<PAGE> 1
LOGO
1,535,000 Shares
ASPEN TECHNOLOGY, INC.
Common Stock
Of the 1,535,000 shares of Common Stock offered hereby, 1,250,000 shares
are being sold by the Company and 285,000 shares are being sold by the Selling
Stockholders. See "Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders.
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "AZPN." On June 10, 1996, the closing sale price of the Common Stock, as
reported by the Nasdaq National Market, was $50.00 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
==========================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $ 50.00 $ 2.44 $ 47.56 $ 47.56
Total(3)................... $76,750,000 $3,745,400 $59,450,000 $13,554,600
- -------------------------------------------------------------------------------------------
- ----------
<FN>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $525,000.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an aggregate of 230,250
additional shares of Common Stock solely to cover over-allotments, if any.
If the Underwriters exercise this option in full, the Price to Public will
total $88,262,500, the Underwriting Discount will total $4,307,210, the
Proceeds to Company will total $69,147,960 and the Proceeds to Selling
Stockholders will total $14,807,330. See "Underwriting."
</TABLE>
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about June 14, 1996.
------------------------
MONTGOMERY SECURITIES
COWEN & COMPANY
WILLIAM BLAIR & COMPANY
June 10, 1996
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information may be
inspected and copies may be obtained (at prescribed rates) at the Commission's
Public Reference Section, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the Commission's Regional Offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300,
New York, New York 10048. Reports and other information concerning the Company
also may be inspected at the offices of the The Nasdaq Stock Market, Inc., 1735
K Street, N.W., Washington D.C. 20006-1500.
This Prospectus constitutes part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
does not contain all of the information contained in the Registration Statement,
and reference is hereby made to the Registration Statement and related exhibits
for further information with respect to the Company and the securities offered
hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in such instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
INFORMATION INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference: (1) the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995;
(2) the Company's definitive Proxy Statement dated November 15, 1995 used in
connection with its Annual Meeting of Stockholders held on December 18, 1995;
(3) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996; and (4) the Company's
Current Report on Form 8-K dated January 5, 1996 and Amendment Nos. 1, 2, 3 and
4 thereto on Form 8-K/A filed on February 26, 1996, March 22, 1996, April 26,
1996, and June 5, 1996, respectively.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of the filing of such reports and documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of the Registration Statement or
this Prospectus.
Any person to whom a copy of this Prospectus is delivered may obtain,
without charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than exhibits expressly incorporated by reference into such documents).
Requests for such documents should be made in writing to Investor Relations, Ten
Canal Park, Cambridge, Massachusetts 02141, or by telephone to Investor
Relations at telephone number (617) 577-0100.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 3
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus or incorporated by reference herein. Except as
otherwise noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Aspen Technology, Inc. ("AspenTech" or the "Company") is a leading supplier
of software products and services for the analysis, design and automation of
manufacturing facilities by companies in the process industries, including the
chemicals, petroleum, pharmaceuticals, pulp and paper, electric power, and food
and consumer products industries.
AspenTech provides a sophisticated, integrated family of software products
for use across the entire process manufacturing life-cycle, from "off-line"
applications used primarily in research and development and engineering to
"on-line" applications used principally in production. AspenTech's product
offering is classified in three categories: modeling; process information
management ("PIM"); and advanced process control ("APC") and optimization. The
Company's off-line modeling software is used by engineers on desktop computers
primarily to simulate and predict manufacturing processes in connection with the
design of new facilities or processes and the analysis of existing facilities or
processes. AspenTech's on-line PIM, APC and optimization software, which is
connected directly to plant instrumentation, enables the real-time adjustment of
production variables in response to constantly changing operating conditions to
improve process efficiency. AspenTech couples its software products with design
and implementation consulting services in order to market a complete solution to
its customers. AspenTech believes its ability to offer a complete solution of
both industry-leading software and sophisticated process engineering expertise
is an important source of competitive differentiation.
The Company significantly enhanced its PIM, APC and optimization software
and service offerings through its acquisitions of Dynamic Matrix Control
Corporation ("DMCC") in January 1996 and Setpoint, Inc. ("Setpoint") in February
1996. The Company initially became a provider of PIM software and services
through its acquisition of Industrial Systems, Inc. ("ISI") in May 1995.
AspenTech's customers span a broad range of process industry segments. With
more than 750 customers worldwide, AspenTech currently licenses its software to
44 of the 50 largest chemical companies in the world and 19 of the 20 largest
petroleum refiners in the world.
<TABLE>
THE OFFERING
<CAPTION>
<S> <C>
Common Stock offered by the Company.............. 1,250,000 shares
Common Stock offered by the Selling
Stockholders................................... 285,000 shares
Common Stock to be outstanding after the
Offering....................................... 9,361,191 shares(1)
Use of Proceeds.................................. For repayment of indebtedness and for
working capital and other general
corporate purposes, including potential
acquisitions.
Nasdaq National Market Symbol.................... AZPN
<FN>
- ---------------
(1) Based on the number of shares outstanding as of April 29, 1996, after giving effect to
the exercise by certain Selling Stockholders of options to acquire 20,697 of the
shares of Common Stock to be sold by such Selling Stockholders in the offering made
hereby. Excludes (i) 1,501,882 shares of Common Stock issuable upon exercise of stock
options outstanding as of April 29, 1996 at a weighted average exercise price per share
of $21.36, (ii) 188,000 shares of Common Stock reserved for future option grants under
the Company's stock option plans, (iii) 250,000 shares of Common Stock reserved for
issuance under the Company's employee stock purchase plans and (iv) 81,925 shares of
Common Stock issuable upon exercise of warrants outstanding at a weighted average
exercise price per share of $4.62.
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 4
- -------------------------------------------------------------------------------
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
ACQUISITIONS(1)
--------------------
NINE MONTHS NINE
ENDED YEAR MONTHS
YEAR ENDED JUNE 30, MARCH 31, ENDED ENDED
----------------------------------------------- ------------------ JUNE 30, MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(2):
Revenues......................... $22,720 $29,687 $33,867 $44,975 $57,498 $38,815 $ 62,301 $114,730 $101,360
Income from operations excluding
charge for in-process research
and development(3)............. 1,005 851 1,408 4,620 6,551 3,426 5,863 7,391 6,967
Income (loss) from operations.... 1,005 851 1,408 4,620 6,551 3,426 (18,558) 7,391 6,967
Income (loss) from continuing
operations..................... 809 1,101 1,854 3,698 5,416 3,044 (19,536) 4,243 4,248
Net income (loss)................ 921 1,281 1,282 3,698 5,416 3,044 (19,536) 4,243 4,248
======= ======= ======= ======= ======= ======= ======== ======== ========
Net income per common and common
equivalent share(4):
Continuing operations excluding
charge for in-process research
and development(3)........... $ 0.17 $ 0.20 $ 0.31 $ 0.58 $ 0.70 $ 0.40 $ 0.57 $ 0.55 $ 0.50
Continuing operations.......... 0.17 0.20 0.31 0.58 0.70 0.40 (2.51) 0.55 0.50
Net income (loss).............. 0.19 0.23 0.22 0.58 0.70 0.40 (2.51) 0.55 0.50
======= ======= ======= ======= ======= ======= ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding(3)(4).............. 5,181 5,911 6,469 6,545 7,781 7,540 7,793 7,781 8,538
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 6,322 $ 41,588
Working capital....................................................................... 19,695 58,461
Total assets.......................................................................... 103,533 138,799
Long-term debt and capital lease obligations (less current portion) and subordinated
note payable to a related party..................................................... 20,977 762
Total stockholders' equity............................................................ 24,289 83,270
<FN>
- ---------------
(1) Pro forma to give effect to the Company's acquisitions of DMCC on January 5,
1996 and Setpoint on February 9, 1996, as if each of such acquisitions had
occurred as of July 1, 1994. The purchase price for the Setpoint acquisition
remains subject to certain downward adjustments. See Notes 3(b) and 3(c) of
Notes to Consolidated Financial Statements and Pro Forma Combined Condensed
Financial Statements, including the Notes thereto.
(2) All periods presented include the results of operations of ISI, which the
Company acquired on May 25, 1995 in a transaction accounted for as a pooling
of interests. See Note 3(a) of Notes to Consolidated Financial Statements.
(3) Excludes effect of non-recurring charge for in-process research and
development of $24.4 million recorded in the nine months ended March 31,
1996 in connection with the acquisitions of DMCC and Setpoint. For pro forma
data, this charge has been assumed to have been recorded before the periods
presented, due to the non-recurring nature of the charge. See Notes 2 and 3
of Notes to Pro Forma Combined Condensed Financial Statements. Weighted
average number of common and common equivalent shares outstanding for the
pro forma nine months ended March 31, 1996 has been adjusted to include the
dilutive effect of common stock equivalents.
(4) Computed as described in Note 2(j) of Notes to Consolidated Financial
Statements.
(5) Adjusted to give effect to (i) the sale of the 1,250,000 shares of Common
Stock offered by the Company hereby and the application of the net proceeds
thereof and (ii) the receipt and application by the Company of approximately
$56,400 upon the exercise of stock options to acquire certain of the shares
of Common Stock offered by the Selling Stockholders hereby. See "Use of
Proceeds."
</TABLE>
------------------------
AspenTech's executive offices are located at Ten Canal Park, Cambridge,
Massachusetts 02141, and its telephone number is (617) 577-0100. As used herein,
the "Company" and "AspenTech" include Aspen Technology, Inc. and its
subsidiaries, unless the context requires otherwise. CIM/21, DMC, DMO, INFOPLUS,
MAX, RT-OPT, SETCIM, SPEEDUP and the Aspen leaf logo are registered trademarks
of the Company, and ADVENT, ASPEN PLUS, AspenTech and SMCA are trademarks of the
Company.
- --------------------------------------------------------------------------------
4
<PAGE> 5
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. The
Company's actual results could differ materially from the results contemplated
in the forward-looking statements as a result of a number of factors, including
the risk factors set forth below. In addition to the other information in this
Prospectus, the following risk factors should be considered in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby.
Integration of DMCC and Setpoint. Through its acquisitions of DMCC in
January 1996 and Setpoint in February 1996, the Company has increased its
product and service offerings to include additional PIM, APC and optimization
software and services, and has substantially increased its scope of operations
and number of personnel. The successful and timely integration of DMCC and
Setpoint into the Company is critical to the Company's future financial
performance. This integration will require that the Company, among other things,
integrate the companies' software products and technologies, retain key
employees, assimilate diverse corporate cultures, integrate management
information systems, consolidate the acquired operations and manage
geographically dispersed operations, each of which could pose significant
challenges. The diversion of the attention of management created by the
integration process, and any disruptions or other difficulties encountered in
the transition process, could have a material adverse effect on the business,
operating results and financial condition of the Company. The difficulty of
combining the three companies may be increased by the need to integrate
personnel, and changes effected in the combination may cause key employees to
leave. The long-term success of the DMCC and Setpoint acquisitions will require
the further development of the PIM, APC and optimization software and services
markets, which currently are immature. There can be no assurance that the
Company will be able to integrate and develop the operations of DMCC and
Setpoint successfully, and any failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
A substantial majority of the revenues of each of DMCC and Setpoint has
been generated by service engagements. AspenTech's revenues historically have
been derived principally from the licensing of software products, and its
management has limited experience in managing a service business. In particular,
a significant portion of the service engagements of DMCC and Setpoint has 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. While the Company believes that its
reserves for fixed-price contracts are reasonable, there can be no assurance
that the Company's reserves will be sufficient to cover future losses that might
be incurred with respect to any fixed-price contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Dependence Upon Increased Market Penetration. Increased use in the process
industries, particularly the chemicals and petroleum industries, of software and
services for the analysis, design and automation of process manufacturing plants
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 achieve increased market penetration.
These factors include product performance, accuracy of results, ease of
implementation and use, breadth and integration of product offerings,
reliability and scope of applications. Failure of the Company to achieve
increased market penetration in the process industries would substantially
restrict the future growth of the Company and could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- The AspenTech Advantage" and "-- Strategy."
Fluctuations in Quarterly Operating Results. The Company's operating
results 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 new products and enhancements by the Company and its competitors, and
fluctuating foreign economic conditions. In addition, the Company ships software
products within a short period after receipt of an order and typically does not
have a material backlog of unfilled orders of software products. Therefore,
revenues from software licenses in any quarter are substantially dependent on
orders booked in that
5
<PAGE> 6
quarter. Historically, a majority of each quarter's revenues from software
licenses has come from license contracts that have been effected in the final
weeks of that quarter. The revenues for a quarter typically include a number of
large orders. If the timing of any of these orders is delayed, it could result
in a substantial reduction in revenues for that quarter. Since the Company's
expense levels are based in part on its expectations as to future 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
disproportionate adverse effect on net income. 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 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.
The Company expects that these factors will continue to affect its operating
results and that the Company may experience net losses in the initial quarter of
future fiscal years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results."
Concentration of Revenues in the Chemicals and Petroleum Industries. The
Company derives a significant portion of its revenues from companies in the
chemicals and petroleum industries. Accordingly, the Company's future success is
dependent upon the continued demand for modeling software by companies in the
chemicals industry and for PIM, APC and optimization software and services by
companies in the chemical and petroleum industries. The chemical and petroleum
industries are highly cyclical. The Company believes that economic downturns in
the United States, Europe, Japan, Asia and South America and pricing pressures
experienced by chemical and petroleum companies in connection with
cost-containment measures have led to delays and reductions in certain capital
and operating expenditures by many of such companies worldwide. The Company's
revenues have in the past been, and may in the future be, subject to substantial
period-to-period fluctuations as a consequence of such industry patterns, as
well as general domestic and foreign economic conditions and other factors
affecting spending by companies in the Company's target process industries.
There can be no assurance that such factors will not have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Product Development and Technological Change. The market for software and
services for the analysis, design and automation of process manufacturing plants
is characterized by continual change and improvement in computer hardware and
software technology. The Company's future success will depend on its ability to
enhance its current software products and services, to introduce new software
products and services that keep pace with technological developments, and to
continue to address the changing needs of its customers. There can be no
assurance that the Company will be successful in developing and marketing new
and enhanced products and services, or that its products and services will
continue to address adequately the needs of the marketplace. Like many other
software products, the Company's products have on occasion contained undetected
errors or "bugs." In addition, because new releases of the Company's products
are initially installed only by a small number of customers, any errors or
"bugs" in those new releases may not be detected for a number of months after
the delivery of the software. If the Company's products do not perform
substantially as expected or are not accepted in the marketplace, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Business -- Product Development."
Dependence on Key Personnel. The Company's future success depends to a
significant extent on Lawrence B. Evans, the Company's chief executive officer,
its other executive officers, and certain key 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-man life insurance on any of its executive officers or
other key employees. The Company believes that its future success also will
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 and retaining the personnel it requires to continue
to grow and operate profitably. See "Management" and "Business -- Employees."
6
<PAGE> 7
Product Liability. The sale and implementation of on-line applications by
the Company may entail the risk of product liability claims. The Company's APC
and optimization software products and services are used in the design,
operation and management of manufacturing processes at large facilities, and any
failure by 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 contained in the Company's license agreements may not be effective as
a result of federal, state or local laws or ordinances or unfavorable judicial
decisions. A successful product liability claim against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Migration to Microsoft Windows. AspenTech believes that operating systems
similar to Microsoft Windows, due to their interoperability and customization
capabilities, are increasingly the preferred choice of certain of its customers.
AspenTech is currently developing native Windows 95 and Windows NT versions of
its software products. The Company is aware of two competitors that are
developing modeling and simulation software for use with existing Microsoft
Windows operating systems, both of which are currently shipping a release of
modeling and simulation software for Windows operating systems. There can be no
assurance that the Company will be successful in developing versions of any or
all of its software products that will operate on Windows 95 or Windows NT, or
that any such development, even if successful, will be completed concurrent with
or prior to introductions by competitors of software products on Windows 95,
Windows NT or any other Microsoft Windows system. Any such failure or delay
could affect the Company's competitive position or lead to product obsolescence
in the future. See "Business -- Product Development" and "-- Competition."
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 received a United
States patent for the expert guidance system in its proprietary graphical user
interface. The Company has registered or applied to register certain of its
significant trademarks in the United States. The Company generally enters into
non-disclosure agreements with its employees and customers, and historically has
restricted access to its software products' source codes, which it regards as
proprietary information. In a few cases, the Company has provided copies of the
source code for certain products to customers solely for the purpose of special
customization of the products and has deposited copies of the source code for
certain products in third-party escrow accounts as security for on-going service
and license obligations. In these cases, the Company relies on nondisclosure and
other contractual provisions to protect its proprietary rights.
The laws of certain countries in which the Company's products are
distributed 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
any foreign copyright or patent registrations. The Company derived more than 50%
of its revenues in each of fiscal 1993, fiscal 1994 and fiscal 1995, and
approximately 44% of its revenues in the first nine months of fiscal 1996, 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 business, results of
operations and financial condition of the Company. 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. See
"Business -- Proprietary Rights."
7
<PAGE> 8
Competition. The Company's software products compete with software tools
that are internally developed by companies in the process industries and with
certain process modeling, PIM, APC and optimization software products that are
sold by a number of commercial suppliers. AspenTech's primary commercial
competitors in the process modeling software market are Simulation Sciences,
Inc., Hyprotech, Ltd. and Chemstations, Inc. In the PIM market, AspenTech
primarily competes with Oil Systems Inc. and Biles and Associates and, to a
lesser extent, with digital control system vendors such as Honeywell Inc. In the
APC and optimization markets, AspenTech competes with the Profimatics and
Icotron divisions of Honeywell Inc., which primarily sell digital control system
hardware, as well as with the Simcon division of ABB Asea Brown Boveri (Holding)
Ltd. Several smaller competitors, including the Litwin Engineering division of
Raytheon Company, Treiber Control and Cambridge Control Ltd., focus exclusively
on the APC market. Emergence of a new competitor or the consolidation of
existing competitors could adversely affect the Company's business, operating
results and financial condition. Certain competitors also supply related
hardware products to existing and potential customers of AspenTech, and may have
established relationships that afford the 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 is no
assurance that the Company will be able to maintain its competitive position.
See "Business -- Competition."
Management of Growth. Since fiscal 1990, the Company has experienced
substantial growth 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, particularly the acquisitions of DMCC and Setpoint in the
third quarter of fiscal 1996. This growth has resulted in an increase in the
level of responsibility for management personnel. To manage its growth
effectively, the Company must continue to implement and improve its operating
and financial systems, and to retain and increase its employee base. There can
be no assurance that the management systems currently in place will be adequate
or that the Company will be able to manage the Company's recent or future growth
successfully, and any failure to do so could have material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
International Operations. The Company derived more than 50% of its
revenues in each of fiscal 1993, fiscal 1994 and fiscal 1995, and approximately
44% of its revenues in the first nine months of fiscal 1996, from customers
outside the United States, and the Company anticipates that revenues from
customers outside the United States will continue to account for a significant
portion of its total revenues in the foreseeable future. AspenTech's customers
outside the United States historically have been located principally in Europe
and Japan, while Setpoint historically has derived a substantial portion of its
revenues from customers in Asia and South America. The Company's operations
outside the United States are subject to certain 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.
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 results of operations cannot be accurately predicted. In recent
years, the Company has increased the extent to which it denominates arrangements
with customers outside the United States in the currencies of the country in
which the software or services are provided. From time to time the Company has
engaged in, and may continue to engage in, hedges of a significant portion of
installment contracts denominated in foreign currencies. There can be no
assurance that any 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, results of operations
8
<PAGE> 9
or financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated With Future Acquisitions. To expand its markets, the
Company's business strategy includes growth through additional acquisitions.
Identifying and pursuing acquisition opportunities and integrating acquired
products and businesses requires 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.
There also can be no assurance that any future acquisition will not have an
adverse effect upon the Company's operating results, particularly in the fiscal
quarters immediately following consummation of the acquisition while the
acquired business is being integrated into the Company's operations. As a result
of acquisitions, the Company may encounter unexpected liabilities and
contingencies associated with the acquired businesses. The Company may use
Common Stock or Preferred Stock or may incur additional 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 the purchasers of the Common Stock
offered hereby, while the use of cash reserves or significant debt financing to
fund acquisitions could reduce the Company's liquidity. See "Use of Proceeds."
Potential Volatility of Stock Price. The stock market has 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
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 Company's
Common Stock.
Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions; Possible Issuances of Preferred Stock. The Company's Restated
Articles of Organization, its By-Laws and certain Massachusetts laws contain
provisions that may discourage acquisition bids for the Company and that may
reduce the temporary fluctuations in the trading price of the Company's Common
Stock which are caused by accumulations of stock, thereby depriving stockholders
of certain opportunities to sell their stock at temporarily higher prices or
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 no present plans to issue any shares of
Preferred Stock. See "Description of Capital Stock -- Preferred Stock" and
"-- Massachusetts Law and Certain Charter and By-Law Provisions."
9
<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company of the sale of the 1,250,000 shares of
Common Stock offered by the Company hereby will be approximately $58,925,000
($68,623,000 if the Underwriters' over-allotment option is exercised in full),
after deducting the underwriting discount and estimated offering expenses. In
addition, the Company will receive approximately $56,400 from the exercise of
stock options by Selling Stockholders to acquire certain of the shares of Common
Stock being offered by the Selling Stockholders hereby. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholders.
The Company intends to use a portion of its net proceeds to repay (i) all
of the indebtedness outstanding under its bank line of credit at the time this
offering is completed (approximately $19.4 million was outstanding at April 29,
1996), (ii) approximately $3.7 million of indebtedness outstanding under
subordinated notes (the "MCRC Notes") payable to Massachusetts Capital Resource
Company ("MCRC"), and (iii) approximately $3.5 million of indebtedness
outstanding under a promissory note (the "Setpoint Note") assumed in connection
with the acquisition of Setpoint. The bank line of credit, which provides up to
$30.0 million, was established in February 1996 for general working capital
purposes and to fund a portion of the purchase price for the acquisition of
Setpoint. A portion of the indebtedness under the bank line of credit bears
interest at a rate (9.0% at April 29, 1996) equal to the bank's prime rate plus
a specified margin, and the balance bears interest at a rate (7.9% at April 29,
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 and terminates on December 31, 1998. The
principal of the MCRC Notes is due in installments on April 30, 1997 and 1998
and bears interest at an annual rate of 9.6%. Joan McArdle, a Vice President of
MCRC, is a director of the Company. The Setpoint Note matures on November 9,
1996 and bears interest at an annual rate of 6.0%. The Setpoint Note is secured
by a letter of credit established under the bank line of credit. All of the
indebtedness to be repaid by the Company using net proceeds of the offering made
hereby may be paid prior to maturity without penalty or premium. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company may use a portion of its 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 products. The
Company has entered into a non-binding term sheet to acquire, in a
pooling-of-interests transaction, a private company with twelve employees and
technology complementary to the Company's process modeling software products.
The Company does not have any agreements or commitments with respect to any
potential acquisitions or investments as of the date of this Prospectus, and
there can be no assurance that any such acquisitions or investments will be
made.
The Company intends to use the remainder of its net proceeds for working
capital and other general corporate purposes. Pending the uses described above,
the Company intends to invest its net proceeds in interest- or dividend-bearing,
investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
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 and the MCRC Notes, the Company is prohibited from paying any cash
dividends. Any future determination relating to dividend policy will be made in
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.
10
<PAGE> 11
PRICE RANGE OF COMMON STOCK
<TABLE>
Since October 26, 1994, the Company's Common Stock has 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 by the Nasdaq National Market.
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995:
Second Quarter (from October 26, 1994)..................................... $20 1/4 $15 3/4
Third Quarter.............................................................. 22 1/4 17 5/8
Fourth Quarter............................................................. 26 1/2 17
FISCAL 1996:
First Quarter.............................................................. 30 23 1/2
Second Quarter............................................................. 37 24 3/4
Third Quarter.............................................................. 43 31 1/2
Fourth Quarter (through June 10, 1996)..................................... 57 1/4 42 1/4
</TABLE>
On June 10, 1996, the closing sale price of the Common Stock, as reported
by the Nasdaq National Market, was $50.00 per share. As of April 29, 1996, there
were 372 holders of record of the Common Stock.
11
<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect (i) the sale of the 1,250,000 shares
of Common Stock offered by the Company hereby and the application by the Company
of the net proceeds thereof (see "Use of Proceeds") and (ii) the receipt by the
Company of approximately $56,400 upon the exercise of stock options by Selling
Stockholders to acquire certain of the shares of Common Stock offered by the
Selling Stockholders hereby. The capitalization information set forth in the
table below is qualified by the more detailed Consolidated Financial Statements,
including the Notes thereto, included elsewhere in this Prospectus, and should
be read in conjunction therewith.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Promissory note payable to the seller of Setpoint..................... $ 3,500 $ --
Current portion of long-term debt and capital lease obligations....... 518 518
======== ========
Long-term debt and capital lease obligations, less current
portion(1).......................................................... $ 17,287 $ 762
Subordinated notes payable to a related party......................... 3,690 --
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares authorized and no
shares issued or outstanding, actual and as adjusted............. -- --
Common stock, $.10 par value; 15,000,000 shares authorized and
8,084,844 shares issued, actual; 15,000,000 shares authorized and
9,355,541 shares issued, as adjusted(2).......................... 809 936
Additional paid-in capital.......................................... 39,800 98,654
Accumulated deficit................................................. (15,445) (15,445)
Cumulative translation adjustment................................... (373) (373)
Treasury stock, at cost (115,198 shares of common stock)............ (502) (502)
-------- --------
Total stockholders' equity.................................. 24,289 83,270
-------- --------
Total capitalization................................... $ 45,266 $ 84,032
======== ========
<FN>
- ---------------
(1) Includes approximately $16.5 million of indebtedness outstanding under the
Company's bank line of credit. The Company intends to use a portion of its
net proceeds of this offering to repay all of the indebtedness outstanding
under the bank line of credit. At April 29, 1996, the outstanding balance
under the bank line of credit was approximately $19.4 million.
(2) Excludes as of March 31, 1996 (i) 1,507,532 shares of Common Stock issuable
upon exercise of stock options outstanding at a weighted average exercise
price per share of $21.30 (excludes 20,697 shares to be issued upon exercise
of stock options for sale in this offering by Selling Stockholders), (ii)
188,000 shares of Common Stock reserved for future option grants under the
Company's stock option plans, (iii) 250,000 shares of Common Stock reserved
for issuance under the Company's employee stock purchase plans and (iv)
81,925 shares of Common Stock issuable upon exercise of warrants outstanding
at a weighted average exercise price per share of $4.62.
</TABLE>
12
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of June 30, 1994 and 1995
and the selected consolidated statement of income data for each of the years
ended June 30, 1993, 1994 and 1995 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, included elsewhere in this Prospectus. The
selected consolidated balance sheet data as of June 30, 1991, 1992 and 1993 and
the selected consolidated statement of income data for each of the years ended
June 30, 1991 and 1992 have been derived from the Company's Consolidated
Financial Statements, which have also been audited by Arthur Andersen LLP, not
included in this Prospectus. The selected consolidated balance sheet data as of
March 31, 1996 and the selected consolidated statement of income data for the
nine months ended March 31, 1995 and 1996 have been derived from the Company's
unaudited Consolidated Financial Statements included elsewhere in this
Prospectus, which unaudited Consolidated Financial Statements have been prepared
on a basis substantially consistent with the audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operation for these
periods. The pro forma selected consolidated statement of income data for the
year ended June 30, 1995 and the nine months ended March 31, 1996 have been
derived from the Company's unaudited Pro Forma Combined Condensed Financial
Statements included elsewhere in this Prospectus. The following selected
consolidated financial data are qualified by the more detailed financial
statements and notes included elsewhere or incorporated by reference in this
Prospectus, and should be read in conjunction therewith and with the discussion
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
PRO FORMA FOR
ACQUISITIONS(1)
-------------------
NINE
MONTHS
NINE MONTHS ENDED YEAR ENDED
YEAR ENDED JUNE 30, MARCH 31, ENDED MARCH
------------------------------------------------- ------------------ JUNE 30, 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996(2)
------- ------- ------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(3):
Revenues:
Software licenses.............. $23,394 $25,833 $36,015 $45,649 $29,954 $ 41,830 $ 55,972 $52,109
Services and other............. 6,293 8,034 8,960 11,849 8,861 20,471 58,758 49,251
------- ------- ------- ------- ------- -------- -------- --------
$22,720(4) 29,687 33,867 44,975 57,498 38,815 62,301 114,730 101,360
------- ------- ------- ------- ------- ------- -------- -------- --------
Expenses:
Cost of software licenses...... 1,220 1,961 2,614 2,799 2,129 2,501 3,531 3,039
Cost of services and other..... 5,323(5) 5,480 6,957 7,027 7,458 5,494 12,384 35,635 31,821
Selling and marketing.......... 9,125 12,888 11,744 18,095 23,233 16,223 22,735 32,657 29,332
Research and development....... 4,622 5,006 7,268 8,159 11,375 7,981 13,022 21,313 18,448
General and administrative..... 2,645 3,489 4,529 4,460 5,132 3,562 5,796 13,253 11,753
Costs related to acquisition... -- 753 -- -- 950 -- -- 950 --
Charge for in-process research
and development(2)........... -- -- -- -- -- -- 24,421 -- --
------- ------- ------- ------- ------- ------- -------- -------- --------
21,715 28,836 32,459 40,355 50,947 35,389 80,859 107,339 94,393
------- ------- ------- ------- ------- ------- -------- -------- --------
Income (loss) from
operations................. 1,005 851 1,408 4,620 6,551 3,426 (18,558) 7,391 6,967
Interest income (expense), net... 627 883 1,480 1,260 2,534 1,782 2,177 (206) 147
Other income (expense), net...... 6 109 47 (95) 56 13 (138) 68 (262)
------- ------- ------- ------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations before provision
for income taxes............. 1,638 1,843 2,935 5,785 9,141 5,221 (16,519) 7,253 6,852
Provision for income taxes....... 829 742 1,081 2,087 3,725 2,177 3,017 3,010 2,604
------- ------- ------- ------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations................... 809 1,101 1,854 3,698 5,416 3,044 (19,536) 4,243 4,248
Discontinued operations.......... 112 180 (572) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)................ $ 921 $ 1,281 $ 1,282 $ 3,698 $ 5,416 $ 3,044 $(19,536) $ 4,243 $ 4,248
======= ======= ======= ======= ======= ======= ======== ======== ========
Net income (loss) per common and
common equivalent share(6)(7):
Continuing operations.......... $ 0.17 $ 0.20 $ 0.31 $ 0.58 $ 0.70 $ 0.40 $ (2.51) $ 0.55 $ 0.50
======= ======= ======= ======= ======= ======= ======== ======== ========
Net income (loss).............. $ 0.19 $ 0.23 $ 0.22 $ 0.58 $ 0.70 $ 0.40 $ (2.51) $ 0.55 $ 0.50
======= ======= ======= ======= ======= ======= ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding(6)................. 5,181 5,911 6,469 6,545 7,781 7,540 7,793 7,781 8,538
(table continued on following page)
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 2,339 $ 3,358 $ 2,218 $ 2,488 $ 4,189 $ 6,322
Working capital.................................. 4,481 6,879 6,123 7,774 27,594 19,695
Total assets..................................... 20,036 28,949 32,764 42,009 75,697 103,533
Long-term debt and capital lease obligations
(less current portion) and subordinated notes
payable to a related party..................... 2,872 2,901 2,251 2,576 4,087 20,977
Total stockholders' equity....................... 7,008 12,191 13,402 17,156 41,789 24,289
<FN>
- ---------------
(1) Pro forma to give effect to the Company's acquisition of DMCC on January 5, 1996 and Setpoint on February 9, 1996, as
if each of such acquisitions had occurred as of July 1, 1994. The purchase price for the Setpoint acquisition remains
subject to certain downward adjustments. See Notes 3(b) and 3(c) of Notes to Consolidated Financial Statements and Pro
Forma Combined Condensed Financial Statements, including the Notes thereto.
(2) A non-recurring charge for in-process research and development was recorded in the nine months ended March 31, 1996 in
connection with the acquisitions of DMCC and Setpoint. For pro forma data, this charge has been assumed to have been
recorded before the periods presented, due to the non-recurring nature of the charge. See Notes 2 and 3 of Notes to Pro
Forma Combined Condensed Financial Statements.
(3) All periods presented include the results of operations of ISI, which the Company acquired on May 25, 1995 in a
transaction accounted for as a pooling of interests. See Note 3(a) of Notes to Consolidated Financial Statements.
(4) Revenues for the year ended June 30, 1991 were not segregated between revenues from software licenses and revenues
from services and other.
(5) Represents total cost of revenues. Cost of revenues for the year ended June 30, 1991 was not segregated between cost
of software licenses and cost of services and other.
(6) Computed as described in Note 2(j) of Notes to Consolidated Financial Statements.
(7) The Company has never declared or paid cash dividends on its capital stock.
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its founding in 1981, the Company has developed and marketed software
and services to the process industries. The Company's revenues have grown each
fiscal year since 1983, when the Company introduced the commercial version of
its ASPEN PLUS modeling software product. In addition to internally generated
growth the Company has completed a number of acquisitions. In fiscal 1992,
AspenTech acquired Prosys, a U.K. company, the developer and marketer of
SPEEDUP. In fiscal 1995, AspenTech acquired ISI, a leading supplier of PIM
software and the developer and marketer of the CIM/21 product family. The Prosys
and ISI acquisitions were accounted for as pooling of interests transactions. On
January 5, 1996 and February 9, 1996, respectively, AspenTech acquired DMCC and
Setpoint, gaining additional expertise in PIM, APC and optimization software and
services. The purchase price of the DMCC acquisition was approximately $20
million in cash, and the purchase price of the Setpoint acquisition was
approximately $28 million, which was paid in cash and by issuance of the
Setpoint Note. The DMCC and Setpoint acquisitions were accounted for as purchase
transactions, and therefore only the portion of their results of operations
subsequent to the acquisition dates is included in the Company's operating
results. As a result, comparisons of results for the nine months ended March 31,
1996 and 1995 are not meaningful.
The Company typically licenses its modeling software products to customers
for terms of either three or five years, and typically licenses its PIM, APC and
optimization software products for a term of 99 years. See "Business -- Products
and Services." 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 license. 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.
The Company's revenues historically have been derived principally from the
licensing of software products. 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
facilities. The Company recognizes service revenues as services are performed.
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 costs for each contract. Service
revenues from time and expense 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 unrecognized amounts are recorded as
unearned revenues on 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 future operating costs will include the amortization of
intangible assets, including goodwill, arising from the acquisitions of DMCC and
Setpoint. These intangible assets total approximately $11.0 million and will be
amortized over periods ranging from 18 months to 10 years. The amortization is
expected to be approximately $565,000 per quarter for the fourth quarter of
fiscal 1996 and each of the five succeeding quarters, and then to be
approximately $410,000 for each of the 14 quarters thereafter.
15
<PAGE> 16
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth the amounts and percentages of total revenues represented by
certain consolidated statement of income data for the period indicated:
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses.............................. 76.3% 80.1% 79.4% 77.2% 67.1%
Services and other............................. 23.7 19.9 20.6 22.8 32.9
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Cost of software licenses...................... 5.8 5.8 4.9 5.5 4.0
Cost of services and other..................... 20.5 15.7 13.0 14.1 19.9
Selling and marketing.......................... 34.7 40.2 40.4 41.8 36.5
Research and development....................... 21.4 18.1 19.8 20.6 20.9
General and administrative..................... 13.4 9.9 8.9 9.2 9.3
Costs related to acquisition................... -- -- 1.6 -- --
Charge for in-process research and
development................................. -- -- -- -- 39.2
----- ----- ----- ----- -----
95.8 89.7 88.6 91.2 129.8
----- ----- ----- ----- -----
Income (loss) from operations.................... 4.2 10.3 11.4 8.8 (29.8)
Interest income.................................. 6.0 4.0 5.4 5.6 4.7
Interest expense................................. (1.6) (1.2) (1.0) (1.0) (1.2)
Other income (expense), net...................... 0.1 (0.2) 0.1 -- (0.2)
----- ----- ----- ----- -----
Income (loss) from continuing operations
before provision for income taxes......... 8.7 12.9 15.9 13.4 (26.5)
Provision for income taxes....................... 3.2 4.7 6.5 5.6 4.9
----- ----- ----- ----- -----
Income (loss) from continuing operations.... 5.5 8.2 9.4 7.8 (31.4)
Discontinued operations.......................... (1.7) -- -- -- --
----- ----- ----- ----- -----
Net income (loss)......................... 3.8% 8.2% 9.4% 7.8% (31.4)%
===== ===== ===== ===== =====
</TABLE>
Comparison of Nine Months Ended March 31, 1996 to Nine Months Ended March 31,
1995
The Company acquired DMCC and Setpoint in the third quarter of fiscal 1996
in purchase transactions and has subsequently taken steps to integrate and
reorganize the operations of AspenTech and its new subsidiaries. As a result,
the Company's operating results for the nine months ended March 31, 1996 and
1995 are not directly comparable. The results of the Company's operations for
the first nine months of fiscal 1996 are not representative of results of
operations of the combined entities for subsequent periods. For the nine months
ended March 31, 1996, on a pro forma basis giving effect to the acquisitions of
DMCC and Setpoint as of the beginning of the period, revenues from software
licenses and revenues from services and other represented 51.4% and 48.6%,
respectively, of total revenues. See Pro Forma Combined Condensed Financial
Statements and related Notes.
Revenues. Revenues are derived from software licenses and services. Total
revenues for the nine months ended March 31, 1996 increased 60.5% to $62.3
million from $38.8 million in the comparable period of fiscal 1995.
Software license revenues represented 67.1% and 77.2% of total revenues for
the nine months ended March 31, 1996 and 1995, respectively. Revenues from
software licenses in the nine months ended March 31, 1996 increased 39.6% to
$41.8 million from $30.0 million in the comparable period of fiscal 1995. The
growth in software license revenues was attributable both to internal growth in
existing operations and to additional licenses entered into by the newly
acquired subsidiaries. The internal growth in software license revenues was
attributable to renewals of software licenses covering existing users, to the
expansion of existing customer relationships through licenses covering
additional users and additional software products, and, to a lesser
16
<PAGE> 17
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 acquisitions of DMCC and Setpoint.
Total revenues from customers outside the United States were $27.7 million
or 44.4% of total revenues and $19.4 million or 50.0% of total revenues for the
nine months ended March 31, 1996 and 1995, respectively. The growth in dollar
amount of total revenues from customers outside the United States was
attributable in part to revenues generated by Setpoint and, to a lesser extent,
to internal growth in existing operations.
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 nine months ended March 31, 1996
increased 131.0% to $20.5 million from $8.9 million for the comparable period of
fiscal 1995.
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. Cost of software licenses consists of
royalties, amortization of previously capitalized software costs, costs related
to delivery of software (including disk duplication and third party software
costs), printing of manuals and packaging. Cost of software licenses for the
nine months ended March 31, 1996 increased 17.5% to $2.5 million from $2.1
million in the comparable period of fiscal 1995. Cost of software licenses as a
percentage of revenues from software licenses decreased to 6.0% for the nine
months ended March 31, 1996 from 7.1% for the comparable period of fiscal 1995.
This decrease was due to the spreading of fixed production and delivery costs
over a larger revenue base and to the generation of a greater portion of sales
having minimal third-party royalty costs.
Cost of Services and Other. 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 nine months ended March 31, 1996 increased
125.4% to $12.4 million from $5.5 million for the comparable period of fiscal
1995. Cost of services and other as a percentage of revenues from services and
other decreased to 60.5% for the nine months ended March 31, 1996 from 62.0% for
the comparable period of fiscal 1995. The percentage decrease reflected a change
in the mix of services provided by the Company, reflecting the acquisitions of
DMCC and Setpoint.
Selling and Marketing. Selling and marketing expenses for the nine months
ended March 31, 1996 increased 40.1% to $22.7 million from $16.2 million for the
comparable period of fiscal 1995 while decreasing as a percentage of total
revenues to 36.5% from 41.8%. 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. 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 for the
nine months ended March 31, 1996 increased 63.2% to $13.0 million from $8.0
million for the comparable period of fiscal 1995 while increasing as a
percentage of total revenues to 20.9% from 20.6%. 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, as well as a reduction in the amount of
research and development capitalized during the period. The Company capitalized
3.4% and 7.7% of its total research and development costs during the nine months
ended March 31, 1996 and 1995, respectively.
General and Administrative. General and administrative expenses consist
primarily of salaries of administrative, executive, financial and legal
personnel, outside professional fees and amortization of intangibles. General
and administrative expenses for the nine months ended March 31, 1996 increased
62.7%
17
<PAGE> 18
to $5.8 million from $3.6 million for the comparable period of fiscal 1995,
while remaining relatively constant as a percentage of total revenues at 9.3%
and 9.2% for the nine months ended March 31, 1996 and 1995, respectively. The
dollar increase principally reflected the growth in the scale and scope of the
Company's operations.
Charge for In-Process Research and Development. In the third quarter of
fiscal 1996, the Company recognized a non-recurring charge of $24.4 million for
the write-off of in-process research and development in connection with its
acquisitions of DMCC and Setpoint.
Interest Income. Interest income is generated primarily from the sale of
software pursuant to installment contracts for off-line modeling software. 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. 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 nine months ended
March 31, 1996 increased 33.1% to $2.9 million from $2.2 million for the
comparable period of fiscal 1995. Interest income increased as a result of
investment of the net proceeds of public offerings completed by the Company in
November 1994 and February 1995, a larger installment contract portfolio and an
increase in the implicit interest rate charged to customers. During the third
quarter of fiscal 1996, the majority of the Company's cash reserves was used to
pay the purchase price for the DMCC acquisition and a portion of the purchase
price for the Setpoint acquisition.
Interest Expense. Interest expense is generated from interest charged on
the Company's bank line of credit, the MCRC Notes and capital lease obligations.
Interest expense for the nine months ended March 31, 1996 increased to $0.7
million from $0.4 million for the comparable period of fiscal 1995. This
increase principally reflected a higher level of borrowings under the Company's
bank line of credit as a result of borrowings used for payment of a portion of
the purchase price for the Setpoint acquisition.
Provision for Income Taxes. The effective tax rate for the nine months
ended March 31, 1996 is calculated as a percentage of income from continuing
operations before taxes, exclusive of the non-recurring charge for in-process
research and development. The effective tax rate decreased for the nine months
ended March 31, 1996 to 38.2% of pretax income from 41.7% for the comparable
period of fiscal 1995. This percentage decrease related principally to
non-deductible acquisition costs incurred in connection with the ISI acquisition
in the nine months ended March 31, 1995.
Comparison of Fiscal 1995 to Fiscal 1994
Revenues. Total revenues for fiscal 1995 increased 27.8% to $57.5 million
from $45.0 million in fiscal 1994.
Software license revenues represented 79.4% and 80.1% of total revenues in
fiscal 1995 and fiscal 1994, respectively. Revenues from software licenses in
fiscal 1995 increased 26.7% to $45.6 million from $36.0 million in fiscal 1994.
The growth in software license revenues was attributable primarily to software
license renewals covering existing users and to the expansion of existing
customer relationships through licenses covering additional users and additional
software products, and, to a lesser extent, to the addition of new customers.
Total revenues from customers outside the United States were $29.8 million
or 51.9% of total revenues and $25.5 million or 56.8% of total revenues for
fiscal 1995 and fiscal 1994, respectively.
Revenues from services for fiscal 1995 increased 32.2% to $11.8 million
from $9.0 million in fiscal 1994. This increase reflected an increased focus
during fiscal 1995 on providing certain high value added consulting and training
services to existing customers.
18
<PAGE> 19
Cost of Software Licenses. Cost of software licenses in fiscal 1995
increased 7.1% to $2.8 million from $2.6 million in fiscal 1994. Cost of
software licenses as a percentage of revenues from software licenses was 6.1% in
fiscal 1995 as compared to 7.3% in fiscal 1994, due to spreading fixed
production and delivery costs over a larger revenue base and generating a
greater portion of sales with minimal royalty costs.
Cost of Services and Other. Cost of services and other for fiscal 1995
increased 6.1% to $7.5 million from $7.0 million for fiscal 1994. Cost of
services and other as a percentage of revenues from services and other decreased
to 62.9% in fiscal 1995 from 78.4% in fiscal 1994. This percentage decrease was
attributable to the Company's ability to support an increased revenue base with
a relatively constant level of consulting, training and other staff.
Selling and Marketing. Selling and marketing expenses in fiscal 1995
increased 28.4% to $23.2 million from $18.1 million for fiscal 1994 while
slightly increasing as a percentage of total revenues to 40.4% from 40.2%. The
increase in costs reflects the Company's continued investment in additional
direct and technical sales personnel and regional sales offices.
Research and Development. Research and development expenses during fiscal
1995 increased 39.4% to $11.4 million from $8.2 million in fiscal 1994 while
increasing as a percentage of total revenues to 19.8% from 18.1%. The increase
in costs reflects continued investment in development of the Company's core
products, ASPEN PLUS and SPEEDUP, as well as accelerated investment in the new
areas of plant modeling and optimization and polymers modeling. The Company
capitalized 8.1% and 9.8% of its total research and development costs during
fiscal 1995 and fiscal 1994, respectively.
General and Administrative. General and administrative expenses in fiscal
1995 increased 15.1% to $5.1 million from $4.5 million in fiscal 1994 while
decreasing as a percentage of total revenues to 8.9% from 9.9%. These costs did
not grow at the same rate as revenues, as the Company's infrastructure was able
to support a larger revenue base.
Costs Related to Acquisition. In connection with the Company's acquisition
of ISI in fiscal 1995, the Company incurred $0.95 million in expenses, primarily
due to professional services related to the acquisition.
Interest Income. Interest income in fiscal 1995 increased 73.0% to $3.1
million from $1.8 million in fiscal 1994. Interest income increased as a result
of an increase in the implicit interest rates charged to customers, a larger
installment contract portfolio and the investment of the net proceeds of public
offerings completed by the Company in November 1994 and February 1995.
Interest Expense. 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 fiscal 1995 remained relatively constant at
$0.6 million in fiscal 1995 from $0.5 million from the same period in fiscal
1994, as the Company's borrowing level increased but its effective rate of total
borrowing decreased.
Provision for Income Taxes. The effective tax rate increased for fiscal
1995 to 40.8% of pretax income from 36.1% for fiscal 1994. This percentage
increase related principally to non-deductible acquisition costs incurred during
the ISI acquisition in the nine months ended March 31, 1995.
Comparison of Fiscal 1994 to Fiscal 1993
Revenues. Total revenues for fiscal 1994 increased 32.8% to $45.0 million
from $33.9 million in fiscal 1993. Software license revenues represented 80.1%
and 76.3% of total revenues in fiscal 1994 and fiscal 1993, respectively.
Revenues from software licenses in fiscal 1994 increased 39.4% to $36.0 million
from $25.8 million in fiscal 1993. The growth in software license revenues was
attributable primarily to software license renewals covering existing users and
to expansion of existing customer relationships through licenses covering
additional users and additional software products and, to a large extent, to the
addition of new customers. The rate of growth in software license revenues from
both existing and new customers is due in part to the significant investment the
Company made to expand its worldwide sales organization in the fourth quarter of
fiscal 1993 and in fiscal 1994. Total revenues from customers outside the United
States were $25.5 million or 56.8% of total revenues for fiscal 1994 and $18.3
million or 53.9% of total revenues for fiscal 1993.
19
<PAGE> 20
Revenues from services and other for fiscal 1994 increased 11.5% to $9.0
million from $8.0 million in fiscal 1993. The reduced rate of growth is the
result of the expiration in fiscal 1994 of a number of preacquisition contracts
of Prosys. Those contracts generally featured levels of annual cancelable
services significantly higher than the Company's typical licenses. Service
revenues from these contracts decreased by $0.4 million from fiscal 1993 to
fiscal 1994. Without giving effect to these preacquisition Prosys contracts,
revenues from maintenance and other services increased 19.4% from fiscal 1993 to
fiscal 1994, which reflected prior years' growth of software license revenues.
Cost of Software Licenses. Cost of software licenses in fiscal 1994
increased 33.3% to $2.6 million from $2.0 million in fiscal 1993, primarily due
to the growth in software license revenues. Cost of software licenses as a
percentage of revenues from software licenses was 7.3% in fiscal 1994 as
compared to 7.6% in fiscal 1993.
Cost of Services and Other. Cost of services and other in fiscal 1994
remained constant from fiscal 1993 at $7.0 million. The Company redeployed
certain staff in fiscal 1994 from applications consulting services to the
development of new software products primarily in the polymers area. The
staffing of the Company's worldwide customer support organization in fiscal 1994
remained relatively constant from fiscal 1993, when the Company completed a
significant expansion of its customer support organization.
Selling and Marketing. Selling and marketing expenses in fiscal 1994
increased 54.1% to $18.1 million from $11.7 million in fiscal 1993 and as a
percentage of total revenues to 40.2% from 34.7%. These increases reflected a
significant investment, which commenced in the fourth quarter of fiscal 1993 and
continued throughout fiscal 1994, in additional direct and technical sales
personnel and regional sales offices to expand the Company's worldwide sales
organization. The investment in sales personnel and regional sales offices was
made to improve the Company's geographic proximity to its customers and was
intended to maximize license renewals, further penetrate existing accounts and
add new customers.
Research and Development. Research and development expenses in fiscal 1994
increased 12.3% to $8.2 million from $7.3 million in fiscal 1993 while
decreasing as a percentage of total revenues to 18.1% from 21.5%. In fiscal
1994, the Company completed the development of Release 9, a major release of
ASPEN PLUS. In connection with Release 9, the Company capitalized approximately
$0.8 million (9.2%) of total research and development costs. In fiscal 1993, the
Company completed development of the initial release of MAX, the Company's
steady-state process modeling software with a more tailored test of engineering
capabilities than ASPEN PLUS, and Release 5.4 of SPEEDUP and, as a result, the
Company capitalized approximately $0.5 million (6.1%) of total research and
development costs for fiscal 1993. The increase in capitalized research and
development costs as a percentage of total research and development costs from
fiscal 1993 to fiscal 1994 reflected the significant level of development effort
required to complete Release 9. Total research and development costs, including
capitalized costs, increased in fiscal 1994 due to the Company's investment in
two new areas, on-line optimization and polymers, as well as continued
development of existing products, including ASPEN PLUS, SPEEDUP and MAX.
General and Administrative. General and administrative expenses in fiscal
1994 remained constant at $4.5 million from fiscal 1993 and decreased as a
percentage of total revenues to 9.9% from 13.4%. This decrease was primarily due
to the Company's decision to perform several functions internally which were
previously conducted by outside professionals.
Interest Income. Interest income declined in fiscal 1994 to $1.8 million
from $2.0 million in fiscal 1993 as a decrease in the average implicit interest
rates charged customers more than offset the increase in interest income
resulting from the larger size of the installment contract portfolio.
Interest Expense. Interest expense in fiscal 1994 remained constant from
fiscal 1993 at $0.5 million. The Company's borrowing levels remained relatively
constant and interest rates did not vary significantly from fiscal 1993 to
fiscal 1994.
Provision for Income Taxes. The Company's effective tax rate decreased
from 36.8% in fiscal 1993 to 36.1% in fiscal 1994. The Company generated fewer
income tax credits in fiscal 1994 than in fiscal 1993. See Note 10 of Notes to
Consolidated Financial Statements.
20
<PAGE> 21
Quarterly Results
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Because the Company ships software
products within a short period after receipt of an order, the Company typically
does not have a material backlog of unfilled orders for software products, and
revenues from software licenses in any quarter are substantially dependent on
orders for software products booked in the quarter. Historically, a majority of
each quarter's revenues from software licenses has come from license contracts
that have been effected in the final weeks of that quarter.
The revenues for a quarter typically include a number of large orders. If
the timing of any of these orders is delayed, it could result in a substantial
reduction in revenues for that quarter. Since the Company's expense levels are
based in part on its expectations as to future revenues, the Company may be
unable to adjust spending in a timely manner to compensate for any revenue
shortfall. Accordingly, any revenue shortfalls would likely have a
disproportionate adverse effect on net income.
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 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 contract renewals. The Company expects that these factors will
continue to affect its operating results. The Company experienced net losses in
the first quarter of each fiscal year prior to the first quarter of fiscal 1996,
when it recognized net income of $0.5 million. The larger loss in the first
quarter of fiscal 1994 resulted in part from the expansion of the Company's
worldwide sales organization that began in the fourth quarter of fiscal 1993.
This expansion generated additional expenses in the first quarter of fiscal
1994, but had not yet begun to produce significant revenues. The decrease in the
net loss in the first quarter of fiscal 1995 compared to the first quarter of
fiscal 1994 resulted principally from increased revenues as a result of the
expansion of the Company's worldwide sales organization. The Company may
continue to experience net losses in the initial quarter of future fiscal years.
See "Risk Factors -- Fluctuations in Quarterly Operating Results."
In addition, in recent years the Company's revenues during the third fiscal
quarter, as compared to the immediately preceding quarter, have grown at a
slower rate than during the second and fourth fiscal quarters, as compared to
their respective immediately preceding quarters. The Company's operating results
for the third quarter of fiscal 1996 included a non-recurring charge for
in-process research and development of $24.4 million recorded in connection with
the acquisitions of DMCC and Setpoint.
21
<PAGE> 22
<TABLE>
The following table presents selected quarterly statement of income data for fiscal 1994, fiscal 1995 and the first three
quarters of fiscal 1996. These data are unaudited but, in the opinion of the Company's management, reflect all adjustments that
the Company considers necessary for a fair presentation of these data in accordance with generally accepted accounting principles.
As a result of the acquisitions of DMCC and Setpoint in purchase transactions during the quarter ended March 31, 1996, the
quarterly results presented below are not indicative of future results of operations.
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
FISCAL 1994 FISCAL 1995 FISCAL 1996
----------------------------------- ----------------------------------- ---------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses....... $ 4,630 $8,782 $9,688 $12,915 $ 7,342 $10,540 $12,072 $15,696 $ 9,927 $13,980 $ 17,923
Services and other...... 1,915 2,477 2,168 2,400 2,360 3,405 3,095 2,988 3,342 3,960 13,169
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
6,545 11,259 11,856 15,315 9,702 13,945 15,167 18,684 13,269 17,940 31,092
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
EXPENSES:
Cost of software
licenses.............. 477 547 612 978 703 643 783 671 591 972 938
Cost of services and
other................. 1,711 1,676 1,753 1,887 1,802 1,804 1,887 1,964 1,847 2,140 8,397
Selling and marketing... 3,772 4,362 4,607 5,354 4,588 5,546 6,089 7,010 6,033 7,071 9,631
Research and
development........... 1,977 1,984 1,939 2,259 2,577 2,737 2,668 3,393 3,457 3,731 5,834
General and
administrative........ 1,055 1,017 1,128 1,260 999 1,203 1,359 1,571 1,288 1,375 3,133
Costs related to
acquisition........... -- -- -- -- -- -- -- 950 -- -- --
Charge for in-process
research and
development........... -- -- -- -- -- -- -- -- -- -- 24,421
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
8,992 9,586 10,039 11,738 10,669 11,933 12,786 15,559 13,216 15,289 52,354
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations.......... (2,447 ) 1,673 1,817 3,577 (967 ) 2,012 2,381 3,125 53 2,651 (21,262)
Interest income, net.... 361 328 279 292 434 617 732 751 870 877 434
Other income
(expense)............. (38 ) (33 ) 12 (36 ) (22 ) (27 ) 61 44 (56 ) (17 ) (69)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before
provision for
(benefit from)
income taxes........ (2,124 ) 1,968 2,108 3,833 (555 ) 2,602 3,174 3,920 867 3,511 (20,897)
Provision for (benefit
from) income taxes.... (793 ) 713 771 1,397 (231 ) 1,084 1,324 1,548 329 1,349 1,339
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)....... $(1,331 ) $1,255 $1,337 $2,436 $ (324 ) $1,518 $1,850 $2,372 $ 538 $2,162 $(22,236)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
Liquidity and Capital Resources
In recent years, the Company has financed its operations principally
through cash generated from sales of securities through private placements and
public offerings of its Common Stock, operating activities, the sale of
installment contracts to third parties and, at certain times during the year,
borrowings under a bank line of credit.
In the second and third quarters of fiscal 1995, the Company received
approximately $17.8 million of net proceeds from its initial public offering and
a subsequent public offering. The net proceeds were used for working capital and
other general corporate purposes and to pay a portion of the purchase prices of
DMCC and Setpoint. A portion of the purchase price of Setpoint was paid through
issuance of the Setpoint Note, which the Company expects to repay using a
portion of its net proceeds of this offering. See "Use of Proceeds." The Company
evaluates on an ongoing basis potential opportunities to acquire or invest in
technologies, products or businesses that expand, complement or are otherwise
related to the Company's current business and products. The Company has entered
into a non-binding term sheet to acquire, in a pooling-of-interests transaction,
a private company with twelve employees and technology complementary to the
Company's process modeling software products. See "Use of Proceeds."
In fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
operating activities provided $3.4 million, $3.6 million and $16.7 million of
cash, respectively, primarily related to net income and increases
22
<PAGE> 23
in accounts payable, accrued expenses and deferred revenue, offset in part by
increases in accounts receivable and installment contracts.
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 1994, installment
contracts increased by $4.4 million to $23.1 million, net of $13.9 million of
installment contracts sold to General Electric Capital Corporation and Sanwa
Business Credit Corporation. During fiscal 1995, installment contracts increased
by $8.5 million to $31.6 million, net of $10.2 million of installment contracts
sold to General Electric Capital Corporation and Sanwa Business Credit
Corporation. During the first nine months of fiscal 1996, installment contracts
decreased by $10.0 million to $21.6 million, net of $26.1 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, 1994, June 30, 1995 and March 31,
1996, the balance of the uncollected principal portion of the contracts sold to
these two financial institutions was $26.3 million, $23.3 million and $43.7
million, respectively, for which the Company had partial recourse obligations of
$4.2 million, $4.6 million and $11.1 million, respectively. The availability
under these arrangements will increase as the financial institutions receive
payment on installment contracts previously sold. See Note 11 of Notes to
Consolidated Financial Statements.
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 (9.0% at April 29,
1996) equal to the bank's prime rate plus a specified margin or, at the
Company's option, a rate (7.9% at April 29, 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 June 30, 1995 and April 29, 1996, $0 and approximately $19.4 million,
respectively, were outstanding under the line of credit. Upon the completion of
this offering, the Company expects to repay all of the then-outstanding
indebtedness under the bank line of credit, using a portion of the Company's net
proceeds of this offering. See "Use of Proceeds."
An aggregate of $3.7 million in principal amount is outstanding under the
MCRC Notes. The principal of the MCRC Notes is due in installments on April 30,
1997 and 1998 and may be prepaid at any time prior to maturity without penalty.
The MCRC Notes accrue interest at an annual rate of 9.6%. Joan McArdle, a Vice
President of MCRC, is a director of the Company. The Company expects to pay the
MCRC Notes in full using a portion of the Company's net proceeds of this
offering. See "Use of Proceeds" and "Management."
The Company's additional commitments as of March 31, 1996 consisted
primarily of leases on its headquarters and other facilities. See
"Business -- Facilities." There were no other material commitments for capital
or other expenditures. The Company believes that its net proceeds of the sale of
Common Stock offered by the Company hereby, together with its current cash
balances, availability of sales of its installment contracts, availability under
its bank line of credit and cash flows from its operations, will be sufficient
to meet its working capital and capital expenditure requirements for at least
the next 12 months.
INFLATION
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have significant impact
during the fourth quarter of fiscal 1996 or during fiscal 1997.
23
<PAGE> 24
BUSINESS
AspenTech is a leading supplier of software products and services for the
analysis, design and automation of manufacturing facilities by companies in the
process industries, including the chemicals, petroleum, pharmaceuticals, pulp
and paper, electric power, and food and consumer products industries. Process
manufacturers use AspenTech's software products and services to design, operate
and manage manufacturing processes more efficiently, safely and profitably.
AspenTech provides a sophisticated, integrated family of software products
for use across the entire process manufacturing life-cycle, from "off-line"
applications used primarily in research and development and engineering to
"on-line" applications used principally in production. The Company's off-line
software is used by engineers on desktop computers primarily to simulate and
predict manufacturing processes in connection with the design of new facilities
or processes and the analysis of existing facilities or processes. AspenTech's
on-line software, which is connected directly to plant instrumentation, enables
the real-time adjustment of production variables in response to constantly
changing operating conditions to improve process efficiency. AspenTech's product
offering is classified in three categories: modeling; process information
management ("PIM"); and advanced process control ("APC") and optimization.
Chemical engineers who work in the off-line research and development and
engineering stages of plant and process design and analysis are the principal
users of modeling products, while chemical and control engineers who work in the
on-line stages of real-time plant operation are the primary users of PIM, APC
and optimization software and services.
The Company's modeling software mathematically simulates and predicts the
performance of manufacturing processes under varying equipment configurations
and operating conditions, enabling chemical engineers to design cost-effective,
efficient processes that comply with environmental and safety requirements.
AspenTech's PIM software is used by process manufacturers to gather and analyze
large volumes of real-time plant operations data in order to better understand
actual performance within a complex process manufacturing facility. PIM software
allows customers to compare actual performance with theoretical benchmarks
derived from models and to make appropriate adjustments on a real-time basis.
AspenTech's APC and optimization software products are designed to enable
customers to achieve superior operating performance by continuously adjusting
key process variables to maintain optimal target levels under constantly
changing conditions. The Company initially became a provider of PIM software and
services through its acquisition of ISI in May 1995, and expanded its PIM
capabilities through its acquisition of Setpoint in February 1996. AspenTech
significantly enhanced its APC and optimization software offerings through the
Setpoint acquisition as well as its acquisition of DMCC in January 1996.
AspenTech couples its software products with design and implementation
consulting services in order to market a complete solution to its customers. The
Company significantly strengthened its on-line consulting services through its
acquisitions of DMCC and Setpoint. AspenTech believes its ability to offer a
complete solution of both industry-leading software and sophisticated process
engineering expertise is an important source of competitive differentiation.
AspenTech's customers span a broad range of process industry segments. With
more than 750 customers worldwide, AspenTech currently licenses its software to
44 of the 50 largest chemical companies in the world and, as a result of the
Company's recent acquisitions of DMCC and Setpoint, 19 of the 20 largest
petroleum refiners in the world.
INDUSTRY BACKGROUND
Companies in the process industries manufacture products as bulk solids,
liquids and gases through operations involving chemical reactions, combustion,
mixing, separation, and heating and cooling. The process industries include the
chemicals, petroleum, pharmaceuticals, pulp and paper, electric power, and food
and consumer products industries. Based on data provided by industry trade
groups, the Company estimates that the aggregate worldwide revenues of the
process industries exceed $3 trillion, of which the chemicals industry has
revenues that exceed $1 trillion and the petroleum segment has revenues in
excess of $500 billion.
24
<PAGE> 25
In recent years, several factors have dramatically affected the
competitiveness and profitability of many sectors of the process industries.
Companies in certain process industries, particularly the chemicals industry,
have experienced intensified global competition, especially from competitors
located close to raw materials sources. In addition, companies in many of the
process industries face more stringent environmental and safety regulations.
These competitive and regulatory factors, as well as cyclical economic
conditions, can have a significant negative effect on the revenues and profits
of process manufacturers. Furthermore, while labor-intensive businesses can
respond to difficult business conditions by downsizing their workforces,
capital-intensive process manufacturers must focus on improving their production
processes. Therefore, in order to significantly reduce costs and increase
profitability, a process manufacturer must design, manage and operate efficient
and cost-effective production processes. In response to competitive, regulatory
and economic pressures, companies in the process industries are adopting
increasingly sophisticated off-line and on-line tools and methodologies to
improve the performance of their facilities.
Chemical engineering analysis is the fundamental discipline behind the
improvement of production processes. Due to the number of variables involved,
chemical engineering analysis is complex and calculation intensive. Without the
use of process modeling and plant automation software, time and cost constraints
force engineers to make simplifying assumptions that may limit the potential
improvements to production processes. These constraints may also force engineers
to evaluate only parts of the process rather than the whole, or to consider
fewer alternative solutions. Process modeling and plant automation software
enables engineers to perform these complex calculations simultaneously in order
to arrive quickly at better solutions.
Sophisticated software tools for off-line use that can accurately model a
broad range of processes have been available to chemical engineers since the
1980s. Although early versions of the tools required substantial modeling
expertise and were limited in scope and complicated to use, in recent years the
availability of affordable, powerful desktop computers and intuitive graphical
user interfaces has expanded the market of potential users of process modeling
software. Moreover, process modeling software can now reliably model highly
complex chemical processes, broadening the scope of projects where its use is
applicable. These software tools can generate savings significantly in excess of
their cost by enabling users to design manufacturing processes with lower raw
material usage, decreased energy and capital equipment costs, improved product
quality and operating safety, cost-effective regulatory compliance and enhanced
engineering productivity. As a result of this improved availability,
functionality and cost-efficiency, many companies that previously relied on
internally developed models are adopting software products developed by third
parties who are better equipped to maintain and enhance these increasingly
complex tools.
In recent years, the use of off-line technology has been complemented by an
increasing demand for on-line applications for several reasons. First, the
economic rewards for making even small improvements in plant efficiency and
safety can be substantial. Second, the benefits of integrated process modeling,
information management, process control and optimization techniques are becoming
increasingly understood by customers. Third, while sophisticated tools and
expertise have not heretofore been widely available, commercial providers are
emerging to address these needs. Recent significant advances in software and
hardware technology, including the availability of more sophisticated
optimization algorithms and updatable graphical user interfaces, have made
on-line applications increasingly feasible for a growing number of process
manufacturers.
As a result of the market dynamics in the process industries and the
rapidly evolving technology available to improve manufacturing processes,
process manufacturers increasingly seek a complete, integrated family of
software and services that can be used to design, operate and manage their
production processes more effectively.
THE ASPENTECH ADVANTAGE
The Company believes it is the largest independent supplier of software and
service solutions used by companies in the process industries to design, operate
and manage their manufacturing processes based on fundamental chemical
engineering principles. AspenTech offers its customers in-depth technical
expertise
25
<PAGE> 26
encompassing both off-line and on-line applications. By combining its
traditional process modeling and optimization capabilities with acquired skills
in PIM and APC, AspenTech has created a complete solution designed to provide
several key advantages to customers:
Family of Products Across Full Manufacturing Life-Cycle. AspenTech
believes that it offers the most complete family of process modeling and plant
automation software tools used across every stage of the production process,
from research and development to engineering to production. The Company's
software products are designed to achieve improved process efficiency through
comparison of off-line predictive models with actual on-line production data and
through real-time adjustments to operating parameters in response to constantly
changing conditions. The Company significantly enhanced its on-line capabilities
through its acquisitions of DMCC and Setpoint, and intends to integrate more
fully the acquired APC and optimization tools with its other software products.
Complete Software and Service Solution. Customers increasingly require
expert consulting services to take full advantage of the highly complex software
tools being designed for the process industries. AspenTech deploys what it
believes is the largest independent organization of control engineers to design
and implement custom solutions, in combination with specialized PIM, APC and
optimization software products. AspenTech believes its ability to offer its
customers a complete solution will be an increasingly important source of
competitive differentiation.
Unparalleled Process Industry Expertise. Over the past 15 years, AspenTech
has built a reputation as a leader in process modeling expertise. AspenTech's
software products incorporate proprietary solution methods, physical property
models and data estimation techniques that enable users to model processes that
involve complex chemistry. AspenTech has refined these methods, models and
techniques based on continuing relationships with customers who have performed
millions of simulations using AspenTech software. The Company has expanded its
expertise through its acquisitions of ISI, DMCC and Setpoint, which the Company
believes are technological leaders in the PIM, APC and optimization markets.
AspenTech believes that the expertise underlying its software products and
services will assist it in maintaining and enhancing its reputation as a
technological leader across the manufacturing process.
STRATEGY
AspenTech's strategy is to expand the use of its products and services to
enable customers to improve the design, operation and management of their
manufacturing processes. The key elements of this strategy are:
Leverage Breadth and Depth of Customer Base. AspenTech considers its
relationships with its existing customers to be an important corporate asset.
AspenTech currently has more than 750 commercial customers worldwide, including
44 of the 50 largest chemical companies in the world and 19 of the 20 largest
petroleum refiners in the world. The Company has historically derived a
significant component of its revenue from additional sales to existing
customers. The Company believes it has a significant opportunity to expand its
existing customer relationships by adding new licensed users, by offering
additional product modules, and by providing consulting and support services.
These solutions are marketed by a single, integrated sales force organized by
customer account. AspenTech believes that, as a result of its recent
acquisitions, significant opportunities exist to cross-sell modeling products to
customers of DMCC and Setpoint and to cross-sell PIM, APC and optimization
solutions to customers who have historically purchased modeling products from
the Company.
Increase Penetration of Process Industries. In recent years, AspenTech has
broadened its penetration of the process industries beyond its traditional
leadership in the chemicals segment to include significant shares of the
petroleum and pulp and paper markets. Many of the same imperatives and
opportunities confront participants in other process industry segments. As the
benefits of its solutions are becoming more widely understood by process
manufacturers, AspenTech is actively pursuing opportunities to expand the use of
its technology in additional vertical markets. AspenTech believes the recent
broadening of its software product and service offerings will enable it to reach
new customers. Over time, AspenTech will also seek to leverage these new
customer relationships by cross-selling its other software product and service
offerings.
26
<PAGE> 27
Offer Broadest, Integrated Family of Products and Services. AspenTech
offers customers a broad family of software products encompassing the full
manufacturing life-cycle, enabling customers to add compatible software
capabilities as their needs grow. These products can be used as stand-alone
solutions or in concert with other software modules. AspenTech offers process
manufacturers what it believes is the most advanced product functionality
available across a wide range of off-line and on-line applications. The Company
intends to integrate further the APC and optimization tools obtained through its
acquisitions of DMCC and Setpoint and to integrate future generations of its
software products. In addition, AspenTech provides implementation consulting
services to ensure that customers can achieve a successful custom solution. In
certain of AspenTech's consulting projects, functionality developed in
connection with a custom solution has appeared applicable to other customers and
has been commercialized by AspenTech. The Company expects this to continue to be
one of its sources of new product development and that its ability to offer its
customers a complete solution will be an increasingly important source of
competitive differentiation.
Extend Technology Leadership. AspenTech intends to extend its reputation
as the technology leader and believes its recent acquisitions of DMCC and
Setpoint represent important opportunities to maintain and enhance its
differentiating capabilities in the marketplace. AspenTech has pioneered a
number of products and algorithms underlying its modeling software. DMCC and
Setpoint are technological leaders in real-time applications, engineering and
consulting solutions for APC and optimization. AspenTech is creating a single,
unified product family that will provide a migration path toward a solution
offering the best features and functionality of the combined companies'
products. The Company is similarly seeking to integrate the consulting services
of AspenTech and its acquired companies.
Focus on Long-Term Customer Relationships. AspenTech's operating strategy
is driven by a long-term approach to customer relationships. AspenTech has
historically derived the substantial majority of its revenues from three- to
five-year software licenses and renewals of those licenses. While it has
recently acquired businesses that have traditionally sold perpetual licenses,
Aspen intends to continue to focus on long-term customer relationships in
marketing its process modeling and plant automation software products and
services. In addition, the Company believes that the consulting services
provided by DMCC and Setpoint have enabled them to establish close ties with
their customers.
Capitalize on Emerging On-Line Market. The Company believes that the
potential market for on-line applications for process industries, while less
mature than the off-line market, may be substantially larger than the potential
off-line market. On-line applications complement existing off-line applications
and afford recurring incremental savings in day-to-day operations. The Company
will seek to continue to develop and expand the market for its PIM, APC and
optimization software and services for the emerging on-line market.
27
<PAGE> 28
CUSTOMERS
AspenTech currently has over 750 commercial customers worldwide, including
44 of the 50 largest chemical companies in the world and 19 of the 20 largest
petroleum refiners in the world. The Company derived more than 50% of its
revenues in each of fiscal 1993, fiscal 1994 and fiscal 1995, and approximately
44% of its revenues in the first nine months of fiscal 1996, from customers
outside the United States. The following table sets forth a selection of
customers of the Company, categorized by process industry, whose agreements with
the Company produced at least $250,000 in fees to the Company in fiscal 1995 or
fiscal 1996 to date:
<TABLE>
<S> <C>
CHEMICALS FOOD PRODUCTS
- --------- -------------
Air Products & Chemicals, Inc. Cargill Incorporated
BASF AG General Mills, Inc.
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc. PETROLEUM
Elf Atochem ---------
Hoechst AG Arco Products Company
Huls AG Chevron Corporation
Huntsman Corporation Citgo Petroleum Corporation
Lyondell Petrochemical Conoco Inc.
Mitsubishi Chemical Corporation Corpoven, S.A.
Olin Corporation Marathon Oil Company
Rhone-Poulenc Industrialisation Mobil Oil Corporation
Sasol Industries (Pty.) Ltd. Neste Oy
Shell International Chemie Mij B.V. Phillips Petroleum Company
Sumitomo Chemical Co. Ltd. Repsol Petroleo SA
Union Carbide Chemicals and Plastics Company, Inc. Shell Oil Company
Star Enterprise
Sun Refining and Marketing Company
CONSTRUCTION AND ENGINEERING
- ---------------------------- PHARMACEUTICALS
Bechtel Corporation ---------------
Fluor Daniel, Inc. Ciba-Geigy AG
John Brown Engineers and Constructors B.V. Eli Lilly and Company
Lurgi AG Fujisawa Pharmaceutical Co., Ltd.
The M.W. Kellogg Company Genentech, Inc.
The Ralph M. Parsons Company Hoffman-LaRoche, Inc.
UOP Kyowa-Hakko Kogyo Co., Ltd.
Zimmer AG Merck & Co., Inc.
Sandoz Technologie AG
CONSUMER PRODUCTS The Upjohn Company
- -----------------
The Procter & Gamble Company PULP AND PAPER
3M Company --------------
Unilever Research Union Camp Corporation
Weyerhaeuser Company
ELECTRIC POWER
- --------------
ABB Stal AB
British Nuclear Fuels plc
Combustion Engineering, Inc.
GEC Alsthom
SGN
Westinghouse Electric Corporation
</TABLE>
No individual customer represented 10% or more of AspenTech's total
revenues for fiscal 1993, 1994 or 1995. There can be no assurance that any of
the customers listed will continue to license software or purchase services from
AspenTech beyond the term of any existing agreement.
28
<PAGE> 29
PRODUCTS AND SERVICES
AspenTech is a leading supplier of software products and services for the
analysis, design and automation of manufacturing facilities by companies in the
process industries. AspenTech's integrated family of software products enables
customers to predict accurately and reliably the performance of a manufacturing
process in order to design, operate and manage manufacturing processes more
efficiently, safely and profitably. These tools are used both off-line by
engineers on desktop computers in connection with the design of new facilities
and processes and the analysis of existing facilities and processes, and on-line
connected directly to plant instrumentation to identify adjustments that can be
made on a real-time basis to optimize performance continually in response to
changing production conditions. In addition, AspenTech provides expert
consulting, training and support services to augment its software expertise and
offer a complete solution to its customers. In fiscal 1995, on a pro forma basis
giving effect to the acquisitions of DMCC and Setpoint as of the beginning of
the year, the Company's revenues from software licenses and revenues from
services and other accounted for approximately 49% and 51%, respectively, of its
total revenues.
<TABLE>
The principal software products of the Company are set forth below:
<CAPTION>
- ------------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION ORIGIN PLATFORMS SUPPORTED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OFF-LINE SOFTWARE
ASPEN PLUS Modeling AspenTech PCs
(steady state processes) UNIX
DEC VMS
Cray
SPEEDUP Modeling AspenTech PCs
(dynamic processes) UNIX
Cray
ADVENT Modeling AspenTech PCs
(process synthesis) UNIX
- ------------------------------------------------------------------------------------------------
ON-LINE SOFTWARE
CIM/21 PIM ISI PCs
UNIX
SETCIM PIM Setpoint UNIX
DEC VMS
InfoPlus-X PIM Setpoint PCs
UNIX
DEC VMS
DMC APC DMCC PCs
IBM UNIX
SMCA APC Setpoint PCs
UNIX
DEC VMS
DMO Optimization DMCC PCs
UNIX
DEC VMS
RT-OPT Optimization AspenTech UNIX
DEC VMS
- ------------------------------------------------------------------------------------------------
</TABLE>
Off-Line Software Products
The Company offers a number of software products for off-line applications.
Off-line software is used primarily to simulate and predict manufacturing
processes in connection with the design of new facilities or processes and the
analysis of existing facilities or processes. ASPEN PLUS is used to simulate
steady state processes in which inputs and conditions are held constant. ASPEN
PLUS can be used in concert with SPEEDUP, dynamic process modeling software that
simulates processes in which inputs and conditions
29
<PAGE> 30
change over time, such as during plant start-up and shutdown or when feedstocks
are adjusted. ADVENT is process synthesis software that minimizes energy
consumption and emissions from a manufacturing process. Layered on top of these
core, integrated off-line applications are a number of separately sold modules
that focus on specialized types of analysis to model separation systems, batch
distillation columns, bioprocess operations, polymers processes, and other
complex systems.
Off-line modeling software was AspenTech's principal area of product focus
from its founding until the acquisitions of ISI, DMCC and Setpoint. AspenTech
typically licenses its modeling software for a term of either three or five
years. Currently, the annualized cost for a single U.S.-based user of one of
AspenTech's off-line software modules ranges from $10,000 to $30,000, depending
on the product and the license term. The license fees charged by AspenTech are
typically based on the number of licensed users, with the cost per user
declining as the number of licensed seats increases. The license fee includes a
separate maintenance component that covers upgrades, revisions or enhancements
during the term of the license, as well as customer support.
On-Line Software Products
For on-line applications, AspenTech offers a family of products and
services that enables customers to better understand and monitor highly complex
manufacturing processes on a real-time basis, and to automate the adjustment of
operating parameters in response to continually changing conditions for improved
process efficiency, safety and cost-effectiveness. AspenTech typically licenses
its on-line software for a term of 99 years. AspenTech's PIM products capture,
display and analyze plant-wide historical and real-time process data, in order
to compare the actual performance to theoretical benchmarks derived from models.
The U.S. list price for an entry-level 99-year PIM license is approximately
$50,000, and varies depending on the number of points of data being collected.
AspenTech's APC and optimization products enable customers to improve the
profitability of a manufacturing facility by determining optimal operating
parameters and simultaneously adjusting multiple process variables to achieve
these targets. The U.S. list price for a 99-year APC or optimization software
license for a single process unit or single facility ranges from $50,000 to
$200,000.
The recent acquisitions of ISI, DMCC and Setpoint have created an on-line
product family that, at present, contains some overlapping functionality.
AspenTech is developing a new generation of products that will offer the best
features and functionality from among the various products, provide a migration
path for existing customers and further integrate on-line analysis software with
AspenTech's off-line modeling software. By so doing, AspenTech believes it will
achieve a significant competitive advantage as the only supplier of consistent
modeling technology across the full life-cycle of a process, from research and
development to engineering to production. There can be no assurance that
AspenTech will be successful in enhancing and integrating these software
products or that a fully integrated product offering will result in the benefits
anticipated. See "Risk Factors -- Integration of DMCC and Setpoint" and
"-- Product Development and Technological Change."
Consulting Services
AspenTech couples its on-line software products with design and
implementation consulting services in order to market a complete solution to its
customers. The emerging on-line market has fewer commercial modeling tools than
the off-line market. As a result, current on-line applications typically consist
of substantial custom consulting services combined with a small component of
standard commercial software. These services are customarily provided pursuant
to contracts with engagement terms of approximately 9 to 24 months. The
contracts may be priced on either a time and materials or fixed price basis. See
"Risk Factors -- Integration of DMCC and Setpoint." The Company believes that,
due to customers' growing awareness of the economic benefits of on-line
optimization and related activities, the demand for services exceeds the number
of trained control engineers that can provide these services. AspenTech's APC
and optimization services business, composed of approximately 270 people, which
AspenTech believes is the largest group of control engineers in the world,
represents a critical resource in its efforts to penetrate the on-line market.
The Company's services personnel are also available to support and maintain its
off-line software products.
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<PAGE> 31
MARKETING AND SALES
AspenTech employs a direct sales force located in key geographic centers
where there are high concentrations of potential business. The Company's sales
approach is designed to provide complete solutions to its customers. AspenTech's
worldwide sales organization is focused by customer account, with an overall
relationship executive responsible for coordinating with regional account
managers and sales engineers. In addition, each sales team includes participants
from the business development group who are responsible for determining the
scope and price of the product or service being offered. AspenTech believes that
its seasoned direct sales force, as well as its ability to sell at senior levels
within customer organizations, are important competitive distinctions. AspenTech
uses sales agents to leverage its direct sales force and provide local coverage
and first-line support in areas of lower customer concentration. The Company
also supplements its direct sales efforts with a variety of marketing
initiatives, including user groups and a triennial conference, ASPENWORLD.
AspenTech devotes substantial resources to increasing the penetration of
its products within existing customers. AspenTech has developed global
technology partnerships with a select group of customers that use modeling
extensively, whereby they meet on a regular basis with AspenTech's senior
technical and managerial staffs to help shape technical direction. Current
global technology partners include Air Products & Chemicals, Inc., BASF AG,
Daicel Chemical Industries, Ltd., The Dow Chemical Company, E.I. du Pont de
Nemours & Company, Inc., Elf Atochem, General Electric Company, Hoechst AG,
Hoechst Celanese Corporation, Huls AG, Mitsubishi Chemical Corporation,
Rhone-Poulenc Industrialisation and Union Carbide Chemicals and Plastics
Company, Inc.
AspenTech licenses its software products at a substantial discount to
universities that agree to use such products in teaching and research, in order
to stimulate future demand once the students enter the workplace. Currently,
more than 350 universities use its software products in undergraduate
instruction.
COMPETITION
The Company's software products compete with software tools that are
internally developed by companies in the process industries and with certain
modeling, PIM, APC and optimization software products that are sold by a number
of commercial suppliers. Increasingly, companies in the process industries are
recognizing that it is inefficient and uneconomical for them to continue to
develop and support this software, and many of them are now deploying commercial
software products alongside their internally developed tools.
AspenTech's primary commercial competitors in the process modeling software
market are Simulation Sciences, Inc., Hyprotech, Ltd. and Chemstations, Inc. In
the PIM market, AspenTech primarily competes with Oil Systems Inc. and Biles and
Associates and, to a lesser extent, with digital control system vendors such as
Honeywell Inc. In the APC and optimization markets, AspenTech competes with the
Profimatics and Icotron divisions of Honeywell Inc., which primarily sell
digital control system hardware, as well as with the Simcon division of ABB Asea
Brown Boveri (Holding) Ltd. Several smaller competitors, including the Litwin
Engineering division of Raytheon Company, Treiber Control and Cambridge Control
Ltd., focus exclusively on the APC market. Emergence of a new competitor or the
consolidation of existing competitors could adversely affect the Company's
business, operating results and financial condition. Certain competitors also
supply related hardware products to existing and potential customers of
AspenTech, and may have established relationships that afford the competitors an
advantage in supplying software and services to those customers.
AspenTech believes that it competes favorably by offering the broadest
range of integrated off-line and on-line modeling software and services, and
that its size, technology and industry expertise will continue to provide it
with a marketplace advantage over niche suppliers focused on a single element of
the solution or companies that primarily sell hardware. 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 is no
assurance that the Company will be able to maintain its competitive position.
See "Risk Factors -- Competition."
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<PAGE> 32
PRODUCT DEVELOPMENT
AspenTech's most important product development objective is to build upon
the technical leadership of its software products both individually and as an
integrated solution. Product development activities focus 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 family of software products and integrating those
software products with other tools. AspenTech is currently focusing significant
efforts on the development of native Windows 95 and Windows NT versions of all
of its software products, as well as on the continued integration of its family
of software products, including products acquired through the DMCC and Setpoint
acquisitions.
AspenTech's approach to Windows is based on a client-server architecture.
AspenTech is developing Windows 95 and Windows NT clients for all of its
software products, with simulation and database servers running on Windows NT,
UNIX and DEC VMS. The objective of the Windows development is to capitalize on
Windows interoperability and customization capabilities, as well as to provide
highly intuitive graphical user interfaces. A native Windows development
environment is used to ensure full support of all Windows features and the
object linking and embedding (OLE) architecture. See "Risk Factors -- Migration
to Microsoft Windows."
In parallel with the Windows project, AspenTech is working to integrate the
overlapping products in each business area by combining the best components from
the existing products under a Windows graphical user interface. In addition,
AspenTech is working to develop an open, distributed object component
architecture for all AspenTech products, with the products sharing common
components and allowing incorporation of customer or third-party components. A
central Software Engineering and Architecture department has been created to
facilitate and coordinate component development.
PROPRIETARY RIGHTS
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 received a United States patent for the expert
guidance system in its proprietary graphical user interface. The Company has
registered or applied to register certain of its significant trademarks in the
United States.
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.
AspenTech distributes its products under non-exclusive and typically
nontransferable license agreements that grant customers the right to use
AspenTech's products, typically for a term of either three or five years in the
case of modeling software products or for a term of 99 years in the case of PIM,
APC and optimization software products. The license agreements contain various
provisions that protect AspenTech's ownership of the products and the
confidentiality of the underlying technology.
The laws of certain countries in which the Company's products are
distributed 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.
The Company derived more than 50% of its revenues in each of fiscal 1993, fiscal
1994 and fiscal 1995, and approximately 44% of total revenues in the first nine
months of fiscal 1996, from customers outside the United States.
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<PAGE> 33
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 business, results of
operations and financial condition of the Company. The Company could incur
substantial costs in protecting and enforcing its intellectual property rights.
Moreover, from time to time third parties may assert patent, trademark,
copyright and other intellectual property rights to technologies that are
important to the Company. In such an event, the Company may be required to incur
significant costs in litigating a resolution to the asserted claims. There can
be no assurance that such a resolution would not require that the Company pay
damages or obtain a license of a third party's proprietary rights in order to
continue licensing its products as currently offered or, if such a license is
required, that it will be available on terms acceptable to the Company.
AspenTech believes that, due to the rapid pace of innovation within the
industry, factors such as the technological and creative expertise of its
personnel, the quality of its products, the quality of its technical support and
training courses, and the frequency of software product enhancements are more
important to establishing and maintaining a technology leadership position
within the industry than the various legal protections for its software products
and technology.
See "Risk Factors -- Dependence on Proprietary Technology."
EMPLOYEES
As of March 31, 1996, AspenTech had a total of 973 full-time employees, of
which 499 were employed by DMCC and Setpoint. 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.
AspenTech's future success depends to a significant extent on the continued
service of Lawrence B. Evans, the Company's chief executive officer, its other
executive officers and certain technical, managerial and marketing personnel.
The Company believes that its future success will also depend on its continuing
ability to attract and retain highly skilled technical, managerial and marketing
personnel. Competition for such personnel is intense and there can be no
assurance that AspenTech can retain its key employees or that it can attract,
assimilate or retain other highly qualified technical and commercial personnel
in the future. To date, seven of the original eight founders of AspenTech are
still employed by AspenTech and are active in its management. See "Risk
Factors -- Dependence on Key Personnel."
FACILITIES
AspenTech's principal offices occupy an aggregate of approximately 85,000
square feet of office space in Cambridge, Massachusetts, and AspenTech is
obligated, in October 1997, to lease an additional 16,000 square feet of office
space in the same building where its principal offices are located. AspenTech's
lease of the premises of its principal office expires on September 30, 2002. In
addition, AspenTech and its subsidiaries lease office space in Charlotte, North
Carolina; Brecksville and Cincinnati, Ohio; Houston, Texas; Bothell, Washington;
Brussels, Belgium; Calgary, Alberta, Canada; Cambridge and Warrington, England;
Hong Kong; Tokyo, Japan; Best, Leiden and Wassenaar, The Netherlands; Singapore;
and other locations of its sales and customer support offices. AspenTech
believes that its existing facilities are adequate for its needs currently and
for the reasonably foreseeable future and that, if additional space is needed,
such space will be available on acceptable terms.
LITIGATION
AspenTech is not a party to any material litigation.
33
<PAGE> 34
MANAGEMENT
<TABLE>
The executive officers and directors of the Company, and their respective ages as of
April 29, 1996, are as follows:
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Lawrence B. Evans........................ 61 Chairman of the Board of Directors and
Chief Executive Officer
Joseph F. Boston......................... 59 President and Director
Herbert I. Britt......................... 50 Senior Vice President, Corporate Product
Planning and Development
Mary A. Palermo.......................... 38 Executive Vice President, Finance and
Chief Financial Officer
Joel B. Rosen............................ 38 Executive Vice President, Marketing and
New Businesses
Gresham T. Brebach, Jr................... 55 Director
Douglas R. Brown(1)(2)................... 41 Director
Joan C. McArdle(1)(2).................... 44 Director
Alison Ross.............................. 35 Director
William C. Rousseau...................... 82 Director
<FN>
- ---------------
(1) Member of Audit Committee of the Board of Directors
(2) Member of Compensation Committee of the Board of Directors
</TABLE>
Lawrence B. Evans, the principal founder of the Company, has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since 1984. He also served as Treasurer of the Company from 1984 through
February 1995 and as President from the inception of the Company until 1984. Mr.
Evans was a Professor of Chemical Engineering at Massachusetts Institute of
Technology ("M.I.T.") from 1962 to 1990 and was the principal investigator for
the Advanced System for Process Engineering ("ASPEN") Project at M.I.T., which
extended from 1976 to 1981. Mr. Evans holds a B.S. in Chemical Engineering from
the University of Oklahoma, and an M.S.E. and Ph.D. in Chemical Engineering from
the University of Michigan.
Joseph F. Boston, a founder of the Company, has served as President of the
Company since 1984 and as a director since 1981. Mr. Boston served as both the
Principal Engineer and as an Associate Project Manager from 1977 to 1981 of the
ASPEN Project at M.I.T. Mr. Boston holds a B.S. in Chemical Engineering from
Washington University, and a Ph.D. in Chemical Engineering from Tulane
University.
Herbert I. Britt, a founder of the Company, has served as Senior Vice
President, Corporate Product Planning and Development since January 1996, and
since the Company's inception has led its product development efforts in various
capacities. From 1981 to March 1991, he served as Vice President, Product
Development, and from April 1991 to January 1996, he served as Senior Vice
President, Product Management. From 1977 to 1981, he was an Associate Project
Manager for the ASPEN Project at M.I.T. Mr. Britt holds a B.S. and Ph.D. in
Chemical Engineering from the University of Missouri.
Mary A. Palermo has served as Chief Financial Officer since May 1989. She
joined the Company in November 1987 as Director of Finance, and was promoted to
Vice President in May 1989, to Senior Vice President, Finance in June 1993 and
to Executive Vice President, Finance in December 1995. From 1979 to 1982, Ms.
Palermo held several positions at Arthur Andersen & Co. Ms. Palermo holds a B.S.
in Accounting from Boston College and is a C.P.A.
Joel B. Rosen has served as Executive Vice President, Marketing and New
Businesses since December 1995. He joined the Company as Director of Marketing
in August 1988, and was promoted to Vice President, Marketing in April 1991, to
Senior Vice President, Marketing in June 1993 and to Senior Vice President,
34
<PAGE> 35
Marketing and New Businesses in July 1994. From 1984 to 1988, Mr. Rosen held
several positions at Bain & Company. Mr. Rosen holds an A.B. in Economics from
Harvard College and an M.B.A. from the Harvard Graduate School of Business
Administration.
Gresham T. Brebach, Jr. has served as a director of the Company since
August 1995. Since January 1995, Mr. Brebach has been Executive Vice
President -- Client Services of Renaissance Solutions, Inc., a provider of
management consulting and client/server systems integration services. From
August 1994 to December 1994, Mr. Brebach operated his own consulting firm,
Brebach and Associates. From April 1993 to August 1994, Mr. Brebach served as
Executive Vice President of Digital Consulting, the management consulting
division of Digital Equipment Corporation. From December 1989 to April 1993, Mr.
Brebach was a Director in the Consumer and Industrial Products sector of
McKinsey & Company, a management consulting firm.
Douglas R. Brown has served as a director of the Company since 1986. Mr.
Brown was appointed the President, Chief Executive Officer and Director of
Advent International Corporation, a venture capital investment firm, in January
1996. Mr. Brown previously served as Chief Investment Officer of Advent
International Corporation since 1994, as well as Senior Vice President and
Managing Director -- Europe since 1990. Mr. Brown holds a B.S. in Chemical
Engineering from M.I.T. and an M.B.A. from the Harvard Graduate School of
Business Administration.
Joan C. McArdle has served as a director of the Company since July 1994.
Since 1985 she has been a Vice President of MCRC, a Boston-based investment
company that is a creditor and warrant holder of the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Ms. McArdle holds an
A.B. in English from Smith College.
Alison Ross has been a director of the Company since February 1996. Ms.
Ross is the President of Smart Finance & Co., an investment banking consulting
firm she founded in January 1995. As described below, Smart Finance & Co.
provides advisory services to the Company from time to time. From September 1992
to January 1995, Ms. Ross was a Principal of Montgomery Securities. From
September 1991 through August 1992, Ms. Ross served as Special Assistant to the
Secretary of the Cabinet in the Executive Office of the President of the United
States, as part of a one-year appointment as a White House Fellow. From 1986 to
August 1991, she was a Vice President of Goldman, Sachs & Co. Ms. Ross holds an
S.B. in Economics and an S.M. in Management from M.I.T.
William C. Rousseau has been a director of the Company since 1982. Mr.
Rousseau retired in 1974 as Vice President and Director of the Badger Company,
Inc., an engineering firm. He holds a B.A. in Chemistry from Stanford University
and an M.A. in Chemical Engineering from M.I.T.
The Company's Board of Directors is divided into three classes, with one
class of directors elected each year at the annual meeting of stockholders for a
three-year term of office. All directors of one class hold their positions until
the annual meeting of stockholders at which the terms of the directors in such
class expire and until their respective successors are elected and qualified.
Messrs. Brown and Rousseau serve in the class whose terms expire in 1996; Mr.
Evans and Ms. McArdle serve in the class whose terms expire in 1997; and Mr.
Boston, Mr. Brebach and Ms. Ross serve in the class whose terms expire in 1998.
Executive officers of the Company are elected annually by the Board of Directors
and serve at the discretion of the Board of Directors or until their successors
are duly elected and qualified.
Since April 1995, Smart Finance & Co., an investment banking consulting
firm founded and operated by Ms. Ross, has provided certain consulting services
to the Company. For the first nine months of fiscal 1996, the fees of Smart
Finance & Co. for services provided to the Company totalled approximately
$38,000. In addition, Smart Finance & Co. is providing certain advisory services
to the Company in connection with the offering made hereby in consideration for
a fee payable by the Company in an amount equal to 0.15% of the gross proceeds
of this offering to the Company and Selling Stockholders.
35
<PAGE> 36
SELLING STOCKHOLDERS
<TABLE>
The following table sets forth certain information with respect to the beneficial ownership
of the Company's Common Stock by each of the Selling Stockholders as of April 29, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby.
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES TO BE
PRIOR TO BENEFICIALLY OWNED
OFFERING(1) NUMBER OF AFTER OFFERING(1)
------------------- SHARES BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Lawrence B. Evans(2)................... 430,773 5.3% 20,000 410,773 4.4%
Wayne Martin........................... 197,547 2.4 98,763 98,784 1.1
Max Morgan............................. 197,546 2.4 98,763 98,783 1.1
Joseph F. Boston(3).................... 174,968 2.2 17,066 157,902 1.7
Herbert I. Britt(4).................... 156,071 1.9 15,211 140,860 1.5
Mary A. Palermo(5)..................... 91,091 1.1 8,835 82,256 *
Joel B. Rosen(6)....................... 81,334 1.0 7,862 73,472 *
Other Selling Stockholders (three
individuals), each beneficially
owning less than 1.0% of the shares
outstanding prior to the
offering(7).......................... 37,478 * 18,500 18,978 *
<FN>
- ---------------
* Percentage of shares beneficially owned is less than 1.0%.
</TABLE>
(1) The number of shares of Common Stock deemed outstanding prior to this
offering consists of 8,090,494 shares outstanding as of April 29, 1996. The
number of shares of Common Stock deemed outstanding after this offering
includes an additional 1,250,000 shares of Common Stock being offered for
sale by the Company in this offering and an additional 20,697 shares being
acquired for sale by Selling Stockholders in this offering upon exercise of
stock options. Assumes no exercise of the Underwriters' over-allotment
option to purchase up to an aggregate of 230,250 shares of Common Stock from
the Company and certain Selling Stockholders. Unless otherwise noted, each
person identified possesses sole voting and investment power with respect to
shares subject to community property laws where applicable. Shares not
outstanding but deemed beneficially owned by virtue of the right of a person
to acquire them within 60 days are treated as outstanding only for purposes
of determining the number and percent of shares owned by such person.
(2) Includes 656 shares subject to stock options exercisable within 60 days of
April 29, 1996 and 100 shares held by Beverley Evans, the wife of Mr. Evans.
Mr. Evans disclaims beneficial ownership of the 100 shares held by Beverley
Evans. Mr. Evans is the Chairman of the Board and Chief Executive Officer of
the Company.
(3) Includes 418 shares subject to stock options exercisable within 60 days of
April 29, 1996. Mr. Boston is the President of the Company.
(4) Includes 418 shares subject to stock options exercisable within 60 days of
April 29, 1996. Mr. Britt is the Senior Vice President, Corporate Product
Planning and Development of the Company.
(5) Includes 83,325 shares subject to stock options exercisable within 60 days
of April 29, 1996. Ms. Palermo is the Executive Vice President, Finance and
Chief Financial Officer of the Company. Ms. Palermo will exercise options to
acquire all of the shares being offered by her hereby.
(6) Includes 80,257 shares subject to stock options exercisable within 60 days
of April 29, 1996 and 350 shares held by a trust of which Mr. Rosen is a
co-trustee. Mr. Rosen is the Executive Vice President, Marketing and New
Businesses of the Company. Mr. Rosen will exercise options to acquire all of
the shares being offered by him hereby.
(7) Includes 5,825 shares subject to stock options exercisable within 60 days of
April 29, 1996. Such options will be exercised to acquire 4,000 shares being
offered hereby.
36
<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, $0.10 par value per share, and 10,000,000 shares of Preferred
Stock, $0.10 par value per share. As of April 29, 1996, there were 8,090,494
shares of Common Stock outstanding and no shares of Preferred Stock outstanding.
In addition, there were outstanding stock options to acquire 1,522,579 shares of
Common Stock and outstanding warrants to acquire 81,925 shares of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of Common Stock entitled to vote in any election of Directors may elect all of
the Directors standing for election. Subject to preferential dividend rights
with respect to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in the assets of the Company legally available for distribution
to the holders of Common Stock, subject to any prior rights of any outstanding
Preferred Stock. Holders of Common Stock have no cumulative voting rights nor
any preemptive, subscription, redemption or conversion rights. All outstanding
shares of Common Stock are, and the shares offered hereby by the Company upon
completion of this offering will be, when issued and paid for, validly issued,
fully paid and non-assessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to cause the Company 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.
The Company has granted to the Board of Directors the authority to cause
the Company to issue Preferred Stock and to determine the rights and preferences
thereof in order to eliminate delays associated with a stockholder vote on
specific issuances. 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 voting stock of the Company. The Company has no present plans to
issue any shares of Preferred Stock. See "Risk Factors -- Effect of Certain
Charters and By-Law Provisions and Anti-Takeover Provisions; Possible Issuances
of Preferred Stock."
WARRANTS
As of the date hereof, MCRC and five consultants of the Company hold
warrants to purchase an aggregate of 81,925 shares of the Company's Common
Stock. Warrants are currently exercisable for 78,925 shares of Common Stock, and
warrants will become exercisable for an additional 1,500 shares of Common Stock
on each of June 1, 1996 and June 1, 1997. The warrants expire on dates from
April 1998 to June 2001, and have exercise prices ranging from $4.00 to $6.67
per share. MCRC is entitled to certain registration rights in respect of the
shares of Common Stock issuable upon exercise of their respective warrants. See
"Registration Rights."
37
<PAGE> 38
REGISTRATION RIGHTS
Certain persons and entities have rights with respect to the registration
of Common Stock under the Securities Act. Immediately after the closing of this
offering, those rights will cover a total of 307,567 shares of Common Stock (the
"Registrable Shares"), which will include 60,000 shares of Common Stock issuable
upon exercise of warrants. In general, the holders of 305,777 of the Registrable
Shares have the right to require the Company to prepare and file from time to
time a registration statement under the Securities Act with respect to their
Registrable Shares and the Company will be required to use its best efforts to
effect such registration, subject to certain conditions and limitations. In
addition, in the event that the Company proposes to register any shares of its
Common Stock under the Securities Act for its own account or the account of
other stockholders at any time or times, subject to certain exceptions, the
Company must, upon the written request of a holder of any Registrable Shares,
use its best efforts to cause to be registered under the Securities Act all the
Registrable Shares requested to be registered. The Company is not, however,
required to register Registrable Shares in excess of the amount, if any, of
Common Stock which the principal underwriter of an underwritten offering shall
reasonably and in good faith agree in writing to include in such offering.
MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain Antitakeover Provisions. The Company is subject to the provisions
of Chapter 110F of the Massachusetts General Laws, an antitakeover law. In
general, this statute prohibits a Massachusetts corporation with more than 200
stockholders from engaging in a "business combination" with "interested
stockholders" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless (i) the interested
stockholder obtains the approval of the board of directors prior to becoming an
interested stockholder, (ii) the interested stockholder acquires 90% of the
outstanding voting stock of the corporation (excluding shares held by certain
affiliates of the corporation) at the time the stockholder becomes an interested
stockholder, or (iii) the business combination is approved by both the board of
directors and holders of two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 5% or
more of the corporation's voting stock. A "business combination" includes a
merger, consolidation, certain stock or asset sales, and certain other specified
transactions resulting in a financial benefit to the interested stockholder. The
Company may at any time elect not to be governed by Chapter 110F by amending its
Restated Articles of Organization and By-Laws by a vote of a majority of the
stockholders entitled to vote, but such an amendment would not be effective for
12 months and would not apply to a business combination with any person who
became an interested stockholder prior to the adoption of the amendment.
In addition, Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions," applies to the Company and provides, in general,
that any stockholder of a corporation subject to this statute who acquires 20%
or more of the outstanding voting stock of such corporation may not vote such
stock unless the other stockholders of such corporation so authorize.
Massachusetts General Laws Chapter 156B, Section 50A, requires that
publicly held Massachusetts corporations that have not "opted out" of Section
50A have a classified board of directors consisting of three classes as nearly
equal in size as possible. Section 50A also provides that directors who are so
classified shall be subject to removal by the stockholders only for cause. The
Company's Amended and Restated By-Laws contain provisions which reflect Section
50A.
The Company's Restated Articles of Organization contain a provision
authorizing a class of Preferred Stock, the terms of which may be fixed from
time to time by the Board of Directors, without further shareholder approval.
See "Preferred Stock."
Certain provisions of Massachusetts law, the Company's Restated Articles of
Organization and its By-Laws would make more difficult or discourage a proxy
contest or the acquisition of control by a holder of a substantial block of the
Company's Common Stock or the removal of the incumbent Board of Directors and
could also have the effect of discouraging a third party from making a tender
offer or otherwise attempting to obtain control of the Company, even though such
an attempt might be beneficial to the Company and its
38
<PAGE> 39
stockholders. In addition, because such provisions also have the effect of
discouraging accumulations of large blocks of the Company's Common Stock by
purchasers whose objective is to have such Common Stock repurchased by the
Company at a premium, such provisions could tend to reduce the temporary
fluctuations in the market price of the Company's Common Stock that are caused
by such accumulations. Accordingly, stockholders could be deprived of certain
opportunities to sell their Common Stock at a temporarily higher market price.
Reference is made to the full text of the foregoing statutes, the Company's
Restated Articles of Organization and its By-Laws for their entire terms. The
partial summary contained in this Prospectus is not intended to be complete.
See "Risk Factors -- Effect of Certain Charter and By-Law Provisions and
Anti-Takeover Provisions; Possible Issuances of Preferred Stock."
Elimination of Monetary Liability for Officers and Directors. The Company's
Restated Articles of Organization also incorporate certain provisions permitted
under the Massachusetts General Laws relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, including gross negligence, except in circumstances involving
certain wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law or authorization of distributions in violation of the
Restated Articles of Organization or of loans to officers or directors of the
Company or any transaction from which the director derived an improper personal
benefit. These provisions do not eliminate a director's duty of care nor do they
prevent recourse against directors through equitable remedies such as injunctive
relief. Moreover, the provisions do not apply to claims against a director for
violations of certain laws, including federal securities laws.
Indemnification of Officers and Directors. The Company's By-Laws contain
provisions to indemnify the directors, officers, employees or other agents of
the Company to the fullest extent permitted by the Massachusetts General Laws.
These provisions may have the practical effect in certain cases of eliminating
the ability of shareholders to collect monetary damages from directors. The
Company believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as directors or officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Fleet
National Bank.
39
<PAGE> 40
UNDERWRITING
Montgomery Securities, Cowen & Company and William Blair & Company, L.L.C.
(the "Underwriters") have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock indicated below
opposite their respective names at the initial price to public less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities................................................... 537,250
Cowen & Company......................................................... 537,250
William Blair & Company, L.L.C. ........................................ 460,500
---------
Total......................................................... 1,535,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $1.45 per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $.10 per share to certain other dealers. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters
and to certain other conditions, including the right to reject any order in
whole or in part. The Underwriters may offer the shares of Common Stock through
a selling group.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in passive market making transactions in shares of
Common Stock on the Nasdaq National Market, immediately prior to the
commencement of sales in this offering, in accordance with Rule 10b-6A under the
Exchange Act. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of independent market makers and
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
shares of Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the shares of Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 203,910 and 26,340 additional shares
of Common Stock, respectively, to cover over-allotments, if any, at the same
price per share as the initial 1,535,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise the option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The closing of this offering is subject to certain conditions, including
receipt by the Underwriters of certain certificates, legal opinions, comfort
letters from the Company's independent public accountants and other information,
all as more specifically described in the Underwriting Agreement. This offering
may be commenced in anticipation of satisfying these conditions, but there can
be no assurance that all of the conditions to closing will be satisfied and
failure to satisfy such conditions may result in termination of this offering.
40
<PAGE> 41
The Company, each of its executive officers and directors, and each of the
Selling Stockholders have entered, or will enter, into lock-up agreements
providing that they will not, within 90 days after the date of this Prospectus,
sell or offer to sell or otherwise dispose of any shares of Common Stock
(including shares purchasable upon exercise of options), or any right to acquire
such shares, without the prior written consent of Montgomery Securities or each
of the Underwriters, other than shares sold in this offering or in the Company's
earlier public offerings. In addition, the Company may issue additional shares
of Common Stock pursuant to its existing stock purchase plans and may grant
options and rights to purchase shares of Common Stock under its existing stock
option plans.
The Common Stock trades on the Nasdaq National Market under the symbol
"AZPN."
Montgomery Securities acted as financial advisor to the Company in
connection with the Company's acquisitions of ISI, DMCC and Setpoint and may
serve as financial advisor to the Company in connection with future
transactions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Certain
legal matters will be passed upon for the Underwriters by Hale and Dorr, Boston,
Massachusetts.
EXPERTS
The consolidated balance sheets of the Company and its subsidiaries as of
June 30, 1994 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended June 30, 1993, 1994 and
1995 included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The balance sheet of DMCC as of December 31, 1995 and the related
statements of income, stockholders' equity and cash flows for the year then
ended incorporated in this Prospectus by reference to the Company's Current
Report on Form 8-K dated January 5, 1996, as amended, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are so incorporated herein in reliance upon the
authority of said firm as experts in giving said report. The balance sheet of
DMCC as of December 31, 1994 and the related statements of income and retained
earnings and cash flow for the year then ended incorporated in this Prospectus
by reference to the Company's Current Report on Form 8-K dated January 5, 1996,
as amended, have been audited by Kelley, Ranshaw & Co., Houston, Texas,
independent public accountants, as indicated in their report with respect
thereto, and are so incorporated herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated balance sheets of Setpoint and its subsidiaries as of
December 31, 1995 and 1994 and the related consolidated statements of
operations, stockholder's equity and cash flows for the years then ended
incorporated in this Prospectus by reference to the Company's Current Report on
Form 8-K dated January 5, 1996, as amended, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are so incorporated herein in reliance upon the authority of said
firm as experts in giving said report.
41
<PAGE> 42
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants........................................... F-2
Consolidated Balance Sheets as of June 30, 1994, 1995 and March 31, 1996
(Unaudited)..................................................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1993, 1994 and
1995 and for the Nine Months Ended March 31, 1995 and 1996 (Unaudited).......... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993,
1994 and 1995 and for the Nine Months Ended March 31, 1996 (Unaudited).......... F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and
1995 and for the Nine Months Ended March 31, 1995 and 1996 (Unaudited).......... F-7
Notes to Consolidated Statement of Operations...................................... F-8
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION:
Pro Forma Combined Condensed Statement of Operations for the Year Ended
June 30, 1995................................................................... F-24
Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended
March 31, 1996.................................................................. F-25
Notes to Pro Forma Combined Condensed Statement of Operations...................... F-26
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspen Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Aspen
Technology, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1995. 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, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 28, 1995
F-2
<PAGE> 44
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
JUNE 30, MARCH 31,
------------------ --------------
1994 1995 1996
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................................. $ 2,488 $ 4,189 $ 6,322
Short-term investments..................................... -- 16,122 42
Accounts receivable, net of reserves of $84 in 1994 and
1995 and $563 in 1996................................... 8,698 11,759 35,814
Unbilled receivables....................................... -- -- 4,645
Current portion of long-term installments receivable, net
of unamortized discount of $723 in 1994, $735 in 1995
and $652 in 1996........................................ 10,211 12,242 9,902
Deferred tax asset......................................... -- -- 2,014
Prepaid expenses and other current assets.................. 984 1,764 3,919
------- ------- --------
Total current assets............................... 22,381 46,076 62,658
------- ------- --------
Long-term Installments Receivable, net of unamortized
discount of $3,147 in 1994, $5,690 in 1995 and $3,287 in
1996....................................................... 12,852 19,324 11,726
------- ------- --------
Property and Leasehold Improvements, at cost:
Building and improvements.................................. -- -- 2,997
Computer equipment......................................... 7,104 9,042 15,723
Purchased software......................................... 1,524 1,791 2,690
Furniture and fixtures..................................... 1,375 1,669 2,864
Leasehold improvements..................................... 308 374 1,226
------- ------- --------
10,311 12,876 25,500
Less -- Accumulated depreciation and amortization.......... 6,137 8,255 10,485
------- ------- --------
4,174 4,621 15,015
------- ------- --------
Computer Software Development Costs, net of accumulated
amortization of $2,543 in 1994, $3,173 in 1995 and $3,698
in 1996.................................................... 1,248 1,644 1,579
------- ------- --------
Land......................................................... -- -- 925
------- ------- --------
Long-term Investments........................................ -- 2,524 --
------- ------- --------
Intangible Assets, net of accumulated amortization of $583
in 1996.................................................... -- -- 9,752
------- ------- --------
Other Assets................................................. 1,354 1,508 1,878
------- ------- --------
$42,009 $75,697 $103,533
======= ======= ========
</TABLE>
F-3
<PAGE> 45
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
JUNE 30, MARCH 31,
----------------- --------------
1994 1995 1996
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt and capital
lease obligations.......................................... $ 647 $ 475 $ 518
Accounts payable.............................................. 1,499 1,980 3,916
Accrued expenses.............................................. 4,605 6,084 11,413
Unearned revenue.............................................. 1,418 1,484 7,620
Deferred revenue.............................................. 4,183 4,994 7,367
Deferred income taxes......................................... 2,255 3,465 8,629
Note payable.................................................. -- -- 3,500
------- ------- --------
Total current liabilities............................. 14,607 18,482 42,963
------- ------- --------
Long-term Debt and Capital Lease Obligations, less current
portion....................................................... 576 87 17,287
------- ------- --------
Subordinated Notes Payable to a Related Party................... 2,000 4,000 3,690
------- ------- --------
Deferred Revenue, less current portion.......................... 4,593 6,498 8,516
------- ------- --------
Other Liabilities............................................... 401 802 901
------- ------- --------
Deferred Income Taxes, less current portion..................... 2,676 4,039 5,887
------- ------- --------
Commitments and Contingencies (Notes 9 and 10)
Stockholders' Equity:
Class A convertible preferred stock, $10.00 par value --
Authorized, issued and outstanding -- 5,000 shares at June
30, 1994 and no shares at June 30, 1995 and March 31,
1996..................................................... 50 -- --
Class B convertible preferred stock, $1.00 par value --
Authorized -- 105,000 shares at June 30, 1994 and no shares
at June 30, 1995 and March 31, 1996
Issued and outstanding -- 101,986 shares at June 30, 1994
and no shares at June 30, 1995 and March 31, 1996........ 102 -- --
Series C-1 convertible preferred stock, $.10 par value --
Authorized -- 1,000,000 shares at June 30, 1994 and no
shares at June 30, 1995 and March 31, 1996
Issued and outstanding -- 250,000 shares at June 30, 1994
and no shares at June 30, 1995 and March 31, 1996........ 25 -- --
Common stock, $.10 par value --
Authorized -- 15,000,000 shares
Issued -- 3,504,665 shares, 7,789,718 shares and 8,084,844
shares in 1994, 1995 and 1996, respectively.............. 350 779 809
Additional paid-in capital.................................... 17,929 37,439 39,800
Retained earnings (deficit)................................... (398) 4,091 (15,445)
Cumulative translation adjustment............................. (390) (300) (373)
Receivable from stockholder for stock issued.................. (15) -- --
Treasury stock, at cost -- 114,594 shares of common stock in
1994, 115,198 shares of common stock in 1995 and 1996...... (497) (502) (502
Unrealized gain on investments................................ -- 282 --
------- ------- --------
Total stockholders' equity............................ 17,156 41,789 24,289
------- ------- --------
$42,009 $75,697 $103,533
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 46
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Software licenses................... $ 25,833 $ 36,015 $ 45,649 $ 29,954 $ 41,830
Services and other.................. 8,034 8,960 11,849 8,861 20,471
---------- ---------- ---------- ---------- ----------
33,867 44,975 57,498 38,815 62,301
---------- ---------- ---------- ---------- ----------
EXPENSES:
Cost of software licenses........... 1,961 2,614 2,799 2,129 2,501
Cost of services and other.......... 6,957 7,027 7,458 5,494 12,384
Selling and marketing............... 11,744 18,095 23,233 16,223 22,735
Research and development............ 7,268 8,159 11,375 7,981 13,022
General and administrative.......... 4,529 4,460 5,132 3,562 5,796
Charge for in-process research and
development...................... -- -- -- -- 24,421
Costs related to acquisition........ -- -- 950 -- --
---------- ---------- ---------- ---------- ----------
32,459 40,355 50,947 35,389 80,859
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................ 1,408 4,620 6,551 3,426 (18,558)
Foreign Currency Exchange Gain
(Loss).............................. 47 (56) 34 13 (148)
Income (Loss) on Equity in Joint
Ventures............................ -- (39) 22 -- 10
Interest Income....................... 2,012 1,789 3,095 2,177 2,897
Interest Expense on Subordinated Notes
Payable to a Related Party.......... (319) (283) (369) (273) (277)
Other Interest Expense................ (213) (246) (192) (122) (443)
---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before provision for
income taxes.............. 2,935 5,785 9,141 5,221 (16,519)
Provision for Income Taxes............ 1,081 2,087 3,725 2,177 3,017
---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations..... 1,854 3,698 5,416 3,044 (19,536)
Discontinued Operations:
Loss from operations of discontinued
PRODABAS business (net of
applicable income tax benefit of
$24)............................. (40) -- -- -- --
Loss on disposal of PRODABAS
business (net of applicable
income tax benefit of $151)...... (532) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 1,282 $ 3,698 $ 5,416 $ 3,044 $ (19,536)
========== ========== ========== ========== ==========
Net Income (Loss) per Common and
Common Equivalent Share:
Income from continuing operations... $ 0.31 $ 0.58 $ 0.70 $ 0.40 $ (2.51)
Discontinued operations............. (0.09) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 0.22 $ 0.58 $ 0.70 $ 0.40 $ (2.51)
========== ========== ========== ========== ==========
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding......................... 6,469,373 6,544,903 7,781,021 7,539,827 7,793,027
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
CLASS A, CLASS B AND
SERIES C-1
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER NUMBER $.10 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992................................................ 356,986 $ 177 3,375,434 $338 $17,375
Issuance of common stock under employee stock purchase plans......... -- -- 77,963 7 181
Exercise of stock options............................................ -- -- 6,450 1 5
Sale of treasury stock............................................... -- -- -- -- 24
Repayment of receivable from stockholder for stock issued............ -- -- -- -- --
Translation adjustment............................................... -- -- -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net...................................... -- -- -- -- --
Net income........................................................... -- -- -- -- --
-------- ----- --------- ---- -------
BALANCE, JUNE 30, 1993................................................ 356,986 177 3,459,847 346 17,585
Issuance of common stock under employee stock purchase plans......... -- -- 20,218 2 79
Exercise of stock options............................................ -- -- 24,600 2 80
Purchase of treasury stock........................................... -- -- -- -- --
Sale of treasury stock............................................... -- -- -- -- 185
Repayment of receivable from stockholder for stock issued............ -- -- -- -- --
Translation adjustment............................................... -- -- -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. -- -- -- -- --
Net income........................................................... -- -- -- -- --
-------- ----- --------- ---- -------
BALANCE, JUNE 30, 1994................................................ 356,986 177 3,504,665 350 17,929
Issuance of common stock in public offerings, net of issuance costs
of $1,223.......................................................... -- -- 1,550,000 155 17,694
Issuance of common stock under employee stock purchase plans......... -- -- 36,032 4 241
Exercise of stock options and warrants............................... -- -- 344,231 35 1,147
Liquidation of fractional shares..................................... -- -- -- -- --
Conversion of preferred stock to common stock........................ (356,986) (177) 2,354,790 235 (58)
Purchase of treasury stock........................................... -- -- -- -- --
Repayment of receivable from stockholder for stock issued............ -- -- -- -- --
Translation adjustment............................................... -- -- -- -- --
Unrealized market gain on investments................................ -- -- -- -- --
Tax benefit on exercise of nonqualified stock options................ -- -- -- -- 486
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. -- -- -- -- --
Net income........................................................... -- -- -- -- --
-------- ----- --------- ---- -------
BALANCE, JUNE 30, 1995................................................ -- -- 7,789,718 779 37,439
Issuance of common stock............................................. -- -- 33,385 3 1,061
Issuance of common stock under employee stock purchase plans......... -- -- 25,110 3 471
Exercise of stock options and warrants............................... -- -- 236,631 24 829
Realized gain on investments......................................... -- -- -- -- --
Translation adjustment............................................... -- -- -- -- --
Net loss............................................................. -- -- -- -- --
-------- ----- --------- ---- -------
BALANCE, MARCH 31, 1996 (UNAUDITED)................................... -- $ -- 8,084,844 $809 $39,800
======== ===== ========= ==== =======
</TABLE>
<TABLE>
<CAPTION>
RECEIVABLE
FROM TREASURY STOCK
RETAINED CUMULATIVE STOCKHOLDER ------------------
EARNINGS TRANSLATION FOR STOCK NUMBER
(DEFICIT) ADJUSTMENT ISSUED OF SHARES AMOUNT
-------- ---------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992................................................ $ (5,061) $(348) $ (40) 114,885 $(288)
Issuance of common stock under employee stock purchase plans......... -- -- -- -- --
Exercise of stock options............................................ -- -- -- -- --
Sale of treasury stock............................................... -- -- (30) (7,500) 16
Repayment of receivable from stockholder for stock issued............ -- -- 40 -- --
Translation adjustment............................................... -- 67 -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net...................................... (344) -- -- -- --
Net income........................................................... 1,282 -- -- -- --
-------- ----- ----- ------- -----
BALANCE, JUNE 30, 1993................................................ (4,123) (281) (30) 107,385 (272)
Issuance of common stock under employee stock purchase plans......... -- -- -- -- --
Exercise of stock options............................................ -- -- -- -- --
Purchase of treasury stock........................................... -- -- -- 71,304 (382)
Sale of treasury stock............................................... -- -- (304) (64,095) 157
Repayment of receivable from stockholder for stock issued............ -- -- 319 -- --
Translation adjustment............................................... -- (109) -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. 27 -- -- -- --
Net income........................................................... 3,698 -- -- -- --
-------- ----- ----- ------- -----
BALANCE, JUNE 30, 1994................................................ (398) (390) (15) 114,594 (497)
Issuance of common stock in public offerings, net of issuance costs
of $1,223.......................................................... -- -- -- -- --
Issuance of common stock under employee stock purchase plans......... -- -- -- -- --
Exercise of stock options and warrants............................... -- -- -- -- --
Liquidation of fractional shares..................................... -- -- -- 32 --
Conversion of preferred stock to common stock........................ -- -- -- -- --
Purchase of treasury stock........................................... -- -- -- 572 (5)
Repayment of receivable from stockholder for stock issued............ -- -- 15 -- --
Translation adjustment............................................... -- 90 -- -- --
Unrealized market gain on investments................................ -- -- -- -- --
Tax benefit on exercise of nonqualified stock options................ -- -- -- -- --
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. (927) -- -- -- --
Net income........................................................... 5,416 -- -- -- --
-------- ----- ----- ------- -----
BALANCE, JUNE 30, 1995................................................ 4,091 (300) -- 115,198 (502)
Issuance of common stock............................................. -- -- -- -- --
Issuance of common stock under employee stock purchase plans......... -- -- -- -- --
Exercise of stock options and warrants............................... -- -- -- -- --
Realized gain on investments......................................... -- -- -- -- --
Translation adjustment............................................... -- (73) -- -- --
Net loss............................................................. (19,536) -- -- -- --
-------- ----- ----- ------- -----
BALANCE, MARCH 31, 1996 (UNAUDITED)................................... $(15,445) $(373) $ -- 115,198 $(502)
======== ===== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED TOTAL
GAIN ON STOCKHOLDERS'
INVESTMENTS EQUITY
----------- --------------
<S> <C> <C>
BALANCE, JUNE 30, 1992................................................ $ -- $ 12,153
Issuance of common stock under employee stock purchase plans......... -- 188
Exercise of stock options............................................ -- 6
Sale of treasury stock............................................... -- 10
Repayment of receivable from stockholder for stock issued............ -- 40
Translation adjustment............................................... -- 67
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net...................................... -- (344)
Net income........................................................... -- 1,282
----- --------
BALANCE, JUNE 30, 1993................................................ -- 13,402
Issuance of common stock under employee stock purchase plans......... -- 81
Exercise of stock options............................................ -- 82
Purchase of treasury stock........................................... -- (382)
Sale of treasury stock............................................... -- 38
Repayment of receivable from stockholder for stock issued............ -- 319
Translation adjustment............................................... -- (109)
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. -- 27
Net income........................................................... -- 3,698
----- --------
BALANCE, JUNE 30, 1994................................................ -- 17,156
Issuance of common stock in public offerings, net of issuance costs
of $1,223.......................................................... -- 17,849
Issuance of common stock under employee stock purchase plans......... -- 245
Exercise of stock options and warrants............................... -- 1,182
Liquidation of fractional shares..................................... -- --
Conversion of preferred stock to common stock........................ -- --
Purchase of treasury stock........................................... -- (5)
Repayment of receivable from stockholder for stock issued............ -- 15
Translation adjustment............................................... -- 90
Unrealized market gain on investments................................ 282 282
Tax benefit on exercise of nonqualified stock options................ -- 486
Dividend distributions to stockholders relating to acquired
Subchapter
S corporation, net................................................. -- (927)
Net income........................................................... -- 5,416
----- --------
BALANCE, JUNE 30, 1995................................................ 282 41,789
Issuance of common stock............................................. -- 1,064
Issuance of common stock under employee stock purchase plans......... -- 474
Exercise of stock options and warrants............................... -- 853
Realized gain on investments......................................... (282) (282)
Translation adjustment............................................... -- (73)
Net loss............................................................. -- (19,536)
----- --------
BALANCE, MARCH 31, 1996 (UNAUDITED)................................... $ -- $ 24,289
===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 48
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ 1,282 $ 3,698 $ 5,416 $ 3,044 $(19,536)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities --
Depreciation and amortization.................................... 1,529 2,038 2,748 2,010 3,338
Charge for in process research and development................... -- -- -- -- 24,421
Deferred income taxes............................................ 951 1,175 2,573 1,601 3,012
Loss on disposal of discontinued operations...................... 532 -- -- -- --
Changes in assets and liabilities, net of acquisitions --
Accounts receivable............................................ (614) (3,174) (3,061) (5,942) (7,234)
Prepaid expenses and other current assets...................... (191) (109) (780) (607) 453
Long-term installments receivable.............................. (3,364) (4,396) (8,503) (120) 9,938
Accounts payable and accrued expenses.......................... (28) 1,489 2,446 1,114 (1,427)
Unearned revenue............................................... 833 558 66 (17) 1,476
Deferred revenue............................................... 984 2,166 2,716 1,241 2,211
------- ------- -------- -------- --------
Net cash provided by operating activities.................... 1,914 3,445 3,621 2,324 16,652
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements...................... (2,032) (972) (2,565) (1,864) (3,653)
Increase in computer software development costs...................... (515) (888) (1,026) (664) (460)
(Increase) decrease in other assets.................................. 19 (454) (154) (179) (97)
(Increase) decrease in investment securities......................... -- -- (18,364) (16,814) 18,322
Increase (decrease) in other liabilities............................. (80) (57) 401 85 101
Payment for the acquisitions of DMCC and Setpoint, net of cash
acquired........................................................... -- (44,723)
------- ------- -------- -------- --------
Net cash used in investing activities.......................... (2,608) (2,371) (21,708) (19,436) (30,510)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................................. -- -- 17,849 17,849 1,064
Issuance of common stock under employee stock purchase plans......... 188 81 245 -- 474
Exercise of common stock options and warrants........................ 6 82 1,182 399 853
Purchase of treasury shares.......................................... -- (382) (5) (5) --
Sale of treasury shares.............................................. 10 38 -- -- --
Repayment of notes receivable for stock issued....................... 40 319 15 15 --
Proceeds from subordinated note payable to related party............. -- -- 2,000 2,000 --
Payment of subordinated note payable to related party................ -- -- -- -- (310)
Payments of long-term debt and capital lease obligations............. (413) (860) (661) (1,078) (2,542)
Borrowings from bank line of credit.................................. -- -- -- 564 16,525
Dividend distributions to stockholders relating to acquired
Subchapter S corporation, net...................................... (344) 27 (927) (241) --
------- ------- -------- -------- --------
Net cash provided by (used in) financing activities............ (513) (695) 19,698 19,503 16,064
------- ------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ 67 (109) 90 114 (73)
------- ------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (1,140) 270 1,701 2,505 2,133
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 3,358 2,218 2,488 2,488 4,189
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 2,218 $ 2,488 $ 4,189 $ 4,993 $ 6,322
======= ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes........................................... $ 73 $ 660 $ 600 $ 631 $ 1,250
======= ======= ======== ======== ========
Cash paid for interest............................................... $ 532 $ 540 $ 524 $ 374 $ 819
======= ======= ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase in equipment under capital lease obligations................ $ 212 $ 1,020 $ -- $ -- $ 100
======= ======= ======== ======== ========
Increase in additional paid-in capital and decrease in accrued
expenses relating to the tax benefit of exercise of nonqualified
stock options...................................................... $ -- $ -- $ 486 $ -- $ --
======= ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During 1996, the Company acquired certain companies as described in
Note 3. These acquisitions are summarized as follows:
Fair value of assets acquired, excluding cash...................... $ -- $ -- $ -- $ -- $ 48,319
Payments in connection with the acquisitions, net of cash
acquired......................................................... -- -- -- -- 44,723
------- ------- -------- -------- --------
Liabilities assumed............................................ $ -- $ -- $ -- $ -- $ 3,596
======= ======= ======== ======== ========
In May 1995, the Company acquired Industrial Systems, Inc., which was
accounted for as a pooling of interests.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 49
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(1) OPERATIONS
Aspen Technology, Inc. (the Company), develops and markets process modeling
and automation software and services internationally to the process industries.
The Company's principal products are used to simulate manufacturing processes in
the chemicals, petroleum, pharmaceuticals, pulp and paper, electric power, and
food and consumer products industries. The Company's services include
application consulting services on a contract basis, hot line assistance and
training courses.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 1996, the
consolidated statements of operation and cash flows for the nine months ended
March 31, 1995 and 1996, and the consolidated statement of stockholders' equity
for the nine months ended March 31, 1996 are unaudited but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of operations for the nine months ended March 31, 1996 are
not necessarily indicative of results to be expected for the entire year.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities of
less than three months.
(d) Short-Term Investments
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, effective
July 1, 1994. The adoption of SFAS No. 115 had no material effect on the
Company's financial position or results of operations.
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 March 31, 1996 consist
of money market investment funds of $42,000.
F-8
<PAGE> 50
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(e) Depreciation and Amortization
<TABLE>
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:
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
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
</TABLE>
(f) Land
In connection with the acquisition of Setpoint, Inc., (Note 3(c)) the
Company acquired land that is being held for investment purposes. The land is
recorded at its appraised value at the date of acquisition.
(g) Revenue Recognition
The Company recognizes revenue from software licenses upon the shipment of
its products, pursuant to a signed noncancelable license agreement. In the case
of license renewals, revenue is recognized upon execution of the renewal license
agreement. The Company has no other significant vendor obligations or
collectibility risk associated with its product sales.
The Company recognizes revenue from postcontract customer support ratably
over the period of the postcontract arrangement. The Company accounts for
insignificant vendor obligations by deferring a portion of the revenue and
recognizing it either ratably as the obligations are fulfilled or when the
related services are performed. If significant application development services
are performed in connection with the purchase of a license, the license fees are
recognized as the application development services are completed.
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. 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 receivables, and unrecognized billings are
recorded as unearned revenue in the accompanying consolidated balance sheets.
Other service revenues are recognized as the related services are performed.
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 statements of operations. The interest rates in effect
for the years ended June 30, 1993, 1994, 1995 and the nine months ended March
31, 1996 were 9.5%, 9.75%, 11% to 12%, and 11% to 12%, respectively.
F-9
<PAGE> 51
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(h) Computer Software Development Costs
In compliance with SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, certain computer software
development costs are capitalized in the accompanying consolidated balance
sheets. Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Amortization of capitalized computer
software development costs is 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 was approximately $247,000,
$497,000, $630,000, $505,000 and $524,000 in fiscal 1993, 1994 and 1995 and the
nine months ended March 31, 1995 and 1996, respectively.
(i) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS No. 52, Foreign Currency Translation. 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. This determination of functional currency is based on these
subsidiaries' financial dependence on the Company.
The Company translates the assets and liabilities of certain other
subsidiaries at the rates of exchange in effect at year-end. Revenues and
expenses are translated using exchange rates in effect during the year. Gains
and losses from foreign currency translation are credited to or charged to the
cumulative translation adjustment account, included in stockholders' equity in
the accompanying consolidated balance sheets, since their functional currency is
their local currency. This determination of functional currency is based on the
subsidiaries' relative financial and operational independence from the Company.
At June 30, 1994 and 1995 and March 31, 1996, the Company had long-term
installments receivable of approximately $4,890,000, $6,072,000 and $5,458,000
denominated in foreign currencies. The March 31, 1996 installments receivable
mature through July 2000 and have been hedged with specific foreign currency
contracts. The Company records a foreign currency gain or loss at the time the
Company enters into the foreign currency contract. There have been no material
gains or losses recorded relating to hedge contracts for the periods presented.
(j) Net Income (Loss) per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed using
the pro forma 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. Stock issued after September 1,
1993 and common stock issuable pursuant to stock options or warrants granted
after September 1, 1993 have been reflected as outstanding for all periods
presented, before the Company's initial public offering of common stock, using
the treasury stock method required by the Securities and Exchange Commission.
Other shares of stock issuable pursuant to stock options and warrants have been
included where their effect is dilutive. 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 convertible preferred
stock, stock options and stock warrants (using the treasury stock method). For
the nine months ended March 31, 1996, common equivalent shares have not been
included since their effect would be antidilutive.
F-10
<PAGE> 52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(l) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments, that potentially subject the Company to
concentration of credit risk are principally cash and cash equivalents,
investments and accounts 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 distributions) 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 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.
(3) ACQUISITIONS
(a) Industrial Systems, Inc. (ISI)
In May 1995, the Company acquired Industrial Systems, Inc. (ISI), a
supplier of open systems Process Information Management (PIM) software for
large-scale process manufacturing environments. The Company exchanged 645,188
shares of its common stock for all outstanding shares of ISI common stock.
Outstanding ISI options were converted into options to purchase 13,040 shares of
the Company's common stock. The acquisition has been accounted for as a pooling
of interests. Accordingly, the consolidated financial statements of the Company
have been prepared to give retroactive effect to the combination with ISI. The
Company incurred approximately $950,000 of expenses related to this acquisition,
which was charged to operations in the accompanying fiscal 1995 consolidated
statement of operations. Unaudited pro forma condensed statements of operations
for the years ended June 30, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
ASPEN ISI COMBINED
------- ------ --------
<S> <C> <C> <C>
Year Ended 1993 --
Revenues........................... $30,473 $3,394 $33,867
======= ====== =======
Net income......................... $ 1,258 $ 24 $ 1,282
======= ====== =======
Year Ended 1994 --
Revenues........................... $37,230 $7,745 $44,975
======= ====== =======
Net income......................... $ 2,538 $1,160 $ 3,698
======= ====== =======
</TABLE>
F-11
<PAGE> 53
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(3) ACQUISITIONS -- (CONTINUED)
(b) Dynamic Matrix Control Corporation (DMCC)
On January 5, 1996, the Company acquired 80.7% of the outstanding shares of
common stock of DMCC, and on February 8, 1996, the Company acquired the
remaining 19.3% of DMCC common stock, for an aggregate purchase price of
$20,139,000 in cash and the assumption of certain expenses related to the
acquisition. DMCC is a supplier of on-line automation and information management
software and services to companies in process manufacturing industries.
<TABLE>
This acquisition was accounted for as a purchase, and accordingly, the
results of operations of DMCC from January 5, 1996 forward are included in the
Company's consolidated statements of operations. The portion of the purchase
price allocated to in-process research and development was based on an
independent appraisal. Such in-process research and development projects had not
yet reached technological feasibility and had no alternative future use as of
January 5, 1996. The purchase price was allocated to the fair value of assets
acquired and liabilities assumed as follows (in thousands):
<CAPTION>
DESCRIPTION AMOUNT LIFE
----------- ------- ----
<S> <C> <C>
Purchased in-process research and development... $ 9,521 --
Existing technology............................. 1,740 5 Years
Other intangibles............................... 1,066 5-10 Years
Building........................................ 627 30 Years
Uncompleted contracts........................... 596 Life of contracts
-------
13,550
Net book value of tangible assets acquired less
liabilities assumed........................... 8,080
-------
21,630
Less -- Deferred taxes.......................... 1,491
-------
$20,139
=======
</TABLE>
(c) Setpoint, Inc. (Setpoint)
On February 9, 1996, the Company acquired all of the outstanding shares of
Setpoint for an aggregate purchase price of $28,180,000 in cash and the
assumption of certain expenses related to the acquisition. The purchase price is
subject to certain downward adjustments based on the net worth of Setpoint as of
December 31, 1995. Based on the tangible net worth identified in the audited
consolidated balance sheet as of December 31, 1995, the purchase price could be
adjusted downward by up to $900,000. Setpoint supplies on-line automation and
information management software and services to companies in process
manufacturing industries.
This acquisition was accounted for as a purchase, and accordingly, the
results of operations of Setpoint from February 9, 1996 forward are included in
the Company's consolidated statements of operations. The portion of the purchase
price allocated to in-process research and development was based on an
independent appraisal. Such in-process research and development projects had not
yet reached technological feasibility and
F-12
<PAGE> 54
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(3) ACQUISITIONS -- (CONTINUED)
<TABLE>
had no alternative future use as of February 9, 1996. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed as
follows (in thousands):
<CAPTION>
DESCRIPTION AMOUNT LIFE
----------- ------- ----
<S> <C> <C>
Purchased in-process research and development... $14,900 --
Existing technology............................. 3,308 5 Years
Other intangibles............................... 1,709 5-10 Years
Goodwill........................................ 1,418 10 Years
Uncompleted contracts........................... 504 Life of contracts
-------
21,839
Net book value of tangible assets acquired net
of liabilities assumed........................ 8,384
-------
30,223
Less -- Deferred taxes.......................... 2,043
-------
$28,180
=======
</TABLE>
(d) Unaudited Pro Forma Combined Results
<TABLE>
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).
<CAPTION>
YEAR ENDED NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1995(1) MARCH 31, 1995(1) MARCH 31, 1996(1)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pro forma revenue................... $114,730 $81,331 $101,360
Pro forma net income................ 4,243 1,889 4,248
Pro forma net income per common and
common equivalent share........... $ 0.55 $ 0.25 $ 0.50
Pro forma weighted average common
and common equivalent share....... 7,781 7,540 8,538
<FN>
- -------------------------
(1) Does not reflect the charge for in-process research and development and nonrecurring acquisition
charges.
</TABLE>
(e) Supplemental Pro Forma Information
In addition to the unaudited pro forma combined results included in Note
3(d) above, supplementary pro forma information reflecting the actual results of
the Company, including the non-recurring write-off of in-process research and
development and adjusted for the intended repayment of outstanding debt
(discussed in Use of Proceeds on page 10) with the corresponding reduction of
the actual interest expense, net of income taxes, using proceeds from the sale
of common stock being offered by this prospectus, pro forma net income (loss)
for the year ended June 30, 1995 and the nine months ended March 31, 1996 would
be $5,634 and $(19,202), respectively. The resulting earnings (loss) per share
would be $0.72 and $(2.42), respectively.
F-13
<PAGE> 55
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(4) LINE OF CREDIT
As of June 30, 1995, the Company maintained a revolving line-of-credit
facility with a bank with borrowings limited to the lesser of $10,000,000 or a
percentage of qualified accounts and installments receivable, as defined.
On February 6, 1996, the Company amended the revolving line-of-credit
agreement with a bank which raised the borrowing limit from $10,000,000 to
$30,000,000 subject to existing limitations. The commitment fee for the unused
portion of the revolving line of credit ranges from .25% to .50%, based on the
financial position of the Company, as defined, and is payable quarterly. A
portion of the outstanding borrowings bears interest on the basis of the
applicable LIBOR rate, as defined (7.9% as of March 31, 1996), the remaining
borrowings under the line of credit bear interest at the bank's prime rate
(8.25% as of March 31, 1996) plus .75%, and is payable monthly in arrears. The
line of credit is secured by a pledge of substantially all of the assets of the
Company and its United States subsidiaries. The line is subject to certain
covenants, including profitability and operating ratios, as defined. As of March
31, 1996, the Company had an available borrowing base of $30,000,000, of which
$16,525,000 was outstanding and $4,131,000 was reserved for a standby letter of
credit securing a note payable (see Note 5) and certain performance bonds
relating to service contracts. The line of credit expires on December 31, 1998.
(5) NOTE PAYABLE
In connection with the acquisition of Setpoint, the Company assumed
approximately $5,200,000 of intercompany debt payable to the former parent of
Setpoint. Upon the closing of the acquisition, the Company paid approximately
$1,700,000 of this debt and signed a note for the remaining balance of
$3,500,000. The note accrues interest at a rate of 6% per year. All principal
and accrued interest is payable in one lump sum on November 9, 1996. This
obligation is secured by a standby letter of credit for the face amount of the
note.
(6) CAPITAL LEASE OBLIGATIONS
The Company has numerous capital lease arrangements. These obligations
accrue interest at rates ranging from 8.5% to 17.0% and are payable in various
monthly installments of principal and interest ranging from $422 to $22,409,
expiring on various dates through December 2000.
<TABLE>
Maturities are as follows (in thousands):
<CAPTION>
AMOUNT
------
<S> <C>
Year Ending June 30,
1996........................................................... $ 253
1997........................................................... 301
1998........................................................... 301
1999........................................................... 191
2000........................................................... 124
Thereafter..................................................... 184
------
1,354
Less -- Amount representing interest............................. 222
------
$1,132
======
</TABLE>
F-14
<PAGE> 56
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(7) SUBORDINATED NOTES PAYABLE TO A RELATED PARTY
As of March 31, 1996, the Company has $3,690,000 outstanding on
subordinated notes payable to an outside investor, of which a director of the
Company is an officer. The notes are payable, $2,000,000 on April 30, 1997 and
$1,690,000 on April 30, 1998, with interest at 9.6%, payable quarterly.
The notes are subordinate to the bank line of credit, as defined, and the
note payable. The Company is subject to certain covenants under the terms of
these notes, including certain financial covenants. In addition, under the terms
of these notes, the Company is prohibited from paying any cash dividends. The
notes may be prepaid at any time prior to maturity without penalty.
(8) CONVERTIBLE 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.
(9) COMMON STOCK
(a) Public Offerings
Effective November 1, 1994, the Company completed its initial public
offering of common stock. In this offering, the Company sold 1,500,000 shares of
its common stock for net proceeds to the Company of approximately $17.2 million.
Upon the closing of the initial public offering, all shares of convertible
preferred stock were converted into 2,354,790 shares of common stock.
On February 14, 1995, the Company completed a public offering of common
stock, raising net proceeds to the Company of approximately $600,000 from the
sale of 50,000 shares of its common stock and the exercise of certain options
and warrants.
(b) Warrants
During fiscal 1990, the Company issued warrants to purchase 127,500 shares
of common stock to the holder of the subordinated notes payable (see Note 7). In
February 1995, warrants to purchase 50,000 shares were exercised and sold as
part of the Company's second public offering of stock. The remaining warrants to
purchase 77,500 shares of common stock were exercised in December 1995. During
1991, the Company issued an additional warrant to purchase 60,000 shares of
common stock to the holder of the subordinated notes payable, exercisable at $4
per share. This warrant expires when all principal and interest on the
subordinated note payable to a related party, which is due on April 30, 1998, is
fully paid.
During fiscal 1992, the Company issued warrants to purchase 30,000 shares
of common stock to a research consultant at an exercise price of $6.67 per
share. In February 1995, warrants to purchase 13,500 shares were exercised and
sold as part of the Company's offering of common stock. In 1996, warrants to
purchase 575 shares were exercised. The remaining warrants to purchase 15,925
shares of common stock are exercisable through June 30, 2001.
F-15
<PAGE> 57
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(9) COMMON STOCK -- (CONTINUED)
During fiscal 1993, the Company issued warrants to purchase 6,000 shares of
common stock to two research consultants, at an exercise price of $5.33 per
share. These warrants are exercisable ratably over four years and expire on June
10, 1998.
(c) Stock Options
In July 1987 and August 1988, the Company entered into stock option
agreements covering 60,000 shares of common stock. The purchase price under the
options is $1.87 to $2.10 based on the fair market value of the common stock on
the date of grant. In fiscal 1995, the option covering 45,000 shares of common
stock at $2.10 per share was exercised. In fiscal 1996, the remaining option
covering 15,000 shares of common stock was exercised at $1.87 per share.
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 to
920,000 shares of common stock. Shares available for grant under this plan will
be 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.
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 rates and expire no later than 10 years from the date
of grant.
<TABLE>
The following is a summary of stock option activity under the 1988 Plan,
the 1995 Plan, and 1995 Director Plan:
<CAPTION>
NUMBER OF PRICE
OPTIONS PER SHARE
--------- --------------
<S> <C> <C>
Outstanding, June 30, 1992................... 674,010 $ 2.10-$ 5.33
Options granted............................ 163,800 5.33
Options exercised.......................... (1,950) 2.10- 5.33
Options terminated......................... (57,750) 2.10- 5.33
--------- --------------
Outstanding, June 30, 1993................... 778,110 2.10- 5.33
Options granted............................ 239,213 5.33- 6.67
Options exercised.......................... (24,600) 2.10- 5.33
Options terminated......................... (36,285) 2.10- 5.33
--------- --------------
Outstanding, June 30, 1994................... 956,438 2.10- 6.67
Options granted............................ 135,000 8.00- 20.50
Options exercised.......................... (178,684) 2.10- 6.67
Options terminated......................... (72,668) 3.67- 6.67
--------- --------------
Outstanding, June 30, 1995................... 840,086 2.10- 20.50
Options granted............................ 836,000 26.25- 37.125
Options exercised.......................... (137,031) 2.10- 20.50
Options terminated......................... (17,350) 5.33- 20.50
--------- --------------
Outstanding, March 31, 1996.................. 1,521,705 $ 2.10-$37.125
========= ==============
Exercisable, March 31, 1996.................. 497,545 $ 2.10-$27.25
========= ==============
</TABLE>
F-16
<PAGE> 58
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(9) COMMON STOCK -- (CONTINUED)
ISI maintained a separate stock option plan (the ISI Plan) under which its
Board of Directors was entitled to grant either incentive or nonqualified stock
options for a maximum of 98,774 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.
<TABLE>
Activity under the ISI Plan is as follows:
<CAPTION>
NUMBER OF PRICE
OPTIONS PER SHARE
--------- ----------
<S> <C> <C>
Outstanding, June 30, 1992 and 1993.............. 59,068 $.51-$1.01
Granted........................................ 6,519 2.53
------- ----------
Outstanding, June 30, 1994....................... 65,587 .51- 2.53
Exercised...................................... (52,547) .51- 1.01
------- ----------
Outstanding at June 30, 1995..................... 13,040 .51- 2.53
Exercised...................................... (6,520) .51
------- ----------
Outstanding at March 31, 1996.................... 6,520 $2.53
======= ==========
Exercisable at March 31, 1996.................... 3,912 $2.53
======= ==========
</TABLE>
(d) 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 may grant
stock purchase rights for a maximum of 570,000 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 250,000 shares through November 2005.
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 and last business day of such payment period,
whichever is less. The purchase price for such shares is paid through payroll
deductions, and the maximum allowable payroll deduction is 5% of each eligible
employee's compensation. Under the plan, the Company issued 77,963 shares,
16,963 shares, 34,250 shares and 25,110 shares during fiscal 1993, 1994 and 1995
and the nine months ended March 31, 1996, respectively. As of March 31, 1996,
250,000 shares of common stock were available for future grants under the plan.
In September 1992, the Company's Board of Directors approved the
establishment of a UK Employees' Stock Purchase Arrangement for all eligible
employees, as defined. Under this arrangement, the rights to purchase shares of
the Company's common stock were granted at fair market value, as determined by
the Board of Directors. The purchase price for these shares was paid through
payroll deductions over a six-month period, and the employees were, in turn,
paid a cash bonus equal to 15% of the stock price after applicable taxes are
withheld. Under this arrangement, the Company issued 3,255 shares and 1,782
shares during fiscal 1994 and 1995, respectively. This plan expired on December
31, 1995.
(e) Stock Dividends
Effective September 28, 1989 and April 19, 1992, the Board of Directors
declared stock dividends of four shares and one share, respectively, for each
share of common stock outstanding. Effective August 31, 1994, the Board of
Directors declared a stock dividend of one share for every two shares of common
stock
F-17
<PAGE> 59
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(9) COMMON STOCK -- (CONTINUED)
outstanding. All share and per share amounts affected by these stock dividends
have been retroactively adjusted for all periods presented.
(10) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes.
<TABLE>
The provisions for income taxes shown in the accompanying consolidated
statements of operations comprise the following (in thousands):
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Federal --
Current..................................... $ 61 $ 283 $1,132
Deferred.................................... 739 1,366 1,949
State --
Deferred.................................... 224 313 485
Foreign --
Current..................................... 57 125 159
------ ------ ------
$1,081 $2,087 $3,725
====== ====== ======
</TABLE>
<TABLE>
The provision for income taxes differs from the federal statutory rate due
to the following:
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate................ 34.0% 34.0% 34.0%
State income tax, net of federal tax
benefit.................................... 6.3 4.4 5.3
Foreign tax.................................. 3.3 (2.9) (4.1)
Tax credits generated........................ (5.3) (0.5) (2.5)
Permanent differences, net................... 0.8 0.6 5.6
Valuation allowance and other................ (2.3) 0.5 2.5
---- ---- ----
Provision for income taxes......... 36.8% 36.1% 40.8%
==== ==== ====
</TABLE>
F-18
<PAGE> 60
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(10) INCOME TAXES -- (CONTINUED)
<TABLE>
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
<CAPTION>
JUNE 30,
-------------------
1994 1995
------- --------
<S> <C> <C>
Deferred tax assets................................... $ 5,805 $ 5,784
Deferred tax liabilities.............................. (8,547) (10,941)
------- --------
(2,742) (5,157)
Valuation allowance................................... (2,189) (2,347)
------- --------
$(4,931) $ (7,504)
======= ========
</TABLE>
<TABLE>
The approximate tax effect of each type of temporary difference and
carryforward items before allocation of the valuation allowance is as follows
(in thousands):
<CAPTION>
JUNE 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Deferred revenue....................................... $(6,311) $(8,808)
Net operating losses................................... 1,717 1,720
General business credits............................... 994 994
Nondeductible reserves and accruals.................... 628 758
Capitalized software development costs................. (426) (554)
State income taxes..................................... 495 499
Alternative minimum tax credits........................ 60 285
Other temporary differences............................ 101 (51)
------- --------
$(2,742) $(5,157)
======= ========
</TABLE>
The tax credit and net operating loss carryforwards expire at various dates
from 1996 through 2010. Due to the uncertainty surrounding the realization and
timing of these tax attributes, the Company has recorded a valuation allowance
of approximately $2,189,000 and $2,347,000 as of June 30, 1994 and 1995,
respectively, as management has concluded that it is not more likely than not to
be fully realized.
The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss and tax credit carryforwards available to be used in any given
year in the event of significant changes in ownership, as defined.
(11) OPERATING LEASES
The Company leases its facilities and various office equipment under
noncancelable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $1,548,000, $1,705,000, $2,227,000 and
$1,980,000 for the years ended June 30, 1993, 1994 and 1995, and the nine months
ended
F-19
<PAGE> 61
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(11) OPERATING LEASES -- (CONTINUED)
<TABLE>
March 31, 1996, respectively. Future minimum lease payments under these leases
as of March 31, 1996 are as follows (in thousands):
<CAPTION>
AMOUNT
-------
<S> <C>
Year Ending June 30,
1996...................................... $ 1,059
1997...................................... 3,911
1998...................................... 3,549
1999...................................... 3,189
2000...................................... 3,042
Thereafter................................ 10,093
-------
$24,843
=======
</TABLE>
(12) SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $13,890,000, $10,224,000 and
$26,062,000 during fiscal 1994, 1995, and the nine months ended March 31, 1996,
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 upon whether the
customers under the installment contracts are foreign or domestic entities.
Collections of these receivables reduce the Company's recourse obligation, as
defined.
At March 31, 1996, the balance of the uncollected principal portion of the
contracts sold with partial recourse was $43,672,000. The Company's potential
recourse obligations related to these contracts is approximately $11,078,000. In
addition, the Company is obligated to pay additional costs to the financial
institutions in the event of default by the customer.
(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 compensation, subject to limitation under the Internal Revenue Code, which
would otherwise be payable to the participant for any plan year. All participant
contributions vest immediately. The Company is not obligated to make
contributions to this plan. During 1993, 1994, 1995, and the nine months ended
March 31, 1995 and 1996, no discretionary contributions were made to this plan.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employer's 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.
F-20
<PAGE> 62
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(14) JOINT VENTURES -- (CONTINUED)
In November 1993, the Company invested approximately $100,000 in a
Cyprus-based corporate joint venture, representing approximately a 14% equity
interest. The Company also has 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. In connection with this, the
Company received a one year option to purchase additional shares, which would
increase its equity interest to approximately 75%.
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, 1994 and 1995 and the nine months ended
March 31, 1995 and 1996, the Company has recognized approximately $(39,000),
$22,000, $0 and $10,000, respectively, in net income (losses) as its portion of
the income (losses) from these joint ventures.
(15) ACCRUED EXPENSES
<TABLE>
Accrued expenses in the accompanying consolidated balance sheets consist of
the following (in thousands):
<CAPTION>
JUNE 30,
---------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
Payroll and payroll -- related................. $1,857 $2,901 $ 4,201
Royalties and outside commissions.............. 1,100 1,442 1,947
Acquisition costs.............................. -- -- 2,128
Other.......................................... 1,648 1,741 3,137
------ ------ -------
$4,605 $6,084 $11,413
====== ====== =======
</TABLE>
(16) RELATED PARTY TRANSACTIONS
KPM Enterprises (KPME), a company of which Kenneth P. Morse, a former
director of the Company, is the sole proprietor, was engaged by the Company as a
marketing consultant from 1986 to 1992 to assist the Company in marketing its
products in Japan. KPME was compensated on an incentive basis as a percentage of
the revenue generated by the Company from KPME's efforts. Payments are made to
KPME as the customers pay the Company. In fiscal 1993, 1994 and 1995, payments
of $210,000, $326,000 and $68,000, respectively, were made by the Company to
KPME as compensation for services rendered prior to the expiration of KPME's
consulting arrangement with the Company. No payments were made during the nine
months ended March 31, 1995 and 1996.
Included in royalties and outside commissions are approximately $68,000 of
commissions due to KPME at June 30, 1994. No amounts were due as of June 30,
1995 or March 31, 1996.
(17) DISCONTINUED OPERATIONS
On June 1, 1993, the Board of Directors voted to discontinue the PRODABAS
business, a separate and distinct business unit that was involved in
development, marketing and customization of engineering database technology. The
Company discontinued all marketing and development activities related to this
business and recorded a provision of approximately $532,000 in the consolidated
statement of income for fiscal 1993. This provision represents a write-down of
assets to estimated net realizable values and an accrual for all customer,
employee severance and other obligations related to the PRODABAS business.
Revenues for the PRODABAS business were approximately $1,312,000 and $779,000 in
fiscal 1992 and 1993, respectively.
F-21
<PAGE> 63
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
(18) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
<TABLE>
Domestic and export sales as a percentage of total revenues are as follows:
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
United States................................... 46.1% 43.2% 48.1% 50.0% 55.6%
Europe.......................................... 31.2 34.8 30.6 27.8 20.7
Japan........................................... 16.1 12.3 12.3 14.7 11.3
Other........................................... 6.6 9.7 9.0 7.5 12.4
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
Revenues, income (loss) from operations and identifiable assets for the Company's United States,
European and Asian operations are as follows (in thousands). The Company has intercompany distribution
arrangements with its subsidiaries. The basis for these arrangements, disclosed below as transfers between
geographic locations, is cost plus a specified percentage for services and a commission rate for sales
generated in the geographic region.
<CAPTION>
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1993 --
Revenues.................................. $32,506 $ 1,361 $ -- $ -- $33,867
Transfers between geographic locations.... 2,813 5,409 2,286 (10,508) --
------- ------- ------ -------- -------
Total revenues.............................. $35,319 $ 6,770 $2,286 $(10,508) $33,867
======= ======= ====== ======== =======
Income (loss) from operations............... $ 1,514 $ 87 $ (193) $ -- $ 1,408
======= ======= ====== ======== =======
Identifiable assets......................... $29,807 $ 2,417 $ 281 $ 259 $32,764
======= ======= ====== ======== =======
Year Ended June 30, 1994 --
Revenues.................................. $44,022 $ 953 $ -- $ -- $44,975
Transfers between geographic locations.... 3,390 7,667 3,732 (14,789) --
------- ------- ------ -------- -------
Total revenues.............................. $47,412 $ 8,620 $3,732 $(14,789) $44,975
======= ======= ====== ======== =======
Income from operations...................... $ 3,962 $ 652 $ 6 $ -- $ 4,620
======= ======= ====== ======== =======
Identifiable assets......................... $39,308 $ 2,386 $ 99 $ 216 $42,009
======= ======= ====== ======== =======
Year Ended June 30, 1995 --
Revenues.................................. $56,951 $ 547 $ -- $ -- $57,498
Transfers between geographic locations.... -- 10,912 4,463 (15,375) --
------- ------- ------ -------- -------
Total revenues.............................. $56,951 $11,459 $4,463 $(15,375) $57,498
======= ======= ====== ======== =======
Income from operations...................... $ 5,126 $ 1,112 $ 313 $ -- $ 6,551
======= ======= ====== ======== =======
Identifiable assets......................... $71,143 $ 4,087 $ 416 $ 51 $75,697
======= ======= ====== ======== =======
</TABLE>
F-22
<PAGE> 64
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
OVERVIEW
On January 5, 1996, the Company acquired 80.7% of the outstanding shares of
common stock of DMCC, and on February 8, 1996, the Company acquired the
remaining 19.3% of DMCC common stock for $20,139,000 in cash and the assumption
of certain expenses related to the acquisition. DMCC is a supplier of on-line
automation and information management software and services to companies in
process manufacturing industries.
On February 9, 1996, the Company acquired all of the outstanding shares of
Setpoint for an aggregate purchase price of $28,180,000 in cash and expenses
related to the acquisition. The purchase price is subject to certain downward
adjustments based on the net worth of Setpoint as of December 31, 1995 and
negotiations with the seller. Based on the tangible net worth identified in the
audited consolidated balance sheet as of December 31, 1995, the purchase price
could be adjusted downward by up to $900,000. Setpoint supplies on-line
automation and information management software and services to companies in
process manufacturing industries.
The following unaudited pro forma combined condensed statements of
operations for the year ended June 30, 1995, and for the nine months ended March
31, 1996, reflect the results of each entities' operations as though DMCC and
Setpoint had been acquired by the Company on July 1, 1994, and accounted for as
purchases. The results of operations for DMCC and Setpoint from and after the
respective acquisition date are included in the Company's actual results of
operations. The pro forma combined condensed financial information presented is
not necessarily indicative of either the results of operations that would have
occurred had the acquisitions taken place at the beginning of the period
presented or of future results of operations of the combined operations.
F-23
<PAGE> 65
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
------------------------------ PRO FORMA
THE ------------------------------------
COMPANY SETPOINT DMCC ADJUSTMENTS CONSOLIDATED
------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Software licenses............... $45,649 $ 7,873 $ 2,637 $ (187) (1) $ 55,972
Services and other.............. 11,849 34,895 12,014 -- 58,758
------- ------- ------- ------- ----------
57,498 42,768 14,651 (187) 114,730
------- ------- ------- ------- ----------
EXPENSES:
Cost of software licenses....... 2,799 620 112 -- 3,531
Cost of services and other...... 7,458 20,572 6,996 609(2)(8) 35,635
Selling and marketing........... 23,233 8,633 791 -- 32,657
Research and development........ 11,375 7,838 2,100 -- 21,313
General and administrative...... 5,132 4,590 1,890 1,641(3)(4)(9) 13,253
Management fees and other
to Amelinc................... -- 684 -- (684) (12) --
Cost related to acquisition..... 950 -- -- -- 950
------- ------- ------- ------- ----------
50,947 42,937 11,889 1,566 107,339
------- ------- ------- ------- ----------
Income (loss) from
operations................. 6,551 (169) 2,762 (1,753) 7,391
Foreign Currency Exchange Gain.... 34 12 -- -- 46
Income (Loss) on Equity in Joint
Venture......................... 22 -- -- -- 22
Interest Income................... 3,095 -- -- (2,415) (6)(11) 680
Interest Expense on Subordinated
Notes Payable to a Related
Party........................... (369) -- -- -- (369)
Other Interest Expense............ (192) (240) (85) -- (517)
------- ------- ------- ------- ----------
Income (loss) before
provision for (benefit
from) income taxes......... 9,141 (397) 2,677 (4,168) 7,253
Provision for (Benefit from)
Income Taxes.................... 3,725 (295) 1,138 (1,558)(5)(10)(13) 3,010
------- ------- ------- ------- ----------
Net income (loss)............ $ 5,416 $ (102) $ 1,539 $(2,610) $ 4,243
======= ======= ======= ======= ==========
Pro Forma Earnings per Share:
Net income per share............ $ 0.55
==========
Shares used to compute pro forma
net income per share......... 7,781,021
==========
</TABLE>
F-24
<PAGE> 66
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
-------------------------------------- PRO FORMA
THE ------------------------------
COMPANY SETPOINT(1) DMCC(1) ADJUSTMENTS CONSOLIDATED
---------- ----------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.................... $ 41,830 $ 8,847 $1,432 $ -- $ 52,109
Services and other................... 20,471 20,502 8,278 -- 49,251
-------- ------- ------ ------- ---------
62,301 29,349 9,710 -- 101,360
-------- ------- ------ ------- ---------
EXPENSES:
Cost of software licenses............ 2,501 478 60 3,039
Cost of services and other........... 12,384 14,402 4,731 304(2)(8) 31,821
Selling and marketing................ 22,735 6,084 513 29,332
Research and development............. 13,022 4,716 710 18,448
General and administrative........... 5,796 2,816 1,899 1,242 (3)(4)(9 11,753
Management and other fees to
Amelinc........................... -- 482 -- (482)(12) --
Setpoint Systems Ltd.
management bonuses................ -- 354 -- (354)(12) --
Charge for in-process research and
development....................... 24,421 -- -- (24,421)(7)(14) --
-------- ------- ------ ------- ---------
80,859 29,332 7,913 (23,711) 94,393
-------- ------- ------ ------- ---------
Income (loss) from operations..... (18,558) 17 1,797 23,711 6,967
Foreign Currency Exchange
Loss................................. (148) (124) -- -- (272)
Income on Equity in Joint Venture...... 10 -- -- -- 10
Interest Income........................ 2,897 (123) -- (1,853)(6)(11) 921
Interest Expense on Subordinated Notes
Payable to a Related Party........... (277) -- -- -- (277)
Other Interest Income (Expense)........ (443) (33) (21) -- (497)
-------- ------- ------ ------- ---------
Income (loss) before provision for
income taxes.................... (16,519) (263) 1,776 21,858 6,852
Provision for Income Taxes............. 3,017 256 803 (1,472)( (10)(13) 2,604
-------- ------- ------ ------- ---------
NET INCOME (LOSS)................. $(19,536) $ (519) $ 973 $23,330 $ 4,248
======== ======= ====== ======= =========
Pro Forma Earnings (Loss) per Share:
Net income (loss) per share.......... $ 0.50
=========
Shares used to compute pro forma net
income (loss) per share........... 8,537,977
=========
</TABLE>
- ---------------
(1) Amounts represent the companies' operations from July 1, 1994 to the dates
of acquisitions.
F-25
<PAGE> 67
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
The following pro forma adjustments are required to reflect the
amortization and depreciation resulting from the allocation of the DMCC and
Setpoint purchase price and acquisition costs to the assets acquired based on
their fair value, as determined by the management of Aspen and an independent
appraiser.
(1) PURCHASE PRICE ALLOCATION
<TABLE>
(a) Acquisition of Dynamic Matrix Control Corporation (DMCC)
The following outlines the current estimate for the purchase price of the
acquisition of DMCC. Management believes that there will be no material
adjustments to this allocation, which is based on an independent appraisal of
the assets purchased and liabilities assumed as follows (in thousands):
<CAPTION>
<S> <C>
In-process research and development......... $ 9,521
Existing technology......................... 1,740
Other intangibles........................... 1,066
Building.................................... 627
Uncompleted contracts....................... 596
-------
13,550
Net book value of tangible assets acquired
net of liabilities assumed................ 8,080
-------
21,630
Less -- Deferred taxes...................... 1,491
-------
$20,139
=======
</TABLE>
<TABLE>
(b) Acquisition of Setpoint, Inc.
The following outlines the current estimate for the purchase price
allocation of Setpoint, Inc. based on an independent appraisal. While management
believes this to be the best estimate at this time, the purchase price that this
estimate is based on has not been finalized. The purchase price was allocated to
the fair value of assets acquired and liabilities assumed as follows (in
thousands):
<CAPTION>
<S> <C>
In-process research and development......... $14,900
Existing technology......................... 3,308
Other intangibles........................... 1,709
Goodwill.................................... 1,418
Uncompleted contracts....................... 504
-------
21,839
Net book value.............................. 8,384
-------
30,223
Less -- Deferred taxes...................... 2,043
-------
$28,180
=======
</TABLE>
F-26
<PAGE> 68
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
(2) PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
combined condensed balance sheets and statements of operations as described
below for both DMCC and Setpoint. The pro forma adjustments outlined below
assume that the purchase of both acquisitions took place at the beginning of
Aspen's last fiscal year, specifically July 1, 1994. Due to the nonrecurring
nature of the purchased in-process research and development it has been assumed
to have been written off before the beginning of the pro forma period (July 1,
1994).
<TABLE>
<S> <C>
DMCC --
(1), (2) Earn out of uncompleted contracts.
(3) Depreciation of additional amounts allocated to building, using a life of 30
years.
(4) Amortization of intangibles over lives ranging from 5-10 years.
(5) Related tax effect of adjustments (1)-(4).
(6) To record effect on interest income of liquidating short-term investments to
acquire DMCC assets, including related tax effect.
(7) Eliminate nonrecurring charge for in-process research and development acquired
in the acquisitions. (See Note 3)
Setpoint --
(8) Earn out of uncompleted contracts.
(9) Amortization of intangibles over lives ranging from 5-10 years.
(10) Related tax effect of adjustments (8) and (9).
(11) To increase interest expense and reduce interest income as a result of
liquidating investments and increasing debt necessary to acquire Setpoint
assets.
(12) Eliminate $684,000 and $482,000 for the year ended June 30, 1995 and the nine
months ended March 31, 1996, respectively, of non-recurring management fees
for which no direct or indirect services were received. Aspen has not charged
such fees to subsidiaries in the past and does not intend to do so in the
future. Eliminate $354,000 of non-recurring bonuses paid pursuant to a phantom
stock agreement terminated by Aspen at the time Setpoint was acquired.
(13) Related tax effect of (11) and (12).
(14) Eliminate nonrecurring charge for in-process research and development acquired
in the acquisitions. (See Note 3)
</TABLE>
(3) IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the purchase price allocation, the Company obtained an
appraisal of the assets acquired from both DMCC and Setpoint which indicates
that these assets combined include approximately $24.4 million of in-process
research and development projects. In the opinion of management, the acquired
in-process research and development has no alternative uses, and accordingly,
this amount was charged to expense at the time the acquisitions were
consummated. Due to the nonrecurring nature of this charge it has been assumed
to be written off before the pro forma periods presented.
F-27
<PAGE> 69
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative, or any other person
has been authorized to give any information or to make
any representations in connection with this offering
other than those contained in this Prospectus, and, if
given or made, such information or representations must
not be relied upon as having been authorized by the
Company, the Selling Stockholders or the Underwriters.
This Prospectus does not constitute an offer to sell or
a solicitation of an offer tobuy any securities other
than the shares of Common Stock to which it relates or
an offer to, or a solicitation of, any person in any
jurisdiction where such an offer or solicitation would
be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in
the affairs of the Company since the date hereof or that
information contained herein is correct as of any time
subsequent to the date hereof.
<TABLE>
----------------------------
TABLE OF CONTENTS
----------------------------
<CAPTION>
Page
----
<S> <C>
Available Information................. 2
Information Incorporated by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 10
Dividend Policy....................... 10
Price Range of Common Stock........... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 24
Management............................ 34
Selling Stockholders.................. 36
Description of Capital Stock.......... 37
Underwriting.......................... 40
Legal Matters......................... 41
Experts............................... 41
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,535,000 SHARES
LOGO
ASPEN TECHNOLOGY, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
COWEN & COMPANY
WILLIAM BLAIR & COMPANY
June 10, 1996
- ------------------------------------------------------
- ------------------------------------------------------
