<PAGE> 1
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 September 30, 1996.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission File Number:
ASPEN TECHNOLOGY, INC.
(exact name of registrant as specified in its charter)
Massachusetts 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)577-0100
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distrifbution of securities under a plan
confirmed by a court.
Yes X No
----- -----
As of November 8, 1996, there were 9,729,730 shares of the Registrant's common
stock (par value $.10 per share) outstanding.
<PAGE> 2
ASPEN TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 1996
and June 30, 1996 3
Consolidated Condensed Statements of Income for the Three Month
Periods Ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for the Three
Month Periods Ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
2
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ASPEN TECHNOLOGY, INC.
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and in thousands)
<CAPTION>
9/30/96 6/30/96
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,050 $ 9,005
Short-term investments 33,086 42,078
Accounts receivable, net and unbilled services 47,149 45,640
Current portion of long-term
installments receivable, net 10,690 12,068
Prepaid expenses and other current assets 3,399 3,318
-------- --------
Total current assets 107,374 112,109
Long-term installments receivable, net 17,185 17,708
Equipment and leasehold
improvements, at cost 32,803 28,764
Accumulated depreciation (13,445) (11,949)
-------- --------
19,358 16,815
Computer software development
costs, net 1,918 1,817
Intangible assets, net 8,539 9,129
Other assets 2,789 2,589
-------- --------
$157,163 $160,167
======== ========
CURRENT LIABILITIES:
Current portion of long-term debt $ 290 $ 425
Accounts payable and accrued expenses 19,410 22,049
Unearned revenue 6,596 8,967
Deferred revenue 8,811 8,953
Deferred income taxes 2,798 2,798
-------- --------
Total current liabilities 37,905 43,192
Long-term debt, less current maturities 679 706
Deferred revenue, less current portion 8,514 8,279
Other liabilities 1,391 1,757
Deferred income taxes 6,398 6,398
STOCKHOLDERS' EQUITY:
Common stock 977 969
Additional paid-in capital 111,828 110,826
Accumulated deficit (9,685) (11,094)
Cumulative translation adjustment (340) (362)
Unrealized market loss on investments (2) (2)
Treasury stock, at cost (502) (502)
-------- --------
Total Stockholders' Equity 102,276 99,835
-------- --------
$157,163 $160,167
======== ========
</TABLE>
3
<PAGE> 4
ASPEN TECHNOLOGY, INC.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited and in thousands, except Share and per Share amounts)
<CAPTION>
THREE MONTHS ENDED
9/30/96 9/30/95
----------- ----------
<S> <C> <C>
REVENUES:
Software licenses $ 16,131 $ 9,927
Services and other 18,737 3,342
----------- ----------
34,868 13,269
----------- ----------
EXPENSES:
Cost of software licenses 816 591
Cost of maintenance and other services 11,129 1,847
Selling and marketing 11,286 6,033
Research and development 6,964 3,457
General and administrative 3,721 1,288
----------- ----------
Total costs and expenses 33,916 13,216
Income from operations 952 53
Other expense, net (22) (56)
Interest income, net 1,345 870
----------- ----------
Income before provision for
income taxes 2,275 867
Provision for income taxes (865) (329)
----------- ----------
NET INCOME $ 1,410 $ 538
=========== ==========
Net income per common and
common equivalent share $ 0.14 $ 0.06
=========== ==========
Weighted average number of common and
common equivalent shares outstanding 10,307,238 8,476,811
=========== ==========
</TABLE>
4
<PAGE> 5
ASPEN TECHNOLOGY, INC.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<CAPTION>
THREE MONTHS ENDED
9/30/96 9/30/95
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,410 $ 538
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,288 687
Deferred income taxes -- (121)
Decrease (increase) in accounts receivable (1,508) 907
Decrease in installments receivable 1,902 3,933
Increase in prepaid expenses
and other current assets (82) (18)
Decrease in accounts payable
and accrued expenses (2,640) (1,693)
Increase (decrease) in unearned revenue (4,658) 235
Increase in deferred revenue 2,380 291
------- ------
Net cash provided by (used in) operating activities (908) 4,759
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (4,038) (533)
Sale (purchase) of investment securities 8,992 (240)
(Increase) decrease in other long-term assets (200) 33
Increase in computer software development costs (305) (295)
Increase (decrease) in other long-term liabilities (366) 45
------- ------
Net cash provided by (used in) investing activities 4,083 (990)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock purchase plans 381 170
Exercise of stock options 629 124
Payments of long-term debt and capital lease obligations (161) (124)
------- ------
Net cash provided by financing activities 849 170
------- ------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 21 (4)
------- ------
INCREASE IN CASH AND CASH EQUIVALENTS 4,045 3,935
CASH AND CASH EQUIVALENTS, beginning of period 9,005 4,189
------- ------
CASH AND CASH EQUIVALENTS, end of period $13,050 $8,124
======= ======
</TABLE>
5
<PAGE> 6
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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 all normal recurring adjustments, necessary for a fair presentation. The
results of operations for the three month period ended September 30, 1996
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, 1996, 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 noncancelable license agreement. In the
case of license renewals, revenue is recognized upon execution of the
renewal license agreement. The Company has no other significant vendor
obligations or collectibility risk associated with its product sales. The
Company recognizes revenue from postcontract customer support ratably over
the period of the postcontract arrangement. The Company accounts for
insignificant vendor obligations by deferring a portion of the revenue and
recognizing it either ratably as the obligations are fulfilled or when the
related services are performed. If significant application development
services are 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.
6
<PAGE> 7
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Services that have been performed but for which billings have not been made
are recorded as unbilled services, and billings that have been recorded
before the services have been performed are recorded as unearned revenue in
the accompanying consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term license agreements that
provide for payment in installments over a one- to five-year period. A
portion of the revenue from each installment agreement is recognized as
interest income in the accompanying consolidated condensed statements of
income. The interest rates in effect for the three months ended September
30, 1995 and 1996 were 12% and 11%, respectively.
(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. Amortization of capitalized
computer software development costs is included in cost of software
licenses 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 month periods ended September 1996 and 1995 was
$203,000 and $153,000, respectively.
(c) Net Income Per Share
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during each period, assuming conversion of all classes of
convertible preferred stock into common stock.
7
<PAGE> 8
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
(c) Net Income Per Share (Continued)
Fully diluted earnings per common share are not presented as they are not
materially different from primary earnings per share. Dilutive common
equivalent shares consist of stock options and stock warrants (using the
treasury stock method).
(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 stockholders equity. Investments held as of
September 30, 1996 consist of $2,838,000 in money market accounts and
$30,248,000 in commercial paper that matures in less than three months.
3. Sale of Installments Receivable
-------------------------------
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for approximately $6.5 million
during the three month period ended September 30, 1996. 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 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.
8
<PAGE> 9
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
3. Sale of Installments Receivable (Continued)
-------------------------------
At September 30, 1996, the balance of the uncollected principal portion of
all contracts sold was $48.7 million. The Company's potential recourse
obligation related to these contracts is approximately $11.5 million at
September 30, 1996. In addition, the Company is obligated to pay additional
costs to the financial institutions in the event of default by the
customer.
4. Subsequent Events
-----------------
On October 1, 1996 the Company acquired 100% of the outstanding shares of
common stock of B-JAC International, Inc. ("B-JAC"), a major supplier of
detailed heat exchanger modeling software. The Company exchanged 52,081
shares of its common stock valued at $3.4 million for all outstanding
shares of B-JAC common stock. This acquisition will be accounted for as a
pooling-of-interests. This transaction is immaterial to the Company's
financial position and results of operations and, accordingly, the net
effect will be recorded as of October 1, 1996.
On October 7, 1996 the Company acquired the assets of the Process Control
Division of Cambridge Control Limited ("the Cambridge Control Division")
for $1.9 million, plus $225,000 in acquisition related costs. The Cambridge
Control Division specializes in advanced process control solutions,
specifically aimed towards process manufacturing controls applications for
the refining, petrochemical and pulp and paper industries. This acquisition
will be accounted for as a purchase with the fair value of assets purchased
as of October 7, 1996 including operations of the Cambridge Control
Division from that point forward. The value of the assets to be recorded
will be based on an independent appraisal which includes a portion of the
purchase price allocated to in-process research and development projects.
Such in-process research and development projects had not reached
technological feasibility and had no alternative future use. As a result,
the Company will recognize a one-time charge of approximately $750,000 in
the second quarter of fiscal 1997.
9
<PAGE> 10
ASPEN TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company acquired Dynamic Matrix Control Corporation ("DMCC") and Setpoint,
Inc. ("Setpoint") in the third quarter of fiscal 1996 in purchase transactions
and has subsequently taken steps to integrate the operations and reorganize the
operations of Aspen Technology, Inc. (the "Company" or "AspenTech") and its new
subsidiaries. As a result of these acquisitions, the Company's operating results
for the three months ended September 30, 1996 and 1995 are not directly
comparable.
Revenues are derived from software licenses and services. Total revenues for the
three months ended September 30, 1996 were $34.9 million, an increase of 162.8%
from $13.3 million in the comparable period of fiscal 1996.
Software license revenues represented 46.3% and 74.8% of total revenues for the
three months ended September 30, 1996 and 1995, respectively. Revenues from
software licenses for the three months ended September 30, 1996 were $16.1
million, an increase of 62.5% from $9.9 million in the comparable period 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, additional software products, and, to a lesser extent, to the
addition of new customers. The decrease in software license revenues as a
percentage of total revenues was attributable to the growth in service revenues
resulting from AspenTech's acquisition of DMCC and Setpoint.
Total revenues from customers outside the United States were $21.0 million or
60.3% of total revenues for the three months ended September 30, 1996, as
compared to $5.3 million or 49.0% of total revenues for the comparable period in
fiscal 1995.
10
<PAGE> 11
The geographical mix of revenues can vary from quarter to quarter, however for
fiscal 1997, the overall mix of revenues from customers outside the United
States is expected to be relatively consistent with the prior year.
Revenues from services and other consist of consulting services, post contract
support on software licenses, training and sales of documentation. Since the
acquisitions of DMCC and Setpoint, the Company has generated a significantly
greater amount of consulting revenues from services for the analysis, design and
automation of process manufacturing plants. As a result, revenues from services
and other for the three months ended September 30, 1996 increased 460.7% to
$18.7 million from $3.3 million in the comparable period in fiscal 1996.
Neither the Company's joint venture and similar activities nor any discounting
or similar activities has historically had a material effect on the Company's
revenues.
Cost of software licenses consists 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. Cost of software licenses for the three months ended September 30,
1996 were $0.8 million, an increase of 38.1% from $0.6 million in the comparable
period in fiscal 1996. Cost of software licenses as a percentage of revenues
from software licenses was 5.1% for the three months ended September 30, 1996 as
compared to 6.0% in the comparable period in fiscal 1996. The decrease is due to
the spreading of fixed production and delivery costs over a larger revenue base
and to the generation of a greater portion of sales having minimal third party
royalty costs.
Cost of services and other 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. Cost of services and other for the
three months ended September 30, 1996 were $11.1 million, an increase of 502.5%
from the comparable period in fiscal 1996. Cost of services and other as a
percentage of services revenues increased to 59.4% in the three months ended
September 30, 1996 from 55.3% in the comparable period of fiscal 1996. This
percentage increase reflected a change in the mix of services provided by the
Company, primarily as a result of the acquisitions of DMCC and Setpoint.
11
<PAGE> 12
Selling and marketing expenses for the three months ended September 30, 1996
increased 87.1% to $11.3 million from $6.0 million in the comparable period in
fiscal 1996 while decreasing as a percentage of total revenues to 32.4% from
45.5%. The percentage decrease in costs reflects the lower level of sales and
marketing activities historically supported by DMCC and Setpoint, as well as the
Company's leveraging of its existing worldwide sales and technical sales force
to market the software products and services of the newly acquired companies.
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 expenses consist primarily of personnel and outside
consultancy costs required to conduct the Company's product development efforts.
Capitalized research and development costs are amortized over three years.
Research and development expenses during the three months ended September 30,
1996 were $7.0 million, an increase of 101.4% from $3.5 million in the
comparable fiscal 1996 period. 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, as well as a reduction in the amount of research and
development capitalized during the period. The Company capitalized 5.6% of its
total research and development costs during the three months ended September 30,
1996 as compared to 8.0% in the comparable period of fiscal 1996.
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 months ended September 30, 1996 were $3.7 million, an
increase of 188.9% from $1.3 million in the comparable period of 1996, and
increased as a percentage of total revenues to 10.7% from 9.7%. The dollar
increase principally reflected the growth in the scale and scope of the
Company's operations.
Interest income is generated from the sale of software pursuant to installment
contracts for off-line modeling software and the investment of excess cash in
short-term investments. Under these contracts, the Company offers customers the
option to make annual payments for 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.
12
<PAGE> 13
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 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
for the three months ended September 30, 1996 was $1.4 million, an increase of
35.5% from $1.0 million, in the comparable fiscal 1996 period. Interest income
increased primarily as a result of the investment of the net proceeds of the
Company's secondary offering which was completed in June, 1996.
Interest expense is generated from interest charged on the Company's bank line
of credit, subordinated notes payable and capital lease obligations. Interest
expense for the three months ended September 30, 1996 was $0.06 million, as
compared to $0.2 million in the same period in fiscal 1996. This decrease
reflects the lower level of borrowings as a result of using the proceeds of the
Company's secondary offering to retire borrowings under the line of credit and
the subordinated notes payable.
The effective tax rate remained the same for the three months ended September
30, 1996 at 38.0% of pretax income.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1996, the Company's cash and cash
equivalents balance increased by $4.0 million. Operations utilized $0.9 million
of cash during this period primarily related to decreases in accounts payable
and accrued expenses and unearned revenue, offset in part by net income and
depreciation and amortization.
In recent years, the Company has had arrangements to sell long-term contracts to
two financial institutions, General Electric Capital Corporation ("GECC") and
Sanwa Business Credit Corporation ("SBCC"). During the three months ended
September 30, 1996, installment contracts decreased by $1.9 million to $27.9
million, net of $6.5 million of installment contracts sold to GECC and SBCC. 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 September 30, 1996, the balance of the uncollected principal
portion of the contracts sold to these two financial institutions was $48.7
million, for which the Company has a partial recourse obligation of $11.5
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,
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 of (8.25% at September 30, 1996) equal to the
bank's prime rate plus a specified margin or, at the Company's option, a rate
(5.375% at September 30, 1996) equal to a defined LIBOR rate plus a specified
margin. The bank line of credit is secured by a pledge of substantially all of
the assets of the Company and its United States subsidiaries. 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 September 30, 1996, there
were no outstanding borrowings under the line of credit.
14
<PAGE> 15
ASPEN TECHNOLOGY, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material proceedings.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
15
<PAGE> 16
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: November 12, 1996 by: /s/ Mary A. Palermo
-------------------------
Mary A. Palermo
Executive Vice President
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,050
<SECURITIES> 33,086
<RECEIVABLES> 47,149
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 107,374
<PP&E> 32,803
<DEPRECIATION> (13,445)
<TOTAL-ASSETS> 157,163
<CURRENT-LIABILITIES> 37,905
<BONDS> 679
<COMMON> 977
0
0
<OTHER-SE> 101,299
<TOTAL-LIABILITY-AND-EQUITY> 157,163
<SALES> 16,131
<TOTAL-REVENUES> 34,868
<CGS> 816
<TOTAL-COSTS> 11,945
<OTHER-EXPENSES> 6,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,275
<INCOME-TAX> 865
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<DISCONTINUED> 0
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<EPS-PRIMARY> .14
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</TABLE>
