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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24786
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2739697
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
TEN CANAL PARK, CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (Zip code)
(617) 577-0100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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 .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as at September 18, 1996 was $622,986,490 based on a total of
8,899,807 shares held by non-affiliates and the closing price reported on the
Nasdaq National Market on that date, which was $70.00.
Number of shares outstanding at September 18, 1996:
9,772,129 shares of Common Stock, par value $0.10 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended June 30,
1996. Portions of such Proxy Statement are incorporated by reference in PART III
of this report.
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ASPEN TECHNOLOGY, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business 2
Item 1a. Risk Factors 10
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 4a. Executive Officers of the Registrant 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K 26
SIGNATURES 28
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PART I
ITEM 1. BUSINESS
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Aspen Technology, Inc. (the "Company" or "AspenTech") is a leading
supplier of off-the-shelf software products and services for the analysis,
design and automation of manufacturing facilities by companies in the process
industries, including the chemicals, petroleum, pharmaceuticals, pulp and paper,
electric power, and food and consumer products industries. Process manufacturers
use AspenTech's software products and services to design, operate and manage
manufacturing processes more efficiently, safely and profitably.
AspenTech provides a sophisticated, integrated family of off-the-shelf
software products for use across the entire process manufacturing life-cycle,
from "off-line" applications used primarily in research and development and
engineering to "on-line" applications used principally in production. The
Company's off-line software is used by engineers on desktop computers primarily
to simulate and predict manufacturing processes in connection with the design of
new facilities or processes and the analysis of existing facilities or
processes. AspenTech's on-line software, which is connected directly to plant
instrumentation, enables the real-time adjustment of production variables in
response to constantly changing operating conditions to improve process
efficiency. AspenTech's product offerings are classified in three categories:
modeling; process information management ("PIM"); and advanced process control
("APC") and optimization. Chemical engineers who work in the off-line research
and development and engineering stages of plant and process design and analysis
are the principal users of modeling products, while chemical and control
engineers who work in the on-line stages of real-time plant operation are the
primary users of PIM, APC and optimization software and services.
The Company's modeling software mathematically simulates and predicts
the performance of manufacturing processes under varying equipment
configurations and operating conditions, enabling chemical engineers to design
cost-effective, efficient processes that comply with environmental and safety
requirements. AspenTech's PIM software is used by process manufacturers to
gather and analyze large volumes of real-time plant operations data in order to
better understand actual performance within a complex process manufacturing
facility. PIM software allows customers to compare actual performance with
theoretical benchmarks derived from models and to make appropriate adjustments
on a real-time basis. AspenTech's APC and optimization software products are
designed to enable customers to achieve superior operating performance by
continuously adjusting key process variables to maintain optimal target levels
under constantly changing conditions. The Company initially became a provider of
PIM software and services through its acquisition of Industrial Systems, Inc.
("ISI") in May 1995, and expanded its PIM capabilities through its acquisition
of Setpoint, Inc. ("Setpoint") in February 1996. AspenTech significantly
enhanced its APC and optimization software offerings through the Setpoint
acquisition as well as its acquisition of Dynamic Matrix Control Corporation
("DMCC") in January 1996.
AspenTech can combine its off-the-shelf software products with design
and implementation consulting services in order to market a complete solution to
its customers. The Company significantly strengthened its on-line consulting
services through its acquisitions of DMCC and Setpoint. AspenTech believes its
ability to offer a complete solution of both industry-leading software and
sophisticated process engineering expertise is an important source of
competitive differentiation.
AspenTech's customers span a broad range of process industry segments.
With more than 750 customers worldwide, AspenTech currently licenses its
software to 44 of the 50 largest chemical companies in the world and 19 of the
20 largest petroleum refiners in the world.
INDUSTRY BACKGROUND
Companies in the process industries manufacture products such as bulk
solids, liquids and gases through operations involving chemical reactions,
combustion, mixing, separation, and heating and cooling. The process industries
include the chemicals, petroleum, pharmaceuticals, pulp and paper, electric
power, and food and consumer products industries. Based on data provided by
industry trade groups, the Company estimates that the aggregate worldwide
revenues of the process industries exceed $3 trillion, of which the chemicals
industry has revenues that exceed $1 trillion and the petroleum segment has
revenues in excess of $500 billion.
In recent years, several factors have dramatically affected the
competitiveness and profitability of many sectors of the process industries.
Companies in certain process industries, particularly the chemicals industry,
have experienced intensified global competition, especially from competitors
located close to raw materials sources. In addition, companies in many of the
process industries face more stringent environmental and safety regulations.
These competitive and regulatory factors, as well as cyclical economic
conditions, can have a significant negative effect on the revenues and profits
of process manufacturers. Furthermore, while labor-intensive businesses can
respond to difficult business conditions by downsizing their workforces,
capital-intensive process manufacturers must focus on improving their production
processes. Therefore, in order to significantly reduce costs and
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increase profitability, a process manufacturer must design, manage and operate
efficient and cost-effective production processes. In response to competitive,
regulatory and economic pressures, companies in the process industries are
adopting increasingly sophisticated off-line and on-line tools and methodologies
to improve the performance of their facilities.
Chemical engineering analysis is the fundamental discipline behind the
improvement of production processes. Due to the number of variables involved,
chemical engineering analysis is complex and calculation intensive. Without the
use of process modeling and plant automation software, time and cost constraints
force engineers to make simplifying assumptions that may limit the potential
improvements to production processes. These constraints may also force engineers
to evaluate only parts of the process rather than the whole, or to consider
fewer alternative solutions. Process modeling and plant automation software
enables engineers to perform these complex calculations simultaneously in order
to arrive quickly at better solutions.
Sophisticated software tools for off-line use that can accurately model
a broad range of processes have been available to chemical engineers since the
1980s. Although early versions of the tools required substantial modeling
expertise and were limited in scope and complicated to use, in recent years the
availability of affordable, powerful desktop computers and intuitive graphical
user interfaces has expanded the market of potential users of process modeling
software. Moreover, process modeling software can now reliably model highly
complex chemical processes, broadening the scope of projects where its use is
applicable. These software tools can generate savings significantly in excess of
their cost by enabling users to design manufacturing processes with lower raw
material usage, decreased energy and capital equipment costs, improved product
quality and operating safety, cost-effective regulatory compliance and enhanced
engineering productivity. As a result of this improved availability,
functionality and cost-efficiency, many companies that previously relied on
internally developed models are adopting software products developed by third
parties who are better equipped to maintain and enhance these increasingly
complex tools.
In recent years, the use of off-line technology has been complemented
by an increasing demand for on-line applications for several reasons. First, the
economic rewards for making even small improvements in plant efficiency and
safety can be substantial. Second, the benefits of integrated process modeling,
information management, process control and optimization techniques are becoming
increasingly understood by customers. Third, while sophisticated tools and
expertise have not heretofore been widely available, commercial providers are
emerging to address these needs. Recent significant advances in software and
hardware technology, including the availability of more sophisticated
optimization algorithms and updatable graphical user interfaces, have made
on-line applications increasingly feasible for a growing number of process
manufacturers.
As a result of the market dynamics in the process industries and the
rapidly evolving technology available to improve manufacturing processes,
process manufacturers increasingly seek a complete, integrated family of
software and services that can be used to design, operate and manage their
production processes more effectively.
THE ASPENTECH ADVANTAGE
The Company believes it is the largest age independent supplier of
software and service solutions used by companies in the process industries to
design, operate and manage their manufacturing processes based on fundamental
chemical engineering principles. AspenTech offers its customers in-depth
technical expertise encompassing both off-line and on-line applications. By
combining its traditional process modeling and optimization capabilities with
acquired skills in PIM and APC, AspenTech has created a complete solution
designed to provide several key advantages to customers:
Family of Products Across Full Manufacturing Life-Cycle. AspenTech
believes that it offers the most complete family of process modeling and plant
automation software tools used across every stage of the production process,
from research and development to engineering to production. The Company's
software products are designed to achieve improved process efficiency through
comparison of off-line predictive models with actual on-line production data and
through real-time adjustments to operating parameters in response to constantly
changing conditions. The Company significantly enhanced its on-line capabilities
through its acquisitions of DMCC and Setpoint, and intends to integrate more
fully the acquired APC and optimization tools with its other software products.
Complete Software and Service Solution. Customers increasingly require
expert consulting services to take full advantage of the highly complex software
tools being designed for the process industries. AspenTech deploys what it
believes is the largest independent organization of control engineers to design
and implement solutions, in combination with PIM, APC and optimization software
products. AspenTech believes its ability to offer its customers a complete
solution will be an increasingly important source of competitive
differentiation.
Process Industry Expertise. Over the past 15 years, AspenTech has built
a reputation as a leader in process modeling expertise. AspenTech's software
products incorporate proprietary solution methods, physical property models and
data estimation techniques that enable users to model processes that involve
complex chemistry. AspenTech has refined these methods, models and techniques
based on continuing relationships with customers who have performed millions of
simulations using AspenTech software. The Company has expanded its expertise
through its acquisitions of ISI, DMCC and Setpoint, which the Company
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believes are technological leaders in the PIM, APC and optimization markets.
AspenTech believes that the expertise underlying its software products and
services will assist it in maintaining and enhancing its reputation as a
technological leader across the manufacturing process.
STRATEGY
AspenTech's strategy is to expand the use of its products and services to enable
customers to improve the design, operation and management of their manufacturing
processes. The key elements of this strategy are:
Leverage Breadth and Depth of Customer Base. AspenTech considers its
relationships with its existing customers to be an important corporate asset.
AspenTech currently has more than 750 commercial customers worldwide, including
44 of the 50 largest chemical companies in the world and 19 of the 20 largest
petroleum refiners in the world. The Company has historically derived a
significant component of its revenue from additional sales to existing
customers. The Company believes it has a significant opportunity to expand its
existing customer relationships by adding new licensed users, by offering
additional product modules, and by providing consulting and support services.
These solutions are marketed by a single, integrated sales force organized by
customer account. AspenTech believes that significant opportunities exist to
cross-sell modeling products to customers of DMCC and Setpoint and to cross-sell
PIM, APC and optimization solutions to customers who have historically purchased
modeling products from the Company.
Increase Penetration of Process Industries. In recent years, AspenTech
has broadened its penetration of the process industries beyond its traditional
leadership in the chemicals segment to include significant shares of the
petroleum and pulp and paper markets. Many of the same imperatives and
opportunities confront participants in other process industry segments. As the
benefits of its solutions are becoming more widely understood by process
manufacturers, AspenTech is actively pursuing opportunities to expand the use of
its technology in additional vertical markets. AspenTech believes the broadening
of its software product and service offerings through its acquisitions of ISI,
DMCC and Setpoint will enable AspenTech to reach new customers. Over time,
AspenTech will also seek to leverage these new customer relationships by
cross-selling its other software product and service offerings.
Offer Broadest, Integrated Family of Products and Services. AspenTech
offers customers a broad family of software products encompassing the full
manufacturing life-cycle, enabling customers to add compatible software
capabilities as their needs grow. These products can be used as stand-alone
solutions or in concert with other software modules. AspenTech offers process
manufacturers what it believes is the most advanced product functionality
available across a wide range of off-line and on-line applications. The Company
intends to integrate further the APC and optimization tools obtained through its
acquisitions of DMCC and Setpoint and to integrate future generations of its
software products. In addition, AspenTech can provide implementation consulting
services to ensure that customers can achieve a successful solution. In certain
of AspenTech's consulting projects, functionality developed in connection with a
solution has appeared applicable to other customers and has been commercialized
by AspenTech. The Company expects this to continue to be one of its sources of
new product development and that its ability to offer its customers a complete
solution will be an increasingly important source of competitive
differentiation.
Extend Technology Leadership. AspenTech intends to extend its
reputation as the technology leader and believes its acquisitions of DMCC and
Setpoint represent important opportunities to maintain and enhance its
differentiating capabilities in the marketplace. AspenTech has pioneered a
number of products and algorithms underlying its modeling software. DMCC and
Setpoint are technological leaders in real-time applications, engineering and
consulting solutions for APC and optimization. AspenTech is creating a single,
unified product family that will provide a migration path toward a solution
offering the best features and functionality of the combined companies'
products. The Company is similarly seeking to integrate the consulting services
of AspenTech and its acquired companies.
Focus on Long-Term Customer Relationships. AspenTech's operating
strategy is driven by a long-term approach to customer relationships. AspenTech
has historically derived the substantial majority of its revenues from three- to
five-year software licenses and renewals of those licenses. While DMCC and
Setpoint traditionally sold perpetual licenses, Aspen intends to continue to
focus on long-term customer relationships in marketing its process modeling and
plant automation software products and services. In addition, the Company
believes that the consulting services provided by DMCC and Setpoint have enabled
them to establish close ties with their customers.
Capitalize on Emerging On-Line Market. The Company believes that the
potential market for on-line applications for process industries, while less
mature than the off-line market, may be substantially larger than the potential
off-line market. On-line applications complement existing off-line applications
and afford recurring incremental savings in day-to-day operations. The Company
will seek to continue to develop and expand the market for its PIM, APC and
optimization software and services for the emerging on-line market.
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CUSTOMERS
AspenTech currently has over 750 commercial customers worldwide,
including 44 of the 50 largest chemical companies in the world and 19 of the 20
largest petroleum refiners in the world. The Company derived more than 50% of
its revenues in each of fiscal 1994 and fiscal 1995, and approximately 45% of
its revenues in fiscal 1996, from customers outside the United States.
CHEMICALS FOOD PRODUCTS
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Air Products & Chemicals, Inc. Cargill Incorporated
BASF AG General Mills, Inc.
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc. PETROLEUM
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Elf Atochem Arco Products Company
Hoechst AG Chevron Corporation
Huls AG Citgo Petroleum Corporation
Huntsman Corporation Conoco Inc.
Lyondell Petrochemical Corpoven, S.A.
Mitsubishi Chemical Corporation Marathon Oil Company
Olin Corporation Mobil Oil Corporation
Rhone-Poulenc Industrialisation Neste Oy
Sasol Industries (Pty.) Ltd. Phillips Petroleum Company
Shell International Chemie Mij B.V. Repsol Petroleo SA
Sumitomo Chemical Co. Ltd. Shell Oil Company
Union Carbide Chemicals and Plastics Company, Inc. Star Enterprise
Sun Refining and Marketing Company
CONSTRUCTION AND ENGINEERING PHARMACEUTICALS
---------------------------- ---------------
Bechtel Corporation Ciba-Geigy AG
Fluor Daniel, Inc. Eli Lilly and Company
John Brown Engineers and Constructors B.V. Fujisawa Pharmaceutical Co., Ltd.
Lurgi AG Genentech, Inc.
The M.W. Kellogg Company Hoffman-LaRoche, Inc.
The Ralph M. Parsons Company Kyowa-Hakko Kogyo Co., Ltd.
UOP Merck & Co., Inc.
Zimmer AG Sandoz Technologie AG
The Upjohn Company
CONSUMER PRODUCTS
-----------------
The Procter & Gamble Company PULP AND PAPER
3M Company --------------
Unilever Research Union Camp Corporation
Weyerhaeuser Company
ELECTRIC POWER
--------------
ABB Stal AB
British Nuclear Fuels plc
Combustion Engineering, Inc.
GEC Alsthom
SGN
Westinghouse Electric Corporation
No individual customer represented 10% or more of AspenTech's total
revenues for fiscal 1994, 1995 or 1996. There can be no assurance that any of
the customers listed will continue to license software or purchase services from
AspenTech beyond the term of any existing agreement.
PRODUCTS AND SERVICES
AspenTech is a leading supplier of software products and services for
the analysis, design and automation of manufacturing facilities by companies in
the process industries. AspenTech's integrated family of software products
enables customers to predict accurately and reliably the performance of a
manufacturing process in order to design, operate and manage manufacturing
processes more efficiently, safely and profitably. These tools are used both
off-line by engineers on desktop computers in connection with the
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design of new facilities and processes and the analysis of existing facilities
and processes, and on-line connected directly to plant instrumentation to
identify adjustments that can be made on a real-time basis to optimize
performance continually in response to changing production conditions. In
addition, AspenTech can provide expert consulting, training and support services
to augment its software expertise and offer a complete solution to its
customers. In fiscal 1996, on a pro forma basis giving effect to the
acquisitions of DMCC and Setpoint as of the beginning of the fiscal year, the
Company's revenues from software licenses and revenues from services and other
accounted for approximately 53% and 47%, respectively, of its total revenues.
The principal software products of the Company are set forth below:
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Products Description Origin Platforms Supported
-----------------------------------------------------------------------------------------------
OFF-LINE SOFTWARE
ASPEN PLUS Modeling AspenTech PCs
(steady state processes) UNIX
DEC VMS
Cray
SPEEDUP Modeling AspenTech PCs
(dynamic processes) UNIX
Cray
ADVENT Modeling AspenTech PCs
(process synthesis) UNIX
-----------------------------------------------------------------------------------------------
ON-LINE SOFTWARE
CIM/21 PIM ISI PCs
UNIX
SETCIM PIM Setpoint UNIX
DEC VMS
InfoPlus-X PIM Setpoint PCs
UNIX
DEC VMS
DMC APC DMCC PCs
IBM UNIX
SMCA APC Setpoint PCs
UNIX
DEC VMS
DMO Optimization DMCC PCs
UNIX
DEC VMS
RT-OPT Optimization AspenTech UNIX
DEC VMS
-----------------------------------------------------------------------------------------------
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Off-Line Software Products
The Company offers a number of software products for off-line
applications. Off-line software is used primarily to simulate and predict
manufacturing processes in connection with the design of new facilities or
processes and the analysis of existing facilities or processes. ASPEN PLUS is
used to simulate steady state processes in which inputs and conditions are held
constant. ASPEN PLUS can be used in concert with SPEEDUP, dynamic process
modeling software that simulates processes in which inputs and conditions change
over time, such as during plant start-up and shutdown or when feedstocks are
adjusted. ADVENT is process synthesis software that minimizes energy consumption
and emissions from a manufacturing process. Layered on top of these core,
integrated off-line applications are a number of separately sold modules that
focus on specialized types of analysis to model separation systems, batch
distillation columns, bioprocess operations, polymers processes, and other
complex systems.
Off-line modeling software was AspenTech's principal area of product
focus from its founding until the acquisitions of ISI, DMCC and Setpoint.
AspenTech typically licenses its modeling software for a term of either three or
five years. Currently, the annualized cost for a single U.S.-based user of one
of AspenTech's off-line software modules ranges from $10,000 to $30,000,
depending on the product and the license term. The license fees charged by
AspenTech are typically based on the number of licensed users, with the cost per
user declining as the number of licensed seats increases. The license fee
includes a separate maintenance component that covers upgrades, revisions or
enhancements during the term of the license, as well as customer support.
On-Line Software Products
For on-line applications, AspenTech offers a family of products and
services that enables customers to better understand and monitor highly complex
manufacturing processes on a real-time basis, and to automate the adjustment of
operating parameters in response to continually changing conditions for improved
process efficiency, safety and cost-effectiveness. AspenTech typically licenses
its on-line software for a term of 99 years. AspenTech's PIM products capture,
display and analyze plant-wide historical and real-time process data, in order
to compare the actual performance to theoretical benchmarks derived from models.
The U.S. list price for an entry-level 99-year PIM license is approximately
$50,000, and varies depending on the number of points of data being collected.
AspenTech's APC and optimization products enable customers to improve the
profitability of a manufacturing facility by determining optimal operating
parameters and simultaneously adjusting multiple process variables to achieve
these targets. The U.S. list price for a 99-year APC or optimization software
license for a single process unit or single facility ranges from $50,000 to
$200,000.
The acquisitions of ISI, DMCC and Setpoint have created an on-line
product family that, at present, contains some overlapping functionality.
AspenTech is developing a new generation of products that will offer the best
features and functionality from among the various products, provide a migration
path for existing customers and further integrate on-line analysis software with
AspenTech's off-line modeling software. By so doing, AspenTech believes it will
achieve a significant competitive advantage as the only supplier of consistent
modeling technology across the full life-cycle of a process, from research and
development to engineering to production. There can be no assurance that
AspenTech will be successful in enhancing and integrating these software
products or that a fully integrated product offering will result in the benefits
anticipated. See "Item 1a. Risk Factors -- Integration of DMCC and Setpoint" and
"-- Product Development and Technological Change."
Consulting Services
AspenTech can combine its on-line off-the-shelf software products with
design and implementation consulting services in order to market a complete
solution to its customers. The emerging on-line market has fewer commercial
modeling tools than the off-line market. As a result, current on-line
applications typically consist of substantial consulting services combined with
a small component of standard commercial software. These services are
customarily provided pursuant to contracts with engagement terms of
approximately 9 to 24 months. The contracts may be priced on either a
time-and-materials or fixed-price basis. Customers can purchase such services
from other vendors or perform them in-house. See "Item 1a. Risk Factors --
Integration of DMCC and Setpoint." The Company believes that, due to customers'
growing awareness of the economic benefits of on-line optimization and related
activities, the demand for services exceeds the number of trained control
engineers that can provide these services. AspenTech's APC and optimization
services business, composed of approximately 270 people, which AspenTech
believes is the largest group of control engineers in the world, represents a
critical resource in its efforts to penetrate the on-line market. The Company's
services personnel are also available to support and maintain its off-line
software products.
MARKETING AND SALES
AspenTech employs a direct sales force located in key geographic
centers where there are high concentrations of potential business. The Company's
sales approach is designed to provide complete solutions to its customers.
AspenTech's worldwide sales organization is focused by customer account, with an
overall relationship executive responsible for coordinating with regional
account managers and sales engineers. In addition, each sales team includes
participants from the business development group who
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are responsible for determining the scope and price of the product or service
being offered. AspenTech believes that its seasoned direct sales force, as well
as its ability to sell at senior levels within customer organizations, are
important competitive distinctions. AspenTech uses sales agents to leverage its
direct sales force and provide local coverage and first-line support in areas of
lower customer concentration. The Company also supplements its direct sales
efforts with a variety of marketing initiatives, including user groups and a
triennial conference, ASPENWORLD.
AspenTech devotes substantial resources to increasing the penetration
of its products within existing customers. AspenTech has developed global
technology partnerships with a select group of customers that use modeling
extensively, whereby they meet on a regular basis with AspenTech's senior
technical and managerial staffs to help shape technical direction.
AspenTech licenses its software products at a substantial discount to
universities that agree to use such products in teaching and research, in order
to stimulate future demand once the students enter the workplace. Currently,
more than 450 universities use its software products in undergraduate
instruction.
COMPETITION
The Company's software products and services compete with software
tools that are internally developed by companies in the process industries and
with certain modeling, PIM, APC and optimization software products and services
that are sold by a number of commercial suppliers. Increasingly, companies in
the process industries are recognizing that it is inefficient and uneconomical
for them to continue to develop and support this software, and many of them are
now deploying commercial software products alongside their internally developed
tools.
AspenTech's primary commercial competitors in the process modeling
software and services market are Simulation Sciences Inc., Hyprotech, Ltd. and
Chemstations, Inc. In the PIM market, AspenTech primarily competes with Oil
Systems Inc. and Biles and Associates and, to a lesser extent, with digital
control system vendors such as Honeywell Inc. In the APC and optimization
markets, AspenTech competes with the Profimatics and Icotron divisions of
Honeywell Inc., which primarily sell digital control system hardware, as well as
with the Simcon division of ABB Asea Brown Boveri (Holding) Ltd. Several smaller
competitors, including the Litwin Engineering division of Raytheon Company,
Treiber Control and Cambridge Control Ltd., focus exclusively on the APC market.
Emergence of a new competitor or the consolidation of existing competitors could
adversely affect the Company's business, operating results and financial
condition. Certain competitors also supply related hardware products to existing
and potential customers of AspenTech, and may have established relationships
that afford the competitors an advantage in supplying software and services to
those customers.
AspenTech believes that it competes favorably by offering the broadest
range of integrated off-line and on-line modeling software and services, and
that its size, technology and industry expertise will continue to provide it
with a marketplace advantage over companies that are niche suppliers focused on
a single element of the solution or companies that primarily sell hardware. The
Company's continued success depends on its ability to compete effectively with
its commercial competitors and to persuade prospective customers to use the
Company's products and services instead of, or in addition to, software
developed internally or services provided by their own personnel. In light of
these factors, there is no assurance that the Company will be able to maintain
its competitive position. See "Item 1a. Risk Factors -- Competition."
PRODUCT DEVELOPMENT
AspenTech's most important product development objective is to build
upon the technical leadership of its software products both individually and as
an integrated solution. Product development activities focus on adding new
chemical engineering analysis and plant operations capabilities, developing new
ease-of-use features and enhancing the user interface, taking advantage of new
hardware capabilities and major new software industry developments, more tightly
integrating AspenTech's family of software products and integrating those
software products with other tools. AspenTech is currently focusing significant
efforts on the development of native Windows 95 and Windows NT versions of all
of its software products, as well as on the continued integration of its family
of software products, including products acquired through the DMCC and Setpoint
acquisitions.
AspenTech's approach to Windows is based on a client-server
architecture. AspenTech is developing Windows 95 and Windows NT clients for all
of its software products, with simulation and database servers running on
Windows NT, UNIX and DEC VMS. The objective of the Windows development is to
capitalize on Windows interoperability and customization capabilities, as well
as to provide highly intuitive graphical user interfaces. A native Windows
development environment is used to ensure full support of all Windows features
and the object linking and embedding (OLE) architecture. See "Item 1a. Risk
Factors -- Migration to Microsoft Windows."
In parallel with the Windows project, AspenTech is working to integrate
the overlapping products in each business area by combining the best components
from the existing products under a Windows graphical user interface. In
addition, AspenTech is working to develop an open, distributed object component
architecture for all AspenTech products, with the products sharing
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common components and allowing incorporation of customer or third-party
components. A central Software Engineering and Architecture department has been
created to facilitate and coordinate component development.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a
combination of copyright, patent, trademark and trade secret laws, license and
confidentiality agreements, and software security measures to protect its
proprietary rights. AspenTech has received a United States patent for the expert
guidance system in its proprietary graphical user interface. The Company has
registered or applied to register certain of its significant trademarks in the
United States.
The Company generally enters into non-disclosure agreements with its
employees and customers, and historically has restricted access to its software
products' source codes, which it regards as proprietary information. In a few
cases, the Company has provided copies of the source code for certain products
to customers solely for the purpose of special customization of the products and
has deposited copies of the source code for certain products in third-party
escrow accounts as security for on-going service and license obligations. In
these cases, the Company relies on nondisclosure and other contractual
provisions to protect its proprietary rights.
AspenTech distributes its products under non-exclusive and typically
nontransferable license agreements that grant customers the right to use
AspenTech's products, typically for a term of either three or five years in the
case of modeling software products or for a term of 99 years in the case of PIM,
APC and optimization software products. The license agreements contain various
provisions that protect AspenTech's ownership of the products and the
confidentiality of the underlying technology.
The laws of certain countries in which the Company's products are
distributed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States. The laws of many
countries in which the Company licenses its products protect trademarks solely
on the basis of registration. The Company currently possesses a limited number
of trademark registrations in certain foreign jurisdictions and does not
possess, and has not applied for, any foreign copyright or patent registrations.
The Company derived more than 50% of its revenues in each of fiscal 1994 and
fiscal 1995, and approximately 45% of total revenues in fiscal 1996, from
customers outside the United States.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the business, results of
operations and financial condition of the Company. The Company could incur
substantial costs in protecting and enforcing its intellectual property rights.
Moreover, from time to time third parties may assert patent, trademark,
copyright and other intellectual property rights to technologies that are
important to the Company. In such an event, the Company may be required to incur
significant costs in litigating a resolution to the asserted claims. There can
be no assurance that such a resolution would not require that the Company pay
damages or obtain a license of a third party's proprietary rights in order to
continue licensing its products as currently offered or, if such a license is
required, that it will be available on terms acceptable to the Company.
AspenTech believes that, due to the rapid pace of innovation within the
industry, factors such as the technological and creative expertise of its
personnel, the quality of its products, the quality of its technical support and
training courses, and the frequency of software product enhancements are more
important to establishing and maintaining a technology leadership position
within the industry than the various legal protections for its software products
and technology.
See "Item 1a. Risk Factors- Dependence on Proprietary Technology."
EMPLOYEES
As of June 30, 1996, AspenTech had a total of 1,040 full-time
employees. None of AspenTech's employees is represented by a labor union.
AspenTech has experienced no work stoppages and believes that its employee
relations are good.
AspenTech's future success depends to a significant extent on the
continued service of Lawrence B. Evans, the Company's chief executive officer,
its other executive officers and certain technical, managerial and marketing
personnel. The Company believes that its future success will also depend on its
continuing ability to attract and retain highly skilled technical, managerial
and marketing personnel. Competition for such personnel is intense and there can
be no assurance that AspenTech can retain its key employees or that it can
attract, assimilate or retain other highly qualified technical and commercial
personnel in the future. To date, seven of the original eight founders of
AspenTech are still employed by AspenTech and are active in its management. See
"Item 1a. Risk Factors - Dependence on Key Personnel"
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ITEM 1a. RISK FACTORS
- ---------------------
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A
NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW.
Integration of DMCC and Setpoint. Through its acquisitions of DMCC in
January 1996 and Setpoint in February 1996, the Company has increased its
product and service offerings to include additional PIM, APC and optimization
software and services, and has substantially increased its scope of operations
and number of personnel. The successful and timely integration of DMCC and
Setpoint into the Company is critical to the Company's future financial
performance. This integration will require that the Company, among other things,
integrate the companies' software products and technologies, retain key
employees, assimilate diverse corporate cultures, integrate management
information systems, consolidate the acquired operations and manage
geographically dispersed operations, each of which could pose significant
challenges. The diversion of the attention of management created by the
integration process, and any disruptions or other difficulties encountered in
the transition process, could have a material adverse effect on the business,
operating results and financial condition of the Company. The difficulty of
combining the three companies may be increased by the need to integrate
personnel, and changes effected in the combination may cause key employees to
leave. The long-term success of the DMCC and Setpoint acquisitions will require
the further development of the PIM, APC and optimization software and services
markets, which currently are immature. There can be no assurance that the
Company will be able to integrate and develop the operations of DMCC and
Setpoint successfully, and any failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
A substantial majority of the revenues of each of DMCC and Setpoint has
been generated by service engagements. AspenTech's revenues historically have
been derived principally from the licensing of software products, and its
management has limited experience in managing a service business. In particular,
a significant portion of the service engagements of DMCC and Setpoint has been
undertaken on a fixed-price basis. The Company bears the risk of cost overruns
and inflation in connection with fixed-price engagements, and as a result any of
these engagements may be unprofitable. While the Company believes that its
reserves for fixed-price contracts are reasonable, there can be no assurance
that the Company's reserves will be sufficient to cover future losses that might
be incurred with respect to any fixed-price contracts. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
Dependence Upon Increased Market Penetration. Increased use in the
process industries, particularly the chemicals and petroleum industries, of
software and services for the analysis, design and automation of process
manufacturing plants in general and of the Company's software products and
services in particular is critical to the Company's future growth. The Company
believes that a number of factors will determine its ability to achieve
increased market penetration. These factors include product performance,
accuracy of results, ease of implementation and use, breadth and integration of
product offerings, reliability and scope of applications. Failure of the Company
to achieve increased market penetration in the process industries would
substantially restrict the future growth of the Company and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 1. Business -- The AspenTech Advantage" and "--
Strategy."
Fluctuations in Quarterly Operating Results. The Company's operating
results have fluctuated in the past and may fluctuate significantly in the
future as a result of a variety of factors, including purchasing patterns,
timing of new products and enhancements by the Company and its competitors, and
fluctuating foreign economic conditions. In addition, the Company ships software
products within a short period after receipt of an order and typically does not
have a material backlog of unfilled orders of software products. Therefore,
revenues from software licenses in any quarter are substantially dependent on
orders booked in that quarter. Historically, a majority of each quarter's
revenues from software licenses has come from license contracts that have been
effected in the final weeks of that quarter. The revenues for a quarter
typically include a number of large orders. If the timing of any of these orders
is delayed, it could result in a substantial reduction in revenues for that
quarter. Since the Company's expense levels are based in part on its
expectations as to future revenues, the Company may be unable to adjust spending
in a timely manner to compensate for any revenue shortfall and any revenue
shortfalls would likely have a disproportionate adverse effect on net income.
Prior to fiscal 1996, the Company experienced a net loss for the first quarter
of each fiscal year, in part because a substantial portion of the Company's
revenues is derived from countries other than the United States where business
is slow during the summer months and also in part because of the timing of
renewals of software licenses. The Company expects that these factors will
continue to affect its operating results and that the Company may experience net
losses in the initial quarter of future fiscal years. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results."
Concentration of Revenues in the Chemicals and Petroleum Industries.
The Company derives a significant portion of its revenues from companies in the
chemicals and petroleum industries. Accordingly, the Company's future success is
dependent upon the continued demand for modeling software by companies in the
chemicals industry and for PIM, APC and optimization software and services by
companies in the chemical and petroleum industries. The chemical and petroleum
industries are highly cyclical. The Company believes that economic downturns in
the United States, Europe, Japan, Asia and South America and pricing pressures
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experienced by chemical and petroleum companies in connection with
cost-containment measures have led to delays and reductions in certain capital
and operating expenditures by many of such companies worldwide. The Company's
revenues have in the past been, and may in the future be, subject to substantial
period-to-period fluctuations as a consequence of such industry patterns, as
well as general domestic and foreign economic conditions and other factors
affecting spending by companies in the Company's target process industries.
There can be no assurance that such factors will not have a material adverse
effect on the Company's business, operating results and financial condition. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
Product Development and Technological Change. The market for software
and services for the analysis, design and automation of process manufacturing
plants is characterized by continual change and improvement in computer hardware
and software technology. The Company's future success will depend on its ability
to enhance its current software products and services, to introduce new software
products and services that keep pace with technological developments, and to
continue to address the changing needs of its customers. There can be no
assurance that the Company will be successful in developing and marketing new
and enhanced products and services, or that its products and services will
continue to address adequately the needs of the marketplace. Like many other
software products, the Company's products have on occasion contained undetected
errors or "bugs." In addition, because new releases of the Company's products
are initially installed only by a small number of customers, any errors or
"bugs" in those new releases may not be detected for a number of months after
the delivery of the software. If the Company's products do not perform
substantially as expected or are not accepted in the marketplace, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Item 1. Business -- Product Development."
Dependence on Key Personnel. The Company's future success depends to a
significant extent on Lawrence B. Evans, the Company's chief executive officer,
its other executive officers, and certain key technical, managerial and
marketing personnel. The loss of the services of any of these individuals or
groups of individuals could have a material adverse effect on the Company's
business, operating results and financial condition. None of the Company's
executive officers has entered into an employment agreement with the Company,
and the Company does not have, and is not contemplating securing, any
significant amount of key-man life insurance on any of its executive officers or
other key employees. The Company believes that its future success also will
depend significantly upon its ability to attract, motivate and retain additional
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining the personnel it requires to continue
to grow and operate profitably. See "Item 1. Business -Employees."
Product Liability. The sale and implementation of on-line applications
by the Company may entail the risk of product liability claims. The Company's
APC and optimization software products and services are used in the design,
operation and management of manufacturing processes at large facilities, and any
failure by the software at those facilities could result in significant claims
for damages or for violations of environmental, safety and other laws and
regulations. The Company's agreements with its customers generally contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of federal, state or local laws or ordinances or unfavorable judicial
decisions. A successful product liability claim against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Migration to Microsoft Windows. AspenTech believes that operating
systems similar to Microsoft Windows, due to their interoperability and
customization capabilities, are increasingly the preferred choice of certain of
its customers. AspenTech is currently developing native Windows 95 and Windows
NT versions of its software products. The Company is aware of two competitors
that are developing modeling and simulation software for use with existing
Microsoft Windows operating systems, both of which are currently shipping a
release of modeling and simulation software for Windows operating systems. There
can be no assurance that the Company will be successful in developing versions
of any or all of its software products that will operate on Windows 95 or
Windows NT, or that any such development, even if successful, will be completed
concurrent with or prior to introductions by competitors of software products on
Windows 95, Windows NT or any other Microsoft Windows system. Any such failure
or delay could affect the Company's competitive position or lead to product
obsolescence in the future. See "Item 1. Business -- Product Development" and
"-- Competition."
Dependence on Proprietary Technology. The Company regards its software
as proprietary and relies on a combination of copyright, patent, trademark and
trade secret laws, license and confidentiality agreements, and software security
measures to protect its proprietary rights. AspenTech has received a United
States patent for the expert guidance system in its proprietary graphical user
interface. The Company has registered or applied to register certain of its
significant trademarks in the United States. The Company generally enters into
non-disclosure agreements with its employees and customers, and historically has
restricted access to its software products' source codes, which it regards as
proprietary information. In a few cases, the Company has provided copies of the
source code for certain products to customers solely for the purpose of special
customization of the products and has deposited copies of the source code for
certain products in third-party escrow accounts as security for on-going service
and license obligations. In these cases, the Company relies on nondisclosure and
other contractual provisions to protect its proprietary rights.
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The laws of certain countries in which the Company's products are
distributed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States. The laws of many
countries in which the Company licenses its products protect trademarks solely
on the basis of registration. The Company currently possesses a limited number
of trademark registrations in certain foreign jurisdictions and does not possess
any foreign copyright or patent registrations. The Company derived more than 50%
of its revenues in each of fiscal 1994 and fiscal 1995, and approximately 45% of
its revenues in fiscal 1996, from customers outside the United States.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the business, results of
operations and financial condition of the Company. The Company could incur
substantial costs in protecting and enforcing its intellectual property rights.
Moreover, from time to time third parties may assert patent, trademark,
copyright and other intellectual property rights to technologies that are
important to the Company. In such an event, the Company may be required to incur
significant costs in litigating a resolution to the asserted claims. There can
be no assurance that such a resolution would not require that the Company pay
damages or obtain a license of a third party's proprietary rights in order to
continue licensing its products as currently offered or, if such a license is
required, that it will be available on terms acceptable to the Company. See
"Item 1. Business -- Proprietary Rights."
Competition. The Company's software products compete with software
tools that are internally developed by companies in the process industries and
with certain process modeling, PIM, APC and optimization software products that
are sold by a number of commercial suppliers. AspenTech's primary commercial
competitors in the process modeling software market are Simulation Sciences,
Inc., Hyprotech, Ltd. and Chemstations, Inc. In the PIM market, AspenTech
primarily competes with Oil Systems Inc. and Biles and Associates and, to a
lesser extent, with digital control system vendors such as Honeywell Inc. In the
APC and optimization markets, AspenTech competes with the Profimatics and
Icotron divisions of Honeywell Inc., which primarily sell digital control system
hardware, as well as with the Simcon division of ABB Asea Brown Boveri (Holding)
Ltd. Several smaller competitors, including the Litwin Engineering division of
Raytheon Company, Treiber Control and Cambridge Control Ltd., focus exclusively
on the APC market. Emergence of a new competitor or the consolidation of
existing competitors could adversely affect the Company's business, operating
results and financial condition. Certain competitors also supply related
hardware products to existing and potential customers of AspenTech, and may have
established relationships that afford the competitors an advantage in supplying
software and services to those customers. The Company's continued success
depends on its ability to compete effectively with its commercial competitors
and to persuade prospective customers to use the Company's products and services
instead of, or in addition to, software developed internally or services
provided by their own personnel. In light of these factors, there is no
assurance that the Company will be able to maintain its competitive position.
See "Item 1. Business -- Competition."
Management of Growth. Since fiscal 1990, the Company has experienced
substantial growth in the number of its employees, the scope of its operating
and financial systems, and the geographic area of its operations. The Company's
operations have expanded significantly through both internally generated growth
and acquisitions, particularly the acquisitions of DMCC and Setpoint in the
third quarter of fiscal 1996. This growth has resulted in an increase in the
level of responsibility for management personnel. To manage its growth
effectively, the Company must continue to implement and improve its operating
and financial systems, and to retain and increase its employee base. There can
be no assurance that the management systems currently in place will be adequate
or that the Company will be able to manage the Company's recent or future growth
successfully, and any failure to do so could have material adverse effect on the
Company's business, operating results and financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
International Operations. The Company derived more than 50% of its
revenues in each of fiscal 1994 and fiscal 1995, and approximately 45% of its
revenues in fiscal 1996, from customers outside the United States, and the
Company anticipates that revenues from customers outside the United States will
continue to account for a significant portion of its total revenues in the
foreseeable future. AspenTech's customers outside the United States historically
have been located principally in Europe and Japan, while Setpoint historically
has derived a substantial portion of its revenues from customers in Asia and
South America. The Company's operations outside the United States are subject to
certain risks, including unexpected changes in regulatory requirements, exchange
rates, tariffs and other barriers, political and economic instability,
difficulties in managing distributors or representatives, difficulties in
staffing and managing foreign subsidiary operations, difficulties or delays in
translating products and product documentation into foreign languages, and
potentially adverse tax consequences. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
The impact of future exchange rate fluctuations on the Company's
financial condition and results of operations cannot be accurately predicted. In
recent years, the Company has increased the extent to which it denominates
arrangements with customers outside the United States in the currencies of the
country in which the software or services are provided. From time to time the
Company has engaged in, and may continue to engage in, hedges of a significant
portion of installment contracts denominated in foreign currencies. There can be
no assurance that any hedging policies implemented by the Company will be
successful or that the
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cost of such hedging techniques will not have a significant impact on the
Company's business, results of operations or financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated With Future Acquisitions. To expand its markets, the
Company's business strategy includes growth through additional acquisitions.
Identifying and pursuing acquisition opportunities and integrating acquired
products and businesses requires a significant amount of management time and
skill. There can be no assurance that the Company will be able to identify
suitable acquisition candidates, consummate any acquisition on acceptable terms
or successfully integrate any acquired business into the Company's operations.
There also can be no assurance that any future acquisition will not have an
adverse effect upon the Company's operating results, particularly in the fiscal
quarters immediately following consummation of the acquisition while the
acquired business is being integrated into the Company's operations. As a result
of acquisitions, the Company may encounter unexpected liabilities and
contingencies associated with the acquired businesses. The Company may use
Common Stock or Preferred Stock or may incur additional long-term indebtedness
or a combination thereof for all or a portion of the consideration to be paid in
future acquisitions. The issuance of Common Stock or Preferred Stock in
acquisitions could result in dilution to existing stockholders, while the use of
cash reserves or significant debt financing to fund acquisitions could reduce
the Company's liquidity.
Potential Volatility of Stock Price. The stock market has from time to
time experienced extreme price and volume fluctuations, particularly in the high
technology sector, and those fluctuations have often been unrelated to the
operating performance of particular companies. In addition, factors such as
announcements of technological innovations or new products by the Company or its
competitors, as well as market conditions in the computer software or hardware
industries, may have a significant impact on the market price of the Company's
Common Stock.
Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions; Possible Issuances of Preferred Stock. The Company's Restated
Articles of Organization, its By-Laws and certain Massachusetts laws contain
provisions that may discourage acquisition bids for the Company and that may
reduce the temporary fluctuations in the trading price of the Company's Common
Stock which are caused by accumulations of stock, thereby depriving stockholders
of certain opportunities to sell their stock at temporarily higher prices or
receive a premium for their shares as part of an acquisition of the Company.
Preferred Stock may be issued by the Company in the future without stockholder
approval and upon such terms as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding stock
of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
ITEM 2. PROPERTIES
- ------------------
AspenTech's principal offices occupy an aggregate of approximately 85,000 square
feet of office space in Cambridge, Massachusetts, and AspenTech is obligated, in
October 1997, to lease an additional 16,000 square feet of office space in the
same building where its principal offices are located. AspenTech's lease of the
premises of its principal offices expires on September 30, 2002. In addition,
AspenTech and its subsidiaries lease office space in Charlotte, North Carolina;
Brecksville and Cincinnati, Ohio; Houston, Texas; Bothell, Washington; Brussels,
Belgium; Calgary, Alberta, Canada; Cambridge and Warrington, England; Hong Kong;
Tokyo, Japan; Best, Leiden and Wassenaar, The Netherlands; Singapore; and other
locations of its sales and customer support offices. AspenTech believes that its
existing facilities are adequate for its needs currently and for the reasonably
foreseeable future and that, if additional space is needed, such space will be
available on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
AspenTech is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
- ---------------------------------------------
The executive officers and directors of the Company, and their ages as
of September 18, 1996, are as follows:
NAME AGE POSITION
---- --- --------
Lawrence B. Evans..... 61 Chairman of the Board of
Directors and
Chief Executive Officer
Joseph F. Boston...... 59 President and Director
Herbert I. Britt...... 51 Senior Vice President,
Corporate Product
Planning and Development
Mary A. Palermo....... 39 Executive Vice President,
Finance and
Chief Financial Officer
Joel B. Rosen......... 38 Executive Vice President,
Marketing and
New Businesses
Gresham T. Brebach, 55 Director
Jr. (2)...............
Douglas R. Brown(2)... 42 Director
Joan C.
McArdle(1)(2)......... 44 Director
Alison Ross(1)........ 36 Director
William C. Rousseau... 82 Director
- ----------
(1) Member of Audit Committee of the Board of Directors
(2) Member of Compensation Committee of the Board of Directors
Lawrence B. Evans, the principal founder of the Company, has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since 1984. He also served as Treasurer of the Company from 1984 through
February 1995 and as President from the inception of the Company until 1984. Mr.
Evans was a Professor of Chemical Engineering at Massachusetts Institute of
Technology ("M.I.T.") from 1962 to 1990 and was the principal investigator for
the Advanced System for Process Engineering ("ASPEN") Project at M.I.T., which
extended from 1976 to 1981. Mr. Evans holds a B.S. in Chemical Engineering from
the University of Oklahoma, and an M.S.E. and Ph.D. in Chemical Engineering from
the University of Michigan.
Joseph F. Boston, a founder of the Company, has served as President of
the Company since 1984 and as a director since 1981. Mr. Boston served as both
the Principal Engineer and as an Associate Project Manager from 1977 to 1981 of
the ASPEN Project at M.I.T. Mr. Boston holds a B.S. in Chemical Engineering from
Washington University, and a Ph.D. in Chemical Engineering from Tulane
University.
Herbert I. Britt, a founder of the Company, has served as Senior Vice
President, Corporate Product Planning and Development since January 1996, and
since the Company's inception has led its product development efforts in various
capacities. From 1981 to March 1991, he served as Vice President, Product
Development, and from April 1991 to January 1996, he served as Senior Vice
President, Product Management. From 1977 to 1981, he was an Associate Project
Manager for the ASPEN Project at M.I.T. Mr. Britt holds a B.S. and Ph.D. in
Chemical Engineering from the University of Missouri.
Mary A. Palermo has served as Chief Financial Officer since May 1989.
She joined the Company in November 1987 as Director of Finance, and was promoted
to Vice President in May 1989, to Senior Vice President, Finance in June 1993
and to Executive Vice President, Finance in December 1995. From 1979 to 1982,
Ms. Palermo held several positions at Arthur Andersen LLP. Ms. Palermo holds a
B.S. in Accounting from Boston College and is a C.P.A.
Joel B. Rosen has served as Executive Vice President, Marketing and New
Businesses since December 1995. He joined the Company as Director of Marketing
in August 1988, and was promoted to Vice President, Marketing in April 1991, to
Senior Vice President, Marketing in June 1993 and to Senior Vice President,
Marketing and New Businesses in July 1994. From 1984 to 1988, Mr. Rosen held
several positions at Bain & Company. Mr. Rosen holds an A.B. in Economics from
Harvard College and an M.B.A. from the Harvard Graduate School of Business
Administration.
Gresham T. Brebach, Jr. has served as a director of the Company since
August 1995. Since January 1995, Mr. Brebach has been Executive Vice President
- -- Client Services of Renaissance Solutions, Inc., a provider of management
consulting and client/server systems integration services. From August 1994 to
December 1994, Mr. Brebach operated his own consulting firm,
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Brebach and Associates. From April 1993 to August 1994, Mr. Brebach served as
Executive Vice President of Digital Consulting, the management consulting
division of Digital Equipment Corporation. From December 1989 to April 1993, Mr.
Brebach was a Director in the Consumer and Industrial Products sector of
McKinsey & Company, a management consulting firm.
Douglas R. Brown has served as a director of the Company since 1986.
Mr. Brown was appointed the President, Chief Executive Officer and Director of
Advent International Corporation, a venture capital investment firm, in January
1996. Mr. Brown previously served as Chief Investment Officer of Advent
International Corporation since 1994, as well as Senior Vice President and
Managing Director -- Europe since 1990. Mr. Brown holds a B.S. in Chemical
Engineering from M.I.T. and an M.B.A. from the Harvard Graduate School of
Business Administration.
Joan C. McArdle has served as a director of the Company since July
1994. Since 1985 she has been a Vice President of MCRC, a Boston-based
investment company that was a creditor and warrant holder of the Company. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." Ms. McArdle holds an A.B. in
English from Smith College.
Alison Ross has been a director of the Company since February 1996. Ms.
Ross is the President of Smart Finance & Co., an investment banking consulting
firm she founded in January 1995. As described below, Smart Finance & Co.
provides advisory services to the Company from time to time. From September 1992
to January 1995, Ms. Ross was a Principal of Montgomery Securities. From
September 1991 through August 1992, Ms. Ross served as Special Assistant to the
Secretary of the Cabinet in the Executive Office of the President of the United
States, as part of a one-year appointment as a White House Fellow. From 1986 to
August 1991, she was a Vice President of Goldman, Sachs & Co. Ms. Ross holds an
S.B. in Economics and an S.M. in Management from M.I.T.
William C. Rousseau has been a director of the Company since 1982. Mr.
Rousseau retired in 1974 as Vice President and Director of the Badger Company,
Inc., an engineering firm. He holds a B.A. in Chemistry from Stanford University
and an M.A. in Chemical Engineering from M.I.T.
The Company's Board of Directors is divided into three classes, with
one class of directors elected each year at the annual meeting of stockholders
for a three-year term of office. All directors of one class hold their positions
until the annual meeting of stockholders at which the terms of the directors in
such class expire and until their respective successors are elected and
qualified. Messrs. Brown and Rousseau serve in the class whose terms expire in
1996; Mr. Evans and Ms. McArdle serve in the class whose terms expire in 1997;
and Mr. Boston, Mr. Brebach and Ms. Ross serve in the class whose terms expire
in 1998. Executive officers of the Company are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors or until their
successors are duly elected and qualified.
The Company's future success depends to a significant extent on
Lawrence B. Evans, the Company's chief executive officer, its other executive
officers and certain technical, managerial and marketing personnel. The loss of
the services of any of these individuals or group of individuals could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 1a. Risk Factors - Dependence on Key Personnel."
Directors who are not full-time employees of the Company receive an
annual fee of $15,000 for their services, plus $1,500 for each meeting attended.
Directors also participate in the 1995 Directors Stock Option Plan.
The Company has adopted its 1995 Employees Stock Purchase Plan (the
"Stock Purchase Plan"), its 1995 Stock Option Plan (the "1995 Plan"), its 1995
Directors Stock Option Plan (the "1995 Directors Plan") and its 401(k) Plan
(the "401(k) Plan"). See Notes 9(c) and (d) and Note 13 of Notes to
Consolidated Financial Statements.
The Board of Directors has appointed an Audit Committee and a
Compensation Committee. The Audit Committee reviews the scope and results of the
annual audit of the Company's consolidated financial statements conducted by the
Company's independent accountants, the scope of other services provided by the
Company's independent accountants, proposed changes in the Company's financial
and accounting standards and principles, and the Company's policies and
procedures with respect to its internal accounting, auditing and financial
controls. The Audit Committee also makes recommendations to the Board of
Directors on the engagement of the independent accountants, as well as other
matters which may come before it or as directed by the Board of Directors. The
Compensation Committee administers the Company's compensation programs,
including the Stock Purchase Plan, the 1995 Plan, the 1995 Directors Plan and
the 401(k) Plan, and performs such other duties as may from time to time be
determined by the Board of Directors.
15
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
Since October 26, 1994, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "AZPN." The following table sets forth, for the
periods indicated, the high and low sale prices per share of the Common Stock as
reported on the Nasdaq National Market.
FISCAL 1995 HIGH LOW
- ----------- ---- ---
Second Quarter (from October 26, 1994) $20.25 $15.75
Third Quarter 22.25 17.625
Fourth Quarter 26.50 17.00
FISCAL 1996 HIGH LOW
- ----------- ---- ---
First Quarter $30.00 $23.50
Second Quarter 37.00 24.75
Third Quarter 43.00 31.50
Fourth Quarter 57.25 42.25
As of June 30, 1996, there were 357 holders of record of the Common
Stock.
The Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain all of its earnings, if any, for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, under the terms of the Company's bank line of
credit, the Company is prohibited from paying any cash dividends. Any future
determination relating to dividend policy will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of Directors
may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The selected consolidated balance sheet data as of June 30, 1995 and
1996 and the selected consolidated statement of income data for each of the
years ended June 30, 1994, 1995 and 1996 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, included elsewhere in this Form 10-K. The
selected consolidated balance sheet data as of June 30, 1992, 1993 and 1994 and
the selected consolidated statement of income data for each of the two years
ended June 30, 1992 and 1993 have been derived from the Company's Consolidated
Financial Statements, which also have been audited by Arthur Andersen LLP, not
included in this Form 10-K. The following selected consolidated financial data
are qualified by the more detailed Consolidated Financial Statements of the
Company and Notes thereto included elsewhere in this Form 10-K, and should be
read in conjunction with such Consolidated Financial Statements and Notes and
the discussion under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
18
YEAR ENDED JUNE 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues ................................................ $29,687 $33,867 $44,975 $57,498 $103,609
------- ------- ------- ------- --------
Cost of revenues ........................................ 6,700 8,918 9,641 10,257 26,425
Selling and marketing ................................... 12,888 11,744 18,095 23,233 34,691
Research and development ................................ 5,006 7,268 8,159 11,375 20,208
General and administrative .............................. 3,489 4,529 4,460 5,132 9,565
Charge for in-process research and development .......... -- -- -- -- 24,421
Costs related to acquisition ............................ 753 -- -- 950 --
------- ------- ------- ------- --------
28,836 32,459 40,355 50,947 115,310
------- ------- ------- ------- --------
Income (loss) from operations ........................ 851 1,408 4,620 6,551 (11,701)
Foreign currency exchange gain (loss ) .................. 109 47 (56) 34 (223)
Income (loss) on equity in joint ventures ............... -- -- (39) 22 10
Interest income ......................................... 1,347 2,012 1,789 3,095 3,666
Interest expense ........................................ (464) (532) (529) (561) (1,323)
------- ------- ------- ------- --------
Income (loss) from continuing operations
before provision for income taxes .................. 1,843 2,935 5,785 9,141 (9,571)
Provision for income taxes .............................. 742 1,081 2,087 3,725 5,614
------- ------- ------- ------- --------
Income (loss) from continuing operations ................ 1,101 1,854 3,698 5,416 (15,185)
Discontinued operations:
Income (loss) from operations ........................ 180 (40) -- -- --
Loss on disposal ..................................... -- (532) -- -- --
------- ------- ------- ------- --------
Net income (loss) ....................................... $ 1,281 $ 1,282 $ 3,698 $ 5,416 $(15,185)
======= ======= ======= ======= ========
Net income (loss) per common and
common equivalent share (1)(2):
Continuing operations ................................... $ 0.20 $ 0.31 $ 0.58 $ 0.70 $ (1.92)
======= ======= ======= ======= ========
Net income (loss) ....................................... $ 0.23 $ 0.22 $ 0.58 $ 0.70 $ (1.92)
======= ======= ======= ======= ========
Weighted average number of common and
common equivalent shares outstanding(1) .............. 5,911 6,469 6,545 7,781 7,929
======= ======= ======= ======= ========
YEAR ENDED JUNE 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(In thousands)
BALANCE SHEET DATA:
Working capital ......................................... $ 6,879 $ 6,123 $ 7,774 $27,594 $ 68,917
Total assets ............................................ 28,949 32,764 42,009 75,697 160,167
Long-term debt and capital lease obligations,
less current portion .................................. 2,901 2,251 2,576 4,087 706
Total stockholders' equity .............................. 12,191 13,402 17,156 41,789 99,835
-----------------------
(1) Computed as described in Note 2(i) of Notes to Consolidated Financial Statements.
(2) The Company has never declared or paid cash dividends on its capital stock.
17
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
Since its founding in 1981, the Company has developed and marketed
software and services to the process industries. The Company's revenues have
grown each fiscal year since 1983, when the Company introduced the commercial
version of its ASPEN PLUS modeling software product. In addition to internally
generated growth the Company has completed a number of acquisitions. In fiscal
1992, AspenTech acquired Prosys, a U.K. company, the developer and marketer of
SPEEDUP. In fiscal 1995, AspenTech acquired ISI, a leading supplier of PIM
software and the developer and marketer of the CIM/21 product family. The Prosys
and ISI acquisitions were accounted for as pooling of interests transactions. On
January 5, 1996 and February 9, 1996, respectively, AspenTech acquired DMCC and
Setpoint, gaining additional expertise in PIM, APC and optimization software and
services. The purchase price of the DMCC acquisition was approximately $20
million in cash, and the purchase price of the Setpoint acquisition was
approximately $28 million, which was paid in cash and by issuance of the
Setpoint Note. The DMCC and Setpoint acquisitions were accounted for as purchase
transactions, and therefore only the portion of their results of operations
subsequent to the acquisition dates is included in the Company's operating
results. As a result, comparisons of results for the years ended June 30, 1996
and 1995 are not meaningful.
The Company typically licenses its modeling software products to
customers for terms of either three or five years, and typically licenses its
PIM, APC and optimization software products for terms of 99 years. See "Item 1.
Business -- Products and Services." Because in all cases the licenses are
noncancelable and do not impose significant obligations on the Company, the
Company recognizes software license revenues upon shipment in accordance with
generally accepted accounting principles. In the case of license renewals,
revenue is recognized upon execution of a renewal license agreement. The Company
recognizes revenues from customer support ratably over the term of the license.
If a customer elects to pay for a license in annual installments, the Company
charges an implicit amount of interest and recognizes interest income over the
term of the license. A substantial majority of the Company's term licenses have
been renewed upon expiration. However, there can be no assurance that customers
will continue to renew expiring term licenses at the historical rate.
The Company's revenues historically have been derived principally from
the licensing of software products. Since the acquisitions of DMCC and Setpoint,
the Company has generated a significantly greater amount of consulting revenues
from services for the implementation of its off-the-shelf software products. The
Company recognizes service revenues as services are performed. Service revenues
from fixed-price contracts are recognized on the percentage-of-completion
method, measured by the portion of costs incurred to date as a percentage of the
estimated total (primarily labor) costs for each contract. Service revenues from
time and expense contracts are recognized as the related services are performed.
Training revenues are recognized as services are performed. Services that have
been performed but for which billings have not been made are recorded as
unbilled receivables, and unrecognized amounts are recorded as unearned revenues
on the Company's Consolidated Balance Sheets.
The Company licenses its software in U.S. dollars and certain foreign
currencies. The Company hedges all material foreign currency-denominated
receivables with specific hedge contracts in amounts equal to those receivables.
While the Company has experienced minor foreign currency exchange gains or
losses due to foreign exchange rate fluctuations, the impact of such movements
has not been material in any period. The Company does not expect fluctuations in
foreign currencies to have a significant impact on either its revenues or
expenses in the foreseeable future.
The Company's operating costs include the amortization of intangible
assets, including goodwill, arising from the acquisitions of DMCC and Setpoint.
These intangible assets total approximately $10.0 million and will be amortized
over periods ranging from 18 months to 10 years. The amortization was
approximately $819,000 in fiscal 1996 and will be approximately $590,000 for
each of the four succeeding quarters, and approximately $410,000 for each of the
14 quarters thereafter.
18
20
RESULTS OF OPERATIONS
The following table sets forth the amount and percentage of total
revenues represented by certain consolidated statement of operations data for
the periods indicated:
Year Ended June 30,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ -------------------
(Dollars in thousands)
Revenues:
Software licenses ............................................. $36,015 80.1% $45,649 79.4% $ 65,644 63.4%
Maintenance and other services ................................ 8,960 19.9 11,849 20.6 37,965 36.6
------- ----- ------- ----- --------- -----
44,975 100.0 57,498 100.0 103,609 100.0
------- ----- ------- ----- --------- -----
Expenses:
Cost of software licenses ..................................... 2,614 5.8 2,799 4.9 3,476 3.4
Cost of services and other .................................... 7,027 15.7 7,458 13.0 22,949 22.1
Selling and marketing ......................................... 18,095 40.2 23,233 40.4 34,691 33.5
Research and development ...................................... 8,159 18.1 11,375 19.8 20,208 19.5
General and administrative .................................... 4,460 9.9 5,132 8.9 9,565 9.2
Charge for in-process research
and development ............................ -- -- -- -- 24,421 23.6
Costs related to acquisition .................................. -- -- 950 1.6 -- --
------- ----- ------- ----- --------- -----
40,355 89.7 50,947 88.6 115,310 111.3
------- ----- ------- ----- --------- -----
Income (loss) from operations ............... 4,620 10.3 6,551 11.4 (11,701) (11.3)
Foreign currency exchange gain (loss) ......................... (56) (0.1) 34 0.1 (223) (0.3)
Income (loss) on equity in joint ventures ..................... (39) (0.1) 22 -- 10 --
Interest income ............................................... 1,789 4.0 3,095 5.4 3,666 3.5
Interest expense .............................................. (529) (1.2) (561) (1.0) (1,323) (1.2)
------- ----- ------- ----- --------- -----
Income (loss) before provision for income taxes ........... 5,785 12.9 9,141 15.9 (9,571) (9.3)
Provision for income taxes .................................... 2,087 4.7 3,725 6.5 5,614 5.4
------- ----- ------- ----- --------- -----
Net income (loss) ........................... $ 3,698 8.2% $ 5,416 9.4% $ (15,185) (14.7%)
======= ===== ======= ===== ========= =====
19
21
COMPARISON OF FISCAL 1996 TO FISCAL 1995
The Company acquired DMCC and Setpoint in the third quarter of fiscal
1996 in purchase transactions and has subsequently taken steps to integrate and
reorganize the operations of AspenTech and its new subsidiaries. As a result,
the Company's operating results for fiscal 1996 and fiscal 1995 are not directly
comparable. The results of the Company's operations for fiscal 1996 are not
representative of results of operations of the combined entities for subsequent
periods. For fiscal 1996, on a pro forma basis giving effect to the acquisitions
of DMCC and Setpoint as of the beginning of the period, revenues from software
licenses and revenues from services and other represented 53% and 47%,
respectively, of total revenues.
Revenues. Revenues are derived from software licenses and services.
Total revenues for fiscal 1996 increased 80.2% to $103.6 million from $57.5
million in fiscal 1995.
Software license revenues represented 63.4% and 79.4% of total revenues
in fiscal 1996 and 1995, respectively. Revenues from software licenses in fiscal
1996 increased 43.8% to $65.6 million from $45.6 million in fiscal 1995. The
growth in software license revenues was attributable both to internal growth in
existing operations and to additional licenses entered into by the newly
acquired subsidiaries. The internal growth in software license revenues was
attributable to renewals of software licenses covering existing users, to the
expansion of existing customer relationships through licenses covering
additional users and additional software products, and, to a lesser extent, to
the addition of new customers. The decrease in software license revenues as a
percentage of total revenues was attributable to the growth in service revenues
resulting from AspenTech's acquisitions of DMCC and Setpoint.
Total revenues from customers outside the United States were $47.1
million or 45.4% of total revenues and $29.8 million or 51.9% of total revenues
for fiscal 1996 and 1995, respectively. The growth in dollar amount of total
revenues from customers outside the United States was attributable in part to
revenues generated by Setpoint and, to a lesser extent, to internal growth in
existing operations.
Revenues from services and other consist of consulting services,
post-contract support on software licenses, training and sales of documentation.
Since the acquisitions of DMCC and Setpoint, the Company has generated a
significantly greater amount of consulting revenues from services for the
analysis, design and automation of process manufacturing plants. As a result,
revenues from services and other for fiscal 1996 increased 220.4% to $38.0
million from $11.8 million in fiscal 1995.
Neither the Company's joint venture and similar activities nor any
discounting or similar activities has historically had a material effect on the
Company's revenues.
Cost of Software Licenses. Cost of software licenses consists of
royalties, amortization of previously capitalized software costs, costs related
to delivery of software (including disk duplication and third party software
costs), printing of manuals and packaging. Cost of software licenses for fiscal
1996 increased 24.2% to $3.5 million from $2.8 million in fiscal 1995. Cost of
software licenses as a percentage of revenues from software licenses decreased
to 5.3% in fiscal 1996 from 6.1% in fiscal 1995. This decrease was due to the
spreading of fixed production and delivery costs over a larger revenue base and
to the generation of a greater portion of sales having minimal third-party
royalty costs.
Cost of Services and Other. Cost of services and other consists of the
cost of execution of application consulting services, technical support
expenses, the cost of training services and the cost of manuals sold separately.
Cost of services and other in fiscal 1996 increased 207.7% to $22.9 million from
$7.5 million in fiscal 1995. Cost of services and other as a percentage of
revenues from services and other decreased to 60.4% in fiscal 1996 from 62.9% in
fiscal 1995. The percentage decrease reflected a change in the mix of services
provided by the Company, primarily as a result of the acquisitions of DMCC and
Setpoint.
Selling and Marketing. Selling and marketing expenses in fiscal 1996
increased 49.3% to $34.7 million from $23.2 million in fiscal 1995 while
decreasing as a percentage of total revenues to 33.5% from 40.4%. The percentage
decrease in costs reflects the lower level of sales and marketing activities
historically supported by DMCC and Setpoint, as well as the Company's leveraging
of its existing worldwide sales and technical sales force to market the software
products and services of the newly acquired companies. The Company continues to
invest in sales personnel and regional sales offices to improve the Company's
geographic proximity to its customers, to maximize the penetration of existing
accounts and to add new customers.
Research and Development. Research and development expenses consist
primarily of personnel and outside consultancy costs required to conduct the
Company's product development efforts. Capitalized research and development
costs are amortized over three years. Research and development expenses in
fiscal 1996 increased 77.7% to $20.2 million from $11.4 million in fiscal 1995
while decreasing as a percentage of total revenues to 19.5% from 19.8%. The
increase in costs principally reflects continued investment in development of
the Company's core modeling products and a common software architecture
encompassing the Company's expanded family of software products, as well as a
reduction in the amount of research and development capitalized during the
period. The Company capitalized 4.2% and 8.1% of its total research and
development costs during fiscal 1996 and 1995, respectively.
20
22
General and Administrative. General and administrative expenses consist
primarily of salaries of administrative, executive, financial and legal
personnel, outside professional fees and amortization of intangibles. General
and administrative expenses in fiscal 1996 increased 86.4% to $9.6 million from
$5.1 in fiscal 1995, and increased as a percentage of total revenues to 9.2%
from 8.9% in fiscal 1995. The dollar increase principally reflected the growth
in the scale and scope of the Company's operations.
Charge for In-Process Research and Development. In the third quarter of
fiscal 1996, the Company recognized a non-recurring charge of $24.4 million for
the write-off of in-process research and development in connection with its
acquisitions of DMCC and Setpoint.
Interest Income. Interest income is generated primarily from the sale
of software pursuant to installment contracts for off-line modeling software.
Under these contracts, the Company offers customers the option to make annual
payments for term licenses instead of a single license fee payment at the
beginning of the license term. A substantial majority of the off-line modeling
customers elect to license these products through installment contracts. The
Company believes this election is made principally because the customers prefer
to pay for the Company's off-line modeling products out of their operating
budgets, rather than out of their capital budgets. Included in the annual
payments is an implicit interest charge based upon the interest rate established
by the Company at the time of the license. The Company sells a portion of the
installment contracts to unrelated financial institutions. The interest earned
by the Company on the installment contract portfolio in any one year is the
result of the implicit interest established by the Company on installment
contracts and the size of the contract portfolio. Interest income in fiscal 1996
increased 18.4% to $3.7 million from $3.1 million in fiscal 1995. Interest
income increased as a result of investment of the net proceeds of public
offerings completed by the Company in November 1994, February 1995, and June
1996, a larger installment contract portfolio and an increase in the implicit
interest rate charged to customers.
Interest Expense. Interest expense is generated from interest charged
on the Company's bank line of credit, subordinated notes payable to the
Massachusetts Capital Resource Company, a promissory note issued in connection
with the Setpoint acquisition, and capital lease obligations. Interest expense
in fiscal 1996 increased to $1.3 million from $0.6 million in fiscal 1995. This
increase principally reflected a higher level of borrowings under the Company's
bank line of credit as a result of borrowings used for payment of a portion of
the purchase price for the Setpoint acquisition.
Provision for Income Taxes. The effective tax rate in fiscal 1996 is
calculated as a percentage of income before taxes, exclusive of the
non-recurring charge for in-process research and development. The effective tax
rate decreased in fiscal 1996 to 37.8% of pretax income from 40.8% in fiscal
1995. This percentage decrease related principally to non-deductible acquisition
costs incurred in connection with the ISI acquisition in fiscal 1995.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Revenues. Total revenues for fiscal 1995 increased 27.8% to $57.5
million from $45.0 million in fiscal 1994.
Software license revenues represented 79.4% and 80.1% of total revenues
in fiscal 1995 and fiscal 1994, respectively. Revenues from software licenses in
fiscal 1995 increased 26.7% to $45.6 million from $36.0 million in fiscal 1994.
The growth in software license revenues was attributable primarily to software
license renewals covering existing users and to the expansion of existing
customer relationships through licenses covering additional users and additional
software products, and, to a lesser extent, to the addition of new customers.
Total revenues from customers outside the U.S. were $29.8 million or
51.9% of total revenues and $25.5 million or 56.8% of total revenues for fiscal
1995 and fiscal 1994, respectively.
Revenues from services and other for fiscal 1995 increased 32.2% to
$11.8 million from $9.0 million in fiscal 1994. This increase reflected an
increased focus during fiscal 1995 on providing certain high value added
consulting and training services to existing customers.
Cost of Software Licenses. Cost of software licenses in fiscal 1995
increased 7.1% to $2.8 million from $2.6 million in fiscal 1994. Cost of
software licenses as a percentage of revenues from software licenses was 6.1% in
fiscal 1995 as compared to 7.3% in fiscal 1994 due to spreading fixed production
and delivery costs over a larger revenue base and generating a greater portion
of sales with minimal royalty costs.
Cost of Services and Other. Cost of services and other for fiscal 1995
increased 6.1% to $7.5 million from $7.0 million for fiscal 1994. Cost of
services and other as a percentage of revenues from services and other decreased
to 62.9% in fiscal 1995 from 78.4% in fiscal 1994. This percentage decrease was
attributable to the Company's ability to support an increased revenue base with
a relatively constant level of consulting, training and other staff.
21
23
Selling and Marketing. Selling and marketing expenses in fiscal 1995
increased 28.4% to $23.2 million from $18.1 million for fiscal 1994 while
slightly increasing as a percentage of total revenues to 40.4% from 40.2%. The
increase in costs reflects the Company's continued investment in additional
direct and technical sales personnel and regional sales offices.
Research and Development. Research and development expenses during
fiscal 1995 increased 39.4% to $11.4 million from $8.2 million in fiscal 1994
while increasing as a percentage of total revenues to 19.8% from 18.1%. The
increase in costs reflects continued investment in development of the Company's
core products, ASPEN PLUS and SPEEDUP, as well as accelerated investment in the
new areas of plant modeling and optimization and polymers modeling. The Company
capitalized 8.1% and 9.8% of its total research and development costs during
fiscal 1995 and fiscal 1994, respectively.
General and Administrative. General and administrative expenses in
fiscal 1995 increased 15.1% to $5.1 million from $4.5 million in fiscal 1994
while decreasing as a percentage of total revenues to 8.9% from 9.9%. These
costs did not grow at the same rate as revenues, as the Company's infrastructure
was able to support a larger revenue base.
Costs Related to Acquisition. In connection with the Company's
acquisition of ISI in fiscal 1995, the Company incurred $0.950 million in
expenses primarily due to professional services related to the acquisition.
Interest Income. Interest income in fiscal 1995 increased 73.0% to $3.1
million from $1.8 million in fiscal 1994. Interest income increased as a result
of an increase in the implicit interest rates charged to customers, a larger
installment contract portfolio and the investment of the net proceeds of public
offerings were completed by the Company in November 1994 and February 1995.
Interest Expense. Interest expense is generated from interest charged
on the Company's bank line of credit, subordinated notes payable, and capital
lease obligations. Interest expense for fiscal 1995 remained relatively constant
at $0.6 million in fiscal 1995 from $0.5 million from the same period in fiscal
1994, as the Company's borrowing level increased but its effective rate of total
borrowing decreased.
Provision for Income Taxes. The effective tax rate increased for fiscal
1995 to 40.8% of pretax income from 36.1% for fiscal 1994. This percentage
increase related principally to an increase in foreign tax credits in fiscal
1996. See note 10 to the consolidated financial statement.
QUARTERLY RESULTS
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Because the Company ships software
products within a short period after receipt of an order, the Company typically
does not have a material backlog of unfilled orders for software products, and
revenues from software licenses in any quarter are substantially dependent on
orders for software products booked in the quarter. Historically, a majority of
each quarter's revenues from software licenses has come from license contracts
that have been effected in the final weeks of that quarter.
The revenues for a quarter typically include a number of large orders.
If the timing of any of these orders is delayed, it could result in a
substantial reduction in revenues for that quarter. Since the Company's expense
levels are based in part on its expectations as to future revenues, the Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall. Accordingly, any revenue shortfalls would likely have a
disproportionate adverse effect on net income.
Prior to fiscal 1996, the Company experienced a net loss for the first
quarter of each fiscal year, in part because a substantial portion of the
Company's revenues is derived from countries other than the United States where
business is slow during the summer months, and also in part because of the
timing of contract renewals. The Company expects that these factors will
continue to affect its operating results. The Company experienced net losses in
the first quarter of each fiscal year prior to the first quarter of fiscal 1996,
when it recognized net income of $0.5 million. The Company may continue to
experience net losses in the initial quarter of future fiscal years. See "Item
1a. Risk Factors - Fluctuations in Quarterly Operating Results."
In addition, in recent years the Company's revenues during the third
fiscal quarter, as compared to the immediately preceding quarter, have grown at
a slower rate than during the second and fourth fiscal quarters, as compared to
their respective immediately preceding quarters. The Company's operating results
for the third quarter of fiscal 1996 included a non-recurring charge for
in-process research and development of $24.4 million recorded in connection with
the acquisitions of DMCC and Setpoint.
The following table presents selected quarterly statement of income
data for fiscal 1994, fiscal 1995 and fiscal 1996. These data are unaudited but,
in the opinion of the Company's management, reflect all adjustments that the
Company considers necessary for a fair presentation of these data in accordance
with generally accepted accounting principles. As a result of the acquisitions
of DMCC and Setpoint in purchase transactions during the quarter ended March 31,
1996, the quarterly results presented below are not indicative of future results
of operations.
22
24
QUARTER ENDED
-----------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996
--------------------------------------- -----------------------------------------
Sept.30 Dec.31 Mar.31 June 30 Sept.30 Dec.31 Mar.31 June 30
------- ------- ------- ------- ------- ------- -------- -------
Revenues:
Software licenses ............................ $ 7,342 $10,540 $12,072 $15,696 $ 9,927 $13,980 $ 17,923 $23,814
Maintenance and other services ............... 2,360 3,405 3,095 2,988 3,342 3,960 13,169 17,494
------- ------- ------- ------- ------- ------- -------- -------
9,702 13,945 15,167 18,684 13,269 17,940 31,092 41,308
Expenses:
Cost of software licenses .................... 703 643 783 671 591 972 938 975
Cost of maintenance and other services ....... 1,802 1,804 1,887 1,964 1,847 2,140 8,397 10,565
Selling and marketing ........................ 4,588 5,546 6,089 7,010 6,033 7,071 9,631 11,956
Research and development ..................... 2,577 2,737 2,668 3,393 3,457 3,731 5,834 7,186
General and administrative ................... 999 1,203 1,359 1,571 1,288 1,375 3,133 3,769
Charge for in-process research and development -- -- -- -- -- -- 24,421 --
Costs related to acquisition ................. -- -- -- 950 -- -- -- --
------- ------- ------- ------- ------- ------- -------- -------
10,669 11,933 12,786 15,559 13,216 15,289 52,354 34,451
Income (loss) from operations ... (967) 2,012 2,381 3,125 53 2,651 (21,262) 6,857
Other income (expense) ....................... (22) (27) 61 44 (56) (17) (69) (71)
Interest income, net ......................... 434 617 732 751 870 877 434 162
Income (loss) before provision for
(benefit from) income taxes .................. (555) 2,602 3,174 3,920 867 3,511 (20,897) 6,948
Provision for (benefit from) income
taxes ........................................ (231) 1,084 1,324 1,548 329 1,349 1,339 2,597
------- ------- ------- ------- ------- ------- -------- -------
Net income (loss) ........................... $ (324) $ 1,518 $ 1,850 $ 2,372 $ 538 $ 2,162 $(22,236) $ 4,351
======= ======= ======= ======= ======= ======= ======== =======
23
25
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has financed its operations principally
through cash generated from sales of securities through private placements and
public offerings of its Common Stock, operating activities, the sale of
installment contracts to third parties and, at certain times during the year,
borrowings under a bank line of credit.
In the fourth quarter of fiscal 1996 and in the second and third
quarters of fiscal 1995, the Company received a total of approximately $87.0
million of net proceeds from its initial public offering and subsequent public
offerings. A portion of the total net proceeds was used for working capital and
other general corporate purposes to pay a portion of the purchase prices of DMCC
and Setpoint, and to repay outstanding indebtedness under its bank line of
credit, subordinated notes and a promissory note issued in conjunction with the
purchase of Setpoint. The Company evaluates on an ongoing basis potential
opportunities to acquire or invest in technologies, products or businesses that
expand, complement or are otherwise related to the Company's current business
and products. See "Item 1a. Risk Factors - Risks Associated with Future
Acquisitions."
In fiscal 1996 and 1995, operating activities provided $18.4 million
and $3.6 million of cash, respectively, primarily related to net income and
increases in accounts payable, accrued expenses and deferred revenue, offset in
part by increases in accounts receivable.
In recent years, the Company has had arrangements to sell long-term
contracts to two financial institutions, General Electric Capital Corporation
and Sanwa Business Credit Corporation. These contracts represent amounts due
over the life of existing term licenses. During fiscal 1996, installment
contracts decreased by $1.8 million to $29.8 million, net of $28.9 million of
installment contracts sold to General Electric Capital Corporation and Sanwa
Business Credit Corporation. During fiscal 1995, installment contracts increased
by $8.5 million to $31.6 million, net of $10.2 million of installment contracts
sold to General Electric Capital Corporation and Sanwa Business Credit
Corporation. The Company's arrangements with these two financial institutions
provide for the sale of installment contracts up to certain limits and with
certain recourse obligations. At June 30, 1996 and June 30, 1995, the balance of
the uncollected principal portion of the contracts sold to these two financial
institutions was $42.7 million and $23.3 million, respectively, for which the
Company had partial recourse obligations of $11.5 million and $4.6 million,
respectively. The availability under these arrangements will increase as the
financial institutions receive payment on installment contracts previously sold.
See Note 12 of Notes to Consolidated Financial Statements.
The Company maintains a $30.0 million bank line of credit, expiring on
December 31, 1998, that provides for borrowings of specified percentages of
eligible accounts receivable and eligible current installment contracts.
Advances under the line of credit bear interest at a rate (8.75% at June 30,
1996) equal to the bank's prime rate plus a specified margin or, at the
Company's option, a rate (6.0% at June 30, 1996) equal to a defined LIBOR rate
plus a specified margin. The bank line of credit is secured by a pledge of
substantially all of the assets of the Company and its United States
subsidiaries. The line of credit agreement requires the Company to provide the
bank with certain periodic financial reports and to comply with certain
financial tests, including maintenance of minimum levels of consolidated net
income before taxes and of the ratio of current assets to current liabilities.
As of June 30, 1996, there were no outstanding borrowings under the line of
credit.
The Company's commitments as of June 30, 1996 consisted primarily of
leases on its headquarters and other facilities. See "Item 1. Business --
Facilities." There were no other material commitments for capital or other
expenditures. The Company believes its current cash balances, availability of
sales of its installment contracts, availability under its bank line of credit
and cash flows from its operations, will be sufficient to meet its working
capital and capital expenditure requirements for at least the next 12 months.
INFLATION
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have significant impact
during fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements of the Company are listed in the Index to Financial
Statements filed in Item 14(a)(i) as part of this Form 10-K.
24
26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There have been no changes or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
DIRECTORS
Certain of the information concerning the directors of the Company
required under this Item is contained in "Item 4a. Executive Officers of the
Registrant," and the remainder of such information is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1996, under the heading "Election of Directors."
EXECUTIVE OFFICERS
Certain of the information concerning the executive officers of the
Company required under this Item is contained in "Item 4a. Executive Officers of
the Registrant," and the remainder of such information is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1996, under the heading "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1996, under the heading "Executive Officer Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1996, under the heading "Share Ownership of Principal
Stockholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1996, under the heading "Certain Relationships and Related
Transactions."
25
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -----------------------------------------------------------------------------
(a)(1) Financial Statements Page
-------------------- ----
- Report of Independent Public Accountants F-2
- Consolidated Financial Statements:
- Balance Sheets as of June 30, 1995 and 1996 F-3
- Statements of Operations for the years ended
June 30, 1994, 1995 and 1996 F-4
- Statements of Stockholders' Equity for the
years ended June 30, 1994, 1995 and 1996 F-5
- Statements of Cash Flows for the years ended
June 30, 1994, 1995 and 1996 F-6
- Notes to Consolidated Financial Statements F-7
(a)(2) Financial Statement Schedules
-----------------------------
Report of Independent Public Accountants on Schedule S-1
II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not required or the required
information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
------ --------
(1) 3.1 - Restated Articles of Organization of the Registrant.
(2) 3.2 - By-laws of Registrant.
(3) 4.1 - Specimen Certificate for Shares of the Registrant's
Common Stock, $.10 par value.
(3) 10.1 - Lease Agreement between Registrant and Teachers
Insurance and Annuity Association of America regarding
Ten Canal Park, Cambridge, Massachusetts.
(3) 10.2 - System License Agreement between the Registrant and the
Massachusetts Institute of Technology, dated March 30,
1982, as amended.
(3)+ 10.3 - Non-Equilibrium Distillation Model Development and
License Agreement between the Registrant and Koch
Engineering Company, Inc., as amended.
(3)+ 10.3a. - Letter, dated October 19, 1994, from the Company to Koch
Engineering Company, Inc., pursuant to which the Company
elected to extend the term of the Company's license
under the Non-Equilibrium Distillation Model Development
and License Agreement.
(3)+ 10.4 - Batch Distillation Computer Program Development and
license agreement between Process Simulation Associates,
Inc. and Koch Engineering Company, Inc.
(3)+ 10.5 - Agreement between the Registrant and Imperial College of
Science, Technology and Medicine regarding Assignment of
SPEEDUP.
10.6 ***(a) Subordinated Note and Warrant Purchase
Agreement dated as of May 7, 1991 between the
Registrant and Massachusetts Capital Resource
Company.
***(b) Subordinated Note due 1998 dated as of May 7,
1991 issued by Registrant to Massachusetts
Capital Resource Company.
(3)(c) Common Stock Purchase Warrant No. 91-1.
(3)(d) Common Stock Purchase Warrant No. 91-2.
(3)(e) Subordinated Note Purchase Agreement dated as
of August 22, 1994 between the Registrant and
Massachusetts Capital Resource Company.
(3)(f) Subordinated Note due 1997 dated as of August
22, 1994 issued by Registrant to Massachusetts
Capital Resource Company.
(3)(g) Security Agreement dated as of July 24, 1989
between the Registrant and Massachusetts
Capital Resource Company, as amended.
(3) 10.7 - Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Registrant and Lawrence B. Evans.
(3) 10.8 - Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Registrant and Joseph F. Boston.
(3) 10.9 - Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Registrant and Paul W. Gallier.
(3) 10.10 - Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Registrant and Herbert I. Britt.
26
28
(3) 10.11 - 1988 Non-Qualified Stock Option Plan, as amended.
(7) 10.12 - 1995 Stock Option Plan
(7) 10.13 - 1995 Directors Stock Option Plan
(7) 10.14 - 1995 Employees Stock Purchase Plan
(3) 10.15 - (7)(a) Vendor Program Agreement between the Registrant
and General Electric Capital Corporation.
(1)(b) Rider No. 1, dated December 14, 1994, to Vendor
Program Agreement between the Registrant and
General Electric Capital Corporation.
(3)+ 10.16 - Letter Agreement between the Registrant and Sanwa
Business Credit Corporation.
(3) 10.17 - Form of Employee Confidentiality and Non-Competition
Agreement.
(3) 10.18 - Equity Joint Venture Contract between the Registrant and
China Petrochemical Technology Company.
(4) 10.19 - Amended and Restated Agreement and Plan of
Reorganization, dated as of May 12, 1995, by and among
the Registrant, Industrial Systems, Inc. and the
stockholders of Industrial Systems, Inc.
(5) 10.20 - Stock Purchase Agreement dated as of December 15, 1995,
among Aspen Technology, Inc., Dynamic Matrix Control
Corporation and Charles R. Cutler, June A. Cutler,
Charles R. Johnston and Cheryl Lynne Johnston, as
shareholders of Dynamic Matrix Control Corporation.
(5) 10.21 - Share Purchase Agreement dated as of January 5, 1996
among Aspen Technology, Inc., Amelinc Corporation and
Cegelec S.A.
(6) 10.22 - Further Amended and Restated Revolving Credit Agreement
dated as of February 15, 1996 among the Registrant,
Prosys Modeling Investment Corporation, Industrial
Systems, Inc., Dynamic Matrix Control Corporation and
Setpoint, Inc., as the Borrowers, the Lenders Parties
thereto, and Fleet Bank of Massachusetts, N.A., as Agent
and Lender, together with related forms of the following
(each in the form executed by each of such Borrowers):
(6)(a) Amended and Restated Revolving Credit Note
(6)(b) Patent Conditional Assignment and Security Agreement
(6)(c) Trademark Collateral Security Agreement.
(6)(d) Security Agreement.
11.1 - Computation of Net Income Per Share.
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of Arthur Andersen LLP.
24.1 - Power of Attorney (included on signature page to Form
10-K).
27 - Financial Data Schedules for fiscal year ended June 30,
1996.
(1) Incorporated by reference to the corresponding Exhibit to the
Registration Statement on Form S-1 of the Registrant (Registration
No. 32-88734) filed on January 29, 1995.
(2) Incorporated by reference to Exhibit 3.3 to the Registration
Statement on Form S-1 of the Registrant (Registration No.
33-83916) filed on September 13, 1994.
(3) Incorporated by reference to the corresponding Exhibit to the
Registration Statement on Form S-1 of the Registrant (Registration
No. 33-83916) filed on September 13, 1994.
(4) Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on form 10-Q for the fiscal quarter ended March
31, 1995.
(5) Incorporated by reference to the corresponding Exhibit to the
Registrant's Current Report on Form 8-K dated January 5, 1996, as
amended, by Amendment Nos. 1,2,3 and 4 thereto.
(6) Incorporated by reference to the corresponding Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(7) Incorporated by reference to the corresponding Exhibit to the
Registration Statement on Form S-8 of the Registrant
(Registration No. 333-11651) filed on September 9, 1996.
+ Certain portions have been granted Confidential Treatment by the
Securities and Exchange Commission at the request of the Company
pursuant to Rule 406 under the Securities Act of 1933.
(b) Reports on Form 8-K
-------------------
On April 16, 1996 and June 5, 1996, respectively, the Company filed Amendment
Nos. 3 and 4 to its Current Report of Form 8-K dated January 5, 1996, relating
to the Company's acquisitions of Dynamic Matrix Control Corporation and
Setpoint, Inc. Such Current Report had been previously amended by Amendment
Nos. 1 and 2 thereto filed on February 26, 1996 and March 22, 1996,
respectively.
27
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this thirtieth day of
September, 1996.
ASPEN TECHNOLOGY, INC.
/s/ LAWRENCE B. EVANS
-------------------------------------------
Lawrence B. Evans, Chairman of the Board of
Directors and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Lawrence B. Evans and
Mary A. Palermo and each of them severally, acting alone and without the other,
his/her true and lawful attorney-in fact with the authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report of Form 10-K necessary or
advisable to enable the Registrant to comply with the rules, regulations, and
requirements of the Securities Act of 1934, as amended, in respect thereof,
which amendments may make such other changes in the Annual Report as the
aforesaid attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the thirtieth day of September, 1996.
28
30
SIGNATURE TITLE(S)
--------- --------
/s/ Lawrence B. Evans Chairman of the Board and Chief Executive
- ------------------------------ Officer (Principal Executive Officer)
Lawrence B. Evans
/s/ Mary A. Palermo Executive Vice President, Finance and Chief
- ------------------------------ Financial Officer (Principal Financial and
Mary A. Palermo Accounting Officer)
/s/ Joseph F. Boston Director
- ------------------------------
Joseph F. Boston
Director
- ------------------------------
Gresham T. Brebach, Jr.
Director
- ------------------------------
Douglas R. Brown
/s/ Joan C. McArdle Director
- ------------------------------
Joan C. McArdle
/s/Alison Ross Director
- ------------------------------
Alison Ross
Director
- ------------------------------
William C. Rousseau
29
31
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH REPORT
OF INDEPENDENT ACCOUNTANTS
F-1
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspen Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Aspen
Technology, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aspen Technology, Inc. and
subsidiaries as of June 30, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
August 13, 1996
F-2
33
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
ASSETS 1995 1996
CURRENT ASSETS:
Cash and cash equivalents $ 4,189 $ 9,005
Short-term investments 16,122 42,078
Accounts receivable, net of reserves of $84 in 1995 and $731 in 1996 11,759 38,006
Unbilled services - 7,634
Current portion of long-term installments receivable, net of
unamortized discount of $735 in 1995 and $930 in 1996 12,242 12,068
Prepaid expenses and other current assets 1,764 3,318
------- --------
Total current assets 46,076 112,109
------- --------
LONG-TERM INSTALLMENTS RECEIVABLE, NET OF UNAMORTIZED
DISCOUNT OF $5,690 IN 1995 AND $5,027 IN 1996 19,324 17,708
------- --------
PROPERTY AND LEASEHOLD IMPROVEMENTS, AT COST:
Building and improvements - 3,741
Computer equipment 9,042 17,862
Purchased software 1,791 2,974
Furniture and fixtures 1,669 3,489
Leasehold improvements 374 698
------- --------
12,876 28,764
Less-Accumulated depreciation and amortization 8,255 11,949
------- --------
4,621 16,815
------- --------
COMPUTER SOFTWARE DEVELOPMENT COSTS, NET OF ACCUMULATED
AMORTIZATION OF $3,173 IN 1995 AND $3,908 IN 1996 1,644 1,817
------- --------
LAND - 925
------- --------
LONG-TERM INVESTMENTS 2,524 -
------- --------
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF $819 IN 1996 - 9,129
------- --------
OTHER ASSETS 1,508 1,664
------- --------
$75,697 $160,167
======= ========
JUNE 30,
LIABILITES AND STOCKHOLDERS' EQUITY 1995 1996
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 475 $ 425
Accounts payable 1,980 6,037
Accrued expenses 6,084 16,012
Unearned revenue 1,484 8,967
Deferred revenue 4,994 8,953
Deferred income taxes 3,465 2,798
------- --------
Total current liabilities 18,482 43,192
------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
LESS CURRENT PORTION 87 706
------- --------
SUBORDINATED NOTES PAYABLE TO A RELATED PARTY 4,000 -
------- --------
DEFERRED REVENUE, LESS CURRENT PORTION 6,498 8,279
------- --------
OTHER LIABILITIES 802 1,757
------- --------
DEFERRED INCOME TAXES, LESS CURRENT PORTION 4,039 6,398
------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value-
Authorized--15,000,000 shares
Issued--7,789,718 shares and 9,691,180 shares in
1995 and 1996, respectively 779 969
Additional paid-in capital 37,439 110,826
Retained earnings (deficit) 4,091 (11,094)
Cumulative translation adjustment (300) (362)
Treasury stock, at cost--115,198 shares of
common stock in 1995 and 1996, respectively (502) (502)
Unrealized gain (loss) on investments 282 (2)
------- --------
Total stockholders' equity 41,789 99,835
------- --------
$75,697 $160,167
======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
34
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED JUNE 30,
1994 1995 1996
REVENUES:
Software licenses $ 36,015 $ 45,649 $ 65,644
Services and other 8,960 11,849 37,965
---------- ---------- ----------
44,975 57,498 103,609
---------- ---------- ----------
EXPENSES:
Cost of software licenses 2,614 2,799 3,476
Cost of services and other 7,027 7,458 22,949
Selling and marketing 18,095 23,233 34,691
Research and development 8,159 11,375 20,208
General and administrative 4,460 5,132 9,565
Charge for in-process research and development - - 24,421
Costs related to acquisition - 950 -
---------- ---------- ----------
40,355 50,947 115,310
---------- ---------- ----------
Income (loss) from operations 4,620 6,551 (11,701)
FOREIGN CURRENCY EXCHANGE GAIN (LOSS) (56) 34 (223)
INCOME (LOSS) ON EQUITY IN JOINT VENTURES (39) 22 10
INTEREST INCOME 1,789 3,095 3,666
INTEREST EXPENSE ON SUBORDINATED NOTES PAYABLE TO A (283) (369) (377)
RELATED PARTY
OTHER INTEREST EXPENSE (246) (192) (946)
---------- ---------- ----------
Income (loss) before provision for income taxes 5,785 9,141 (9,571)
PROVISION FOR INCOME TAXES 2,087 3,725 5,614
---------- ---------- ----------
Net income (loss) $ 3,698 $ 5,416 $ (15,185)
========== ========== ==========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.58 $ 0.70 $ (1.92)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,544,903 7,781,021 7,928,736
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
35
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A, CLASS B AND
SERIES C-1 CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
NUMBER NUMBER $.10 PAID-IN EARNINGS
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL (DEFICIT)
BALANCE, JUNE 30, 1993 356,986 $ 177 3,459,847 $346 $ 17,585 $ (4,123)
Issuance of common stock under employee stock
purchase plans - - 20,218 2 79 -
Exercise of stock options - - 24,600 2 80 -
Purchase of treasury stock - - - - - -
Sale of treasury stock - - - - 185 -
Repayment of receivable - - - - - -
Translation adjustment - - - - - -
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net - - - - - 27
Net income - - - - - 3,698
------- ----- --------- ---- -------- --------
BALANCE, JUNE 30, 1994 356,986 177 3,504,665 350 17,929 (398)
Issuance of common stock in public offerings,
net of issuance costs of $1,223 - - 1,550,000 155 17,694 -
Issuance of common stock under employee stock
purchase plans - - 36,032 4 241 -
Exercise of stock options and warrants - - 344,231 35 1,147 -
Liquidation of fractional shares - - - - - -
Conversion of preferred stock to common stock (356,986) (177) 2,354,790 235 (58) -
Purchase of treasury stock - - - - - -
Repayment of receivable - - - - - -
Translation adjustment - - - - - -
Unrealized market gain on investments - - - - - -
Tax benefit on exercise of nonqualified stock options - - - - 486 -
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net - - - - - (927)
Net income - - - - - 5,416
------- ----- --------- ---- -------- --------
BALANCE, JUNE 30, 1995 - - 7,789,718 779 37,439 4,091
Issuance of common stock in a public offering,
net of issuance costs of $4,239 - - 1,453,910 145 68,312 -
Issuance of common stock in a private placement - - 33,385 3 1,061 -
Issuance of common stock under employee stock
purchase plans - - 25,110 3 471 -
Exercise of stock options and warrants - - 389,057 39 1,436 -
Translation adjustment - - - - - -
Realized gain on investments - - - - - -
Unrealized market loss on investments - - - - - -
Tax benefit on exercise of nonqualified stock options - - - - 2,107 -
Net loss - - - - - (15,185)
------- ----- --------- ---- -------- --------
BALANCE, JUNE 30, 1996 - $ - 9,691,180 $969 $110,826 $(11,094)
======= ===== ========= ==== ======== ========
RECEIVABLE
FROM UNREALIZED
CUMULATIVE STOCKHOLDER TREASURY STOCK GAIN TOTAL
TRANSLATION FOR STOCK NUMBER (LOSS) ON STOCKHOLDERS'
ADJUSTMENT ISSUED OF SHARES AMOUNT INVESTMENTS EQUITY
BALANCE, JUNE 30, 1993 $(281) $ (30) 107,385 $(272) $ - $ 13,402
Issuance of common stock under employee stock
purchase plans - - - - - 81
Exercise of stock options - - - - - 82
Purchase of treasury stock - - 71,304 (382) - (382)
Sale of treasury stock - (304) (64,095) 157 - 38
Repayment of receivable - 319 - - - 319
Translation adjustment (109) - - - - (109)
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net - - - - - 27
Net income - - - - - 3,698
----- ----- ------- ----- ----- --------
BALANCE, JUNE 30, 1994 (390) (15) 114,594 (497) - 17,156
Issuance of common stock in public offerings,
net of issuance costs of $1,223 - - - - - 17,849
Issuance of common stock under employee stock
purchase plans - - - - - 245
Exercise of stock options and warrants - - - - - 1,182
Liquidation of fractional shares - - 32 - - -
Conversion of preferred stock to common stock - - - - - -
Purchase of treasury stock - - 572 (5) - (5)
Repayment of receivable - 15 - - - 15
Translation adjustment 90 - - - - 90
Unrealized market gain on investments - - - - 282 282
Tax benefit on exercise of nonqualified stock options - - - - - 486
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net - - - - - (927)
Net income - - - - - 5,416
----- ----- ------- ----- ----- --------
BALANCE, JUNE 30, 1995 (300) - 115,198 (502) 282 41,789
Issuance of common stock in a public offering,
net of issuance costs of $4,239 - - - - - 68,457
Issuance of common stock in a private placement - - - - - 1,064
Issuance of common stock under employee stock
purchase plans - - - - - 474
Exercise of stock options and warrants - - - - - 1,475
Translation adjustment (62) - - - - (62)
Realized gain on investments - - - - (282) (282)
Unrealized market loss on investments - - - - (2) (2)
Tax benefit on exercise of nonqualified stock options - - - - - 2,107
Net loss - - - - - (15,185)
----- ----- ------- ----- ----- --------
BALANCE, JUNE 30, 1996 $(362) $ - 115,198 $(502) $ (2) $ 99,835
===== ===== ======= ===== ===== ========
F-5
36
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,698 $ 5,416 $(15,185)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 2,038 2,748 5,641
Charge for in-process research and development - - 24,421
Deferred income taxes 1,175 2,573 (295)
Changes in assets and liabilities-
Accounts receivable (3,174) (3,061) (12,415)
Prepaid expenses and other current assets (109) (780) 1,053
Long-term installments receivable (4,396) (8,503) 1,790
Accounts payable and accrued expenses 1,489 2,446 7,000
Unearned revenue 558 66 2,823
Deferred revenue 2,166 2,716 3,560
------- -------- --------
Net cash provided by operating activities 3,445 3,621 18,393
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and leasehold improvements (972) (2,565) (7,017)
Increase in computer software development costs (888) (1,026) (908)
Increase in other assets (454) (154) 117
(Increase) decrease in investment securities - (18,364) (23,716)
Increase (decrease) in other liabilities (57) 401 955
Payment for the acquisitions of DMCC and Setpoint,
net of cash acquired - - (44,723)
------- -------- --------
Net cash used in investing activities (2,371) (21,708) (75,292)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 17,849 69,521
Issuance of common stock under employee stock
purchase plans 81 245 474
Exercise of common stock options and warrants 82 1,182 925
Purchase of treasury shares (382) (5) -
Sale of treasury shares 38 - -
Repayment of notes receivable for stock issued 319 15 -
Proceeds from subordinated note payable to related party - 2,000 -
Payment of subordinated notes payable to related parties - - (3,450)
Payments of long-term debt and capital lease obligations (860) (661) (5,693)
Dividend distributions to stockholders relating to
acquired Subchapter S corporation, net 27 (927) -
------- -------- --------
Net cash provided by (used in) financing activiities (695) 19,698 61,777
------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (109) 90 (62)
------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 270 1,701 4,816
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,218 2,488 4,189
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,488 $ 4,189 $ 9,005
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 660 $ 600 $ 1,861
======= ======== ========
Cash paid for interest $ 540 $ 524 $ 1,363
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Increase in equipment under capital lease obligations $ 1,020 $ - $ 105
======= ======== ========
Increase in additional paid-in capital and decrease
in accrued expenses relating to the tax benefit of
exercise of nonqualified stock options $ - $ 486 $ 2,107
======= ======== ========
Increase in common stock additional paid-in capital
and decrease in subordinated notes payable to a
related party relating to the exercise of warrants $ - $ - $ 550
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO
ACQUISITIONS:
During 1996, the Company acquired certain companies
as described in Note 3. These acquisitions are
summarized as follows-
Fair value of assets acquired, excluding cash $ - $ - $ 47,919
Payments in connection with the acquisitions, net
of cash acquired - - 44,723
------- -------- --------
Liabilities assumed $ - $ - $ 3,196
======= ======== ========
In May 1995, the Company acquired Industrial Systems, Inc., which was accounted
for as a pooling-of-interests.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
37
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) OPERATIONS
Aspen Technology, Inc. (the Company) develops and markets process modeling
and automation software and services internationally to the process
industries. The Company's principal products are used to simulate
manufacturing processes in the chemicals, petroleum, pharmaceuticals, pulp
and paper, electric power, and food and consumer products industries. The
Company's services include hot line assistance, training courses and
application consulting services on a contract basis.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the results
of operations of the Company and its wholly owned subsidiaries. All
material intercompany balances and transactions have been eliminated
in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates
market, and consist of short-term, highly liquid investments with
original maturities of less than three months.
(c) Investments
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES, effective July 1, 1994. The adoption of SFAS No. 115 had
no material effect on the Company's financial position or results of
operations.
Under SFAS No. 115, securities purchased to be held for indefinite
periods of time, and not intended at the time of purchase to be held
until maturity, are classified as available-for-sale securities.
Securities classified as available-for-sale are required to be
recorded at market value
F-7
38
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Investments (Continued)
in the financial statements. Unrealized gains and losses have been
accounted for as a separate component of stockholders' equity.
Available for sale investments as of June 30, 1996 are as follows (in
thousands):
CONTRACTED MARKET VALUE JUNE 30,
DESCRIPTION MATURITY 1995 1996
Money market fund N/A $ 377 $ 3,519
Commercial paper 1-3 Months 6,837 38,559
U.S. Treasury bills and notes 1-11 Months 8,908 -
------- -------
16,122 42,078
U.S. Treasury notes 12-17 Months 2,524 -
------- -------
$18,646 $42,078
======= =======
The net unrealized holding gains (losses) at June 30, 1995 and 1996
were approximately $282 and $(2), respectively. The Company had no
realized gains or losses for the years ended June 30, 1994 and 1995,
and a realized gain of $282 for the year ended June 30, 1996.
(d) Depreciation and Amortization
The Company provides for depreciation and amortization, computed using
the straight-line and declining balance methods, by charges to
operations in amounts estimated to allocate the cost of the assets
over their estimated useful lives as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Building and improvements 7-30 Years
Computer equipment 3-10 Years
Purchased software 3 Years
Furniture and fixtures 3-10 Years
Leasehold improvements Life of Lease
F-8
39
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Land
In connection with the acquisition of Setpoint, Inc. (see Note 3(c)),
the Company acquired land that is being held for investment purposes.
The land has been recorded at its appraised value at the date of
acquisition.
(f) Revenue Recognition
The Company recognizes revenue from software licenses upon the
shipment of its products, pursuant to a signed noncancelable license
agreement. In the case of license renewals, revenue is recognized upon
execution of the renewal license agreement. The Company has no other
significant vendor obligations or collectibility risk associated with
its product sales. The Company recognizes revenue from postcontract
customer support ratably over the period of the postcontract
arrangement. The Company accounts for insignificant vendor obligations
by deferring a portion of the revenue and recognizing it either
ratably as the obligations are fulfilled or when the related services
are performed. If significant application development services are
performed in connection with the purchase of a license, the license
fees are recognized as the application development services are
performed.
Service revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs
(primarily labor) incurred to date as compared to the estimated total
costs (primarily labor) for each contract. When a loss is anticipated
on a contract, the full amount thereof is provided currently. Service
revenues from time and expense contracts and consulting and training
revenue are recognized as the related services are performed. Services
that have been performed but for which billings have not been made are
recorded as unbilled services, and billings that have been recorded
before the services have been performed are recorded as unearned
revenue in the accompanying consolidated balance sheets.
Installments receivable represent the present value of future payments
related to the financing of noncancelable term license agreements that
provide for payment in installments over a one- to five-year period. A
portion of each installment agreement is recognized as interest income
in the accompanying consolidated statements of operations. The
interest rates in effect in fiscal 1994, 1995 and 1996 were 9.75%, 11%
to 12% and 11% to 12%, respectively.
F-9
40
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Computer Software Development Costs
In compliance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, certain computer
software development costs are capitalized in the accompanying
consolidated balance sheets. Capitalization of computer software
development costs begins upon the establishment of technological
feasibility. Amortization of capitalized computer software development
costs is included in cost of software licenses and is provided on a
product-by-product basis using the straight-line method over the
remaining estimated economic life of the product, not to exceed three
years. Total amortization expense charged to operations was
approximately $497,000, $630,000 and $735,000 in fiscal 1994, 1995 and
1996, respectively.
(h) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION. This determination of functional currency is based on the
subsidiaries' relative financial and operational independence on the
Company. Foreign currency exchange and translation gains or losses for
certain wholly owned subsidiaries are credited or charged to the
accompanying consolidated statements of operations since the
functional currency of the subsidiaries is the U.S. dollar. Gains and
losses from foreign currency translation are credited to or charged to
the cumulative translation adjustment account, included in
stockholders' equity in the accompanying consolidated balance sheets,
since their functional currency is their local currency.
At June 30, 1995 and 1996, the Company had long-term installments
receivable of approximately $6,072,000 and $7,301,000 denominated in
foreign currencies. The June 1996 installments receivable mature
through January 2000 and have been hedged with specific foreign
currency contracts. The Company records a foreign currency gain or
loss at the time the Company enters into the foreign currency
contract. There have been no material gains or losses recorded
relating to hedge contracts for the periods presented.
F-10
41
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Net Income (Loss) per Share
Net income (loss) per common and common equivalent share is computed
using the weighted average number of common and dilutive common
equivalent shares outstanding during each period, assuming conversion
of all classes of convertible preferred stock into common stock. Stock
issued after September 1, 1993 and common stock issuable pursuant to
stock options or warrants granted after September 1, 1993 have been
reflected as outstanding for all periods presented, before the
Company's initial public offering of common stock, using the treasury
stock method required by the Securities and Exchange Commission. Other
shares of stock issuable pursuant to stock options and warrants have
been included where their effect is dilutive. Fully diluted earnings
per common share and common equivalent are not presented, as they are
not materially different from primary earnings per share. Dilutive
common equivalent shares consist of convertible preferred stock, stock
options and stock warrants (using the treasury stock method).
(j) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Concentration of Credit Risk
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK, requires disclosure of any significant
off-balance sheet and credit risk concentrations. Financial
instruments that potentially subject the Company to concentration of
credit risk are principally cash and cash equivalents, investments,
accounts receivable and installments receivable. The Company places
its cash and cash equivalents and investments in highly rated
institutions. Concentration of credit risk with respect to receivables
is limited to certain customers (end-users and distributors) to which
the Company makes substantial sales. To reduce risk, the Company
routinely assesses the financial strength of its customers, hedges
specific foreign receivables and routinely sells its receivables to
financial institutions with and without recourse. As a result, the
Company believes that its accounts and installments receivable credit
risk exposure is limited. The Company maintains an allowance for
potential credit losses but historically has not experienced any
significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
F-11
42
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Financial Instruments
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure about fair value of financial instruments.
Financial instruments consist of cash equivalents, investments,
accounts receivable and installments receivable. The estimated fair
value of these financial instruments approximates their carrying value
and, except for accounts receivable and installments receivable, is
based primarily on market quotes.
(m) Intangible Assets
Intangible assets consist of goodwill, existing products, tradenames
and assembled workforce. Intangible assets are being amortized on a
straight-line basis over estimated useful lives of five to ten years.
At each balance sheet date, the Company evaluates the realizability of
intangible assets based on profitability and cash flow expectations
for the related asset or subsidiary. Based on its most recent
analysis, the Company believes that no impairment of intangible assets
exists at June 30, 1996. Goodwill (net of accumulated amortization)
was approximately $1,378,000 at June 30, 1996. Amortization of
goodwill amounted to approximately $40,000 for the year ended June 30,
1996.
(n) New Accounting Standards
The Company will adopt SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, in fiscal 1997. The standard defines a fair-value-based
method of accounting for employee stock options and other stock-based
compensation. The compensation expense arising from this method of
accounting can be reflected in the financial statements or,
alternatively, the pro forma net income and earnings per share effect
of the fair-value-based accounting can be disclosed in the financial
footnotes. The Company expects to adopt the disclosure alternative.
(3) ACQUISITIONS
(a) Industrial Systems, Inc. (ISI)
In May 1995, the Company acquired Industrial Systems, Inc. (ISI), a
supplier of open systems Process Information Management (PIM) software
for large-scale process manufacturing environments. The Company
exchanged 645,188 shares of its common stock for all outstanding
shares of ISI common stock. Outstanding ISI options were converted
into options to purchase 13,040 shares of the Company's common stock.
The acquisition has been accounted for as a pooling-of-interests.
Accordingly, the consolidated financial statements of the Company have
F-12
43
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(3) ACQUISITIONS (Continued)
(a) Industrial Systems, Inc. (ISI) (Continued)
been prepared to give retroactive effect to the combination with ISI.
The Company incurred approximately $950,000 of expenses related to
this acquisition, which was charged to operations in the accompanying
fiscal 1995 consolidated statement of operations. Unaudited pro forma
condensed statements of operations for the year ended June 30, 1994 is
as follows (in thousands):
HISTORICAL HISTORICAL PRO FORMA
ASPEN ISI COMBINED
Year Ended 1994-
Revenues $37,230 $7,745 $44,975
======= ====== =======
Net income $ 2,538 $1,160 $ 3,698
======= ====== =======
(b) Dynamic Matrix Control Corporation (DMCC)
On January 5, 1996, the Company acquired 80.7% of the outstanding
shares of common stock of DMCC, and on February 8, 1996, the Company
acquired the remaining 19.3% of DMCC common stock, for an aggregate
purchase price of $20,139,000 in cash and the assumption of certain
expenses related to the acquisition. DMCC is a supplier of on-line
automation and information management software and services to
companies in process manufacturing industries.
For financial statement purposes, this acquisition was accounted for
as a purchase, and accordingly, the results of operations of DMCC from
January 5, 1996 forward are included in the Company's consolidated
statements of operations. The fair market value of assets acquired and
liabilities assumed was based on an independent appraisal. The portion
of the purchase price allocated to in-process research and development
represents projects that had not yet reached technological feasibility
and had no alternative future uses as of January 5, 1996.
F-13
44
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(3) ACQUISITIONS (Continued)
(b) Dynamic Matrix Control Corporation (DMCC) (Continued)
For financial statement purposes, the purchase price was allocated to
the fair value of assets acquired and liabilities assumed as follows
(in thousands):
DESCRIPTION AMOUNT LIFE
Purchased in-process research and development $ 9,521 -
Existing technology 1,740 5 Years
Other intangibles 1,066 5-10 Years
Building 627 30 Years
Uncompleted contracts 596 Life of contracts
-------
13,550
Net book value of tangible assets acquired, less
liabilities assumed 8,080
-------
21,630
Less--Deferred taxes 1,491
-------
$20,139
=======
For tax purposes, this acquisition is being accounted for as a
purchase, and due to the different basis in assets for book and tax
purposes, deferred taxes have been provided for as part of the
purchase allocation in accordance with SFAS No. 109.
(c) Setpoint, Inc. (Setpoint)
On February 9, 1996, the Company acquired all of the outstanding
shares of Setpoint for an aggregate purchase price of $27,780,000,
after final adjustment, in cash and the assumption of certain expenses
related to the acquisition. The purchase price was subject to certain
downward adjustments based on the net worth of Setpoint as of December
31, 1995. In May 1996, this contingency was resolved resulting in a
$400,000 reduction of purchase price. Setpoint supplies on-line
automation and information management software and services to
companies in process manufacturing industries.
For financial statement purposes, this acquisition was accounted for
as a purchase, and accordingly, the results of operations of Setpoint
from February 9, 1996 forward are included in the Company's
consolidated statements of operations. The fair market value of assets
acquired and liabilities assumed was based on an independent
appraisal. The portion of the purchase price
F-14
45
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(3) ACQUISITIONS (Continued)
(c) Setpoint, Inc. (Setpoint) (Continued)
allocated to in-process research and development represents projects
that had not yet reached technological feasibility and had no
alternative future use as of February 9, 1996. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed
as follows (in thousands):
DESCRIPTION AMOUNT LIFE
Purchased in-process research and
development $14,900 -
Existing technology 3,308 5 Years
Other intangibles 1,709 5-10 Years
Goodwill 1,418 10 Years
Uncompleted contracts 504 Life of contracts
-------
21,839
Net book value of tangible assets
acquired, less liabilities assumed 7,984
-------
29,823
Less--Deferred taxes 2,043
-------
$27,780
=======
For tax purposes, this acquisition is being accounted for as a
purchase, and due to the different basis in assets for book and tax
purposes, deferred taxes have been provided for as part of the
purchase allocation in accordance with SFAS No. 109.
F-15
46
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(3) ACQUISITIONS (Continued)
(d) Unaudited Pro Forma Combined Results
The following table represents selected unaudited pro forma combined
financial information for the Company, DMCC and Setpoint, assuming the
companies had combined at the beginning of fiscal 1995 (in thousands,
except per share data):
YEARS ENDED JUNE 30,
1995(1) 1996(1)
Pro forma revenue $114,730 $142,668
Pro forma net income 4,243 8,599
Pro forma net income per common and common
equivalent share $ 0.55 $ 0.99
Pro forma weighted average common and
common equivalent shares outstanding 7,781 8,649
(1) Does not reflect the charge for in-process research and
development and nonrecurring acquisition charges.
Pro forma results are not necessarily indicative of either actual
results of operations that would have occurred had the acquisitions
been made at the beginning of fiscal 1995 or of future results.
(4) LINE OF CREDIT
As of June 30, 1995, the Company maintained a revolving line-of-credit
facility with a bank with borrowings limited to the lesser of
$10,000,000 or a percentage of qualified accounts and installments
receivable, as defined.
On February 6, 1996, the Company amended the revolving line-of-credit
agreement with a bank which raised the borrowing limit from $10,000,000
to $30,000,000, subject to existing limitations. The commitment fee for
the unused portion of the revolving line of credit ranges from .25% to
.50%, based on the financial position of the Company, as defined, and
is payable quarterly. At the Company's election, borrowings can bear
interest on the basis of the applicable LIBOR rate, as defined (6.0% as
of June 30, 1996), or at the bank's prime rate (8.75% as of June 30,
1996). The line of credit is secured by a pledge of substantially all
of the assets of the Company and its United States subsidiaries. The
line is subject to certain covenants, including profitability and
operating ratios, as defined. As of June 30, 1996, the Company had an
available borrowing base of approximately $28,987,500, none of which
was outstanding, and approximately $634,000 was reserved for certain
performance bonds relating to service contracts. The line of credit
expires on December 31, 1998.
F-16
47
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(5) NOTE PAYABLE
In connection with the acquisition of Setpoint, the Company assumed
approximately $5,200,000 of intercompany debt payable to the former parent
of Setpoint. Upon the closing of the acquisition, the Company paid
approximately $1,700,000 of this debt and signed a note for the remaining
balance of $3,500,000. The note accrues interest at a rate of 6% per year.
All principal and accrued interest was payable in one lump sum on November
9, 1996. This obligation was secured by a standby letter of credit for the
face amount of the note. This obligation was extinguished on June 27, 1996.
(6) CAPITAL LEASE OBLIGATIONS
The Company has numerous capital lease arrangements. These obligations
accrue interest at rates ranging from 8.5% to 17.0% and are payable in
various monthly installments of principal and interest ranging from $422 to
$22,409, expiring on various dates through December 2001.
Maturities are as follows (in thousands):
AMOUNT
Year Ending June 30,
1997 $ 502
1998 333
1999 198
2000 135
2001 129
Thereafter 62
------
1,359
Less--Amount representing interest 228
------
$1,131
======
(7) SUBORDINATED NOTES PAYABLE TO A RELATED PARTY
As of June 30, 1995, the Company had $4,000,000 outstanding on subordinated
notes payable to an outside investor, of which a director of the Company is
an officer. The notes were repayable, $2,000,000 on April 30, 1997 and
$2,000,000 on April 30, 1998, with interest at 9.6%, payable quarterly.
On December 1995 and June 1996, the lender exercised 77,500 and 60,000 of
warrants, respectively. The total proceeds due to the Company relating to
the exercise of the warrants of $550,000 were recognized as a reduction of
principal on the notes. The Company paid the remaining balance of
$3,450,000 on June 27, 1996.
F-17
48
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(8) PREFERRED STOCK
The Company's Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue, from
time to time, up to an aggregate of 10,000,000 shares of preferred stock in
one or more series. Each such series of preferred stock shall have such
number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges, which may include, among
others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences and conversion rights, as shall be
determined by the Board of Directors in a resolution or resolutions
providing for the issuance of such series. Any such series of preferred
stock, if so determined by the Board of Directors, may have full voting
rights with the common stock or superior or limited voting rights and may
be convertible into common stock or another security of the Company.
(9) COMMON STOCK
(a) Stock Offerings
Effective November 1, 1994, the Company completed its initial public
offering of common stock. In this offering, the Company sold 1,500,000
shares of its common stock for net proceeds to the Company of
approximately $17.2 million. Upon the closing of the initial public
offering, all shares of convertible preferred stock were converted
into 2,354,790 shares of common stock.
On February 14, 1995, the Company completed a public offering, raising
net proceeds to the Company of approximately $600,000 from the sale of
50,000 shares of its common stock and the exercise of certain options
and warrants.
On January 10, 1996, the Company completed a private placement of
stock relating to the acquisition of DMCC (Note 3(b)). The offering
raised net proceeds to the Company of approximately $1,064,000 from
the sale of 33,385 shares of common stock.
On June 20, 1996, the Company completed a public offering, raising net
proceeds to the Company of approximately $68,457,000 from the sale of
1,453,910 shares of its common stock.
(b) Warrants
During fiscal 1990, the Company issued warrants to purchase 127,500
shares of common stock to the holder of the subordinated notes payable
(see Note 7). In February 1995, warrants to purchase 50,000 shares
were exercised and sold as part of the Company's second public
offering of stock. The remaining warrants to purchase 77,500 shares of
common stock were exercised in
F-18
49
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(9) COMMON STOCK (Continued)
(b) Warrants (Continued)
December 1995. During 1991, the Company issued an additional warrant
to purchase 60,000 shares of common stock to the holder of the
subordinated notes payable (see Note 7). These warrants were exercised
in June 1996.
During fiscal 1992, the Company issued warrants to purchase 30,000
shares of common stock to a research consultant at an exercise price
of $6.67 per share. In February 1995, warrants to purchase 13,500
shares were exercised and sold as part of the Company's offering of
common stock. In 1996, warrants to purchase 575 shares were exercised.
The remaining warrants to purchase 15,925 shares of common stock are
exercisable through June 30, 2001.
During fiscal 1993, the Company issued warrants to purchase 6,000
shares of common stock to two research consultants at an exercise
price of $5.33 per share. These warrants are exercisable ratably over
four years and expire June 10, 1998.
(c) Stock Options
In July 1987 and August 1988, the Company entered into stock option
agreements covering 60,000 shares of common stock. The purchase price
under the options is $1.87 to $2.10 based on the fair market value of
the common stock on the date of grant. In fiscal 1995, options
covering 45,000 shares of common stock at $2.10 per share were
exercised. As of June 30, 1996, options covering 15,000 shares of
common stock at an exercise price of $1.87 had vested but had not been
exercised.
Prior to November 1995, options were granted under the 1988
Nonqualified Stock Option Plan (the 1988 Plan), which provided for the
issuance of nonqualified stock options. In November 1995, the Board of
Directors approved the establishment of the 1995 Stock Option Plan
(the 1995 Plan) and the 1995 Directors Stock Option Plan (the 1995
Directors Plan), which provided for the issuance of incentive stock
options and nonqualified options. Under these plans, the Board of
Directors may grant stock options to purchase up to an aggregate of
920,000 shares of common stock. Shares available for grant under this
plan will be increased on July 1, 1996 and 1997 by an amount equal to
5% of the outstanding shares as of the preceding June 30. As a result
of the adoption of the 1995 Plan, no additional options may be granted
pursuant to the 1988 Plan. The exercise price of options are granted
at a price not less than 100% of the fair market value of the common
stock on the date of grant. Stock options become exercisable over
varying rates and expire no later than 10 years from the date of
grant.
F-19
50
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(9) COMMON STOCK (Continued)
(c) Stock Options (Continued)
The following is a summary of stock option activity under the 1988
Plan, the 1995 Plan and 1995 Director Plan:
NUMBER OF
OPTIONS PRICE PER SHARE
Outstanding, June 30, 1993 778,110 $ 2.10-$ 5.33
Options granted 239,213 5.33- 6.67
Options exercised (24,600) 2.10- 5.33
Options terminated (36,285) 2.10- 5.33
--------- -------------
Outstanding, June 30, 1994 956,438 2.10- 6.67
Options granted 135,000 8.00- 20.50
Options exercised (178,684) 2.10- 6.67
Options terminated (72,668) 3.67- 6.67
--------- -------------
Outstanding, June 30, 1995 840,086 2.10- 20.50
Options granted 886,000 26.25-37.125
Options exercised (230,057) 2.10- 20.50
Options terminated (25,650) 5.33- 20.50
--------- -------------
Outstanding, June 30, 1996 1,470,379 $2.10-$37.125
========= =============
Exercisable, June 30, 1996 481,495 $2.10-$37.125
========= =============
ISI maintained a separate stock option plan (the ISI Plan) under which
its Board of Directors was entitled to grant either incentive or
nonqualified stock options for a maximum of 98,774 shares of common
stock (as converted to reflect the pooling of interests and conversion
to options to purchase Aspen common stock) to eligible employees, as
defined.
F-20
51
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(9) COMMON STOCK (Continued)
(c) Stock Options (Continued)
Activity under the ISI Plan is as follows:
NUMBER OF PRICE PER
OPTIONS SHARE
Outstanding, June 30, 1992 and 1993 59,068 $.51-$1.01
Granted 6,519 2.53
------- ----------
Outstanding, June 30, 1994 65,587 .51-2.53
Exercised (52,547) .51-1.01
------- ----------
Outstanding, June 30, 1995 13,040 .51-2.53
Exercised (6,520) .51
------- ----------
Outstanding, June 30, 1996 6,520 $ 2.53
======= ==========
Exercisable, June 30, 1996 6,520 $ 2.53
======= ==========
(d) Employee Stock Purchase Plans
In February 1986, the Company's Board of Directors approved the 1986
Employees' Stock Purchase Plan, under which the Board of Directors may
grant stock purchase rights for a maximum of 570,000 shares through
November 1995. In December 1995, the Company's Board of Directors
approved the 1995 Employees' Stock Purchase Plan, under which the
Board of Directors may grant stock purchase rights for a maximum of
250,000 shares through November 2005.
Participants are granted options to purchase shares of common stock on
the last business day of each semiannual payment period for 85% of the
market price of the common stock on the first and last business day of
such payment period, whichever is less. The purchase price for such
shares is paid through payroll deductions, and the current maximum
allowable payroll deduction is 10% of each eligible employee's
compensation. Under the plan, the Company issued 16,963 shares, 34,250
shares and 23,672 shares during fiscal 1994, 1995 and 1996,
respectively. As of June 30, 1996, 250,000 shares of common stock were
available for future grants under the plan, of which rights to
purchase 13,271 shares of common stock were outstanding.
F-21
52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(9) COMMON STOCK (Continued)
(d) Employee Stock Purchase Plans (Continued)
In September 1992, the Company's Board of Directors approved the
establishment of a UK Employees' Stock Purchase Arrangement for all
eligible employees, as defined. Under this arrangement, the rights to
purchase shares of the Company's common stock are granted at fair
market value, as determined by the Board of Directors. The purchase
price for these shares is paid through payroll deductions over a
six-month period, and the employees are, in turn, paid a cash bonus
equal to 15% of the stock price after applicable taxes are withheld.
Under this arrangement, the Company issued 1,782 shares and 1,438
shares during fiscal 1995 and 1996, respectively.
(e) Stock Dividends
Effective August 31, 1994, the Board of Directors declared a stock
dividend of one share for every two shares of common stock
outstanding. All share and per share amounts affected by this stock
dividend have been retroactively adjusted for all periods presented.
(10) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method specified by SFAS
No. 109, a deferred tax asset or liability is measured based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates.
The provisions for income taxes shown in the accompanying consolidated
statements of income comprise the following (in thousands):
1994 1995 1996
Federal-
Current $ 283 $1,132 $4,512
Deferred 1,366 1,949 (295)
State-
Current - - 892
Deferred 313 485 -
Foreign-
Current 125 159 505
------ ------ ------
$2,087 $3,725 $5,614
====== ====== ======
F-22
53
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(10) INCOME TAXES (Continued)
The provision for income taxes differs from the federal statutory rate due
to the following:
YEAR ENDED JUNE 30,
1994 1995 1996(1)
Federal tax at statutory rate 34.0% 34.0% 35.0%
State income tax, net of federal tax
benefit 4.4 5.3 5.0
Foreign tax (2.9) (4.1) 2.4
Tax credits generated (0.5) (2.5) (8.2)
Permanent differences, net 0.6 5.6 4.3
Valuation allowance and other 0.5 2.5 (.7)
---- ---- ----
Provision for income taxes 36.1% 40.8% 37.8%
==== ==== ====
(1) Calculated based on pretax income before charge for in-process
research and development of $14,850,000.
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
JUNE 30,
1995 1996
Deferred tax assets $ 5,285 $ 7,418
Deferred tax liabilities (10,941) (15,189)
-------- --------
(5,656) (7,771)
Valuation allowance (1,848) (1,425)
-------- --------
$ (7,504) $ (9,196)
======== ========
F-23
54
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(10) INCOME TAXES (Continued)
The approximate tax effect of each type of temporary difference and
carryforward:
JUNE 30,
1995 1996
Deferred revenue $(8,808) $(6,974)
Net operating losses 1,720 1,425
General business credits 994 -
Nondeductible reserves and accruals 758 1,523
Alternative minimum tax credits 285 -
Intangible assets (554) (3,819)
Other temporary differences (51) 74
------- -------
$(5,656) $(7,771)
======= =======
The foreign tax credit and net operating loss carryforwards expire at
various dates from 1997 through 2011. Due to the uncertainty surrounding
the realization and timing of these tax attributes, the Company has
recorded a valuation allowance of approximately $1,848,000 and $1,425,000
as of June 30, 1995 and 1996, respectively, as management has concluded
that it is not more likely than not to be fully realized.
The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss and tax credit carryforwards available to be used in any
given year in the event of significant changes in ownership, as defined.
(11) OPERATING LEASES
The Company leases its facilities and various office equipment under
noncancelable operating leases with terms in excess of one year. Rent
expense charged to operations was approximately $1,705,000, $2,227,000 and
$3,346,000 for the years ended June 30, 1994, 1995 and 1996, respectively.
Future minimum lease payments under these leases as of June 30, 1996 are as
follows (in thousands):
AMOUNT
Year Ending June 30,
1997 $ 4,919
1998 4,594
1999 3,665
2000 3,278
2001 3,019
Thereafter 7,771
-------
$27,246
=======
F-24
55
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(12) SALE OF INSTALLMENTS RECEIVABLE
The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $10,224,000 and $28,895,000
during fiscal 1995 and 1996, respectively. The financial institutions have
partial recourse to the Company only upon nonpayment by the customer under
the installments receivable. The amount of recourse is determined pursuant
to the provisions of the Company's contracts with the financial
institutions and varies depending upon whether the customers under the
installment contracts are foreign or domestic entities. Collections of
these receivables reduce the Company's recourse obligation, as defined.
At June 30, 1996, the balance of the uncollected principal portion of the
contracts sold with partial recourse was approximately $42,737,000. The
Company's potential recourse obligations related to these contracts is
approximately $11,497,000. In addition, the Company is obligated to pay
additional costs to the financial institutions in the event of default by
the customer.
(13) RETIREMENT PLAN
The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all eligible employees, as
defined. Under the plan, a participant may elect to defer receipt of a
stated percentage of their compensation, subject to limitation under the
Internal Revenue Code, which would otherwise be payable to the participant
for any plan year. All participant contributions vest immediately. The
Company is not obligated to make contributions to this plan. During 1994,
1995 and 1996, no discretionary contributions were made to this plan.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS.
(14) JOINT VENTURES
In May 1993, the Company entered into an Equity Joint Venture agreement
with China Petrochemical Technology Company to form a limited liability
company governed by the laws of the People's Republic of China. This
company has the nonexclusive right to distribute the Company's products
within the People's Republic of China. The Company invested $300,000 on
August 6, 1993, which represents a 30% equity interest in the joint
venture.
In November 1993, the Company invested approximately $100,000 in a
Cyprus-based corporate joint venture, representing approximately a 14%
equity interest. The Company had a two-year option to purchase additional
shares in the joint venture corporation, which would increase its equity
interest to 22.5%. In December 1995, the Company exercised its option to
acquire these additional shares for approximately $125,000. In connection
with this, the Company received a one-year option to purchase additional
shares, which would increase its equity interest to approximately 75%.
F-25
56
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(14) JOINT VENTURES (Continued)
The Company is accounting for these investments using the equity method.
The net investments are included in other assets in the accompanying
consolidated balance sheets. In the accompanying consolidated statements of
operations for the years ended June 30, 1995 and 1996, the Company has
recognized approximately $22,000 and $10,000, respectively, in net income
as its portion of the income from these joint ventures.
(15) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following (in thousands):
JUNE 30,
1995 1996
Payroll and payroll-related $2,901 $ 4,743
Royalties and outside commissions 1,442 4,149
Other 1,741 7,120
------ -------
$6,084 $16,012
====== =======
(16) RELATED PARTY TRANSACTIONS
KPM Enterprises (KPME), a company of which Kenneth P. Morse, a former
director of the Company, is the sole proprietor, was engaged by the Company
as a marketing consultant from 1986 to 1992 to assist the Company in
marketing its products in Japan. KPME was compensated on an incentive basis
as a percentage of the revenue generated by the Company from KPME's
efforts. Payments are made to KPME as the customer pays the Company. In
fiscal 1994, 1995 and 1996, payments of $326,000, $68,000 and $25,502,
respectively, were made by the Company to KPME as compensation for services
rendered prior to the expiration of KPME's consulting arrangement with the
Company.
F-26
57
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(17) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and export sales as a percentage of total revenues are as follows:
YEAR ENDED JUNE 30,
1994 1995 1996
United States 43.2% 48.1% 54.6%
Europe 34.8 30.6 26.7
Japan 12.3 12.3 9.6
Other 9.7 9.0 9.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Revenues, income (loss) from operations and identifiable assets for the
Company's United States, European and Asian operations are as follows (in
thousands). The Company has intercompany distribution arrangements with its
subsidiaries. The basis for these arrangements, disclosed below as
transfers between geographic locations, is cost plus a specified percentage
for services and a commission rate for sales generated in the geographic
region.
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
Year Ended June 30, 1994-
Revenues $44,022 $ 953 $ - $ - $44,975
Transfers between
geographic locations 3,390 7,667 3,732 (14,789) -
------- ------- ------ --------- -------
Total revenues $47,412 $ 8,620 $3,732 $(14,789) $44,975
======= ======= ====== ======== =======
Income from operations $ 3,962 $ 652 $ 6 $ - $ 4,620
======= ======= ====== ======== =======
Identifiable assets $39,308 $ 2,386 $ 99 $ 216 $42,009
======= ======= ====== ======== =======
Year Ended June 30, 1995-
Revenues $56,951 $ 547 $ - $ - $57,498
Transfers between
geographic locations - 10,912 4,463 (15,375) -
------- ------- ------ -------- -------
Total revenues $56,951 $11,459 $4,463 $(15,375) $57,498
======= ======= ====== ======== =======
Income from operations $ 5,126 $ 1,112 $ 313 $ - $ 6,551
======= ======= ====== ======== =======
Identifiable assets $71,143 $ 4,087 $ 416 $ 51 $75,697
======= ======= ====== ======== =======
F-27
58
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(17) FINANCIAL INFORMATION BY GEOGRAPHIC AREA (Continued)
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
Year Ended June 30, 1996-
Revenues $100,958 $ 2,643 $ 8 $ - $ 103,609
Transfers between
geographic locations - 13,474 4,645 (18,119) -
-------- ------- ------- -------- ------------
Total revenues $100,958 $16,117 $4,653 $(18,119) $ 103,609
======== ======= ====== ======== ============
Income (loss) from operations $(11,449) $ (267) $ 15 $ - $ (11,701)
======== ======= ====== ======== ============
Identifiable assets $183,550 $11,172 $ 414 $(45,948) $ 149,188
======== ======= ====== ======== ============
F-28
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Aspen Technology, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Aspen Technology, Inc. and subsidiaries,
included in this Form 10-K, and have issued our report thereon dated August 13,
1996. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 13, 1996
S-1
60
SCHEDULE II
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE, CHARGED TO BALANCE,
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OTHER(1) OF PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
June 30, 1994 $40,000 $ 60,000 $(16,000) $ - $ 84,000
June 30, 1995 84,000 - - - 84,000
June 30, 1996 84,000 200,000 (2,315) 449,000 730,685
(1) Relates to amounts acquired in the acquisitions of Setpoint and DMCC.
S-2