<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended September 30, 1997.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number:
ASPEN TECHNOLOGY, INC.
(exact name of registrant as specified in its charter)
Massachusetts 04-2739697
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Ten Canal Park, Cambridge, Massachusetts, 02141
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (617) 949-1000
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
As of September 30, 1997, there were 20,592,459 shares of the Registrant's
common stock (par value $.10 per share) outstanding.
<PAGE> 2
ASPEN TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of September 30, 1997 and June 30, 1997 3
Consolidated Condensed Statements of
Income for the Three Month Period
Ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
for the Three Month Period Ended
September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE> 3
ASPEN TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and in thousands)
9/30/97 6/30/97
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 12,721 $ 16,091
Short-term investments 14,895 15,843
Accounts receivable, net 57,887 56,624
Current portion of long-term
installments receivable, net 20,475 19,063
Prepaid expenses and other current assets 8,235 7,403
-------- --------
Total current assets 114,213 115,024
Long-term installments receivable, net 31,694 30,963
Equipment and leasehold
improvements, at cost 54,247 47,338
Accumulated depreciation (22,363) (19,904)
-------- --------
31,884 27,434
Computer software development
costs, net 3,791 3,058
Intangible assets, net 12,003 12,768
Other assets 3,139 3,017
-------- --------
$196,724 $192,264
======== ========
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,776 $ 288
Accounts payable and accrued expenses 22,398 23,284
Unearned revenue 4,451 4,294
Deferred revenue 15,513 14,372
Deferred income taxes 2,621 1,775
-------- --------
Total current liabilities 46,759 44,013
Long-term debt, less current maturities 1,710 462
Deferred revenue, less current portion 9,641 9,441
Other liabilities 970 942
Deferred income taxes 5,965 5,965
STOCKHOLDERS' EQUITY:
Common stock 2,077 2,036
Additional paid-in capital 128,899 127,578
Retained earnings 1,599 2,588
Cumulative translation adjustment (407) (255)
Unrealized (gain) loss on investments 13 (4)
Treasury stock, at cost (502) (502)
-------- --------
Total Stockholders' Equity 131,679 131,441
-------- --------
$196,724 $192,264
======== ========
3
<PAGE> 4
ASPEN TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
THREE MONTHS ENDED
9/30/97 9/30/96
------- -------
REVENUES:
Software licenses $21,783 $16,131
Services and other 22,504 18,737
------- -------
44,287 34,868
------- -------
EXPENSES:
Cost of software licenses 1,263 816
Cost of services and other 13,169 11,129
Selling and marketing 14,345 11,286
Research and development 9,431 6,964
General and administrative 4,163 3,721
Costs related to acquisitions 509 -
------- -------
Total costs and expenses 42,880 33,916
Income from operations 1,407 952
Other expense, net (67) (22)
Interest income, net 1,379 1,345
------- -------
Income before provision for
income taxes 2,719 2,275
Provision for income taxes 979 865
------- -------
NET INCOME $ 1,740 $ 1,410
======= =======
Net income per common and
common equivalent share $ 0.08 $ 0.07
======= =======
Weighted average number of common and
common equivalent shares outstanding 21,637 20,614
======= =======
4
<PAGE> 5
ASPEN TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
9/30/97 9/30/96
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,741 $ 1,410
Adjustments to reconcile net income to net cash provided by (used in)
operating activities (net of acquisition related activity disclosed below):
Depreciation and amortization 2,831 2,288
Deferred income taxes 846 -
Decrease (increase) in accounts receivable 15 (1,508)
(Increase) decrease in installments receivable (2,142) 1,902
Increase in prepaid expenses
and other current assets (679) (82)
Decrease in accounts payable
and accrued expenses (3,506) (2,640)
Increase (decrease) in unearned revenue 575 (4,658)
Increase in deferred revenue 369 2,380
------- -------
Net cash provided by (used in) operating activities 51 (908)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (4,331) (4,038)
Sale of investment securities 965 8,992
Increase in other long-term assets (99) (200)
Increase in computer software development costs (901) (305)
Increase (decrease) in other long-term liabilities 28 (366)
Cash used in the purchase of business, net of cash acquired (591) -
------- -------
Net cash provided by (used in) investing activities (4,929) 4,083
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock purchase plans - 381
Exercise of stock options 887 629
Proceeds from (payments of) long-term debt and capital lease obligations 774 (161)
------- -------
Net cash provided by financing activities 1,661 849
------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (153) 21
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,370) 4,045
CASH AND CASH EQUIVALENTS, beginning of period 16,091 9,005
------- -------
CASH AND CASH EQUIVALENTS, end of period $12,721 $13,050
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During the three months ended September 30, 1997, the Company
acquired certain companies in pooling-of-interests
transactions as described in Note 4
These acquisitions are summarized as follows-
Book value of assets acquired, excluding cash $ 3,717 $ -
Liabilities assumed 5,136 -
Book value of equity (1,419) -
------- -------
$ 3,717 $ -
======= =======
</TABLE>
5
<PAGE> 6
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated condensed
financial statements have been prepared in conformity with generally
accepted accounting principles and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation.
The results of operations for the three month period ended September 30,
1997 are not necessarily indicative of the results to be expected for
the full year. It is suggested that these interim consolidated condensed
financial statements be read in conjunction with the audited
consolidated financial statements for the year ended June 30, 1997,
which are contained in the Company's Form 10-K, as previously filed with
the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue from software licenses upon the shipment
of its products, pursuant to a signed noncancelable license agreement.
In the case of license renewals, revenue is recognized upon execution of
the renewal license agreement. The Company has no significant vendor
obligations or collectibility risk associated with its product sales.
The Company recognizes revenue from postcontract customer support
ratably over the period of the postcontract arrangement. The Company
accounts for insignificant vendor obligations by deferring a portion of
the revenue and recognizing it either ratably as the obligations are
fulfilled or when the related services are performed. If significant
application development services are performed in connection with the
purchase of a license, the license fees are recognized as the
application development services are performed.
Service revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs
(primarily labor) incurred to date as compared to the estimated total
costs (primarily labor) for each contract. When a loss is anticipated on
a contract, the full amount thereof is provided currently. Service
revenues from time and expense contracts and consulting and training
revenue are recognized as the related services are performed.
6
<PAGE> 7
Services that have been performed but for which billings have not been
made are recorded as unbilled services, and billings that have been
recorded before the services have been performed are recorded as
unearned revenue in the accompanying consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term license agreements that
provide for payment in installments over a one- to five-year period. A
portion of the revenue from each installment agreement is recognized as
interest income in the accompanying consolidated condensed statements of
income loss. The interest rates in effect for the three months ended
September 30, 1996 was 11% and for the three months ended September 30,
1997 was 8.5%.
(b) Computer Software Development Costs
In compliance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", certain computer software development
costs are capitalized in the accompanying consolidated condensed balance
sheets. Capitalization of computer software development costs begins
upon the establishment of technological feasibility and ends upon market
introduction. Amortization of capitalized computer software development
costs is included in cost of revenues and is provided on a
product-by-product basis at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues or (b) the straight-line
method over the remaining estimated economic life of the product, not to
exceed three years. Total amortization expense charged to operations in
the three month period ended September 30, 1997 was $168,000 as compared
to $203,000 for the three month period ended September 30, 1996.
(c) Net Income Per Share
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during each period. Fully diluted earnings per common share
are not presented as they are not materially different from primary
earnings per share. Dilutive common equivalent shares consist of stock
options and stock warrants (using the treasury stock method).
7
<PAGE> 8
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). This Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly
traded common stock or potential common stock. SFAS 128 is effective for
financial statements for both interim and annual periods ending after
December 15, 1997 and early adoption is not permitted. When adopted, the
statement will require restatement of prior years' earnings per share.
The Company will adopt this statement for its quarter ended December 31,
1997. Assuming that SFAS 128 had been implemented, basic income per
share would have been $0.09 and $0.07 for the three month periods ended
September 30, 1997 and September 30, 1996, respectively. Under this
Statement, diluted income per share would not have differed from the net
income per share disclosed on the accompanying statement of income.
(d) Investments
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Under SFAS No. 115, securities purchased to be
held for indefinite periods of time, and not intended at the time of
purchase to be held until maturity, are classified as available-for-sale
securities. Securities classified as available-for-sale are required to
be recorded at market value in the financial statements. Unrealized
gains and losses have been accounted for as a separate component of
stockholders' equity. Investments held as of September 30, 1997 consist
of $2,351,000 in money market accounts and $12,544,000 in municipal
bonds.
3. SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for approximately $9.5 million
during the three month period ended September 30, 1997. The financial
institutions have partial recourse to the Company only upon non-payment
by the customer under the installments receivable. The amount of
recourse is determined pursuant to the provisions of the Company's
contracts with the financial institutions and varies depending upon
whether the customers under the installment contracts are foreign or
domestic entities. Collections of these receivables reduce the Company's
recourse obligations, as defined.
At September 30, 1997, the balance of the uncollected principal portion
of all contracts sold was $74.2 million. The Company's potential
recourse obligation related to these contracts is approximately $6.5
million. In addition, the Company is obligated to pay additional costs
to the financial institutions in the event of default by the customer.
8
<PAGE> 9
4. ACQUISITIONS
(a) Special Analysis and Simulation Technologies ("SAST")
On August 28, 1997, the Company acquired 100% of the outstanding shares
of common stock of SAST, a global leader in dynamic simulation and
operator training services and applications. The Company exchanged
288,330 shares of its common stock valued at approximately $10.2 million
and paid approximately $841,000 in cash for all outstanding shares of
SAST common stock. The acquisition has been accounted for as a pooling
of interests. This transaction is immaterial to the Company's financial
position and results of operations, and accordingly the historical
financial statements have not been restated.
(b) NeuralWare, Inc.
On August 27, 1997 the Company acquired 100% of the outstanding shares
of common stock of NeuralWare, Inc., a leading provider of neural net
technology. The Company exchanged 26,502 shares of its common stock for
all outstanding shares of NeuralWare, Inc. common stock. The acquisition
has been accounted for as a pooling of interests. This transaction is
immaterial to the Company's financial position and results of operation,
and accordingly the historical financial statements have not been
restated.
5. SHAREHOLDERS RIGHTS PLAN
On October 9, 1997, the Board of Directors voted to adopt a Shareholders
Rights Plan (the Plan). The Plan gives certain shareholders the right to
purchase additional share, at a specified price, under certain
circumstances.
9
<PAGE> 10
ASPEN TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
RESULTS OF OPERATIONS
Revenues are derived from software licenses and maintenance and other services.
Total revenues for the three months ended September 30, 1997 was $44.3 million,
an increase of 27.0% from $34.9 million in the comparable period of fiscal 1997.
Software license revenues represented 49.2% of total revenues for the three
months ended September 30, 1997, as compared to 46.3% in the comparable period
of fiscal 1997. Revenues from software licenses for the three months ended
September 30, 1997 was $21.8 million, an increase of 35.0% from $16.1 million in
the comparable period of fiscal 1997. The growth in software license revenues
was attributable to software license renewals covering existing users, the
expansion of existing customer relationships through licenses covering
additional users, additional software products, and, to a lesser extent, to the
addition of new customers.
Total revenues from customers outside the United States were $20.7 million or
46.8% of total revenues for the three months ended September 30, 1997, as
compared to $21.0 million or 60.3% of total revenues for the comparable period
in fiscal year 1997. The geographical mix of license revenues can vary from
quarter to quarter; however for fiscal year 1998, the overall mix of revenues
from customers outside the United States is expected to be relatively consistent
with the prior year.
Revenues from services and other consist of consulting services, post contract
support on software licenses, training and sales of documentation. Since the
acquisitions of DMCC and Setpoint (January and February 1996), the Company has
continued to generate a significant amount of consulting revenues form services
for the analysis, design, and automation of process engineering plants. As a
result, revenues from services and other for the three months ended September
30, 1997 was $22.5 million, an increase of 20.1% from $18.7 million in the
comparable period in fiscal 1997. This increase reflects a continued focus
during fiscal year 1998 on providing high value added consulting and training
services to existing customers.
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.
10
<PAGE> 11
Cost of software licenses consists of royalties, amortization of previously
capitalized software costs, costs related to the delivery of software (including
disk duplication and third party software costs), printing of manuals and
packaging. Cost of software licenses for the three months ended September 30,
1997 was $1.3 million, an increase of 54.8% from $0.8 million in the comparable
period of fiscal 1997. Cost of software licenses as a percentage of revenues
from software licenses was 5.8% for the three months ended September 30, 1997 as
compared to 5.1% for the three months ended September 30, 1996. The increase in
costs is primarily due to the increase in software license revenues. These costs
have increased slightly as a percentage of revenues due to the generation of a
greater portion of sales which have third party costs.
Cost of services and other consists of the cost of execution of application
consulting services, technical support expenses, the cost of training services
and the cost of manuals sold separately. Cost of maintenance and other services
for the three months ended September 30, 1997 was $13.2 million, an increase of
18.3% from $11.1 million in the comparable period in fiscal year 1997. Cost of
services and other as a percentage of services revenue was 58.5% in the three
months ended September 30, 1997 and 59.4% in the comparable period of fiscal
year 1997. This percentage decrease reflected improved efficiency in the
execution of the implementation services projects.
Selling and marketing expenses for the three months ended September 30, 1997
were $14.3 million, an increase of 27.1% from $11.3 million in the comparable
period in fiscal year 1997. As a percentage of revenues, selling and marketing
expenses were 32.4% for the three months ended September 30, 1997 and September
30, 1996. The Company continues to invest in sales personnel and regional sales
offices to improve the Company's geographic proximity to its customers, to
maximize the penetration of existing accounts and to add new customers.
Research and development expenses consist primarily of personnel and outside
consultancy costs required to conduct the Company's product development efforts.
Capitalized research and development costs are amortized over three years.
Research and development expenses during the three months ended September 30,
1997 were $9.4 million, an increase of 35.4% from $7.0 million in the comparable
period of fiscal 1997. The increase in costs reflects continued investment in
the development of the Company's core modeling products and a common software
architecture encompassing the Company's expanded family of software products.
The Company capitalized 8.7% of its total research and development costs during
the three months ended September 30, 1997 as compared to 5.6% in the comparable
period of fiscal year 1997.
General and administrative expenses consist primarily of salaries of
administrative, executive, financial and legal personnel, outside professional
fees, and amortization of certain intangibles. General and administrative
expenses for the three months ended September 30, 1997 were $4.2 million, an
increase of 11.9% from $3.7 million in the comparable period of fiscal year
1997. The dollar increase principally reflected the growth in the scale and
scope of the Company's operations.
11
<PAGE> 12
Interest income is generated from the sale of software pursuant to installment
contracts for off-line modeling software and the investment of excess cash in
short-term and long-term investments. Under these contracts, the Company offers
customers the option to make annual payments for its term licenses instead of a
single license fee payment at the beginning of the license term. A substantial
majority of the off-line modeling customers elect to license these products
through installment contracts. The Company believes this election is made
principally because the customers prefer to pay for the Company's off-line
modeling products out of their operating budgets, rather than out of their
capital budgets. Included in the annual payments is an implicit interest charge
based upon the interest rate established by the Company at the time of the
license. The Company sells a portion of the installment contracts to unrelated
financial institutions. The interest earned by the Company on the installment
contract portfolio in any one year is the result of the implicit interest
established by the Company on installment contracts and the size of the contract
portfolio. Interest income was $1.4 million for the three months ended September
30, 1997 and 1996.
Interest expense is generated from interest charged on the Company's bank line
of credit, subordinated notes payable and capital lease obligations. Interest
expense for the three months ended September 30, 1997 was $0.07 million as
compared to $0.02 million in the comparable period of fiscal year 1997.
The effective tax rate decreased for the three months ended September 30, 1997
to 36.0% of pretax income from 38.0% for the comparable period of fiscal year
1997. This decrease is primarily due to utilization of various tax credits and
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1997, the Company's cash and cash
equivalents balance decreased by $3.4 million. Operations provided $0.05 million
of cash during this period primarily related to net income offset in part by
increases in installments receivable and decreases in accounts payable and
accrued expenses.
In recent years, the Company has had arrangements to sell long-term contracts to
two financial institutions, General Electric Capital Corporation ("GECC") and
Sanwa Business Credit Corporation (SBCC"). During the three months ended
September 30, 1997, installment contracts increased to $52.2 million, net of
$9.5 million of installment contracts sold to GECC and SBCC. The Company's
arrangements with the two financial institutions provide for the sale of
installment contracts up to certain limits and with certain recourse
obligations. At September 30, 1997, the balance of the uncollected principal
portion of the contracts sold to these two financial institutions was $74.2
million, for which the Company has a partial recourse obligation of
approximately $6.5 million. The availability under these arrangements will
increase as the financial institutions receive payment on installment contracts
previously sold.
12
<PAGE> 13
The Company maintains a $30.0 million bank line of credit, expiring December 31,
1998, that provides for borrowings of specified percentages of eligible accounts
receivable and eligible current installment contracts. Advances under the line
of credit bear interest at a rate equal to the bank's prime rate (8.5% at
September 30, 1997) plus a specified margin or, at the Company's option, a rate
equal to a defined LIBOR (5.7% at September 30, 1997) plus a specified margin.
The line of credit agreement requires the Company to provide the bank with
certain periodic financial reports and to comply with certain financial tests,
including maintenance of minimum levels of consolidated net income before taxes
and of the ratio of current assets to current liabilities.
13
<PAGE> 14
ASPEN TECHNOLOGY, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material proceedings.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 9, 1997.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASPEN TECHNOLOGY, INC.
Date: November 14, 1997 by: /s/ Mary A. Palermo
--------------------------
Mary A. Palermo
Executive Vice President
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 INCLUDED IN THE COMPANY'S
FORM 10-K FOR SUCH PERIOD AND THE CONDENSED FINANCIAL STATEMENTS AS OF SEPTEMBER
30, 1997 INCLUDED IN THE COMPANY'S FORM 10-Q FOR SUCH PERIOD AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 12,721
<SECURITIES> 14,895
<RECEIVABLES> 57,887
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,213
<PP&E> 54,247
<DEPRECIATION> (22,363)
<TOTAL-ASSETS> 196,724
<CURRENT-LIABILITIES> 46,759
<BONDS> 0
0
0
<COMMON> 2,077
<OTHER-SE> 129,602
<TOTAL-LIABILITY-AND-EQUITY> 196,724
<SALES> 21,783
<TOTAL-REVENUES> 44,287
<CGS> 1,263
<TOTAL-COSTS> 14,432
<OTHER-EXPENSES> 9,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,719
<INCOME-TAX> 979
<INCOME-CONTINUING> 1,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,740
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
