ANSYS, Inc. 2005 Annual Report 13

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

ANSYS, Inc.’s (the “Company”) results for the year ended December 31, 2005 reflect revenue growth of 17% and diluted earnings per share growth of 24%. These results were impacted by various factors, including higher revenues from the Company’s software products and services, the January 2005 acquisition of Century Dynamics, Inc., an improvement in operating margins and higher interest income. The Company’s financial position is strong with $194 million in cash and short-term investments, and working capital of $162 million as of December 31, 2005.

ANSYS, Inc. 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, biomedical and defense. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company and its subsidiaries employ approximately 600 people and focus 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®, ANSYS Workbench™, CFX®, DesignSpace®, ICEM CFD™ and AUTODYN® products through a global network of channel partners, in addition to its own direct sales offices in strategic, global locations. It is the Company’s intention to continue to maintain this mixed sales and distribution model.

The Company licenses its technology to businesses, educational institutions and governmental agencies. The growth in the Company’s revenues is affected by the strength of the global economies, general business conditions, customer budgetary constraints and the competitive position of the Company’s products. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results.

The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of stock awards, bad debts, valuation of investments, contract revenue, valuation of goodwill, valuation of intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience, estimated future cash flows and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

This Annual Report 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 the following statements, as well as statements that contain such words as “anticipates,” “intends,” “believes,” “plans” and other similar expressions:

 

    the Company’s intentions related to investments in global sales and marketing, and research and development

 

    increased exposure to volatility of foreign exchange rates

 

    exposure to changes in domestic and foreign tax laws in future periods

 

    plans related to future capital spending

 

    the Company’s intentions regarding its mixed sales and distribution model

 

    the sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements

 

    management’s assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings

 

    management’s assessment of its ability to realize deferred tax assets

 

    management’s intention regarding the reinvestment of undistributed foreign earnings

Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the “Important Factors Regarding Future Results” beginning on page 26.


ANSYS, Inc. 2005 Annual Report 14

 

Acquisitions

On February 26, 2003, the Company acquired 100% of the shares in certain entities and assets (hereafter collectively referred to as “CFX”) for a purchase price of approximately $21.7 million in cash. CFX is a leading supplier of computational fluid dynamics (“CFD”) software and services. By acquiring CFX, ANSYS broadened the scope of engineering physics solutions it could offer to its customers and gained access to new customers and geographic territories.

The total purchase price was allocated to the foreign and domestic assets and liabilities of CFX based upon estimated fair market values. The allocations, based upon foreign currency translation rates as of the date of acquisition, were approximately $11.5 million to identifiable intangible assets (including $9.5 million to core software technology to be amortized over five years, $900,000 to customer lists to be amortized over three years and $1.1 million to trademark) and $14.1 million to goodwill, $5.1 million of which is tax deductible. The trademark is not being amortized as it has been determined to have an indefinite life.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

(in thousands)    At February 26, 2003  

Current assets

   $ 7,477  

Property and equipment

     1,640  

Intangible assets

     11,500  

Goodwill

     14,076  

Total assets acquired

     34,693  

Current liabilities

     (11,009 )

Other liabilities

     (1,937 )

Total liabilities assumed

     (12,946 )

Net assets acquired

   $ 21,747  

In valuing deferred revenue on the CFX balance sheet as of the acquisition date, the Company applied the fair value provisions of Emerging Issues Task Force (“EITF”) Issue No. 01-3 “Accounting in a Business Combination for Deferred Revenue of an Acquiree.” In accordance with EITF 01-3, acquired deferred revenue of approximately $4.8 million was recorded on the opening balance sheet.

CFX reported revenue of approximately $19 million for its fiscal year ended March 31, 2002. The CFX business was a carve-out entity from the acquiree with significant intercompany transactions and, as a result, pro forma information on revenue, income before extraordinary items and the cumulative effect of accounting changes, net income and earnings per share are indeterminable. The operating results of CFX have been included in ANSYS, Inc.’s consolidated financial statements since the date of acquisition.

On January 5, 2005, the Company acquired Century Dynamics, Inc. (hereafter “CDI”), a leading provider of sophisticated simulation software for solving linear, nonlinear, explicit and multi-body hydrodynamics problems, for an initial purchase price of approximately $5.1 million in cash. In addition, the agreement provided for a future cash payment contingent upon the attainment of certain 2005 performance criteria, which is to be paid no later than March 22, 2006. This payment is estimated to be approximately $4.5 million and was accounted for as an addition to both goodwill and other accrued expenses and liabilities in 2005. The acquisition of CDI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive solution to its customers.

The initial cash purchase price was allocated to the foreign and domestic assets and liabilities of CDI based upon estimated fair market values and foreign currency translation rates as of the date of acquisition. Approximately $2.7 million was allocated to identifiable intangible assets (including $1.5 million to core technology, $450,000 to non-compete agreements, $300,000 to customer contracts and $500,000 to trademarks) and $2.7 million to goodwill, which is not tax deductible. In the third quarter of 2005, a customer exercised its option to pay the Company approximately $300,000 under the contract that was valued on the acquisition date. As a result, the customer contract was removed from intangible assets as of December 31, 2005. The identified intangible assets are being amortized over three to five years. The operating results of CDI have been included in ANSYS, Inc.’s consolidated financial statements since the date of acquisition.


ANSYS, Inc. 2005 Annual Report 15

 

Had the acquisition occurred on January 1, 2005, the 2005 results would not be materially different from those presented in these consolidated financial statements. The following unaudited pro forma information presents the 2004 and 2003 results of operations of the Company as if the acquisition had occurred on January 1, 2003. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the years presented, nor are they necessarily indicative of future results.

 

     Year Ended December 31,
(in thousands, except per share data)    2004    2003

Total revenue

   $ 139,811    $ 117,828

Net income

     33,941      20,459

Earnings per share:

     

Basic

   $ 1.10    $ 0.68

Diluted

   $ 1.03    $ 0.64

In October 2005, the Company acquired substantially all of the assets and certain liabilities of Harvard Thermal, Inc. (hereafter “HTI”), a leader in thermal analysis software tools, for an up-front purchase price of approximately $1.3 million in cash and stock. In addition, the acquisition agreement provides for future payments of up to $400,000, contingent upon the attainment of certain performance criteria. The acquisition of HTI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive simulation solution to its customers. The operating results for HTI have been included with the Company’s operating results from the date of acquisition.

The total purchase price was allocated to the domestic assets and liabilities of HTI based upon estimated fair market values as of the date of acquisition. Approximately $515,000 was allocated to identifiable intangible assets, comprised primarily of core technology, and $1.0 million was allocated to goodwill, which is not tax deductible. The identified intangible assets are being amortized over three years.

Had the acquisition of HTI occurred on January 1, 2003, the 2003, 2004 and 2005 results would not be materially different from those presented in these financial statements. Accordingly, the Company has not presented pro forma information on revenue, net income or earnings per share.

On February 16, 2006, the Company announced a definitive agreement to acquire Fluent, Inc. (hereafter “Fluent”), a global provider of CFD-based computer-aided engineering software and services. Under the terms of the merger agreement, the Company will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash to acquire Fluent, subject to certain adjustments at closing. The Company will use a combination of existing cash and approximately $200 million from committed bank financing to fund the transaction. The acquisition of Fluent is expected to enhance the breadth, functionality, usability and interoperability of the ANSYS portfolio of simulation solutions. This will increase operational efficiency and lower design and engineering costs for customers, and accelerate development and delivery of new and innovative products to the marketplace. Subject to customary closing conditions and the expiration or termination of the waiting periods under the Hart-Scott-Rodino Act, the transaction is anticipated to close in the second quarter of 2006.


ANSYS, Inc. 2005 Annual Report 16

 

Results of Operations

The operating results of CFX, CDI and HTI have been included in the results of operations since the acquisition dates of February 2003, January 2005 and October 2005, respectively.

For purposes of the following discussion and analysis, the table below sets forth certain consolidated financial data for the years 2005, 2004 and 2003.

 

     Year Ended December 31,
(in thousands)    2005    2004    2003

Revenue:

        

Software licenses

   $ 85,680    $ 71,326    $ 58,408

Maintenance and service

     72,356      63,213      55,127

Total revenue

     158,036      134,539      113,535

Cost of sales:

        

Software licenses

     5,292      4,840      5,365

Amortization of software and acquired technology

     3,576      3,030      3,028

Maintenance and service

     15,171      13,437      13,112

Total cost of sales

     24,039      21,307      21,505

Gross profit

     133,997      113,232      92,030

Operating expenses:

        

Selling and marketing

     25,955      24,984      24,777

Research and development

     30,688      26,281      23,792

Amortization

     1,184      1,149      1,055

General and administrative

     17,330      14,840      12,089

Total operating expenses

     75,157      67,254      61,713

Operating income

     58,840      45,978      30,317

Other income, net

     4,271      1,923      357

Income before income tax provision

     63,111      47,901      30,674

Income tax provision

     19,208      13,334      9,361

Net income

   $ 43,903    $ 34,567    $ 21,313


ANSYS, Inc. 2005 Annual Report 17

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenue:

 

     Year Ended December 31,    Change
(in thousands, except percentages)    2005    2004    Amount    %

Revenue:

           

Software licenses

   $ 85,680    $ 71,326    $ 14,354    20.1

Maintenance and service

     72,356      63,213      9,143    14.5

Total revenue

     158,036      134,539      23,497    17.5

The increase in revenue is primarily due to the following:

 

    newly generated software license revenue of $10.9 million

 

    increase of $7.3 million in product maintenance revenue, primarily associated with annual maintenance subscriptions sold in connection with new perpetual license sales in recent quarters

 

    post-acquisition revenue of $6.1 million ($3.5 million in license revenue and $2.6 million in maintenance and service revenue) related to CDI which was purchased on January 5, 2005

 

    decrease of $800,000 in engineering consulting revenue

On average, for the year ended December 31, 2005, the U.S. Dollar was 0.5% stronger, when measured against the Company’s primary foreign currencies, than for the year ended December 31, 2004. The U.S. Dollar strengthened against the British Pound, the Japanese Yen and the Euro while it weakened against the Indian Rupee and the Canadian Dollar. As a result of these fluctuations, the net adverse impact on revenue and operating income during 2005, as compared with 2004, was $300,000 and $600,000, respectively.

International and domestic revenues, as a percentage of total revenue, were 66.8% and 33.2%, respectively, during the year ended December 31, 2005 and 65.3% and 34.7%, respectively, in the year ended December 31, 2004.

A substantial portion of the Company’s maintenance revenue is derived from annual maintenance contracts. These contracts are generally renewed on an annual basis and have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company’s maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new maintenance contracts sold during that period. To the extent the rate of customer renewal for maintenance contracts remains at current levels, incremental maintenance contracts sold with new perpetual licenses will result in maintenance revenue growth.


ANSYS, Inc. 2005 Annual Report 18

 

Cost of Sales and Gross Profit:

 

     Year Ended December 31,          
     2005    2004    Change
(in thousands, except percentages)    Amount    % of
Revenue
   Amount    % of
Revenue
   Amount    %

Cost of sales:

                 

Software licenses

   $ 5,292    3.3    $ 4,840    3.6    $ 452    9.3

Amortization of software and acquired technology

     3,576    2.3      3,030    2.2      546    18.0

Maintenance and service

     15,171    9.6      13,437    10.0      1,734    12.9

Total cost of sales

     24,039    15.2      21,307    15.8      2,732    12.8

Gross profit

     133,997    84.8      113,232    84.2      20,765    18.3

The change in cost of sales is primarily due to the following:

 

    increased technical support and consulting fees of $1.0 million

 

    non-amortization expenses related to CDI of $800,000

 

    increased third party software royalties of $300,000

 

    increased amortization of $500,000 related to technology acquired in the CDI acquisition

The improvement in gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales.

Operating Expenses:

 

     Year Ended December 31,          
     2005    2004    Change
(in thousands, except percentages)    Amount    % of
Revenue
   Amount    % of
Revenue
   Amount    %

Operating expenses:

                 

Selling and marketing

   $ 25,955    16.4    $ 24,984    18.6    $ 971    3.9

Research and development

     30,688    19.4      26,281    19.5      4,407    16.8

Amortization

     1,184    0.8      1,149    0.9      35    3.0

General and administrative

     17,330    11.0      14,840    11.0      2,490    16.8

Total operating expenses

     75,157    47.6      67,254    50.0      7,903    11.8

Selling and Marketing Expenses: Selling and marketing expenses increased by $1.1 million due to CDI. Excluding the CDI personnel, salaries and incentive compensation each increased by $300,000. These costs were partially offset by a decrease in third party commissions and consulting of $400,000, and a decrease in costs associated with the biennial ANSYS Users’ Conference of $400,000, which was held in 2004.

The Company anticipates that it will make investments throughout 2006 in its global sales and marketing organization to enhance major account sales activities and to support its worldwide distribution and marketing strategies.


ANSYS, Inc. 2005 Annual Report 19

 

Research and Development: The change in research and development primarily resulted from a $2.1 million increase in salary and headcount related expenses, excluding CDI personnel, and $1.5 million in additional costs related to CDI development. In addition, incentive compensation increased $500,000. The 2005 and 2004 costs were reduced by $300,000 and $500,000, respectively, for amounts capitalized related to internal software development activities.

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 increased by $260,000 due to the acquisition of CDI in January 2005. This increase was partially offset by the amortization of certain acquired intangibles that ceased in August 2005.

General and Administrative: The 2005 period includes additional costs of $1.4 million related to post-acquisition costs of CDI and $900,000 related to increased non-CDI related salaries and headcount costs.

Other Income: Other income increased to $4.3 million for the year ended December 31, 2005 as compared with $1.9 million for the 2004 year. The net increase was a result of the following two factors:

Foreign Currency Transaction - During 2005, the Company had a net foreign exchange loss of $200,000 as compared with a gain of $200,000 in 2004. During 2005, the U.S. Dollar strengthened against the British Pound, the Japanese Yen and the Euro while it weakened against the Indian Rupee and the Canadian Dollar. During 2004, on average, the U.S. Dollar weakened against each of the currencies. Because the CFX acquisition consisted primarily of non-U.S. locations, the Company, for the foreseeable future, will have increased exposure to volatility of foreign exchange rates. The Company is most impacted by movements among and between the Canadian Dollar, the British Pound, the Euro and the U.S. Dollar.

Investment Income - Interest and dividend income increased by $2.7 million in the year ended December 31, 2005 as compared with the year ended December 31, 2004. Larger cash balances invested, in addition to higher interest rates, caused the increase in interest income.

Income Tax Provision: The Company’s effective tax rate was 30.4% in 2005 as compared to 27.8% in 2004. These rates are lower than the federal and state combined statutory rate as a result of export benefits, as well as the generation of research and experimentation credits. The effective tax rates in 2005 and 2004 were also favorably impacted by the tax benefits discussed in the following paragraphs.

During the third quarter of 2005, the Company filed its 2004 U.S. federal and state tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2004 taxes to reflect the actual results and recorded a $500,000 tax benefit.

During 2004, the Company and the Internal Revenue Service (IRS) settled and closed the audits of the Company’s 2001, 2002 and 2003 federal income tax returns. The Company provides in the financial statements an estimate for income taxes based on its tax filing positions and interpretations of existing tax law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. As a result of the federal income tax returns for 2001, 2002 and 2003 being settled and closed, the Company adjusted its estimated accrued income tax balance related to those years by recording a one-time tax benefit and reducing the tax accrual by $1.1 million in 2004.

In November 2000, the United States enacted the Foreign Sales Corporation (“FSC”) Repeal and Extraterritorial Income Exclusion Act (the “ETI Act”) in response to a challenge from the World Trade Organization (“WTO”) that the existing tax benefits provided by foreign sales corporations were prohibited tax subsidies. The ETI Act generally repealed the foreign sales corporation and implemented an extraterritorial income (“ETI”) tax benefit. Upon introduction of the ETI tax benefit, the European Union (“EU”) stated that it did not believe the ETI Act provisions bring U.S. tax law into WTO-compliance and asked the WTO to rule on the matter. On August 30, 2002, the WTO ruled that the EU may impose up to $4 billion per year in retaliatory duties against U.S. exports.

In October 2004, the American Jobs Creation Act of 2004 was signed into law and included replacement legislation for the FSC/ETI. This bill retains FSC grandfather rules and ETI benefits for transactions in the ordinary course of business under binding contracts with unrelated persons in effect on September 17, 2003. The phase-out of the ETI associated with the legislation is summarized as follows:

 

    

Export Benefit Phase-out

2004

   No effect

2005

   80% of otherwise-applicable benefits

2006

   60% of otherwise-applicable benefits

2007 - beyond

   Export benefits fully eliminated


ANSYS, Inc. 2005 Annual Report 20

 

In addition to repealing the export tax benefits, the American Jobs Creation Act of 2004 provides significant tax relief for domestic manufacturers. Effective for taxable years beginning after December 31, 2004, qualifying entities may deduct a certain percentage (as defined below) of the lesser of their qualified production activities income or their taxable income for a taxable year. The deduction, however, is limited to 50% of an employer’s W-2 wages for the tax year. Beginning in 2010, when the 9% deduction is fully phased in, corporations facing a marginal tax rate of 35% would be subject to an effective tax rate of 31.85% on qualifying income.

 

    

Manufacturing Income Deduction Phase-in

2004

   No effect

2005 – 2006

   3% applicable deduction for qualified income

2007 – 2009

   6% applicable deduction for qualified income

2010 – beyond

   9% applicable deduction for qualified income

In 2005, export benefits reduced the Company’s effective tax rate by approximately 2.9%. The impact of the above legislation on the Company’s effective tax rate in 2005 was not significant. The Company expects the above legislation to adversely impact the effective tax rate by 1.0% in 2006. Any other prospective changes regarding tax benefits associated with the Company’s export sales or other federal and state tax planning vehicles may adversely impact the Company’s effective tax rate and decrease its net income in future periods.

The Company makes significant estimates in determining its worldwide income tax provision. These estimates involve complex tax regulations in a number of jurisdictions across the Company’s global operations and are subject to many transactions and calculations where the ultimate tax outcome is uncertain. Although the Company believes that its estimates are reasonable, the final outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the period in which such determination is made.

Net Income: The Company’s net income increased 27.0% to $43.9 million, or $1.30 diluted earnings per share, in 2005 as compared to net income of $34.6 million, or $1.05 diluted earnings per share, in 2004. The weighted average common and common equivalent shares used in computing diluted earnings per share were 33.7 million in 2005 and 33.0 million in 2004.


ANSYS, Inc. 2005 Annual Report 21

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenue:

 

     Year Ended December 31,    Change
(in thousands, except percentages)    2004    2003    Amount    %

Revenue:

           

Software licenses

   $ 71,326    $ 58,408    $ 12,918    22.1

Maintenance and service

     63,213      55,127      8,086    14.7

Total revenue

     134,539      113,535      21,004    18.5

The increase in revenue is primarily due to the following:

 

    2004 CFX revenue was $28.1 million as compared with the 2003 post-acquisition CFX revenue of $19.2 million. Three factors contributed to the higher CFX revenue in 2004 and include:

 

    the growth of the business over 2003

 

    a full twelve months of CFX revenue in 2004 as compared to ten months in 2003

 

    a $2.7 million reduction in the adverse impact on reported CFX license revenue related to the accounting for acquired deferred revenue which is discussed below

 

    newly generated software license revenue of $5.0 million from the Company’s non-CFX products

 

    increased maintenance revenue related to contracts sold in association with perpetual license sales

On average, for the year ended December 31, 2004, the U.S. Dollar was 9.0% weaker, when measured against the Company’s primary foreign currencies, than for the year ended December 31, 2003. The U.S. Dollar weakened against the British Pound, the Japanese Yen, the Euro, the Indian Rupee and the Canadian Dollar. The fluctuation in these foreign currencies resulted in increased revenue and operating income during 2004, as compared with 2003, of $3.7 million and $1.7 million, respectively.

International and domestic revenues, as a percentage of total revenue, were 65.3% and 34.7%, respectively, during the year ended December 31, 2004 and 67.1% and 32.9%, respectively, in the year ended December 31, 2003.

In valuing deferred revenue for inclusion on the CFX opening balance sheet as of the acquisition date, February 26, 2003, the Company complied with the fair value provisions of Emerging Issues Task Force (“EITF”) Issue No. 01-3 “Accounting in a Business Combination for Deferred Revenue of an Acquiree.” In accordance with EITF 01-3, acquired deferred revenue of $4.8 million was recorded on the acquisition date balance sheet for CFX. This amount was $3.4 million lower than the historical carrying value. Although this purchase accounting requirement had no impact on the Company’s business or cash flow, it adversely impacted the Company’s reported software license revenue under accounting principles generally accepted in the United States of America (“GAAP”) post-acquisition. The adverse impact on reported revenue under GAAP was $300,000 and $3.0 million for the years ended December 31, 2004 and 2003, respectively.


ANSYS, Inc. 2005 Annual Report 22

 

Cost of Sales and Gross Profit:

 

     Year Ended December 31,             
     2004    2003    Change  
(in thousands, except percentages)    Amount    % of
Revenue
   Amount    % of
Revenue
   Amount     %  

Cost of sales:

                

Software licenses

   $ 4,840    3.6    $ 5,365    4.7    $ (525 )   (9.8 )

Amortization of software and acquired technology

     3,030    2.2      3,028    2.7      2     0.1  

Maintenance and service

     13,437    10.0      13,112    11.5      325     2.5  

Total cost of sales

     21,307    15.8      21,505    18.9      (198 )   (0.9 )

Gross profit

     113,232    84.2      92,030    81.1      21,202     23.0  

The change in cost of sales is primarily due to the following:

 

    a reduction of $600,000 in third party royalties

 

    a reduction of $600,000 associated with technical and other consulting support

 

    an additional $1.1 million in costs associated with CFX due to a full twelve months of activity in 2004 as compared to only ten months of activity in 2003

The improvement in gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales.

Operating Expenses:

 

     Year Ended December 31,          
     2004    2003    Change
(in thousands, except percentages)    Amount    % of
Revenue
   Amount    % of
Revenue
   Amount    %

Operating expenses:

                 

Selling and marketing

   $ 24,984    18.6    $ 24,777    21.8    $ 207    0.8

Research and development

     26,281    19.5      23,792    21.0      2,489    10.5

Amortization

     1,149    0.9      1,055    0.9      94    8.9

General and administrative

     14,840    11.0      12,089    10.7      2,751    22.8

Total operating expenses

     67,254    50.0      61,713    54.4      5,541    9.0

Selling and Marketing: The 2004 increase in selling and marketing is a result of $700,000 in additional costs related to CFX, mainly the result of the inclusion of a full twelve months of CFX operational activity in 2004 as compared to only ten months in 2003, and $400,000 related to the Company’s biennial users’ conference. These increases were partially offset by a $900,000 reduction in global marketing and advertising costs.


ANSYS, Inc. 2005 Annual Report 23

 

Research and Development: The change in research and development primarily resulted from a $1.5 million increase in total compensation and headcount related costs, and $900,000 in additional costs related to CFX, mainly the result of the inclusion of a full twelve months of CFX operational activity in 2004 as compared to only ten months in 2003.

The 2004 and 2003 costs were reduced by $500,000 and $600,000, respectively, for amounts capitalized related to internal software development activities.

Amortization: Amortization expense remained consistent at $1.1 million in both 2004 and 2003.

General and Administrative: The 2004 period includes additional costs of $1.2 million related to increased salaries, incentive compensation and related payroll taxes, $800,000 of third party compliance costs associated with the Sarbanes-Oxley Act of 2002 and $500,000 related to a full versus partial year of CFX expenses.

Other Income: Other income increased to $1.9 million for the year ended December 31, 2004 as compared with $400,000 for the 2003 year. The net increase was a result of the following three factors:

Foreign Currency Transaction - During 2004, the Company had a net foreign exchange gain of $200,000 as compared with a gain of $400,000 for 2003.

Investment Income - Interest and dividend income increased by $1.0 million in the year ended December 31, 2004 as compared with the year ended December 31, 2003. The change in investment income was a result of an increased level of funds invested as well as higher interest rates in 2004 as compared with 2003.

Other - During the year ended December 31, 2003, the Company recorded other-than-temporary impairment losses on equity and cost-basis investments of $600,000, and the Company also recorded losses of $100,000 for investments accounted for under the equity method. These losses did not recur in 2004. The current net book value of equity and cost-basis investments is zero.

Income Tax Provision: The Company’s effective tax rate was 27.8% in 2004 as compared to 30.5% in 2003. These rates are lower than the federal and state combined statutory rate as a result of export benefits, as well as the generation of research and experimentation credits. The effective tax rate in 2004 was also favorably impacted by the one-time tax benefit discussed in the following paragraph.

During 2004, the Company and the IRS settled and closed the audits of the Company’s 2001, 2002 and 2003 federal income tax returns. The Company provides in the financial statements an estimate for income taxes based on its tax filing positions and interpretations of existing tax law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. As a result of the federal income tax returns for 2001, 2002 and 2003 being settled and closed, the Company adjusted its estimated accrued income tax balance related to those years by recording a one-time tax benefit and reducing the tax accrual by $1.1 million.

Net Income: The Company’s net income increased 62.2% to $34.6 million, or $1.05 diluted earnings per share, in 2004 as compared to net income of $21.3 million, or $0.67 diluted earnings per share, in 2003. The weighted average common and common equivalent shares used in computing diluted earnings per share were 33.0 million in 2004 and 31.9 million in 2003.


ANSYS, Inc. 2005 Annual Report 24

 

Liquidity and Capital Resources

As of December 31, 2005, the Company had cash, cash equivalents and short-term investments totaling $194.2 million and working capital of $162.0 million as compared to cash, cash equivalents and short-term investments of $138.4 million and working capital of $120.1 million at December 31, 2004. 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 $67.8 million in 2005, $51.4 million in 2004 and $38.8 million in 2003. The $16.5 million increase in the Company’s cash flow from operations in 2005 as compared to 2004 was primarily the result of $7.7 million in increased earnings, adjusted for non-cash expenses such as depreciation, amortization and deferred income taxes, and $8.8 million in working capital fluctuations. The increase in cash generated from operations in 2004 compared to 2003 was primarily the result of $13.3 million in increased earnings after the effect of non-cash expenses, such as depreciation, amortization and deferred income taxes. This increase was partially offset by a net decrease in cash of $800,000 from other working capital fluctuations.

Cash provided by investing activities was $28.2 million in 2005, and cash used by investing activities was $53.2 million in 2004 and $15.9 million in 2003. In 2005, the Company had $37.3 million more in maturing short-term investments than in related purchases, and spent $4.5 million on capital expenditures and $4.4 million on business acquisitions. In 2004, the Company purchased $49.5 million more in short-term investments than related maturities and spent $3.2 million on capital expenditures. During 2003, cash outlays of $22.3 million for business acquisitions, primarily related to CFX, and $2.8 million for capital expenditures were partially offset by $10.0 million in net maturities of short-term investments.

Financing activities used cash of $1.5 million in 2005, and provided cash of $5.9 million in 2004 and $7.5 million in 2003. During each of the three years, the Company received proceeds from the exercise of stock options and the issuance of common stock under the Employee Stock Purchase Plan. During 2005, the Company used $7.5 million in cash to repurchase stock.

The Company believes that existing cash and cash equivalent balances of $176.2 million, together with short-term investment balances and cash generated from operations, will be sufficient to meet the Company’s working capital and capital expenditure requirements through at least the next fiscal year. 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.

The Company continues to generate positive cash flows from operating activities and believes that the best use of its excess cash is to grow the business and, under certain conditions, to repurchase stock. Additionally, the Company has in the past and expects in the future to acquire or make investments in complementary companies, products, services and technologies. As previously discussed under “Acquisitions,” the Company announced, on February 16, 2006, a definitive agreement to acquire Fluent, Inc., a global provider of CFD-based computer-aided engineering software and services. The Company will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash to acquire Fluent, subject to certain adjustments at closing. The Company will use a combination of existing cash and approximately $200 million from committed bank financing to fund the transaction. Any future acquisitions may be funded by available cash and investments, cash generated from operations, existing or additional credit facilities, or from the issuance of additional securities.

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

The Company’s significant contractual obligations as of December 31, 2005 are summarized below:

 

     Payments Due by Period
(in thousands)    Total    Within 1 year    2 –3 years    4 –5 years    After 5 years

Long-term debt

   $ —      $ —      $ —      $ —      $ —  

Corporate office lease

     12,298      1,241      2,481      2,859      5,717

Other office leases

     6,243      1,852      2,663      1,665      63

Unconditional purchase obligations

     4,693      1,763      2,056      874      —  

Other long-term obligations

     —        —        —        —        —  

Total contractual obligations

   $ 23,234    $ 4,856    $ 7,200    $ 5,398    $ 5,780

The Company has no outstanding long-term debt; however, the Company has an uncommitted and unsecured $10.0 million line of credit with a bank. Interest on any borrowings is at the bank’s prime rate or LIBOR, plus an applicable margin. The bank may demand repayment of the entire amount outstanding under the line of credit at any time and for any reason without notice. The Company, in lieu of a fee for the line of credit, has agreed to maintain certain deposits, which range from $5 million to $10 million, depending on the deposit type, with the bank. No borrowings have occurred under this line of credit.


ANSYS, Inc. 2005 Annual Report 25

 

The Company’s significant contractual obligations as of December 31, 2005 primarily include lease commitments for its corporate office facility, as well as various noncancellable operating leases for equipment and sales offices. In May 2004, the Company entered into the first amendment to its corporate headquarters lease agreement, with an effective date of January 1, 2004. Under the new amendment, the corporate office facility lease agreement includes a commitment through 2014, with an option for five additional years.

The Company has ongoing employment agreements with certain employees, including the Chairman of the Board of Directors and the Chief Executive Officer. The terms of these employment agreements generally include annual compensation, severance payment provisions and non-competition clauses. The employment agreements terminate upon the occurrence of certain events described in the contracts.

Additionally, the Company had an outstanding irrevocable standby letter of credit for $1.6 million at December 31, 2005. This letter of credit is subject to annual renewal and was issued as a guarantee for damages that could be awarded related to a legal matter in which the Company was involved. The fair value of the letter of credit approximates the contract value based on the nature of the fee arrangements with the issuing bank. No material losses on this commitment have been incurred, nor are any anticipated.

Critical Accounting Policies and Estimates

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” and related interpretations. Revenue from perpetual licenses is recognized upon delivery of the licensed product and the utility that enables the customer to request authorization keys, provided that acceptance has occurred and a signed contractual obligation has been received, the price is fixed and determinable, and collectibility of the receivable is probable. Revenue for software lease licenses is recognized ratably over the period of the lease contract. Revenue is recorded net of the distributor fee for sales through the Company’s distribution network. The Company estimates the value of post-contract customer support sold together with perpetual licenses by reference to published price lists that generally represent the prices at which customers could purchase renewal contracts for such services. Costs related to maintenance obligations are expensed as incurred. Revenue from maintenance contracts is recognized ratably over the term of the contract. Revenue from training, support and other services is recognized as the services are performed.

The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices from both a value and delinquency perspective. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable and the geographical area of origin. In determining these percentages, the Company analyzes its historical collection experience and current economic trends in the customer’s industry and geographic region. If the historical data used to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and future results of operations could be materially affected.

The Company 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 an impairment 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.

The Company makes significant estimates in determining its worldwide income tax provision. These estimates involve complex tax regulations in a number of jurisdictions across the Company’s global operations and are subject to many transactions and calculations where the ultimate tax outcome is uncertain. Although the Company believes that its estimates are reasonable, the final outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the period in which such determination is made.

The Company tests goodwill and intangibles with indefinite lives for impairment at least annually by comparing the fair value of each asset to its carrying value. Fair value is estimated using the discounted cash flow and other valuation methodologies. In preparing the estimate of fair value, the Company relies on a number of factors, including historical operating results, business plans, anticipated future cash flows, economic projections and other market data. Because there are inherent uncertainties involved in these factors, the Company’s estimates of fair value are imprecise and the resulting carrying value of goodwill and intangible assets may be misstated.

The Company is involved in various investigations, claims and legal proceedings that arise in the ordinary course of its business activities. The Company reviews the status of these matters, assesses its financial exposure and records a related accrual if the potential loss from an investigation, claim or legal proceeding is probable and the amount is reasonably estimable. Significant judgment is involved in the determination of probability and in the determination of whether an exposure is reasonably estimable. As a result of the uncertainties involved in making these estimates, the Company may have to revise its estimates as facts and circumstances change. The revision of these estimates could have a material impact on the Company’s results of operations and financial position.


ANSYS, Inc. 2005 Annual Report 26

 

Recently Issued and Adopted Accounting Pronouncements

In December 2004, the FASB issued a revised version of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement No. 123(R)”). The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award, typically the vesting period. For public entities, the revised statement indicated an effective date as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, the Securities and Exchange Commission announced on April 14, 2005 a new rule that allows companies to implement Statement No. 123(R) at the beginning of the next fiscal year. The Company is required to adopt Statement No. 123(R) in compliance with the revised implementation date on January 1, 2006.

The Company issues both nonqualified and incentive stock options; however, incentive stock options comprise a significant portion of outstanding stock options. The tax benefits associated with incentive stock options are unpredictable, as they are predicated upon an award recipient triggering an event that disqualifies the award and that then results in a tax deduction to the Company. Statement No. 123(R) requires that these tax benefits be recorded at the time of the triggering event. The triggering events for each option holder are not easily projected. In order to estimate the tax benefits related to incentive stock options, the Company makes many assumptions and estimates, including the number of incentive stock options that will be exercised during the period by U.S. employees, the number of incentive stock options that will be disqualified during the period and the fair market value of the Company’s stock price on the exercise dates. Each of these items is subject to significant uncertainty and, therefore, the overall estimated impact of stock-based compensation on the Company’s 2006 net income and earnings per share may differ materially from the Company’s estimates. Considering these limitations, the Company’s current estimate is that the impact of Statement No. 123(R) on the Company’s net income will range from an adverse impact of $2.2 million, or ($0.06) diluted earnings per share, to a positive impact of $2.7 million, or $0.08 diluted earnings per share.

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets.” Statement No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Statement No. 153 is effective for fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

On June 7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Statement No. 154 changes the requirements for the accounting for and reporting of changes in accounting principles. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income in the period of the change. Statement No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. The Company does not believe that the adoption of Statement No. 154 will have a material effect on its consolidated financial position, results of operations or cash flows.

Important Factors Regarding Future Results

Information provided by the Company or its spokespersons, including information contained in this Annual Report to Stockholders, may from time to time contain forward-looking statements concerning projected financial performance, market and industry sector growth, product development and commercialization or other aspects of future operations. Such statements will be based on the assumptions and expectations of the Company’s management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors including, but not limited to, the following may cause the Company’s future results to differ materially from those projected in any forward-looking statement.

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS: The Company may experience significant fluctuations in future quarterly operating results. Fluctuations may be caused by many factors, including the timing of new product releases or product enhancements by the Company or its competitors; the size and timing of individual orders, including a fluctuation in the demand for and the ability to complete large contracts; software errors or other product quality problems; competition and pricing changes; customer order deferrals in anticipation of new products or product enhancements; changes in demand for the Company’s products; changes in operating expenses; changes in the mix of software license and maintenance and service revenue; personnel changes; and general economic conditions. A substantial portion of the Company’s operating expenses is related to personnel, facilities and marketing programs. The level of personnel and related expenses cannot be adjusted quickly and is based, in significant part, on the Company’s expectation for future revenue. The Company does not typically experience significant order backlog. Further, the Company has often recognized a substantial portion of its revenue in the last month of a quarter, with this revenue frequently concentrated in the last weeks or days of a quarter. During certain quarterly periods, the Company has been dependent upon receiving large orders of perpetual licenses involving the payment of a single up-front fee and, more recently, has shifted the business emphasis


ANSYS, Inc. 2005 Annual Report 27

 

of its products to provide a collaborative solution to the Company’s customers. This emphasis has increased the Company’s average order size and increased the related sales cycle time for the larger orders. This shift may have the effect of increasing the volatility of the Company’s revenue and profit from period to period. As a result, product revenue in any quarter is substantially dependent upon sales completed in the latter part of that quarter, and revenue for any future quarter is not predictable with any significant degree of accuracy.

SEASONAL VARIATIONS: The Company’s business has experienced significant seasonality, including quarterly reductions in software sales resulting from the slowdown in Europe during the summer months, as well as from the seasonal purchasing and budgeting patterns of the Company’s customers.

ECONOMIC SLOWDOWN IN CERTAIN SECTORS: The Company’s sales are based significantly on end user demand for products in key industrial sectors. Many of these sectors periodically experience economic declines. These economic declines may be exacerbated by other economic factors, such as the recent increase in global energy prices. These economic factors may adversely affect the Company’s business by extending sales cycles and reducing revenue.

The Company has customers who supply a wide spectrum of goods and services in virtually all of the world’s major economic regions. The Company’s performance is materially impacted by general economic conditions and the performance of its customers. The Company’s management team forecasts macroeconomic trends and developments and integrates them through long-range planning into budgets, research and development strategies and a wide variety of general management duties. When forecasting future economic trends and technological developments, management does not have a comparative advantage. To the extent that the Company’s forecasts are in error by being overly optimistic or overly pessimistic about the performance of an economy or sector, the Company’s performance may be hindered because of a failure to properly match corporate strategy with economic conditions.

Terrorist attacks, other increased global hostilities and natural disasters have, at times, contributed to widespread uncertainty and speculation in the world financial markets. This uncertainty and speculation may result in further economic contraction, resulting in the suspension or delay of purchasing by the Company’s customers.

STOCK MARKET AND STOCK PRICE VOLATILITY: Market prices for securities of software companies have generally been volatile. In particular, the market price of the Company’s common stock has been, and may continue to be, subject to significant fluctuations as a result of factors affecting the Company, the software industry or the securities markets in general. Such factors include, but are not limited to, declines in trading price that may be triggered by the Company’s failure to meet the expectations of securities analysts and investors. The Company cannot provide assurance that in such circumstances the trading price of the Company’s common stock will recover or that it will not experience a further decline. Moreover, the trading price could be subject to additional fluctuations in response to quarter-to-quarter variations in the Company’s operating results, material announcements made by the Company or its competitors, conditions in the software industry generally or other events and factors, many of which are beyond the Company’s control.

RAPIDLY CHANGING TECHNOLOGY; NEW PRODUCTS; RISK OF PRODUCT DEFECTS: The Company operates in an industry generally characterized by rapidly changing technology and frequent new product introductions that can render existing products obsolete or unmarketable. A major factor in the Company’s future success will be its ability to anticipate technological changes and to develop and introduce, in a timely manner, enhancements to its existing products and new products to meet those changes. If the Company is unable to introduce new products and to respond quickly to industry changes, its business, financial condition, results of operations and cash flows could be materially adversely affected.

The introduction and marketing of new or enhanced products require the Company to manage the transition from existing products in order to minimize disruption in customer purchasing patterns. There can be no assurance that the Company will be successful in developing and marketing, on a timely basis, new products or product enhancements, that its new products will adequately address the changing needs of the marketplace or that it will successfully manage the transition from existing products. Software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released, and the likelihood of errors is increased as a result of the Company’s commitment to accelerating the frequency of its product releases. There can be no assurance that errors will not be found in new or enhanced products after commencement of commercial shipments. Any of these problems may result in the loss of or delay in customer acceptance, diversion of development resources, damage to the Company’s reputation or increased service and warranty costs, any of which could have a material, adverse effect on the Company’s business, financial condition, results of operations and cash flows.


ANSYS, Inc. 2005 Annual Report 28

 

SALES OF NEW PRODUCTS: The Company continues to develop and introduce new software products. Certain of these products require a higher level of sales and support expertise. The ability of the Company’s sales channel, particularly the indirect channel, to obtain this expertise and to sell the new product offerings effectively could have an impact on the Company’s sales in future periods. Additionally, royalties and engineering service engagements associated with the new software products may result in the Company’s cost of sales increasing as a percentage of revenue in future periods.

DEPENDENCE ON CHANNEL PARTNERS: The Company continues to distribute a substantial portion of its products through its global network of independent, regional channel partners. The channel partners sell the Company’s software products to new and existing customers, expand installations within the existing customer base, offer consulting services and provide the first line of technical support. Consequently, the Company is highly dependent upon the efforts of the channel partners. Difficulties in ongoing relationships with channel partners, such as delays in collecting accounts receivable, failure to meet performance criteria or to promote the Company’s products as aggressively as the Company expects and differences in the handling of customer relationships could adversely affect the Company’s performance. Additionally, the loss of any major channel partner for any reason, including a channel partner’s decision to sell competing products rather than the Company’s products, could have a material adverse effect on the Company. Moreover, the Company’s future success will depend substantially on the ability and willingness of its channel partners to continue to dedicate the resources necessary to promote the Company’s products and to support a larger installed base of the Company’s products. If the channel partners are unable or unwilling to do so, the Company may be unable to sustain revenue growth.

Currently the Company is partially protected from exchange rate fluctuations among the U.S. Dollar and other currencies as a result of its indirect sales channel, which generally pays the Company in U.S. Dollars. The revenues and expenses associated with the Company’s international direct sales channel are subject to foreign currency exchange fluctuations and, as a result, the Company’s future financial results may be impacted by fluctuations in exchange rates. Additionally, any future changes to the Company’s sales channel involving proportionally higher direct sales from international locations could result in additional exposure to the foreign currency exchange fluctuations. This exposure could adversely impact the Company’s financial position and results of operations in future periods.

COMPETITION: The Company continues to experience intense competition across all markets for its products and services. Some of the Company’s current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well established relationships with current and potential customers of the Company. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.

DEPENDENCE ON SENIOR MANAGEMENT AND KEY TECHNICAL PERSONNEL: The Company is highly dependent upon the ability and experience of its senior executives and its key technical and other management employees. Although the Company has employment agreements with certain employees, the loss of these employees, or any of the Company’s other key employees, could adversely affect the Company’s ability to conduct its operations.

RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES: A majority of the Company’s business comes from outside the United States of America. Risks inherent in the Company’s international business activities include imposition of government controls, export license requirements, restrictions on the export of critical technology, products and services, political and economic instability, trade restrictions, changes in tariffs and taxes, difficulties in staffing and managing international operations, longer accounts receivable payment cycles and the burdens of complying with a wide variety of foreign laws and regulations. Effective patent, copyright and trade secret protection may not be available in every foreign country in which the Company sells its products and services. The Company’s business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks.

As the Company continues to expand its direct sales presence in international regions, the portion of its revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, changes in currency exchange rates from time to time may affect the Company’s financial position, results of operations and cash flows.

Additionally, countries in certain international regions have continued to experience weaknesses in their currency, banking and equity markets. These weaknesses could adversely affect consumer demand for the Company’s products and ultimately the Company’s financial condition, results of operations and cash flows.

As the Company has grown, it has become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. As a result of the current economic slowdown, many companies are delaying or reducing technology purchases, which has had an impact on the Company’s visibility into the closing of new business, as opposed to its recurring business. This slowdown has also contributed to, and may continue to contribute to, reductions in sales, longer sales cycles and increased price pressure. Each of these items could adversely affect the Company’s sales in future periods.


ANSYS, Inc. 2005 Annual Report 29

 

The Company has historically received significant tax benefits related to its export activities. In October 2004, the American Jobs Creation Act of 2004 was signed into law and included replacement legislation for existing export benefits. This bill retains certain export benefits for transactions in the ordinary course of business under binding contracts with unrelated persons in effect on September 17, 2003. The phase-out of the existing export benefits associated with the legislation is summarized as follows:

 

    

Export Benefit Phase-out

2004

   No effect

2005

   80% of otherwise-applicable benefits

2006

   60% of otherwise-applicable benefits

2007 - beyond

   Export benefits fully eliminated

In addition to repealing the export tax benefits, the American Jobs Creation Act of 2004 provides significant tax relief for domestic manufacturers. Effective for taxable years beginning after December 31, 2004, qualifying entities may deduct a certain percentage (as defined below) of the lesser of their qualified production activities income or their taxable income for a taxable year. The deduction, however, is limited to 50% of an employer’s W-2 wages for the tax year. Beginning in 2010, when the 9% deduction is fully phased in, corporations facing a marginal tax rate of 35% would be subject to an effective tax rate of 31.85% on qualifying income.

 

    

Manufacturing Income Deduction Phase-in

2004

   No effect

2005 - 2006

   3% applicable deduction for qualified income

2007 - 2009

   6% applicable deduction for qualified income

2010 - beyond

   9% applicable deduction for qualified income

In 2005, export benefits reduced the Company’s effective tax rate by approximately 2.9%. The impact of the above legislation on the Company’s effective tax rate in 2005 was not significant. The Company expects the above legislation to adversely impact the effective tax rate by 1.0% in 2006. Any other prospective changes regarding tax benefits associated with the Company’s export sales or other federal and state tax planning vehicles may adversely impact the Company’s effective tax rate and decrease its net income in future periods.

DEPENDENCE ON PROPRIETARY TECHNOLOGY: The Company’s success is highly dependent upon its proprietary technology. Although the Company was awarded a patent by the U.S. Patent and Trademark Office for its Web-based reporting technology, the Company generally relies on contracts and the laws of copyright and trade secrets to protect its technology. Although the Company maintains a trade secrets program, enters into confidentiality agreements with its employees and distributors, and limits access to and distribution of its software, documentation and other proprietary information, there can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties, or that third parties will not be able to develop similar technology independently. Although the Company is not aware that any of its technology infringes upon the rights of third parties, there can be no assurance that other parties will not assert technology infringement claims against the Company or that, if asserted, such claims will not prevail.

INCREASED RELIANCE ON PERPETUAL LICENSES: Although the Company has historically maintained stable recurring revenue from the sale of software lease licenses, software maintenance subscriptions and third party royalties, it also has relied on sales of perpetual licenses that involve payment of a single up-front fee and that are more typical in the computer software industry. While revenue generated from software lease licenses, software maintenance subscriptions and third party royalties currently represents a portion of the Company’s software license revenue, to the extent that perpetual license revenue continues to represent a significant percentage of total software license revenue, the Company’s revenue in any period will depend increasingly on sales completed during that period.


ANSYS, Inc. 2005 Annual Report 30

 

RISKS ASSOCIATED WITH ACQUISITIONS: The Company has consummated and may continue to consummate certain strategic acquisitions in order to provide increased capabilities to its existing products, supply new products and services or enhance its distribution channels. In the future, the Company may not be able to identify suitable acquisition candidates or, if suitable candidates are identified, the Company may not be able to complete the business combination on commercially acceptable terms. Business acquisitions may result in devotion of significant management and financial resources. The ability of the Company to integrate the acquired businesses, including delivering sales and support, ensuring continued customer commitment, obtaining further commitments and challenges associated with expanding sales in particular markets and retaining key personnel, will impact the success of these acquisitions. If the Company is unable to properly and timely integrate the acquired businesses, there could be a material, adverse effect on the Company’s business, financial condition, results of operations and cash flows.

DISRUPTION OF OPERATIONS OR INFRASTRUCTURE FAILURES: A significant portion of the Company’s software development personnel, source code and computer equipment is located at operating facilities in the United States, Canada and Europe. The occurrence of a natural disaster or other unforeseen catastrophe at any of these facilities could cause interruptions in the Company’s operations, services and product development activities. Additionally, if the Company experiences problems that impair its business infrastructure, such as a computer virus, telephone system failure or an intentional disruption of its information technology systems by a third party, these interruptions could have a material, adverse effect on the Company’s business, financial condition, results of operations, cash flows and the ability to meet financial reporting timelines. Further, because the Company’s sales are not generally linear during any quarterly period, the potential adverse effects resulting from any of the events described above or any other disruption of the Company’s business could be accentuated if it occurs close to the end of a fiscal quarter.

PERIODIC REORGANIZATION OF SALES FORCE: The Company relies heavily on its direct sales force. From time to time, the Company reorganizes and makes adjustments to its sales force in response to such factors as management changes, performance issues, market opportunities and other considerations. These changes may result in a temporary lack of sales production and may adversely impact revenue in future quarters. There can be no assurance that the Company will not restructure its sales force in future periods or that the transition issues associated with such a restructuring will not recur.

THIRD PARTY ROYALTY AGREEMENTS: The Company has agreements with third parties whereby it receives royalty revenues in return for the right of the third party to utilize the Company’s technology or embed the Company’s technology in the third party’s products. To the extent that the Company is unable to maintain these third party relationships, or that the third party is unsuccessful in selling the embedded products, there could be a material, adverse impact on the Company’s business, financial condition, results of operations and cash flows.

SALES FORECASTS: The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts. The Company’s sales personnel continually monitor the status of all proposals, including the estimated closing date and the value of the sale, in order to forecast quarterly sales. These forecasts are subject to significant estimation and are impacted by many external factors. For example, a slowdown in information technology spending or economic factors could cause purchasing decisions to be delayed. A variation in actual sales activity from that forecasted could cause the Company to plan or to budget incorrectly and, therefore, could adversely affect the Company’s business, financial condition, results of operations and cash flows.

INCOME TAX ESTIMATES: The Company makes significant estimates in determining its worldwide income tax provision. These estimates involve complex tax regulations in a number of jurisdictions across the Company’s global operations and are subject to many transactions and calculations where the ultimate tax outcome is uncertain. Although the Company believes that its estimates are reasonable, the final outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the period in which such determination is made.


ANSYS, Inc. 2005 Annual Report 31

 

REGULATORY COMPLIANCE: Like all other public companies, the Company is subject to the rules and regulations of the Securities and Exchange Commission (“SEC”), including those that require the Company to report on and receive a certification from its independent accounting firm regarding the Company’s internal controls. Compliance with these requirements causes the Company to incur additional expenses and causes management to divert time from the day-to-day operations of the Company. While the Company anticipates being able to fully comply with these internal control requirements, if it is not able to comply with the Sarbanes-Oxley reporting or certification requirements relating to internal controls, the Company may be subject to sanction by the SEC or NASDAQ.

The Company’s stock is listed on The NASDAQ National Market; thus, the Company is subject to the ongoing financial and corporate governance requirements of NASDAQ. While the Company anticipates being able to fully comply with these requirements, if it is not able to comply, the Company’s name may be published on NASDAQ’s daily Non-Compliant Companies list until NASDAQ determines that it has regained compliance or the Company no longer trades on NASDAQ.

The Company’s sales to the Government of the United States must comply with the regulations set forth in the Federal Acquisition Regulations. Failure to comply with these regulations could result in penalties being assessed against the Company or an order preventing the Company from making future sales to the United States Government. Further, the Company’s international activities must comply with the export control laws of the United States, the Foreign Corrupt Practices Act and a variety of other laws and regulations of the United States of America and other countries in which the Company operates. Failure to comply with any of these laws and regulations could adversely affect the Company’s business, financial position, results of operation and cash flows.

CONTINGENCIES: The Company is involved in various investigations, claims and legal proceedings from time to time that arise in the ordinary course of its business activities. These proceedings currently include customary audit activities by various taxing authorities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company.

CHANGES IN EXISTING FINANCIAL ACCOUNTING STANDARDS OR TAXATION RULES: Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on the Company’s results of operations or the manner in which the Company conducts its business. Further, such changes could potentially affect the Company’s reporting of transactions completed before such changes are effective. For example, the Company is not currently required to record stock-based compensation charges to earnings in connection with stock option grants to its employees. However, the FASB issued Statement No. 123(R) which will require the Company to record stock-based compensation charges to earnings commencing in the first quarter of fiscal 2006. Such charges will negatively impact the Company’s earnings.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: The Company is exposed to certain market risks, primarily foreign currency exchange rates, that arise from transactions entered into in the normal course of business. The Company seeks to minimize these risks primarily through its normal operating and financing activities.


ANSYS, Inc. 2005 Annual Report 32

 

Internal Controls – Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ANSYS, Inc.

Canonsburg, Pennsylvania

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that ANSYS, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2005 of the Company and our reports dated March 1, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

March 1, 2006


ANSYS, Inc. 2005 Annual Report 33

 

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the financial reporting criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial records used in preparation of the Company’s published financial statements. As all internal control systems have inherent limitations, even systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Based on its assessment, management has concluded that the Company maintained an effective system of internal control over financial reporting as of December 31, 2005. The Company’s registered public accounting firm has issued an attestation report on management’s assessment in conjunction with their audit of the Company’s system of internal control over financial reporting and the financial statements.

 

/s/ James E. Cashman III

   

/s/ Maria T. Shields

James E. Cashman III     Maria T. Shields
President and Chief Executive Officer     Chief Financial Officer

March 1, 2006

Financial Statements – Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ANSYS, Inc.

Canonsburg, Pennsylvania

We have audited the accompanying consolidated balance sheets of ANSYS, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ANSYS, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control–-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

March 1, 2006


ANSYS, Inc. 2005 Annual Report 34

 

Consolidated Balance Sheets

 

(in thousands, except share data)    December 31,
2005
    December 31,
2004
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 176,166     $ 83,547  

Short-term investments

     18,066       54,899  

Accounts receivable, less allowance for doubtful accounts of $2,231 and $1,890, respectively

     19,134       18,792  

Other receivables and current assets

     25,065       23,612  

Deferred income taxes

     4,055       3,404  

Total current assets

     242,486       184,254  

Property and equipment, net

     6,362       5,551  

Capitalized software costs, net

     642       898  

Goodwill

     43,277       36,277  

Other intangibles, net

     10,589       12,108  

Deferred income taxes

     2,153       558  

Total assets

   $ 305,509     $ 239,646  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,330     $ 1,100  

Accrued bonuses

     9,631       7,927  

Other accrued expenses and liabilities

     19,677       11,244  

Deferred revenue

     49,894       43,906  

Total current liabilities

     80,532       64,177  

Commitments and contingencies

     —         —    

Stockholders’ equity:

    

Preferred stock, $.01 par value; 2,000,000 shares authorized; zero shares issued or outstanding

     —         —    

Common stock, $.01 par value; 50,000,000 shares authorized; 33,169,516 shares issued

     332       332  

Additional paid-in capital

     59,543       50,868  

Retained earnings

     179,171       135,268  

Treasury stock, at cost: 1,121,726 and 1,753,391 shares, respectively

     (18,340 )     (17,700 )

Accumulated other comprehensive income

     4,271       6,701  

Total stockholders’ equity

     224,977       175,469  

Total liabilities and stockholders’ equity

   $ 305,509     $ 239,646  

The accompanying notes are an integral part of the consolidated financial statements.


ANSYS, Inc. 2005 Annual Report 35

 

Consolidated Statements of Income

 

(in thousands, except per share data)    2005    2004    2003

Revenue:

        

Software licenses

   $ 85,680    $ 71,326    $ 58,408

Maintenance and service

     72,356      63,213      55,127

Total revenue

     158,036      134,539      113,535

Cost of sales:

        

Software licenses

     5,292      4,840      5,365

Amortization of software and acquired technology

     3,576      3,030      3,028

Maintenance and service

     15,171      13,437      13,112

Total cost of sales

     24,039      21,307      21,505

Gross profit

     133,997      113,232      92,030

Operating expenses:

        

Selling and marketing

     25,955      24,984      24,777

Research and development

     30,688      26,281      23,792

Amortization

     1,184      1,149      1,055

General and administrative

     17,330      14,840      12,089

Total operating expenses

     75,157      67,254      61,713

Operating income

     58,840      45,978      30,317

Other income, net

     4,271      1,923      357

Income before income tax provision

     63,111      47,901      30,674

Income tax provision

     19,208      13,334      9,361

Net income

   $ 43,903    $ 34,567    $ 21,313

Earnings per share – basic:

        

Basic earnings per share

   $ 1.38    $ 1.12    $ 0.71

Weighted average shares – basic

     31,749      30,955      29,916

Earnings per share – diluted:

        

Diluted earnings per share

   $ 1.30    $ 1.05    $ 0.67

Weighted average shares – diluted

     33,692      32,978      31,876

The accompanying notes are an integral part of the consolidated financial statements.


ANSYS, Inc. 2005 Annual Report 36

 

Consolidated Statements of Cash Flow

 

(in thousands)    2005     2004     2003  

Cash flows from operating activities:

      

Net income

   $ 43,903     $ 34,567     $ 21,313  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     8,107       7,588       7,098  

Deferred income tax (benefit) provision

     (2,051 )     546       (17 )

Provision for bad debts

     570       153       447  

Impairment of investment

     —         —         611  

Equity in loss of investment

     —         —         75  

Changes in operating assets and liabilities:

      

Accounts receivable

     (1,033 )     1,884       503  

Other receivables and current assets

     (2,393 )     (7,251 )     1,715  

Accounts payable, accrued expenses and liabilities

     14,030       8,889       594  

Deferred revenue

     6,692       4,990       6,467  

Net cash provided by operating activities

     67,825       51,366       38,806  

Cash flows from investing activities:

      

Capital expenditures

     (4,482 )     (3,191 )     (2,761 )

Capitalization of internally developed software costs

     (270 )     (544 )     (550 )

Purchases of short-term investments

     (52,865 )     (74,455 )     (25,030 )

Maturities of short-term investments

     90,164       25,000       34,988  

Business acquisitions, net of cash acquired

     (4,385 )     —         (22,335 )

Purchase of long-term investments

     —         —         (200 )

Net cash provided by (used in) investing activities

     28,162       (53,190 )     (15,888 )

Cash flows from financing activities:

      

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     849       484       408  

Proceeds from exercise of stock options

     5,182       5,408       7,105  

Purchase of treasury stock

     (7,492 )     —         —    

Net cash (used in) provided by financing activities

     (1,461 )     5,892       7,513  

Effect of exchange rate fluctuations

     (1,907 )     1,441       1,409  

Net increase in cash and cash equivalents

     92,619       5,509       31,840  

Cash and cash equivalents, beginning of year

     83,547       78,038       46,198  

Cash and cash equivalents, end of year

   $ 176,166     $ 83,547     $ 78,038  

Supplemental disclosures of cash flow information:

      

Cash paid during the year for income taxes

   $ 10,902     $ 5,439     $ 3,407  

The accompanying notes are an integral part of the consolidated financial statements.


ANSYS, Inc. 2005 Annual Report 37

 

Consolidated Statements of Stockholders’ Equity

 

(in thousands)    Common Stock   

Additional

Paid-in
Capital

   Retained
Earnings
   Treasury Stock     Accumulated
Other
Comprehensive
Income
   

Total

Stockholders’

Equity

   

Total

Comprehensive
Income

 
   Shares    Amount          Shares     Amount        

Balance, December 31, 2002

   33,170    $ 332    $ 41,250    $ 79,388    4,031     $ (30,337 )   $ 760     $ 91,393    

Exercise of stock options, including tax benefit of $3,175

   —        —        2,992      —      (1,344 )     7,288       —         10,280    

Issuance of common stock under Employee Stock Purchase Plan

   —        —        127      —      (52 )     281       —         408    

Net income for the year

   —        —        —        21,313    —         —         —         21,313     $ 21,313  

Other comprehensive income

   —        —        —        —      —         —         3,680       3,680       3,680  

Balance, December 31, 2003

   33,170      332      44,369      100,701    2,635       (22,768 )     4,440       127,074       24,993  

Exercise of stock options, including tax benefit of $5,552

   —        —        6,107      —      (844 )     4,853       —         10,960    

Issuance of common stock under Employee Stock Purchase Plan

   —        —        306      —      (31 )     178       —         484    

Issuance of restricted stock

   —        —        86      —      (7 )     37       —         123    

Net income for the year

   —        —        —        34,567    —         —         —         34,567       34,567  

Other comprehensive income

   —        —        —        —      —         —         2,261       2,261       2,261  

Balance, December 31, 2004

   33,170      332      50,868      135,268    1,753       (17,700 )     6,701       175,469       36,828  

Treasury stock acquired

   —        —        —        —      206       (7,492 )     —         (7,492 )  

Purchase of HTI assets

   —        —        745      —      (27 )     302       —         1,047    

Exercise of stock options, including tax benefit of $8,046

   —        —        6,985      —      (764 )     6,243       —         13,228    

Issuance of common stock under Employee Stock Purchase Plan

   —        —        606      —      (35 )     243       —         849    

Issuance of restricted stock

   —        —        339      —      (11 )     64       —         403    

Net income for the year

   —        —        —        43,903    —         —         —         43,903       43,903  

Other comprehensive loss

   —        —        —        —      —         —         (2,430 )     (2,430 )     (2,430 )

Balance, December 31, 2005

   33,170    $ 332    $ 59,543    $ 179,171    1,122     $ (18,340 )   $ 4,271     $ 224,977     $ 41,473  

The accompanying notes are an integral part of the consolidated financial statements.


ANSYS, Inc. 2005 Annual Report 38

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

ANSYS, Inc. (the “Company” or “ANSYS”) 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, biomedical and defense.

The Company operates as one segment, as defined by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Given the integrated approach to the problem-solving needs of the Company’s customers, a single sale of software may contain components from multiple product areas and include combined technologies. There is no means by which the Company can provide accurate historical (or current) reporting among its various product-line segmentations. Disclosure of such information is impracticable.

2. Summary of Significant Accounting Policies

ACCOUNTING PRINCIPLES: The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.

PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the amounts of revenue and expenses during the reported periods. Significant estimates included in these consolidated financial statements include allowances for doubtful accounts receivable, income tax accruals and tax valuation reserves, fair value of stock-based compensation, useful lives for depreciation and amortization, loss contingencies, valuation of goodwill and indefinite-lived intangible assets, carrying value of non-marketable securities and estimates of service contract revenue. Actual results could differ from these estimates. Changes in estimates are recorded in the results of operations in the period that the changes occur.

REVENUE RECOGNITION: Revenue is derived principally from the licensing of computer software products and from related maintenance contracts. ANSYS recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” and related interpretations. Revenue from perpetual licenses is recognized upon delivery of the licensed product and the utility that enables the customer to request authorization keys, provided that acceptance has occurred and a signed contractual obligation has been received, the price is fixed and determinable, and collectibility of the receivable is probable. Revenue is recorded net of the distributor fee for sales through the ANSYS distribution network. Revenue for software lease licenses is recognized ratably over the period of the lease contract. The Company estimates the value of post-contract customer support sold together with perpetual licenses by reference to published price lists that generally represent the prices at which customers could purchase renewal contracts for such services. Revenue from maintenance contracts is recognized ratably over the term of the contract. Costs related to maintenance obligations are expensed as incurred. Revenue from training, support and other services is recognized as the services are performed.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist primarily of highly liquid investments such as time deposits held at major banks, money market mutual funds and other securities with remaining maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value.


ANSYS, Inc. 2005 Annual Report 39

 

SHORT-TERM INVESTMENTS: The Company considers investments backed by government agencies or U.S. financial institutions to be highly liquid and, accordingly, classifies such investments as short-term investments. Short-term investments are recorded at fair value. The Company uses the specific identification method to determine the realized gain or loss upon the sale of such securities. As of the balance sheet date, there were no significant unrealized gains or losses on the investments, all of which had maturities, renewal options or auction rate dates of less than one year.

The Company’s investment portfolio is subject to market risk due to changes in interest rates. The Company is averse to principal loss and seeks to preserve invested funds by limiting default risk, market risk and reinvestment risk by placing its investments with high quality credit issuers.

PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the various classes of assets, which range from one to seven years. Repairs and maintenance are charged to expense as incurred. Gains or losses from the sale or retirement of property and equipment are included in other income.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs, other than certain capitalized software development costs, are expensed as incurred.

CAPITALIZED SOFTWARE: Internally developed computer software costs and costs of product enhancements are capitalized subsequent to the determination of technological feasibility; such capitalization continues until the product becomes available for general release. Amortization of capitalized software costs, both for internally developed as well as for purchased software products, is computed on a product-by-product basis over the estimated economic life of the product, which is generally three years. Amortization is the greater of the amount computed using: (i) the ratio of the current year’s gross revenue to the total current and anticipated future gross revenue for that product or (ii) the straight-line method over the estimated life of the product. Amortization expense related to capitalized and acquired software costs was $3.6 million for the year ended December 31, 2005, and $3.0 million for each of the years ended December 31, 2004 and 2003. These amounts include amortization expense related to capitalized costs of internally developed software of $500,000 for the year ended December 31, 2005 and $600,000 for each of the years ended December 31, 2004 and 2003.

The Company periodically reviews the carrying value of capitalized software. Impairments are recognized in the results of operations when the expected future undiscounted operating cash flow derived from the capitalized costs of internally developed software is less than the carrying value. No charges for impairment have been required to date.

GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Intangible assets consist of trademarks, non-compete agreements, customer lists and acquired software and technology.

The Company evaluates, at least annually, the realizability of the carrying value of goodwill by comparing the carrying value to its estimated fair value. The Company performs its annual goodwill impairment test on January 1 of each year unless there is an indicator that would require a test during the year. No impairments were recorded during 2005, 2004 or 2003.

The Company periodically reviews the carrying value of other intangible assets and will recognize impairments when the expected future discounted operating cash flow derived from such intangible assets is less than the carrying value. No impairment charges have been required to date.


ANSYS, Inc. 2005 Annual Report 40

 

CONCENTRATIONS OF CREDIT RISK: The Company has a concentration of credit risk with respect to trade receivables due to the limited number of distributors through which the Company sells its products. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.

During 2005, sales by distributors comprised approximately 42% of the Company’s total revenue, with two distributors each individually accounting for approximately 10% and 8% of total revenue. During 2004, sales by distributors comprised approximately 43% of the Company’s total revenue, with two distributors each individually accounting for approximately 10% and 8% of total revenue. During 2003, sales by distributors comprised approximately 45% of the Company’s total revenue, with two distributors each individually accounting for approximately 11% and 9% of total revenue. No individual customer accounted for more than 10% of revenue for the years ended December 31, 2005, 2004 or 2003.

In addition to the concentration of credit risk with respect to trade receivables, the Company’s cash and cash equivalents are also exposed to concentration of credit risk. The Company maintains its cash accounts primarily in U.S. banks, which are insured by the F.D.I.C. up to $100,000 per bank. The Company had cash balances on deposit with two U.S. banks at December 31, 2005 that exceeded the balance insured by the F.D.I.C. in the amounts of approximately $23.8 million and $6.2 million. A significant portion of the Company’s remaining U.S. cash balance is also uninsured. As a result of the Company’s operations in international locations, it also has significant, uninsured cash balances denominated in foreign currencies and held outside of the U.S.

ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices from both a value and delinquency perspective. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable and the geographical area of origin. In determining these percentages, the Company analyzes its historical collection experience and current economic trends in the customer’s industry and geographic region. The Company recorded $570,000, $153,000 and $447,000 in bad debt expense for the years ended December 31, 2005, 2004 and 2003, respectively.

INCOME TAXES: Deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

FOREIGN CURRENCIES: Certain of the Company’s sales transactions are denominated in foreign currencies. These transactions are translated to the functional currency at the exchange rate on the transaction date. Accounts receivable in foreign currencies at year-end are translated at the effective exchange rate on the balance sheet date. Gains and losses resulting from foreign exchange transactions are included in other income. The Company recorded a net foreign exchange loss of $200,000 for the year ended December 31, 2005, and a net foreign exchange gain of $200,000 and $400,000 for the years ended December 31, 2004 and 2003, respectively.

The financial statements of the Company’s foreign subsidiaries are translated from the functional currency, generally the local currency, to U.S. Dollars. Assets and liabilities are translated at the exchange rates on the balance sheet date. Results of operations are translated at average exchange rates. Accumulated other comprehensive income in the accompanying consolidated statements of stockholders’ equity consists entirely of the resulting exchange difference.


ANSYS, Inc. 2005 Annual Report 41

 

EARNINGS PER SHARE: Basic earnings per share (“EPS”) amounts are computed by dividing net income by the weighted average number of common shares outstanding during each year. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. Common equivalent shares are not included in the per share calculations where their inclusion would be anti-dilutive. The details of basic and diluted earnings per share are as follows:

 

     Year Ended December 31,
(in thousands, except per share data)    2005    2004    2003

Net income

   $ 43,903    $ 34,567    $ 21,313

Weighted average shares outstanding – basic

     31,749      30,955      29,916

Basic earnings per share

   $ 1.38    $ 1.12    $ 0.71

Effect of dilutive securities:

        

Shares issuable upon exercise of dilutive outstanding stock options

     1,943      2,023      1,960

Weighted average shares outstanding – diluted

     33,692      32,978      31,876

Diluted earnings per share

   $ 1.30    $ 1.05    $ 0.67

Anti-dilutive shares/options, not included in the computation

     41      —        —  

STOCK-BASED COMPENSATION: The Company has elected to account for stock-based compensation arrangements through the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation.” Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market value of the underlying common stock over the amount the employee is required to pay on the date both the number of shares and the price to be paid are known. No compensation expense has been recognized in the consolidated statements of income as option grants generally are made with exercise prices equal to the fair value of the underlying common stock on the award date, which is typically the date of compensation measurement. Had compensation cost been determined based on the fair value at the date of grant, in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated below:

 

     Year Ended December 31,  
(in thousands, except per share data)    2005     2004     2003  

Net income, as reported

   $ 43,903     $ 34,567     $ 21,313  

Add: Stock-based employee compensation expense included in net income, net of related tax effects

     —         —         —    

Deduct: Stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects

     (3,570 )     (2,797 )     (2,903 )

Pro forma net income

   $ 40,333     $ 31,770     $ 18,410  

Earnings per share:

      

Basic – as reported

   $ 1.38     $ 1.12     $ 0.71  

Basic – pro forma

   $ 1.27     $ 1.03     $ 0.62  

Diluted – as reported

   $ 1.30     $ 1.05     $ 0.67  

Diluted – pro forma

   $ 1.20     $ 0.96     $ 0.58  


ANSYS, Inc. 2005 Annual Report 42

 

The weighted-average fair value of options granted was $17.61 per share in 2005, $10.82 per share in 2004 and $6.99 per share in 2003.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates. The fair values of options granted were estimated using the Black-Scholes pricing model with the risk-free interest rates ranging from 3.65% - 4.46% for 2005, 3.16% - 3.96% for 2004 and 2.13% - 3.22% for 2003. The interest rates used were determined by using the five-year Treasury Note yield at the date of grant. The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; expected volatility of 50%, 53% and 57% for 2005, 2004 and 2003, respectively, and expected term of 5.1 years, 5.3 years and 5.0 years for 2005, 2004 and 2003, respectively.

In December 2004, the FASB issued a revised version of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement No. 123(R)”). The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award, typically the vesting period. For public entities, the revised statement indicated an effective date as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, the Securities and Exchange Commission announced on April 14, 2005 a new rule that allows companies to implement Statement No. 123(R) at the beginning of the next fiscal year. The Company is required to adopt Statement No. 123(R) in compliance with the revised implementation date on January 1, 2006.

The Company issues both nonqualified and incentive stock options; however, incentive stock options comprise a significant portion of outstanding stock options. The tax benefits associated with incentive stock options are unpredictable, as they are predicated upon an award recipient triggering an event that disqualifies the award and which then results in a tax deduction to the Company. Statement No. 123(R) requires that these tax benefits be recorded at the time of the triggering event. The triggering events for each option holder are not easily projected. In order to estimate the tax benefits related to incentive stock options, the Company makes many assumptions and estimates, including the number of incentive stock options that will be exercised during the period by U.S. employees, the number of incentive stock options that will be disqualified during the period and the fair market value of the Company’s stock price on the exercise dates. Each of these items is subject to significant uncertainty and, therefore, the overall estimated impact of stock-based compensation on the Company’s 2006 net income and earnings per share may differ materially from the Company’s estimates. The Company currently estimates that the adoption of Statement No. 123(R) will increase 2006 operating expenses and reduce pre-tax income by $3.9 - $4.8 million. Considering the inherent limitations in estimating the related income tax benefit discussed above, the Company’s current estimate is that the impact of Statement No. 123(R) on the Company’s 2006 net income will range from an adverse impact of $2.2 million, or ($0.06) diluted earnings per share, to a positive impact of $2.7 million, or $0.08 diluted earnings per share.

OTHER RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets.” Statement No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Statement No. 153 is effective for fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.


ANSYS, Inc. 2005 Annual Report 43

 

On June 7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Statement No. 154 changes the requirements for the accounting for and reporting of changes in accounting principles. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income in the period of the change. Statement No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. The Company does not believe that the adoption of Statement No. 154 will have a material effect on its consolidated financial position, results of operations or cash flows.

RECLASSIFICATIONS: Certain reclassifications have been made to the footnotes of the 2003 and 2004 financial statements to conform to the 2005 presentation.

3. Acquisitions

On February 26, 2003 the Company acquired 100% of the shares in certain entities and assets (hereafter collectively referred to as “CFX”) for a purchase price of approximately $21.7 million in cash. CFX is a leading supplier of computational fluid dynamics (“CFD”) software and services. By acquiring CFX, ANSYS broadened the scope of engineering physics solutions it could offer to its customers and gained access to new customers and geographic territories.

The total purchase price was allocated to the foreign and domestic assets and liabilities of CFX based upon estimated fair market values. The allocations, based upon foreign currency translation rates as of the date of acquisition, were approximately $11.5 million to identifiable intangible assets (including $9.5 million to core software technology to be amortized over five years, $900,000 to customer lists to be amortized over three years and $1.1 million to trademark) and $14.1 million to goodwill, $5.1 million of which is tax deductible. The trademark is not being amortized as it has been determined to have an indefinite life.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

(in thousands)    At February 26, 2003  

Current assets

   $ 7,477  

Property and equipment

     1,640  

Intangible assets

     11,500  

Goodwill

     14,076  

Total assets acquired

     34,693  

Current liabilities

     (11,009 )

Other liabilities

     (1,937 )

Total liabilities assumed

     (12,946 )

Net assets acquired

   $ 21,747  


ANSYS, Inc. 2005 Annual Report 44

 

In valuing deferred revenue on the CFX balance sheet as of the acquisition date, the Company applied the fair value provisions of Emerging Issues Task Force (“EITF”) Issue No. 01-3 “Accounting in a Business Combination for Deferred Revenue of an Acquiree.” In accordance with EITF 01-3, acquired deferred revenue of approximately $4.8 million was recorded on the opening balance sheet.

CFX reported revenue of approximately $19 million for its fiscal year ended March 31, 2002. The CFX business was a carve-out entity from the acquiree with significant intercompany transactions and, as a result, pro forma information on revenue, income before extraordinary items and the cumulative effect of accounting changes, net income and earnings per share are indeterminable. The operating results of CFX have been included in ANSYS, Inc.’s consolidated financial statements since the date of acquisition.

On January 5, 2005, the Company acquired Century Dynamics, Inc. (hereafter “CDI”), a leading provider of sophisticated simulation software for solving linear, nonlinear, explicit and multi-body hydrodynamics problems, for an initial purchase price of approximately $5.1 million in cash. In addition, the agreement provided for a future payment contingent upon the attainment of certain 2005 performance criteria, which is to be paid no later than March 22, 2006. This payment is estimated to be approximately $4.5 million and was accounted for as an addition to both goodwill and other accrued expenses and liabilities in 2005. The acquisition of CDI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive solution to its customers.

The initial cash purchase price was allocated to the foreign and domestic assets and liabilities of CDI based upon estimated fair market values and foreign currency translation rates as of the date of acquisition. Approximately $2.7 million was allocated to identifiable intangible assets (including $1.5 million to core technology, $450,000 to non-compete agreements, $300,000 to customer contracts and $500,000 to trademarks) and $2.7 million to goodwill, which is not tax deductible. In the third quarter of 2005, a customer exercised its option to pay the Company approximately $300,000 under the contract that was valued on the acquisition date. As a result, the customer contract was removed from intangible assets as of December 31, 2005. The identified intangible assets are being amortized over three to five years. The operating results of CDI have been included in ANSYS, Inc.’s consolidated financial statements since the date of acquisition.

Had the acquisition occurred on January 1, 2005, the 2005 results would not be materially different from those presented in these financial statements. The following unaudited pro forma information presents the 2004 and 2003 results of operations of the Company as if the acquisition had occurred on January 1, 2003. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the years presented, nor are they necessarily indicative of future results.

 

     Year Ended December 31,
(in thousands, except per share data)    2004    2003

Total revenue

   $ 139,811    $ 117,828

Net income

     33,941      20,459

Earnings per share:

     

Basic

   $ 1.10    $ 0.68

Diluted

   $ 1.03    $ 0.64


ANSYS, Inc. 2005 Annual Report 45

 

In October 2005, the Company acquired substantially all of the assets and certain liabilities of Harvard Thermal, Inc. (hereafter “HTI”), a leader in thermal analysis software tools, for an up-front purchase price of approximately $1.3 million in cash and stock. In addition, the acquisition agreement provides for future payments of up to $400,000, contingent upon the attainment of certain performance criteria. The acquisition of HTI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive simulation solution to its customers. The operating results for HTI have been included with the Company’s operating results from the date of acquisition.

The total purchase price was allocated to the domestic assets and liabilities of HTI based upon estimated fair market values as of the date of acquisition. Approximately, $515,000 was allocated to identifiable intangible assets, comprised primarily of core technology, and $1.0 million was allocated to goodwill, which is not tax deductible. The identified intangible assets are being amortized over three years.

Had the acquisition of HTI occurred on January 1, 2003, the 2003, 2004 and 2005 results would not be materially different from those presented in these financial statements. Accordingly, the Company has not presented pro forma information on revenue, net income or earnings per share.

4. 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 $21.0 million and $20.1 million as of December 31, 2005 and 2004, respectively.

5. Property and Equipment

Property and equipment consists of the following:

 

(in thousands)    Estimated Useful Lives    December 31, 2005     December 31, 2004  

Equipment

   2-5 years    $ 14,963     $ 13,744  

Computer software

   1-5 years      7,747       7,326  

Furniture

   5-7 years      1,536       1,292  

Leasehold improvements

   5-7 years      2,335       1,037  
        26,581       23,399  

Less: Accumulated depreciation and amortization

        (20,219 )     (17,848 )
      $ 6,362     $ 5,551  

Depreciation and amortization expense related to property and equipment was approximately $3.4 million, $3.4 million and $2.9 million for the years ended December 31, 2005, 2004 and 2003, respectively.


ANSYS, Inc. 2005 Annual Report 46

 

6. Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition.

During the first quarter of 2005, the Company completed the annual impairment test for goodwill and intangibles with indefinite lives and determined these assets had not been impaired as of the test date, January 1, 2005. The Company tested the goodwill and identifiable intangible assets attributable to each of its reporting units utilizing estimated discounted cash flow methodologies and market comparable information. No events occurred or circumstances changed during the year ended December 31, 2005 that required an interim goodwill impairment test.

The changes in goodwill during the years ended 2005 and 2004 are as follows:

 

     Year Ended December 31,
(in thousands)    2005     2004

Beginning balance

   $ 36,277     $ 35,151

Business acquisitions

     8,206       —  

Currency translation & other

     (1,206 )     1,126

Ending balance

   $ 43,277     $ 36,277

Identifiable intangible assets with finite lives continue to be amortized on a straight-line basis over their estimated useful lives (three to ten years) and are reviewed for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.

As of December 31, 2005 and 2004, the Company’s intangible assets have estimated useful lives and are classified as follows:

 

     December 31, 2005     December 31, 2004  
(in thousands)    Gross Carrying
Amount
  

Accumulated

Amortization

    Gross Carrying
Amount
  

Accumulated

Amortization

 

Amortized intangible assets:

          

Core technology (3-10 years)

   $ 19,011    $ (10,393 )   $ 16,894    $ (7,491 )

Non-compete agreements (4-5 years)

     2,892      (2,531 )     2,536      (2,126 )

Customer lists (5 years)

     2,399      (2,344 )     2,474      (1,872 )

Total

   $ 24,302    $ (15,268 )   $ 21,904    $ (11,489 )

Unamortized intangible assets:

          

Trademarks

   $ 1,555      $ 1,693   

Amortization expense for intangible assets reflected above was $4.2 million, $3.6 million and $3.5 million for the years ended December 31, 2005, 2004 and 2003, respectively, and is expected to be approximately $3.5 million, $3.4 million, $850,000, $350,000 and $260,000 for the years ending December 31, 2006, 2007, 2008, 2009 and 2010, respectively.


ANSYS, Inc. 2005 Annual Report 47

 

7. Income Taxes

Income before income tax provision includes the following:

 

(in thousands)    December 31, 2005    December 31, 2004    December 31, 2003  

Domestic

   $ 54,474    $ 43,662    $ 32,126  

Foreign

     8,637      4,239      (1,452 )

Total

   $ 63,111    $ 47,901    $ 30,674  

The provision for income taxes is comprised of the following:

 

(in thousands)    December 31, 2005     December 31, 2004     December 31, 2003  

Current:

      

Federal

   $ 16,727     $ 9,690     $ 7,132  

State

     1,504       1,122       1,126  

Foreign

     3,028       1,976       1,120  

Deferred:

      

Federal

     (1,165 )     1,224       1,755  

State

     (410 )     103       127  

Foreign

     (476 )     (781 )     (1,899 )

Total

   $ 19,208     $ 13,334     $ 9,361  

The reconciliation of the U.S. federal statutory tax rate to the consolidated effective tax rate is as follows:

 

     December 31, 2005     December 31, 2004     December 31, 2003  

Federal statutory tax rate

   35.0 %   35.0 %   35.0 %

State income taxes, net of federal benefit

   1.1     1.7     2.7  

Research and experimentation credits

   (1.9 )   (2.2 )   (2.8 )

Export benefits

   (2.9 )   (4.2 )   (6.3 )

One-time tax benefit (see below)

   —       (2.2 )   —    

Other

   (0.9 )   (0.3 )   1.9  
   30.4 %   27.8 %   30.5 %

During the third quarter of 2005, the Company filed its 2004 U.S. federal and state tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2004 taxes to reflect the actual results and recorded a $500,000 tax benefit.

During 2004, the Company and the Internal Revenue Service (IRS) settled and closed the audits of the Company’s 2001, 2002 and 2003 federal income tax returns. The Company provides in the financial statements an estimate for income taxes based on its tax filing positions and interpretations of existing tax law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. As a result of the federal income tax returns for 2001, 2002 and 2003 being settled and closed, the Company adjusted its estimated accrued income tax balance related to those years by recording a tax benefit and reducing the tax accrual by approximately $1.1 million. Such amount is reflected as a one-time tax benefit in the table above.


ANSYS, Inc. 2005 Annual Report 48

 

The components of deferred tax assets and liabilities are as follows:

 

(in thousands)    December 31, 2005     December 31, 2004  

Deferred tax assets:

    

Goodwill

   $ 776     $ 1,467  

Other intangible assets

     956       445  

Allowance for doubtful accounts

     865       679  

Deferred revenue

     4,357       2,382  

Net operating loss carryforwards

     749       678  

Investments

     746       746  

Other

     709       474  

Valuation allowance

     (1,024 )     (746 )
     8,134       6,125  

Deferred tax liabilities:

    

Property and equipment

     (374 )     (659 )

Acquired software

     (1,002 )     (972 )

Other intangible assets

     (550 )     —    

Other

     —         (532 )
     (1,926 )     (2,163 )

Net deferred tax assets

   $ 6,208     $ 3,962  

The deferred tax assets labeled “investments” in the table above relate to impaired investments, the deduction for which may only be utilized to offset future capital gains. Based on the nature of the Company’s investments, it has been determined that it is more likely than not that it will not experience these capital gains and, therefore, the Company has established a full valuation allowance against the related tax assets. The Company has also established a valuation allowance of approximately $300,000 related to net operating loss carryforwards in a foreign jurisdiction. Based upon the Company’s current and historical taxable income, and the anticipated level of future taxable income, management believes it is more likely than not that the remaining deferred tax assets will be realized. Accordingly, no valuation allowance has been established against those assets.

The Company has foreign operating loss carryforwards of approximately $1.9 million, which have no expiration date.

The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on $11.5 million of its undistributed earnings for non-U.S. subsidiaries because these earnings are intended to be reinvested indefinitely.


ANSYS, Inc. 2005 Annual Report 49

 

8. Pension and Profit-Sharing Plans

The Company has historically maintained both a money purchase pension plan (the “Pension Plan”) and a 401(k) / profit-sharing plan (the “Profit-Sharing Plan”) for all qualifying full-time domestic employees. The Company also maintains various defined contribution pension arrangements for its international employees. The Pension Plan is a noncontributory plan and requires the Company to contribute 5% of each participant’s eligible compensation. The 401(k) feature of the Profit-Sharing Plan permits employee contributions up to 25% of eligible compensation. The Company makes matching contributions on behalf of each participant in an amount equal to 100% of the employee contribution up to a maximum of 5% of employee compensation. There is a five-year graduated vesting schedule for employer contributions. Under the profit-sharing provisions of the plan, the Company contribution is determined annually by the Board of Directors, subject to a maximum limitation of 5% of eligible compensation. On April 30, 2003, the Pension Plan and the Profit-Sharing Plan were merged into a single plan, the ANSYS, Inc. Employees’ Retirement Program. The former benefits of the two plans were maintained for all domestic employees hired prior to January 1, 2004; however, the 5% annual pension contribution is now discretionary. Employees hired on or after January 1, 2004 receive a Company match of 50% of the employee contribution up to the first 6% of the employee’s compensation.

Total expense related to the Company’s retirement programs was $3.0 million in 2005, and $2.6 million in each of 2004 and 2003.

9. Non-Compete and Employment Agreements

Employees of the Company have signed covenant agreements under which they have agreed not to disclose trade secrets or confidential information, or to engage in or become connected with any business that is competitive with the Company anywhere in the world, while employed by the Company (and, in some cases, for specified periods thereafter), and that any products or technology created by them during their term of employment are the property of the Company. In addition, the Company requires all channel partners and resellers to enter into agreements not to disclose the Company’s trade secrets and other proprietary information.

As part of the Company’s acquisition of Century Dynamics, Inc. in January 2005, shareholders of Century Dynamics, Inc. agreed to non-compete clauses for periods of one, three or five years, depending on each shareholder’s level of responsibility.

The Company has an employment agreement with the Chairman of its Board of Directors. In the event the Chairman is terminated without cause, his employment agreement provides for severance at the annual rate of $300,000 for the earlier of a period of one year after termination or when he accepts other employment. The Chairman is subject to a one-year restriction on competition following termination of employment under the circumstances described in the contract.

The Company has an employment agreement with the Chief Executive Officer. This agreement provides for, among other things, minimum severance payments equal to his base salary, target bonus and then-existing benefits, in equal semi-monthly installments, through the earlier of the second anniversary of the termination date if the Chief Executive Officer is terminated without cause or when he accepts other employment. The Chief Executive Officer is subject to a two-year restriction on competition following termination of employment under the circumstances described in the contract.

The Company also has employment agreements with several other employees, primarily in foreign jurisdictions. The terms of these employment agreements generally include annual compensation, severance payment provisions and non-compete clauses.


ANSYS, Inc. 2005 Annual Report 50

 

10. Stock Option and Grant Plans

The Company has two stock option and grant plans — the 1994 Stock Option and Grant Plan (“1994 Stock Plan”) and the Second Amended and Restated 1996 Stock Option and Grant Plan (“1996 Stock Plan”). The 1994 and 1996 Stock Plans, as amended, authorize the grant of up to 1,736,220 and 10,700,000 shares, respectively, of the Company’s common stock in the form of: (i) incentive stock options (“ISOs”), (ii) nonqualified stock options or (iii) the issuance or sale of common stock with or without vesting or other restrictions. Additionally, the 1996 Stock Plan permits the grant of common stock upon the attainment of specified performance goals and the grant of the right to receive cash dividends with the holders of the common stock as if the recipient held a specified number of shares of the common stock. No further grants may be made under the 1994 Stock Plan.

The 1994 and 1996 Stock Plans provide that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant. The Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criteria), payment terms and other provisions for each grant. Shares associated with unexercised options or reacquired shares of common stock become available for options or issuances under the 1996 Stock Plan. The Compensation Committee of the Board of Directors may, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the 1994 and 1996 Stock Plans may vest or be exercised. In the event of a merger, liquidation or sale of substantially all of the assets of the Company, the Board of Directors has the discretion to accelerate the vesting of the options granted under the 1994 and 1996 Stock Plans, except that options granted to Independent Directors and certain key executives vest automatically. Under certain scenarios, other optionees may also automatically vest upon the occurrence of such an event. In addition, the 1994 and 1996 Stock Plans and the grants issued thereunder terminate upon the effectiveness of any such transaction or event, unless a provision is made in connection with such transaction for the assumption of grants theretofore made. Under the 1996 Stock Plan, at the discretion of the Compensation Committee, any option may include a “reload” feature. Such feature allows an optionee exercising an option to receive, in addition to the number of shares of common stock due on the exercise, an additional option with an exercise price equal to the fair market value of the common stock on the date such additional option is granted.

In addition, the 1996 Stock Plan provided for the automatic grant of non-qualified options to Independent Directors. Under such provisions, each Independent Director received an annual grant to purchase 12,000 shares of common stock. These options vested in annual installments over four years, commencing with the date of grant, and expired ten years after the grant, subject to earlier termination if the optionee ceased to serve as a director. Recently, the Board of Directors modified the Director compensation arrangements such that the Chairman of the Board of Directors and the non-affiliate Independent Directors will receive, at their option, (i) an annual grant of 3,600 deferred stock units, which are rights to receive shares of common stock upon termination of service as a director, or (ii) options to purchase 12,000 shares of common stock. The stock options and deferred stock units will be issued quarterly in arrears. The exercisability of unvested stock options will be accelerated upon the occurrence of a merger, liquidation or sale of substantially all of the assets of the Company.

Information regarding stock option transactions is summarized below:

 

      Year Ended December 31,
      2005          2004          2003
(options in thousands)    Options     Weighted Average
Exercise Price
   Options     Weighted Average
Exercise Price
   Options     Weighted Average
Exercise Price

Outstanding, beginning of year

   3,915     $ 10.08    4,268     $ 7.37    5,540     $ 6.55

Granted

   501     $ 34.07    683     $ 23.51    296     $ 13.75

Exercised

   (764 )   $ 6.78    (844 )   $ 6.41    (1,344 )   $ 5.29

Forfeited

   (30 )   $ 14.89    (192 )   $ 15.51    (224 )   $ 7.58

Outstanding, end of year

   3,622     $ 14.05    3,915     $ 10.08    4,268     $ 7.37

Exercisable, end of year

   2,359     $ 8.22    2,409     $ 6.38    2,384     $ 5.66


ANSYS, Inc. 2005 Annual Report 51

 

Information regarding stock options outstanding as of December 31, 2005 is summarized below:

 

     Options Outstanding    Options Exercisable

(options in thousands)

Range of Exercise Prices

   Options   

Weighted

Average Remaining
Contractual Life

  

Weighted

Average

Exercise Price

   Options   

Weighted

Average

Exercise Price

$3.00 - $4.94

   485    2.68    $ 4.14    485    $ 4.14

$5.00 - $9.89

   1,583    5.22    $ 7.50    1,476    $ 7.33

$11.13 - $21.72

   802    7.28    $ 15.14    334    $ 13.75

$31.09 - $41.71

   752    9.18    $ 33.09    64    $ 31.15

11. Stock Repurchase Program

In October 2001, the Company announced that its Board of Directors had amended its common stock repurchase program to acquire up to an additional two million shares, or eight million shares in total under a program that was initially announced in February 2000. Under this program, ANSYS repurchased 206,477 shares in 2005 and repurchased no shares in 2004. As of December 31, 2005, 2.0 million shares remained authorized for repurchase under the program.

12. Employee Stock Purchase Plan

The Company’s 1996 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by the Board of Directors on April 19, 1996 and was subsequently approved by the Company’s stockholders. The stockholders approved an amendment to the Purchase Plan on May 6, 2004 to increase the number of shares available for offerings to 800,000 shares. The Purchase Plan is administered by the Compensation Committee. Offerings under the Purchase Plan commence on each February 1 and August 1, and have a duration of six months. An employee who owns or is deemed to own shares of stock representing in excess of 5% of the combined voting power of all classes of stock of the Company may not participate in the Purchase Plan.

During each offering, an eligible employee may purchase shares under the Purchase Plan by authorizing payroll deductions of up to 10% of his cash compensation during the offering period. The maximum number of shares that may be purchased by any participating employee during any offering period is limited to 1,920 shares (as adjusted by the Compensation Committee from time to time). Unless the employee has previously withdrawn from the offering, his accumulated payroll deductions will be used to purchase common stock on the last business day of the period at a price equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Under applicable tax rules, an employee may purchase no more than $25,000 worth of common stock in any calendar year. At December 31, 2005, 407,371 shares of common stock had been issued under the Purchase Plan of which 372,682 were issued as of December 31, 2004.

13. Leases

In January 1996, the Company entered into a lease agreement with an unrelated third party for a new corporate office facility, which the Company occupied in February 1997. In May 2004, the Company entered into the first amendment to this lease agreement, effective January 1, 2004. The lease was extended from an original period of ten years, with an option for five additional years to a period of 18 years from the inception date, with an option for five additional years. The Company incurred lease rental expense related to this facility of $1.2 million in 2005, $1.6 million in 2004 and $1.4 million in 2003. The future minimum lease payments are $1.2 million per annum from January 1, 2006 to December 31, 2008 and $1.4 million per annum from January 1, 2009 to December 31, 2014. The future minimum lease payments from January 1, 2015 through December 31, 2019 will be determined based on prevailing market rental rates at the time of the extension, if elected. The amended lease also provides for the lessor to reimburse the Company for up to $550,000 in building refurbishments completed through March 31, 2006. These amounts are recorded as a reduction of lease expense over the remaining term of the lease.

The Company has also entered into various noncancellable operating leases for equipment and office space. Office space lease expense totaled $2.3 million, $2.4 million and $2.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. Future minimum lease payments under noncancellable operating leases for office space in effect at December 31, 2005 are $1.3 million in 2006, $900,000 in 2007, $700,000 in 2008, $600,000 in 2009 and $100,000 in 2010.


ANSYS, Inc. 2005 Annual Report 52

 

14. Royalty Agreements

The Company has entered into various renewable, nonexclusive license agreements under which the Company has been granted access to the licensor’s technology and the right to sell the technology in the Company’s product line. Royalties are payable to developers of the software at various rates and amounts generally based upon unit sales or revenue. Royalty fees are reported in cost of goods sold and were approximately $2.6 million, $1.7 million and $2.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.

15. Geographic Information

Revenue by geographic area is as follows:

 

     Year Ended December 31,
(in thousands)    2005    2004    2003

United States

   $ 52,473    $ 46,723    $ 37,320

Canada

     4,468      4,217      5,553

United Kingdom

     11,794      11,883      10,569

Germany

     23,402      20,243      15,235

Japan

     19,880      17,000      15,852

Other European

     29,852      22,226      18,012

Other International

     16,167      12,247      10,994

Total

   $ 158,036    $ 134,539    $ 113,535

Long-lived assets (excluding deferred tax assets) by geographic area are as follows:

 

     December 31,
(in thousands)    2005    2004

United States

   $ 37,470    $ 27,728

Canada

     6,041      6,831

United Kingdom

     7,521      8,607

Germany

     3,473      4,080

Japan

     862      1,006

Other European

     5,225      6,313

Other International

     278      269

Total

   $ 60,870    $ 54,834


ANSYS, Inc. 2005 Annual Report 53

 

16. Contingencies and Commitments

The Company had an outstanding irrevocable standby letter of credit for $1.6 million at December 31, 2005. This letter of credit is subject to annual renewal and was issued as a guarantee for damages that could be awarded related to a legal matter in which the Company was involved. The fair value of the letter of credit approximates the contract value based on the nature of the fee arrangements with the issuing bank. No material losses on this commitment have been incurred, nor are any anticipated.

From time to time, the Company is involved in various investigations, claims and legal proceedings that arise in the ordinary course of its business activities. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such matters will not materially affect the Company’s financial position, liquidity or results of operations.

The Company has an uncommitted and unsecured $10.0 million line of credit with a bank. Interest on any borrowings is at the bank’s prime rate or LIBOR, plus an applicable margin. The bank may demand repayment of the entire amount outstanding under the line of credit at any time and for any reason without notice. The Company, in lieu of a fee for the line of credit, has agreed to maintain certain deposits, which range from $5 million to $10 million, depending on the deposit type, with the bank. No borrowings have occurred under this line of credit.

17. Subsequent Event

On February 16, 2006, the Company announced a definitive agreement to acquire Fluent, Inc. (“Fluent”), a global provider of CFD-based computer-aided engineering software and services. Under the terms of the merger agreement, the Company will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash to acquire Fluent, subject to certain adjustments at closing. The Company will use a combination of existing cash and approximately $200 million from committed bank financing to fund the transaction. The acquisition of Fluent is expected to enhance the breadth, functionality, usability and interoperability of the ANSYS portfolio of simulation solutions. This will increase operational efficiency and lower design and engineering costs for customers, and accelerate development and delivery of new and innovative products to the marketplace. Subject to customary closing conditions and the expiration or termination of the waiting periods under the Hart-Scott-Rodino Act, the transaction is anticipated to close in the second quarter of 2006.


ANSYS, Inc. 2005 Annual Report 54

 

Quarterly Financial Information (Unaudited)

 

     Fiscal Quarter Ended
(in thousands, except per share data)    December 31,
2005
   September 30,
2005
  

June 30,

2005

   March 31,
2005

Revenue

   $ 43,721    $ 39,035    $ 37,656    $ 37,624

Gross profit

     37,570      33,002      31,819      31,606

Operating income

     17,762      14,329      13,328      13,421

Net income

     13,271      11,174      9,775      9,683

Earnings per share – basic

     0.41      0.35      0.31      0.31

Earnings per share – diluted

     0.39      0.33      0.29      0.29

Common stock price per share(1):

           

High

     45.09      39.50      36.81      37.34

Low

     35.13      34.98      28.80      28.91

 

     Fiscal Quarter Ended
(in thousands, except per share data)    December 31,
2004
   September 30,
2004
  

June 30,

2004

   March 31,
2004

Revenue

   $ 38,887    $ 32,318    $ 32,002    $ 31,332

Gross profit

     33,174      26,877      27,024      26,157

Operating income

     14,869      10,461      10,678      9,970

Net income

     12,251      7,599      7,577      7,140

Earnings per share – basic

     0.39      0.24      0.25      0.23

Earnings per share – diluted

     0.36      0.23      0.23      0.22

Common stock price per share(1):

           

High

     33.16      24.87      23.95      22.25

Low

     25.41      20.85      18.19      18.56

(1) The Company’s common stock trades on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol: ANSS. The common stock prices shown are based on the NASDAQ daily closing stock price.

The Company has not paid cash dividends on its common stock as it has retained earnings for use in its business. The Company reviews its policy with respect to the payment of dividends from time to time; however, there can be no assurance that any dividends will be paid in the future.

On February 1, 2006, there were 249 stockholders of record and approximately 26,500 beneficial holders of the Company’s common stock.


ANSYS, Inc. 2005 Annual Report 55

 

Corporate Information

Stockholder Information

Requests for information about the Company should be directed to:

Investor Relations

ANSYS, Inc.

Southpointe

275 Technology Drive

Canonsburg, PA 15317

U.S.A.

Telephone: 724.514.1782

Report on Form 10-K

Stockholders may obtain additional financial information about ANSYS, Inc. from the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Copies are available from the Company without charge upon written request.

Stock Listing

ANSS (NASDAQ Listed)

Transfer Agent

Mellon Investor Services LLC

P.O. Box 3315

South Hackensack, NJ 07606

or

480 Washington Boulevard

Jersey City, NJ 07310-1900

Telephone: 1.800.756.3353 or 201.329.8660

www.melloninvestor.com/isd

Counsel

Goodwin Procter LLP, Boston, MA

Independent Registered Public Accounting Firm

Deloitte & Touche LLP, Pittsburgh, PA

Headquarters

ANSYS, Inc.

Southpointe

275 Technology Drive

Canonsburg, PA 15317

U.S.A.

Telephone: 1.866.267.9724 or 724.746.3304

www.ansys.com

ANSYS, Inc. is an Equal Opportunity/Affirmative Action Employer. It is the Company’s policy to provide equal employment opportunity to employees and applicants for employment and to prohibit discrimination on the basis of, among other protected categories, race, color, religion, sex, age, national origin, veteran status or being a qualified individual with a disability in all aspects of employment including recruiting, hiring, training or promoting personnel.

ANSYS, ANSYS Workbench, CFX, AUTODYN and any and all ANSYS, Inc. product and service names are registered trademarks or trademarks of ANSYS, Inc. or its subsidiaries located in the United States or other countries. ICEM CFD is a trademark licensed by ANSYS, Inc. All other trademarks or registered trademarks are the property of their respective owners.

Copyright © 2006, ANSYS, Inc. All rights reserved.

Subsidiaries of the Registrant; filed herewith

EXHIBIT 21

Subsidiaries of the Registrant

SAS IP, Inc., a Wyoming corporation

ANSYS Europe Limited, a United Kingdom corporation

CFX Limited, a United Kingdom corporation

ANSYS Software Private Limited, an India corporation

CADOE S.A., a France corporation

ANSYS Germany GmbH, a Germany corporation

ANSYS KK, a Japan corporation

ANSYS Canada Limited, a Canada corporation

2011767 Ontario, Inc., a Canada corporation

Century Dynamics, Inc., a California corporation

Century Dynamics, Ltd., a United Kingdom Corporation

Silver Nugget Ltd., a United Kingdom Corporation

Consent of Deloitte & Touche LLP, independent registered public accounting firm

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-110728, 333-69506, and 333-08613 on Form S-8 of our reports dated March 1, 2006, relating to the financial statements and financial statement schedule of ANSYS, Inc. and management’s report on the effectiveness of internal control over financial reporting, appearing in and incorporated by reference in the Annual Report on Form 10-K of ANSYS, Inc. for the year ended December 31, 2005.

 

/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania

March 9, 2006

Section 302 CEO Certification

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, James E. Cashman, III, certify that:

 

1. I have reviewed this annual report on Form 10-K of ANSYS, Inc. (“ANSYS”);

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of ANSYS as of, and for, the periods presented in this annual report;

 

4. ANSYS’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for ANSYS and we have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to ANSYS, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c. evaluated the effectiveness of ANSYS’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

 

  d. disclosed in this report any change in ANSYS’s internal control over financial reporting that occurred during ANSYS’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ANSYS’s internal control over financial reporting; and

 

5. ANSYS’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to ANSYS’s auditors and the audit committee of ANSYS’s Board of Directors:

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect ANSYS’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in ANSYS’s internal control over financial reporting.

 

Date: March 9, 2006  

/s/ James E. Cashman, III

  James E. Cashman, III
  President and Chief Executive Officer
Section 302 CFO Certification

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Maria T. Shields, certify that:

 

1. I have reviewed this annual report on Form 10-K of ANSYS, Inc. (“ANSYS”);

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of ANSYS as of, and for, the periods presented in this annual report;

 

4. ANSYS’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for ANSYS and we have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to ANSYS, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c. evaluated the effectiveness of ANSYS’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

 

  d. disclosed in this report any change in ANSYS’s internal control over financial reporting that occurred during ANSYS’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ANSYS’s internal control over financial reporting; and

 

5. ANSYS’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to ANSYS’s auditors and the audit committee of ANSYS’s Board of Directors:

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect ANSYS’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in ANSYS’s internal control over financial reporting.

 

Date: March 9, 2006  

/s/ Maria T. Shields

  Maria T. Shields
  Chief Financial Officer
Section 906 CEO Certification

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ANSYS, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Cashman III, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

  (1) The Report fully complies with requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be part of the Report or filed for any purpose whatsoever.

 

/s/ James E. Cashman, III

James E. Cashman, III
President and Chief Executive Officer
March 9, 2006
Section 906 CFO Certification

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ANSYS, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Maria T. Shields, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

  (1) The Report fully complies with requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be part of the Report or filed for any purpose whatsoever.

 

/s/ Maria T. Shields

Maria T. Shields
Chief Financial Officer
March 9, 2006