<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-24786
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2739697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
TEN CANAL PARK, CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive office and zip code)
(617) 949-1000
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant: (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
As of October 31, 2000, there were 29,714,274 shares of the Registrant's
common stock (par value $.10 per share) outstanding.
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<PAGE> 2
ASPEN TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30,
2000 (unaudited) and June 30, 2000.......................... 3
Consolidated Condensed Statements of Operations for the
Three Month Periods Ended September 30, 2000 and 1999
(unaudited)................................................. 4
Consolidated Condensed Statements of Cash Flows for the
Three Month Periods Ended September 30, 2000 and 1999
(unaudited)................................................. 5
Notes to Consolidated Condensed Financial Statements
(unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Market Risk Disclosures........ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 5. Other Information...........................................
Item 6. Exhibits and Reports on Form 8-K............................ 24
SIGNATURES............................................................... 26
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ASPEN TECHNOLOGY, INC
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 44,225 $ 49,371
Short-term investments.................................... 62,250 64,161
Accounts receivable, net.................................. 78,225 81,781
Unbilled services......................................... 22,760 21,894
Current portion of long-term installments receivable,
net.................................................... 27,879 24,873
Deferred tax asset........................................ 3,300 3,300
Prepaid expenses and other current assets................. 18,562 16,175
-------- --------
Total current assets.............................. 257,201 261,555
-------- --------
Long-term installments receivable, net...................... 33,346 28,301
-------- --------
Property and leasehold improvements, at cost................ 98,368 92,343
Accumulated depreciation.................................... (59,133) (56,250)
-------- --------
39,235 36,093
-------- --------
Computer software development costs, net.................... 7,372 7,026
Intangible assets, net...................................... 22,907 8,856
Deferred tax asset.......................................... 3,775 10,130
Other assets................................................ 12,996 12,984
-------- --------
$376,832 $364,945
======== ========
Current Liabilities:
Current portion of long-term debt......................... $ 2,898 $ 1,327
Accounts payable and accrued expenses..................... 45,862 53,392
Unearned revenue.......................................... 15,038 13,903
Deferred revenue.......................................... 23,761 23,553
-------- --------
Total current liabilities......................... 87,559 92,175
-------- --------
Long-term debt, less current maturities..................... 2,246 1,923
5 1/4% Convertible subordinated debentures.................. 86,250 86,250
Deferred revenue, less current portion...................... 13,954 14,374
Other liabilities........................................... 1,063 1,025
Stockholders' Equity:
Common stock.............................................. 2,988 2,906
Additional paid-in capital................................ 193,930 173,591
Accumulated deficit....................................... (7,437) (3,752)
Accumulated other comprehensive loss...................... (3,219) (3,045)
Treasury stock, at cost................................... (502) (502)
-------- --------
Total stockholders' equity........................ 185,760 169,198
-------- --------
$376,832 $364,945
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ASPEN TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Software licenses........................................... $32,582 $21,507
Service and other........................................... 36,906 31,845
------- -------
Total revenues.................................... 69,488 53,352
------- -------
Cost of software licenses................................... 2,565 2,076
Cost of service and other................................... 22,320 20,138
Selling and marketing....................................... 24,718 19,328
Research and development.................................... 14,992 11,722
General and administrative.................................. 6,565 5,568
Charge for in-process research and development.............. 5,000 --
------- -------
Total costs and expenses.......................... 76,160 58,832
Loss from operations........................................ (6,672) (5,480)
Other (expense) income, net................................. (134) 50
Interest income, net........................................ 1,541 981
------- -------
Loss before benefit from income taxes....................... (5,265) (4,449)
Benefit from income taxes................................... (1,580) (1,379)
------- -------
Net loss.......................................... $(3,685) $(3,070)
======= =======
Basic and diluted loss per share............................ $ (0.13) $ (0.11)
======= =======
Basic and diluted weighted average shares outstanding....... 29,181 27,789
======= =======
</TABLE>
The accompanying notes are an integral component of these financial statements.
4
<PAGE> 5
ASPEN TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS.................................................. $ (3,685) $(3,070)
Adjustments to reconcile net loss to net cash provided by
operating activities (net of acquisition-related
activity disclosed below):
Depreciation and amortization.......................... 4,898 4,387
Charge for in-process research and development......... 5,000 --
Deferred income taxes.................................. 514 --
Decrease in accounts receivable........................ 3,891 13,792
Increase in unbilled services.......................... (1,132) (1,978)
Decrease (increase) in installments receivable......... 4,702 (3,165)
(Increase) decrease in prepaid expenses and other
current assets........................................ (2,324) 713
Decrease in accounts payable and accrued expenses...... (8,750) (3,145)
Increase in unearned revenue........................... 577 1,557
Decrease in deferred revenue........................... (3,667) (2,201)
-------- -------
Net cash provided by operating activities................. 24 6,890
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements........... (4,739) (1,353)
Sale (purchase) of investment securities.................. 2,241 (4,999)
Decrease (increase) in other long-term assets............. 226 (70)
Increase in computer software development costs........... (1,184) (717)
Decrease in other long-term liabilities................... (247) (112)
Cash used in the purchase of business, net of cash
acquired............................................... (8,969) --
-------- -------
Net cash used in investing activities..................... (12,672) (7,251)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock purchase
plans.................................................. 2,118 1,998
Exercise of stock options................................. 5,867 97
Payments of long-term debt and capital lease
obligations............................................ (377) (1,603)
-------- -------
Net cash provided by financing activities................. 7,608 492
-------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH.................... (106) (79)
-------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (5,146) 52
CASH AND CASH EQUIVALENTS, beginning of period.............. 49,371 34,039
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 44,225 $34,091
======== =======
During the three months ended September 30, 2000, the
Company acquired a company in a purchase transaction.
This acquisition is summarized as follows-
Fair value of assets acquired, excluding cash.......... $ 22,857
Payments in connection with the acquisitions, net of
cash acquired......................................... (8,969)
--------
Liabilities assumed............................... $ 13,888
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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, 2000 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, 2000, 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
Effective July 1, 1998, the Company adopted Statement of Position (SOP) No.
97-2, "Software Revenue Recognition." SOP 97-2 was issued by the American
Institute of Certified Public Accountants in October 1997 in order to provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The adoption of SOP 97-2 did not have a
material impact on the Company's financial position, results of operations or
cash flows. License revenue, including license renewals, consists principally of
revenue earned under fixed-term and perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or determinable, and
vendor-specific objective evidence exists for all undelivered elements to allow
allocation of the total fee to all delivered and undelivered elements of the
arrangement. Revenues under such arrangements, which may include several
different software products and services sold together, are allocated to each
element based on the residual method in accordance with SOP 98-9, "Software
Revenue Recognition, with Respect to Certain Transactions." Under the residual
method, the fair value of the undelivered elements is deferred and subsequently
recognized when earned. The Company has established sufficient vendor specific
objective evidence for professional services, training and maintenance and
support services. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with professional
services, training and maintenance and support services. The Company uses
installment contracts as a standard business practice and has a history of
successfully collecting under the original payment terms without making
concessions on payments, products or services.
Service revenues from fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of costs (primarily
labor) incurred to date as compared to the estimated total costs (primarily
labor) for each contract. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Service revenues from time and expense
contracts and consulting and training revenue are recognized as the related
services are performed. Services that have been performed but for which billings
have not been made are recorded as unbilled services, and billings that have
been recorded before the services have been performed are recorded as unearned
revenue in the accompanying consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term and perpetual license agreements
that provide for payment in installments over a one- to five-year period. A
portion of each installment agreement is recognized as interest income in the
accompanying consolidated condensed statements of operations. The interest rate
utilized for the three month periods ended September 30, 2000 and 1999 was 9.0%
and 8.5%, respectively. At September 30, 2000, the Company had long term
installments receivable of approximately $5.0 million denominated in foreign
currencies. The September 2000 foreign installments receivable mature through
October 2004 and have been hedged with specific foreign currency contracts.
There have been no material gains or losses recorded relating to hedge
6
<PAGE> 7
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
contracts for the periods presented. The Company does not use derivative
financial instruments for speculative or trading purposes.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. SAB 101, as amended by SAB 101A
and SAB 101B, is required to be implemented no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company does not
expect that any impact of adoption will be material.
(b) Computer Software Development Costs
Certain computer software development costs are capitalized in the
accompanying consolidated condensed balance sheets. Capitalization of computer
software development costs begins upon the establishment of technological
feasibility. Amortization of capitalized computer software development costs is
included in cost of revenues and is provided on a product-by-product basis using
the straight-line method, beginning upon commercial release of the product and
continuing over the remaining estimated economic life of the product, not to
exceed three years. Total amortization expense charged to operations in each of
the three month periods ending September 30, 2000 and 1999 was approximately
$0.8 million.
(c) Net Income (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share reflect the dilution of potentially dilutive
securities, primarily stock options, based on the treasury stock method.
The following dilutive effect of potential common shares were excluded from
the calculation of diluted weighted average shares outstanding as their effect
would be anti-dilutive (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Options and Warrants...................................... 3,521 412
Convertible Debt.......................................... 410 401
----- ---
Total........................................... 3,931 813
===== ===
</TABLE>
(d) Investments
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 and accumulated other comprehensive loss. Realized
investment gains and losses were not material in the three month periods ending
September 30, 2000 and 1999, respectively. Investments held as of September 30,
2000 consist of $50.3 million in U.S. Corporate Bonds, $5.0 million in U.S.
Government Bonds and $7.0 million in Certificates of Deposit. The Company does
not use derivative financial instruments in its investment portfolio.
(e) Derivative Instruments and Hedging
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires
7
<PAGE> 8
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
that all derivatives, including foreign currency exchange contracts, be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be recorded at fair value through earnings. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is to be immediately
recognized in earnings. The adoption of SFAS No. 133 resulted in an immaterial
cumulative effect on income and other comprehensive income for the Company.
Forward foreign exchange contracts are used primarily by the Company to
hedge certain balance sheet exposures resulting from changes in foreign currency
exchange rates. Such exposures primarily result from portions of the Company's
assets that are denominated in currencies other than the U.S. dollar, primarily
the Japanese Yen and certain European currencies. These foreign exchange
contracts are entered into to hedge recorded installments receivable made in the
normal course of business, and accordingly, are not speculative in nature. As
part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, the Company hedges the majority of
its installments receivable denominated in foreign currencies. At September 30,
2000, the Company had effectively hedged $8.4 million of installments receivable
denominated in foreign currency. The Company does not hold or transact in
financial instruments for purposes other than risk management.
The Company records its foreign currency exchange contracts at fair value
in its consolidated balance sheet and the related gains or losses on these hedge
contracts are recognized in earnings. Gains and losses resulting from the impact
of currency exchange rate movements on forward foreign exchange contracts are
designated to offset certain accounts receivable and are recognized as other
income or expense in the period in which the exchange rates change and offset
the foreign currency losses and gains on the underlying exposures being hedged.
A small portion of the forward foreign currency exchange contract is designated
to hedge the future interest income of the related receivables. The gains and
losses resulting from the impact of currency rate movements on forward currency
exchange contracts are recognized in other comprehensive income for this portion
of the hedge.
The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of September 30, 2000.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated condensed financial statements. The table presents the
notional amount (at contract exchange rates) and the weighted average
contractual foreign currency rates (in thousands, except average contract
rates):
<TABLE>
<CAPTION>
NOTIONAL AVERAGE
AMOUNT CONTRACT RATE
-------- -------------
<S> <C> <C>
Japanese Yen........................................... $ 3,578 107.71
British Pound Sterling................................. 3,110 1.52
German Deutsche Mark................................... 644 1.70
French Franc........................................... 574 6.21
Swiss Franc............................................ 461 1.52
Netherlands Guilder.................................... 28 2.40
-------
$ 8,395
=======
Estimated fair value................................... 8,390*
</TABLE>
---------------
* The estimated fair value is based on the estimated amount at which the
contracts could be settled based on forward exchange rates as of September 30,
2000. The market risk associated with these instruments
8
<PAGE> 9
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
resulting from currency exchange rate movements is expected to offset the
market risk of the underlying installments being hedged. The credit risk is
that the Company's banking counterparties may be unable to meet the terms of
the agreements. The Company minimizes such risk by limiting its counterparties
to major financial institutions. In addition, the potential risk of loss with
any one party resulting from this type of credit risk is monitored. Management
does not expect any loss as a result of default by other parties. However,
there can be no assurances that the Company will be able to mitigate market
and credit risks described above.
3. SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for approximately $11.4 million during
the three-month period ended September 30, 2000. 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, 2000, the balance of the uncollected principal portion of all
contracts sold was $104.4 million. The Company's potential recourse obligation
related to these contracts is approximately $4.8 million. In addition, the
Company is obligated to pay additional costs to the financial institutions in
the event of default by the customer.
4. ACQUISITION
On August 29, 2000, the Company acquired ICARUS Corporation and ICARUS
Services Limited (together, ICARUS), a market leader in providing software that
is used by process manufacturing industries to estimate plant capital costs and
evaluate project economics. The Company acquired 100% of the outstanding shares
and options to purchase shares of ICARUS for a purchase price of approximately
$24.9 million. This acquisition was accounted for as a purchase, and
accordingly, the results of operations from the date of acquisition are included
in the Company's consolidated statements of operations commencing as of the
acquisition date. The fair market value of assets acquired and liabilities
assumed was based on independent appraisal. The portion of the purchase price
allocated to in-process research and development represents projects that had
not yet reached technological feasibility and had no alternative future use. Pro
forma information related to this acquisition is not presented as it is not
material. The purchase price was allocated to the fair market value of assets
acquired and liabilities assumed, as follows (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT LIFE
----------- ------- -------
<S> <C> <C>
Purchased in-process research and development............. $ 5,000 --
Acquired technology....................................... 9,590 6 years
Goodwill.................................................. 5,103 6 years
Other intangibles......................................... 401 2 years
-------
20,094
Net book value of tangible assets acquired, less
liabilities assumed..................................... 7,557
-------
27,651
Less-Deferred taxes....................................... 2,701
-------
$24,950
=======
</TABLE>
9
<PAGE> 10
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Allocation of the purchase price for this acquisition was based on an
estimate of the fair value of the net assets acquired and is subject to
adjustment based on the finalization of the purchase price allocation.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The components of comprehensive income
(loss) for the three months ended September 30, 2000 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income (loss)........................................ $(3,685) $(3,070)
Unrealized gain (loss) on investments.................... 330 (18)
Foreign currency adjustment.............................. (532) 726
Foreign currency exchange contract hedge................. 28 --
------- -------
Comprehensive income (loss)............................ $(3,859) $(2,362)
======= =======
</TABLE>
6. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1999, the Company undertook certain actions
to restructure its business. The restructuring resulted from a lower than
expected level of license revenues which adversely affected fiscal year 1999
operating results. The license revenue shortfall resulted primarily from delayed
decision making driven by economic difficulties among customers in certain of
our core vertical markets. The restructuring plan resulted in a pre-tax
restructuring charge totaling $17.9 million. The following discusses the
components of the restructuring and other charges.
Close-down/consolidation of facilities: Approximately $10.2 million of the
restructuring charge relates to the termination of facility leases and other
lease-related costs. The facility leases have remaining terms ranging from one
month to six years. The amount accrued reflects the Company's best estimate of
actual costs to buy out the leases in certain cases or the net cost to sublease
the properties in other cases. Included in this amount is the write off of
certain assets, primarily building and leasehold improvements and adjustments to
certain obligations that relate to the closing of facilities. Employee
Severance, Benefits and Related Costs: Approximately $4.3 million of the
restructuring charge relates to the reduction in workforce.
As of September 30, 2000, there was approximately $3.2 million remaining in
the accrued expenses relating to the restructuring. Substantially all of this
amount relates to the close-down/consolidation of facilities.
7. SEGMENT INFORMATION
SFAS No. 131 established standards for reporting information about
operating segments in the Company's financial statements. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. The Company's chief operating decision maker is
the Chief Executive Officer of the Company.
The Company is organized geographically and by line of business. The
Company has three major lines of business operating segments: license,
consulting services and maintenance and training. The Company also evaluates
certain subsets of business segments by vertical industries as well as by
product categories. While the Executive Management Committee evaluates results
in a number of different ways, the line of business management structure is the
primary basis for which it assesses financial performance and allocates
resources.
10
<PAGE> 11
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The accounting policies of the line of business operating segments are the
same as those described in the Company's Form 10-K for the fiscal year ended
June 30, 2000. The Company does not track assets or capital expenditures by
operating segments. Consequently, it is not practical to show assets, capital
expenditures, depreciation or amortization by operating segments. The following
table presents a summary of operating segments (in thousands):
<TABLE>
<CAPTION>
CONSULTING MAINTENANCE
LICENSE SERVICES AND TRAINING TOTAL
------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000-
Revenues from unaffiliated customers................ $32,582 $24,407 $12,499 $69,488
Controllable expenses............................... 11,565 17,403 3,266 32,234
------- ------- ------- -------
Controllable margin(1).............................. $21,017 $ 7,004 $ 9,233 $37,254
======= ======= ======= =======
Three Months Ended September 30, 1999-
Revenues from unaffiliated customers................ $21,507 $21,036 $10,809 $53,352
Controllable expenses............................... 11,990 15,174 2,198 29,362
------- ------- ------- -------
Controllable margin(1).............................. $ 9,517 $ 5,862 $ 8,611 $23,990
======= ======= ======= =======
</TABLE>
---------------
(1) The Controllable Margins reported reflect only the expenses of the line of
business and do not represent the actual margins for each operating segment
since they do not contain an allocation for selling and marketing, general
and administrative, development and other corporate expenses incurred in
support of the line of business.
Profit Reconciliation (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDING
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Total controllable margin for reportable segments........... $ 37,254 $ 23,990
Selling and marketing....................................... (20,924) (14,531)
Research and development.................................... (1,624) (75)
General and administrative and overhead..................... (16,378) (14,864)
Charge for in-process research and development.............. (5,000) --
Interest and other income and expense, net.................. 1,407 1,031
-------- --------
Loss before benefit from income taxes....................... $ (5,265) $ (4,449)
======== ========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY
REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JUNE 30, 2000. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS
THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK" AND
ELSEWHERE IN THIS QUARTERLY REPORT.
RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
We acquired ICARUS in the first quarter of fiscal 2001 and acquired M2R in
the fourth quarter of fiscal 2000. Both of these acquisitions were accounted for
as purchase transactions. We have subsequently taken steps to integrate the
operations and reorganize our operations and our new subsidiaries. As a result
of these acquisitions, our operating results for the three month periods ended
September 30, 2000 and 1999 are not comparable.
Total Revenues
Revenues are derived from software licenses and maintenance and other
services. Total revenues for the three months ended September 30, 2000 were
$69.5 million, an increase of 30.2% from $53.4 million in the comparable period
of fiscal 2000.
Total revenues from customers outside the United States were $28.6 million
or 41.2% of total revenues for the three months ended September 30, 2000, as
compared to $22.9 million or 42.9% of total revenues for the comparable period
in fiscal 2000. The geographical mix of license revenues can vary from quarter
to quarter; however, for fiscal 2001, the overall mix of revenues from customers
outside the United States is expected to be relatively consistent with the prior
year.
Software License Revenues
Software license revenues represented 46.9% of total revenues for the three
months ended September 30, 2000, as compared to 40.3% in the comparable period
of fiscal 2000. Revenues from software licenses for the three months ended
September 30, 2000 were $32.6 million, an increase of 51.5% from $21.5 million
in the comparable period of fiscal 2000. This percentage increase was primarily
attributable to an increased penetration in the market as well as increased
sales of our eSupply Chain suite of products.
Service and Other Revenues
Revenues from service and other consist of consulting services, post
contract support on software licenses, training and sales of documentation.
Revenues from service and other for the three months ended September 30, 2000
were $36.9 million, an increase of 15.9% from $31.8 million in the comparable
period in fiscal 2000. This increase reflects a continued demand for our
services implementation expertise, as well as higher levels of software
maintenance revenues attributable to the relatively higher fiscal 2000 license
revenues.
Cost of Software Licenses
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,
2000 was
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$2.6 million, an increase of 23.6% from $2.1 million in the comparable period of
fiscal 2000. Cost of software licenses as a percentage of revenues from software
licenses was 7.9% for the three months ended September 30, 2000 as compared to
9.7% for the three months ended September 30, 1999. The percentage decrease was
due primarily to the higher revenue base.
Cost of Service and Other
Cost of service and other consists of the cost of execution of application
consulting services, technical support expenses, the cost of training services
and the cost of manuals sold separately. Cost of service and other for the three
months ended September 30, 2000 was $22.3 million, an increase of 10.8% from
$20.1 million in the comparable period in fiscal year 2000. Cost of service and
other as a percentage of service and other revenues was 60.5% in the three
months ended September 30, 2000 and 63.2% in the comparable period of fiscal
year 2000. This percentage decrease was primarily a result of increased revenue
per hour and improved utilization rates of billable engineers in the three
months ended September 30, 2000, as well as software maintenance revenues which
increased at a rate higher than the costs required to support the higher revenue
base.
Selling and Marketing Expenses
Selling and marketing expenses for the three months ended September 30,
2000 were $24.7 million, an increase of 27.9% from $19.3 million in the
comparable period in fiscal year 2000. As a percentage of total revenues,
selling and marketing expenses were 35.6% for the three months ended September
30, 2000, as compared to 36.2% for the comparable period in fiscal 2000. The
dollar increase was attributable to an expense base that increased to support a
higher license revenue level. We continue to selectively invest in sales
personnel and regional sales offices to improve our geographic proximity to our
customers, to maximize the penetration of existing accounts and to add new
customers. The increase in costs also was attributable to our continued
investment in partnerships, the addition of costs relating to ICARUS and M2R,
and initiatives to expand market awareness of our company and our products and
services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
outside consultancy costs required to conduct our product development efforts.
Capitalized research and development costs are amortized over the estimated
remaining economic life of the relevant product, not to exceed three years.
Research and development expenses during the three months ended September 30,
2000 were $15.0 million, an increase of $3.3 million, or 27.9%, from $11.7
million in the comparable period of fiscal 2000. As a percentage of revenues,
research and development costs were 21.6% for the three months ended September
30, 2000, as compared to 22.0% for the same period in fiscal 2000. The increase
in costs was attributable to the roll out of our new net market solutions, the
addition of costs relating to the acquisition of ICARUS, and other internet
initiatives including the majority of the $1.0 million of costs invested in
PetroVantage. We capitalized 7.6% of our total research and development costs
during the three months ended September 30, 2000 as compared to 5.3% in the
comparable period of fiscal year 2000.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries of
administrative, executive, financial and legal personnel, outside professional
fees, and amortization of certain intangibles. General and administrative
expenses were $6.6 million for the three months ended September 30, 2000 and
$5.6 million for the comparable period in fiscal 2000. This increase was due to
the amortization of intangibles related to the ICARUS and M2R acquisitions, the
addition of costs relating to the ICARUS and M2R acquisitions, and the
additional personnel hired to support our growth.
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Charge for In-Process Research and Development
In connection with the acquisition of ICARUS in August 2000, approximately
$5.0 million of the purchase price was allocated to in-process research and
development projects based upon an independent appraisal. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.
At the acquisition date, ICARUS was conducting design, development,
engineering and testing activities associated with the completion of its
next-generation product. This project involved developing a framework that will
unify ICARUS' cost engine technology and user modules into one seamless
architecture. At the acquisition date, the technologies under development ranged
from 15 to 80 percent complete based on engineering man-month data and
technological progress. Anticipated completion dates ranged from 5 to 12 months
at an estimated cost of $0.5 million.
In making the purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects are based on
estimates of cost of sales, operating expenses, and income taxes from such
projects. The rates utilized to discount the net cash flows to their present
value were based on estimated cost of capital calculations. Due to the nature of
the forecast and the risks associated with the projected growth and
profitability of the developmental projects, a discount rate of 25 percent was
considered appropriate for the in-process research and development.
Interest Income
Interest income is generated from the investment of excess cash in
short-term and long-term investments and from the license of software pursuant
to installment contracts for engineering suite software. Under these installment
contracts, we offer 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. Historically, a substantial majority of the engineering suite customers
have elected to license our products through installment contracts. Included in
the annual payments is an implicit interest charge based upon the interest rate
established us at the time of the license. As we sell more perpetual licenses
for eSupply Chain and Plantelligence Solutions, these new sales are being paid
for in forms that are not installment contracts. If the mix of sales moves away
from installment contracts, the interest income in future periods will be
reduced. We sell a portion of the installment contracts to unrelated financial
institutions. The interest earned by us on the installment contract portfolio in
any period is the result of the implicit interest established by us on
installment contracts and the size of the contract portfolio. Interest income
was $2.8 million for the three months ended September 30, 2000 and $2.5 million
for the comparable period in fiscal 2000. This increase was attributable to
increases in our short-term and long-term investments.
Interest Expense
Interest expense is generated from interest charged on our 5 1/4%
convertible debentures, bank line of credit, notes payable and capital lease
obligations. Interest expense was $1.3 million and $1.4 million for the three
months ended September 30, 2000 and $1.4 million for the comparable period in
fiscal 2000.
Tax Rate
The effective tax rate for the three months ended September 30, 2000 was
approximately 30.0% of pretax income (loss), as compared to 31.0% for the
comparable period of fiscal year 2000. This percentage decrease was primarily
due to the generation and utilization of tax credits, including foreign tax
credits.
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LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 2000, our cash and cash
equivalents balance decreased by $5.1 million. This decrease was attributable to
the investments we made in the acquisition of ICARUS and in PetroVantage.
Operations provided and used approximately the same amount of cash during this
period, primarily a result of the decrease in accounts payable, accrued
expenses, deferred revenue and the increase in prepaid expenses offset by the
decrease in installments receivable and accounts receivable and the charge for
in-process research and development for the current fiscal quarter.
We have arrangements to sell long-term contracts to two financial
institutions, General Electric Capital Corporation and Fleet Business Credit
Corporation. During the three months ended September 30, 2000, installment
contracts increased to $61.2 million, net of $11.4 million of installment
contracts sold to the two financial institutions. Our arrangements with these
two financial institutions provide for the sale of installment contracts up to
certain limits and with certain recourse obligations. At September 30, 2000, the
balance of the uncollected principal portion of the contracts sold to these two
financial institutions was $104.4 million, for which we have a partial recourse
obligation of approximately $4.8 million. The availability under these
arrangements will increase as the financial institutions receive payment on
installment contracts previously sold.
We maintain a $30.0 million unsecured bank line of credit, expiring October
26, 2003, 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 (9.50%
at September 30, 2000) or, at our option, a rate equal to a defined LIBOR (6.82%
at September 30, 2000) plus a specified margin. The line of credit agreement
requires us to provide the bank with certain periodic financial reports and to
comply with certain financial tests, including maintenance of minimum levels of
consolidated net worth and of the ratio of cash and cash equivalents, accounts
receivable and current portion of our long term installments receivable to
current liabilities. At September 30, 2000, there were no outstanding borrowings
under the line of credit.
In June 1998, we sold $86.3 million of 5 1/4% convertible subordinated
debentures. The debentures are convertible into shares of our common stock at
any time prior to June 15, 2005, unless previously redeemed or repurchased, at a
conversion price of $52.97 per share, subject to adjustment in certain events.
Interest on the debentures is payable on June 15 and December 15 of each year.
The debentures are redeemable in whole or part at our option at any time on or
after June 15, 2001 at various redemption prices expressed as a percentage of
principal plus accrued interest through the date of redemption.
In the event of a change of control, as defined, each holder of the
debentures may require us to repurchase those debentures, in whole or in part,
for cash or, at our option, for common stock (valued at 95% of the average last
reported sale prices for the 5 trading days immediately preceding the repurchase
date) at a price of 100% of principal amount plus accrued interest to the
repurchase date. The debentures are unsecured obligations and are subordinated
in right of payment to all existing and future senior debt, as defined.
As of September 30, 2000, we had cash and cash-equivalents totalling $44.2
million, as well as short-term investments totalling $62.3 million. Our
commitments as of September 30, 2000 consisted primarily of leases on our
headquarters and other facilities. There were on other material commitments for
capital or other expenditures. We believe our current cash balances,
availability of sales of our installment contracts, availability under our bank
line of credit and cash flows from our operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next
twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE PURCHASING
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. IF ANY
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OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT CASE, THE TRADING PRICE OF
OUR COMMON STOCK COULD FALL, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID
TO BUY OUR COMMON STOCK.
Our Lengthy Sales Cycle Makes It Difficult to Predict Quarterly Revenue Levels
and Operating Results.
Because license fees for our software products are substantial and the
decision to purchase our products typically involves members of our customers'
senior management, the sales process for our solutions is lengthy and can exceed
one year. Accordingly, the timing of our software revenues is difficult to
predict, and the delay of an order could cause our quarterly revenues to fall
substantially below expectations. Moreover, to the extent that we succeed in
shifting customer purchases away from individual software solutions and toward
more costly integrated suites of software and services, our sales cycle may
lengthen, which could increase the likelihood of delays and cause the effect of
a delay to become more pronounced. We have limited experience in forecasting the
timing of sales of our integrated suites of software and services. Delays in
sales could cause significant shortfalls in our revenues and operating results
for any particular period.
Fluctuations in Our Quarterly Revenues, Operating Results and Cash Flow May
Cause the Market Price of Our Common Stock to Fall.
Our revenues, operating results and cash flow have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside of our control, including:
- our customers' purchasing patterns;
- the length of our sales cycle;
- changes in the mix of our license revenues and service revenues;
- the timing of introductions of new solutions and enhancements by us and
our competitors;
- seasonal weakness in the first quarter of each fiscal year, primarily
caused by a slowdown in business in some of our international markets;
- the timing of our investments in new product development;
- changes in our operating expenses; and
- fluctuating economic conditions, particularly as they affect companies
in the chemicals, petrochemicals and petroleum industries.
We ship software products within a short period after receipt of an order
and typically do not have a material backlog of unfilled orders for software
products. Consequently, revenues from software licenses in any quarter are
substantially dependent on orders booked and shipped in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
come from license agreements that have been entered into in the final weeks of
the quarter. Therefore, even a short delay in the consummation of an agreement
may cause our revenues to fall below public expectations for that quarter.
Since our expense levels are based in part on anticipated revenues, we may
be unable to adjust spending quickly enough to compensate for any revenue
shortfall and any revenue shortfall would likely have a disproportionately
adverse effect on our operating results. We expect that these factors will
continue to affect our operating results for the foreseeable future. Because of
the foregoing factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
As a result of lower-than-anticipated license revenues in our fiscal
quarters ended September 30, 1998 and March 31, 1999, our operating results for
each of those quarters were below the expectations of public market analysts and
many investors. In each case, the market price of our common stock declined
substantially upon the announcement of our operating results. If, due to one or
more of the foregoing factors or
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an unanticipated cause, our operating results fail to meet the expectations of
public market analysts and investors in a future quarter, the market price of
our common stock would likely decline.
Because We Derive a Majority of Our Total Revenues from Customers in the
Cyclical Chemicals, Petrochemicals and Petroleum Industries, Our Operating
Results May Suffer if These Industries Experience an Economic Downturn.
We derive a majority of our total revenues from companies in the chemicals,
petrochemicals and petroleum industries. Accordingly, our future success depends
upon the continued demand for manufacturing optimization software and services
by companies in these process manufacturing industries. The chemicals,
petrochemicals and petroleum industries are highly cyclical. In the past,
worldwide economic downturns and pricing pressures experienced by chemical,
petrochemical and petroleum companies have led to consolidations and
reorganizations. These downturns, pricing pressures and restructurings have
caused delays and reductions in capital and operating expenditures by many of
these companies. These delays and reductions have reduced demand for products
and services like ours. A recurrence of these industry patterns, as well as
general domestic and foreign economic conditions and other factors that reduce
spending by companies in these industries, could harm our operating results in
the future.
If We Do Not Hire and Retain Highly Qualified Employees, We May Be Unable to
Execute Our Business Plan Successfully.
Our success depends, in large part, on our ability to attract, hire, train
and retain highly qualified employees, particularly project engineers, supply
chain and eBusiness experts, sales and marketing personnel and operations
research experts. For project engineers and other process manufacturing experts,
we primarily hire individuals who have obtained a doctoral or master's degree in
chemical engineering or a related discipline or who have significant relevant
industry experience. As a result, the pool of qualified potential employees is
relatively small, and we face significant competition for these employees, from
not only our direct competitors but also our customers, academic institutions
and other enterprises. In addition, the pool of individuals with supply chain
and eBusiness expertise is very limited, and competition for these individuals
is intense. We have limited experience in hiring and retaining employees in this
area. Our failure to recruit and retain the highly qualified employees who are
integral to our services, product development and sales and marketing efforts
may limit the rate at which we generate sales and develop new products and
product enhancements, which could hurt our operating results. Moreover, intense
competition for these employees may result in significant increases in our labor
costs, which would impact our operating results.
We Will Lose Valuable Strategic Leadership and Our Customer Relationships May Be
Harmed if We Lose the Services of Our Chief Executive Officer or Other Key
Personnel.
Our future success depends to a significant extent on Lawrence B. Evans,
our principal founder, Chairman and Chief Executive Officer, our other executive
officers and a number of key engineering, technical, managerial and marketing
personnel. The loss of the services of any of these individuals or groups of
individuals could harm our business. None of our executive officers has entered
into an employment agreement with us.
If We Do Not Compete Successfully, We May Lose Market Share.
We face three primary sources of competition:
- commercial vendors of software products targeting one or more process
manufacturing functions in the areas of engineering, manufacturing and
supply chain, such as Hyprotech, a division of AEA Technology, i2
Technologies, SAP and Simulation Sciences, a division of Invensys;
- vendors of hardware that offer software solutions in order to add value
to their proprietary distributed control systems, such as Honeywell and
Invensys, and vendors of ERP systems, such as Oracle, PeopleSoft and
SAP; and
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- large companies in the process industries that have developed their own
proprietary software solutions.
Some of our current competitors have significantly greater financial,
marketing and other resources than we have. In addition, many of our current
competitors have established, and may in the future continue to establish,
cooperative relationships with third parties to improve their product offerings
and to increase the availability of their products to the marketplace. The entry
of new competitors or alliances into our market could reduce our market share,
require us to lower our prices, or both. Many of these factors are outside our
control, and we may not be able to maintain or enhance our competitive position
against current and future competitors.
Our Revenue Growth Will Depend on Our Relationships with Systems Integrators and
Other Strategic Partners.
One element of our growth strategy is to increase the number of third-party
implementation partners who market and integrate our products. If we do not
adequately train a sufficient number of systems integrator partners, or if
potential partners focus their efforts on integrating or co-selling competing
products to the process industries, our future revenue growth could be limited
and our operating results could be harmed. If our partners fail to implement our
solutions for our customers properly, the reputations of our solutions and our
company could be harmed and we might be subject to claims by our customers. We
also intend to continue to establish partnerships with technology companies,
such as Extricity Software, and new eBusiness entities, such as e-Chemicals, to
accelerate the development and marketing of our eBusiness solutions. To the
extent that we are unsuccessful in maintaining our existing relationships and
developing new relationships, our revenue growth may be harmed.
If We Fail to Anticipate and Respond to Changes in the Market for eBusiness
Solutions for Process Manufacturers, Which is at a Very Early Stage, Our Future
Revenue Growth May Be Limited.
The use of eBusiness solutions by process manufacturers is at a very early
stage. Because this market is new, it is difficult to predict its potential size
or growth rate. Moreover, historically, the process industries have not been
early adopters of new business technologies. In addition, the market for
eBusiness software and services for process manufacturing optimization is
characterized by rapidly changing technology and customer needs. Our future
success depends on our ability to enhance our current eBusiness offerings, to
anticipate trends in the process industries regarding use of the Internet, and
to develop in a timely and cost-effective manner new software and services that
respond to evolving customer needs, emerging Internet technologies and
standards, and new competitive software and service offerings. We have invested,
and intend to continue to invest from time to time, in eBusiness entities, such
as e-Chemicals and Extricity Software, to accelerate the development and
marketing of our eBusiness solution. If any of these eBusiness entities are not
successful, our investment may be lost or substantially reduced in value.
If We Fail to Integrate the Operations of the Companies We Acquire, We May Not
Realize the Anticipated Benefits and Our Operating Costs Could Increase.
We intend to continue to pursue strategic acquisitions that will provide us
with complementary products, services and technologies and with additional
personnel. The identification and pursuit of these acquisition opportunities and
the integration of acquired personnel, products, technologies and businesses
require a significant amount of management time and skill. There can be no
assurance that we will identify suitable acquisition candidates, consummate any
acquisition on acceptable terms or successfully integrate any acquired business
into our operations. Additionally, in light of the consolidation trend in our
industry, we expect to face competition for acquisition opportunities, which may
substantially increase the cost of any potential acquisition.
We have experienced in the past, and may experience again in the future,
problems integrating the operations of a newly acquired company with our own
operations. Acquisitions also expose us to potential risks, including diversion
of management's attention, failure to retain key acquired personnel, assumption
of legal or other liabilities and contingencies, and the amortization of
goodwill and other acquired intangible
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assets. Moreover, customer dissatisfaction with, or problems caused by, the
performance of any acquired products or technologies could hurt our reputation.
We may issue additional equity securities or incur long-term indebtedness
to finance future acquisitions. The issuance of equity securities could result
in dilution to existing stockholders, while the use of cash reserves or
significant debt financing could reduce our liquidity and weaken our financial
condition.
We May Lose All or Part of Our Investment in PetroVantage if PetroVantage Is
Unable to Develop an Independent, Self-Sustaining Digital Marketplace.
On September 14, 2000, we announced that we had formed PetroVantage, Inc.
to develop and operate a digital, Internet-based marketplace for crude oil,
intermediates and refined petroleum products. We have committed to invest $10
million in PetroVantage and may invest additional amounts in the future. We may
lose all or a portion of our investment in PetroVantage if PetroVantage's
digital marketplace does not gain market acceptance, is unable to achieve
profitability or positive cash flow, or otherwise fails to meet our
expectations.
The operation of a digital marketplace differs significantly from the
operation of our traditional business, and PetroVantage has no operating history
that can be used to evaluate its business and future prospects. The creation and
maintenance of a digital marketplace for bulk commodities such as petroleum is a
new, rapidly evolving and intensely competitive business. Barriers to entry are
relatively low as potential competitors are able to launch new competing sites
at relatively low costs using commercially-available software.
PetroVantage faces significant risks and uncertainties relating to its
ability to implement its new and unproven business model. These risks include
the following:
- PetroVantage may be unable to attract commodity traders, brokers,
petroleum companies, logistics providers, and other parties to use
PetroVantage as their platform for carrying out activities related to
the trading of crude oil and other petroleum products. These individuals
and companies may be committed to other digital marketplaces or projects
to build digital marketplaces, may be unconvinced of the value of
participating in a digital marketplace, or may be concerned that a
digital marketplace could reduce their competitiveness or profits.
- We intend that PetroVantage be operated and perceived as an independent
entity separate from our core business. We believe that PetroVantage's
independence is critical to its success because potential users, some of
which may compete with our company, will be less likely to utilize the
marketplace if they perceive that we rather than PetroVantage are
operating the marketplace. We may be unable to attract outside investors
as part of our strategy to make PetroVantage a neutral digital
marketplace that is not controlled by a technology or petroleum company.
- PetroVantage's business model relies on its ability to provide users of
the PetroVantage digital marketplace with a superior trading experience
and to maintain sufficient transaction volume to attract buyers and
sellers to the PetroVantage marketplace. The effective promotion and
positioning of PetroVantage will depend heavily upon PetroVantage's
efforts to provide users with high quality and efficient service to help
them carry out transactions. To accomplish this goal, PetroVantage will
invest heavily in site development, technology and operating
infrastructure development. We cannot be certain that PetroVantage will
be able to develop, license or acquire, and then integrate, those
technologies, if at all, without delays or inefficiencies.
- PetroVantage's business model relies heavily on the value provided users
of the digital marketplace by decision support software applications and
collaboration among trading partners. To accomplish this PetroVantage
will need to design a compelling workflow for petroleum trading, develop
or modify our decision support software to be useable over the internet,
and provide data and information from petroleum companies and others. We
cannot be certain that the workflow design will meet the needs of
traders or be favored by traders, brokers and other companies; that the
decision support software will work well over the internet, or that we
will be able to establish arrangements for sharing
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information or carrying out transactions with brokers, petroleum
companies, shipping companies or individuals or companies who
participate in the petroleum market.
We May Suffer Losses on Fixed-Price Engagements.
We derive a substantial portion of our total revenues from service
engagements and a significant percentage of these engagements have been
undertaken on a fixed-price basis. We bear the risk of cost overruns and
inflation in connection with fixed-price engagements, and as a result, any of
these engagements may be unprofitable. In the past, we have had cost overruns on
fixed-price service engagements. In addition, to the extent that we are
successful in shifting customer purchases to our integrated suites of software
and services and we price those engagements on a fixed-price basis, the size of
our fixed-price engagements may increase, which could cause the impact of an
unprofitable fixed-price engagement to have a more pronounced impact on our
operating results.
We Have Been, and May in the Future Be, Involved in Securities Class Action
Litigation.
In October and November 1998, stockholders commenced three separate legal
actions against us and some of our directors and officers. These lawsuits sought
substantial monetary damages for alleged violations of securities laws. While
our motion to dismiss the claims was granted by the Court on November 1, 2000,
the plaintiffs may appeal the District Court's decision. If the plaintiffs are
ultimately successful and their recoveries exceed the limits of our insurance
coverage, our financial position will be harmed. Litigation is inherently
uncertain and an adverse resolution of these actions may have a negative effect
on our operating results in the period in which they are resolved. For further
discussion of these lawsuits, see "Legal Proceedings."
Our Business May Suffer if We Fail to Address the Challenges Associated with
International Operations.
We have derived approximately 50% of our total revenues from customers
outside the United States in each of the past three fiscal years. We anticipate
that revenues from customers outside the United States will continue to account
for a significant portion of our total revenues for the foreseeable future. Our
operations outside the United States are subject to additional risks, including:
- unexpected changes in regulatory requirements, exchange rates, tariffs
and other barriers;
- political and economic instability;
- difficulties in managing distributors and representatives;
- difficulties in staffing and managing foreign subsidiary operations;
- difficulties and delays in translating products and product
documentation into foreign languages; and
- potentially adverse tax consequences.
The impact of future exchange rate fluctuations on our operating results
cannot be accurately predicted. In recent years, we have increased the extent to
which we denominate arrangements with international customers in the currencies
of the countries in which the software or services are provided. From time to
time we have engaged in, and may continue to engage in, hedges of a significant
portion of installment contracts denominated in foreign currencies. Any hedging
policies implemented by us may not be successful, and the cost of these hedging
techniques may have a significant negative impact on our operating results.
We May Not Be Able to Protect Our Intellectual Property Rights, Which Could Make
Us Less Competitive and Cause Us to Lose Market Share.
We regard our software as proprietary and rely on a combination of
copyright, patent, trademark and trade secret laws, license and confidentiality
agreements, and software security measures to protect our proprietary rights. We
have United States patents for the expert guidance system in our proprietary
graphical user interface, the simulation and optimization methods in our
optimization software, a process flow diagram
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generator in our planning and scheduling software, and a process simulation
apparatus in our polymers software. We have registered or have applied to
register certain of our significant trademarks in the United States and in
certain other countries. We generally enter into non-disclosure agreements with
our employees and customers, and historically have restricted access to our
software products' source codes, which we regard as proprietary information. In
a few cases, we have provided copies of the source code for certain products to
customers solely for the purpose of special product customization and have
deposited copies of the source code for some of our products in third-party
escrow accounts as security for ongoing service and license obligations. In
these cases, we rely on non-disclosure and other contractual provisions to
protect our proprietary rights.
The laws of certain countries in which our products are licensed do not
protect our products and intellectual property rights to the same extent as the
laws of the United States. The laws of many countries in which we license our
products protect trademarks solely on the basis of registration. The steps we
have taken to protect our proprietary rights may not be adequate to deter
misappropriation of our technology or independent development by others of
technologies that are substantially equivalent or superior to our technology.
Any misappropriation of our technology or development of competitive
technologies could harm our business, and could force us to incur substantial
costs in protecting and enforcing our intellectual property rights.
We May Have to Defend Against Intellectual Property Infringement Claims, Which
Could Be Expensive and, if We Are Not Successful, Could Disrupt Our Business.
Third parties may assert patent, trademark, copyright and other
intellectual property rights to technologies that are important to us. In such
an event, we may be required to incur significant costs in litigating a
resolution to the asserted claims. The outcome of any litigation could require
us to pay damages or obtain a license to a third party's proprietary rights in
order to continue licensing our products as currently offered. If such a license
is required, it might not be available on terms acceptable to us, if at all.
Our Inability to Manage Our Growth May Harm Our Operating Results.
We have experienced substantial growth in recent years in the number of our
employees, the scope of our operating and financial systems, and the geographic
area of our operations. Our operations have expanded significantly through both
internal growth and acquisitions. Our growth has placed, and is expected to
continue to place, a significant strain on our management and our operating and
financial systems. To manage our growth effectively, we must continue to expand
our management team, attract, motivate and retain employees, and implement and
improve our operating and financial systems. Our current management systems may
not be adequate and we may not be able to manage any future growth successfully.
Our Software is Complex and May Contain Undetected Errors.
Like many other complex software products, our software has on occasion
contained undetected errors or "bugs." Because new releases of our software
products are initially installed only by a selected group of customers, any
errors or "bugs" in those new releases may not be detected for a number of
months after the delivery of the software. These errors could result in loss of
customers, harm to our reputation, adverse publicity, loss of revenues, delay in
market acceptance, diversion of development resources, increased insurance costs
or claims against us by customers.
We May Be Subject to Significant Expenses and Damages Because of Liability
Claims.
The sale and implementation of certain of our software products and
services, particularly in the areas of advanced process control and
optimization, may entail the risk of product liability claims. Our software
products and services are used in the design, operation and management of
manufacturing processes at large facilities, and any failure of our software
could result in significant claims against us for damages or for violations of
environmental, safety and other laws and regulations. Our agreements with our
customers generally contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions in our agreements may not be effective as a result of
federal,
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state or local laws or ordinances or unfavorable judicial decisions. A
substantial product liability claim against us could harm our operating results
and financial condition.
Our Common Stock May Experience Substantial Price and Volume Fluctuations.
The equity markets have from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, and those
fluctuations have often been unrelated to the operating performance of
particular companies. In addition, factors such as our financial performance,
announcements of technological innovations or new products by us or our
competitors, as well as market conditions in the computer software or hardware
industries, may have a significant impact on the market price of our common
stock.
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We Have Anti-Takeover Defenses That Could Delay or Prevent an Acquisition of Our
Company, Which May Reduce the Market Price of Our Common Stock.
Our charter and bylaws and applicable Delaware laws contain provisions that
may discourage acquisition bids for us and that may deprive stockholders of
certain opportunities to receive a premium for their stock as part of an
acquisition, which may have the effect of reducing the market price of our
common stock. In addition, we have adopted a stockholder rights plan, which also
may deter or delay attempts to acquire us or accumulate shares of our common
stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Information relating to quantitative and qualitative disclosure about
market risk is set forth under the caption "Notes to Consolidated Condensed
Financial Statements," (2. (a), (d) and (e)) and below under the captions
"Investment Portfolio" and "Foreign Exchange Hedging."
Investment Portfolio
We do not use derivative financial instruments in our investment portfolio.
We place our investments in instruments that meet high credit quality standards,
as specified in our investment policy guidelines; the policy also limits the
amount of credit exposure to any one issuer and the types of instruments
approved for investment. We do not expect any material loss with respect to our
investment portfolio. The following table provides information about our
investment portfolio. For investment securities, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars($)
<TABLE>
<CAPTION>
FAIR VALUE AT FY2005 &
9/30/00 FY2001 FY2002 FY2003 FY2004 THEREAFTER
------------- ------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents................. $22,894 $22,894 -- -- -- --
Weighted Average Interest Rate... 4.44% 4.44% -- -- -- --
Investments...................... $62,248 $21,102 $18,866 $13,156 $3,003 $6,121
Weighted Average Interest Rate... 6.57% 6.53% 6.28% 6.97% 6.35% 6.88%
Total Portfolio.................. $85,142 $43,996 $18,866 $13,156 $3,003 $6,121
Weighted Average Interest Rate... 6.00% 5.44% 6.28% 6.97% 6.35% 6.88%
</TABLE>
Impact of Foreign Currency Rate Changes
During the first three months of fiscal 2001, the U.S. dollar strengthened
against most currencies in Europe and Asia/Pacific. The translation of the
parent company's intercompany receivables and foreign entities assets and
liabilities did not have a material impact on our consolidated results. Foreign
exchange forward contracts are only purchased to hedge certain customer accounts
receivable amounts denominated in a foreign currency.
Foreign Exchange Hedging
We enter into foreign exchange forward contracts to reduce our exposure to
currency fluctuations on customer accounts receivables denominated in foreign
currency. The objective of these contracts is to neutralize the impact of
foreign currency exchange rate movements on our operating results. We do not use
derivative financial instruments for speculative or trading purposes. We had
$8.4 million of foreign exchange forward contracts denominated in British,
French, Japanese, Swiss, German and Netherlands currencies which represented
underlying customer accounts receivable transactions at the end of the first
quarter of fiscal 2001. We adopted SFAS 133 for the first quarter of fiscal
2001. As a result, at each balance sheet date, the foreign exchange forward
contracts and the related installments receivable denominated in foreign
currency are revalued based on the current market exchange rates. Resulting
gains and losses are included in earnings or deferred as a component of other
comprehensive income. These deferred gains and losses are recognized in
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income in the period in which the underlying anticipated transaction occurs.
Gains and loss related to these instruments for the first quarter of fiscal 2001
were not material to our financial position. We do not anticipate any material
adverse effect on our consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments. However, we can not
assure you that these strategies will be effective or that transaction losses
can be minimized or forecasted accurately.
The following table provides information about our foreign exchange forward
contracts at the end of the first quarter of fiscal 2001. The table presents the
value of the contracts in U.S. dollars at the contract exchange rate as of the
contract maturity date. The average contract rate approximates the weighted
average contractual foreign currency exchange rate and the forward position in
U.S. dollars approximates the fair value of the contract at the end of the first
quarter of fiscal 2001.
Forward Contracts to Sell Foreign Currencies for U.S. Dollars Related to
Customer Installments Receivable:
<TABLE>
<CAPTION>
AVERAGE FORWARD AMOUNT
CONTRACT IN U.S. DOLLARS CONTRACT ORIGINATION CONTRACT MATURITY
CURRENCY RATE (IN THOUSANDS) DATE DATE
-------- -------- --------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
British Pound Various: Apr 98-Jan 00 Various: Jul 00-Jul 02
Sterling............ 1.52 $3,110
French Franc.......... 6.21 574 Various: Jan 99-Jun 00 Various: Jan 01-May 02
German Deutsche Mark.. 1.70 644 Various: Jan 98-Apr 99 Various: Jul 00-Jan 01
Japanese Yen.......... 107.71 3,578 Various: Mar 98-May 00 Various: Jul 00-Jun 02
Swiss Franc........... 1.52 461 Various: Jan 99-Jul 99 Various: Feb 01-Jul 02
Netherland Guilder.... 2.40 28 Various: May 00 Various: Aug 01-Aug 02
------
Total....... $8,395
======
</TABLE>
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998, a purported class action lawsuit was filed in the
United States District Court for the District of Massachusetts against us and
certain of our officers and directors, on behalf of purchasers of our common
stock between April 28, 1998 and October 2, 1998. This lawsuit is identified
here as the Van Ormer Complaint. The lawsuit seeks an unspecified amount of
damages and claims violations of Sections 10(b) and 20(a) of the Securities
Exchange Act, alleging that we issued a series of materially false and
misleading statements concerning our financial condition, our operations and our
integration of several acquisitions. On October 26, 1998, a second purported
class action lawsuit was filed in the United States District Court for the
District of Massachusetts against us and certain of our officers and directors,
on behalf of purchasers of our common stock between April 28, 1998 and October
2, 1998. This second lawsuit was identical to the Van Ormer Complaint except for
the named plaintiff. This second lawsuit is identified here as the Clancey
Complaint. On November 20, 1998, a third purported class action lawsuit was
filed in the same court against the same defendants. This third lawsuit was
identical to the Van Ormer and Clancey Complaints except for the named
plaintiff, the expansion of the class action period to include purchasers of our
common stock from January 27, 1998 to October 2, 1998 and the addition of
references to statements made between January 27, 1998 and April 28, 1998. This
third lawsuit is identified here as the Marucci Complaint. On January 27, 1999,
in response to a motion to dismiss filed by us, the plaintiffs consolidated the
three complaints and filed a consolidated amended class action complaint. On
November 1, 2000, the Court granted our motion to dismiss the complaint and
entered judgment in our favor. The plaintiffs have 30 days after the dismissal
in which they can file a motion to appeal the District Court's decision.
We continue to believe that we have meritorious legal defenses to the
lawsuits and intend to defend vigorously against any appeal of this consolidated
action. We are unable, however, to determine whether the ultimate resolution of
these matters will have a material adverse effect on our operating results or
financial position, or reasonably estimate the amount of the loss, if any, that
may result from resolution of these matters.
In addition to the foregoing lawsuits, we may be a party to lawsuits in the
normal course of our business. We note that securities litigation, in particular
can be expensive and disruptive to our normal business operations and the
outcome of complex legal proceedings can be very difficult to predict.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 29, 2000, we acquired ICARUS Corporation and ICARUS Services
Limited, providers of software used by the process manufacturing industries to
estimate plant capital costs and evaluate capital project economies. In this
acquisition, we issued 248,411 shares of common stock, valued on the date of
acquisition at $50.0625 per share or $12,436,075.69, and $2,095,000 principal
amount of one-year promissory notes in a private placement exempt from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
3.1(1) Certificate of Incorporation of Aspen Technology, Inc.
3.2(1) By-Laws of Aspen Technology, Inc.
10.1(2) Registration Rights Agreement dated August 29, 2000 between
Aspen Technology, Inc. and the former stockholders of ICARUS
Corporation and ICARUS Services Limited.
10.2(2) Second Amendment to Lease Agreement dated as of August 14,
2000 between Aspen Technology, Inc. and Beacon Properties,
L.P., successor-in-interest to Teachers Insurance and
Annuity Association of America, regarding the extension of
the lease for 10 Canal Park, Cambridge, Massachusetts.
</TABLE>
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<TABLE>
<S> <C>
10.3 Credit Agreement between Fleet National Bank and Aspen
Technology, Inc. dated October 27, 2000.
</TABLE>
---------------
(1) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen
Technology, Inc. dated March 12, 1998 (filed on March 27, 1998) and
incorporated herein by reference.
(2) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen
Technology, Inc. for the fiscal year ended June 30, 2000 (filed on September
28, 2000) and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
On August 29, 2000, we filed a Current Report on Form 8-K with respect
to our press release announcing our acquisition of ICARUS Corporation
and ICARUS Services Limited.
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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.
<TABLE>
<S> <C>
Date: November 14, 2000 By: /s/ LISA W. ZAPPALA
--------------------------------------------------------
Lisa W. Zappala Senior Vice President and Chief
Financial Officer
</TABLE>
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