Form 8-K Amendment

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 8-K/A

(Amendment No. 2)

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): May 1, 2006

 


ANSYS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   0-20853  

04-3219960

(State or Other Jurisdiction of Incorporation)  

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

275 Technology Drive,

Canonsburg, PA

  15317
(Address of Principal Executive Offices)   (Zip Code)

(Registrant’s Telephone Number, Including Area Code) (724) 746-3304

 


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

  ¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

  ¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

  ¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

  ¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))


Explanatory Note

On May 5, 2006, ANSYS, Inc. (“ANSYS”) filed a Form 8-K under Item 2.01 thereto to report the completion of its acquisition of Fluent Inc. In response to parts (a) and (b) of Item 9.01 of such Form 8-K, ANSYS stated that it would file the required financial information by amendment, as permitted by Item 9.01(a)(4) and 9.01(b)(2) to Form 8-K. On July 14, 2006, ANSYS filed a Current Report on Form 8-K/A to amend its Form 8-K filed on May 5, 2006 with the Securities and Exchange Commission, solely in order to provide the required financial information (the “Form 8-K/A”). ANSYS is filing this amendment to the Form 8-K/A in order to revise and clarify certain information provided therein as follows:

 

  (1) Revise the Report of Independent Auditors included in Exhibit 99.1 to the Form 8-K/A in the form attached hereto as Exhibit 99.1 to reflect a manual signature on the audit opinion of Ernst & Young for Fluent Inc. and to include the city and state where issued.

 

  (2) Amend the unaudited pro forma condensed combined financial statements included in Exhibit 99.2 to the Form 8-K/A for the following:

 

  i. Revise the estimate of in-process research and development expenditures from $31.9 million to $28.1 million.

 

  ii. Clarify the treatment of approximately $14.9 million in deferred tax assets related to net operating loss carryforwards associated with Aavid Thermal Technologies, Inc.

 

  iii. Revise the estimate of deferred tax liabilities associated with acquired intangibles to exclude the trade name, which is not amortized or tax-deductible.

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired.

The audited consolidated balance sheets of Fluent Inc. as of December 31, 2005 and 2004 and the related consolidated statements of income, statements of cash flows and statements of stockholders’ equity for each of the three years in the period ended December 31, 2005 and the notes to the consolidated financial statements together with the Report of Independent Auditors thereon of Ernst & Young LLP as well as the unaudited consolidated balance sheet of Fluent Inc. as of March 31, 2006 and the related unaudited consolidated statements of income and statements of cash flows for each of the three months in the period ended March 31, 2006 and March 31, 2005 are attached as Exhibit 99.1 to this Form 8-K/A and incorporated herein by reference.

 

(b) Pro Forma Financial Information

The amended unaudited pro forma condensed combined balance sheet of ANSYS, Inc. as of March 31, 2006 and the unaudited condensed combined statements of operations for the three months ended March 31, 2006 and for the year ended December 31, 2005 are filed as Exhibit 99.2 to this Form 8-K/A and incorporated herein by reference.

 

(d) Exhibits

 

2


Exhibit
Number
    

Description

23.1      Consent of Ernst & Young LLP for ANSYS, Inc. (previously filed as Exhibit 23.1 to the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 14, 2006).
99.1 *    Audited consolidated balance sheets of Fluent Inc. as of December 31, 2005 and 2004 and the related consolidated statements of income, statements of cash flows and statements of stockholders’ equity for each of the three years in the period ended December 31, 2005 and the notes to the consolidated financial statements together with the Report of Independent Auditors thereon of Ernst & Young LLP as well as the unaudited consolidated balance sheet of Fluent Inc. as of March 31, 2006 and the related unaudited consolidated statements of income and statements of cash flows for each of the three months in the period ended March 31, 2006 and March 31, 2005.
99.2 *    Amended unaudited pro forma condensed combined balance sheet of ANSYS, Inc. as of March 31, 2006 and the unaudited condensed combined statements of operations for the three months ended March 31, 2006 and for the year ended December 31, 2005.

* Filed herewith

 

3


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

ANSYS, Inc.

Date: August 17, 2006

 

By:

 

/s/ Maria T. Shields

   

Maria T. Shields — Chief Financial Officer,

VP of Finance and Administration

    (Ms. Shields is the Principal Financial and Accounting Officer and has been duly authorized to sign on behalf of the Registrant)

 

4


INDEX TO EXHIBITS

 

Exhibit
Number
  

Description

23.1    Consent of Ernst & Young LLP for ANSYS, Inc. (previously filed as Exhibit 23.1 to the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 14, 2006).
99.1*    Audited consolidated balance sheets of Fluent Inc. as of December 31, 2005 and 2004 and the related consolidated statements of income, statements of cash flows and statements of stockholders’ equity for each of the three years in the period ended December 31, 2005 and the notes to the consolidated financial statements together with the Report of Independent Auditors thereon of Ernst & Young LLP as well as the unaudited consolidated balance sheet of Fluent Inc. as of March 31, 2006 and the related unaudited consolidated statements of income and statements of cash flows for each of the three months in the period ended March 31, 2006 and March 31, 2005.
99.2*    Amended unaudited pro forma condensed combined balance sheet of ANSYS, Inc. as of March 31, 2006 and the unaudited condensed combined statements of operations for the three months ended March 31, 2006 and for the year ended December 31, 2005.

* Filed herewith

 

5

Audited Consolidated Balance Sheets of Fluent Inc. as of 12/31/2005 and 2004

Exhibit 99.1

Report of Independent Auditors

The Board of Directors

Fluent Inc.

We have audited the accompanying consolidated balance sheets of Fluent Inc. (a wholly-owned subsidiary of Aavid Thermal Technologies, Inc.) and subsidiaries 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 auditing standards generally accepted in the 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fluent Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated 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.

 

/s/ Ernst & Young LLP
Manchester, New Hampshire
February 17, 2006


Fluent Inc.

Consolidated Balance Sheets

 

      December 31         Unaudited
March 31
      2005    2004         2006

Assets

           

Current assets:

           

Cash and cash equivalents

   $ 22,922,149    $ 17,964,180       $ 22,733,944

Accounts receivable–trade, less allowance for doubtful accounts of $887,163 in 2005 and $1,014,986 in 2004 and $678,644 at March 31, 2006

     28,294,385      27,577,857         28,098,355

Unbilled receivables

     392,662      837,168         772,836

Deferred income taxes

     5,692,244      5,244,705         6,213,876

Prepaids and other assets

     3,572,252      2,964,070         3,968,168
                         

Total current assets

     60,873,692      54,587,980         61,787,179

Property, plant and equipment, at cost:

           

Land

     1,027,969      1,042,554         1,032,220

Building and leasehold improvements

     7,457,701      7,354,923         7,508,098

Computer equipment and furniture

     14,077,233      13,391,066         14,261,006

Vehicles

     412,214      296,629         450,383
                         
       22,975,117      22,085,172         23,251,707

Less: accumulated depreciation

     8,500,866      7,085,012         8,457,674
                         
       14,474,251      15,000,160         14,794,033

Goodwill

     37,487,252      37,487,252         37,487,252

Deferred income taxes

     820,276      851,223         820,276

Investment in related party

     4,632,640      4,632,640         4,632,640

Other assets

     1,024,326      1,118,142         1,026,093
                         

Total assets

   $ 119,312,437    $ 113,677,397       $ 120,547,473
                         

See accompanying notes.

 

2


Fluent Inc.

Consolidated Balance Sheets

 

      December 31         

Unaudited

March 31

 
      2005     2004          2006  

Liabilities and stockholders’ equity

         

Current liabilities:

         

Current portion of long-term debt and capital lease obligations (Note 3)

   $ 698,791     $ 1,216,795        $ 771,456  

Accounts payable

     2,182,438       1,593,351          2,076,629  

Accrued expenses (Note 2)

     19,152,312       16,686,576          17,453,216  

Current portion of deferred revenues

     44,765,557       43,049,360          51,082,304  
                             

Total current liabilities

     66,799,098       62,546,082          71,383,605  
 

Long-term debt and capital lease obligations, less current portion (Note 3)

     536,507       4,394,831          653,955  

Note payable to parent (Note 7)

     3,633,820       22,870,274          —    

Note payable to related party (Note 7)

     4,632,640       4,632,640          4,632,640  

Due to parent

     10,643,490       4,800,174          4,374,476  

Deferred income taxes

     —         —            —    

Deferred revenues, less current portion

     92,919       86,645          —    
                             

Total liabilities

     86,338,474       99,330,646          81,044,676  
 

Commitments (Note 4)

         
 

Stockholders’ equity:

         

Series A Preferred stock, $.01 par value, at redemption value:

         

Authorized shares – 160,000

         

Issued and outstanding shares – 48,133

     97,871,905       86,806,305          100,810,620  

Preferred stock, $.01 par value:

         

Authorized shares – 40,000

         

Issued and outstanding shares – none

     —         —            —    

Common stock, $.01 par value:

         

Authorized shares – 300,000

         

Issued and outstanding shares – 279,679

     2,797       2,797          2,797  

Additional paid-in capital

     2,794,336       2,794,336          2,794,336  

Notes receivable from sale of common stock

     (263,466 )     (263,466 )        (263,466 )

Accumulated deficit

     (66,187,616 )     (74,408,299 )        (62,773,337 )

Cumulative translation adjustment

     (1,243,993 )     (584,922 )        (1,068,153 )
                             

Total stockholders’ equity

     32,973,963       14,346,751          39,502,797  
                             

Total liabilities and stockholders’ equity

   $ 119,312,437     $ 113,677,397        $ 120,547,473  
                             

See accompanying notes.

 

3


Fluent Inc.

Consolidated Statements of Income

 

      Years Ended December 31        

Unaudited

Three Months Ended March 31

      2005     2004    2003         2006    2005

Revenues:

              

Software licenses

   $ 79,497,381     $ 73,010,126    $ 58,825,321       $ 21,689,497    $ 19,982,224

Service

     42,372,210       31,396,976      27,731,365         11,582,872      9,797,536
                                        

Total revenues

     121,869,591       104,407,102      86,556,686         33,272,369      29,779,760
 

Cost of revenues:

              

Software licenses

     2,856,093       2,607,319      2,093,587         1,448,201      835,431

Service

     19,228,219       15,746,785      15,134,849         4,648,854      4,305,581
                                        

Total cost of revenues

     22,084,312       18,354,104      17,228,436         6,097,055      5,141,012
                                        

Gross profit

     99,785,279       86,052,998      69,328,250         27,175,314      24,638,748
 

Operating expenses:

              

Selling, general and administrative

     52,065,708       46,404,214      38,924,645         12,927,178      12,771,017

Amortization of intangible assets

     —         243,233      3,042,602         —        —  

Research and development

     15,714,051       14,333,552      12,697,165         4,118,506      3,742,882
                                        
       67,779,759       60,980,999      54,664,412         17,045,684      16,513,899
                                        
       32,005,520       25,071,999      14,663,838         10,129,630      8,124,849
 

Other expenses:

              

Interest expense, net

     1,883,505       3,830,053      5,713,930         28,011      581,199

Other nonoperating (income) expense

     (306,899 )     211,038      (926,461 )       110,892      166,817
                                        
       1,576,606       4,041,091      4,787,469         138,903      748,016
                                        

Income before income taxes

     30,428,914       21,030,908      9,876,369         9,990,727      7,376,833

Provision for income taxes

     11,142,631       6,040,756      3,164,474         3,637,733      3,086,572
                                        

Net income

   $ 19,286,283     $ 14,990,152    $ 6,711,895       $ 6,352,994    $ 4,290,261
                                        

See accompanying notes.

 

4


Fluent Inc.

Consolidated Statements of Cash Flows

 

      Years Ended December 31         

Unaudited

Three Months Ended March 31

 
      2005     2004     2003          2006     2005  

Operating activities

             

Net income

   $ 19,286,283     $ 14,990,152     $ 6,711,895        $ 6,352,994     $ 4,290,261  

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

             

Depreciation and amortization

     2,975,766       2,746,712       2,351,715          775,086       676,566  

Deferred income tax expense (benefit)

     131,148       (511,599 )     (2,192,706 )        (521,632 )     (309,848 )

Amortization of intangible assets

     —         235,680       2,852,160          —         —    

Other

     204,941       31,381       176,371          14,601       1,557  

Changes in operating assets and liabilities:

             

Accounts receivable–trade

     (2,606,060 )     (4,804,762 )     (2,145,407 )        387,457       3,221,089  

Unbilled receivables

     231,130       1,233,601       (155,510 )        (359,043 )     (178,046 )

Prepaids and other assets

     (900,125 )     4,414       7,597          (373,910 )     (83,187 )

Other long-term assets

     81,864       (233,900 )     (84,820 )        (1,767 )     12,666  

Accounts payable and accrued expenses

     4,054,063       4,141,179       1,427,843          (1,927,053 )     (1,915,459 )

Deferred revenues

     4,925,477       4,210,069       5,326,636          5,923,786       3,716,548  
                                             

Net cash provided by operating activities

     28,384,487       22,042,927       14,275,774          10,270,519       9,432,147  
 

Investing activities

             

Capital expenditures

     (2,175,670 )     (3,426,790 )     (3,078,028 )        (640,802 )     (703,363 )
                                             

Net cash used in investing activities

     (2,175,670 )     (3,426,790 )     (3,078,028 )        (640,802 )     (703,363 )
 

Financing activities

             

Principal payments on long-term debt and capital lease obligations

     (5,316,673 )     (1,289,856 )     (1,044,141 )        (216,420 )     (344,399 )

Principal payments on note payable to parent

     (19,236,454 )     (16,290,442 )     (8,914,503 )        (9,902,834 )     (5,182,041 )

Due to parent

     5,843,316       3,367,947       4,469,254          —         —    
                                             

Net cash used in financing activities

     (18,709,811 )     (14,212,351 )     (5,489,390 )        (10,119,254 )     (5,526,440 )
 

Effect of foreign exchange on cash flows

     (2,541,037 )     850,118       30,260          301,332       (479,561 )
                                             

Net increase (decrease) in cash and cash equivalents

     4,957,969       5,253,904       5,738,616          (188,205 )     2,722,783  

Cash and cash equivalents at beginning of period

     17,964,180       12,710,276       6,971,660          22,922,149       17,964,180  
                                             

Cash and cash equivalents at end of period

   $ 22,922,149     $ 17,964,180     $ 12,710,276        $ 22,733,944     $ 20,686,963  
                                             

Supplemental disclosure of cash flow information:

             

Cash paid for:

             

Interest

   $ 1,890,130     $ 3,929,124     $ 6,034,532        $ 141,997     $ 667,981  
                                             

Income taxes

   $ 4,034,378     $ 679,190     $ 201,659        $ 395,811     $ (65,101 )
                                             

Supplemental disclosure of non-cash investing activities:

             

Capital lease obligations

   $ 937,241     $ 1,228,593     $ 555,817        $ 405,505     $ 216,044  
                                             

See accompanying notes.

 

5


Fluent Inc.

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2005, 2004 and 2003

 

                   

Additional

Paid-In

Capital

  

Notes

Receivable

   

Accumulated

Deficit

   

Comprehensive

Income (Loss)

   

Cumulative

Translation

Adjustment

   

Total

Stockholders’

Equity (Deficit)

 
    

Series A

Preferred Stock

   Common Stock              
     Shares    Amount    Shares    Amount              

Balance at January 1, 2003

   48,133    $ 68,286,951    279,679    $ 2,797    $ 2,794,336    $ (263,466 )   $ (77,590,992 )     $ (641,551 )   $ (7,411,925 )

Net income

                      6,711,895     $ 6,711,895         6,711,895  

Change in cumulative translation adjustment, net of tax of $427,594

                        (340,179 )     (340,179 )     (340,179 )
                               

Total comprehensive income

                      $ 6,371,716      
                               

Accretion of preferred stock dividends

        8,704,849                 (8,704,849 )      
                                                                 

Balance at January 1, 2004

   48,133      76,991,800    279,679      2,797      2,794,336      (263,466 )     (79,583,946 )       (981,730 )     (1,040,209 )

Net income

                      14,990,152     $ 14,990,152         14,990,152  

Change in cumulative translation adjustment, net of tax of $139,300

                        396,808       396,808       396,808  
                               

Total comprehensive income

                      $ 15,386,960      
                               

Accretion of preferred stock dividends

        9,814,505                 (9,814,505 )      
                                                                 

Balance at December 31, 2004

   48,133      86,806,305    279,679      2,797      2,794,336      (263,466 )     (74,408,299 )       (584,922 )     14,346,751  

Net income

                      19,286,283     $ 19,286,283         19,286,283  

Change in cumulative translation adjustment, net of tax of $547,740

                        (659,071 )     (659,071 )     (659,071 )
                               

Total comprehensive income

                      $ 18,627,212      
                               

Accretion of preferred stock dividends

        11,065,600                 (11,065,600 )      
                                                                 

Balance at December 31, 2005

   48,133    $ 97,871,905    279,679    $ 2,797    $ 2,794,336    $ (263,466 )   $ (66,187,616 )     $ (1,243,993 )   $ 32,973,963  
                                                                 

See accompanying notes.

 

6


Fluent Inc.

Notes to Consolidated Financial Statements

December 31, 2005

1. Accounting Policies

Description of Business

Fluent Inc. (the “Company”) designs, develops, and markets advanced technology and computerized design and simulation software used to predict air and fluid flow, heat and mass transfer, chemical reaction and related phenomena. The Company markets its products through a worldwide network of salespeople, value added resellers, and distributors. On August 31, 1995, the Company was acquired by Aavid Thermal Technologies, Inc. (“Aavid”) and, accordingly, is a wholly-owned subsidiary of Aavid. On February 2, 2000, Aavid was acquired by Heat Holdings Corp., a corporation newly formed by Willis Stein & Partners II, L.P. (the “Merger”). The Merger was accounted for using the purchase method.

The fair value of the net assets of Fluent Inc. on the date of acquisition was $117,000,000 based upon independent appraisal, resulting in goodwill of $71,971,000 which, prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, was being amortized over 4 years. Developed technology (which was fully amortized at December 31, 2004) of $13,000,000 was also being amortized over 4 years. Amortization expense for the developed technology was $235,680 and $2,852,160, for the years ended December 31, 2004 and 2003, respectively.

The Company’s stock held by Aavid collateralizes Aavid’s senior indebtedness. The Company and its domestic subsidiaries have also jointly and severally guaranteed, on a senior subordinated basis, the principal amount of Aavid’s 12 3/4% senior subordinated notes.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

7


Revenue Recognition

The Company recognizes revenue on its software license and maintenance arrangements in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, and related pronouncements. The pronouncements provide specific industry guidance and stipulate that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post-contract customer support (“PCS”), and training. In accordance with SOP 97-2, the Company recognizes revenue from software licenses and related ancillary products when:

 

    Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and software license agreement has been signed;

 

    Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically) and related ancillary products;

 

    The customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties;

 

    Collectibility is probable, and;

 

    Vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, typically PCS and professional services.

The Company licenses its software products under both perpetual and annual license arrangements.

For perpetual license arrangements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value (VSOE) of the undelivered elements (typically PCS) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (software) and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. The Company recognizes revenue from the undelivered PCS element ratably over the period of the PCS arrangement.

For annual license arrangements, with unbundled PCS, since VSOE of value for the PCS does not exist, the Company recognizes revenue for both the software license and the PCS ratably over the 12-month term of the license.

Training and consulting revenues are recognized upon completion of services or, in certain instances, on the percentage-of-completion method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Revenues generated from PCS, training and consulting services have been included in service revenues in the accompanying consolidated statements of operations. For perpetual license agreements, amounts allocated to service revenues are consistent with the allocation used for VSOE of value. For annual license agreements, the Company has allocated revenues between software and services in a manner consistent with perpetual license agreements.

 

8


Cash Equivalents and Financial Instruments

Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The risk is limited due to the relatively large number of customers comprising the Company’s customer base and their dispersion across many industries and geographic areas within the United States, Europe and Asia. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility of all accounts receivable, considering historical losses, existing economic conditions and individual customers’ credit worthiness. The Company’s write-offs of accounts receivable have not been significant during the years presented. The Company’s revenues have been primarily denominated in U.S. dollars, and the effects of foreign exchange fluctuations are not considered to be material. At December 31, 2005 and 2004, no customer accounted for greater than 10% of total accounts receivable.

The estimated fair value of the Company’s financial instruments, including accounts receivable, accounts payable and cash and cash equivalents, approximates carrying value. The fair value of the Company’s long-term debt approximates carrying value due to variable interest rates and relatively short maturities.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the following estimated useful lives:

 

     Years

Building

   40

Computer equipment

   3–5

Furniture and fixtures

   7–10

Vehicles

   3

Leasehold improvements

   Shorter of useful
life or lease period

Repairs and maintenance expense is charged against income when incurred. When property, plant and equipment are retired or sold, their cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in other expenses.

Investment in Related Party

The Company owns 3,141,690 shares of B Ordinary Shares of Aavid Thermalloy (U.K.) Holdings Limited, a subsidiary of Aavid. The B Ordinary Shares carry no dividend or voting rights. The Company is accounting for its investment in this related party by the cost method of accounting. See Note 7 for the note payable related to the purchase of the B Ordinary Shares.

 

9


Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is the local currency. Accordingly, the balance sheet accounts of the foreign subsidiaries are translated into U.S. dollars at year-end exchange rates; revenue and expense accounts are translated at average exchange rates throughout the year. Translation gains and losses are included in the cumulative translation adjustment in stockholders’ equity. Foreign currency gains and losses, included in the consolidated statements of operations, were approximately $244,000 (gain), $234,000 (loss) and $937,000 (gain) in 2005, 2004 and 2003, respectively.

Research and Development

Research and development costs are expensed as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have not been material. Through December 31, 2005, all research and software development costs have been expensed.

Advertising

Advertising costs are expensed in the period incurred. Amounts charged to expense approximated $1,439,000 in 2005, $1,064,000 in 2004 and $990,000 in 2003.

Income Taxes

The Company files a consolidated tax return with Aavid. The allocation of tax expense is based on what the Company’s current and deferred tax provision would have been had the Company filed a separate tax return.

The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. Under this method, the amount of deferred tax liabilities or assets is calculated by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. SFAS No. 109 requires a valuation allowance against deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realizable.

Goodwill

SFAS No. 142 prohibits the amortization of goodwill but requires that goodwill be reviewed for impairment at least annually. The impairment test would also be performed if an event occurs, or when circumstances change between annual tests, that would more likely than not reduce the fair value of a reporting unit below its carrying value. Through December 31, 2005, there has been no impairment of goodwill.

 

10


Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, provides for the reporting and display of comprehensive income (loss) and its components. SFAS No. 130 requires companies to report all changes in stockholders’ equity during a period, except those resulting from investment by owners and distribution to owners, in comprehensive income (loss) in the period in which they are recognized. Accordingly, the Company’s foreign currency translation adjustments are included in other comprehensive income (loss).

Reclassifications

Certain amounts in 2003 have been reclassified to conform to the 2004 and 2005 presentations.

2. Accrued Expenses

Accrued expenses at December 31 has the following components:

 

     2005    2004

Profit sharing and bonus

   $ 6,429,510    $ 6,428,037

Payroll and related taxes

     4,825,044      3,996,361

Foreign and state income taxes

     3,456,182      1,721,599

Sales related taxes

     1,464,254      1,684,409

Other

     2,977,322      2,856,170
             
   $ 19,152,312    $ 16,686,576
             

3. Debt Obligations

Debt obligations as of December 31, 2005 and 2004 consist of the following:

 

     2005    2004

Term loans under a Loan and Security Agreement payable in 40 consecutive quarterly installments of $145,000 commencing November 1, 2002

   $ —      $ 4,495,000

Capitalized lease obligations (Note 4)

     1,235,298      1,116,626
             
     1,235,298      5,611,626

Less current portion

     698,791      1,216,795
             

Debt obligations, net of current portion

   $ 536,507    $ 4,394,831
             

On August 1, 2002, Aavid refinanced its senior credit facility. The credit facility (the “Loan and Security Agreement”) is a $27,500,000 (on a consolidated basis) asset-based facility available through August 1, 2006. The facility is specifically secured by, and allocated among, specific Aavid subsidiaries, including the Company. The Company’s specific portion of the credit facility consists of a $5,800,000 term loan component which requires quarterly principal payments. The Company repaid all principal amounts outstanding under the term loan component of the credit facility during 2005. The Loan and Security Agreement also provides the Company with a revolving line-of-credit component. All borrowings under the credit facility are secured by substantially all assets of Aavid and the Company. Availability under the line-of-credit component is determined by a borrowing base of 85% of eligible accounts receivable, as defined in the Loan and Security Agreement.

 

11


Debt outstanding under the Loan and Security Agreement bears interest at a rate equal to, at the Company’s option, either (1) in the case of LIBOR rate loans, the sum of the offered rate for deposits in United States dollars for a period equal to such interest period as it appears on Telerate page 3750 as of 11:00am London time and a margin of between 2.5% and 2.85%, or (2) the sum of LaSalle Business Credit’s prime rate plus a margin of between .25% and .50%. At December 31, 2005, availability under the revolving line-of-credit was approximately $10,241,000 and there were no borrowings outstanding.

4. Lease Obligations

The Company has several noncancelable operating and capital leases, primarily for office equipment and office space that expire at various dates through 2015. Rental expense for the years ended December 31, 2005, 2004 and 2003 totaled approximately $4,071,000, $5,105,000 and $4,118,000, respectively.

Future minimum lease payments under noncancelable operating and capital leases as of December 31, 2005 are approximately as follows:

 

    

Operating

Leases

  

Capital

Leases

Year ending December 31:

     

2006

   $ 3,976,583    $ 746,140

2007

     1,960,917      420,861

2008

     1,100,785      159,800

2009

     942,144      —  

2010

     793,728      —  

Thereafter

     2,108,743      —  
             

Total minimum lease payments

   $ 10,882,900      1,326,801
         

Less amount representing interest

        91,503
         

Present value of total minimum lease payments

        1,235,298

Less current portion

        698,791
         

Long-term capital lease obligations

      $ 536,507
         

5. Income Taxes

Income before income taxes for domestic and foreign operations is as follows for the year ended December 31:

 

     2005    2004    2003

Domestic

   $ 18,959,885    $ 11,414,186    $ 6,834,795

Foreign

     11,469,029      9,616,722      3,041,574
                    
   $ 30,428,914    $ 21,030,908    $ 9,876,369
                    

 

12


Income tax expense (benefit) consists of the following for the year ended December 31:

 

     2005    2004     2003  

Current:

       

Federal

   $ 3,907,190    $ 3,000,592     $ 3,604,093  

State

     1,921,258      1,024,126       899,366  

Foreign

     5,183,035      2,527,637       853,721  
                       
     11,011,483      6,552,355       5,357,180  

Deferred:

       

Federal

     63,428      (1,421,048 )     (1,846,787 )

State

     58,350      671,563       (311,914 )

Foreign

     9,370      237,886       (34,005 )
                       
     131,148      (511,599 )     (2,192,706 )
                       
   $ 11,142,631    $ 6,040,756     $ 3,164,474  
                       

The differences between actual income tax expense and the amount computed by applying the U.S. statutory rate to pretax income are as follows for the year ended December 31:

 

     2005     2004     2003  

Expected federal tax provision

   $ 10,650,120     $ 7,150,509     $ 3,357,965  

State income taxes, net

     1,286,745       1,119,155       387,718  

Foreign rate differences

     1,178,244       (501,400 )     (214,341 )

Foreign tax credit

     (351,675 )     (475,933 )  

R&D tax credit

     (1,675,035 )     (527,809 )  

Other

     54,232       (723,766 )     (366,868 )
                        
   $ 11,142,631     $ 6,040,756     $ 3,164,474  
                        

The Company is currently operating under a tax holiday at its India subsidiary. The tax holiday, which expires in 2009, resulted in tax savings of $430,000, $420,000 and $580,000 in 2005, 2004 and 2003, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows at December 31:

 

     2005     2004  

Assets:

    

Receivable reserves not currently deductible

   $ 178,727     $ 228,472  

Deferred revenues

     4,854,159       4,495,408  

Employee benefit-related

     482,716       421,458  

Depreciation

     257,969       273,990  

Foreign

     923,443       987,759  

Currency translation adjustment

     836,034       288,294  

Other

     176,864       211,950  
                
     7,709,912       6,907,331  

Liabilities:

    

Unremitted foreign earnings

     (1,197,392 )     (811,403 )
                
     (1,197,392 )     (811,403 )
                
   $ 6,512,520     $ 6,095,928  
                

 

13


6. Stockholders’ Equity

Common and Preferred Stock

The Company is authorized to issue up to 160,000 shares of Series A preferred stock (“Series A Preferred”) and 300,000 shares of common stock, par value $.01 per share. The Company has also authorized 40,000 shares of undesignated preferred stock, par value $.01 per share. The board of directors is authorized to designate the powers, preferences and rights of the undesignated preferred stock.

The Series A Preferred has the following rights and preferences:

Liquidation Value

Liquidation value of any share of Series A Preferred, as of any particular date, shall be equal to $1,000 per share plus any accrued and unpaid dividends.

Dividends

The holders of the Series A Preferred shall be entitled to receive, when and if declared by the board of directors, preferential dividends. Dividends on each share of Series A Preferred shall accrue on a daily basis, at a rate of 12% per annum, on the sum of the liquidation value thereof plus all accumulated and unpaid dividends thereon, from and including the date of issuance of such share to and including the date on which the liquidation value of such share (plus all accrued and unpaid dividends thereon) is paid. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends.

Except as otherwise provided within the Certificate of Incorporation, if at any time the Company pays less than the total amount of dividends then accrued with respect to the Series A Preferred, such payment shall be distributed ratably among the holders based upon the aggregate accrued but unpaid dividends on the shares held by each such holder.

In the sole discretion of the Company, any dividends accruing on shares of Series A Preferred may be paid, in lieu of cash dividends, by the issuance of additional shares of Series A Preferred as provided in the Certificate of Incorporation.

Voting Rights

Each outstanding share of Series A Preferred shall have one vote on all matters submitted to a vote of stockholders. In the event the Company shall at any time declare or pay any dividend on common stock payable in shares of common stock, or effect a subdivision or combination or consolidation of the outstanding common stock (by reclassification or otherwise than by payment of a dividend in shares of common stock) into a greater or lesser number of shares of common stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred were entitled immediately prior to such event shall be adjusted by multiplying such number of votes by a fraction of the numerator of which is the number of shares of common stock outstanding immediately after such event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such event. Except as otherwise provided in the Certificate of Incorporation or by law, the holders of shares of Series A Preferred and the holders of common stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company.

 

14


The consent of the holders of a majority of the Series A Preferred, voting together as a separate class, shall be required to approve any public offering of any shares of the Company, or any change in control.

Redemption

At any time after January 31, 2021, the holders of a majority of the Series A Preferred may request redemption of all or any portion of their shares. For each share which is to be redeemed, the Company shall be obligated, on the redemption date, to pay the holder of such share an amount equal to the liquidation value of such share. If the funds of the Company legally available for payment of the redemption amounts on any payment date are insufficient to make the total payments required to be made, those funds which are legally available shall be used to redeem the maximum number of shares possible, ratably among the holders of the shares to be redeemed based upon the aggregate liquidation value of such shares (plus all unpaid dividends and any applicable premium on such share). At any time thereafter, when additional funds of the Company are legally available for the redemption of shares, such funds shall immediately be used to redeem the balance of the shares which the Company has become obligated to redeem but which it has not redeemed.

Liquidation Preference

Upon any liquidation, dissolution or winding up of the Company, each holder of Series A Preferred shall be entitled to be paid, before any distribution or payment is made upon any junior securities, as defined, an amount in cash equal to the aggregate liquidation value of the Series A Preferred held by such holder. If upon any such liquidation, dissolution or winding-up of the Company, the Company’s assets to be distributed among the holders of the Series A Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders based upon the aggregate liquidation value (plus all accrued and unpaid interest and dividends) of the Series A Preferred held by each holder.

Management Incentive Purchase Program

During 2000, the board of directors of Aavid approved the Management Incentive Purchase Program (the “Program”). The Program provides for the grant and purchase of non-voting restricted stock of Fluent Inc. to and by certain employees and directors of the Company. Shares acquired pursuant to the Program are subject to a right of repurchase, which lapses as the shares vests. These shares are subject to certain repurchase rights, generally based on fair value, upon termination of employment. The vesting is generally five years. The board of directors of Aavid set aside approximately 10% of the common equity ownership in Fluent Inc., or 28,149 shares, for the Program.

 

15


Activity with respect to the Program for the years ended December 31, 2005, 2004 and 2003 follows:

 

     Number of
Shares
  

Weighted

Average

Purchase Price

Balance at January 1, 2003

   26,346    $ 10.00

Activity during 2003

   —     
       

Balance at January 1, 2004

   26,346    $ 10.00

Activity during 2004

   —     
       

Balance at December 31, 2004

   26,346    $ 10.00

Activity during 2005

   —     
       

Balance at December 31, 2005

   26,346    $ 10.00
       

Vested at December 31, 2005

   26,346    $ 10.00

Vested at December 31, 2004

   21,077    $ 10.00

Vested at December 31, 2003

   15,808    $ 10.00

As of December 31, 2005 and 2004, the Company held notes receivable for shares in the amount of $263,466 from employees in consideration for the purchase of common stock under the Program. The notes bear interest at 7%. Notes issued in connection with the Program are due November 1, 2007 or upon termination of employment and are collateralized by the underlying common stock. In addition, the interest due and 60% of the note balance are full recourse to the employee. These notes are recorded as notes receivable from sale of common stock in the accompanying consolidated balance sheets.

7. Related Party Transactions

Corporate Allocation

Aavid allocates certain general and administrative costs to the Company, and certain financial and other services, on a defined formula which is based on revenues. Total corporate allocation expense charged to the Company was approximately $1,302,000, $1,227,000 and $1,253,000 in 2005, 2004 and 2003, respectively.

Note Payable to Parent

On February 2, 2000, the Company issued a demand $67,000,000 promissory note payable to Aavid, of which $3,633,820 and $22,870,274, respectively, is outstanding as of December 31, 2005 and 2004. The note, as amended, bears interest at 12-3/4%, a rate equal to the interest charged to Aavid under its Senior Subordinated Notes. Interest expense related to this note totaled $1,688,546, $3,659,927 and $5,286,468 for the years ended December 31, 2005, 2004 and 2003, respectively. Aavid has agreed not to demand payment of the intercompany note payable prior to January 1, 2007. Accordingly, the Company has classified the note payable to parent as a long-term liability in the accompanying consolidated balance sheets at December 31, 2005 and 2004.

 

16


Note Payable to Related Party

On February 2, 2000, the Company issued a demand $4,632,640 promissory note payable to Aavid Thermalloy, LLC, a subsidiary of Aavid, of which $4,632,640 is outstanding as of December 31, 2005 and 2004. The note, as amended, bears interest at a rate equal to the interest charged to Aavid under certain provisions of its Loan and Security Agreement (7.5% at December 31, 2005). Interest expense related to this note totaled $298,393, $212,677 and $208,469 for the years ended December 31, 2005, 2004 and 2003, respectively. Aavid Thermalloy, LLC has agreed not to demand payment of the $4,632,640 intercompany note payable prior to January 1, 2007. Accordingly, the Company has classified the note payable as a long-term liability in the accompanying consolidated balance sheets at December 31, 2005 and 2004.

8. 401(k) Plan

The Company has a 401(k) plan which covers eligible employees. Employees are eligible to participate in the plan on the first day of the month following the date of hire. Employees may elect to contribute up to 100% of their eligible pay, subject to a maximum annual limitation set by Internal Revenue Service. The Company, at its discretion, makes matching contributions for each employee. Employer matching contributions are subject to a vesting schedule. The Company’s matching contributions were $542,331, $500,686 and $421,126 in 2005, 2004 and 2003 respectively.

9. Subsequent Event

On February 15, 2006, Aavid entered into a definitive agreement to be acquired by ANSYS, Inc. (“ANSYS”). Under the terms of the agreement, ANSYS will issue 6,000,000 shares of its common stock and pay approximately $300 million to the stockholders of Aavid, subject to certain adjustments at closing. Prior to the closing, Aavid’s thermal management solutions business, Aavid Thermalloy, will be spun-off to Aavid’s stockholders.

 

17

Amended unaudited pro forma condensed combined balance sheet

Exhibit 99.2

ANSYS, Inc.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On May 1, 2006, ANSYS, Inc. (hereafter “ANSYS” or the “Company”) completed its acquisition of Fluent Inc., a global provider of computational fluid dynamics (“CFD”)-based computer-aided engineering software and services (hereafter “Fluent”). Under the terms of the merger agreement, ANSYS issued approximately 6,000,000 shares of its common stock, valued at approximately $274 million based on the average closing market price on the two days preceding and the two days following the announcement of the acquisition, and paid approximately $315 million in cash to acquire Fluent. The total purchase price of approximately $598 million includes approximately $9 million in transaction fees. The acquisition is accounted for under the purchase method of accounting.

The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon management’s estimates of the fair market values of the assets acquired and the liabilities assumed. These estimates are subject to change upon the final valuation of Fluent’s assets and liabilities.

The unaudited pro forma condensed combined balance sheet as of March 31, 2006 is presented as if the Fluent acquisition and related bank financing occurred on March 31, 2006.

The unaudited pro forma condensed combined statements of operations of ANSYS and Fluent for the three months ended March 31, 2006 and for the year ended December 31, 2005 are presented as if the Fluent acquisition and related bank financing had taken place on January 1, 2005 and were carried forward through March 31, 2006 and December 31, 2005, respectively.

The unaudited pro forma condensed combined financial statements are based on the historical financial statements of ANSYS and Fluent after giving effect to borrowings used and stock issued to finance the Fluent acquisition, as well as the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated results of operations or financial position of the Company that would have been reported had the acquisition and borrowings been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of the Company. This information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and cost savings that the Company may achieve with respect to the combined companies. The unaudited pro forma statements of operations also exclude a charge of approximately $28.1 million, which represents the estimated fair value of Fluent research projects in process. This charge will be recorded upon consummation of the acquisition.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of ANSYS’ annual report filed on Form 10-K for the year ended December 31, 2005, and quarterly report on Form 10-Q for the quarter ended March 31, 2006, and of Fluent included as Exhibit 99.1 in this Form 8-K/A.


ANSYS, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2006

 

     Historical           
(in thousands)    ANSYS    Fluent    Pro Forma
Adjustments
    Pro Forma
Combined

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 197,159    $ 22,734    $ (126,428 )(A)   $ 93,465

Short-term investments

     6,071      —        —         6,071

Accounts receivable, net

     22,491      28,098      —         50,589

Other receivables and current assets

     28,014      4,741      —         32,755

Deferred income taxes

     4,179      6,214      (1,622 )(E)     8,771
                            

Total current assets

     257,914      61,787      (128,050 )     191,651

Property and equipment, net

     6,265      14,794      3,038 (C)     24,097

Capitalized software costs, net

     528      —        —         528

Goodwill

     44,582      37,487      342,852 (D)     424,921

Other intangibles, net

     9,440      —        213,900 (B)     223,340

Investment in related party

     —        4,633      (4,633 )(L)     —  

Other assets

     3,864      1,026      1,871 (O)     6,761

Deferred income taxes

     2,950      820      (3,770 )(E)     —  
                            

Total assets

   $ 325,543    $ 120,547    $ 425,208     $ 871,298
                            

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Current portion of long-term debt and capital lease obligations

   $ —      $ 771    $ 29,000 (M)   $ 29,771

Accounts payable

     1,385      2,077      —         3,462

Accrued bonuses

     4,368      2,833      —         7,201

Other accrued expenses and liabilities

     16,845      14,620      —         31,465

Deferred revenue

     57,724      51,082      (19,054 )(F)     89,752
                            

Total current liabilities

     80,322      71,383      9,946       161,651

Long-term debt and capital lease obligations, less current portion

     —        654      169,000 (M)     169,654

Other long-term liabilities

     1,375      —        —         1,375

Amounts due to parent and related party

     —        9,007      (9,007 )(L)     —  

Deferred income taxes

     —        —        48,854 (E)     48,854

Commitments and contingencies

          

Stockholders’ equity

     243,846      39,503      206,415 (G)     489,764
                            

Total liabilities and stockholders’ equity

   $ 325,543    $ 120,547    $ 425,208     $ 871,298
                            

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.


ANSYS, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2005

 

     Historical              
(in thousands, except per share data)    ANSYS     Fluent     Pro Forma
Adjustments
    Pro Forma
Combined
 

Revenue:

        

Software licenses

   $ 85,680     $ 79,497     $ —       $ 165,177  

Maintenance and service

     72,356       42,372       —         114,728  
                                

Total revenue

     158,036       121,869       —         279,905  

Cost of sales:

        

Software licenses

     5,292       2,856       —         8,148  

Amortization of software and acquired technology

     3,576       —         17,134 (H)     20,710  

Maintenance and service

     15,171       19,228       3,202 (I)(N)     37,601  
                                

Total cost of sales

     24,039       22,084       20,336       66,459  
                                

Gross profit

     133,997       99,785       (20,336 )     213,446  

Operating expenses:

        

Selling, general and administrative

     43,285       52,066       (5,143 )(I)(N)     90,208  

Research and development

     30,688       15,714       2,183 (I)(N)     48,585  

Amortization

     1,184       —         8,731 (H)     9,915  
                                

Total operating expenses

     75,157       67,780       5,771       148,708  
                                

Operating income

     58,840       32,005       (26,107 )     64,738  

Interest income (expense), net

     4,295       (1,883 )     (15,147 )(J)     (12,735 )

Other income (expense), net

     (24 )     307       —         283  
                                

Income before income tax provision

     63,111       30,429       (41,254 )     52,286  

Income tax provision

     19,208       11,143       (15,677 )(K)     14,674  
                                

Net income

   $ 43,903     $ 19,286     $ (25,577 )   $ 37,612  
                                

Earnings per share – basic:

        

Basic earnings per share

   $ 1.38         $ 1.00  
                    

Weighted average shares – basic

     31,749         6,000       37,749  
                          

Earnings per share – diluted:

        

Diluted earnings per share

   $ 1.30         $ 0.95  
                    

Weighted average shares – diluted

     33,692         6,000       39,692  
                          

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.


ANSYS, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2006

 

     Historical              
(in thousands, except per share data)    ANSYS    Fluent     Pro Forma
Adjustments
    Pro Forma
Combined
 

Revenue:

         

Software licenses

   $ 26,752    $ 21,689     $ —       $ 48,441  

Maintenance and service

     19,259      11,583       —         30,842  
                               

Total revenue

     46,011      33,272       —         79,283  

Cost of sales:

         

Software licenses

     1,490      1,448       —         2,938  

Amortization of software and acquired technology

     908      —         4,391 (H)     5,299  

Maintenance and service

     4,470      4,649       785 (I)(N)     9,904  
                               

Total cost of sales

     6,868      6,097       5,176       18,141  
                               

Gross profit

     39,143      27,175       (5,176 )     61,142  

Operating expenses:

         

Selling, general and administrative

     11,839      12,927       (1,324 )(I)(N)     23,442  

Research and development

     9,357      4,118       599 (I)(N)     14,074  

Amortization

     128      —         2,097 (H)     2,225  
                               

Total operating expenses

     21,324      17,045       1,372       39,741  
                               

Operating income

     17,819      10,130       (6,548 )     21,401  

Interest income (expense), net

     1,512      (28 )     (3,572 )(J)     (2,088 )

Other income (expense), net

     186      (111 )     —         75  
                               

Income before income tax provision

     19,517      9,991       (10,120 )     19,388  

Income tax provision

     6,604      3,638       (3,846 )(K)     6,396  
                               

Net income

   $ 12,913    $ 6,353     $ (6,274 )   $ 12,992  
                               

Earnings per share – basic:

         

Basic earnings per share

   $ 0.40        $ 0.34  
                   

Weighted average shares – basic

     32,122        6,000       38,122  
                         

Earnings per share – diluted:

         

Diluted earnings per share

   $ 0.38        $ 0.32  
                   

Weighted average shares – diluted

     34,165        6,000       40,165  
                         

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.


ANSYS, Inc.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Pro Forma Presentation

The unaudited pro forma condensed combined financial statements are based on the historical financial statements of ANSYS and Fluent after giving effect to borrowings used to finance the Fluent acquisition, as well as certain assumptions and adjustments.

The unaudited pro forma condensed combined balance sheet as of March 31, 2006 is presented as if the Fluent acquisition and related bank financing occurred on March 31, 2006.

The unaudited pro forma condensed combined statements of operations of ANSYS and Fluent for the three months ended March 31, 2006 and for the year ended December 31, 2005 are presented as if the Fluent acquisition and related bank financing had taken place on January 1, 2005 and were carried forward through March 31, 2006 and December 31, 2005, respectively.

ANSYS accounts for acquisitions under Financial Accounting Standards Board Statement No. 141, “Business Combinations” (“Statement 141”). In accordance with business combination accounting, ANSYS allocates the purchase price of an acquired company to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. The excess of the purchase price over the net tangible and identifiable intangible assets will be recorded as goodwill.

The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon management’s estimates of the fair market values of the assets acquired and the liabilities assumed. These estimates are subject to change upon the final valuation of Fluent’s assets and liabilities.

The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated results of operations or financial position of ANSYS that would have been reported had the acquisition and borrowings been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of ANSYS. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and cost savings that ANSYS may achieve with respect to the combined companies. The unaudited pro forma statements of operations also exclude a charge of approximately $28.1 million, which represents the estimated fair value of Fluent research projects in process. This charge will be recorded upon consummation of the acquisition.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of ANSYS’ annual report filed on Form 10-K for the year ended December 31, 2005, and quarterly report on Form 10-Q for the quarter ended March 31, 2006, and of Fluent included as Exhibit 99.1 in this Form 8-K/A.


Transactions between ANSYS and Fluent were nominal during the periods presented. No pro forma adjustments were made to conform Fluent’s accounting policies to ANSYS’ accounting policies, except as noted below.

In connection with its acquisition of Fluent, ANSYS also acquired Fluent’s parent, Aavid Thermal Technologies, Inc. (“ATTI”). ATTI was primarily a shell entity with no assets or liabilities other than the tax attributes of its subsidiaries. These tax attributes included net operating loss carryforwards of approximately $42.7 million. The related deferred tax assets had been fully reserved in ATTI’s historical financial statements. These net operating loss carryforwards will have value to ANSYS post-acquisition and the reduction of the related valuation reserve will result in an increase in deferred tax assets and a decrease in goodwill of $14.9 million. This deferred tax asset is reflected as an adjustment to the unaudited pro forma condensed combined balance sheet as indicated in Notes 3.E. and 5. Other than this deferred tax asset, the unaudited pro forma condensed combined financial statements do not include the balances or activity of ATTI.

2. Fluent Acquisition

On May 1, 2006, ANSYS completed its acquisition of Fluent Inc., a global provider of CFD-based computer-aided engineering software and services. Under the terms of the merger agreement, ANSYS issued approximately 6,000,000 shares of its common stock, valued at approximately $274 million based on the average closing market price on the two days preceding and the two days following the announcement of the acquisition (February 16, 2006), and paid approximately $315 million in net cash to acquire Fluent. The total purchase price of approximately $598 million includes approximately $9 million in transaction fees. The Company used a combination of existing cash and $198 million from committed bank financing to fund the transaction. The interest rate on the indebtedness associated with the transaction is equal to a margin based on the Company’s consolidated leverage ratio, plus the then current rate based on (a) the British Bankers Association London Inter-Bank Offered Rate for dollar deposits (“LIBOR”) or (b) the higher of (i) the Bank of America prime rate and (ii) the Federal Funds rate plus .50%. The interest rate for the period from May 1, 2006 through June 30, 2006 was set at 6.08% which was based on LIBOR + 1.00%. The debt is scheduled to be repaid over a period of five years and includes covenants related to the consolidated leverage ratio and the consolidated fixed charge coverage ratio, as well as certain restrictions on additional investments and indebtedness.


Preliminary Purchase Price

The total preliminary purchase price is estimated at $598 million, and is comprised of:

 

     (in thousands)

Value of 5,999,948 shares of common stock based on the average closing market price two days before and after the announced acquisition.

   $ 274,018

Cash consideration – at closing, less working capital and other adjustments

     314,961

Acquisition-related transaction costs

     9,467
      

Total preliminary purchase price

   $ 598,446
      

Acquisition-related transaction costs: Acquisition-related transactions costs of $9 million include ANSYS’ estimate of investment banking fees of $6 million, and legal, accounting and other professional fees of $3 million.

Preliminary Purchase Price Allocation

The total preliminary purchase price will be allocated to Fluent tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values as of the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets will be recorded as goodwill. Based upon a preliminary valuation, the total preliminary purchase price was allocated as follows:

 

     (in thousands)  

Cash and other net tangible assets/liabilities

     23,319  

Goodwill

     380,339  

Identifiable intangible assets

     213,900  

Net deferred tax liabilities

     (47,212 )

In-process research and development

     28,100  
        

Total preliminary purchase price allocation

   $ 598,446  
        

The preliminary allocation of the purchase price is based upon a preliminary valuation, as described below, and ANSYS’ estimates and assumptions are subject to change upon final valuation.

Cash and other net tangible assets/liabilities: Cash and tangible assets were recorded at their respective carrying amounts, except for adjustments to deferred revenues and property plant and equipment. ANSYS reduced Fluent’s historical deferred revenues by $19.1 million in the pro forma condensed combined balance sheet to adjust deferred revenue to fair value. ANSYS increased Fluent’s historical net carrying value of certain property by $3.0 million in the pro forma condensed combined balance sheet to reflect its fair market value.


Goodwill: Goodwill represents the excess of the preliminary purchase price over the estimated fair value of tangible and identifiable intangible assets acquired. The fair value of Fluent’s assembled workforce was also estimated and was classified as goodwill in accordance with Statement No. 141. Goodwill amounts are not amortized, but rather are tested for impairment at least annually. In the event that ANSYS determines that the value of goodwill has become impaired, ANSYS will incur an accounting charge for the amount of impairment during the fiscal quarter in which such determination is made. See Note 3.D.

Identifiable intangible assets: Identifiable intangible assets acquired include developed software, trade name and customer contracts and related relationships. Developed software comprises products that have reached technological feasibility. Customer contracts and related relationships represent the underlying relationships and agreements with customers of Fluent’s installed base.

The fair value of intangible assets was based on a preliminary valuation using either the discounted cash flow method, the relief from royalty method, or a combination of the two, as well as discussions with Fluent management and a review of certain transaction-related documents and forecasts. The rate utilized to discount net cash flows to their present values was 17%. This discount rate was determined after consideration of similar companies’ required rates of return, utilizing the Capital Asset Pricing Model.

Estimated useful lives were based on historical experience with technology life cycles, product roadmaps, branding strategy, historical and projected maintenance renewal rates, historical treatment of Fluent and ANSYS acquisition-related intangible assets and ANSYS’ intended future use of the intangible assets. Intangible assets other than the trade name are being amortized using the proportional cash flow method. Fluent’s trade name is one of the most recognized in the computer aided engineering market. The trade name represents a reputation of superior technical capability and strong support service that has been recognized by Fluent’s customers. Because the trade name continues to gain strength in the market today, as evidenced by Fluent’s increased sales over the past several years, the Company expects the trade name to contribute to cash flows indefinitely and, accordingly, has assigned an indefinite life to the trade name. See Note 3.B.

In-process research and development: In-process research and development represents incomplete Fluent research and development projects that had not reached technological feasibility and had no alternative future use when acquired. ANSYS estimates that $28.1 million of the preliminary purchase price represents purchased in-process technology related to projects which had not yet reached technological feasibility and have no alternative future use. The fair value of in-process research and development as determined based on the discounted cash flow method, utilizing a risk adjusted discount rate of 22% and an expectation that net cash inflows related to the in-process projects would commence in 2009. This estimate is subject to change upon final valuation of the in-process research and development. Although in-process research and development costs are not considered in the unaudited pro forma condensed combined statements of operations, such costs will be expensed in ANSYS’ consolidated financial statements as a non-tax deductible charge for the quarter ended June 30, 2006. This has been reflected in the pro forma balance sheet with an adjustment to equity. See Note 3.G.


Pre-acquisition contingencies: Other than certain tax contingencies, ANSYS has currently not identified any pre-acquisition contingencies where a liability is probable and the amount of the liability can be reasonably estimated. If information becomes available prior to the end of the purchase price allocation period, which would indicate that a liability is probable and the amount can be reasonably estimated, such items will be included in the purchase price allocation and result in additional goodwill.

Financing Activities

On May 1, 2006, ANSYS and Fluent borrowed $175 million and $23 million, respectively, from a syndicate of banks. The interest rate on the indebtedness associated with the transaction is equal to a margin based on the Company’s consolidated leverage ratio, plus the then current rate based on (a) the British Bankers Association London Inter-Bank Offered Rate for dollar deposits (“LIBOR”) or (b) the higher of (i) the Bank of America prime rate and (ii) the Federal Funds rate plus .50%. The interest rate for the period from May 1, 2006 through June 30, 2006 was set at 6.08%, which was based on LIBOR + 1.00%. An increase or decrease in the interest rate of 1/8% would affect pro forma interest expense by $235,000 in the annual period and $53,000 in the quarterly period. The debt is scheduled to be repaid over a period of five years and includes covenants related to the consolidated leverage ratio and the consolidated fixed charge coverage ratio, as well as certain restrictions on additional investments and indebtedness.

3. Pro Forma Adjustments

The following pro forma adjustments are included in the unaudited pro forma condensed combined balance sheet:

 

  (A) To record the following adjustments to cash and cash equivalents:

 

     (in thousands)  

To record ANSYS bank loan proceeds

   $ 175,000  

To record Fluent bank loan proceeds

     23,000  

To record acquisition-related transaction costs

     (9,467 )

To record cash paid to Fluent stockholders

     (173,033 )

To record cash paid to Fluent debt/noteholders

     (141,928 )
        

Total adjustments to cash

   $ (126,428 )
        


  (B) To record the difference between the preliminary fair value and the historical amount of intangible assets:

 

(dollars in thousands)    Historical
Amount,
Net
  

Preliminary
Fair

Value

   Increase   

Annual

Amortization

   Three
Months
Amortization
  

Estimated

Useful

Life

Developed software

   $ —      $ 88,000    $ 88,000    $ 17,134    $ 4,391    7 years

Trade name

     —        60,000      60,000      —        —      Indefinite

Customer contracts and related relationships

     —        65,900      65,900      8,731      2,097    9.5 years
                                     

Total identifiable intangible assets

   $ —      $ 213,900    $ 213,900      25,865      6,488   
                             

Fluent historical amortization

              —        —     
                         

Net increase in amortization

            $ 25,865    $ 6,488   
                         

 

  (C) To record the difference between the preliminary fair value and the historical value of property, plant and equipment:

 

(dollars in thousands)    Historical
Amount,
Net
  

Preliminary
Fair

Value

   Increase    Annual
Depreciation
   Three
Months
Depreciation
  

Estimated

Useful

Life

Land

   $ 1,032    $ 1,920    $ 888    $ —      $ —      Indefinite

Depreciable property

     13,762      15,912      2,150      3,218      835    3–20 years
                                     

Total property, plant and equipment

   $ 14,794    $ 17,832    $ 3,038      3,218      835   
                             

Fluent historical depreciation

              2,976      775   
                         

Net increase in depreciation

            $ 242    $ 60   
                         

 

  (D) To eliminate Fluent’s historical goodwill and record the preliminary fair value of goodwill:

 

(in thousands)    Historical
Amount,
Net
  

Preliminary

Fair

Value

   Increase

Goodwill

   $ 37,487    $ 380,339    $ 342,852
                    

 

  (E) To record adjustments for deferred tax balances related to identifiable intangible assets, deferred revenues and acquired net operating losses:

 

(dollars in thousands)    Preliminary
Fair Value
Adjustment
  

Statutory
Tax

Rate

    Deferred
Tax Asset
(Liability)
 

Increase in identifiable intangible assets (excludes trade name)

   $ 153,900    40 %   $ (61,560 )

Decrease in deferred revenues

   $ 19,054    40 %     (7,622 )

ATTI net operating losses (Note 5)

   $ 42,675    35 %     14,936  
             

Net deferred tax liabilities

        $ (54,246 )
             

Fluent’s intellectual property is owned by a U.S.-based legal entity. Additionally, a substantial portion of Fluent’s deferred revenue is recorded on a U.S.-based legal entity. Accordingly, the U.S. statutory tax rate of 40% was utilized to record the deferred tax liabilities for intangible assets and deferred revenues rather than the blended global tax rate of 38%. The ATTI net operating losses relate to U.S. federal taxes and are, therefore, recorded at the federal tax rate of 35%.


  (F) To record the difference between the preliminary fair value and the historical amount of Fluent’s deferred revenue. The preliminary fair value comprises unexpired contractual obligations, primarily for post-contract support. To the extent that these underlying support contracts are renewed, ANSYS will recognize the revenue for the full value of the support contracts over the support periods, the majority of which are one year.

 

(in thousands)    Historical
Amount,
Net
  

Preliminary
Fair

Value

   Decrease  

Deferred revenues

   $ 51,082    $ 32,028    $ (19,054 )
                      

 

  (G) To record the following adjustments to stockholders’ equity:

 

     (in thousands)  

To eliminate Fluent’s historical stockholders’ equity

   $ (39,503 )

To record the issuance of 5,999,948 ANSYS shares in connection with the acquisition

     274,018  

To record the preliminary estimated fair value of in-process research and development

     (28,100 )
        

Total adjustments to stockholders’ equity

   $ 206,415  
        

 

  (H) To record additional amortization expenses related to intangible assets acquired. Amortization expense was estimated based on the ratio of the projected net cash flows of the intangible asset in the current period to the total projected net cash flows over the expected life of the intangible assets – see Note 3.B.

 

  (I) To record additional depreciation related to property, plant and equipment acquired as follows – see Note C:

 

(in thousands)    Annual
Depreciation
  

Three
Month

Depreciation

Selling, general & administrative

   $ 117    $ 29

Cost of sales

   $ 69    $ 17

Research and development

   $ `56    $ 14


  (J) To record the effects of the acquisition on interest expense and interest income as further discussed below:

 

(dollars in thousands)    Estimated
Annual Interest
Rate
    Effect on Annual
Interest Income
(Expense)
    Effect on Three
Months Interest
Income (Expense)
 

Interest expense on ANSYS debt financing of $175 million

   6.08 %   $ (10,811 )   $ (2,524 )

Interest expense on Fluent debt financing of $23 million

   6.08 %     (1,230 )     (197 )

Interest income from ANSYS cash used in acquisition of $126 million

       (3,404 )     (851 )

Interest expense of Fluent on certain pre-acquisition borrowings

       298       —    
                  

Total adjustments to interest expense

     $ (15,147 )   $ (3,572 )
                  

To record interest expense, including amortization of issuance costs associated with the debt to finance the Fluent acquisition at a rate of 6.08%, which represents the actual interest rate at the inception of the bank loan as of May 1, 2006. The pro forma condensed combined statements of operations do not assume reductions in interest based on other-than-scheduled principal repayments of ANSYS’ borrowings or changes in interest rates if ANSYS refinances its borrowings. Since a significant portion of the purchase price was paid from existing cash and short-term investments of ANSYS, the pro forma condensed combined statements of operations assume that earnings are adversely impacted by the foregone interest income on such balances.

Additionally, interest expense on certain pre-acquisition borrowings was removed from the pro forma financial results because such borrowings were paid in full upon consummation of the acquisition.

 

  (K) To record the income tax impact on pro forma adjustments at the statutory rate of 38%. The pro forma combined provision for income taxes does not reflect the amounts that would have resulted had ANSYS and Fluent filed consolidated income tax returns during the periods presented.

 

  (L) To record the elimination of intercompany and related party assets and liabilities.

 

  (M) To record the current and long-term portions of debt associated with the financing obtained by ANSYS and Fluent in connection with the transaction.


  (N) To allocate certain expenditures to cost of sales and research and development, that were historically recorded in the Fluent financial statements as selling, general and administrative, to be consistent with ANSYS’ historical financial statement presentation, as follows:

 

(in thousands)    Annual
Reclassification
   

Three Month

Reclassification

 

Selling, general & administrative

   $ (5,260 )   $ (1,353 )

Cost of sales

   $ 3,133     $ 768  

Research and development

   $ 2,127     $ 585  

 

  (O) To record deferred financing costs of $1,871,000 related to the costs of obtaining debt financing associated with the acquisition.

4. Pro Forma Earnings Per Share

The pro forma basic and diluted earnings per share are based on the weighted average number of shares of ANSYS common stock outstanding and are adjusted for additional common stock issued to Fluent’s stockholders as part of the acquisition.

 

     Weighted Average Shares
(in thousands)    Year Ended
December 31, 2005
   Three Months Ended
March 31, 2006

Basic, as reported

   31,749    32,122

Stock issued in Fluent acquisition

   6,000    6,000
         

Basic, pro forma

   37,749    38,122
         

Diluted, as reported

   33,692    34,165

Stock issued in Fluent acquisition

   6,000    6,000
         

Diluted, pro forma

   39,692    40,165
         

5. Other Assets Acquired

In connection with its acquisition of Fluent, ANSYS also acquired Fluent’s parent, ATTI. ATTI was primarily a shell entity with no assets or liabilities other than the tax attributes of its subsidiaries. These tax attributes included net operating loss carryforwards of approximately $42.7 million. The related deferred tax assets had been fully reserved in ATTI’s historical financial statements. These net operating loss carryforwards will have value to ANSYS post-acquisition and the reduction of the related valuation reserve will result in an increase in deferred tax assets and a decrease in goodwill of $14.9 million. This deferred tax asset is reflected as an adjustment to the unaudited pro forma condensed combined balance sheet as indicated in Note 3.E. Other than this deferred tax asset, the unaudited pro forma condensed combined financial statements do not include the balances or activity of ATTI.