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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 27, 1998
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Aspen Technology, Inc.
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(Exact Name of Registrant as Specified in Charter)
Delaware 0-24786 04-2739697
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
Ten Canal Park, Cambridge, Massachusetts 02141
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (617) 949-1000
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Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
On May 27, 1998 (the "Closing Date"), pursuant to an Agreement and Plan
of Reorganization dated as of April 28, 1998 (the "Reorganization Agreement"),
among Aspen Technology, Inc. ("AspenTech" or the "Company"), AT Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of AspenTech
("Acquisition Corp."), Chesapeake Decision Sciences, Inc., a New Jersey
corporation ("Chesapeake"), and Dr. Thomas E. Baker, a stockholder of
Chesapeake, AspenTech acquired Chesapeake by means of a statutory merger (the
"Merger") of Acquisition Corp. into Chesapeake, with Chesapeake remaining as the
surviving corporation in the Merger. As a result of the Merger, Chesapeake
became a wholly owned subsidiary of AspenTech. Acquisition Corp. was formed
solely for the purpose of effecting the Merger. AspenTech is the leading
supplier of software and service solutions used by companies in the process
industries to design, operate and manage their manufacturing processes.
Chesapeake is a provider of supply chain management solutions to companies in
process and other industries.
Pursuant to the Reorganization Agreement, an aggregate of 2,961,959
shares of the Common Stock, $.10 par value per share (the "Common Stock"), of
AspenTech were issued in exchange for all of the issued and outstanding capital
stock of Chesapeake. Each outstanding share of Chesapeake capital stock was
converted into the right to receive a number of shares of AspenTech Common Stock
equal to 2,961,959 divided by the sum of the total number of shares of
Chesapeake capital stock outstanding on the Closing Date.
The consideration paid by AspenTech for the outstanding capital stock
of Chesapeake pursuant to the Reorganization Agreement was determined pursuant
to arm's-length negotiations and took into account various factors concerning
the valuation of the business of Chesapeake, including public market valuations
of comparable companies, discounted cash flows for Chesapeake, and multiples
paid in recent acquisitions of comparable companies.
AspenTech intends to account for the acquisition of Chesapeake under
the "pooling-of-interests" accounting method. Generally accepted accounting
principles preclude AspenTech from restating its historical Consolidated
Financial Statements to reflect the combined operations of AspenTech and
Chesapeake until AspenTech has announced results of operations reflecting
post-acquisition combined operations. AspenTech has included in this Form 8-K
both its historical Consolidated Financial Statements, which reflect the
operations of AspenTech without Chesapeake, and its Supplemental Consolidated
Financial Statements, which reflect the combined operations of AspenTech and
Chesapeake as if the two entities had operated as one entity since inception.
See Note 1 of Notes to Supplemental Consolidated Financial Statements.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE REORGANIZATION AGREEMENT, A COPY OF WHICH IS
INCLUDED AS AN EXHIBIT TO THIS FORM 8-K AND IS INCORPORATED BY REFERENCE HEREIN.
BECAUSE THE ACQUISITION OF CHESAPEAKE IS NOT DEEMED TO INVOLVE A
SIGNIFICANT AMOUNT OF ASSETS FOR PURPOSES OF ITEM 2 OF FORM 8-K AND THE IMPACT
OF THE CHESAPEAKE ACQUISITION DOES NOT MEET THE MINIMUM MATERIALITY THRESHOLD OF
RULE 305(b)(2)(i) OF REGULATION S-X, FINANCIAL AND OTHER INFORMATION REGARDING
CHESAPEAKE AND THE ACQUISITION THEREOF IS NOT REQUIRED TO BE FILED PURSUANT TO
ITEM 2 OR PARAGRAPH (a) OR (b) OF ITEM 7 OF FORM 8-K. ASPENTECH IS PROVIDING
INFORMATION REGARDING THE ACQUISITION AND THE INFORMATION SET FORTH BELOW
BECAUSE ASPENTECH DEEMS THIS INFORMATION TO BE OF IMPORTANCE TO HOLDERS OF
COMMON STOCK. UNLESS OTHERWISE INDICATED, (I) THE INFORMATION BELOW GIVES
RETROACTIVE EFFECT TO ASPENTECH'S ACQUISITION OF CHESAPEAKE ON MAY 27, 1998 AND
(II) REFERENCES IN THIS FORM 8-K TO "ASPENTECH" OR THE "COMPANY" ARE TO ASPEN
TECHNOLOGY, INC. AND ITS SUBSIDIARIES.
The following is a table of contents for the information included in
this Item 5:
Page
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Forward-Looking Statements................................................ 3
Selected Supplemental Consolidated Financial Data......................... 4
Management's Discussion and Analysis of Supplemental
Consolidated Financial Condition and Results of Operations.............. 6
Business.................................................................. 17
Risk Factors.............................................................. 33
Index to Consolidated Financial Statements................................ F-1
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FORWARD-LOOKING STATEMENTS
This Form 8-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," and similar expressions are intended to identify
forward-looking statements. Readers are cautioned that all forward-looking
statements involve risks and uncertainties, many of which are beyond the
Company's control, including the factors set forth under "--Risk Factors."
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and there can be no assurance that actual
results will be the same as those indicated by the forward-looking statements
included in this Form 8-K. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Moreover, the Company assumes no obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
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SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The selected supplemental consolidated financial data as of the end of and
for each of the Company's last five fiscal years have been derived from the
Company's Supplemental Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
supplemental consolidated financial data as of March 31, 1998 and for the nine
months ended March 31, 1997 and 1998 have been derived from the Company's
unaudited Supplemental Consolidated Financial Statements, which unaudited
Supplemental Consolidated Financial Statements have been prepared on a basis
substantially consistent with the audited Supplemental Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the supplemental financial condition and results of operations
of the Company for these periods. Results of operations for the nine months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the entire year. The following selected supplemental consolidated
financial data are qualified by the more detailed Supplemental Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 8-K, and
should be read in conjunction therewith and with the discussion under
"--Management's Discussion and Analysis of Supplemental Consolidated Financial
Condition and Results of Operations."
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
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1993 1994 1995 1996 1997 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Software licenses............................... $27,266 $37,725 $49,479 $ 70,199 $103,179 $ 71,741 $ 95,544
Service and other............................... 10,378 11,682 16,540 44,619 90,891 65,858 82,500
------- ------- ------- -------- -------- -------- --------
Total revenues.................................... 37,644 49,407 66,019 114,818 194,070 137,599 178,044
------- ------- ------- -------- -------- -------- --------
Expenses:
Cost of software licenses....................... 2,099 2,795 3,080 3,992 5,539 4,090 4,964
Cost of service and other....................... 8,513 8,824 10,052 27,220 54,006 39,315 48,342
Selling and marketing........................... 12,664 18,912 24,276 36,610 56,034 40,223 52,683
Research and development........................ 8,223 9,193 12,652 22,310 33,580 23,686 31,519
General and administrative...................... 5,057 5,005 5,679 10,715 17,072 12,854 14,650
Charge for in-process research and development.. -- -- -- 24,421 8,664 8,664 8,472
Costs related to acquisition.................... -- -- 950 -- -- -- 984
------- ------- ------- -------- -------- -------- --------
Total expenses.................................... 36,556 44,729 56,689 125,268 174,895 128,832 161,614
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Income (loss) from operations..................... 1,088 4,678 9,330 (10,450) 19,175 8,767 16,430
Foreign currency exchange gain (loss)............. 47 (56) 34 (223) (236) (110) (365)
Income (loss) on equity in joint ventures......... -- (39) 22 10 26 -- 45
Interest income................................... 2,032 1,799 3,138 3,745 5,556 3,984 4,305
Interest expense.................................. (532) (524) (561) (1,323) (151) (117) (147)
------- ------- ------- -------- -------- -------- --------
Income (loss) from continuing operations before
provision for income taxes...................... 2,635 5,858 11,963 (8,241) 24,370 12,524 20,268
Provision for income taxes........................ 961 2,116 4,854 6,146 10,169 6,268 10,324
------- ------- ------- -------- -------- -------- --------
Income (loss) from continuing operations.......... 1,674 3,742 7,109 (14,387) 14,201 6,256 9,944
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Discontinued operations:
Loss from operations............................ (40) -- -- -- -- -- --
Loss on disposal................................ (532) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- --------
Net income (loss)(2).............................. $ 1,102 $ 3,742 $ 7,109 $(14,387) $ 14,201 $ 6,256 $ 9,944
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NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
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1993 1994 1995 1996 1997 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
Diluted earnings (loss) per share(3):
Continuing operations......................... $ 0.12 $ 0.26 $ 0.42 $ (0.83) $ 0.63 $ 0.28 $ 0.41
Net income (loss)............................. 0.08 0.26 0.42 (0.83) 0.63 0.28 0.41
Basic earnings (loss) per share(3):
Continuing operations......................... $ 0.21 $ 0.45 $ 0.46 $ (0.83) $ 0.66 $ 0.30 $ 0.43
Net income (loss)............................. 0.14 0.45 0.46 (0.83) 0.66 0.30 0.43
Weighted average shares
outstanding -- diluted(3)....................... 14,065 14,318 17,113 17,432 22,707 22,596 24,432
Weighted average shares outstanding -- basic(3)... 8,061 8,340 15,321 17,432 21,368 21,190 23,101
PRO FORMA DATA(4):
Income from continuing operations................. $ 2,635 $ 5,858 $12,913 $ 16,180 $ 33,034 $ 21,188 $ 29,724
Net income........................................ 1,674 3,742 7,672 10,034 21,165 13,220 19,039
Diluted earnings per share........................ 0.12 0.26 0.45 0.53 0.93 0.59 0.78
Weighted average shares
outstanding -- diluted(3)....................... 14,065 14,318 17,113 18,874 22,707 22,596 24,432
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA(1):
Cash and cash equivalents......................... $ 2,538 $ 2,932 $ 6,290 $ 14,773 $ 18,284 $ 12,645 $ 25,546
Working capital................................... 6,889 8,546 31,377 72,560 73,789 63,237 82,694
Total assets...................................... 35,890 45,066 83,259 168,986 203,545 186,196 236,088
Long-term obligations, less current maturities.... 2,251 2,576 4,087 706 462 586 3,315
Total stockholders' equity........................ 15,580 19,284 45,824 104,477 137,414 120,255 150,977
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(1) On May 27, 1998, the Company acquired all of the outstanding capital stock
of Chesapeake in exchange for 2,961,959 shares of Common Stock. The selected
supplemental consolidated financial data give effect to the Chesapeake
acquisition, which the Company intends to account for under the
"pooling-of-interests" accounting method. See Note 1 of Notes to
Supplemental Consolidated Financial Statements.
(2) The Company has never declared or paid cash dividends on its capital stock,
although one of the Company's subsidiaries paid dividends to its
stockholders prior to its acquisition by the Company in fiscal 1995.
(3) Computed as described in Note 2(j) of Notes to Supplemental Consolidated
Financial Statements. In February 1998, the Commission issued SAB No. 98,
which revised the Commission's guidance for calculating earnings per share
with respect to equity security issuances before an initial public offering
and is effective for fiscal years ending after December 15, 1997. The
Company has restated its weighted average shares outstanding for the periods
prior to its initial public offering in 1994 for SAB No. 98. This change did
not affect diluted earnings per share.
(4) Pro forma data are calculated by excluding the effects of charge for
in-process research and development, costs related to acquisition and
discontinued operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its founding in 1981, the Company has developed and marketed software
and services to companies in the process industries. The Company's revenues have
increased each year since 1983, when the Company introduced the commercial
version of its Aspen Plus process design software solution. In addition to
internally generated growth, the Company has acquired 14 businesses since May
1995, including Industrial Systems, Inc. ("ISI") in the fourth quarter of fiscal
1995, Dynamic Matrix Control Corporation ("DMCC") and Setpoint, Inc.
("Setpoint") in the third quarter of fiscal 1996, and Chesapeake in the fourth
quarter of fiscal 1998.
The Company acquired DMCC, Setpoint and three other, less material
businesses in transactions accounted for as purchases. The Company's results of
operations include the results of operations of DMCC, Setpoint and these three
other companies only for periods subsequent to their respective dates of
acquisition. As of result, period-to-period comparisons of the Company's results
of operations may not be meaningful. See Note 3 of Notes to Supplemental
Consolidated Financial Statements.
Through March 31, 1998, the Company acquired ISI and six other businesses
in transactions accounted for as poolings of interests. Of these acquisitions,
only the acquisition of ISI was material to the Company's financial condition
and results of operations. Accordingly, the Company has restated its financial
statements to reflect the historic operations of ISI but not the other,
immaterial businesses. On May 27, 1998, the Company acquired Chesapeake in a
transaction that the Company intends to account for as a pooling of interests.
Generally accepted accounting principles preclude the Company from restating its
historical Consolidated Financial Statements to reflect the combined operations
of the Company and Chesapeake until the Company has announced results of
operations reflecting post-acquisition combined operations. The Company has
included in this Form 8-K both its historical Consolidated Financial Statements,
which reflect the operations of the Company without Chesapeake, and its
Supplemental Consolidated Financial Statements, which reflect the combined
operations of the Company and Chesapeake as if the two entities had operated as
one entity since inception. See Note 1 of Notes to Supplemental Consolidated
Financial Statements. In addition, on May 29, 1998, the Company acquired Treiber
Controls, Inc. in a transaction that the Company intends to account for as a
pooling of interests. The acquisition of Treiber Controls, Inc. is not material
to the financial condition or results of operations of the Company, and the
Company does not intend to restate its consolidated financial statements to
reflect this acquisition.
The Company typically licenses its process design software solutions for
terms of 3 to 5 years, its process operation software solutions for terms of 99
years, its planning and scheduling software solutions for terms of 5 or 25
years, and its other process management software solutions for terms of 99
years. See "--Business -- Software and Service Solutions."
Because in all cases the licenses are noncancelable and do not impose
significant obligations on the Company, the Company recognizes software license
revenues upon shipment in accordance with generally accepted accounting
principles. In the case of license renewals, revenue is recognized upon
execution of a renewal license agreement. The Company recognizes revenues from
customer support ratably over the term of the support agreement. If a customer
elects to pay for a license in annual installments, the Company charges an
implicit amount of interest and recognizes interest income over the term of the
license. A substantial majority of the Company's term licenses have been renewed
upon expiration. However, there can be no assurance that customers will continue
to renew expiring term licenses at the historical rate.
Prior to fiscal 1996, the Company derived the substantial majority of its
total revenues from the licensing of software products. Since the acquisitions
of DMCC and Setpoint in the third quarter of fiscal 1996, the Company has
generated a significantly greater amount of service revenues related to the
implementation of its software solutions, particularly in connection with
projects involving
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advanced process control and real-time optimization. For the nine months ended
March 31, 1998, the Company derived 53.7% of its total revenues from the
licensing of software products and 46.3% of its total revenues from the
provision of services. The Company generally charges customers for consulting
services on a fixed-price basis, but charges customers for certain services,
primarily on-site advanced process control and optimization services, on a
time-and-materials basis. Service revenues from fixed-price contracts are
recognized on the percentage-of-completion method, measured by the portion of
costs incurred to date as a percentage of the estimated total (primarily labor)
costs for each contract. Service revenues from time-and-materials contracts are
recognized as the related services are performed. Training revenues are
recognized as services are performed. Services that have been performed but for
which billings have not been made are recorded as unbilled receivables, and
billings for which services have not been performed are recorded as unearned
revenue in the Company's Supplemental Consolidated Balance Sheets.
The Company licenses its software in U.S. dollars and certain foreign
currencies. The Company hedges all material foreign currency-denominated
receivables with specific hedge contracts in amounts equal to those receivables.
While the Company has experienced minor foreign currency exchange gains or
losses due to foreign exchange rate fluctuations, the impact of such movements
has not been material in any period. The Company does not expect fluctuations in
foreign currencies to have a significant impact on either its revenues or
expenses in the foreseeable future.
The Company's operating costs include the amortization of intangible
assets, including goodwill, arising from acquisitions accounted for as
purchases. The net balance of these intangible assets as of March 31, 1998 was
approximately $13.6 million and is being amortized over periods ranging from 18
months to 12 years. The amortization from completed acquisitions that was
charged to operations was approximately $2.5 million for fiscal 1997 and $2.0
million for the nine months ended March 31, 1998 and will be approximately
$692,000 for each of the next 12 quarters and approximately $340,000 for each of
the next succeeding 8 quarters.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain supplemental consolidated statement of operations data for the
periods indicated:
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
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1995 1996 1997 1997 1998
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Revenues:
Software licenses............................. 74.9% 61.1% 53.2% 52.1% 53.7%
Service and other............................. 25.1 38.9 46.8 47.9 46.3
----- ----- ----- ----- -----
Total revenues.................................. 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Cost of software licenses..................... 4.7 3.5 2.9 3.0 2.8
Cost of service and other..................... 15.2 23.7 27.8 28.6 27.2
Selling and marketing......................... 36.8 31.9 28.9 29.2 29.6
Research and development...................... 19.2 19.4 17.3 17.2 17.7
General and administrative.................... 8.6 9.3 8.8 9.3 8.2
Charge for in-process research and
development................................ -- 21.3 4.5 6.3 4.7
Costs related to acquisition.................. 1.4 -- -- -- 0.6
----- ----- ----- ----- -----
Total expenses.................................. 85.9 109.1 90.2 93.6 90.8
----- ----- ----- ----- -----
Income (loss) from operations................... 14.1 (9.1) 9.8 6.4 9.2
Interest income............................... 4.8 3.3 2.9 2.9 2.4
Interest expense.............................. (0.8) (1.2) (0.1) (0.1) (0.1)
Other income (expense), net................... 0.1 (0.1) (0.1) (0.1) (0.1)
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes......................................... 18.2 (7.1) 12.5 9.1 11.4
Provision for income taxes.................... 7.4 5.4 5.2 4.6 5.8
----- ----- ----- ----- -----
Net income (loss)............................... 10.8% (12.5)% 7.3% 4.5% 5.6%
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Pro forma data, excluding charge for in-process
research and development and costs related to
acquisition:
Income from continuing operations............. 19.6% 14.1% 17.0% 15.4% 16.7%
Net income.................................... 11.6% 8.7% 10.9% 9.6% 10.7%
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO NINE MONTHS ENDED MARCH
31, 1997
REVENUES. Revenues are derived from software licenses and services. Total
revenues for the nine months ended March 31, 1998 increased 29.4% to $178.0
million from $137.6 million in the comparable period of fiscal 1997.
Software license revenues represented 53.7% and 52.1% of total revenues for
the nine months ended March 31, 1998 and 1997, respectively. Revenues from
software licenses in the nine months ended March 31, 1998 increased 33.2% to
$95.5 million from $71.7 million in the comparable period of fiscal 1997. The
growth in software license revenues was attributable to software license
renewals covering existing users, the expansion of existing customer
relationships through licenses covering additional users, licenses of additional
software products, and, to a lesser extent, to the addition of new customers.
Total revenues from customers outside the United States were $80.7 million
or 45.3% of total revenues and $66.6 million or 48.4% of total revenues for the
nine months ended March 31, 1998 and 1997, respectively. The geographical mix of
revenues can vary from quarter to quarter.
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Revenues from service and other consist of consulting services,
post-contract support on software licenses, training and sales of documentation.
Revenues from service and other for the nine months ended March 31, 1998
increased 25.3% to $82.5 million from $65.9 million for the comparable period of
fiscal 1997. This increase reflects a continued focus during fiscal 1998 on
providing high value-added consulting and training services to existing
customers.
Neither the Company's joint venture or similar activities nor any
discounting or similar activities have historically had a material effect on the
Company's revenues.
COST OF SOFTWARE LICENSES. Cost of software licenses consists of
royalties, amortization of previously capitalized software costs, costs related
to delivery of software (including disk duplication and third-party software
costs), printing of manuals and packaging. Cost of software licenses for the
nine months ended March 31, 1998 increased 21.4% to $5.0 million from $4.1
million in the comparable period of fiscal 1997. Cost of software licenses as a
percentage of revenues from software licenses decreased to 5.2% for the nine
months ended March 31, 1998 from 5.7% for the comparable period of fiscal 1997.
This decrease was due to the spreading of fixed production and delivery costs
over a larger revenue base and to the generation of a greater portion of sales
having minimal third-party costs.
COST OF SERVICE AND OTHER. Cost of service and other consists of the cost
of execution of application consulting services, technical support expenses, the
cost of training services and the costs of manuals that are sold as separate
items. Cost of service and other for the nine months ended March 31, 1998
increased 23.0% to $48.3 million from $39.3 million for the comparable period of
fiscal 1997. Cost of service and other as a percentage of revenues from services
and other decreased to 58.6% for the nine months ended March 31, 1998 from 59.7%
for the comparable period of fiscal 1997. This percentage decrease reflects
improved efficiency in the execution of the implementation services projects.
SELLING AND MARKETING. Selling and marketing expenses for the nine months
ended March 31, 1998 increased 31.0% to $52.7 million from $40.2 million for the
comparable period of fiscal 1997 while increasing slightly as a percentage of
revenues to 29.6% from 29.2%. The Company continues to invest in sales personnel
and regional sales offices to improve the Company's geographic proximity to its
customers, to maximize the penetration of existing accounts and to add new
customers.
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
personnel and outside consultancy costs required to conduct the Company's
product development efforts. Capitalized research and development costs are
amortized over the estimated remaining economic life of the relevant product,
not to exceed three years. Research and development expenses for the nine months
ended March 31, 1998 increased 33.1% to $31.5 million from $23.7 million for the
comparable period of fiscal 1997 while increasing as a percentage of total
revenues to 17.7% from 17.2%. The increase in costs principally reflects
continued investment in development of the Company's core modeling products and
a common software architecture encompassing the Company's expanded family of
software products. The Company capitalized 8.4% of its total research and
development costs during the nine months ended March 31, 1998 as compared to
5.9% in the comparable period of fiscal 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of administrative, executive, financial and legal
personnel, outside professional fees and amortization of intangibles. General
and administrative expenses for the nine months ended March 31, 1998 increased
14.0% to $14.7 million from $12.9 million for the comparable period of fiscal
1997, while decreasing as a percentage of total revenues to 8.2% from 9.3%.
These costs did not grow at the same rate as revenues, as the Company's
infrastructure was able to support a larger revenue base; however, the increased
dollar amounts reflect the growth in the scale and scope of the Company's
operations.
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CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with several
acquisitions during the nine months ended March 31, 1998 and 1997, the Company
allocated approximately $8.5 million and $8.7 million, respectively, of the
purchase prices to in-process research and development based upon independent
appraisals. These costs were charged to operations as of the respective
acquisition dates, because they related to projects that had not yet reached
technological feasibility and that had no alternative future use until
completion of development. At the respective times of the acquisitions, these
projects required substantial additional development and testing by the Company
in order to reach technological feasibility and there was no assurance that
these projects would reach technological feasibility or develop into products
that could be sold by the Company.
COST RELATED TO ACQUISITIONS. In connection with several acquisitions by
the Company during the nine months ended March 31, 1998 that were accounted for
as poolings of interests, the Company incurred $1.0 million in expenses,
primarily investment banking and professional service fees related to the
transactions.
INTEREST INCOME. Interest income is generated from the license of software
pursuant to installment contracts for process design software and the investment
of excess cash in short-term investments. Under these installment contracts, the
Company offers customers the option to make annual payments for its term
licenses instead of a single license fee payment at the beginning of the license
term. A substantial majority of the process design modeling customers elect to
license these products through installment contracts. The Company believes this
election is made principally because the customers prefer to pay for the
Company's process design software out of their operating budgets, rather than
out of their capital budgets. Included in the annual payments is an implicit
interest established by the Company at the time of the license. The Company
sells a portion of the installment contracts to unrelated financial
institutions. The interest earned by the Company on the installment contract
portfolio in any one year is the result of the implicit interest established by
the Company on installment contracts and the size of the contract portfolio.
Interest income was $4.3 million for the nine months ended March 31, 1998 as
compared to $4.0 million in the comparable period of fiscal 1997.
INTEREST EXPENSE. Interest expense is generated from interest charged on
the Company's bank line of credit and capital lease obligations. Interest
expense for the nine months ended March 31, 1998 and 1997 was approximately $0.1
million.
PROVISION FOR INCOME TAXES. The effective tax rate in the nine months
ended March 31, 1998 is calculated as a percentage of income before taxes,
exclusive of the non-recurring charges for in-process research and development.
The effective tax rate decreased for the nine months ended March 31, 1998 to
36.0% of pre-tax income from 38.0% for the comparable period of fiscal 1997.
This decrease was primarily due to utilization of various tax credits and
carryforwards.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
The Company acquired DMCC and Setpoint in the third quarter of fiscal 1996
in transactions accounted for as purchases. The combined operations of DMCC and
Setpoint at the time of acquisitions were roughly the same size as AspenTech. As
a result, the Company's results of operations for fiscal 1997 and fiscal 1996
are not directly comparable.
REVENUES. Total revenues for fiscal 1997 increased 69.0% to $194.1 million
from $114.8 million in fiscal 1996.
Software license revenues represented 53.2% and 61.1% of total revenues in
fiscal 1997 and 1996, respectively. Revenues from software licenses in fiscal
1997 increased 47.0% to $103.2 million from $70.2 million in fiscal 1996. The
growth in software license revenues was attributable
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both to internal growth in existing operations and to additional licenses
entered into by the acquired subsidiaries. The internal growth in software
license revenues was attributable to renewals of software licenses covering
existing users, the expansion of existing customer relationships through
licenses covering additional users and additional software products, and, to a
lesser extent, the addition of new customers. The decrease in software license
revenues as a percentage of total revenues was attributable to the growth of
service revenues resulting from the Company's acquisitions of DMCC and Setpoint.
Total revenues from customers outside the United States were $97.0 million
or 50.0% of total revenues and $48.2 million or 42.0% of total revenues for
fiscal 1997 and 1996, respectively.
Since the acquisitions of DMCC and Setpoint, the Company has generated a
significantly greater amount of revenues from services. As a result of the
acquisitions and the subsequent expansion of the combined services execution
capability, revenues from service and other in fiscal 1997 increased 103.7% to
$90.9 million from $44.6 million in fiscal 1996.
Neither the Company's joint venture or similar activities nor any
discounting or similar activities have historically had a material effect on the
Company's revenues.
COST OF SOFTWARE LICENSES. Cost of software licenses in fiscal 1997
increased 38.8% to $5.5 million from $4.0 million in fiscal 1996. Cost of
software licenses as a percentage of revenues from software licenses decreased
to 5.4% in fiscal 1997 from 5.7% in fiscal 1996. This decrease was due to the
spreading of fixed production and delivery costs over a larger revenue base and
to the generation of a greater portion of sales having minimal third-party
royalty costs.
COST OF SERVICE AND OTHER. Cost of service and other in fiscal 1997
increased 98.4% to $54.0 million from $27.2 million in fiscal 1996. Cost of
service and other as a percentage of revenues from service and other decreased
to 59.4% in fiscal 1997 from 61.0% in fiscal 1996. The percentage decrease
reflected not only a change in mix of services provided by the Company but
improvement in the efficiency of project execution.
SELLING AND MARKETING. Selling and marketing expenses in fiscal 1997
increased 53.1% to $56.0 million from $36.6 million in fiscal 1996 while
decreasing as a percentage of total revenues to 28.9% from 31.9%. The percentage
decrease in costs reflects the Company's leveraging of its worldwide sales and
technical sales force to market all of the Company's products and services. The
Company continued to invest in sales personnel and regional sales offices to
improve the Company's geographic proximity to its customers, to maximize the
penetration of existing accounts and to add new customers.
RESEARCH AND DEVELOPMENT. Research and development expenses in fiscal 1997
increased 50.5% to $33.6 million from $22.3 million in fiscal 1996 while
decreasing as a percentage of total revenues to 17.3% from 19.4%. The increase
in costs principally reflected investment in a suite of next generation products
from overlapping technology purchased through the series of acquisitions and a
continued investment in the Company's core modeling products. The Company
capitalized 6.6% and 3.9% of its total research and development expenses during
fiscal 1997 and fiscal 1996, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in fiscal
1997 increased 59.3% to $17.1 million from $10.7 million in fiscal 1996, and
decreased as a percentage of total revenues to 8.8% from 9.3%. The decrease was
the result of improvement in the efficiency of the administrative group over an
increasing revenue base.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. In the second quarter of
fiscal 1997, the Company recognized a non-recurring charge of $8.7 million for
the write-off of in-process research and development in connection with the
acquisitions of the Process Control Division of Cambridge Control Limited, the
planning and scheduling software division of Bechtel Corporation, and Basil
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Joffe Associates, Inc. The Company recognized a similar charge during the third
quarter of fiscal 1996 of $24.4 million in connection with its acquisition of
DMCC and Setpoint.
INTEREST INCOME. Interest income in fiscal 1997 increased 48.4% to $5.6
million from $3.7 million in fiscal 1996. Interest income increased as a result
of investment of the net proceeds of the Company's public offering completed in
June 1996 and a larger installment contract portfolio.
INTEREST EXPENSE. Interest expense in fiscal 1997 and fiscal 1996 was
generated from interest charged on the Company's line of credit, subordinated
notes payable to the Massachusetts Capital Resource Company, a promissory note
issued in connection with the Setpoint acquisition, and capital lease
obligations. Interest expense in fiscal 1997 decreased to $0.2 million from $1.3
million in fiscal 1996. This decrease reflects the repayment at the end of
fiscal 1996 of borrowings under the Company's line of credit, the subordinated
notes and the promissory note issued in connection with the acquisition of
Setpoint.
PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 1997 and
fiscal 1996 is calculated as a percentage of income before taxes, exclusive of
the non-recurring charges for in-process research and development. The effective
tax rate decreased in fiscal 1997 to 36.0% of pre-tax income from 38.0% in
fiscal 1996. This decrease was primarily due to utilization of various tax
credits and carryforwards.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
The Company acquired DMCC and Setpoint in the third quarter of fiscal 1996
in transactions accounted for as purchases. The combined operations of DMCC and
Setpoint at the time of the acquisitions were roughly the same size as
AspenTech. As a result, the Company's results of operations for fiscal 1996 and
fiscal 1995 are not directly comparable.
REVENUES. Total revenues in fiscal 1996 increased 73.9% to $114.8 million
from $66.0 million in fiscal 1995.
Software license revenues represented 61.1% and 74.9% of total revenues in
fiscal 1996 and fiscal 1995, respectively. Revenues from software licenses in
fiscal 1996 increased 41.9% to $70.2 million from $49.5 million in fiscal 1995.
The growth in software license revenues was attributable both to internal growth
in existing operations and to additional licenses entered into by the newly
acquired subsidiaries. The internal growth in software license revenues was
attributable to renewals of software licenses covering existing users, to the
expansion of existing customer relationships through licenses covering
additional users and additional software products, and, to a lesser extent, to
the addition of new customers. The decrease in software license revenues as a
percentage of total revenues was attributable to the growth in service revenues
resulting from the Company's acquisitions of DMCC and Setpoint.
Total revenues from customers outside the United States were $48.2 million
or 42.0% of total revenues and $31.6 million or 47.8% of total revenues in
fiscal 1996 and fiscal 1995, respectively. The growth in dollar amount of total
revenues from customers outside the United States was attributable in part to
revenues generated by Setpoint and, to a lesser extent, to internal growth in
existing operations.
Since the acquisitions of DMCC and Setpoint, the Company has generated a
significantly greater amount of revenues from services. As a result, revenues
from service and other in fiscal 1996 increased 169.8% to $44.6 million from
$16.5 million in fiscal 1995.
COST OF SOFTWARE LICENSES. Cost of software licenses in fiscal 1996
increased 29.6% to $4.0 million from $3.1 million in fiscal 1995. Cost of
software licenses as a percentage of revenues from software licenses decreased
to 5.7% in fiscal 1996 from 6.2% in fiscal 1995. This decrease was due to the
spreading of fixed production and delivery costs over a larger revenue base and
to the generation of a greater portion of sales having minimal third-party
royalty costs.
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COST OF SERVICE AND OTHER. Cost of service and other in fiscal 1996
increased 170.8% to $27.2 million from $10.1 million in fiscal 1995. Cost of
service and other as a percentage of revenues from service and other increased
slightly to 61.0% in fiscal 1996 from 60.8% in fiscal 1995.
SELLING AND MARKETING. Selling and marketing expenses in fiscal 1996
increased 50.8% to $36.6 million from $24.3 million in fiscal 1995 while
decreasing as a percentage of total revenues to 31.9% from 36.8%. The percentage
decrease reflected the lower level of sales and marketing activities
historically supported by DMCC and Setpoint, as well as the Company's leveraging
of its existing worldwide sales and technical sales force to market the software
products and services of the newly acquired companies.
RESEARCH AND DEVELOPMENT. Research and development expenses in fiscal 1996
increased 76.3% to $22.3 million from $12.7 million in fiscal 1995 and increased
as a percentage of total revenues to 19.4% from 19.2%. The increase in expenses
principally reflected continued investment in development of the Company's core
modeling products and a common software architecture encompassing the Company's
expanded suite of software products, as well as a reduction in the amount of
research and development capitalized during the period. The Company capitalized
3.9% and 7.3% of its total research and development expenses during fiscal 1996
and fiscal 1995, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in fiscal
1996 increased 88.7% to $10.7 million from $5.7 million in fiscal 1995, and
increased as a percentage of total revenues to 9.3% from 8.6%. The dollar
increase principally reflected the growth in the scale and scope of the
Company's operations.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. In the third quarter of
fiscal 1996, the Company recognized a non-recurring charge of $24.4 million for
the write-off of in-process research and development in connection with its
acquisitions of DMCC and Setpoint.
INTEREST INCOME. Interest income in fiscal 1996 increased 19.3% to $3.7
million from $3.1 million in fiscal 1995. Interest income increased as a result
of investment of the net proceeds of public offerings completed by the Company
in November 1994, February 1995 and June 1996, a larger installment contract
portfolio and an increase in the implicit interest rate charged to customers.
INTEREST EXPENSE. Interest expense in fiscal 1996 increased to $1.3
million from $0.6 million in fiscal 1995. This increase principally reflected a
higher level of borrowings under the Company's bank line of credit as a result
of borrowings used for payment of a portion of the purchase price for the
Setpoint acquisition.
PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 1996 is
calculated as a percentage of income before taxes, exclusive of the
non-recurring charge for in-process research and development. The effective tax
rate decreased in fiscal 1996 to 38.0% of pre-tax income from 40.6% in fiscal
1995. This percentage decrease related principally to non-deductible acquisition
costs incurred in connection with the ISI acquisition in fiscal 1995.
QUARTERLY RESULTS
The Company's operating results and cash flow have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, including purchasing patterns, timing of introductions of new solutions
and enhancements by the Company and its competitors, and fluctuating economic
conditions. Because license fees for the Company's software products are
substantial and the implementation of the Company's solutions often requires the
services of the Company's engineers over an extended period of time, the sales
process for the Company's solutions is lengthy and can exceed one year.
Accordingly, software revenue is difficult to predict, and the delay of any
order could cause the Company's quarterly revenues to fall substantially below
expectations. Moreover, to the extent that the Company succeeds in shifting
customer purchases
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away from point solutions and toward integrated suites of its software and
service solutions, the likelihood of delays in ordering may increase and the
effect of any delay may become more pronounced.
The Company ships software products within a short period after receipt of
an order and usually does not have a material backlog of unfilled orders of
software products. Consequently, revenues from software licenses in any quarter
are substantially dependent on orders booked and shipped in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
been derived from license agreements that have been consummated in the final
weeks of the quarter. Therefore, even a short delay in the consummation of an
agreement may cause revenues to fall below expectations for that quarter. Since
the Company's expense levels are based in part on anticipated revenues, the
Company may be unable to adjust spending in a timely manner to compensate for
any revenue shortfall and any revenue shortfalls would likely have a
disproportionately adverse effect on net income. The Company expects that these
factors will continue to affect its operating results for the foreseeable
future.
Prior to fiscal 1996, the Company experienced a net loss for the first
quarter of each fiscal year, in part because a substantial portion of the
Company's total revenues is derived from countries other than the United States
where business is slow during the summer months and also in part because of the
timing of renewals of software licenses. Although the Company has generated a
profit for the first quarter of each of fiscal 1997 and fiscal 1998, the Company
expects that it will continue to experience declines in total revenues and net
income in the first fiscal quarter as compared to the immediately preceding
fiscal quarter.
Because of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
See "--Risk Factors--Fluctuations in Quarterly Operating Results and Cash Flow."
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The following table presents selected supplemental quarterly statement of
operations data for fiscal 1997 and the nine months ended March 31, 1998. These
data are unaudited but, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of these data in accordance with generally accepted accounting
principles.
QUARTER ENDED
---------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
----------------------------------------- ------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
Revenues:
Software licenses................. $17,049 $24,988 $29,704 $31,438 $24,388 $32,465 $38,691
Service and other................. 20,371 22,059 23,428 25,033 25,065 27,738 29,697
------- ------- ------- ------- ------- ------- -------
Total revenues...................... 37,420 47,047 53,132 56,471 49,453 60,203 68,388
------- ------- ------- ------- ------- ------- -------
Expenses:
Cost of software licenses......... 982 1,456 1,652 1,449 1,672 1,752 1,540
Cost of service and other......... 12,230 13,256 13,829 14,691 14,712 16,356 17,274
Selling and marketing............. 11,778 13,483 14,962 15,811 15,186 17,621 19,876
Research and development.......... 7,494 7,701 8,491 9,894 10,163 10,358 10,998
General and administrative........ 3,979 4,249 4,626 4,218 4,502 4,839 5,309
Charge for in-process research and
development..................... -- 8,664 -- -- -- -- 8,472
Costs related to acquisition...... -- -- -- -- 509 -- 475
------- ------- ------- ------- ------- ------- -------
Total expenses...................... 36,463 48,809 43,560 46,063 46,744 50,926 63,944
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....... 957 (1,762) 9,572 10,408 2,709 9,277 4,444
Other expense, net.................. (22) (88) -- (100) (67) (91) (162)
Interest income, net................ 1,376 1,292 1,199 1,538 1,453 1,347 1,358
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes...................... 2,311 (558) 10,771 11,846 4,095 10,533 5,640
Provision for income taxes.......... 879 1,367 4,022 3,901 1,460 3,791 5,073
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $ 1,432 $(1,925) $ 6,749 $7,945 $ 2,635 $ 6,742 $ 567
======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has financed its operations principally
through cash generated from sales of securities through private placements and
public offerings of its Common Stock, operating activities, the sale of
installment contracts to third parties and, at certain times during the year,
borrowings under a bank line of credit.
In the fourth quarter of fiscal 1996 and in the second and third quarters
of fiscal 1995, the Company received a total of approximately $87.0 million of
net proceeds from its initial public offering and subsequent public offerings. A
portion of the total net proceeds was used for working capital and other general
corporate purposes, to pay a portion of the purchase prices of DMCC and Setpoint
and to repay outstanding indebtedness under the Company's bank line of credit,
subordinated notes and a promissory note issued in conjunction with the purchase
of Setpoint. The Company evaluates on an ongoing basis potential opportunities
to acquire or invest in technologies, products, services, businesses or
engineering personnel that expand, complement or are otherwise related to the
Company's current business and products. See "--Risk Factors -- Risks Associated
with Future Acquisitions."
In fiscal 1997 and the nine months ended March 31, 1998, operating
activities provided $3.1 million and $20.2 million of cash, respectively,
primarily as a result of net income, increases in accounts payable, accrued
expenses and deferred revenue, offset in part by increases in long-term
installments receivable and accounts receivable. In fiscal 1996 and fiscal 1995,
operating activities provided $19.7 million and $4.9 million of cash,
respectively, primarily as a result of net income and
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increases in accounts payable, accrued expenses and deferred revenue, offset in
part by increases in accounts receivable.
In recent years, the Company has had arrangements to sell long-term
contracts to two financial institutions, General Electric Capital Corporation
and Sanwa Business Credit Corporation. These contracts represent amounts due
over the life of existing term licenses. During the nine months ended March 31,
1998, installment contracts increased by $1.1 million to $51.1 million, net of
$44.1 million of installment contracts sold to General Electric Capital
Corporation and Sanwa Business Credit Corporation. During fiscal 1997,
installment contracts increased by $20.3 million to $50.0 million, net of $30.2
million of installment contracts sold to General Electric Capital Corporation
and Sanwa Business Credit Corporation. During fiscal 1996, installment contracts
decreased by $1.8 million to $29.8 million, net of $28.9 million of installment
contracts sold to General Electric Capital Corporation and Sanwa Business Credit
Corporation. The Company's arrangements with these two financial institutions
provide for the sale of installment contracts up to certain limits and with
certain recourse obligations. At March 31, 1998, June 30, 1997 and June 30,
1996, the balance of the uncollected principal portion of the contracts sold to
these two financial institutions was $87.7 million, $57.8 million and $42.7
million, respectively, for which the Company had partial recourse obligations of
$5.0 million, $6.6 million and $11.5 million, respectively. The availability
under these arrangements will increase as the financial institutions receive
payment on installment contracts previously sold.
The Company maintains a $30.0 million bank line of credit, expiring on
December 31, 1998, that provides for borrowings of specified percentages of
eligible accounts receivable and eligible current installment contracts.
Advances under the line of credit bear interest at a rate (8.5% at March 31,
1998) equal to the bank's prime rate plus a specified margin or, at the
Company's option, a rate (5.7% at March 31, 1998) equal to a defined LIBOR plus
a specified margin. The line of credit agreement requires the Company to provide
the bank with certain periodic financial reports and to comply with certain
financial tests, including maintenance of minimum levels of consolidated net
income before taxes and of the ratio of current assets to current liabilities.
As of May 31, 1998, there were no outstanding borrowings under the line of
credit.
The Company's commitments as of March 31, 1998 consisted primarily of
leases on its headquarters and other facilities. See "--Business -- Properties."
There were no other material commitments for capital or other expenditures. The
Company believes its current cash balances, availability of sales of its
installment contracts, availability under its bank line of credit and cash flows
from its operations, together with its net proceeds of the proposed debenture
placement, will be sufficient to meet its working capital and capital
expenditure requirements for the next 12 months. The Company intends to raise
additional funds in June 1998 through an offering and placement of $75,000,000
aggregate principal amount of seven-year debentures to qualified institutional
buyers (as defined in Rule 144A under the Securities Act).
Management has initiated a Company-wide program to prepare the Company's
computer systems and applications as well as the Company's product offerings for
the year 2000. The Company expects to incur internal staff costs as well as
consulting and other expenses related to system enhancements for the year 2000.
Certain of the Company's product offerings are currently year 2000 compliant.
Although the Company does not expect the costs associated with its year 2000
compliance program to be material, there can be no assurance that unidentified
year 2000 problems will not cause the Company to incur material expenses in
responding to such problems or otherwise have a material adverse effect on the
Company's business, operating results and financial condition. See "--Risk
Factors -- Year 2000 Compliance."
INFLATION
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have significant impact
during the remainder of fiscal 1998 or during fiscal 1999.
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BUSINESS
AspenTech is the leading supplier of software and service solutions used by
companies in the process industries to design, operate and manage their
manufacturing processes. The process industries include manufacturers of
chemicals, petrochemicals, petroleum products, pharmaceuticals, pulp and paper,
electric power, food and beverages, consumer products, and metals and minerals.
AspenTech offers a comprehensive, integrated suite of process manufacturing
optimization solutions that help process manufacturers enhance profitability by
improving efficiency, productivity, capacity utilization, safety and
environmental compliance throughout the entire manufacturing life-cycle, from
research and development to engineering, planning and scheduling, procurement,
production and distribution. In addition to its software solutions, AspenTech
offers systems implementation, advanced process control, real-time optimization
and other consulting services through its staff of more than 450 project
engineers. As part of its strategy to offer the broadest, most integrated suite
of process manufacturing optimization solutions, AspenTech has acquired
businesses from time to time to obtain technologies and expertise that
complement or enhance its core solutions. AspenTech currently has more than 750
customers worldwide, including 44 of the 50 largest chemical companies, 17 of
the 20 largest petroleum refiners and 16 of the 20 largest pharmaceutical
companies.
INDUSTRY BACKGROUND
Companies in the process industries manufacture products in the form of
bulk solids, liquids and gases by using production methods involving chemical
reactions, combustion, mixing, separation, heating, cooling and similar
processes. The process industries encompass manufacturers of chemicals,
petrochemicals, petroleum products, pharmaceuticals, pulp and paper, electric
power, food and beverages, consumer products, and metals and minerals. Companies
in a number of other industries, such as semiconductor manufacturing, utilize
production techniques with characteristics similar to those underlying process
manufacturing.
In recent years, intensifying global competition and more stringent
environmental and safety regulations have placed increased pressure on the
profitability of companies in the process industries. The profitability of these
companies depends substantially upon the costs of raw materials, energy and
capital; accordingly, the management and utilization of these inputs
significantly affect the companies' financial results. Unlike labor-intensive
businesses, which can materially change the scale of their business operations
by adjusting the sizes of their labor forces, process manufacturers must focus
on improving their production methods in order to increase output, lower costs
and reduce waste. Because of the large volumes typically produced by process
manufacturers, even a relatively small reduction in raw material or energy
requirements or a relatively small improvement in throughput or product yields
can have a dramatic impact on the profitability of the manufacturing process.
Improvement of production methods in the process industries requires a
thorough understanding of chemical engineering analysis, the fundamental
discipline underlying the manufacturing processes. Due to the number of
variables involved, chemical engineering analysis is complex and calculation
intensive. Because of this complexity, many process manufacturers are seeking
technology-based solutions to aid them in their process manufacturing decisions,
with the objective of moving toward optimization of their production processes
under existing process and equipment constraints.
Increasingly sophisticated process manufacturing optimization solutions
have been introduced to assist process manufacturers in optimizing the design,
operation and management of their manufacturing processes. In designing
manufacturing processes, engineers use tools on desktop computers to simulate a
new or existing process and to optimize tradeoffs between variables such as
capital investment and operating costs. During operation of the manufacturing
process, plant operators rely on automation systems installed in the plant to
control and optimize the manufactur-
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ing process by, for example, accepting a lower yield to increase overall
throughput. To manage the production process, plant managers use information
systems to perform tasks such as planning and scheduling of production, analysis
and reporting of performance, and yield accounting. Although early versions of
process manufacturing optimization solutions were limited in scope and
complicated to use, the availability of increasingly powerful, affordable
computers and networks and sophisticated intuitive graphical user interfaces has
expanded the capabilities of the solutions and the market of potential users.
Process manufacturing optimization solutions include applications to
address a broad range of manufacturing activities, including the following:
DESIGN OPERATE MANAGE
Process Modeling Advanced Process Control Process Information Management
Design Analysis & Optimization Real-time Optimization Production Scheduling &
Process Improvements Operator Training Planning
Plant Retrofits Quality Assurance
Environmental, Health & Safety
Compliance
Many process manufacturers have implemented solutions to automate processes
outside the actual methods of production. For many years, companies in the
process industries have sought to control their production processes by
deploying distributed control systems ("DCS"), which use computer hardware
systems, communication networks and industrial instruments to measure, record
and automatically control process variables during production. More recently,
process manufacturers have automated key business processes through the
implementation of enterprise resource planning ("ERP") solutions that enhance
their ability to manage resources across the enterprise and enable them to
integrate front- and back-office business functions. DCS and ERP solutions
generally do not, however, incorporate the detailed chemical engineering
knowledge of the process required to optimize the operation and management of
the production process.
Process manufacturers are increasingly seeking a complete, integrated
family of process manufacturing optimization software products and services that
can be used to improve their efficiency and productivity throughout the entire
manufacturing life-cycle, while at the same time establishing links with the
process manufacturers' existing DCS and ERP solutions.
THE ASPENTECH ADVANTAGE
AspenTech is the leading supplier of software and service solutions that
enable companies in the process industries to optimize the design, operation and
management of their manufacturing processes. AspenTech's comprehensive suite of
solutions helps process manufacturers enhance profitability by improving
efficiency, productivity, capacity utilization, safety and environmental
compliance throughout the entire manufacturing life-cycle. AspenTech believes
its customers increasingly view their investments in its solutions as strategic
because of the substantial potential economic benefits these solutions offer and
the broad range of production issues they address. The Company's competitive
advantage is based on the following key attributes:
TECHNOLOGY LEADERSHIP. AspenTech believes it is the technology leader
among providers of process manufacturing optimization solutions. The Company has
achieved this technology leadership through internal research and development
and strategic acquisitions and partnerships. For example, the Company obtained
the leading advanced process control and optimization technologies through its
acquisitions of DMCC and Setpoint in 1996. In 1997, AspenTech introduced Batch
Plus, a commercialized version of recipe-based simulation functionality
developed in collaboration with Merck & Co., Inc. AspenTech has integrated
acquired technologies with existing products in order to offer solutions that
include the best features and functionality of both. Moreover, the Company has
designed its software solutions to operate on all major operating system
platforms used by process manufacturers and to be compatible with all major
distributed control systems.
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BROADEST SUITE OF INTEGRATED SOLUTIONS. AspenTech believes its solutions
represent the most complete suite of integrated software and services available
for the design, operation and management of manufacturing processes in the
process industries. Process manufacturers are able to use AspenTech's solutions
across every stage of the manufacturing life-cycle, from research and
development to engineering, planning and scheduling, procurement, production and
distribution. The Company is continuing to integrate its software products in
order to further increase the ability of its customers to share models and data
across different AspenTech software solutions. In October 1997, AspenTech
announced the introduction of Plantelligence, a framework within which AspenTech
has begun to offer integrated solutions designed to address specific functional
problems, such as production planning or purchasing raw material feedstocks.
Plantelligence is being developed to permit, for example, a buyer for a
petroleum refinery to determine how much it will cost to refine a specific
boatload of crude oil under then-current operating conditions. This information
can then be used to help the buyer decide whether it is economically desirable
to purchase that crude oil at then-prevailing prices. The buyer can perform
these analyses using a single graphical user interface, without needing to
understand the individual AspenTech software solutions used to perform the
analysis.
UNPARALLELED PROCESS INDUSTRY EXPERTISE. Over the past 17 years, AspenTech
has established a reputation as a leading source of process manufacturing
optimization expertise. AspenTech's significant base of chemical engineering and
process manufacturing experience and knowledge serves as the foundation for the
proprietary solution methods, physical property models and data estimation
techniques embodied in its software solutions. AspenTech has enhanced its
knowledge and understanding of process manufacturing optimization solutions over
time through extensive interaction with its customers, which have performed
millions of simulations using AspenTech software. These customer relationships
have also enabled AspenTech to identify and develop or acquire solutions that
best meet the needs of its customers. To complement its software expertise,
AspenTech has assembled a staff of more than 450 project engineers to provide
implementation, advanced process control, real-time optimization and other
consulting services to its customers. AspenTech believes this large engineering
team provides an important source of competitive differentiation.
STRATEGY
AspenTech's principal objective is to extend its leadership in providing
solutions for process manufacturers to optimize the design, operation and
management of their manufacturing processes. AspenTech's strategy to achieve
this objective includes the following key elements:
EXTEND TECHNOLOGY LEADERSHIP POSITION. AspenTech believes that it offers
the most technologically advanced solutions available for the design, operation
and management of manufacturing processes, particularly in the areas of process
simulation, advanced process control, real-time optimization, scheduling and
planning, and process information management. In order to extend the
technological leadership of its individual software solutions, AspenTech intends
to continue to invest in research and development and to identify and pursue
opportunities for strategic acquisitions of complementary technologies and
expertise. The Company believes that additional use of its individual software
solutions in recent years has provided process manufacturers with increased
evidence of the economic benefits that may be obtained from implementation of
those solutions. The Company believes, however, that further integration of the
Company's individual software solutions will provide process manufacturers with
even greater economic benefits. To capitalize on this opportunity, the Company
intends to continue to integrate its individual software solutions and to
further develop Plantelligence.
LEVERAGE INSTALLED CUSTOMER BASE. AspenTech has historically derived a
significant portion of its revenue from additional sales to its existing
customers, which it believes are significantly underpenetrated with respect to
its solutions. AspenTech currently has more than 750 customers worldwide,
including 44 of the 50 largest chemical companies, 17 of the 20 largest
petroleum
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refiners and 16 of the 20 largest pharmaceutical companies. AspenTech considers
its relationships with its existing customers to be an important corporate
asset. AspenTech believes it has significant opportunities to continue to derive
additional revenue from its existing customers by increasing the number of users
of currently licensed software, licensing additional software modules and
applications, offering consulting services to supplement licensed software, and
cross-selling complementary solutions.
INCREASE PENETRATION ACROSS PROCESS INDUSTRIES. In recent years, AspenTech
has taken advantage of strategic acquisitions and partnership arrangements to
extend its customer base beyond its early leadership in the chemicals industry
to include a significant market share of the petroleum, petrochemicals and
pharmaceuticals industries. Many companies in other process industries confront
the same imperatives and opportunities that face chemical, petroleum,
petrochemical and pharmaceutical companies. The Company is extending its
customer base to include companies in other process industries, particularly the
pulp and paper, electric power, metals and minerals, and food and beverage
industries, as well companies in the semiconductor industry. In expanding its
presence in a targeted process industry, the Company's approach is to first seek
to establish relationships with a small number of technologically advanced
companies in the industry. The Company then gains expertise in the targeted
process industry through the hiring of a core group of personnel with
significant experience in that industry or through acquisitions or partnering
arrangements. In addition, where necessary, AspenTech refines its solutions
based on feedback from its initial customers in order to address the specific
needs of the industry. AspenTech believes that opportunities to expand the use
of its technology in additional vertical markets are increasing as the benefits
of its solutions are becoming more widely understood by process manufacturers.
PURSUE STRATEGIC ACQUISITIONS. AspenTech intends to continue to seek
strategic acquisitions that will provide it with complementary products and
technologies, as well as with additional engineering personnel to perform
consulting services and software development. Since May 1995, AspenTech has
completed 14 acquisitions that have provided the Company with, or significantly
enhanced, its capabilities in the areas of process information management,
advanced process control and optimization, advanced planning and scheduling, and
supply chain management. AspenTech has successfully integrated the operations of
12 of these acquired businesses and is in the process of integrating the
operations of the remaining 2 businesses, which were acquired in late May 1998.
The Company believes that its recent acquisition of Chesapeake will enable the
Company to offer supply chain management solutions that augment its existing
suite of solutions and will provide the Company with cross-selling opportunities
in additional process industries. See "--Software and Service
Solutions -- Acquisitions of Software and Service Solutions."
PARTNER WITH COMPLEMENTARY PROCESS INDUSTRY SUPPLIERS. AspenTech believes
that process manufacturers are increasingly seeking process manufacturing
optimization solutions that will be compatible with their existing technologies
and enable them to implement seamless enterprise-wide solutions. In response to
this trend, the Company has completed a certified interface with the SAP R/3 ERP
solution and has also completed interfaces with all major DCS, including those
offered by The Foxboro Company and Honeywell Inc. From time to time, AspenTech
enters into working relationships with other industry vendors, including
companies with which the Company sometimes competes, on a customer-by-customer
basis. AspenTech has entered into partnering agreements with DCS vendors such as
Elsag Bailey, Inc. and Yokagawa Electric Corporation to provide process
manufacturing optimization solutions for their customers, and with a limited
number of consulting and solutions vendors. For example, the Company has
partnered with Intergraph Corporation, a computer-aided design company, to
provide integrated process and plant design solutions. The Company expects to
enter into additional partnering arrangements with providers of complementary
products and services, including process licensors, DCS suppliers, engineering
and construction firms, and industry consulting firms.
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SOFTWARE AND SERVICE SOLUTIONS
AspenTech offers a comprehensive suite of software and service solutions
that enable process manufacturers to optimize the design, operation and
management of their manufacturing processes. AspenTech's solutions capture
process knowledge in consistent, accurate and reliable models that customers can
use as the basis for decision-making across the entire manufacturing life-cycle
and provide vital functionality for elements of the manufacturing process that
other software applications, such as ERP and DCS software, do not address.
Certain of AspenTech's software solutions can be linked with ERP solutions and
DCS to improve a customer's ability to gather, analyze and use information
across the entire process manufacturing life-cycle. To enable its customers to
take full advantage of its software solutions, AspenTech also offers
comprehensive expert consulting, training and support services.
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PROCESS DESIGN SOFTWARE SOLUTIONS
AspenTech offers a number of software solutions for the design and analysis
of new and existing manufacturing facilities and processes. The following table
describes the Company's principal process design software solutions and their
applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
- ---------------------- ----------------------------------- -----------------------------------
Aspen Plus............ Rigorous steady-state modeling Used to design processes, evaluate
system for simulating chemically- process changes and analyze
based manufacturing processes "what-if" scenarios.
involving vapors, liquids, solids
and electrolytes with a library of
equipment and physical property
models.
DynaPlus/
SPEEDUP............. Rigorous modeling system for Used to examine process
simulating processes under changing operability, safety and control as
(dynamic) conditions with a library operating parameters fluctuate
of equipment and controller models. during plant startup and shutdown
and other transient conditions.
Batch Plus............ Batch process modeling system for Used to scale-up and design new
recipe-based processes. processes, and to analyze the
production of one batch or an
entire batch plant.
Aspen Zyqad........... System for integrating, automating Used to integrate and automate work
and managing data, applications and flow between engineers designing
activities in the engineering work new process plants or improving
process. existing facilities.
Layered on top of these core, integrated applications are a number of
separately licensed modules that focus on specialized types of analysis for
modeling polymer processes, heat exchanger equipment, separation systems, batch
distillation columns, adsorption processes and other complex systems. All of
these process design software solutions can operate in Windows. Aspen Plus and
SPEEDUP also run on DEC VMS and UNIX.
AspenTech typically licenses its process design software solutions for a
term of three to five years. The annual cost for a single user of one of
AspenTech's process design software solutions ranges from $10,000 to $30,000,
depending on the solution, the license term and the number of licensed users.
The license fee includes a separate maintenance component that covers customer
support, upgrades, revisions and enhancements during the term of the license.
Implementation of AspenTech's process design software solutions does not
typically require substantial consulting services, although services may be
provided for customized model designs and process synthesis.
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PROCESS OPERATION SOFTWARE SOLUTIONS
AspenTech offers several solutions that enable customers to better control
and optimize actual plant operations on a real-time basis. The following table
describes the Company's principal process operation software solutions and their
applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
- -------------------- ----------------------------------- -----------------------------------
Aspen RT-Opt........ Real-time optimization system. Used to identify plant adjustments
in order to optimize operations on
a real-time basis.
DMCplus............. Advanced process control system Used to tightly control actual
using multi-variable plant operations at multiple
model-predictive control operating constraints.
technology.
OTISS............... System for developing operator Used to train operators to better
training simulators. manage daily plant operations and
respond to abnormal situations.
Aspen RT-Opt operates on DEC VMS and UNIX. DMCplus operates on Windows, DEC
VMS and UNIX. OTISS operates on UNIX, Hewlett-Packard and Sun Solaris.
AspenTech typically licenses its process operation software solutions for
terms of 99 years. The list price for a 99-year license of Aspen RT-Opt or
DMCplus generally ranges from $50,000 to $200,000, depending on the solution and
on whether the license covers a single process unit or an entire facility. The
list price for a 99-year license of OTISS is approximately $50,000. Maintenance
of process operation software solutions is available under separate contracts.
Implementation of AspenTech's process operation software solutions
typically requires substantial consulting services.
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PROCESS MANAGEMENT SOFTWARE SOLUTIONS
AspenTech offers a number of solutions for the management of a broad range
of business activities related to manufacturing, from what, how and when to
create products, to raw material procurement, to current plant optimization, to
product distribution. The following table describes AspenTech's principal
process management software solutions and their respective applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
- ----------------- ------------------------------------------ ------------------------------------------
InfoPlus.21..... Process information management system with Used to compare real-time and historical
a real-time database of historical information generated by plant systems to
information. present a unified view of plant
operations.
MIMI............ Supply chain management system, including Used to identify best supply chain
demand management, inventory control and decisions to maximize asset utilization,
available-to-promise. minimize raw material costs, maximize
product values and control inventories.
Aspen PIMS...... Linear programming-based economic planning Used to identify short-term and strategic
and scheduling system. decisions on feedstock purchases, capacity
utilization and production planning.
Aspen ADVISOR... Yield-accounting solution. Used to track inventory and material
movements into, through and out of
processing plants, in order to enable
manufacturers to report production data
accurately to ERP and other business
systems.
1stQuality...... System to address issues in polymer Used to integrate the management, usage
manufacturing. and monitoring of operating conditions to
reduce transition time, improve product
consistency and monitor process
compliance.
All of the Company's process management software solutions can operate in
Windows.
AspenTech typically licenses InfoPlus.21, MIMI, Aspen ADVISOR and
1stQuality for terms of 99 years and typically licenses Aspen PIMS for a term of
5 years or 25 years. The list price for an entry-level 99-year InfoPlus.21
license is approximately $50,000 and varies depending on the number of points of
data being collected. The list price for an entry-level 99-year multi-user site
license for MIMI is approximately $220,000. The list price for a license of
Aspen PIMS modules ranges from $10,000 to $200,000, depending on the solution
and the license term. The list price for an entry-level 99-year Aspen ADVISOR
license ranges from $50,000 to $200,000, depending on the number of nodes, and
the list price for an entry-level 99-year 1stQuality license is approximately
$150,000 per plant.
Implementation of AspenTech's process management software solutions
typically requires consulting services, although not to the same extent as its
process operation software solutions.
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CONSULTING SERVICES
AspenTech offers implementation, advanced process control, real-time
optimization and other consulting services in order to provide its customers
with complete solutions. Although customers frequently can use AspenTech's
process design software solutions without assistance from AspenTech, many of the
projects in which customers deploy AspenTech's process operation software
solutions and process management software solutions are sufficiently complex
that customers require assistance from AspenTech in order to take full advantage
of the benefits of those solutions. Customers that obtain consulting services
from AspenTech typically engage AspenTech to provide such services over periods
of between 1 day and 24 months. AspenTech generally charges customers for
consulting services on a fixed-price basis, but charges customers for certain
services, primarily on-site advanced process control and optimization services,
on a time-and-materials basis.
AspenTech employs a staff of more than 450 project engineers to provide
consulting services to its customers. AspenTech believes this large team of
experienced and knowledgeable project engineers provides an important source of
competitive differentiation. AspenTech primarily hires as project engineers
individuals who have obtained doctoral or master's degrees in chemical
engineering or a related discipline or who have significant relevant industry
experience. AspenTech employees include experts in fields ranging from
thermophysical properties, distillation, adsorption processes, polymer
processes, industrial reactor modeling, the identification of empirical models
for process control or analysis, large scale optimization, supply distribution
systems modeling and scheduling methods.
Historically, most licensees of AspenTech's planning and scheduling
solutions and a limited number of licensees of process information management
systems have obtained implementation consulting services from third-party
vendors. AspenTech intends to continue to develop relationships with third-party
consultants in order to provide a secondary channel of consulting services to
support the Company's process management software solutions.
ACQUISITIONS OF SOFTWARE AND SERVICE SOLUTIONS
As part of its strategy to offer the broadest, most integrated suite of
software and service solutions for the design, operation and management of
manufacturing processes, AspenTech from time to time acquires businesses to
obtain technologies and expertise that complement or enhance AspenTech's core
solutions. AspenTech typically combines acquired technologies with its pre-
existing products in order to offer solutions that include the best features and
functionality of both. The Company provides an upward migration path and support
for any discontinued products.
AspenTech has completed 15 acquisitions that have provided the Company
with, or significantly enhanced, its capabilities in the areas of process
information management, advanced process control and optimization, advanced
planning and scheduling, and supply chain management. AspenTech has successfully
integrated the operations of 13 of these acquired businesses and is in
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the process of integrating the operations of the remaining 2 businesses, which
were acquired in late May 1998. The following table describes AspenTech's
acquisitions to date:
BUSINESS ACQUIRED DATE ACQUIRED SOLUTION ACQUIRED OR ENHANCED
- ----------------------------------- ----------------- -----------------------------------
Prosys Technology Limited.......... October 16, 1991 SPEEDUP
Industrial Systems, Inc. .......... May 25, 1995 Components of InfoPlus.21
Dynamic Matrix Control
Corporation...................... January 5, 1996 Components of DMCplus and Aspen
RT-Opt
Setpoint, Inc. .................... February 9, 1996 Components of DMCplus, Aspen RT-Opt
and InfoPlus.21
B-JAC International, Inc. ......... October 1, 1996 Heat exchanger modeler
Process Control Division of
Cambridge Control Limited........ October 8, 1996 Consulting service capabilities for
advanced process control and
optimization
Basil Joffe Associates, Inc. and
PIMS division of Bechtel
Corporation...................... December 31, 1996 Aspen PIMS
NeuralWare, Inc. .................. August 27, 1997 Neural network technology and tools
integrated with Aspen Plus, DMCplus
and InfoPlus.21
The SAST Corporation Limited ...... August 28, 1997 OTISS and consulting service
capabilities
Cimtech S.A./N.V. ................. February 27, 1998 Components of InfoPlus.21
Contas Process Control S.r.L....... February 27, 1998 Consulting service capabilities for
advanced process control and
optimization
IISYS, Inc. ....................... March 6, 1998 Aspen ADVISOR
Zyqad Limited...................... March 16, 1998 Aspen Zyqad
Chesapeake Decision
Sciences, Inc. .................. May 27, 1998 MIMI
Treiber Controls, Inc. ............ May 29, 1998 Software and consulting service
capabilities for advanced process
control and optimization
TECHNOLOGY AND PRODUCT DEVELOPMENT
AspenTech's software and service solutions combine AspenTech's
sophisticated modeling capabilities, based on fundamental chemical engineering
principles, with its extensive experience with a broad variety of manufacturing
processes in the chemicals, petrochemicals, petroleum, pharmaceuticals and other
industries. AspenTech's technology enables customers not only to design models
for particular manufacturing processes but also to use those models to operate
and manage those manufacturing processes. AspenTech's models employ advanced
mathematical algorithms developed by employees of AspenTech and others, such as
the dynamic matrix control algorithm for multi-variable, model-based predictive
control and the inside-out algorithm for simulating distillation. AspenTech has
used these advanced algorithms to develop proprietary models that provide highly
accurate representations of the chemical and physical properties of a broad
range of materials typically encountered in the chemicals, petroleum, and other
process industries.
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AspenTech has also created rigorous models of a variety of equipment used
in these process manufacturing facilities, such as heat exchangers, distillation
columns and compressors. AspenTech believes that the development and refinement
of highly accurate models such as those developed by AspenTech require a
thorough understanding of both the fundamental chemistry underlying
manufacturing processes and the technology of modeling. AspenTech has been able
to develop and refine its models only as a result of its close familiarity with
millions of simulations by its customers. AspenTech believes that few companies
have a base of knowledge and experience in the process modeling industry as
extensive as that of AspenTech.
AspenTech's most important product development objective is to build upon
the technical leadership of its software solutions, both individually and as
integrated solutions. Product development activities are currently focused on
adding new chemical engineering analysis and plant operations capabilities,
developing new ease-of-use features and enhancing the user interface, taking
advantage of new hardware capabilities and major new software industry
developments, more tightly integrating AspenTech's suite of software solutions,
and integrating those software products with other tools. As of March 31, 1998,
AspenTech employed a product development staff of 398 persons.
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CUSTOMERS
AspenTech software solutions are installed at more than 750 customers
worldwide. The following table sets forth a selection of AspenTech's customers,
whose agreements with AspenTech produced at least $250,000 in fees to AspenTech
in fiscal 1997 or fiscal 1998 to date:
CHEMICALS PETROLEUM PRODUCTS
Air Products & Chemicals, Inc. Agip Petroli S.p.A.
Allied Signal, Inc. Amoco Corporation
BASF AG Arco Products Company
Bayer AG British Petroleum
The Dow Chemical Company Chevron Corporation
E.I. du Pont de Nemours & Company, Inc. Citgo Petroleum Corporation
Elf Atochem Exxon Company U.S.A.
Equistar Chemicals LP Instituto Mexicano del Petroleo
Hoechst AG Marathon Oil Company
Huls AG Mobil Oil Corporation
Huntsman Corporation Neste Oy
Imperial Chemical Industries plc Pemex Gas y Petroquimica Basica
Mitsubishi Chemical Corporation Petroleus de Venezuela, S.A.
Rhone-Poulenc Industrialisation Phillips Petroleum Company
Sasol Industries (Pty.) Ltd. Repsol Petroleo SA
Shell International Chemie Mij B.V. RVI
Union Carbide Chemicals and Plastics Shell Oil Company
Company, Inc. Star Enterprise
Wellman, Inc. Sun Refining and Marketing Company
Westlake Management Services Corporation Sunoco Inc.
Texaco Refining & Marketing Company
CONSUMER PRODUCTS UOP
3M Company Valero Refining Company
The Goodyear Tire & Rubber Company
The Procter & Gamble Company PHARMACEUTICALS
Unilever Research Genentech, Inc.
Hoffman-LaRoche, Inc.
ELECTRIC POWER Merck & Co., Inc.
British Nuclear Fuels plc Novartis Pharma A.G.
FOOD AND BEVERAGE PULP AND PAPER
Cargill Incorporated Buckeye Cellulose Corporation
General Mills, Inc. Weyerhaeuser Company
Nestle UK Ltd.
SEMICONDUCTORS
METALS AND MINERALS Cypress Corporation
Phelps Dodge LSI Logic Corporation
Aluminum Company of America Rockwell International Corporation
AspenTech's customers also include a number of engineering and construction
firms, such as Bechtel Corporation, Fluor Daniel, Inc. and The M.W. Kellogg
Company, which have entered into software license agreements with AspenTech and
which offer products and services to the process industries.
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For fiscal 1996, fiscal 1997 and the nine months ended March 31, 1998,
international revenues accounted for approximately 42.0%, 50.0% and 45.3%,
respectively, of AspenTech's total revenues. No individual customer represented
more than 10% of AspenTech's total revenues in fiscal 1995, 1996 or 1997. There
can be no assurance that any of the customers listed above will continue to
license software or purchase services from AspenTech beyond the term of any
existing agreement.
SALES AND MARKETING
AspenTech employs a value-based sales approach, offering customers a
comprehensive suite of software and service solutions that enhance the
efficiency and productivity of their process manufacturing operations. AspenTech
has increasingly focused on selling its solutions as a strategic investment by
its customers and therefore targets its principal sales efforts at senior
management levels, including chief executive officers and senior decision-makers
in manufacturing, operations and technology.
Because the complexity and cost of AspenTech's solutions often result in a
sales cycle of between six and nine months, AspenTech believes that the
development of long-term, consultative relationships with its customers is
essential to a successful selling strategy. To develop these relationships,
AspenTech organizes its worldwide sales force by industry and appoints a single
sales account manager to be responsible for AspenTech's relationship with each
customer. In order to market the specific functionality and other complex
technical features of AspenTech's software solutions, each sales account manager
leads a specialized team of regional account managers, technical sales engineers
and product specialists organized for each sales and marketing effort.
AspenTech's technical sales engineers typically have advanced degrees in
chemical engineering or related disciplines and actively consult with the
customer's plant engineers who would be the ultimate users of AspenTech's
solutions. Product specialists share their detailed knowledge of the specific
features of AspenTech's software solutions. Each sales team also includes
participants from AspenTech's business development group who determine the scope
and price of service solutions offered to customers.
In order to market AspenTech's newly acquired supply chain management
software solutions, AspenTech intends to utilize its existing sales and
marketing organization for sales to AspenTech's existing clients and to assemble
a separate team for sales to supply chain software customers. AspenTech expects
that this team will be able to identify opportunities to cross-sell AspenTech's
other software solutions to customers in industries outside AspenTech's
traditional process industry markets.
AspenTech believes that its seasoned direct sales force, consisting of 118
individuals as of March 31, 1998, and its ability to sell at senior levels
within customer organizations are important competitive advantages. AspenTech
has established direct sales offices in key geographic areas where there are
high concentrations of potential business, including New Jersey, Texas,
Brussels, Cambridge (England), Dusseldorf, Hong Kong, Paris, Singapore and
Tokyo. In geographic areas of lower customer concentration, AspenTech uses sales
agents and other resellers to leverage its direct sales force and to provide
local coverage and first-line support.
The Company also supplements its direct sales efforts with a variety of
marketing initiatives, including public relations activities, campaigns to
promote awareness among industry analysts, user groups and the Company's
triennial conference, AspenWorld. AspenWorld has become a prominent forum for
industry participants, including process manufacturing executives and analysts,
to discuss emerging technologies and other process engineering solutions and to
attend seminars led by industry experts. The AspenWorld 97 conference, held in
October 1997, attracted more than 1,400 participants.
AspenTech also licenses its software solutions at a substantial discount to
universities that agree to use its solutions in teaching and research. AspenTech
believes that students' familiarity with its solutions will stimulate future
demand once the students enter the workplace. Currently, more than 550
universities use the Company's software solutions in undergraduate instruction.
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COMPETITION
AspenTech faces three primary sources of competition: commercial vendors of
software products for one or more elements in the design, operation and
management of manufacturing processes; vendors of hardware that offer software
solutions in order to add value to their proprietary DCS; and large companies in
the process industries that have developed their own proprietary software
solutions. AspenTech believes that suppliers of individual software solutions
are under intensifying pressure to offer integrated functionality beyond their
traditional applications and that, at the same time, process manufacturers are
increasingly concluding that it is no longer efficient or economical for them to
continue to develop or support internally developed software. Certain
competitors also supply related hardware products to existing and potential
customers of AspenTech and may have established relationships that afford those
competitors an advantage in supplying software and services to those customers.
AspenTech believes, however, that customers prefer to select best-in-class
software solutions, independent of their selection of underlying industrial
automation hardware platforms. AspenTech does not offer its solutions with any
particular hardware and designs its software products to operate effectively on
systems manufactured by all major hardware vendors. As the market for
manufacturing process optimization solutions consolidates further, AspenTech
believes that its exclusive focus on developing and marketing best-in-class
software and services will continue to provide a competitive advantage.
Because of the breadth of its software and service offerings, AspenTech
faces competition from different vendors depending on the solution in question.
AspenTech competes with respect to the largest number of its solutions with
Simulation Sciences, Inc., a subsidiary of Siebe plc. With respect to particular
software solutions, AspenTech also competes with Chemstations, Inc., Hyprotech,
Ltd. (a subsidiary of AEA Technology plc), OSI Software, Inc., The Foxboro
Company and Wonderware Corporation (both of which are subsidiaries of Siebe
plc), the Simcon division of ABB Asea Brown Boveri (Holding) Ltd., and several
smaller competitors, such as Pavilion Technologies, Inc. With the acquisition of
Chesapeake, AspenTech now competes with established commercial vendors of supply
chain management software, including i2 Technologies, Inc. and Manugistics
Group, Inc.
A number of vendors of ERP software products, such as Baan Company N.V.,
J.D. Edwards Inc., Oracle Corporation, PeopleSoft, Inc. and SAP A.G., have
announced their intentions to enter or expand their presence in the market for
supply chain management solutions. AspenTech also expects to encounter
increasing competition from DCS vendors, such as Honeywell Inc., as they expand
their software and service offerings to include additional aspects of process
manufacturing.
In recent years, there has been consolidation in the markets in which
AspenTech competes that has expanded the breadth of product and service
offerings by certain of AspenTech's competitors, such as the acquisitions by
Siebe plc of Simulation Sciences, Inc. and Wonderware Corporation. As a result
of this consolidation and the expansion of DCS and ERP vendors into additional
markets, AspenTech from time to time may compete with divisions of companies
with which it collaborates on other occasions, such as Honeywell Inc. and Siebe
plc. There can be no assurance that AspenTech's efforts to compete and cooperate
simultaneously with these or other companies will be successful. The further
consolidation of existing competitors or the emergence of new competitors could
have a material adverse effect on AspenTech's business, operating results and
financial condition.
AspenTech's continued success depends on its ability to compete effectively
with its commercial competitors and to persuade prospective customers to use
AspenTech's products and services instead of, or in addition to, software
developed internally or services provided by their own personnel. In light of
these factors, there can be no assurance that AspenTech will be able to maintain
its competitive position.
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INTELLECTUAL PROPERTY
The Company regards its software as proprietary and relies on a combination
of copyright, patent, trademark and trade secret laws, license and
confidentiality agreements, and software security measures to protect its
proprietary rights. AspenTech has United States patents for the expert guidance
system in its proprietary graphical user interface, the simulation and
optimization methods in its optimization software, a process flow diagram
generator in its planning and scheduling software, and a process simulation
apparatus in its polymers software. The Company has registered or applied to
register certain of its significant trademarks in the United States and in
certain other countries.
The Company generally enters into non-disclosure agreements with its
employees and customers, and historically has restricted access to its software
products' source codes, which it regards as proprietary information. In a few
cases, the Company has provided copies of the source code for certain products
to customers solely for the purpose of special customization of the products and
has deposited copies of the source code for certain products in third-party
escrow accounts as security for on-going service and license obligations. In
these cases, the Company relies on nondisclosure and other contractual
provisions to protect its proprietary rights.
The laws of certain countries in which the Company's products are licensed
do not protect the Company's products and intellectual property rights to the
same extent as the laws of the United States. The laws of many countries in
which the Company licenses its products protect trademarks solely on the basis
of registration. The Company currently possesses a limited number of trademark
registrations in certain foreign jurisdictions and does not possess, and has not
applied for, any foreign copyright or patent registrations. In fiscal 1996,
fiscal 1997 and the nine months ended March 31, 1998, the Company derived
approximately 42.0%, 50.0% and 45.3% of its total revenues, respectively, from
customers outside the United States.
There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the Company's business,
operating results and financial condition. The Company could incur substantial
costs in protecting and enforcing its intellectual property rights. Moreover,
from time to time third parties may assert patent, trademark, copyright and
other intellectual property rights to technologies that are important to the
Company. In such an event, the Company may be required to incur significant
costs in litigating a resolution to the asserted claims. There can be no
assurance that such a resolution would not require that the Company pay damages
or obtain a license of a third party's proprietary rights in order to continue
licensing its products as currently offered or, if such a license is required,
that it will be available on terms acceptable to the Company.
AspenTech believes that, due to the rapid pace of innovation within the
industry, factors such as the technological and creative expertise of its
personnel, the quality of its products, the quality of its technical support and
training courses, and the frequency of software product enhancements are more
important to establishing and maintaining a technology leadership position
within the industry than the various legal protections for its software products
and technology. See "--Risk Factors -- Dependence on Proprietary Technology."
EMPLOYEES
As of March 31, 1998, AspenTech had a total of 1,480 full-time employees.
None of AspenTech's employees is represented by a labor union. AspenTech has
experienced no work stoppages and believes that its employee relations are good.
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While the Company has substantially expanded the breadth and depth of its
management team in recent years, AspenTech's future success depends to a
significant extent on the continued service of Lawrence B. Evans, the principal
founder of the Company and its Chairman and Chief Executive Officer, its other
executive officers, and certain engineering, technical, managerial and marketing
personnel. The Company believes that its future success will also depend on its
continuing ability to attract, motivate and retain additional highly skilled
engineering, technical, managerial and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that AspenTech will be
successful in attracting, assimilating and retaining the personnel it requires
to continue to grow and operate profitably.
PROPERTIES
AspenTech's principal offices occupy approximately 110,000 square feet of
office space in Cambridge, Massachusetts. AspenTech's lease of its principal
offices expires on September 30, 2002. AspenTech and its subsidiaries also own
or lease office space in New Providence, New Jersey; Houston, Texas; Midlothian,
Virginia; Bothell, Washington; Brussels, Belgium; Calgary, Alberta, Canada;
Cambridge, England; Warrington, England; Hong Kong; Tokyo, Japan; Best, The
Netherlands; Singapore; and other locations where additional sales and customer
support offices are located. AspenTech believes that its existing facilities are
adequate for its current needs and its needs for the reasonably foreseeable
future and that, if additional space is needed, such space will be available on
acceptable terms.
LEGAL PROCEEDINGS
AspenTech is not a party to any material litigation.
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RISK FACTORS
In addition to the other information in this Form 8-K, the following risk
factors should be considered in evaluating the Company and its business.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND CASH FLOW
The Company's operating results and cash flow have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, including purchasing patterns, timing of introductions of new solutions
and enhancements by the Company and its competitors, and fluctuating economic
conditions. Because license fees for the Company's software products are
substantial and the implementation of the Company's solutions often requires the
services of the Company's engineers over an extended period of time, the sales
process for the Company's solutions is lengthy and can exceed one year.
Accordingly, software revenue is difficult to predict, and the delay of any
order could cause the Company's quarterly revenues to fall substantially below
expectations. Moreover, to the extent that the Company succeeds in shifting
customer purchases away from individual software solutions and toward integrated
suites of its software and service solutions, the likelihood of delays in
ordering may increase and the effect of any delay may become more pronounced.
The Company ships software products within a short period after receipt of
an order and usually does not have a material backlog of unfilled orders of
software products. Consequently, revenues from software licenses in any quarter
are substantially dependent on orders booked and shipped in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
been derived from license agreements that have been consummated in the final
weeks of the quarter. Therefore, even a short delay in the consummation of an
agreement may cause revenues to fall below expectations for that quarter. Since
the Company's expense levels are based in part on anticipated revenues, the
Company may be unable to adjust spending in a timely manner to compensate for
any revenue shortfall and any revenue shortfalls would likely have a
disproportionately adverse effect on net income. The Company expects that these
factors will continue to affect its operating results for the foreseeable
future.
Prior to fiscal 1996, the Company experienced a net loss for the first
quarter of each fiscal year, in part because a substantial portion of the
Company's total revenues is derived from countries other than the United States
where business is slow during the summer months and also in part because of the
timing of renewals of software licenses. Although the Company has generated a
profit for the first quarter of each of fiscal 1997 and fiscal 1998, the Company
expects that it will continue to experience declines in total revenues and net
income in the first fiscal quarter as compared to the immediately preceding
fiscal quarter. Because of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price the Common Stock would likely
be materially adversely affected. See "--Management's Discussion and Analysis of
Supplemental Consolidated Financial Condition and Results of
Operations--Quarterly Results."
The Company derives a substantial portion of its total revenues from
service engagements and a majority of these engagements have been undertaken on
a fixed-price basis. The Company bears the risk of cost overruns and inflation
in connection with fixed-price engagements, and as a result, any of these
engagements may be unprofitable. See "--Management's Discussion and Analysis of
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Supplemental Consolidated Financial Condition and Results of Operations" and
"--Business--Software and Service Solutions--Consulting Services."
LIMITED SUPPLY OF QUALIFIED PROJECT ENGINEERS
The Company derives a substantial portion of its total revenues from
services, particularly projects involving advanced process control and
optimization and similar projects. These projects can be extremely complex and
in general only highly qualified, highly educated project engineers have the
necessary training and skills to complete these projects successfully. In order
to continue to staff its current and future projects, the Company will need to
attract, motivate and retain a significant number of highly qualified, highly
educated chemical and other project engineers. The Company primarily hires as
project engineers individuals who have obtained a doctoral or master's degree in
chemical engineering or a related discipline or who have significant relevant
industry experience. As a result, the pool of potential qualified employees is
relatively small, and the Company faces significant competition for these
employees, from not only the Company's direct competitors but also the Company's
clients, academic institutions and other enterprises. Many of these competing
employers are able to offer potential employees significantly greater
compensation and benefits or more attractive lifestyle choices, career paths or
geographic locations than the Company. The failure to recruit and retain a
significant number of qualified project engineers could have a material adverse
effect on the Company's business, operating results and financial condition.
Moreover, increasing competition for these engineers may also result in
significant increases in the Company's labor costs, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "--Business--Software and Service Solutions--Consulting Services"
and "--Employees."
INTEGRATION OF CHESAPEAKE AND OTHER RECENTLY ACQUIRED COMPANIES
Through its acquisitions of Chesapeake and several smaller companies in
1998, the Company has expanded its product and service offerings, has entered
new markets and has increased its scope of operations and the number of its
employees. The successful and timely integration of Chesapeake and these other
companies into the Company's operations is critical to the Company's future
financial performance. This integration will require that the Company, among
other things, integrate the companies' software products and technologies,
retain key employees, assimilate diverse corporate cultures, integrate
management information systems, consolidate the acquired operations and manage
geographically dispersed operations, each of which could pose significant
challenges. To succeed in the market for supply chain management solutions, the
Company must also invest additional resources, primarily in the areas of sales
and marketing, to extend name recognition and increase market share. The
diversion of the attention of management created by the integration process, any
disruptions or other difficulties encountered in the integration process, and
unforseen liabilities or unanticipated problems with the acquired businesses
could have a material adverse effect on the business, operating results and
financial condition of the Company. The difficulty of combining these companies
may be increased by the need to integrate personnel, and changes effected in the
combination may cause key employees to leave. There can be no assurance that
these acquisitions will provide the benefits expected by the Company or that the
Company will be able to integrate and develop the operations of Chesapeake and
these other companies successfully. Any failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.
COMPETITION
The Company faces three primary sources of competition: commercial vendors
of software products for one or more elements in the design, operation and
management of manufacturing processes; vendors of hardware that offer software
solutions in order to add value to their proprietary DCS; and large companies in
the process industries that have developed their own proprietary software
solutions. Because of the breadth of its software
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and service offerings, the Company faces competition from different vendors
depending on the solution in question. The Company competes with respect to the
largest number of its solutions with Simulation Sciences, Inc., a subsidiary of
Siebe plc. With respect to particular software solutions, the Company also
competes with Chemstations, Inc., Hyprotech, Ltd. (a subsidiary of AEA
Technology plc), The Foxboro Company and Wonderware Corporation (both of which
are subsidiaries of Siebe plc), OSI Software, Inc., the Simcon division of ABB
Asea Brown Boveri (Holding) Ltd., and several smaller competitors, such as
Pavilion Technologies, Inc. With the acquisition of Chesapeake, the Company now
competes with established commercial vendors of supply chain management
software, including i2 Technologies, Inc. and Manugistics Group, Inc. A number
of vendors of ERP software products, such as Baan Company N.V., J.D. Edwards
Inc., Oracle Corporation, PeopleSoft, Inc., and SAP A.G., have announced their
intentions to enter or expand their existing presence in the market for supply
chain management solutions. The Company also expects to encounter increasing
competition from DCS solution vendors, such as Honeywell Inc., as they expand
their software and service offerings to include additional aspects of process
manufacturing. Moreover, in recent years, there has been consolidation in the
markets in which the Company competes that has expanded the breadth of product
and service offerings by certain of the Company's competitors, such as the
acquisitions by Siebe plc of Simulation Sciences, Inc. and Wonderware
Corporation. As a result of this consolidation and the expansion of DCS and ERP
vendors into additional markets, the Company from time to time may compete with
divisions of companies with which it collaborates on other occasions, such as
Honeywell Inc. and Siebe plc. There can be no assurance that the Company's
efforts to compete and cooperate simultaneously with these or other companies
will be successful. The further consolidation of existing competitors or the
emergence of new competitors could have a material adverse effect on the
Company's business, operating results and financial condition. Certain
competitors also supply related hardware products to existing and potential
customers of the Company and may have established relationships that afford
those competitors an advantage in supplying software and services to those
customers. The Company's continued success depends on its ability to compete
effectively with its commercial competitors and to persuade prospective
customers to use the Company's products and services instead of, or in addition
to, software developed internally or services provided by their own personnel.
In light of these factors, there can be no assurance that the Company will be
able to maintain its competitive position. See "--Business--Competition."
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
An element of the Company's business strategy is to continue to pursue
strategic acquisitions that will provide it with complementary products,
services and technologies and with additional engineering personnel. The
identification and pursuit of these acquisition opportunities and the
integration of acquired personnel, products, technologies and businesses require
a significant amount of management time and skill. There can be no assurance
that the Company will be able to identify suitable acquisition candidates,
consummate any acquisition on acceptable terms or successfully integrate any
acquired business into the Company's operations. In light of the consolidation
trend in the Company's industry, the Company expects to face competition for
acquisition opportunities, which may substantially increase the cost of any
acquisition consummated by the Company. There can also be no assurance that any
future acquisition will not have a material adverse effect upon the Company's
operating results as a result of non-recurring charges associated with the
acquisition or as a result of integration problems in the fiscal quarters
following consummation of the acquisition. Acquisitions may also expose the
Company to additional risks, including diversion of management's attention,
failure to retain key acquired personnel, assumption of legal or other
liabilities and contingencies, and amortization of goodwill and other acquired
intangible assets, some or all of which could have a material adverse effect on
the Company's business, operating results and financial condition. Moreover,
customer dissatisfaction with, or problems caused by, the performance of any
acquired technologies could have a material adverse
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36
impact on the reputation of the Company as a whole. In addition, there can be
no assurance that acquired businesses will achieve anticipated revenues and
earnings. The Company may use Common Stock or Preferred Stock or may incur
long-term indebtedness or a combination thereof for all or a portion of the
consideration to be paid in future acquisitions. The issuance of Common Stock or
Preferred Stock in acquisitions could result in dilution to existing
stockholders, while the use of cash reserves or significant debt financing to
fund acquisitions could reduce the Company's liquidity. See
"--Business--Strategy--Pursue Strategic Acquisitions."
CONCENTRATION OF REVENUES IN THE CHEMICALS, PETROCHEMICALS AND PETROLEUM
INDUSTRIES
The Company derives a substantial majority of its total revenues from
companies in the chemicals, petrochemicals and petroleum industries.
Accordingly, the Company's future success depends upon the continued demand for
process manufacturing optimization software and services by companies in these
industries. The chemicals, petrochemicals and petroleum industries are highly
cyclical. The Company believes that worldwide economic downturns and pricing
pressures experienced by chemical, petrochemical and petroleum companies in
connection with cost-containment measures and environmental regulatory pressures
have in the past led to worldwide delays and reductions in certain capital and
operating expenditures by many of these companies. There can be no assurance
that these industry patterns, as well as general domestic and foreign economic
conditions and other factors affecting spending by companies in these
industries, will not have a material adverse effect on the Company's business,
operating results and financial condition. See "--Management's Discussion and
Analysis of Supplemental Consolidated Financial Condition and Results of
Operations--Results of Operations" and "--Business--Customers."
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The market for software and services for process manufacturing optimization
is characterized by rapidly changing technology and continuing improvements in
computer hardware, operating systems, programming tools, programming languages
and database technology. The Company's future success will depend on its ability
to enhance its current software products and services, integrate its current and
future software offerings, modify its products to operate on additional or new
operating platforms or systems, and develop in a timely and cost-effective
manner new software and services that meet changing market conditions, including
evolving customer needs, new competitive software and service offerings,
emerging industry standards and changing technology. The Company has announced
its intention to further integrate its software products with each other and to
integrate those products with ERP, DCS and other business software solutions.
The Company believes additional development will be necessary before its
products are fully integrated with each other and with these other solutions,
particularly with respect to ERP solutions. In the past, the Company has
experienced delays in the development and enhancement of new and existing
products, particularly the Windows version of Aspen Plus, and has on occasion
postponed scheduled delivery dates for certain of its products. There can be no
assurance that the Company will be able to meet customers' expectations with
respect to product development, enhancement and integration or that the
Company's software and services will otherwise address adequately the needs of
customers. Like many other software products, the Company's software has on
occasion contained undetected errors or "bugs." Because new releases of the
Company's software products are initially installed only by a selected group of
customers, any errors or "bugs" in those new releases may not be detected for a
number of months after the delivery of the software. If the Company's products
do not perform substantially as expected or are not accepted in the marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected. See "--Business--Technology and Product
Development."
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DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on Lawrence B.
Evans, the principal founder of the Company and its Chairman and Chief Executive
Officer, its other executive officers, and certain engineering, technical,
managerial and marketing personnel. The loss of the services of any of these
individuals or groups of individuals could have a material adverse effect on the
Company's business, operating results and financial condition. None of the
Company's executive officers has entered into an employment agreement with the
Company, and the Company does not have, and is not contemplating securing, any
significant amount of key-person life insurance on any of its executive officers
or other key employees. In addition to the need to recruit qualified project
engineers, the Company believes that its future success will also depend
significantly upon its ability to attract, motivate and retain additional highly
skilled technical, managerial and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, motivating and retaining the personnel it requires to
continue to grow and operate profitably. See "--Business--Employees."
PRODUCT LIABILITY
The sale and implementation of certain of the Company's software products
and services, particularly in the areas of advanced process control and
optimization, may entail the risk of product liability claims. The Company's
software products and services are used in the design, operation and management
of manufacturing processes at large facilities, and any failure of the software
at those facilities could result in significant claims for damages or for
violations of environmental, safety and other laws and regulations. The
Company's agreements with its customers generally contain provisions designed to
limit the Company's exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions in the Company's
agreements may not be effective as a result of federal, state or local laws or
ordinances or unfavorable judicial decisions. A substantial product liability
claim against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company regards its software as proprietary and relies on a combination
of copyright, patent, trademark and trade secret laws, license and
confidentiality agreements, and software security measures to protect its
proprietary rights. AspenTech has United States patents for the expert guidance
system in its proprietary graphical user interface, the simulation and
optimization methods in its optimization software, a process flow diagram
generator in its planning and scheduling software, and a process simulation
apparatus in its polymers software. The Company has registered or has applied to
register certain of its significant trademarks in the United States and in
certain other countries. The Company generally enters into non-disclosure
agreements with its employees and customers, and historically has restricted
access to its software products' source codes, which it regards as proprietary
information. In a few cases, the Company has provided copies of the source code
for certain products to customers solely for the purpose of special
customization of the products and has deposited copies of the source code for
certain products in third-party escrow accounts as security for on-going service
and license obligations. In these cases, the Company relies on nondisclosure and
other contractual provisions to protect its proprietary rights.
The laws of certain countries in which the Company's products are licensed
do not protect the Company's products and intellectual property rights to the
same extent as the laws of the United States. The laws of many countries in
which the Company licenses its products protect trademarks solely on the basis
of registration. The Company currently possesses a limited number of trademark
registrations in certain foreign jurisdictions and does not possess, and has not
applied for, any foreign copyright or patent registrations. In fiscal 1996,
fiscal 1997 and the nine months ended
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March 31, 1998, the Company derived approximately 42.0%, 50.0% and 45.3% of its
total revenues, respectively, from customers outside the United States.
There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the Company's business,
operating results and financial condition. The Company could incur substantial
costs in protecting and enforcing its intellectual property rights. Moreover,
from time to time third parties may assert patent, trademark, copyright and
other intellectual property rights to technologies that are important to the
Company. In such an event, the Company may be required to incur significant
costs in litigating a resolution to the asserted claims. There can be no
assurance that such a resolution would not require that the Company pay damages
or obtain a license of a third party's proprietary rights in order to continue
licensing its products as currently offered or, if such a license is required,
that it will be available on terms acceptable to the Company, if at all. See
"--Business--Intellectual Property."
MANAGEMENT OF GROWTH
The Company has experienced substantial growth in recent years in the
number of its employees, the scope of its operating and financial systems, and
the geographic area of its operations. The Company's operations have expanded
significantly through both internally generated growth and acquisitions. This
growth has resulted in increased responsibilities for the Company's management.
To manage its growth effectively, the Company must continue to expand its
management team, attract, motivate and retain employees, including qualified
project engineers, and implement and improve its operating and financial
systems. There can be no assurance that the Company's current management systems
will be adequate or that the Company will be able to manage the Company's recent
or future growth successfully. Any failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition. See "--Management's Discussion and Analysis of Supplemental
Consolidated Financial Condition and Results of Operations--Results of
Operations."
INTERNATIONAL OPERATIONS
In fiscal 1996, fiscal 1997 and the nine months ended March 31, 1998, the
Company derived approximately 42.0%, 50.0% and 45.3% of its total revenues,
respectively, from customers outside the United States. The Company anticipates
that revenues from customers outside the United States will continue to account
for a significant portion of its total revenues for the foreseeable future. The
Company's operations outside the United States are subject to additional risks,
including unexpected changes in regulatory requirements, exchange rates, tariffs
and other barriers, political and economic instability, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations, difficulties or delays in translating products and
product documentation into foreign languages, and potentially adverse tax
consequences. In addition, the Company currently is unable to determine the
effect, if any, that recent economic downturns in Asia, particularly Japan, or
the adoption and use of the euro, the single European currency to be introduced
in January 1999, will have on the Company's business. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
The impact of future exchange rate fluctuations on the Company's financial
condition and operating results cannot be accurately predicted. In recent years,
the Company has increased the extent to which it denominates arrangements with
customers outside the United States in the currencies of the country in which
the software or services are provided. From time to time the Company has engaged
in, and may continue to engage in, hedges of a significant portion of
installment contracts denominated in foreign currencies. There can be no
assurance that any
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hedging policies implemented by the Company will be successful or that the cost
of such hedging techniques will not have a significant impact on the Company's
business, operating results and financial condition. See "--Management's
Discussion and Analysis of Supplemental Consolidated Financial Condition and
Results of Operations."
DEPENDENCE UPON INCREASED MARKET PENETRATION
Increased use in the process industries of software and services for
process manufacturing optimization in general and of the Company's software
products and services in particular is critical to the Company's future growth.
The Company believes that a number of factors will determine its ability to
increase market penetration. These factors include product performance, accuracy
of results, reliability, breadth and integration of product offerings, scope of
applications, and ease of implementation and use. Failure of the Company to
achieve increased market penetration in the process industries would
substantially restrict the future growth of the Company and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Business--The AspenTech Advantage" and "--Strategy."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software applications are
designed to accept only two digit entries in the date code field used to
identify years. These date code fields will need to be modified to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with "year
2000" requirements. Significant uncertainty exists in the software industry
concerning the potential effects of failure to comply with such requirements.
The Company has developed a testing and compliance program to ascertain whether
and to what extent the Company may need to update its software products to
become year 2000 compliant. The Company does not intend to test or modify all
prior versions of its software products, current products used on year 2000
non-compliant systems, custom applications developed by or for customers, or
certain current software products that the Company plans to replace with either
new software products or year 2000 compliant releases by the end of 1999.
Certain of the Company's software products are currently year 2000 compliant;
however, the Company has not completed testing on many of the other software
products that it intends to test. There can be no assurance that the Company
will complete in a timely manner the testing of such software products or the
development of any updates necessary to render such software products year 2000
compliant. Although the Company has obtained representations as to year 2000
compliance from the sellers of certain of its recently acquired technologies,
there can be no assurance that the Company will not encounter year 2000 problems
arising from these technologies or any other technologies that the Company may
acquire in the future. Moreover, the ability of the Company's software products
to comply with year 2000 requirements depends in part upon the availability of
year 2000 compliant versions of operating systems and software applications used
by or with the Company's products. Any delay in developing or offering, or the
failure to develop or offer year 2000 compliant products or any necessary
updates to existing products, could result in delays in the purchasing of the
Company's products and services or in reduced demand for those products and
services, and could also result in errors that materially impair the utility of
one or more of the Company's products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. Although the Company does not expect the costs associated with its
year 2000 compliance program to be material, there can be no assurance that
unidentified year 2000 problems will not cause the Company to incur material
expenses in responding to such problems or otherwise have a material adverse
effect on the Company's business, operating results and financial condition.
Moreover, customer purchasing patterns may be affected by year 2000 issues as
customers delay purchases in anticipation of the future release of year 2000
compliant products or releases, and as customers expend significant resources to
upgrade their current software systems and applications for year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as
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those offered by the Company. See "--Management's Discussion and Analysis of
Supplemental Consolidated Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NEW ACCOUNTING STANDARD
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company adopted for software license agreements entered
into with customers on or after January 1, 1998. This statement provides
accounting standards for software revenue recognition. The Company believes that
its revenue recognition policies comply with SOP 97-2; however, unanticipated
changes or new interpretations by the AICPA of SOP 97-2 could require changes in
the Company's revenue recognition practices, which could have a material adverse
effect on the Company's operating results and financial condition.
POTENTIAL VOLATILITY OF PRICE OF COMMON STOCK
The equity markets have from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, and those
fluctuations have often been unrelated to the operating performance of
particular companies. In addition, factors such as the financial performance of
the Company, announcements of technological innovations or new products by the
Company or its competitors, as well as market conditions in the computer
software or hardware industries, may have a significant impact on the market
price of the Common Stock.
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCES OF PREFERRED STOCK; STOCKHOLDER RIGHTS PLAN
The Company's Certificate of Incorporation, its By-Laws and certain
Delaware laws contain provisions that may discourage acquisition bids for the
Company and that may deprive stockholders of certain opportunities to receive a
premium for their shares as part of an acquisition of the Company. Preferred
Stock may be issued by the Company in the future without stockholder approval
and upon such terms as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding stock
of the Company. The Company has adopted a stockholder rights plan, which may
deter or delay attempts to acquire the Company or accumulate shares of Common
Stock. Except for the stockholder rights plan, the Company has no present plans
to designate or issue any shares of Preferred Stock.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS, EXCLUDING CHESAPEAKE
DECISION SCIENCES, INC.:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997
and March 31, 1998 (Unaudited)......................... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1995, 1996 and 1997 and for the Nine Months
Ended March 31, 1997 and 1998 (Unaudited).............. F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1995, 1996 and 1997 and for the
Nine Months Ended March 31, 1998 (Unaudited)........... F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1995, 1996 and 1997 and for the Nine Months
Ended March 31, 1997 and 1998 (Unaudited).............. F-7
Notes to Consolidated Financial Statements................ F-9
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING
CHESAPEAKE DECISION SCIENCES, INC.:
Report of Independent Public Accountants.................. F-29
Supplemental Consolidated Balance Sheets as of June 30,
1996 and 1997 and March 31, 1998 (Unaudited)........... F-30
Supplemental Consolidated Statements of Operations for the
Years Ended June 30, 1995, 1996 and 1997 and for the
Nine Months Ended March 31, 1997 and 1998
(Unaudited)............................................ F-32
Supplemental Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1995, 1996 and 1997
and for the Nine Months Ended March 31, 1998
(Unaudited)............................................ F-33
Supplemental Consolidated Statements of Cash Flows for the
Years Ended June 30, 1995, 1996 and 1997 and for the
Nine Months Ended March 31, 1997 and 1998
(Unaudited)............................................ F-34
Notes to Supplemental Consolidated Financial Statements... F-36
F-1
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspen Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Aspen
Technology, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Aspen Technology, Inc. and
subsidiaries as of June 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 29, 1998
F-2
43
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 12,524 $ 16,091 $ 25,295
Short-term investments............................... 38,559 15,843 6,609
Accounts receivable, net of reserves of $731 in 1996,
$720 in 1997 and $1,229 in 1998................... 38,006 44,180 55,969
Unbilled services.................................... 7,634 12,444 18,282
Current portion of long-term installments receivable,
net of unamortized discount of $930 in 1996, $815
in 1997 and $977 in 1998.......................... 12,068 19,063 21,447
Prepaid expenses and other current assets............ 3,318 7,403 8,951
-------- -------- --------
Total current assets......................... 112,109 115,024 136,553
-------- -------- --------
Long-term installments receivable, net of unamortized
discount of $5,027 in 1996, $7,386 in 1997 and $6,438
in 1998.............................................. 17,708 30,963 29,698
-------- -------- --------
Property and leasehold improvements, at cost:
Building and improvements............................ 3,741 3,922 5,835
Computer equipment................................... 17,862 23,393 30,354
Purchased software................................... 2,974 9,852 14,901
Furniture and fixtures............................... 3,489 7,553 8,892
Leasehold improvements............................... 698 2,618 4,505
-------- -------- --------
28,764 47,338 64,487
Less -- accumulated depreciation and amortization...... 11,949 19,904 28,635
-------- -------- --------
16,815 27,434 35,852
-------- -------- --------
Computer software development costs, net of accumulated
amortization of $3,908 in 1996, $5,051 in 1997 and
$5,832 in 1998....................................... 1,817 3,058 5,272
-------- -------- --------
Land................................................... 925 925 925
-------- -------- --------
Intangible assets, net of accumulated amortization of
$819 in 1996, $3,347 in 1997 and $5,352 in 1998...... 9,129 12,768 13,574
-------- -------- --------
Other assets........................................... 1,664 2,092 2,516
-------- -------- --------
$160,167 $192,264 $224,390
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
44
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............. $ 425 $ 288 $ 1,581
Accounts payable..................................... 6,037 6,712 5,491
Accrued expenses..................................... 16,012 16,572 20,787
Unearned revenue..................................... 8,967 4,294 4,822
Deferred revenue..................................... 8,953 14,372 19,110
Deferred income taxes................................ 2,798 1,775 5,486
-------- -------- --------
Total current liabilities.................... 43,192 44,013 57,277
-------- -------- --------
Long-term obligations, less current portion............ 706 462 3,315
-------- -------- --------
Deferred revenue, less current portion................. 8,279 9,441 10,068
-------- -------- --------
Other liabilities...................................... 1,757 942 741
-------- -------- --------
Deferred income taxes.................................. 6,398 5,965 9,888
-------- -------- --------
Commitments and contingencies (Notes 10, 11 and 12)
Stockholders' equity:
Common stock, $.10 par value --
Authorized -- 40,000,000 shares
Issued -- 19,382,360 shares, 20,359,892 shares and
21,442,680 shares in 1996, 1997 and 1998,
respectively.................................... 1,938 2,036 2,144
Additional paid-in capital........................... 109,857 127,578 137,321
Retained earnings (Accumulated deficit).............. (11,094) 2,588 4,232
Cumulative translation adjustment.................... (362) (255) (100)
Treasury stock, at cost -- 230,396 shares, 230,330
shares and 230,330 shares of common stock in 1996,
1997 and 1998, respectively....................... (502) (502) (502)
Unrealized gain (loss) on investments................ (2) (4) 6
-------- -------- --------
Total stockholders' equity................... 99,835 131,441 143,101
-------- -------- --------
$160,167 $192,264 $224,390
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
45
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
----------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Revenues:
Software licenses................. $45,649 $ 65,644 $ 97,240 $ 66,715 $ 90,125
Service and other................. 11,849 37,965 83,059 60,330 74,356
------- -------- -------- -------- --------
57,498 103,609 180,299 127,045 164,481
------- -------- -------- -------- --------
Expenses:
Cost of software licenses......... 2,799 3,476 4,538 3,267 4,149
Cost of service and other......... 7,458 22,949 48,702 35,577 43,093
Selling and marketing............. 23,233 34,691 53,517 38,446 50,548
Research and development.......... 11,375 20,208 31,153 21,966 29,211
General and administrative........ 5,132 9,565 15,933 12,022 13,630
Charge for in-process research and
development.................... -- 24,421 8,664 8,664 8,472
Costs related to acquisition...... 950 -- -- -- 984
------- -------- -------- -------- --------
50,947 115,310 162,507 119,942 150,087
------- -------- -------- -------- --------
Income (loss) from
operations................... 6,551 (11,701) 17,792 7,103 14,394
Foreign currency exchange gain
(loss)............................ 34 (223) (236) (110) (365)
Income on equity in joint
ventures.......................... 22 10 26 -- 45
Interest income..................... 3,095 3,666 5,323 3,824 4,105
Interest expense on subordinated
notes payable to a related
party............................. (369) (377) -- -- --
Other interest expense.............. (192) (946) (151) (117) (147)
------- -------- -------- -------- --------
Income (loss) before provision
for income taxes............. 9,141 (9,571) 22,754 10,700 18,032
Provision for income taxes.......... 3,725 5,614 9,599 5,624 9,535
------- -------- -------- -------- --------
Net income (loss).............. $ 5,416 $(15,185) $ 13,155 $ 5,076 $ 8,497
======= ======== ======== ======== ========
Net income (loss) per share:
Diluted........................... $ 0.35 $ (0.96) $ 0.63 $ 0.24 $ 0.39
======= ======== ======== ======== ========
Basic............................. $ 0.39 $ (0.96) $ 0.67 $ 0.26 $ 0.41
======= ======== ======== ======== ========
Weighted average shares outstanding:
Diluted........................... 15,562 15,857 20,967 20,938 21,960
======= ======== ======== ======== ========
Basic............................. 13,770 15,857 19,628 19,532 20,629
======= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
46
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A, CLASS B
AND SERIES C-1
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER OF NUMBER OF $.10 PAR PAID-IN
SHARES PAR VALUE SHARES VALUE CAPITAL
--------- --------- ---------- -------- ----------
Balance, June 30, 1994.................................... 356,986 $ 177 7,009,330 $ 701 $ 17,578
Issuance of common stock in a public offering, net of
issuance costs of $1,223............................... -- -- 3,100,000 310 17,539
Issuance of common stock under employee stock purchase
plans.................................................. -- -- 72,064 7 238
Exercise of stock options and warrants................... -- -- 688,462 69 1,113
Liquidation of fractional shares......................... -- -- -- -- --
Conversion of preferred stock to common stock............ (356,986) (177) 4,709,580 471 (294)
Purchase of treasury stock............................... -- -- -- -- --
Repayment of receivable.................................. -- -- -- -- --
Translation adjustment................................... -- -- -- -- --
Unrealized market gain on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- 486
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net................. -- -- -- -- --
Net income............................................... -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1995.................................... -- -- 15,579,436 1,558 36,660
Issuance of common stock in a public offering, net of
issuance costs of $4,239............................... -- -- 2,907,820 291 68,166
Issuance of common stock in a private placement.......... -- -- 66,770 6 1,058
Issuance of common stock under employee stock purchase
plans.................................................. -- -- 50,220 5 469
Exercise of stock options and warrants................... -- -- 778,114 78 1,397
Translation adjustment................................... -- -- -- -- --
Realized gain on investments............................. -- -- -- -- --
Unrealized market loss on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- 2,107
Net loss................................................. -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1996.................................... -- -- 19,382,360 1,938 109,857
Issuance of common stock in a pooling.................... -- -- 104,162 10 165
Issuance of common stock in the purchase of businesses... -- -- 155,740 16 5,892
Issuance of common stock under employee stock purchase
plans.................................................. -- -- 210,085 21 3,549
Exercise of stock options and warrants................... -- -- 507,545 51 4,152
Translation adjustment................................... -- -- -- -- --
Issuance of treasury stock to charity.................... -- -- -- -- --
Unrealized market loss on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- 3,963
Net income............................................... -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1997.................................... -- -- 20,359,892 2,036 127,578
Issuance of common stock in poolings..................... -- -- 626,443 63 2,046
Issuance of common stock under employee stock purchase
plans.................................................. -- -- 115,617 11 3,867
Exercise of stock options and warrants................... -- -- 340,728 34 3,830
Translation adjustment................................... -- -- -- -- --
Unrealized market gain on investments.................... -- -- -- -- --
Net income............................................... -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, March 31, 1998 (Unaudited)....................... -- $ -- 21,442,680 $2,144 $137,321
======== ===== ========== ====== ========
RECEIVABLE
RETAINED FROM TREASURY STOCK
EARNINGS CUMULATIVE STOCKHOLDER -------------------
(ACCUMULATED TRANSLATION FOR STOCK NUMBER OF
DEFICIT) ADJUSTMENT ISSUED SHARES AMOUNTS
------------ ----------- ----------- --------- -------
Balance, June 30, 1994.................................... $ (398) $(390) $(15) 229,188 $(497)
Issuance of common stock in a public offering, net of
issuance costs of $1,223............................... -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................. -- -- -- -- --
Exercise of stock options and warrants................... -- -- -- -- --
Liquidation of fractional shares......................... -- -- -- 64 --
Conversion of preferred stock to common stock............ -- -- -- -- --
Purchase of treasury stock............................... -- -- -- 1,144 (5)
Repayment of receivable.................................. -- -- 15 -- --
Translation adjustment................................... -- 90 -- -- --
Unrealized market gain on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- --
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net................. (927) -- -- -- --
Net income............................................... 5,416 -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1995.................................... 4,091 (300) -- 230,396 (502)
Issuance of common stock in a public offering, net of
issuance costs of $4,239............................... -- -- -- -- --
Issuance of common stock in a private placement.......... -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................. -- -- -- -- --
Exercise of stock options and warrants................... -- -- -- -- --
Translation adjustment................................... -- (62) -- -- --
Realized gain on investments............................. -- -- -- -- --
Unrealized market loss on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- --
Net loss................................................. (15,185) -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1996.................................... (11,094) (362) -- 230,396 (502)
Issuance of common stock in a pooling.................... 527 -- -- -- --
Issuance of common stock in the purchase of businesses... -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................. -- -- -- -- --
Exercise of stock options and warrants................... -- -- -- -- --
Translation adjustment................................... -- 107 -- -- --
Issuance of treasury stock to charity.................... -- -- -- (66) --
Unrealized market loss on investments.................... -- -- -- -- --
Tax benefit related to stock options..................... -- -- -- -- --
Net income............................................... 13,155 -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1997.................................... 2,588 (255) -- 230,330 (502)
Issuance of common stock in poolings..................... (6,853) -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................. -- -- -- -- --
Exercise of stock options and warrants................... -- -- -- -- --
Translation adjustment................................... -- 155 -- -- --
Unrealized market gain on investments.................... -- -- -- -- --
Net income............................................... 8,497 -- -- -- --
-------- ----- ---- ------- -----
Balance, March 31, 1998 (Unaudited)....................... $ 4,232 $(100) $ -- 230,330 $(502)
======== ===== ==== ======= =====
UNREALIZED
GAIN TOTAL
(LOSS) ON STOCKHOLDERS'
INVESTMENTS EQUITY
----------- -------------
Balance, June 30, 1994.................................... $ -- $ 17,156
Issuance of common stock in a public offering, net of
issuance costs of $1,223............................... -- 17,849
Issuance of common stock under employee stock purchase
plans.................................................. -- 245
Exercise of stock options and warrants................... -- 1,182
Liquidation of fractional shares......................... -- --
Conversion of preferred stock to common stock............ -- --
Purchase of treasury stock............................... -- (5)
Repayment of receivable.................................. -- 15
Translation adjustment................................... -- 90
Unrealized market gain on investments.................... 282 282
Tax benefit related to stock options..................... -- 486
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net................. -- (927)
Net income............................................... -- 5,416
----- --------
Balance, June 30, 1995.................................... 282 41,789
Issuance of common stock in a public offering, net of
issuance costs of $4,239............................... -- 68,457
Issuance of common stock in a private placement.......... -- 1,064
Issuance of common stock under employee stock purchase
plans.................................................. -- 474
Exercise of stock options and warrants................... -- 1,475
Translation adjustment................................... -- (62)
Realized gain on investments............................. (282) (282)
Unrealized market loss on investments.................... (2) (2)
Tax benefit related to stock options..................... -- 2,107
Net loss................................................. -- (15,185)
----- --------
Balance, June 30, 1996.................................... (2) 99,835
Issuance of common stock in a pooling.................... -- 702
Issuance of common stock in the purchase of businesses... -- 5,908
Issuance of common stock under employee stock purchase
plans.................................................. -- 3,570
Exercise of stock options and warrants................... -- 4,203
Translation adjustment................................... -- 107
Issuance of treasury stock to charity.................... -- --
Unrealized market loss on investments.................... (2) (2)
Tax benefit related to stock options..................... -- 3,963
Net income............................................... -- 13,155
----- --------
Balance, June 30, 1997.................................... (4) 131,441
Issuance of common stock in poolings..................... -- (4,744)
Issuance of common stock under employee stock purchase
plans.................................................. -- 3,878
Exercise of stock options and warrants................... -- 3,864
Translation adjustment................................... -- 155
Unrealized market gain on investments.................... 10 10
Net income............................................... -- 8,497
----- --------
Balance, March 31, 1998 (Unaudited)....................... $ 6 $143,101
===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
47
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................... $ 5,416 $(15,185) $ 13,155 $ 5,076 $ 8,497
Adjustments to reconcile net income (loss) to
net cash provided by operating activities --
Depreciation and amortization................. 2,748 5,641 11,301 7,945 9,534
Charge for in-process research and
development................................. -- 24,421 8,664 8,664 8,472
Deferred income taxes......................... 2,573 (295) (1,646) 2,982 6,834
Changes in assets and liabilities --
Accounts receivable......................... (3,061) (12,415) (9,501) (8,142) (15,519)
Prepaid expenses and other current assets... (780) 1,053 (4,042) (2,157) (693)
Long-term installments receivable........... (8,503) 1,790 (20,251) (8,325) (609)
Accounts payable and accrued expenses....... 2,446 7,000 3,750 (883) (1,368)
Unearned revenue............................ 66 2,823 (7,835) (6,780) 527
Deferred revenue............................ 2,716 3,560 7,229 4,145 4,392
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................. 3,621 18,393 824 2,525 20,067
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and leasehold
improvements.................................. (2,565) (7,017) (18,093) (13,907) (12,845)
Increase in computer software development
costs......................................... (1,026) (908) (2,384) (1,482) (2,923)
(Increase) decrease in other assets............. (154) 117 (549) (323) (445)
(Increase) decrease in short-term investments... (18,364) (20,197) 22,715 16,690 9,244
Increase (decrease) in other liabilities........ 401 955 (815) (2,281) (201)
Net cash acquired in immaterial poolings........ -- -- 792 -- (778)
Cash used in the purchase of business, net of
cash acquired................................. -- (44,723) (6,232) (5,307) (9,911)
-------- -------- -------- -------- --------
Net cash used in investing activities.... (21,708) (71,773) (4,566) (6,610) (17,859)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock........................ 17,849 69,521 -- -- --
Issuance of common stock under employee stock
purchase plans................................ 245 474 3,570 381 3,878
Exercise of stock options and warrants.......... 1,182 925 4,203 2,299 3,864
Purchase of treasury stock...................... (5) -- -- -- --
Repayment of receivable for stock issued........ 15 -- -- -- --
Proceeds from subordinated note payable to
related party................................. 2,000 -- -- -- --
Payment of subordinated notes payable to related
parties....................................... -- (3,450) -- -- --
Payments of long-term debt and capital lease
obligations................................... (661) (5,693) (571) (472) (907)
Dividend distributions to stockholders relating
to acquired Subchapter S corporation, net..... (927) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities............................. 19,698 61,777 7,202 2,208 6,835
-------- -------- -------- -------- --------
F-7
48
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Effect of exchange rate changes on cash and cash
equivalents..................................... 90 (62) 107 59 161
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 1,701 8,335 3,567 (1,818) 9,204
Cash and cash equivalents, beginning of period.... 2,488 4,189 12,524 12,524 16,091
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 4,189 $ 12,524 $ 16,091 $ 10,706 $ 25,295
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes...................... $ 600 $ 1,861 $ 2,334 $ 527 $ 400
======== ======== ======== ======== ========
Cash paid for interest.......................... $ 524 $ 1,363 $ 199 $ 92 $ 109
======== ======== ======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Increase in equipment under capital lease
obligations................................... $ -- $ 105 $ -- $ -- $ --
======== ======== ======== ======== ========
Increase in additional paid-in capital and
decrease in accrued expenses relating to the
tax benefit of exercise of nonqualified stock
options....................................... $ 486 $ 2,107 $ 3,963 $ -- $ --
======== ======== ======== ======== ========
Increase in common stock and additional paid-in
capital and decrease in subordinated notes
payable to a related party relating to the
exercise of warrants.......................... $ -- $ 550 $ -- $ -- $ --
======== ======== ======== ======== ========
Supplemental disclosure of cash flows related to
acquisitions:
During 1996, 1997 and the nine months ended
March 31, 1998, the Company acquired certain
companies as described in Note 3. These
acquisitions are summarized as follows --
Fair value of assets acquired, excluding
cash........................................ $ -- $ 47,919 $ 15,469 $ 15,982 $ 11,316
Issuance of common stock related to
acquisitions................................ -- -- (5,908) (6,496) --
Payments in connection with the acquisitions,
net of cash acquired........................ -- (44,723) (6,232) (5,307) (9,911)
-------- -------- -------- -------- --------
Liabilities assumed...................... $ -- $ 3,196 $ 3,329 $ 4,179 $ 1,405
======== ======== ======== ======== ========
During the fiscal year 1995, the Company acquired Industrial Systems, Inc.,
which was accounted for as a pooling of interests. During the fiscal year 1997,
the Company acquired B-JAC International, Inc., which was accounted for as a
pooling of interests. During the fiscal year 1998, the Company acquired
NeuralWare, Inc., The SAST Corporation Limited, Cimtech S.A./N.V., Contas
Process Control S.r.L. and Zyqad Limited, which were accounted for as poolings
of interests.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
49
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Aspen Technology, Inc. and subsidiaries (the Company) is a supplier of
software and service solutions that companies in the process industries use to
design, operate and manage their manufacturing processes. The process industries
include manufacturers of chemicals, petrochemicals, petroleum products,
pharmaceuticals, pulp and paper, electric power, food and beverages, consumer
products, and metals and minerals. The Company offers a comprehensive,
integrated suite of process manufacturing optimization solutions that help
process manufacturers enhance profitability by improving efficiency,
productivity, capacity utilization, safety and environmental compliance
throughout the entire manufacturing life-cycle, from research and development to
engineering, planning and scheduling, procurement, production and distribution.
In addition to its broad range of software solutions, the Company offers system
implementation, advanced process control, real-time optimization and other
consulting services through its staff of project engineers. The Company has
operations and customers worldwide.
On May 27, 1998, the Company acquired Chesapeake Decision Sciences, Inc.
and subsidiaries (CDI), a provider of software and services for the supply chain
management market. The Company exchanged 2,961,959 shares of common stock for
all the outstanding shares of CDI. The Company placed 296,196 of these shares
into escrow as security for indemnification obligations of CDI relating to
representation, warranties and tax matters. This merger will be accounted for as
a pooling of interests. As a result, the Company's historical financial
statements will be restated to reflect the combination (see Note 18). The
Company has incurred approximately $4.0 million of merger-related costs, which
will be included in the 1998 consolidated statement of operations during the
period in which the merger is completed.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
(b) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of March 31, 1998 and
for the nine months ended March 31, 1997 and 1998 are unaudited, but in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. Results for the nine months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998.
F-9
50
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities of
less than three months.
(d) SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities purchased to be held for indefinite periods of time, and not intended
at the time of purchase to be held until maturity, are classified as
available-for-sale securities. Securities classified as available-for-sale are
required to be recorded at market value in the accompanying consolidated
financial statements. Unrealized gains and losses have been accounted for as a
separate component of stockholders' equity. Available-for-sale investments as of
June 30, 1996 and 1997 and March 31, 1998 are as follows (in thousands):
MARKET VALUE AT
---------------------------------
CONTRACTED JUNE 30, JUNE 30, MARCH 31,
DESCRIPTION MATURITY 1996 1997 1998
----------- ---------- -------- -------- ---------
Commercial paper............................ 1-11 months $38,559 $ 2,150 $ --
Money market funds.......................... N/A -- -- 1,202
Corporate and foreign bonds................. 1-12 months -- 3,030 --
Corporate and foreign bonds................. 1-5 years -- 10,663 5,407
------- ------- ------
$38,559 $15,843 $6,609
======= ======= ======
The Company had no realized gains or losses for the years ended June 30,
1995 and 1997 and had realized gains (losses) of $282,000 and $(3,000) for the
year ended June 30, 1996 and the nine months ended March 31, 1998, respectively.
The amortized cost of these investments does not differ significantly from their
stated market value for all periods presented.
(e) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization, computed using the
straight-line and declining balance methods, by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful lives,
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Building and improvements............................. 7-30 years
Computer equipment.................................... 3-10 years
Purchased software.................................... 3 years
Furniture and fixtures................................ 3-10 years
Leasehold improvements................................ Life of lease
(f) LAND
In connection with the acquisition of Setpoint, Inc. (see Note 3(a)), the
Company acquired land that is being held for investment purposes. The land was
recorded at its appraised value at the date of acquisition.
F-10
51
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) REVENUE RECOGNITION
The Company recognizes revenue from software licenses upon the shipment of
its products, pursuant to a signed noncancelable license agreement. In the case
of license renewals, revenue is recognized upon execution of the renewal license
agreement. The Company has no other significant vendor obligations or
collectibility risk associated with its product sales. The Company recognizes
revenue from postcontract customer support ratably over the period of the
postcontract arrangement. The Company accounts for insignificant vendor
obligations by deferring a portion of the revenue and recognizing it either
ratably as the obligations are fulfilled or when the related services are
performed. If significant application development services are required as part
of a software license, the license fees are recognized as the application
development services are performed.
Service revenues from fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of costs (primarily
labor) incurred to date as compared to the estimated total costs (primarily
labor) for each contract. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Service revenues from time and expense
contracts and consulting and training revenue are recognized as the related
services are performed. Services that have been performed but for which billings
have not been made are recorded as unbilled services, and billings that have
been recorded before the services have been performed are recorded as unearned
revenue in the accompanying consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term license agreements that provide
for payment in installments over a one- to five-year period. A portion of each
installment agreement is recognized as interest income in the accompanying
consolidated statements of operations. The interest rates in effect for the
years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31,
1998 were 11% to 12%, 11% to 12%, 8.5% to 11% and 8.5%, respectively.
(h) COMPUTER SOFTWARE DEVELOPMENT COSTS
In compliance with SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, certain computer software
development costs are capitalized in the accompanying consolidated balance
sheets. Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Amortization of capitalized computer
software development costs is provided on a product-by-product basis using the
straight-line method over the remaining estimated economic life of the product,
not to exceed three years. Total amortization expense charged to operations was
approximately $630,000, $735,000, $1,143,000, $738,000 and $709,000 in fiscal
1995, 1996 and 1997 and for the nine months ended March 31, 1997 and 1998,
respectively.
(i) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS No. 52, Foreign Currency Translation. The
determination of functional currency is based on the subsidiaries' relative
financial and operational independence from the Company. Foreign currency
exchange and translation gains or losses for certain wholly owned subsidiaries
are credited or charged to the accompanying consolidated statements of
operations since the functional currency of the subsidiaries is the U.S. dollar.
Gains and losses from foreign currency translation related to entities whose
functional currency is their local currency are credited or charged to the
cumulative translation adjustment account, included in stockholders' equity in
the accompanying consolidated balance sheets.
F-11
52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1996 and 1997 and March 31, 1998, the Company had long-term
installments receivable of approximately $7,301,000, $8,987,000 and $5,810,000
denominated in foreign currencies. The March 1998 installments receivable mature
through October 2002 and have been hedged with specific foreign currency
contracts. There have been no material gains or losses recorded relating to
hedge contracts for the periods presented.
(j) NET INCOME (LOSS) PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings per Share. This statement established standards for computing
and presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. This statement is effective for periods
ending after December 15, 1997. The prior years' earnings per share have been
retroactively restated to reflect the adoption of SFAS No. 128.
Basic earnings per share was determined by dividing net income by the
weighted average common shares outstanding during the period. Diluted earnings
per share was determined by dividing net income by diluted weighted average
shares outstanding. Diluted weighted average shares reflects the dilutive
effect, if any, of common equivalent shares. Common equivalent shares include
common stock options to the extent their effect is dilutive, based on the
treasury stock method.
The calculations of basic and diluted weighted average shares outstanding
are as follows (in thousands):
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------- -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Basic weighted average common shares
outstanding............................. 13,770 15,857 19,628 19,532 20,629
Weighted average common equivalent
shares.................................. 1,792 -- 1,339 1,406 1,331
------ ------ ------ ------ ------
Diluted weighted average shares
outstanding............................. 15,562 15,857 20,967 20,938 21,960
====== ====== ====== ====== ======
(k) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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.
(l) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant offbalance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents,
investments, accounts receivable and installments receivable. The Company places
its cash and cash equivalents and investments in highly rated institutions.
Concentration of credit risk with respect to receivables is limited to certain
customers (end users and distributors) to which the Company makes substantial
sales. To reduce risk, the Company routinely assesses the financial strength of
its
F-12
53
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers, hedges specific foreign receivables and routinely sells its
receivables to financial institutions with and without recourse. As a result,
the Company believes that its accounts and installments receivable credit risk
exposure is limited. The Company maintains an allowance for potential credit
losses but historically has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area.
(m) FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash and cash equivalents, short-term investments,
accounts receivable and installments receivable. The estimated fair value of
these financial instruments approximates their carrying value and, except for
accounts receivable and installments receivable, is based primarily on market
quotes.
(n) INTANGIBLE ASSETS
Intangible assets consist of goodwill, existing products, trade names and
assembled work force of certain acquired entities. Intangible assets are being
amortized on a straight-line basis over estimated useful lives of five to twelve
years. At each balance sheet date, the Company evaluates the realizability of
intangible assets based on profitability and cash flow expectations for the
related asset or subsidiary. Based on its most recent analysis, the Company
believes that no impairment of intangible assets exists at March 31, 1998.
Goodwill (net of accumulated amortization) was approximately $4,497,000 at March
31, 1998. Amortization of goodwill was approximately $40,000, $279,000 and
$337,000 for the years ended June 30, 1996 and 1997 and the nine months ended
March 31, 1998, respectively.
(o) NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to disclose similar prior period information upon adoption.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires
computer software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met. SOP 98-1
is effective beginning January 1, 1999. The Company does not expect adoption of
this statement to have a material impact on its consolidated financial position
or results of operations.
(3) ACQUISITIONS
(a) DYNAMIC MATRIX CONTROL CORPORATION (DMCC) AND SETPOINT, INC. (SETPOINT)
During the quarter ended March 31, 1996, the Company acquired 100% of the
outstanding shares of common stock of DMCC and Setpoint for purchase prices of
$20,139,000 and
F-13
54
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$27,780,000, respectively, in cash and the assumption of certain expenses
related to the acquisitions. DMCC and Setpoint were suppliers of on-line
automation and information management software and services to companies in
process manufacturing industries.
These acquisitions were accounted for as purchase transactions, and
accordingly, their results of operations from the date of acquisitions forward
are included in the Company's consolidated statements of operations. The fair
market value of assets acquired and liabilities assumed was based on an
independent appraisal. The portion of the purchase price allocated to in-process
research and development represents projects that had not yet reached
technological feasibility and had no alternative future. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed as
follows (in thousands):
DESCRIPTION DMCC SETPOINT LIFE
----------- ---- -------- ----
Purchased in-process research and
development............................... $ 9,521 $14,900 --
Existing technology......................... 1,740 3,308 5 years
Other intangibles........................... 1,066 1,709 5-10 years
Building.................................... 627 -- 30 years
Goodwill.................................... -- 1,418 10 years
Uncompleted contracts....................... 596 504 Life of contracts
------- -------
13,550 21,839
Net book value of tangible assets acquired,
less liabilities assumed.................. 8,080 7,984
------- -------
21,630 29,823
Less -- Deferred taxes...................... 1,491 2,043
------- -------
$20,139 $27,780
======= =======
For tax purposes, these acquisitions were accounted for as purchases of
stock, and due to the different basis in assets for book and tax purposes,
deferred taxes were provided for as part of the purchase price allocation in
accordance with SFAS No. 109.
(b) ACQUISITIONS DURING FISCAL YEAR 1997
During fiscal year 1997, the Company acquired B-JAC International, Inc.
(B-JAC), the Process Control Division of Cambridge Control Limited (the
Cambridge Control Division), the PIMS Division of Bechtel Corporation and Basil
Joffe Associates, Inc.
The Company exchanged 104,162 shares of its common stock valued at
approximately $3,400,000 for all outstanding shares of B-JAC, a major supplier
of detailed heat exchanger modeling software. The acquisition has been accounted
for as a pooling of interests and as a result of its immateriality as compared
to the Company's financial position and results of operations, the historical
financial statements were not restated.
The Company's acquisitions of the Cambridge Control Division, the PIMS
Division and Basil Joffe Associates, Inc. were all accounted for as purchase
transactions. Total purchase price for these acquisitions was approximately
$12,217,000 plus approximately $3,011,000 in assumed liabilities and acquisition
related costs. The Cambridge Control Division specialized in advanced process
control solutions, specifically aimed toward process manufacturing controls
applications for the refining, petrochemical and pulp and paper industries. The
PIMS Division and a related software development organization, Basil Joffe
Associates, Inc., developed and sold proprietary PIMS
F-14
55
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
software used by companies in process industries for economic planning and
scheduling based on linear programming models.
The results of operations of these companies from the dates of acquisition
forward are included in the Company's consolidated statements of operations. The
fair market value of assets acquired and liabilities assumed was based on an
independent appraisal. The portion of the purchase price allocated to in-process
research and development represents projects that had not yet reached
technological feasibility and had no alternative future use. The purchase price
was allocated to the fair value of assets acquired and liabilities assumed as
follows (in thousands):
DESCRIPTION AMOUNT LIFE
----------- ------ ----
Purchased in-process research and development............... $ 8,664 --
Existing technology......................................... 600 5 years
Goodwill.................................................... 2,744 10 years
Intangible assets........................................... 2,786 5-12 years
-------
14,794
Net book value of tangible assets acquired, less liabilities
assumed................................................... (2,429)
-------
12,365
Less -- Deferred taxes...................................... 148
-------
$12,217
=======
(c) ACQUISITIONS DURING THE FIRST THREE QUARTERS OF FISCAL YEAR 1998
During the first three quarters of fiscal year 1998, the Company acquired
100% of the outstanding shares of NeuralWare, Inc., The SAST Corporation
Limited, Cimtech S.A./N.V., Contas Process Control S.r.L. and Zyqad Limited. The
Company exchanged 626,443 shares of its common stock and paid approximately
$841,000 in cash for all outstanding shares of the acquired companies. These
acquisitions were accounted for as poolings of interests, and none of them were
material to the Company's financial position or results of operations.
Accordingly, the historical financial statements of the Company have not been
restated.
Additionally, the Company acquired 100% of the outstanding shares of IISYS,
Inc. for an aggregate purchase price of approximately $8,400,000 in cash and the
assumption of approximately $1,600,000 in debt. For financial statement
purposes, this acquisition was accounted for as a purchase, and accordingly, the
results of operations from the date of acquisition are included in the Company's
consolidated statements of operations. The fair market value of assets acquired
and liabilities assumed was based on an independent appraisal. The portion of
the purchase allocated to in-process research and development represents
projects that had not yet reached technological
F-15
56
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
feasibility and had no alternative future use. The purchase price was allocated
to the fair market value of assets acquired and liabilities as follows (in
thousands):
DESCRIPTION AMOUNT LIFE
----------- ------ ----
Purchased in-process research and development............... $ 8,472 --
Existing technology......................................... 2,178 5 years
Intangible assets........................................... 392 5 years
-------
11,042
Net book value of tangible assets acquired, less liabilities
assumed................................................... (321)
-------
10,721
Less -- Deferred taxes...................................... 800
-------
$ 9,921
=======
(d) SUBSEQUENT ACQUISITION
On May 29, 1998, the Company acquired 100% of the outstanding shares of
Treiber Controls Inc. (Treiber). The Company exchanged 140,000 shares of its
common stock for all outstanding shares of Treiber. Treiber specializes in
advanced process control and optimization solutions, specifically in petroleum
refining, petrochemical and chemical industries. The Company intends to account
for this acquisition as a pooling of interests. The Company expects this
transaction will be immaterial to the Company's financial position and results
of operations and accordingly the historical financial statements will not be
restated.
(e) UNAUDITED PRO FORMA COMBINED RESULTS
The following table represents selected unaudited pro forma combined
financial information for the Company, DMCC and Setpoint, assuming the companies
had combined at the beginning of fiscal 1995 (in thousands, except per share
data):
YEAR ENDED
--------------------
JUNE 30, JUNE 30,
1995 1996(1)
-------- --------
Pro forma revenue........................................... $114,730 $142,668
Pro forma net income........................................ $ 4,243 $ 8,599
Pro forma net income per share -- diluted................... $ 0.27 $ 0.50
Pro forma weighted average shares outstanding -- diluted.... 15,562 17,298
- ---------------
(1) Does not reflect the charge for in-process research and development and
nonrecurring acquisition charges.
Pro forma results are not necessarily indicative of either actual results
of operations that would have occurred had the acquisitions been made at the
beginning of fiscal 1995 or of future results. The pro forma effect of the
acquisitions during fiscal year 1997 and 1998, except for CDI (see Note 18), has
not been presented, as they are immaterial.
(4) LINE OF CREDIT
The Company has a revolving line-of-credit agreement with a bank, which
provides for borrowings up to $30,000,000, subject to existing limitations. The
commitment fee for the unused portion of the revolving line of credit ranges
from .25% to .50%, based on the financial position of the
F-16
57
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, as defined, and is payable quarterly. At the Company's election,
borrowings bear interest on the basis of the applicable LIBOR, as defined (5.69%
as of March 31, 1998), or at the bank's prime rate (8.5% as of March 31, 1998).
The line is subject to certain covenants, including profitability and operating
ratios, as defined. As of March 31, 1998, no amounts were outstanding under this
line and approximately $29,359,000 was available for future borrowings, as
approximately $641,000 was reserved for certain performance bonds relating to
service contracts. The line of credit expires on December 31, 1998.
(5) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1996 and 1997
and March 31, 1998 (in thousands):
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
-------- -------- ---------
Credit arrangement of subsidiary with a bank........... $ -- $ -- 1,540
Mortgage payable due in annual installments of
approximately $101,000............................... -- -- 1,279
Non-interest bearing note payable due in annual
installments of approximately $67,000................ -- -- 1,000
Convertible Debenture due in 2000, interest is payable
at an annual rate of 6%. This note is convertible
into approximately 7,500 shares of the Company's
common stock at the option of the holder............. -- -- 393
Note payable due in annual installments of $125,000
plus interest at 9.5% per year....................... 671 547 454
Other obligations...................................... 460 203 230
------ ------ ------
1,131 750 4,896
Less -- Current maturities............................. 425 288 1,581
------ ------ ------
$ 706 $ 462 $3,315
====== ====== ======
Maturities of these long-term obligations are as follows (in thousands):
AMOUNT
------
Years Ending June 30,
1998.................................................... $1,618
1999.................................................... 618
2000.................................................... 409
2001.................................................... 474
2002.................................................... 379
Thereafter.............................................. 1,519
------
5,017
Less -- Amount representing interest.................... 121
-- Current maturities............................. 1,581
------
$3,315
======
F-17
58
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) SUBORDINATED NOTES PAYABLE TO A RELATED PARTY
At June 30, 1995, the Company had $4,000,000 of outstanding subordinated
notes payable to an outside investor, of which a director of the Company is an
officer. The notes were repayable $2,000,000 on April 30, 1997 and $2,000,000 on
April 30, 1998, with interest at 9.6%, payable quarterly.
In December 1995 and June 1996, the lender exercised warrants to purchase
77,500 and 60,000 shares of common stock, respectively. The total proceeds due
to the Company relating to the exercise of the warrants of $550,000 were
recognized as a reduction of principal on the notes. The Company paid the
remaining balance of $3,450,000 on June 27, 1996.
(7) PREFERRED STOCK
The Company's Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue, from time to
time, up to an aggregate of 10,000,000 shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges, which may include, among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences and
conversion rights, as shall be determined by the Board of Directors in a
resolution or resolutions providing for the issuance of such series. Any such
series of preferred stock, if so determined by the Board of Directors, may have
full voting rights with the common stock or superior or limited voting rights
and may be convertible into common stock or another security of the Company.
(8) COMMON STOCK
(a) AUTHORIZED AND OUTSTANDING SHARES
On November 11, 1996, the Company increased its authorized shares of $.10
par value common stock from 30,000,000 to 40,000,000. On February 14, 1997, the
Company effected a two for one stock split through the issuance of a stock
dividend. All share and per share amounts affected by this split have been
retroactively adjusted for all periods presented.
(b) WARRANTS
During fiscal 1990, the Company issued warrants to purchase 255,000 shares
of common stock to the holder of the subordinated notes payable to a related
party (see Note 6). In February 1995, warrants to purchase 100,000 shares were
exercised and sold as part of the Company's second public offering of stock. The
remaining warrants to purchase 155,000 shares of common stock were exercised in
December 1995. During 1991, the Company issued an additional warrant to purchase
120,000 shares of common stock to the holder of the subordinated notes payable
(see Note 6). These warrants were exercised in June 1996.
During fiscal 1992, the Company issued warrants to purchase 60,000 shares
of common stock to a research consultant at an exercise price of $3.34 per
share. In February 1995, warrants to purchase 27,000 shares were exercised and
sold as part of the Company's offering of common stock. In 1996, warrants to
purchase 1,150 shares were exercised. In 1997, warrants to purchase 5,700 shares
were exercised and warrants to purchase 774 shares were terminated. In the nine
month period ended March 31, 1998, warrants to purchase 3,513 shares were
exercised and warrants to purchase 283 shares were terminated. The remaining
warrants to purchase 21,580 shares of common stock are exercisable through June
30, 2001.
F-18
59
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1993, the Company issued warrants to purchase 12,000 shares
of common stock to two research consultants at an exercise price of $2.67 per
share. In 1997, warrants to purchase 2,250 shares were exercised. In the nine
month period ended March 31, 1998, warrants to purchase 750 shares were
exercised. The remaining warrants to purchase 9,000 shares of common stock are
currently exercisable and expire June 10, 1998.
In connection with the August 1997 acquisition of NeuralWare, Inc., the
Company converted warrants and options to purchase NeuralWare common stock into
warrants and options to purchase 10,980 and 6,618 shares of the Company's common
stock, respectively, of which 13,290 shares are currently exercisable and the
remainder vest over three years. The warrants have exercise prices that range
between $61.73 and $135.80 per share.
(c) STOCK OPTIONS
In July 1987 and August 1988, the Company entered into stock option
agreements covering 120,000 shares of common stock. The purchase price under the
options is $0.93 to $1.05 based on the fair market value of the common stock on
the date of grant. In fiscal 1995, options covering 90,000 shares of common
stock at $1.05 per share were exercised. During fiscal 1997, options covering
the remaining 30,000 shares of common stock at an exercise price of $0.93 were
exercised.
Prior to November 1995, options were granted under the 1988 Nonqualified
Stock Option Plan (the 1988 Plan), which provided for the issuance of
nonqualified stock options. In November 1995, the Board of Directors approved
the establishment of the 1995 Stock Option Plan (the 1995 Plan) and the 1995
Directors Stock Option Plan (the 1995 Directors Plan), which provided for the
issuance of incentive stock options and nonqualified options. Under these plans,
the Board of Directors may grant stock options to purchase up to an aggregate of
3,827,687 (as adjusted) shares of common stock. Shares available for grant under
these plans were increased on July 1, 1996 and 1997 by an amount equal to 5% of
the outstanding shares as of the preceding June 30. As a result of the adoption
of the 1995 Plan, no additional options may be granted pursuant to the 1988
Plan. In December 1997, the shareholders approved an amendment to the 1995 Plan.
The amendment provides for three annual increases to the number of shares for
which options may be granted, beginning July 1, 1999, by an amount equal to 5%
of the outstanding shares on the preceding June 30. In December 1996, the
shareholders of the Company approved the establishment of the 1996 Special Stock
Option Plan (the 1996 Plan). This plan provides for the issuance of incentive
stock options and nonqualified options to purchase up to 500,000 shares of
common stock. The exercise price of options are granted at a price not less than
100% of the fair market value of the common stock on the date of grant. Stock
options become exercisable over varying periods and expire no later than 10
years from the date of grant.
The following is a summary of stock option activity under the 1988 Plan,
the 1995 Plan, the 1995 Directors Plan and the 1996 Plan:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding, June 30, 1994................................ 1,912,876 $ 2.13
Options granted......................................... 270,000 8.45
Options exercised....................................... (357,368) 2.22
Options terminated...................................... (145,336) 2.16
--------- ------
F-19
60
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding, June 30, 1995................................ 1,680,172 3.12
Options granted......................................... 1,772,000 17.08
Options exercised....................................... (460,114) 1.90
Options terminated...................................... (51,300) 10.04
--------- ------
Outstanding, June 30, 1996................................ 2,940,758 11.65
Options granted......................................... 680,000 31.30
Options exercised....................................... (484,205) 8.21
Options terminated...................................... (157,616) 16.61
--------- ------
Outstanding, June 30, 1997................................ 2,978,937 16.44
Options granted......................................... 2,014,637 30.02
Options exercised....................................... (329,679) 12.55
Options terminated...................................... (71,714) 16.10
--------- ------
Outstanding, March 31, 1998............................... 4,592,181 $22.66
========= ======
As of March 31, 1998, there were 166,144 and 78,500 shares of common stock
available for grant under the 1995 and 1996 plans, respectively.
In connection with the 1995 acquisition of Industrial Systems, Inc. (ISI),
the Company assumed the ISI option plan (the ISI Plan). Under the ISI Plan, the
Board of Directors of ISI was entitled to grant either incentive or nonqualified
stock options for a maximum of 197,548 shares of common stock (as converted to
reflect the pooling of interests and conversion to options to purchase Aspen
common stock) to eligible employees, as defined.
Activity under the ISI Plan is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Outstanding, June 30, 1994.................................. 131,174 $ .45
Exercised................................................. (105,094) .38
-------- -----
Outstanding, June 30, 1995.................................. 26,080 .76
Exercised................................................. (13,040) .25
-------- -----
Outstanding, June 30, 1996.................................. 13,040 1.26
Exercised................................................. (13,040) 1.26
-------- -----
Outstanding, June 30, 1997.................................. -- $ --
======== =====
No future grants are available under the ISI Plan.
F-20
61
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information about stock options outstanding
and exercisable at March 31, 1998:
WEIGHTED
OPTIONS AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
AT MARCH 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE
------------------------ ------------ ----------- --------
$ 1.05.......................................... 158,898 2.2 $ 1.05
1.83-2.66..................................... 197,588 3.8 2.64
3.33-4.00..................................... 246,764 6.1 3.42
8.06-10.25.................................... 80,700 7.0 9.97
13.12-19.12.................................... 1,202,163 7.7 16.43
25.00-32.50.................................... 2,387,568 8.9 29.33
38.00-40.18.................................... 318,500 9.3 37.48
--------- ------
4,592,181 $22.66
========= ======
OPTIONS WEIGHTED
EXERCISABLE AVERAGE
AT MARCH 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 PRICE
------------------------ ------------ --------
$ 1.05...................................................... 158,898 $ 1.05
1.83-2.66................................................. 197,588 2.64
3.33-4.00................................................. 240,764 3.40
8.50-10.25................................................ 38,700 9.84
13.62-19.12................................................ 505,142 16.29
25.00-32.50................................................ 556,915 29.65
38.00...................................................... 43,256 38.00
--------- ------
Exercisable, March 31, 1998................................. 1,741,263 $16.24
========= ======
Exercisable, June 30, 1997.................................. 1,160,258 $ 9.47
========= ======
Exercisable, June 30, 1996.................................. 962,990 $ 4.58
========= ======
Exercisable, June 30, 1995.................................. 1,046,572 $ 2.07
========= ======
(d) FAIR VALUE OF STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of income or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the
disclosure-only alternative under SFAS No. 123.
F-21
62
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's option plan been determined based
on the fair value at the grant dates, as prescribed in SFAS No. 123, the
Company's net income (loss) (in thousands) and net income (loss) per share would
have been as follows:
1996 1997
---- ----
Net (loss) income (in thousands) --
As reported....................................... $(15,185) $13,155
Pro forma......................................... (16,421) 8,474
Net(loss) income per share --
Diluted --
As reported.................................... $ (0.96) $ 0.63
Pro forma...................................... (1.04) 0.42
Basic --
As reported.................................... $ (0.96) $ 0.67
Pro forma...................................... (1.04) 0.43
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: no dividend yield and volatility of 58% for
all periods; risk-free interest rates of 5.54% to 6.83% for options granted
during fiscal 1996 and 6.42% to 6.76% for options granted during fiscal 1997;
and a weighted average expected option term of 7.5 years for all periods. The
weighted average fair value per share of options granted during 1996 and 1997
was $12.83 and $23.49, respectively.
(e) EMPLOYEE STOCK PURCHASE PLANS
In February 1986, the Company's Board of Directors approved the 1986
Employees' Stock Purchase Plan, under which the Board of Directors could grant
stock purchase rights for a maximum of 1,1400,000 shares through November 1995.
In December 1995, the Company's Board of Directors approved the 1995 Employees'
Stock Purchase Plan, under which the Board of Directors may grant stock purchase
rights for a maximum of 500,000 shares through November 2005. In October 1997,
the Company's Board of Directors approved the 1998 Employee Stock Purchase Plan,
under which the Board of Directors may grant stock purchase rights for a maximum
of 1,000,000 shares through September 30, 2007.
Participants are granted options to purchase shares of common stock on the
last business day of each semiannual payment period for 85% of the market price
of the common stock on the first or last business day of such payment period,
whichever is less. The purchase price for such shares is paid through payroll
deductions, and the current maximum allowable payroll deduction is 10% of each
eligible employee's compensation. Under the plans, the Company issued 72,064
shares, 50,220 shares, 81,586 shares and 127,547 shares during fiscal 1995, 1996
and 1997 and the nine months ended March 31, 1998, respectively. As of March 31,
1998, there were 1,000,000 shares available for future issuance under the 1998
Employee Stock Purchase Plan. No shares of common stock were available for
future issuance under the 1986 Employee Stock Purchase Plan or the 1995
Employees' Stock Purchase Plan.
(f) STOCKHOLDER RIGHTS PLAN
During fiscal 1998, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Rights Plan") and distributed one Right for
each outstanding share of Common Stock. The Rights were issued to holders of
record of Common Stock outstanding on March 12, 1998. Each share of Common Stock
issued after March 12, 1998 will also include one Right, subject
F-22
63
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to certain limitations. Each Right when it becomes exercisable will initially
entitle the registered holder to purchase from the Company one one-hundredth
(1/100th) of a share of Series A Preferred Stock at a price of $175.00 (the
"Purchase Price").
The Rights will become exercisable and separately transferable when the
Company learns that any person or group has acquired beneficial ownership of 15%
or more of the outstanding Common Stock or on such other date as may be
designated by the Board of Directors following the commencement of, or first
public disclosure of an intent to commence, a tender or exchange offer for
outstanding Common Stock that could result in the offeror becoming the
beneficial owner of 15% or more of the outstanding Common Stock. In such
circumstances, holders of the Rights will be entitled to purchase, for the
Purchase Price, a number of hundredths of a share of Series A Preferred Stock
equivalent to the number of shares of Common Stock (or, in certain
circumstances, other equity securities) having a market value of twice the
Purchase Price. Beneficial holders of 15% or more of the outstanding Common
Stock, however, would not be entitled to exercise their Rights in such
circumstances. As a result, their voting and equity interests in the Company
would be substantially diluted if the Rights were to be exercised.
The Rights expire in March 2008, but may be redeemed earlier by the Company
at a price of $.01 per Right, in accordance with the provisions of the Rights
Plan.
(9) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is measured based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates.
The provisions for income taxes shown in the accompanying consolidated
statements of operations are composed of the following (in thousands):
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
---- ---- ----
Federal --
Current.............................................. $1,132 $4,512 $6,550
Deferred............................................. 1,949 (295) 1,232
State --
Current.............................................. -- 892 901
Deferred............................................. 485 -- 224
Foreign --
Current.............................................. 159 505 692
------ ------ ------
$3,725 $5,614 $9,599
====== ====== ======
F-23
64
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the federal statutory rate due
to the following:
YEARS ENDED JUNE 30,
--------------------------
1995 1996(1) 1997(1)
---- ------- -------
Federal tax at statutory rate............................ 34.0% 35.0% 35.0%
State income tax, net of federal tax benefit............. 5.3 5.0 5.2
Foreign tax.............................................. (4.1) 2.4 (1.8)
Tax credits generated.................................... (2.5) (8.2) (4.2)
Permanent differences, net............................... 5.6 4.3 2.6
Valuation allowance and other............................ 2.5 (.7) (.9)
---- ---- ----
Provision for income taxes.......................... 40.8% 37.8% 35.9%
==== ==== ====
- ---------------
(1) Calculated based on pretax income, before nondeductible charges for
in-process research and development, of $14,850,000 and $26,704,000 for 1996
and 1997, respectively.
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
JUNE 30,
--------------------
1996 1997
---- ----
Deferred tax assets.................................. $ 7,418 $ 6,260
Deferred tax liabilities............................. (15,189) (14,000)
-------- --------
(7,771) (7,740)
Valuation allowance.................................. (1,425) --
-------- --------
$ (9,196) $ (7,740)
======== ========
The approximate tax effect of each type of temporary difference and
carryforwards is as follows (in thousands):
JUNE 30,
------------------
1996 1997
---- ----
Revenue related........................................ $(6,974) $(7,665)
Foreign operating losses............................... 1,425 1,063
Nondeductible reserves and accruals.................... 1,523 1,034
Intangible assets...................................... (3,819) (2,241)
Other temporary differences............................ 74 69
------- -------
$(7,771) $(7,740)
======= =======
The decrease in valuation allowance during 1997 resulted from the
utilization of previously reserved tax assets. The foreign operating loss
carryforwards expire at various dates through 2011.
(10) OPERATING LEASES
The Company leases its facilities and various office equipment under
noncancelable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $2,227,000, $3,346,000, $5,015,000,
$3,761,000 and $4,668,000 for the years ended June 30, 1995, 1996 and 1997 and
the nine months ended March 31, 1997 and 1998, respectively.
F-24
65
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under these leases as of June 30, 1997 are as
follows (in thousands):
AMOUNT
------
Year Ending June 30, 1998................................. $ 4,266
1999.................................................... 3,865
2000.................................................... 3,704
2001.................................................... 3,390
2002.................................................... 3,379
Thereafter.............................................. 3,954
-------
$22,558
=======
(11) SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $28,895,000, $30,210,000 and
$44,063,000 during fiscal 1996 and 1997 and the nine months ended March 31,
1998, respectively. The financial institutions have partial recourse to the
Company only upon nonpayment by the customer under the installments receivable.
The amount of recourse is determined pursuant to the provisions of the Company's
contracts with the financial institutions and varies depending on whether the
customers under the installment contracts are foreign or domestic entities.
Collections of these receivables reduce the Company's recourse obligation, as
defined. The Company records these transactions as sales of financial assets in
accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as it surrenders control to
these receivables upon transfer.
At March 31, 1998, the balance of the uncollected principal portion of the
contracts sold with partial recourse was approximately $87,659,000. The
Company's potential recourse obligations related to these contracts is
approximately $5,000,000. In addition, the Company is obligated to pay
additional costs to the financial institutions in the event of default by the
customer.
(12) COMMITMENTS
The Company has entered into agreements with six executive officers
providing for the payment of cash and other benefits in certain events of their
voluntary or involuntary termination within three years following a change in
control. Payment under these agreements would consist of a lump sum equal to
approximately three years of each executive's annual taxable compensation. The
agreements also provide that the payment would be increased in the event that it
would subject the officer to excise tax as a parachute payment under the federal
tax code. The increase would be equal to the additional tax liability imposed on
the executive as a result of the payment.
(13) RETIREMENT PLAN
The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all eligible employees, as defined.
Under the plan, a participant may elect to defer receipt of a stated percentage
of his or her compensation, subject to limitation under the Internal Revenue
Code, which would otherwise be payable to the participant for any plan year. The
Company may make discretionary contributions to this plan. No such contributions
were made during 1995 or 1996. During 1997, the plan was modified to provide,
among other changes, for the Company to make matching contributions equal to 25%
of pretax employee contributions up to a maximum of 6% of an employee's salary.
During the fiscal year ended June 30, 1997 and the nine
F-25
66
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended March 31, 1997 and 1998, the Company made matching contributions of
approximately $385,000, $175,000 and $598,000, respectively.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions.
(14) JOINT VENTURES
In May 1993, the Company entered into an Equity Joint Venture agreement
with China Petrochemical Technology Company to form a limited liability company
governed by the laws of the People's Republic of China. This company has the
nonexclusive right to distribute the Company's products within the People's
Republic of China. The Company invested $300,000 on August 6, 1993, which
represents a 30% equity interest in the joint venture.
In November 1993, the Company invested approximately $100,000 in a
Cyprus-based corporate joint venture, representing approximately a 14% equity
interest. The Company had a two-year option to purchase additional shares in the
joint venture corporation, which would increase its equity interest to 22.5%. In
December 1995, the Company exercised its option to acquire these additional
shares for approximately $125,000.
The Company is accounting for these investments using the equity method.
The net investments are included in other assets in the accompanying
consolidated balance sheets. In the accompanying consolidated statements of
operations for the years ended June 30, 1995, 1996 and 1997 and the nine months
ended March 31, 1997 and 1998, the Company has recognized approximately $22,000,
$10,000, $26,000, $0 and $45,000, respectively, as its portion of the income
from these joint ventures.
(15) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following (in thousands):
JUNE 30,
------------------ MARCH 31,
1996 1997 1998
---- ---- ---------
Income taxes................................ $ 2,728 $ 6,711 $ 9,172
Payroll and payroll-related................. 4,743 3,302 4,930
Royalties and outside commissions........... 4,149 2,051 2,291
Other....................................... 4,392 4,508 4,394
------- ------- -------
$16,012 $16,572 $20,787
======= ======= =======
(16) RELATED PARTY TRANSACTION
Smart Finance & Co., a company of which a director of the Company is the
President, provides advisory services to the Company from time to time. In
fiscal 1996 and 1997 and the nine months ended March 31, 1998, payments of
approximately $72,000, $222,000 and $43,000, respectively, were made by the
Company to Smart Finance & Co. as compensation for services rendered.
F-26
67
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and export sales as a percentage of total revenues are as follows:
NINE MONTHS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
United States........................... 48.1% 54.6% 47.7% 49.3% 52.3%
Europe.................................. 30.6 26.7 32.4 25.1 29.1
Japan................................... 12.3 9.6 9.2 16.3 11.4
Other................................... 9.0 9.1 10.7 9.3 7.2
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Revenues, income (loss) from operations and identifiable assets for the
Company's United States, European and Asian operations are as follows (in
thousands). The Company has intercompany distribution arrangements with its
subsidiaries. The basis for these arrangements, disclosed below as transfers
between geographic locations, is cost plus a specified percentage for services
and a commission rate for sales generated in the geographic region.
UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------- ------ ---- ------------ ------------
Year ended June 30, 1995 --
Revenues..................... $ 56,951 $ 547 $ -- $ -- $ 57,498
Transfers between geographic
locations................. -- 10,912 4,463 (15,375) --
-------- ------- ------ -------- --------
Total revenues....... $ 56,951 $11,459 $4,463 $(15,375) $ 57,498
======== ======= ====== ======== ========
Income from operations......... $ 5,126 $ 1,112 $ 313 $ -- $ 6,551
======== ======= ====== ======== ========
Identifiable assets............ $ 71,143 $ 4,087 $ 416 $ 51 $ 75,697
======== ======= ====== ======== ========
Year ended June 30, 1996 --
Revenues..................... $100,958 $ 2,643 $ 8 $ -- $103,609
Transfers between geographic
locations................. -- 13,474 4,645 (18,119) --
-------- ------- ------ -------- --------
Total revenues....... $100,958 $16,117 $4,653 $(18,119) $103,609
======== ======= ====== ======== ========
Income (loss) from
operations................... $(11,449) $ (267) $ 15 $ -- $(11,701)
======== ======= ====== ======== ========
Identifiable assets............ $183,550 $11,172 $ 414 $(45,948) $149,188
======== ======= ====== ======== ========
Year ended June 30, 1997 --
Revenues..................... $171,644 $ 8,611 $ 44 $ -- $180,299
Transfers between geographic
locations................. -- 22,812 8,099 (30,911) --
-------- ------- ------ -------- --------
Total revenues....... $171,644 $31,423 $8,143 $(30,911) $180,299
======== ======= ====== ======== ========
Income from operations......... $ 14,620 $ 2,578 $ 594 $ -- $ 17,792
======== ======= ====== ======== ========
Identifiable assets............ $221,544 $ 7,094 $1,191 $(53,391) $176,438
======== ======= ====== ======== ========
F-27
68
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) SUBSEQUENT EVENT
On May 27, 1998, the Company acquired CDI, a provider of software and
services for the supply chain management market. The Company exchanged 2,961,959
shares of its common stock for all the outstanding shares of CDI common stock.
The acquisition will be accounted for as a pooling of interests. Accordingly,
the consolidated financial statements of the Company will be restated to give
retroactive effect to the combination with CDI. The Company expects to incur
approximately $4.0 million of expenses related to this acquisition, which will
be charged to operations in the quarter ending June 30, 1998.
The following information details the results of operations of the Company
and CDI for the periods before the pooling of interests combination was
consummated:
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Revenue --
The Company.................... $57,498 $103,609 $180,299 $127,045 $164,481
CDI............................ 8,521 11,209 13,771 10,554 13,563
------- -------- -------- -------- --------
Combined....................... $66,019 $114,818 $194,070 $137,599 $178,044
======= ======== ======== ======== ========
Net income (loss) --
The Company.................... $ 5,416 $(15,185) $ 13,155 $ 5,076 $ 8,497
CDI............................ 1,693 798 1,046 1,180 1,447
------- -------- -------- -------- --------
Combined....................... $ 7,109 $(14,387) $ 14,201 $ 6,256 $ 9,944
======= ======== ======== ======== ========
Net income (loss) per share --
Diluted --
The Company.................... $ 0.35 $ (0.96) $ 0.63 $ 0.24 $ 0.39
======= ======== ======== ======== ========
CDI............................ $ 1.09 $ 0.51 $ 0.60 $ 0.71 $ 0.59
======= ======== ======== ======== ========
Combined....................... $ 0.42 $ (0.83) $ 0.63 $ 0.28 $ 0.41
======= ======== ======== ======== ========
Net income (loss) per share --
Basic --
The Company.................... $ 0.39 $ (0.96) $ 0.67 $ 0.26 $ 0.41
======= ======== ======== ======== ========
CDI............................ $ 1.09 $ 0.51 $ 0.60 $ 0.71 $ 0.59
======= ======== ======== ======== ========
Combined....................... $ 0.46 $ (0.83) $ 0.66 $ 0.30 $ 0.43
======= ======== ======== ======== ========
F-28
69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
To Aspen Technology, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Aspen Technology, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1996 and 1997, and the related supplemental consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1997. The supplemental consolidated statements give
retroactive effect to the merger with Chesapeake Decision Sciences, Inc. and
subsidiaries (CDI) on May 27, 1998, which has been accounted for as a pooling of
interests as described in Note 1. These supplemental financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the supplemental financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the supplemental 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, based upon our audit, the supplemental consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Aspen Technology, Inc. and subsidiaries as of June 30,
1996 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1997, after giving retroactive
effect to the merger with CDI as described in Note 1, all in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 29, 1998
F-29
70
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,773 $ 18,284 $ 25,546
Short-term investments............................... 38,821 16,622 9,172
Accounts receivable, net of reserves of $731 in 1996,
$840 in 1997 and $1,429 in 1998................... 41,217 46,997 59,751
Unbilled services.................................... 7,634 12,444 18,282
Current portion of long-term installments receivable,
net of unamortized discount of $930 in 1996, $815
in 1997 and $977 in 1998.......................... 12,068 19,063 21,447
Prepaid expenses and other current assets............ 4,181 8,876 9,590
-------- -------- --------
Total current assets......................... 118,694 122,286 143,788
-------- -------- --------
Long-term installments receivable, net of unamortized
discount of $5,027 in 1996, $7,386 in 1997 and $6,438
in 1998.............................................. 17,708 30,963 29,698
-------- -------- --------
Property and leasehold improvements, at cost:
Land................................................. 350 664 728
Building and improvements............................ 5,000 6,499 8,749
Computer equipment................................... 18,813 24,774 31,938
Purchased software................................... 3,056 9,934 14,983
Furniture and fixtures............................... 3,833 7,941 9,402
Leasehold improvements............................... 698 2,618 4,505
-------- -------- --------
31,750 52,430 70,305
Less -- Accumulated depreciation and amortization...... 12,961 21,271 30,315
-------- -------- --------
18,789 31,159 39,990
-------- -------- --------
Computer software development costs, net of accumulated
amortization of $3,908 in 1996, $5,051 in 1997 and
$5,832 in 1998....................................... 1,817 3,058 5,272
-------- -------- --------
Land................................................... 925 925 925
-------- -------- --------
Intangible assets, net of accumulated amortization of
$819 in 1996, $3,347 in 1997 and $5,352 in 1998...... 9,129 12,768 13,574
-------- -------- --------
Other assets........................................... 1,924 2,386 2,841
-------- -------- --------
$168,986 $203,545 $236,088
======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
F-30
71
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations............. $ 425 $ 288 $ 1,581
Accounts payable..................................... 6,584 7,442 5,541
Accrued expenses..................................... 16,417 17,968 21,803
Unearned revenue..................................... 8,967 4,294 4,822
Deferred revenue..................................... 10,943 16,730 21,861
Deferred income taxes................................ 2,798 1,775 5,486
-------- -------- --------
Total current liabilities.................... 46,134 48,497 61,094
-------- -------- --------
Long-term obligations, less current portion............ 706 462 3,315
-------- -------- --------
Deferred revenue, less current portion................. 8,279 9,441 10,068
-------- -------- --------
Other liabilities...................................... 1,757 942 741
-------- -------- --------
Deferred income taxes.................................. 7,633 6,789 9,893
-------- -------- --------
Commitments and contingencies (Notes 10, 11 and 12)
Stockholders' equity:
Common stock, $.10 par value --
Authorized -- 40,000,000 shares
Issued -- 20,758,343 shares, 22,342,399 shares and
24,404,639 shares in 1996, 1997 and 1998,
respectively.................................... 2,076 2,235 2,440
Additional paid-in capital........................... 110,388 128,344 138,466
Retained earnings (Accumulated deficit).............. (7,121) 7,607 10,695
Cumulative translation adjustment.................... (362) (261) (100)
Treasury stock, at cost -- 230,396 shares, 230,330
shares and 230,330 shares of common stock in 1996,
1997 and 1998, respectively....................... (502) (502) (502)
Unrealized gain (loss) on investments................ (2) (9) (22)
-------- -------- --------
Total stockholders' equity................... 104,477 137,414 150,977
-------- -------- --------
$168,986 $203,545 $236,088
======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
F-31
72
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Revenues:
Software licenses..................... $49,479 $ 70,199 $103,179 $ 71,741 $ 95,544
Service and other..................... 16,540 44,619 90,891 65,858 82,500
------- -------- -------- -------- --------
66,019 114,818 194,070 137,599 178,044
------- -------- -------- -------- --------
Expenses:
Cost of software licenses............. 3,080 3,992 5,539 4,090 4,964
Cost of service and other............. 10,052 27,220 54,006 39,315 48,342
Selling and marketing................. 24,276 36,610 56,034 40,223 52,683
Research and development.............. 12,652 22,310 33,580 23,686 31,519
General and administrative............ 5,679 10,715 17,072 12,854 14,650
Charge for in-process research and
development........................ -- 24,421 8,664 8,664 8,472
Costs related to acquisition.......... 950 -- -- -- 984
------- -------- -------- -------- --------
56,689 125,268 174,895 128,832 161,614
------- -------- -------- -------- --------
Income (loss) from operations...... 9,330 (10,450) 19,175 8,767 16,430
Foreign currency exchange gain (loss)... 34 (223) (236) (110) (365)
Income on equity in joint ventures...... 22 10 26 -- 45
Interest income......................... 3,138 3,745 5,556 3,984 4,305
Interest expense on subordinated notes
payable to a related party............ (369) (377) -- -- --
Other interest expense.................. (192) (946) (151) (117) (147)
------- -------- -------- -------- --------
Income (loss) before provision for
income taxes..................... 11,963 (8,241) 24,370 12,524 20,268
Provision for income taxes.............. 4,854 6,146 10,169 6,268 10,324
------- -------- -------- -------- --------
Net income (loss).................. $ 7,109 $(14,387) $ 14,201 $ 6,256 $ 9,944
======= ======== ======== ======== ========
Net income (loss) per share:
Diluted............................... $ 0.42 $ (0.83) $ 0.63 $ 0.28 $ 0.41
======= ======== ======== ======== ========
Basic................................. $ 0.46 $ (0.83) $ 0.66 $ 0.30 $ 0.43
======= ======== ======== ======== ========
Weighted average shares outstanding:
Diluted............................... 17,113 17,432 22,707 22,596 24,432
======= ======== ======== ======== ========
Basic................................. 15,321 17,432 21,368 21,190 23,101
======= ======== ======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
F-32
73
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A, CLASS B
AND SERIES C-1
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER OF NUMBER OF $.10 PAR PAID-IN
SHARES PAR VALUE SHARES VALUE CAPITAL
--------- --------- ---------- -------- ----------
Balance, June 30, 1994...................................... 356,986 $ 177 8,339,148 $ 834 $ 18,092
Issuance of common stock in a public offering, net of
issuance costs of $1,223................................. -- -- 3,100,000 310 17,539
Issuance of common stock under employee stock purchase
plans.................................................... -- -- 72,064 7 238
Exercise of stock options and warrants..................... -- -- 688,462 69 1,113
Liquidation of fractional shares........................... -- -- -- -- --
Conversion of preferred stock to common stock.............. (356,986) (177) 4,709,580 471 (294)
Purchase of treasury stock................................. -- -- -- -- --
Repayment of receivable.................................... -- -- -- -- --
ESOP contribution.......................................... -- -- 443,209 45 171
Translation adjustment..................................... -- -- -- -- --
Unrealized market gain on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- 486
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net............................ -- -- -- -- --
Net income................................................. -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1995..................................... -- -- 17,352,463 1,736 37,345
Issuance of common stock in a public offering, net of
issuance costs of $4,239................................. -- -- 2,907,820 291 68,166
Issuance of common stock in a private placement............ -- -- 66,770 6 1,058
Issuance of common stock under employee stock purchase
plans.................................................... -- -- 50,220 5 469
Exercise of stock options and warrants..................... -- -- 778,114 78 1,397
ESOP contribution.......................................... -- -- 514,807 51 199
Retired stock.............................................. -- -- (911,851) (91) (353)
Translation adjustment..................................... -- -- -- -- --
Realized gain on investments............................... -- -- -- -- --
Unrealized market loss on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- 2,107
Net loss................................................... -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1996...................................... -- -- 20,758,343 2,076 110,388
Issuance of common stock in a pooling...................... -- -- 104,162 10 165
Issuance of common stock in the purchase of businesses..... -- -- 155,740 16 5,892
Issuance of common stock under employee stock purchase
plans.................................................... -- -- 210,085 21 3,549
Exercise of stock options and warrants..................... -- -- 507,545 51 4,152
ESOP contribution.......................................... -- -- 696,154 70 268
Retired stock.............................................. -- -- (89,630) (9) (33)
Translation adjustment..................................... -- -- -- -- --
Issuance of treasury stock to charity...................... -- -- -- -- --
Unrealized market loss on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- 3,963
Net income................................................. -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, June 30, 1997...................................... -- -- 22,342,399 2,235 128,344
Issuance of common stock in poolings....................... -- -- 626,443 63 2,046
Issuance of common stock under employee stock purchase
plans.................................................... -- -- 115,617 11 3,867
Exercise of stock options and warrants..................... -- -- 340,728 34 3,830
ESOP contribution.......................................... -- -- 983,145 98 380
Retired stock.............................................. -- -- (3,693) (1) (1)
Translation adjustment..................................... -- -- -- -- --
Unrealized market loss on investments...................... -- -- -- -- --
Net income................................................. -- -- -- -- --
-------- ----- ---------- ------ --------
Balance, March 31, 1998 (Unaudited)......................... -- $ -- 24,404,639 $2,440 $138,466
======== ===== ========== ====== ========
RECEIVABLE
RETAINED FROM TREASURY STOCK
EARNINGS CUMULATIVE STOCKHOLDER -------------------
(ACCUMULATED TRANSLATION FOR STOCK NUMBER OF
DEFICIT) ADJUSTMENT ISSUED SHARES AMOUNTS
------------ ----------- ----------- --------- -------
Balance, June 30, 1994...................................... $ 1,084 $(390) $(15) 229,188 $(497)
Issuance of common stock in a public offering, net of
issuance costs of $1,223................................. -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................... -- -- -- -- --
Exercise of stock options and warrants..................... -- -- -- -- --
Liquidation of fractional shares........................... -- -- -- 64 --
Conversion of preferred stock to common stock.............. -- -- -- -- --
Purchase of treasury stock................................. -- -- -- 1,144 (5)
Repayment of receivable.................................... -- -- 15 -- --
ESOP contribution.......................................... -- -- -- -- --
Translation adjustment..................................... -- 87 -- -- --
Unrealized market gain on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net............................ (927) -- -- -- --
Net income................................................. 7,109 -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1995..................................... 7,266 (303) -- 230,396 (502)
Issuance of common stock in a public offering, net of
issuance costs of $4,239................................. -- -- -- -- --
Issuance of common stock in a private placement............ -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................... -- -- -- -- --
Exercise of stock options and warrants..................... -- -- -- -- --
ESOP contribution.......................................... -- -- -- -- --
Retired stock.............................................. -- -- -- -- --
Translation adjustment..................................... -- (59) -- -- --
Realized gain on investments............................... -- -- -- -- --
Unrealized market loss on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- --
Net loss................................................... (14,387) -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1996...................................... (7,121) (362) -- 230,396 (502)
Issuance of common stock in a pooling...................... 527 -- -- -- --
Issuance of common stock in the purchase of businesses..... -- -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................... -- -- -- -- --
Exercise of stock options and warrants..................... -- -- -- -- --
ESOP contribution.......................................... -- -- -- -- --
Retired stock.............................................. -- -- -- -- --
Translation adjustment..................................... -- 101 -- -- --
Issuance of treasury stock to charity...................... -- -- -- (66) --
Unrealized market loss on investments...................... -- -- -- -- --
Tax benefit related to stock options....................... -- -- -- -- --
Net income................................................. 14,201 -- -- -- --
-------- ----- ---- ------- -----
Balance, June 30, 1997...................................... 7,607 (261) -- 230,330 (502)
Issuance of common stock in poolings....................... (6,856) -- -- -- --
Issuance of common stock under employee stock purchase
plans.................................................... -- -- -- -- --
Exercise of stock options and warrants..................... -- -- -- -- --
ESOP contribution.......................................... -- -- -- -- --
Retired stock.............................................. -- -- -- -- --
Translation adjustment..................................... -- 161 -- -- --
Unrealized market loss on investments...................... -- -- -- -- --
Net income................................................. 9,944 -- -- -- --
-------- ----- ---- ------- -----
Balance, March 31, 1998 (Unaudited)......................... $ 10,695 $(100) $ -- 230,330 $(502)
======== ===== ==== ======= =====
UNREALIZED
GAIN TOTAL
(LOSS) ON STOCKHOLDERS'
INVESTMENTS EQUITY
----------- -------------
Balance, June 30, 1994...................................... $ -- $ 19,285
Issuance of common stock in a public offering, net of
issuance costs of $1,223................................. -- 17,849
Issuance of common stock under employee stock purchase
plans.................................................... -- 245
Exercise of stock options and warrants..................... -- 1,182
Liquidation of fractional shares........................... -- --
Conversion of preferred stock to common stock.............. -- --
Purchase of treasury stock................................. -- (5)
Repayment of receivable.................................... -- 15
ESOP contribution.......................................... -- 216
Translation adjustment..................................... -- 87
Unrealized market gain on investments...................... 282 282
Tax benefit related to stock options....................... -- 486
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net............................ -- (927)
Net income................................................. -- 7,109
----- --------
Balance, June 30, 1995..................................... 282 45,824
Issuance of common stock in a public offering, net of
issuance costs of $4,239................................. -- 68,457
Issuance of common stock in a private placement............ -- 1,064
Issuance of common stock under employee stock purchase
plans.................................................... -- 474
Exercise of stock options and warrants..................... -- 1,475
ESOP contribution.......................................... -- 250
Retired stock.............................................. -- (444)
Translation adjustment..................................... -- (59)
Realized gain on investments............................... (282) (282)
Unrealized market loss on investments...................... (2) (2)
Tax benefit related to stock options....................... -- 2,107
Net loss................................................... -- (14,387)
----- --------
Balance, June 30, 1996...................................... (2) 104,477
Issuance of common stock in a pooling...................... -- 702
Issuance of common stock in the purchase of businesses..... -- 5,908
Issuance of common stock under employee stock purchase
plans.................................................... -- 3,570
Exercise of stock options and warrants..................... -- 4,203
ESOP contribution.......................................... -- 338
Retired stock.............................................. -- (42)
Translation adjustment..................................... -- 101
Issuance of treasury stock to charity...................... -- --
Unrealized market loss on investments...................... (7) (7)
Tax benefit related to stock options....................... -- 3,963
Net income................................................. -- 14,201
----- --------
Balance, June 30, 1997...................................... (9) 137,414
Issuance of common stock in poolings....................... -- (4,747)
Issuance of common stock under employee stock purchase
plans.................................................... -- 3,878
Exercise of stock options and warrants..................... -- 3,864
ESOP contribution.......................................... -- 478
Retired stock.............................................. -- (2)
Translation adjustment..................................... -- 161
Unrealized market loss on investments...................... (13) (13)
Net income................................................. -- 9,944
----- --------
Balance, March 31, 1998 (Unaudited)......................... $ (22) $150,977
===== ========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-33
74
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................... $ 7,109 $(14,387) $ 14,201 $ 6,256 $ 9,944
Adjustments to reconcile net income (loss) to
net cash provided by operating activities --
Depreciation and amortization................. 2,856 5,817 11,655 8,198 9,844
Charge for in-process research and
development................................. -- 24,421 8,664 8,664 8,472
Deferred income taxes......................... 3,684 (295) (1,646) 2,982 6,834
Changes in assets and liabilities --
Accounts receivable......................... (6,210) (11,930) (9,107) (8,622) (16,484)
Prepaid expenses and other current assets... (734) 215 (4,686) (2,040) 111
Long-term installments receivable........... (8,503) 1,790 (20,251) (8,325) (609)
Accounts payable and accrued expenses....... 2,697 7,615 4,513 (655) (3,249)
Unearned revenue............................ 66 2,823 (7,835) (6,780) 527
Deferred revenue............................ 3,953 3,596 7,597 4,458 4,785
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................. 4,918 19,665 3,105 4,136 20,175
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and leasehold
improvements.................................. (2,701) (7,926) (20,199) (15,973) (13,570)
Increase in computer software development
costs......................................... (1,026) (908) (2,384) (1,482) (2,923)
(Increase) decrease in other assets............. (154) 117 (549) (323) (445)
(Increase) decrease in short-term investments... (18,081) (20,221) 22,194 16,548 7,437
Increase (decrease) in other liabilities........ 401 955 (815) (2,281) (201)
Cash acquired in immaterial poolings............ -- -- 792 -- (778)
Cash used in the purchase of business, net of
cash acquired................................. -- (44,723) (6,232) (5,307) (9,911)
-------- -------- -------- -------- --------
Net cash used in investing activities.... (21,561) (72,706) (7,193) (8,818) (20,391)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock........................ 17,849 69,521 -- -- --
Issuance of common stock under employee stock
purchase plans................................ 245 474 3,570 381 3,878
Issuance of common stock under employee stock
ownership plan................................ 216 250 338 339 478
Exercise of stock options and warrants.......... 1,182 925 4,203 2,299 3,864
Purchase of treasury stock...................... (5) -- -- -- --
Repurchase of common stock...................... -- (444) (42) (42) (2)
Repayment of receivable for stock issued........ 15 -- -- -- --
Proceeds from subordinated note payable to
related party................................. 2,000 -- -- -- --
Payment of subordinated notes payable to related
parties....................................... -- (3,450) -- -- --
Payments of long-term debt and capital lease
obligations................................... (661) (5,693) (571) (472) (907)
Dividend distributions to stockholders relating
to acquired Subchapter S corporation, net..... (927) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities............................. 19,914 61,583 7,498 2,505 7,311
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... 87 (59) 101 50 167
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 3,358 8,483 3,511 (2,127) 7,262
Cash and cash equivalents, beginning of period.... 2,932 6,290 14,773 14,773 18,284
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 6,290 $ 14,773 $ 18,284 $ 12,646 $ 25,546
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
F-34
75
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
NINE MONTHS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Cash paid for income taxes...................... $ 621 $ 3,080 $ 4,074 $ 1,526 $ 1,143
======== ======== ======== ======== ========
Cash paid for interest.......................... $ 524 $ 1,363 $ 199 $ 92 $ 109
======== ======== ======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Increase in equipment under capital lease
obligations................................... $ -- $ 105 $ -- $ -- $ --
======== ======== ======== ======== ========
Increase in additional paid-in capital and
decrease in accrued expenses relating to the
tax benefit of exercise of nonqualified stock
options....................................... $ 486 $ 2,107 $ 3,963 $ -- $ --
======== ======== ======== ======== ========
Increase in common stock and additional paid-in
capital and decrease in subordinated notes
payable to a related party relating to the
exercise of warrants.......................... $ -- $ 550 $ -- $ -- $ --
======== ======== ======== ======== ========
Supplemental disclosure of cash flows related to
acquisitions:
During 1996, 1997 and the nine months ended
March 31, 1998, the Company acquired certain
companies as described in Note 3. These
acquisitions are summarized as follows --
Fair value of assets acquired, excluding
cash........................................ $ -- $ 47,919 $ 15,469 $ 15,982 $ 11,316
Issuance of common stock related to
acquisitions................................ -- -- (5,908) (6,496) --
Payments in connection with the acquisitions,
net of cash acquired........................ -- (44,723) (6,232) (5,307) (9,911)
-------- -------- -------- -------- --------
Liabilities assumed...................... $ -- $ 3,196 $ 3,329 $ 4,179 $ 1,405
======== ======== ======== ======== ========
During the fiscal year 1995, the Company acquired Industrial Systems, Inc.,
which was accounted for as a pooling of interests. During the fiscal year 1997,
the Company acquired B-JAC International, Inc., which was accounted for as a
pooling of interests. During the fiscal year 1998, the Company acquired
NeuralWare, Inc., The SAST Corporation Limited, Cimtech S.A./N.V., Contas
Process Control S.r.L. and Zyqad Limited, which were accounted for as poolings
of interests.
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
F-35
76
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Aspen Technology, Inc. and subsidiaries (the Company) is a supplier of
software and service solutions that companies in the process industries use to
design, operate and manage their manufacturing processes. The process industries
include manufacturers of chemicals, petrochemicals, petroleum products,
pharmaceuticals, pulp and paper, electric power, food and beverages, consumer
products, and metals and minerals. The Company offers a comprehensive,
integrated suite of process manufacturing optimization solutions that help
process manufacturers enhance profitability by improving efficiency,
productivity, capacity utilization, safety and environmental compliance
throughout the entire manufacturing life-cycle, from research and development to
engineering, planning and scheduling, procurement, production and distribution.
In addition to its broad range of software solutions, the Company offers system
implementation, advanced process control, real-time optimization and other
consulting services through its staff of project engineers. The Company has
operations and customers worldwide.
On May 27, 1998, the Company acquired Chesapeake Decision Sciences, Inc.
and subsidiaries (CDI), a provider of software and services for the supply chain
management market. The Company exchanged 2,961,959 shares of common stock for
all the outstanding shares of CDI. The Company placed 296,196 of these shares
into escrow as security for indemnification obligations of CDI relating to
representation, warranties and tax matters. This merger will be accounted for as
a pooling of interests. Generally accepted accounting principles do not allow
for restatement of historical financial statements for a pooling of interests
transaction until results which include post-merger activity have been issued.
These accompanying supplemental financial statements have been retroactively
restated to reflect the transaction as if the Company and CDI had operated as
one entity since inception.
F-36
77
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information details the results of operations of the Company
and CDI for the periods before the pooling of interests combination was
consummated:
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
Revenue --
The Company.................... $57,498 $103,609 $180,299 $127,045 $164,481
CDI............................ 8,521 11,209 13,771 10,554 13,563
------- -------- -------- -------- --------
Combined....................... $66,019 $114,818 $194,070 $137,599 $178,044
======= ======== ======== ======== ========
Net income (loss) --
The Company.................... $ 5,416 $(15,185) $ 13,155 $ 5,076 $ 8,497
CDI............................ 1,693 798 1,046 1,180 1,447
------- -------- -------- -------- --------
Combined....................... $ 7,109 $(14,387) $ 14,201 $ 6,256 $ 9,944
======= ======== ======== ======== ========
Net income (loss) per share --
Diluted --
The Company.................... $ 0.35 $ (0.96) $ 0.63 $ 0.24 $ 0.39
======= ======== ======== ======== ========
CDI............................ $ 1.09 $ 0.51 $ 0.60 $ 0.71 $ 0.59
======= ======== ======== ======== ========
Combined....................... $ 0.42 $ (0.83) $ 0.63 $ 0.28 $ 0.41
======= ======== ======== ======== ========
Net income (loss) per share --
Basic --
The Company.................... $ 0.39 $ (0.96) $ 0.67 $ 0.26 $ 0.41
======= ======== ======== ======== ========
CDI............................ $ 1.09 $ 0.51 $ 0.60 $ 0.71 $ 0.59
======= ======== ======== ======== ========
Combined....................... $ 0.46 $ (0.83) $ 0.66 $ 0.30 $ 0.43
======= ======== ======== ======== ========
The Company has incurred approximately $4.0 million of merger-related
costs, which will be included in the 1998 consolidated statement of operations
during the period in which the merger was completed.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying supplemental consolidated financial statements include the
results of operations of the Company, CDI and their wholly owned subsidiaries.
All material intercompany balances and transactions have been eliminated in
consolidation.
(b) INTERIM FINANCIAL STATEMENTS
The accompanying supplemental consolidated financial statements as of March
31, 1998 and for the nine months ended March 31, 1997 and 1998 are unaudited,
but in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of results for
the interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. Results for the nine months ended
F-37
78
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities of
less than three months.
(d) SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities purchased to be held for indefinite periods of time, and not intended
at the time of purchase to be held until maturity, are classified as
available-for-sale securities. Securities classified as available-for-sale are
required to be recorded at market value in the accompanying supplemental
consolidated financial statements. Unrealized gains and losses have been
accounted for as a separate component of stockholders' equity.
Available-for-sale investments as of June 30, 1996 and 1997 and March 31,
1998 are as follows (in thousands):
MARKET VALUE AT
---------------------------------
CONTRACTED JUNE 30, JUNE 30, MARCH 31,
DESCRIPTION MATURITY 1996 1997 1998
----------- ---------- -------- -------- ---------
Commercial paper.......................... 1-11 months $38,559 $ 2,150 $ --
Money market funds........................ N/A 34 189 2,886
Stocks and mutual funds................... N/A 120 -- 757
Certificate of deposit.................... 1-11 months -- 475 --
Corporate and foreign bonds............... 1-12 months 108 3,145 122
Corporate and foreign bonds............... 1-5 years -- 10,663 5,407
------- ------- ------
$38,821 $16,622 $9,172
======= ======= ======
The Company had no realized gains or losses for the years ended June 30,
1995 and 1997 and had realized gains (losses) of $282,000 and $(3,000) for the
year ended June 30, 1996 and the nine months ended March 31, 1998, respectively.
The amortized cost of these investments does not differ significantly from their
stated market value for all periods presented.
(e) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization, computed using the
straight-line and declining balance methods, by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful lives,
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Building and improvements........................... 7-30 years
Computer equipment.................................. 3-10 years
Purchased software.................................. 3 years
Furniture and fixtures.............................. 3-10 years
Leasehold improvements.............................. Life of lease
F-38
79
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) LAND
In connection with the acquisition of Setpoint, Inc. (see Note 3(a)), the
Company acquired land that is being held for investment purposes. The land was
recorded at its appraised value at the date of acquisition.
(g) REVENUE RECOGNITION
The Company recognizes revenue from software licenses upon the shipment of
its products, pursuant to a signed noncancelable license agreement. In the case
of license renewals, revenue is recognized upon execution of the renewal license
agreement. The Company has no other significant vendor obligations or
collectibility risk associated with its product sales. The Company recognizes
revenue from postcontract customer support ratably over the period of the
postcontract arrangement. The Company accounts for insignificant vendor
obligations by deferring a portion of the revenue and recognizing it either
ratably as the obligations are fulfilled or when the related services are
performed. If significant application development services are required as part
of a software license, the license fees are recognized as the application
development services are performed.
Service revenues from fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of costs (primarily
labor) incurred to date as compared to the estimated total costs (primarily
labor) for each contract. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Service revenues from time and expense
contracts and consulting and training revenue are recognized as the related
services are performed. Services that have been performed but for which billings
have not been made are recorded as unbilled services, and billings that have
been recorded before the services have been performed are recorded as unearned
revenue in the accompanying supplemental consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term license agreements that provide
for payment in installments over a one- to five-year period. A portion of each
installment agreement is recognized as interest income in the accompanying
supplemental consolidated statements of operations. The interest rates in effect
for the years ended June 30, 1995, 1996 and 1997 and the nine months ended March
31, 1998 were 11% to 12%, 11% to 12%, 8.5% to 11% and 8.5%, respectively.
(h) COMPUTER SOFTWARE DEVELOPMENT COSTS
In compliance with SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, certain computer software
development costs are capitalized in the accompanying supplemental consolidated
balance sheets. Capitalization of computer software development costs begins
upon the establishment of technological feasibility. Amortization of capitalized
computer software development costs is provided on a product-by-product basis
using the straight-line method over the remaining estimated economic life of the
product, not to exceed three years. Total amortization expense charged to
operations was approximately $630,000, $735,000, $1,143,000, $738,000 and
$709,000 in fiscal 1995, 1996 and 1997 and for the nine months ended March 31,
1997 and 1998, respectively.
(i) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS No. 52, Foreign Currency Translation. The
determination of functional currency is based on the subsidiaries' relative
financial and operational independence from the Company. Foreign currency
exchange and translation gains or losses for certain wholly owned subsidiaries
are
F-39
80
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credited or charged to the accompanying supplemental consolidated statements of
operations since the functional currency of the subsidiaries is the U.S. dollar.
Gains and losses from foreign currency translation related to entities whose
functional currency is their local currency are credited or charged to the
cumulative translation adjustment account, included in stockholders' equity in
the accompanying supplemental consolidated balance sheets.
At June 30, 1996 and 1997 and March 31, 1998, the Company had long-term
installments receivable of approximately $7,301,000, $8,987,000 and $5,810,000
denominated in foreign currencies. The March 1998 installments receivable mature
through October 2002 and have been hedged with specific foreign currency
contracts. There have been no material gains or losses recorded relating to
hedge contracts for the periods presented.
(j) NET INCOME (LOSS) PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings per Share. This statement established standards for computing
and presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. This statement is effective for periods
ending after December 15, 1997. The prior years' earnings per share have been
retroactively restated to reflect the adoption of SFAS No. 128.
Basic earnings per share was determined by dividing net income by the
weighted average common shares outstanding during the period. Diluted earnings
per share was determined by dividing net income by diluted weighted average
shares outstanding. Diluted weighted average shares reflects the dilutive
effect, if any, of common equivalent shares. Common equivalent shares include
common stock options to the extent their effect is dilutive, based on the
treasury stock method.
The calculations of basic and diluted weighted average shares outstanding
are as follows (in thousands):
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------ -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Basic weighted average common shares
outstanding.................................. 15,321 17,432 21,368 21,190 23,101
Weighted average common equivalent shares...... 1,792 -- 1,339 1,406 1,331
------ ------ ------ ------ ------
Diluted weighted average shares outstanding.... 17,113 17,432 22,707 22,596 24,432
====== ====== ====== ====== ======
(k) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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.
(l) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents,
investments,
F-40
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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts receivable and installments receivable. The Company places its cash and
cash equivalents and investments in highly rated institutions. Concentration of
credit risk with respect to receivables is limited to certain customers (end
users and distributors) to which the Company makes substantial sales. To reduce
risk, the Company routinely assesses the financial strength of its customers,
hedges specific foreign receivables and routinely sells its receivables to
financial institutions with and without recourse. As a result, the Company
believes that its accounts and installments receivable credit risk exposure is
limited. The Company maintains an allowance for potential credit losses but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.
(m) FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash and cash equivalents, short-term investments,
accounts receivable and installments receivable. The estimated fair value of
these financial instruments approximates their carrying value and, except for
accounts receivable and installments receivable, is based primarily on market
quotes.
(n) INTANGIBLE ASSETS
Intangible assets consist of goodwill, existing products, trade names and
assembled work force of certain acquired entities. Intangible assets are being
amortized on a straight-line basis over estimated useful lives of five to twelve
years. At each balance sheet date, the Company evaluates the realizability of
intangible assets based on profitability and cash flow expectations for the
related asset or subsidiary. Based on its most recent analysis, the Company
believes that no impairment of intangible assets exists at March 31, 1998.
Goodwill (net of accumulated amortization) was approximately $4,497,000 at March
31, 1998. Amortization of goodwill was approximately $40,000, $279,000 and
$337,000 for the years ended June 30, 1996 and 1997 and the nine months ended
March 31, 1998, respectively.
(o) NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to disclose similar prior period information upon adoption.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires
computer software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met. SOP 98-1
is effective beginning January 1, 1999. The Company does not expect adoption of
this statement to have a material impact on its supplemental consolidated
financial position or results of operations.
F-41
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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS
(a) DYNAMIC MATRIX CONTROL CORPORATION (DMCC) AND SETPOINT, INC. (SETPOINT)
During the quarter ended March 31, 1996, the Company acquired 100% of the
outstanding shares of common stock of DMCC and Setpoint for purchase prices of
$20,139,000 and $27,780,000, respectively, in cash and the assumption of certain
expenses related to the acquisitions. DMCC and Setpoint were suppliers of
on-line automation and information management software and services to companies
in process manufacturing industries.
These acquisitions were accounted for as purchase transactions, and
accordingly, their results of operations from the date of acquisitions forward
are included in the Company's supplemental consolidated statements of
operations. The fair market value of assets acquired and liabilities assumed was
based on an independent appraisal. The portion of the purchase price allocated
to in-process research and development represents projects that had not yet
reached technological feasibility and had no alternative future.
The purchase price was allocated to the fair value of assets acquired and
liabilities assumed as follows (in thousands):
DESCRIPTION DMCC SETPOINT LIFE
- ----------- ---- -------- ----
Purchased in-process research and
development............................... $ 9,521 $14,900 --
Existing technology......................... 1,740 3,308 5 years
Other intangibles........................... 1,066 1,709 5-10 years
Building.................................... 627 -- 30 years
Goodwill.................................... -- 1,418 10 years
Uncompleted contracts....................... 596 504 Life of contracts
------- -------
13,550 21,839
Net book value of tangible assets acquired,
less liabilities assumed.................. 8,080 7,984
------- -------
21,630 29,823
Less -- Deferred taxes...................... 1,491 2,043
------- -------
$20,139 $27,780
======= =======
For tax purposes, these acquisitions were accounted for as purchases of
stock, and due to the different basis in assets for book and tax purposes,
deferred taxes were provided for as part of the purchase price allocation in
accordance with SFAS No. 109.
(b) ACQUISITIONS DURING FISCAL YEAR 1997
During fiscal year 1997, the Company acquired B-JAC International, Inc.
(B-JAC), the Process Control Division of Cambridge Control Limited (the
Cambridge Control Division), the PIMS Division of Bechtel Corporation and Basil
Joffe Associates, Inc.
The Company exchanged 104,162 shares of its common stock valued at
approximately $3,400,000 for all outstanding shares of B-JAC, a major supplier
of detailed heat exchanger modeling software. The acquisition has been accounted
for as a pooling of interests and as a result of its immateriality as compared
to the Company's financial position and results of operations, the historical
financial statements were not restated.
F-42
83
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's acquisitions of the Cambridge Control Division, the PIMS
Division and Basil Joffe Associates, Inc. were all accounted for as purchase
transactions. Total purchase price for these acquisitions was approximately
$12,217,000 plus approximately $3,011,000 in assumed liabilities and acquisition
related costs. The Cambridge Control Division specialized in advanced process
control solutions, specifically aimed toward process manufacturing controls
applications for the refining, petrochemical and pulp and paper industries. The
PIMS Division and a related software development organization, Basil Joffe
Associates, Inc., developed and sold proprietary PIMS software used by companies
in process industries for economic planning and scheduling based on linear
programming models.
The results of operations of these companies from the dates of acquisition
forward are included in the Company's supplemental consolidated statements of
operations. The fair market value of assets acquired and liabilities assumed was
based on an independent appraisal. The portion of the purchase price allocated
to in-process research and development represents projects that had not yet
reached technological feasibility and had no alternative future use. The
purchase price was allocated to the fair value of assets acquired and
liabilities assumed as follows (in thousands):
DESCRIPTION AMOUNT LIFE
----------- ------ ----
Purchased in-process research and development............... $ 8,664 --
Existing technology......................................... 600 5 years
Intangible assets........................................... 5,530 5-12 years
-------
14,794
Net book value of tangible assets acquired, less liabilities
assumed................................................... (2,429)
-------
12,365
Less -- Deferred taxes...................................... 148
-------
$12,217
=======
(c) ACQUISITIONS DURING THE FIRST THREE QUARTERS OF FISCAL YEAR 1998
During the first three quarters of fiscal year 1998, the Company acquired
100% of the outstanding shares of NeuralWare, Inc., The SAST Corporation,
Limited, Cimtech S.A./N.V., Contas Process Control S.r.L. and Zyqad Limited. The
Company exchanged 626,443 shares of its common stock and paid approximately
$841,000 in cash for all outstanding shares of the acquired companies. These
acquisitions were accounted for as poolings of interests, and none of them were
material to the Company's financial position or results of operations.
Accordingly, the historical financial statements of the Company have not been
restated.
Additionally, the Company acquired 100% of the outstanding shares of IISYS,
Inc. for an aggregate purchase price of approximately $8,400,000 in cash and the
assumption of approximately $1,600,000 in debt. For financial statement
purposes, this acquisition was accounted for as a purchase, and accordingly, the
results of operations from the date of acquisition are included in the Company's
supplemental consolidated statements of operations. The fair market value of
assets acquired and liabilities assumed was based on an independent appraisal.
The portion of the purchase price allocated to in-process research and
development represents projects that had not
F-43
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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
yet reached technological feasibility and had no alternative future use. The
purchase price was allocated to the fair market value of assets acquired and
liabilities as follows (in thousands):
DESCRIPTION AMOUNT LIFE
----------- ------ ----
Purchased in process research and development........... $ 8,472 --
Existing technology..................................... 2,178 5 years
Intangible assets....................................... 392 5 years
-------
11,042
Net book value of tangible assets acquired, less
liabilities assumed................................... (321)
-------
10,721
Less -- Deferred taxes.................................. 800
-------
$ 9,921
=======
(d) SUBSEQUENT ACQUISITION
On May 29, 1998, the Company acquired 100% of the outstanding shares of
Treiber Controls Inc. (Treiber). The Company exchanged 140,000 shares of its
common stock for all outstanding shares of Treiber. Treiber specializes in
advanced process control and optimization solutions, specifically in petroleum
refining, petrochemical and chemical industries. The Company intends to account
for this acquisition as a pooling of interests. The Company expects this
transaction will be immaterial to the Company's financial position and results
of operations and accordingly the historical financial statements will not be
restated.
(e) UNAUDITED PRO FORMA COMBINED RESULTS
The following table represents selected unaudited pro forma combined
financial information for the Company, DMCC and Setpoint, assuming the companies
had combined at the beginning of fiscal 1995 (in thousands, except per share
data):
YEAR ENDED
--------------------
JUNE 30, JUNE 30,
1995 1996(1)
-------- --------
Pro forma revenue........................................... $123,251 $153,877
Pro forma net income........................................ $ 5,936 $ 9,397
Pro forma net income per share -- diluted................... $ 0.35 $ 0.50
Pro forma weighted average shares outstanding -- diluted.... 17,113 18,873
- ---------------
(1) Does not reflect the charge for in-process research and development and
nonrecurring acquisition charges.
Pro forma results are not necessarily indicative of either actual results
of operations that would have occurred had the acquisitions been made at the
beginning of fiscal 1995 or of future results. The pro forma effect of the
acquisitions during fiscal year 1997 and 1998, except for CDI (see Note 1), has
not been presented, as they are immaterial.
(4) LINE OF CREDIT
The Company has a revolving line-of-credit agreement with a bank, which
provides for borrowings up to $30,000,000, subject to existing limitations. The
commitment fee for the unused
F-44
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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion of the revolving line of credit ranges from .25% to .50%, based on the
financial position of the Company, as defined, and is payable quarterly. At the
Company's election, borrowings bear interest on the basis of the applicable
LIBOR, as defined (5.69% as of March 31, 1998), or at the bank's prime rate
(8.5% as of March 31, 1998). The line is subject to certain covenants, including
profitability and operating ratios, as defined. As of March 31, 1998 no amounts
were outstanding under this line and approximately $29,359,000 was available for
future borrowings as approximately $641,000 was reserved for certain performance
bonds relating to service contracts. The line of credit expires on December 31,
1998.
(5) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1996 and 1997
and March 31, 1998 (in thousands):
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
-------- -------- ---------
Credit arrangement of subsidiary with a bank......... $ -- $ -- $1,540
Mortgage payable due in annual installments of
approximately $101,000............................. -- -- 1,279
Non-interest bearing note payable due in annual
installments of approximately $67,000.............. -- -- 1,000
Convertible Debenture due in 2000, interest is
payable at an annual rate of 6%. This note is
convertible into approximately 7,500 shares of the
Company's common stock at the option of the
holder............................................. -- -- 393
Note payable due in annual installments of $125,000
plus interest at 9.5% per year..................... 671 547 454
Other obligations.................................... 460 203 230
------ ---- ------
1,131 750 4,896
Less -- Current maturities........................... 425 288 1,581
------ ---- ------
$ 706 $462 $3,315
====== ==== ======
Maturities of these long term obligations are as follows (in thousands):
AMOUNT
------
Years Ending June 30,
1998...................................................... $1,618
1999...................................................... 618
2000...................................................... 409
2001...................................................... 474
2002...................................................... 379
Thereafter................................................ 1,519
------
5,017
Less -- Amount representing interest...................... 121
-- Current maturities............................... 1,581
------
$3,315
======
(6) SUBORDINATED NOTES PAYABLE TO A RELATED PARTY
At June 30, 1995, the Company had $4,000,000 of outstanding subordinated
notes payable to an outside investor, of which a director of the Company is an
officer. The notes were repayable
F-45
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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,000,000 on April 30, 1997 and $2,000,000 on April 30, 1998, with interest at
9.6%, payable quarterly.
In December 1995 and June 1996, the lender exercised warrants to purchase
77,500 and 60,000 shares of common stock, respectively. The total proceeds due
to the Company relating to the exercise of the warrants of $550,000 were
recognized as a reduction of principal on the notes. The Company paid the
remaining balance of $3,450,000 on June 27, 1996.
(7) PREFERRED STOCK
The Company's Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue, from time to
time, up to an aggregate of 10,000,000 shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges, which may include, among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences and
conversion rights, as shall be determined by the Board of Directors in a
resolution or resolutions providing for the issuance of such series. Any such
series of preferred stock, if so determined by the Board of Directors, may have
full voting rights with the common stock or superior or limited voting rights
and may be convertible into common stock or another security of the Company.
(8) COMMON STOCK
(a) AUTHORIZED AND OUTSTANDING SHARES
On November 11, 1996, the Company increased its authorized shares of $.10
par value common stock from 30,000,000 to 40,000,000. On February 14, 1997, the
Company effected a two for one stock split through the issuance of a stock
dividend. All share and per share amounts affected by this split have been
retroactively adjusted for all periods presented.
(b) WARRANTS
During fiscal 1990, the Company issued warrants to purchase 255,000 shares
of common stock to the holder of the subordinated notes payable to a related
party (see Note 6). In February 1995, warrants to purchase 100,000 shares were
exercised and sold as part of the Company's second public offering of stock. The
remaining warrants to purchase 155,000 shares of common stock were exercised in
December 1995. During 1991, the Company issued an additional warrant to purchase
120,000 shares of common stock to the holder of the subordinated notes payable
(see Note 6). These warrants were exercised in June 1996.
During fiscal 1992, the Company issued warrants to purchase 60,000 shares
of common stock to a research consultant at an exercise price of $3.34 per
share. In February 1995, warrants to purchase 27,000 shares were exercised and
sold as part of the Company's offering of common stock. In 1996, warrants to
purchase 1,150 shares were exercised. In 1997, warrants to purchase 5,700 shares
were exercised and warrants to purchase 774 shares were terminated. In the nine
month period ended March 31, 1998, warrants to purchase 3,513 shares were
exercised and warrants to purchase 283 shares were terminated. The remaining
warrants to purchase 21,580 shares of common stock are exercisable through June
30, 2001.
During fiscal 1993, the Company issued warrants to purchase 12,000 shares
of common stock to two research consultants at an exercise price of $2.67 per
share. In 1997, warrants to purchase 2,250 shares were exercised. In the nine
month period ended March 31, 1998, warrants to purchase
F-46
87
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
750 shares were exercised. The remaining warrants to purchase 9,000 shares of
common stock are currently exercisable and expire June 10, 1998.
In connection with the August 1997 acquisition of NeuralWare, Inc. the
Company converted warrants and options to purchase NeuralWare common stock into
warrants and options to purchase 10,980 and 6,618 shares of the Company's common
stock, respectively, of which 13,290 shares are currently exercisable and the
remainder vest over three years. The warrants have exercise prices that range
between $61.73 and $135.80 per share.
(c) STOCK OPTIONS
In July 1987 and August 1988, the Company entered into stock option
agreements covering 120,000 shares of common stock. The purchase price under the
options is $0.93 to $1.05 based on the fair market value of the common stock on
the date of grant. In fiscal 1995, options covering 90,000 shares of common
stock at $1.05 per share were exercised. During fiscal 1997, options covering
the remaining 30,000 shares of common stock at an exercise price of $0.93 were
exercised.
Prior to November 1995, options were granted under the 1988 Nonqualified
Stock Option Plan (the 1988 Plan), which provided for the issuance of
nonqualified stock options. In November 1995, the Board of Directors approved
the establishment of the 1995 Stock Option Plan (the 1995 Plan) and the 1995
Directors Stock Option Plan (the 1995 Directors Plan), which provided for the
issuance of incentive stock options and nonqualified options. Under these plans,
the Board of Directors may grant stock options to purchase up to an aggregate of
3,827,687 (as adjusted) shares of common stock. Shares available for grant under
these plans were increased on July 1, 1996 and 1997 by an amount equal to 5% of
the outstanding shares as of the preceding June 30. As a result of the adoption
of the 1995 Plan, no additional options may be granted pursuant to the 1988
Plan. In December 1997 the shareholders approved an amendment to the 1995 Plan.
The amendment provides for three annual increases to the number of shares for
which options may be granted, beginning July 1, 1999 by an amount equal to 5% of
the outstanding shares on the preceding June 30. In December 1996, the
shareholders of the Company approved the establishment of the 1996 Special Stock
Option Plan (the 1996 Plan). This plan provides for the issuance of incentive
stock options and nonqualified options to purchase up to 500,000 shares of
common stock. The exercise price of options are granted at a price not less than
100% of the fair market value of the common stock on the date of grant. Stock
options become exercisable over varying periods and expire no later than 10
years from the date of grant.
F-47
88
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity under the 1988 Plan,
the 1995 Plan, the 1995 Directors Plan and the 1996 Plan:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Outstanding, June 30, 1994.................................. 1,912,876 $ 2.13
Options granted........................................... 270,000 8.45
Options exercised......................................... (357,368) 2.22
Options terminated........................................ (145,336) 2.16
--------- ------
Outstanding, June 30, 1995.................................. 1,680,172 3.12
Options granted........................................... 1,772,000 17.08
Options exercised......................................... (460,114) 1.90
Options terminated........................................ (51,300) 10.04
--------- ------
Outstanding, June 30, 1996.................................. 2,940,758 11.65
Options granted........................................... 680,000 31.30
Options exercised......................................... (484,205) 8.21
Options terminated........................................ (157,616) 16.61
--------- ------
Outstanding, June 30, 1997.................................. 2,978,937 16.44
Options granted........................................... 2,014,637 30.02
Options exercised......................................... (329,679) 12.55
Options terminated........................................ (71,714) 16.10
--------- ------
Outstanding, March 31, 1998................................. 4,592,181 $22.66
========= ======
As of March 31, 1998, there were 166,144 and 78,500 shares of common stock
available for grant under the 1995 and 1996 plans, respectively.
In connection with the 1995 acquisition of Industrial Systems, Inc. (ISI),
the Company assumed the ISI option plan (the ISI Plan). Under the ISI Plan, the
Board of Directors of ISI was entitled to grant either incentive or nonqualified
stock options for a maximum of 197,548 shares of common stock (as converted to
reflect the pooling of interests and conversion to options to purchase Aspen
common stock) to eligible employees, as defined.
Activity under the ISI Plan is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Outstanding, June 30, 1994.................................. 131,174 $ .45
Exercised................................................. (105,094) .38
-------- -----
Outstanding, June 30, 1995.................................. 26,080 .76
Exercised................................................. (13,040) .25
-------- -----
Outstanding, June 30, 1996.................................. 13,040 1.26
Exercised................................................. (13,040) 1.26
-------- -----
Outstanding, June 30, 1997.................................. -- $ --
======== =====
No future grants are available under the ISI Plan.
F-48
89
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information about stock options outstanding
and exercisable at March 31, 1998:
WEIGHTED
OPTIONS AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
AT MARCH 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE
------------------------ ------------ ----------- --------
$ 1.05.......................................... 158,898 2.2 $ 1.05
1.83-2.66..................................... 197,588 3.8 2.64
3.33-4.00..................................... 246,764 6.1 3.42
8.06-10.25.................................... 80,700 7.0 9.97
13.12-19.12.................................... 1,202,163 7.7 16.43
25.00-32.50.................................... 2,387,568 8.9 29.33
38.00-40.18.................................... 318,500 9.3 37.48
--------- ------
4,592,181 $22.66
========= ======
OPTIONS WEIGHTED
EXERCISABLE AVERAGE
AT MARCH 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 PRICE
------------------------ ------------ --------
$ 1.05...................................................... 158,898 $ 1.05
1.83-2.66................................................. 197,588 2.64
3.33-4.00................................................. 240,764 3.40
8.50-10.25................................................ 38,700 9.84
13.62-19.12................................................ 505,142 16.29
25.00-32.50................................................ 556,915 29.65
38.00...................................................... 43,256 38.00
--------- ------
Exercisable, March 31, 1998................................. 1,741,263 $16.24
========= ======
Exercisable, June 30, 1997.................................. 1,160,258 $ 9.47
========= ======
Exercisable, June 30, 1996.................................. 962,990 $ 4.58
========= ======
Exercisable, June 30, 1995.................................. 1,046,572 $ 2.07
========= ======
(d) FAIR VALUE OF STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of income or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the
disclosure-only alternative under SFAS No. 123.
F-49
90
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's option plan been determined based
on the fair value at the grant dates, as prescribed in SFAS No. 123, the
Company's net income (loss) (in thousands) and net income (loss) per share would
have been as follows:
1996 1997
---- ----
Net (loss) income (in thousands) --
As reported......................................... $(14,387) $14,201
Pro forma........................................... (15,623) 9,520
Net (loss) income per share --
Diluted --
As reported...................................... $ (0.83) $ 0.63
Pro forma........................................ (0.90) 0.42
Basic --
As reported...................................... $ (0.83) $ 0.66
Pro forma........................................ (0.90) 0.45
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: no dividend yield and volatility of 58% for
all periods; risk-free interest rates of 5.54% to 6.83% for options granted
during fiscal 1996 and 6.42% to 6.76% for options granted during fiscal 1997;
and a weighted average expected option term of 7.5 years for all periods. The
weighted average fair value per share of options granted during 1996 and 1997
was $12.83 and $23.49, respectively.
(e) EMPLOYEE STOCK PURCHASE PLANS
In February 1986, the Company's Board of Directors approved the 1986
Employees' Stock Purchase Plan, under which the Board of Directors could grant
stock purchase rights for a maximum of 1,1400,000 shares through November 1995.
In December 1995, the Company's Board of Directors approved the 1995 Employees'
Stock Purchase Plan, under which the Board of Directors may grant stock purchase
rights for a maximum of 500,000 shares through November 2005. In October 1997,
the Company's Board of Directors approved the 1998 Employee Stock Purchase Plan,
under which the Board of Directors may grant stock purchase rights for a maximum
of 1,000,000 shares through September 30, 2007.
Participants are granted options to purchase shares of common stock on the
last business day of each semiannual payment period for 85% of the market price
of the common stock on the first or last business day of such payment period,
whichever is less. The purchase price for such shares is paid through payroll
deductions, and the current maximum allowable payroll deduction is 10% of each
eligible employee's compensation. Under the plans, the Company issued 72,064
shares, 50,220 shares, 81,586 shares and 127,547 shares during fiscal 1995, 1996
and 1997 and the nine months ended March 31, 1998, respectively. As of March 31,
1998, there were 1,000,000 shares available for future issuance under the 1998
Employee Stock Purchase Plan. No shares of common stock were available for
future issuance under the 1986 Employee Stock Purchase Plan or the 1995
Employees' Stock Purchase Plan.
(f) STOCKHOLDER RIGHTS PLAN
During fiscal 1998, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Rights Plan") and distributed one Right for
each outstanding share of Common Stock. The Rights were issued to holders of
record of Common Stock outstanding on March 12, 1998. Each share of Common Stock
issued after March 12, 1998 will also include one Right, subject
F-50
91
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to certain limitations. Each Right when it becomes exercisable will initially
entitle the registered holder to purchase from the Company one one-hundredth
(1/100(th)) of a share of Series A Preferred Stock at a price of $175.00 (the
"Purchase Price").
The Rights will become exercisable and separately transferable when the
Company learns that any person or group has acquired beneficial ownership of 15%
or more of the outstanding Common Stock or on such other date as may be
designated by the Board of Directors following the commencement of, or first
public disclosure of an intent to commence, a tender or exchange offer for
outstanding Common Stock that could result in the offeror becoming the
beneficial owner of 15% or more of the outstanding Common Stock. In such
circumstances, holders of the Rights will be entitled to purchase, for the
Purchase Price, a number of hundredths of a share of Series A Preferred Stock
equivalent to the number of shares of Common Stock (or, in certain
circumstances, other equity securities) having a market value of twice the
Purchase Price. Beneficial holders of 15% or more of the outstanding Common
Stock, however, would not be entitled to exercise their Rights in such
circumstances. As a result, their voting and equity interests in the Company
would be substantially diluted if the Rights were to be exercised.
The Rights expire in March 2008, but may be redeemed earlier by the Company
at a price of $.01 per Right, in accordance with the provisions of the Rights
Plan.
(g) EMPLOYEE STOCK OWNERSHIP PLAN
In January 1987, CDI established an Employee Stock Ownership Plan and Trust
(the Plan) which covers substantially all employees who have attained the age of
21, completed 1,000 hours of service during the initial plan year in which they
have their first hour of service and are not covered by any collective
bargaining agreement. CDI makes discretionary contributions to the Plan on an
annual basis based on 10% of all eligible employees' base salaries. The common
stock shares are then allocated based on a formula determined by management.
CDI's discretionary contributions for the years ended June 30, 1996 and 1997 and
the nine months ended March 31, 1998 were approximately $250,000, $338,000 and
$478,000, respectively. The Plan also provides for the repurchase of common
stock upon the employee's termination of employment. In connection with the
merger between the Company and CDI, contributions to this Plan ceased as of May
27, 1998.
(h) RESTRICTED STOCK
CDI has stockholders agreements with all existing stockholders that provide
for the repurchase of common stock upon their termination of employment.
(9) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is measured based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates.
F-51
92
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes shown in the accompanying supplemental
consolidated statements of operations are composed of the following (in
thousands):
YEARS ENDED JUNE 30,
---------------------------
1995 1996 1997
---- ---- ----
Federal --
Current............................................. $1,713 $4,933 $ 7,174
Deferred............................................ 2,327 (264) 1,092
State --
Current............................................. 103 966 1,011
Deferred............................................ 552 6 198
Foreign --
Current............................................. 159 505 692
------ ------ -------
$4,854 $6,146 $10,169
====== ====== =======
The provision for income taxes differs from the federal statutory rate due
to the following:
YEARS ENDED JUNE 30,
--------------------------
1995 1996(1) 1997(1)
---- ------- -------
Federal tax at statutory rate............................ 34.0% 34.5% 34.5%
State income tax, net of federal tax benefit............. 5.7 5.5 5.6
Foreign tax.............................................. (2.1) 1.2 (0.9)
Tax credits generated.................................... (1.1) (5.0) (4.1)
Permanent differences, net............................... 2.8 2.2 1.3
Valuation allowance and other............................ 1.3 (0.4) (0.5)
---- ---- ----
Provision for income taxes............................. 40.6% 38.0% 35.9%
==== ==== ====
- ---------------
(1) Calculated based on pretax income, before nondeductible charges for
in-process research and development, of $14,850,000 and $26,704,000 for 1996
and 1997, respectively.
The components of the net deferred tax liability recognized in the
accompanying supplemental consolidated balance sheets are as follows (in
thousands):
JUNE 30,
--------------------
1996 1997
---- ----
Deferred tax assets.................................. $ 7,418 $ 6,344
Deferred tax liabilities............................. (16,424) (14,908)
-------- --------
(9,006) (8,564)
Valuation allowance.................................. (1,425) --
-------- --------
$(10,431) $ (8,564)
======== ========
F-52
93
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate tax effect of each type of temporary difference and
carryforwards is as follows (in thousands):
JUNE 30,
------------------
1996 1997
---- ----
Revenue related........................................ $(6,974) $(8,430)
Foreign operating losses............................... 1,425 1,063
Nondeductible reserves and accruals.................... 1,523 1,118
Intangible assets...................................... (3,819) (2,241)
Accounting methods..................................... (1,235) (143)
Other temporary differences............................ 74 69
------- -------
$(9,006) $(8,564)
======= =======
The decrease in valuation allowance during 1997 resulted from the
utilization of previously reserved tax assets. The foreign operating loss
carryforwards expire at various dates through 2011.
(10) OPERATING LEASES
The Company leases its facilities and various office equipment under
noncancelable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $2,227,000, $3,418,000, $5,017,000,
$3,762,000 and $4,692,000 for the years ended June 30, 1995, 1996 and 1997 and
the nine months ended March 31, 1997 and 1998, respectively. Future minimum
lease payments under these leases as of June 30, 1997 are as follows (in
thousands):
AMOUNT
------
Year Ending June 30,
1998.................................................... $ 4,440
1999.................................................... 4,027
2000.................................................... 3,830
2001.................................................... 3,498
2002.................................................... 3,476
Thereafter.............................................. 4,001
-------
$23,272
=======
(11) SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $28,895,000, $30,210,000 and
$44,063,000 during fiscal 1996 and 1997 and the nine months ended March 31,
1998, respectively. The financial institutions have partial recourse to the
Company only upon nonpayment by the customer under the installments receivable.
The amount of recourse is determined pursuant to the provisions of the Company's
contracts with the financial institutions and varies depending on whether the
customers under the installment contracts are foreign or domestic entities.
Collections of these receivables reduce the Company's recourse obligation, as
defined. The Company records these transactions as sales of financial assets in
accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as it surrenders control to
these receivables upon transfer.
At March 31, 1998, the balance of the uncollected principal portion of the
contracts sold with partial recourse was approximately $87,659,000. The
Company's potential recourse obligations
F-53
94
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to these contracts is approximately $5,000,000. In addition, the Company
is obligated to pay additional costs to the financial institutions in the event
of default by the customer.
(12) COMMITMENTS
The Company has entered into agreements with six executive officers
providing for the payment of cash and other benefits in certain events of their
voluntary or involuntary termination within three years following a change in
control. Payment under these agreements would consist of a lump sum equal to
approximately three years of each executive's annual taxable compensation. The
agreements also provide that the payment would be increased in the event that it
would subject the officer to excise tax as a parachute payment under the federal
tax code. The increase would be equal to the additional tax liability imposed on
the executive as a result of the payment.
(13) RETIREMENT PLAN
The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all eligible employees, as defined.
Under the plan, a participant may elect to defer receipt of a stated percentage
of his or her compensation, subject to limitation under the Internal Revenue
Code, which would otherwise be payable to the participant for any plan year. The
Company may make discretionary contributions to this Plan. No such contributions
were made during 1995 or 1996. During 1997, the plan was modified to provide,
among other changes, for the Company to make matching contributions equal to 25%
of pretax employee contributions up to a maximum of 6% of an employee's salary.
During the fiscal year ended June 30, 1997 and the nine months ended March 31,
1997 and 1998, the Company made matching contributions of approximately
$385,000, $175,000 and $598,000, respectively.
CDI also maintains a deferred contribution (401k) profit sharing plan
covering all full-time employees. Under the plan, a participant may elect to
defer receipt of a stated percentage of his or her compensation, subject to
limitation under the Internal Revenue Code, which would otherwise be payable to
the participant for any plan year. The plan provides for CDI to make matching
contributions equal to 50% of pretax employee contributions up to a maximum of
6% of an employee's salary. In addition, CDI may make discretionary
contributions to the plan determined annually by management. During the fiscal
year ended June 30, 1997 and the nine months ended March 31, 1998, CDI made
matching contributions of approximately $183,000 and $314,000, respectively.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions.
(14) JOINT VENTURES
In May 1993, the Company entered into an Equity Joint Venture agreement
with China Petrochemical Technology Company to form a limited liability company
governed by the laws of the People's Republic of China. This company has the
nonexclusive right to distribute the Company's products within the People's
Republic of China. The Company invested $300,000 on August 6, 1993, which
represents a 30% equity interest in the joint venture.
In November 1993, the Company invested approximately $100,000 in a
Cyprus-based corporate joint venture, representing approximately a 14% equity
interest. The Company had a two-year option to purchase additional shares in the
joint venture corporation, which would increase its equity interest to 22.5%. In
December 1995, the Company exercised its option to acquire these additional
shares for approximately $125,000.
F-54
95
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is accounting for these investments using the equity method.
The net investments are included in other assets in the accompanying
supplemental consolidated balance sheets. In the accompanying supplemental
consolidated statements of operations for the years ended June 30, 1995, 1996
and 1997 and the nine months ended March 31, 1997 and 1998, the Company has
recognized approximately $22,000, $10,000, $26,000, $0 and $45,000,
respectively, as its portion of the income from these joint ventures.
(15) ACCRUED EXPENSES
Accrued expenses in the accompanying supplemental consolidated balance
sheets consist of the following (in thousands):
JUNE 30,
------------------ MARCH 31,
1996 1997 1998
---- ---- ---------
Income taxes................................ $ 2,728 $ 6,711 $ 9,172
Payroll and payroll-related................. 5,672 3,713 5,432
Royalties and outside commissions........... 4,437 2,168 2,321
Other....................................... 3,580 5,376 4,878
------- ------- -------
$16,417 $17,968 $21,803
======= ======= =======
(16) RELATED PARTY TRANSACTION
Smart Finance & Co., a company of which a director of the Company is the
President, provides advisory services to the Company from time to time. In
fiscal 1996 and 1997 and the nine months ended March 31, 1998, payments of
approximately $72,000, $222,000 and $43,000, respectively, were made by the
Company to Smart Finance & Co. as compensation for services rendered.
(17) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and export sales as a percentage of total revenues are as follows:
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------- -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
United States....................... 52.2% 58.0% 50.0% 51.6% 54.7%
Europe.............................. 27.7 24.4 30.6 23.8 27.8
Japan............................... 11.4 9.0 8.7 15.3 10.8
Other............................... 8.7 8.6 10.7 9.3 6.7
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Revenues, income (loss) from operations and identifiable assets for the
Company's United States, European and Asian operations are as follows (in
thousands). The Company has intercompany distribution arrangements with its
subsidiaries. The basis for these arrangements, disclosed below as transfers
between geographic locations, is cost plus a specified percentage for services
and a commission rate for sales generated in the geographic region.
F-55
96
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------- ------ ---- ------------ ------------
Year ended June 30, 1995 --
Revenues...................... $ 64,819 $ 1,200 $ -- $ -- $ 66,019
Transfers between geographic
locations.................. -- 10,912 4,463 (15,375) --
------------- ------- ------ -------- --------
Total revenues........ $ 64,819 $12,112 $4,463 $(15,375) $ 66,019
============= ======= ====== ======== ========
Income from operations.......... $ 7,904 $ 1,113 $ 313 $ -- $ 9,330
============= ======= ====== ======== ========
Identifiable assets............. $ 78,555 $ 4,237 $ 416 $ 51 $ 83,259
============= ======= ====== ======== ========
Year ended June 30, 1996 --
Revenues...................... $ 111,304 $ 3,506 $ 8 $ -- $114,818
Transfers between geographic
locations.................. -- 13,771 4,645 (18,416) --
------------- ------- ------ -------- --------
Total revenues........ $ 111,304 $17,277 $4,653 $(18,416) $114,818
============= ======= ====== ======== ========
Income (loss) from operations... $ (10,363) $ (102) $ 15 $ -- $(10,450)
============= ======= ====== ======== ========
Identifiable assets............. $ 192,016 $11,391 $ 414 $(45,814) $158,007
============= ======= ====== ======== ========
Year ended June 30, 1997 --
Revenues...................... $ 184,193 $ 9,833 $ 44 $ -- $194,070
Transfers between geographic
locations.................. -- 23,588 8,099 (31,687) --
------------- ------- ------ -------- --------
Total revenues........ $ 184,193 $33,421 $8,143 $(31,687) $194,070
============= ======= ====== ======== ========
Income from operations.......... $ 15,959 $ 2,622 $ 594 $ -- $ 19,175
============= ======= ====== ======== ========
Identifiable assets............. $ 232,599 $ 7,493 $1,191 $(53,564) $187,719
============= ======= ====== ======== ========
F-56
97
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Because the impact of the acquired business does not meet the minimum
materiality threshold of Rule 3-05(b)(2)(i) of Regulation S-X, financial
information of the acquired business is not required to be filed pursuant to
Item 7(a) of this Form 8-K.
(b) Pro Forma Financial Information.
Because (i) separate financial statements of the acquired business are
not required to be included in this filing and (ii) the acquisition of
Chesapeake does not constitute a significant business combination under Rule
11-01(b)(1) of Regulation S-X, pro forma financial information is not required
to be filed pursuant to Item 7(b) of this Form 8-K.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization dated as of April 28, 1998,
among Aspen Technology, Inc., AT Acquisition Corp., Chesapeake
Decision Sciences, Inc. and Dr. Thomas E. Baker
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
41
98
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 hereunto duly authorized.
ASPEN TECHNOLOGY, INC.
Date: June 3, 1998 By: /s/ MARY A. PALERMO
-------------------------------------
Mary A. Palermo
Executive Vice President, Finance and
Chief Financial Officer
42
99
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization dated as of April 28, 1998,
among Aspen Technology, Inc., AT Acquisition Corp., Chesapeake
Decision Sciences, Inc. and Dr. Thomas E. Baker
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
1
Exhibit 2.1
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF APRIL 28, 1998
AMONG
ASPEN TECHNOLOGY, INC.,
AT ACQUISITION CORP.,
CHESAPEAKE DECISION SCIENCES, INC.
AND
DR. THOMAS E. BAKER
================================================================================
2
TABLE OF CONTENTS
Page
----
1. Certain Defined Terms.................................................... 1
2. The Merger............................................................... 5
2.1. Merger Documents................................................... 5
2.2. Closing Date....................................................... 5
2.3. Effective Time..................................................... 5
2.4. Effect on Capital Stock............................................ 5
2.5. Exchange of Chesapeake Certificates................................ 6
2.6. Lost, Stolen or Destroyed Chesapeake Certificates.................. 6
2.7. Other Effects...................................................... 6
2.8. Accounting and Tax Treatment....................................... 7
2.9. Further Action..................................................... 7
3. Representations and Warranties of Chesapeake............................. 7
3.1. Organization and Qualification..................................... 7
3.2. Capitalization and Other Ownership Interests....................... 7
3.3. Authority; No Violations........................................... 8
3.4. Compliance with Applicable Laws.................................... 8
3.5. Properties......................................................... 9
3.6. Financial Statements............................................... 9
3.7. Indebtedness....................................................... 10
3.8. Absence of Certain Changes or Events; Undisclosed Liabilities...... 10
3.9. Litigation......................................................... 10
3.10. Commitments........................................................ 10
3.11. Customers, Suppliers and Sales Agents.............................. 11
3.12. Warranty and Product Liability Claims.............................. 11
3.13. Intellectual Property.............................................. 11
3.14. Investments........................................................ 12
3.15. Insurance.......................................................... 12
3.16. Books and Records.................................................. 13
3.17. Employee Relations................................................. 13
3.18. Employee Plans..................................................... 13
3.19. Potential Conflicts of Interest.................................... 14
3.20. Bank Accounts...................................................... 15
3.21. Taxes.............................................................. 15
3.22. Environmental Matters.............................................. 16
3.23. Finder's Fees...................................................... 17
3.24. Disclosure......................................................... 17
4. Additional Representations and Warranties of the Principal Stockholder... 17
4.1. Investment in AspenTech Common..................................... 17
4.2. Execution; No Violations........................................... 18
-i-
3
5. Representations and Warranties of AspenTech and Acquisition Corp......... 19
5.1. Organization and Qualification..................................... 19
5.2. Capitalization..................................................... 19
5.3. Authority; No Violations........................................... 19
5.4. SEC Documents...................................................... 20
5.5. Financial Statements............................................... 21
5.6. Litigation......................................................... 21
5.7. Finder's Fees...................................................... 21
6. Covenants of Chesapeake and the Principal Stockholder as to
Conduct of Business...................................................... 21
6.1. Operation of Business.............................................. 21
6.2. Capital Structure.................................................. 21
6.3. Notification of Changes............................................ 22
6.4. Exclusivity........................................................ 22
6.5. Investments and Acquisitions....................................... 22
6.6. Indebtedness....................................................... 22
6.7. Litigation......................................................... 22
6.8. Commitments........................................................ 22
6.9. Taxes.............................................................. 22
6.10. Employee Plans..................................................... 22
6.11. Employee Matters................................................... 23
6.12. Compliance with Applicable Laws.................................... 23
7. Additional Covenants..................................................... 23
7.1. Access to Information.............................................. 23
7.2. Confidentiality.................................................... 23
7.3. Public Disclosure.................................................. 24
7.4. Pooling Accounting................................................. 24
7.5. Consents; Further Assurances....................................... 24
7.6. Updates of Chesapeake Disclosure Schedule.......................... 25
7.7. Antitrust Laws..................................................... 25
7.8. Stock Options...................................................... 25
7.9. Expenses........................................................... 26
7.10. Tax Matters........................................................ 26
7.11. Employment and Non-Competition Agreements.......................... 26
7.12. Securities and Corporate Statutes.................................. 26
7.13. Nasdaq Rules....................................................... 26
7.14. Records............................................................ 26
7.15. Amendment of Registration Rights Declaration....................... 27
8. Conditions Precedent..................................................... 27
8.1. Conditions to Each Party's Obligations............................. 27
8.2. Additional Conditions to Obligations of AspenTech and
Acquisition Corp................................................... 28
8.3. Additional Conditions to Obligations of Chesapeake and the
Principal Stockholder.............................................. 29
9. Indemnification.......................................................... 30
9.1. Agreement to Indemnify............................................. 30
9.2. Survival of Indemnity.............................................. 30
9.3. Additional Provisions.............................................. 31
9.4. Escrow............................................................. 32
-ii-
4
10. Term and Termination..................................................... 32
10.1. Term............................................................... 32
10.2. Termination........................................................ 32
10.3. Effect of Termination and Abandonment.............................. 33
11. Miscellaneous............................................................ 33
11.1. Amendment and Waiver............................................... 33
11.2. Notices............................................................ 33
11.3. Successors; Third Parties; Assignment.............................. 34
11.4. Entire Agreement................................................... 34
11.5. Applicable Law..................................................... 34
11.6. Consent to Jurisdiction............................................ 35
11.7. Validity........................................................... 35
11.8. Captions; Construction............................................. 35
11.9. Counterparts....................................................... 35
Exhibit A. List of Stockholders............................................ A-1
Exhibit B. Form of Delaware Agreement of Merger............................ B-1
Exhibit C. Form of Employment Agreement with Thomas E. Baker............... C-1
Exhibit D. Form of Employment Agreement with Walter H. Beadling............ D-1
Exhibit E. Form of Employment Agreement with Robert A. Cooper.............. E-1
Exhibit F. Form of Employment Agreement with David L. Linkin............... F-1
Exhibit G. Form of Escrow Agreement........................................ G-1
Exhibit H. Form of New Jersey Certificate of Merger........................ H-1
Exhibit I. Form of Non-Competition Agreements.............................. I-1
Exhibit J. Form of Registration Rights Declaration......................... J-1
Exhibit K. List of ESOP Participants....................................... K-1
Exhibit L. List of AspenTech Option Grants................................. L-1
Chesapeake Disclosure Schedule
-iii-
5
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT dated as of April 28, 1998 among Aspen Technology, Inc., a
Delaware corporation ("AspenTech"), AT Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of AspenTech ("Acquisition Corp."), Chesapeake
Decision Sciences, Inc., a New Jersey corporation ("Chesapeake"), and Dr. Thomas
E. Baker, a stockholder of Chesapeake (the "Principal Stockholder").
INTRODUCTION
The individuals named on EXHIBIT A, including the Principal Stockholder
(collectively the "Stockholders"), are the record holders of all of the issued
and outstanding shares of capital stock of Chesapeake.
The parties to this Agreement desire to effect a reorganization in which
Acquisition Corp. shall be merged with and into Chesapeake (the "Merger"), with
the surviving corporation to be a wholly owned subsidiary of AspenTech and all
of the issued and outstanding shares of capital stock of Chesapeake to be
converted into shares of common stock, $.10 par value, of AspenTech ("AspenTech
Common"), all upon the terms and conditions set forth in this Agreement.
The boards of directors of AspenTech, Acquisition Corp. and Chesapeake
each have determined that the Merger is in the best interests of their
respective corporations and the stockholders thereof and have approved the
Merger and the execution of this Agreement. The Principal Stockholder has
delivered to Chesapeake a written consent dated April 28, 1998 approving the
Merger and Chesapeake's execution of this Agreement, which consent constitutes
all action of the Stockholders necessary to approve the Merger.
1. CERTAIN DEFINED TERMS.
As used in this Agreement, the following terms shall have the following
meanings:
"ASPENTECH MAE" means any material adverse effect on the business,
properties, assets or financial condition of AspenTech and its subsidiaries,
taken as a whole.
"CHESAPEAKE CERTIFICATES" means the stock certificates representing all of
the shares of Chesapeake Common outstanding immediately prior to the Closing.
"CHESAPEAKE CLASS A COMMON" means Class "A" common stock, without par
value, of Chesapeake.
"CHESAPEAKE CLASS B COMMON" means Class "B" common stock, without par
value, of Chesapeake.
"CHESAPEAKE COMMON" means, together, Class A Common and Class B Common.
"CHESAPEAKE DISCLOSURE SCHEDULE" means the disclosure schedule of
Chesapeake attached to this Agreement.
"CHESAPEAKE MAE" means any material adverse effect on the business,
properties, assets or financial condition of Chesapeake.
"CLOSING" means the closing of the transactions contemplated by this
Agreement.
1
6
"CLOSING DATE" means the date on which the Closing is held, as established
pursuant to Section 2.2.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITMENTS" means, with respect to a Person, all written contracts,
agreements, instruments, powers of attorney, guarantees, promises, obligation,
undertakings and commitments entered into by such Person.
"COMMONLY CONTROLLED ENTITY" means any entity that is under common control
with Chesapeake within the meaning of Code section 414(b), (c), (m) or (o).
"CREDITOR EXCEPTION" means bankruptcy, reorganization, insolvency,
moratorium or similar laws of general application from time to time in effect
and relating to or affecting the rights or remedies of creditors generally.
"DAMAGES" has the meaning set forth in Section 9.1.
"DELAWARE AGREEMENT OF MERGER" means the agreement of merger to be
executed by Acquisition Corp. and Chesapeake substantially in the form of
EXHIBIT B.
"EFFECTIVE TIME" means the later of (a) the time at which the Delaware
Agreement of Merger is filed with the Secretary of State of the State of
Delaware and (b) the time at which the New Jersey Certificate of Merger is filed
with the Secretary of State of the State of New Jersey.
"EMPLOYEE PLANS" means (a) all "employee benefit plans" as defined in
ERISA section 3(3), (b) all "fringe benefit plans" as defined in Code section
6039D and (c) all other pension, benefit, profit sharing, retirement, deferred
compensation, welfare, insurance, disability, bonus, vacation pay, severance pay
and other similar plans, programs and agreements (including any and all
self-insurance arrangements), whether reduced to writing or not, relating to the
employees of Chesapeake or any Commonly Controlled Entity, or maintained at any
time by Chesapeake or any Commonly Controlled Entity for its employees.
"EMPLOYMENT AGREEMENTS" means the employment agreements to be entered into
as of the Closing Date between Chesapeake and Thomas E. Baker, Walter H.
Beadling, Robert A. Cooper and David L. Linkin substantially in the forms set
forth in EXHIBIT C, EXHIBIT D, EXHIBIT E and EXHIBIT F, respectively.
"ENVIRONMENT" means all navigable waters, waters of the contiguous zone,
ocean waters, natural resources, surface waters, ground water, drinking water
supply, land surface, subsurface strata, ambient air, both inside and outside of
buildings and structures, and plant and animal life on Earth.
"ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws,
principles of common law, rules, regulations and codes, as well as orders,
decrees, judgments or injunctions issued, promulgated, approved or entered
thereunder relating to pollution, protection of the environment or public health
and safety, including the Release or threatened Release of Oil or Hazardous
Material into the environment or otherwise relating to presence, manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Oil or Hazardous Material.
"ENVIRONMENTAL LIABILITIES AND COSTS" means all costs, expenses or losses,
whether direct or indirect, known or unknown, current or potential, past,
present or future, arising from, relating to or imposed by, under or pursuant to
Environmental Laws and in any way based on, arising out of or otherwise in
respect of (a) the ownership or operation by Chesapeake or any predecessor or
affiliate, of the business of Chesapeake
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or (b) the condition or operation of any real property, assets, equipment or
facilities owned, leased or operated by Chesapeake (including, in each case, the
disposal or arrangement for the disposal of any Oil or Hazardous Material, or
other substances or wastes on-site or off-site), including all costs, expenses
or losses (i) related to Remedial Actions, (ii) necessary for compliance with
any requirements of Environmental Laws and any applicable permits, licenses,
approvals or other authorizations, (iii) necessary to make full economic use of
the property, assets, equipment and facilities of Chesapeake (assuming that
Chesapeake's properties are operated for substantially the same purpose and at
substantially the same levels as at the date hereof) and (iv) related to
reasonable fees, disbursements and expenses of counsel and consultants.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means American Stock Transfer & Trust Company, as escrow
agent under the Escrow Agreement.
"ESCROW AGREEMENT" means the escrow agreement to be entered into as of the
Closing Date among AspenTech, Chesapeake, the Principal Stockholder and the
Escrow Agent substantially in the form set forth as EXHIBIT G.
"ESCROW SHARES" has the meaning set forth in Section 2.5.
"ESOP" means the Chesapeake Decision Sciences, Inc. Employee Stock
Ownership Plan and Trust effective January 1, 1987, as amended and restated
effective January 1, 1989.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FACCENDA AGREEMENT" means the letter agreement dated March 10, 1997
between Chesapeake and Joseph Faccenda.
"GOVERNMENT ENTITY" means any domestic or foreign court, administrative
agency or commission, or other governmental authority or instrumentality.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"INDEBTEDNESS" means (a) all indebtedness of Chesapeake for borrowed
money, (b) all indebtedness or obligations of Chesapeake evidenced by bonds,
notes, or similar written instruments, (c) all obligations of Chesapeake in
respect of letters of credit or similar instruments issued or accepted by banks
and other financial institutions for the account of Chesapeake, (d) all
capitalized lease obligations of Chesapeake, and (e) all guarantees by
Chesapeake of indebtedness and obligations of other Persons, which indebtedness
and obligations are of a character described in clause (a), (b), (c) or (d) of
this definition.
"INTELLECTUAL PROPERTY" means all trademarks, trade names, service marks,
logos, trade secrets, patents, inventions, copyrights and other proprietary
rights, whether or not registered, and all rights, licenses and registration
applications with respect thereto, used by Chesapeake in connection with the
development, manufacturing, processing, distribution, licensing, service or
marketing of products and services of Chesapeake.
"LIABILITIES" means all items (except items of capital stock or partners'
or owners' equity or of surplus or retained earnings or of general contingency
reserves) that in accordance with generally accepted
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accounting principles would be included in determining total liabilities as
shown on the liability side of a balance sheet.
"NEW JERSEY CERTIFICATE OF MERGER" means the certificate of
merger/consolidation (profit corporations) to be executed by Chesapeake and
Acquisition Corp. substantially in the form of EXHIBIT H.
"NON-COMPETITION AGREEMENTS" means the non-competition agreements to be
entered into as of the Closing Date among AspenTech, Chesapeake and each of
Thomas E. Baker and David L. Linkin, each substantially in the form set forth in
EXHIBIT I.
"NUMBER OF MERGER SHARES" means the remainder of (a) 3,000,000 less (b)
the quotient of the total amount of Offset Expenses divided by the average of
the last sales prices of AspenTech Common on the Nasdaq National Market during
the ten trading days immediately preceding the date that is two business days
before the Closing Date.
"OFFSET EXPENSES" means all costs and expenses of Chesapeake incurred or
arising prior to the Closing in connection with or in anticipation of the Merger
and the other transactions contemplated hereby, including all fees and expenses
of accountants (including Rosenberg, Rich, Baker, Berman & Company, but
excluding Arthur Andersen LLP), counsel (including Bourne, Noll & Kenyon and
Skadden, Arps, Slate, Meagher & Flom LLP) and financial advisors (including
Donaldson, Lufkin & Jenrette Securities Corporation) incurred by Chesapeake in
connection with or in anticipation of the Merger or the other transactions
contemplated hereby.
"OIL OR HAZARDOUS MATERIAL" means any waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial substance
or waste, petroleum or petroleum-derived substance or waste, asbestos-containing
substance or waste, radioactive material or any constituent of any such
substance or waste, including any such substance regulated under or defined by
any Environmental Law.
"PERMITS" means all permits, licenses, variances, certificates of
occupancy, exemptions, orders, approvals and authorizations of all Government
Entities necessary to conduct Chesapeake's business substantially in the manner
in which it is currently being conducted.
"PERSON" means any individual, company, corporation, association,
partnership, joint venture, or other legal entity.
"REGISTRATION RIGHTS DECLARATION" means the declaration of registration
rights adopted by the board of directors of Aspen, effective as of the Closing
Date, substantially in the form set forth in EXHIBIT J.
"RELEASE" means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching, migration, or movement of Oil
or Hazardous Material through the Environment.
"REMEDIAL ACTION" means all actions reasonably necessary, whether
voluntary or involuntary, to: (a) clean up, remove, treat or in any other way
adjust Oil or Hazardous Material in the indoor or outdoor environment; (b)
prevent the Release of Oil or Hazardous Material so that they do not migrate or
endanger or threaten to endanger public health or welfare or the Environment; or
(c) perform investigations, remedial studies, restoration and post-remedial
studies and monitoring on, in, under, above or about any assets or properties
on-site or off-site.
"SEC DOCUMENTS" has the meaning set forth in Section 5.4.
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"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.7(a).
"TAX RETURNS" means all returns, declarations, reports, forms, estimates,
information returns and statements required to be filed in respect of any Taxes
or to be supplied to a taxing authority in connection with any Taxes.
"TAXES" means all taxes of any kind and nature, charges, fees, customs,
duties, imposts, levies or other assessments, including all net income, gross
receipts, ad valorem, value added, transfer, gains, franchise, profits,
inventory, net worth, capital stock, asset, sales, use, license, estimated,
withholding, payroll, transaction, capital, employment, social security, workers
compensation, unemployment, excise, severance, stamp, occupation, and property
taxes, together with any interest, penalties, additions or additional amounts
imposed by any taxing authority.
"VIOLATION" means, with respect to any provision of a Commitment, statute,
judgment, corporate governance document, security, or other legal document or
instrument, (a) any material violation of or material default (with or without
notice or lapse of time, or both) under such provision, (b) the arising of any
right of termination, cancellation or acceleration of any material obligation,
or loss of any material benefit, under such provision, or (c) the arising of any
material lien, pledge, claim, charge, security interest, mortgage, easement,
servitude, refusal, claim of infringement or other restriction or encumbrance of
any kind, including any restriction on use, voting (in the case of any
security), transfer, receipt of income or exercise of any other attribute of
ownership on assets or properties.
2. THE MERGER.
2.1. MERGER DOCUMENTS. Subject to and upon the terms and conditions of
this Agreement, and on the basis of the agreements, covenants, representations
and warranties herein contained, at the Closing Acquisition Corp. and Chesapeake
shall execute and deliver the Delaware Agreement of Merger and the New Jersey
Certificate of Merger, which together shall provide for the Merger as of the
Effective Time. Under the Delaware Agreement of Merger, shares of Chesapeake
Common issued and outstanding immediately prior to the Effective Time will be
converted into fully paid and nonassessable shares of AspenTech Common, in
accordance with Section 2.4.
2.2. CLOSING DATE. The Closing shall be held on May 18, 1998 or, if each
of the conditions to the Closing provided herein shall not have been satisfied
or waived by such date, on a later date occurring as soon as reasonably
practicable after each of such conditions has been satisfied or waived, as such
later date shall be reasonably agreed upon by AspenTech, Acquisition Corp.,
Chesapeake and the Principal Stockholder. The time of the Closing on the Closing
Date, and the place of the Closing, shall be as reasonably agreed upon by
AspenTech, Acquisition Corp., Chesapeake and the Principal Stockholder.
2.3. EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Delaware Agreement of Merger to be filed in
accordance with the Delaware General Corporation Law and shall cause the New
Jersey Certificate of Merger to be filed in accordance with the New Jersey
Business Corporation Act, in each case as soon as practicable after the Closing.
The Merger shall become effective as of the Effective Time.
2.4. EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of any party:
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(a) All of the 1,000 issued and outstanding shares of common stock,
$.001 par value, of Acquisition Corp. shall be converted into an aggregate
of 1,000 shares of Class "B" common stock, without par value, of the
Surviving Corporation. Each stock certificate representing shares of
common stock, $.001 par value, of Acquisition Corp. prior to the Effective
Time shall represent an equal number of shares of Class "B" common stock,
without par value, of the Surviving Corporation from and after the
Effective Time.
(b) Each outstanding share of Chesapeake Common shall be converted,
subject to the indemnification and escrow provisions of Section 9, into a
number of shares of AspenTech Common equal to the quotient of the Number
of Merger Shares divided by the number of shares of Chesapeake Common
outstanding immediately prior to the Closing (including any shares issued
pursuant to the Faccenda Agreement), rounded, with respect to each
Stockholder, to the nearest whole share of AspenTech Common. Each
fractional share of Chesapeake Common shall be converted into the
equivalent fractional amount of such quotient, subject to rounding as
aforesaid. No fractional shares of AspenTech Common shall be issuable in
connection with the Merger.
2.5. EXCHANGE OF CHESAPEAKE CERTIFICATES. At the Closing, upon surrender
of all of the Chesapeake Certificates to AspenTech (or affidavits and bonds
relating thereto in accordance with Section 2.6), AspenTech shall deliver to
each of the Stockholders certificates representing ninety percent of the shares
of AspenTech Common issuable to such Stockholder pursuant to Section 2.4 and
shall deliver to the Escrow Agent, in accordance with the provisions of
Section 9 and the Escrow Agreement, a certificate representing the remaining ten
percent of the Number of Merger Shares issuable to the Stockholders (the "Escrow
Shares"). Upon the delivery of such certificates representing AspenTech Common,
the Chesapeake Certificates shall forthwith be canceled. All AspenTech Common
issued to the Stockholders pursuant to this Section 2.5 or retained in escrow
pursuant to Section 9 and the Escrow Agreement shall be deemed to have been
given in full satisfaction of all rights pertaining to the ownership of the
shares represented by the Chesapeake Certificates.
2.6. LOST, STOLEN OR DESTROYED CHESAPEAKE CERTIFICATES. In the event any
of the Chesapeake Certificates shall have been lost, stolen or destroyed,
AspenTech shall issue in exchange for such lost, stolen or destroyed Chesapeake
Certificates, upon the making of an affidavit of that fact by the record holder
thereof, shares of AspenTech Common in accordance with Sections 2.4 and 2.5;
provided, however, that AspenTech may, in its discretion and as a condition
precedent to the issuance thereof, require the record holder of such lost,
stolen or destroyed Chesapeake Certificates to deliver a bond in such sum as
AspenTech may reasonably direct as indemnity against any claim that may be made
against AspenTech with respect to the Chesapeake Certificates alleged to have
been lost, stolen or destroyed.
2.7. OTHER EFFECTS. At the Effective Time:
(a) the separate existence of Acquisition Corp. shall cease and
Acquisition Corp. shall be merged with and into Chesapeake, with
Chesapeake remaining as the surviving corporation (the "Surviving
Corporation");
(b) the by-laws of Chesapeake shall become the by-laws of the
Surviving Corporation;
(c) the directors and officers of Acquisition Corp. shall become
the directors and officers of the Surviving Corporation; and
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(d) the Merger shall, from and after the Effective Time, have all
of the effects provided under the Delaware General Corporation Law, the
New Jersey Business Corporation Act and any other applicable law.
2.8. ACCOUNTING AND TAX TREATMENT. The parties intend that the Merger
shall be treated as a pooling of interests for accounting purposes and as a
reorganization under Code section 368(a).
2.9. FURTHER ACTION. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, properties, rights, privileges and powers of
Acquisition Corp. and Chesapeake, the officers and directors of Acquisition
Corp. and Chesapeake are fully authorized in the name of their respective
corporations or otherwise to take, and shall take, all such lawful and necessary
action.
3. REPRESENTATIONS AND WARRANTIES OF CHESAPEAKE.
Chesapeake represents and warrants to AspenTech as follows, subject to
such exceptions as are specifically disclosed under appropriate section headings
in the Chesapeake Disclosure Schedule:
3.1. ORGANIZATION AND QUALIFICATION. Chesapeake is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey. Chesapeake is qualified to do business and is in good standing in
all other jurisdictions in which such qualification is required, other than
those jurisdictions where failure to so qualify would not have a Chesapeake MAE.
Chesapeake has all requisite corporate power and authority to own its property,
to carry on its business as now being conducted, to execute, deliver and perform
this Agreement, and to consummate the transactions contemplated by this
Agreement. Complete and correct copies of the Certificate of Incorporation and
By-Laws of Chesapeake, each as amended to date, have been delivered to
AspenTech.
3.2. CAPITALIZATION AND OTHER OWNERSHIP INTERESTS. The authorized capital
stock of Chesapeake consists of 1,000 shares of Chesapeake Class A Common, of
which 300 shares are outstanding and no shares are held as treasury stock as of
the date hereof, and 1,000 shares of Chesapeake Class B Common, of which
197.95176 shares are outstanding and no shares are held as treasury stock as of
the date hereof. All of the outstanding shares of Chesapeake Common have been
duly authorized and validly issued, are fully paid and nonassessable, and are
not subject to preemptive rights created by statute, Chesapeake's Certificate of
Incorporation or By-Laws, or any agreement to which Chesapeake is a party or by
which it is bound. Each of the Stockholders is the record holder of the number
of shares of Chesapeake Class A Common and Chesapeake Class B Common set forth
opposite such Stockholder's name on EXHIBIT A. The shares of Chesapeake Class A
Common held of record of Robert A. Cooper, as trustee of the ESOP, were, as of
December 31, 1997, beneficially owned by the ESOP participants named in
EXHIBIT K, in the respective numbers set forth opposite their names therein. No
Indebtedness having the right to vote (or convertible into securities having the
right to vote) on any matters on which holders of Chesapeake Common may vote has
been issued or is outstanding. Except as provided by the ESOP and the Faccenda
Agreement (complete and correct copies of both of which have been provided to
AspenTech), neither Chesapeake, the Principal Stockholder nor, to the knowledge
of Chesapeake, any of the other Stockholders is a party to or bound by: (a) any
option, warrant, call, right or agreement obligating Chesapeake to issue,
deliver or sell additional shares of Chesapeake Common or to grant, extend or
enter into any such option, warrant, call, right or agreement; (b) any option,
warrant, call, right or agreement obligating any Stockholder, in any
circumstances, to deliver or sell, or offer for delivery or sale, any shares of
Chesapeake Common or obligating any of the Stockholders to grant, extend or
enter into any such option, warrant, call, right or agreement, including any
agreement containing provisions with respect to preemptive rights, rights of
first
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refusal, purchase rights, "tag-along" or "come-along" arrangements, or similar
rights, except as provided in the redemption agreements between Chesapeake and
certain employees as listed in the Chesapeake Disclosure Schedule (complete and
correct copies of all of which have been provided or made available to
AspenTech); (c) any voting trust, proxy or other agreement or understanding with
respect to the voting of shares of Chesapeake Common; and (d) any other
agreement restricting the transfer of, or affecting rights with respect to,
shares of Chesapeake Common. The Faccenda Agreement contemplates that .3032
shares of Chesapeake Common will become issuable to Joseph Faccenda on May 1,
1998 if Mr. Faccenda continues to be employed by Chesapeake as of that date. In
the event such fractional share of Chesapeake Common is issued to Mr. Faccenda
pursuant to the Faccenda Agreement, EXHIBIT A shall be promptly amended to
reflect such fractional share and Mr. Faccenda shall be deemed to be a
"Stockholder" for purposes of this Agreement.
3.3. AUTHORITY; NO VIOLATIONS.
(a) The execution, delivery and performance of this Agreement and
all agreements and instruments to be entered into or delivered by
Chesapeake in connection with the transactions contemplated hereby
(including the Delaware Agreement of Merger, the New Jersey Certificate of
Merger and each of the Employment Agreements and Non-Competition
Agreements) have been duly and validly authorized by all requisite
corporate action on the part of Chesapeake. This Agreement has been duly
executed and delivered by Chesapeake, constitutes a valid and binding
obligation of Chesapeake, and is enforceable against Chesapeake in
accordance with its terms, all as may be subject to or affected by the
Creditor Exception. As of the Closing Date, the Delaware Agreement of
Merger, the New Jersey Certificate of Merger and each of the Employment
Agreements and Non-Competition Agreements will be duly and validly
executed and delivered by Chesapeake and will constitute valid and binding
obligation of Chesapeake enforceable in accordance with their respective
terms, all as may be subject to or affected by the Creditor Exception.
(b) The execution, delivery and performance of this Agreement by
Chesapeake do not and will not result in any Violation of any provision of
(i) the Certificate of Incorporation or By-Laws of Chesapeake, each as
amended to date, (ii) any Commitment by which Chesapeake is bound, (iii)
any judgment, order, decree, ruling or injunction applicable to Chesapeake
or the Chesapeake Common or (iv) any statute, law, regulation or rule of
any Government Entity applicable to Chesapeake or the Chesapeake Common.
Chesapeake does not have any plans, programs or agreements to which it is
a party or subject pursuant to which payments may be required or
acceleration of benefits may be required upon a change of control of
Chesapeake.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Government Entity is
required by or with respect to Chesapeake in connection with the
execution, delivery and performance of this Agreement by Chesapeake,
except for the filing of a notification under the HSR Act, the filing of
the Delaware Agreement of Merger with the Secretary of State of the State
of Delaware, the filing of the New Jersey Certificate of Merger with the
Secretary of State of the State of New Jersey, and such other consents,
authorizations, filings, approvals and registrations that if not obtained
or made would not have a material adverse effect on the transactions
contemplated by this Agreement.
3.4. COMPLIANCE WITH APPLICABLE LAWS. Chesapeake holds all Permits and
has delivered or made available to AspenTech complete and correct copies of all
of the Permits. All of the Permits are in full force and effect and Chesapeake
is in compliance with the terms of the Permits, except in either case where any
failure, individually or in the aggregate with any other such failures, would
not have a Chesapeake MAE.
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No Violation of any of the Permits has been alleged by any Government Entity,
and no proceeding is pending, or to the knowledge of Chesapeake threatened, to
revoke, suspend, cancel or limit any of the Permits. Except for normal renewal
and reporting requirements, no action by Chesapeake, AspenTech, the Surviving
Corporation or any other party is required in order that all of the Permits will
remain in full force and effect following the Merger. The business of Chesapeake
is not being conducted in Violation of any law, ordinance or regulation or any
order, judgment, injunction, award or decree of any Government Entity and
Chesapeake is not otherwise subject to or in Violation of any judgment, order,
writ, injunction or decree of any court, administrative agency or Government
Entity or under any rule or regulation of any Government Entity relating to or
affecting Chesapeake (other than Environmental Laws, which are the subject of
Section 3.22), except in any such case where any such Violation, individually or
in the aggregate with any other such Violations, would not have a Chesapeake
MAE.
3.5. PROPERTIES. The unaudited balance sheet of Chesapeake at March 31,
1998 reflects all of the real and personal property used by Chesapeake in its
business or otherwise held by Chesapeake, except for personal property acquired
in the ordinary course of business by Chesapeake since March 31, 1998 and
personal property not required under generally accepted accounting principles to
be reflected on the unaudited balance sheet of Chesapeake at March 31, 1998.
Chesapeake has good and marketable title in fee simple to the real property
owned by it and good and marketable title to all of the personal property
reflected as owned on the unaudited balance sheet of Chesapeake at March 31,
1998 or thereafter acquired, in each case free and clear of any imperfection of
title, lien, claim or encumbrance except for (a) any lien, claim or encumbrance
securing taxes, assessments, governmental charges or levies, or the claims of
material men, carriers, landlords and similar Persons, all of which are not yet
due and payable, (b) imperfections of title and other minor liens, claims and
encumbrances that do not have a material adverse effect on the use of such real
or personal property by Chesapeake and (c) as shown on deeds, title policies or
other real estate instruments provided or made available to AspenTech.
Chesapeake does not own or hold, and is not obligated under or a party to, any
option, right of first refusal or other contractual right to purchase, acquire,
sell or dispose of any real property. There is no lease, sublease, license or
other agreement granting to any Person other than Chesapeake any right to the
possession, use, occupancy or enjoyment of any portion of the real property
owned by Chesapeake. The continued use, occupancy and operation of the real
property owned by Chesapeake as currently used, occupied and operated does not
constitute a nonconforming use under any law, ordinance or regulation or any
order, judgment, injunction, award or decree of any Government Entity such as
would have a Chesapeake MAE.
3.6. FINANCIAL STATEMENTS. The unaudited balance sheets of Chesapeake at
each of December 31, 1995, 1996 and 1997 and the related unaudited statements of
income, stockholders' equity and cash flows for the years then ended, and the
unaudited balance sheet of Chesapeake at March 31, 1998 and the related
unaudited statements of income, stockholders' equity and cash flows for the
three months then ended, all as provided by Chesapeake to AspenTech, have been
prepared in accordance with generally accepted accounting principles, applied on
a consistent basis for the periods involved (except that such statements do not
contain all the notes that may be required by generally accepted accounting
principles and are subject to normal and recurring year-end adjustments that are
not expected to be material in amount), and fairly present in all material
respects the financial position of Chesapeake as of the dates thereof and its
results of operations and cash flows for the periods then ended. The books of
account of Chesapeake have been prepared and maintained in accordance with
Chesapeake's normal practice, and Chesapeake has indicated to AspenTech those
provisions that are not consistent in all material respects with the accounting
principles and policies reflected in such financial statements.
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3.7. INDEBTEDNESS. Chesapeake does not have any outstanding Indebtedness
other than Indebtedness reflected or reserved against in the unaudited balance
sheet of Chesapeake at March 31, 1998 and accounts payable incurred since
March 31, 1998 in the ordinary course of business consistent with past practice.
3.8. ABSENCE OF CERTAIN CHANGES OR EVENTS; UNDISCLOSED LIABILITIES. Since
March 31, 1998, Chesapeake has not entered into any transaction that is not in
the ordinary course of business consistent with past practice, except as
otherwise specifically contemplated by this Agreement. Since March 31, 1998,
Chesapeake has not sold or purchased, assigned or transferred any of its assets
or properties or canceled any material debts or material claims, or done any act
or omitted to do any act that would cause any Violation of any material
Commitment of Chesapeake. Since March 31, 1998, there has been no change, and no
commitments have been made by Chesapeake, that has had, or could reasonably be
expected to have, a Chesapeake MAE. Chesapeake does not have any unstated
Liabilities other than Liabilities reflected or reserved against in the
unaudited balance sheet of Chesapeake at March 31, 1998, other than Liabilities
incurred since March 31, 1998 in the ordinary course of business consistent with
past practice.
3.9. LITIGATION. Chesapeake is not a party to nor to its knowledge
threatened with, or involved in any litigation, suit, action, investigation,
proceeding or controversy, at law or in equity, before any court, administrative
agency or other Government Entity relating to or affecting Chesapeake. To the
knowledge of Chesapeake, there are no facts that, if known to customers,
Government Entities or other Persons, would result in any claim, dispute,
action, suit, appeal, legal, administrative or arbitral proceeding, or
investigation that could reasonably be expected to have a Chesapeake MAE.
Chesapeake is not named as a subject of any order, writ, injunction or decree of
any court, agency, authority, arbitration panel or other tribunal, nor is it in
default with respect to any notice, order, writ, injunction or decree. No
judgment has been entered by, and no claim, dispute, action, suit, appeal,
legal, administrative or arbitral proceeding, or investigation, at law or in
equity, is pending or, to the knowledge of Chesapeake, threatened that
materially and adversely affects, or could materially and adversely affect, the
ability of Chesapeake or any of the Stockholders to perform under this
Agreement.
3.10. COMMITMENTS.
(a) Chesapeake has delivered or made available to AspenTech
complete and correct copies of the following Commitments of Chesapeake:
(i) pledges, conditional sale or title retention agreements,
security agreements, equipment obligations, and lease
agreements relating to any assets or properties of
Chesapeake;
(ii) Commitments currently in effect that were entered into
in the ordinary course of business and that involve
executory payment of consideration to or by Chesapeake
in excess of $100,000;
(iii) Commitments to perform consulting, modeling or
integration services that include an obligation,
guarantee, promise or undertaking to be responsible or
liable for damages, losses or costs in excess of
$100,000;
(iv) Commitments establishing franchise, distribution or
sales agency arrangements;
(v) Commitments with any current or former officer,
director, employee, consultant, agent, representative or
security holder, including any employment, consulting or
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deferred compensation agreement and any executive
compensation, bonus or incentive plan agreement;
(vi) Commitments for the purchase, sale or lease of
materials, supplies, equipment, goods, research and
development, or capital assets, or the receipt of
services, the performance of which will extend over a
period of more than one year or involve consideration in
excess of $100,000;
(vii) Commitments under which Chesapeake agrees to indemnify
any party other than Commitments entered into in the
ordinary course of business;
(viii) Commitments for the sale of any assets or properties of
Chesapeake other than in the ordinary course of business
or for the grant to any Person of any preferential
rights to purchase any assets or properties of
Chesapeake; and
(ix) any other Commitments that were not made in the ordinary
course of business and that are, individually or in the
aggregate, material to Chesapeake.
(b) With respect to each Commitment described in Section 3.10(a),
(i) Chesapeake is not in Violation of any provision of such Commitment,
(ii) no event has occurred that, after notice or lapse of time or both,
would constitute a Violation of any provision of such Commitment, and
(iii) to the knowledge of Chesapeake, there is no existing Violation of
any provision of such Commitment by any other party to such Commitment and
no event has occurred that, after notice or lapse of time or both, would
constitute such a Violation by such other party.
3.11. CUSTOMERS, SUPPLIERS AND SALES AGENTS. The relationships of
Chesapeake with its suppliers, customers and sales agents are good commercial
working relationships. Since December 31, 1997, no customer, supplier or sales
agent of Chesapeake has canceled or otherwise terminated, or threatened in
writing to cancel or otherwise terminate, its relationship with Chesapeake.
3.12. WARRANTY AND PRODUCT LIABILITY CLAIMS. No amounts in excess of
$50,000 have been paid to third parties in satisfaction of warranty or other
product liability claims made against Chesapeake other than in the ordinary
course of business. Chesapeake does not have and will not have any obligations
for warranties or indemnities in connection with the conduct of its business
prior to the Closing Date in excess of the amount accrued therefor on the
unaudited balance sheet of Chesapeake at March 31, 1998.
3.13. INTELLECTUAL PROPERTY.
(a) Chesapeake owns, or is licensed or otherwise possesses legally
enforceable rights to use, all Intellectual Property rights that either
are material to Chesapeake or are commonly used by Chesapeake for the
development, support or license of any of the software products licensed
or used by Chesapeake, and all designs, permits, labels, packages and
displays, schematics, technology, know-how, computer software programs or
applications (in object code form and, with respect to Intellectual
Property rights owned or purported to be owned by Chesapeake, in source
code form) used on or in connection with such rights, and Chesapeake has
not received notice of a claim, and does not have present knowledge of any
potential claim, against Chesapeake that any of its operations,
activities, products or publications infringes on any patent, trademark,
trade name, copyright or other property right of others, or that
Chesapeake is illegally or otherwise using the trade secrets, formulae or
any property rights of others. To the knowledge of Chesapeake, (i) there
are no assertions by others against
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Chesapeake conflicting with Chesapeake's rights to any Intellectual
Property, (ii) no other Person has any superior right to the Intellectual
Property owned or purported to be owned by Chesapeake, and (iii) no other
Person has infringed the rights of Chesapeake in the Intellectual Property
or uses the Intellectual Property owned or purported to be owned by
Chesapeake without a license from Chesapeake. Chesapeake is not aware of
any steps in its judgment reasonably necessary to protect its right, title
and interest in and to the Intellectual Property that have not been taken.
(b) The execution and delivery of this Agreement by Chesapeake, and
the consummation of the transactions contemplated hereby, will not cause
Chesapeake to be in Violation of any provision of any license, sublicense
or agreement with respect to Intellectual Property.
(c) Each employee, officer and consultant of Chesapeake has
executed a confidentiality agreement in substantially the form provided to
AspenTech, providing Chesapeake with title and ownership to Intellectual
Property developed or used by Chesapeake in its business. All of such
agreements are valid, binding and enforceable in accordance with their
terms in all material respects. To the knowledge of Chesapeake, no
employee, officer or consultant of Chesapeake is in Violation of any term
or any employment or consulting contract, proprietary information and
inventions agreement, non-competition agreement, or any other contract or
agreement relating to the relationship of any such employee, officer or
consultant with Chesapeake or any previous employer.
(d) Each Chesapeake software program has been tested for compliance
with Year 2000 standards, are Year 2000 compliant and otherwise comply
with the Year 2000 warranties and representations made in binding
agreements with third parties. Year 2000 compliant means that the products
are capable of (i) correctly processing, providing and receiving date data
within and between the twentieth and twenty-first centuries and (ii)
handling the computer date rollover on December 31, 1999 at midnight.
(e) Each Chesapeake software program substantially meets the
specifications applicable to it and the standards set forth in the
documentation and marketing information and in Chesapeake's
representations and warranties (express and implied) to customers and
sales agents.
3.14. INVESTMENTS. Chesapeake does not directly or indirectly own, or have
the right to acquire, any equity interest or investment in the equity capital of
any Person. Chesapeake has no obligation to acquire any class of securities
(including debt securities) issued by any Person. Chesapeake has not owned or
controlled any subsidiary corporation or any stock or other interest in any
Person and is not a party to, and has not been a party to, or bound by any
partnership, joint venture, voluntary association, cooperative or business trust
agreement or arrangement other than in the ordinary course of business.
3.15. INSURANCE. The Chesapeake Disclosure Schedule sets forth a complete
and correct list of all insurance policies that are maintained by Chesapeake or
of which Chesapeake is a beneficiary or a named insured. All such insurance
policies will be maintained through and including the Closing Date. Such
insurance policies will not terminate as a result of any action contemplated by
this Agreement and will remain valid in accordance with their terms after the
Merger. Chesapeake is not a party to, or bound by, any Commitment requiring
Chesapeake (a) to name a third party as loss payee under any insurance policy or
binder held by or on behalf of Chesapeake or otherwise requiring Chesapeake to
obtain insurance for or on behalf of any party or (b) to provide coverage to
third parties (such as, for example, under leases or service agreements). There
is no self-insurance arrangement by or affecting Chesapeake.
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3.16. BOOKS AND RECORDS. The general ledgers and books of account of
Chesapeake are in all material respects complete and correct and have been
maintained in accordance with Chesapeake's normal accounting practices.
Chesapeake has no knowledge of any law or regulation that would materially
affect the information and disclosures set forth in the books, records and
accounts, correspondence, production records, technical, accounting,
manufacturing and procedural manuals, customer lists, studies, reports and
summaries relating to Chesapeake.
3.17. EMPLOYEE RELATIONS.
(a) Chesapeake is in material compliance with all laws respecting
employment and employment practices, terms and conditions of employment,
and wages and hours, and is not engaged in any unfair labor practice.
Chesapeake is not in arrears in the payment of any wages. There is no
material labor trouble affecting Chesapeake.
(b) The Chesapeake Disclosure Schedule sets forth a complete and
correct list of (i) the employee benefits provided by Chesapeake to its
employees and all contracts or agreements between Chesapeake and any of
its employees and (ii) Chesapeake's current payroll, including the current
salary or wage rates of each of its employees, showing separately for each
employee the amounts paid or payable as bonus payments for the year ending
December 31, 1997, including any special bonus arrangements payable prior
to the Closing.
3.18. EMPLOYEE PLANS.
(a) The Chesapeake Disclosure Schedule contains a complete and
correct list of all Employee Plans, and Chesapeake has no other
obligations relating to any Employee Plan, contingent or otherwise, past
or present, under any applicable law or the terms of any Employee Plan.
(b) No Employee Plan is subject to ERISA Title IV or to Code
section 412 or is a defined benefit plan within the meaning of ERISA
section 3(35) or Code section 414(i). Neither Chesapeake nor any Commonly
Controlled Entity has ever maintained or contributed to a "multiemployer
pension plan," as such term is defined in ERISA section 3(37). Each of
Chesapeake and any Commonly Controlled Entities has made all payments due
from it to date with respect to each Employee Plan. All amounts properly
accrued as liabilities to or expenses of any Employee Plan that have not
been paid have been properly reflected on the unaudited balance sheet of
Chesapeake at March 31, 1998. Each Employee Plan conforms to, and its
administration (where applicable) is in material compliance with, the
terms of such Employee Plan, the Code and ERISA and with all other
applicable federal, state, and local laws and regulations. To the
knowledge of Chesapeake, there are no actions, liens, suits or claims
pending or threatened (other than routine claims for benefits) with
respect to any Employee Plan. Each Employee Plan that is intended to
qualify under Code section 401(a) or 402(a) so qualifies, and the Internal
Revenue Service has issued a favorable determination letter with respect
to such plan. No event has occurred and there exists no condition or set
of circumstances that presents a material risk of a partial termination
(within the meaning of Code section 411(d)(3)) of any Employee Plan.
Chesapeake does not have any Employee Plan that is a "group health plan"
(as defined in ERISA section 607(1)), other than medical insurance
coverage as described in the Chesapeake Disclosure Schedule. No assets or
properties of Chesapeake are allocated to or held in a "rabbi trust" or
similar funding vehicle. Chesapeake does not have any Employee Plan that
is a welfare plan within the meaning of ERISA section 3(1) (regardless of
whether the plan is covered by ERISA) and that provides benefits to
current or former employees beyond their retirement or other termination
of service (other than coverage mandated by COBRA, the cost of which is
fully paid by the current or former employee
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or his dependents); and there exists no (i) unfunded benefit obligations
with respect to any employee of Chesapeake that are not fairly reflected
by reserves shown on Chesapeake's most recent financial statements or (ii)
reserves, assets, surpluses or prepaid premiums with respect to any
Employee Plan that is a welfare plan within the meaning of ERISA
section 3(1) (regardless of whether the plan is covered by ERISA).
(c) Chesapeake has performed in all material respects all
obligations required to be performed by it under, and is not in Violation
in any respect of, and there has been no Violation by any other party with
respect to, any of the Employee Plans. There has been no "prohibited
transaction" (as such term is defined in Code section 4975 or in part 4 of
subtitle B of ERISA Subchapter I) with respect to any Employee Plan. No
Employee Plan has incurred any federal income or excise tax liability.
(d) Chesapeake has previously delivered or made available to
AspenTech complete and correct copies of all Employee Plans that have been
reduced to writing and written descriptions of all Employee Plans that
have not been reduced to writing, and all agreements, including trust
agreements and insurance contracts, related to such Employee Plans.
(e) All premiums or other payments required by the terms of any
group or individual insurance policies and programs maintained by
Chesapeake and covering any present or former employees of Chesapeake with
respect to all periods up to and including the Closing Date have been
fully paid for the length of the obligation.
(f) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any individual currently or formerly
employed by Chesapeake or any Commonly Controlled Entity to severance pay,
unemployment compensation or any similar payment, (ii) accelerate the time
of payment or vesting, or increase the amount of any compensation due to,
any individual currently or formerly employed by Chesapeake or any
Commonly Controlled Entity, (iii) constitute or involve a prohibited
transaction (as defined in ERISA section 406 or Code section 4975),
constitute or involve a breach of fiduciary responsibility within the
meaning of ERISA section 502(l) or otherwise violate part 4 of title I or
ERISA or (iv) result in the payment of compensation that would, in
combination with any other payment, result in an "excess parachute
payment" within the meaning of Code section 280G(b).
(g) All reports, returns and similar items required to be filed
with any Government Entity or distributed to employees or Employee Plan
participants in connection with the maintenance or operation of any
Employee Plan have been duly and timely filed and distributed, and there
have bee no acts or omissions by Chesapeake or any Commonly Controlled
Entity that have given rise to, or may reasonably be expected to give rise
to, any material fines, penalties, taxes or related charges under ERISA
section 502(c), 502(i) or 4071 or Code chapter 43 or section 6039D for
which Chesapeake or any Commonly Controlled Entity may be liable.
3.19. POTENTIAL CONFLICTS OF INTEREST. Except for compensation received as
an employee, no officer, director or Stockholder of Chesapeake and no entity
known by Chesapeake to be controlled by any officer, director or Stockholder of
Chesapeake:
(a) is directly or indirectly engaged in business as a competitor,
lessor, lessee, customer or supplier of Chesapeake; owns
directly or indirectly any interest in any Person (except for
ownership of not more than five percent of the outstanding
voting stock of any publicly traded company) that is directly
or indirectly engaged in business as a competitor, lessor,
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lessee, franchisee, customer or supplier of Chesapeake; or is
an officer, director, employee or consultant of any such
Person;
(b) owns directly or indirectly, in whole or part, any material
tangible or intangible property used by Chesapeake;
(c) has any cause of action or other claim whatsoever against, or
owes any amount to, Chesapeake, except for (i) claims in the
ordinary course of business, such as for normal compensation,
accrued vacation pay and advances for reimbursable expenses,
(ii) rights under the ESOP, and (iii) similar matters in
agreements existing on the date hereof, complete and correct
copies of which have been provided or made available to
AspenTech; or
(d) has made any payment or commitment to pay any commission, fee
or other amount to, or purchase or obtain or otherwise
contract to purchase or obtain any goods or services from, any
Person of which any officer or director of Chesapeake is a
partner or stockholder (except for ownership of not more than
five percent of the outstanding voting stock of any publicly
traded company).
3.20. BANK ACCOUNTS. Chesapeake has provided or made available to
AspenTech complete and correct written summaries of information regarding all
accounts, lock boxes and safe deposit boxes maintained by Chesapeake at banks,
trust companies, securities or other brokers or other financial institutions,
including the names of all Persons authorized to draw thereon or have access
thereto.
3.21. TAXES.
(a) Chesapeake has timely filed in accordance with all applicable
laws all Tax Returns required to be filed by or with respect to it, its
operations and assets, and all Taxes shown as due on such Tax Returns have
been paid. All Tax Returns filed by Chesapeake with respect to Taxes were
prepared in compliance with all applicable laws and regulations and were
true and complete in all material respects as of the date on which they
were filed or as subsequently amended to the date hereof. Complete and
correct copies of federal, state, local and foreign Tax Returns of
Chesapeake for each of the years ended December 31, 1993, 1994, 1995 and
1996 have been delivered or made available to AspenTech. Prior to the date
hereof, Chesapeake has provided or made available to AspenTech complete
and correct copies of all revenue agents' reports and other written
assertions of deficiencies or other liabilities for Taxes with respect to
the past periods for which the applicable statute of limitations has not
expired. Chesapeake will provide to AspenTech copies of any such reports
or written assertions received after the date hereof within ten days of
receipt.
(b) Chesapeake has timely filed, or will timely pay on or prior to
the Closing Date, all Taxes for which notice of, or assessment or demand
for, payment has been received or that are otherwise due and payable up to
and including the Closing Date with respect to Chesapeake, its operations
and assets (in each case, whether or not shown on any Tax Return).
(c) Chesapeake has complied in all material respects with all
applicable laws, rules and regulations relating to the withholding of
Taxes and has timely collected or withheld and paid over (and up to the
Closing Date will have timely collected or withheld and paid over) to the
proper governmental authorities substantially all amounts required to be
so collected or withheld and paid over for all periods up to the Closing
Date under all applicable laws. There are not currently in effect any
waivers or
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extensions of any applicable statute of limitations for the assessment or
collection of Taxes with respect to any Tax Return that relates to
Chesapeake, and no request for any such waiver or extension is pending.
There are no Tax rulings, requests for rulings or closings agreements
relating to Chesapeake that could affect its liability for Taxes for any
period after the Closing Date.
(d) No action, suit, proceeding, investigation, audit, claim or
assessment is presently pending, or to the knowledge of Chesapeake
threatened, with regard to any Taxes for which Chesapeake would or could
be liable. Chesapeake does not know of any fact or condition that, if
known to any taxing authority having jurisdiction, would likely result in
the issuance of a notice of proposed deficiency or similar notice of
intention to assess Taxes against Chesapeake, and no issue has arisen in
any examination of Chesapeake by any taxing authority that if raised with
respect to any other period not so examined would, if upheld, result in a
material deficiency for such other period.
(e) Chesapeake is not a party to, bound by or subject to any Tax
allocation or Tax sharing agreement (or similar agreement). Chesapeake has
no current or potential contractual obligation to indemnify any other
Person with respect to Taxes, and has no obligation to make distributions
in respect of Taxes.
(f) No claim has ever been made by a taxing authority in a
jurisdiction where Chesapeake does not file Tax Returns that Chesapeake is
or may be subject to taxation in such jurisdiction.
(g) No power of attorney has been granted by Chesapeake with
respect to any matter relating to Taxes, which power of attorney is
currently in force.
3.22. ENVIRONMENTAL MATTERS.
(a) Chesapeake has been in the past and is now in material
compliance with all Environmental Laws and all requirements of applicable
Permits pertaining thereto.
(b) Chesapeake has received no notification that it is or could be,
and to the knowledge of Chesapeake there is no basis for it to become, and
it is not, subject to any claim, action, obligation, proceeding,
investigation or evaluation, directly or indirectly relating to any of its
current or past operations, or those of any predecessor or affiliate, or
any of its currently or formerly owned, leased or operated properties, or
those of any predecessor or affiliate, that could reasonably be expected
directly or indirectly to result in the incurrence of any Environmental
Liabilities and Costs by Chesapeake.
(c) There are not now and never have been any underground storage
tanks situated on any real property owned by Chesapeake or any of its
affiliates or, to the knowledge of Chesapeake, any property leased or
operated by Chesapeake or any of its affiliates.
(d) Chesapeake has entered into no agreement with any Government
Entity or other Person by which responsibility was assumed, either
directly or indirectly, for the conduct of any Remedial Action or the
incurrence of any other Environmental Liabilities and Costs.
(e) Chesapeake has not prepared, caused to be prepared or received
any environmental audits, environmental risk assessments or site
assessments. Chesapeake is not a party to any Commitment with respect to
the removal or disposal of any Oil or Hazardous Material.
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3.23. FINDER'S FEES. Neither Chesapeake nor the Principal Stockholder has
incurred any liability, contingent or otherwise, for brokerage fees, finder's
fees, agent's commissions, financial advisory fees or other similar forms of
compensation in connection with this Agreement or any of the transactions
contemplated hereby, other than to Donaldson, Lufkin & Jenrette Securities
Corporation.
3.24. DISCLOSURE. Disclosure of any matter herein, including as set forth
under any Section of the Chesapeake Disclosure Schedule, shall, if reasonable,
be deemed to be set forth under any other Section of the Chesapeake Disclosure
Schedule for which such matter is applicable. Chesapeake has made available to
AspenTech all material facts pertaining to its business and properties.
4. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDER.
The Principal Stockholder represents and warrants to AspenTech and
Acquisition Corp. as follows:
4.1. INVESTMENT IN ASPENTECH COMMON.
(a) The Principal Stockholder is an accredited investor as defined
in Rule 501 under the Securities Act and is a resident of New Jersey. The
Principal Stockholder (together with such Principal Stockholder's
financial and other advisors, if any) has such knowledge and expertise in
financial and business matters that the Principal Stockholder is capable
of evaluating the merits and risks of the conversion of the Principal
Stockholder's shares of Chesapeake Common into shares of AspenTech Common
pursuant to the Merger and of protecting the Principal Stockholder's
interests in connection therewith. The Principal Stockholder has the
ability to bear the economic risk of his investment in AspenTech Common.
(b) The Principal Stockholder has received from AspenTech and has
reviewed copies of AspenTech's proxy statement dated November 25, 1997,
annual report on Form 10-K for the fiscal year ended June 30, 1997 and
quarterly reports on Form 10-Q for the quarters ended September 30, 1997
and December 31, 1997, and will review any additional SEC Documents
provided by AspenTech. The Principal Stockholder has had an opportunity to
discuss AspenTech's business, management and financial affairs with
AspenTech's management.
(c) The Principal Stockholder understands that the shares of
AspenTech Common to be issued in connection with the Merger will not be
registered under the Securities Act and will not be registered or
qualified under the securities or blue sky laws of any jurisdiction,
except as contemplated by the Registration Rights Declaration. The
Principal Stockholder further understands that such shares are being
issued to the Stockholders pursuant to exemptions contained in the
Securities Act and other applicable securities and blue sky laws and that
AspenTech's reliance on these exemptions is based in part on the
representations of the Principal Stockholder made herein. The Principal
Stockholder is acquiring shares of AspenTech Common for his own account
and not with a view to, or for resale in connection with, any distribution
thereof in Violation of any applicable law, and unless the shares have
been registered in accordance with this Agreement and such registration is
then in effect, the Principal Stockholder has no present intention of
selling, granting any participation in, or otherwise distributing the same
in Violation of any applicable law. The Principal Stockholder understands
that the shares of AspenTech Common issued in the Merger will constitute
"restricted securities" within the meaning of Rule 144 under the
Securities Act and that, as such, such shares must be held indefinitely
unless they are subsequently registered under the Securities Act or unless
an exemption from the registration requirements of the Securities Act is
available. The Principal Stockholder is also aware of the provisions of
Rule 144 under the Securities Act that permit limited resales of shares
purchased in a
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private placement subject to the satisfaction of certain conditions,
including the existence of a public market for the shares, the
availability of certain current public information about AspenTech, the
resale occurring not less than one year after a party has purchased and
paid for the security to be sold, the sale being effected through a
"broker's transaction" or in transactions directly with a "market maker"
(as provided by Rule 144(f) under the Securities Act) and the number of
shares being sold during any three-month period not exceeding specified
limitations.
(d) Without in any way limiting the representations set forth
above, the Principal Stockholder further agrees not to make any
disposition of all or any portion of the shares of AspenTech Common
received by the Principal Stockholder as a result of the Merger will
unless and until:
(i) there is then in effect a registration statement under
the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement;
or
(ii) the Principal Stockholder (A) has notified AspenTech of
the proposed disposition and has furnished AspenTech with a
reasonably detailed statement of the circumstances surrounding the
proposed disposition and (B) if requested by AspenTech, has
furnished AspenTech with an opinion of counsel, reasonably
satisfactory to AspenTech, that such disposition will not require
registration under the Securities Act.
(e) It is understood that each certificate representing shares of
AspenTech Common received by the Stockholders as a result of the Merger
will bear a legend substantially to the following effect (in addition to
any legend required under applicable state securities or blue sky laws):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
4.2. EXECUTION; NO VIOLATIONS.
(a) This Agreement has been duly executed and delivered by the
Principal Stockholder, constitutes a valid and binding obligation of the
Principal Stockholder, and is enforceable against the Principal
Stockholder in accordance with its terms, all as may be subject to or
affected by the Creditor Exception. As of the Closing Date, the Principal
Stockholder's Employment Agreement and Non-Competition Agreement will be
duly and validly executed and delivered by the Principal Stockholder and
will constitute valid and binding obligation of the Principal Stockholder
enforceable in accordance with their respective terms, all as may be
subject to or affected by the Creditor Exception.
(b) The execution, delivery and performance of this Agreement by
the Principal Stockholder do not and will not result in any Violation of
any provision of (i) any note, agreement, contract, license, instrument,
mortgage, lease or other obligation by which the Principal Stockholder is
bound, (iii) any judgment, order, decree, ruling or injunction applicable
to the Principal Stockholder or (iv) any statute, law, regulation or rule
of any Government Entity applicable to the Principal Stockholder.
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(c) No consent, approval, order or authorization of, or
registration, declaration or filing with any Government Entity is required
by or with respect to the Principal Stockholder in connection with the
execution, delivery and performance of this Agreement by the Principal
Stockholder, except for the filing of a notification under the HSR Act and
such other consents, authorizations, filings, approvals and registrations
that if not obtained or made would not have a material adverse effect on
the transactions contemplated by this Agreement.
5. REPRESENTATIONS AND WARRANTIES OF ASPENTECH AND ACQUISITION CORP.
AspenTech and Acquisition Corp., jointly and severally, represent and
warrant to Chesapeake as follows:
5.1. ORGANIZATION AND QUALIFICATION. Each of AspenTech and Acquisition
Corp. is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of AspenTech and Acquisition Corp.
is qualified to do business and is in good standing in all other jurisdictions
in which such qualification is required, other than those jurisdictions where
failure to so qualify would not have an AspenTech MAE. Each of AspenTech and
Acquisition Corp. has all requisite corporate power and authority to own its
property, to carry on its business as now being conducted, to execute, deliver
and perform this Agreement, and to consummate the transactions contemplated by
this Agreement.
5.2. CAPITALIZATION.
(a) The authorized capital stock of AspenTech consists of (i)
10,000,000 shares of Preferred Stock, $.10 par value, none of which are
issued or outstanding, and (ii) 40,000,000 shares of AspenTech Common, of
which 21,728,140 shares were issued and outstanding as of April 24, 1998.
All of the outstanding shares of AspenTech Common are, and the shares of
AspenTech Common when issued and delivered to the Stockholders in
accordance with the Delaware Agreement of Merger will be, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights created by statute, AspenTech's Certificate of Incorporation or
By-Laws, or any agreement to which AspenTech is a party or by which it is
bound. All outstanding shares of AspenTech Common are approved for
quotation on the Nasdaq National Market, and there are no proceedings to
revoke or suspend the quotation of AspenTech Common on the Nasdaq National
Market.
(b) The authorized capital stock of Acquisition Corp. consists of
1,000 shares of common stock, $.001 par value, all of which are
outstanding and held of record by AspenTech.
5.3. AUTHORITY; NO VIOLATIONS
(a) The execution, delivery and performance of this Agreement and
all agreements and instruments to be entered into or delivered by
AspenTech in connection with the transactions contemplated hereby
(including the Escrow Agreement, the Non-Competition Agreements and the
Registration Rights Declaration) have been duly and validly authorized by
all requisite corporate action on the part of AspenTech. This Agreement
has been duly executed and delivered by AspenTech, constitutes a valid and
binding obligation of AspenTech, and is enforceable against AspenTech in
accordance with its terms, all as may be subject to or affected by the
Creditor Exception. As of the Closing Date, the Escrow Agreement and each
of the Non-Competition Agreements will be duly and validly executed and
delivered by AspenTech, the Registration Rights Declaration will be duly
and validly adopted by the board of directors of AspenTech, and each of
the Escrow Agreement, the Non-Competition Agreement and the Registration
Rights Declaration will constitute a valid and
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binding obligation of AspenTech enforceable against AspenTech in
accordance with its terms, all as may be subject to or affected by the
Creditor Exception.
(b) The execution, delivery and performance of this Agreement and
all agreements and instruments to be entered into or delivered by
Acquisition Corp. in connection with the transactions contemplated hereby
(including the Delaware Agreement of Merger and the New Jersey Certificate
of Merger) have been duly and validly authorized by all requisite
corporate action on the part of Acquisition Corp. This Agreement has been
duly executed and delivered by Acquisition Corp., constitutes a valid and
binding obligation of Acquisition Corp., and is enforceable against
Acquisition Corp. in accordance with its terms, all as may be subject to
or affected by the Creditor Exception. As of the Closing Date, each of the
Delaware Agreement of Merger and the New Jersey Certificate of Merger will
be duly and validly executed and delivered by Chesapeake and will
constitute a valid and binding obligation of Acquisition Corp. enforceable
in accordance with its terms, all as may be subject to or affected by the
Creditor Exception.
(c) The execution, delivery and performance of this Agreement by
AspenTech do not and will not result in any Violation of any provision of
(i) the Certificate of Incorporation or By-Laws of AspenTech, (ii) any
Commitment by which AspenTech is bound, (iii) any judgment, order, decree,
ruling or injunction applicable to AspenTech or the AspenTech Common or
(iv) any statute, law, regulation or rule of any Government Entity
applicable to AspenTech or the AspenTech Common, except to the extent that
a consent or waiver to any such Violation has been obtained as of the date
hereof or is obtained prior to the Closing.
(d) The execution, delivery and performance of this Agreement by
Acquisition Corp. do not and will not result in any Violation of any
provision of (i) the Certificate of Incorporation or By-Laws of
Acquisition Corp., (ii) any Commitment by which Acquisition Corp. is
bound, (iii) any judgment, order, decree, ruling or injunction applicable
to Acquisition Corp. or (iv) any statute, law, regulation or rule of any
Government Entity applicable to Acquisition Corp., except to the extent
that a consent or waiver to any such Violation has been obtained as of the
date hereof or is obtained prior to the Closing.
(e) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Government Entity is
required by or with respect to AspenTech or Acquisition Corp. in
connection with the execution, delivery and performance of this Agreement
by AspenTech and Acquisition Corp., except for the filing of a
notification under the HSR Act, the filing of the Delaware Agreement of
Merger with the Secretary of State of the State of Delaware, the filing of
the New Jersey Certificate of Merger with the Secretary of State of the
State of New Jersey, such filings under the Securities Act or applicable
state securities or blue sky laws as may be necessary or desirable in
connection with the issuance of shares of AspenTech Common in the Merger
or with the transactions contemplated by the Registration Rights
Declaration, the filing of a current report on Form 8-K with the
Securities and Exchange Commission in accordance with the Exchange Act,
and such other consents, authorizations, filings, approvals and
registrations that if not obtained or made would not have a material
adverse effect on the transactions contemplated by this Agreement.
5.4. SEC DOCUMENTS. AspenTech has furnished to Chesapeake and the
Principal Stockholder complete and correct copies of AspenTech's proxy statement
dated November 25, 1997, annual report on Form 10-K for the fiscal year ended
June 30, 1997 and quarterly reports on Form 10-Q for the quarters ended
September 30, 1997 and December 31, 1997, and will furnish, promptly after
filing and in any event before the Closing Date, complete and correct copies of
any other statement, report, registration statement or
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definitive proxy statement filed by AspenTech with the Securities and Exchange
Commission from the date hereof to the Closing Date. Such proxy statement,
annual report and quarterly reports and any such other filings are collectively
referred to herein as the "SEC Documents." As of their respective filing dates,
the SEC Documents complied or will comply in all material respects with the
requirements of the Exchange Act or the Securities Act (as the case may be) and
none of the SEC Documents contained or will contain any untrue statement of a
material fact or will omit to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading, as of their
respective filing dates, except to the extent corrected by a subsequently filed
SEC Document.
5.5. FINANCIAL STATEMENTS. The audited and unaudited consolidated balance
sheets and consolidated statements of income, stockholders' equity and cash
flows included in the SEC Documents have been or will be (as the case may be)
prepared in accordance with generally accepted accounting principles, applied on
a consistent basis for the periods involved (except that the unaudited
statements do not or may not contain all the notes that may be required by
generally accepted accounting principles and are or may be subject to normal and
recurring year-end adjustments that are not expected to be material in amount),
and fairly present in all material respects the consolidated financial position
of AspenTech and its consolidated subsidiaries as of the respective dates
thereof and its results of operations and cash flows for the periods then ended.
5.6. LITIGATION. No judgment has been entered by, and no claim, dispute,
action, suit, appeal, legal, administrative or arbitral proceeding, or
investigation, at law or in equity, is pending or, to the knowledge of AspenTech
or Acquisition Corp., threatened that materially and adversely affects, or could
materially and adversely affect, the ability of AspenTech or Acquisition Corp.
to perform under this Agreement.
5.7. FINDER'S FEES. Neither AspenTech nor Acquisition Corp. has incurred
any liability, contingent or otherwise, for brokerage fees, finder's fees,
agent's commissions, financial advisory fees or other similar forms of
compensation in connection with this Agreement or any of the transactions
contemplated hereby, other than to NationsBanc Montgomery Securities.
6. COVENANTS OF CHESAPEAKE AND THE PRINCIPAL STOCKHOLDER AS TO CONDUCT OF
BUSINESS.
From and after the date of this Agreement and until the Closing Date, each
of Chesapeake and the Principal Stockholder covenants and agrees with AspenTech
and Acquisition Corp. that, except as specifically contemplated by this
Agreement or as consented to by AspenTech and Acquisition Corp. in writing:
6.1. OPERATION OF BUSINESS. Chesapeake shall conduct its business and
maintain its assets and properties diligently and in substantially the same
manner as prior to the date of this Agreement. Chesapeake shall not: (a) incur
any obligation or liability other than in the ordinary course of business
consistent with past practice; (b) mortgage, pledge, subject to any lien or
encumbrance, sell, transfer or assign any of its assets or properties other than
in the ordinary course of business consistent with past practice; (c) enter into
any contracts, agreements, leases or understandings other than in the ordinary
course of business consistent with past practice; (d) modify, amend or terminate
any material Commitments; (e) waive any rights of material value; or (f)
otherwise materially change the normal conduct of its business.
6.2. CAPITAL STRUCTURE. Chesapeake shall not: (a) declare or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of any shares of Chesapeake Common; (b) issue,
deliver or sell, or authorize the issuance, delivery or sale of, any shares of
capital stock of any class, any voting debt or any options, warrants, calls,
rights or agreements that obligate Chesapeake
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to issue, deliver or sell additional shares of Chesapeake Common or voting debt
or to grant, extend or enter into any option, warrant, call, right or agreement,
other than any issuance of shares of Chesapeake Common pursuant to the Faccenda
Agreement; (c) split, combine or reclassify any of the Chesapeake Common; or (d)
purchase, redeem or otherwise acquire, directly or indirectly, any Chesapeake
Common.
6.3. NOTIFICATION OF CHANGES. Chesapeake shall promptly advise AspenTech
in writing of any material change in the condition of its assets, properties or
business, whether arising from matters occurring in the ordinary course of
business or otherwise.
6.4. EXCLUSIVITY. Chesapeake and the Principal Stockholder shall not,
directly or indirectly, through any officer, director or agent or otherwise: (a)
solicit, initiate or encourage any acquisition proposal or offers from any
Person relating to the purchase of all or a material portion of the capital
stock or assets of Chesapeake; (b) discuss any acquisition proposals relating to
Chesapeake either from parties who have already expressed an interest in
Chesapeake or from any other unsolicited outside sources; or (c) disclose (other
than to AspenTech) any material unpublished information concerning Chesapeake.
Chesapeake and the Principal Stockholder shall promptly notify AspenTech if any
such proposal or offer, or any inquiry or contact with any Person with respect
thereto, is made.
6.5. INVESTMENTS AND ACQUISITIONS. Chesapeake shall not (a) acquire any
equity interest or investment in any Person, (b) merge or consolidate with any
other Person, or (c) enter into any partnership, joint venture, voluntary
association, cooperative or business trust agreement or arrangement.
6.6. INDEBTEDNESS. Chesapeake shall not, and shall not propose to, incur
any Indebtedness for borrowed money, incur any other Indebtedness except in the
ordinary course of business consistent with past practice, or guarantee any
Indebtedness of others. Chesapeake shall not pay, discharge or satisfy, in an
amount in excess of $50,000 (in the aggregate), any claims, liabilities or
obligations reflected or reserved against in the unaudited balance sheet of
Chesapeake at March 31, 1998, except in the ordinary course of business
consistent with past practice.
6.7. LITIGATION. Chesapeake shall not commence any litigation without the
prior written consent of AspenTech, except that Chesapeake may take such action
if a delay would result in an irreparable material injury or loss to it.
6.8. COMMITMENTS. Chesapeake shall not: (a) enter into any Commitment or
engage in any transaction not in the ordinary course of business consistent with
past practice; (b) amend or otherwise modify any Commitment except in the
ordinary course of business consistent with past practice; or (c) do or omit to
do any act or permit any act or omission to act, which act or omission will
result in a Violation of any provision of any Commitment of Chesapeake.
6.9. TAXES. Chesapeake shall not make or change any material election in
respect of Taxes, adopt or change any accounting method in respect of Taxes,
enter into any closing agreement, consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes, or
settle any claim or assessment in respect of Taxes, except for any such
settlement that is entered into in connection with the currently pending audit
of the Internal Revenue Service and that is consented to in writing by AspenTech
(which consent shall not be unreasonably withheld).
6.10. EMPLOYEE PLANS. Chesapeake shall not adopt any new Employee Plan or
amend any Employee Plan in any material respect.
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6.11. EMPLOYEE MATTERS. Chesapeake shall not (a) adopt any collective
bargaining agreement, (b) grant any severance or termination pay to any
director, officer or other employee of Chesapeake except in accordance with
existing agreements and policies disclosed in the Chesapeake Disclosure
Statement, (c) grant any general or uniform increase in the rates of pay of
employees of Chesapeake or in the benefits under any bonus plan or other
compensation arrangements or (d) increase the compensation payable or to become
payable to any officer or key salaried employee.
6.12. COMPLIANCE WITH APPLICABLE LAWS. Chesapeake shall comply in all
respects with all applicable laws, ordinances and regulations and all applicable
orders, judgments, injunctions, awards and decrees of Government Entities,
except where any failure, individually or in the aggregate with any other such
failures, would not have a Chesapeake MAE.
7. ADDITIONAL COVENANTS.
7.1. ACCESS TO INFORMATION. Chesapeake shall afford to AspenTech, and
shall cause its independent accountants to afford to AspenTech and AspenTech's
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Closing to all of Chesapeake's
assets, properties, books, Commitments and records. Chesapeake and the Principal
Stockholder shall permit AspenTech and its representatives to make abstracts
from and copies of such books and records. During such period, Chesapeake shall
use its reasonable best efforts to furnish promptly to AspenTech all other
information concerning the business, properties and personnel of Chesapeake as
AspenTech may reasonably request. Chesapeake shall use its reasonable best
efforts to cause its management and independent auditors to facilitate on a
timely basis (a) the preparation of financial statements (including pro forma
financial statements if required) as required by AspenTech to comply with
applicable regulations of the Securities and Exchange Commission and (b) the
review of any Chesapeake review work papers for any of the past three fiscal
years or any portion of the current fiscal year, including the examination of
selected interim financial statements and data.
7.2. CONFIDENTIALITY.
(a) For purposes of this Section 7.2, a "party" shall refer to (i)
together, Chesapeake (prior to the Closing Date) and the Principal
Stockholder and (ii) together, AspenTech and Acquisition Corp. Each party
shall treat as confidential, and shall cause its accountants, counsel and
other representatives to treat as confidential, all documents and
information concerning the other party furnished by the other party to
such party (including documents and information furnished prior to the
date hereof) in connection with the transactions contemplated by this
Agreement, except to the extent that such any such document or
information: (i) at the time of its disclosure to the receiving party by
or on behalf of the disclosing party is already known or available to the
receiving party, provided that the receiving party is not subject to
similar restrictions of confidentiality as set forth herein with a third
party with respect to such information; (ii) is or becomes known or
available to the public other than as a result of an unauthorized
disclosure by the receiving party or its directors, officers, employees,
agents or representatives; (iii) is or becomes known or available to the
receiving party without similar restrictions of confidentiality as set
forth herein from a source other than the disclosing party, provided that
such source is not known by the receiving party, after reasonable inquiry,
to be bound by a confidentiality agreement with, or other obligation of
secrecy to, the disclosing party that would prohibit such disclosures to
the receiving party by such other party; (iv) is independently generated
by the receiving party and not derived from confidential information; or
(v) is required to be disclosed by the receiving party by any law,
regulation, court order or other legal requirement, provided that the
recipient takes reasonable steps to limit such disclosure to the extent
permissible under law. Subject to the foregoing,
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each party shall not release or disclose such information or documents to
any Person other than its representatives in connection with this
Agreement and shall not use such information for purposes other than as
contemplated by this Agreement. In the event of the termination of this
Agreement, each party hereto shall, and shall cause its representatives
to, deliver to the other party the originals of all documents obtained by
such party or on behalf of such party from the other party in connection
with this Agreement, whether so obtained before or after the execution
hereof, and such party shall, and shall cause its representatives to,
destroy all abstracts therefrom and copies thereof.
(b) Except for a press release issued pursuant to Section 7.3 or a
filing made by AspenTech with the Securities and Exchange Commission
pursuant to the Securities Act or the Exchange Act, no party shall
disclose to any Person (other than the party's representatives) any
information regarding the transactions contemplated by this Agreement,
including the existence and terms of this Agreement. Notwithstanding the
foregoing, after such a press release or filing, (i) either party may
disclose to its employees, its clients and others information regarding
the transactions contemplated by this Agreement, but only to the extent
(A) such information is set forth in such press release or filing or (B)
such information relates to the proposed operations of the Surviving
Corporation after the Closing and disclosure thereof to such parties has
been generally agreed upon in advance by AspenTech and Chesapeake and (ii)
Chesapeake and the Principal Stockholder may disclose to the other
Stockholders and to ESOP participants such additional information
regarding the transactions contemplated by this Agreement as they may deem
necessary or desirable to effect such transactions, provided that they
take reasonable steps to ensure that such other Stockholders maintain the
confidentiality of such additional information. Prior to the earlier of
(i) the time that this Agreement is disclosed in a current report on Form
8-K filed by AspenTech after the Closing and (ii) two full business days
after the time that this Agreement is terminated, the Principal
Stockholder shall not, directly or indirectly, buy, sell or otherwise
trade in any shares of AspenTech Common or advise any other Person as to
any trading of AspenTech Common.
(c) The agreements contained in this Section 7.2 shall survive any
termination of this Agreement and remain in effect for a period of five
years from the date hereof.
7.3. PUBLIC DISCLOSURE. Subject to the obligations of the parties to
comply with applicable laws (including state corporate laws and federal and
state securities laws) and the obligation of AspenTech to comply with the rules
and regulations of the Nasdaq Stock Market, Inc., any press release or other
public disclosure of information regarding the transactions contemplated by this
Agreement (including the existence and terms of this Agreement) shall be
approved by AspenTech and Chesapeake, which approval shall not be unreasonably
withheld.
7.4. POOLING ACCOUNTING. No party to this Agreement shall knowingly take
any action, directly or indirectly, that would cause the Merger to fail to
qualify as a pooling of interests, including taking any action that would alter
the equity interests of Chesapeake in a way that would prohibit pooling of
interests treatment for the Merger. AspenTech shall use its reasonable best
efforts to publish financial results reflecting the first thirty days of
combined operations of AspenTech and the Surviving Corporation (i) by August 11,
1998, if the Closing occurs by May 31, 1998, or (ii) by October 27, 1998, if the
Closing occurs after May 31, 1998 but before September 1, 1998.
7.5. CONSENTS; FURTHER ASSURANCES. The parties shall use their reasonable
best efforts to obtain any consent, authorization, order or approval of, or any
exemption by, any Government Entity, or other third party, required to be
obtained or made by such party in connection with the taking of any action
contemplated by this Agreement (including, with respect to Chesapeake, the
consents and approvals required
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from third parties relating to Commitments listed under Section 3.3(c) of the
Chesapeake Disclosure Schedule), provided that AspenTech shall not be required
to agree to any divestiture by AspenTech, Chesapeake or any of AspenTech's
subsidiaries of shares of capital stock or of any business, assets or properties
of AspenTech, Chesapeake or any of AspenTech's subsidiaries or the imposition of
any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such stock, assets or properties.
Each party shall use its reasonable best efforts to ensure that its
representations and warranties herein remain true in all material respects and
to obtain the satisfaction of the conditions specified in Section 8 of this
Agreement and the consummation of the transactions contemplated hereby.
AspenTech or Acquisition Corp. shall give prompt notice to Chesapeake and the
Principal Stockholder, and Chesapeake or the Principal Stockholder shall give
prompt notice to AspenTech and Acquisition Corp., of (a) the occurrence or
non-occurrence of any event that is likely to cause any representation or
warranty of such notifying party contained in this Agreement to be untrue at or
prior to the Closing Date and (b) any failure of such notifying party to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; the delivery of any notice pursuant to this sentence
shall not limit or otherwise affect any remedies available to the parties
receiving notice. At any time and from time to time after the Closing, the
parties agree to cooperate with each other to execute and deliver such other
documents, instruments or transfer or assignment, files, books and records, and
to do all such further acts and things, as may be reasonably required to carry
out the transactions contemplated hereby.
7.6. UPDATES OF CHESAPEAKE DISCLOSURE SCHEDULE. Chesapeake may, from time
to time after the date hereof but not later than three business days before the
Closing Date, prepare and deliver to AspenTech updates to the Chesapeake
Disclosure Schedule disclosing any changes thereto required in respect of
matters not known to Chesapeake on or prior to the date hereof. In the event the
Closing does not occur, the initial Chesapeake Disclosure Schedule shall
constitute the Chesapeake Disclosure Schedule to be used in determining any
inaccuracy in, or breach of, any representations or warranties of Chesapeake
hereunder. In the event the Closing occurs, the final version of the Chesapeake
Disclosure Schedule as of the Closing Date shall supersede the initial
Chesapeake Disclosure Schedule and shall constitute the definitive Chesapeake
Disclosure Schedule for all purposes of this Agreement.
7.7. ANTITRUST LAWS. As promptly as practicable, to the extent required
under applicable laws, Chesapeake, the Principal Stockholder, AspenTech and
Acquisition Corp. shall make all such filings and submissions under the HSR Act
as may be reasonably required to be made in connection with this Agreement and
the transactions contemplated hereby. Chesapeake and the Principal Stockholder
shall furnish to AspenTech and Acquisition Corp., and AspenTech and Acquisition
Corp. shall furnish to Chesapeake and the Principal Stockholder, such
information and assistance as the others may reasonably request in connection
with the preparation of any such filings and submissions. Chesapeake and the
Principal Stockholder shall provide AspenTech and Acquisition Corp., and
AspenTech and Acquisition Corp. shall provide Chesapeake and the Principal
Stockholder, with copies of all correspondence, filings or communications (or
memoranda setting forth the substance thereof) between such party or any of its
representatives, on the one hand, and any Government Entity or members of their
respective staffs, on the other hand, with respect to this Agreement and the
transactions contemplated hereby, except to the extent that AspenTech or
Chesapeake is advised by counsel that the provision of such information would be
inadvisable under applicable antitrust laws.
7.8. STOCK OPTIONS. On or prior to August 31, 1998, AspenTech shall grant
under, at AspenTech's sole determination, either or both of the Aspen
Technology, Inc. 1996 Special Stock Option Plan or the Aspen Technology, Inc.
1995 Stock Option Plan, to each of the Persons named in EXHIBIT L an incentive
stock option to purchase the number of shares of AspenTech Common set forth
opposite the name of such Person in EXHIBIT L, provided that such Person is an
employee of the Surviving Corporation as of the date of grant.
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7.9. EXPENSES. If the Merger is not consummated, each party shall be and
remain responsible for its costs and expenses, including fees and disbursements
of consultants, investment bankers and other financial advisors, counsel and
accountants, and the costs incurred in seeking necessary consents, in connection
with the acquisition of Chesapeake by AspenTech. In the event the Merger is
completed, (a) AspenTech and Acquisition Corp. shall be and remain responsible
for their costs and expenses and (b) the Stockholders shall be and remain
responsible for their costs and expenses and further shall be responsible for
the Offset Expenses. The obligations of the Stockholders to pay the Offset
Expenses shall be deemed to be paid by decreasing the Number of Merger Shares as
contemplated in Section 2.4. A true and complete listing of the Offset Expenses
shall be set forth in a certificate delivered to AspenTech by Chesapeake no
later than two business days before the Closing Date.
7.10. TAX MATTERS. The parties shall not, before or after the Effective
Time, purposefully take any action or fail to take any action that would
prevent, or would be reasonably likely to prevent, the Merger from qualifying as
a reorganization within the meaning of Code section 368(a). Each of the
Stockholders and each participant in the ESOP shall pay all Taxes relating to
any resale of shares of AspenTech Common Shares acquired as a result of the
Merger.
7.11. EMPLOYMENT AND NON-COMPETITION AGREEMENTS. Chesapeake and the
Principal Stockholder shall use their reasonable best efforts to cause the
specified employees to enter into the Employment Agreements and the
Non-Competition Agreements as of the Closing Date.
7.12. SECURITIES AND CORPORATE STATUTES. AspenTech shall use its
reasonable best efforts to comply with the securities and blue sky laws of all
jurisdictions of the United States that are applicable in connection with the
Merger. Chesapeake and the Principal Stockholder shall use its reasonable best
efforts to assist AspenTech as may be necessary to comply with such laws. During
the two-year period following the Closing Date, AspenTech shall use its
reasonable best efforts to make current public information available in
accordance with Rule 144(c) under the Securities Act. If any state takeover law
shall become applicable to the transactions contemplated by this Agreement,
AspenTech and its board of directors or Chesapeake and its board of directors,
as the case may be, shall use its reasonable best efforts to obtain such
approvals and take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as practicable on
the terms contemplated by this Agreement and otherwise to minimize the effects
of such state takeover law on the transactions contemplated by this Agreement.
7.13. NASDAQ RULES. AspenTech shall comply in all material respects with
all rules and regulations of the Nasdaq Stock Market, Inc. applicable to it in
connection with the Merger.
7.14. RECORDS.
(a) At the Closing, the Stockholders shall deliver to AspenTech all
books, records and other documents in their possession relating to
Chesapeake.
(b) From the Closing Date until the later of (i) the first
anniversary of the Closing Date and (ii) the date on which all
indemnification claims under Section 9 have been resolved, AspenTech and
the Surviving Corporation shall retain all books, records and other
documents relating to the business of Chesapeake and in existence on the
Closing Date and shall make the same available during normal business
hours for inspection and copying by the Stockholders, at the Stockholders'
expense, upon reasonable request and upon reasonable advance notice. No
such books, records or other documents shall be destroyed by AspenTech or
the Surviving Corporation without first advising the Stockholders in
writing and giving the Stockholders a reasonable opportunity to obtain
possession thereof. Without
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limiting the generality of the foregoing, AspenTech and the Surviving
Corporation shall make available to the Stockholders and their
representatives all information reasonably deemed necessary or desirable
by the Stockholders in preparing their respective financial statements and
tax returns and in complying with any audits in connection therewith.
7.15. AMENDMENT OF REGISTRATION RIGHTS DECLARATION. AspenTech shall not
modify or amend the Registration Rights Declaration after the Closing Date
except with the requisite consent of Holders (as defined therein) as provided in
section 1.8 thereof.
8. CONDITIONS PRECEDENT.
8.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of
AspenTech, Acquisition Corp., Chesapeake and the Principal Stockholder to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or before the Closing, of the following conditions precedent:
(a) SEC DOCUMENTS. The SEC Documents shall not have contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, as of their respective filing dates, except to the extent
corrected by a subsequently filed SEC Document.
(b) CONSENTS OF THIRD PARTIES. There shall have been obtained
consents or approvals required from third parties relating to (i)
Commitments listed under Section 3.3(c) of the Chesapeake Disclosure
Schedule and marked with an asterisk and (ii) contracts, agreements,
licenses, leases and other instruments to which AspenTech is a party or by
which it is bound, to the extent that such contracts, agreements,
licenses, leases and other instruments are material to the business of
AspenTech.
(c) STATUTES. No statute, rule or regulation shall have been
enacted by any Government Entity that (i) makes the consummation of the
transactions contemplated by this Agreement illegal, (ii) prohibits
AspenTech's ownership or operation of all or a material portion of the
business, assets or properties of Chesapeake, or compels AspenTech to
dispose of or hold separate all or a material portion of the business,
assets or properties of Chesapeake, as a result of the transaction
contemplated by this Agreement, or (iii) renders AspenTech or Chesapeake
unable to consummate the transactions contemplated by this Agreement.
(d) ADVERSE PROCEEDINGS. No action or proceeding by or before any
court or other governmental body shall have been instituted or threatened
by any Government Entity or Person that (i) shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement,
(ii) might affect the Merger or any of the other transactions contemplated
hereby or (iii) shall seek to prohibit AspenTech's ownership or operation
of all or a material portion of the business, assets or properties of
Chesapeake.
(e) SECURITIES LAW COMPLIANCE. The issuance of AspenTech Common in
the Merger shall be exempt from registration under the Securities Act and
shall have been qualified or shall be exempt under all applicable state
securities and blue sky laws.
(f) HSR COMPLIANCE. Any applicable waiting period under the HSR Act
shall have expired or been terminated.
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(g) ACCOUNTANT'S LETTER. AspenTech shall have received from Arthur
Andersen LLP, AspenTech's independent accountants, an letter regarding
such firm's concurrence with the conclusion of AspenTech's management that
pooling of interests accounting for the Merger is appropriate under
Accounting Principles Board Opinion No. 16 if consummated in accordance
with this Agreement.
8.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ASPENTECH AND ACQUISITION
CORP. The obligations of AspenTech and Acquisition Corp. to consummate the
transactions contemplated by this Agreement are subject to the fulfillment, at
or before the Closing, of the following conditions precedent:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of Chesapeake and the Principal Stockholder contained in
this Agreement shall have been true in all material respects as of the
date of this Agreement and shall be true in all material respects at and
as of the Closing Date as though such representations and warranties were
made on and as of such date, except for any changes permitted by the terms
of this Agreement. Each of Chesapeake and the Principal Stockholder shall
have performed and complied in all material respects with all terms,
conditions, obligations, agreements and restrictions required by this
Agreement to be performed or complied with by it prior to or at the
Closing. Since March 31, 1998, there shall have been no changes that, in
the aggregate, have had or could reasonably be expected to have a
Chesapeake MAE, and the Closing, itself, shall not cause any default under
any material Commitment to which Chesapeake is a party or otherwise have a
Chesapeake MAE. AspenTech shall have received a certificate signed by the
chief executive officer and chief financial officer of Chesapeake
confirming the preceding three sentences.
(b) FINAL CHESAPEAKE DISCLOSURE SCHEDULE. The updates, if any, to
the Chesapeake Disclosure Schedule pursuant to Section 7.6 shall be
reasonably satisfactory in form and substance to AspenTech.
(c) MERGER DOCUMENTS. Chesapeake shall have executed the Delaware
Agreement of Merger and the New Jersey Certificate of Merger.
(d) EMPLOYMENT AGREEMENTS. Chesapeake and the respective employees
party thereto shall have entered into the Employment Agreements.
(e) NON-COMPETITION AGREEMENTS. Chesapeake and the respective
employees party thereto shall have entered into the Non-Competition
Agreements.
(f) ESCROW AGREEMENT. The Principal Stockholder and the Escrow
Agent shall have entered into the Escrow Agreement.
(g) FAIRNESS OPINION. AspenTech shall have received a written
opinion from NationsBanc Montgomery Securities (or any successor thereto)
to the effect that the transactions contemplated by this Agreement are
fair to the stockholders of AspenTech from a financial point of view.
(h) OPINIONS OF COUNSEL FOR CHESAPEAKE AND THE PRINCIPAL
STOCKHOLDER. AspenTech shall have received opinions dated as of the
Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel
for Chesapeake and the Principal Stockholder, and Bourne, Noll & Kenyon,
general counsel for Chesapeake and the Principal Stockholder, each in a
form reasonably satisfactory to AspenTech.
(i) TAX OPINION OF COUNSEL FOR ASPENTECH. AspenTech shall have
received an opinion dated as of the Closing Date of Foley, Hoag & Eliot
LLP (or, if such counsel fails to deliver the opinion, of
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Bourne, Noll & Kenyon) to the effect that the Merger will constitute a
reorganization within the meaning of Code section 368(a).
(j) FIRPTA COMPLIANCE. Chesapeake shall deliver to AspenTech a
properly executed statement, in a form reasonably acceptable to AspenTech,
for purposes of satisfying AspenTech's obligations under Treasury
Regulation section 1.1445-2(c)(3).
(k) DISSENTERS' RIGHTS. Either (i) none of the Stockholders shall
have any right to exercise dissenters', appraisal or similar rights under
the New Jersey Business Corporation Act by virtue of the Merger or (ii)
Stockholders owning less than five percent of the shares of Chesapeake
Common outstanding immediately prior to the Closing shall have exercised,
or shall have a continuing right to exercise, such dissenters', appraisal
or similar rights.
(l) REPAYMENT OF INSIDER LOANS. All loans payable to Chesapeake
from any of its officers, directors or employees shall have been repaid in
full.
(m) PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings in
connection with the transactions contemplated by this Agreement, and all
certificates and documents delivered to AspenTech and Acquisition Corp.
pursuant to this Section 8.2 or otherwise reasonably requested by
AspenTech or Acquisition Corp., shall be reasonably satisfactory to
AspenTech, Acquisition Corp. and their counsel.
8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF CHESAPEAKE AND THE PRINCIPAL
STOCKHOLDER. The obligations of Chesapeake and the Principal Stockholder to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or before the Closing, of the following conditions precedent:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of AspenTech and Acquisition Corp. contained in this
Agreement shall have been true in all material respects as of the date of
this Agreement and shall be true in all material respects at and as of the
Closing Date as though such representations and warranties were made on
and as of such date, except for any changes permitted by the terms of this
Agreement. Each of AspenTech and Acquisition Corp. shall have performed
and complied in all material respects with all terms, conditions,
obligations, agreements and restrictions required by this Agreement to be
performed or complied with by it prior to or at the Closing. Since March
31, 1998, there shall have been no changes that, in the aggregate, have
had or could reasonably be expected to have an AspenTech MAE, and the
Closing, itself, shall not cause any default under any material Commitment
to which AspenTech is a party or otherwise have an AspenTech MAE.
Chesapeake and the Principal Stockholder shall have received a certificate
signed by the chief executive officer and chief financial officer of
AspenTech confirming the preceding three sentences.
(b) MERGER DOCUMENTS. Acquisition Corp. shall have executed the
Delaware Agreement of Merger and the New Jersey Certificate of Merger.
(c) REGISTRATION RIGHTS DECLARATION. The Registration Rights
Declaration shall have been adopted by the board of directors of AspenTech
and shall be in full force and effect as of the Closing Date.
(d) NON-COMPETITION AGREEMENTS. AspenTech shall have entered into
each of the Non-Competition Agreements.
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(e) ESCROW AGREEMENT. AspenTech shall have entered into the Escrow
Agreement.
(f) FAIRNESS OPINION. Chesapeake shall have received a written
opinion from Donaldson, Lufkin & Jenrette Securities Corporation to the
effect that the transactions contemplated by this Agreement are fair to
the Stockholders from a financial point of view.
(g) OPINION OF COUNSEL FOR ASPENTECH. Chesapeake and the Principal
Stockholder shall have received an opinion dated as of the Closing Date of
Foley, Hoag & Eliot LLP, special counsel for AspenTech, in a form
reasonably satisfactory to Chesapeake and the Principal Stockholder.
(h) TAX OPINION OF COUNSEL FOR CHESAPEAKE. Chesapeake shall have
received an opinion dated as of the Closing Date of Bourne, Noll & Kenyon
(or, if such counsel fails to deliver the opinion, of Foley, Hoag & Eliot
LLP) to the effect that the Merger will constitute a reorganization within
the meaning of Code section 368(a).
(i) PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings in
connection with the transactions contemplated by this Agreement, and all
certificates and documents delivered to Chesapeake and the Principal
Stockholder pursuant to this Section 8.3 or otherwise reasonably requested
by Chesapeake or the Principal Stockholder, shall be reasonably
satisfactory to Chesapeake, the Principal Stockholder and their counsel.
9. INDEMNIFICATION.
9.1. AGREEMENT TO INDEMNIFY. Following the Closing and subject to the
limitations set forth herein, (a) all of the Stockholders collectively and the
Principal Stockholder individually shall indemnify and agree to defend and hold
harmless AspenTech and the Surviving Corporation (and their respective
affiliates, officers, directors, employees, representatives and agents) against
and in respect of any and all claims, costs, losses, expenses, liabilities or
other damages, including interest and penalties (collectively "Damages"), by
reason of or otherwise arising out of a breach by Chesapeake or the Principal
Stockholder prior to or at the Closing of a representation, warranty or covenant
contained in this Agreement and (b) AspenTech shall indemnify and agree to
defend and hold harmless the Stockholders (and their respective affiliates,
representatives and agents) against and in respect of any and all Damages by
reason of or otherwise arising out of a breach by AspenTech or Acquisition Corp.
prior to or at the Closing of a representation, warranty or covenant contained
in this Agreement. The amounts for which AspenTech, the Surviving Corporation
and the Stockholders may seek indemnification under this Section 9 shall extend
to, and as used herein the term "Damages" shall include, reasonable attorneys'
fees and disbursements, reasonable accountants' fees and disbursements, costs of
litigation and other expenses incurred by them (or their respective affiliates,
officers, directors or employees) in the defense of any claim asserted against
them (or their respective affiliates, officers, directors or employees) and any
amounts paid in settlement or compromise of any claim asserted against them to
the extent that the claim asserted is or would have been subject to the
indemnification provisions hereof, subject to the limitations on indemnification
set forth in Sections 9.2 and 9.3. "Damages" shall not include any amount for
which reimbursement is received by AspenTech, the Surviving Corporation or the
Stockholders, as the case may be, pursuant to insurance policies or third-party
payments by virtue of indemnification or subrogation received by such party.
9.2. SURVIVAL OF INDEMNITY. The indemnification obligations of each
indemnifying party pursuant to Section 9.1 shall survive the Closing and
continue for all Damages as to an indemnified party has given written notice
thereof to the indemnifying party on or prior to the first anniversary of the
Closing Date. Upon expiration of such period, no indemnifying party shall have
any liability for Damages under such
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indemnification obligations unless it has received written notice from an
indemnified party claiming indemnification prior to the expiration of the
applicable period as required.
9.3. ADDITIONAL PROVISIONS.
(a) LIMITATIONS ON INDEMNIFIED AMOUNTS OF STOCKHOLDERS. The
Stockholders collectively shall not have any obligation to indemnify any
parties under this Section 9 until the indemnified parties' aggregate
indemnity obligations shall exceed $250,000, whereupon such parties shall
be entitled to receive Damages from the first dollar, provided that the
foregoing limitation shall not apply to any breach of the covenants of the
Stockholders contained in this Agreement to the extent such covenants
continue after the Closing Date. The liability of the Stockholders
collectively for indemnification under this Section 9 by reason of or
arising out of any breach by Chesapeake or the Principal Stockholder of
any covenant that does not survive the Closing or of any representation or
warranty (i) shall be limited to the setoff and application of Damages
against the Escrow Shares in accordance with the terms of the Escrow
Agreement and this Section 9 and (ii) shall not be modified, waived or
diminished by any examination or investigation conducted by AspenTech of
the books, records or operations of Chesapeake.
(b) ADDITIONAL INDEMNIFICATION OBLIGATIONS OF PRINCIPAL
STOCKHOLDER. In addition to the Principal Stockholder's pro rata liability
for indemnification provided by the Stockholders collectively, the
Principal Stockholder individually shall have the additional
indemnification obligations set forth in Section 9.1, subject to the
limitations of this Section 9.3(b). Except to the extent of his pro rata
liability for indemnification provided by the Stockholders collectively,
the Principal Stockholder shall have no any obligation to indemnify any
parties under this Section 9 until the indemnified parties' aggregate
indemnity obligations shall exceed the amount of any indemnification
provided by the Stockholders collectively pursuant to Section 9.1, as
limited by Section 9.3(a), provided that the foregoing limitation shall
not apply to any breach of the covenants of the Principal Stockholder
contained in this Agreement to the extent such covenants continue after
the Closing Date. The liability of the Principal Stockholder for
indemnification under this Section 9 by reason of or arising out of any
breach by Chesapeake or the Principal Stockholder of any covenant that
does not survive the Closing or of any representation or warranty (i)
shall be limited to an aggregate of an amount equal to (A) ten percent of
the Number of Merger Shares multiplied by (B) the average of the last
sales prices of AspenTech Common on the Nasdaq National Market during the
ten trading days immediately preceding the Closing Date and (ii) shall not
be modified, waived or diminished by any examination or investigation
conducted by AspenTech of the books, records or operations of Chesapeake.
(c) LIMITATIONS ON INDEMNIFIED AMOUNTS OF ASPENTECH. AspenTech
shall have no obligation to indemnify any parties under this Section 9
until the indemnified parties' aggregate indemnity obligations shall
exceed $250,000, whereupon such parties shall be entitled to receive
Damages from the first dollar, provided that the foregoing limitation
shall not apply to any breach of the covenants contained in this Agreement
to the extent such covenants continue after the Closing Date. The
liability of AspenTech for indemnification under this Section 9 by reason
of or arising out of any breach by AspenTech or Acquisition Corp. of any
covenant that does not survive the Closing or of any representation or
warranty (i) shall be limited to an aggregate of an amount equal to (A)
twenty percent of the Number of Merger Shares multiplied by (B) the
average of the last sales prices of AspenTech Common on the Nasdaq
National Market during the ten trading days immediately preceding the
Closing Date and (ii) shall not be modified, waived or diminished by any
examination or investigation conducted by Chesapeake or any Stockholder of
the books, records or operations of AspenTech and Acquisition Corp.
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(d) NO LIMITATION IN EVENT OF FRAUD. Notwithstanding any other
provision hereof, nothing in this Section 9 (including the provisions of
paragraphs (a), (b) and (c) of this Section 9.3) or otherwise shall limit,
in any manner, any remedy at law or equity, to which any party may be
entitled as a result of fraud by any indemnifying party or its employees,
officers or directors.
(e) EXCLUSIVITY OF REMEDY; SURVIVAL OF COVENANTS. Following the
Closing Date, except in respect of claims based upon fraud, the
indemnification accorded by this Section shall be the sole and exclusive
remedy of the parties indemnified under this Section 9 in respect of any
misrepresentation or inaccuracy in, or breach of, any representation or
warranty or any breach or failure in performance of any covenant or
agreement made in this Agreement (including the Chesapeake Disclosure
Schedule) or in any document or certificate delivered pursuant hereto.
Notwithstanding the foregoing, in the event of any breach or failure in
performance after the Closing Date of any covenant or agreement, a
non-breaching party shall also be entitled to seek specific performance,
injunctive or other equitable relief. The covenants of any party shall
terminate according to the terms of such covenant and the expiration of
the applicable statutes of limitations.
(f) SUBROGATION. Upon making any payment to an indemnified party
for any indemnification claim pursuant to this Section 9, an indemnifying
party shall be subrogated, to the extent of such payment, to any rights
that the indemnified party may have against any other Persons with respect
to the subject matter underlying such indemnification claim and the
indemnified party shall take such actions as the indemnifying party may
reasonably require to perfect such subrogation or to pursue such rights
against such other Persons as the indemnified party may have.
9.4. ESCROW. At the Closing, AspenTech, the Principal Stockholder and the
Escrow Agent shall enter into the Escrow Agreement pursuant to which AspenTech
shall deliver the Escrow Shares to the Escrow Agent, subject to the requirements
of pooling of interests accounting. To the extent any of the parties named in
Section 9.1 is entitled to indemnification from the Stockholders collectively
under Section 9.1 as a result of any Damages, AspenTech shall be entitled to set
off and apply against all of such Damages the Escrow Shares in accordance with
the terms of the Escrow Agreement and this Section 9. Pursuant to the terms of
the Escrow Agreement, the Escrow Shares shall be valued at any time, for
purposes of set off against any Damages, at the average closing sales price per
share of the AspenTech Common for the thirty trading days preceding the date on
which such valuation is determined, as reported on the Nasdaq National Market or
such other principal exchange or trading market on which AspenTech Common is
then traded.
10. TERM AND TERMINATION.
10.1. TERM. Subject to the other terms and conditions hereof, the term of
this Agreement shall continue until the earlier of (i) June 30, 1998 and (ii)
termination pursuant to the provisions of Section 10.2 below.
10.2. TERMINATION. This Agreement may be terminated at any time prior to
the Closing:
(a) by mutual written consent of Chesapeake and AspenTech;
(b) by Chesapeake if there has been a material breach of any
representation, warranty, covenant or agreement contained in
this Agreement on the part of AspenTech or Acquisition Corp.
and, if such breach is curable, such breach has not been cured
within thirty days after written notice of such breach, or by
AspenTech if there has been a material breach of any
representation, warranty, covenant or agreement contained in
this
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Agreement on the part of Chesapeake and, if such breach is
curable, such breach has not been cured within thirty days
after written notice of such breach;
(c) by either Chesapeake or AspenTech if the Closing shall not
have been consummated on or before June 30, 1998;
(d) by either Chesapeake or AspenTech if (i) there shall be a
final nonappealable order of a federal or state court in
effect preventing consummation of the Merger or the other
transactions contemplated by this Agreement or (ii) there
shall be any action taken, or any statute, rule, regulation or
order erected, promulgated or issued or deemed applicable to
the Merger or the other transactions contemplated by this
Agreement by any Government Entity that would make
consummation of the Merger or the other transactions
contemplated by this Agreement illegal; or
(e) by AspenTech if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger or the other
transactions contemplated by this Agreement by any Government
Entity that would (i) prohibit AspenTech's or the Surviving
Corporation's ownership or operation of all or a material
portion of the business, assets or properties of Chesapeake or
AspenTech and its subsidiaries taken as a whole, or compel
AspenTech or Chesapeake to dispose of or hold separate all or
a material portion of the business, assets or properties of
Chesapeake or AspenTech, as a result of the Merger or (ii)
render AspenTech or Chesapeake unable to consummate the Merger
or the other transactions contemplated by this Agreement.
10.3. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement pursuant to this Section 10, written notice thereof shall be
given as promptly as practicable to the other parties to this Agreement and this
Agreement shall terminate and the transactions contemplated hereby shall be
abandoned without further action by the parties hereto; provided, however, that
such termination shall not relieve any party hereto of any liability for any
breach of this Agreement occurring prior to the date of termination.
11. MISCELLANEOUS.
11.1. AMENDMENT AND WAIVER. This Agreement, or any provision of this
Agreement, may be amended or waived from time to time only upon the mutual
written agreement of each of the parties hereto. No delay or omission by any
party to exercise any right or power hereunder shall impair such right or power
or be construed to be a waiver thereof. A waiver by any of the parties hereto of
any of the covenants to be performed by the other or any breach thereof shall
not be construed to be a waiver of any subsequent breach or of any other
covenant contained in this Agreement.
11.2. NOTICES. Notices and other communications by a party under this
Agreement shall be in writing and hand-delivered, deposited with an overnight
carrier for next- or second-day delivery, or transmitted by facsimile (with
receipt confirmed), addressed to the parties as follows (or to such other
addresses as any party may designate from time to time in writing):
To AspenTech: Aspen Technology, Inc.
Ten Canal Park
Cambridge, Massachusetts 02141-2201
Facsimile: (617) 949-1722
Attention: Chairman and Chief Executive Officer
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with a copy to: Aspen Technology, Inc.
Ten Canal Park
Cambridge, Massachusetts 02141-2201
Facsimile: (617) 949-1717
Attention: Vice President and General Counsel
To Chesapeake or any Stockholder (including the Principal Stockholder):
Chesapeake Decision Sciences, Inc.
200 South Street
New Providence, New Jersey 07974
Facsimile: (908) 464-4134
Attention: Thomas E. Baker
With copies to: J. Gregory Milmoe, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Facsimile: (212) 735-2000
John F. Kuntz, Esq.
Bourne, Noll & Kenyon
382 Springfield Avenue
Summit, New Jersey 07901
Facsimile: (908) 277-6808
and shall be deemed given when received.
11.3. SUCCESSORS; THIRD PARTIES; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns. This Agreement is not intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder, except as
otherwise expressly provided herein. No provisions of this Agreement are
intended, nor shall be interpreted, to provide or create any third party
beneficiary rights or any other rights of any kind in any client, customer,
affiliate, stockholder, partner or employee of any party hereto or any other
Person unless specifically provided otherwise herein, and, except as so
provided, all provisions hereof shall be personal solely between the parties to
this Agreement. Neither Chesapeake nor the Principal Stockholder may assign its
obligations under this Agreement without the prior written consent of AspenTech,
and neither AspenTech nor Acquisition Corp. may assign its obligations under
this Agreement without the prior written consent of Chesapeake and the Principal
Stockholder.
11.4. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among Chesapeake, the Principal Stockholder, AspenTech and Acquisition Corp.
with respect to the subject matter of this Agreement, and supersedes any and all
prior agreements, understandings, promises or representations made by either
party concerning the subject matter of this Agreement. All Exhibits and the
Chesapeake Disclosure Schedule are an integral part of this Agreement and are
incorporated in this Agreement by this reference.
11.5. APPLICABLE LAW. The validity, performance and construction of this
Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts.
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11.6. CONSENT TO JURISDICTION. Each of the parties hereby consents and
agrees to submit himself or itself to the non-exclusive jurisdiction of the
federal courts of Massachusetts.
11.7. VALIDITY. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
11.8. CAPTIONS; CONSTRUCTION. Titles or captions of Sections contained in
this Agreement are inserted only as a matter of convenience and for reference,
and in no way define, limit, extend or describe the scope of this Agreement or
the intent of any provision of this Agreement. The words "herein" and "hereof"
and other words of similar import refer to this Agreement as a whole and not to
any particular part of this Agreement. The word "including" as used herein shall
not be construed so as to exclude any other thing not referred to or described.
All references herein to Sections and Exhibits shall be deemed references to
such parts of this Agreement, except as otherwise provided.
11.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
This Agreement has been duly executed as a sealed instrument as of and on
the date first above written.
ASPEN TECHNOLOGY, INC. CHESAPEAKE DECISION SCIENCES, INC.
By: /s/ Lawrence B. Evans By: /s/ Thomas E. Baker
------------------------- -------------------------------------
Lawrence B. Evans Thomas E. Baker
Chief Executive Officer President and Chief Executive Officer
AT ACQUISITION CORP.
By: /s/ Lawrence B. Evans /s/ Thomas E. Baker
------------------------- -----------------------------------------
Lawrence B. Evans Thomas E. Baker, Individually
President and
Chief Executive Officer
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K of our reports dated May 29, 1998 on our audit of the consolidated
financial statements of Aspen Technology, Inc. and subsidiaries and our audit of
the supplemental consolidated financial statements of Aspen Technology, Inc. and
subsidiaries.
ARTHUR ANDERSEN LLP
