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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter ended March 31, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 000-24786
ASPEN TECHNOLOGY, INC.
(exact name of registrant as specified in its charter)
Delaware 04-2739697
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Ten Canal Park, Cambridge, Massachusetts 02141
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (617) 949-1000
Indicate by check mark whether the registrant: (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 [ ]
--- ---
As of March 31, 1999, there were 24,940,072 shares of the Registrant's common
stock (par value $.10 per share) outstanding.
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ASPEN TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of March 31, 1999 and June 30, 1998 3
Consolidated Condensed Statements of
Operations for the Three and Nine Month
Periods Ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows
for the Nine Month Periods Ended
March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-15
Item 3. Quantitative and Qualitative Market Risk Disclosures 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17-18
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Aspen Technology, Inc.
Consolidated Condensed Balance Sheets
(Unaudited and in thousands)
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
Current Assets:
Cash and cash equivalents $ 37,812 $ 78,694
Short-term investments 62,088 34,987
Accounts receivable, net 62,334 71,803
Unbilled services 19,767 18,077
Current portion of long-term installments receivable, net 29,268 23,643
Prepaid expenses and other current assets 12,294 10,831
--------- ---------
Total current assets 223,563 238,035
Long-term installments receivable, net 33,078 36,203
Property and leasehold improvements, at cost 84,414 76,314
Accumulated depreciation (42,566) (33,578)
--------- ---------
41,848 42,736
Computer software development costs, net 5,952 5,696
Intangible assets, net 11,703 12,857
Other assets 6,602 7,355
--------- ---------
$ 322,746 $ 342,882
========= =========
Current Liabilities:
Current portion of long-term debt $ 842 $ 2,187
Accounts payable and accrued expenses 26,123 38,545
Unearned revenue 7,316 6,008
Deferred revenue 20,501 17,888
Deferred income taxes 541 541
--------- ---------
Total current liabilities 55,323 65,169
Long-term debt, less current maturities 4,126 4,385
5 1/4% Convertible subordinated debentures 86,250 86,250
Deferred revenue, less current portion 12,825 15,074
Other liabilities 539 914
Deferred income taxes 6,076 6,074
Stockholders' Equity:
Common stock 2,516 2,473
Additional paid-in capital 154,120 148,342
Retained earnings 2,742 14,922
Accumulated other comprehensive income (loss) (1,269) (219)
Treasury stock, at cost (502) (502)
--------- ---------
Total stockholders' equity 157,607 165,016
--------- ---------
$ 322,746 $ 342,882
========= =========
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Aspen Technology, Inc.
Consolidated Condensed Statements of Operations
(Unaudited and in thousands, except per share data)
Three Months Ended March 31, Nine Months Ended March 31,
-------------------------------------------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Software licenses $ 22,191 $ 38,691 $ 66,868 $ 95,544
Maintenance and other services 32,001 29,697 95,688 82,500
-------- -------- --------- ---------
Total revenues 54,192 68,388 162,556 178,044
-------- -------- --------- ---------
Cost of software licenses 2,149 1,540 5,759 4,964
Cost of maintenance and other services 21,204 17,274 62,217 48,342
Selling and marketing 22,207 19,876 62,961 52,683
Research and development 12,297 10,998 35,838 31,519
General and administrative 6,235 5,309 17,335 14,650
One-time acquisition costs -- 8,947 -- 9,456
-------- -------- --------- ---------
Total costs and expenses 64,092 63,944 184,110 161,614
-------- -------- --------- ---------
Income (loss) from operations (9,900) 4,444 (21,554) 16,430
Other income (expense), net (115) (162) 131 (320)
Interest income, net 1,005 1,358 3,369 4,158
-------- -------- --------- ---------
Income (loss) before provision for (benefit from)
income taxes (9,010) 5,640 (18,054) 20,268
Provision for (benefit from) income taxes (3,153) 5,073 (6,318) 10,324
-------- -------- --------- ---------
Net income (loss) $ (5,857) $ 567 $ (11,736) $ 9,944
======== ======== ========= =========
Diluted earnings (loss) per share $ (0.23) $ 0.02 $ (0.47) $ 0.41
======== ======== ========= =========
Weighted average shares outstanding-diluted 24,925 25,324 24,954 24,432
======== ======== ========= =========
Basic earnings (loss) per share $ (0.23) $ 0.02 $ (0.47) $ 0.43
======== ======== ========= =========
Weighted average shares outstanding-basic 24,925 23,857 24,954 23,101
======== ======== ========= =========
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Aspen Technology, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited and in thousands)
Nine Months Ended March 31
----------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (11,736) $ 9,944
Adjustments to reconcile net income (loss) to net cash provided by
operating activities (net of acquisition-related activity disclosed below):
Depreciation and amortization 13,329 9,844
Charge for in-process research and development -- 8,472
Foreign exchange gain (loss) (310) --
Deferred income taxes 2 6,834
Decrease (increase) in accounts receivable 9,275 (10,802)
Increase in unbilled services (1,658) (5,682)
Increase in installments receivable (2,500) (609)
(Increase) decrease in prepaid expenses and other current assets (1,557) 111
Decrease in accounts payable and accrued expenses (12,407) (3,249)
Increase in unearned revenue 1,268 527
Increase in deferred revenue 404 4,785
---------- ----------
Net cash provided by (used in) operating activities (5,890) 20,175
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements (8,535) (13,570)
(Purchase) sale of investment securities (27,244) 7,437
(Increase) decrease in other long-term assets 737 (445)
Increase in computer software development costs (2,207) (2,923)
Decrease in other long-term liabilities (374) (201)
Cash overdraft acquired in immaterial poolings -- (778)
Cash used in the purchase of business, net of cash acquired (1,200) (9,911)
---------- ----------
Net cash used in investing activities (38,823) (20,391)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock purchase plans 4,474 3,878
Issuance of common stock under employee stock ownership plan -- 478
Exercise of stock options and warrants 940 3,864
Repurchase of common stock -- (2)
Payments of long-term debt and capital lease obligations (1,313) (907)
---------- ----------
Net cash provided by financing activities 4,101 7,311
---------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (270) 167
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (40,882) 7,262
CASH AND CASH EQUIVALENTS, beginning of period 78,694 18,284
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 37,812 $ 25,546
========== ==========
During the nine months ended March 31, 1999 and 1998, the Company
acquired certain companies in purchase transactions.
These acquisitions are summarized as follows-
Fair value of assets acquired, excluding cash $ 1,290 $ 11,316
Payments in connection with the acquisitions, net of cash acquired (1,200) (9,911)
---------- ----------
Liabilities assumed $ 90 $ 1,405
========== ==========
During the nine months ended March 31, 1998, the Company
acquired certain companies in poolings-of-interest transactions.
These acquisitions are summarized as follows-
Liabilities assumed $ 9,783
Book value of equity (3,911)
----------
Book value of assets acquired $ 5,872
==========
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ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated condensed financial
statements have been prepared in conformity with generally accepted accounting
principles and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The results of operations for
the three and nine month periods ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year. It is suggested that
these interim consolidated condensed financial statements be read in conjunction
with the audited consolidated financial statements for the year ended June 30,
1998, which are contained in the Company's Form 10-K, as previously filed with
the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue from software licenses upon the shipment
of its products, pursuant to a signed non-cancelable license agreement.
In the case of license renewals, revenue is recognized upon execution
of the renewal license agreement. The Company has no significant vendor
obligations or collectability risk associated with its product sales.
The Company recognizes revenue from post-contract customer support
ratably over the period of the post-contract 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 performed in connection with the
purchase of a license, the license fees are recognized as the
application development services are performed.
Service revenues from fixed-price contracts are recognized on 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. Service billings that have
been recorded before the services have been performed are recorded as
unearned revenue in the accompanying consolidated condensed balance
sheets.
Installments receivable represent the present value of future payments
related to the financing of non-cancelable term license agreements that
provide for payment in installments over a one to five year period. A
portion of the revenue from each installment agreement is recognized as
interest income in the accompanying consolidated condensed statements
of operations over the
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installment period. The interest rate in effect for the three and nine
months ended March 31, 1998 and 1999 was 8.5%. At March 31, 1999, the
Company had long-term installment receivables of approximately $6.1
million denominated in foreign currencies. These foreign installments
receivable will mature through June 2003 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. The Company does not use derivative financial instruments
for speculative or trading purposes.
(b) Computer Software Development Costs
In compliance with Statement of Financial Accounting Standards (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 condensed
balance sheets. Capitalization of computer software development costs
begins upon the establishment of technological feasibility and ends
upon market introduction. Amortization of capitalized computer software
development costs is included in cost of revenues and is provided on a
product-by-product basis at the greater of the amount computed using
(a) the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues or (b) the straight-line
method over the remaining estimated economic life of the product, not
to exceed three years. Total amortization expense charged to operations
in the three and nine month periods ended March 31, 1999 was
approximately $0.6 and $1.9 million, respectively, as compared to the
three and nine month periods ended March 31, 1998, which was $0.3 and
$0.7 million, respectively.
(c) Net Income (Loss) Per Share
In accordance with SFAS No. 128, basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss)
per share reflect the dilution of potentially dilutive securities,
primarily stock options, based on the treasury stock method.
Basic and diluted weighted average shares outstanding as required by
SFAS No. 128 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTH ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------------------- -------------------
Weighted average
shares outstanding - basic 24,925 23,857 24,954 23,101
Weighted average common
equivalent shares -- 1,467 -- 1,331
------ ------ ------ ------
Diluted weighted average
shares outstanding - diluted 24,925 25,324 24,954 24,432
====== ====== ====== ======
There were 530,411 and 1,139,103 stock options and warrants not
included in diluted weighted
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average shares outstanding for the three and nine month periods ended
March 31, 1999, respectively, as the effect would have been
anti-dilutive.
(d) Investments
The Company accounts for its investments in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115, securities purchased to be held for
indefinite periods of time, and not intended at the time of purchase to
be held until maturity, are classified as available-for-sale
securities. Securities classified as available-for-sale are required to
be recorded at market value in the financial statements. Unrealized
gains and losses have been accounted for as a separate component of
comprehensive income. Short-term investments held as of March 31, 1999
consist of $55.0 million in U.S. Corporate Bonds and $7.0 million in
U.S. government bonds.
The Company does not use derivative financial instruments in its
investment portfolio.
3. SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, some of its installment contracts to
financial institutions for approximately $6.0 and $21.5 million during the three
and nine month periods ended March 31, 1999, respectively. The financial
institutions have partial recourse to the Company only upon non-payment by the
customer under certain installment receivables. The amount of recourse is
determined pursuant to the provisions of the Company's contracts with the
financial institutions and varies depending upon whether the customers under the
installment contracts are foreign or domestic entities. Collections of these
receivables reduce the Company's recourse obligations, as defined.
At March 31, 1999, the balance of the uncollected principal portion of all
contracts sold was $86.5 million. The Company's potential recourse obligation
related to these contracts is approximately $3.7 million. In addition, the
Company is obligated to pay additional costs to the financial institutions in
the event of default by the customer.
4. ACQUISITIONS
(a) OPTPEMS Business of Callidus Technologies, Inc.
On September 14, 1998 the Company paid $1.2 million in cash for certain
assets and personnel of Callidus Technologies, Inc., a consulting firm
that specializes in the modeling of predictive emissions monitoring.
This acquisition has been accounted for as a purchase transaction. The
purchase price has been allocated to various assets, primarily
intangible assets, based on their fair values.
5. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective July
1, 1998. SFAS No. 130 requires that items defined as other comprehensive income,
such as foreign currency translation adjustments and unrealized gains and losses
on investments, be separately classified in the financial statements and that
the accumulated balance of other comprehensive income be reported separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. The
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components of comprehensive income for the three and nine months ended March 31,
1999 and 1998 are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $(5,857) $567 $(11,736) $ 9,944
Unrealized gain (loss) on investments (105) 55 (85) (13)
Foreign currency adjustment (917) 183 (965) 161
-------- ---- --------- --------
Comprehensive income (loss) $(6,879) $805 $(12,786) $ 10,092
Effective January 1, 1999 the local currency of several foreign subsidiaries was
changed from the U.S. dollar to the respective foreign currency. This change was
made in order to comply with the regulations of SFAS No. 52, Foreign Currency
Translation, and reflects the current status of the Company's operations in
those foreign countries.
6. REPRICING OF EMPLOYEE STOCK OPTIONS
On November 11, 1998 the Company's Board of Directors approved the repricing of
certain employee stock options with exercise prices in excess of the fair market
value of the Company's common stock. The exercise price for the 2.62 million
shares of employee stock options that were repriced was reset to $14.125, the
closing market price on November 11, 1998. In connection with the repricing the
vesting of options was reduced by one year. Stock options held by executive
officers and directors were not eligible for such repricing.
RESTRUCTURING CHARGE
Subsequent to March 31, 1999 Company management has begun certain actions to
restructure its business. In connection with this restructuring, the Company is
reducing its staff by approximately 200 employees, about twelve percent of the
global workforce, as well as consolidating facilities, streamlining operations
and rationalizing certain non-core products and activities acquired in recent
years. As a result of these measures, the Company expects to report a $17-19
million restructuring charge in the fourth quarter ending June 30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations: Comparison of Three and Nine Months Ending
March 31, 1999 and 1998
OVERVIEW
The Company's operating results for the third quarter of fiscal 1999 were
adversely affected by a lower than expected level of license revenues. The
shortfall resulted primarily from delayed decision making driven by economic
difficulties among customers in our core vertical markets of refining, chemicals
and
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petrochemicals. These lower revenues caused the Company's reporting of lower
than planned net income for the fiscal quarter and nine months ended March 31,
1999.
Subsequent to March 31, 1999 Company management has begun certain actions to
restructure its business. In connection with this restructuring, the Company is
reducing its staff by approximately 200 employees, about twelve percent of the
global workforce, as well as consolidating facilities, streamlining operations
and rationalizing certain non-core products and activities acquired in recent
years. As a result of these measures, the Company expects to report a $17-19
million restructuring charge in the fourth quarter ending June 30, 1999.
TOTAL REVENUES
Revenues are derived from software licenses and maintenance and other services.
Total revenues for the three months ended March 31, 1999 were $54.2 million, a
decrease of $14.2 million, or 20.8%, from $68.4 million in the comparable period
of fiscal 1998. Total revenues for the nine months ended March 31, 1999 were
$162.6 million, a decrease of $15.5 million, or 8.7%, from $178.0 million in the
comparable period of fiscal 1998. This decrease is primarily as a result of
lower license revenues, discussed above.
Total revenues from customers outside the United States were $30.0 and $86.7
million, or 55.4% and 53.3%, of total revenues for the three and nine months
ended March 31, 1999, respectively. The non-U.S. revenues for the comparable
periods in fiscal 1998 were $30.2 and $80.3 million, or 44.1% and 45.1%, of
total revenues. The geographical mix of license revenues can vary from quarter
to quarter; during fiscal 1999, the overall level of revenues from customers
outside the United States is expected to be relatively consistent with the prior
year. The largest decrease in license revenues came from within certain of our
core vertical markets in the United States.
SOFTWARE LICENSES
Revenues from software licenses for the three months ended March 31, 1999 were
$22.2 million, a decrease of $16.5 million, or 42.6%, from $38.7 million in
fiscal 1998. Software license revenue represented 40.9% of total revenue for the
three months ended March 31, 1999, as compared to 56.6% in fiscal 1998. Revenues
from software licenses for the nine months ended March 31, 1999 were $66.9
million, a decrease of $28.6 million, or 29.9%, from $95.5 million in the
comparable period of fiscal 1998. Software license revenue represented 41.1% of
total revenue for the nine months ended March 31, 1999, as compared to 53.7% in
fiscal 1998. The decline in software license revenues was mainly attributable to
global economic conditions in certain of our core vertical markets, as discussed
above.
MAINTENANCE AND OTHER SERVICES
Revenues from maintenance and other services consist of consulting services,
post contract support on software licenses, training and sales of documentation.
Revenues from maintenance and other services for the three months ended March
31, 1999 were $32.0 million, an increase of $2.3 million, or 7.7%, from $29.7
million in the comparable period in fiscal 1998. Revenues from maintenance and
other services for the nine months ended March 31, 1999 were $95.7 million, an
increase of $13.2 million, or 16.0%, from $82.5 million in the comparable period
in fiscal 1998. The increases in both periods reflect a continued focus during
fiscal 1999 on providing high value-added consulting and training services to
existing customers.
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COST OF SOFTWARE LICENSES
Cost of software licenses consist of royalties, amortization of previously
capitalized software costs, costs related to the delivery of software (including
disk duplication and third party software costs), printing of manuals and
packaging. These costs, for the three and nine months periods ended March 31,
1999 were $2.1 and $5.8 million, or 4.0% and 3.5%, respectively, of total
revenues. This compares to $1.5 and $5.0 million, or 2.3% and 2.8%,
respectively, of total revenues in the comparable period of fiscal 1998. Cost of
software licenses as a percentage of revenues from software licenses were 9.7%
and 8.6% for the three and nine months periods ended March 31, 1999. This is
compared to 4.0% and 5.2% for the three and nine months periods ended March 31,
1998, respectively. The increase in these costs as a percentage of software
license revenue in fiscal 1999 compared to fiscal 1998 is due primarily to
incremental amortization of computer software development costs and the
spreading of this cost over a smaller revenue base.
COSTS OF MAINTENANCE AND OTHER SERVICES
Costs of maintenance and other services consists of the cost of execution of
application consulting services, technical support expenses, the cost of
training services and the cost of manuals sold separately. These costs for the
three and nine months ended March 31, 1999 were $21.2 and $62.2 million, or
39.1% and 38.3%, of total revenues, respectively. During the comparable period
in fiscal year 1998, these costs were $17.3 and $48.3 million, or 25.3% and
27.2%, of total revenues, respectively. Costs of maintenance and other services
as a percentage of their revenue were 66.3% and 65.0% in the three and nine
months ended March 31, 1999. The same percentages in the comparable periods of
fiscal year 1998 were 58.2% and 58.6%, respectively. These percentage increases
reflect investments in personnel and related support, which were made to improve
the execution of the services projects. Additionally, the expenses are spread
over a slightly lower revenue base due to a decrease in the utilization of
project engineers as a result of certain of our customers pushing back the
timing of the execution of some projects.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three and nine months periods ended March
31, 1999 were $22.2 and $63.0 million, an increase of 11.7% and 19.5%,
respectively, from $19.9 and $52.7 million in the comparable periods in fiscal
year 1998. As a percentage of revenues, selling and marketing expenses were
41.0% and 38.7%, for the three and nine months periods ended March 31, 1999,
respectively. These same percentages were 29.1% and 29.6% for the comparable
period in fiscal 1998. The increase in the percentage of selling and marketing
expenses, on a comparative period basis, is primarily related to the decline in
software licenses revenues identified above. Additionally, the Company has
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. The Company is reevaluating all
resources involved in the sales process as component of the previously discussed
announced fourth quarter fiscal 1999 restructuring.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel and outside
consultancy costs required to conduct the Company's product development efforts.
Capitalized software development costs are amortized over three years and
expensed as costs of license. Research and development expenses during the three
and nine months periods ended March 31, 1999 were $12.3 and $35.8 million,
respectively, an increase of $1.3 and $4.3 million, or 11.8% and 13.7%,
respectively, from $11.0 and $31.5 million in the comparable periods of fiscal
1998. As a percentage of revenues, research and development costs were 22.7% and
22.0% for the three and nine months periods ended March 31, 1999,
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respectively. The percentages for the same period in fiscal 1998 were 16.1% and
17.7%, respectively. The increase in costs reflects continued investment in the
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 5.9% of its total research and development costs during
the three and nine months periods ended March 31, 1999. In the comparable
periods of fiscal year 1998, the Company capitalized 8.5%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries of
administrative, executive, financial and legal personnel, outside professional
fees, and amortization of certain intangibles. General and administrative
expenses for the three and nine months periods ended March 31, 1999 were $6.2
and $17.3 million, an increase of $0.9 and $2.7 million, or 17.4% and 18.3%,
respectively, from the comparable period of fiscal 1998. The increased expense
level reflects the growth in the scale and scope of the Company's operations,
particularly the investments made in improving its information systems.
INTEREST INCOME
Interest income is generated from the license of software pursuant to
installment contracts and the investment of excess cash in short-term and
long-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 off-line 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 off-line
modeling products out of their operating budgets, rather than out of their
capital budgets. Included in the annual payments is an implicit interest charge
based upon the interest rate 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 period is the result of the implicit interest
established by the Company on installment contracts and the size of the contract
portfolio. Interest income was $2.5 and $7.6 million for the three and nine
months ended March 31, 1999 as compared to $1.4 and $4.3 million for the
corresponding periods in fiscal 1998. The increase reflects the interest income
generated from excess cash from the Company's 5 1/4% convertible debentures,
which was not issued and outstanding in the comparable three and nine months
periods ended March 31, 1998.
INTEREST EXPENSE
Interest expense is generated from interest charged on the Company's 5 1/4%
convertible debentures, bank line of credit, notes payable and capital lease
obligations. Interest expense for the three and nine months ended March 31, 1999
was $1.5 and $4.2 million compared to $0.1 and $0.1 million in the same periods
of fiscal 1998. The increase is primarily related to the interest expense on the
Company's 5 1/4% convertible debentures, which did not exist in the comparable
periods ended March 31, 1998.
TAX RATE
The effective tax rate for the three and nine months periods ended March 31,
1999 was approximately 35% of pretax income (loss). The tax rate for the
comparable periods of fiscal year 1998 was slightly higher and was approximately
36%.
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LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 1999, the Company's cash and cash
equivalents balance decreased by $40.9 million, most of which was invested in
short-term securities. Operations used $5.9 million of cash during this period,
primarily related to the net loss.
In recent years, the Company has had arrangements to sell long-term contracts to
two financial institutions, General Electric Capital Corporation ("GECC") and
Fleet Business Credit Corporation ("FBCC"), formerly Sanwa Business Credit
Corporation. During the nine months ended March 31, 1999, installment contracts
increased slightly to $62.3 million, net of $21.5 million of installment
contracts sold to GECC and FBCC. The Company's arrangements with the two
financial institutions provide for the sale of installment contracts up to
certain limits and with certain recourse obligations. At March 31, 1999, the
balance of the uncollected principal portion of the contracts sold to these two
financial institutions was $86.5 million, for which the Company has a partial
recourse obligation of approximately $3.7 million. 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 December 31,
2000, 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 equal to the bank's prime rate (7.75% at March
31, 1999) plus a specified margin or, at the Company's option, a rate equal to a
defined LIBOR (5.04% at March 31, 1999) 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. At March 31, 1999, there were no
outstanding borrowings under the line of credit.
In June 1998, the Company sold $86.3 million of 5 1/4% Convertible subordinated
debentures (the Debentures). 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. The Debentures are redeemable in whole or part at
the option of the Company at any time on or after June 15, 2001 at various
redemption prices expressed as a percentage of principal plus accrued interest
through the date of redemption.
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.
13
14
YEAR 2000 COMPLIANCE
INTRODUCTION
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 has formed a Year 2000 Steering Committee comprised
of representatives from the different divisions of the Company, including
product development staff and internal systems staff. The Steering Committee is
responsible for defining Year 2000 compliance standards for the entire Company,
identifying Year 2000 requirements for each area of the Company's business and
internal requirements, assessing current compliance and compliance efforts, and
generally providing direction and management of the Company's Year 2000 efforts.
The Company's Year 2000 efforts are focused on the compliance of its product and
service offerings to customers and on internal business-critical items.
Hardware, software, systems, technologies and applications are considered
"business-critical" if a failure would either have a material adverse impact on
the Company's business, financial condition or results of operations or involve
a safety risk to employees or customers.
STATE OF READINESS
The Company has tested and determined that substantially all of its standard
products are compliant and has established a web-site, which lists the status of
the majority of products. The Company is also working on the work processes of
its service groups to incorporate Year 2000 compliance tests or procedures in
carrying out service projects and is in the process of determining the readiness
of its internal systems that are business-critical.
INTERNAL SYSTEMS
The Company has reviewed certain internal systems and future system plans to
assess Year 2000 compliance. The Company expects that its internal system
development plans will address the Year 2000 issue and will correct any existing
non-compliant systems without the need to accelerate the overall information
systems implementation plans. 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.
TESTING
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 results of this testing program are available on
the Company's public web-site.
The Company is also developing a plan to test any internal systems which have
not been certified as Year 2000 compliant or which have been determined to be
business-critical as described above. The experience of the Company in
developing its internal product testing program will be used in the development
of any testing program for internal systems.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE
The Company expects to incur internal staff costs as well as consulting and
other expenses related to system enhancements for the year 2000. The Company
believes the total costs to be incurred for all Year 2000 related projects will
not have a material impact on the future results from operations; however, the
Company is assessing such costs on an on-going basis in order to adjust spending
plans as necessary.
14
15
CONTINGENCY PLANNING AND RISKS
The Company has risks both that its products and services fail to be compliant
with certain Year 2000 functionality and that its business operations would be
interrupted or affected by the failure of other products or services to be Year
2000 compliant. The external risks are difficult to determine due to the general
uncertainty inherent from the Company's dependence upon the Year 2000 compliance
of third party software operating systems and applications with which the
Company's software operates, and third-party suppliers, vendors and customers
with whom the Company does business. The Company is unable to determine at this
time its most reasonably likely worst case scenario. While costs related to the
lack of Year 2000 compliance of third parties, business interruptions,
litigation and other liabilities related to Year 2000 issues could materially
and adversely affect the Company's business, results of operations and financial
condition, the Company expects its Year 2000 compliance efforts to reduce
significantly the Company's level of uncertainty about the impact of Year 2000
issues affecting both its products and services and internal systems.
Item 3. Quantitative and Qualitative Market Risk Disclosures
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Notes to Consolidated Condensed Financial
Statements," 2. (a) and (d), and below under the captions "Investment Portfolio"
and "Foreign Exchange Hedging".
INVESTMENT PORTFOLIO
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issuer and the types of instruments approved for investment. The Company does
not expect any material loss with respect to its investment portfolio. The
following table provides information about the Company's investment portfolio.
For investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars
(in 000s, except interest rates)
Fair Value at FY2003
3/31/99 FY1999 FY2000 FY2001 FY2002 & Thereafter
------------- ------- ------ ------ ------ ------------
Cash Equivalents $25,186 $25,186
Weighted Average Interest Rate 4.86% 4.86% -- -- -- --
Investments $62,088 $1,003 $28,711 $12,952 $13,888 $5,534
Weighted Average Interest Rate 6.12% 7.24% 6.07% 6.15% 6.03% 6.31%
Total Portfolio $87,274 $26,189 $28,711 $12,952 $13,888 $5,534
Weighted Average Interest Rate 5.75% 4.96% 6.07% 6.15% 6.03% 6.31%
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During the first nine months of fiscal 1999, most currencies in Europe and
Asia/Pacific fluctuated, with a general weakening of the U.S. dollar in the
first two quarters of fiscal 1999 and a strengthened U.S.
15
16
dollar in the third quarter of fiscal 1999. However, the translation of the
parent Company's intercompany receivables and foreign entities assets and
liabilities did not have a material impact on the consolidated results of the
Company. Foreign exchange forward contracts are only purchased to hedge certain
customer accounts receivable amounts denominated in a foreign currency.
Effective January 1, 1999 the local currency of several foreign subsidiaries was
changed from the U.S. dollar to the respective foreign currency. This change was
made in order to comply with the regulations of SFAS No. 52, Foreign Currency
Translation, and reflects the current status of the Company's operations in
those foreign countries.
FOREIGN EXCHANGE HEDGING
The company enters into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on customer accounts receivables denominated
in foreign currency. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on the Company's operating
results. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company had $7.1 million of foreign
exchange forward contracts denominated in British, French, Japanese, Swiss,
German, Belgium and Netherlands currencies which represented underlying customer
accounts receivable transactions at the end of the third quarter of fiscal 1999.
The gains and losses on these contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized. Gains and
loss related to these instruments for the third quarter and the first nine
months of fiscal 1999 were not material to the Company. Looking forward, the
Company does not anticipate any material adverse effect on its consolidated
financial position, results of operations, or cash flows resulting from the use
of these instruments. However, there can be no assurance that these strategies
will be effective or that transaction losses can be minimized or forecasted
accurately.
The following table provides information about the Company's foreign exchange
forward contracts at the end of the third quarter of fiscal 1999. The table
presents the value of the contracts in U.S. dollars at the contract exchange
rate as of the contract maturity date. The average contract rate approximates
the weighted average contractual foreign currency exchange rate and the forward
position in U.S. dollars approximates the fair value of the contract at the end
of the third quarter of fiscal 1999.
Forward Contracts to Sell Foreign Currencies for U.S. Dollars Related to
Customer Accounts Receivable:
Average Forward Amount
Contract in U.S. Dollars Contract Origination Contract Maturity
Currency Rate (in thousands) Date Date
- ------------------------------ ------------ ----------------- ---------------------------- ----------------------------
Belgian Franc 29.90 $ 23 Various: May 98 Various: Jan 00
British Pound Sterling 1.57 1,423 Various: Jun 97 - Mar 99 Various: Apr 99 - Jun 02
French Franc 5.45 577 Various: Apr 98 - Mar 99 Various: Apr 99 - Apr 02
German Deutsche Mark 1.58 1,145 Various: Apr 97 - Mar 99 Various: Apr 99 - Oct 02
Japanese Yen 116.36 3,754 Various: Jan 97 - Feb 99 Various: Apr 99 - Jun 03
Netherlands Guilder 1.81 24 Various: Apr 97 - Jan 99 Various: Apr 99 - Jul 99
Swiss Franc 1.34 124 Various: Jan 99 Various: Feb 99 - Jan 01
=================
Total $ 7,070
=================
16
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its business. The
Company believes that it has meritorious defenses in all lawsuits in which the
Company or its subsidiaries is a defendant. The Company notes that (i)
securities litigation, in particular, can be expensive and disruptive to normal
business operations and (ii) the results of complex legal proceedings can be
very difficult to predict.
On October 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts against the Company and
certain of its officers and directors, on behalf of purchasers of the Company's
common stock between April 28, 1998 and October 2, 1998 (the "Van Ormer
Complaint"). The lawsuit seeks an unspecified amount of damages and claims
violations of Sections10 (b) and 20(a) of the Securities Exchange Act of 1934,
alleging that the defendants issued a series of materially false and misleading
statements concerning the Company's financial condition, its operations and
integration of several acquisitions. On October 26 a second purported class
action lawsuit was filed in the United States District Court for the District of
Massachusetts against the Company and certain of its officers and directors, on
behalf of purchasers of the Company's common stock between April 28, 1998 and
October 2, 1998 which was verbatim identical to the Van Ormer Complaint except
only for the plaintiff's name (the "Clancey Complaint"). On November 20, 1998 a
third purported class action lawsuit was filed in the same court against the
same defendants which was verbatim identical to the Van Ormer and Clancey
Complaints except only for the plaintiff's name, the expansion of the class
action period from January 27, 1998 to October 2, 1998, and the addition of
references to statements made between January 27, 1998 and April 28, 1998 (the
"Marucci Complaint"). On January 27, 1999, in response to a motion to dismiss
filed by the Company, the plaintiffs consolidated the three complaints and filed
a Consolidated Amended Class Action Complaint. The Company believes it has
meritorious legal defenses to the lawsuits and intends to defend vigorously
against these actions. The Company is currently unable, however, to determine
whether resolution of these matters will have a material adverse impact on the
Company's financial position or results of operations, or reasonably estimate
the amount of the loss, if any, that may result from resolution of these
matters.
Item 2. Changes in Securities and use of Proceeds
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
17
18
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 10, 1999.
(c) Other Exhibits: Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASPEN TECHNOLOGY, INC.
Date: May 13, 1999 By: /s/ Lisa W. Zappala
-----------------------------------
Lisa W. Zappala
Senior Vice President
Chief Financial Officer
18
5
1,000
US DOLLARS
9-MOS
JUN-30-1999
JUL-01-1998
MAR-31-1999
1
37,812
62,088
111,369
0
0
223,563
84,414
42,566
322,746
55,323
90,376
0
0
2,516
155,091
322,746
162,556
162,556
67,976
184,110
(131)
0
(3,369)
(18,054)
(6,318)
(11,736)
0
0
0
(11,736)
(.47)
(.47)
