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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 December 31, 1999.
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 December 31, 1999, there were 25,339,351 shares of the Registrant's common
stock (par value $.10 per share) outstanding.
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ASPEN TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of December 31, 1999 and June 30, 1999 3
Consolidated Condensed Statements of
Operations for the Three and Six Month
Periods Ended December 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows
for the Six Month Periods Ended
December 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 13 - 17
Item 3. Quantitative and Qualitative Market Risk Disclosures 18 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19 - 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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Aspen Technology, Inc.
Consolidated Condensed Balance Sheets
(Unaudited and in thousands)
December 31, 1999 June 30, 1999
----------------- -------------
Current Assets:
Cash and cash equivalents $ 37,917 $ 33,456
Short-term investments 60,764 63,512
Accounts receivable, net 77,513 73,858
Unbilled services 18,456 16,634
Current portion of long-term installments
receivable, net 21,086 25,344
Deferred tax asset 2,752 2,752
Prepaid expenses and other current assets 14,009 12,157
-------- --------
Total current assets 232,497 227,713
Long-term installments receivable, net 26,412 31,231
Property and leasehold improvements, at cost 85,468 82,615
Accumulated depreciation and amortization (51,145) (45,775)
-------- --------
34,323 36,840
Computer software development costs, net 6,203 6,011
Intangible assets, net 7,997 9,143
Deferred tax asset 4,757 4,757
Other assets 6,081 6,547
-------- --------
$318,270 $322,242
======== ========
Current Liabilities:
Current portion of long-term debt $ 511 $ 2,360
Accounts payable and accrued expenses 38,959 42,612
Unearned revenue 12,804 10,116
Deferred revenue 18,215 20,482
-------- --------
Total current liabilities 70,489 75,570
Long-term debt, less current maturities 3,096 3,155
5 1/4% Convertible subordinated debentures 86,250 86,250
Deferred revenue, less current portion 12,571 13,528
Other liabilities 513 513
Stockholders' Equity:
Common stock 2,555 2,517
Additional paid-in capital 157,566 154,480
Accumulated deficit (12,371) (11,257)
Accumulated other comprehensive loss (1,897) (2,012)
Treasury stock, at cost (502) (502)
-------- --------
Total stockholders' equity 145,351 143,226
-------- --------
$318,270 $322,242
======== ========
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Aspen Technology, Inc.
Consolidated Condensed Statements of Operations
(Unaudited and in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
Software licenses $29,011 $28,673 $ 50,488 $ 44,677
Service and other 32,753 32,982 64,233 63,687
------- ------- -------- --------
Total revenues 61,764 61,655 114,721 108,364
------- ------- -------- --------
Cost of software licenses 2,174 1,943 4,244 3,610
Cost of service and other 20,557 21,040 40,534 41,013
Selling and marketing 20,529 21,609 39,639 40,754
Research and development 11,498 11,937 22,936 23,541
General and administrative 5,562 5,625 10,992 11,100
------- ------- -------- --------
Total costs and expenses 60,320 62,154 118,345 120,018
------- ------- -------- --------
Income (loss) from operations 1,444 (499) (3,624) (11,654)
Other income (expense), net (69) 28 (17) 246
Interest income, net 995 1,212 1,954 2,364
------- ------- -------- --------
Income (loss) before provision for
(benefit from) income taxes 2,370 741 (1,687) (9,044)
Provision for (benefit from)
income taxes 806 260 (573) (3,165)
------- ------- -------- --------
Net income (loss) $ 1,564 $ 481 $ (1,114) $ (5,879)
======= ======= ======== ========
Diluted earnings (loss) per share $ 0.06 $ 0.02 $ (0.04) $ (0.24)
======= ======= ======== ========
Weighted average shares
outstanding-diluted 27,087 25,191 25,202 24,708
======= ======= ======== ========
Basic earnings (loss) per share $ 0.06 $ 0.02 $ (0.04) $ (0.24)
======= ======= ======== ========
Weighted average shares
outstanding-basic 25,264 24,707 25,202 24,708
======= ======= ======== ========
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Aspen Technology, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited and in thousands)
Six Months Ended
December 31,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(1,114) $ (5,879)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
(net of acquisition-related activity disclosed
below):
Depreciation and amortization 8,285 8,905
Deferred income taxes -- 2
(Increase) decrease in accounts receivable (3,595) 6,330
Increase in unbilled services (1,718) (421)
Decrease (increase) in installments receivable 9,077 (348)
Increase in prepaid expenses
and other current assets (1,850) (3,266)
Decrease in accounts payable
and accrued expenses (3,701) (6,704)
Increase in unearned revenue 2,699 1,547
Decrease in deferred revenue (3,251) (551)
------- --------
Net cash provided by (used in) operating activities 4,832 (385)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements (2,688) (5,143)
Sale (purchase) of investment securities 2,568 (19,464)
Decrease in other long-term assets 201 295
Increase in computer software development costs (1,684) (1,482)
Decrease in other long-term liabilities -- 196)
Cash used in the purchase of business, net of cash
acquired -- (1,200)
------- --------
Net cash used in investing activities (1,603) (27,190)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock
purchase plans 1,998 2,076
Exercise of stock options 1,126 832
Payments of long-term debt and capital lease
obligations (1,937) (1,355)
------- --------
Net cash provided by financing activities 1,187 1,553
------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 45 (47)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,461 (26,069)
CASH AND CASH EQUIVALENTS, beginning of period 33,456 78,694
------- --------
CASH AND CASH EQUIVALENTS, end of period $37,917 $ 52,625
======= ========
During the six months ended December 31, 1998,
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
========
5
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ASPEN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December 31, 1999
(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 six month periods ended December 31, 1999 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.
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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 December 31, 1999 was 9.0% and for the six month
period ended December 31, 1999 was 8.5% to 9.0%. In the three and six
month periods ended December 31, 1998, the rate utilized was 8.5%. At
December 31, 1999, the Company had long term installments receivable of
approximately $5.8 million denominated in foreign currencies. The
December 1999 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 charged
to operations in the three and six month periods ended December 31,
1999 was approximately $0.7 and $1.5 million, respectively, as compared
to the three and six month periods ended December 31, 1998, which was
$0.6 and $1.3 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.
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The calculations of basic and diluted weighted average shares
outstanding are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------------ -------------------
Basic weighted average common
shares outstanding 25,264 24,707 25,202 24,708
Weighted average potential
common shares 1,823 484 -- --
------ ------ ------ ------
Diluted weighted average
shares outstanding 27,087 25,191 25,202 24,708
====== ====== ====== ======
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------------ -------------------
Options and Warrants -- -- 879 856
Convertible Debt 410 410 821 821
--- --- ----- -----
Total 410 410 1,700 1,677
=== === ===== =====
(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 December 31, 1999
consist of $51.8 million in U.S. Corporate Bonds, $5.0 million in U.S.
Government Bonds and $4.0 million in Certificates of Deposit. 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 $11.8 and $17.3 million during the
three and six month periods ended December 31, 1999, 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.
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At December 31, 1999, the balance of the uncollected principal portion of all
contracts sold was $102.5 million. The Company's potential recourse obligation
related to these contracts is approximately $3.9 million. In addition, the
Company is obligated to pay additional costs to the financial institutions in
the event of default by the customer.
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 six months ended December 31, 1999 and 1998 are as follows (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $1,564 $ 481 $(1,114) $(5,879)
Unrealized gain (loss) on investments (162) (302) (180) 20
Foreign currency adjustment (431) (422) 295 (48)
------ ----- ------- -------
Comprehensive income (loss) $ 971 $(243) $ (999) $(5,907)
====== ===== ======= =======
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 six months ended
December 31, 1999. The remaining accrual will be paid by the end of fiscal 2000.
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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 Dec 31,
1999 Payments 1999
-------- -------- ---------
Close-down/consolidation of facilities $4,760 $ 192 $4,568
Employee severance, benefits and related costs 1,938 1,445 493
Other 101 97 4
------ ------ ------
$6,799 $1,734 $5,065
====== ====== ======
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.
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.
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The following table presents a summary of operating segments (in thousands):
Service and
License Other Total
------- ----- -----
Three Months Ended December 31, 1999-
Revenues from unaffiliated customers $29,011 $32,753 $ 61,764
Cost of revenue 2,174 20,557 22,731
Research and development 10,368 1,130 11,498
------- ------- -------
Operating margin (1) $16,469 $11,066 $27,535
======= ======= ========
Three Months Ended December 31, 1998-
Revenues from unaffiliated customers $28,673 $32,982 $ 61,655
Cost of revenue 1,943 21,040 22,983
Research and development 10,628 1,309 11,937
------- ------- -------
Operating margin (1) $16,102 $10,633 $ 26,735
======= ======= ========
Six Months Ended December 31, 1999-
Revenues from unaffiliated customers $50,488 $64,233 $114,721
Cost of revenue 4,244 40,534 44,778
Research and development 20,572 2,364 22,936
------- ------- -------
Operating margin (1) $25,672 $21,335 $ 47,007
======= ======= ========
Six Months Ended December 31, 1998-
Revenues from unaffiliated customers $44,677 $63,687 $108,364
Cost of revenue 3,610 41,013 44,623
Research and development 21,084 2,457 23,541
------- ------- -------
Operating margin (1) $19,983 $20,217 $ 40,200
======= ======= ========
(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 Six Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Total operating margin for
reportable segments $ 27,535 $ 26,735 $ 47,007 $ 40,200
Selling and marketing (20,529) (21,609) (39,639) (40,754)
General and administrative (5,562) (5,625) (10,992) (11,100)
Interest and other income and
expense 926 1,240 1,937 2,610
-------- -------- -------- --------
Income (loss) before provision
for (benefit from) income taxes $ 2,370 $ 741 $ (1,687) $ (9,044)
======== ======== ======== ========
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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 and six month periods
ended December 31, 1999, the Company paid $1.3 million in prepaid royalties to
Extricity Software.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations: Comparison of Three and Six Months Ending December 31,
1999 and 1998
TOTAL REVENUES
Revenues are derived from software licenses and maintenance and other services.
Total revenues for the three months ended December 31, 1999 were $61.8 million,
a slight increase from $61.7 million in the comparable period of fiscal 1999.
Total revenues for the six months ended December 31, 1999 were $114.7 million,
an increase of $6.4 million, or 5.9%, from $108.4 million in the comparable
period of fiscal 1999.
Total revenues from customers outside the United States were $30.0 and $52.9
million, or 48.6% and 46.1%, of total revenues for the three and six months
ended December 31, 1999, respectively. The non-U.S. revenues for the comparable
periods in fiscal 1999 were $32.6 and $56.7 million, or 52.8% and 52.3%, 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 47.0% of total revenue for the three months
ended December 31, 1999, as compared to 46.5% in fiscal 1999. Revenues from
software licenses for the three months ended December 31, 1999 were $29.0
million, an increase of $0.3 million, or 1.2%, from $28.7 million in fiscal
1999. Software license revenue represented 44.0% of total revenue for the six
months ended December 31, 1999, as compared to 41.2% in fiscal 1999. Revenues
from software licenses for the six months ended December 31, 1999 were $50.5
million, an increase of $5.8 million, or 13.0%, from $44.7 million in the
comparable period of fiscal 1999. During the second quarter of fiscal 2000, the
Company entered into a significant license contract with a customer to license
certain of the Company's software for its worldwide operations. A portion of
this license revenue was recognized in the second quarter of fiscal 2000 with
the remainder to be recognized in subsequent quarters.
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 December 31, 1999 were $32.8
million, a slight decrease of $0.2 million, or 1.0%, from $33.0 million in the
comparable period in fiscal 1999. Revenues from service and other for the six
months ended December 31, 1999 were $64.2 million, an increase of $0.5 million,
or 1.0%, from $63.7 million in the comparable period in fiscal 1999. Growth in
the services business is lagging that of the Company's license business as the
Company brings on new partners to help deploy the Company's solutions and also
due to the effect on post-contract support revenue of prior periods slower
license revenue growth.
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 7.5% and 8.4% for the three and six month periods ended December
31, 1999. This is compared to 6.8% and 8.1% for
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the three and six month periods ended December 31, 1998, respectively. The
increase in these costs as a percentage of software license revenue is due
primarily to higher royalties, due to a change in the mix of licenses in the
fiscal 2000 periods as compared to the fiscal 1999 periods.
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 62.8% and 63.1% in the three and six months
ended December 31, 1999. The same percentages in the comparable periods of
fiscal year 1999 were 63.8% and 64.4%, respectively. This percentage decrease is
primarily a result of an increased revenue per hour and improved utilization
rates of billable engineers in the three and six month periods ended December
31, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three and six month periods ended
December 31, 1999 were $20.5 and $39.6 million, a decrease of 5.0% and 2.7%,
respectively, from $21.6 and $40.8 million in the comparable periods in fiscal
year 1999. As a percentage of revenues, selling and marketing expenses were
33.2% and 34.6%, for the three and six month periods ended December 31, 1999,
respectively. These same percentages were 35.0% and 37.6% for the comparable
periods in fiscal 1999. The decrease in these percentages in fiscal 2000 is the
result of a similar expense level spread over a larger revenue base. A
significant component 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.
The Company continues to selectively invest in sales personnel and regional
sales offices to improve the Company's geographic proximity to its customers, to
maximize the penetration of existing accounts and to add new customers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel and outside
consultancy costs required to conduct the Company's product development efforts.
Capitalized research and development costs are amortized over the estimated
remaining economic life of the relevant product, not to exceed three years.
Research and development expenses during the three and six month periods ended
December 31, 1999 were $11.5 and $22.9 million, respectively, a decrease of $0.4
and $0.6 million, or 3.7% and 2.6%, respectively, from $11.9 and $23.5 million
in the comparable periods of fiscal 1999. As a percentage of revenues, research
and development costs were 18.6% and 20.0% for the three and six month periods
ended December 31, 1999, respectively. The percentages for the same periods in
fiscal 1999 were 19.4% and 21.7%, respectively. The decrease in these
percentages in fiscal 2000 is the result of a similar expense level spread over
a larger revenue base. The Company capitalized 8.0% and 6.7% of its total
research and development costs during the three and six month periods ended
December 31, 1999, respectively. In the comparable periods of fiscal year 1999,
the Company capitalized 5.9% and 6.0%. The costs remained relatively flat in
fiscal 2000 as compared to fiscal 1999, as the Company works to optimize
deployment of its resources towards the development of its individual software
solutions and development of Aspen Framework as the backbone of its
Plantelligence Solution.
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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 six month periods ended December 31, 1999 were $5.6
and $11.0 million, a decrease of $0.1, or 1.0%, for both comparable periods of
fiscal 1999.
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, the Company offers customers the option to make annual payments for
its term licenses instead of a single license fee payment at the beginning of
the license term. Historically, a substantial majority of the off-line modeling
customers have elected to license these products through installment contracts.
The Company believes this election is made principally because the customers
prefer to pay for the Company's off-line modeling products out of their
operating budgets, rather than out of their capital budgets. Included in the
annual payments is an implicit interest charge based upon the interest rate
established by the Company at the time of the license. As the Company sells more
perpetual licenses for 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. The Company sells a portion of the installment
contracts to unrelated financial institutions. The interest earned by the
Company on the installment contract portfolio in any period is the result of the
implicit interest established by the Company on installment contracts and the
size of the contract portfolio. Interest income was $2.4 and $4.7 million for
the three and six months ended December 31, 1999 as compared to $2.5 and $5.1
million for the corresponding periods in fiscal 1999.
INTEREST EXPENSE
Interest expense is generated from interest charged on the Company's 5 1/4%
convertible debentures, bank line of credit, notes payable and capital lease
obligations. Interest expense for the three and six months ended December 31,
1999 was $1.4 and $2.8 million compared to $1.3 and $2.7 million in the same
periods of fiscal 1999.
TAX RATE
The effective tax rate for the three and six month periods ended December 31,
1999 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 six months ended December 31, 1999, the Company's cash and cash
equivalents balance increased by $4.5 million. Operations provided $4.8 million
of cash during this period, primarily as a result of the decrease in long-term
installments receivable offset by an increase in accounts receivable and
decreases in accounts payable and accrued expenses, as well as deferred
revenues.
The Company has 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 six months ended December 31, 1999, installment contracts decreased by $9.1
million to $47.5 million, net of $17.3 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 the Company. The Company's arrangements with the two
financial institutions provide for the sale of installment contracts up to
certain limits and with certain recourse obligations. At December 31, 1999, the
balance of the uncollected principal portion of the contracts sold to these two
financial institutions was $102.5 million, for which the Company has a partial
recourse obligation of
15
<PAGE> 16
approximately $3.9 million. The availability under these arrangements will
increase as the financial institutions receive payment on installment contracts
previously sold.
The Company maintains a $30.0 million bank line of credit, expiring December 31,
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 (8.50% at
December 31, 1999) or, at the Company's option, a rate equal to a defined LIBOR
(5.88% at December 31, 1999) plus a specified margin. The line of credit
agreement requires the Company to provide the bank with certain periodic
financial reports and to comply with certain financial tests, including
maintenance of minimum levels of consolidated net income before taxes and of the
ratio of current assets to current liabilities. Additionally, the line is
secured by certain of the Company's marketable securities. At December 31, 1999,
there were no outstanding borrowings under the line of credit.
In June 1998, the Company sold $86.3 million of 5 1/4% Convertible subordinated
debentures (the Debentures). The Debentures are convertible into shares of the
Company's 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
the option of the Company 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 the Company to repurchase its Debentures, in whole or in part, for
cash or, at the Company's 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
existing and future senior debt of the Company, as defined, and effectively
subordinate in right of payment to all indebtedness and other liabilities of the
Company's subsidiaries.
YEAR 2000 COMPLIANCE
INTRODUCTION
Management has in place a Company-wide program that prepared the Company's
computer systems and applications as well as the Company's product offerings for
the year 2000. The Year 2000 Steering Committee comprising of representatives
from the different divisions of the Company, including product development staff
and internal systems staff, remains responsible for defining Year 2000
compliance standards for the entire Company, including assessing current
compliance and compliance efforts and generally providing direction and
management of the Company's Year 2000 efforts. The Company's Year 2000 efforts
focused on the compliance of its product and service offerings to customers and
on internal business-critical items. As of January 31, 2000, the Company has not
experienced any Year 2000-related interruptions in its products or services, nor
in its internal systems. Hardware, software, systems, technologies and
applications are considered "business-critical" if a failure would either have a
material adverse impact on the Company's business, financial condition or
results of operations or involve a safety risk to employees or customers.
16
<PAGE> 17
STATE OF READINESS
All of the Company's current products and services are Year 2000 compliant. The
Company's internal business systems have been tested and it has determined that
over 95% of its computers and all of its business critical systems are
compliant. The results of the product testing program and further information on
Y2K readiness are available on the Company's public website.
PRODUCTS AND SERVICES
The Company has tested and determined that all most recent revisions of its
standard products currently being licensed are compliant and has listed the
status of current products and older versions of installed products on its
website at www.AspenTech.com. The Company has also incorporated Y2K compliance
tests and procedures into the work processes of its service groups carrying out
customer projects.
INTERNAL SYSTEMS
The Company has tested and determined the Y2K readiness of its internal systems
which are business-critical. The Company expects that its internal system
development plans will continue to address the Year 2000 issue and will correct
any existing non-compliant systems without the need to accelerate the overall
information systems implementation plans.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE
The Company expects to incur internal staff costs as well as consulting and
other expenses related to system enhancements for the year 2000, although such
expenditures have largely been made, and will diminish as systems complete
testing. The Company believes the total costs to be incurred for all year 2000
related projects will not have a material impact on the future results from
operations; however, the Company is assessing such costs on an on-going basis in
order to adjust spending plans as necessary.
CONTINGENCY PLANNING AND RISKS
The Company has risks both that its products and services could fail to be
compliant with certain Y2K functionality and that its business operations would
be interrupted or affected by the failure of other products or services to be
Y2K compliant. External risks are difficult to determine due to the general
uncertainty inherent in the Company's dependence upon the Y2K compliance of
third party software operating systems and applications with which the Company's
software operates, and third-party suppliers, vendors and customers with whom
the Company does business. The Company is unable to determine at this time its
most reasonably likely worst case scenario. Although costs related to the lack
of Y2K compliance of third parties, business interruptions, litigation and other
liabilities related to Y2K issues could materially and adversely affect the
Company's business, results of operations and financial condition, the lack of
Year 2000 problems as of January 31, 2000 and the Company's Y2K compliance
efforts have reduced significantly the Company's level of uncertainty about the
impact of Y2K issues affecting both its products and services and internal
systems.
17
<PAGE> 18
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
The Company does not use derivative financial instruments in its investment
portfolio. The company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issuer and the types of instruments approved for investment. The Company does
not expect any material loss with respect to its investment portfolio. The
following table provides information about the Company's 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
12/31/99 FY2000 FY2001 FY2002 FY2003 & Thereafter
------------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents $28,064 $28,064
Weighted Average Interest Rate 5.81% 5.81% -- -- -- --
Investments $60,764 $23,523 $12,589 $17,209 $5,960 $1,483
Weighted Average Interest Rate 6.33% 6.09% 6.63% 6.41% 6.57% 5.62%
Total Portfolio $88,828 $51,587 $12,589 $17,209 $5,960 $1,483
Weighted Average Interest Rate 6.18% 5.94% 6.63% 6.41% 6.57% 5.62%
</TABLE>
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During the first six 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 the
consolidated results of the Company. Foreign exchange forward contracts are only
purchased to hedge certain customer accounts receivable amounts denominated in a
foreign currency.
FOREIGN EXCHANGE HEDGING
The company enters into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on customer accounts receivables amounts
denominated in foreign currency. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on the
Company's operating results. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company had $5.9 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 second 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 second quarter and the first six
months of fiscal 2000 were not material to the Company. Looking forward, the
Company does 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
18
<PAGE> 19
assurance that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
The following table provides information about the Company's foreign exchange
forward contracts at the end of the second 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 second 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 29.90 $ 23 May 98 Jan 00
British Pound Sterling 1.55 1,178 Various: Apr 98 - Jul 99 Various: Jan 00-Jul 02
French Franc 5.68 614 Various: Apr 98-Jul 99 Various: Jan 00-Jan 02
German Deutsche Mark 1.60 833 Various: Apr 97 - Apr 99 Various: Jan 00-Jul 01
Japanese Yen 115.74 2,667 Various: Apr 97 - Jul 99 Various: Feb 00-Aug 02
Swiss Franc 1.51 585 Various: Jan 99-Jul 99 Various: Feb 00-Jul 02
------
Total $5,900
======
</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
19
<PAGE> 20
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 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 Compaint. On January 27, 1999, in response to a motion to dismiss
filed by us, the plaintiffs consolidated the three complaints and filed a
Comsolidated Amended Class Action Complaint. On December 9, 1999, the Court
heard oral arguments to review the pleadings in the case; as of January 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: February 14, 2000 by: /s/ Lisa W. Zappala
----------------------------
Lisa W. Zappala
Senior Vice President
Chief Financial Officer
20
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 37,917
<SECURITIES> 60,764
<RECEIVABLES> 97,349
<ALLOWANCES> (1,380)
<INVENTORY> 0
<CURRENT-ASSETS> 232,497
<PP&E> 85,468
<DEPRECIATION> 51,145
<TOTAL-ASSETS> 318,270
<CURRENT-LIABILITIES> 70,489
<BONDS> 0
0
0
<COMMON> 2,555
<OTHER-SE> 142,796
<TOTAL-LIABILITY-AND-EQUITY> 318,270
<SALES> 50,488
<TOTAL-REVENUES> 114,721
<CGS> 4,244
<TOTAL-COSTS> 44,778
<OTHER-EXPENSES> 22,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,721
<INCOME-PRETAX> (1,687)
<INCOME-TAX> (573)
<INCOME-CONTINUING> (3,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,114)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
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