<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 March 31, 2000.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 000-24786
ASPEN TECHNOLOGY, INC.
(exact name of registrant as specified in its charter)
DELAWARE 04-2739697
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TEN CANAL PARK, CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (617) 949-1000
Indicate by check mark whether the registrant: (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
As of March 31, 2000, there were 26,096,113 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of March 31, 2000 and June 30, 1999 3
Consolidated Condensed Statements of
Operations for the Three and Nine Month
Periods Ended March 31, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows
for the Nine Month Periods Ended
March 31, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11 - 13
Item 3. Quantitative and Qualitative Market Risk Disclosures 13 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14 - 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
Aspen Technology, Inc.
Consolidated Condensed Balance Sheets
(In thousands)
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 37,913 $ 33,456
Short-term investments 69,514 63,512
Accounts receivable, net 82,264 73,858
Unbilled services 20,113 16,634
Current portion of long-term installments
receivable, net 21,111 25,344
Deferred tax asset 2,752 2,752
Prepaid expenses and other current assets 13,638 12,157
--------- ---------
Total current assets 247,305 227,713
Long-term installments receivable, net 25,971 31,231
Property and leasehold improvements, at cost 88,393 82,615
Accumulated depreciation and amortization (54,067) (45,775)
--------- ---------
34,326 36,840
Computer software development costs, net 6,590 6,011
Intangible assets, net 7,343 9,143
Deferred tax asset 4,757 4,757
Other assets 10,871 6,547
--------- ---------
$ 337,163 $ 322,242
========= =========
Current Liabilities:
Current portion of long-term debt $ 843 $ 2,360
Accounts payable and accrued expenses 41,615 42,612
Unearned revenue 15,365 10,116
Deferred revenue 22,066 20,482
--------- ---------
Total current liabilities 79,889 75,570
Long-term debt, less current maturities 2,508 3,155
5 1/4% Convertible subordinated debentures 86,250 86,250
Deferred revenue, less current portion 12,192 13,528
Other liabilities 513 513
Stockholders' Equity:
Common stock 2,632 2,517
Additional paid-in capital 165,335 154,480
Accumulated deficit (9,447) (11,257)
Accumulated other comprehensive loss (2,207) (2,012)
Treasury stock, at cost (502) (502)
--------- ---------
Total stockholders' equity 155,811 143,226
--------- ---------
$ 337,163 $ 322,242
========= =========
3
<PAGE> 4
Aspen Technology, Inc.
Consolidated Condensed Statements of Operations
(Unaudited and in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Software licenses $ 34,155 $ 22,191 $ 84,643 $ 66,868
Service and other 33,601 32,001 97,834 95,688
-------- -------- --------- ---------
Total revenues 67,756 54,192 182,477 162,556
-------- -------- --------- ---------
Cost of software licenses 2,452 2,149 6,696 5,759
Cost of service and other 21,259 21,204 61,793 62,217
Selling and marketing 22,303 22,207 61,942 62,961
Research and development 12,489 12,297 35,425 35,838
General and administrative 5,805 6,235 16,797 17,335
-------- -------- --------- ---------
Total costs and expenses 64,308 64,092 182,653 184,110
-------- -------- --------- ---------
Income (loss) from operations 3,448 (9,900) (176) (21,554)
Other income (expense), net (97) (115) (114) 131
Interest income, net 1,080 1,005 3,034 3,369
-------- -------- --------- ---------
Income (loss) before provision
(benefit from) income taxes 4,431 (9,010) 2,744 (18,054)
Provision for (benefit from)
income taxes 1,507 (3,153) 934 (6,318)
-------- -------- --------- ---------
Net income (loss) $ 2,924 $ (5,857) $ 1,810 $ (11,736)
======== ======== ========= =========
Diluted earnings (loss) per
share $ 0.10 $ (0.23) $ 0.07 $ (0.47)
======== ======== ========= =========
Weighted average shares
outstanding-diluted 29,543 24,925 27,737 24,954
======== ======== ========= =========
Basic earnings (loss) per share $ 0.11 $ (0.23) $ 0.07 $ (0.47)
======== ======== ========= =========
Weighted average shares
outstanding-basic 25,828 24,925 25,386 24,954
======== ======== ========= =========
4
<PAGE> 5
Aspen Technology, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 1,810 $(11,736)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities (net of
acquisition-related activity disclosed below):
Depreciation and amortization 12,791 13,329
Foreign exchange loss -- (310)
Deferred income taxes -- 2
(Increase) decrease in accounts receivable (8,511) 9,275
Increase in unbilled services (3,510) (1,658)
Decrease (increase) in installments receivable 9,493 (2,500)
Increase in prepaid expenses
and other current assets (1,510) (1,557)
Decrease in accounts payable
and accrued expenses (955) (12,407)
Increase in unearned revenue 5,272 1,268
Decrease in deferred revenue 236 404
-------- --------
Net cash provided by (used in) operating activities 15,116 (5,890)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements (5,804) (8,535)
Purchase of investment securities (6,205) (27,244)
(Increase) decrease in other long-term assets (4,735) 737
Increase in computer software development costs (2,864) (2,207)
Decrease in other long-term liabilities -- (374)
Cash used in the purchase of business, net of cash
acquired -- (1,200)
-------- --------
Net cash used in investing activities (19,608) (38,823)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock
purchase plans 3,850 4,474
Exercise of stock options 7,120 940
Payments of long-term debt and capital lease
obligations (2,176) (1,313)
-------- --------
Net cash provided by financing activities 8,794 4,101
-------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 155 (270)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,457 (40,882)
CASH AND CASH EQUIVALENTS, beginning of period 33,456 78,694
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 37,913 $ 37,812
======== ========
During the nine months ended March 31, 1999, the Company
acquired a company in a purchase transaction. This
acquisition is summarized as follows:
Fair value of assets acquired, excluding cash $ 1,290
Payments in connection with the acquisitions,
net of cash acquired (1,200)
--------
Liabilities assumed $ 90
========
</TABLE>
5
<PAGE> 6
ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 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 and nine month periods ended March 31, 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,
1999, 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 to allocate the total fee
to all delivered and undelivered elements of the arrangement. 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 condensed 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 period ended March 31, 2000 was 9.0% and for the nine month
period ended March 31, 2000 was 8.5% to 9.0%. In the three and nine
month periods ended March 31, 1999, the rate utilized was 8.5%. At
March 31, 2000, the Company had long-term installments receivable of
approximately $6.3 million denominated in foreign currencies. The March
2000 foreign installments receivable mature through July 2004 and have
been hedged with specific foreign currency contracts. There have been
no material gains or losses recorded relating to hedge contracts for
the periods presented. The Company does not use derivative financial
instruments for speculative or trading purposes.
(b) Computer Software Development Costs
Certain computer software development costs are capitalized in the
accompanying consolidated condensed balance sheets. Capitalization of
computer software development costs begins upon the establishment of
technological feasibility. Amortization of capitalized computer
software development costs is included in cost of software license
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
6
<PAGE> 7
charged to operations in the three and nine month periods ended March
31, 2000 was approximately $0.8 and $2.3 million, respectively, as
compared to the three and nine month periods ended March 31, 1999 which
was $0.6 and $1.9 million, respectively.
(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 calculations of basic and diluted weighted average shares
outstanding are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
-------------------- --------------------
Basic weighted average common
shares outstanding 25,828 24,925 25,386 24,954
Weighted average potential
common shares 3,715 -- 2,351 --
------ ------ ------ ------
Diluted weighted average
shares outstanding 29,543 24,925 27,737 24,954
====== ====== ====== ======
The following potential common shares were excluded from the
calculation of diluted weighted average shares outstanding as their
effect would be anti-dilutive (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
-------------------- --------------------
Options and Warrants -- 530 -- 1,139
Convertible Debt 406 401 1,227 1,222
--- --- ----- -----
Total 406 931 1,227 2,361
=== === ===== =====
(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. Investments held as of March 31, 2000 consist
of $62.5 million in U.S. Corporate Bonds and $7.0 million in U.S.
Government Bonds. The Company does not use derivative financial
instruments in its investment portfolio.
3. SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment contracts to
two financial institutions for approximately $5.9 and $23.2 million during the
three and nine month periods ended March 31, 2000, respectively. 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 March 31, 2000 the balance of the uncollected principal portion of all
contracts sold was $95.5 million. The Company's potential recourse obligation
related to these contracts is approximately $4.5 million. In addition, the
Company is obligated to pay additional costs to the financial institutions in
the event of default by the customer.
7
<PAGE> 8
4. 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 and nine months ended March 31, 2000 and 1999 are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- -------- -------- ---------
Net income (loss) $ 2,924 $(5,857) $ 1,810 $(11,736)
Unrealized loss on investments (23) (105) (203) (85)
Foreign currency adjustment (287) (917) 8 (965)
------- ------- ------ --------
Comprehensive income (loss) $ 2,614 $(6,879) $ 1,615 $(12,786)
======= ======= ======= ========
5. 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. The amount
accrued has decreased by severance payments paid during the nine months ended
March 31, 2000. The remaining accrual will be paid by the end of fiscal 2000.
The remaining accrual for the restructuring and other charge is broken down
as follows (in thousands):
ACCRUED LESS: ACCRUED
EXPENSES, FISCAL EXPENSES,
JUNE 30, 2000 MAR 31,
1999 PAYMENTS 2000
--------- -------- ---------
Close-down/consolidation of facilities $ 4,760 $ 808 $ 3,952
Employee severance, benefits and related 1,938 1,501 437
Other 101 97 4
------- ------- -------
$ 6,799 $ 2,406 $ 4,393
======= ======= =======
6. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in fiscal 1999. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for disclosures
about products and services, and geographic areas. 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.
8
<PAGE> 9
The Company is organized geographically and by line of business. The Company has
two major line of business operating segments: license and service and other.
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.
The license line of business is engaged in the development and licensing of
software. The software can be classified into three broad categories: process
design software, process operation software and process management software. The
service and other line of business offers implementation, advanced process
control, real-time optimization and other consulting services in order to
provide its customers with complete solutions.
The accounting policies of the line of business operating segments are the same
as those described in the summary of significant accounting policies. 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):
SERVICE AND
LICENSE OTHER TOTAL
------- ----------- -----
Three Months Ended March 31, 2000-
Revenues from unaffiliated customers $ 34,155 $ 33,601 $ 67,756
Cost of revenue 2,452 21,259 23,711
Research and development 11,241 1,248 12,489
-------- -------- ---------
Operating margin (1) $ 20,462 $ 11,094 $ 31,556
======== ======== =========
Three Months Ended March 31, 1999-
Revenues from unaffiliated customers $ 22,191 $ 32,001 $ 54,192
Cost of revenue 2,149 21,204 23,353
Research and development 11,118 1,179 12,297
-------- -------- ---------
Operating margin (1) $ 8,924 $ 9,618 $ 18,542
======== ======== =========
Nine Months Ended March 31, 2000-
Revenues from unaffiliated customers $ 84,643 $ 97,834 $ 182,477
Cost of revenue 6,696 61,793 68,489
Research and development 31,813 3,612 35,425
-------- -------- ---------
Operating margin (1) $ 46,134 $ 32,429 $ 78,563
======== ======== =========
Nine Months Ended March 31, 1999-
Revenues from unaffiliated customers $ 66,868 $ 95,688 $ 162,556
Cost of revenue 5,759 62,217 67,976
Research and development 32,202 3,636 35,838
-------- -------- ---------
Operating margin (1) $ 28,907 $ 29,835 $ 58,742
======== ======== =========
(1) The operating 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):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
Total operating margin for
reportable segments $ 31,556 $ 18,542 $ 78,563 $ 58,742
Selling and marketing (22,303) (22,207) (61,942) (62,961)
General and administrative (5,805) (6,235) (16,797) (17,335)
Interest and other income and
expense 983 890 2,920 3,500
-------- -------- -------- --------
Income (loss) before provision
for (benefit from) income taxes $ 4,431 $ (9,010) $ 2,744 $(18,054)
======== ======== ======== ========
9
<PAGE> 10
7. RELATED PARTY TRANSACTIONS
On September 30, 1999, the Company entered into a "Software License Distribution
and Strategic Relationship" agreement with Extricity Software, Inc., a leading
provider of business-to-business e-commerce software. The Company has partnered
with Extricity Software to deliver e-commerce solutions that will enhance
integration and automate the flow of information between disparate supply chain
and enterprise resource planning systems and customers, suppliers and trading
partners. The President and Chief Executive Officer of Extricity Software is the
spouse of one of the Company's directors. In the three month period ended
December 31, 1999, the Company paid $1.3 million in prepaid fees to Extricity
Software. In the accompanying consolidated condensed statements of operations
for the three and nine months ended March 31, 2000, the Company has recognized
approximately $188,000 of these fees.
Subsequent to March 31, 2000, the Company made a $2.0 million investment in
Extricity Software, Inc. This investment entitles the Company to a minority
interest in Extricity Software and will be accounted for using the cost method.
The Company believes that all transactions with Extricity Software are rendered
at arms length.
8. INVESTMENTS
On March 13, 2000, the Company and e-Chemicals, Inc., a leader in providing
end-to-end e-supply chain solutions for the chemical industry, entered into a
Stock Purchase Agreement whereby the Company acquired 833,333 shares of
e-Chemicals non-voting Series E Preferred Stock for $6.00 per share. This
investment entitles the Company to a minority interest in e-Chemicals and will
be accounted for using the cost method. This investment is included in other
assets in the accompanying consolidated condensed balance sheet as of March 31,
2000. In addition, the Company and e-Chemicals formed an alliance to combine
their technology solutions to optimize chemical industry supply chain
connectivity.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations: Comparison of Three and Nine Months Ending March 31, 2000
and 1999
TOTAL REVENUES
Revenues are derived from software licenses and maintenance and other services.
Total revenues for the three months ended March 31, 2000 were $67.8 million, an
increase of $13.6 million, or 25%, from $54.2 million in the comparable period
of fiscal 1999. Total revenues for the nine months ended March 31, 2000 were
$182.5 million, an increase of $19.9 million, or 12.3%, from $162.6 million in
the comparable period of fiscal 1999.
Total revenues from customers outside the United States were $30.2 and $83.0
million, or 44.6% and 45.5%, of total revenues for the three and nine months
ended March 31, 2000 respectively. The non-U.S. revenues for the comparable
periods in fiscal 1999 were $30.0 and $86.7 million, or 55.4% and 53.3%, of
total revenues. The geographical mix of license revenues can vary from quarter
to quarter; however, for fiscal 2000, the overall mix of revenues from customers
outside the United States is expected to be relatively consistent with the prior
year.
SOFTWARE LICENSES
Software license revenue represented 50.4% of total revenue for the three months
ended March 31, as compared to 40.9% in fiscal 1999. Revenues from software
licenses for the three months ended March 31, 2000 were $34.2 million, an
increase of $12.0 million, or 53.9%, from $22.2 million in fiscal 1999. Software
license revenue represented 46.4% of total revenue for the nine months ended
March 31, as compared to 41.1% in fiscal 1999. Revenues from software licenses
for the nine months ended March 31, 2000 were $84.6 million, an increase of
$17.8 million, or 26.6%, from $66.9 million in the comparable period of fiscal
1999. During the second quarter of fiscal 2000, we entered into a significant
license contract with a customer to license certain of our software for the
customer's worldwide operations. A portion of this license revenue was
recognized in the second and third quarters of fiscal 2000 based on requested
delivery dates.
SERVICE AND OTHER
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 March 31, 2000 were $33.6 million,
an increase of $1.6 million, or 5.0%, from $32.0 million in the comparable
period in fiscal 1999. Revenues from service and other for the nine months ended
March 31, 2000 were $97.8 million, an increase of $2.1 million, or 2.2%, from
$95.7 million in the comparable period in fiscal 1999. Growth in the services
business has been slower than our license business as a result of (1) our
decision to utilize partners to help deploy our solutions and (2) the effect on
post-contract support revenues of slower license revenue growth in prior
periods.
COST OF SOFTWARE LICENSES
Cost of software licenses consist of royalties, amortization of previously
capitalized software costs, costs related to the delivery of software (including
disk duplication and third party software costs), printing of manuals and
packaging. Cost of software licenses as a percentage of revenues from software
licenses were 7.2% and 7.9% for the three and nine month periods ended March 31,
2000. This is compared to 9.7% and 8.6% for the three and nine month periods
ended March 31, 1999, respectively. The decrease in these costs as a percentage
of software license revenue is due primarily to a higher revenue base.
COSTS OF SERVICE AND OTHER
Costs of service and other consists of the cost of execution of application
consulting services, post-contract support expenses, the cost of training
services and the cost of manuals sold separately. Costs of service and other as
a percentage of their revenue were 63.3% and 63.2% in the three and nine months
ended March 31, 2000. The same percentages in the comparable periods of fiscal
year 1999 were 66.3% and 65.0%, respectively. This percentage decrease is
primarily a result of an increased revenue per hour and improved utilization
rates of billable engineers in the nine month period ended March 31,
2000.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three and nine month periods ended March
31, 2000 were $22.3 and $61.9 million, an increase of 0.4% and a decrease of
1.6%, respectively, from $22.2 and $63.0 million in the comparable periods in
fiscal year 1999. As a percentage of revenues, selling and marketing expenses
were 32.9% and 33.9%, for the three and nine month periods ended March 31, 2000,
respectively. These same percentages were 41.0% and 38.7% for the comparable
periods in fiscal 1999. The decrease in these percentages in fiscal 2000 is the
result of relatively similar expense levels spread over a larger revenue base. A
significant component
11
<PAGE> 12
of the April 1999 restructuring included selective reduction of sales and
marketing staff in certain markets and geographic locations. These selective
reductions were made to correspond to the customer opportunities in certain of
our core vertical markets and customer locations. 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. Additional investments were made in the third quarter of
fiscal 2000 in our new collaborative Internet portal site for process industry
professionals, ProcessCity, and in the rebranding of our new logo.
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 and nine month periods ended
March 31, 2000 were $12.5 and $35.4 million, respectively, an increase of $0.2
million and a decrease of $0.4 million, or 1.6% and 1.2%, respectively, from
$12.3 and $35.8 million in the comparable periods of fiscal 1999. As a
percentage of revenues, research and development costs were 18.4% and 19.4% for
the three and nine month periods ended March 31, 2000, respectively. The
percentages for the same periods in fiscal 1999 were 22.7% and 22.0%,
respectively. The decrease in these percentages in fiscal 2000 is the result of
a similar expense level spread over a larger revenue base. We capitalized 8.9%
and 7.5% of its total research and development costs during the three and nine
month periods ended March 31, 2000, respectively. In both of the comparable
periods of fiscal year 1999, we capitalized 5.9% of our total research and
development costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries of
administrative, executive, financial and legal personnel, outside professional
fees, and amortization of certain intangibles. General and administrative
expenses for the three and nine month periods ended March 31, 2000 were $5.8 and
$16.8 million, a decrease of $0.4 and $0.5 million, or 6.9% and 3.1%,
respectively, from $6.2 and $17.3 million in the comparable periods of fiscal
1999. This decrease is primarily the result of decreasing amortization expense
of intangible assets, including goodwill.
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 off-line modeling 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 off-line modeling customers
have elected to license these products through installment contracts. Included
in the annual payments is an implicit interest charge based upon the interest
rate established by us at the time of the license. As we sell more perpetual
licenses for e-Supply 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 $2.4 and $7.1 million for the three and nine months ended March 31, 2000 as
compared to $2.5 and $7.6 million for the corresponding periods in fiscal 1999.
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 for the three and nine months ended March 31, 2000 was $1.3 and
$4.1 million compared to $1.5 and $4.2 million in the same periods of fiscal
1999.
TAX RATE
The effective tax rate for the three and nine month periods ended March 31, 2000
was approximately 34.0% of pretax income (loss), versus 35.0% for the comparable
periods of fiscal 1999. This decrease in the effective tax rate was primarily
due to the increased utilization of certain tax credits.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 2000, our cash and cash equivalents
balance increased by $4.5 million. Operations provided $15.1 million of cash
during this period, primarily as a result of the decrease in long-term
installments receivable and an increase in unearned revenue offset by an
increase in accounts receivable and unbilled services.
12
<PAGE> 13
We have arrangements to sell long-term contracts to two financial institutions,
General Electric Capital Corporation ("GECC") and Fleet Business Credit
Corporation ("FBCC", formerly Sanwa Business Credit Corporation). During the
nine months ended March 31, 2000, installment contracts decreased by $9.5
million to $47.1 million, net of $23.2 million of installment contracts sold to
GECC and FBCC. This decrease is related to the decline in the mix of license
sales that are sold in the installment form where customers chose to finance
their license purchase with us. Our arrangements with the two financial
institutions provide for the sale of installment contracts up to certain limits
and with certain recourse obligations. At March 31, 2000, the balance of the
uncollected principal portion of the contracts sold to these two financial
institutions was $95.5 million, for which we have a partial recourse obligation
of approximately $4.5 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 bank line of credit, expiring December 31, 2000,
that provides for borrowings of specified percentages of eligible accounts
receivable and eligible current installment contracts. Advances under the line
of credit bear interest at a rate equal to the bank's prime rate (9.00% at March
31, 2000) or, at our option, a rate equal to a defined LIBOR (6.14% at March 31,
2000) plus a specified margin. The line of credit agreement requires that we
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. Additionally, the line is secured by certain of our marketable
securities. At March 31, 2000, there were no outstanding borrowings under the
line of credit.
In June 1998, we issued $86.3 million of 5 1/4% Convertible subordinated
debentures (the 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 its 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
repurchase price of 100% of the principal amount of the Debentures to be
repurchased, plus accrued interest to the repurchase date. The Debentures are
unsecured obligations subordinate in right of payment to all of our existing and
future senior debt, as defined, and effectively subordinate in right of payment
to all indebtedness and other liabilities of our subsidiaries.
Item 3. Quantitative and Qualitative Market Risk Disclosures
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Notes to Consolidated Condensed Financial
Statements," 2. (a) and (d), and below under the captions "Investment Portfolio"
and "Foreign Exchange Hedging".
INVESTMENT PORTFOLIO
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 (in 000s,
except interest rates)
<TABLE>
<CAPTION>
FAIR VALUE AT FY2004
3/31/00 FY2000 FY2001 FY2002 FY2003 & THEREAFTER
------------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents $19,335 $19,335
Weighted Average Interest Rate 6.12% 6.12% -- -- -- --
Investments $69,514 $16,136 $13,636 $20,459 $12,709 $6,574
Weighted Average Interest Rate 6.33% 6.10% 6.69% 6.33% 6.16% 6.53%
Total Portfolio $88,849 $35,471 $13,636 $20,459 $12,709 $6,574
Weighted Average Interest Rate 6.29% 6.11% 6.69% 6.33% 6.16% 6.53%
</TABLE>
13
<PAGE> 14
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During the first nine months of fiscal 2000, most currencies in Europe and
Asia/Pacific fluctuated minimally ending the period mixed against the U.S.
dollar. 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 receivable amounts 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
$5.3 million of foreign exchange forward contracts denominated in British,
French, Japanese, Swiss, German and Belgium currencies which represented
underlying customer accounts receivable transactions at the end of the third
quarter of fiscal 2000. The gains and losses on these contracts are included in
earnings when the underlying foreign currency denominated transaction is
recognized. Gains and loss related to these instruments for the third quarter
and the first nine months of fiscal 2000 were not material to our financial
position. Looking forward, we do not anticipate any material adverse effect on
its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments. However, there can be no assurance
that these strategies will be effective or that transaction losses can be
minimized or forecasted accurately.
The following table provides information about our foreign exchange forward
contracts at the end of the third quarter of fiscal 2000. The table presents the
value of the contracts in U.S. dollars at the contract exchange rate as of the
contract maturity date. The average contract rate approximates the weighted
average contractual foreign currency exchange rate and the forward position in
U.S. dollars approximates the fair value of the contract at the end of the third
quarter of fiscal 2000.
Forward Contracts to Sell Foreign Currencies for U.S. Dollars Related to
Customer Accounts 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>
Belgian Franc 41.89 $ 17 May 00 May 00
British Pound Sterling 1.58 977 Various: Apr 98 - Mar 00 Various: May 00-Jul 02
French Franc 5.64 430 Various: Apr 98-Mar 00 Various: Apr 00-Jan 02
German Deutsche Mark 1.60 779 Various: Jan 98-Mar 00 Various: May 00-Jul 01
Japanese Yen 114.96 2,548 Various: Mar 98-Mar 00 Various: Apr 00-Aug 02
Swiss Franc 1.54 520 Various: Jan 99-Mar 00 Various: May 00-Jul 02
-------
Total $ 5,271
=======
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its business. The
Company believes that it has meritorious defenses in all lawsuits in which the
Company or its subsidiaries is a defendant. The Company notes that (i)
litigation, particularly securities litigation, can be expensive and disruptive
to normal business operations and (ii) the results of complex legal proceedings
can be very difficult to predict.
On October 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts against the Company and
certain of its officers and directors, on behalf of purchasers of the Company's
common stock between April 28, 1998 and October 2, 1998, the Van Ormer
Complaint. The lawsuit seeks an unspecified amount of damages and claims
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
alleging that the defendants issued a series of materially false and misleading
statements concerning the Company's financial condition, its operations and
integration of several acquisitions. On October 26 a second purported class
action lawsuit was filed in the United States District Court for the District of
Massachusetts against the Company and certain of its officers and directors, on
behalf of purchasers of the Company's common stock between April
14
<PAGE> 15
28, 1998 and October 2, 1998 which was verbatim identical to the Van Ormer
Complaint except only for the plaintiff's name, the Clancey Complaint. On
November 20, 1998 a third purported class action lawsuit was filed in the same
court against the same defendants which was verbatim identical to the Van Ormer
and Clancy Complaints except only for the plaintiff's name, the expansion of the
class action period from January 27, 1998 to October 2, 1998, and the addition
of references to statements made between January 27, 1998 and April 28, 1998,
the Marucci Complaint. On January 27, 1999, in response to a motion to dismiss
filed by us, the plaintiffs consolidated the three complaints and filed a
Consolidated Amended Class Action Complaint. On December 9, 1999, the Court
heard oral arguments to review the pleadings in the case; as of March 31, 2000,
there has been no decision rendered by the Court. The Company believes it has
meritorious legal defenses to the lawsuits and intends to defend vigorously
against these actions. The Company is currently unable, however, to determine
whether resolution of these matters will have a material adverse impact on the
Company's financial position or results of operations, or reasonably estimate
the amount of the loss, if any, that may result from resolution of these
matters.
Item 2. Changes in Securities and use of Proceeds
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
(c) Other Exhibits: Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASPEN TECHNOLOGY, INC.
Date: May 15, 2000 by: /s/ Lisa W. Zappala
------------------------------------
Lisa W. Zappala
Senior Vice President
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 37,913
<SECURITIES> 69,514
<RECEIVABLES> 103,765
<ALLOWANCES> (1,388)
<INVENTORY> 0
<CURRENT-ASSETS> 247,305
<PP&E> 88,393
<DEPRECIATION> 54,067
<TOTAL-ASSETS> 337,163
<CURRENT-LIABILITIES> 79,889
<BONDS> 0
0
0
<COMMON> 2,632
<OTHER-SE> 153,179
<TOTAL-LIABILITY-AND-EQUITY> 337,163
<SALES> 84,643
<TOTAL-REVENUES> 182,477
<CGS> 6,696
<TOTAL-COSTS> 68,489
<OTHER-EXPENSES> 35,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,061
<INCOME-PRETAX> 2,744
<INCOME-TAX> 934
<INCOME-CONTINUING> (176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,810
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
