ITEM 1: BUSINESS
ANSYS, Inc. develops, markets and supports software solutions for design analysis and optimization. Engineering analysts and design engineers use the Company's software to accelerate product time to market, reduce production costs, improve engineering processes and optimize product quality and safety for a variety of manufactured products. The ANSYS(R) product family features open, flexible architecture that permits easy integration and collaboration within customers' enterprise-wide engineering systems.
Since its founding in 1970 as Swanson Analysis Systems, Inc. ("Swanson Analysis"), the Company has become a technology leader in the market for computer-aided engineering ("CAE") analysis software. The Company has long- standing relationships with customers in many industries, including automotive, aerospace, consumer goods and electronics. Using the Company's products, engineers can construct computer models of structures, compounds, components or systems to simulate performance conditions and physical responses to varying levels of stress, pressure, temperature and velocity. This helps reduce the time and expense of physical prototyping and testing.
The Company's product line ranges from ANSYS/Multiphysics, a sophisticated multi-disciplinary CAE tool for engineering analysts, to its DesignSpace(R) products, innovative computer-aided design ("CAD")-integrated design optimization products for design engineers. The Company's individual design and analysis software programs, all of which are included in the ANSYS/Multiphysics program, are available as subsets or standalone products. The Company's multiphysics products, and maintenance sold in connection with those products, comprise the core of its business and accounted for a substantial portion of the Company's revenue in 1998, 1997 and 1996. The Company's CAD integration products provide design optimization tools for use directly within a particular CAD product. CAD integration products are accessed from the graphical user interface of, and operate directly on the geometry produced within, the CAD product. The output from these programs may be read into any of the products in the ANSYS product family. The Company's product family features a unified database, a wide range of analysis functionality, a consistent, easy-to-use graphical user interface, support for multiple hardware platforms and operating systems (including Windows 95, Windows NT and UNIX), effective user customization tools and integration with leading CAD systems. The Company's products are developed using the Company's ISO 9001-certified quality system.
The Company markets its products principally through its global network of 35 independent regional ANSYS Support Distributors ("ASDs"), which have 67 offices in 26 countries.
PRODUCT DEVELOPMENT
The Company makes significant investments in research and development and emphasizes accelerated new product releases. The Company's product development strategy centers on ongoing development and innovation of new technologies to increase productivity and provide solutions that customers can integrate into enterprise-wide
engineering systems. The Company's product development efforts focus on extensions of the ANSYS product family with new functional modules, further integration with CAD products and the development of new products based on object-oriented technology. The Company's products run on the most widely used engineering computing platforms and operating systems, including Windows 95, Windows NT and most UNIX workstations, as well as on supercomputers such as the Cray.
During 1998, the Company achieved the following with respect to major product development activities and releases:
. The release of ANSYS 5.5, a new and enhanced version of the Company's flagship multiphysics product, and all component products. Major enhancements in this release include lower and higher order flexible-to- flexible contact; increased solution power for highly nonlinear structural analysis; new turbulence models for computational fluid dynamics; nonlinear harmonic analysis for electromagnetic applications; and topological optimization.
. ANSYS/ProFEA and ANSYS Connection for Pro/ENGINEER enhancement releases were available subsequent to Parametric Technology Corporation's ("Parametric Technology") release of its new versions of Pro/ENGINEER. These products enable users to access Pro/ENGINEER geometry directly from ANSYS products.
. The release of commercial versions of DesignSpace 4.0. These products are developed using a C++ object-oriented product development environment . The current release of the DesignSpace products provides expanded functionality to associatively support geometry created in Mechanical Desktop, SolidWorks and Unigraphics, and support solid models created in any ACIS or Parasolid modeling CAD program. The software allows engineers to quickly and easily simulate design performance and provides tighter integration between design and analysis, as well as enhanced solving capabilities.
The Company's total research and development expense was $11.6 million, $11.0 million and $9.8 million in 1998, 1997 and 1996 or 20.6%, 21.8% and 20.8% of total revenue, respectively. As of December 31, 1998, the Company's product development staff consisted of 106 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 help for the products; implement development enhancement tools, software configuration management and product licensing processes; and conduct regression tests of ANSYS products for all supported platforms.
PRODUCT QUALITY
During 1998, the Company continued to maintain ISO 9001 certification for its quality system. This standard applies to all of the Company's commercial software products and covers all product-related activities, from establishing product requirements to customer service practices and procedures.
In accordance with the ISO 9001 certification for its quality system, the Company's employees perform all product development and support tasks according to predefined quality plans, procedures and work instructions. These plans define for each project the methods to be used, the responsibilities of project participants and the quality objectives to be met. To ensure that the Company meets or surpasses the IS0 9001 standards, the Company establishes quality plans for all products 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 its multiphysics products and services primarily through its global ASD network. This network provides the Company with a cost-effective, highly specialized channel of distribution and technical support. Approximately 82% of the Company's revenue in 1998 was derived through the ASDs.
At December 31, 1998, the ASD network consisted of 35 independent distributors in 67 locations in 26 countries, including 16 in North America, 8 in Europe and 11 throughout the Asia-Pacific region and the remainder of the world. The ASDs sell ANSYS and DesignSpace 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 ASD certification process helps to ensure that each ASD has the ongoing capacity to adequately represent the Company's product line and provide an acceptable level of training, consultation and support.
The Company also has a sales management infrastructure in place to work with the ASDs to develop a more enterprise-wide focused sales approach, to implement a worldwide major account strategy and to provide additional support in strategic locations through the presence of direct sales offices. As of December 31, 1998, the Company's sales management organization consisted of a North American Vice President of Sales, supported by four Regional Sales Directors and four Major Account Representatives; an International Vice President of Sales and a Regional Sales Director; and a European Managing Director supported by three Regional Sales Directors and one Strategic Account Manager.
During 1998, the Company continued to expand its direct global sales infrastructure through the establishment of additional regional sales offices in Houston, Texas; Minneapolis, Minnesota; New England and China. The Company also continued to invest in its previously established strategic sales offices in the United Kingdom, Michigan and Japan. In total, these offices employ 26 persons who are responsible for the implementation of sales and marketing initiatives and administration in those geographic areas designed to support the Company's overall revenue growth and market share expansion strategies.
During fiscal 1998, the Company also continued to expand the reseller channel for both its ANSYS and DesignSpace products. This channel compliments the ASD network by establishing a broader user base for the Company's products and services. As of December 31, 1998, the Company had signed agreements with 172 resellers. All resellers are required to meet the Company's standards for sales and customer support by ensuring they have appropriately trained marketing and technical personnel.
The Company's products have an installed base of approximately 53,000 seats at commercial sites and approximately 97,000 seats at university sites worldwide. The Company's products are utilized by organizations ranging in size from small consulting firms to the world's largest industrial companies. No single customer accounted for more than 1.4% of the Company's revenue in fiscal 1998.
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 31,1998 ("1998 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.
Additionally, countries in the Asia-Pacific region, including Japan, have experienced weaknesses in their currency, banking and equity markets throughout most of 1998. To the extent that such trends continue, these economic weaknesses could adversely affect consumer demand for the Company's products and ultimately the Company's financial position or results of operations.
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 providers. The Company believes these relationships allow it to accelerate the incorporation of advanced technology into the ANSYS product family, gain access to important new markets, expand the Company's sales channel, develop specialized product applications and provide direct integration with leading CAD systems.
One such example is the Company's software license agreement with Livermore Software Corporation under which Livermore 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, Livermore assists in the integration of the LS/DYNA software with the Company's pre- and postprocessing capabilities and provides updates and problem resolution in return for a share of revenue from sales of ANSYS/LS-DYNA.
The Company has technical and marketing relationships with leading CAD vendors, such as Parametric Technology, Autodesk, Computervision, Intergraph, EDS/Unigraphics, SolidWorks and Dassault Systemes, to provide direct links between the vendors' CAD packages. These links facilitate the transfer of electronic data models between the CAD system and ANSYS products. During 1998, the Company also entered into a joint marketing and development agreement with Tanner EDA, a leader in PC-based design software for MicroElectro Mechanical Systems, aimed at accelerating the growth of microsystem product design to deliver a new generation of design and analysis capabilities.
The Company has established relationships with leading suppliers of computer hardware, including Hewlett-Packard, Compaq, Silicon Graphics/Cray, Sun Microsystems, Intergraph, IBM, Dell and Intel. The relationships typically provide the Company with joint marketing and advertising, Internet links with the hardware partner's home page and reduced equipment costs.
The Company's Enhanced Solution Provider Program actively encourages specialized developers of niche software solutions to use ANSYS as a development platform for their applications. Examples of companies using the products include COMET Acoustics, which uses ANSYS/PrepPost/TM/ to run its acoustic solver for the automobile industry; AC Technologies, which provides an interface to ANSYS in connection with its plastic injection mold flow analysis product; Materials Engineering Research Laboratory, Ltd., which offers a bundled product consisting of their FLEXPAC solver, and ANSYS/PrepPost/TM/ that enables users to make fatigue calculations an integral part of their design process for a wide range of elastomeric components. In most cases, the sale of the Enhanced Solution Providers' products is accompanied by the sale of an ANSYS product.
COMPETITION
The CAD, CAE and computer-aided manufacturing ("CAM") markets are intensely competitive. In the traditional CAE market, the Company's primary competitors include MacNeal-Schwendler Corporation, Hibbitt, Karlsson and Sorensen, Inc. and MARC Analysis Research Corporation. The Company also faces competition from smaller vendors of specialized analysis applications in fields such as computational fluid dynamics. In addition, certain integrated CAD suppliers such as Parametric Technology, Structural Dynamics Research Corporation and Dassault Systemes provide varying levels of design analysis and optimization and verification capabilities as part of their product offerings.
The entrance of new competitors would likely intensify competition in all or a portion of the overall CAD, CAE and CAM markets. Some of the Company's current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well-established relationships with current and potential customers of the Company. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share or that competition will increase as a result of software industry consolidation. Increased competition may result in price reductions, reduced profitability and loss of market share, any of which would materially adversely affect the Company's business, financial condition and results of operations.
The Company believes that the principal competitive factors affecting its market include ease of use; flexibility; quality; ease of integration into CAD systems; file compatibility across computer platforms; range of supported computer platforms; performance; price and cost of ownership; customer service and support; company reputation and financial viability; and effectiveness of sales and marketing efforts. Although the Company believes that it currently competes effectively with respect to such factors, there can be no assurance that the Company will be able to maintain its competitive position against current and potential competitors. There also can be no assurance that CAD software companies will not develop their own analysis software, acquire analysis software from companies other than the Company or otherwise discontinue their relationships with the Company. If any of these events occur, the Company's business, financial condition and results of operations could be materially adversely affected.
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions, and technical measures to protect its proprietary rights in its products. The Company distributes its ANSYS software under software license agreements that grant customers nonexclusive licenses for the use of the Company's products, which are typically nontransferable. Although the Company distributes its products primarily through the ASDs, licenses of the Company's products are directly between the Company and end users. Use of the licensed software is usually restricted to the customer's internal operations on designated computers at specified sites unless the customer obtains a site license for its use of the software. Software and hardware security measures are also employed to prevent unauthorized use of the Company's software, and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction of the software. Customers may either purchase a paid-up perpetual license of the technology with the right to purchase annually ongoing maintenance, support and updates, or may lease the product on an annual basis for a fee which includes the license, maintenance, support and upgrades.
For certain software such as DesignSpace and ANSYS/ED, the Company primarily relies on "shrink-wrapped" licenses that are not signed by licensees. The enforceability of these types of agreements under the laws of certain 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 a federal trademark protection for ANSYS and DesignSpace. The Company has also obtained trademark registrations of ANSYS and DesignSpace in a number of foreign countries and is in the process of seeking such registration in other foreign countries.
Most employees of the Company have signed a Covenant Agreement under which they have agreed not to disclose trade secrets or confidential information, or to engage in or become connected with any business which is competitive with the Company anywhere in the world while employed by the Company (and in some cases for specified periods thereafter), and that any products or technology created by them during their term of employment is the property of the Company. In addition, the Company requires all ASDs to enter into agreements not to disclose the Company's trade secrets and other proprietary information.
Despite these precautions, there can be no assurance that misappropriation of the Company's technology will not occur. Further, there can be no assurance that copyright and trade secret protection will be available for the Company's products in certain countries, or that restrictions on competition will be enforceable.
The software development industry is characterized by rapid technological change. Therefore, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections of its technology which may be available.
The Company is not aware that any of its products infringe 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 in the Company's market segment grow and the functionality of products in different market segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company.
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, 1998, the Company had 260 full time employees. At that date, there were also approximately five contract personnel and co-op students providing ongoing development services and technical support. The Company believes that its relationship with its employees is good.
ITEM 2:
ITEM 2: PROPERTIES
The Company's executive offices and those related to product development, marketing, production and administration are located in a 107,000 square foot office facility in Canonsburg, Pennsylvania, which is leased for an annual rent of approximately $1,227,000. The Company also leases office space in various locations throughout the world. ANSYS's subsidiaries lease office space for their operations. 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.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to various legal proceedings from time to time that arise in the ordinary course of business activities. Each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company.
ITEM 4:
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 1998.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to page 35 and the section captioned "Corporate Information" appearing in the Company's 1998 Annual Report to Stockholders.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 1 of the Company's 1998 Annual Report to Stockholders.
ITEM 7:
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 10 through 19 of the Company's 1998 Annual Report to Stockholders, including the Important Factors Regarding Future Results.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages 20 through 34 of the Company's 1998 Annual Report to Stockholders.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10:
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 1999 Proxy Statement and is set forth under "Information Regarding Directors" and "Information Regarding Executive Officers" therein.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's 1999 Proxy Statement and is set forth under "Executive Compensation" therein.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Company's 1999 Proxy Statement and is set forth under "Principal and Management Stockholders" therein.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Company's 1999 Proxy Statement and is set forth under "Certain Transactions" therein.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Annual Report on Form 10-K:
1. Financial Statements: The following Consolidated Financial Statements of ANSYS, Inc. and Report of PricewaterhouseCoopers LLP, Independent Accountants, are incorporated by reference to pages 20 through 33 of the Registrant's 1998 Annual Report to Stockholders:
- Report of PricewaterhouseCoopers LLP, Independent Accountants - Consolidated Balance Sheets as of December 31, 1998 and 1997 - Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements
2. Financial Statement Schedules: The following financial statement schedule for ANSYS, Inc. is filed on page 13 of this Annual Report and should be read in conjunction with the Consolidated Financial Statements of ANSYS, Inc.
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 schedules are filed as part of, or incorporated by reference into, this Annual Report.
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this Annual Report.
(c) Exhibits
The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the attached Exhibit Index on page 11 of this Annual Report.
(d) Financial Statement Schedules
The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 14 (a) 2 as set forth above.
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 22, 1999 By: /s/ Peter J. Smith ------------------------------ Peter J. Smith Chairman, President and Chief Executive Officer
Date: March 22, 1999 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 Peter J. Smith, 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 and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.
EXHIBIT INDEX -------------
- -------------------------- * Indicates management contract or compensatory plan, contract or arrangement.
- ---------------------------
* Indicates management contract or compensatory plan, contract or arrangement.
SCHEDULE II
ANSYS, INC.
Valuation and Qualifying Accounts