ASPEN TECHNOLOGY INC /DE/ - 10-Q Quarterly Report

Aspen Technology, Inc.
(Exact name of registrant as specified in its charter)

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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o

As of February 10, 2003, there were 38,979,761 shares of the registrant's common stock (par value $.10 per share) outstanding.

ASPEN TECHNOLOGY, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

In the opinion of management, the accompanying unaudited interim consolidated condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is suggested that these unaudited interim consolidated condensed financial statements be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2002, which are contained in the Annual Report on 10-K of Aspen Technology, Inc. (the Company), as previously filed with the SEC. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of June 30, 2002 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the three- and six-month periods ended December 31, 2002 are not necessarily indicative of the results to be expected for the full year.

In November 2001, the Emerging Issues Task Force (EITF) released Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket' Expenses Incurred". This requires that reimbursements received for out-of-pocket expenses be recorded as revenue and not as a reduction of expenses. Reimbursable out-of-pocket expenses totaling $4.9 million and $10.0 million in the three and six months ended December 31, 2002, and $5.1 million and $10.0 million in the three and six months ended December 31, 2001, respectively, have been classified as service and other revenue and cost of service and other.

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Under this statement, one accounting model is required to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This statement broadens the presentation of discontinued operations to include more disposal transactions. Under the provisions of this statement, several long-lived assets were reviewed for impairment in association with the October 2002 restructuring plan, resulting in an impairment charge during the three months ended December 31, 2002.

Securities purchased to be held for indefinite periods of time, and not intended at the time of purchase to be held until maturity, are classified as available-for-sale securities. Securities classified as available-for-sale are required to be recorded at market value in the financial statements. Unrealized gains and losses have been accounted for as a separate component of stockholders' equity within accumulated other comprehensive loss. Realized investment gains and losses were not material in the three- or six- month periods ended December 31, 2002 and 2001. Investments held as of December 31, 2002 consisted of $3.1 million in U.S. corporate bonds. The Company does not use derivative financial instruments in its investment portfolio.

Cash equivalents totaling $10.8 million were held by the bank as compensating balances for outstanding letters of credit as of December 31, 2002.

Installments receivable represent the present value of future payments related to the financing of noncancelable term and perpetual license agreements that provide for payment in installments over a one-to five-year period. A portion of each installment agreement is recognized as interest income in the accompanying consolidated condensed statements of operations. The interest rates utilized for the three and six months ended December 31, 2002 were 7.0% and 7.0% to 7.5%, respectively. In the three and six months ended December 31, 2001, the rates utilized were 7.0% and 7.0% to 8.0%, respectively.

The Company has arrangements to sell its installments receivable to two financial institutions. These arrangements provide for the sale of up to a maximum of $160.0 million, subject to the approval by the institutions, to be outstanding at any one time. The Company sold, with limited recourse, certain of its installment contracts for aggregate proceeds of approximately $24.1 million and $32.6 million during the three and six months ended December 31, 2002, respectively. The financial institutions have certain recourse to the Company upon non-payment by the customer under the installments receivable. The amount of recourse is determined pursuant to the provisions of the Company's contracts with the financial institutions. Collections of these receivables reduce the Company's recourse obligations, as defined. Generally, no gain or loss is recognized on the sale of the receivables, due to the consistency of the discount rates used by the Company and the financial institutions.

At December 31, 2002, the balance of the uncollected principal portion of all contracts sold was $138.5 million. The Company expects that there will be continued availability under the arrangements, as the collection of the sold receivables will reduce this outstanding balance and the maximum limits under the arrangements can be increased. The Company's potential recourse obligation related to these contracts is within the range of $6.8 million to $9.2 million. In addition, the Company is obligated to pay additional costs to the financial institutions in the event of default by the customer.

The Company follows the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is to be immediately recognized in earnings.

Forward foreign exchange contracts are used primarily by the Company to hedge certain balance sheet exposures resulting from changes in foreign currency exchange rates. Such exposures primarily result from portions of the Company's assets that are denominated in currencies other than the U.S. dollar, primarily the British Pound, the Japanese Yen and the Euro. These foreign exchange contracts are entered into to hedge recorded installments receivable made in the normal course of business, and accordingly, are not speculative in nature. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company hedges the majority of its installments receivable denominated in foreign currencies.

At December 31, 2002, the Company had effectively hedged $7.9 million of installments receivable denominated in foreign currency. The Company does not hold or transact in financial instruments for purposes other than risk management. The gross value of the long-term installments receivable that were denominated in foreign currency was $25.0 million at December 31, 2002. The December 2002

installments receivable mature through January 2007. There have been no material gains or losses recorded relating to hedge contracts for the periods presented.

The Company records its foreign currency exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these hedge contracts are recognized in earnings. Gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts are designated to offset certain accounts or installments receivable and are recognized as other income or expense in the period in which the exchange rates change and offset the foreign currency losses and gains on the underlying exposures being hedged. A small portion of the forward foreign currency exchange contract is designated to hedge the future interest income of the related receivables. The gains and losses resulting from the impact of currency rate movements on forward currency exchange contracts are recognized in other comprehensive income for this portion of the hedge.

The following table provides information about the Company's foreign currency derivative financial instruments outstanding as of December 31, 2002. The information is provided in U.S. dollar amounts, as presented in the Company's consolidated condensed financial statements. The table presents the notional amount (at contract exchange rates), the estimated fair value and the weighted average contractual foreign currency rates (in thousands, except average contract rates):

	Notional Amount		Estimated Fair value		Average Contract Rate
Euro	$	3,289	$	3,570	1.08
Japanese Yen		2,143		1,981	118.88
British Pound Sterling		1,981		2,132	0.67
Swiss Franc		456		493	1.50

	$	7,869	$	8,176

Basic income (loss) per common share is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share reflect the dilutive effect, if any, of potential common shares.

The following dilutive effect of potential common shares were excluded from the calculation of diluted weighted average shares outstanding as their effect would be anti-dilutive (in thousands):

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive income (loss) for the three and six months ended December 31, 2002 and 2001 are as follows (in thousands):

		Three Months Ended		Six Months Ended
		2002		2001		2002		2001
Net loss		$	(134,601	)	$	(102	)	$	(145,334	)	$	(14,461	)
Unrealized gain (loss) on investments			(51	)		(175	)		(5	)		(106	)
Foreign currency translation adjustment			553			(613	)		2,314			829

	Comprehensive loss		$	(134,099	)	$	(890	)	$	(143,025	)	$	(13,738	)

During the three months ended December 31, 2002, the Company made adjustments to the purchase price allocation associated with the Hyprotech acquisition, which was completed in May 2002. These consisted of various adjustments to the opening balance sheet to accrue for certain obligations and contingencies and to write-off certain assets. These adjustments resulted in a $1.8 million increase to goodwill. The Company intends to make final adjustments to the purchase price, as required, through May 2003.

The Company follows the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". In October 2002, management determined that the goodwill should be tested for impairment as a result of management's lowered revenue expectations and the overall decline in the Company's market value. An independent third party valued the Company's three reporting units, license, consulting services, and maintenance and training. The valuation was based on an income approach, using a five-year present value calculation of income, and a market approach, using comparable company valuations. Based on this analysis, it was determined that the full values of the goodwill associated with the license reporting unit and consulting services reporting unit were impaired. It was also determined that the fair value of the maintenance and training reporting unit exceeded its carrying value, resulting in no impairment of its goodwill. This amounted to a $74.7 million aggregate impairment charge.

The changes in the carrying amount of goodwill by reporting unit for the three months ended December 31, 2002 were as follows (in thousands):

The restructuring and other charges, totaling $60.5 million in the accompanying consolidated condensed statements of operations for the three and six months ended December 31, 2002, consist of $55.6 million of charges associated with the Company's October 2002 restructuring plan, and $4.9 million of accrued legal costs related to the ongoing FTC investigation as discussed in Note 10.

In October 2002, the Company initiated a plan to further reduce operating expenses in response to first quarter revenue results that were below expectations and general economic uncertainties. In addition, the Company revised its revenue expectations for the remainder of the fiscal year and beyond, primarily related to the Company's manufacturing / supply chain product line, which has been effected the most by the current economic conditions. The plan to reduce operating expenses resulted in headcount reductions, consolidation of facilities, cancellation of certain internal capital projects and discontinuation of development and support for certain non-critical products. As a result of the discontinuation of development and support for certain products, coupled with the revised revenue expectations, certain long-lived assets were reviewed and determined to be impaired in accordance with SFAS No. 144. These actions resulted in an aggregate restructuring charge of $55.6 million. As of December 31, 2002, there was $12.0 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the three months ended December 31, 2002, the following activity was recorded (in thousands):

The Company expects that the remaining obligations will be paid-out by December 2010.

Closedown/consolidation of facilities: Approximately $8.7 million of the restructuring charge relates to the termination of facility leases and other lease related costs. The facility leases had remaining terms ranging from several months to eight years. The amount accrued is an estimate of the remaining obligation under the lease or actual costs to buy-out leases, reduced by expected income from the sublease of the underlying properties.

Employee severance, benefits and related costs: Approximately $8.2 million of the restructuring charge relates to the reduction in headcount. Approximately 400 employees, or 20% of the workforce, were eliminated under the restructuring plan implemented by management. All geographic regions and business units were affected, including services, sales and marketing, research and development, and general and administrative.

Impairment/write-off of assets: Approximately $38.7 million of the restructuring charge relates to charges associated with long-lived assets that were reviewed for impairment under the provisions of SFAS No. 144 and were either written-down to fair value or written-off due to the fact that they will no longer be utilized. The resulting charges include:

In the fourth quarter of fiscal 2002, the Company initiated a plan to reduce its operating expenses and to restructure operations around its two primary product lines, engineering software and manufacturing/supply chain software. The Company reduced worldwide headcount by approximately 10% or 200 employees, closed-down and consolidated facilities, and disposed of certain assets, resulting in an aggregate restructuring charge of $14.4 million. As of December 31, 2002, there was $7.6 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities			Employee Severance, Benefits, and Related Costs			Total
Accrued expenses, September 30, 2002	$	4,838		$	4,088		$	8,926
Payments		(70	)		(1,290	)		(1,360	)

Accrued expenses, December 31, 2002	$	4,768		$	2,798		$	7,566

The Company expects that the remaining obligations will be paid-out by December 2010.

During the first quarter of fiscal 2002, in light of further economic uncertainties, Company management made a decision to adjust its business plan by further reducing spending. This change in business plan consisted of a reduction in worldwide headcount of approximately 5% of the workforce and a reduction of certain future discretionary expenses. As a result of these measures, the Company recorded a restructuring charge of $2.6 million, primarily for severance, for the quarter ended September 30, 2001. As of December 31, 2002, all obligations had been paid-out. During the three months ended December 31, 2002, the following activity was recorded:

	Employee Severance, Benefits, and Related Costs			Total
Accrued expenses, September 30, 2002	$	47		$	47
Payments		(47	)		(47	)

Accrued expenses, December 31, 2002	$	—		$	—

In the third quarter of fiscal 2001, the revenues realized by the Company were below the Company's expectations as customers delayed spending in the widespread slowdown in information technology spending and the deferral of late-quarter purchasing decisions. At that time, the Company also reduced its revenue expectations for the fourth quarter of fiscal year 2001 and for the fiscal year 2002. Based on the reduced revenue expectations, Company management evaluated the business plan and made significant changes, resulting in a restructuring plan for the Company's operations. This restructuring plan included a reduction in headcount, a substantial decrease in discretionary spending and a sharpening of the Company's e-business focus to emphasize its marketplace solutions. The restructuring plan resulted in a pretax charge totaling $7.0 million. As of December 31, 2002, there was $0.9 million remaining in accrued expenses relating to the restructuring. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities			Total
Accrued expenses, September 30, 2002	$	1,105		$	1,105
Payments		(190	)		(190	)

Accrued expenses, December 31, 2002	$	915		$	915

The Company expects that the remaining obligations will be paid-out by March 2008.

In the fourth quarter of fiscal 1999, the Company undertook certain actions to restructure its business. The restructuring resulted from a lower than expected level of license revenues which adversely affected fiscal year 1999 operating results. The license revenue shortfall resulted primarily from delayed decision making driven by economic difficulties among customers in certain of the Company's core vertical markets. The restructuring plan resulted in a pre-tax restructuring charge totaling $17.9 million. As of December 31, 2002, there was $0.6 million remaining in the accrued expenses relating to the restructuring. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities
Accrued expenses, September 30, 2002	$	274
Net sub-lease receipts (lease payments)		324

Accrued expenses, December 31, 2002	$	598

The Company expects that the remaining obligations will be paid-out by December 2004.

On February 8, 2002 the Company entered into a strategic alliance with Accenture, focused on creating solutions for manufacturing and supply chain execution by chemical and petroleum manufacturers. Under the alliance, the Company will pay $29.6 million for intellectual property and up to $7.4 million for services. The $29.6 million intellectual property obligation was partially settled with the payment of $18.5 million in common stock on June 9, 2002. In August 2002, the alliance agreements were amended to provide a payment schedule for the remaining $11.1 million. Under this revised payment schedule, the Company made cash payments totaling $3.1 million in the six months ended December 31, 2002 and will make the remaining payments in installments of cash, due through July 2003. In addition, the unpaid balance of this obligation accrues interest at a rate of 1.5% per month and, as of December 31, 2002, was secured by a pledge of the Company's patents and software. On January 30, 2003, the agreement was modified so that the unpaid balance of the obligation will be secured by a pledge of certain installments receivable not sold to financial institutions. As discussed in Note 8(a), during the three months ended December 31, 2002 it was determined that the intellectual property was impaired, which resulted in an impairment charge of $23.6 million.

Beginning July 1, 2002, the Company is obligated to pay Accenture a royalty on sales of certain software products over a four-year period. During the three and six months ended December 31, 2002, the Company accrued $0.3 million and $0.5 million, respectively, associated with this royalty obligation.

By letter of June 7, 2002, the FTC informed the Company that it was conducting an investigation into the competitive effects of the Company's recent acquisition of Hyprotech. The Company completed production of all requested documents in January 2003, is currently complying with deposition requests and expects to conclude its presentation to the FTC of its market analysis and supporting arguments for the acquisition in February 2003. The FTC may determine to challenge the acquisition through an administrative civil complaint seeking to declare the acquisition in violation of Section 7 of the Clayton Act or Section 5 of the FTC Act. If the FTC were to prevail in that challenge, it could seek to impose a wide variety of remedies, some of which may have a material adverse effect on the Company's ability to continue to operate under its current business plans. These potential

remedies include divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and the Company's other engineering software products to one or more of its competitors. The Company continues to cooperate fully with the FTC. During the quarter ended December 31, 2002, the Company provided $4.9 million for estimated legal fees associated with the FTC investigation.

On May 31, 2002, the Company acquired the capital stock of Hyprotech from AEA Technology plc. AEA Technology is engaged in arbitration proceedings in England over a contract dispute with KBC Advanced Technologies PLC, an English technology and consulting services company ("KBC"). The dispute remains in arbitration and concerns the characterization of certain technology for purposes of calculating royalties, plus other contractual rights, with respect to Hysys.Refinery. Hysys.Refinery was retained by AEA Technology with support for Hysys.Refinery to be provided by Hyprotech pursuant to a contract with AEA Technology. The Company indemnified AEA under the Sale and Purchase Agreement between AEA Technology plc and the Company dated May 10, 2002 against any costs, damages or expenses in respect of a claim brought by KBC alleging damages due to AEA's i) failure to comply with its contractual obligations after the acquisition, ii) breach of non-competition clauses with respect to activities occurring after the acquisition, iii) breach of certain obligations to KBC under its agreement by virtue of the acquisition, or iv) execution of the acquisition agreement.

On September 11, 2002, the Company and Hyprotech were sued by KBC in state district court in Houston, Texas on issues related to the technology subject to review in the arbitration proceeding. KBC has requested actual and exemplary damages, costs and interest. The Company believes the causes of action to be without merit and will defend the case vigorously. The Company has filed a counterclaim against KBC requesting actual and punitive damages and attorney fees.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting information about operating segments in companies' financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer of the Company.

The Company is organized geographically and by line of business. The Company has three major lines of business operating segments: license, consulting services and maintenance and training. The Company also evaluates certain subsets of business segments by vertical industries as well as by product categories. While the Executive Management Committee evaluates results in a number of different ways, the line of business management structure is the primary basis for which it assesses financial performance and allocates resources.

The accounting policies of the line of business operating segments are the same as those described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. The Company does not track assets or capital expenditures by operating segments. Consequently, it is not practical to

show assets, capital expenditures, depreciation or amortization by operating segments. The following table presents a summary of operating segments (in thousands):

	Three Months Ending December 31,		Six Months Ending December 31,
	2002		2001		2002		2001
Total controllable margin for reportable segments	$	42,887		$	46,943		$	76,257		$	73,273
Selling and marketing		(23,178	)		(21,741	)		(48,494	)		(42,210	)
Research and development		—			(5,242	)		—			(10,281	)
General and administrative and overhead		(19,021	)		(20,079	)		(37,888	)		(39,341	)
Goodwill impairment losses		(74,715	)		—			(74,715	)		—
Restructuring and other charges		(60,529	)		—			(60,529	)		(2,642	)
Interest and other income and expense, net		(45	)		(27	)		35			542

Loss before benefit from income taxes	$	(134,601	)	$	(146	)	$	(145,334	)	$	(20,659	)

During the three months ended December 31, 2002 the Company adopted a policy to accrue future legal fees associated with outstanding litigation. Previously, the Company had not encountered litigation that resulted in material defense costs, and thus the Company had no established policy. Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are

recorded when it is probable that a liability has been incurred and the amount of the claim assessment or damages can be reasonably estimated.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 rescinds Statement No. 4, "Reporting Gains and Losses from Extinguishments of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". SFAS No. 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". SFAS No. 145 amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision of SFAS No. 145 related to the rescission of Statement No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to Statement No. 13 should be applied for transactions occurring after May 15, 2002. Early application of the provisions of this Statement is encouraged. The adoption of SFAS No. 145 did not have a significant impact on consolidated results of operations, financial position or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement supersedes EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. As the Company's October 2002 restructuring plan was undertaken prior to December 31, 2002, the previous guidance as set forth in EITF 94-3 was followed.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the impact that the adoption of the recognition provisions of FIN 45 will have on its financial statements.

In January 2003, the Company executed a Loan Arrangement with Silicon Valley Bank. This arrangement provides a line of credit of up to the lesser of (i) $15.0 million or (ii) 70% of eligible domestic receivables, and a line of credit of up to the lesser of (i) $10.0 million or (ii) 80% of eligible foreign receivables. The lines of credit bear interest at the bank's prime rate (4.25% at December 31, 2002) plus ¹/2%, which may be reduced to the bank's prime rate upon the achievement of two consecutive quarters of net income. The Company is required to maintain a $4.0 million compensating cash balance with the bank, or be subject to an unused line fee and collateral handling fees. The lines of credit will initially be collateralized by nearly all of the assets of the Company, and upon achieving certain net income targets, the collateral will be reduced to a lien on the accounts receivable. The

Company is required to meet certain financial covenants, including minimum tangible net worth, minimum cash balances and an adjusted quick ratio. The Loan Arrangement expires in January 2005.

On January 31, 2003, the Company completed the sale of the assets and liabilities associated with the Aspen Metals products. These products were originally acquired in the December 2000 acquisition of Broner Systems. The Company will receive an aggregate of £300,000 ($494,000 as of January 31, 2003), to be paid in four semi-annual installments from June 2003 to January 2005.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2002. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK" AND ELSEWHERE IN THIS QUARTERLY REPORT.

Since our founding in 1981, we have developed and marketed software and services to companies in the process industries. In addition to internally generated growth, we have acquired a number of businesses, including Hyprotech in the fourth quarter of fiscal 2002.

We acquired Hyprotech in a transaction accounted for as a purchase. Our operating results include the operating results of these acquisitions only for periods subsequent to their respective dates of acquisition.

We typically license our engineering solutions for terms of three to five years and license our manufacturing/supply chain solutions for terms of 99 years.

Software license revenues, including license renewals, consists principally of revenues earned under fixed-term and perpetual software license agreements and is generally recognized upon shipment of the software if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence, or VSOE, of fair value exists for all undelivered elements. We determine VSOE based upon the price charged when the same element is sold separately. Maintenance and support VSOE represents a consistent percentage of the license fees charged to customers. Consulting services VSOE represents standard rates, which we charge our customers when we sell our consulting services separately. For an element not yet being sold separately, VSOE represents the price established by management having the relevant authority when it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. Revenues under license arrangements, which may include several different software products and services sold together, are allocated to each element based on the residual method in accordance with SOP 98-9, "Software Revenue Recognition, with Respect to Certain Transactions." Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized when earned. We have established sufficient VSOE for professional services, training and maintenance and support services. Accordingly, software license revenues are recognized under the residual method in arrangements in which software is licensed with professional services, training and maintenance and support services. We use installment contracts as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products or services.

Maintenance and support services revenues are recognized ratably over the life of the maintenance and support contract period. Maintenance and support services include telephone support and unspecified rights to product upgrades and enhancements. These services are typically sold for a one-year term and are sold either as part of a multiple element arrangement with software licenses or are sold independently at time of renewal. We do not provide specified upgrades to our customers in connection with the licensing of our software products.

Service revenues from fixed-price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount thereof is provided currently. Service revenues from time-and-expense contracts and consulting and training revenues 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.

We license our software in U.S. dollars and several foreign currencies. We hedge material foreign currency-denominated installments receivable with specific hedge contracts in amounts equal to those installments receivable. Historically, we experience minor foreign currency exchange gains or losses due to foreign exchange rate fluctuations, the impact of which have not been material in periods prior to the fourth quarter of fiscal 2002. During the fourth quarter of fiscal 2002, the U.S. Dollar weakened against European currencies, and we experienced foreign currency exchange losses primarily due to ineffective hedging of accounts receivable of our foreign subsidiaries, in particular Hyprotech and its subsidiaries, that were denominated in currencies other than the local functional currencies. We do not expect fluctuations in foreign currencies to have a significant impact on either our revenues or our expenses in the foreseeable future.

We adopted EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket' Expenses Incurred", in the three months ended March 31, 2002. This requires that reimbursements received for out-of-pocket expenses be recorded as revenue and not as a reduction of expenses. Reimbursable out-of-pocket expenses totaling $4.9 million and $10.0 million in the three and six months ended December 31, 2002 and $5.1 million and $10.0 million in the three and six months ended December 31, 2001, have been classified as service and other revenue and cost of service and other.

In October 2002, we determined that the goodwill should be tested for impairment as a result of lowered revenue expectations and the overall decline in our market value. An independent third party valued our three business operating units, license, consulting services, and maintenance and training. The valuation was based on an income approach, using a five-year present value calculation of income, and a market approach, using comparable company valuations. Based on this analysis, it was determined that the full values of the goodwill associated with the license unit and consulting services unit were impaired. It was also determined that the fair value of the maintenance and training reporting unit exceeded its carrying value, resulting in no impairment of its goodwill. This amounted to a $74.7 million aggregate impairment charge, recorded in the accompanying consolidated condensed statements of operations.

The restructuring and other charges, totaling $60.5 million in the accompanying consolidated condensed statements of operations for the three and six months ended December 31, 2002, consist of $55.6 million of charges associated with our October 2002 restructuring plan, and $4.9 million of accrued legal costs, related to the FTC investigation into our acquisition of Hyprotech.

In October 2002, we initiated a plan to further reduce operating expenses in response to first quarter revenue results that were below our expectations and to general economic uncertainties. In addition, we revised our revenue expectations for the remainder of the fiscal year and beyond, primarily related to our manufacturing / supply chain product line, which has been effected the most by the current economic conditions. The plan to reduce operating expenses resulted in headcount reductions,

consolidation of facilities, cancellation of certain internal capital projects and discontinuation of development and support for certain non-critical products. As a result of the discontinuation of development and support for certain products, coupled with the revised revenue expectations, certain long-lived assets were reviewed and determined to be impaired in accordance with SFAS No. 144. These actions resulted in an aggregate restructuring charge of $55.6 million. As of December 31, 2002, there was $12.0 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the three months ended December 31, 2002, the following activity was recorded (in thousands):

Employee severance, benefits and related costs: Approximately $8.2 million of the restructuring charge relates to the reduction in headcount. Approximately 400 employees, or 20% of the workforce, were eliminated under the restructuring plan. All geographic regions and business units were affected, including services, sales and marketing, research and development, and general and administrative.

In the fourth quarter of fiscal 2002, we initiated a plan to reduce operating expenses and to restructure operations around our two primary product lines, engineering software and manufacturing/supply chain software. We reduced worldwide headcount by approximately 10% or 200 employees, closed-down and consolidated facilities, and disposed of certain assets, resulting in an aggregate restructuring charge of $14.4 million. As of December 31, 2002, there was $7.6 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities			Employee Severance, Benefits, and Related Costs			Total
Accrued expenses, September 30, 2002	$	4,838		$	4,088		$	8,926
Payments		(70	)		(1,290	)		(1,360	)

Accrued expenses, December 31, 2002	$	4,768		$	2,798		$	7,566

During the first quarter of fiscal 2002, in light of further economic uncertainties, our management made a decision to adjust our business plan by further reducing spending. This change in business plan consisted of a reduction in worldwide headcount of approximately 5% of the workforce and a reduction of certain future discretionary expenses. As a result of these measures, we recorded a restructuring charge of $2.6 million, primarily for severance, for the quarter ended September 30, 2001. As of December 31, 2002, all obligations had been paid-out. During the three months ended December 31, 2002, the following activity was recorded:

	Employee Severance, Benefits, and Related Costs			Total
Accrued expenses, September 30, 2002	$	47		$	47
Payments		(47	)		(47	)

Accrued expenses, December 31, 2002	$	—		$	—

In the third quarter of fiscal 2001, the revenues realized were below expectations as customers delayed spending in the widespread slowdown in information technology spending and the deferral of late-quarter purchasing decisions. At that time, we also reduced our revenue expectations for the fourth quarter of fiscal year 2001 and for the fiscal year 2002. Based on the reduced revenue expectations, management evaluated the business plan and made significant changes, resulting in a restructuring plan for our operations. This restructuring plan included a reduction in headcount, a substantial decrease in discretionary spending and a sharpening of our e-business focus to emphasize our marketplace solutions. The restructuring plan resulted in a pretax charge totaling $7.0 million. As of December 31,

2002, there was $0.9 million remaining in accrued expenses relating to the restructuring. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities			Total
Accrued expenses, September 30, 2002	$	1,105		$	1,105
Payments		(190	)		(190	)

Accrued expenses, December 31, 2002	$	915		$	915

In the fourth quarter of fiscal 1999, we undertook certain actions to restructure our business. The restructuring resulted from a lower than expected level of license revenues which adversely affected fiscal year 1999 operating results. The license revenue shortfall resulted primarily from delayed decision making driven by economic difficulties among customers in certain of our core vertical markets. The restructuring plan resulted in a pre-tax restructuring charge totaling $17.9 million. As of December 31, 2002, there was $0.6 million remaining in the accrued expenses relating to the restructuring. During the three months ended December 31, 2002, the following activity was recorded:

	Closedown/ Consolidation of Facilities
Accrued expenses, September 30, 2002	$	274
Net sub-lease receipts (lease payments)		324

Accrued expenses, December 31, 2002	$	598

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

We recognize software license revenue in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position, or SOP, No. 97-2, "Software Revenue Recognition", as amended by SOP No. 98-4 and SOP No. 98-9, as well as the various interpretations and clarifications

of those statements. These statements require that four basic criteria must be satisfied before software license revenue can be recognized:

Our management uses its judgment concerning the satisfaction of these criteria, particularly the criteria relating to the determination of whether the fee is fixed and determinable and the criteria relating to the collectibility of the receivables relating to such sales. Should changes and conditions cause management to determine that these criteria are not met for certain future transactions, all or substantially all of the software license revenue recognized for such transactions could be deferred.

We recognize revenue associated with fixed-fee service contracts in accordance with AICPA SOP No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts", using the percentage-of-completion method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount of the anticipated loss is provided currently. Our management uses its judgment concerning the estimation of the total costs to complete the contract, considering a number of factors, including the experience of the personnel that are performing the services and the overall complexity of the project. Should changes and conditions cause actual results to differ significantly from management's estimates, revenue recognized in future periods could be adversely affected.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we review the carrying value of long-lived assets periodically, based upon the expected future operating cash flows of our business. These future cash flow estimates are based on historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. Actual results may differ materially from these estimates.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", we conduct at least an annual assessment of the carrying value of our goodwill assets. We obtain a third-party valuation of the reporting units associated with the goodwill assets, which is based on either estimates of future income from the reporting units or estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. Actual results may differ materially from these estimates. In addition, the relevancy of recent transactions used to establish market value for our reporting units is based on management's judgment.

During the three months ended December 31, 2002, we recorded charges related to the impairment of certain long-lived assets and intangible assets and a portion of our goodwill. The timing and size of future impairment charges involves the application of management's judgment and estimates and could result in the write-off of all or substantially all of our long-lived assets, intangible assets and goodwill.

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Tax assets also result from net operating losses, research and development tax credits and foreign tax credits. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, the impact will be included in the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could result in a tax provision equal to the carrying value of our deferred tax assets.

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts do not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be required for all or substantially all of certain receivable balances.

The following table sets forth the percentages of total revenues represented by certain consolidated condensed statement of operations data for the periods indicated:

Revenues are derived from software licenses and maintenance and other services. Total revenues for the three months ended December 31, 2002 decreased 4.6% to $83.0 million from $87.0 million in the three months ended December 31, 2001. Total revenues for the six months ended December 31, 2002 increased 4.6% to $160.2 million from $153.2 million in the six months ended December 31, 2001.

Total revenues from customers outside the United States were $41.7 million and $82.3 million, or 50.3% and 51.4% of total revenues, for the three and six months ended December 31, 2002 respectively, as compared to $31.5 million and $65.3 million, or 36.2% and 42.6% of total revenues, for the three and six months ended December 31, 2001. The geographical mix of license revenues can vary from quarter to quarter; however, for fiscal 2003, the overall geographical mix of revenues from customers outside the United States is expected to be relatively consistent with the prior fiscal year.

Software license revenues represented 44.3% of total revenues for the three months ended December 31, 2002, as compared to 45.9% in the three months ended December 31, 2001. Revenues from software licenses for the three months ended December 31, 2002 decreased 7.9% to $36.8 million from $39.9 million in the three months ended December 31, 2001. This decrease primarily was due to the overall decline in demand for our manufacturing/supply chain products, in addition to the inclusion in the three months ended December 31, 2001 of software license revenue from a significant purchase by The Dow Chemical Company, offset by the inclusion of software license revenue associated with Hyprotech, which we acquired in May 2002.

Software license revenues represented 41.5% of total revenues for the six months ended December 31, 2002, as compared to 38.6% in the six months ended December 31, 2001. Revenues from software licenses for the six months ended December 31, 2002 increased 12.3% to $66.4 million from $59.2 million in the six months ended December 31, 2001. This increase for the comparable six month periods was due a 54.2% increase in license revenue in the three months ended September 30, 2002, as compared to the three months ended September 30, 2001. This increase was due to the inclusion in the three months ended September 30, 2002 of software license revenue associated with Hyprotech, and the negative impact of the September 11, 2001 attacks on the closure rate of license agreements in the final weeks of the three months ended September 30, 2001.

Revenues from service and other consist of consulting services, post contract support on software licenses, training and sales of documentation. Revenues from service and other for the three months ended December 31, 2002 decreased 1.8% to $46.2 million, from $47.1 million in the three months ended December 31, 2001. Revenues from service and other for the six months ended December 31, 2002 decreased 0.2% to $93.8 million, from $94.0 million in the six months ended December 31, 2001.

These decreases reflect a decline in revenues from our consulting business, partially offset by the inclusion in the three and six months ended December 31, 2002 of service and other revenue associated with Hyprotech, which we acquired in May 2002. The decline in consulting revenue primarily was related to the decline in demand for our manufacturing/supply chain software products, along with which we typically sell consulting projects. The decline is also due to reductions in headcount, offset by the inclusion of service and other revenue from Hyprotech.

Cost of software licenses consists of royalties, amortization of previously capitalized software costs, costs related to the delivery of software, including disk duplication and third party software costs, printing of manuals and packaging. Cost of software licenses for the three months ended December 31, 2002 increased 15.0% to $3.5 million, from $3.1 million in the three months ended December 31, 2001. Cost of software licenses for the six months ended December 31, 2002 increased 24.5% to $6.8 million, from $5.5 million in the six months ended December 31, 2001. Cost of software licenses as a percentage of revenues from software licenses was 9.5% and 10.3% for the three and six months ended December 31, 2002, respectively, as compared to 7.6% and 9.3% for the three and six months ended December 31, 2001, respectively.

The increases in software license costs, in both absolute dollars and as a percentage of revenues from software licenses, were due to the July 2002 inception of the Accenture royalty agreement and a general increase in the amortization of capitalized software costs.

Cost of service and other consists of the cost of execution of application consulting services, technical support expenses and the cost of training services. Cost of service and other for the three months ended December 31, 2002 decreased 11.4% to $26.8 million from $30.3 million in the three months ended December 31, 2001. Cost of service and other for the six months ended December 31, 2002 decreased 9.2% to $54.8 million from $60.4 million in the six months ended December 31, 2001. Cost of service and other as a percentage of service and other revenues was 58.1% and 58.5% in the three and six months ended December 31, 2002, respectively, as compared to 64.3% and 64.2% in the three and six months ended December 31, 2001.

This decrease in absolute dollars was due to the reductions in headcount that occurred in May 2002 and October 2002. The decrease as a percentage of service and other revenues was due to the headcount reductions, as well as the increase of revenues from software maintenance as a percentage of service and other revenue, a service that provides higher margins than consulting services.

Selling and marketing expenses for the three months ended December 31, 2002 decreased 5.0% to $27.0 million from $28.5 million in the three months ended December 31, 2001. Selling and marketing expenses for the six months ended December 31, 2002 increased 2.0% to $56.2 million from $55.1 million in the six months ended December 31, 2001. As a percentage of total revenues, selling and marketing expenses were 32.6% and 35.1% for the three and six months ended December 31, 2002, respectively, as compared to 32.7% and 36.0% for the three and six months ended December 31, 2001, respectively.

The decrease in absolute dollars for the comparable three-month periods was attributable to the headcount reductions that took place in October 2002, offset by the amortization of costs associated with our October 2002 AspenWorld conference and by the inclusion of Hyprotech costs in the three months ended December 31, 2002. The increase in absolute dollars for the comparable six-month periods was primarily due to an increase in sales commissions related to higher license revenues in the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 in addition to abovementioned AspenWorld and Hyprotech costs in the six months ended December 31, 2002.

Research and development expenses consist primarily of personnel and outside consultancy costs required to conduct our product development efforts. Capitalized research and development costs are amortized over the estimated remaining economic life of the relevant product, not to exceed three years. Research and development expenses during the three months ended December 31, 2002 decreased 10.3% to $16.0 million from $17.8 million in the three months ended December 31, 2001. Research and development expenses during the six months ended December 31, 2002 decreased 5.8% to $33.7 million from $35.8 million in the six months ended December 31, 2001. As a percentage of revenues, research and development costs were 19.3% and 21.1% for the three and six months ended December 31, 2002, respectively, as compared to 20.5% and 23.4% for the three and six months ended December 31, 2001, respectively.

The decrease in absolute dollars was attributable to the effect of reductions in headcount from the September 2001, May 2002 and October 2002 restructuring plans, partially offset by the inclusion in the three and six months ended December 31, 2002 of costs associated with Hyprotech. We capitalized 13.6% and 16.8% of our total research and development costs during the three and six months ended December 31, 2002, respectively. Of these amounts, 8.0% and 2.5%, respectively, related to

development costs incurred by Accenture and the amortization of the purchased intellectual property. The remaining 11.1% and 11.2%, respectively, related to our internal development costs, as compared to 8.0% and 7.9% in the three and six months ended December 31, 2001. This increase in capitalized costs was due to two large development projects that were nearing completion during the six months ended December 31, 2002, for which nearly all costs incurred were eligible for capitalization.

General and administrative expenses consist primarily of salaries of administrative, executive, financial and legal personnel, outside professional fees, and amortization of intangible assets. General and administrative expenses for the three months ended December 31, 2002 increased 18.7% to $8.9 million from $7.5 million for the three months ended December 31, 2001. General and administrative expenses for the six months ended December 31, 2002 increased 25.4% to $18.7 million from $14.9 million for the six months ended December 31, 2001.

These increases were attributable primarily to a higher level of amortization relating to other intangible assets arising from our acquisition of Hyprotech in May 2002 and the inclusion of Hyprotech costs in fiscal 2003, both offset by the effect of reductions in headcount from the September 2001, May 2002 and October 2002 restructuring plans.

Interest income is generated from the investment of excess cash in short-term and long-term investments and from the license of software pursuant to installment contracts. Under these installment contracts, we offer customers the option to make annual payments for its term licenses instead of a single license fee payment at the beginning of the license term. Historically, a substantial majority of the engineering software customers have elected to license our products through installment contracts, while significantly all of our manufacturing/supply chain customers have selected perpetual licenses for which payment is generally made up-front. Included in the annual payments of the installment contracts is an implicit interest charge based upon the interest rate established by us at the time of the license. If the mix of sales moves away from installment contracts, the interest income from these contracts in future periods will be reduced. We sell a portion of the installment contracts to unrelated financial institutions. The interest earned by us on the installment contract portfolio in any period is the result of the implicit interest established by us on installment contracts and the size of the contract portfolio. Interest income was $2.5 million and $4.6 million for the three and six months ended December 31, 2002, respectively, as compared to $1.5 and $3.6 for the three and six months ended December 31, 2001. These increases are due to the increase of installment contracts associated with Hyprotech, which we acquired in May 2002.

Interest expense is generated from interest charged on our 5¹/4% convertible debentures, notes payable and capital lease obligations. Interest expense was $2.3 million and $3.8 million for the three and six months ended December 31, 2002, respectively, as compared to $1.3 million and $2.6 million for the three and six months ended December 31, 2001. This increase was due to interest on the amounts owed to Accenture and a general increase in the amount of capital leases.

We did not record an income tax provision or benefit for the three or six months ended December 31, 2002, as we provided a full valuation against the tax loss carryforwards that were generated during the period. The effective tax rate for the three and six months ended December 31, 2001 was approximately 30.0% of pretax loss.

During the six months ended December 31, 2002, our cash and cash equivalents balance increased by $17.0 million. Net cash provided by operations was $11.1 million due primarily to the decrease in accounts receivable and unbilled services, offset by the net loss. Net cash provided by investing activities was $9.6 million due to the sale of investment securities of $15.5 million, partially offset by capital purchases of $2.9 million and an increase in computer software development of $4.1 million. Net cash used in financing activities was $4.0 million, consisting primarily of $3.2 million in payments on long-term debt and capital leases and $3.1 million in payments to Accenture, offset by $2.2 million in proceeds from the issuance of common stock under our employee stock purchase plan. During the six months ended December 31, 2002, we acquired $1.1 million of equipment and software by entering into capital lease arrangements.

Historically, we have had arrangements to sell long-term contracts to two financial institutions, General Electric Capital Corporation and Fleet Business Credit Corporation. These contracts represent amounts due over the life of existing term licenses. During the six months ended December 31, 2002, installment contracts decreased by $3.0 million to $105.7 million, net of $32.6 million of installment contracts sold to General Electric Credit Corporation and Fleet Business Credit Corporation. Our arrangements with these two financial institutions provide for the sale of installment contracts up to a maximum of $160.0 million, subject to approval by the institutions, having certain recourse obligations. At December 31, 2002, the balance of the uncollected principal portion of the contracts sold to these two financial institutions was $138.5 million, for which we had a partial recourse obligation that was within the range of $6.8 million to $9.2 million. We expect that there will be continued availability under the arrangements, as the collection of the sold receivables will reduce this outstanding balance, and the maximum limits under the arrangements can be increased.

In January 2003, we executed a Loan Arrangement with Silicon Valley Bank. This arrangement provides a line of credit of up to the lesser of (i) $15.0 million or (ii) 70% of eligible domestic receivables, and a line of credit of up to the lesser of (i) $10.0 million or (ii) 80% of eligible foreign receivables. The lines of credit bear interest at the bank's prime rate (4.25% at December 31, 2002) plus ¹/2%, which may be reduced to the bank's prime rate upon the achievement of two consecutive quarters of net income. We are required to maintain a $4.0 million compensating cash balance with the bank, or be subject to an unused line fee and collateral handling fees. The lines of credit will initially be collateralized by nearly all of our assets, and upon achieving certain net income targets, the collateral will be reduced to a lien on our accounts receivable. We are required to meet certain financial covenants, including minimum tangible net worth, minimum cash balances and an adjusted quick ratio. The Loan Arrangement expires in January 2005.

In February and March 2002, we issued and sold 40,000 shares of Series B-I convertible preferred stock and 20,000 shares of Series B-II convertible preferred stock, together with warrants to purchase 791,044 shares of common stock, for an aggregate purchase price of $60.0 million. The Series B preferred stock accrues dividends at an annual rate of 4% that is payable quarterly, commencing in June 30, 2002, in either cash or common stock, at our option (subject to our satisfaction of specified conditions set forth in our charter). On January 2, 2003, we issued 196,971 shares of common stock in satisfaction of this obligation for the three months ended December 31, 2002.

As of December 31, 2002, we had cash and cash-equivalents totaling $50.6 million, as well as short-term investments totaling $3.1 million. Our commitments as of December 31, 2002, consisted primarily of amounts owed to Accenture, capital lease obligations and leases on our headquarters and other facilities. Other than these, there were no other material commitments for capital or other

expenditures. Our obligations related to these items as of December 31, 2002 are as follows (in thousands):

We believe our current cash balances, availability of sales of our installment contracts, availability under the Silicon Valley Bank line of credit and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. However, we may need to obtain additional financing thereafter or earlier, if our current plans and projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties. In addition, we may seek to take advantage of favorable market conditions by raising additional funds from time to time through public or private security offerings, debt financings, strategic alliances or other financing sources. Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, reduce or defer our development activities, or delay our introduction of new products and services. Any of these actions may seriously harm our business and operating results.

Factors that may Affect Future Results and the Trading Price of Our Common Stock

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE PURCHASING OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD FALL, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.

Our lengthy sales cycle makes it difficult to predict quarterly revenue levels and operating results.

Because license fees for our software products are substantial and the decision to purchase our products typically involves members of our customers' senior management, the sales process for our solutions is lengthy and can exceed one year. Accordingly, the timing of our license revenues is difficult to predict, and the delay of an order could cause our quarterly revenues to fall substantially below expectations. Moreover, to the extent that we succeed in shifting customer purchases away from individual software products and toward more costly integrated suites of software and services, our sales cycle may lengthen, which could increase the likelihood of delays and cause the effect of a delay to become more pronounced. We have limited experience in forecasting the timing of sales of our integrated suites of software and services. Delays in sales could cause significant shortfalls in our revenues and operating results for any particular period.

Fluctuations in our quarterly revenues, operating results and cash flow may cause the market price of our common stock to fall.

Our revenues, operating results and cash flow have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control, including:

We ship software products within a short period after receipt of an order and typically do not have a material backlog of unfilled orders for software products. Consequently, revenues from software licenses in any quarter are substantially dependent on orders booked and shipped in that quarter. Historically, a majority of each quarter's revenues from software licenses has come from license agreements that have been entered into in the final weeks of the quarter. Therefore, even a short delay in the consummation of an agreement may cause our revenues to fall below public expectations for that quarter.

Since our expense levels are based in part on anticipated revenues, we may be unable to adjust spending quickly enough to compensate for any revenue shortfall and any revenue shortfall would likely have a disproportionately adverse effect on our operating results. We expect that these factors will continue to affect our operating results for the foreseeable future. Because of the foregoing factors, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

If, due to one or more of the foregoing factors or an unanticipated cause, our operating results fail to meet the expectations of public market analysts and investors in a future quarter, the market price of our common stock would likely decline. Since April 5, 2002, the date on which we preliminarily announced our estimated results for the three months ended March 31, 2002, through the close of business on February 10, 2003, the price per share of our common stock, as reported by the Nasdaq National Market, decreased from $17.37 to $2.95.

By letter of June 7, 2002, the Federal Trade Commission, or FTC, informed us that it was conducting an investigation into the competitive effects of our recent acquisition of Hyprotech. The FTC may determine to challenge the acquisition through an administrative civil complaint seeking to declare the acquisition in violation of Section 7 of the Clayton Act or Section 5 of the FTC Act. If the FTC were to prevail in that challenge, it could seek to impose a wide variety of remedies, some of which may have a material adverse effect on our ability to continue to operate under our current business plans. These potential remedies include divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and our other engineering software products to one or more of our competitors.

We can provide no assurance as to the outcome of the FTC's investigation. Any conclusion of this investigation in a manner adverse to us would have a material adverse effect on our business and results of operations. In addition, the cost to us of continuing to cooperate in the investigation or of defending any litigation or other proceeding that may result from the investigation, even if resolved in our favor, could be substantial. The continuance of the investigation or any commencement of litigation or any other proceeding would continue to divert the attention of our management. Uncertainties resulting from the continuation of this investigation or the initiation of litigation or other proceedings could harm our ability to compete in the marketplace.

Because we derive a majority of our total revenues from customers in the cyclical chemicals, petrochemicals and petroleum industries, our operating results may suffer if these industries experience an economic downturn.

We derive a majority of our total revenues from companies in the chemicals, petrochemicals and petroleum industries. Accordingly, our future success depends upon the continued demand for manufacturing optimization software and services by companies in these process manufacturing industries. The chemicals, petrochemicals and petroleum industries are highly cyclical and highly reactive to the price of oil, as well as general economic conditions. In the past, worldwide economic downturns and pricing pressures experienced by chemical, petrochemical and petroleum companies have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have caused delays and reductions in capital and operating expenditures by many of these companies. These delays and reductions have reduced demand for products and services like ours. A recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in these industries, could harm our operating results in the future.

If economic conditions and the markets for our products do not improve, sales of our product lines, particularly our manufacturing and supply chain product suites, will be adversely affected.

Adverse changes in the economy and continuing global uncertainty have caused delays and reductions in information technology spending by our customers and a consequent deterioration of the markets for our products and services, particularly our manufacturing and supply chain product suites. If these adverse economic conditions continue or worsen, we will experience further reductions, delays, and postponements of customer purchases that will negatively impact our revenue and operating results. If economic and political conditions and the market for our products do not improve and our revenues decline, our business could be harmed, and we may not be able to further reduce our costs to align them with these decreased revenues.

We may need to raise additional capital in order to fund the continued development and marketing of our solutions. We expect our current cash balances, cash-equivalents, short-term investments, availability of sales of our installment contracts, availability under the Silicon Valley Bank lines of credit and cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, we may need to obtain additional financing thereafter or earlier, if our current plans and projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties. An important part of our cash management program is the sale of receivables. Historically, we have had arrangements to sell long-term contracts to two financial institutions, General Electric Capital Corporation and Fleet Business Credit Corporation. These contracts represent amounts due over the life of existing term licenses. During the six months ended December 31, 2002, installment contracts decreased by $3.0 million to $105.7 million, net of $32.6 million of installment contracts sold to General Electric Credit Corporation and Fleet Business Credit Corporation. Our ability to continue these arrangements or replace them with similar arrangements is important to maintaining adequate funding. In addition, in August 2002, we amended several of the terms of our strategic alliance with Accenture, which will require us to make monthly cash payments totaling $11.1 million, $8.0 million of which is outstanding as of December 31, 2002 and payable in installments through July 2003, instead of the originally agreed-to stock payment in August 2002. Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. In 2002, we

issued convertible preferred stock and common stock warrants that contain anti-dilution provisions, rights of first refusal and other terms that may limit or impair our ability to raise additional funds through future financings. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, reduce or defer our development activities, or delay our introduction of new products and services. Any of these actions may seriously harm our business and operating results.

Our markets are highly competitive. Our engineering software competes with products of businesses such as Simulation Sciences, a division of Invensys, Shell Global Solutions, ABB, MDC Technology, Cadcentre, WinSim, Inc. (formerly ChemShare) and Process Systems Enterprise Ltd. As we expand our engineering solutions into the collaborative Process asset Lifecycle Management (PLM) market we may see competition from companies that we have not typically competed against in the past, such as Agile, PTC, and EDS. Our manufacturing/supply chain software competes with products of companies such as Honeywell's Hi-Spec division, Invensys, ABB, Rockwell, i2 Technologies, Manugistics and certain components of SAP's supply chain offering. We also face competition in all three areas from large companies in the process industries that have developed their own proprietary software solutions.

Some of our current competitors have significantly greater financial, marketing and other resources than we have. In addition, many of our current competitors have established, and may in the future continue to establish, cooperative relationships with third parties to improve their product offerings and to increase the availability of their products to the marketplace. The entry of new competitors or alliances into our market could reduce our market share, require us to lower our prices, or both. Many of these factors are outside our control, and we may not be able to maintain or enhance our competitive position against current and future competitors.

If we fail to integrate the operations of the companies we acquire, we may not realize the anticipated benefits and our operating costs could increase.

We intend to continue to pursue strategic acquisitions that will provide us with complementary products, services and technologies and with additional personnel. The identification and pursuit of these acquisition opportunities and the integration of acquired personnel, products, technologies and businesses require a significant amount of management time and skill. There can be no assurance that we will identify suitable acquisition candidates, consummate any acquisition on acceptable terms or successfully integrate any acquired business into our operations. Additionally, in light of the consolidation trend in our industry, we expect to face competition for acquisition opportunities, which may substantially increase the cost of any potential acquisition.

We have experienced in the past, and may experience again in the future, problems integrating the operations of a newly acquired company with our own operations. Acquisitions also expose us to potential risks, including diversion of management's attention, failure to retain key acquired personnel, assumption of legal or other liabilities and contingencies, and the amortization of acquired intangible assets. Moreover, customer dissatisfaction with, or problems caused by, the performance of any acquired products or technologies could hurt our reputation.

In particular, on May 31, 2002, we purchased the capital stock of Hyprotech Ltd. and related subsidiaries of AEA for £66.2 million (or $96.6 million, based on the exchange rate as of May 9, 2002, the date of the agreement) in cash. The Hyprotech business operates globally and is the second largest acquisition we have made. The integration of the personnel, products and technologies of Hyprotech will require significant management time and skill, and our inability to complete the acquisition effectively and efficiently could cause our operating results to suffer.

We funded the Hyprotech acquisition substantially from the proceeds of convertible preferred stock and common stock financings effected in 2002. We may issue additional equity securities or incur long-term indebtedness to finance future acquisitions. The issuance of equity securities could result in dilution to existing stockholders, while the use of cash reserves or significant debt financing could reduce our liquidity and weaken our financial condition.

Our operating results may be harmed if our restructuring plans and cost reduction measures do not achieve the anticipated results or cause undesirable consequences.

Since the fourth quarter of fiscal 1999, we have implemented restructuring plans and cost reduction measures, which have included, among other things, significant workforce reductions. Because of the nature and extent of the restructuring actions we have taken to date, we may be unable to initiate additional, significant restructuring measures in future periods. If we fail to achieve the desired results of our restructuring plans and our cost reduction measures, we may suffer material harm to our business.

Our recent cost reduction initiative may yield unintended consequences, such as attrition beyond our planned reduction in workforce and reduced employee morale. In addition, the recent trading levels of our stock have decreased the value of our stock options granted to employees under our stock option plans. As a result of these factors, our employees may seek alternate employment. Attrition beyond our planned reduction in workforce could have a material adverse effect on our financial performance.

If we do not continue to make the technological advances required by the marketplace, our business could be seriously harmed.

Enterprises are requiring their application software vendors to provide greater levels of functionality and broader product offerings. Moreover, competitors continue to make rapid technological advances in computer hardware and software technology and frequently introduce new products, services and enhancements. We must continue to enhance our current product line and develop and introduce new products and services that keep pace with the technological developments of our competitors. Our business and operating results could suffer if we cannot successfully respond to the technological advances of others or if our new products or product enhancements and services do not achieve market acceptance.

We must also satisfy increasingly sophisticated customer requirements. Under our business plan, we are investing significantly in the development of new business process products that are intended to anticipate and meet the emerging needs of our target market. We are focusing significantly on development of these products, which means we will not invest as substantially in the continued enhancement of our current products. We cannot assure you that our new product development will result in products that will meet market needs and achieve market acceptance.

Moreover, a portion of our product development for enterprise solutions in the foreseeable future is expected to be conducted through co-development arrangements with Accenture LLP that we entered into in February 2002. Our business and operating results will be harmed if this co-development arrangement does not result in our being able to deliver timely products sought by companies in the process industries.

If we are unable to successfully market our products to senior executives of potential customers, our revenue growth may be limited.

With the development of our integrated manufacturing/supply chain solutions and the new solutions we are developing with Accenture, we are increasingly focused on selling the strategic value of our technology to the highest executive levels of customer organizations, typically the chief executive

officer, chief financial officer or chief information officer. We have limited experience in selling and marketing at these levels. If we are not successful at selling and marketing to senior executives, our revenue growth and operating results could suffer.

If we are unable to develop relationships with strategic partners, our revenue growth may be harmed.

An element of our growth strategy is to strategically partner with a few select third-party implementation partners who market and integrate our products. The most significant of these partnerships is our joint marketing and development alliance with Accenture. If we do not adequately train a sufficient number of systems integrator partners, or if potential partners focus their efforts on integrating or co-selling competing products to the process industries, our future revenue growth could be limited and our operating results could be harmed. If our partners fail to implement our solutions for our customers properly, the reputations of our solutions and our company could be harmed and we might be subject to claims by our customers. We intend to continue to establish business relationships with technology companies to accelerate the development and marketing of our solutions. To the extent that we are unsuccessful in maintaining our existing relationships and developing new relationships, our revenue growth may be harmed.

We derive a substantial portion of our total revenues from service engagements and a significant percentage of these engagements have been undertaken on a fixed-price basis. We bear the risk of cost overruns and inflation in connection with fixed-price engagements, and as a result, any of these engagements may be unprofitable. In the past, we have had cost overruns on fixed-price service engagements. In addition, to the extent that we are successful in shifting customer purchases to our integrated suites of software and services and we price those engagements on a fixed-price basis, the size of our fixed-price engagements may increase, which could cause the impact of an unprofitable fixed-price engagement to have a more pronounced impact on our operating results.

Our business may suffer if we fail to address the challenges associated with international operations.

We derived approximately 50% of our total revenues from customers outside the United States in each of the past three fiscal years. We anticipate that revenues from customers outside the United States will continue to account for a significant portion of our total revenues for the foreseeable future. Our operations outside the United States are subject to additional risks, including:

The impact of future exchange rate fluctuations on our operating results cannot be accurately predicted. In recent years, we have increased the extent to which we denominate arrangements with international customers in the currencies of the countries in which the software or services are provided. From time to time we have engaged in, and may continue to engage in, hedges of a significant portion of installment contracts denominated in foreign currencies. Any hedging policies

implemented by us may not be successful, and the cost of these hedging techniques may have a significant negative impact on our operating results.

We may not be able to protect our intellectual property rights, which could make us less competitive and cause us to lose market share.

We regard our software as proprietary and rely on a combination of copyright, patent, trademark and trade secret laws, license and confidentiality agreements, and software security measures to protect our proprietary rights. We have registered or have applied to register several of our significant trademarks in the United States and in certain other countries. We generally enter into non-disclosure agreements with our employees and customers, and historically have restricted access to our software products' source codes, which we regard as proprietary information. In a few cases, we have provided copies of the source code for some of our products to customers solely for the purpose of special product customization and have deposited copies of the source code for some of our products in third-party escrow accounts as security for ongoing service and license obligations. In these cases, we rely on non-disclosure and other contractual provisions to protect our proprietary rights.

The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of our technology or independent development by others of technologies that are substantially equivalent or superior to our technology. Any misappropriation of our technology or development of competitive technologies could harm our business, and could force us to incur substantial costs in protecting and enforcing our intellectual property rights. The laws of some countries in which our products are licensed do not protect our products and intellectual property rights to the same extent as the laws of the United States.

We may have to defend against intellectual property infringement claims, which could be expensive and, if we are not successful, could disrupt our business.

Third parties may assert patent, trademark, copyright and other intellectual property rights to technologies that are important to us. In such an event, we may be required to incur significant costs in litigating a resolution to the asserted claims. The outcome of any litigation could require us to pay damages or obtain a license to a third party's proprietary rights in order to continue licensing our products as currently offered. If such a license is required, it might not be available on terms acceptable to us, if at all.

Like many other complex software products, our software has on occasion contained undetected errors or "bugs." Because new releases of our software products are initially installed only by a selected group of customers, any errors or "bugs" in those new releases may not be detected for a number of months after the delivery of the software. These errors could result in loss of customers, harm to our reputation, adverse publicity, loss of revenues, delay in market acceptance, diversion of development resources, increased insurance costs or claims against us by customers.

We may be subject to significant expenses and damages because of liability claims.

The sale and implementation of certain of our software products and services, particularly in the areas of advanced process control and optimization, may entail the risk of product liability claims. Our software products and services are used in the design, operation and management of manufacturing processes at large facilities, and any failure of our software could result in significant claims against us for damages or for violations of environmental, safety and other laws and regulations. Our agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions in our agreements may

not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A substantial product liability claim against us could harm our operating results and financial condition.

Implementation of our products can be difficult and time-consuming, and customers may be unable to implement our products successfully or otherwise achieve the benefits attributable to our products.

Our products are intended to work with complex business processes. Some of our software, such as customized scheduling applications and integrated supply chain products, must integrate with the existing computer systems and software programs of our customers. This can be complex, time-consuming and expensive. As a result, some customers may have difficulty in implementing or be unable to implement these products successfully or otherwise achieve the benefits attributable to these products. Customers may also make claims against us relating to the functionality, performance or implementation of this software. Delayed or ineffective implementation of the software products or related services may limit our ability to expand our revenues and may result in customer dissatisfaction, harm to our reputation and may result in customer unwillingness to pay the fees associated with these products.

If we are not successful in our management transition or in attracting and retaining management team members and other highly qualified individuals in our industry, we may not be able to successfully implement our business strategy.

Our ability to establish and maintain a position of technology leadership in the highly competitive e-business software market depends in large part upon our ability to attract and retain highly qualified managerial, sales and technical personnel. We have historically relied on the services of Lawrence B. Evans, our principal founder and our Chairman, President and Chief Executive Officer. On October 1, 2002, David L. McQuillin, became our Chief Executive Officer. McQuillin had been serving as one of our co-chief operating officer and had not previously served as the chief executive officer of a publicly traded corporation. Most of our executive officers have not entered into an employment agreement with us. In the future, we may experience the departure of other senior executives due to competition for talent from start-ups and other companies. Our future success depends on a successful management transition and will also depend on our continuing to attract, retain and motivate highly skilled employees. Competition for employees in our industry is intense. We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

Our common stock may experience substantial price and volume fluctuations.

The equity markets have from time to time experienced extreme price and volume fluctuations, particularly in the high technology sector, and those fluctuations have often been unrelated to the operating performance of particular companies. In addition, factors such as our financial performance, announcements of technological innovations or new products by us or our competitors, as well as market conditions in the computer software or hardware industries, may have a significant impact on the market price of our common stock. Since April 5, 2002, the date on which we preliminarily announced our estimated results for the three months ended March 31, 2002, the price per share of our common stock, as reported by the Nasdaq National Market, decreased from $17.90 to a low of $0.59 on October 11, 2002. On February 10, 2003, the last reported sale price of our common stock on the Nasdaq National Market was $2.95.

In the past, following periods of volatility in the market price of a public companies securities, securities class action litigation has often been instituted against companies. This type of litigation could result in substantial costs and a diversion of management's attention and resources.

Our common stockholders may experience further dilution and the price of our common stock may decline as a result of our convertible preferred stock and common stock financings.

In 2002, we issued convertible preferred stock, together with warrants to purchase 791,044 shares of common stock. We currently have outstanding 40,000 shares of Series B-I convertible preferred stock and 20,000 shares of Series B-II convertible preferred stock.

Each share of Series B-I and B-II convertible preferred stock is convertible into a number of shares of common stock equal to the stated value, which initially is $1,000, divided by a conversion price of $19.97 in the case of the Series B-1 convertible preferred stock and $17.66 in the case of the Series B-2 convertible preferred stock, subject to antidilution and other adjustments for events affecting our capital structure. If we issue additional shares of common stock, or instruments convertible or exchangeable for common stock, at an effective net price less than the lesser of (a) $17.75, in the case of the Series B-I convertible preferred stock, or $15.69 in the case of the Series B-II convertible preferred stock and (b) the then-applicable conversion price for such series, the conversion price for that series will be reduced to equal that effective net price. These adjustments do not apply to the issuance of common stock or such instruments in specified firm commitment underwritten public offerings, strategic arrangements, mergers or acquisitions, and grants and purchases of securities pursuant to equity incentive plans.

The Series B-I and B-II convertible preferred stock accrues dividends at an annual rate of 4% that is payable quarterly, commencing June 30, 2002, in either cash or common stock, at our option (subject to our satisfaction of specified conditions set forth in our charter). From August 6, 2003 until February 6, 2004, for the Series B-I convertible preferred stock, and from August 28, 2003 until February 17, 2004, for the Series B-II convertible preferred stock, holders may require that we redeem up to a total of 20,000 shares of Series B-I convertible preferred stock and 10,000 shares of Series B-II convertible preferred stock if the average closing price of the common stock for the 20 consecutive trading days immediately preceding August 7, 2003 and August 28, 2003, respectively, or any date thereafter is below the then-applicable conversion price. Beginning on February 8, 2004 and February 28, 2004, holders of Series B-I convertible preferred stock and Series B-II convertible preferred stock, respectively, may require that we redeem any or all of their shares. We will be required to redeem all of the then-outstanding Series B-I and B-II convertible preferred stock on February 7, 2009 at a price equal to the stated value plus all accrued but unpaid dividends. In each instance, the redemption price may be paid in cash, stock or both, at our option. The stock payment will consist of either common stock or Series C preferred stock, subject to our satisfaction of specified conditions set forth in our charter.

In May 2002, we sold 4,166,665 shares of common stock, together with five-year warrants to purchase up to 750,000 shares of common stock, in a private placement. If we issue additional shares of common stock, or instruments convertible or exchangeable for common stock, in specified transactions at an effective net price less than the exercise price of any of the five-year warrants, then the exercise price of the warrants will be adjusted pursuant to a weighted average anti-dilution formula. As the result of these and other provisions, these warrants may be exercised at a price per share that may be less than the then-current market price of the stock, which may cause dilution to our existing common stockholders.

As a result of these and other provisions of the Series B-I and B-II convertible preferred stock and the warrants issued in the preferred and common stock financings, the Series B-I and B-II convertible preferred stock may be converted, and the warrants may be exercised, at a price per share that may be less than the then-current market price of the common stock, which may cause substantial dilution to our existing common stockholders. If the conversion price of the Series B-I and B-II convertible preferred stock or the exercise price of the warrants decreases as a result of antidilution

provisions, the number of shares of common stock issuable in connection with any dividends conversion or redemption could increase significantly.

As part of our obligations under these financings, we registered for public resale by the holders of the Series B-I and B-II convertible preferred stock and common stock issued in the financings a total of 13,776,392 shares of common stock, including shares issuable upon conversion of the Series B-I and B-II convertible preferred stock and exercise of the warrants and shares that may become issuable as a result of antidilution provisions. If all of these registered shares were to be issued (disregarding limitations on the right of a holder to acquire shares of common stock upon the conversion of Series B-I or B-II convertible preferred stock or the exercise of warrants if the conversion or exercise would result in this holder beneficially owning more than 4.99% of our outstanding common stock without first providing us proper notice), these shares would represent 35.3% shares of our common stock issued and outstanding as of February 10, 2003. Any sale of these shares of common stock into the public market could cause a decline in the trading price of our common stock.

Information relating to quantitative and qualitative disclosure about market risk is set forth under the caption "Notes to Consolidated Condensed Financial Statements," [2., 3. and 4.] and below under the captions "Investment Portfolio" and "Foreign Exchange Hedging."

We do not use derivative financial instruments in our investment portfolio. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issuer and the types of instruments approved for investment. We do not expect any material loss with respect to our investment portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

	Fair Value at 12/31/2002			FY2003			FY2004
Cash Equivalents	$	50,610		$	50,610		$	—
Weighted Average Interest Rate		1.38	%		1.38	%		—
Investments	$	3,055		$	2,015		$	1,040
Weighted Average Interest Rate		2.57	%		2.52	%		2.66	%
Total Portfolio	$	53,665		$	52,625		$	1,040
Weighted Average Interest Rate		1.45	%		1.42	%		2.66	%

During the first six months of fiscal 2003, the U.S. dollar generally weakened against Asia/Pacific and European currencies. The translation of the parent company's intercompany receivables and foreign entities assets and liabilities did not have a material impact on our consolidated results. Foreign exchange forward contracts are only purchased to hedge certain customer accounts and installment receivable amounts denominated in a foreign currency.

We enter into foreign exchange forward contracts to reduce our exposure to currency fluctuations on customer accounts receivables denominated in foreign currency. The objective of these contracts is

to neutralize the impact of foreign currency exchange rate movements on our operating results. We do not use derivative financial instruments for speculative or trading purposes. We had $7.9 million of foreign exchange forward contracts denominated in British, Japanese, Swiss, Netherlands, and Euro currencies, which represented underlying customer accounts receivable transactions at December 31, 2002. At each balance sheet date, the foreign exchange forward contracts and the related installments receivable denominated in foreign currency are revalued based on the current market exchange rates. Resulting gains and losses are included in earnings or deferred as a component of other comprehensive income. These deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. Gains and losses related to these instruments for the six months ended December 31, 2002 were not material to our financial position. We do not anticipate any material adverse effect on our consolidated financial position, results of operations, or cash flows resulting from the use of these instruments. However, we cannot assure you that these strategies will be effective or that transaction losses can be minimized or forecasted accurately.

The following table provides information about our foreign exchange forward contracts at December 31, 2002. The table presents the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity date. The average contract rate approximates the weighted average contractual foreign currency exchange rate and the forward position in U.S. dollars approximates the fair value of the contract at December 31, 2002.

Forward Contracts to Sell Foreign Currencies for U.S. Dollars Related to Customer Installments Receivable:

(a) Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and are operating in an effective manner.

(b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

By letter of June 7, 2002, the FTC informed us that it was conducting an investigation into the competitive effects of our recent acquisition of Hyprotech. We completed production of all requested documents in January 2003, are currently complying with deposition requests and expect to conclude our presentation to the FTC of our market analysis and supporting arguments for the acquisition in February 2003. We continue to cooperate fully with the FTC.

We cannot be certain whether the FTC might seek any relief from us or the nature of any such relief that might be sought. The FTC may determine to challenge the acquisition through an administrative civil complaint seeking to declare the acquisition in violation of Section 7 of the Clayton Act or Section 5 of the FTC Act. If the FTC were to prevail in that challenge, it could seek to impose a wide variety of remedies, some of which may have a material adverse effect on our ability to continue to operate under our current business plans. These potential remedies include divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and our other engineering software products to one or more of our competitors.

On May 31, 2002, we acquired the capital stock of Hyprotech from AEA Technology plc. AEA is engaged in arbitration proceedings in England over a contract dispute with KBC Advanced Technologies PLC, an English technology and consulting services company. The dispute remains in arbitration and concerns the characterization of certain technology for purposes of calculating royalties, plus other contractual rights with respect to Hysys.Refinery. Hysys.Refinery was retained by AEA with support for Hysys.Refinery to be provided by Hyprotech pursuant to a contract with AEA. We indemnified AEA under the Sale and Purchase Agreement with AEA dated May 10, 2002 against any costs, damages or expenses in respect of a claim brought by KBC alleging damages due to AEA's (a) failure to comply with its contractual obligations after the acquisition, (b) breach of non-competition clauses with respect to activities occurring after the acquisition, (c) breach of certain obligations to KBC under its agreement by virtue of the acquisition, or (d) execution of the acquisition agreement.

On September 11, 2002, we and Hyprotech were sued by KBC in state district court in Houston, Texas on issues related to the technology subject to review in the arbitration proceeding. KBC has requested actual and exemplary damages, costs and interest. We believe the causes of action to be without merit and will defend the case vigorously. We have filed a counterclaim against KBC requesting actual and punitive damages and attorney fees.

In accordance with the terms of our Series B preferred stock, on October 1, 2002 and January 2, 2003, we elected to issue to the holders of our Series B preferred stock a total of 189,468 and 196,971 shares of our common stock in payment of the dividends accrued in the amounts of $604,932 on our Series B preferred stock for the quarterly dividend periods ended September 30, 2002 and December 31, 2002, respectively. The issuance of these dividend shares was made in reliance on Section 4(2) of the Securities Act of 1933, as amended, which provides an exemption from the registration provisions of the Securities Act for sales by an issuer not involving a public offering. We have registered these dividend shares for resale under the Securities Act on a shelf registration statement on Form S-3 (registration no. 333-90066).

We held our annual meeting of stockholders on December 10, 2002 to elect two directors to hold office until our 2005 annual meeting of stockholders. Proxies for the meeting were solicited in

accordance with Section 14(a) of the Securities Exchange Act pursuant to a proxy statement dated November 4, 2002. There was no solicitation in opposition to the persons nominated by the board of directors, and both of the board's nominees were elected. The votes cast by proxy or in person with respect to the election of directors, as determined by the final report of the inspectors, are set forth below. There were no broker non-votes with respect to either nominee.

Nominee		Votes for Nominee		Votes Withheld
Lawrence B. Evans		31,814,831		327,042
Joan C. McArdle		31,452,078		689,795

The following directors of the company continued in office after the annual meeting: Gresham T. Brebach, Jr., Douglas R. Brown, Stephen L. Brown, Stephen M. Jennings, and David L. McQuillin.

Exhibit Number		Description
10.1		Loan and Security Agreement, dated as of January 30, 2003, by and among Silicon Valley Bank and Aspen Technology, Inc., AspenTech, Inc. and Hyprotech Company.
10.2		Export-Import Bank Loan and Security Agreement, dated as of January 30, 2003, by and among Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
10.3		Export-Import Bank Borrower Agreement, dated as of January 30, 2003, by and between Aspen Technology, Inc. and AspenTech Inc. in favor of the Export-Import Bank of the United States and Silicon Valley Bank.
10.4		Promissory Note (Ex-Im), dated January 30, 2003, by and between Aspen Technology, Inc. and AspenTech, Inc. in favor of Silicon Valley Bank.
10.5		Form of Negative Pledge Agreement, dated as of January 30, 2003, in favor of Silicon Valley Bank, executed by Aspen Technology, Inc., AspenTech, Inc. and Hyprotech Company.
10.6		Security Agreement, dated as of January 30, 2003, by and between Silicon Valley Bank and AspenTech Securities Corporation.
10.7		Unconditional Guaranty, dated as of January 30, 2003, by AspenTech Securities Corporation in favor of Silicon Valley Bank.
10.8		Amendment No. 1 to Security Agreement, dated as of January 30, 2003, by and between Accenture LLP and Aspen Technology, Inc.
10.9		Employment Agreement, dated as of November 26, 2002, by and between Aspen Technology, Inc. and David L. McQuillin.
10.10		Employment Agreement, dated as of November 26, 2002, by and between Aspen Technology, Inc. and Stephen J. Doyle.

On October 10, 2002, we filed a current report on Form 8-K with respect to our press release announcing preliminary financial results for the fiscal quarter ended September 30, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Delaware (State or other jurisdiction of incorporation or organization)		04-2739697 (IRS Employer Identification No.)
Ten Canal Park, Cambridge, Massachusetts 02141 (Address of principal executive office and zip code)
(617) 949-1000 (Registrant's telephone number, including area code)

			December 31, 2002			June 30, 2002
			(Unaudited and in thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	50,610		$	33,571
	Short-term investments			3,055			18,549
	Accounts receivable, net			76,600			95,418
	Unbilled services			21,745			30,569
	Current portion of long-term installments receivable, net			36,418			40,404
	Deferred tax asset			2,929			2,929
	Prepaid expenses and other current assets			20,676			18,699

		Total current assets		212,033			240,139

Long-term installments receivable, net				69,296			68,318

Property and leasehold improvements, at cost				129,245			133,676
Accumulated depreciation and amortization				(89,798	)		(82,873	)

				39,447			50,803

Computer software development costs, net				15,017			13,810
Purchased intellectual property, net				2,143			27,626
Other intangible assets, net				31,740			41,105
Goodwill, net				11,341			84,258
Deferred tax asset				15,576			15,576
Other assets				6,036			6,708

			$	402,629		$	548,343

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	4,807		$	5,334
	Amount owed to Accenture			8,300			11,100
	Accounts payable and accrued expenses			93,258			94,987
	Unearned revenue			17,730			20,983
	Deferred revenue			35,612			38,624

		Total current liabilities		159,707			171,028

Long-term debt and obligations, less current maturities				3,334			5,885

5¹/4% Convertible subordinated debentures				86,250			86,250

Obligation subject to common stock settlement				4,245			1,810

Deferred revenue, less current portion				15,797			9,548

Deferred tax liability				14,964			15,003

Other liabilities				5,268			5,031

Stockholders' equity:
	Preferred stock
		Outstanding—60,000 shares as of December 31, 2002 and June 30, 2002		54,064			50,753
	Common stock
		Outstanding—38,150,608 as of December 31, 2002 and 37,500,753 as of June 30, 2002		3,838			3,773
	Additional paid-in capital			313,484			310,039
	Accumulated deficit			(257,448	)		(107,593	)
	Accumulated other comprehensive loss			(372	)		(2,682	)
	Treasury stock, at cost			(502	)		(502	)

		Total stockholders' equity		113,064			253,788

			$	402,629		$	548,343

			Three Months Ended December 31,						Six Months Ended December 31,
			2002			2001			2002			2001
			(Unaudited and in thousands, except per share data)
Software licenses			$	36,781		$	39,939		$	66,427		$	59,170
Service and other				46,192			47,057			93,796			94,017

		Total revenues		82,973			86,996			160,223			153,187

Cost of software licenses				3,511			3,054			6,846			5,498
Cost of service and other				26,823			30,261			54,831			60,403
Selling and marketing				27,031			28,451			56,185			55,075
Research and development				15,997			17,829			33,742			35,828
General and administrative				8,923			7,520			18,744			14,942
Goodwill impairment charge				74,715			—			74,715			—
Restructuring and other charges				60,529			—			60,529			2,642

		Total costs and expenses		217,529			87,115			305,592			174,388

Loss from operations				(134,556	)		(119	)		(145,369	)		(21,201	)
Other income (expense), net				(313	)		(171	)		(814	)		(355	)
Interest income, net				268			144			849			897

Loss before benefit from income taxes				(134,601	)		(146	)		(145,334	)		(20,659	)
Benefit from income taxes				—			(44	)		—			(6,198	)

	Net loss			(134,601	)		(102	)		(145,334	)		(14,461	)
Preferred stock dividend earned				(605	)		—			(1,210	)		—
Accretion of preferred stock discount				(1,682	)		—			(3,311	)		—

	Net loss applicable to common shareholders		$	(136,888	)	$	(102	)	$	(149,855	)	$	(14,461	)

Basic and diluted loss applicable to common shareholders per share			$	(3.59	)	$	(0.00	)	$	(3.93	)	$	(0.46	)

Basic and diluted weighted average shares outstanding				38,128			31,748			38,092			31,740

			Six Months Ended December 31,
			2002			2001
			(Unaudited and in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss			$	(145,334	)	$	(14,461	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization				14,258			11,283
	Goodwill impairment charge			74,715			—
	Asset impairments and write-offs under the restructuring and other charges			38,732			—
	Loss on revaluation of intercompany loans denominated in foreign currencies			481			—
	Research and development costs subject to common stock settlement			564			—
	Deferred income taxes			509			(45	)
	Decrease in accounts receivable			19,484			3,164
	Decrease in unbilled services			9,713			2,057
	Decrease in installments receivable			1,798			15,242
	Increase in prepaid expenses and other current assets			(1,952	)		(1,398	)
	Decrease in accounts payable and accrued expenses			(1,805	)		(14,381	)
	Increase (decrease) in unearned revenue			(3,721	)		193
	Increase in deferred revenue			3,689			4,148

		Net cash provided by operating activities		11,131			5,802

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and leasehold improvements			(2,901	)		(5,654	)
	Proceeds from sale of property			—			1,725
	Sale of investment securities			15,489			16,646
	Decrease (increase) in other long-term assets			694			(1,199	)
	Increase in computer software development costs			(4,055	)		(3,132	)
	Increase in other long-term liabilities			407			—

		Net cash provided by investing activities		9,634			8,386

CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock under employee stock purchase plans			2,219			3,052
	Exercise of stock options			81			148
	Payment of amount owed to Accenture			(3,100	)		—
	Payments of long-term debt and capital lease obligations			(3,245	)		(2,443	)

		Net cash (used in) provided by financing activities		(4,045	)		757

		EFFECTS OF EXCHANGE RATE CHANGES ON CASH		319			216

		DECREASE IN CASH AND CASH EQUIVALENTS		17,039			15,161
CASH AND CASH EQUIVALENTS, beginning of period				33,571			36,633

CASH AND CASH EQUIVALENTS, end of period			$	50,610		$	51,794

		Three Months Ended December 31,		Six Months Ended December 31,
		2002	2001	2002	2001
Convertible debt		1,628	1,628	1,628	1,628
Convertible preferred stock		3,135	—	3,135	—
Obligation subject to common stock settlement		1,329	—	1,114	—
Preferred stock dividend, to be settled in common stock		95	—	95	—
Options, restricted stock and warrants		8	1,648	64	1,907

	Total	6,195	3,276	6,036	3,535

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	Reporting Unit
	License			Consulting Services			Maintenance and Training		Total
Carrying amount as of September 30, 2002	$	67,933		$	5,298		$	11,052	$	84,283
Purchase price adjustment		1,407			88			264		1,759
Effect of change in rates used for translation		(17	)		6			25		14
Impairment charge		(69,323	)		(5,392	)		—		(74,715	)

Carrying amount as of December 31, 2002	$	—		$	—		$	11,341	$	11,341

	Closedown/ Consolidation of Facilities			Employee Severance, Benefits, and Related Costs			Impairment/ Write-off of Assets			Total
Restructuring charge	$	8,670		$	8,169		$	38,732		$	55,571
Write-off/Impairment of assets		—			—			(38,732	)		(38,732	)
Payments		(69	)		(4,769	)		—			(4,838	)

Accrued expenses, December 31, 2002	$	8,601		$	3,400		$	—		$	12,001

	License		Consulting Services		Maintenance and Training		Total
Three Months Ended December 31, 2002—
Revenues from unaffiliated customers	$	36,781	$	26,849	$	19,343	$	82,973
Controllable expenses		16,334		20,717		3,035		40,086

Controllable margin(1)	$	20,447	$	6,132	$	16,308	$	42,887

Three Months Ended December 31, 2001—
Revenues from unaffiliated customers	$	39,939	$	32,250	$	14,807	$	86,996
Controllable expenses		14,562		22,618		2,873		40,053

Controllable margin(1)	$	25,377	$	9,632	$	11,934	$	46,943

Six Months Ended December 31, 2002—
Revenues from unaffiliated customers	$	66,427	$	54,581	$	39,215	$	160,223
Controllable expenses		34,254		43,360		6,352		83,966

Controllable margin(1)	$	32,173	$	11,221	$	32,863	$	76,257

Six Months Ended December 31, 2001—
Revenues from unaffiliated customers	$	59,170	$	64,690	$	29,327	$	153,187
Controllable expenses		29,426		44,759		5,729		79,914

Controllable margin(1)	$	29,744	$	19,931	$	23,598	$	73,273

			Three Months Ended				Six Months Ended
			December 31, 2002		December 31, 2001		December 31, 2002		December 31, 2001
Revenues:
	Software licenses		44.3	%	45.9	%	41.5	%	38.6	%
	Service and other		55.7		54.1		58.5		61.4

		Total revenues	100.0		100.0		100.0		100.0

Expenses:
	Cost of software licenses		4.2		3.5		4.3		3.6
	Cost of service and other		32.3		34.8		34.2		39.3
	Selling and marketing		32.6		32.7		35.1		36.0
	Research and development		19.3		20.5		21.1		23.4
	General and administrative		10.8		8.6		11.7		9.8
	Goodwill impairment loss		90.0		—		46.5		—
	Restructuring and other charges		73.0		—		37.8		1.7

		Total expenses	262.2		100.1		190.7		113.8

Income (loss) from operations			(162.2	)	(0.1	)	(90.7	)	(13.8	)
	Other income (expense), net		(0.4	)	(0.3	)	(0.5	)	(0.2	)
	Interest income, net		0.4		0.2		0.5		0.5

Income (loss) before provision for (benefit from) income taxes			(162.2	)	(0.2	)	(90.7	)	(13.5	)
	Provision for (benefit from) income taxes		—		(0.1	)	—		(4.1	)

		Net income (loss)	(162.2	)	(0.1	)	(90.7	)	(9.4	)
	Accretion of preferred stock discount and dividend		(2.8	)	—		(2.8	)	—

		Net income (loss) applicable to common stockholders	(165.0	)%	(0.1	)%	(93.5	)%	(9.4	)%

	2003		2004		2005		2006		2007		Thereafter
Non-cancelable operating leases	$	8,704	$	12,932	$	11,373	$	11,480	$	11,405	$	45,888
Non-cancelable capital leases and debt obligations		2,934		4,016		689		312		300		568
Amounts owed to Accenture		6,667		1,333		—		—		—		—

Total commitments	$	18,304	$	18,281	$	12,062	$	11,792	$	11,705	$	46,456

		ASPEN TECHNOLOGY, INC.
		By:	/s/ DAVID L. MCQUILLIN David L. McQuillin President and Chief Executive Officer