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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-24786
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ASPEN TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2739697
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
TEN CANAL PARK 02141
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 949-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: Common stock,
$.10 par value per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
As of September 18, 1998, the aggregate market value of Common Stock (the
only outstanding class of common equity of the registrant) held by nonaffiliates
of the registrant was $593,684,059, based on a total of 23,570,583 shares of
Common Stock held by nonaffiliates and on a closing price of $25.1875 for the
Common Stock as reported on the Nasdaq National Market.
As of September 18, 1998, 24,672,008 shares of Common Stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended June 30,
1998. Portions of such proxy statement are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 1A. Risk Factors................................................ 15
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K.................................................... 36
SIGNATURES............................................................ 40
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Unless the context otherwise requires, references in this Form 10-K to
"AspenTech" or the "Company" are to Aspen Technology, Inc. and its subsidiaries.
ASPEN PLUS, ASPENTECH, MIMI, RT-OPT and SPEEDUP are registered trademarks of the
Company, and 1STQUALITY, ASPEN ADVISOR, ASPEN PIMS, BATCH PLUS, CIMVIEW,
CIMWORK, DMCPLUS, DYNAPLUS, INFOPLUS.21, OTISS and PLANTELLIGENCE are trademarks
of the Company.
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This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, 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 control of the Company,
including the factors set forth under "Item. 1A. 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 10-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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PART I
ITEM 1. 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 481 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 manufacturing 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 compli-
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cated 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:
[DIAGRAM, CONSISTING OF THREE BOXES CONTAINING THE FOLLOWING LANGUAGE, WITH
ARROWS POINTING FROM LEFT TO RIGHT BETWEEN THE BOXES:]
DESIGN OPERATE MANAGE
Process Modeling Advanced Process Control Process Information Management
Design Analysis & Optimization Real-time Optimization Production Scheduling & Planning
Process Improvements Operator Training Quality Assurance
Plant Retrofits 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 Dynamic Matrix Control Corporation ("DMCC") and Setpoint, Inc.
("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.
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,
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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 481 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 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
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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. The Company believes that its acquisition of Chesapeake
Decision Sciences, Inc. ("Chesapeake") in May 1998 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.
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
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Aspen Plus........................... Rigorous steady-state modeling Used to design processes,
system for simulating evaluate process changes and
chemically-based manufacturing analyze "what-if" scenarios.
processes 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 operability, safety and
changing (dynamic) conditions control as operating
with a library of equipment parameters fluctuate during
and controller models. plant startup and shutdown and
other transient conditions.
Batch Plus........................... Batch process modeling system Used to scale-up and design
for recipe-based processes. new processes, and to analyze
the production of one batch or
an entire batch plant.
Aspen Zyqad.......................... System for integrating, Used to integrate and automate
automating and managing data, work flow between engineers
applications and activities in designing new process plants
the engineering work process. or improving 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 Used to tightly control actual
system using multi-variable plant operations at multiple
model-predictive control operating constraints.
technology.
OTISS................................ System for developing operator Used to train operators to
training simulators. better 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 Used to compare real-time and
system with a real-time database of historical information generated by
historical information. plant systems to present a unified
view of plant operations.
MIMI............... Supply chain management system, Used to identify best supply chain
including demand management, decisions to maximize asset
inventory control and available-to- utilization, minimize raw material
promise. costs, maximize product values and
control inventories.
Aspen PIMS......... Linear programming-based economic Used to identify short-term and
planning and scheduling system. strategic 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,
manufacturing. usage 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 481 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.
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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. 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
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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.
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 June 30, 1998,
AspenTech employed a product development staff of 391 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 1998:
CHEMICALS
Air Products & Chemicals, Inc.
Allied Signal, Inc.
BASF AG
Bayer AG
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc.
Elf Atochem
Equistar Chemicals LP
Hoechst AG
Huls AG
Huntsman Corporation
Imperial Chemical Industries plc
Mitsubishi Chemical Corporation
Rhone-Poulenc Industrialisation
Sasol Industries (Pty.) Ltd.
Shell International Chemie Mij B.V.
Union Carbide Chemicals and Plastics
Company, Inc
Wellman, Inc.
Westlake Management Services Corporation
CONSUMER PRODUCTS
3M Company
The Goodyear Tire & Rubber Company
The Procter & Gamble Company
Unilever Research
ELECTRIC POWER
British Nuclear Fuels plc
FOOD AND BEVERAGE
Cargill Incorporated
General Mills, Inc.
Nestle UK Ltd.
METALS AND MINERALS
Phelps Dodge
Aluminum Company of America
PETROLEUM PRODUCTS
Agip Petroli S.p.A.
Amoco Corporation
Arco Products Company
British Petroleum
Chevron Corporation
Citgo Petroleum Corporation
Exxon Company U.S.A.
Instituto Mexicano del Petroleo
Marathon Oil Company
Mobil Oil Corporation
Neste Oy
Pemex Gas y Petroquimica Basica
Petroleus de Venezuela, S.A.
Phillips Petroleum Company
Repsol Petroleo SA
RVI
Shell Oil Company
Star Enterprise
Sun Refining and Marketing Company
Sunoco Inc.
Texaco Refining & Marketing Company
UOP
Valero Refining Company
PHARMACEUTICALS
Genentech, Inc.
Hoffman-LaRoche, Inc.
Merck & Co., Inc.
Novartis Pharma A.G.
PULP AND PAPER
Buckeye Cellulose Corporation
Weyerhaeuser Company
SEMICONDUCTORS
Cypress Corporation
LSI Logic Corporation
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.
For fiscal 1996, 1997 and 1998, international revenues accounted for
approximately 42.0%, 50.0% and 45.4%, respectively, of AspenTech's total
revenues. No individual customer represented more than 10% of AspenTech's total
revenues in fiscal 1996, 1997 or 1998. 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.
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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 123
individuals as of June 30, 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.
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
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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.
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.
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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, 1997
and 1998, the Company derived approximately 42.0%, 50.0% and 45.4% 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 "Item 1A. Risk Factors -- Dependence on Proprietary
Technology."
EMPLOYEES
As of June 30, 1998, AspenTech had a total of 1,518 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.
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.
ITEM 1A. RISK FACTORS
In addition to the other information in this Form 10-K, the following
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
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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 one or more
future quarters the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the Common
Stock would likely be materially adversely affected. As a result principally of
slower-than-anticipated growth in the Company's services revenue and
higher-than-expected levels of expenses throughout the AspenTech organization in
the fiscal quarter ended June 30, 1998, the Company's operating results in the
fiscal quarter and fiscal year ended June 30, 1998 were below the expectations
of certain public market analysts and investors. From July 27, 1998, the date on
which the Company preliminarily announced its estimated results for the fiscal
quarter and year ended June 30, 1998, through the close of business on September
18, 1998, the price per share of Common Stock, as reported by the Nasdaq
National Market, decreased from $48.25 to $25.1875.
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.
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
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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.
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 continued successful 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 more closely the companies' software products and
technologies, retain key employees, assimilate diverse corporate cultures,
further 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 unforeseen 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 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
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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.
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 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.
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.
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
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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.
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.
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
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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, 1997
and 1998, the Company derived approximately 42.0%, 50.0% and 45.4% 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.
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.
INTERNATIONAL OPERATIONS
In fiscal 1996, 1997 and 1998, the Company derived approximately 42.0%,
50.0% and 45.4% 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
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22
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 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.
DEPENDENCE ON 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.
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 those offered by the Company.
The Company has reviewed certain internal systems and future system plans
on a preliminary basis to assess year 2000 compliance. The Company expects that
its internal system development plans will address
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the year 2000 issue and will correct any existing non-compliant systems without
the need to accelerate the overall information systems implementation plans. The
Company believes that the cost of any modifications will not be material. The
Company's ability to implement its information systems plan and to make the
necessary modifications or replacements may be adversely affected by a number of
factors outside the control of the Company, including the availability and cost
of trained personnel and the ability of such personnel to acquire year 2000
compliant systems and otherwise to locate and correct all relevant computer
codes. The Company is also conducting an additional assessment of its systems
and operations in order to more fully identify and plan for any year 2000 risks,
although it believes that its business would not be materially affected by the
failure of any internal systems to be year 2000 compliant. If there are
unidentified dependencies on internal systems to operate the business, or if any
required modifications are not completed on a timely basis or are more costly to
implement than currently anticipated, the Company's business, financial
condition or results of operations could be materially adversely affected.
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. From July 27, 1998, the date on which the Company
preliminarily announced its estimated results for the fiscal quarter and year
ended June 30, 1998, through the close of business on September 18, 1998, the
price per share of Common Stock, as reported by the Nasdaq National Market,
decreased from $48.25 to $25.1875. See "-- Fluctuations in Quarterly Operating
Results and Cash Flow."
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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ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
AspenTech is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "AZPN." The following table sets forth, for the periods indicated,
the high and low sale prices per share of the Common Stock as reported on the
Nasdaq National Market.
HIGH LOW
------- -------
FISCAL 1997:
First Quarter............................................. $36.375 $20.000
Second Quarter............................................ 42.500 29.625
Third Quarter............................................. 41.000 25.750
Fourth Quarter............................................ 39.625 24.750
FISCAL 1998:
First Quarter............................................. $46.250 $29.500
Second Quarter............................................ 39.875 27.875
Third Quarter............................................. 43.375 23.500
Fourth Quarter............................................ 51.000 38.250
HOLDERS
As of June 30, 1998, there were 1,172 holders of record of the Company's
Common Stock.
DIVIDENDS
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. The Company currently
intends to retain all of its earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
under the terms of the Company's bank line of credit, the Company is prohibited
from paying any cash dividends. Any future determination relating to dividend
policy will be made at the discretion of the Board of Directors of the Company
and will depend on a number of factors, including the future earnings, capital
requirements, financial condition and future prospects of the Company and such
other factors as the Board of Directors may deem relevant.
SALES OF UNREGISTERED SECURITIES
During fiscal 1998, AspenTech issued shares of its Common Stock to the
former equity holders of seven corporations and other business entities, in
exchange for all of the outstanding equity securities of those entities, as
follows:
SHARES OF
COMMON
BUSINESS ACQUIRED DATE ACQUIRED STOCK ISSUED
- ----------------- ----------------- ------------
NeuralWare, Inc.............................. August 27, 1997 26,502
The SAST Corporation Limited................. August 28, 1997 288,330
Cimtech S.A./N.V............................. February 27, 1998 118,299
Contas Process Control S.r.L................. February 27, 1998 21,975
Zyqad Limited................................ March 16, 1998 171,337
Chesapeake Decision Sciences, Inc............ May 27, 1998 2,961,959
Treiber Controls, Inc........................ May 29, 1998 140,000
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All of these shares were issued in transactions exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended. Certain of these shares
have been subsequently registered pursuant to shelf registration statements
filed with the Securities and Exchange Commission in accordance with
registration rights arrangements entered into in connection with the
acquisitions.
On June 17, 1998, AspenTech completed the sale of $86,250,000 aggregate
principal amount of its 5 1/4% Convertible Subordinated Debentures due June 15,
2005 (the "Debentures"). The Debentures were sold by the Company to Goldman,
Sachs, & Co., NationsBanc Montgomery Securities LLC and William Blair & Company,
L.L.C. (the "Initial Purchasers"), which offered and sold the Debentures to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
of 1933, as amended. The Company initially offered $75,000,000 aggregate
principal amount of Debentures and sold an additional $11,250,000 aggregate
principal amount of Debentures pursuant to the Initial Purchasers' exercise of
an over-allotment option.
The Debentures were offered at a price of 100% of principal amount, or
$86,250,000. The net proceeds received by the Company from the sale of the
Debentures, after deducting underwriting commissions of $3,018,750 (but before
deducting expenses of the offering), totalled $83,231,250. The Company intends
to use the net proceeds for working capital and other general corporate
purposes. The Company may use a portion of the net proceeds to acquire or invest
in one or more new technologies, products or businesses that expand, complement
or are otherwise related to the Company's current business and software and
service solutions.
The Debentures are convertible into shares of Common Stock at any time
prior to the close of business on the maturity date, unless previously redeemed
or repurchased, at a conversion price of approximately $52.97 per share of
Common Stock (equivalent to a conversion rate of 18.9791 shares per $1,000
principal amount of Debentures), subject to adjustment in certain events.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated balance sheet data as of June 30, 1997 and 1998
and the selected consolidated statement of income data for each of the years
ended June 30, 1996, 1997 and 1998 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, and are included elsewhere in this Form
10-K. The selected consolidated balance sheet data as of June 30, 1994, 1995 and
1996 and the selected consolidated statement of income data for the years ended
June 30, 1994 and 1995 have been derived from the Company's Consolidated
Financial Statements, which also have been audited by Arthur Andersen LLP but
are not included in this Form 10-K. The following selected consolidated
financial data are qualified by reference to the more detailed Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Form 10-K, and should be read in conjunction with such Consolidated Financial
Statements and Notes and the discussion under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
YEAR ENDED JUNE 30,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Software licenses................... $37,725 $49,479 $ 70,199 $103,179 $139,390
Services and other.................. 11,682 16,540 44,619 90,891 113,165
------- ------- -------- -------- --------
Total revenues........................ 49,407 66,019 114,818 194,070 252,555
------- ------- -------- -------- --------
Expenses:
Cost of software licenses........... 2,795 3,080 3,992 5,539 8,178
Cost of services and other.......... 8,824 10,052 27,220 54,006 68,490
Selling and marketing............... 18,912 24,276 36,610 56,034 74,926
Research and development............ 9,193 12,652 22,310 33,580 43,553
General and administrative.......... 5,005 5,679 10,715 17,072 20,208
Charge for in-process research and
development...................... -- -- 24,421 8,664 8,472
Costs related to acquisitions....... -- 950 -- -- 4,984
------- ------- -------- -------- --------
Total expenses........................ 44,729 56,689 125,268 174,895 228,811
------- ------- -------- -------- --------
Income (loss) from operations......... 4,678 9,330 (10,450) 19,175 23,744
Foreign currency exchange gain
(loss).............................. (56) 34 (223) (236) (454)
Income (loss) on equity in joint
ventures............................ (39) 22 10 26 45
Interest income....................... 1,799 3,138 3,745 5,556 5,727
Interest expense...................... (524) (561) (1,323) (151) (377)
------- ------- -------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes........................ 5,858 11,963 (8,241) 24,370 28,685
Provision for income taxes............ 2,116 4,854 6,146 10,169 14,049
------- ------- -------- -------- --------
Net income (loss)(1).................. $ 3,742 $ 7,109 $(14,387) $ 14,201 $ 14,636
======= ======= ======== ======== ========
Diluted net income (loss) per
share(2)............................ $ 0.26 $ 0.42 $ (0.83) $ 0.63 $ 0.59
Basic net income (loss) per
share(2)............................ $ 0.45 $ 0.46 $ (0.83) $ 0.66 $ 0.63
Weighted average shares outstanding --
diluted(2).......................... 14,318 17,113 17,432 22,707 24,883
Weighted average shares outstanding --
basic(2)............................ 8,340 15,321 17,432 21,368 23,415
(footnotes appear on page 27)
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JUNE 30,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash-equivalents........... $ 2,932 $ 6,290 $ 14,773 $ 18,284 $ 78,694
Working capital..................... 8,546 31,377 72,560 73,789 172,866
Total assets........................ 45,066 83,259 168,986 203,545 342,882
Long-term obligations, less current
maturities....................... 2,576 4,087 706 462 90,635
Total stockholders' equity.......... 19,284 45,824 104,477 137,414 165,016
- ---------------
(1) 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.
(2) Computed as described in Note 2(i) of Notes to Consolidated Financial
Statements. In February 1998, the Commission issued Staff Accounting
Bulletin 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
Staff Accounting Bulletin No. 98. This change did not affect diluted
earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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, DMCC and 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 Consolidated
Financial Statements.
The Company acquired ISI, Chesapeake and seven other businesses in
transactions accounted for as poolings of interests. Of these acquisitions, only
the acquisitions of ISI and Chesapeake were material to the Company's financial
condition and results of operations. Accordingly, the Company has restated its
consolidated financial statements to reflect the historic operations of ISI and
Chesapeake but not the other, immaterial businesses.
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 "Item 1. 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.
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29
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 advanced process control and real-time optimization. For
fiscal 1998, the Company derived 55.2% of its total revenues from the licensing
of software products and 44.8% 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
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 June 30, 1998 was
$12.9 million and is being amortized over periods ranging from 5 to 12 years.
The amortization from completed acquisitions that was charged to operations was
$2.5 million for fiscal 1997 and $2.7 million for fiscal 1998 and will be
$692,000 for each of the next 11 quarters and $340,000 for each of the next
succeeding 8 quarters.
The Company's operating results for the fourth quarter of fiscal 1998 were
adversely affected by the level of telecommunications and overhead charges
incurred across the Company. These charges, which are allocated to various cost
and expense line items in the Company's statements of operation, did not
materially increase any particular cost or expense. In the aggregate, however,
the level of these expenses contributed to the Company's reporting
lower-than-planned net income for the fiscal quarter and year ended June 30,
1998.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain consolidated statement of operations data for the periods indicated:
YEAR ENDED JUNE 30,
-----------------------
1996 1997 1998
----- ----- -----
Revenues:
Software licenses......................................... 61.1% 53.2% 55.2%
Service and other......................................... 38.9 46.8 44.8
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
----- ----- -----
Expenses:
Cost of software licenses................................. 3.5 2.9 3.2
Cost of service and other................................. 23.7 27.8 27.1
Selling and marketing..................................... 31.9 28.9 29.7
Research and development.................................. 19.4 17.3 17.2
General and administrative................................ 9.3 8.8 8.0
Charge for in-process research and development............ 21.3 4.5 3.4
Costs related to acquisitions............................. -- -- 2.0
----- ----- -----
Total expenses.............................................. 109.1 90.2 90.6
----- ----- -----
Income (loss) from operations............................... (9.1) 9.8 9.4
Interest income........................................... 3.3 2.9 2.3
Interest expense.......................................... (1.2) (0.1) (0.1)
Other income (expense), net............................... (0.1) (0.1) (0.2)
----- ----- -----
Income (loss) before provision for income taxes............. (7.1) 12.5 11.4
Provision for income taxes................................ 5.4 5.2 5.6
----- ----- -----
Net income (loss)........................................... (12.5)% 7.3% 5.8%
===== ===== =====
COMPARISON OF FISCAL 1998 TO FISCAL 1997
REVENUES. Revenues are derived from software licenses and services. Total
revenues for fiscal 1998 increased 30.1% to $252.6 million from $194.1 million
in fiscal 1997.
Software license revenues represented 55.2% and 53.2% of total revenues for
fiscal 1998 and 1997, respectively. Revenues from software licenses in fiscal
1998 increased 35.1% to $139.4 million from $103.2 million in 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 $114.7 million
or 45.4% of total revenues and $97.0 million or 50.0% of total revenues for
fiscal 1998 and 1997, respectively. The geographical mix of revenues can vary
from quarter to quarter.
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 fiscal 1998 increased 24.5% to $113.2
million from $90.9 million for fiscal 1997. This increase reflects a continued
focus during fiscal 1998 on providing high value-added consulting and training
services to existing customers. Revenues from service and other for fiscal 1998
was adversely affected by lower-than-planned levels of consultant utilization
attributable to temporary mismatches between types and geographies of scheduled
projects, the skill sets and locations of available personnel and the timing of
certain project starts. During the second half of fiscal 1998 the Company
implemented programs intended to mitigate these issues through, for example,
targeted sales incentives and improved information flow between sales and
consulting personnel.
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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 fiscal
1998 increased 47.6% to $8.2 million from $5.5 million in fiscal 1997. Cost of
software licenses as a percentage of revenues from software licenses increased
to 5.9% for fiscal 1998 from 5.4% for fiscal 1997. This increase was due to the
generation of a greater portion of sales having third-party software and royalty
costs in the fourth quarter of fiscal 1998.
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 fiscal 1998 increased 26.8% to $68.5
million from $54.0 million for fiscal 1997. Cost of service and other as a
percentage of revenues from services and other increased to 60.5% for fiscal
1998 from 59.4% for fiscal 1997. This percentage increase reflects a change in
mix to more application consulting services, which have a higher cost base, and,
to a lesser extent, special payments made in connection with a transitional
incentive compensation plan for consultants based on hours billed.
SELLING AND MARKETING. Selling and marketing expenses for fiscal 1998
increased 33.7% to $74.9 million from $56.0 million for fiscal 1997 while
increasing slightly as a percentage of revenues to 29.7% from 28.9%. The dollar
and percentage increases were attributable in part to compensation earned by
sales personnel who exceeded their quotas and earned commissions at higher
rates. 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 fiscal 1998
increased 29.7% to $43.6 million from $33.6 million for fiscal 1997 while
decreasing slightly as a percentage of total revenues to 17.2% from 17.3%. 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 8.2% of its total research and development costs during fiscal 1998
as compared to 6.6% in 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 fiscal 1998 increased 18.4% to $20.2 million
from $17.1 million for fiscal 1997, while decreasing as a percentage of total
revenues to 8.0% from 8.8%. 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.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with several
acquisitions during fiscal 1998 and 1997, the Company allocated $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 fiscal 1998 that were accounted for as poolings of interests,
the Company incurred $5.0 million in expenses, primarily investment banking and
professional service fees related to the transactions.
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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 $5.7 million for fiscal 1998 as compared to $5.6 million in
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 in fiscal 1998 increased to $0.4 million from $0.2 million in fiscal
1997.
PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 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 fiscal 1998 to 33.6% of pre-tax income from 35.9% for fiscal
1997. This decrease was primarily due to utilization of foreign loss carrybacks,
foreign tax credits, and research and development credits.
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 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
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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
Joffe Associates, Inc. The Company recognized a similar charge during the third
quarter of fiscal 1996 of $24.4 million in connection with its acquisitions 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 35.9% of pre-tax income from 38.0% in
fiscal 1996. This decrease was primarily due to utilization of various tax
credits and carryforwards.
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,
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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 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 "Item 1A. Risk Factors -- Fluctuations in Quarterly Operating Results and
Cash Flow."
The following table presents selected quarterly statement of operations
data for fiscal 1997 and 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.
FISCAL 1997 FISCAL 1998
-------------------------------------- --------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
Revenues:
Software licenses............... $17,049 $24,988 $29,704 $31,438 $24,388 $32,465 $38,691 $43,846
Service and other............... 20,371 22,059 23,428 25,033 25,065 27,738 29,697 30,665
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................... 37,420 47,047 53,132 56,471 49,453 60,203 68,388 74,511
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Cost of software licenses....... 982 1,456 1,652 1,449 1,672 1,752 1,540 3,214
Cost of service and other....... 12,230 13,256 13,829 14,691 14,712 16,356 17,274 20,148
Selling and marketing........... 11,778 13,483 14,962 15,811 15,186 17,621 19,876 22,243
Research and development........ 7,494 7,701 8,491 9,894 10,163 10,358 10,998 12,034
General and administrative...... 3,979 4,249 4,626 4,218 4,502 4,839 5,309 5,558
Charge for in-process research
and development............... -- 8,664 -- -- -- -- 8,472 --
Costs related to acquisitions... -- -- -- -- 509 -- 475 4,000
------- ------- ------- ------- ------- ------- ------- -------
Total expenses.................... 36,463 48,809 43,560 46,063 46,744 50,926 63,944 67,197
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... 957 (1,762) 9,572 10,408 2,709 9,277 4,444 7,314
Other expense, net................ (22) (88) -- (100) (67) (91) (162) (89)
Interest income, net.............. 1,376 1,292 1,199 1,538 1,453 1,347 1,358 1,192
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes.................... 2,311 (558) 10,771 11,846 4,095 10,533 5,640 8,417
Provision for income taxes........ 879 1,367 4,022 3,901 1,460 3,791 5,073 3,725
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 1,432 $(1,925) $ 6,749 $ 7,945 $ 2,635 $ 6,742 $ 567 $ 4,692
======= ======= ======= ======= ======= ======= ======= =======
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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 and the Debentures, 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 $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. In the fourth quarter of fiscal 1998, the Company received a total
of $82.4 million from its sale of the Debentures. A portion of these net
proceeds was used for working capital and other general corporate purposes. 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 "Item 1A. Risk Factors -- Risks Associated with
Future Acquisitions."
In fiscal 1996, 1997 and 1998, operating activities provided $19.7 million,
$3.1 million and $18.4 million of cash, respectively, primarily as a result of
net income and increases in accounts payable, accrued expenses and deferred
revenue, offset in part by increases in long-term installments receivable and
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 fiscal 1998, installment
contracts increased by $9.8 million to $59.8 million, net of $51.3 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 June 30, 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 $87.6 million, $57.8 million and $42.7 million, respectively,
for which the Company had partial recourse obligations of $4.5 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 June 30,
1998) equal to the bank's prime rate plus a specified margin or, at the
Company's option, a rate (5.72% at June 30, 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 June 30, 1998, there were no outstanding borrowings under the line of
credit.
As of June 30, 1998, the Company had cash and cash-equivalents totalling
$78.7 million, as well as short-term investments totalling $35.0 million. The
Company's commitments as of June 30, 1998 consisted primarily of leases on its
headquarters and other facilities. See "Item 1. 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 at least the next 12 months.
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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 "Item 1A.
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 fiscal 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company are listed in the
Index to Financial Statements filed in Item 14(a)(i) as part of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with accountants on accounting
or financial disclosure matters during the Company's two most recent fiscal
years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1998, under the heading "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1998, under the heading "Executive Officer Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1998, under the heading "Share Ownership of Principal
Stockholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1998, under the heading "Certain Relationships and Related
Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Balance Sheets as of June 30, 1997 and 1998............... F-3
Statements of Operations for the years ended June 30,
1996, 1997 and 1998.................................... F-4
Statements of Stockholders' Equity for the years ended
June 30, 1996, 1997 and 1998........................... F-5
Statements of Cash Flows for the years ended June 30,
1996, 1997 and 1998.................................... F-6
Notes to Consolidated Financial Statements................ F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Public Accountants on Schedule........ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
All other schedules are omitted because they are not required or the
required information is shown in the Consolidated Financial Statements or Notes
thereto.
(a)(3) EXHIBITS
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-laws of the Company.
4.1 (2) Specimen Certificate for Shares of the Company's Common
Stock, $.10 par value.
4.2 (1) Rights Agreement dated as of March 12, 1998 between the
Company and American Stock Transfer and Trust Company, as
Rights Agent, including related forms of the following:
(a) Certificate of Designation of Series A Participating
Cumulative Preferred Stock of the Company.
(b) Right Certificate.
4.3 (3) Indenture dated as of June 17, 1998 between the Company and
The Chase Manhattan Bank, as trustee, with respect to up to
$86,250,000 principal amount of 5 1/4% Convertible
Subordinated Debentures due June 15, 2005 of the Company.
4.4 (3) Form of 5 1/4% Convertible Subordinated Debentures due June
15, 2005 of the Company (included in Sections 2.2, 2.3 and
2.4 of the Indenture filed as Exhibit 4.1)
10.1 (4) System License Agreement between the Company and the
Massachusetts Institute of Technology, dated March 30, 1982,
as amended.
10.2 (4)+ Non-Equilibrium Distillation Model Development and License
Agreement between the Company and Koch Engineering Company,
Inc., as amended.
10.3 (4)+ Letter, dated October 19, 1994, from the Company to Koch
Engineering Company, Inc., pursuant to which the Company
elected to extend the term of the Company's license under
the Non-Equilibrium Distillation Model Development and
License Agreement.
10.4 (4)+ Batch Distillation Computer Program Development and License
Agreement between Process Simulation Associates, Inc. and
Koch Engineering Company, Inc.
10.5 (4)+ Agreement between the Company and Imperial College of
Science, Technology and Medicine regarding Assignment of
SPEEDUP.
(footnotes appear on page 38)
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38
10.6 (5) Amended and Restated Agreement and Plan of Reorganization,
dated as of May 12, 1995, by and among the Company,
Industrial Systems, Inc. and the stockholders of Industrial
Systems, Inc.
10.7 (6) Stock Purchase Agreement dated as of December 15, 1995,
among the Company, Dynamic Matrix Control Corporation and
Charles R. Cutler, June A. Cutler, Charles R. Johnston and
Cheryl Lynne Johnston, as shareholders of Dynamic Matrix
Control Corporation.
10.8 (6) Share Purchase Agreement dated as of January 5, 1996 among
the Company, Amelinc Corporation and Cegelec S.A.
10.9 (7) Agreement and Plan of Reorganization dated as of April 28,
1998, among the Company, AT Acquisition Corp., Chesapeake
Decision Sciences, Inc. and Dr. Thomas E. Baker
10.10(4) Vendor Program Agreement between the Company and General
Electric Capital Corporation.
10.11(8) Rider No. 1, dated December 14, 1994, to Vendor Program
Agreement between the Company and General Electric Capital
Corporation filed as Exhibit 10.22.
10.12(4)+ Letter Agreement between the Company and Sanwa Business
Credit Corporation.
10.13(4) Equity Joint Venture Contract between the Company and China
Petrochemical Technology Company.
10.14(4) Lease Agreement between the Company and Teachers Insurance
and Annuity Association of America regarding Ten Canal Park,
Cambridge, Massachusetts.
10.15(9) Further Amended and Restated Revolving Credit Agreement
dated as of February 15, 1996 among the Company, Prosys
Modeling Investment Corporation, Industrial Systems, Inc.,
Dynamic Matrix Control Corporation and Setpoint, Inc., as
the Borrowers, the Lenders Parties thereto, and Fleet Bank
of Massachusetts, N.A., as Agent and Lender, together with
related forms of the following (each in the form executed by
each of such Borrowers):
(a) Amended and Restated Revolving Credit Note
(b) Patent Conditional Assignment and Security Agreement
(c) Trademark Collateral Security Agreement.
(d) Security Agreement.
10.16* First Amendment dated as of December 31, 1996 among the
Company, Prosys Modeling Investment Corporation, Industrial
Systems, Inc., Dynamic Matrix Control Corporation and
Setpoint, Inc., as the Borrowers, the Lenders Parties
thereto, and Fleet Bank of Massachusetts, N.A., as Agent and
Lender, amending Further Amended and Restated Revolving
Credit Agreement filed as Exhibit 10.30, together with
related Collateral Release Agreement made as of December 31,
1996 among such parties.
10.17(10) Declaration of Registration Rights made as of April 27, 1998
by the Company for the benefit of former stockholders of
Chesapeake Decision Sciences, Inc.
10.18(3) Registration Rights Agreement, dated as of June 17, 1998,
between the Company and Goldman, Sachs & Co., NationsBanc
Montgomery Securities LLC and William Blair & Company,
L.L.C.
10.19(4) 1988 Non-Qualified Stock Option Plan, as amended.
10.20(11) 1995 Stock Option Plan.
10.21(11) 1995 Directors Stock Option Plan.
10.22(12) 1996 Special Stock Option Plan.
10.23(11) 1995 Employees' Stock Purchase Plan.
10.24(4) Form of Employee Confidentiality and Non-Competition
Agreement.
(footnotes appear on page 38)
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10.25(4) Noncompetition, Confidentiality and Proprietary Rights Agreement between the Company and
Lawrence B. Evans.
10.26(4) Noncompetition, Confidentiality and Proprietary Rights Agreement between the Company and Joseph
F. Boston.
10.27(4) Noncompetition, Confidentiality and Proprietary Rights Agreement between the Company and Paul
W. Gallier.
10.28(4) Noncompetition, Confidentiality and Proprietary Rights Agreement between the Company and
Herbert I. Britt.
10.29(12) Change in Control Agreement between the Company and Lawrence B. Evans dated August 12, 1997.
10.30(12) Change in Control Agreement between the Company and Joseph F. Boston dated August 12, 1997.
10.31(12) Change in Control Agreement between the Company and David McQuillin dated August 12, 1997.
10.32(12) Change in Control Agreement between the Company and Mary A. Palermo dated August 12, 1997.
10.33(12) Change in Control Agreement between the Company and Joel B. Rosen dated August 12, 1997.
10.34(12) Change in Control Agreement between the Company and Stephen J. Doyle dated August 12, 1997.
21.1 * Subsidiaries of the Company.
23.1 * Consent of Arthur Andersen LLP.
24.1 * Power of Attorney (included in signature page to Form 10-K).
27.1 * Financial Data Schedules for fiscal year ended June 30, 1998.
- ---------------
* Filed herewith.
+ Certain portions have been granted Confidential Treatment by the Securities
and Exchange Commission at the request of the Company.
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated March 12, 1998 (filed on March 27, 1998), and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A, as amended by Amendment No. 1 thereto (filed on June 12, 1998),
and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 17, 1998 (filed on June 19, 1998), and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-83916) filed on September 13, 1994, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995, and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated January 5, 1996, as amended by Amendment Nos. 1, 2, 3 and 4 thereto,
and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 27, 1998 (filed June 3, 1998), and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-88734) filed on January 29, 1995, and
incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, and incorporated herein
by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 333-63483) filed on September 16, 1998, and
incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-11651) filed on September 9, 1996, and
incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, and incorporated herein by
reference.
38
40
(b) REPORTS ON FORM 8-K
1. On May 6, 1998, the Company filed a Current Report on Form 8-K dated
April 28, 1998 with respect to a press release of the Company announcing
the execution of a definitive agreement for the acquisition of
Chesapeake.
2. On June 3, 1998, the Company filed a Current Report on Form 8-K dated
May 27, 1998 providing updated disclosure in light of the Company's
completion of the Chesapeake acquisition and other recent events. This
Form 8-K included the following financial statements:
CONSOLIDATED FINANCIAL STATEMENTS, EXCLUDING CHESAPEAKE:
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1997 and March 31,
1998 (Unaudited)
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)
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)
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)
Notes to Consolidated Financial Statements
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING CHESAPEAKE:
Report of Independent Public Accountants
Supplemental Consolidated Balance Sheets as of June 30, 1996 and 1997
and March 31,1998 (Unaudited)
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)
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)
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)
Notes to Supplemental Consolidated Financial Statements
On September 17, 1998, the Company filed Amendment No. 1 to the Form 8-K
dated May 27, 1998 described above, in order to reflect the fact that the
Company's supplemental consolidated financial statements had become its
historical financial statements due to its publishing of financial
results after the Chesapeake acquisition. This Amendment No. 1 included
the following financial statements:
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING CHESAPEAKE:
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1997 and March 31,
1998 (Unaudited)
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)
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)
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
Notes to Consolidated Financial Statements
3. On June 12, 1998, the Company filed Amendment No. 1 to its Current
Report on Form 8-K dated March 12, 1998 with respect to the
reincorporation of the Company in Delaware and related matters.
4. On June 19, 1998, the Company filed a Current Report on Form 8-K dated
June 17, 1998 with respect to the issuance and sale of the Debentures.
39
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts, as of September 28, 1998.
ASPEN TECHNOLOGY, INC.
By: /s/ LAWRENCE B. EVANS
------------------------------------
Lawrence B. Evans
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Aspen Technology, Inc.,
hereby severally constitute and appoint Lawrence B. Evans, Lisa W. Zappala and
Stephen J. Doyle, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Annual Report on Form 10-K filed herewith
and any and all amendments to said Annual Report and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Aspen Technology, Inc. to comply with the provisions of the
Securities Exchange Act of 1934 and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, to said Annual Report and any
and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of September 28, 1998.
SIGNATURE TITLE
--------- -----
/s/ LAWRENCE B. EVANS Chairman of the Board and Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Lawrence B. Evans
/s/ LISA W. ZAPPALA Chief Financial Officer
- -------------------------------------------------------- (Principal Financial and Accounting Officer)
Lisa W. Zappala
/s/ JOSEPH F. BOSTON Director
- --------------------------------------------------------
Joseph F. Boston
Director
- --------------------------------------------------------
Gresham T. Brebach, Jr.
/s/ DOUGLAS R. BROWN Director
- --------------------------------------------------------
Douglas R. Brown
/s/ JOAN C. MCARDLE Director
- --------------------------------------------------------
Joan C. McArdle
/s/ ALISON ROSS Director
- --------------------------------------------------------
Alison Ross
40
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of June 30, 1997 and 1998.... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1996, 1997 and 1998.................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
43
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, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. 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, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 11, 1998
F-2
44
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
--------------------
1997 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,284 $ 78,694
Short-term investments.................................... 16,622 34,987
Accounts receivable, net of reserves of $840 in 1997 and
$1,482 in 1998.......................................... 46,997 71,803
Unbilled services......................................... 12,444 18,077
Current portion of long-term installments receivable, net
of unamortized discount of $815 in 1997 and $1,016 in
1998.................................................... 19,063 23,643
Prepaid expenses and other current assets................. 8,876 10,831
-------- --------
Total current assets............................... 122,286 238,035
-------- --------
Long-term installments receivable, net of unamortized
discount of $7,386 in 1997 and $7,305 in 1998............. 30,963 36,203
-------- --------
Property and leasehold improvements, at cost:
Land...................................................... 664 727
Building and improvements................................. 6,499 8,790
Computer equipment........................................ 24,774 33,096
Purchased software........................................ 9,934 16,599
Furniture and fixtures.................................... 7,941 11,746
Leasehold improvements.................................... 2,618 5,356
-------- --------
52,430 76,314
Less -- Accumulated depreciation and amortization........... 21,271 33,578
-------- --------
31,159 42,736
-------- --------
Computer software development costs, net of accumulated
amortization of $5,051 in 1997 and $6,314 in 1998......... 3,058 5,696
-------- --------
Land........................................................ 925 925
-------- --------
Intangible assets, net of accumulated amortization of $3,347
in 1997 and $6,066 in 1998................................ 12,768 12,857
-------- --------
Other assets................................................ 2,386 6,430
-------- --------
$203,545 $342,882
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 288 $ 2,187
Accounts payable.......................................... 7,442 6,139
Accrued expenses.......................................... 17,968 32,406
Unearned revenue.......................................... 4,294 6,008
Deferred revenue.......................................... 16,730 17,888
Deferred income taxes..................................... 1,775 541
-------- --------
Total current liabilities.......................... 48,497 65,169
-------- --------
Long-term obligations, less current portion................. 462 4,385
-------- --------
5 1/4% Convertible subordinated debentures.................. -- 86,250
-------- --------
Deferred revenue, less current portion...................... 9,441 15,074
-------- --------
Other liabilities........................................... 942 914
-------- --------
Deferred income taxes....................................... 6,789 6,074
-------- --------
Commitments and contingencies (Notes 10, 11 and 12)
Stockholders' equity:
Common stock, $.10 par value --
Authorized -- 40,000,000 shares
Issued -- 22,342,399 shares and 24,729,741 shares in
1997 and 1998, respectively............................ 2,235 2,473
Additional paid-in capital................................ 128,344 148,342
Retained earnings......................................... 7,607 14,922
Cumulative translation adjustment......................... (261) (163)
Treasury stock, at cost -- 230,330 shares of common
stock................................................... (502) (502)
Unrealized loss on investments............................ (9) (56)
-------- --------
Total stockholders' equity......................... 137,414 165,016
-------- --------
$203,545 $342,882
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
45
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
--------------------------------
1996 1997 1998
-------- -------- --------
Revenues:
Software licenses........................................ $ 70,199 $103,179 $139,390
Service and other........................................ 44,619 90,891 113,165
-------- -------- --------
114,818 194,070 252,555
-------- -------- --------
Expenses:
Cost of software licenses................................ 3,992 5,539 8,178
Cost of service and other................................ 27,220 54,006 68,490
Selling and marketing.................................... 36,610 56,034 74,926
Research and development................................. 22,310 33,580 43,553
General and administrative............................... 10,715 17,072 20,208
Charge for in-process research and development........... 24,421 8,664 8,472
Costs related to acquisitions............................ -- -- 4,984
-------- -------- --------
125,268 174,895 228,811
-------- -------- --------
Income (loss) from operations......................... (10,450) 19,175 23,744
Foreign currency exchange loss............................. (223) (236) (454)
Income on equity in joint ventures......................... 10 26 45
Interest income............................................ 3,745 5,556 5,727
Interest expense on subordinated notes payable to a related
party.................................................... (377) -- --
Other interest expense..................................... (946) (151) (377)
-------- -------- --------
Income (loss) before provision for income taxes....... (8,241) 24,370 28,685
Provision for income taxes................................. 6,146 10,169 14,049
-------- -------- --------
Net income (loss)........................................ $(14,387) $ 14,201 $ 14,636
======== ======== ========
Net income (loss) per share:
Diluted.................................................. $ (0.83) $ 0.63 $ 0.59
======== ======== ========
Basic.................................................... $ (0.83) $ 0.66 $ 0.63
======== ======== ========
Weighted average shares outstanding:
Diluted.................................................. 17,432 22,707 24,883
======== ======== ========
Basic.................................................... 17,432 21,368 23,415
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
46
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK RETAINED TREASURY STOCK
--------------------- ADDITIONAL EARNINGS CUMULATIVE -------------------
NUMBER OF $.10 PAR PAID-IN (ACCUMULATED TRANSLATION NUMBER OF
SHARES VALUE CAPITAL DEFICIT) ADJUSTMENT SHARES AMOUNTS
---------- -------- ---------- ------------ ----------- --------- -------
BALANCE, JUNE 30, 1995................ 17,352,463 $1,736 $ 37,345 $ 7,266 $(303) 230,396 $(502)
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.............. -- -- -- -- (59) -- --
Realized gain on investments........ -- -- -- -- -- -- --
Unrealized market loss on
investments....................... -- -- -- -- -- -- --
Tax benefit related to stock
options........................... -- -- 2,107 -- -- -- --
Net loss............................ -- -- -- (14,387) -- -- --
---------- ------ -------- -------- ----- -------- -----
BALANCE, JUNE 30, 1996................ 20,758,343 2,076 110,388 (7,121) (362) 230,396 (502)
Issuance of common stock in an
immaterial pooling................ 104,162 10 165 527 -- -- --
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.............. -- -- -- -- 101 -- --
Issuance of treasury stock to
charity........................... -- -- -- -- -- (66) --
Unrealized market loss on
investments....................... -- -- -- -- -- -- --
Tax benefit related to stock
options........................... -- -- 3,963 -- -- -- --
Net income.......................... -- -- -- 14,201 -- -- --
---------- ------ -------- -------- ----- -------- -----
BALANCE, JUNE 30, 1997................ 22,342,399 2,235 128,344 7,607 (261) 230,330 (502)
Issuance of common stock in
immaterial poolings............... 766,443 77 2,046 (7,321) -- -- --
Issuance of common stock under
employee stock purchase plans..... 115,617 11 3,867 -- -- -- --
Exercise of stock options and
warrants.......................... 525,830 53 7,194 -- -- -- --
ESOP contribution................... 983,145 98 380 -- -- -- --
Retired stock....................... (3,693) (1) (1) -- -- -- --
Translation adjustment.............. -- -- -- -- 98 -- --
Unrealized market loss on
investments....................... -- -- -- -- -- -- --
Tax benefit related to stock
options........................... -- 6,512 -- -- -- -- --
Net income.......................... -- -- -- 14,636 -- -- --
---------- ------ -------- -------- ----- -------- -----
BALANCE, JUNE 30, 1998................ 24,729,741 $2,473 $148,342 $ 14,922 $(163) 230,330 $(502)
========== ====== ======== ======== ===== ======== =====
UNREALIZED
GAIN TOTAL
(LOSS) ON STOCKHOLDERS'
INVESTMENTS EQUITY
----------- -------------
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 an
immaterial 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
immaterial poolings............... -- 5,198
Issuance of common stock under
employee stock purchase plans..... -- 3,878
Exercise of stock options and
warrants.......................... -- 7,247
ESOP contribution................... -- 478
Retired stock....................... -- (2)
Translation adjustment.............. -- 98
Unrealized market loss on
investments....................... (47) (47)
Tax benefit related to stock
options........................... -- 6,512
Net income.......................... -- 14,636
----- --------
BALANCE, JUNE 30, 1998................ $ (56) $165,016
===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
47
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
1996 1997 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $(14,387) $ 14,201 $ 14,636
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization........................... 5,817 11,655 14,144
Charge for in-process research and development.......... 24,421 8,664 8,472
Deferred income taxes................................... (295) (1,646) (2,749)
Changes in assets and liabilities --
Accounts receivable................................... (11,930) (9,107) (28,728)
Prepaid expenses and other current assets............. 215 (4,686) (388)
Long-term installments receivable..................... 1,790 (20,251) (9,394)
Accounts payable and accrued expenses................. 7,615 4,513 14,954
Unearned revenue...................................... 2,823 (7,835) 1,713
Deferred revenue...................................... 3,596 7,597 5,744
-------- -------- --------
Net cash provided by operating activities........... 19,665 3,105 18,404
-------- -------- --------
Cash flows from investing activities:
Purchase of property and leasehold improvements........... (7,926) (20,199) (19,356)
Increase in computer software development costs........... (908) (2,384) (3,900)
Decrease (increase) in other assets....................... 117 (549) (3,981)
(Increase) decrease in short-term investments............. (20,221) 22,194 (18,413)
Increase (decrease) in other liabilities.................. 955 (815) (28)
Cash acquired in immaterial poolings...................... -- 792 (1,123)
Cash used in the purchase of business, net of cash
acquired................................................ (44,723) (6,232) (9,911)
-------- -------- --------
Net cash used in investing activities............... (72,706) (7,193) (56,712)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock.................................. 69,521 -- --
Issuance of common stock under employee stock purchase
plans................................................... 474 3,570 3,878
Issuance of common stock under employee stock ownership
plan.................................................... 250 338 478
Exercise of stock options and warrants.................... 925 4,203 7,247
Repurchase of common stock................................ (444) (42) (2)
Proceeds from 5 1/4% convertible subordinated
debentures.............................................. -- -- 86,250
Payment of subordinated notes payable to related
parties................................................. (3,450) -- --
Payments of long-term debt and capital lease
obligations............................................. (5,693) (571) 769
-------- -------- --------
Net cash provided by financing activities........... 61,583 7,498 98,620
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (59) 101 98
-------- -------- --------
Increase in cash and cash equivalents....................... 8,483 3,511 60,410
Cash and cash equivalents, beginning of period.............. 6,290 14,773 18,284
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 14,773 $ 18,284 $ 78,694
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................ $ 3,080 $ 4,074 $ 1,363
======== ======== ========
Cash paid for interest.................................... $ 1,363 $ 199 $ 245
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Increase in equipment under capital lease obligations..... $ 105 $ -- $ 2,351
======== ======== ========
Increase in additional paid-in capital and decrease in
accrued expenses relating to the Tax benefit of exercise
of nonqualified stock options........................... $ 2,107 $ 3,963 $ 6,512
======== ======== ========
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 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 $ 11,316
Issuance of common stock related to acquisitions........ -- (5,908) --
Payments in connection with the acquisitions, net of
cash acquired.......................................... (44,723) (6,232) (9,911)
-------- -------- --------
Liabilities assumed................................... $ 3,196 $ 3,329 $ 1,405
======== ======== ========
During the fiscal year 1997, the Company acquired B-JAC International, Inc.
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., Zyqad
Limited and Treiber Controls, Inc., all of which were accounted for as poolings
of interests. Due to their immateriality to the financial position and results
of operations of the Company, the historical financial statements were not
restated.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
48
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 its common stock
for all the outstanding shares of CDI common stock. 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 was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements of the Company have been restated to give retroactive effect to the
combination of CDI. The Company incurred approximately $4.0 million of expenses
related to this acquisition, which were 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:
YEARS ENDED JUNE 30,
--------------------------------
1996 1997 1998
-------- -------- --------
Revenue --
The Company...................................... $103,609 $180,299 $234,461
CDI.............................................. 11,209 13,771 18,094
-------- -------- --------
Combined......................................... $114,818 $194,070 $252,555
======== ======== ========
Net income (loss) --
The Company...................................... $(15,185) $ 13,155 $ 14,922
CDI.............................................. 798 1,046 (286)
-------- -------- --------
Combined......................................... $(14,387) $ 14,201 $ 14,636
======== ======== ========
Net income (loss) per share --
Diluted --
The Company................................... $ (0.96) $ 0.63 $ 0.67
======== ======== ========
CDI........................................... $ 0.51 $ 0.60 $ (0.11)
======== ======== ========
Combined...................................... $ (0.83) $ 0.63 $ 0.59
======== ======== ========
Net income loss per share --
Basic --
The Company................................... $ (0.96) $ 0.67 $ 0.72
======== ======== ========
CDI........................................... $ 0.51 $ 0.60 $ (0.11)
======== ======== ========
Combined...................................... $ (0.83) $ 0.66 $ 0.63
======== ======== ========
F-7
49
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying 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) 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.
(c) SHORT-TERM INVESTMENTS
The Company accounts for its 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 included in
short-term investments and cash and cash equivalents and 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, 1997 and 1998 are as follows
(in thousands):
JUNE 30, 1997 JUNE 30, 1998
-------------------- ---------------------
TOTAL TOTAL TOTAL TOTAL
CONTRACTED MARKET AMORTIZED MARKET AMORTIZED
DESCRIPTION MATURITY VALUE COST VALUE COST
- ----------- ----------- ------- --------- -------- ---------
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents.......... N/A $ 8,858 $ 8,858 $ 12,883 $ 12,883
Commercial paper................... 0-3 months 4,974 4,974 30,811 30,845
Money market funds................. 0-3 months 4,452 4,452 -- --
Repurchase agreement............... 0-3 months -- -- 35,000 35,000
------- ------- -------- --------
Total cash and cash
equivalents.............. 18,284 18,284 78,694 78,728
------- ------- -------- --------
SHORT TERM INVESTMENTS:
Commercial paper................... 4-11 months 2,150 2,151 -- --
Money market funds................. N/A 189 189 30,926 30,948
Certificates of deposit............ 4-11 months 475 475 9 9
Corporate and foreign bonds........ 4-12 months 3,145 3,148 1,757 1,760
Corporate and foreign bonds........ 1-5 years 10,663 10,668 2,295 2,292
------- ------- -------- --------
Total short term
investments.............. 16,622 16,631 34,987 35,009
------- ------- -------- --------
$34,906 $34,915 $113,681 $113,737
======= ======= ======== ========
F-8
50
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) 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
(e) 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) REVENUE RECOGNITION
The Company recognizes revenue from software licenses upon the shipment of
its products, pursuant to a signed noncancellable 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 noncancellable 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 utilized for the years
ended June 30, 1996, 1997 and 1998 were 11% to 12%, 8.5% to 11% and 8.5%,
respectively.
(g) 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
F-9
51
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
life of the product, not to exceed three years. Total amortization expense
charged to operations was approximately $735,000, $1,143,000 and $1,263,000 in
fiscal 1996, 1997 and 1998, respectively.
(H) 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.
At June 30, 1997 and 1998, the Company had long-term installments
receivable of approximately $8,987,000 and $4,953,000 denominated in foreign
currencies. The June 1998 installments receivable mature through January 2004
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.
(I) 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. In February 1998, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 98. This bulletin
revises the SEC's guidance for calculating earnings per share with respect to
equity security issuances before an initial public offering (IPO) and is
effective for fiscal years ending after December 15, 1997. The prior years'
earnings per share have been retroactively restated to reflect the adoption of
SFAS No. 128 and SAB No. 98.
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 and nominal issuances. Common
equivalent shares include common stock options and warrants to the extent their
effect is dilutive, based on the treasury stock method. Nominal issuances arise
when a registrant issues common stock, options or warrants to purchase common
stock or other potentially dilutive instruments for nominal consideration, as
defined by SAB No. 98, in the periods preceding an IPO. During the period
preceding the Company's IPO, the Company did not have any nominal issuances.
The calculations of basic and diluted weighted average shares outstanding
are as follows (in thousands):
YEAR ENDED JUNE 30,
--------------------------
1996 1997 1998
------ ------ ------
Basic weighted average common shares
outstanding.................................... 17,432 21,368 23,415
Weighted average common equivalent shares........ -- 1,339 1,468
------ ------ ------
Diluted weighted average shares outstanding...... 17,432 22,707 24,883
====== ====== ======
Diluted weighted average shares outstanding do not include 1,783,000 and
190,000 common equivalent shares at June 30, 1996 and June 30, 1997,
respectively, as their effect would be anti-dilutive. In addition, diluted
weighted average shares outstanding for June 30, 1998 do not include 1,622,805
of common equivalent shares related to the convertible debt, as their effect
would be antidilutive.
F-10
52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) 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.
(k) 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, 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. As of June 30, 1998, the Company had one customer that
represented 10% of total accounts receivable. As of June 30, 1997, no single
customer represented greater than 10% of total accounts receivable.
(l) 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.
(m) INTANGIBLE ASSETS AND IMPAIRMENT OF LONG-LIVED 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. Goodwill (net of accumulated amortization) was approximately $4,471,000
at June 30, 1998. Amortization of goodwill was approximately $279,000 and
$532,000 for the years ended June 30, 1997 and 1998, respectively.
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
evaluates it long-lived assets, which include property and leasehold
improvements and intangible assets for impairment as events and circumstances
indicate the carrying amount may not be recoverable and at a minimum each
balance sheet date. The Company evaluates the realizability of its long-lived
assets based on profitability and cash flow expectations for the related asset
or subsidiary. Management believes that as of each of the balance sheet dates
presented none of the Company's long-lived assets were impaired.
F-11
53
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) 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 (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 8-1 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 is effective for fiscal years
beginning after December 15, 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 $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 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.
F-12
54
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 bases 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 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
F-13
55
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 FISCAL YEAR 1998 (OTHER THAN CDI)
During 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., Zyqad Limited, and Treiber Controls, Inc. The
Company exchanged 766,443 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 interest and were immaterial to
the Company's financial position and 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 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 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
=======
F-14
56
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) 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,
1996(1)
--------
Pro forma revenue......................................... $153,877
Pro forma net income...................................... $ 9,397
Pro forma net income per share -- diluted................. $ 0.50
Pro forma weighted average shares
outstanding -- diluted.................................. 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 effects of the
acquisitions during fiscal year 1997 and 1998, except for CDI (see Note 1), have
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 certain 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 Company, as defined,
and is payable quarterly. At the Company's election, borrowings bear interest on
the basis of the applicable LIBOR, as defined (5.72% as of June 30, 1998), or at
the bank's prime rate (8.50% as of June 30, 1998). The line is subject to
certain covenants, including profitability and operating ratios, as defined. As
of June 30, 1998, no amounts were outstanding under this line and approximately
$29,134,000 was available for future borrowings as approximately $866,000 was
reserved for certain performance bonds relating to service contracts and
outstanding letters of credit. The line of credit expires on December 31, 1998.
F-15
57
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1997 and 1998
(in thousands):
JUNE 30, JUNE 30,
1997 1998
-------- --------
Capital lease obligation due in monthly installments of
$65,000 plus interest at 8.8% per year through April
2001.................................................... $ -- $2,060
Credit arrangement of subsidiary with a bank.............. -- 1,339
Mortgage payable due in annual installments of
approximately $101,000 plus interest at 9.25% per
year.................................................... -- 1,251
Non-interest bearing note payable due in annual
installments of approximately $67,000................... -- 953
Convertible Debenture due in 2000, interest 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............................. -- 403
Note payable due in annual installments of $125,000 plus
interest at 9.5% per year............................... 547 423
Other obligations......................................... 203 143
---- ------
750 6,572
Less -- Current maturities................................ 288 2,187
---- ------
$462 $4,385
==== ======
Maturities of these long term obligations are as follows (in thousands):
YEARS ENDING JUNE 30, AMOUNT
- --------------------- ------
1999........................................................ $2,758
2000........................................................ 1,196
2001........................................................ 1,070
2002........................................................ 386
2003........................................................ 168
Thereafter.................................................. 1,363
------
6,941
Less -- Amount representing interest........................ 369
-- Current maturities................................. 2,187
------
$4,385
======
(6) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
In June 1998, the Company sold $86.3 million of 5 1/4% Convertible
subordinated debentures (the Debentures) to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933. The Debentures are
convertible into shares of the Company's common stock at any time prior to June
15, 2005, unless previously redeemed or repurchased, at a conversion price of
$52.97 per share, subject to adjustment in certain events. Interest on the
Debentures is payable on June 15 and December 15 of each year, commencing
December 15, 1998. The Debentures are redeemable in whole or part at the option
of the Company at any
F-16
58
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time on or after June 15, 2001 at the following redemption prices expressed as a
percentage of principal plus accrued interest through the date of redemption:
12 MONTHS
BEGINNING REDEMPTION
JUNE 15 OF PRICE
- ---------- ----------
2001...................................................... 103.00%
2002...................................................... 102.25%
2003...................................................... 101.50%
2004...................................................... 100.75%
In the event of a change of control, as defined, each holder of the
Debentures may require the Company to repurchase its Debentures, in whole or in
part, for cash or, at the Company's option, for common stock (valued at 95% of
the average last reported sale prices for the 5 trading days immediately
preceding the repurchase date) at a repurchase price of 100% of the principal
amount of the Debentures to be repurchased, plus accrued interest to the
repurchase date. The Debentures are unsecured obligations subordinate in right
of payment to all existing and future senior debt of the Company, as defined,
and effectively subordinate in right of payment to all indebtedness and other
liabilities of the Company's subsidiaries. The Company has agreed to file a
shelf registration statement in respect of the Debentures and common stock
issuable upon conversion thereof.
In connection with this financing the Company incurred approximately $3.9
million of issuance costs. These costs have been classified as other assets in
the accompanying balance sheet as of June 30, 1998 and will be amortized, as
interest expense, over the term of the Debentures. Approximately $3.0 million of
issuance costs related to fees paid to investment bankers in connection with the
sale of these Debentures.
(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 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. 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
F-17
59
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company issued an additional warrant to purchase 120,000 shares of common stock
to the holder of the subordinated notes payable. 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 of common stock 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 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 1998,
warrants to purchase the remaining 9,750 shares were exercised.
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 exercise price under the
option agreement was $0.93 to $1.05 per share and was 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 in the number of shares for
which options may be granted, beginning July 1, 1998 by an amount equal to 5% of
the outstanding shares on the preceding June 30. On July 1, 1998 the number of
shares available under the 1995 plan were increased by 1,237,712 shares. 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-18
60
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO 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
SHARES 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...................................... 2,092,637 30.00
Options exercised.................................... (512,321) 14.41
Options terminated................................... (108,064) 18.80
--------- ------
Outstanding, June 30, 1998............................. 4,451,189 $22.96
========= ======
As of June 30, 1998, there were 52,083, 74,000 and 78,500 shares of common
stock available for grant under the 1995 Plan, the 1995 Directors Plan and the
1996 Plan, 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
SHARES PRICE
--------- --------
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-19
61
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information about stock options outstanding
and exercisable at June 30, 1998:
WEIGHTED
OPTIONS AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
AT JUNE 30, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE
- ------------------------ ----------- ----------- --------
$ 1.05..................................... 151,398 1.9 $ 1.05
1.83 -- 2.66............................ 190,512 3.6 2.66
3.33 -- 4.00............................ 218,564 5.9 3.37
8.06 -- 10.25............................ 76,050 6.7 10.00
13.12 -- 19.12............................ 1,116,334 7.5 16.41
25.00 -- 32.50............................ 2,379,831 8.7 29.32
36.06 -- 40.18............................ 318,500 9.1 37.48
--------- ------
4,451,189 $22.96
========= ======
OPTIONS WEIGHTED
EXERCISABLE AVERAGE
AT JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 1998 PRICE
- ------------------------ ----------- --------
$ 1.05................................................. 151,398 $ 1.05
1.83 -- 2.66........................................ 190,512 2.66
3.33 -- 4.00........................................ 212,564 3.35
8.50 -- 10.25........................................ 52,650 10.12
13.12 -- 19.12........................................ 522,439 16.24
25.00 -- 32.50........................................ 637,145 29.54
36.06 -- 38.38........................................ 61,151 37.76
--------- ------
Exercisable, June 30, 1998............................. 1,827,859 $17.25
========= ======
Exercisable, June 30, 1997............................. 1,160,258 $ 9.47
========= ======
Exercisable, June 30, 1996............................. 962,990 $ 4.58
========= ======
(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-20
62
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's option plans 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 1998
-------- ------- -------
Net (loss) income (in thousands) --
As reported................................ $(14,387) $14,201 $14,636
Pro forma.................................. (15,623) 9,520 2,179
Net (loss) income per share --
Diluted --
As reported............................. $ (0.83) $ 0.63 $ 0.59
Pro forma............................... (0.90) 0.42 0.09
Basic --
As reported............................. $ (0.83) $ 0.66 $ 0.63
Pro forma............................... (0.90) 0.45 0.09
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
fiscal years 1996 and 1997 and volatility of 75% for fiscal year 1998; risk-free
interest rates of 5.54% to 6.83% for options granted during fiscal 1996, 6.42%
to 6.76% for options granted during fiscal 1997 and 5.60% to 6.28% for options
granted during fiscal 1998; and a weighted average expected option term of 5
years for all periods. The weighted average fair value per share of options
granted during 1996, 1997 and 1998 was $12.83, $23.49 and $25.57, 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 1,140,000 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 50,220
shares, 210,085 shares and 115,617 shares during fiscal 1996, 1997 and 1998,
respectively. As of June 30, 1998, there were 1,000,000 shares available for
future issuance under the 1998 Employee Stock Purchase Plan. In addition on July
1, 1998, the Company issued 73,094 shares 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 to certain
limitations. Each Right when it
F-21
63
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(g) EMPLOYEE STOCK OWNERSHIP PLAN
In January 1987, CDI established an Employee Stock Ownership Plan and Trust
(the Plan) which covered substantially all employees who attained the age of 21,
completed 1,000 hours of service during the initial plan year in which they had
their first hour of service and were not covered by any collective bargaining
agreement. CDI made discretionary contributions to the Plan on an annual basis
based on 10% of all eligible employees' base salaries. The common stock shares
were then allocated based on a formula determined by management. CDI's
discretionary contributions for the years ended June 30, 1996, 1997 and 1998
were approximately $250,000, $338,000 and $478,000, respectively. The Plan also
provided for the repurchase of common stock upon the employee's termination of
employment. In connection with the merger between the Company and CDI, the Plan
was frozen as of May 27, 1998 and all outstanding shares were converted into the
Company's common stock.
(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.
Income (loss) before provision for income taxes consists of the following
(in thousands):
YEARS ENDED JUNE 30,
-----------------------------
1996 1997 1998
------- ------- -------
Domestic...................................... $(8,435) $21,312 $22,068
Foreign....................................... 194 3,058 6,617
------- ------- -------
Total............................... $(8,241) $24,370 $28,685
======= ======= =======
F-22
64
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes shown in the accompanying consolidated
statements of operations are composed of the following (in thousands):
YEARS ENDED JUNE 30,
----------------------------
1996 1997 1998
------ ------- -------
Federal --
Current...................................... $4,933 $ 7,174 $ 8,185
Deferred..................................... (264) 1,092 1,893
State --
Current...................................... 966 1,011 746
Deferred..................................... 6 198 857
Foreign --
Current...................................... 505 692 2,368
------ ------- -------
$6,146 $10,169 $14,049
====== ======= =======
The provision for income taxes differs from the federal statutory rate due
to the following:
YEARS ENDED JUNE 30,
-----------------------------
1996(1) 1997(1) 1998(1)
------- ------- -------
Federal tax at statutory rate.................... 34.5% 34.5% 34.5%
State income tax, net of federal tax benefit..... 5.5 5.6 4.2
Foreign tax...................................... 1.2 (0.9) (1.0)
Tax credits generated............................ (5.0) (4.1) (4.7)
Permanent differences, net....................... 2.2 1.3 0.6
Valuation allowance and other.................... (0.4) (0.5) --
---- ---- ----
Provision for income taxes....................... 38.0% 35.9% 33.6%
==== ==== ====
- ---------------
(1) Calculated based on pretax income, before nondeductible charges for
in-process research and development and costs related to acquisitions, of
$14,850,000, $26,704,000 and $41,780,000 for 1996, 1997 and 1998,
respectively.
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
JUNE 30,
--------------------
1997 1998
-------- --------
Deferred tax assets.................................... $ 6,344 $ 6,560
Deferred tax liabilities............................... (14,908) (13,175)
-------- --------
$ (8,564) $ (6,615)
======== ========
F-23
65
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate tax effect of each type of temporary difference and
carryforward is as follows (in thousands):
JUNE 30,
------------------
1997 1998
------- -------
Revenue related.......................................... $(8,430) $(4,492)
Foreign operating losses................................. 1,063 --
Nondeductible reserves and accruals...................... 1,118 422
Intangible assets........................................ (2,241) (2,720)
Other temporary differences.............................. (74) 175
------- -------
$(8,564) $(6,615)
======= =======
(10) OPERATING LEASES
The Company leases its facilities and various office equipment under
noncancellable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $3,418,000, $5,017,000, and $6,383,000
for the years ended June 30, 1996, 1997 and 1998, respectively. Future minimum
lease payments under these leases as of June 30, 1998 are as follows (in
thousands):
AMOUNT
-------
Year Ending June 30,
1999..................................................... $ 5,156
2000..................................................... 4,898
2001..................................................... 2,671
2002..................................................... 2,480
2003..................................................... 675
Thereafter................................................. 1,071
-------
$16,951
=======
(11) SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $30,210,000 and $51,304,000 during
fiscal 1997 and 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 June 30, 1998, the balance of the uncollected principal portion of the
contracts sold with partial recourse was approximately $87,586,000. The
Company's potential recourse obligations related to these contracts is
approximately $4,483,000. In addition, the Company is obligated to pay
additional costs to the financial institutions in the event of default by the
customer.
F-24
66
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 contribution
was made during 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 years ended June 30, 1997 and 1998, the Company made matching
contributions of approximately $385,000 and $839,000, respectively.
CDI also maintains a defined contribution 401(k) 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 fiscal years
ended June 30, 1996, June 30, 1997 and 1998, CDI made matching contributions of
approximately $252,000, $183,000 and $314,000, respectively. This plan was
merged with the Company's plan as of June 1, 1998.
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, 1996, 1997 and 1998, the Company has
recognized approximately $10,000, $26,000 and $45,000, respectively, as its
portion of the income from these joint ventures.
F-25
67
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following (in thousands):
JUNE 30,
------------------
1997 1998
------- -------
Income taxes............................................. $ 6,711 $14,279
Payroll and payroll-related.............................. 3,713 8,366
Royalties and outside commissions........................ 2,168 1,985
Other.................................................... 5,376 7,776
------- -------
$17,968 $32,406
======= =======
(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 1997 and 1998, payments of approximately $222,000 and $62,000,
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:
YEARS ENDED JUNE 30,
-----------------------
1996 1997 1998
----- ----- -----
United States....................................... 58.0% 50.0% 54.6%
Europe.............................................. 24.4 30.6 28.4
Japan............................................... 9.0 8.7 4.6
Other............................................... 8.6 10.7 12.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Revenues, income (loss) from operations and identifiable assets for the
Company's North American, 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-26
68
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NORTH AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------
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
======== ======= ======= ========= ========
Year ended June 30, 1998 --
Revenues....................... $224,541 $27,663 $ 351 $ -- $252,555
Transfers between geographic
locations................... -- 25,281 8,965 (34,246) --
-------- ------- ------- --------- --------
Total revenues......... $224,541 $52,944 $ 9,316 $ (34,246) $252,555
======== ======= ======= ========= ========
Income (loss) from operations.... $ 17,001 $ 9,624 $(2,881) $ -- $ 23,744
======== ======= ======= ========= ========
Identifiable assets.............. $405,606 $22,231 $(1,128) $(102,380) $324,329
======== ======= ======= ========= ========
F-27
69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Aspen Technology, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Aspen Technology, Inc. and
subsidiaries, included in this Form 10-K, and have issued our report thereon
dated August 11, 1998. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in Item
14(a)-2 is the responsibility of the Company's management, is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 11, 1998
S-1
70
SCHEDULE II
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE, CHARGED TO BALANCE,
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OTHER(1) PERIOD
- ----------- ------------ ---------- ---------- -------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
June 30, 1996................. $84,000 $200,000 $ (2,315) $449,000 $ 730,685
June 30, 1997................. 730,685 120,000 (222,850) 211,882 839,717
June 30, 1998................. 839,717 180,000 (136,000) 598,000 1,481,717
- ---------------
(1) Relates to amounts acquired in acquisitions.
S-2
71
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-laws of the Company.
4.1 (2) Specimen Certificate for Shares of the Company's Common
Stock, $.10 par value.
4.2 (1) Rights Agreement dated as of March 12, 1998 between the
Company and American Stock Transfer and Trust Company, as
Rights Agent, including related forms of the following:
(a) Certificate of Designation of Series A Participating
Cumulative Preferred Stock of the Company.
(b) Right Certificate.
4.3 (3) Indenture dated as of June 17, 1998 between the Company and
The Chase Manhattan Bank, as trustee, with respect to up to
$86,250,000 principal amount of 5 1/4% Convertible
Subordinated Debentures due June 15, 2005 of the Company.
4.4 (3) Form of 5 1/4% Convertible Subordinated Debentures due June
15, 2005 of the Company (included in Sections 2.2, 2.3 and
2.4 of the Indenture filed as Exhibit 4.1)
10.1 (4) System License Agreement between the Company and the
Massachusetts Institute of Technology, dated March 30, 1982,
as amended.
10.2 (4)+ Non-Equilibrium Distillation Model Development and License
Agreement between the Company and Koch Engineering Company,
Inc., as amended.
10.3 (4)+ Letter, dated October 19, 1994, from the Company to Koch
Engineering Company, Inc., pursuant to which the Company
elected to extend the term of the Company's license under
the Non-Equilibrium Distillation Model Development and
License Agreement.
10.4 (4)+ Batch Distillation Computer Program Development and License
Agreement between Process Simulation Associates, Inc. and
Koch Engineering Company, Inc.
10.5 (4)+ Agreement between the Company and Imperial College of
Science, Technology and Medicine regarding Assignment of
SPEEDUP.
10.6 (5) Amended and Restated Agreement and Plan of Reorganization,
dated as of May 12, 1995, by and among the Company,
Industrial Systems, Inc. and the stockholders of Industrial
Systems, Inc.
10.7 (6) Stock Purchase Agreement dated as of December 15, 1995,
among the Company, Dynamic Matrix Control Corporation and
Charles R. Cutler, June A. Cutler, Charles R. Johnston and
Cheryl Lynne Johnston, as shareholders of Dynamic Matrix
Control Corporation.
10.8 (6) Share Purchase Agreement dated as of January 5, 1996 among
the Company, Amelinc Corporation and Cegelec S.A.
10.9 (7) Agreement and Plan of Reorganization dated as of April 28,
1998, among the Company, AT Acquisition Corp., Chesapeake
Decision Sciences, Inc. and Dr. Thomas E. Baker
10.10(4) Vendor Program Agreement between the Company and General
Electric Capital Corporation.
10.11(8) Rider No. 1, dated December 14, 1994, to Vendor Program
Agreement between the Company and General Electric Capital
Corporation filed as Exhibit 10.22.
10.12(4)+ Letter Agreement between the Company and Sanwa Business
Credit Corporation.
10.13(4) Equity Joint Venture Contract between the Company and China
Petrochemical Technology Company.
10.14(4) Lease Agreement between the Company and Teachers Insurance
and Annuity Association of America regarding Ten Canal Park,
Cambridge, Massachusetts.
(footnotes appear on page I-3)
I-1
72
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15(9) Further Amended and Restated Revolving Credit Agreement
dated as of February 15, 1996 among the Company, Prosys
Modeling Investment Corporation, Industrial Systems, Inc.,
Dynamic Matrix Control Corporation and Setpoint, Inc., as
the Borrowers, the Lenders Parties thereto, and Fleet Bank
of Massachusetts, N.A., as Agent and Lender, together with
related forms of the following (each in the form executed by
each of such Borrowers):
(a) Amended and Restated Revolving Credit Note
(b) Patent Conditional Assignment and Security Agreement
(c) Trademark Collateral Security Agreement.
(d) Security Agreement.
10.16* First Amendment dated as of December 31, 1996 among the
Company, Prosys Modeling Investment Corporation, Industrial
Systems, Inc., Dynamic Matrix Control Corporation and
Setpoint, Inc., as the Borrowers, the Lenders Parties
thereto, and Fleet Bank of Massachusetts, N.A., as Agent and
Lender, amending Further Amended and Restated Revolving
Credit Agreement filed as Exhibit 10.30, together with
related Collateral Release Agreement made as of December 31,
1996 among such parties.
10.17(10) Declaration of Registration Rights made as of April 27, 1998
by the Company for the benefit of former stockholders of
Chesapeake Decision Sciences, Inc.
10.18(3) Registration Rights Agreement, dated as of June 17, 1998,
between the Company and Goldman, Sachs & Co., NationsBanc
Montgomery Securities LLC and William Blair & Company,
L.L.C.
10.19(4) 1988 Non-Qualified Stock Option Plan, as amended.
10.20(11) 1995 Stock Option Plan.
10.21(11) 1995 Directors Stock Option Plan.
10.22(12) 1996 Special Stock Option Plan.
10.23(11) 1995 Employees' Stock Purchase Plan.
10.24(4) Form of Employee Confidentiality and Non-Competition
Agreement.
10.25(4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Lawrence B. Evans.
10.26(4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Joseph F. Boston.
10.27(4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Paul W. Gallier.
10.28(4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Herbert I. Britt.
10.29(12) Change in Control Agreement between the Company and Lawrence
B. Evans dated August 12, 1997.
10.30(12) Change in Control Agreement between the Company and Joseph
F. Boston dated August 12, 1997.
10.31(12) Change in Control Agreement between the Company and David
McQuillin dated August 12, 1997.
10.32(12) Change in Control Agreement between the Company and Mary A.
Palermo dated August 12, 1997.
10.33(12) Change in Control Agreement between the Company and Joel B.
Rosen dated August 12, 1997.
10.34(12) Change in Control Agreement between the Company and Stephen
J. Doyle dated August 12, 1997.
(footnotes appear on page I-3)
I-2
73
EXHIBIT
NO. DESCRIPTION
------- -----------
21.1 * Subsidiaries of the Company.
23.1 * Consent of Arthur Andersen LLP.
24.1 * Power of Attorney (included in signature page to Form 10-K).
27.1 * Financial Data Schedules for fiscal year ended June 30,
1998.
- ---------------
* Filed herewith.
+ Certain portions have been granted Confidential Treatment by the Securities
and Exchange Commission at the request of the Company.
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated March 12, 1998 (filed on March 27, 1998), and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A, as amended by Amendment No. 1 thereto (filed on June 12, 1998),
and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 17, 1998 (filed on June 19, 1998), and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-83916) filed on September 13, 1994, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995, and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated January 5, 1996, as amended by Amendment Nos. 1, 2, 3 and 4 thereto,
and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 27, 1998 (filed June 3, 1998), and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-88734) filed on January 29, 1995, and
incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, and incorporated herein
by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 333-63483) filed on September 16, 1998, and
incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-11651) filed on September 9, 1996, and
incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, and incorporated herein by
reference.
I-3
1
EXHIBIT 10.16
FIRST AMENDMENT TO FURTHER AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
Dated as of December 31, 1996
Among
ASPEN TECHNOLOGY, INC.,
PROCESS MODELING INVESTMENT CORPORATION,
INDUSTRIAL SYSTEMS, INC.
and ASPENTECH, INC.
as the Borrowers
THE LENDERS PARTIES HERETO,
and
FLEET NATIONAL BANK
as Agent and Lender
2
FIRST AMENDMENT TO FURTHER AMENDED
AND RESTATED REVOLVING CREDIT AGREEMENT
This FIRST AMENDMENT TO FURTHER AMENDED AND RESTATED REVOLVING CREDIT
AGREEMENT (the "Agreement") is entered into as of December __, 1996 among Aspen
Technology, Inc., a Massachusetts corporation ("Aspen"), Process Modeling
Investment Corporation, a Delaware corporation ("PMIC"), Industrial Systems,
Inc., a Washington corporation ("ISI"), and AspenTech, Inc., a Texas corporation
(formerly known as Setpoint, Inc.) ("AspenTech", and collectively with Aspen,
PMIC and ISI, the "Borrowers"), and Fleet National Bank, formerly known as Fleet
National Bank of Connecticut, successor by merger to Fleet Bank of
Massachusetts, N.A., a national banking association (the "Agent"), as Agent for
the Lenders from time to time parties hereto.
Recitals
WHEREAS, Aspen, PMIC and the Agent are parties to a Revolving Credit
Agreement dated as of January 28, 1993, as amended by a First Amendment to
Revolving Credit Agreement dated September 30, 1993, and a Second Amendment to
Revolving Credit Agreement dated September 7, 1994; and
WHEREAS, Aspen, PMIC, Dynamic Matrix Control Corporation, a Texas
corporation ("DMC"), ISI and the Agent are parties to an Amended and Restated
Revolving Credit Agreement dated as of February 6, 1996; and
WHEREAS, Aspen acquired all of the outstanding capital stock of
Setpoint, Inc., a Texas corporation ("Setpoint") subsequent to February 6, 1996;
and
WHEREAS, Aspen, PMIC, DMC, ISI, Setpoint and the Agent are parties to a
Further Amended and Restated Revolving Credit Agreement dated as of February 15,
1996 (the "Further Amended and Restated Revolving Credit Agreement"); and
WHEREAS, as security for their respective obligations, the Borrowers
have previously granted various security interests and other collateral to the
Agent pursuant to (i) Security Agreements between each of the Borrowers and the
Agent, (ii) Stock Pledge Agreements between certain of the Borrowers and the
Agent, (iii) Software Escrow Agreements and an Amended Software Escrow Agreement
between each of the Borrowers and the Agent, (iv) Collateral Assignment of
License Agreement between Aspen and the Agent, (v) Assignments of Trademarks
between certain of the Borrowers and the Agent, (vi) Assignments of Patents
between certain of the Borrowers and the Agent, (vii) Patent Conditional
Assignments and Security Agreements between each of the Borrowers and the Agent
and (viii) certain UCC financing statements between each of the Borrowers and
the Agent (collectively the "Security Documents", and the collateral granted to
the Agent thereunder being hereinafter referred to as the "Collateral"); and
3
WHEREAS, effective October 2, 1996 DMC was merged with and into
Setpoint with Setpoint as the surviving corporation and the name of the
surviving corporation was changed to AspenTech, Inc.; and
WHEREAS, the Borrowers have requested the Agent to release its
interests in the Collateral, and
WHEREAS, the Agent is willing, on the terms and subject to the
conditions set forth herein, to do so.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 5, the Borrowers and the Agent hereby amend
the Further Amended and Restated Revolving Credit Agreement as follows:
Section 1. Definitions. Section 1.1 of the Further Amended and Restated
Revolving Credit Agreement is hereby amended as follows:
(a) The definitions of "Applicable LIBOR Rate Margin" and
"Applicable Prime Rate Margin" are hereby deleted in their entirety.
(b) The definitions of "Applicable LIBOR Rate" and "Applicable
Prime Rate" are hereby deleted in their entirety and new definitions
substituted therefor as follows:
"Applicable LIBOR Rate" shall mean the sum of (i) the
LIBOR Rate (as defined below) as in effect from time to time plus (ii)
one and one-half percent (1.5%).
"Applicable Prime Rate" shall mean the Prime Rate (as
defined below) as in effect time to time.
Section 2. Amendment to Covenant and Borrowing Base Certificate.
(a) Section 8.4 of the Further Amended and Restated Revolving
Credit Agreement is hereby amended by deleting the ratio "1.00:1.00,"
and substituting therefor the ratio "1.25:1.00"
(b) The Borrowing Base Certificate shall be amended to reflect
the change in the Consolidated Quick Ratio indicated in Section 2(a) of
this Agreement.
Section 3. Fee Change. Section 2.7 of the Further Amended and Restated
Revolving Credit Agreement is hereby deleted in its entirety and a new Section
2.7 is substituted therefor as follows:
2
4
"The Borrowers shall pay to the Agent, for the accounts of the Lenders
in accordance with their respective Commitment Percentages, a commitment fee
(the "Revolving Commitment Fee") equal to $50,000 per year. The Revolving
Commitment Fee shall be payable quarterly in arrears on the last day of each
March, June, September and December, commencing March 31, 1996, for the quarter
then ended. For purposes hereof, the Maximum Revolving Credit Amount shall not
be deemed to be reduced should the Borrowing Base be less than $30,000,000."
Section 4. Representations and Warranties; No Default. The Borrowers
hereby confirms to the Agent the representations and warranties of the Borrowers
set forth in Article 6 of the Further Amended and Restated Revolving Credit
Agreement (as amended hereby) as of the date hereof, as if set forth herein in
full. The Borrowers hereby certify that no Default exists under the Further
Amended and Restated Revolving Credit Agreement.
Section 5. Conditions to Effectiveness. This First Amendment to Further
Amended and Restated Revolving Credit Agreement shall become effective as of
December __ , 1996 upon execution hereof by the Burrowers and the Agent and
satisfaction of the following conditions:
(a) Collateral Release Agreement. The Agent and the Borrowers
shall execute a Collateral Release Agreement of even date herewith releasing the
Agent's interest in the Borrowers' Collateral, in form and substance
satisfactory to the Agent and its counsel.
(b) Execution of Note; Cancellation of Existing Note. The
Borrowers shall execute and deliver to the Agent an Amended and Restated
Revolving Credit Note reflecting AspenTech as a borrower thereunder. Upon
receipt of the Amended and Restated Revolving Credit Note, the Agent will return
the current Amended and Restated Revolving Credit Note dated February 6, 1996 to
the Borrowers.
Section 6. Miscellaneous. The Borrowers agree to pay on demand all the
Agent's reasonable expenses in preparing, executing and delivering this First
Amendment to Further Amended and Restated Revolving Credit Agreement, and all
related instruments and documents, including, without limitation, the reasonable
fees and out-of-pocket expenses of the Agent's special counsel, Goodwin, Procter
& Hoar LLP. This First Amendment to Further Amended and Restated Revolving
Credit Agreement shall be a Bank Agreement and shall be governed by and
construed and enforced under the laws of The Commonwealth of Massachusetts.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
5
IN WITNESS WHEREOF, the Borrower and the Agent have caused this First
Amendment to Further Amended and Restated Revolving Credit Agreement to be
executed by their duly authorized officers as of the date first set forth above.
ASPEN TECHNOLOGY, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
PROCESS MODELING INVESTMENT
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
INDUSTRIAL SYSTEMS, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
ASPENTECH, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
FLEET NATIONAL BANK
By: /s/ THOMAS W. DAVIES
-----------------------------------------
Name: Thomas W. Davies
Title: VP
4
6
COLLATERAL RELEASE AGREEMENT
This Agreement is made as of December 31, 1996 among Aspen Technology,
Inc., a Massachusetts corporation ("Aspen"), Process Modeling Investment
Corporation, a Delaware corporation ("PMIC"), Industrial Systems, Inc., a
Washington corporation ("ISI"), and AspenTech, Inc., a Texas corporation
(formerly known as Setpoint, Inc.) ("AspenTech", and collectively with Aspen,
PMIC and ISI, the "Debtors"), and Fleet National Bank, formerly known as Fleet
National Bank of Connecticut, successor by merger to Fleet Bank of
Massachusetts, N.A. a national banking association (the "Bank").
RECITALS
WHEREAS, Aspen, PMIC and the Bank are parties to a Revolving Credit
Agreement dated as of January 28, 1993, as amended by a First Amendment to
Revolving CreditAgreement dated September 30, 1993, and a Second Amendment to
Revolving Credit Agreement dated September 7, 1994; and
WHEREAS, Aspen, PMIC, Dynamic Matrix Control Corporation, a Texas
corporation ("DMC"), ISI and the Bank are parties to an Amended and Restated
Revolving Credit Agreement dated as of February 6, 1996; and
WHEREAS, Aspen acquired all of the outstanding capital stock of
Setpoint, Inc., a Texas corporation ("Setpoint"), subsequent to February 6,
1996; and
WHEREAS, Aspen, PMIC, DMC, ISI, Setpoint and the Bank are parties to a
Further Amended and Restated Revolving Credit Agreement dated as of February 15,
1996 (the "Further Amended and Restated Revolving Credit Agreement"); and
WHEREAS, as security for their respective obligations, the Debtors have
previously granted various security interests and other collateral to the Bank
pursuant to (i) Security Agreements between each of the Debtors and the Bank,
(ii) Stock Pledge Agreements between certain of the Debtors and the Bank, (iii)
Software Escrow Agreements and an Amended Software Escrow Agreement between each
of the Debtors and the Bank, (iv) Collateral Assignment of License Agreement
between Aspen and the Bank, (v) Assignments of Trademarks between certain of the
Debtors and the Bank, (vi) Assignments of Patents between certain of the Debtors
and the Bank, (vii) Patent Conditional Assignments and Security Agreements
between each of the Debtors and the Bank and (viii) certain UCC financing
statements between each of the Debtors and the Bank (collectively the "Security
Documents", and the collateral granted to the Bank thereunder being hereinafter
referred to as the "Collateral"); and
7
WHEREAS, effective October 2, 1996, DMC was merged with and into
Setpoint with Setpoint as the surviving corporation and the name of the
surviving corporation was changed to AspenTech, Inc.; and
WHEREAS, the Debtors have requested the Bank, to release its interests
in the Collateral; and
WHEREAS, the Bank is willing, on the terms and subject to the
conditions set forth herein, to do so.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Release of Collateral. Upon the effectiveness of this Agreement
pursuant to the terms of Section 3 hereof, the Bank releases and terminates all
of its rights and interests in and to the Collateral. The Bank agrees to
cooperate with the Debtors in executing such terminations of financing
statements, such assignments of patents and trademarks and such other documents
as the Debtors may reasonably request to fully effectuate the release of
Collateral contemplated by the preceding sentence. The Debtors shall pay and be
responsible for all filing fees, costs and expenses (including the fees of
counsel to the Bank) incurred in connection with such release of Collateral.
2. Release of Bank. The Debtors hereby release the Bank from, and agree
to indemnify the Bank with regard to, any and all liabilities and claims any of
the Debtors or other parties may now or in the future have (whether known or
unknown) as a result of or arising in connection with the Bank's possession or
control of, or security interest in, the Collateral or its conduct, action or
inaction in connection therewith.
3. Conditions. This Agreement shall become effective only upon delivery
by the Debtors to the Bank of all documentation requested by counsel to the Bank
in connection with the First Amendment to Further Amended and Restated Revolving
Credit Agreement of even date herewith (the "Amendment").
4. Miscellaneous. All other documents executed in connection with the
Further Amended and Restated Revolving Credit Agreement are hereby ratified and
confirmed as remaining in full force and effect and binding on the parties
thereto in accordance with their respective terms except as such documents may
be amended by the Amendment.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ASPEN TECHNOLOGY, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
PROCESS MODELING INVESTMENT
CORPORATION
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
INDUSTRIAL SYSTEMS, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
ASPENTECH, INC.
By: /s/ LAWRENCE B. EVANS
-----------------------------------------
Name: Lawrence B. Evans
Title: Chairman & Chief Executive Officer
FLEET NATIONAL BANK
By: /s/ THOMAS W. DAVIES
-----------------------------------------
Name: Thomas W. Davies
Title: VP
3
1
Exhibit 21.1
LIST OF SUBSIDIARIES
OF ASPEN TECHNOLOGY, INC.
Aspen Technology, Inc. owns, directly or indirectly, 100% of the
outstanding capital stock of each of the following:
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
Aspen Technology (Asia), Inc. Delaware
Aspen Technology S.r.l. Italy
AspenTech Asia, Ltd. Hong Kong
AspenTech Canada, Ltd. Canada
AspenTech Europe, B.V. Netherlands
AspenTech Europe S.A./N.V. Belgium
AspenTech, Inc. Texas
AspenTech Japan Co. Ltd. Japan
AspenTech Securities Corporation Delaware
AspenTech UK, Ltd. England
Chesapeake Decision Sciences, Inc. New Jersey
Cimtech S.A./N.V. Belgium
IISYS, Inc. Texas
Industrial Systems, Inc. Washington
NeuralWare, Inc. Pennsylvania
Process Modeling Investment Corporation Delaware
The SAST Corporation Limited England
S.A.S.T., Inc. Texas
Special Analysis and Computing Services
Limited England
Special Analysis and Simulation Technology
Limited England
Treiber Controls, Inc. Ontario, Canada
Treiber Controls, Inc. Texas
Treiber Controls (Alberta), Inc. Alberta, Canada
Zyqad Limited England
In addition, Cimtech S.A./N.V. owns 60% of Cimtrade S.A., a French company.
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 33-88298, 33-88300, 33-97094, 333-11651,
333-21593, 333-44575, 333-61121, 333-63439 and 333-63483.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 25, 1998
5
1,000
US DOLLARS
YEAR
JUN-30-1998
JUL-01-1997
JUN-30-1998
1
78,694
34,987
89,880
0
0
238,035
76,314
33,578
342,882
65,169
0
0
0
2,473
162,543
342,882
139,390
252,555
8,178
76,668
43,553
0
0
28,685
14,049
23,744
0
0
0
14,636
0.63
0.59
