SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Report on Form 6-K dated June 1, 2004
Commission File No. 0-28578
DASSAULT SYSTEMES S.A.
----------------------
(Name of Registrant)
9, Quai Marcel Dassault, B.P. 310, 92156 Suresnes Cedex, France
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(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
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Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Yes No X
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Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes No X
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Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___________
ENCLOSURES:
Dassault Systemes S.A. (the "Company") is furnishing under
cover of Form 6-K a Report of the Board of Directors for the
Annual Meeting of Shareholders on June 2, 2004
and the consolidated financial statements for the fiscal year ended
December 31, 2003 prepared in accordance with U.S. GAAP.
DASSAULT SYSTEMES
A French Societe anonyme with a share capital of(euro)113,403,665
Registered office: 9, Quai Marcel Dassault - 92150 SURESNES
322 306 440 R.C.S. NANTERRE
REPORT OF THE
BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
ON JUNE 2, 2004
Year ended December 31, 2003
------------
Dear Shareholders,
Before submitting the Dassault Systemes and consolidated financial statements
for the year ended December 31, 2003 for your approval and your decision
regarding allocation of earnings, we are providing you with a summary of
Dassault Systemes and its subsidiaries ("the Company") activities over the past
year, prospects for the future and other information required by law.
DASSAULT SYSTEMES, S.A. with a share capital of 114,570,841 euros - * page 1 *
CONSOLIDATED RESULTS AND BUSINESS OF THE DASSAULT SYSTEMES GROUP
----------------------------------------------------------------
OVERVIEW
--------
Summary Financial Results
In 2003 total revenue decreased 2.5% to (euro)754.8 million from (euro)774.1
million in 2002, but in constant currencies total revenue increased 5%. Software
revenue decreased 3.6% to (euro)645.6 million, but increased 4% in constant
currencies. Service revenue increased 4.8% to (euro)109.2 million in 2003 and
increased 13% in constant currencies. Process-centric revenue, accounting for
83% of our consolidated revenue, decreased 2.9% in 2003 to (euro)629.1 million
(excluding (euro)1.4 million of inter-segment sales) and included PDM revenue,
which increased 14.4% to (euro)94.6 million. In constant currencies,
Process-centric revenue increased 2% and PDM revenue increased 21% in 2003.
Design-centric revenue, accounting for 17% of our consolidated revenue, amounted
to (euro)125.7 million in 2003 (excluding (euro)0.4 million of inter-segment
sales) compared to (euro)126.4 million in 2002 (excluding (euro)0.5 million of
inter-segment sales). In constant currencies, Design-centric revenue increased
17% in 2003. Operating income totaled (euro)212.7 million, representing an
operating margin of 28.2% in 2003, compared to (euro)203.0 million, representing
an operating margin of 26.2% in 2002. Net income totaled (euro)135.4 million or
diluted net income per share of (euro)1.18 in 2003, compared to (euro)126.4
million or (euro)1.09 per share in 2002, representing an increase of 8.3% on a
per share basis.
Excluding amortization of intangibles incurred in business combinations
("acquisition costs"), our net income for the year ended December 31, 2003,
totaled (euro)140.4 million with diluted net income per share of (euro)1.22,
compared to (euro)136.0 million or (euro)1.17 per share in 2002, representing an
increase of 4.3% on a per share basis. We believe that this supplemental
information is an important indicator of operational strength and performance of
our business and is used by analysts, investors and other interested parties.
However, operating income, net income and diluted net income per share excluding
acquisition costs, as defined above, is not a U.S. generally accepted accounting
principles measurement and should not be considered as an alternative to amounts
reported under U.S. generally accepted accounting principles. See "-- Results of
Operations -- Breakdown of Revenues" and "-- Consolidated Data".
See our discussion of non-GAAP financial measures in "Growth on a constant
currency basis" and "Results of Operations".
Executive Overview
We set two key objectives at the outset of 2003. The first was to increase our
market share within the PLM market. Our second objective for 2003 was to
increase our operating margin before acquisition costs by approximately 1% while
also continuing to invest in growing our research and development resources. We
were pleased to accomplish these objectives.
Market position. In U.S. dollars (used by industry consultants to
measure market share), our revenues increased 17% in 2003, leading to an
estimated market share gain of two percentage points to an estimated 23%. We
were ranked number one in PLM in 2002 with a market share of 21% and believe we
continue to be number one by a solid margin for 2003.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 2 *
Operating profitability. Our second key objective was to improve our
operating margin before acquisition costs by one percentage point in 2003. This
objective was achieved with our operating margin before acquisition costs
improving 1.3 percentage points to 29.0% for 2003, from 27.7% in 2002. And on a
constant currency basis, we also increased our operating margin before
acquisition costs by 1.0 percentage point. We achieved our objective by focusing
on improving the efficiency of our operations while continuing to invest in our
business. We increased average staffing by 3.5%, with a strategic focus on
increasing research and development. Our average staffing in research and
development increased 5.4% in 2003 and represented 49% of our average employee
base for 2003.
Growth on a constant currency basis. The significant currency movements
in 2003 masked the underlying improvement in our level of activity. We absorbed
a seven-percentage point reduction in our revenue growth rate due to the
strengthening of the euro. As reported, total revenue decreased 2.5% to
(euro)754.8 million for 2003, with software revenue decreasing 3.6% to
(euro)645.6 million for 2003. However, total revenue and software revenue
increased 5% and 4%, respectively, in constant currencies for 2003. More
particularly, our PDM business increased 21% and our Design-centric business
increased 17% in constant currencies. From a regional perspective, we
experienced strong growth in both the Americas and Asia, with revenues from the
Americas growing 15% and Asia growing 14% in constant currencies.
We use constant currency revenue growth to evaluate our financial performance in
comparison to prior periods and as a measure of expected growth in planning and
in setting objectives for future periods. We believe this measure is an
important indicator of our progress and outlook because it provides a better
gauge of the level of change in business activity as it eliminates any changes
arising solely from currency fluctuations. The U.S. dollar weakened 20% against
the euro for 2003, with the U.S. dollar to euro average exchange rate of $1.13
per euro for 2003, compared to $0.94 per euro for 2002. The Japanese yen
weakened by 11% versus the euro resulting in a Japanese yen to euro average
exchange rate of JPY131 per euro for 2003 compared to JPY118 per euro for 2002.
The decreases in the value of the U.S. dollar and Japanese yen in 2003
negatively impacted our operating profit and earnings per share. The total
currency impact on operating profit before acquisition costs was (euro)14.4
million or 7% of total operating profit excluding acquisition costs, with
(euro)7.0 million attributable to the U.S. dollar and (euro)7.4 million arising
from the Japanese yen. On a constant currency basis and excluding acquisition
costs, operating profit increased 9% in 2003.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 3 *
Year ended December 31, 2003
----------------------------------------------------------
Operating Operating Operating
Revenue Expenses Income Margin
------- -------- ------ ------
(in millions of euro, except %)
Information on a reported basis.......... 754.8 542.1 212.7 28.2%
Growth................................... (2)% (5)% 5% 2
percentage
points
Amortization of intangibles incurred in
business combinations................. 0.0 (5.9) 5.9
Excluding amortization of intangibles
incurred in business combinations..... 754.8 536.2 218.6 29.0%
Growth excluding amortization of
intangibles incurred in business
combinations.......................... (2)% (4)% 2% 1
percentage
point
US$ impact
US$/(euro)from $0.94 to $1.13........ 45.1 38.1 7.0
JPY/Won impact
JPY/(euro)from JPY118 to JPY131...... 12.0 4.6 7.4
------- -------- ------
Total.................................... 57.1 42.7 14.4
Excluding amortization of intangibles
incurred in business combinations and
currency exchange..................... 811.9 578.9 233.0 28.7%
Growth excluding acquisition costs 1
percentage
and currency exchange................. 5% 3% 9% point
Changes in the value of foreign currencies compared to the euro also had an
impact on our short-term assets, as those held in foreign currencies are
translated to euro at the end of period exchange rate. In total, the weakening
of our major foreign currencies resulted in a (euro)0.13 reduction in earnings
per share (EPS), excluding acquisition costs to (euro)1.22 per diluted share. As
a result, we reported a growth rate for earnings per share, excluding
acquisition costs of 4% for 2003 rather than 15%.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 4 *
Year ended December 31, 2003
----------------------------
Net Profit EPS
---------- ---
(in millions of euro, except %)
Information on a reported basis...................................... 135.4 1.18
Growth............................................................... 7% 8%
Amortization of intangibles incurred in business combinations........ 5.9 0.05
Tax on amortization of intangibles incurred
in business combinations........................................ (0.9) (0.01)
------- -------
Excluding amortization of intangibles
incurred in business combinations............................... 140.4 1.22
Growth excluding amortization of intangibles
incurred in business combinations............................... 3% 4%
Currency exchange impact on operating income......................... 14.4 0.13
Currency exchange impact on financial revenue and other.............. 8.1 0.07
Tax on currency exchange (tax rate = 35.7%).......................... (8.0) (0.07)
------- -------
Total................................................................ 14.5 0.13
Excluding amortization of intangibles incurred in business
combinations and currency exchange.............................. 154.9 1.35
Growth excluding amortization of intangibles incurred in business
combinations and currency exchange.............................. 14% 15%
--------------
We calculate changes in revenues and expenses on a constant currency basis by
applying 2002 average market exchange rates to 2003 balances. We have used the
same methodology for the comparison of prior periods. For 2002, the average
annual exchange rate for the U.S. dollar to euro was $0.94 to (euro)1.00 and the
average annual exchange rate for the Japanese yen to euro was JPY118 to
(euro)1.00. For 2001, the average annual exchange rate for the U.S. dollar to
euro was $0.90 to (euro)1.00 and the average annual exchange rate for the
Japanese yen to euro was JPY109 to (euro)1.00.
Quarterly Trends. Our revenue performance improved as 2003 progressed
with year over year growth comparisons improving with each quarter of the year.
We saw an improvement in revenue growth on an as reported basis and in constant
currencies. Revenue in the second half of the year increased 8% compared to a 3%
increase in the first half of the year, on a constant currency basis.
Year ended December 31, 2003
--------------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(Unaudited, in millions of euro, except %)
Revenue..................................... 169.4 181.3 176.3 227.8 754.8
Growth...................................... (7)% (5)% 0% 2% (2)%
US$ impact................................ 11.4 12.8 7.7 13.2 45.1
JPY/Won impact............................ 2.6 4.0 3.6 1.8 12.0
Revenue excluding currency exchange impact 183.4 198.1 187.5 242.8 811.9
Growth excluding currency exchange impact... 1% 4% 7% 8% 5%
--------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 5 *
Our improvement was also reflected in our seat growth performance during 2003.
For the full year, total seats licensed decreased 1%. However, while seats
licensed decreased 9% for the first half of the year, total seats licensed
increased 8% during the second half of the year.
Recurring Revenue. An important attribute of our financial model is our
high percentage of recurring revenue. We have had, and continue to have, a high
level of recurring software revenue. In 2003, recurring revenue represented 51%
of our total software revenue, which in turn represented 86% of total revenue.
Financial Position. We continued to have a strong financial position,
with cash and short-term investments totaling (euro)439.7 million at December
31, 2003. During the year, we added on a net basis (euro)51.3 million to cash
and short-term investments. This figure is after cash dividends totaling
(euro)37.2 million and stock repurchases totaling (euro)29.5 million in 2003.
Economic and Other Business Indicators. A number of factors have an
influence on our revenue growth rate, including economic factors. The overall
economic environment has an impact on the level of activity of our businesses.
As a software company we also look at overall information technology spending.
In addition, our customers are largely composed of manufacturing companies. We,
therefore, find it useful to look at industrial investment spending trends. In
Europe, which represented approximately 46% of our revenues in 2003, industrial
spending has trended down for two consecutive years and this clearly had an
impact on our results in the region. However, we are also a critical tool for
innovation and productivity gains for our customers. Therefore, in the Americas,
in spite of modest levels of investment spending in the U.S., for example, in
2003, we had strong revenue growth of approximately 15% in constant currencies.
We have experienced strong revenue growth in Asia, in part explained by the good
level of industrial investment spending in Japan, and the decision to invest in
productivity gains that we bring to manufacturers. For 2003, business investment
increased 2.8% in the U.S. and 8.7% in Japan, while it declined 1.7% in France.
Industrial production increased 0.3% in the U.S., 3.2% in Japan, and 0.2% in
Germany, while decreasing 0.8% in France for 2003. Overall growth in the economy
as measured by GDP was 3.1% in the U.S. and 2.3% in Japan for 2003, while France
grew only 0.1% and Germany decreased 0.1%.
In addition to economic indicators, our level of business activity is also
affected by structural trends within the end markets we address. For example, in
the automotive and aerospace industries, spending decisions in part reflect the
timing of the introduction of new automotive processes or plans for new aircraft
programs.
Financial Overview
Revenue.
Our total revenue is comprised of software licensing and service and other
revenue. Our primary source of revenue is derived from the licensing of our
software products, which accounted for 86%, 87% and 86% of our total revenue in
2003, 2002 and 2001, respectively. Our software solutions are marketed and
distributed principally by IBM, as well as through a network of other
distribution partners and a direct sales force for certain products. We generate
service revenue through the consulting and technical assistance we provide to
our customers. Revenue generated through our marketing and distribution
agreement with IBM represented approximately 59% of our total revenue in 2003
compared with 61% in 2002 and 60% in 2001. See "Operating Results -- Results of
Operations -- Breakdown of
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 6 *
Revenues". The royalties we receive from IBM for their distribution of CATIA,
ENOVIA, SMARTEAM and DELMIA products include both up-front license fees and
royalties related to periodic fees corresponding to either rental arrangements
or maintenance.
We also sell our CATIA, ENOVIA, SMARTEAM and DELMIA products either directly or
through other partners. They are mainly licensed under one of two payment
structures: (i) "rental" licenses, for which the customer pays equal periodic
fees to keep the license active, and (ii) "primary fee" licenses, for which the
customer pays an initial fee (a "primary" fee). Customers who pay a primary fee
subsequently pay periodic fees (generally annual). For both forms of license,
periodic fees entitle the customer to corrective maintenance and product updates
without additional charge. Product updates include improvements to existing
products but do not cover new products. For a breakdown of revenue between
initial fees and periodic fees, see Note C to our consolidated financial
statements.
Software licenses offered by SolidWorks require the payment of a one-time fee.
Access to upgrades and maintenance require payment of an annual subscription
fee.
For software components sold by Spatial, we receive license and maintenance fees
as well as royalties on revenue derived from the sale of software products
including embedded Spatial components.
Recurring software revenue represented 51%, 48% and 45% of total software
revenue in 2003, 2002 and 2001, respectively. Recurring software revenue is
comprised of rental fees (mainly to large customers) and maintenance fees.
We generate service revenue mainly from consulting services in methodology and
engineering services. In addition, we generate service revenue from sales
activities as an IBM partner in France, Belgium and Switzerland, where we act
(through one of our French divisions and through our Swiss subsidiary) as IBM's
commercial partner for the sale of CATIA, ENOVIA and SMARTEAM licenses. We
record the commissions we receive from IBM for this activity as service revenue.
The division in charge of this activity also resells computer hardware, but in
this case we record only the gross margin from the sales as service revenue.
Expenses.
Research and development expenses represented 29%, 29% and 28% of total revenue
in 2003, 2002 and 2001, respectively. Research and development expenses
primarily include personnel costs for specialists in software architecture and
various application fields such as mechanical design, manufacturing, mechanical
engineering and computer graphics, as well as for specialists with significant
experience and knowledge of our target industrial sectors. Research and
development expenses also include computer rental expenses, the depreciation and
cost of maintenance related to computer hardware used in research and
development, development tools, networking and communication expenses.
Costs for research and development of software are expensed when incurred, if
the analysis of technical criteria does not qualify them as a capital asset.
Since our founding in 1981, implementation of this accounting policy has
resulted in all such costs being expensed in the period in which they were
incurred.
Marketing and sales expenses represented 22%, 22% and 22% of total revenue in
2003, 2002 and 2001, respectively. Marketing and sales expenses are derived
principally from our marketing activities in support of IBM and the SolidWorks,
DELMIA, SMARTEAM and Spatial Corp. direct and indirect sales channels. We also
incur marketing and sales expenses from our activities as an IBM business
partner in France, Belgium and Switzerland. Marketing and sales expenses
primarily consist of personnel costs, travel expenses and marketing
infrastructure costs, such as computer and office rental expenses, as well as
sales commissions.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 7 *
Amortization of intangibles incurred in business combinations includes expenses
for research and development projects that have not reached the technical
feasibility stage or are considered to have no future value. Amortization of
intangibles incurred in business combinations also includes amortization of
goodwill (prior to fiscal year 2002) and amortization of technology acquired in
connection with business combinations.
RESULTS OF OPERATIONS
---------------------
For the year ended December 31, 2003, we recorded revenue of (euro)754.8 million
and net income of (euro)135.4 million, representing diluted net income per share
of (euro)1.18. These results included acquisition costs of (euro)5.9 million
((euro)5.0 million after tax). Excluding acquisition costs, our net income for
the year ended December 31, 2003, totaled (euro)140.4 million with diluted net
income per share of (euro)1.22. The table below sets forth key figures from our
statements of income.
Year ended December 31,
---------------------------------------------
2003 2002 2001
-------- -------- -------
(in millions of euro, except per share data)
Revenue ............................................... (euro)754.8 (euro)774.1 (euro)746.1
Gross profit........................................... 643.4 653.3 638.7
Operating income....................................... 212.7 203.0 162.6
Net income ............................................ 135.4 126.4 88.7
Basic weighted average number of common shares
outstanding.......................................... 113.0 114.1 113.7
Diluted weighted average number of common shares
outstanding.......................................... 114.7 116.2 116.7
Basic net income per share............................. 1.20 1.11 0.78
Diluted net income per share .......................... 1.18 1.09 0.76
Financial information excluding amortization of
------------------------------------------------
intangibles incurred in business combinations(1)
---------------------------------------------
Operating income....................................... 218.6 214.1 221.0
Net income............................................. 140.4 136.0 144.0
Basic net income per share............................. 1.24 1.19 1.27
Diluted net income per share .......................... 1.22 1.17 1.23
----------------
(1) We believe that this supplemental information is an important indicator of
operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S. generally accepted accounting principles
measurement and should not be considered as an alternative to amounts reported
under U.S. generally accepted accounting principles. Amortization of intangibles
incurred in business combinations (acquisition costs) totaled (euro)5.9 million
in 2003 ((euro)5.0 after tax) compared with (euro)11.1 million in 2002
((euro)9.6 million after tax), and consisted entirely of the amortization of
acquired technology, and (euro)58.4 million in 2001 ((euro)55.3 million after
tax).
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 8 *
The table below sets forth the contribution of the Process-centric and
Design-centric segments to our revenue, gross profit, operating income and net
income (see Notes A and Q to our consolidated financial statements).
Year ended December 31,
------------------------------------------------------------------------
2003 2002 2001
------------------ ------------------ --------------------
(in millions of euro, except percentages)
Revenue
Process-centric............... (euro)630.5 83.5% (euro)649.4 83.9% (euro)617.9 82.8%
Design-centric................ 126.1 16.7% 126.9 16.4% 128.2 17.2%
Elimination................... (1.8) (0.2%) (2.2) (0.3%)
----- ----- ----- ----- ----- -----
Total................... 754.8 100.0% 774.1 100.0% 746.1 100.0%
===== ===== ===== ===== ==== =====
Gross profit
Process-centric............... 530.3 82.4% 541.6 82.9% 522.4 81.8%
Design-centric................ 114.4 17.8% 113.3 17.3% 116.3 18.2%
Elimination................... (1.3) (0.2%) (1.7) (0.2%)
----- ----- ----- ----- ----- -----
Total................... 643.4 100.0% 653.3 100.0% 638.7 100.0%
===== ===== ===== ===== ==== =====
Operating income..
Process-centric............... 175.4 82.5% 170.9 84.2% 126.6 77.8%
Design-centric................ 37.3 17.5% 32.1 15.8% 36.0 22.2%
----- ----- ----- ----- ----- -----
Total................... 212.7 100.0% 203.0 100.0% 162.6 100.0%
===== ===== ===== ===== ==== =====
Net income
Process-centric............... 111.2 82.1% 104.2 82.4% 63.8 72.0%
Design-centric................ 24.2 17.9% 22.2 17.6% 24.9 28.0%
----- ----- ----- ----- ----- -----
Total................... 135.4 100.0% 126.4 100.0% 88.7 100.0%
===== ===== ===== ===== ==== =====
Financial information excluding amortization of intangibles
-----------------------------------------------------------
incurred in business combinations(1)
---------------------------------
Operating income..
Process-centric.............. 181.0 82.8% 181.8 84.9% 184.0 83.3%
Design-centric............... 37.6 17.2% 32.3 15.1% 37.0 16.7%
Total........................... 218.6 100.0% 214.1 100.0% 221.0 100.0%
===== ===== ===== ===== ===== ======
Net income
Process-centric.............. 116.1 82.7% 113.6 83.5% 118.2 82.1%
Design-centric............... 24.3 17.3% 22.4 16.5% 25.8 17.9%
----- ----- ----- ----- ----- ------
Total........................... 140.4 100.0% 136.0 100.0% 144.0 100.0%
===== ===== ===== ===== ===== ======
----------------
(1) We believe that this supplemental information is an important indicator of
operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S. generally accepted accounting principles
measurement and should not be considered as an alternative to amounts reported
under U.S. generally accepted accounting principles. Amortization of intangibles
incurred in business combinations (acquisition costs) totaled
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 9 *
(euro)5.9 million in 2003 ((euro)5.0 after tax) compared with (euro)11.1 million
in 2002 ((euro)9.6 million after tax), and consisted entirely of the
amortization of acquired technology, and (euro)58.4 million in 2001 ((euro)55.3
million after tax).
The tables below set forth the breakdown of revenue by type of activity and
geographic region for the periods indicated.
Breakdown of Revenues
Year ended December 31,
--------------------------------------------------
2003 2002 2001
---------- ---------- ----------
(in millions of euro)
Revenue by activity
Software revenue ............................. (euro)645.6 (euro)669.9 (euro)643.0
Service and other revenue..................... 109.2 104.2 103.1
----- ----- -----
Total.............................................. 754.8 774.1 746.1
===== ===== =====
Year ended December 31,
--------------------------------------------------
2003 2002 2001
---------- ---------- ----------
(in millions of euro)
Revenue by geographic region(1)
Europe(2)..................................... (euro)353.8 (euro)374.5 (euro)380.4
North and South America(3).................... 215.4 224.0 219.3
Asia Pacific(3)............................... 185.6 175.6 146.4
----- ----- -----
Total.............................................. 754.8 774.1 746.1
===== ===== =====
----------------
(1) In our consolidated financial statements, we classify and state software
revenue by geographic region in two ways: (i) by the geographic location of the
end-user customer, and (ii) by the geographic location of our business unit
which records the transaction. See Note Q to our consolidated financial
statements. In the tables above, software revenue is classified by the
geographic location of the end-user customer, while service and other revenue is
classified by the location where the activity is performed.
(2) Germany and France account for most of our sales in Europe. See Note Q to
our consolidated financial statements.
(3) Most of the revenue from North and South America comes from the United
States, and most of the revenue from the Asia Pacific region comes from Japan.
The tables below present certain financial data taken from our consolidated
financial statements expressed as a percentage of our total revenue, except for
data per share, which is expressed in euro, and for number of shares. Our
revenue and the percentage of the various expense or other revenue items of
total revenue may not be comparable with those of our competitors due to the
distribution of our products by IBM.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 10 *
Consolidated Data
Year ended December 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
(as a % of total revenue, except per share data)
Revenue
Software revenue........................................... 85.5% 86.5% 86.2%
Service and other revenue.................................. 14.5 13.5 13.8
----- ----- -----
Total revenue.............................................. 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Software................................................... (2.9) (3.2) (2.8)
Service and other.......................................... (11.9) (12.4) (11.6)
----- ----- -----
Total cost of revenue...................................... (14.8) (15.6) (14.4)
----- ----- -----
Gross profit............................................... 85.2 84.4 85.6
----- ----- -----
Research, selling and administrative expenses:
Research and development................................... (28.6) (28.7) (28.0)
Marketing and sales........................................ (21.5) (21.9) (22.0)
General and administrative................................. (6.2) (6.2) (5.9)
Amortization of goodwill................................... -- -- (5.9)
Amortization of acquired technology........................ (0.8) (1.4) (1.9)
----- ----- -----
Total research, selling and administrative expenses........ (57.1) (58.2) (63.8)
----- ----- -----
Operating income .......................................... 28.2 26.2 21.8
===== ===== =====
Equity in net income of unconsolidated affiliates -
joint ventures........................................ 0.1 0.0 0.0
----- ----- -----
Financial revenue and other - net.......................... (0.1) 0.4 1.9
----- ----- -----
Income before income taxes................................. 28.1 26.6 23.7
Income tax expense......................................... (10.2) (10.3) (11.8)
----- ----- -----
Net income................................................. 17.9 16.3 11.9
===== ===== =====
Financial information excluding amortization of intangibles
-----------------------------------------------------------
incurred in business combinations:(1)
---------------------------------
Operating income........................................... 29.0 27.7 29.6
Net income................................................. 18.6 17.6 19.3
---------------------
(1) We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S. generally accepted accounting principles
measurement and should not be considered as an alternative to amounts reported
under U.S. generally accepted accounting principles. Amortization of intangibles
incurred in business combinations (acquisition costs) totaled (euro)5.9 million
in 2003 ((euro)5.0 million after tax) (and consisted entirely of the
amortization of acquired technology) compared with (euro)11.1 million in 2002
((euro)9.6 million after tax) and (euro)58.4 million in 2001 ((euro)55.3 million
after tax).
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 11 *
Process-centric Consolidated Data
Year ended December 31,
---------------------------------------
2003 2002 2001
-------- ------- --------
(as a % of Process-centric revenue)
Total revenue: %
Software revenue .................................. 82.5% 83.7% 83.3%
Service and other revenue ......................... 17.5 16.3 16.7
----- ----- -----
Total Process-centric revenue ..................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Software .......................................... (1.6) (1.7) (1.4)
Service and other ................................. (14.2) (14.8) (14.0)
----- ----- -----
Total cost of revenue ............................. (15.9) (16.6) (15.4)
----- ----- -----
Gross profit ...................................... 84.1 83.4 84.6
----- ----- -----
Research, selling and administrative expenses:
Research and development .......................... (30.6) (29.9) (29.5)
Marketing and sales ............................... (18.2) (18.8) (19.0)
General and administrative ........................ (6.7) (6.7) (6.2)
Amortization of goodwill .......................... -- -- (7.0)
Amortization of acquired technology ............... (0.9) (1.7) (2.3)
----- ----- -----
Total research, selling and administrative expenses (56.3) (57.1) (64.1)
----- ----- -----
Operating income .................................. 27.8 26.3 20.5
Equity in net income of unconsolidated affiliates -
joint ventures .................................... 0.1 0.0 0.0
Financial revenue and other - net ................. 0.0 0.2 1.8
----- ----- -----
Income before income taxes ........................ 27.9 26.5 22.3
Income tax expense ................................ (10.3) (10.5) (12.0)
----- ----- -----
Net income ........................................ 17.6 16.0 10.3
----- ----- -----
Financial information excluding amortization of
-----------------------------------------------
intangibles incurred in business combinations:(1)
---------------------------------------------
Operating income .................................. 28.7 28.0 29.8
Net income ........................................ 18.4 17.5 19.1
-----------------
(1) We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S. generally accepted accounting principles
measurement and should not be considered as an alternative to amounts reported
under U.S. generally accepted accounting principles.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 12 *
Design-centric Consolidated Data
Year ended December 31,
---------------------------------------
2003 2002 2001
-------- ------- --------
(as a % of Design-centric revenue)
Revenue:
Software revenue .......................................... 99.8% 99.7% 100.0%
Service and other revenue ................................. 0.2 0.3 0.0
----- ----- -----
Total Design-centric revenue .............................. 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Software .................................................. (9.3) (10.7) (9.3)
Service and other ......................................... 0.0 0.0 0.0
----- ----- -----
Total cost of revenue ..................................... (9.3) (10.7) (9.3)
----- ----- -----
Gross profit .............................................. 90.7 89.3 90.7
----- ----- -----
Research, selling and administrative expenses:
Research and development .................................. (18.5) (21.5) (20.8)
Marketing and sales ....................................... (38.2) (38.0) (36.7)
General and administrative ................................ (4.2) (4.4) (4.4)
Amortization of goodwill .................................. -- -- (0.8)
Amortization of acquired technology ....................... (0.2) (0.1) 0.0
Total research, selling and administrative expenses ....... 61.1 (64.0) (62.6)
----- ----- -----
Operating income .......................................... 29.6 25.3 28.1
----- ----- -----
Equity in net income of unconsolidated affiliates - joint
ventures .................................................. 0.0 -- 0.0
Financial revenue and other - net ......................... (0.8) 1.4 2.3
----- ----- -----
Income before income taxes ................................ 28.7 26.7 30.4
Income tax expense ........................................ (9.6) (9.2) (11.0)
----- ----- -----
Net income ................................................ 19.2 17.5 19.4
Financial information excluding amortization of intangibles
-----------------------------------------------------------
incurred in business combinations:(1)
----------------------------------
Operating income .......................................... 29.8 25.5 28.8
Net income ................................................ 19.3 17.6 20.1
----------------------
(1) We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S. generally accepted accounting principles
measurement and should not be considered as an alternative to amounts reported
under U.S. generally accepted accounting principles.
2003 VERSUS 2002
----------------
Consolidated Information
Total revenue. Total revenue was (euro)754.8 million in 2003, compared
to (euro)774.1 million in 2002. Total revenue was comprised of software revenue
of (euro)645.6 million, representing 86% of total revenue, and service revenue
of (euro)109.2 million, representing 14% of total
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 13 *
revenue. Process-centric revenue totaled (euro)629.1 million or 83% of total
revenue and included PDM revenue of (euro)94.6 million. Design-centric revenue
totaled (euro)125.7 million or 17% of total revenue in 2003.
As reported, total revenue decreased 2.5% but on a constant currency basis,
total revenue increased 5% in 2003 compared to 2002, reflecting strong growth in
our PDM and Design-centric businesses which grew 21% and 17%, respectively, in
constant currencies.
Total revenue by geographic region. As a percentage of 2003 total
revenue, Europe represented 46%, the Americas accounted for 29% and Asia
represented 25%. As a percentage of 2002 total revenue, Europe represented 48%,
the Americas accounted for 29% and Asia represented 23%.
Revenue declined 5.5% in Europe in 2003 as we faced weak market conditions
throughout the year. In comparison, revenues decreased 1.5% in 2002 in Europe as
the economy began to weaken in the middle of the year, lagging the downturn in
the U.S. economy. In Europe, software revenue declined 8% in 2003, largely
reflecting weaker performance in our Process-centric segment while service
revenue was up 7% reflecting an increase in PLM consulting projects. For the
full year revenue declined 3.8% in the Americas. In constant currencies, the
Americas increased 15% in 2003. Contributing to the growth in constant
currencies were stronger performances both from our Process-centric and
Design-centric businesses. The United States is our largest market in the
Americas region.
Revenue increased 5.7% in Asia in 2003 and 14% in constant currencies,
reflecting good performances by both our Process-centric and Design-centric
businesses.
Software revenue. Software revenue totaled (euro)645.6 million in 2003,
compared to (euro)669.9 million in 2002, representing a decrease of 3.6%. On a
constant currency basis, software revenue increased 4% in 2003 primarily
reflecting year over year growth in our Design-centric segment and in our PDM
portion of the Process-centric segment.
Recurring software revenue. Recurring software revenue totaled
(euro)332.0 million in 2003, compared to (euro)320.1 million in 2002,
representing an increase of 3.7%. While total software revenue decreased in
2003, compared to 2002, recurring software revenue increased reflecting the
increase in the installed workstation base of the Process-centric segment and to
the growing share of maintenance fees in the Design-centric segment. Recurring
software revenue represented 51% of total software revenue in 2003, compared to
48% in 2002.
Seat licensing and pricing. In 2003 a total of 57,524 CATIA and
SolidWorks seats were licensed. CATIA seats licensed totaled 32,163 in 2003,
representing a decrease of 6.3% compared to 34,308 CATIA seats licensed in 2002.
SolidWorks seats licensed in 2003 increased 7.3% to 25,361, compared to 23,626
in 2002.
CATIA Version 5 seats represented 74% of total CATIA seats licensed in 2003,
compared to 59% in 2002. The average CATIA Version 5 end-user price per seat
decreased 1%, but in constant currencies increased 7% as we added more functions
with the release of CATIA Version 5 Release 11 and Release 12 during 2003. The
average CATIA end-user price per seat in 2003 decreased 10%, with 7 percentage
points of the decrease attributable to unfavorable exchange rates. In constant
currencies, the average CATIA end-user price per seat decreased 3%. This
decrease was entirely due to the increased proportion of the Version 5 licenses
sold in 2003, compared to 2002.
The average SolidWorks end-user price per seat increased 7% in 2003. This
increase reflected the favorable impact of both geographic and product mix
changes. SolidWorks Office and Office Professional represented approximately 48%
of total seats licensed in 2003.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 14 *
Service revenue. Service revenue totaled (euro)109.2 million in 2003,
compared to (euro)104.2 million in 2002, representing an increase of 4.8%. In
constant currencies, service revenue increased 13%. We experienced an increase
in PLM consulting projects.
Gross Profit. Gross profit totaled (euro)643.4 million in 2003, compared
to (euro)653.3 million in 2002, representing a decrease of 1.5%. The gross
profit margin for software in 2003 was similar to 2002, at 96.6% in 2003,
compared to 96.4% in 2002. The gross profit margin for services increased
significantly in 2003 to 17.8%, compared to 7.5% in 2002. The improvement in the
gross profit margin for services is primarily attributable to a higher
percentage of consulting assignments in 2003 as a proportion of total service
and other revenue.
Operating expenses.
-------------------
Summary. The Company's objective in 2003 was to limit operating expense
growth in light of the general weak business climate, while continuing to invest
in critical research and development staffing. In 2003, operating expenses were
comprised of (i) research and development costs of (euro)215.6 million, (ii)
marketing and sales costs of (euro)162.4 million and (iii) general and
administrative expenses of (euro)46.8 million. Operating expenses totaled
(euro)424.8 million in 2003, compared to (euro)439.1 million in 2002,
representing a decrease of 3.3%. Total expenses, including cost of revenue of
(euro)111.4 million and operating expenses of (euro)424.8 million, totaled
(euro)536.2 million in 2003. In constant currencies, total expenses increased
3.4%, tracking closely average headcount growth of 3.5% for 2003. The
composition of operating expenses by currency was approximately as follows: 56%
euro, 36% U.S. dollars and 8% Japanese yen.
Research and development expenses. Research and development expenses
totaled (euro)215.6 million in 2003, compared to (euro)221.6 million in 2002,
representing a 2.7% decrease. The additional costs resulting from the 5.4%
increase in average headcount were more than offset by the decrease in research
and development expenses as a result of the weakening of the U.S. dollar in
2003. On December 31, 2003, the total headcount in research and development was
2,025 employees, representing 49.5% of total employees, compared to 48.1% at
December 31, 2002. Research and development expenses represented 28.6% of total
revenue in 2003, similar to 2002.
Marketing and sales expenses. Marketing and sales expenses totaled
(euro)162.4 million in 2003, compared to (euro)169.7 million in 2002,
representing a decrease of 4.3%. Marketing and sales average headcount growth
was 1.8% in 2003, reflecting selective hiring. These higher staffing expenses
were more than offset by the impact of a stronger euro on our non-euro
denominated marketing and sales expenses. On December 31, 2003, the total
headcount in marketing and sales was 1,763 employees, representing 43.1% of
total employees, compared to 44.2% at December 31, 2002. Marketing and sales
expenses represented 21.5% of total revenue in 2003, compared to 21.9% in 2002.
General and administrative expenses. General and administrative expenses
totaled (euro)46.8 million in 2003, compared to (euro)47.9 million in 2002,
representing a decrease of 2.6%. In 2003, our average headcount increased 1.7%
and we also incurred higher legal fees. These higher expenses were more than
offset by the impact of a stronger euro on our non-euro denominated general and
administrative expenses. General and administrative expenses represented 6.2% of
total revenue in 2003, unchanged from 2002.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 15 *
Amortization of intangibles incurred in business combinations
("acquisition costs"). Acquisition costs totaled (euro)5.9 million in 2003,
compared to (euro)11.1 million in 2002, representing a decrease of 46.6%. This
decrease reflects the completion of the amortization of acquisition costs
related to several acquisitions.
Operating income and operating margin.
--------------------------------------
Operating income was (euro)212.7 million in 2003, compared to (euro)203.0
million in 2002. Operating income excluding acquisition costs increased to
(euro)218.6 million in 2003 or 29.0% of total revenue, compared to (euro)214.1
million or 27.7% in 2002. See "Quantitative and Qualitative Disclosures About
Market Risk".
Financial revenue and other, net.
---------------------------------
Financial revenue and other totaled (euro)(0.9) million in 2003, compared to
(euro)2.5 million in 2002. The decrease in financial revenue and other primarily
reflected the revaluation of assets denominated in U.S. dollars. Specifically,
financial revenue and other in 2003 was comprised of net financial revenue of
(euro)10.1 million, exchange losses on accounts receivables of (euro)(8.1)
million and other losses of (euro)(2.8) million, including an impairment charge
of (euro)1.7 million. Our average balance of cash and short-term investments
increased in 2003. At December 31, 2003, cash and short-term investments totaled
(euro)439.7 million, compared to (euro)388.4 million at December 31, 2002. See
Note D to our consolidated financial statements.
Income tax expense.
-------------------
Income tax expense totaled (euro)76.9 million in 2003, compared to (euro)79.4
million in 2002. The effective tax rate in 2003 was 36.2%, compared to 38.6% in
2002. The decrease in the effective tax rate between 2003 and 2002 was largely
attributable to reduced losses of our SmarTeam subsidiary, which benefits from
certain tax exemptions. See Note E to our consolidated financial statements.
Net income.
-----------
Net income was (euro)135.4 million in 2003, compared to (euro)126.4 million in
2002. Excluding acquisition costs, net income increased 3.3% to (euro)140.4
million in 2003, compared to (euro)136.0 million in 2002.
Earnings per share.
-------------------
Diluted net income per share was (euro)1.18 in 2003, compared to (euro)1.09 per
share in 2002. Excluding acquisition costs, diluted net income per share
increased 4.3% to (euro)1.22 in 2003, compared to (euro)1.17 per share in 2002
and reflected (euro)0.13 per diluted share negative impact from currency
fluctuations.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 16 *
Revenue and Operating Income by Segment
Process-centric.
----------------
Summary. Overall, revenue results for the Process-centric segment
reflected in large measure the slowdown persisting in Europe throughout 2003.
Our PDM business performed well, with revenue increasing 14.4%, and 21% on a
constant currency basis for 2003. While total CATIA licenses declined in 2003,
we saw positive year over year growth trends in both the third and fourth
quarter of the year. In addition, CATIA Version 5 sales increased and pricing
was generally stable on a constant currency basis.
Revenue. Revenue for the Process-centric segment, including PDM revenue,
totaled (euro)630.5 million in 2003 (including (euro)1.4 million of
inter-segment sales) compared with (euro)649.4 million in 2002 (including
(euro)1.7 million of inter-segment sales). Revenue decreased 2.9%, but on a
constant currency basis, revenue increased 2%, primarily reflecting growth in
our PDM business. PDM revenue on a stand-alone basis increased 14.4% to
(euro)94.6 million, up from (euro)82.7 million in 2002 and increased 21% on a
constant currency basis. Nearly all service revenue was generated by the
Process-centric segment (excluding inter-segment sales) in 2003 and 2002. See
"-- Consolidated Information -- Service Revenue" above.
Operating income. Operating income from the Process-centric segment
totaled (euro)175.4 million in 2003, compared with (euro)170.9 million in 2002.
Operating income, excluding acquisition costs, amounted to (euro)181.0 million
in 2003, compared with (euro)181.8 million in 2002. Operating income, excluding
acquisition costs, represented 28.7% of revenue for this segment in 2003,
compared to 28.0% in 2002. The increase primarily reflected our focus on
increasing the efficiency of our consulting services for PLM as well as cost
control initiatives.
Design-centric.
---------------
Summary. Excluding the impact of currency fluctuations, we believe our
Design-centric segment showed strong year over year improvement in both revenue
and operating income. In U.S. dollars, the functional reporting currency for our
Design-centric business, revenue grew 19% in 2003, compared to 2002. This
improvement reflected revenue growth in all three geographic regions. In
addition, both unit growth and pricing trends were positive in 2003, with the
number of units sold increasing 7% and the average end-user price per seat
rising 7% in U.S. dollars. Notwithstanding this strong performance, the decline
in the value of the U.S. dollar in 2003 compared to 2002 more than offset the
underlying revenue growth.
At the operating income level, the operating margin showed good growth, as
revenue growth outpaced operating expense growth, resulting in a 4.3 percentage
point improvement in the operating margin. At the operating income level, the
negative impact of a weaker U.S. dollar at the revenue level is offset by the
favorable impact of translating U.S. dollar-denominated expenses into euro.
Revenue. Revenue in the Design-centric segment was (euro)126.1 million
in 2003 (including (euro)0.4 million of inter-segment sales), compared with
(euro)126.9 million in 2002 (including (euro)0.5 million of inter-segment
sales). The decrease in revenue net of inter-segment sales was due to the lower
U.S. dollar to euro exchange rate. On a constant currency basis,
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 17 *
revenue increased 17% in 2003. Software revenue represented 100% of total
Design-centric revenue (after inter-segment eliminations) in 2003 and 2002.
Operating income. Operating income for the Design-centric segment
amounted to (euro)37.3 million in 2003, compared with (euro)32.1 million in
2002. Operating income, excluding acquisition costs, amounted to (euro)37.6
million in 2003, compared with (euro)32.3 million in 2002. Operating income,
excluding acquisition costs, represented 29.8% of total segment revenue in 2003,
compared with 25.5% in 2002.
2002 VERSUS 2001
----------------
Consolidated Information
Total revenue. Revenue increased 3.8% to (euro)774.1 million in 2002
compared with (euro)746.1 million in 2001. On a constant currency basis, total
revenue increased 7% in 2002. Specifically, our revenue was impacted by the
decrease in the value of the U.S. dollar, our principal invoicing currency
outside the euro-zone, which negatively impacted growth in consolidated revenue
by 2 percentage points. The decrease in the value of the U.S. dollar also led to
a 2 percentage point decrease in our expenditures. In addition, the Japanese
yen, which is our second most important invoicing currency outside the
euro-zone, accounted for a 1 percentage point decrease in the growth in
consolidated revenue.
Software revenue. Software revenue increased 4.2% to (euro)669.9 million
in 2002 compared with (euro)643.0 million in 2001. This increase can be
attributed principally to a 5.6% growth in software revenue (excluding
inter-segment sales) in our Process-centric segment. Process-centric growth
benefited from the strong performance of our PDM software solutions, which
reported a 25% increase in revenue, and from the strengthening of Version 5
including new functionalities aimed at broadening our PLM offering.
Software revenue (excluding inter-segment sales) in the Design-centric segment
decreased by 1.4% to (euro)126.4 million in 2002 which reflected primarily the
weak economic environment, as well as unfavorable exchange rates. Software
revenue represented 100% of total Design-centric revenue (excluding
inter-segment sales) in both 2002 and 2001.
Recurring software revenue. Recurring software revenue increased 9.7% to
(euro)320.1 million in 2002 compared to (euro)291.8 million in 2001. Recurring
software revenue represented 48% of software revenue in 2002 compared with 45%
in 2001. The contribution of recurring software revenue to total software
revenue is growing largely due to the continuous increase in the installed
workstation base of the Process-centric segment and to the growing share of
recurring revenue fees in the Design-centric segment.
Service revenue. Service revenue increased 1.2% to (euro)104.2 million
in 2002, compared with (euro)103.1 million in 2001. This increase was lower than
our growth in sales of software in the Process-centric segment because part of
the services team was directed to develop new Version 5 methodologies as Best
Practices for our PLM solutions.
Total revenue by geographic region. The growth in total revenue was 2.1%
in the Americas and the decrease in total revenue was 1.5% in Europe.
Performance in these two regions was negatively impacted by the slower economic
environment. In addition, in the Americas, growth was negatively impacted by
about 5 percentage points because of the decrease in value of the U.S. dollar
against the euro. Revenue from the Asia-Pacific region increased by 20.0% in
euro in 2002, despite the strong impact of the Japanese yen decrease
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 18 *
(approximately 10 percentage points of growth). This growth resulted from
continued strong interest in our products and on-going sales and marketing
efforts despite the crisis of recent years.
Gross Profit. Gross profit increased 2.3% to (euro)653.3 million in 2002
compared with (euro)638.7 million in 2001. This increase reflects the rise in
revenue, which was partially offset by a higher cost of sales principally from
consulting service activities. Gross profit for services represented 7.5% of
services revenue in 2002 compared with 16.0% in 2001 due to our increased
investment in new Version 5 methodologies as Best Practices for our PLM
solutions. Gross margin decreased from 85.6% in 2001 to 84.4 % in 2002. Software
cost of revenue represented 3.6% of software revenue in 2002 compared to 3.2% in
2001, reflecting an increase in investment in third party component software.
Operating expenses.
-------------------
Research and development expenses. Research and development expenses
increased by 5.9% to (euro)221.6 million in 2002 compared with (euro)209.2
million in 2001. This increase was due to the 11.2% increase in average research
and development staff devoted to the on-going development of the V5 architecture
and its related PLM software applications. These increases were partially offset
by the lower relative value of the U.S. dollar and cost control measures. As a
percentage of total revenue, research and development expenses increased to
28.7% in 2002, compared with 28.0% in 2001. On December 31, 2002, the total
headcount involved in research and development and production represented 48.1%
of our total workforce, compared with 46.7% at the end of 2001.
Marketing and sales expenses. Marketing and sales expenses increased by
3.2% to (euro)169.7 million in 2002, compared with (euro)164.3 million in 2001.
This increase is due to a 6% increase in average sales and marketing headcount
to support sales growth, partially offset by a lower U.S. dollar and cost
cutting initiatives. The growth in marketing and sales expenses includes our
investment in connection with our agreement with IBM to share marketing and
publicity expenses to market CATIA, ENOVIA and SMARTEAM. Marketing and sales
expenses represented 21.9% of total revenue in 2002, compared to 22.0% in 2001.
General and administrative expenses. General and administrative expenses
increased 8.4% to (euro)47.9 million in 2002, compared with (euro)44.2 million
in 2001, and represented 6.2% of total revenue in 2002, compared with 5.9% in
2001. The increase reflected an increase in professional fees and insurance
fees, the impact of 2001 and 2002 acquisitions and a 4% increase in average
headcount excluding the impact of 2001 and 2002 acquisitions.
Amortization of intangibles incurred in business combinations
("acquisition costs"). Acquisition costs amounted to (euro)11.1 million in 2002,
compared with (euro)58.4 million in 2001. The decrease was due to our adoption
of SFAS 141 as of January 1, 2002, pursuant to which goodwill is no longer
amortized.
Operating income and operating margin.
--------------------------------------
Our operating income was (euro)203.0 million in 2002, compared with (euro)162.6
million in 2001. Operating income excluding acquisition costs amounted to
(euro)214.1 million in 2002, or 27.7% of net revenue, compared with (euro)221.0
million in 2001, or 29.6% of net revenue, a decrease of 3.1%. This decrease is
due mainly to the negative impact of the decrease in the value of the
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 19 *
Japanese yen and the lower than anticipated revenue resulting from the
significant slowdown in the business environment, particularly in the second
half of 2002, which was partially offset by cost control initiatives. See
"Quantitative and Qualitative Disclosures About Market Risk".
Financial revenue, investment in equity and other - net.
--------------------------------------------------------
Financial revenue, investment in equity and other - net amounted to (euro)2.8
million in 2002, compared with (euro)14.1 million in 2001. Our average cash
position increased in 2002, particularly at Dassault Systemes, the parent
company, and at SolidWorks. At December 31, 2002, cash and cash equivalents
amounted to (euro)388.4 million. The decrease in financial revenue, investment
in equity and other - net primarily reflects the revaluation of U.S. dollar and
Japanese yen denominated assets, the decrease in interest rates and a (euro)3.1
million charge related to our investment in PlanetCad. See Note D to our
consolidated financial statements.
Income tax expenses.
--------------------
Income tax expense amounted to (euro)79.4 million in 2002, compared with
(euro)87.9 million in 2001. The decrease in effective tax rate between 2002 and
2001 came from the approximately 1 percentage point decrease in the French
statutory income tax rate and the improvement of the results of our SmarTeam
subsidiary. See Note E to our consolidated financial statements.
Net income.
-----------
We realized net income of (euro)126.4 million in 2002, compared with (euro)88.7
million in 2001. Excluding acquisition costs, net income amounted to (euro)136.0
million in 2002, compared with (euro)144.0 million in 2001, a decrease of 5.6%.
Earnings per share.
-------------------
We realized diluted net income per share of (euro)1.09 for the year ended
December 31, 2002, compared with (euro)0.76 for the year ended December 31,
2001. Excluding acquisition costs, our diluted net income per share amounted to
(euro)1.17 in 2002, compared with (euro)1.23 in 2001, a decrease of 4.9%.
Revenue and Operating Income by Segment
Process-centric.
----------------
Revenue. Revenue for the Process-centric segment, including PDM revenue,
increased 5.1% to (euro)649.4 million in 2002 (including (euro)1.7 million of
inter-segment sales) compared with (euro)617.8 million in 2001. PDM revenue on a
stand-alone basis increased 25% to (euro)82.7 million, up from (euro)65.9
million in 2001.
Software revenue for the Process-centric segment increased 5.6% to (euro)543.6
million in 2002, compared with (euro)514.8 million in 2001. This increase in
software revenue mainly reflected the strong growth in software revenue from
ENOVIA and SMARTEAM.
A total of 34,308 CATIA licenses were sold in 2002 compared with 33,962 CATIA
licenses in 2001, a 1.0% increase. Sales of CATIA 5 licenses increased
substantially during 2002, with CATIA 5 licenses accounting for 59% of CATIA
licenses sold in 2002 compared with 36% in 2001. Following the release of CATIA
5R9 in June 2002 and V5R10 in October 2002, CATIA 5 licenses sold during the
fourth quarter 2002 represented 67% of the
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 20 *
overall CATIA license sales. The average CATIA license price declined 5% during
2002 to (euro)15,394. The decrease in the average price per seat in 2002
primarily reflected the increased proportion of the Version 5 licenses sold in
2002 compared to 2001, since the price per Version 5 license is lower than
Version 4 (V4), due to a still less mature product mix. The change in the V5 to
V4 proportion had an unfavorable effect on the price, which was partly offset by
a higher price per CATIA Version 5 license. V5 price per seat has increased
approximately 9% since 2001 to (euro)13,129, reflecting the strong growth of our
V5 product solutions. In addition, the lower U.S. dollar to euro exchange rate
also contributed to the decrease in the average price per CATIA seat, accounting
for 3 percentage points of the 5% decrease.
During 2002, we continued our investment in PLM. We introduced three new
releases during the year, including V5R8 in February 2002, V5R9 in June 2002 and
V5R10 in October 2002. Commencing with V5R9, our new releases cover our CATIA,
DELMIA, ENOVIA and now SMARTEAM brands. Spatial Corp. announced its 3D ACIS
Modeler Version 8.0 in May 2002.
Services revenue was generated entirely by the Process-centric segment
(excluding inter-segment sales) in 2002 and 2001. See "2002 versus 2001 --
Consolidated Information -- Service Revenue" above.
Operating income. Operating income from the Process-centric segment totaled
(euro)170.9 million in 2002, compared with (euro)126.5 million in 2001.
Operating income, excluding acquisition costs, amounted to (euro)181.8 million
in 2002, compared with (euro)184.0 million in 2001, a 1.2% decrease. Operating
income, excluding acquisition costs, represented 28.0% of revenue for this
segment in 2002, compared to 29.8% in 2001. This decrease principally reflected
lower than anticipated revenue resulting from the significant slowdown in the
business environment particularly in the second half of 2002, which was
partially offset by cost control initiatives.
Design-centric.
---------------
Revenue. Revenue in the Design-centric segment was (euro)126.9 million in 2002
(including (euro)0.5 million of inter-segment sales), compared with (euro)128.2
million in 2001. The decrease in revenue net of inter-segment sales was mainly
due to the difficult market conditions existing in the Design-centric market,
reflecting the weak overall economic environment. In addition, the lower U.S.
dollar exchange rate contributed to the decrease in revenue. The number of
licenses sold by SolidWorks decreased 9.8% to 23,626 licenses in 2002, compared
with 26,183 licenses in 2001.
Operating income. Operating income for the Design-centric segment amounted to
(euro)32.1 million in 2002, compared with (euro)36.0 million in 2001. Operating
income, excluding acquisition costs, amounted to (euro)32.3 million in 2002,
compared with (euro)37.0 million in 2001. Operating income, excluding
acquisition costs, represented 25.5% of total segment revenue in 2002, compared
with 28.8% in 2001, reflecting higher software costs as well as a 2.2% increase
in other operating expenses (excluding acquisition costs).
In 2002, SolidWorks continued to invest in research and development and
intensified its efforts in sales and marketing. These expenses increased
slightly by 2.4% and 2.6% respectively, from 2001 to 2002.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 21 *
ANALYSIS OF QUARTERLY RESULTS
-----------------------------
The tables below present certain financial information for 2003 and 2002. This
information comes from our unaudited quarterly consolidated financial
statements, which are prepared according to generally accepted accounting
principles in the United States and on a comparable basis with our annual
audited consolidated financial statements. In the opinion of management, the
quarterly financial information includes only the normal adjustments recurring
and necessary for a fair presentation of the information. Operating income for
any given quarter is not necessarily representative of results for any future
period and should not be used as an indication of future results.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 22 *
Unaudited Quarterly Data
2003 2002
---------------------------------------- ----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Revenue: (in millions of euro or shares, except for amounts per share which are
expressed in euro)
Software revenue................. 196.5 152.2 151.8 145.1 194.4 149.5 166.7 159.3
Service and other revenue........ 31.3 24.1 29.5 24.3 30.0 26.4 24.6 23.2
------------------------------------------------------------------------------------
Total revenue.................... 227.8 176.3 181.3 169.4 224.4 175.9 191.3 182.5
------------------------------------------------------------------------------------
Cost of revenue:
Software......................... (5.2) (5.1) (5.6) (5.8) (6.4) (6.3) (4.8) (6.9)
Service and other................ (23.8) (19.4) (24.6) (21.9) (28.2) (23.9) (23.5) (20.8)
------------------------------------------------------------------------------------
Total cost of revenue............ (29.0) (24.5) (30.2) (27.7) (34.6) (30.2) (28.3) (27.7)
------------------------------------------------------------------------------------
Gross profit 198.8 151.8 151.1 141.7 189.8 145.7 163.0 154.8
------------------------------------------------------------------------------------
Research, selling and
administrative expenses:
Research and development......... (55.8) (53.6) (52.6) (53.6) (54.6) (53.5) (56.3) (57.2)
Marketing and sales ............. (41.3) (41.4) (40.1) (39.6) (41.0) (41.4) (44.9) (42.4)
General and administrative....... (10.9) (12.8) (11.4) (11.7) (10.7) (12.0) (12.7) (12.5)
Amortization of goodwill ........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Amortization of acquired technology (1.0) (1.4) (1.4) (2.1) (2.1) (2.5) (2.6) (3.9)
------------------------------------------------------------------------------------
Total research, selling and (109.0) (109.2) (105.5) (107.0) (108.4) (109.4) (116.5) (116.0)
administrative expenses..........
------------------------------------------------------------------------------------
Operating income................. 89.8 42.6 45.6 34.7 81.4 36.3 46.5 38.8
------------------------------------------------------------------------------------
Financial revenue and other - net (3.0) 1.0 (0.4) 2.0 (1.8) 0.7 (0.7) 4.6
------------------------------------------------------------------------------------
Income before income taxes....... 86.8 43.6 45.2 36.7 79.6 37.0 45.8 43.4
------------------------------------------------------------------------------------
Income tax expense............... (29.0) (16.5) (17.0) (14.4) (28.2) (15.0) (18.1) (18.1)
------------------------------------------------------------------------------------
Net income....................... 57.8 27.1 28.2 22.3 51.4 22.0 27.7 25.3
====================================================================================
Basic income per share........... 0.51 0.24 0.25 0.20 0.45 0.19 0.24 0.22
Diluted net income per share..... 0.50 0.24 0.25 0.20 0.45 0.19 0.24 0.21
Weighted average number
of shares outstanding............ 113.0 112.9 112.8 113.5 114.2 114.2 114.1 114.0
Diluted weighted average number of
shares outstanding............... 116.0 114.8 114.1 114.0 114.7 115.0 117.1 118.1
Financial information excluding amortization of
------------------------------------------------
intangibles incurred in business combinations:(1)
---------------------------------------------
Operating income................. 90.8 44.0 47.0 36.8 83.5 38.8 49.1 42.7
Net income....................... 58.7 28.2 29.3 24.2 53.2 24.3 30.0 28.5
Diluted net income per share..... 0.51 0.25 0.26 0.21 0.46 0.21 0.26 0.24
----------------
(1) We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income, net income
and diluted net income per share excluding amortization of intangibles incurred
in business combinations is not a U.S.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 23 *
generally accepted accounting principles measurement and should not be
considered as an alternative to amounts reported under U.S. generally accepted
accounting principles.
Unaudited Quarterly Data (as a percentage of total revenue)
2003 2002
---------------------------------- -----------------------------------
Dec. Sept. June Mar. Dec. Sept. June Mar.
31 30 30 31 31 30 30 31
------- -------- ------ ------- ------- ------- ------- -------
(in millions of euro or shares, except for amounts per share which are
expressed in euro)
Revenue:
Software revenue...................... 86.3 86.3 83.7 85.7 86.6 85.0 87.1 87.3
Service and other revenue............. 13.7 13.7 16.3 14.3 13.4 15.0 12.9 12.7
------- -------- ------ ------- ------- ------- ------- -------
Total revenue......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- -------- ------ ------- ------- ------- ------- -------
Cost of revenue:
Software.............................. (2.3) (2.9) (3.1) (3.5) (2.9) (3.6) (2.5) (3.8)
Service and other..................... (10.4) (11.0) (13.5) (12.9) (12.6) (13.6) (12.3) (11.4)
------- -------- ------ ------- ------- ------- ------- -------
Total cost of revenue................. (12.7) (13.9) (16.6) (16.4) (15.4) (17.2) (14.8) (15.2)
------- -------- ------ ------- ------- ------- ------- -------
Gross profit 87.3 86.1 83.4 83.6 84.6 82.8 85.2 84.8
------- -------- ------ ------- ------- ------- ------- -------
Research, selling and
administrative expenses:
Research and development.............. (24.5) (30.4) (29.0) (31.7) (24.3) (30.4) (29.4) (31.3)
Marketing and sales................... (18.1) (23.5) (22.1) (23.4) (18.3) (23.5) (23.5) (23.2)
General and administrative............ (4.7) (7.3) (6.4) (6.8) (4.8) (6.8) (6.6) (6.8)
Amortization of goodwill.............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Amortization of acquired technology... (0.5) (0.7) (0.8) (1.2) (0.9) (1.4) (1.4) (2.1)
Total research, selling and
administrative expenses............... (47.8) (61.9) (58.3) (63.1) (48.3) (62.2) (60.9) (63.6)
------- -------- ------ ------- ------- ------- ------- -------
Operating income...................... 39.5 24.2 25.1 20.5 36.3 20.6 24.3 21.3
Financial revenue and other - net..... (1.3) 0.5 (0.2) 1.2 (0.8) 0.4 (0.4) 2.5
------- -------- ------ ------- ------- ------- ------- -------
Income before income taxes 38.2 24.7 24.9 21.7 35.5 21.0 23.9 23.8
------- -------- ------ ------- ------- ------- ------- -------
Income tax expense.................... (12.8) (9.3) (9.4) (8.5) (12.6) (8.5) (9.5) (9.9)
------- -------- ------ ------- ------- ------- ------- -------
Net income............................ 25.4 15.4 15.5 13.2 22.9 12.5 14.5 13.9
======= ======== ====== ======= ======= ======= ======= =======
Financial information excluding amortization of
------------------------------------------------
intangibles incurred in business combinations:(1)
---------------------------------------------
Operating income...................... 40.0 24.9 25.9 21.7 37.2 22.1 25.7 23.4
Net income............................ 25.8 16.0 16.2 14.2 23.7 13.8 15.7 15.6
----------------
(1) We believe that this supplemental information is an important indicator of
operational strength and performance of our business and is used by analysts,
investors and other interested parties. However, operating income and net income
excluding amortization of intangibles incurred in business combinations is not a
U.S. generally accepted accounting principles measurement and should not be
considered as an alternative to amounts reported under U.S. generally accepted
accounting principles.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 24 *
As is typical in the Product Lifecycle Management software market, we normally
experience our highest licensing activity for the year in December. Software
revenue, total revenue, operating income and net income have generally been
highest in the fourth quarter of each year.
For example, in 2003, revenue for the fourth, third, second and first quarters
of 2003 respectively, represented 30.2%, 23.4%, 24.0% and 22.4% of total revenue
for 2003 compared with our revenue for the fourth, third, second and first
quarters of 2002 which represented, respectively, 29.0%, 22.7%, 24.7% and 23.6%
of our total revenue for 2002.
Quarterly operating results varied significantly and are likely to vary
significantly in the future, depending on factors such as foreign currency
exchange rates; the number, timing and significance of product enhancements or
new products by us or our competitors; our ability to develop, introduce, and
market new and enhanced versions of our products; customer order deferrals in
anticipation of new or enhanced products; the timing and cyclical nature of
royalties received from our distribution agreement with IBM; general conditions
in the Product Lifecycle Management software market, computer industries and
regional economies; and other factors and events. A significant portion of sales
typically occurs in the last month of each quarter. Therefore, the timing of
orders and shipments, including unexpected delays, or actions taken by
competitors in reducing prices or introducing new products, could result in
significant quarterly fluctuations in operating results.
LIQUIDITY AND CAPITAL RESOURCES.
--------------------------------
Since 1994, our principal source of liquidity has been cash from operations.
Cash obtained from operations has been used primarily for working capital,
short-term investments, dividend payments and, since 1997, the financing of
business acquisitions.
The table below presents the change in working capital as reflected in our
consolidated statements of cash flows.
Year ended December 31,
---------------------------------
2003 2002 2001
-------- -------- --------
Changes in current assets and liabilities (in millions of euro)
(Increase) decrease in trade accounts receivable.................. (5.1) (29.2) (5.8)
(Increase) decrease in other current assets....................... 2.2 10.9 1.8
Increase (decrease) in accounts payable and accrued expenses...... 12.4 (2.8) 0.2
Increase (decrease) in income taxes payable....................... 0.6 (20.0) (4.5)
Increase (decrease) in sales incentive payable.................... 4.4 2.8 0.4
Increase in unearned revenue...................................... 6.1 19.9 3.0
Increase (decrease) in other current liabilities.................. 7.9 (3.0) 5.5
-------- -------- --------
Change in working capital......................................... 28.5 (21.4) 0.6
----------------------
Customers' days of sales outstanding as of December 31, 2003 was 90 days,
compared to 92 days as of December 31, 2002.
Under the marketing and distribution agreement with IBM, IBM is required to pay
us a cash settlement one month after it records its licensing activity. However,
due to holidays and other factors, such payments are not always received
precisely within the one-month period. Delays that cause a payment to be made in
a subsequent accounting period can lead to noticeable variations in the balance
of accounts receivable on any given balance sheet date. See Note A to our
consolidated financial statements.
Cash and short-term investments totaled (euro)439.7 million as of December 31,
2003, compared with (euro)388.4 million and (euro)369.2 million as of December
31, 2002, and December 31, 2001,
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 25 *
respectively. The 2003 increase reflects net cash provided by operating
activities. During 2003, net cash provided by operating activities amounted to
(euro)177.4 million compared with (euro)142.8 million during 2002. (euro)45.2
million of this cash was used for investments, acquisitions and loans as
discussed below. Net cash used in financing activities totaled (euro)62.4
million in 2003, primarily comprised of cash dividends of (euro)37.2 million and
share repurchases of (euro)29.5 million. Exchange rates had a negative effect of
(euro)22.2 million on our December 31, 2003 cash balance. This decrease is
primarily attributable to the exchange rate translation loss in connection with
translating U.S. based subsidiaries cash balances from U.S. dollars to euro.
In May 2003, we acquired Athys, a 13-employee company based in Grenoble, France
for (euro)3.3 million. Athys specializes in the development of work cell control
software. In April 2002, we entered into an agreement with RAND A Technology
Corporation ("Rand"), to accelerate the development of marketing, sales and
services infrastructure required to support PLM. Under the terms of this
agreement, we granted Rand two 10-year convertible loans (the "Loans"), each for
a principal amount of (euro)6.6 million and US$6.2 million ((euro)23.1 million
in the aggregate as of December 31, 2003). One of the Loans is convertible into
common shares of Rand at Rand's option, and the other Loan is convertible into
common shares of Rand at our option. The conversion rights are subject to
certain limitations and their exercise must not result in our holding in excess
of 19.9% of Rand's shares. The Loans are secured by certain tangible and
intangible assets of Rand and, to the extent not converted, are repayable in
quarterly installments beginning in 2004.
In November and December 2003, the Company made short-term advances in the
amount of (euro)5.5 million to Rand. These advances bear interest at 5.5% and
are repayable in 2004. Due to their short-term maturity, these advances have
been classified in other current assets in our consolidated financial
statements.
We have no significant capital expenditure requirements, no
financial indebtedness other than financial leases relating to our offices, and
no lines of credit. Management believes that currently available sources of
liquidity will provide sufficient resources for its operations for the
foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Our overall risk management policy is based upon the prudent management of our
market risks, primarily interest rate risk and foreign currency exchange risk.
Our programs with respect to the management of these risks, including the use of
hedging instruments, are discussed below. Our exposure to these risks may change
over time and there can be no assurance that the benefits of our risk management
policies will exceed the related costs. Such changes could have a materially
adverse impact on our financial results.
Interest rate risk.
With the exception of a change in the general economic environment, which is
difficult to assess, we believe that our revenue and earnings, before financial
income, were not materially affected by changes in interest rates in 2003.
Similarly, interest rates are not expected to affect future earnings before
financial income, but may affect financial income. Therefore, our interest rate
risk is primarily a risk related to a reduction of financial revenue.
We generate positive cash flows from operations and have some financial
obligations (e.g., employee profit sharing and a long-term capital lease for a
building) but we are a net lender. We sometimes use bank overdrafts, for
non-significant amounts, for which the interest rate is a variable market rate.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 26 *
We have no loan agreement outside the Group except the long-term capital lease
for a building, as described in Note K to our consolidated financial statements.
Therefore, we have no risks linked to any early repayment triggers.
Financial revenue is composed in part of interest from cash and cash
equivalents, as well as revenue from short-term investments. As a result, it is
sensitive to fluctuations in interest rates. We follow a conservative policy for
investing our cash resources, mostly relying on short-term, investment grade
investments. Investment rules are determined and controlled by the treasury
department of the parent company.
In 2003, the decrease of short-term interest rates in the U.S. and in Europe had
a negative impact on our financial revenue. For cash management purposes, we do
not invest in any common shares or any funds investing primarily in common
shares. Our financial results are therefore not directly linked to stock market
variations.
Taking into account the low interest rates and our underwriting position, we did
not subscribe to any rate hedging products during 2003.
Foreign currency exchange risk.
Our revenue is primarily invoiced in U.S. dollars, euro and Japanese yen. Under
the IBM marketing and sales agreement, the royalties we receive for the products
distributed by IBM are generally set in the local currency of the end purchaser,
and then remitted to us by IBM in U.S. dollars based on conversion rates
adjusted monthly. In addition, we incur expenses in several currencies, through
our suppliers and employees in different countries. Finally, we engage in
mergers and acquisitions outside the euro zone and may lend money in different
currencies to our fully or partially owned subsidiaries. As a result, our
results of operations may be affected by changes in exchange rates, particularly
between the U.S. dollar or the Japanese yen and the euro.
To a certain extent, we experience natural hedging, with revenue denominated in
U.S. dollars partially compensated by our U.S. dollar expenses. Our net exposure
in Japanese yen is less in absolute terms, but more significant as a proportion
of Japanese yen-denominated revenue. In 2003, revenue denominated in U.S.
dollars represented approximately 40% of total revenue, compared with 40% in
2002 and 41% in 2001, after taking into account the monthly conversion by IBM of
royalties coming from end-user payments in currencies other than U.S. dollars.
Our operating expenses denominated in U.S. dollars represented 37% of total
operating expenses in 2003, compared with 38% in 2002 and 40% in 2001.
As a result, our net operating exposure to U.S. dollars was limited to (euro)103
million in 2003 (14% of our revenue), and this exposure was hedged through
market instruments at a level of (euro)76 million, as further described below.
The U.S. dollar depreciated approximately 20% against the euro in 2003 compared
to 2002 and depreciated approximately 5% against the euro in 2002 compared to
2001. As a result of our U.S. dollar-denominated revenues and U.S.
dollar-denominated expenses being relatively comparable in amount, changes in
value of the U.S. dollar compared to the euro had relatively little impact on
our operating income in 2002. In 2003, however, U.S. dollar depreciation had a
significant negative impact on operating income. In 2003 and 2002, the Japanese
yen depreciated 11% and 8% against the euro, respectively, compared to the
respective preceding year, with a negative impact on operating income.
Currency fluctuations may impact revenue and expenses as well as financial
revenue. The main items of financial revenue subject to fluctuations linked to
exchange rates are:
- The difference between the exchange rate used to record invoices and
expenses in foreign currencies and the exchange rate when we receive
or make the payment.
- The revaluation of payables and receivables denominated in foreign
currencies.
- The revaluation of assets denominated in foreign currencies.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 27 *
We are able to hedge some of our foreign currency exchange risk, but some
currency risks, such as the impact of the consolidation of subsidiaries
reporting in U.S. dollars, cannot be hedged. Our hedging transactions typically
involve purchasing currency options and foreign exchange contracts. We only
hedge our revenues and expenses coming from usual and predictable activity
arising in the normal course of operations. We do not hedge revenues in local
currencies from our North American or Japanese subsidiaries. We use exclusively
forward agreements or financial instruments with a maximum predictable loss. All
hedging activities are carried out by the parent company and all hedging
transactions and our resulting exposure are reported to the Chief Financial
Officer on a monthly basis. The table below sets forth, for the year ended
December 31, 2003, our revenue, operating expenses and net position before and
after hedging denominated in U.S. dollars, Japanese yen and other currencies,
principally the euro.
Year ended December 31, 2003
------------------------------------------------------------
U.S. dollars Japanese yen euro and others
------------ ------------ ---------------
(in thousands of euro)
Revenue............................. 301,174 134,358 319,290
Operating expenses.................. (198,518) (41,515) (302,050)
Net position........................ 102,656 92,843 17,240
Hedge(1)............................ 76,450 55,725 -
Net position after hedge............ 26,206 37,118 17,240
----------------
(1) Includes operations considered as a cash flow or fair value hedge under FAS
133 only.
The following table presents the notional amount and market value of financial
instruments at December 31, 2003 and 2002:
Year ended December 31,
---------------------------------------------------
2003 2002
---------------------- --------------------
Notional Market Notional Market
amount value amount value
-------- ------ -------- ------
(in thousands of euro)
Call USD/euro................................. 1,979 - - -
Digital JPY/euro(1) .......................... - - 400 135
Collars USD/euro.............................. 35,629 3,441 47,082 7,096
Collars JPY/euro(1) .......................... 41,468 7,893 86,017 7,073
Forward exchange contract USD/euro............ 10,821 1,454 20,625 4,246
Forward exchange contract JPY/euro(1)......... - - 15,274 2,395
----------------
(1) "JPY" means Japanese yen.
Revenue and expenses denominated in currencies other than the euro are
translated into euro using rates determined by the applicable accounting
regulation. For example, most non-euro transactions originating in France are
translated using the average exchange rate of the month preceding the
transaction. When consolidating subsidiaries reporting in currencies other than
the euro, however, the average exchange rate of the quarter in which the
consolidation takes place is used. In the context of business acquisitions, the
currency exchange rate used is the rate on the date of the acquisition, or on
the date the foreign currency used for the acquisition was purchased.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 28 *
HUMAN RESOURCES
---------------
At December 31, 2003, the Company had 4,088 employees, up 3% over 2002.
The following table shows employees of Dassault Systemes and of its
subsidiaries:
December 31, 2003 2002 2001
---------------------------------------------------------------------
Dassault Systemes 1,632 1,591 1,429
Subsidiaries 2,456 2,375 2,419
=====================================================================
Total 4,088 3,966 3,848
The following tables show our employees both by function and geographically for
the past three years:
December 31,
2003 2002 2001
Research and Development and Product Production........ 2,025 1,907 1,796
Marketing, Sales and Services.......................... 1,763 1,755 1,755
Administrative and Other Functions..................... 300 304 297
Total.................................................. 4,088 3,966 3,848
December 31,
2003 2002 2001
France................................................. 1,970 1,940 1,913
United States and other locations...................... 2,118 2,026 1,935
Total.................................................. 4,088 3,966 3,848
EXCEPTIONAL EVENTS AND LITIGATION
---------------------------------
There are no exceptional events or litigation which could have a material impact
on the financial position or the earnings of the Company.
RECENT DEVELOPMENTS
-------------------
V5R13 "PLM Workspace for Collective Innovation" was announced in March
of 2004. CATIA, DELMIA, ENOVIA AND SMARTEAM V5R13 product portfolios bring
business value to manufacturers in the following areas: (1) Powers Major Product
Programs: V5R13 powers major product programs by enabling manufacturers and
their supply chain to deploy competitive new PLM Best Practices that reduce
development cycles by at least 20%; (2) Design in Context, Decide in Context: a
major innovation in the V5R13 release is the new ENOVIA VPM Navigator product
that enables manufacturers to take advantage of relational design, integrating
ENOVIA's virtual product definition into CATIA's easy-to-use design environment;
(3) Process Expertise Inside: Best Practices captured in new industry-specific
applications and process templates enable manufacturers to deploy competitive
methodologies to increase productivity through streamlined processes; (4) World
Class PLM for Medium-sized Businesses: V5R13 makes PLM practices available to
companies of all sizes through specialized right-sized PLM packages for
industrial and consumer products, the electronics industry, and the automotive
and aerospace supply chains, and (5) Proven
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 29 *
Openness and Standards Support: underscoring our commitment to openness and
global IT standards, V5R13 includes enhancements to make it easier for companies
to personalize their PLM platforms, share data with systems used by partners,
and integrate PLM solutions with legacy systems.
OUTLOOK
-------
In 2004 we will look to continue developing our business around our two axes:
"PLM" and "3D for all" by emphasizing our key business strengths and pursuing
our growth strategies. We will continue to focus on: (i) building and
strengthening long-term, integrated relationships with our customers; (ii)
maintaining a substantial commitment to technological innovation by a strong
level of investment in research and development; (iii) working closely with our
current partners in our extended enterprise as well as growing our existing
relationships; (iv) continuing to base our financial model upon a high level of
recurring software revenue; and (v) maintaining a strong level of profitability
and cash flow from operations. Our growth strategies address opportunities to
expand our business with our V5 PLM solutions and with our Design centric
solutions.
During 2004 we plan to focus on developing growth opportunities by pursuing the
following strategies: (i) win new strategic customers; (ii) extend our CAD
penetration in our customer base; (iii) implement the complete PLM solution with
product data management and digital manufacturing solutions; (iv) extend our
penetration of the supply chain within key industries; (v) expand our presence
in our target industries; and (vi) capitalize on the 2D to 3D migration
opportunity.
Our CATIA, DELMIA, ENOVIA and SMARTEAM brands are our solutions for PLM. In this
market, we have two releases planned for 2004 including Version 5 Release 13
(V5R13) and Version 5 Release 14 (V5R14). The release of V5R13 was announced in
March of 2004 and V5R14 is planned for release in the second half of 2004.
More broadly, through the V5 platform and the resulting partnerships, we will
continue to provide product and data management solutions for end-users to
optimize the creation, manufacturing and maintenance processes for their
industrial products, as well as a development environment and software
components that meet the needs of our technology partners and many software
providers. Industries willing to implement a PLM solution will then benefit from
a broad and fully integrated software offer, as it is developed on the V5
platform.
In addition to the fact that 3D representation has become an important
communication tool in the PLM market, we are also focused on addressing the
Design centric market for customers who wish to also design their products in
3D. We address this market with our SolidWorks brand. In the Design-centric
market, SolidWorks has one new release planned for 2004.
Our financial objectives for 2004 include moderate revenue growth on a constant
currency basis, assuming that business conditions, particularly in Europe,
remain similar to 2003. Based upon information currently available, our revenue
growth objective for 2004 is about 8% in constant currencies. Assuming a U.S.
dollar to euro exchange rate of $1.25 per (euro)1.00, our actual revenue would
be expected to be about (euro)785 million for 2004 and our earnings per share
objective for 2004 is approximately (euro)1.29 to (euro)1.31 per diluted share
and approximately (euro)1.30 to (euro)1.32 per diluted share excluding
acquisition costs. Our operating margin objective for 2004 is to maintain a
stable to slightly increasing operating margin in comparison to 2003, where our
operating margin was 29.0% before acquisition costs. All of our objectives
discussed above are based upon the assumption of a U.S. dollar to euro exchange
rate of $1.25 per (euro)1.00 for 2004.
Our financial results will remain subject to any further weakening of general
economic conditions as well as currency fluctuations.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 30 *
Management's beliefs and expectations set forth in the preceding paragraphs
constitute forward-looking statements subject to risks and uncertainties. These
forward-looking statements are based on management's current views and
assumptions and involve known and unknown risks and uncertainties that could
cause actual results to differ materially from those anticipated or expected.
Factors which could cause actual results to differ include a continuing general
economic decline and/or a further reduction in the level of corporate investment
in information technology infrastructure; currency fluctuations, particularly
the value of the U.S. dollar or Japanese yen with respect to the euro;
unanticipated difficulties in our relationship with IBM as the principal
distributor of our products; growth in market share by our competitors; and
other factors.
RESULTS AND BUSINESS OF DASSAULT SYSTEMES, THE PARENT COMPANY
-------------------------------------------------------------
ACTIVITY
--------
The operational activity of the Dassault Systemes company is on the one hand the
development of PLM software applications, which is the major part of the
development of CATIA products and part of the development of ENOVIA products,
and on the other hand the development of the Version 5 architecture which allows
integration of the brands associated to the PLM market. Moreover, Dassault
Systemes manages the whole Company and the global relationship with IBM.
PRESENTATION OF THE ANNUAL FINANCIAL STATEMENTS AND VALUATION METHODS USED
--------------------------------------------------------------------------
The annual financial statements for the year ended December 31, 2003 have been
prepared and presented in compliance with the provisions of the accounting law
of April 30, 1983 and its decree of application of November 29, 1983.
In accordance with the provisions of Article L.232-6 of the Commercial Code, the
annual financial statements have been prepared in the same forms and according
to the same valuation rules as for the previous period.
EARNINGS
--------
The key feature of 2003 was lower operating revenue that came in at 492 million
euros, down 5.0% compared to 2002 (26 million euros). This reduction largely
concerns CATIA software revenue generated by IBM's distribution channel, which
amounted to 351 million euros, down from 388 million euros in 2002 (- 37 million
euros). This was the result of a combination of a downturn in the European
market and, to a lesser extent, the fall in the dollar and the yen in relation
to the euro. Service revenue edged down 2% compared to 2002 principally due to
market difficulties in France during 2003.
The portion of revenue for export was (euro) 447 million, which represented
90.8% of the total revenue.
CATIA royalties represented 76.2% of revenue.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 31 *
The sale of CATIA licenses decreased from 33,965 in 2002 to 31,484 in 2003,
which represents an decrease of 7.3%. The sale of CATIA V5 licenses represented
73.7% of the total sale of licenses in 2003 with 23,189 CATIA V5 licenses sold
in 2003 compared to 20,174 in 2002.
Operating income decreased 17.5 % to (euro) 184 million in 2003 and Dassault
Systemes' net income decreased 19.8% to (euro) 105 million.
In addition, equity capital before distribution at December 31, 2003 totaled
(euro) 1,104 million.
Finally, the solidity of the balance sheet of Dassault Systemes demonstrates its
financial health.
ASSIGNMENT OF EARNINGS
----------------------
The financial statements we have presented to you and the elements contained in
this report show that the year ended December 31, 2003 showed a profit of (euro)
104,978,708.31, which are proposing to allocate as follows, being mentioned that
the legal reserve has already been brought to its maximum:
Earning..................................................... (euro) 104,978,708.31
which, increased by the retained earnings from
prior fiscal years, which equals............................ (euro) 593,848,427.09
equals a distributable sum of............................... (euro) 698,827,135.40
to be distributed as follows:
o for distribution to the 113,044,227(*) shares composing
the capital stock and with the right to dividends,
a dividend of............................................ (euro) 38,435,037.18
((euro)0.34 x 113,044,227 shares)
o to be retained........................................... (euro) 660,392,098.22
(*) This number represents the number of shares with the right to dividends as
of December 31, 2003. Pursuant to the provisions of Article L. 225-210 of the
Commercial Code, the amount of the dividend for treasury shares held on the
payment date shall be retained.
If you accept this proposal, total earnings per share will be:
o (euro) 0.51 for individual shareholders and for legal entity shareholders
who are entitled to maintain the rate of the avoir fiscal (tax credit) at
50%, which is a dividend of (euro) 0.34 and an avoir fiscal of (euro) 0.17.
o (euro) 0.374 for legal entity shareholders benefiting from an avoir fiscal
of 10%, which is a dividend of (euro) 0.34 and (euro) 0.034 in avoir
fiscal.
By law, we remind you that the following amounts have been distributed per share
for the last three financial years:
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 32 *
(amounts in euro) 2000 (1) 2001 (2) 2002 (3)
--------------------------------------------------------------------------------
Dividend 0.31 0.33 0.33
--------------------------------------------------------------------------------
Avoir Fiscal 50% 0.155 0.165 0.165
--------------------------------------------------------------------------------
Avoir Fiscal 25% 0.08 - -
Avoir Fiscal 15% - 0.05 -
Avoir Fiscal 10% - - 0.033
--------------------------------------------------------------------------------
Total income 0.465 0.495 0.495
(if avoir fiscal 50%)
--------------------------------------------------------------------------------
Total income 0.39 -
(if avoir fiscal 25%)
--------------------------------------------------------------------------------
Total income - 0.38 -
(if avoir fiscal 15%)
--------------------------------------------------------------------------------
Total income - - 0.363
(if avoir fiscal 10%)
--------------------------------------------------------------------------------
(1) Capital of 113,926,963 divided into 113,926,963 shares with a(euro)1
nominal value
(2) Capital of 114,475,204 divided into 114,475,204 shares with a(euro)1
nominal value
(3) Capital of 114,570,841 divided into 114,570,841 shares with a(euro)1
nominal value
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
In addition to the financial statements for the fiscal year ending 31 December
2003, we propose that you approve the consolidated financial statements of
Dassault Systemes for the same period.
EMPLOYMENT DATA
---------------
--------------------------------------------------------------------------------
1. Workforce
--------------------------------------------------------------------------------
Total workforce in long and As of December 31, 2003, Dassault
short-term contracts Systemes employed 1,491 staff--1,442 on
long-term contracts (CDI), 27 on fixed
term contracts (CDD), and 22 on
internships.
Total recruitment for long term and In 2003, Dassault Systems hired 131
short term contracts employees for all types contracts of
contracts--66 on long-term contracts,
47 on fixed term and 18 on internships.
During 2003, 13 fixed term contracts
were transformed to long-term
contracts.
Recruitment challenges There were no particular recruitment
difficulties for R&D positions given
the profiles sought: young
degree-bearing engineers. However,
there was a shortage of candidates with
sufficient English language skills in
Finance, Accounting, and Human
Resources (Bachelor of Science and
Master of Science level).
Layoffs In 2003, Dassault Systemes terminated
eight
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 33 *
--------------------------------------------------------------------------------
employment agreements for personal
cause.
Outsourced labor The amount paid to external companies
in 2003 was 161,473 euros.
--------------------------------------------------------------------------------
2- Headcount Reduction
--------------------------------------------------------------------------------
Redundancy plans, work safeguards, This was non-applicable in 2003 at
re-distribution efforts, re-hires, Dassault Systemes. In fact, the
support employee population actually increased
by 3.69% compared to 2002.
--------------------------------------------------------------------------------
3. Working Hours
--------------------------------------------------------------------------------
Organization and length of working The length of work for full time
hours for full-time employees managers on a daily rate is 216 days
annually, and the average work length
for full time employees on an hourly
rate is 37.80 hours per week, taking
into account work reduction (JRTT)
days. For non managers, the average
weekly time worked is 35 hours, taking
into account JRTT.
Work length for part-time The average work length for part-time
employees employees is 76.21%. Nearly 3.55% of
total employees work part-time. 21
employees work part-time on a daily
rate, while 32 work part-time on an
hourly rate.
Extra hours Employees working on an hourly rate,
have a flexible work system that does
not require the booking of extra hours.
Rate and reasons for staff The overall absentee rate in 2003 not
absenteeism including paid holidays is 4.80%. The
breakdown is as follows:
----------------------------------
Illness 2,565 days
----------------------------------
Maternity 2,501 days
----------------------------------
Paternity Leave 248 days
----------------------------------
Work-related
accidents and
travel 157 days
----------------------------------
Total 5,471 days
--------------------------------------------------------------------------------
4. Salary
--------------------------------------------------------------------------------
Staff salary evolutions The average gross monthly salary
evolved 5.97% on December 31, 2003,
compared to the same date in 2002.
Social fees The social fees for 2003 were
36,549,733 euros.
The application of Title IV Book IV The total sum of profit sharing
in the Labor Code (Profit Sharing distributed in 2003 for 2002 was
& Participation) 8,747,942 (euro).
The total amount reserved for staff
participation in 2002, and distributed
in 2003 was 11,156,487 (euro).
Annual results for the financial year
ending on December 31 2003, to be
approved by shareholders on June 2,
2004, should provide profit sharing
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 34 *
--------------------------------------------------------------------------------
amounting to 7,540,403 (euro), while
"freeing up" a special participation
reserve of 10,225,242 (euro).
For the year 2003, profit sharing and
special participation reserve should
respectively represent the equivalent
of 10.5% and 14.3% of the total gross
employee salary mass in 2003. This
amount represents a very high profit
sharing level.
Employee Savings Plan As early as 1993, a company savings
plan has been in place allowing
personnel to invest in Mutual Funds.
This plan, however, excludes staff
investment in Dassault Systemes shares.
Male/Female Professional Equity As of December 31, 2003, the breakdown
between men and women at Dassault
Systemes was 21.6% (322) women vs.
78.4% men (1,169).
Given the three categories below,
average female salaries compared to
their male counterparts varied from
-3.6 % to +2.3% (based on annual
salary).
---------------------------------------
Breakdown in %
---------------
Position Women Men Ratio F/M
---------------------------------------
Levels I to
V: Index 140
to 305 78 % 22 % +2.20 %
---------------------------------------
Related
management
PI and PII 20 % 80 % -3.50 %
---------------------------------------
Management
P III A 14 % 86 % +2.26 %
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 35 *
--------------------------------------------------------------------------------
5. Labor Relations
--------------------------------------------------------------------------------
Labor relations and collective In 2003, Dassault Systemes signed, on
agreements April 9, two amendments to the
collective agreements dated October 15,
1999 and February 8, 2000 relating to
the RTT of managers and non managers
working on an hourly rate. Dassault
Systemes also signed four collective
agreements related to :
-Anti-smoking and assistance in
quitting- signed on June 16, 2003.
-Implementation of a voluntary employee
savings plan (PPESV), signed on
September 18, 2003.
- Pre-election agreement relating to
the renewal of the works' council dated
December 15, 2003.
- Integration of physically challenged
employees into the Company, signed on
December 18, 2003. The latter obtained
an approval from the Prefet des
Hauts-de-Seine on March 12, 2004.
Following the agreements signed in
2002, in respect to staff Participation
and to employee profit-sharing, the
rules concerning the Company Sharing
Plan (PEE) were changed on February 18,
2003.
--------------------------------------------------------------------------------
6. Hygiene and Security
--------------------------------------------------------------------------------
Hygiene and security conditions Dassault Systemes Hygiene, Security and
Working Conditions Committee met 6
times throughout 2003.
In accordance with the decrees of
November 5th and December 24, 2002,
Dassault Systemes published the results
of Hygiene and Security risks by
business unit in a single document.
Specific actions were implemented in
2003:
-In the framework of an agreement
signed with the unions, an anti-smoking
campaign & assistance to quit smoking
was implemented with funding shared
between individual employees and
Dassault Systemes.
-Renovation of 4,500 M2 of office
space.
-Specific communications for employees
who travel abroad frequently (eg. for
SRAS).
-Training of 120 employees in emergency
responsiveness.
- Training of 40 employees in fire
safety.
--------------------------------------------------------------------------------
7. Training
--------------------------------------------------------------------------------
Internal training Dassault Systemes has established a
budget of 5.40% of the total gross
employee salary base for professional
training.
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 36 *
--------------------------------------------------------------------------------
In 2003, 3,759 employees participated
in training, representing a total of
45,957 hours. 82% of the total
employees in Suresnes were trained in
2003. The training plan, that is part
of the worldwide group training plan,
is focused on 3 main areas:
1. Company's Solutions training (1,752
employees*) representing 31% of
total training.
2. R&D and computer technology
training (651 employees)
representing 27% of total training.
3. Management tools training (235
managers) representing 15% of total
training.
*Number of trained staff knowing that
the same individual could be counted
several times if the person
participated in several different
professional development sessions.
In 2003, Dassault Systemes also offered
specific training events widely opened:
-Launch of a summer << PLM University
>> addressing, for the most part, staff
in sales divisions.
- Organization of presentation days for
staff. These "Solutions Overiew" allow
staff to improve their knowledge on
Dassault Systemes solutions and their
evolution.
- Development of an in-house e-learning
system, called Companion V5. This
self-training tool, awarded in 2002 by
l'ICERC (International Competition
Educational Research Creation), is a
generally available and offered to all
employees of the Company who wish being
trained to Dassault Systemes Solutions.
New hires working in development
positions are provided training on
Companion V5 shortly after they join
Dassault Systemes.
--------------------------------------------------------------------------------
Work and integration On December 18, 2003, Dassault Systemes
signed an agreement in favor of
integrating physically challenged
employees in the workplace. This
agreement aims to create favorable
conditions for their integration. It
obtained an approval from the Prefet
des Hauts-de-Seine on March 12, 2004.
Three main actions are envisaged :
-Training for young physically
challenged employees.
-Initiatives to facilitate the
recruitment of handicapped workers.
-Enhanced internal communication on
awareness and comprehension of
physically handicapped people within
the company.
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 37 *
--------------------------------------------------------------------------------
8. Social Benefits
--------------------------------------------------------------------------------
Dassault Systemes' works council
receives an annual subsidy devoted to
social and cultural activities
equivalent to 5% of the gross employee
salary base during the year. This
subsidy is considered a one of the
highest in the market. In 2003, the
works council received 3,543,367 (euro)
for social and cultural activities.
--------------------------------------------------------------------------------
9. Outsourcing
--------------------------------------------------------------------------------
Importance of outsourcing and In 2003, the Company spent 60 million
promotion of OIT amongst external euros for outsourcing, including 53.5
staff at headquarters and in million euros inside the Company.
subsidiaries
Dassault Systemes favors contractual
relations with subcontractors who
respect the provisions of the
fundamental conventions of the
International Labor Organization, and
in particular :
-Trade union freedom and the protection
of trade union rights;
-The abolition of forced labor;
-Equal treatment for women and men;
-The absence of discrimination in
respect of employment and occupation;
-The elimination of child labor.
--------------------------------------------------------------------------------
10. Regional impact on business
--------------------------------------------------------------------------------
Economic impact on regional The growth in the number of employees
development at Dassault Systemes is a benefit to
local and regional development (Paris
and regions: Lille, Lyon...).
Also see section below, "Relationships
with external associations-Educational
institutions".
--------------------------------------------------------------------------------
11. Relationships with external
associations
--------------------------------------------------------------------------------
Integration services Within the framework of the agreement
signed in 2003 by Dassault Systemes and
approved on March 12, 2004, regarding
the integration of physically
challenged employees, Dassault Systemes
will work with associations to
facilitate the integration of
individuals with the required profiles
in designated locations.
Educational institutions Dassault Systemes is involved with
educational institutions in a number of
different areas: instruction,
internships, and partnership in
research projects.
Its objective is to:
-Share PLM skills and technology
developed by Dassault Systemes with
students
-Create synergies between industry and
fundamental research
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 38 *
--------------------------------------------------------------------------------
-Facilitate the integration of students
into the workplace.
Dassault Systemes offered 140
internships in 2003.
In addition, each year, the Company
participates in recruitment forums in
engineering schools in France and
abroad.
Environmental protection Non applicable given Dassault Systemes
associations activity.
Consumer associations Dassault Systemes organizes annual
events with its customers in order to
present new products, listen to their
feedback on our products.
These events took place on 3
continents: The CATIA Operators
Exchange in the US, the European CATIA
Forum in Europe, the Japanese CATIA
Forum in Asia, the SolidWorks World and
the DELMIA Use Conference. In 2003,
more than 5,500 of our customers and
partners participated.
Neighborhood associations Dassault Systemes is chairman of the
Commercial Zone Association (ZAC) in
Suresnes where its headquarters are
located. In this respect, it takes care
to its business impact on the life
quality of the neighborhood and
contributes to its enhancement.
--------------------------------------------------------------------------------
12. Subsidiaries
--------------------------------------------------------------------------------
How overseas subsidiaries deal with The growth in employee numbers at the
the impact of their activities on Company is a benefit to local
regional development and local development in our overseas
population subsidiaries.
In terms of contributing to community
development, Dassault Systemes has
donated 1 million USD over several
years to form a partnership with the
Detroit Planetarium ("New Detroit
Sciences Center"). This partnership
aims to encourage young people to
discover science and new technology.
The center has since been re-named the
Dassault Systemes Planetarium.
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 39 *
ENVIRONMENTAL DATA
------------------
--------------------------------------------------------------------------------
1. Consumption :
--------------------------------------------------------------------------------
Resource consumption in terms of:
-Water A total of 16,781 m3 of water was
consumed in 2003. This was in fact a
reduction of 2,000 m3 compared to 2002,
due to the enhancement of the quality
of the equipment and to its
maintenance.
-Natural/raw resources Since its creation, the Company did not
stop introducing measures to reduce raw
materials. For instance, some of our
software applications are delivered via
the web. That considerably reduces CD
volumes. Thanks to the delivery of its
solutions documentation in an
electronic form, the use of paper
products by Dassault significantly
decreased within the last two years (-
40%).
In terms of paper consumption at
Dassault Systemes' headquarters, a
total of 9,800 boxes of paper
(4,900,000 sheets) were used in 2003.
Energy and measures taken to A total of 11,170,983 Kwh of
improve energy efficiency electricity was consumed at the
Dassault Systemes' headquarters in
2003. In order to improve energy
efficiency in 2003, economical lighting
was installed throughout the site's
buildings.
Use of renewable energy A recovery process of the heat released
by computers was introduced in Dassault
Systemes. This process that uses a
"heat-pump" process, is the only one
energy source for heating the premises.
Use of water, soil, noise Non applicable given Dassault Systemes
pollution, air pollution, emission activity.
of odor
Waste The very nature of Dassault Systemes
solutions, along with virtual
simulation technology, helps to reduce
unnecessary waste. Virtual simulation
for example, helps to reduce the need
to physically create blueprints, models
or crash tests, allowing for the
reduction of significant waste.
Dassault Systemes entrusts the
recycling of printer and fax ink
cartridges, neon lights magnetic strips
and CD ROMs to specialist service
providers.
In addition, Dassault Systemes leases
95% of its computer hardware
(computers, PCs, major systems, screens
etc.). Such leased equipments are
returned to the manufacturer after use.
The
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 40 *
--------------------------------------------------------------------------------
remaining 5% are sold to computer
distributors or disposed of to
recycling companies which destroy them
under environmental norms.
--------------------------------------------------------------------------------
2. Measures taken to limit harmful
effects
--------------------------------------------------------------------------------
Measures taken to ensure biological Non significant given Dassault Systemes
balance, respect of natural activity.
environment, protection of
animal and vegetable species
3. Environmental measures taken
-------------------------------
Evaluations, certifications
4.Regulations and laws applicable
---------------------------------
Status of all applicable measures
Status of measures taken to assure
laws and regulations are adhered to
5.Prevent harmful consequences of
---------------------------------
the activity on the environment.
--------------------------------
Funds spent on prevention measures
--------------------------------------------------------------------------------
6. Environmental management
--------------------------------------------------------------------------------
Internal environment management Given Dassault Systemes activity, no
services specific environment management service
exists at Suresnes. Environment
management is undertaken by various
services, specially the General
Services department.
Environmental training and Given Dassault Systemes activity, no
information provided specific environmental management
to employees. training exists. This being said,
fire-prevention training has been
performed within the General Services
department (40 trainees in 2003 upon
150 trainees in total).
Mitigation plans in place to reduce Non applicable given Dassault Systemes
risk and organization in place to activity
deal with accident that could have
an external impact.
--------------------------------------------------------------------------------
7. Provisions and environmental
risk insurance
--------------------------------------------------------------------------------
Provisions and Insurance Non applicable given Dassault Systemes
activity
--------------------------------------------------------------------------------
8. Legal decisions implemented
--------------------------------------------------------------------------------
Funds spent or actions taken Non applicable
resulting from legal decisions
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 41 *
--------------------------------------------------------------------------------
9. Goals set for overseas
subsidiaries
--------------------------------------------------------------------------------
On information 1-6 above Overseas subsidiaries of Dassault
Systemes ensure that measures are put
in place in each of these domains.
--------------------------------------------------------------------------------
VIGEO's* rating of Dassault Systemes Corporate Social Responsibility in December
2003
Criteria Rating 2003/12
(min -- /max ++)
Human Resources +
Environment ++
Customers & Suppliers +
Corporate Governance +
Community Involvement +
Human Rights +
Company: ++ Leader, + Advanced, = Average, - Below average, -- Unconcerned
*VIGEO, an independant corporate social responsibility rating agency, based in
France.
EQUITY INTERESTS - SUBSIDIARIES
-------------------------------
In reporting to you on the activity of the group, we have described the activity
of the subsidiaries of Dassault Systemes.
On May 27, 2003, Dassault Systemes purchased 80% of the share capital of the
French company Athys at a price of 3,200,000 (euro). The remaining 20% will be
purchased by Dassault Systemes in the second half of 2005 at a price included
between 72,000 and 1,600,000 (euro) according to some conditions. This
acquisition aims to enhance the functional coverage of the Company's products in
the design and simulation of the manufacturing systems control.
The table of subsidiaries and holdings is attached to the balance sheet.
IMPORTANT EVENTS THAT HAVE OCCURRED BETWEEN THE CLOSE OF THE FISCAL YEAR AND THE
--------------------------------------------------------------------------------
DATE OF THIS REPORT
-------------------
We have related the important events that have occurred since December 31, 2003
in the summary of the Company's "Recent developments".
FORESEEABLE EVOLUTION AND FUTURE OUTLOOK
----------------------------------------
As a major portion of the business of the Company is performed by Dassault
Systemes, the parent company, the outlook for this company corresponds to the
outlook for the Company.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 42 *
GOVERNED AGREEMENTS
-------------------
The following agreements, which were approved in accordance with Articles
L.225-38 and following of the Commercial Code, were executed during the course
of the financial period ending 31 December 2003:
- On 28 June 1996: A "Management Liability" insurance policy entered into
with the insurance company AIG EUROPE;
- On 11 March 1998: A non-exclusive and free license for the brand ENOVIA
granted to Enovia.
Additionally, on 28 May 2003, the Board of Directors resolved to grant each
Audit Committee member special compensation for each Audit Committee meeting
convened between 28 May and 31 December 2003. The amount of this compensation
varied between 500 euros for a conference call to review announcements of the
company's results and 1,000 euros for a formal Committee meeting.
Lastly, on 23 September 2003, the Board of Directors authorized the following
agreements:
- A decision to pay Bernard Charles severance if the Board of Directors
cancels his term as Chief Executive Officer of the Company other than for
the cause of intentional misconduct harmful to the interests of Dassault
Systemes. The amount of this payment shall be equivalent to 24 months of
his most recent gross annual compensation as Chief Executive Officer.
- An amendment to the employment contract of Bernard Charles with the
objective in particular of stipulating a lump-sum payment equivalent to 24
months of his most recent gross annual compensation under his employment
contract if his employment is terminated for any cause other than serious
misconduct or gross negligence.
- An undertaking to reimburse, under certain conditions, the legal defense
costs of Directors if they are forced to prepare their personal defense
before a civil, criminal, or administrative court in the United States in
the context of an inquiry, trial, or investigation undertaken against
Dassault Systemes.
The Statutory Auditors have prepared a special report pursuant to Article
L.225-40 of the Commercial Code. We call upon you to review it at the same time
you review the Statutory Auditors' general report and to approve the
aforementioned agreements.
TABLE OF EARNINGS FOR THE LAST FIVE FINANCIAL YEARS
---------------------------------------------------
Attached to this report is the table of earnings for Dassault Systemes for each
of the past five fiscal years.
CAPITAL STOCK
-------------
On December 31 2003, sixteen Dassault Systemes stock option plans are in effect:
1. Plan of June 28, 1996
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 43 *
The Board of Directors, at its meeting of June 28, 1996, using the authorization
given by the Extraordinary Meeting of Shareholders on April 15, 1996, granted to
certain employees of Dassault Systemes and two of its subsidiaries - Dassault
Systemes of America ("DSA") and Dassault Systemes K.K. ("DSKK") - stock options
for Dassault Systemes shares which entitle them to the subscription of 513,890
Dassault Systemes shares with a 10 Francs nominal value per share, which,
following the 1997 two-for-one stock split and the 1999 conversion in euro of
the share's nominal value, represent 1,027,780 shares with a (euro)1 nominal
value. Each stock option gives the right to the subscription of one share for a
price of (euro) 9 (FRF 59.01) per share, or one share in the form of an American
Depositary Share ("ADS") for a unit price of USD 11.50.
During the years 1996 to 2002, 732,766 shares and 73,300 shares in the form of
ADS were subscribed under this option plan.
During fiscal year 2003, 35,555 shares were subscribed under this same plan,
which resulted in a 2003 capital increase for Dassault Systemes of (euro)
35,555.
2. Plan of December 15, 1997
On December 15, 1997, the Board of Directors, using the full authorization that
had been given to it by the Joint Meeting of Shareholders on June 6, 1997,
granted 1,031,840 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes; each option gives the right to the subscription
of one share. The subscription price per share was set at (euro) 25.92 (FRF
170).
During fiscal years 1999 to 2002, 76,244 shares were subscribed under this
option plan.
During fiscal year 2003, 66,660 shares, with a (euro) 1 nominal value, were
subscribed under this option plan, which resulted in a 2003 capital increase for
Dassault Systemes of (euro) 66,660.
3. Plan of January 28, 1998 (1998-1)
On January 28, 1998, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on January 26, 1998, granted
750,000 stock options for Dassault Systemes shares to certain employees of
Delmia ; each option gives the right to the subscription of one share for a
price of (euro) 26.37 (FRF 173), or one share in the form of ADS for a unit
price of USD 28.59.
During fiscal years 1998 to 2002, 624,700 shares in the form of ADS were
subscribed under this option plan.
During fiscal year 2003, 85,000 shares in the form of ADS were subscribed under
this option plan, which resulted in a 2003 capital increase for Dassault
Systemes of (euro) 85,000.
4. Plans of November 9, 1998 (1998-2 and 1998-3)
On November 9, 1998, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on January 26, 1998, granted the
following under the terms of two distinct option plans:
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 44 *
o 2,468,730 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes; each option gives the right to the
subscription of one share. The subscription price per share was set at
(euro) 29.58 (FRF 194).
o 354,750 stock options for Dassault Systemes shares to certain
employees of its subsidiaries DSA, DSKK, Delmia and Enovia; each
option gives the right to subscribe to one share or one share in the
form of an ADS. The subscription price per share was set at (euro)
29.58 or USD 34.48.
During fiscal years 1999 to 2002, 34,094 shares and 120,482 shares in the form
of ADS were subscribed under this option plan.
During fiscal year 2003, 10,040 shares and 1,575 shares in the form of ADS were
subscribed under this option plan, which resulted in a 2003 capital increase for
Dassault Systemes of (euro) 11,615.
5. Plans of September 15, 1999 (1998-4 et 1998-5)
On September 15, 1999, the Board of Directors, using the authorization it
received from the Extraordinary Meeting of Shareholders on January 26, 1998,
granted the following under the terms of two distinct option plans:
o 3,297,000 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes and Dassault Systemes Provence ("DSP");
each option gives the right to the subscription of one share with a
par value of (euro) 1. The subscription price per share was set at
(euro) 37.
o 320,000 stock options for Dassault Systemes shares to certain
employees of its subsidiaries DSA, DSKK, Delmia and Enovia; each
option gives the right to subscribe to one share with a par value of
(euro) 1 or one share in the form of an ADS. The subscription price
per share was set at (euro) 37 or USD 38.36.
During fiscal years 1999 to 2002, 13,500 shares and 66,127 shares in the form of
ADS were subscribed under this option plan.
During fiscal year 2003, 1,750 shares in the form of ADS were subscribed under
this option plan, which resulted in a 2003 capital increase for Dassault
Systemes of (euro) 1,750.
6. Plans of March 29, 2001 (1998-8 and 1998-9)
On March 29, 2001, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on January 26, 1998, granted the
following under the terms of two distinct option plans:
o 2,909,600 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes and DSP; each option gives the right to
the subscription of one share with a par value of (euro) 1. The
subscription price per share was set at (euro) 52. None of these
options may be exercised before March 29, 2003.
o 553,300 stock options for Dassault Systemes shares to certain
employees or representatives of its subsidiaries DSA, DSKK, Delmia,
Delmia GmbH, Enovia, Safework and Spatial, each option gives the right
to subscribe to one share with a
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 45 *
par value of (euro) 1 or one share in the form of an ADS. The
subscription price per share was set at (euro) 52 or USD 46.55.
During fiscal year 2002, 650 shares in the form of ADS were subscribed under
this option plan.
During fiscal year 2003, no share or share in the form of ADS was subscribed
under this option plan.
7. Plan of June 29, 2001 (1998-10)
On June 29, 2001, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on January 26, 1998, granted
138,000 stock options for Dassault Systemes shares to certain employees or
representatives of SRAC, each option gives the right to the subscription of one
share with a par value of (euro) 49, or of one share in the form of an ADS with
a par value of USD 41.55.
During fiscal year 2002, 101 shares in the form of ADS were subscribed under
this option plan.
During fiscal year 2003, no share or share in the form of ADS was subscribed
under this option plan.
8. Plans of October 5, 2001 (1998-11 and 1998-12)
On October 5, 2001, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on January 26, 1998, granted the
following under the terms of two distinct option plans:
o 1,387,400 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes, DSP and Dassault Data Services
("DDS"); each option gives the right to the subscription of one share
with a par value of (euro) 1. The subscription price per share was set
at (euro) 35.
o 328,650 stock options for Dassault Systemes shares to certain
employees or representatives of its subsidiaries DSKK, DSAG, Dassault
Systemes Inc., Delmia GmbH, Enovia, Safework, DSA, Delmia and Spatial
and the subsidiaries of the three latters, each option gives the right
to subscribe to one share with a par value of (euro) 1 or one share in
the form of an ADS. The subscription price per share was set at (euro)
35 or USD 32.11.
During fiscal year 2002, no share or share in the form of ADS was subscribed
under this option plan.
During fiscal year 2003, 7,295 shares in the form of ADS were subscribed under
this option plan, which resulted in a 2003 capital increase for Dassault
Systemes of (euro) 7,295.
9. Plans of May 28, 2002 (2002-01 and 2002-02)
On May 28, 2002, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on the same date, granted the
following under the terms of two distinct option plans:
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 46 *
o 1,363,563 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes, DSP and Dassault Data Services
("DDS"); each option gives the right to the subscription of one share
with a par value of (euro) 1. The subscription price per share was set
at (euro) 45.50. None of these options may be exercised before May 28,
2003.
o 355,300 stock options for Dassault Systemes shares to certain
employees or representatives of its subsidiaries DSKK, Dassault
Systemes Inc., Delmia GmbH, Enovia, Safework, DSA, Delmia, Spatial et
SolidWorks and subsidiaries of the four latters, each option gives the
right to subscribe to one share with a par value of (euro) 1 or one
share in the form of an ADS. The subscription price per share was set
at (euro) 45.50 or USD 41.92. None of these options may be exercised
before May 28, 2003.
During fiscal year 2003, 150 shares in the form of ADS were subscribed under
this option plan, which resulted in a 2003 capital increase for Dassault
Systemes of (euro) 150.
10. Plans of January 20, 2003 (2002-03 and 2002-04)
On January 20, 2003, the Board of Directors, using the authorization it received
from the Extraordinary Meeting of Shareholders on May 28, 2002, granted the
following under the terms of two distinct option plans:
o 3,325,000 stock options for Dassault Systemes shares to certain
employees of Dassault Systemes, DSP, DDS and the subsidiary of the
latter; each option gives the right to the subscription of one share
with a par value of (euro) 1. The subscription price per share was set
at (euro) 23. None of these options may be exercised before January
20, 2004.
o 675,000 stock options for Dassault Systemes shares to certain
employees or representatives of its subsidiaries DSKK, Delmia GmbH,
KTI Inc., KTI Ltd., SolidWorks, DSA, Dassault Systemes Canada Inc.,
Delmia, Enovia, SmarTeam and Spatial and subsidiaries of the six
latters, each option gives the right to subscribe to one share with a
par value of (euro) 1 or one share in the form of an ADS. The
subscription price per share was set at (euro) 23 or USD 24.50. None
of these options may be exercised before December 31, 2004.
The table below summarizes the exercised options since the implementation of the
first plan (the data includes retroactively the two-for-one stock split of the
nominal value which occurred on October 14, 1997); it is established on 31
December 2003:
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 47 *
Stock option
plan 1996 1997 1998-1 1998-2 1998-3 1998-4 1998-5 1998-8
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Meeting date 28/06/96 15/12/97 28/01/98 09/11/98 09/11/98 15/09/99 15/09/99 29/03/01
of Board
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Shareholders' 15/04/96 06/06/97 26/01/98 26/01/98 26/01/98 26/01/98 26/01/98 26/01/98
Meeting Dates
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 1,027,780(1) 1,031,840 750,000 2,468,730 354,750 3,297,000 320,000 2,909,600
options
granted
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
--to directors 167,000 175,400 0 1,042,850 0 1,845,750 0 1,676,150
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
--to the 230,000 411,600 706,000 838,000 126,000 844,000 103,500 736,000
top 10
beneficiary
employees
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Maximum 1,027,780 1,031,840 750,000 2,468,730 354,750 3,297,000 320,000 2,909,600
number of
shares
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 916 362 26 1,018 296 556 290 531
beneficiaries
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise 9.00 25.92 26.37 29.58 29.58 37.00 37.00 52.00
price per
option in(euro)
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise 28/06/96 15/12/99 28/01/98 09/11/00 09/11/98 15/09/01 15/09/99 29/03/03
first date
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise last 27/06/06 14/12/07 27/01/08(a) 08/11/08 08/11/08(b) 14/09/09 14/09/09(c) 28/03/11
date
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 806,066(2) 76,244 624,700 34,094 120,482 13,500 66,127 0
options
exercised
1996-2002
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 35,555(3) 66,660 85,000 10,040 1,575 0 1,750 0
options
exercised in
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 29,960 24,946 0 52,790 0 44,640 0 18,360
options
cancelled
1996-2002
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 0 4,900 27,800 2,620 39,888 9,340 42,688 8,220
options
cancelled in
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 156,199 859,090 12,500 2,369,186 192,805 3,229,520 209,435 2,883,020
options
outstanding
as
of December 31,
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Stock option
plan 1998-9 1998-10 1998-11 1998-12 2002-01 2002-02 2002-03 2002-04 Total
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Meeting date 29/03/01 29/06/01 05/10/01 05/10/01 28/05/02 28/05/02 20/01/03 20/01/03
of Board
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Shareholders' 26/01/98 26/01/98 26/01/98 26/01/98 28/05/02 28/05/02 28/05/02 28/05/02
Meeting Dates
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 553,300 138,000 1,387,400 328,650 1,363,563 355,300 3,325,000 675,000 20,285,913
options
granted
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
--to directors 0 0 655,000 0 651,403 0 1,500,000 0 7,713,553
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
--to the 176,600 116,403 424,100 101,000 454,000 139,000 1,060,000 219,000 6,685,203
top 10
beneficiary
employees
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Maximum 553,300 138,000 1,387,400 328,650 1,363,563 355,300 3,325,000 675,000 20,285,913
number of
shares
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 513 44 400 434 378 401 803 533 7,501
beneficiaries
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise 52.00 49.00 35.00 35.00 45.50 45.50 23.00 23.00
price per
option in(euro)
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise 29/03/01 29/06/01 05/10/02 05/10/02 28/05/03 28/05/03 20/01/04 31/12/04
first date
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Exercise last 28/03/11(d) 28/06/11(e) 04/10/11(f) 04/10/11(g) 27/05/12(h) 27/05/12(i) 19/01/13 19/01/13
date
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 650 101 0 0 0 0 - - 1,741,964
options
exercised
1996-2002
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 0 0 0 7,295 0 150 - - 208,025
options
exercised in
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 0 0 4,800 0 3,569 0 0 0 179,065
options
cancelled
1996-2002
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Number of 32,890 0 3,600 8,500 3,009 0 3,200 0 186,655
options
cancelled in
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of 519,760 137,899 1,379,000 312,855 1,356,985 355,150 3,321,800 675,000 17,970,204
options
outstanding
as
of December 31,
2003
-------------------- ----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 48 *
[DASSULT SYSTEMES LOGO] [GRAPHIC OMITTED]
(1) including 946,680 to employees of Dassault Systemes and DSKK and 81,100 to
employees of DSA
(2) including 732,766 by employees of Dassault Systemes and DSKK and 73,300 by
employees of DSA.
(3) by employees of Dassault Systemes and DSKK only.
(a) of which 475,002 have been exercisable since January 28, 1998, an additional
100,000 exercisable since January 28, 1999, an additional 99,998 exercisable
since January 28, 2000, an additional 50,000 exercisable since January 28, 2001
and the balance since January 28, 2002.
(b) of which 88,687 have been exercisable since November 9, 1998, an additional
88,688 exercisable since November 9, 1999, an additional 88,687 exercisable
since November 9, 2000 and the balance since November 9, 2001.
(c) of which 80,000 have been exercisable since September 15, 1999, an
additional 80,000 exercisable since September 15, 2000, an additional 80,000
since September 15, 2001 and the balance since September 15, 2002.
(d) of which 138,325 have been exercisable since March 29, 2001, an additional
138,325 exercisable since March 29, 2002, an additional 138,325 exercisable
since March 29, 2003 and the balance since March 29, 2004.
(e) of which 34,500 have been exercisable since June 29, 2001 and an additional
34,500 exercisable since June 29, 2002, and an additional 34,500 exercisable
since June 29, 2003.
(f) of which 346,850 have been exercisable since October 5, 2002 and an
additional 346,850 exercisable since October 5, 2003.
(g) of which 82,162 have been exercisable since October 5, 2002 and an
additional 82,163 exercisable since October 5, 2003.
(h) of which 340,891 have been exercisable since May 28, 2003.
(i) of which 88,825 have been exercisable since May 28, 2003.
As a result, following the exercise of 208,025 stock options during the past
fiscal year, and the cancellation of 1,375,201 shares directly held by Dassault
Systemes on May 31, 2003, the capital stock of Dassault Systemes was (euro)
113,403,665 as of December 31, 2003.
On this date, the share capital was therefore divided into 113,403,665 shares
with a (euro) 1 nominal value, which the Board of Directors duly noted in its
meeting of March 26, 2004.
The exercise of the balance of the options allotted since 1996, which have not
yet been exercised and may be exercised as of December 31, 2003, would result in
a capital increase of (euro) 11,675,012 through the issue of 11,675,012 shares
with a (euro) 1 nominal value. The exercise of the balance of the options
allotted since 1996 and not yet exercised, whether or not they may already be
exercised, would result in a capital increase of (euro) 17,970,204 through the
issue of 17,970,204 shares with a (euro) 1 nominal value.
Moreover, the Joint General Meeting on June 13, 2000 authorized the Board of
Directors to grant, until June 12, 2005 included, stock purchase options for
Dassault Systemes shares to certain employees or representatives exercising
their duties in the Company.
SHAREHOLDERS
------------
In accordance with the provisions of Article L.233-13 of the Commercial Code and
taking into account the information received pursuant to Articles L.233-7 et
L.233-12 of the said Code, we are notifying you that the main shareholders of
Dassault Systemes, as of December 31, 2003, were the following:
Name of the shareholder Number of shares Percentage of Percentage of
held capital voting rights
--------------------------------------------------------------------------------
Groupe Industriel Marcel Dassault 51,184,857 45.1 % 42.4 %
--------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 49 *
--------------------------------------------------------------------------------
Mr. Charles Edelstenne 7,658,007 6.8 % 12.7 %
On December 31, 2002, The French State owned 15.6% of the share capital and
14.6% of the voting rights of Dassault Systemes. It sold exclusively to
international qualified investors all shares it owned on September 8, 2003 under
an accelerated bookbuilding process.
To the knowledge of Dassault Systemes, no other shareholder owns more than 5% of
the capital.
In addition to these shareholders, institutional shareholders or small investors
whose shares are freely negotiable on the Stock Exchange hold 47.8% of the
Dassault Systemes share capital and 44.9% of voting rights.
Moreover, at December 31, 2003, SW Securities L.L.C., a wholly owned American
subsidiary of SolidWorks, held 359,438 shares of Dassault Systemes, which is
0.3% of the capital. These shares, which do not carry a voting right and are not
intended to collect dividends, were issued as part of the take-over of
SolidWorks in order to remunerate the exercise of the stock subscription options
issued by SolidWorks prior to the acquisition of this company by Dassault
Systemes. During fiscal year ended December 31, 2003, 31,972 shares were
allotted to the holders of stock options and 743 options were canceled.
MANDATES AND DUTIES OF REPRESENTATIVES
--------------------------------------
The mandates and duties exercised by the representatives of Dassault Systemes
are the following:
Names Mandates and duties
------------------- -----------------------------------------------------------------------------------
Charles Edelstenne o Chairman of the Board of directors of Dassault Systemes.
o Chairman and Chief Executive Officer of Dassault Aviation.
o Director of Groupe Industriel Marcel Dassault, of Thales Systemes
Aeroportes, of Sogitec Industries, of Societe Anonyme Belge de
Constructions Aeronautiques, and of Dassault Reassurance.
o Chairman of Dassault Falcon Jet Corporation.
o President of Dassault International Inc.
------------------- -----------------------------------------------------------------------------------
Paul Brown Professor in the Accounting, Taxation and Business Law Department of
the Leonard N. Stern Business School at the New York University.
Academic Director, TRIUM Executive MBA Program.
Director and member of the audit committee of Dictaphone, Inc.
------------------- -----------------------------------------------------------------------------------
Bernard Charles o President and Chief Executive Officer of Dassault Systemes.
o President of Dassault Systemes Canada Inc.
o Chairman of Dassault Data Services, Delmia Corp., Enovia Corp., and
SolidWorks Corporation.
o Chairman, President and Chief Executive Officer of Dassault Systemes Corp.,
o Chairman, President and representative director of Dassault Systemes
------------------- -----------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 50 *
K.K.,
o Director of SmarTeam Corporation Ltd and of Business Objects.
------------------- -----------------------------------------------------------------------------------
Laurent Dassault o Chairman and Chief Executive Officer of Dassault Belgique Aviation.
o Director of Groupe Industriel Marcel Dassault, of Sogitec Industries, of
Power Corporation du Canada, of Pechel Industries, of Generali France, of
Kudelski SA, of Banque Privee Edmond de Rothschild Luxembourg, of
Terramaris, of BSS Investment SA, of Industrial Procurement Services, of
NAFCO - National Aerospace Stener Co., of Chenfeng Machinery and of
Aero Precision Repair and Overhaul Company . [[ A-pro]]
o President of Immobiliere Dassault.
o General manager of Dassault Investissements and of Chateau Dassault.
o Member of the Supervisory Board of Eurazeo.
o Member of the Advisory Board of Syntek Capital SA, 21 Central Partners,
and Member of the Advisory Committee of Power Private Equity Fund.
o Chairman of Midway Aircraft Corporation and of Dassault Falcon Jet do
Brazil.
o President of Dassault Investment Fund Inc., of Societe des voitues
Electriques, and of Vina Totihue S.A.
Christian Decaix o Executive Vice President Social and Industrial Operations of Dassault
Aviation.
o Director of Sogitec Industries, of Dassault Falcon Jet Corporation, of
Dassault Reassurance and of European Aerosystems Ltd.
------------------- -----------------------------------------------------------------------------------
Bernard Dufau o Strategic Counsel and General manager of B. Dufau Conseil.
o Director and chairman of the Audit Committee of France Telecom.
o Director and member of the Audit Committee of Kesa Electricals.
o Director of Mood Media.
------------------- -----------------------------------------------------------------------------------
Andre Kudelski o President and Chief Executive Officer of the Kudelski group.
o Chairman and Chief executive Officer of Nagra +.
o Director of Nestle, of Edipresse and of Swiss International Air Lines Ltd.
o Member of the of [[Swiss Advisory Board]] Credit Suisse and of the
Swiss American Chamber of Commerce.
------------------- -----------------------------------------------------------------------------------
Loik Segalen o Vice President Economic and Financial Affairs of Dassault Aviation.
o Chairman and Chief Executive Officer of Dassault Assurances Courtage.
o Chairman of Dassault Reassurance.
o Director of Dassault Belgique Aviation, of Midway Aircraft Instrument
Corporation, Dassault Falcon Jet, and of Paris Le Bourget Parc des
Expositions.
o General manager of Dassault Aero Service.
o Permanent representative of Dassault Aviation to the Board of directors of
Corse Composites Aeronautiques.
------------------- -----------------------------------------------------------------------------------
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 51 *
------------------- -----------------------------------------------------------------------------------
Thibault de Tersant o Executive Vice-President and Chief Financial Officer of Dassault
Systemes.
o Director of SolidWorks, of Delmia, of Dassault Systemes Corp., of Enovia
and of SmarTeam.
REMUNERATION OF MEMBERS OF THE BOARD
------------------------------------
The global remuneration before taxation in euro granted by the Company to each
member of the board during the fiscal year 2002 is the following:
-------------------------- ----------------------------------- -------------- ----------------- ------------ -----------
Directors Salary and fees Other Directors' fees Total for Total for
benefits 2003 2002
-------------------------- ----------------------------------- -------------- ----------------- ------------ -----------
Fixed Bonus Total
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Charles Edelstenne (1) 542,800 - 542,800 - 20,000 562,800 552,325
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Bernard Charles 541,304 360,870 (3) 902,174 4,666 10,000 916,840 825,983
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Thibault de Tersant 199,536 85,515 (4) 285,051 2,761 10,000 297,812 260,760
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Paul Brown - - - - 13,000 13,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Laurent Dassault (2) - - - - 10,000 10,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Christian Decaix - - - - 10,000 10,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Bernard Dufau - - - - 13,000 13,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Andre Kudelski - - - - 13,000 13,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
Loik Segalen - - - - 10,000 10,000 8,000
-------------------------- ----------- ------------- --------- -------------- ----------------- ------------ -----------
(1) In 2003, Groupe Industriel Marcel Dassault paid (euro)16,000 to Charles
Edelstenne in director's fees.
(2) In 2003, Groupe Industriel Marcel Dassault paid (euro)304,898 to Laurent
Dassault as gross annual salary and (euro)15,000 in director's fees.
(3) Bernard Charles also received (euro)33,667 in profit-sharing.
(4) Thibault de Tersant also received (euro)33,667 in profit-sharing.
The subsidiaries of Dassault Systemes have not granted any salary or benefit in
kind to any of the above-mentioned representatives.
STATUTORY AUDITORS' FEES PAID BY DASSAULT SYSTEMES
--------------------------------------------------
The following table presents the aggregate fees for professional services and
other services rendered by Deloitte Touche Tohmatsu and Ernst & Young Audit to
the Company in 2003 and 2002.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 52 *
------------------------------------------ ------------------------------------------
Deloitte Touche Tohmatsu Ernst & Young Audit
------------------------------------------ ------------------------------------------
-------------------- ---------------------
Fee amount in euros % Fee amount %
--------------------- -------------------- -------------------- ---------------------
2003 2002 2003 2002 2003 2002 2003 2002
----------- --------- ---------- --------- ---------- --------- ---------- ----------
-----------------------------------
Audit
- Audit fees (1) 507,766 523,519 54.8% 65.6% 290,321 292,396 94.5% 87.7%
- Audit-related fees 217,000 35,982 23.4% 4.5% 17,000 22,820 5.5% 6.9%
----------------------------------- ----------- --------- ---------- --------- ---------- --------- ---------- ----------
Sub-total 724,766 559,501 78.2% 70.1% 307,321 315,216 100.0% 94.6%
----------------------------------- ----------- --------- ---------- --------- ---------- --------- ---------- ----------
All other fees
- Legal, tax, labor 201,852 238,687 21.8% 29.9% - 17,904 - 5.4%
----------------------------------- ----------- --------- ---------- --------- ---------- --------- ---------- ----------
Sub-total 201,852 238,687 21.8% 29.9% - 17,904 0.0% 5.4%
----------------------------------- ----------- --------- ---------- --------- ---------- --------- ---------- ----------
Total 926,618 798,188 100.0% 100.0% 307,321 333,120 100.0% 100.0%
----------------------------------- ----------- --------- ---------- --------- ---------- --------- ---------- ----------
---------------
(1) Audit Fees consist of fees billed for the annual audit services
engagement and other audit services, which are those services that only
the external auditor reasonably can provide, and include the Group audit;
statutory audits; consents; attest services; and services provided in
connection with documents filed with the SEC and the French market
authorities (AMF).
(2) Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company's financial statements or that are traditionally
performed by the external auditor, and include consultations concerning
financial accounting and reporting standards and the application of new
accounting pronouncements.
(3) Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund;
tax consultations, such as assistance and representation in connection
with tax audits and appeals.
EXPENDITURE ON LUXURIES AND OVERHEAD AS PROVIDED FOR IN ARTICLE 223 OF THE
--------------------------------------------------------------------------
GENERAL TAX CODE
----------------
In accordance with the provisions of Article 223 quater and quinquies of the
General Tax Code, we are informing you of the total amount of non-deductible tax
charges, which totaled (euro) 295,533 for the past fiscal year; the resulting
corporate tax was (euro) 104,707.
DIRECTORS' FEES
---------------
We propose that you set the amount of the directors' fees to (euro) 140,000 for
the current and following fiscal years until a new decision will amend this
point.
EXPIRATION OF THE TERMS OF A STATUTORY AUDITOR AND AN ALTERNATE AUDITOR
-----------------------------------------------------------------------
We remind you that the term of Statutory Auditor Ernst & Young Audit and that of
Alternate Auditor Mr. Francois Carrega will expire at the end of this General
Shareholders' Meeting.
We propose that you renew both the term of the company Ernst & Young Audit and
that of Mr. Francois Carrega for a period of six fiscal years. Please note that
Mr. Jean-Marc Montserrat will henceforth represent the company Ernst & Young
Audit in his duties.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 53 *
In compliance with the law, we are notifying you that Ernst & Young Audit is
affiliated with the Ernst & Young network. For the period 1 January to 31
December 2003, this network received no fees for services not directly related
to the role of Statutory Auditor and provided to entities controlled by Dassault
Systemes or which Dassault Systemes controls in the sense of Article L.233-3
(items I and II) of the Commercial Code. The company Ernst & Young Audit has not
provided and shall not provide any services to the Company in 2004 and during
the entire period of its mission as Statutory Auditor other than those services
directly related to its role as auditor. The same is true and will remain true
for the member entities of its network.
It is further specified that Dassault Systemes and the companies it controls
were not subject to capital contribution or merger transactions during the last
two fiscal years. Consequently, Article L.225-228 paragraph 2 of the Commercial
Code does not apply.
AUTHORIZATION OF COMPANY TRANSACTIONS ON THE MARKET
---------------------------------------------------
Pursuant to the provision stipulated by Article L.225-209 of the Commercial
Code, the Joint General Shareholders' Meeting on 28 May 2003 authorized the
Board of Directors to implement a share redemption plan up to a limit of 10% of
the share capital and for a period to expire at the end of the Annual General
Shareholders' Meeting called to approve the financial statements for the
financial year ending 31 December 2003, in particular to enable cancellation of
the shares and thereby to optimize profitability and earnings per share. The
maximum purchase price may not exceed 60 euros per share (excluding acquisition
costs) and the minimum sale price may not be under 15 euros per share (excluding
sales costs). Cumulative acquisitions may not exceed 400 million euros. This
authorization replaced a similar authorization granted by the General
Shareholders' Meeting of 28 May 2002 that stipulated a maximum purchase price of
80 euros and a minimum sales price of 20 euros. It was the subject of an
information memorandum referenced by the Commission des Operations de Bourse
under number 03-398 dated 9 May 2003.
Pursuant to the authorization of 28 May 2002, Dassault Systemes acquired in
early February 2003, 1,375,201 of its shares on the market for the sole purpose
of canceling them and for a total value of 29,450,250 euros and a weighted
average unit price of 21.42 euros, excluding acquisition costs. No liquidity
agreement or derivatives were implemented under this buyback program.
Pursuant to the authorization of 28 May 2003, Dassault Systemes cancelled on 31
May 2003, its 1,375,201 treasury shares. Dassault Systemes has not executed any
transactions to purchase shares since this date and consequently holds none of
its own shares.
Pursuant to the same provision stipulated by Article L.225-209 of the Commercial
Code, we recommend that you authorize the Board of Directors to implement a
share redemption program up to a limit 10% of the share capital and for a period
to expire at the end of the aforementioned General Shareholders' Meeting, which,
as long as no stock options are executed between 1 April 2004 and this date,
represents a maximum of 11,347,674 shares. If you adopt this proposal, the
authorization shall be valid until the Annual General Shareholders' Meeting
called to approve the financial statements for the financial year ending 31
December 2004, and for a purchase price up to a limit of 60 euros per share. The
maximum amount of funds for the redemption of shares of Dassault Systemes may
not exceed 400 million euros.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 54 *
This transaction would be executed to intervene in the securities market, in
descending priority, and without prejudice to the effective order of use of the
buyback authorization, which shall be based on needs and opportunities, to:
o optimize earnings per share by means of canceling the Company's
own shares, leading to a reduction in share capital;
o promote to the Company's financial affairs or growth;
o adjust stock prices;
o grant shares to Company employees and executives pursuant to the
implementation of a stock option purchase plan;
o give shares thus purchased to the beneficiaries of rights attached to
securities granting subscription rights to shares of the Company when their
rights are exercised;
o retain the securities acquired and, as applicable, assign them by any means
allowed by law.
The information memorandum issued by the Autorite des marches financiers is
available to you free of charge upon request during the two weeks before the
Meeting. It contains all the additional information you need on the subject of
the share redemption plan.
In anticipation of a cancellation of the purchased shares, we recommend that you
also authorize the Board of Directors to cancel, as needed, on one or more
occasions, and for the same time period, all or part of the shares that it will
have purchased in this manner, making a corresponding share capital reduction of
up to 10% of its total. Any and all powers would be delegated to the Board of
Directors to carry out this share capital reduction.
AUTHORIZATION TO ISSUE DEBT SECURITIES
--------------------------------------
We recommend that you give any and all powers to the Board of Directors for a
five-year period to proceed on one or more occasions, at its sole discretion, in
France or abroad, with the issue of debt securities or similar securities, in
particular, subordinated securities, with or without a fixed term, granting, in
the same issue, a same right to receive payments from the Company, with or
without warrants giving right to the allotment, purchase or subscription of
other debt securities or similar securities.
The maximum nominal amount of all the securities to be issued shall not exceed 1
billion euros or the equivalent of this amount in foreign currency or in any
monetary units established by reference to several currencies.
AUTHORIZATION TO ISSUE SECURITIES GIVING RIGHTS TO THE COMPANY'S CAPITAL
------------------------------------------------------------------------
The Joint General Meeting of Shareholders on 28 May 2002 delegated to the Board
of Directors, for a period of 26 months, the necessary powers to enable it to
issue securities giving immediate or future rights to the capital of Dassault
Systemes, with a maximum nominal amount limited to 10 million euros. The nominal
amount of the debt securities likely to be issued was set at 600 million euros
or the equivalent value of this amount in foreign currency or in account units
set in reference to several currencies. This delegation also enabled the Board
of Directors to carry out capital increases by capitalizing reserves, profits,
premiums, or any other sums that could be capitalized. It therefore enabled the
Board of Directors to carry out capital increases reserved for Dassault Systemes
employees and/or
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 55 *
companies in which it holds directly or indirectly more than 50% of the capital
or voting rights, and participants in the company savings plans or in a
voluntary employee partnership savings plan.
We are notifying you that the Board of Directors made no use of this
comprehensive delegation.
We recommend that you renew the aforementioned delegation and thereby grant any
and all powers to the Board of Directors, for a new 26-month period, for the
purpose of proceeding, in one or more transactions, at the time and in the
proportions it deems appropriate, both in France and abroad, with the issue of
shares and/or any other securities, including warrants for new shares (and/or,
if applicable, the allotment of existing shares) issued separately, which give
rights, immediately or in the future, at any time or on a fixed date, by
subscription, conversion, exchange, redemption, presentation of a warrant or in
any other manner, to a portion of the capital of Dassault Systemes. The maximum
nominal amount of increases in the share capital to be made either now or in the
future pursuant to this delegation may not exceed 25 million euros; it being
specified that, within the limit of this cap, issues of non-voting preferred
shares or investment certificates may not have the effect of increasing the
capital of each of these types of issues by a total nominal amount of more than
10 million euros. The nominal amount of debt securities giving rights to the
capital of the Company to be issued pursuant to such delegation, shall not
exceed a maximum of 1 billion euros or the equivalent value of such amount in
foreign currency or in account units set in reference to several currencies.
Pursuant to this delegation, the Board of Directors may proceed with the issue
of securities, either by permitting shareholders to retain their preemptive
subscription right, or by resolving to eliminate their preemptive subscription
right.
With a resolution to eliminate the preemptive subscription right, the Board of
Directors may also proceed with the issue of shares or securities representing
of a portion of the share capital of Dassault Systemes following an issue by its
subsidiaries of bonds accompanied by warrants to subscribe for shares of
Dassault Systemes or any other securities giving the right through conversion,
exchange, redemption, presentation of a warrant, or any other way, to the
allotment of securities which for this purpose shall be issued to represent a
portion of the capital of Dassault Systemes.
a) The issue of securities with preemptive subscription rights
The shareholders shall have a preemptive subscription right to a fixed number of
shares and, if applicable, additional shares, the Board of Directors having the
option to grant shareholders the right to subscribe to a fixed number of
additional securities which exceeds the fixed number to which they are entitled,
in proportion to the subscription rights they hold and, in any event, up to the
maximum of their request. In the event subscriptions to the fixed number of
shares and, if applicable, to additional shares, have not exhausted the
securities issue, the Board of Directors may use, in the order it determines,
any of the following options:
o Limit the issue to the amount of the subscriptions collected, provided that
this amount is at least three-quarters of the relevant issue; and/or
o Distribute at its discretion all or part of the fixed number of
securities not subscribed and, if applicable, the additional
securities not subscribed; and/or
o Offer all or part of the securities not subscribed to the public.
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 56 *
The issue of warrants for new shares (and/or, as applicable, the allotment of
existing shares) may be granted either by a subscription offer pursuant to the
aforementioned terms and conditions, or by bonus allotment to owners of existing
shares. In the case of bonus allotments of warrants for new shares, the Board of
Directors may decide that allotment rights resulting in split shares shall not
be negotiable and that the corresponding warrants shall be sold, the proceeds
from such sale to be allocated to the holders of rights no later than 30 days
after the date on which the whole number of warrants allotted is recorded in
their account.
The delegation shall automatically imply, in favor of the holders of securities
giving future rights to shares of Dassault Systemes, the waiver by shareholders
of their preemptive subscription rights to the shares to which said securities
entitle them. The preemptive subscription right to the shares issued by
conversion of debt securities or the exercise of warrants for new shares
(and/or, as applicable, the allotment of existing shares) issued separately
shall be eliminated.
The sum due or falling due to the Company for each share issued pursuant to this
delegation, after taking into account, in the event of an issue of detachable
warrants for new shares (and/or, as applicable, allotment of existing shares),
the issue price of said warrants, must be at least equal to the par value of the
shares of Dassault Systemes on the date of issue.
b) The issue of securities without preemptive subscription rights
In the event securities are issued without preemptive subscriptions rights, the
shareholders' preemptive subscription right to future securities shall be
eliminated. It is understood that the Board of Directors may give shareholders a
priority subscription to all or part of this issue during a period and subject
to conditions that it shall determine. In this case, the capital increase may
also result from the exercise of an allotment right, by conversion, exchange,
redemption, presentation of a warrant or in any other manner, resulting from all
securities issued by any company in which Dassault Systemes holds directly or
indirectly more than half the capital, with the agreement of said company.
Furthermore, the Board of Directors may use this delegation, in whole or in
part, to remunerate all securities tendered in a public exchange offer initiated
by Dassault Systemes, within the limits and subject to the conditions stipulated
by law at the time this delegation is used.
The delegation automatically implies, in favor of the holders of securities
giving future rights to shares of Dassault Systemes that may be issued, the
waiver by shareholders of their preemptive subscription rights to the shares to
which said securities entitle them. The preemptive subscription right to the
shares issued by conversion of debt securities or the exercise of warrants for
new shares (and/or, as applicable, the allotment of existing shares) issued
separately shall be eliminated.
The sum due or falling due to Dassault Systemes for each share issued or to be
issued pursuant to this delegation, after taking into account, in the event of
an issue of detachable warrants for new shares (and/or, as applicable, allotment
of existing shares) the issue price of said warrants, must be at least equal to
the minimum value set by the applicable law.
c) Capital increase by capitalization of reserves, profits, or premiums
It is specified that the aggregate delegation submitted to you also enables the
Board of Directors to increase share capital in one or more transactions through
the capitalization of reserves, profits, premiums, or any other sums that may be
capitalized; or by combination with a capital increase in cash transacted with
or without preemptive subscription rights, to be performed by the issue and
allotment of bonus shares or an increase in the nominal value of
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 57 *
the shares, or by combining the two transactions. Upon your approval, this
delegation shall replace and supercede the delegation granted by the General
Shareholders' Meeting of 28 May 2002 that is currently in force.
d) Authorization to increase share capital in the event of a public tender
or exchange offer for the shares of Dassault Systemes
We recommend that you authorize the Board of Directors to use the authorization
granted under paragraphs a), b), and c) hereinabove, to increase the share
capital, with or without preemptive subscription rights, or through
capitalization of reserves, by issuing shares or any other securities giving
access to immediate or future rights to shares of Dassault Systemes in the event
of a public tender or exchange offer for Dassault Systemes shares. This
authorization shall expire at the end of the General Shareholders' Meeting
called to approve the annual financial statements for the fiscal year ending
December 31, 2004.
e) Increase of share capital reserved for employees
So that we may comply with the Commercial Code provisions introduced by the law
of 9 February 2001 governing employee savings plans, we also recommend that you
permit the Board of Directors to increase the share capital reserved for
Dassault Systemes employees and/or employees of affiliated companies
participating in company savings plans. In this framework, the maximum nominal
amount of capital increases that may be completed in one or more transactions
would be 10 million euros per issue of new shares or other shares giving access
to the capital of Dassault Systemes under the terms and conditions established
by law. This new delegation would replace and supercede the delegation granted
by the General Shareholders' Meeting of 28 May 2002 and currently in force.
f) Share capital increase reserved to one class of beneficiaries
We recommend that you allow the Board of Directors to increase the share capital
reserved for qualified investors, as permitted under the Commercial Code. In
this framework, the maximum nominal amount of capital increases that may be
completed in one or more transactions would be 15 million euros per issue of new
shares, with or without warrants, through the issue of securities other than
shares giving preemptive rights and/or through the issue of warrants (and/or, as
applicable, allotments of existing shares) separately or attached to the
securities issued simultaneously. The nominal amount of Dassault Systemes debt
securities that may be issued under this authorization may not exceed 600
million euros.
AMENDMENTS TO BY-LAWS
---------------------
In order to harmonize the by-laws of Dassault Systemes with the new provisions
of the Law of 1 August 2003 governing financial security (n(degree) 2003-706),
we recommend amending the following provisions:
o Reduction to five trading days for the information period provided in
the event a threshold is crossed
o Directors' disclosure rights
o Deletion of the provision announcing that the Chairman of the Board of
Directors represents the Board
o Modification of the definition of agreements governed by regulations
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 58 *
o Calling the Auditors to Board of Directors' meetings to review and to
close interim accounts
REPORT ON THE WORK OF THE BOARD OF DIRECTORS AND INTERNAL CONTROL
-----------------------------------------------------------------
The Chairman's report of the work of the Board of Directors and internal control
is attached to this report as stipulated by Article L.225-37, paragraph 6 of the
Commercial Code.
DISCHARGE OF THE DIRECTORS
--------------------------
After reading the preceding explanations and hearing those the Board will give
you during the Meeting, we ask you to approve the financial statements for the
financial period ending 31 December 2003 as they have been presented to you and
to grant full release and discharge to the Directors with respect to their
duties exercised for the financial year that has just expired.
If you approve our proposals, please adopt the resolutions that have been
submitted to you.
THE BOARD OF DIRECTORS
DASSAULT SYSTEMES, a French societe anonyme with a share capital
of 113,403,665 euros - * page 59 *
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dassault Systemes
Suresnes, France:
We have audited the accompanying consolidated balance sheets of Dassault
Systemes as of December 31, 2003 and 2002, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2003. 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 of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dassault Systemes at December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for the years ended December 31, 2003, 2002
and 2001 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note I to the consolidated financial statements, in 2002,
the Company changed its method of accounting for goodwill and other intangible
assets in accordance with guidance provided in Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
Paris and Neuilly-sur-Seine, France, April 28, 2004
Ernst & Young Audit Deloitte Touche Tohmatsu
Represented by Represented by
Jean-Marc MONTSERRAT Philippe MOURARET
1
DASSAULT SYSTEMES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
(All amounts in thousands except share amounts) December 31,
------------
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents (Note F) (euro) 419,572 (euro)371,992
Short-term investments (Note G) 20,102 16,436
Trade accounts receivable, net of allowance for doubtful accounts 227,579 229,505
of (euro)7,477 in 2003 and(euro)7,881 in 2002
VAT receivable 6,732 6,316
Prepaid expenses and advances 9,595 19,172
Financial instruments 7,226 17,270
Income tax receivable 12,664 8,877
Deferred tax assets (Note E) 31,634 27,947
Other current assets 32,446 24,134
-------- ---------
Total current assets 767,550 721,649
Property and equipment, at cost:
Land 6,037 6,109
Buildings 29,801 30,335
Computer equipment 57,885 56,702
Office furniture and equipment 18,257 19,280
Leasehold improvements 27,899 23,708
--------- --------
139,879 136,134
Less accumulated depreciation and amortization (83,340) (76,261)
--------- ---------
Property and equipment, net (Note H) 56,539 59,873
Other non-current assets (Note J) 39,507 39,167
Investment in equity of unconsolidated affiliates - joint ventures 475 304
Long-term deferred tax assets (Note E) 19,292 15,405
Intangible assets (Note I) :
Goodwill 73,804 71,599
Other intangible assets (less accumulated depreciation of(euro)92,616 7,323 12,167
in 2003 and(euro)94,496 in 2002)
--------- ---------
Total assets (euro) 964,490 (euro)920,164
========= =========
See accompanying notes to consolidated financial statements.
2
DASSAULT SYSTEMES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(All amounts in thousands except share amounts) December 31,
------------
2003 2002
---- ----
Liabilities and shareholders' equity
Current liabilities:
Accounts payable (euro) 42,264 (euro) 31,638
Accrued wages and other personnel costs 54,212 56,892
Sales incentive payable (Note P) 15,787 15,668
Unearned revenue 85,188 92,229
Income taxes payable 21,258 14,535
Current portion of long-term obligations 10,713 7,475
VAT and sales tax payables 6,551 8,182
Deferred tax liabilities (Note E) 4,937 6,135
Accrued expenses and other current liabilities 21,542 16,209
--------- --------
Total current liabilities 262,452 248,963
Long-term obligations :
Capital lease (Note K) 4,205 5,916
Employee profit sharing (Note L) 19,261 22,655
Pension and post retirements benefits (Note M) 10,688 8,388
Deferred tax liabilities and other (Note E) 10,206 5,981
--------- --------
Total long-term obligations 44,360 42,940
Commitments and contingencies (Note N)
Shareholders' equity :
Share capital, par value Euro 1, 113,403,665 shares authorized 113,404 114,571
and issued and 113,044,227 shares outstanding at December 31,
2003, and 114,570,841 shares authorized and issued and
114,179,431 shares outstanding at December 31, 2002 (Note O)
Additional paid-in capital 66,694 89,278
Retained earnings - unrestricted 514,363 416,180
Retained earnings - restricted (Note O) 11,457 11,446
Accumulated other comprehensive income (48,240) (3,214)
-------- --------
Total shareholders' equity 657,678 628,261
--------- --------
Total liabilities and shareholders' equity (euro) 964,490 (euro)920,164
========= =========
See accompanying notes to consolidated financial statements.
3
DASSAULT SYSTEMES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
(All amounts in thousands, except per share data) Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenue :
Software revenue (Note C) (euro) 645,565 (euro)669,886 (euro)643,034
Services and other revenue 109,258 104,229 103,019
---------- --------- ----------
Total revenue 754,823 774,115 746,053
Cost of revenue :
Software (21,664) (24,448) (20,791)
Services and other (89,793) (96,413) (86,542)
---------- ---------- --------
Total cost of revenue (111,457) (120,861) (107,333)
---------- ---------- ----------
Gross profit 643,366 653,254 638,720
Research, selling and administrative expenses :
Research and development (215,609) (221,563) (209,235)
Marketing and sales (162,414) (169,653) (164,323)
General and administration (46,679) (47,908) (44,183)
Amortization of goodwill - - (44,144)
Amortization of acquired technology (5,925) (11,098) (14,240)
---------- ---------- ----------
(430,627) (450,222) (476,125)
---------- ---------- ----------
Operating income 212,739 203,032 162,595
Equity in net income of unconsolidated affiliates 419 214 -
Financial revenue and other, net (Note D) (855) 2,545 14,062
---------- ---------- ----------
Income before income taxes 212,303 205,791 176,657
Income tax expense (Note E) (76,884) (79,376) (87,916)
---------- ---------- ----------
Net income (euro) 135,419 (euro)126,415 (euro)88,741
=========== ========== ==========
Basic net income per share (Note O) (euro) 1.20 (euro) 1.11 (euro) 0.78
Diluted net income per share (Note O) (euro) 1.18 (euro) 1.09 (euro) 0.76
See accompanying notes to consolidated financial statements.
4
DASSAULT SYSTEMES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
(All amounts in thousands) Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (euro) 135,418 (euro)126,415 (euro) 88,741
Adjustments to reconcile net income to net cash provided by operating
activities :
Depreciation and amortization of property, plant and equipment 15,302 19,051 18,174
Amortization of intangible assets 7,751 13,999 60,809
Deferred income taxes (10,920) (8,004) (9,878)
Tax benefits from employee stock plans 814 5,254 -
Non-cash stock-based compensation - 3,636 1,338
Other 533 3 793 (586)
Changes in current assets and liabilities :
(Increase) decrease in trade accounts receivable (5,093) (29,221) (5,778)
(Increase) decrease in other current assets 2,205 10,929 1,810
Increase (decrease) in accounts payable and accrued expenses 12,432 (2,792) 228
Increase (decrease) in income taxes payable 577 (19,967) (4,519)
Increase (decrease) in sales incentive payable 4,376 2,829 364
Increase in unearned revenue 6,117 19,870 2,951
Increase (decrease) in other current liabilities 7,862 (3,028) 5,533
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 177,374 142,764 159,187
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, equipment and intangibles (19,236) (20,427) (22,956)
Purchases of short-term investments (63,962) (10,351) (5,002)
Proceeds from sales and maturities of short-term investments 58,029 - 7,752
Payment for acquisitions, net of cash acquired (6,085) (29,923) (12,361)
Proceeds from sale of Revit investment - 10,088 -
Increase in long-term receivables (13,670) (25,601) (2,204)
Other (270) 216 141
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (45,194) (75,998) (34,630)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (29,450) - (1,017)
Proceeds from exercise of stock options 4,458 4,149 4,380
Proceeds from issuance of common stock - - 20
Cash dividends paid (37,225) (37,601) (35,135)
Payments on capital lease obligations (211) (1,643) (1,643)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (62,428) (35,095) (33,395)
Effect of exchange rate changes on cash (22,172) (22,815) 6,036
---------- ---------- ----------
Increase in cash and cash equivalents 47,580 8,856 97,198
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 371,992 363,136 265,938
CASH AND CASH EQUIVALENTS AT END OF PERIOD (euro) 419,572 (euro)371,992 (euro) 363,136
========== =========== ==========
SUPPLEMENTAL DISCLOSURE
Income taxes paid (euro) 76,452 (euro) 97,922 (euro) 76,694
Cash interest paid (euro) 1,696 (euro) 1,295 (euro) 1,523
See accompanying notes to consolidated financial statements.
5
DASSAULT SYSTEMES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Share capital
Share capital issued outstanding
-------------------- -----------------
Retained earnings
Number of Stated Number of Paid in -----------------
Shares value shares capital Unrestricted Restricted
---------- -------- ---------- -------- ----------- ----------
(All amounts in thousands, except number of shares)
January 1, 2001............. 113,926,963 (euro)113,927 113,319,196 (euro)52,443 (euro)274,874 (euro)11,320
============ ============= ============ ============ ============= ============
Net income:
Unrestricted........................ 88,741
Restricted.......................... (72) 72
Other items of comprehensive income
Available for sale securities.......
Net derivative gains on
cash-flow hedges....................
Foreign currency translation
adjustment..........................
------------ ------------- ------------ ------------ ------------- -------------
Comprehensive income..................
------------ ------------- ------------ ------------ ------------- -------------
Exercise of stock options (Note
O).................................... 168,191 168 273,541 4,197
Other stock transaction............... 1,338
Purchase of treasury stock (29,033) (29) (29,033) (988)
Shares issued in connection with
acquisitions........................ 380,050 380 380,050 18,577
(35,135)
Cash dividends paid................... ------------ ------------- ------------ ------------ ------------- -------------
December 31, 2001..................... 114,446,171 (euro)114,446 113,943,754 (euro)76,555 (euro)327,420 (euro)11,392
============ ============= ============ ============ ============= ============
Net income:
Unrestricted........................ 126,415
Restricted.......................... (54) 54
Other items of comprehensive
income
Available for sale securities...
Net derivative gains on
cash-flow hedges................
Minimum pension liability.......
Foreign currency translation
adjustment....................
------------ ------------- ------------ ------------ ------------- -------------
Comprehensive income............ ------------ ------------- ------------ ------------ ------------- -------------
Exercise of stock options (Note
O)........................... 124,670 125 235,677 3,833
Other stock transaction......... 3,636
Tax benefits (Note E)........... 5,254
Cash dividends paid............. (37,601)
------------ ------------- ------------ ------------ ------------- -------------
Comprehensive income............ ------------ ------------- ------------ ------------ ------------- -------------
December 31, 2002............... 114,570,841 (euro)114,571 114,179,431 (euro)89,278 (euro)416,180 (euro)11,446
Net income:
Unrestricted.................. 135,419
Restricted.................... (11) 11
Other items of comprehensive
income......................
Net derivative losses on
cash-flow hedges............
Minimum pension liability...
Foreign currency translation
adjustment....................
------------ ------------- ------------ ------------ ------------- -------------
Comprehensive income...........
------------ ------------- ------------ ------------ ------------- -------------
Exercise of stock options
(Note O)....................... 208,025 208 239,997 4,677
Purchase of treasury stock..... (1,375,201) (1,375) (1,375,201) (28,075)
Tax benefits (Note E).......... 814
Cash dividends paid............ (37,225)
------------ ------------- ------------ ------------ ------------- -------------
December 31, 2003.............. 113,403,665 (euro) 113,404 113,044,227 (euro)66,694 (euro)514,363 (euro)11,457
============ ============= ============ ============ ============= ============
Other items of
comprehensive
income Total
-------------- ---------
(euro)13,101 (euro)465,665
============== ============
88,741
-
(760) (760)
1,433 1,433
7,291 7,291
------------- ------------
96,705
------------- ------------
4,365
1,338
(1,017)
18,957
(35,135)
-------------- -------------
(euro)21,065 (euro)550,878
============== =============
126,415
-
3,017 3,017
9,718 9,718
(384) (384)
(36,630) (36,630)
------------- -------------
102,136
------------- -------------
3,958
3,636
5,254
(37,601)
------------- -------------
------------- -------------
(euro)3,214) (euro)628,261
135,419
(6,485) (6,485)
(361) (361)
(38,180) (38,180)
------------- -------------
90,393
------------- -------------
4,885
(29,450)
814
(37,225)
------------- ------------
(euro)48,240) (euro)657,678
============== ============
See accompanying notes to consolidated financial statements.
6
DASSAULT SYSTEMES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
NOTE - A. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND
CONSOLIDATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business.
Dassault Systemes and its subsidiaries (the "Company") develops and sells
integrated solutions created to manage its customers' industrial product
lifecycles ("Product Lifecycle Management" or "PLM") from their initial product
concept and design to their maintenance through manufacturing simulation and to
offer the power of 3D visualization to the largest number of users.
The Company operates in two segments: one dedicated to customers who need
to support product development, production and maintenance: the
"Process-centric" segment and one for customers primarily focused on product
design solutions: the "Design-centric" segment. Process-centric products are
organized under the Company's flagship CATIA brand for product creation
(CAD/CAE), its DELMIA brand for digital manufacturing process management, its
ENOVIA and SMARTEAM brands for virtual product synthesis, collaboration and
product lifecycle integration. Spatial, a wholly-owned subsidiary of the
Company, distributes and supports the Compnany's CAA V5 development platform.
CATIA, ENOVIA and SMARTEAM solutions are marketed, distributed, and supported
worldwide by International Business Machines Corporation (IBM).
The Company's Design-centric products and services are offered under the
SolidWorks brand. SolidWorks solutions are marketed, distributed, and supported
directly by the Company or through various independent sales representatives.
In addition to the development and sale of software products, the Company
also provides services and obtains other revenue from its support of IBM
marketing and distribution efforts, direct support to customers, technological
consulting services, and hardware resale activities.
Basis of Presentation and Consolidation.
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The Company also prepared separate financial statements in conformity with the
generally accepted accounting principles in France. Differences between these
two sets of financial statements are summarized in Note T.
The consolidated financial statements include the accounts of Dassault
Systemes and its subsidiaries. Intercompany transactions and balances have been
eliminated.
Companies over which the Company exercises significant influence over
operating and financial policies are accounted for under the equity method.
7
As of December 31, percentage of capital and voting rights of the
Company were as follows:
Year ended December 31,
Voting rights Capital rights
------------- --------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
French State - 14.6% 15.6% - 15.6% 15.6%
GIMD ("Groupe Industriel Marcel Dassault") 42.4% 42.0% 44.6% 45.1% 44.7% 44.3%
Mr. Charles Edelstenne, Chairman of the Company 12.7% 12.5% 6.7% 6.8% 6.7% 6.7%
Public 44.9% 30.9% 33.1% 48.1% 33.0% 33.4%
------ ------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Summary of Significant Accounting Policies.
Use of estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition.
The Company derives revenues from three primary sources: (1) its marketing
and distribution agreement with IBM, (2) new software licenses and maintenance,
which includes software license updates and technical support, and (3) services
and other, which includes consulting and training services.
Marketing and distribution agreement with IBM - Under the Company's
agreement with IBM, the Company licenses its products to IBM who then
sublicenses the products to end-users. The Company provides maintenance to IBM
but does not contract or directly interface with IBM customers. In addition, the
Company provides training to IBM employees for new product releases,
participates with IBM in a worldwide marketing arrangement and is involved in
other product development initiatives for both Company and IBM products.
Royalties under this arrangement are earned as revenue is recognized by IBM
from its sublicensing of the products and services. In general, this results in
recognition of license royalties when IBM sublicense software to end users and
PCS royalties over the period which IBM is required to provide support to end
users. Royalty payments are made within 30 days after the end of the month in
which the royalties are earned. The reporting of IBM activity is subject to an
annual audit and adjustment process, whereby either party has the opportunity to
correct differences which may have occurred in the monthly reporting process
during the preceding year. Such differences nearly always result from interim
reporting which occasionally either overstates or understates the number of
software license transactions to a group or groups of end-user customers. The
Company monitors possible differences based upon historical trends and known
specific situations, and defers the recognition of revenue by IBM based upon its
estimate of adjustments that will ultimately be made.
8
The Company's agreement with IBM provides for increases in the share of
licensing revenue to be retained by IBM if certain annual sales and growth
targets are met by IBM. Since 2002, this incentive is also linked to IBM meeting
a certain level of sales and marketing expenses for the distribution of CATIA,
ENOVIA and SMARTEAM. This incentive is recorded as a reduction to the royalties
payable to the Company from IBM.
New Software License and Maintenance Revenue - New software license
revenues represent all fees earned from granting customers licenses to use our
software. Our new software license revenues consist of perpetual and term
license sales of software products. New software license revenues are recognized
when: persuasive evidence of an arrangement exists, delivery and acceptance of
the software has occurred, the software license fee is fixed or determinable,
and collectibility is probable. In instances when any of the four criteria are
not met, we defer recognition of software license revenues until the criteria
are met. Revenue related to the licensing of software through
value-added-resellers (VAR) is recognized when the VAR provides notice of
delivery to an end-user customer, assuming all other revenue recognition
criteria have been met.
Maintenance revenues represent fees associated with the sale of periodic
unspecified product updates and technical support. License updates consist of
the right to unspecified software updates on a when-and-if-available basis and
are entered into in connection with the initial software license purchase.
Maintenance support may be renewed at the conclusion of each term. Revenue from
maintenance is deferred and recognized as revenue on a straight-line basis over
the term of the maintenance agreement.
Revenues under multiple-element arrangements, which typically include new
software licenses and maintenance agreements sold together, are allocated to
each element in the arrangement primarily using the residual method based upon
the fair value of the undelivered elements, which is specific to us
(vendor-specific objective evidence of fair value or "VSOE"). Discounts, if any,
are applied to the delivered elements, usually software licenses, under the
residual method. For maintenance, VSOE is based upon either the renewal rate
specified in each contract or the price charged when sold separately.
Services and Other - Professional services revenues consist of fees from
consulting services and training and are recognized as the services are
performed. When we enter into consulting service arrangements that include
significant modifications to the software that are essential to the customer's
use and the arrangement is bundled with software, revenue under the entire
arrangement is recognized under the percentage-of-completion method. We estimate
the percentage-of-completion based on our estimate of total hours to complete
the project as a percentage of total hours incurred and the estimated hours to
complete. Revenue derived from hardware resale activities is recognized upon
delivery.
Computer Software Costs / Research and Development.
Costs incurred to research and develop computer software products to be
licensed or otherwise marketed to customers are expensed in the period incurred,
unless such costs qualify for capitalization after technological feasibility is
established. Application of this accounting policy has resulted in all such
costs being expensed in the period incurred. Purchased in-process research and
development that is not technologically feasible as of the acquisition date and
has no future alternative use is expensed.
9
Cash and Cash Equivalents and Short-Term Investments.
The Company considers deposits with banks, investments in interest-bearing
accounts and marketable debt securities with maturities of less than 90 days
when acquired to be cash equivalents. Marketable debt securities with maturities
of more than 90 days when acquired are considered to be short-term investments
and are accounted for at carrying value which approximates fair value based on
quoted market price at December 31, 2003 and 2002. All of the Company's
short-term investments are classified as available-for-sale. The cost of
securities sold is based on the specific identification method.
Property and Equipment.
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives: Buildings, 30 years;
computer equipment, 18 months to 5 years; office furniture and equipment, 5 to
10 years; leasehold improvements are amortized over the shorter of the life of
the assets or the remaining lease term, not exceeding 10 years.
Goodwill and Intangible Assets.
Goodwill, which is equal to the fair value of consideration paid in excess
of the fair value of the net assets purchased, has been recorded in conjunction
with several of the Company's purchase business combinations. Beginning in
fiscal 2002 with the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but
instead tested for impairment at least annually. Prior to fiscal 2002, goodwill
was amortized using the straight-line method over its estimated period of
benefit.
Intangible assets primarily include acquired technology, patents and
trademarks. Costs related to acquired technology, patents and trademarks are
capitalized and amortized using the straight-line method over their estimated
useful lives (generally 18 months to 5 years).
Foreign Currency Adjustments.
The functional currency of the Company's foreign subsidiaries is the
applicable local currency in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation, while the Company's reporting
currency is the euro. Assets and liabilities of the Company and its subsidiaries
with functional currencies other than the euro are translated into euro
equivalents at the rate of exchange in effect on the balance sheet date.
Revenues and expenses are translated at the weighted average monthly exchange
rates for the year. Translation gains or losses are recorded as a separate
component of shareholders' equity and transaction gains and losses are reflected
in net income.
Fair Value of Derivatives and Other Financial Instruments.
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate fair
value, due to the short-term maturities of such instruments. Realized and
unrealized gains or losses associated with foreign exchange options, futures,
and forward contracts, which are designated and serve as hedges, are recorded at
their fair market value.
10
The Company accounts for its derivative instruments under the provisions of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133") . This statement
requires that each derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value, and that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The statement also establishes criteria for a
derivative to qualify as a hedge for accounting purposes. Changes in fair value
of derivatives designated as hedges of forecasted transactions will be deferred
and recorded as a component of accumulated other comprehensive income until the
hedged forecasted transaction occurs and is recognized in earnings. The change
in fair value of derivatives designated as cash-flow hedges is reported as a
component of other comprehensive income until the hedged item is recognized in
earnings.
Income Taxes.
Deferred tax assets and liabilities are recognized for temporary
differences between financial and tax reporting. Deferred taxes are adjusted for
changes in the applicable, enacted tax rates. Deferred tax assets are recognized
whenever the realization of such amounts is considered to be more likely than
not.
Shipping and Handling.
Shipping and handling costs related to license fees are included in cost of
software for all periods presented. Shipping and handling costs related to
maintenance releases are included in cost of software.
Advertising Costs.
Advertising costs are expensed as incurred.
Pension and Post Retirement Benefits.
The estimated cost of providing benefits to employees is accrued during the
years that the employees render services. The Company utilizes defined benefit
plans under which the fair value of plan assets is assessed annually and
actuarial assumptions are used to determine cost and benefit obligations.
Liabilities and prepaid expenses are accrued over the estimated term of service
of employees using actuarial methods. Experience gains and losses, as well as
changes in actuarial assumptions and plan assets and provisions are amortized
over the average future service period of employees.
Information about Operating Segments.
The Company reports its segments and related information in accordance with
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). Operating segments are
components of the Company for which discrete financial information is available
and whose operating results are regularly reviewed by management to assess
performance and allocate resources.
Comprehensive Income.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company reports comprehensive income in the consolidated statements of
shareholders' equity.
11
Earnings Per Share.
Basic earnings per share is determined by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is determined by dividing net income by the weighted average
number of common shares outstanding plus the effect of applying the treasury
stock method of computing dilution for the stock options outstanding during the
period.
Stock Option Plans.
The Company is accounting for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25 "Accounting for stock
issued to employees" ("APB 25") and related Interpretations. Under those rules,
no compensation expense is recognized for stock options that are granted at the
market price at the date of grant.
In addition, the Company applies the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
employee stock options:
(in thousands except per share amounts) Year Ended December 31,
------------------------------------------
2003 2002 2001
------------- ------------ -------------
Net Income:
As reported (euro) 135,419 (euro) 126 415 (euro) 88,741
Add : Stock-based employee compensation expense included in
reported net income, net of related tax effect - 3,636 1,338
Less : Stock-based employee compensation expense determined under
fair value based method, net of related tax effect (55,506) (54,300) (29,033)
Pro forma (euro) 79,913 (euro) 75,751 (euro) 61,046
Basic net income per share
As reported (euro) 1.20 (euro) 1.11 (euro) 0.78
Pro forma (euro) 0.71 (euro) 0.66 (euro) 0.54
Diluted net income per share
As reported (euro) 1.18 (euro) 1.09 (euro) 0.76
Pro forma (euro) 0.70 (euro) 0.65 (euro) 0.52
12
The fair value of stock options granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
Year Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------ -------------
Weighted-average expected life (years) 3.7 3.5 3.5
Expected volatility rates 60% 58% 44%
Expected dividend yield 1.4% 0% 0%
Risk-free interest rate 3.3% 3.9% 3.5%
The estimated compensation expense determined under the fair value method
for the next three fiscal years is shown in the table below. The estimated
compensation expense amounts shown in the below table are based on existing
stock option plans as of December 31, 2003. These estimates reflect the expected
impact of stock options granted as of December 31, 2003 on future periods and
could change significantly if the Company decided to grant additional stock
options in the future.
(in thousands) Stock-based employee compensation
expense, net of related tax effect
-------------------------------------------
For the year ended December 31, 2004 (euro) 9,749
For the year ended December 31, 2005 1,164
For the year ended December 31, 2006 -
The Black-Scholes option pricing model was developed to estimate the fair
value of fully transferable traded options, with no vesting requirements and
does not take into account certain characteristics of employee stock options. In
addition, option valuation models require the input of highly subjective
assumptions, including the option's expected life and the expected stock price
volatility. Because the options granted by the Company to its employees have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management the existing model does not necessarily
provide a single reliable measure of the fair value of employee stock options.
Marketable securities.
Marketable securities are classified as available-for-sale and initially
recorded at their acquisition cost and adjusted to current market value. Net
unrealized gains and losses on marketable securities classified as
available-for-sale are credited or charged to other comprehensive income. If it
is considered that a decline in market value is other-than-temporary, the
security is considered impaired and the difference between cost and current
market value is recorded as an expense in the statement of operations.
Reclassifications.
Certain reclassifications have been made to prior years amounts to conform
with current year presentation.
Recently issued accounting standards.
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, an amendment of
13
FASB Statements No. 87, 88 and 106 (SFAS 132-R). This Statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans required
by FASB Statements No. 87, Employers'Accounting for Pensions, No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits, and No. 106, Employers' Accounting forPostretirement
Benefits Other Than Pensions. This Statement retains the disclosure requirements
contained in the previously issued Statement of Financial Accounting Standard
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. It requires additional disclosures to those in the
original statement about the assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided separately for
pension plans and for other postretirement benefit plans. The Company has
adopted the disclosure provisions associated with its domestic plans, effective
December 31, 2003. The Company will adopt the disclosure provisions for its
foreign plans in the fiscal year ending December 31, 2004, as required. Adoption
of the provisions did not and will not have an impact on the Company's financial
position or results of operations for the years ended December 31, 2003 and
2004, respectively.
The FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable
Interest Entities, in January 2003 and released a revised version of FIN 46 in
December 2003. FIN 46 requires an investor with a majority of the variable
interests in a variable interest entity to consolidate the entity. A variable
interest entity is an entity in which the equity investors do not have a
controlling interest or the equity investment at risk is insufficient to finance
the entity's activities without receiving additional subordinated financial
support. The consolidation requirements of FIN 46 are effective; immediately for
all variable interest entities created after January 31, 2003; as of December
31, 2003 for special purposes entities created before February 1, 2003 and; in
the first quarter of 2004 for all other variable interest entities.
The application of the initial consolidation provisions of FIN 46 did not
have a material impact on the Company's financial position or results of
operations. We do not expect the application of the remaining consolidation
provisions of FIN 46, as required in the first quarter of 2004, to have a
material effect on the Company's financial statements.
NOTE - B. BUSINESS COMBINATIONS
On May 31, 2003, the Company acquired an interest in Athys, a 13-employee
company based in Grenoble (France), for (euro)3.3 million. As a result of this
transaction, an amount of (euro)4.5 million was recorded in goodwill. Athys
specializes in the development of work cell control software.
On July 20, 2001 the Company acquired the consulting and services business and
related assets of Alliance Commerciale Technologique ("ACT") for (euro)9 million
in cash. The total purchase price was allocated as follows:
Trade accounts receivable (euro)2 million
Property and equipment (euro)1 million
Intangible assets (euro)6 million
14
On May 31, 2001, the Company acquired Structural Research and Analysis
Corp. ("SRAC"), a private company located in California, for (euro)23 million.
This acquisition was financed by an issuance of shares for (euro)19 million with
the remainder paid in cash. SRAC is a supplier of CAE and CAD integrated design
analysis software. The purchase price in excess of the net assets acquired was
allocated as follows:
Goodwill (euro)13 million
Software (euro)9 million
On May 3, 2001, the Company exchanged its investment in Advanced Entreprise
Solutions ("AES") for a 9% minority interest in MSC.Software ("MSC"). This
exchange did not result in any gain or loss. MSC is a provider of simulation
software, with related services and systems.
All acquisitions were accounted for under the purchase method of accounting
and all acquisitions have been consolidated in the Company's financial
statements as of the date the acquisition was consummated. Pro forma results of
operations reflecting these acquisitions have not been presented because the
results of operations of the acquired companies, either individually or
collectively, are not material to the Company's results of operations.
NOTE - C. SOFTWARE REVENUE
Software revenue was comprised of initial software license charges (primary
license charges) of (euro)313,590,000, (euro)349,784,000 and (euro)351,196,000
and periodic license and maintenance fees of (euro)331,975,000,
(euro)320,102,000 and (euro)291,838,000, in the years ended December 31, 2003,
2002, and 2001, respectively.
NOTE - D. FINANCIAL REVENUE AND OTHER, NET
Year ended December 31,
-----------------------
(In thousands)
2003 2002 2001
---- ---- ----
Interest income (euro) 11,007 (euro) 11,648 (euro) 15,425
Interest expense (949) (1,682) (2,354)
Foreign exchange (losses) gains, net (8,086) (6,280) 345
Other, net (2,827) (1,141) 646
-------- -------- --------
Total (euro) (855) (euro) 2,545 (euro) 14,062
The Company transacts in various foreign currencies, primarily U.S. dollars and
Japanese yen. To manage this currency exposure, the Company purchases and sells
currency options (puts or calls) and may purchase other foreign exchange
contracts from time to time. All the derivative instruments held by the Company
are designated as hedges, have high correlation with the underlying exposure and
are highly effective in offsetting underlying price movements.
15
The fair market values of foreign forward contracts and options were
determined by a financial institution using quoted market prices and option
pricing models.
The effectiveness of forward contracts is measured using forward rates and
the forward value of the underlying hedged transaction. For currency options,
effectiveness is measured by the change in the option intrinsic value, which
represents the change in the option's strike price compared to the spot price of
the underlying hedged transaction. During 2003 and 2002, the portion of hedging
instruments' gains or losses excluded from the assessment of effectiveness and
the ineffective portions of hedges had no material impact on earnings and was
recorded in financial revenue in the statement of operations.
The Company recognized after-tax gains of (euro)868,000 during the year
ended December 31, 2002, for cash flow hedges that were discontinued because the
forecasted transaction did not occur. All amounts have been included in
financial revenue in the statement of operations. No cash flow hedges were
discontinued for the years ended December 31, 2003 and 2001.
In connection with its cash flow hedges, the Company has recorded
approximately (euro)4.7 million (2002: (euro)9.7 million) of net gains in
accumulated other comprehensive income as of December 31, 2003, net of tax,
substantially all of which is expected to be reclassified to net income within
the next year to provide an economic offset to the impact of the underlying
anticipated cash flows hedged. At December 31, 2003, the fair value of all
derivative instruments has been recorded in the balance sheet in other current
assets.
The following table presents the carrying amount of financial instruments
at December 31, 2003, 2002 and 2001:
Year ended December 31,
(In thousands) 2003 2002
---- ----
Nominal Market Nominal Market
amount Value amount Value
Collars USD/euros (euro) 35,629 (euro)3,441 (euro)47,082 (euro)7,096
Collars JPY/euros 41,468 7,893 86,017 7,073
Forward exchange contrat USD/euros 10,821 1,454 20,625 4,246
Forward exchange contrat JPY/euros - - 15,274 2,395
Call USD/euros 1,979 - - -
Digital JPY/euros - - 400 135
"USD" means United States Dollar; "JPY" means Japanese Yen
All these financial instruments, which relate to the hedging strategy of
the Company, usually have a maturity date of less than 24 months. Management
believes counter-party risk on financial instruments is minimal since the
Company deals with major banks and financial institutions.
The Company does not use derivative financial instruments for trading or
speculative purposes.
16
NOTE - E. INCOME TAXES
Deferred tax assets and (liabilities) are as follows:
(in thousands) December 31,
------------
2003 2002
---- ----
Deferred tax assets:
Accelerated depreciation and amortization for (euro) 17,212 (euro)24,529
financial statement purposes
Profit sharing and pension accruals not yet deductible 7,336 6,639
Provisions and other expenses not currently deductible 25,919 15,865
Net tax loss and tax credit carryforward assets 20,724 23,751
Valuation reserves (20,228) (23,473)
-------- --------
Total deferred tax assets 50,963 47,311
Deferred tax liabilities:
Accelerated depreciation and amortization for tax (8,606) (8,144)
purposes
Other (2,598) (6,217)
-------- --------
Total deferred tax liabilities (11,204) (14,361)
-------- --------
Net deferred tax asset (euro) 39,759 (euro)32,950
======== ========
The balance sheet classification of deferred tax is as follows and reflects
that, in accordance with SFAS 109, the Company has not offset deferred tax
assets and liabilities attributable to different tax jurisdictions:
(in thousands) December 31,
------------
2003 2002
---- ----
Short-term deferred tax assets (euro) 31,634 (euro)27,947
Long-term deferred tax assets 19,292 15,405
-------- --------
Total deferred tax assets 50,926 43,352
======== ========
Short-term deferred tax liabilities (4,937) (6,135)
Long-term deferred tax liabilities (6,230) (4,267)
-------- --------
Total deferred tax liabilities (11,167) (10,402)
========= =========
Net deferred tax asset (liability) (euro) 39,759 (euro)32,950
========= =========
17
The short-term deferred tax assets relate primarily to the profit sharing
expenses and reserves not currently deductible. Short-term deferred tax assets
are included in the balance sheet in other current assets.
The components of income (loss) before income taxes are as follows:
(in thousands) Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
France (euro) 177,748 (euro)215,727 (euro)221,899
Foreign 34,555 (9,936) (45,242)
-------- -------- --------
Income before income taxes (euro) 212,303 (euro)205,791 (euro)176,657
======== ======== =========
The significant components of income tax expense are as follows:
(in thousands) Year ended December 31,
-------------------------------------------
2003 2002 2001
---- ---- ----
France (euro) 63,277 (euro)74,810 (euro)80,304
Foreign 24,527 12,570 17,490
-------- -------- --------
Current taxes 87,804 87,380 97,794
Change in deferred taxes (10,920) (8,004) (9,878)
-------- -------- --------
Income tax expense (euro) 76,884 (euro)79,376 (euro)87,916
======== ======== =========
The differences between the income tax provision and the provision computed
using the statutory French income tax rate are as follows:
Year ended December 31,
--------------------------------------------
(in thousands) 2003 2002 2001
------------ ------------ -----------
Taxes computed at the statutory rate of 35.43% for 2003, 35.43%
for 2002 and 36.43% for 2001 (euro) 75,219 (euro) 72,912 (euro) 64,356
Foreign losses 5,858 1,788 (74)
Foreign tax rate differentials (1) 1,419 7,170 14,722
Permanent differences related to non-deductible goodwill and
other intangible assets - - 10,342
Other (5,611) (2,494) (1,430)
----------- ---------- ------------
Income tax expense (euro) 76,884 (euro) 79,376 (euro) 87,916
========== =========== ============
Effective tax rate 36.2% 38.6% 49.8%
(1) SmarTeam, a subsidiary with operating losses, has the status of an
"Approved Enterprise" as defined by the Israeli Investment Center and
is entitled to a tax exemption. Therefore the effective tax rate of
SmarTeam is 0%.
18
At December 31, 2003, there were net tax operating losses and tax
credit carryforwards of (euro)61,903,000 and (euro)5,440,000 respectively. Net
operating tax loss carryforwards and tax credits are scheduled to expire in the
following years:
(in thousands) Net Tax credits
operating
losses
2004 - 296
2005 - -
2006 - -
2007 - -
2008 - -
2009 and later 61,903 5,144
-------- --------
Total (euro) 61,903 (euro) 5,440
The Company has not provided any deferred income taxes on the undistributed
earnings of its foreign subsidiaries based upon its determination that such
earnings will be indefinitely reinvested. Company management has decided that
the determination of the amount of any unrecognized deferred tax liability for
the cumulative undistributed earnings of the foreign subsidiaries is not
practical since it would depend on a number of factors that cannot be known
until such time as a decision to repatriate the earnings might be made.
In connection with the exercise of stock options and warrants, SolidWorks
and Delmia Corp. realized tax benefits totaling (euro)814,000, (euro)5,254,000
and (euro)0 for the years ended December 31, 2003, 2002 and 2001 respectively,
which were reflected in shareholders' equity.
NOTE - F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are maintained on deposit with large financial
institutions, principally in France. Management monitors the credit-worthiness
of such counter-parties.
December 31,
------------
(in thousands) 2003 2002
---- ----
Bank accounts (euro) 110,872 (euro)118,450
Money market accounts 308,700 253,542
-------- --------
(euro) 419,572 (euro) 371,992
At December 31, 2003, 69% of such amounts were denominated in euros (2002:
65%), 27% in U.S. dollars (2002: 32%) and 3% in Japanese yen (2002: 2%).
19
NOTE - G. SHORT-TERM INVESTMENTS
Short-term investments are comprised of marketable interest-bearing
securities with large financial institutions. Management considers the credit
risk exposure due to counter-party failure to be minimal.
At December 31, 2003, and 2002 such investments amounted to
(euro)20,102,324 (substantially all of which were denominated in U.S. dollars)
and (euro)16,436,000 (substantially all of which were denominated in euro),
respectively. Such short-term investments are liquid, and have stated maturities
of one year or less at each balance sheet date. Gross unrealized gains and
losses are not significant.
NOTE - H. PROPERTY AND EQUIPMENT
(in thousands) Land and Computer Office Leasehold Total
--------- --------- ------- ---------- -----
buildings equipment furniture and improvements
--------- --------- ------------- ------------
equipment
---------
Net value
December 31, 2002 (euro) 25,929 (euro) 15,054 (euro) 7,845 (euro) 11,045 (euro) 59,873
Acquisitions - 8,270 1,910 5,679 15,859
Disposals - (455) (373) (116) (944)
Depreciation and (925) (9,011) (2,492) (2,875) (15,303)
amortization for the
year
Exchange differences (473) (1,193) (746) (535) (2,946)
--------- --------- ------- --------- --------
December 31, 2003 (euro) 24,531 (euro) 12,666 (euro) 6,144 (euro) 13,198 (euro) 56,539
========= ========= ======== ========= ========
NOTE - I. INTANGIBLE ASSETS
(in thousands) Goodwill Software Patents and Total
trademarks
and other
intangible
assets
Net balance at December 31, 2002 71,599 8,526 3,641 83,766
Additions 6,731 4,414 - 11,145
Disposals - (97) (110) (207)
Amortization for the year - (6,468) (1,314) (7,782)
Exchange differences (4,526) (867) (402) (5,795)
-------- --------- ---------- --------
Net balance at December 31, 2003 (euro) 73,804 (euro) 5,508 (euro) 1,815 (euro)81,127
======== ========= ========== ========
20
Substantially all of the goodwill at December 31, 2003 is allocated to the
process-centric segment. Goodwill at December 31, 2003 consists principally of
excess purchase price from the acquisitions of Delmia GmbH ((euro)18 million),
SmarTeam ((euro)16 million), Spatial ((euro)13 million) and SRAC ((euro)13
million). Goodwill additions in 2003 resulted primarily from the acquisition of
Athys.
Total intangible amortization expense, excluding goodwill amortization, was
(euro)7,782,000, (euro)13,999,000 and (euro)13,234,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Based on the carrying value of
intangible assets as of December 31, 2003, intangible amortization expense is
expected to amount to (euro) 5,247,000 in 2004 and 2,076,000 in 2005.
The Company adopted SFAS 142 on January 1, 2002. During 2002, the Company
performed the transitional impairment test required upon the adoption of SFAS
142; which resulted in a finding that no impairment to goodwill existed. The
Company also performed its annual impairment test in the fourth quarter of 2003
and 2002; no impairment of goodwill was indicated as a result of these tests.
These tests consisted of a comparison of the fair value of the Company's
reporting units with their respective carrying amount, including the goodwill.
The fair value of the reporting units was determined based on the income
approach, which estimates the fair value based on the future discounted cash
flows. Based on the analysis, the Company determined that the fair value was in
excess of the carrying amount of the reporting units.
The following table sets forth net income per share adjusted to exclude
goodwill amortization recognized prior to the adoption of SFAS 142 on January 1,
2002:
(in thousands except per share amounts) Year ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- -------
Reported net income (euro) 135,419(euro) 126,415 (euro) 88,741
Add back: goodwill amortization, net of tax benefit - - 44,144
Adjusted net income 135,419 126,415 132,885
------- ------- -------
Net income per share-- basic:
Reported net income (euro) 1.20 (euro) 1.11 (euro) 0.78
Add back: goodwill amortization, net of tax benefit 0.39
Adjusted net income 1.20 1.11 1.17
------- ------- -------
Net income per share-- diluted:
Reported net income 1.18 1.09 0.76
Add back: goodwill amortization, net of tax benefit 0.38
Adjusted net income (euro) 1.18 (euro) 1.09 (euro) 1.14
------- ------- -------
NOTE - J. OTHER NON-CURRENT ASSETS
In April 2002, the Company entered into an agreement with RAND A Technology
Corporation ("Rand"), to accelerate the development of marketing, sales and
services infrastructure required to support PLM. Under the terms of this
agreement, the Company granted Rand two 10-year convertible loans (the "Loans"),
each for a principal amount of (euro)6.6 million and U.S.$6.2 million
((euro)23.1 million in aggregate as of December 31, 2003). One of the Loans is
convertible into common shares of Rand at Rand's option, and the other one is
21
convertible into common shares of Rand at the Company's option. The conversion
rights are subject to certain limitations and their exercise must not result in
the Company holding in excess of 19.9% of Rand's shares. The loans are secured
by certain tangible and intangible assets of Rand and, to the extent not
converted, are repayable in quarterly installments beginning in 2004.
In November and December 2003, the Company made short-term advances
totaling (euro)5.5 million to Rand. These advances bear interest at 5.5% and are
repayable in 2004. Due to their short-term maturity, these advances have been
classified in other current assets.
At December 31, 2003 other non-current assets are comprised of the
following components:
(in thousands) December 31,
------------
2003 2002
Investments
ImpactXoft (euro) 8,474 (euro) 9,589
MSC.Software 5,542 6,506
Other 1,366 437
------ ------
Total investments (euro) 15,382 (euro)16,532
Loans receivable Interest
rate
Rand 23,128 18,821 5.5%
ImpactXoft 3,959 4,768 5.0%
Other 1,742 -
------ ------
Total loans receivable 28,829 23,589
Less: Current portion (4,704) (954)
Total loans and investments (euro) 39,507 (euro)39,167
Loans receivable at December 31, 2003 are due as follows:
(in thousands)
2004 (euro) 4,704
2005 4,941
2006 5,179
2007 4,622
2008 4,145
Therafter 5,238
--------
Total 28,829
Less current portion (4,704)
--------
Long-term loans (euro) 24,125
22
NOTE - K. LEASES
At December 31, 2003, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
Capital Operating
(in thousands) Leases Leases
------ ------
Year ending December 31:
2004 (euro) 2,092 (euro) 12,614
2005 1,972 10,614
2006 1,728 8,778
2007 422 7,875
2008 - 7,226
Thereafter - 14,863
---------- ----------
Total minimum lease payments 6,214 (euro) 61,970
Less amount representing interest (119)
and other
--------
Present value of net minimum lease 6,095
payments
Less current maturities of capital (1,890)
lease obligations
--------
Capital lease obligations (euro) 4,205
The Company leases land and buildings related to its offices under capital
leases. The following summarizes property held under capital leases:
Year ended December 31,
(in thousands) 2003 2002
Land (euro) 5,680 (euro) 5,680
Buildings 27,188 27,188
Accumulated depreciation (10,649) (9,742)
-------- --------
(euro) 22,219 (euro) 23,126
The Company also leases computer equipment, premises and office equipment
under operating leases. Rent expense under operating leases was
(euro)33,159,360, (euro)29,189,000 and (euro)26,796,000, in the years ended
December 31, 2003, 2002, and 2001, respectively.
NOTE - L. EMPLOYEE PROFIT-SHARING
In accordance with French legal requirements, the Company has
profit-sharing arrangements for its French employees. Profit-sharing amounts are
based on formulas, which consider return on assets and employment levels.
Profit-sharing expense was (euro) 10,632,000, (euro)11,623,000 and
(euro)11,701,000, for the years ended December 31, 2003, 2002, and 2001,
respectively. Such amounts are accrued each year, are interest-bearing, and
23
are paid in cash, including the accrued interest, generally after five years.
The interest rate applied was 4.6% and 5.1% in the years ended December 31, 2003
and 2002 respectively.
(in thousands) December 31,
------------
2003 2002
---- ----
Employee profit-sharing liability, (euro) 27,891 (euro)28,325
including accrued interest
Less current maturities (8,630) (5,670)
-------- --------
(euro) 19,261 (euro) 22,655
Estimated maturities of these obligations at December 31, 2003 are as follows
(in thousands):
2004 (euro) 8,630
2005 2,122
2006 3,832
2007 4,011
2008 4,183
2009 5,113
----------
(euro) 27,891
NOTE - M. RETIREMENT AND PENSION ARRANGEMENTS
The Company provides defined benefit retirement indemnities to the
employees of its French operations, and sponsors defined benefit pension plans
for certain employees in the United States.
In addition, the Company has certain other plans in countries other than
the United States, which are not significant and are combined with the French
plan for presentation purposes.
The measurement date for all defined benefit plans is December 31.
French plans and other
In France, the retirement indemnities are based upon an individual's years
of credited service and annualized salary at retirement. Such benefits vest, and
are funded as a lump sum paid to the employee, upon the employee's retirement.
Estimated retirement indemnities are accrued over the working life of the
employees using actuarial assumptions and calculations. The projected benefit
obligation was determined using the prospective method and the following
actuarial assumptions: retirement age 60 years; salary increases at 1% over
inflation. Weighted-average assumptions used for the French operations were as
follows:
24
Weighted-average assumptions used to determine the benefit obligation:
Year ended December 31,
-----------------------
French plans and other 2003 2002 2001
---- ---- ----
Discount rate 5.00% 5.00% 5.00%
Expected return on plan assets 5.50% 5.50% 5.50%
Rate of compensation increase 3.00% 3.00% 3.00%
Weighted-average assumptions used to determine the net periodic benefit cost:
Year ended December 31,
French plans and other 2003 2002 2001
---- ---- ----
Discount rate 5.00% 5.00% 5.00%
Expected return on plan assets 5.50% 5.50% 5.50%
Rate of compensation increase 3.00% 3.00% 3.00%
The components of net periodic benefit cost were as follows:
(in thousands of euro) Year ended December 31,
--------------------------------
French plans and other 2003 2002 2001
---- ---- ----
Service cost (euro) 1,779 (euro) 1,346 (euro) 1,208
Interest cost 684 588 475
Expected return on plan assets (351) (382) (277)
Net amortization and deferral 1 (14) (27)
-------- -------- --------
Net periodic benefit cost (euro) 2,113 (euro) 1,538 (euro) 1,379
======= ======= ========
Changes in the funded status of the benefit plans were as follows:
(in thousands of euro) Year ended December 31,
-----------------------
French plans and other 2003 2002
---- ----
Change in benefit obligations
Benefit obligations at beginning of year (euro) 13,904 (euro) 12,175
Service cost 1,779 1,346
Interest cost 684 588
Change in scope - -
Actuarial gain (1,775) (155)
Exchange rate differences (140) (11)
Benefits paid (226) (39)
-------- ---------
Benefit obligations at end of year (euro) 14,226 (euro) 13,904
========= =========
Change in plan assets
Fair value of plan assets at beginning of year 6,960 7,468
Employer contribution 168 39
Return on plan assets 446 (508)
Benefits paid (168) (39)
--------- ---------
Fair value of plan assets at end of year (euro) 7,406 (euro) 6,960
========= =========
Funded status (6,820) (6,944)
Unrecognized actuarial (gain) loss (1,702) 595
--------- ---------
Accrued benefit cost - French plans and other (euro) (8,522) (euro) (6,349)
========= =========
25
The accumulated benefit obligation for the French defined benefit plans was
(euro) 7.9 million and (euro) 8.0 million at December 31, 2003, and 2002,
respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets is as follows:
(in thousands of euro) Year ended December 31,
-----------------------
French plans 2003 2002
---- ----
Projected benefit obligation (euro) 11,456 (euro) 11,801
Accumulated benefit obligation 7,430 7,505
Fair Value of plan assets 6,706 6,317
All plan assets for the French plans are invested in an insurance contract
with Sogecap, a life-insurance company, which is part of the Societe Generale
group. To date, the Company has contributed (euro) 6.8 million to this insurance
contract.
The Company does not expect to make any additional contributions to its
French pension plans in 2004.
U.S. Plans
----------
In the United States, pension benefits are based upon years of credited
service and the employee's average final earnings. Retirement benefits are
funded by the Company's contributions to segregated pension plan assets, in an
amount that is sufficient to meet or exceed the minimum annual funding
requirements of the Employee Retirement Income Security Act. The projected
benefit obligation was determined using the prospective method. Weighted-average
assumptions used for the U.S. plans were as follows:
Weighted-average assumptions used to determine the benefit obligation:
Year ended December 31,
-----------------------
U.S. plans 2003 2002 2001
---- ---- ----
Discount rate 6.00% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 3.00% 3.75% 4.25%
Weighted-average assumptions used to determine the net periodic benefit cost:
Year ended December 31,
-----------------------
U.S. plans 2003 2002 2001
---- ---- ----
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 3.75% 4.25% 4.50%
26
The components of net periodic benefit cost were as follows:
(in thousands of euro) Year ended December 31,
--------------------------------
U.S. plans 2003 2002 2001
---- ---- ----
Service cost (euro) 770 (euro) 756 (euro) 622
Interest cost 838 902 868
Expected return on plan assets (722) (804) (648)
Net amortization and deferral 218 133 103
-------- -------- ----------
Net periodic benefit cost - U.S. plans (euro) 1,104 (euro) 987 (euro) 945
============= =========== ==========
Changes in the funded status of the benefit plan were as follows:
(in thousands of euro) Year ended December 31,
-----------------------
U.S. plans 2003 2002
---- ----
Change in benefit obligations
Benefit obligations at beginning of year (euro) 13,209 (euro) 13,475
Service cost 770 756
Interest cost 838 902
Actuarial loss 1 325 768
Benefits paid (303) (333)
Exchange rate differences (2,516) (2,359)
-------- --------
Benefit obligations at end of year (euro) 13,323 (euro) 13,209
============== =============
Change in plan assets
Fair value of plan assets at beginning of year 8,616 9,543
Employer contribution 1,186 1,300
Return on plan assets 1,274 (305)
Benefits paid (303) (333)
Exchange rate differences (1,687) 1,589)
-------- --------
Fair value of plan assets at end of year (euro) 9,086 (euro) 8,616
============= ============
Funded status (4,237) (4,593)
Unrecognized actuarial loss 3,108 3,172
Unrecognized prior service cost 332 494
-------- --------
Accrued benefit cost - U.S. Plans (euro) (797) (euro) (927)
============= ============
Amounts recognized in the Statement of financial position:
Accrued benefit cost (797) (927)
Accrued benefit liability (1,369) (1,112)
Intangible assets 332 493
Accumulated other comprehensive income 1,037 619
-------- --------
Net amount recognized - U.S. Plans (euro) (797) (euro) (927)
============= ============
The Company recorded a minimum pension liability at December 31, 2003 as
required when the accumulated benefit obligation in the plan exceeds the fair
value of the underlying pension plan assets and accrued liability.
27
The adjustment related entirely to our U.S. plans and amounted to (euro)
361,000 (net of tax), which is reflected in other comprehensive income.
NOTE - N. CONTINGENCIES
The Company is involved in litigation incidental to normal operations. It
is not possible to determine the ultimate liability, if any, in these matters.
In the opinion of management, after consultation with legal counsel, the
resolution of such litigation and proceedings will not have a material effect on
the consolidated financial statements of the Company.
NOTE - O. STOCK OPTION PLANS, RETAINED EARNINGS AND EARNINGS PER SHARE
Stock Option Plans
On April 15, 1996, the Company implemented a stock option plan under which
1,027,780 shares were set aside for grants to officers and most employees of the
Company. The options were allocated on June 28, 1996, upon the Initial Public
Offering, to broaden employee ownership of the Company. All options were vested
and exercisable immediately. The options may be exercised during 10 years
subject to continued employment. Each option entitles the holder thereof to
purchase one share at a price equal to the initial offering price ( (euro)9 or
U.S.$ 11.5). As the stock was not publicly traded prior to the Initial Public
Offering, the fair market value of the stock at the date of grant is equal to
the initial offering price. The stock option plan is non-compensatory and
therefore does not result in compensation expense in the financial statements.
At December 31, 2003, 841,621 options have been exercised and there were 176,359
unexercised stock options.
On June 6, 1997, an Extraordinary Shareholders' Meeting of the Company
authorized the Board of Directors to establish a stock option plan, under which
1,031,840 shares of the Company were authorized to be issued pursuant to grants
to certain officers (including executive officers) and employees of the Company.
The options were allocated by the Board of Directors on December 15, 1997. Each
option entitles the holder thereof to purchase one share at a strike price of
(euro)25.92. The options can be exercised by the optionees from December 15,
1999 until December 14, 2007, subject to continued employment, and the shares
resulting from the exercise of the options cannot be sold before December 15,
2002. At December 31, 2003, 142,904 options have been exercised and there were
838,930 unexercised stock options.
On July 25, 1997, the Company approved the SolidWorks merger. SolidWorks
had adopted an incentive and non-qualified stock option plan in 1994 and issued
a single warrant in 1995. Pursuant to the terms of the merger, all outstanding
stock options and the warrant previously issued by SolidWorks became exercisable
for shares of the Company. The Company reserved 2,378,564 shares for the future
exercise of such options and
28
warrant, which is the total amount of additional shares which would be issued
if all such options and warrant were to be exercised. At December 31, 2003 a
total of 359,438 shares remain reserved for that purpose.
In 1998, the Board of Directors granted 3,573,480 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systemes
of America, Dassault Systemes KK, Delmia and Enovia) with a strike price ranging
from (euro)26.39 to (euro)29.58. A total of 544,488 options were vested and
exercisable immediately. Other options vest over various periods subject to
continued employment but expire no more than ten years from the date of grant.
In addition, the shares resulting from the exercise of options granted to French
employees (2,468,730 options) cannot be sold before November 8, 2003. At
December 31, 2003, 875,891 options have been exercised and there were 2,574,491
unexercised options.
In 1999, the Board of Directors granted 3,617,000 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systemes
of America, Dassault Systemes KK, Delmia and Enovia) with a strike price of
(euro)37.00. As of December 31, 2003, 81,377 options were exercised and there
were 3,438,955 unexercised options. Options vest over various periods subject to
continued employment but expire no more than ten years from the date of grant.
In 2001, the Board of Directors granted 5,316,950 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systemes
Provence, Dassault Data Services, Dassault Systemes of America, Dassault
Systemes KK, Delmia, Delmia GmbH, Enovia, Safework, Spatial, Dassault Systemes
AG, Dassault Systemes Inc. and Structural Research and Analysis Corp.) with a
price ranging from (euro)35 to (euro)52. As of December 31, 2003, 8,046 options
were exercised and there were 5,232,534 unexercised options. Options vest over
various periods subject to continued employment but expire no more than ten
years from the date of grant.
On May 28, 2002, an Extraordinary Shareholders' Meeting of the Company
authorized the Board of Directors to implement additional stock option plans
until July 27, 2005 for officers and certain employees of the Company, subject
to a limitation under which options granted by the Board of Directors and not
exercised give right to purchase additional shares not to exceed 17% of
outstanding shares of the Company.
In 2002, the Board of Directors granted 1,718,863 options to officers and
certain employees of the Company (including subsidiaries) with a strike price of
(euro)45.50. Options vest over four years subject to continued employment but
expire no more than ten years from the date of grant.
On January 20, 2003, the Board of Directors granted 4,000,000 options to
officers and certain employees of the Company (including subsidiaries) with a
strike price of (euro)23. Options vest over one year subject to continued
employment for the plan dedicated to Dassault Systemes, Dassault Systemes
Provence and Dassault Data Services employees and almost two years for the plan
dedicated to employees of foreign subsidiaries (Dassault Systemes of America,
Dassault Systemes KK, Delmia, Delmia GmbH, Enovia, Dassault Systemes Canada
Inc., Spatial Corp., SmarTeam Corp, KTI and SolidWorks Corp.). Options expire no
more than ten years from the date of grant.
29
The activity in the stock option plans of the Company is summarized below:
2003 2002 2001
Number of Weighted Number of Weighted Number of Weighted
shares average shares average shares average
exercise exercise exercise
price price price
Outstanding at beginning of year 14,504,017 (euro) 38.01 13,069,840 (euro) 37.30 8,107,686 (euro) 30.45
Granted 4,000,000 22.77 1,718,863 45.27 5,316,950 46.37
Exercised (239,997) 21.17 (235,677) 15.58 (271,541) 14.53
Cancelled (188,490) 33.77 (49,009) 38.66 (83,255) 25.81
Outstanding at end of year 18,075,530 34.32 14,504,017 38.01 13,069,840 37.30
========== ===== ============ ======= ============ =====
Exercisable 11,776,246 (euro) 37.46 8,254,974 (euro) 32.64 7,779,885 (euro) 31.43
For various price ranges, information for options outstanding and
exercisable at December 31, 2003 was as follows:
Outstanding options Exercisable options
------------------------- --------------------------
Number of Weighted Weighted Number of Weighted
shares average average shares average
remaining exercise exercise
life (years) price price
Range of exercise price
(euro)0.09 to(euro)23 4,268,125 8.66 (euro) 21.47 290,093 (euro) 8.10
(euro)23 to(euro)26 1,174,645 4.97 25.79 991,709 25.84
(euro)26 to(euro)30 2,561,991 4.86 29.58 2,561,991 29.58
(euro)30 to(euro)34 493,049 8.16 33.11 192,074 33.03
(euro)34 to(euro)37 5,337,715 6.39 36.47 4,518,112 36.68
(euro)37 to(euro)46 1,356,985 8.41 45.50 339,247 45.50
(euro)46 to(euro)52 2,883,020 7.25 52.00 2,883,020 52.00
-------- ------ -------- --------- --------
(euro)0.09 to(euro)52 18,075,530 6.95 (euro) 34.32 11,776,246 (euro) 37.46
============ ====== ============== ============ ============
The weighted average fair value of the options granted during, 2003, 2002
and 2001 are estimated at (euro) 9.94, (euro)20.82 and (euro)17.11,
respectively, on the date of grant, using the Black-Scholes pricing model.
In 2002, SolidWorks instituted a buy-back plan for the SolidWorks shares
held by its employees under which (i) an employee can put his mature shares to
SolidWorks (i.e., shares that have been owned by an employee for greater than 6
months) on specific dates at their then fair market value, and (ii) SolidWorks
can call such mature shares in this same timeframe at the same fair market
value. The adoption of this amendment did not create any compensation charge.
30
Should all the options that are currently eligible be exercised and should all
the put rights be exercised when allowed, approximately 6.7 million shares may
have to be repurchased by SolidWorks in the future. Based on the current price
per share of SolidWorks and assumptions about the holding period, the Company
estimated the potential future cash outlays would be (euro)42.6 million.
Changes to Dassault Systemes share capital during 2003 are as follows:
Number of Nominal Share capital
shares value
(in(euro)) (in(euro))
Share capital issued as of January 1st , 2003 114,570,841 1 114,570,841
Number of shares issued in 2003 with reference to 35,555 1 35,555
the stock option plan of June 28, 1996
Number of shares issued in 2003 with reference to 66,660 1 66,660
the stock option plan of December 15, 1997
Number of shares issued in 2003 with reference to 85,000 1 85,000
the stock option plan of January 28, 1998
Number of shares issued in 2003 with reference to 11,615 1 11,615
the stock option plan of November 9, 1998
Number of shares issued in 2003 with reference to 1,750 1 1,750
the stock option plan of September 15, 1999
Number of shares issued in 2003 with reference to 7,295 1 7,295
the stock option plan of October 5, 2001
Number of shares issued in 2003 with reference to 150 1 150
the stock option plan of May 28, 2001
Common stocks repurchased and cancelled (1,375,201) 1 (1,375,201)
----------- -----------
Total 113,403,665 1 113,403,665
SmarTeam had a stock option plan covering certain employees. Options under
the plan vested over a period of four years from the date of grant. The Company
recorded (euro)3,636,000 and (euro)1,338,000 of compensation expense related to
this plan for the years ended December 31, 2002 and 2001, respectively. During
2002 the Company terminated the option plan, which accelerated the vesting of
certain options of the plan, and repurchased the shares.
Retained Earnings
Under French law, the net profits, if any, related to the French legal
entities are allocated at a rate of 5% each year to a legal reserve (restricted
retained earnings) until the amount in the legal reserve is equal to 10% of the
nominal share capital of each entity. The legal reserve is distributable only
upon liquidation of the entity.
31
Earnings per share
The following table presents the calculation for both basic and diluted
earnings per share:
Year ended December 31,
-----------------------
(in units, except net income in thousands) 2003 2002 2001
---- ---- ----
Net income (euro) 135,419 (euro) 126,415 (euro) 88,741
Weighted average number of shares outstanding 113,048,656 114,118,817 113,694,585
Dilutive effect of stock options 1,665,410 2,128,909 2,965,403
Diluted weighted average number of shares outstanding 114,714,066 116,247,725 116,659,988
Basic income per share (euro) 1.20 (euro) 1.11 (euro) 0.78
Diluted income per share (euro) 1.18 (euro) 1.09 (euro) 0.76
NOTE - P. TRANSACTIONS WITH IBM AND RELATED PARTIES
Since the Company's inception in 1981, CATIA products, and since 1998
ENOVIA products, have been marketed, distributed and supported principally by
IBM, pursuant to a mutually, non-exclusive agreement that encompasses such
activities. Since 2001, SMARTEAM products are also marketed by IBM under this
non-exclusive agreement.
Revenue obtained through the commercial relationship with IBM represents
59%, 61%, and 60% of consolidated revenues of the Company for the years ended
December 31, 2003, 2002, and 2001, respectively. IBM is under no contractual
obligation to continue to actively market and distribute the Company's products,
and IBM may choose to discontinue such activities, without penalty, at its
discretion. A decision by IBM to cease or substantially reduce its marketing and
distribution efforts would likely cause a significant interruption in such
activities which would adversely affect the financial position and operating
results of the Company, at least in the short-term. However, management believes
its long-term relationship with IBM is based upon mutual respect and success,
and management is not aware of circumstances related to either party which would
cause the relationship to be terminated.
For the years ended December 31, 2003, 2002, and 2001, IBM met certain
annual sales and growth targets and the Company has charged a sales incentive to
software revenue of (euro)15,462,000, (euro)15,452,000 and (euro)13,053,000,
respectively. The related liability on the balance sheet will be settled in U.S.
dollars.
The balances of trade accounts receivable with IBM were (euro)101,986,000,
(euro)117,930,000, and (euro)113,200,000 at December 31, 2003, 2002, and 2001,
respectively, substantially all of which relates to software revenue. Management
believes that the financial position of IBM mitigates the potential credit risk
related to the
32
concentration of its trade accounts receivable with IBM. At December 31, 2003,
95% of such accounts receivable were denominated in U.S. dollars (2002: 95%),
with the remainder denominated in euros.
The Company licenses products for internal use to both IBM and to Dassault
Aviation, a former direct shareholder of the Company whose chief executive
officer is the chairman of the Company. For IBM, such activities generated
revenues of (euro)2,512,000, (euro)5,672,000, and (euro)4,062,000 during the
years ended December 31, 2003, 2002, and 2001, respectively, using commercial
terms consistent with those granted to the Company's other customers of similar
size. Dassault Aviation licenses the Company's products on commercial terms
consistent with those granted to the Company's other customers of similar size.
Licensing revenue amounted to (euro)5,779,000, (euro)6,109,000, and
(euro)3,916,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
The Company also provides service and support to Dassault Aviation. Such
activity generated service revenues of (euro)9,298,000, (euro)6,169,000, and
(euro)7,303,000 in the years ended December 31, 2003, 2002, and 2001,
respectively.
The balances of trade accounts receivable with Dassault Aviation were
(euro)7,502,000, (euro)9,126,000 and (euro)2,377,000 at December 31, 2003, 2002,
and 2001, respectively.
Most of our development organizations subcontract software development work
to 3D PLM Software Solutions Limited ("3D PLM"), a joint venture between
Dassault Systemes and Geometric Software Solutions Co. Ltd., located in India,
which is accounted for under the equity method. 3D PLM's revenue, substantially
all of which was realized with the Company, amounted to (euro)5,698,000 in 2003.
NOTE - Q. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is operating in two reportable segments: the "Process-Centric"
segment and the "Design-centric" segment.
The "Process-centric" market serves customers seeking to optimize their
industrial processes from the design stage through to manufacturing and
maintenance. The "Design-centric" market serves companies seeking to support
product design.
The accounting policies of the reportable segments are the same as those
described in Note A.
33
Data by operating segment is as follows:
(in thousands) 2003
Process- Design- Elim. Total
-------- ------- ----- -----
centric centric
------- -------
Revenue:
Software revenue (euro) 519,901 (euro)125,834 (euro)(170) (euro)645,565
Service and other revenue 110,608 279 (1,629) 109,258
---------- ---------- -------- ----------
Total revenue 630,509 126,113 (1,799) 754,823
Cost of revenue:
Software (10,344) (11,752) 432 (21,664)
Service and other (89,810) - 18 (89,793)
---------- ---------- -------- ----------
Total cost of revenue (100,154) (11,752) 450 (111,457)
---------- ---------- -------- ----------
Gross profit 530,355 114,361 (1,349) 643,366
Research and development (192,750) (23,368) 509 (215,609)
Marketing and sales (114,553) (48,133) 272 (162,414)
General and administration (41,965) (5,282) 568 (46,679)
Amortization of acquired technology (5,660) (265) - (5,925)
---------- ---------- -------- ----------
(354,928) (77,048) 1,349 (430,627)
---------- ---------- -------- ----------
Operating income 175,427 37,313 - 212,739
Equity in net income of unconsolidated affiliates 419 - - 419
Financial revenue and other, net 202 (1,057) - (855)
---------- ---------- -------- ----------
Income before income taxes 176,048 36,256 - 212,303
Income tax expense (64,786) (12,098) - (76,884)
---------- ---------- -------- ----------
Net income (euro)111,262 (euro)24,158 - (euro)135,419
Depreciation and amortization of property 19,172 3,881 - 23,053
and equipment amortization of intangible assets
Total assets 807,740 180,566 (23,816) 964,490
Acquisitions of property and equipment and 15,590 3,646 - 19,236
intangible assets
34
(in thousands) 2002
Process- Design- Elim. Total
-------- ------- ----- -----
centric centric
------- -------
Revenue:
Software revenue (euro)543,622 (euro)126,509 (euro)(245) (euro)669,886
Service and other revenue 105,758 374 (1,903) 104,229
---------- ---------- -------- ----------
Total revenue 649,380 126,883 (2,148) 774,115
Cost of revenue:
Software (11,335) (13,540) 427 (24,448)
Service and other (96,413) - - (96,413)
---------- ---------- -------- ----------
Total cost of revenue (107,748) (13,540) 427 (120,861)
---------- ---------- -------- ----------
Gross profit 541,632 113, 343 (1,721) 653,254
Research and development (194,493) (27,314) 244 (221,563)
Marketing and sales (121,823) (48,204) 374 (169,653)
General and administration (43,485) (5,526) 1,103 (47,908)
Amortization of acquired technology (10,939) (159) - (11,098)
---------- ---------- -------- ----------
(370,740) (81,203) 1,721 (450,222)
---------- ---------- -------- ----------
Operating income 170,892 32,140 - 203,032
Equity in net income of unconsolidated affiliates 214 - 214
Financial revenue and other, net 820 1,725 - 2,545
---------- ---------- -------- ----------
Income before income taxes 171,926 33,865 - 205 791
Income tax expense (67,721) (11,655) (79,376)
---------- ---------- -------- ----------
Net income (euro)104,205 (euro)22,210 - (euro)126,415
Depreciation and amortization of property 27,502 5,548 - 33,050
and equipment and amortization of intangible assets
Total assets 782,256 164,921 (27,013) 920,164
Acquisitions of property and equipment and 14,191 6,236 - 20,427
intangible assets
35
(in thousands)
Process- Design- Total
-------- ------- -----
centric centric
------- -------
Revenue:
Software revenue (euro) 514,816 (euro)128,218 (euro)643,034
Service and other revenue 103,019 - 103,019
---------- ---------- --------
Total revenue 617,835 128,218 746,053
Cost of revenue:
Software (8,864) (11,927) (20,791)
Service and other (86,542) - (86,542)
---------- ---------- --------
Total cost of revenue (95,406) (11,927) (107,333)
---------- ---------- --------
Gross profit 522,429 116,291 638,720
Research and development (182,562) (26,673) (209,235)
Marketing and sales (117,323) (47,000) (164,323)
General and administration (38,534) (5,649) (44,183)
Amortization of Goodwill (43,225) (919) (44,144)
Amortization of acquired technology (14,240) - (14,240)
---------- ---------- --------
(395,884) (80,241) (476,125)
---------- ---------- --------
Operating income 126,545 36,050 162,595
Financial revenue and other, net 11,153 2,909 14,062
---------- ---------- --------
Income before income taxes 137,698 38,959 176,657
Income tax expense (73,844) (14,072) (87,916)
---------- ---------- --------
Net income 63,854 24,887 88,741
Depreciation and amortization of property 73,336 5,647 78,983
and equipment and amortization of intangible assets
Total assets 667,882 163,545 831,427
Acquisitions of property and equipment and 17,704 5,252 22,956
intangible assets
36
The data by geographic operations of the Company is established according to the
geographical location of the consolidated companies.
France United Total
States &
Other
---------------------------------------------
(in thousands)
2003
Revenues (euro) 450,501 (euro) 304,322 (euro)754,823
Operating income (loss) 176,288 36,451 212,739
Identifiable assets 501,725 462,765 964,490
2002
Revenues (euro) 473,788 (euro) 300,327 (euro)774,115
Operating income (loss) 210,669 (7,637) 203,032
Identifiable assets 456,274 463,890 920,164
2001
Revenues (euro) 462,154 (euro) 283,899 (euro)746,053
Operating income (loss) 211,317 (48,722) 162,595
Identifiable assets 522,757 308,670 831,427
Revenues generated by the parent company of the Company were (euro)
491,309,000, (euro)515,653,000 and (euro)496,799,000 for the years ended
December 31, 2003, 2002 and 2001 respectively. Revenues generated by export
transactions from France into other geographic areas realized by the parent
company were (euro) 447,097,000, (euro)468,206,000, and (euro)447,757,000 for
the years ended December 31, 2003, 2002, and 2001, respectively. Nearly all of
such revenues relate to the IBM relationship, which is based in the United
States.
The Company also receives data from IBM that identifies the location of
IBM's end-user customers. Using such information, the revenues by geographic
area would be as follows:
(in thousands) 2003 2002 2001
---- ---- ----
France (euro) 88,560 (euro) 102,338 (euro) 99,185
Western Europe -- other than France 265,279 272,221 281,225
Americas 215,388 223,988 219,289
Asia / Pacific 185,596 175,568 146,354
-------- -------- --------
(euro) 754,823 (euro) 774,115 (euro)746,053
-------------- ============== =============
37
NOTE - R. SCOPE OF CONSOLIDATION
---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Consolidated % of % of share- Method % of % of share- Method % of % of share- Method
voting holding voting holding voting holding
rights rights rights
-------------------------------------------------------------------------------------------------
Companies
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes K. K. 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Dassault Data Services 95% 95% Consolidation 95% 95% Consolidation 95% 95% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes of 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
America Corp. and its
subsidiaries
--------------------------------------------------------------------------------------------------------------------------
SolidWorks Corporation 99% 99% Consolidation 100% 100% Consolidation 100% 100% Consolidation
and its subsidiaries
--------------------------------------------------------------------------------------------------------------------------
Delmia Corp. and its 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
subsidiaries
--------------------------------------------------------------------------------------------------------------------------
Enovia Corp and its 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
subsidiary
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes Corp 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes AG 100% 100% Consolidation 100% 100% Consolidation 99% 99% Consolidation
--------------------------------------------------------------------------------------------------------------------------
SmarTeam Corporation 100% 100% Consolidation 100% 100% Consolidation 84% 84% Consolidation
Ltd. and its subsidiaries
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
Provence
--------------------------------------------------------------------------------------------------------------------------
Delmia GmbH 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes Canada 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
Inc.
--------------------------------------------------------------------------------------------------------------------------
Safework Inc. 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Spatial Corp. and its 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
subsidiaries
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes Srl. 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Structural Research and 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
Analysis Corp.
--------------------------------------------------------------------------------------------------------------------------
Invention Machine 20% 20% Equity Method 17% 17% Equity Method 17% 17% Equity Method
Corporation
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes Inc. 100% 100% Consolidation 100% 100% Consolidation 100% 100% Consolidation
--------------------------------------------------------------------------------------------------------------------------
Knowledge Technologies 100% 100% Consolidation 100% 100% Consolidation
International Inc
--------------------------------------------------------------------------------------------------------------------------
Knowledge Technologies 100% 100% Consolidation 100% 100% Consolidation
International Ltd.
--------------------------------------------------------------------------------------------------------------------------
Knowledge Technologies 100% 100% Consolidation 100% 100% Consolidation
International France
--------------------------------------------------------------------------------------------------------------------------
Dassault Systemes 98% 98% Consolidation 98% 98% Consolidation
(Switzerland) Ltd.
--------------------------------------------------------------------------------------------------------------------------
3D PLM Software 30% 30% Equity Method 30% 30% Equity Method
Solutions Ltd.
--------------------------------------------------------------------------------------------------------------------------
Athys 80% 80% Consolidation
38
NOTE - S. PERSONNEL COSTS
Personnel costs were (euro)297,846,360, (euro)305,766,000 and
(euro)271,781,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. Directors' compensation was (euro)100,000, (euro)80,000 and
(euro)61,000 in the years ended December 31, 2003, 2002, and 2001, respectively.
NOTE - T. SUMMARY OF DIFFERENCES BETWEEN FINANCIAL STATEMENTS ESTABLISHED IN
FRENCH GAAP AND U.S. GAAP
The differences are summarized below (in thousands of euros):
As of and for the year ended December 31, 2003 Net equity Net income
-------------- -------------
U.S. GAAP (euro)657,678 (euro)135,419
Goodwill amortization (1) (52,465) (24,896)
Derivative instruments (2) (3,256) 508
Accounting for issuance of SolidWorks stock (3) 3,624 2,488
Other, net (206) 579
-------------- -------------
As adjusted for French GAAP (euro)605,375 (euro)114,098
============== =============
(1) Under French GAAP, Goodwill is amortized over its useful life.
Under U.S. GAAP, in accordance with SFAS 141 ("Business Combinations") and
SFAS 142 ("Goodwill and Other Intangible Assets"), goodwill is not amortized.
Goodwill amortization is replaced by an annual impairment test implemented at
the reporting unit level using fair value measurement.
(2) Under French GAAP, financial instruments designated as hedging instruments
are not recognized but are disclosed as off-balance sheet instruments. The fair
market value of a financial instrument is recognized when the hedged item is
recognized in earnings.
Under U.S. GAAP, all derivatives instruments are recorded in the balance
sheet at fair value. Changes in the fair value are recognized in earnings except
for the effective portion of cash-flow hedging instruments, which is reported as
a component of other comprehensive income.
(3) Under French GAAP, the issuance of new shares by SolidWorks, which
decreased the Company's ownership, was recognized as a proceeds of stock.
Accordingly, a dilution gain was recognized in earnings.
Under U.S. GAAP, the gain is not recognized as reacquisition of shares is
contemplated at the time of issuance and this dilution gain is accounted for as
an equity transaction.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DASSAULT SYSTEMES S.A.
Date: June 1, 2004 By: /s/ Thibault de Tersant
-----------------------
Name: Thibault de Tersant
Title: Executive Vice President,
Finance and Administration