Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24786
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2739697
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
TEN CANAL PARK, CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (Zip code)
(617) 949-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes _X_ No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as at September 19, 1997 was $654,185,862 based on a total of
19,823,814 shares held by non-affiliates and the closing price reported on the
Nasdaq National Market on that date, which was $33.00.
Number of shares outstanding at September 19, 1997:
21,087,628 shares of Common Stock, par value $0.10 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended June 30,
1997. Portions of such Proxy Statement are incorporated by reference in PART III
of this report.
2
ASPEN TECHNOLOGY, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business 2
Item 1a. Risk Factors 10
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4a. Executive Officers of the Registrant 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K 27
SIGNATURES 29
1
3
PART I
ITEM 1. BUSINESS
Aspen Technology, Inc. (the "Company" or "AspenTech") is a leading
supplier of off-the-shelf software products and services for the analysis,
design and automation of manufacturing facilities by companies in the process
industries, including the chemicals, petrochemicals, petroleum, pharmaceuticals,
pulp and paper, electric power, and food and consumer products industries.
Process manufacturers use AspenTech's solutions, a family of software products
and services, to design, operate and manage manufacturing processes more
efficiently, safely and profitably.
AspenTech provides a sophisticated, integrated family of
off-the-shelf software products for use across the entire process manufacturing
life-cycle, from "off-line" applications used primarily in research and
development, and engineering, to "on-line" applications used principally in
production. The Company's off-line software is used by engineers on desktop
computers primarily to simulate and predict the performance of manufacturing
processes in connection with the design of new facilities or processes and
the analysis of existing facilities or processes. AspenTech's on-line software,
which is connected directly to plant instrumentation, enables the real-time
adjustment of production variables in response to constantly changing
operating conditions to improve process efficiency, planning and scheduling.
AspenTech's product offerings are classified in four categories: modeling;
planning and scheduling; information management systems ("IMS"); and advanced
process control ("APC") and optimization. Chemical engineers who work in the
off-line research and development and engineering stages of plant and
process design and analysis are the principal users of modeling products,
while chemical and control engineers who work in the on-line stages of
real-time plant operation are the primary users of IMS, APC and optimization
software and services.
The Company's modeling software mathematically simulates and predicts
the performance of manufacturing processes under varying equipment
configurations and operating conditions, enabling chemical engineers to design
cost-effective, efficient processes that comply with environmental and safety
requirements. AspenTech's planning and scheduling software is used by petroleum
refiners and chemical manufacturers for feedstock selection, product mix
optimization, logistics, scheduling, process unit optimization, and investment
planning. AspenTech's IMS software is used by process manufacturers to gather
and analyze large volumes of real-time plant operations data in order to better
understand actual performance within a complex process manufacturing facility.
IMS software allows customers to compare actual performance with theoretical
benchmarks derived from models and to make appropriate adjustments on a
real-time basis. AspenTech's APC and optimization software products are designed
to enable customers to achieve superior operating performance by continuously
adjusting key process variables to maintain optimal target levels under
constantly changing conditions. The Company initially became a provider of IMS
software and services through its acquisition of Industrial Systems, Inc.
("ISI") in May 1995, and expanded its IMS capabilities through its acquisition
of Setpoint, Inc. ("Setpoint") in February 1996. AspenTech significantly
enhanced its APC and optimization software offerings through the Setpoint
acquisition as well as its acquisition of Dynamic Matrix Control Corporation
("DMCC") in January 1996. AspenTech further extended family of on-line
solutions to include economic planning and scheduling capabilities by acquiring
the assets of Bechtel Corporation's PIMS (Process Industries Modeling System)
business in December 1996.
AspenTech combines its integrated family of off-the-shelf software
products with design and implementation consulting services in order to market a
complete solution to its customers. The Company significantly strengthened its
on-line consulting services through its acquisitions of DMCC and Setpoint in
early 1996, and expanded the global reach of its consulting services
organization with the acquisition in October 1996 of the process control
division of Cambridge Control Ltd ("Cambridge Control"). AspenTech believes its
ability to offer a complete solution of both industry-leading software and
sophisticated process engineering expertise is an important source of
competitive differentiation.
AspenTech's customers span a broad range of process industry
segments. With more than 750 customers worldwide, AspenTech currently licenses
its software to 45 of the 50 largest chemical companies in the world and 18 of
the 20 largest petroleum refiners in the world.
INDUSTRY BACKGROUND
Companies in the process industries manufacture products such as bulk
solids, liquids and gases through operations involving chemical reactions,
combustion, mixing, separation, and heating and cooling. The process industries
include the chemicals, petrochemicals, petroleum, pharmaceuticals, pulp and
paper, electric power, and food and consumer products industries. Based on data
provided by industry trade groups, the Company estimates that the aggregate
worldwide revenues of the process industries exceed $3 trillion, of which the
chemicals industry has revenues that exceed $1 trillion and the petroleum
segment has revenues in excess of $500 billion.
2
4
In recent years, several factors have dramatically affected the
competitiveness and profitability of many sectors of the process industries.
Companies in certain process industries, particularly the chemicals industry,
have experienced intensified global competition, especially from competitors
located close to raw materials sources. In addition, companies in many of the
process industries face more stringent environmental and safety regulations.
These competitive and regulatory factors, as well as cyclical economic
conditions, can have a significant negative effect on the revenues and profits
of process manufacturers. Furthermore, while labor-intensive businesses can
respond to difficult business conditions by downsizing their workforces,
capital-intensive process manufacturers must focus on improving their production
processes. Therefore, in order to significantly reduce costs and increase
profitability, a process manufacturer must design, manage and operate efficient
and cost-effective production processes. In response to competitive, regulatory
and economic pressures, companies in the process industries are adopting
increasingly sophisticated off-line and on-line tools and methodologies to
improve the performance of their facilities.
Chemical engineering analysis is the fundamental discipline behind
the improvement of production processes. Due to the number of variables
involved, chemical engineering analysis is complex and calculation intensive.
Without the use of process modeling and plant automation software, time and cost
constraints force engineers to make simplifying assumptions that may limit the
potential improvements to production processes. These constraints may also force
engineers to evaluate only parts of the process rather than the whole, or to
consider fewer alternative solutions. Process modeling and plant automation
software enables engineers to perform these complex calculations simultaneously
in order to arrive at better solutions quickly.
Sophisticated software tools for off-line use that can accurately
model a broad range of processes have been available to chemical engineers since
the 1980s. Although early versions of the tools required substantial modeling
expertise and were limited in scope and complicated to use, in recent years the
availability of affordable, powerful desktop computers and intuitive graphical
user interfaces has expanded the market of potential users of process modeling
software. Moreover, process modeling software can now reliably model highly
complex chemical processes, broadening the scope of projects where its use is
applicable. These software tools can generate savings significantly in excess of
their cost by enabling users to design manufacturing processes with lower raw
material usage, decreased energy and capital equipment costs, improved product
quality and operating safety, cost-effective regulatory compliance and enhanced
engineering productivity. As a result of this improved availability,
functionality and cost-efficiency, many companies that previously relied on
internally developed models are adopting software products developed by third
parties who are better equipped to maintain and enhance these increasingly
complex tools.
The use of off-line technology has been complemented by an increasing
demand for on-line applications for several reasons. First, the economic rewards
for making even small improvements in plant efficiency and safety can be
substantial. Second, the benefits of integrated process modeling, information
management, process control and optimization techniques are becoming
increasingly understood by customers. Third, while sophisticated tools and
expertise have not heretofore been widely available, commercial providers are
emerging to address these needs. Recent significant advances in software and
hardware technology, including the availability of more sophisticated
optimization algorithms and updatable graphical user interfaces, have made
on-line applications increasingly feasible for a growing number of process
manufacturers.
In recent years, there has been increasing demand for integration of
all manufacturing processes from research and development to design,
engineering, and process and manufacturing management. Customers are looking to
the advantages which integrated on-line and off-line applications can bring to
their management of all process manufacturing activities. This is similar to the
integration by enterprise resource planning ("ERP") vendors of financial,
materials management, production planning, human resource management, sales, and
accounting applications. Commercial providers are emerging to offer tools and
expertise to further connect this technology layer which consists of integrated
design, control and management applications for process manufacturing ("Smart
Manufacturing Systems") with the ERP applications and the distributed control
systems ("DCS") which control the plants.
As a result of the market dynamics in the process industries and the
rapidly evolving technology available to improve manufacturing processes,
process manufacturers increasingly seek a complete, integrated family of
software and services that can be used to design, operate and manage their
production processes more effectively.
THE ASPENTECH ADVANTAGE
The Company believes it is the largest independent supplier of
software and service solutions used by companies in the process industries to
design, operate and manage their manufacturing processes based on fundamental
chemical engineering principles. AspenTech offers its customers in-depth
technical expertise encompassing both off-line and on-line applications. By
combining its traditional process modeling and optimization capabilities with
acquired skills in economic planning and scheduling, IMS and APC, AspenTech has
created a complete solution designed to provide several key advantages to
customers.
Family of Products Across Full Manufacturing Life-Cycle. AspenTech
believes that it offers the most complete family of process modeling and plant
automation software tools used across every stage of the production process,
from research and development to engineering to production. The Company's
software products are designed to achieve improved process efficiency through
comparison of off-line predictive models with actual on-line production data and
through real-time adjustments to operating
3
5
parameters in response to constantly changing conditions. The Company has
significantly integrated its on-line applications and intends to continue
integrating and enhancing both on-line and off-line applications.
Complete Software and Service Solution. Customers increasingly
require expert consulting services to take full advantage of the highly complex
software tools being designed for the process industries. AspenTech deploys what
it believes is the largest independent organization of control engineers to
design and implement solutions, in combination with IMS, APC and optimization
software products. AspenTech believes its ability to offer its customers a
complete solution will be an increasingly important source of competitive
differentiation.
Process Industry Expertise. Over the past 16 years, AspenTech has
built a reputation as a leader in process modeling expertise. AspenTech's
software products incorporate proprietary solution methods, physical property
models and data estimation techniques that enable users to model processes that
involve complex chemistry. AspenTech has refined these methods, models and
techniques based on continuing relationships with customers who have performed
millions of simulations using AspenTech software. The Company has expanded its
on-line expertise through its acquisitions of ISI, DMCC, Setpoint, Cambridge
Control and Bechtel PIMS, and the Company believes it is now the technological
leader in the planning and scheduling, IMS, APC and optimization markets.
AspenTech believes that the expertise underlying its software products and
services will assist it in maintaining and enhancing its reputation as a
technological leader across the manufacturing process.
STRATEGY
AspenTech's strategy is to expand the use of its products and
services to enable customers to improve the design, operation and management of
their manufacturing processes. The key elements of this strategy are:
Leverage Breadth and Depth of Customer Base. AspenTech considers its
relationships with its existing customers to be an important corporate asset.
AspenTech currently has more than 750 commercial customers worldwide, including
45 of the 50 largest chemical companies in the world and 18 of the 20 largest
petroleum refiners in the world. The Company has historically derived a
significant component of its revenue from additional sales to existing
customers. The Company believes it has a significant opportunity to expand its
existing customer relationships by adding new licensed users, by offering
additional product modules, and by providing consulting and support services.
These solutions are marketed by a single, integrated sales force organized by
customer account. AspenTech is capitalizing on the significant opportunities it
has created to cross-sell modeling products to traditional APC and optimization
customers and vice versa.
Leverage Lead in the Area of Smart Manufacturing Systems. AspenTech
believes that it has emerged as the leader in the area of integrated design,
control and management applications for process manufacturing ("Smart
Manufacturing Systems"). As the benefits of integrated applications across
process manufacturing design, control and management functions are more widely
understood and appreciated by process manufacturers, AspenTech is expanding its
integration efforts, developing relationships with enterprise resource planning
("ERP") vendors and distributed control system ("DCS") vendors, and offering
customers complete solutions which link the Smart Manufacturing Systems to the
ERP and DCS technology layers.
Increase Penetration of Process Industries. In recent years,
AspenTech has broadened its penetration of the process industries beyond its
traditional leadership in the chemicals segment to include significant shares of
the petroleum and pulp and paper markets. Many of the same imperatives and
opportunities confront participants in other process industry segments. As the
benefits of its solutions are becoming more widely understood by process
manufacturers, AspenTech is actively pursuing opportunities to expand the use of
its technology in additional vertical markets. For example, AspenTech's
introduction in March 1997 of BatchPlus, a solution for the modeling and
simulation of complex, recipe-based pharmaceutical and batch chemical processes,
has broadened the Company's historically limited presence in these large and
underpenetrated vertical market segments. AspenTech believes the continuous
broadening of its software product and service offerings through acquisition and
internal development will enable AspenTech to expand its reach further. Over
time, AspenTech will also seek to leverage these new customer relationships by
cross-selling its other software product and service offerings.
Offer Broadest, Integrated Family of Products and Services. AspenTech
offers customers a broad family of software products encompassing the full
manufacturing life-cycle, enabling customers to add compatible software
capabilities as their needs grow. These products can be used as stand-alone
solutions or in concert with other software modules. AspenTech offers process
manufacturers what it believes is the most advanced product functionality
available across a wide range of off-line and on-line applications. The Company
intends to integrate further the APC and optimization tools obtained through its
acquisitions into future generations of its software products. In addition,
AspenTech provides implementation consulting services to ensure that customers
can achieve a successful solution. In certain of AspenTech's projects,
functionality developed in connection with a solution has appeared applicable to
other customers and has been commercialized by AspenTech, such as BatchPlus,
developed in conjunction with Merck & Co.. The Company expects this to continue
to be one of its sources of new products and that its ability to offer its
customers a complete solution will be an increasingly important source of
competitive differentiation. Where acquisition represents the most
4
6
efficient source of product line extension, AspenTech expects to continue to
acquire products and technologies opportunistically, as with its October 1996
purchase of B-JAC International, Inc., a leading supplier of specialized heat
exchanger modeling tools.
Extend Technology Leadership. AspenTech intends to extend its
reputation as the technology leader and believes its recent acquisitions
represent important opportunities to maintain and enhance its differentiating
capabilities in the marketplace. AspenTech believes its modeling software
solutions include a number of pioneering products and algorithms, and its
on-line offerings are technological leaders in real-time applications,
engineering and consulting solutions for APC and optimization. AspenTech's
reputation for technological leadership continues to be an important source of
attraction for scarce, highly talented engineers and technical personnel.
Focus on Long-Term Customer Relationships. AspenTech's operating
strategy is driven by a long-term approach to customer relationships. AspenTech
historically derives a substantial portion of its revenues from three- to
five-year software licenses and renewals of those licenses. Because a
significant portion of its revenues come from its installed base, AspenTech
focuses on long-term customer relationships in marketing its process modeling
and plant automation software products and services. Increasingly, cross-selling
opportunities are merging the customer bases of AspenTech's traditional modeling
users with those of the recently acquired companies, who traditionally focused
exclusively on on-line solutions. AspenTech intends to leverage these
relationships to an increasing extent, particularly as the product integrations
are completed. This includes alliances which provide for significant customer
involvement in product development and testing as well as customer sharing of
technology, such as the AspenTech Dow Chemical Co. alliance announced in June
1997.
Capitalize on Emerging On-Line Market. The Company believes that the
potential market for on-line applications for process industries, while less
mature than the off-line market, may be substantially larger than the potential
off-line market. On-line applications complement existing off-line applications
and afford recurring incremental savings in day-to-day operations. The Company
will seek to continue to develop and expand the market for its IMS, APC and
optimization software and services for the emerging on-line market.
Partner with Complementary Process Industry Suppliers. In recent
years, shifts toward open technologies, lower-cost and more powerful hardware
platforms, and intensifying global business pressures are causing process
industry customers to look increasingly at purchasing open, best-of-breed
solutions, rather than single-vendor proprietary approaches. In response to this
trend, AspenTech has embarked on a strategy to partner with leading technology
vendors, such as SAP A.G., Yokagawa Electric Corporation, and Elsag Bailey, Inc.
in order to broaden the reach of its marketing organization and to enable its
customers to create integrated solutions that best achieve their goals.
CUSTOMERS
AspenTech currently has over 750 commercial customers worldwide,
including 45 of the 50 largest chemical companies in the world and 18 of the 20
largest petroleum refiners in the world. The Company derived more than 50% in
fiscal 1995, approximately 45% in fiscal 1996, and more than 50% in fiscal 1997
of revenues from customers outside the United States.
CHEMICALS
---------
Air Products & Chemicals, Inc.
BASF AG
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc.
Elf Atochem
Hoechst AG
Huls AG
Huntsman Corporation
Lyondell Petrochemical
Mitsubishi Chemical Corporation
Olin Corporation
Rhone-Poulenc Industrialisation
Sasol Industries (Pty.) Ltd.
Shell International Chemie Mij B.V.
Sumitomo Chemical Co. Ltd.
Union Carbide Chemicals and Plastics Company, Inc.
ENGINEERING AND CONSTRUCTION
----------------------------
Bechtel Corporation
5
7
Fluor Daniel, Inc.
John Brown Engineers and Constructors B.V.
Lurgi AG
The M.W. Kellogg Company
The Ralph M. Parsons Company
UOP
Zimmer AG
CONSUMER PRODUCTS
-----------------
The Procter & Gamble Company
3M Company
Unilever Research
ELECTRIC POWER
--------------
ABB Stal AB
British Nuclear Fuels plc
Combustion Engineering, Inc.
GEC Alsthom
SGN
Westinghouse Electric Corporation
FOOD PRODUCTS
-------------
Cargill Incorporated
General Mills, Inc.
PETROLEUM
---------
Arco Products Company
British Petroleum
Chevron Corporation
Citgo Petroleum Corporation
Conoco Inc.
Corpoven, S.A.
Marathon Oil Company
Mobil Oil Corporation
Neste Oy
Phillips Petroleum Company
Repsol Petroleo SA
Shell Oil Company
Star Enterprise
Sun Refining and Marketing Company
PHARMACEUTICALS
---------------
Ciba-Geigy AG
Eli Lilly and Company
Fujisawa Pharmaceutical Co., Ltd.
Genentech, Inc.
Hoffman-LaRoche, Inc.
Kyowa-Hakko Kogyo Co., Ltd.
Merck & Co., Inc.
Sandoz Technologie AG
The Upjohn Company
PULP AND PAPER
--------------
Union Camp Corporation
Weyerhaeuser Company
METALS AND MINERALS
-------------------
Phelps Dodge
No individual customer represented 10% or more of AspenTech's total
revenues for fiscal 1995, 1996 or 1997. There can be no assurance that any of
the customers listed will continue to license software or purchase services from
AspenTech beyond the term of any existing agreement.
PRODUCTS AND SERVICES
AspenTech is a leading supplier of software products and services for
the analysis, design and automation of manufacturing facilities by companies in
the process industries. AspenTech's integrated family of software products
enables customers to predict accurately and reliably the performance of a
manufacturing process in order to design, operate and manage manufacturing
processes more efficiently, safely and profitably. These tools are used both
off-line by engineers on desktop computers in connection with the design of new
facilities and processes and the analysis of existing facilities and processes,
and on-line connected directly to plant instrumentation to identify adjustments
that can be made on a real-time basis to optimize performance continually in
response to changing production conditions. In addition, AspenTech can provide
expert consulting, training and support services to augment its software
expertise and offer a complete solution to its customers.
----------------------------- ------------------------------- --------------------
Products Description Category
OFF-LINE SOFTWARE
ASPEN PLUS(R) Rigorous steady-state modeling Modeling
for chemicals, electrolytes, (steady state
solids, and petroleum assays processes)
SPEEDUP(R) Rigorous modeling environment Modeling
for dynamically simulating (dynamic processes)
chemical, hydrocarbon, and
petroleum processes
ADVENT(R) Simulation tool for designing Modeling
reduced cost processes for (process synthesis)
chemical plants and refineries
via process/utility heat
integration
BATCH PLUS(TM) Recipe-based simulation engine Modeling
that can model one batch or a (batch process)
whole plant
----------------------------- ------------------------------- --------------------
ON-LINE SOFTWARE
InfoPlus.21(TM) A hierarchical, real-time, IMS
memory-resident configurable
database
6
8
DMCplus(TM) Multivariable predictive APC
constraint process control
application
RT-OPT(R) Real-time closed-loop Optimization
optimization product
Aspen PIMS(TM) Linear programming product to Planning and
optimize an economic model of Scheduling
a manufacturing complex
----------------------------- ------------------------------- --------------------
OFF-LINE SOFTWARE PRODUCTS
The Company offers a number of software products for off-line
applications. Off-line software is used primarily to simulate and predict
manufacturing processes in connection with the design of new facilities or
processes and the analysis of existing facilities or processes. ASPEN PLUS is
used to simulate steady state processes in which inputs and conditions are held
constant. ASPEN PLUS can be used in concert with SPEEDUP, dynamic process
modeling software that simulates processes in which inputs and conditions change
over time, such as during plant start-up and shutdown or when feedstocks are
adjusted. ADVENT is process synthesis software that minimizes energy consumption
and emissions from a manufacturing process. BATCH PLUS is modeling and
simulation software for recipe-based pharmaceutical and batch chemical process
manufacturing. Layered on top of these core, integrated off-line applications
are a number of separately sold modules that focus on specialized types of
analysis to model separation systems, batch distillation columns, bioprocess
operations, polymers processes, and other complex systems. All of these products
can operate in Windows. ASPEN PLUS, SPEEDUP, and ADVENT also run on UNIX and
both ASPEN PLUS and SPEEDUP run on DEC VMS. See "Item 1. Product Development"
and "Item 1a. Risk Factors - Migation to MicroSoft Windows; Emergence of Other
Standards".
AspenTech typically licenses its modeling software for a term of
either three or five years. Currently, the annualized cost for a single
U.S.-based user of one of AspenTech's off-line software modules ranges from
$10,000 to $30,000, depending on the product and the license term. The license
fees charged by AspenTech are typically based on the number of licensed users,
with the cost per user declining as the number of licensed seats increases. The
license fee includes a separate maintenance component that covers upgrades,
revisions or enhancements during the term of the license, as well as customer
support.
ON-LINE SOFTWARE PRODUCTS
For on-line applications, AspenTech offers a family of products and
services that enables customers to better understand and monitor highly complex
manufacturing processes on a real-time basis, and to automate the adjustment of
operating parameters in response to continually changing conditions for improved
process efficiency, safety and cost-effectiveness. AspenTech typically licenses
its on-line software for a term of 99 years. AspenTech's IMS products capture,
display and analyze plant-wide historical and real-time process data, in order
to compare the actual performance to theoretical benchmarks derived from models.
The U.S. list price for an entry-level 99-year IMS license is approximately
$50,000, and varies depending on the number of points of data being collected.
AspenTech's APC and optimization products enable customers to improve the
profitability of a manufacturing facility by determining optimal operating
parameters and simultaneously adjusting multiple process variables to achieve
these targets. The U.S. list price for a 99-year APC or optimization software
license for a single process unit or single facility ranges from $50,000 to
$200,000.
AspenTech's PIMS products provide economic planning and scheduling
tools to customers which are based on large linear programming models. They
enable customers to make both short-term and strategic decisions which help
identify optimum plant investments. AspenTech typically licenses its PIMS
software for a term of five years or 25 years. The U.S. list price for a license
of AspenTech's PIMS modules range from $10,000 to $200,000 depending on the
product and the license term.
All of these products can operate in Windows. InfoPlus.21, DMCplus,
and RT-OPT also run on DEC VMS, and both InfoPlus.21 and RT-OPT operate on a
UNIX platform. See "Item 1. Product Development" and "Item 1a. Risk Factors -
Migration to Microsoft Windows; Emergence of Other Standards".
CONSULTING SERVICES
AspenTech can combine its on-line off-the-shelf software products
with design and implementation consulting services in order to market a complete
solution to its customers. The emerging on-line market has fewer commercial
modeling tools than the off-line market. As a result, current on-line
applications typically consist of substantial consulting services combined with
a small component of standard commercial software. These services are
customarily provided pursuant to contracts with engagement terms of
approximately 9 to 24 months. The contracts may be priced on either a
time-and-materials or fixed-price basis. Customers can purchase such services
from other vendors or perform them in-house. The Company believes that, due to
customers' growing awareness of the economic benefits of on-line optimization
and related activities, the demand for services exceeds the number of
7
9
trained control engineers that can provide these services. AspenTech's IMS, APC
and optimization services business, composed of approximately 330 people, which
AspenTech believes is the largest group of control engineers in the world,
represents a critical resource in its efforts to penetrate the on-line market.
The Company's services personnel are also available to support and maintain its
off-line software products.
MARKETING AND SALES
AspenTech employs a direct sales force located in key geographic
centers where there are high concentrations of potential business. The Company's
sales approach is designed to provide complete solutions to its customers.
AspenTech's worldwide sales organization is focused by customer account, with an
overall relationship executive responsible for coordinating with regional
account managers and sales engineers. In addition, each sales team includes
participants from the business development group who are responsible for
determining the scope and price of the product or service being offered.
AspenTech believes that its seasoned direct sales force, as well as its ability
to sell at senior levels within customer organizations, are important
competitive distinctions. AspenTech uses sales agents to leverage its direct
sales force and provide local coverage and first-line support in areas of lower
customer concentration. The Company also supplements its direct sales efforts
with a variety of marketing initiatives, including user groups and a triennial
conference, AspenWorld.
AspenTech devotes substantial resources to increasing the penetration
of its products within existing customers. AspenTech has developed global
technology partnerships with a select group of customers that use modeling
extensively, whereby they meet on a regular basis with AspenTech's senior
technical and managerial staffs to help shape technical direction.
AspenTech licenses its software products at a substantial discount to
universities that agree to use such products in teaching and research, in order
to stimulate future demand once the students enter the workplace. Currently,
more than 520 universities use its software products in undergraduate
instruction.
COMPETITION
The Company's software products and services compete with software
tools that are internally developed by companies in the process industries and
with certain modeling, planning and scheduling, IMS, APC and optimization
software products and services that are sold by a number of commercial
suppliers. Increasingly, companies in the process industries are recognizing
that it is inefficient and uneconomical for them to continue to develop and
support this software, and many of them are now deploying commercial software
products alongside their internally developed tools.
AspenTech's primary commercial competitors in the process modeling
software and services market are Simulation Sciences Inc., Hyprotech, Ltd. (a
subsidiary of AEA Technology plc), and Chemstations, Inc. In the planning and
scheduling market, the Company competes with Bonner and Moore Associates, Inc.
Haverly Systems, Inc. Chesapeake Decision Science, Inc., and Ernst & Young
Wright Killen. In the IMS market, AspenTech primarily competes with Oil Systems
Inc. and Biles and Associates (which entered into an agreement to be acquired by
Simulation Sciences, Inc. in August 1997) and, to a lesser extent, with
distributed control system vendors such as Honeywell Inc. In the APC and
optimization markets, AspenTech competes with the Industrial Automation and
Control business unit of Honeywell Inc., which primarily sells distributed
control system hardware, as well as with Pavilion Technologies, Inc. and the
Simcon division of ABB Asea Brown Boveri (Holding) Ltd. Several smaller
competitors, including Treiber Control, focus exclusively on the APC market.
Emergence of a new competitor or the consolidation of existing competitors could
adversely affect the Company's business, operating results and financial
condition. Certain competitors also supply related hardware products to existing
and potential customers of AspenTech, and may have established relationships
that afford the competitors an advantage in supplying software and services to
those customers.
AspenTech believes that it competes favorably by offering the
broadest range of integrated off-line and on-line modeling software and
services, and that its size, technology and industry expertise will continue to
provide it with a marketplace advantage over companies that are niche suppliers
focused on a single element of the solution or companies that primarily sell
hardware. The Company's continued success depends on its ability to compete
effectively with its commercial competitors and to persuade prospective
customers to use the Company's products and services instead of, or in addition
to, software developed internally or services provided by their own personnel.
In light of these factors, there is no assurance that the Company will be able
to maintain its competitive position. See "Item 1a. Risk Factors --
Competition."
PRODUCT DEVELOPMENT
AspenTech's most important product development objective is to build
upon the technical leadership of its software products both individually and as
an integrated solution. Product development activities focus on adding new
chemical engineering analysis and plant operations capabilities, developing new
ease-of-use features and enhancing the user interface, taking advantage of new
hardware capabilities and major new software industry developments, more tightly
integrating AspenTech's family of software products and integrating those
software products with other tools. AspenTech has focused significant efforts on
the development of Windows 95
8
10
and Windows NT versions of all of its software products and continues to focus
on the continued integration of its family of software products, including
products acquired through past acquisitions.
AspenTech's approach to Windows is based on a client-server
architecture. AspenTech is developing Windows 95 and Windows NT clients for all
of its core software products not already Windows 95 or Windows NT compatible,
with simulation and database servers running on Windows NT, UNIX and DEC VMS.
The objective of the Windows development is to capitalize on Windows
interoperability and customization capabilities, as well as to provide highly
intuitive graphical user interfaces. A native Windows development environment is
used to ensure full support of all Windows features and object linking and
embedding (OLE) architecture. See "Item 1a. Risk Factors -- Migration to
Microsoft Windows; Emergence of Other Standards."
AspenTech has integrated overlapping products in each business area
by combining the best components from these products under a Windows graphical
user interface. AspenTech is continuing to work on the development of an open,
distributed object component architecture for all AspenTech products, with the
products sharing common components and allowing incorporation of customer or
third-party components. A central Software Engineering and Architecture
department has facilitated and coordinated component development.
AspenTech continues to invest in maintaining its technology
leadership through development and enhancement of existing products and
development of new products. The Company has successfully integrated closely
related products such as ASPEN PLUS and SPEEDUP, as well as products from
different divisions such as DMCplus and InfoPlus.21. Release 10 of ASPEN PLUS,
which includes Windows NT capability, is scheduled for release by the end of the
first calendar quarter of 1998 to be followed by Release 11, an
equation-oriented version of ASPEN PLUS, which does not yet have a scheduled
release date. In addition, the Company has completed integration of RT-OPT with
[DMO], AspenTech's dynamic matrix optimization software acquired with the
acquisition DMCC. The Company is also focusing certain resources on the
production of a complete, integrated solution between certain enterprise
resource planning ("ERP") products such as SAP's R/3 and distributed control
systems. Finally, the Company has also established a year 2000 compliance
program to test and, if necessary, modify software to enable it to handle the
date change on and after the year 2000. There can be no assurance that AspenTech
will be successful in enhancing and integrating these software products or that
it will release scheduled releases on time or that a full integrated product
offering will result in the benefits anticipated. See "Item 1a. Risk Factors -
Product Development and Technological Change" and "Migration to Microsoft
Windows; Emergence of Other Standards."
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a
combination of copyright, patent, trademark and trade secret laws, license and
confidentiality agreements, and software security measures to protect its
proprietary rights. AspenTech has United States patents for the expert guidance
system in its proprietary graphical user interface, simulation and optimization
methods in its optimization software, a process flow diagram generator in its
planning and scheduling software, and a process simulation apparatus in its
polymers software. The Company has registered or applied to register certain of
its significant trademarks in the United States and in certain other countries.
The Company generally enters into non-disclosure agreements with its
employees and customers, and historically has restricted access to its software
products' source codes, which it regards as proprietary information. In a few
cases, the Company has provided copies of the source code for certain products
to customers solely for the purpose of special customization of the products and
has deposited copies of the source code for certain products in third-party
escrow accounts as security for on-going service and license obligations. In
these cases, the Company relies on nondisclosure and other contractual
provisions to protect its proprietary rights.
AspenTech distributes its products under non-exclusive and typically
nontransferable license agreements that grant customers the right to use
AspenTech's products, typically for a term of either three or five years in the
case of modeling software products, five and twenty-five years for planning and
scheduling software, or for a term of 99 years in the case of IMS, APC and
optimization software products. The license agreements contain various
provisions that protect AspenTech's ownership of the products and the
confidentiality of the underlying technology.
The laws of certain countries in which the Company's products are
distributed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States. The laws of many
countries in which the Company licenses its products protect trademarks solely
on the basis of registration. The Company currently possesses a limited number
of trademark registrations in certain foreign jurisdictions and does not
possess, and has not applied for, any foreign copyright or patent registrations.
The Company derived more than 50% in fiscal 1995, approximately 45% in fiscal
1996, and more than 50% in fiscal 1997 of its total revenues from customers
outside the United States.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the business, results of
operations and financial condition of the Company. The Company
9
11
could incur substantial costs in protecting and enforcing its intellectual
property rights. Moreover, from time to time third parties may assert patent,
trademark, copyright and other intellectual property rights to technologies that
are important to the Company. In such an event, the Company may be required to
incur significant costs in litigating a resolution to the asserted claims. There
can be no assurance that such a resolution would not require that the Company
pay damages or obtain a license of a third party's proprietary rights in order
to continue licensing its products as currently offered or, if such a license is
required, that it will be available on terms acceptable to the Company.
AspenTech believes that, due to the rapid pace of innovation within
the industry, factors such as the technological and creative expertise of its
personnel, the quality of its products, the quality of its technical support and
training courses, and the frequency of software product enhancements are more
important to establishing and maintaining a technology leadership position
within the industry than the various legal protections for its software products
and technology. See "Item 1a. Risk Factors- Dependence on Proprietary
Technology."
EMPLOYEES
As of June 30, 1997, AspenTech had a total of 1,239 full-time
employees. None of AspenTech's employees is represented by a labor union.
AspenTech has experienced no work stoppages and believes that its employee
relations are good.
While the Company has substantially expanded the breadth and depth of
its management team in recent years, AspenTech's future success depends to a
significant extent on the continued service of Lawrence B. Evans, the Company's
chief executive officer, its other executive officers and certain technical,
managerial and marketing personnel. The Company believes that its future success
will also depend on its continuing ability to attract and retain highly skilled
technical, managerial and marketing personnel. Competition for such personnel is
intense and there can be no assurance that AspenTech can retain its key
employees or that it can attract, assimilate or retain other highly qualified
technical and commercial personnel in the future. To date, six of the original
eight founders of AspenTech are still employed by AspenTech and are active in
its management. See "Item 1a. Risk Factors - Dependence on Key Personnel".
ITEM 1A. RISK FACTORS
Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
the results contemplated in the forward-looking statements as a result of a
number of factors, including the risk factors set forth below.
Dependence Upon Increased Market Penetration. Increased use in the
process industries, particularly the chemicals and petroleum industries, of
software and services for the analysis, design and automation of process
manufacturing plants in general and of the Company's software products and
services in particular is critical to the Company's future growth. The Company
believes that a number of factors will determine its ability to achieve
increased market penetration. These factors include product performance,
accuracy of results, ease of implementation and use, breadth and integration of
product offerings, reliability and scope of applications. Failure of the Company
to achieve increased market penetration in the process industries would
substantially restrict the future growth of the Company and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 1. Business -- The AspenTech Advantage" and "--
Strategy."
Fluctuations in Quarterly Operating Results. The Company's operating
results have fluctuated in the past and may fluctuate significantly in the
future as a result of a variety of factors, including purchasing patterns,
timing of new products and enhancements by the Company and its competitors, and
fluctuating foreign economic conditions. In addition, the Company ships software
products within a short period after receipt of an order and typically does not
have a material backlog of unfilled orders of software products. Therefore,
revenues from software licenses in any quarter are substantially dependent on
orders booked in that quarter. Historically, a majority of each quarter's
revenues from software licenses has come from license contracts that have been
effected in the final weeks of that quarter. The revenues for a quarter
typically include a number of large orders. If the timing of any of these orders
is delayed, it could result in a substantial reduction in revenues for that
quarter. Since the Company's expense levels are based in part on its
expectations as to future revenues, the Company may be unable to adjust spending
in a timely manner to compensate for any revenue shortfall and any revenue
shortfalls would likely have a disproportionate adverse effect on net income.
Prior to fiscal 1996, the Company experienced a net loss for the first quarter
of each fiscal year, in part because a substantial portion of the Company's
revenues is derived from countries other than the United States where business
is slow during the summer months and also in part because of the timing of
renewals of software licenses. The Company expects that these factors will
continue to affect its operating results and that the Company may experience net
losses in the initial quarter of future fiscal years. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results."
10
12
Concentration of Revenues in the Chemicals and Petroleum Industries.
The Company derives a significant portion of its revenues from companies in the
chemicals and petroleum industries. Accordingly, the Company's future success is
dependent upon the continued demand for modeling software by companies in the
chemicals industry and for planning and scheduling, IMS, APC and optimization
software and services by companies in the chemical and petroleum industries. The
chemical and petroleum industries are highly cyclical. The Company believes that
economic downturns in the United States, Europe, Japan, Asia and South America
and pricing pressures experienced by chemical and petroleum companies in
connection with cost-containment measures have led to delays and reductions in
certain capital and operating expenditures by many of such companies worldwide.
The Company's revenues have in the past been, and may in the future be, subject
to substantial period-to-period fluctuations as a consequence of such industry
patterns, as well as general domestic and foreign economic conditions and other
factors affecting spending by companies in the Company's target process
industries. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
Product Development and Technological Change. The market for software
and services for the analysis, design and automation of process manufacturing
plants is characterized by continual change and improvement in computer hardware
and software technology. The Company's future success will depend on its ability
to enhance its current software products and services, to introduce new software
products and services that keep pace with technological developments, and to
continue to address the changing needs of its customers. There can be no
assurance that the Company will be successful in developing and marketing new
and enhanced products and services, or that its products and services will
continue to address adequately the needs of the marketplace. Like many other
software products, the Company's products have on occasion contained undetected
errors or "bugs." In addition, because new releases of the Company's products
are initially installed only by a small number of customers, any errors or
"bugs" in those new releases may not be detected for a number of months after
the delivery of the software. If the Company's products do not perform
substantially as expected or are not accepted in the marketplace, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Item 1. Business -- Product Development."
Dependence on Key Personnel. The Company's future success depends to
a significant extent on Lawrence B. Evans, the Company's chief executive
officer, its other executive officers, and certain key technical, managerial and
marketing personnel. The loss of the services of any of these individuals or
groups of individuals could have a material adverse effect on the Company's
business, operating results and financial condition. None of the Company's
executive officers has entered into an employment agreement with the Company,
and the Company does not have, and is not contemplating securing, any
significant amount of key-man life insurance on any of its executive officers or
other key employees. The Company believes that its future success also will
depend significantly upon its ability to attract, motivate and retain additional
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining the personnel it requires to continue
to grow and operate profitably. See "Item 1. Business -- Employees."
Product Liability. The sale and implementation of on-line
applications by the Company may entail the risk of product liability claims. The
Company's APC and optimization software products and services are used in the
design, operation and management of manufacturing processes at large facilities,
and any failure by the software at those facilities could result in significant
claims for damages or for violations of environmental, safety and other laws and
regulations. The Company's agreements with its customers generally contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of federal, state or local laws or ordinances or unfavorable judicial
decisions. A successful product liability claim against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Migration to Microsoft Windows; Emergence of Other Standards.
AspenTech believes that operating systems such as to Microsoft Windows, due to
their interoperability and customization capabilities, are increasingly the
preferred choice of certain of its customers. AspenTech has developed Windows 95
versions of its software products and Windows NT versions of most of its core
products. It has developed a Windows NT version of ASPEN PLUS which is in test
stages and is developing a Windows NT version of RT-OPT. There can be no
assurance of customer acceptance of Windows versions of all products, or that
they will be competitive with offerings form the Company's competition. Although
the Company does not believe that there are currently other operating platforms
which are in demand by customers, there can be no assurance that customers will
not migrate to or require compatibility with other systems such as Java(TM). The
Company is also aware of customer concerns that its products be able to handle
the date change on and after the year 2000 and has established a compliance
program to test and, if necessary, modify new versions of its products. Any such
failure or delay in developing and releasing new operating systems versions or
testing and/or modifying its software to be year 2000 compliant could affect the
Company's competitive position or lead to product obsolescence in the future.
See "Item 1. Business -- Product Development" and "-- Competition."
Dependence on Proprietary Technology. The Company regards its
software as proprietary and relies on a combination of copyright, patent,
trademark and trade secret laws, license and confidentiality agreements, and
software security measures to protect its proprietary rights. AspenTech has
United States patents for the expert guidance system in its proprietary
graphical user interface, simulation and optimization methods in its
optimization software, a process flow diagram generator in its planning and
scheduling
11
13
software, and a process simulation apparatus in its polymers software. The
Company has registered or applied to register certain of its significant
trademarks in the United States and certain other countries. The Company
generally enters into non-disclosure agreements with its employees and
customers, and historically has restricted access to its software products'
source codes, which it regards as proprietary information. In a few cases, the
Company has provided copies of the source code for certain products to customers
solely for the purpose of special customization of the products and has
deposited copies of the source code for certain products in third-party escrow
accounts as security for on-going service and license obligations. In these
cases, the Company relies on nondisclosure and other contractual provisions to
protect its proprietary rights.
The laws of certain countries in which the Company's products are
distributed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States. The laws of many
countries in which the Company licenses its products protect trademarks solely
on the basis of registration. The Company currently possesses a limited number
of trademark registrations in certain foreign jurisdictions and does not possess
any foreign copyright or patent registrations. The Company derived more than 50%
in fiscal 1995, approximately 45% in fiscal 1996, and more than 50% in fiscal
1997 of its revenues from customers outside the United States.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the business, results of
operations and financial condition of the Company. The Company could incur
substantial costs in protecting and enforcing its intellectual property rights.
Moreover, from time to time third parties may assert patent, trademark,
copyright and other intellectual property rights to technologies that are
important to the Company. In such an event, the Company may be required to incur
significant costs in litigating a resolution to the asserted claims. There can
be no assurance that such a resolution would not require that the Company pay
damages or obtain a license of a third party's proprietary rights in order to
continue licensing its products as currently offered or, if such a license is
required, that it will be available on terms acceptable to the Company. See
"Item 1. Business -- Proprietary Rights."
Competition. The Company's software products compete with software
tools that are internally developed by companies in the process industries and
with certain process modeling, planning and scheduling, IMS, APC and
optimization software products that are sold by a number of commercial
suppliers. AspenTech's primary commercial competitors in the process modeling
software market are Simulation Sciences, Inc., Hyprotech, Ltd. (a subsidiary of
AEA Technology plc) and Chemstations, Inc. In the planning and scheduling
market, the Company competes with Bonner and Moore Associates, Inc., Haverly
Systems, Inc., Chesapeake Decision Science, Inc., and Ernst & Young Wright
Killen. In the IMS market, AspenTech primarily competes with Oil Systems Inc.
and Biles and Associates (which entered into an agreement to be acquired by
Simulation Sciences, Inc. in August 1997.) and, to a lesser extent, with
distributed control system vendors such as Honeywell Inc. In the APC and
optimization markets, AspenTech competes with the Industrial Automation and
Control business unit of Honeywell Inc., which primarily sell distributed
control system hardware, as well as with Pavilion Technologies, Inc. and the
Simcon division of ABB Asea Brown Boveri (Holding) Ltd. Several smaller
competitors, including Treiber Control, focus exclusively on the APC market.
There has also been a number of acquisitions and consolidations which expand the
breadth of product and service offerings by certain of these competitors
including the acquisition of both Interplant Consulting, Inc., a provider of
real-time database applications, and Measurex Corporation, a provider of control
systems in the pulp and paper industry, by Honeywell, Inc.; Hyprotech, Ltd. by
AEA Technologies plc; and Visual Solutions, Inc., a provider of simulation
software and services, the on-line technology division of Raytheon Engineers
Contractors, Inc. and Biles & Associates, a provider of information management
and control solutions, by Simulation Sciences, Inc. Emergence of a new
competitor or the consolidation of existing competitors could adversely affect
the Company's business, operating results and financial condition. Certain
competitors also supply related hardware products to existing and potential
customers of AspenTech, and may have established relationships that afford the
competitors an advantage in supplying software and services to those customers.
The Company's continued success depends on its ability to compete effectively
with its commercial competitors and to persuade prospective customers to use the
Company's products and services instead of, or in addition to, software
developed internally or services provided by their own personnel. In light of
these factors, there is no assurance that the Company will be able to maintain
its competitive position. See "Item 1. Business -- Competition."
Management of Growth. Since fiscal 1990, the Company has experienced
substantial growth in the number of its employees, the scope of its operating
and financial systems, and the geographic area of its operations. The Company's
operations have expanded significantly through both internally generated growth
and acquisitions, particularly the acquisitions of DMCC and Setpoint in the
third quarter of fiscal 1996. This growth has resulted in an increase in the
level of responsibility for management personnel. To manage its growth
effectively, the Company must continue to implement and improve its operating
and financial systems, and to retain and increase its employee base. There can
be no assurance that the management systems currently in place will be adequate
or that the Company will be able to manage the Company's recent or future growth
successfully, and any failure to do so could have material adverse effect on the
Company's business, operating results and financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
12
14
International Operations. The Company derived more than 50% in fiscal
1995, approximately 45% in fiscal 1996, and more than 50% in fiscal 1997 of its
revenues from customers outside the United States. The Company anticipates that
revenues from customers outside the United States will continue to account for a
significant portion of its total revenues in the foreseeable future. The
Company's operations outside the United States are subject to certain risks,
including unexpected changes in regulatory requirements, exchange rates, tariffs
and other barriers, political and economic instability, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations, difficulties or delays in translating products and
product documentation into foreign languages, and potentially adverse tax
consequences. There can be no assurance that any of these factors will not have
a material adverse effect on the Company's business, operating results and
financial condition.
The impact of future exchange rate fluctuations on the Company's
financial condition and results of operations cannot be accurately predicted. In
recent years, the Company has increased the extent to which it denominates
arrangements with customers outside the United States in the currencies of the
country in which the software or services are provided. From time to time the
Company has engaged in, and may continue to engage in, hedges of a significant
portion of installment contracts denominated in foreign currencies. There can be
no assurance that any hedging policies implemented by the Company will be
successful or that the cost of such hedging techniques will not have a
significant impact on the Company's business, results of operations or financial
condition. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated With Future Acquisitions. To expand its markets, the
Company's business strategy includes growth through additional acquisitions.
Identifying and pursuing acquisition opportunities and integrating acquired
products and businesses requires a significant amount of management time and
skill. There can be no assurance that the Company will be able to identify
suitable acquisition candidates, consummate any acquisition on acceptable terms
or successfully integrate any acquired business into the Company's operations.
There also can be no assurance that any future acquisition will not have an
adverse effect upon the Company's operating results, particularly in the fiscal
quarters immediately following consummation of the acquisition while the
acquired business is being integrated into the Company's operations. As a result
of acquisitions, the Company may encounter unexpected liabilities and
contingencies associated with the acquired businesses. The Company may use
Common Stock or Preferred Stock or may incur additional long-term indebtedness
or a combination thereof for all or a portion of the consideration to be paid in
future acquisitions. The issuance of Common Stock or Preferred Stock in
acquisitions could result in dilution to existing stockholders, while the use of
cash reserves or significant debt financing to fund acquisitions could reduce
the Company's liquidity.
Potential Volatility of Stock Price. The stock market has from time
to time experienced extreme price and volume fluctuations, particularly in the
high technology sector, and those fluctuations have often been unrelated to the
operating performance of particular companies. In addition, factors such as
announcements of technological innovations or new products by the Company or its
competitors, as well as market conditions in the computer software or hardware
industries, may have a significant impact on the market price of the Company's
Common Stock.
Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions; Possible Issuances of Preferred Stock. The Company's Restated
Articles of Organization, its by-laws and certain Massachusetts laws contain
provisions that may discourage acquisition bids for the Company and that may
reduce the temporary fluctuations in the trading price of the Company's Common
Stock which are caused by accumulations of stock, thereby depriving stockholders
of certain opportunities to sell their stock at temporarily higher prices or
receive a premium for their shares as part of an acquisition of the Company.
Preferred Stock may be issued by the Company in the future without stockholder
approval and upon such terms as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding stock
of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
ITEM 2. PROPERTIES
AspenTech's principal offices occupy the entire building
(approximately 110,000 square feet) of office space in Cambridge, Massachusetts,
where its principal offices are located. AspenTech's lease of the premises of
its principal offices expires on September 30, 2002. In addition, AspenTech and
its subsidiaries lease office space in Midlothian, Virginia, Brecksville and
Cincinnati, Ohio; Houston, Texas; Bothell, Washington; Brussels, Belgium;
Calgary, Alberta, Canada; Cambridge and Warrington, England; Hong Kong; Tokyo,
Japan; Best, The Netherlands; Singapore; and other locations of its sales and
customer support offices. AspenTech believes that its existing facilities are
adequate for its needs currently and for the reasonably foreseeable future and
that, if additional space is needed, such space will be available on acceptable
terms.
ITEM 3. LEGAL PROCEEDINGS
AspenTech is not a party to any material litigation.
13
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, and their ages as
of September 26, 1997, are as follows:
NAME AGE POSITION
--------------------------- --- --------------------------------------
Lawrence B. Evans..... 62 Chairman of the Board of Directors
and
Chief Executive Officer
Joseph F. Boston...... 60 President and Director
Gresham T. Brebach, Jr. (2) 56 Director
Douglas R. Brown(2) 43 Director
Joan C. McArdle(1)(2) 45 Director
Alison Ross(1)........ 37 Director
David L. McQuillin 40 Executive Vice President,
Worldwide Sales & Marketing
Mary A. Palermo....... 40 Executive Vice President, Finance
and
Chief Financial Officer
Joel B. Rosen......... 39 Executive Vice President
John Ayala 42 Senior Vice President
Herbert I. Britt...... 52 Senior Vice President,
and
Chief Technical Officer
Michael Catt.......... 45 Senior Vice President
John Derbyshire....... 46 Senior Vice President
Vladimir Mahalec...... 50 Senior Vice President
David Mushin.......... 41 Senior Vice President
Stephen J. Doyle...... 44 Vice President, General Counsel
and
Chief Legal Officer
Lisa Zappala.......... 37 Treasurer
- ----------
(1) Member of Audit Committee of the Board of Directors
(2) Member of Compensation Committee of the Board of Directors
Lawrence B. Evans, the principal founder of the Company, has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since 1984. He also served as Treasurer of the Company from 1984 through
February 1995 and as President from the inception of the Company until 1984. Mr.
Evans was a Professor of Chemical Engineering at Massachusetts Institute of
Technology ("M.I.T.") from 1962 to 1990 and was the principal investigator for
the Advanced System for Process Engineering ("ASPEN") Project at M.I.T., which
extended from 1976 to 1981. Mr. Evans holds a B.S. in Chemical Engineering from
the University of Oklahoma, and an M.S.E. and Ph.D. in Chemical Engineering from
the University of Michigan.
Joseph F. Boston, a founder of the Company, has served as President of
the Company since 1984 and as a director since 1981. Mr. Boston served as both
the Principal Engineer and as an Associate Project Manager from 1977 to 1981 of
the ASPEN Project at M.I.T. Mr. Boston holds a B.S. in Chemical Engineering from
Washington University, and a Ph.D. in Chemical Engineering from Tulane
University.
Gresham T. Brebach, Jr. has served as a director of the Company since
August 1995. Since February 1997, Mr. Brebach has been President and Chief
Executive Office of Nextera Enterprises, L.L.C., a Lexington, Massachusetts
based consulting company. Between January 1995 and February 1997, Mr. Brebach
was Executive Vice President -- Client Services of Renaissance Solutions,
14
16
Inc., a provider of management consulting and client/server systems integration
services. From August 1994 to December 1994, Mr. Brebach operated his own
consulting firm, Brebach and Associates. From April 1993 to August 1994, Mr.
Brebach served as Executive Vice President of Digital Consulting, the management
consulting division of Digital Equipment Corporation. From December 1989 to
April 1993, Mr. Brebach was a Director in the Consumer and Industrial Products
sector of McKinsey & Company, a management consulting firm.
Douglas R. Brown has served as a director of the Company since 1986.
Mr. Brown was appointed the President, Chief Executive Officer and Director of
Advent International Corporation, a venture capital investment firm, in January
1996. Mr. Brown previously served as Chief Investment Officer of Advent
International Corporation since 1994, as well as Senior Vice President and
Managing Director -- Europe since 1990. Mr. Brown holds a B.S. in Chemical
Engineering from M.I.T. and an M.B.A. from the Harvard Graduate School of
Business Administration.
Joan C. McArdle has served as a director of the Company since July
1994. Since 1985 she has been a Vice President of MCRC, a Boston-based
investment company that was a creditor and warrant holder of the Company. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." Ms. McArdle holds an A.B. in
English from Smith College.
Alison Ross has been a director of the Company since February 1996. Ms.
Ross is the President of Smart Finance & Co., an investment banking consulting
firm she founded in January 1995. As described below, Smart Finance & Co.
provides advisory services to the Company from time to time. From September 1992
to January 1995, Ms. Ross was a Principal of Montgomery Securities. From
September 1991 through August 1992, Ms. Ross served as Special Assistant to the
Secretary of the Cabinet in the Executive Office of the President of the United
States, as part of a one-year appointment as a White House Fellow. From 1986 to
August 1991, she was a Vice President of Goldman, Sachs & Co. Ms. Ross holds an
S.B. in Economics and an S.M. in Management from M.I.T.
David L. McQuillin has served as Executive Vice President, Worldwide
Sales & Marketing since June 1997. Prior to joining the Company, Mr. McQuillin
held several positions at Honeywell, Inc. Mr. McQuillin holds a B.S., in Applied
Science from Miami University.
Mary A. Palermo has served as Chief Financial Officer since May 1989.
She joined the Company in November 1987 as Director of Finance, and was promoted
to Vice President in May 1989, to Senior Vice President, Finance in June 1993
and to Executive Vice President, Finance in December 1995. From 1979 to 1982,
Ms. Palermo held several positions at Arthur Andersen LLP. Ms. Palermo holds a
B.S. in Accounting from Boston College and is a C.P.A.
Joel B. Rosen has served as Executive Vice President, since December
1995. He joined the Company as Director of Marketing in August 1988, and was
promoted to Vice President, Marketing in April 1991, to Senior Vice President,
Marketing in June 1993 and to Senior Vice President, Marketing and New
Businesses in July 1994. From 1984 to 1988, Mr. Rosen held several positions at
Bain & Company. Mr. Rosen holds an A.B. in Economics from Harvard College and an
M.B.A. from the Harvard Graduate School of Business Administration.
John S. Ayala has served as Senior Vice President of the Company and
President, Advanced Control and Optimization Division since May 1997. Prior to
its merger with AspenTech in 1996, he served as Vice President, Optimization of
Dynamic Matrix Control Corporation. From 1987 to 1996, he served as Senior Vice
President of Optimization. Mr. Ayala holds B.S. and M.S. degrees in Chemical
Engineering from M.I.T.
Herbert I. Britt, a founder of the Company, has served as Senior Vice
President, Corporate Product Planning and Development since January 1996 and
Chief Technical Officer since April 1997. Since the Company's inception Mr.
Britt has led its product development efforts in various capacities. From 1981
to March 1991, he served as Vice President, Product Development, and from April
1991 to January 1996, he served as Senior Vice President, Product Management.
From 1977 to 1981, he was an Associate Project Manager for the ASPEN Project at
M.I.T. Mr. Britt holds a B.S. and Ph.D. in Chemical Engineering from the
University of Missouri.
Michael L. Catt has served as Senior Vice President, Production
Management Division since 1996. Prior to its merger with AspenTech, 1996, he
served as Vice President, Sales and Marketing of Setpoint, Inc. Mr. Catt holds a
B.S. in Chemical Engineering from Perdue University.
John Derbyshire has served as Senior Vice President, since January
1996. Prior to its merger with AspenTech, he served as Vice President and
General Manager of Software Products Division of Setpoint, Inc. Mr. Derbyshire
holds a B.S. in Chemical Engineering from University of Salford, United Kingdom.
Vladimir Mahalec has served as Senior Vice President, since January
1996. He joined the Company in October 1991 as Vice President and was promoted
to Vice President and General Manager of Optimization in 1994. Mr. Mahalec has
his dipl.Ing from the University of Zagreb Croatia and obtained a Ph.D. from the
University of Houston under a Fullbright Scholarship program.
15
17
David Mushin has served as Senior Vice President and General Manager,
Information Management Division since January 1996. From 1991 to 1996, Mr.
Mushin served as Vice President and General Manager of Plant Operations. Prior
to its merger with AspenTech in 1991, he served as General Manager of Prosys
Technology. Mr. Mushin holds a Masters in Chemical Engineering from the
University of Cambridge, England.
Stephen J. Doyle has served as Vice President, General Counsel and
Chief Legal Officer since September 1996. Prior to joining the Company, Mr.
Doyle was a partner in Mirick, O'Connell, DeMallie & Lougee concentrating in
technology and international business law from 1994 to 1996. From 1986 to 1994,
Mr. Doyle was International Counsel to Prime Computer (renamed Computervision
Corporation) and from 1981 to 1985 was International Attorney for the Bank of
Boston. From 1978 to 1981, Mr. Doyle was an attorney in private practice. Mr.
Doyle holds a B.A. from Georgetown University and J.D. and M.B.A. degrees from
the University of Denver.
Lisa Zappala has served as Treasurer since 1985. She joined the company
in January 1993 as Director of Financial Operations and was promoted to
Treasurer in 1985. From 1981 to 1993, Ms. Zappala held several positions at
Arthur Andersen LLP. Ms. Zappala holds a B.S. in Accounting from Boston College
and is a C.P.A.
The Company's Board of Directors is divided into three classes, with
one class of directors elected each year at the annual meeting of stockholders
for a three-year term of office. All directors of one class hold their positions
until the annual meeting of stockholders at which the terms of the directors in
such class expire and until their respective successors are elected and
qualified. Mr. Evans and Ms. McArdle serve in the class whose terms expire in
1997; and Mr. Boston and Mr. Brebach serve in the class whose terms expire in
1998. Mr. Brown and Ms. Ross serve in the class whose terms expires in 1999.
Executive officers of the Company are elected annually by the Board of Directors
and serve at the discretion of the Board of Directors or until their successors
are duly elected and qualified.
The Company's future success depends to a significant extent on
Lawrence B. Evans, the Company's chief executive officer, its other executive
officers and certain technical, managerial and marketing personnel. The loss of
the services of any of these individuals or group of individuals could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 1a. Risk Factors - Dependence on Key Personnel."
Directors who are not full-time employees of the Company receive an
annual fee of $15,000 for their services, plus $1,500 for each regularly
scheduled meeting attended. Directors also participate in the 1995 Directors
Stock Option Plan.
The Company has adopted its 1995 Employees Stock Purchase Plan (the
"Stock Purchase Plan"), its 1995 Stock Option Plan (the "1995 Plan"), 1995
Directors Stock Option Plan (the "1995 Directors Plan") and 1996 Special Stock
Option Plan ("1996 Special Plan") which provided for the issuance of incentive
stock options and non-qualified options and its 401(k) Plan (the "401(k) Plan").
See Notes 9(c), (d) and (e) and Note 14 of Notes to Consolidated Financial
Statements.
The Board of Directors has appointed an Audit Committee and a
Compensation Committee. The Audit Committee reviews the scope and results of the
annual audit of the Company's consolidated financial statements conducted by the
Company's independent accountants, the scope of other services provided by the
Company's independent accountants, proposed changes in the Company's financial
and accounting standards and principles, and the Company's policies and
procedures with respect to its internal accounting, auditing and financial
controls. The Audit Committee also makes recommendations to the Board of
Directors on the engagement of the independent accountants, as well as other
matters which may come before it or as directed by the Board of Directors. The
Compensation Committee administers the Company's compensation programs,
including the Stock Purchase Plan, the 1995 Plan, the 1995 Directors Plan, the
1996 Special Plan and the 401(k) Plan, and performs such other duties as may
from time to time be determined by the Board of Directors.
16
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since October 26, 1994, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "AZPN." The following table sets forth, for the
periods indicated, the high and low sale prices per share of the Common Stock as
reported on the Nasdaq National Market.
FISCAL 1996 HIGH LOW
- ----------- ---- ---
First Quarter ........ $15.00 $11.75
Second Quarter ....... 18.50 12.375
Third Quarter ........ 21.50 15.75
Fourth Quarter ...... 28.625 21.125
HIGH LOW
---- ---
FISCAL 1997
- -----------
First Quarter ....... $36.375 $20.00
Second Quarter ...... 42.50 29.625
Third Quarter ....... 41.00 25.75
Fourth Quarter ...... 39.625 24.75
As of June 30, 1997, there were 826 holders of record of the Common
Stock. The Company has never declared or paid cash dividends on its capital
stock.
The Company currently intends to retain all of its earnings, if any,
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, under the terms of the Company's bank line of
credit, the Company is prohibited from paying any cash dividends. Any future
determination relating to dividend policy will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of Directors
may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated balance sheet data as of June 30, 1996 and
1997 and the selected consolidated statement of income data for each of the
years ended June 30, 1995, 1996 and 1997 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, included elsewhere in this Form 10-K. The
selected consolidated balance sheet data as of June 30, 1993, 1994 and 1995 and
the selected consolidated statement of income data for the year ended June 30,
1993 have been derived from the Company's Consolidated Financial Statements,
which also have been audited by Arthur Andersen LLP, not included in this Form
10-K. The following selected consolidated financial data are qualified by
reference to the more detailed Consolidated Financial Statements of the Company
and Notes thereto included elsewhere in this Form 10-K, and should be read in
conjunction with such Consolidated Financial Statements and Notes and the
discussion under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
17
19
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues ..................................... $ 33,867 $ 44,975 $ 57,498 $ 103,609 $ 180,299
-------- -------- --------- --------- ---------
Cost of revenues ............................. 8,918 9,641 10,257 26,425 53,240
Selling and marketing ........................ 11,744 18,095 23,233 34,691 53,517
Research and development ..................... 7,268 8,159 11,375 20,208 31,153
General and administrative ................... 4,529 4,460 5,132 9,565 15,933
Charge for in-process research and development -- -- -- 24,421 8,664
Costs related to acquisition ................. -- -- 950 -- --
-------- -------- --------- --------- ---------
32,459 40,355 50,947 115,310 162,507
-------- -------- --------- --------- ---------
Income (loss) from operations ............. 1,408 4,620 6,551 (11,701) 17,792
Foreign currency exchange gain (loss ) ....... 47 (56) 34 (223) (236)
Income (loss) on equity in joint ventures .... -- (39) 22 10 26
Interest income .............................. 2,012 1,789 3,095 3,666 5,323
Interest expense ............................. (532) (529) (561) (1,323) (151)
-------- -------- --------- --------- ---------
Income (loss) from continuing operations
before provision for income taxes ....... 2,935 5,785 9,141 (9,571) 22,754
Provision for income taxes ................... 1,081 2,087 3,725 5,614 9,599
-------- -------- --------- --------- ---------
Income (loss) from continuing operations ..... 1,854 3,698 5,416 (15,185) 13,155
Discontinued operations:
Income (loss) from operations ............. (40) -- -- -- --
Loss on disposal .......................... (532) -- -- -- --
-------- -------- --------- --------- ---------
Net income (loss) ............................ $ 1,282 $ 3,698 $ 5,416 $ (15,185) $ 13,155
======== ======== ========= ========= =========
Net income (loss) per common and
common equivalent share (1)(2):
Continuing operations ........................ $ 0.14 $ 0.28 $ 0.35 $ (0.96) $ 0.63
======== ======== ========= ========= =========
Net income (loss) ............................ $ 0.10 $ 0.28 $ 0.35 $ (0.96) $ 0.63
======== ======== ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding(1) .... 12,938 13,090 15,562 15,857 20,967
======== ======== ========= ========= =========
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(In thousands)
BALANCE SHEET DATA:
Working capital ............................. $ 6,123 $ 7,774 $27,594 $ 68,917 $ 71,011
Total assets ................................ 32,764 42,009 75,697 160,167 192,264
Long-term debt and capital lease obligations,
less current portion ...................... 2,251 2,576 4,087 706 462
Total stockholders' equity .................. 13,402 17,156 41,789 99,835 131,441
- --------------------------
(1) Computed as described in Note 2(i) of Notes to Consolidated Financial
Statements.
(2) The Company has never declared or paid cash dividends on its capital
stock.
18
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its founding in 1981, the Company has developed and marketed
software and services to the process industries. The Company's revenues have
grown each year since 1983, when the Company introduced the commercial version
of its ASPEN PLUS modeling software product. In addition to internally generated
growth, the Company has completed a number of acquisitions during the past three
fiscal years. In the fourth quarter of fiscal 1995, AspenTech acquired ISI, a
leading supplier of IMS software. In the third quarter of fiscal 1996, the
Company acquired DMCC and Setpoint, gaining additional expertise in IMS, APC,
and optimization software and services. In the second quarter of fiscal 1997,
AspenTech acquired four additional companies, B-Jac International, the process
control division of Cambridge Control Limited, the planning and scheduling
software division of Bechtel Corporation and Basil Joffe Associates, Inc.
gaining additional modeling, APC, planning, and scheduling expertise. The ISI
and B-Jac International acquisitions were accounted for as pooling of interest
transactions. The Company's financial statements, due to the immateriality of
the B-Jac acquisition, have been restated for ISI only. The remaining
acquisitions were accounted for as purchase transactions; therefore, only
the portion of their results of operations subsequent to the acquisition dates
is included in the Company's operating results. As a result, comparisons of
results for the years ended June 30, 1997, 1996, and 1995 are not meaningful.
The Company typically licenses its modeling software products to
customers for terms of either three or five years, planning and scheduling
software for five or twenty-five years, and its IMS, APC and optimization
software products for terms of 99 years. See "Item 1. Business -- Products and
Services." Because in all cases the licenses are noncancelable and do not impose
significant obligations on the Company, the Company recognizes software license
revenues upon shipment in accordance with generally accepted accounting
principles. In the case of license renewals, revenue is recognized upon
execution of a renewal license agreement. The Company recognizes revenues from
customer support ratably over the term of the license. If a customer elects to
pay for a license in annual installments, the Company charges an implicit amount
of interest and recognizes interest income over the term of the license. A
substantial majority of the Company's term licenses have been renewed upon
expiration. However, there can be no assurance that customers will continue to
renew expiring term licenses at the historical rate.
The Company's revenues historically have been derived principally from
the licensing of software products. Since the acquisitions of DMCC and Setpoint,
the Company has generated a significantly greater amount of consulting revenues
from services for the implementation of its off-the-shelf software products. The
Company recognizes service revenues as services are performed. Service revenues
from fixed-price contracts are recognized on the percentage-of-completion
method, measured by the portion of costs incurred to date as a percentage of the
estimated total (primarily labor) costs for each contract. Service revenues from
time and expense contracts are recognized as the related services are performed.
Training revenues are recognized as services are performed. Services that have
been performed but for which billings have not been made are recorded as
unbilled receivables, and billings for which services have not been performed
are recorded as unearned revenues on the Company's Consolidated Balance Sheets.
The Company licenses its software in U.S. dollars and certain foreign
currencies. The Company hedges all material foreign currency-denominated
receivables with specific hedge contracts in amounts equal to those receivables.
While the Company has experienced minor foreign currency exchange gains or
losses due to foreign exchange rate fluctuations, the impact of such movements
has not been material in any period. The Company does not expect fluctuations in
foreign currencies to have a significant impact on either its revenues or
expenses in the foreseeable future.
The Company's operating costs include the amortization of intangible
assets, including goodwill, arising from the acquisitions of DMCC, Setpoint, the
Process Control Division of Cambridge Control Limited, Bechtel Corporation PIMS
and Basil Joffe Associates, Inc. The net balance of these intangible assets as
of June 30, 1997 is approximately $12.8 million and is being amortized over
periods ranging from 18 months to 12 years. The amortization was approximately
$2,528,000 in fiscal 1997 and will be approximately $564,000 for each of the
next fourteen quarters.
On August 27, 1997 and August 28, 1997 the Company acquired 100% of
the outstanding shares of NeuralWare, Inc. (NeuralWare) and the SAST
Corporation Limited (SAST), both accounted for as pooling-of-interests.
NeuralWare is a provider of neural net technology and SAST is a provider of
dynamic simulation and operator training services. Since the transactions
occurred after the end of the 1997 fiscal year, they had no affect on
operations. See footnote 3(g) "Acquisitions Subsequent to Year End" to "Notes
to Consolidated Financial Statements".
19
21
RESULTS OF OPERATIONS
The following table sets forth the amount and percentage of total
revenues represented by certain consolidated statement of income data for the
periods indicated:
Year Ended June 30,
------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- ---------------------
(Dollars in thousands)
Revenues:
Software licenses ................................. $ 45,649 79.4% $ 65,644 63.4% $ 97,240 53.9%
Maintenance and other services .................. 11,849 20.6 37,965 36.6 83,059 46.1
-------- ---- -------- ---- ------- ----
57,498 100.0 103,609 100.0 180,299 100.0
-------- ---- -------- ---- ------- ----
Expenses:
Cost of software licenses ....................... 2,799 4.9 3,476 3.4 4,538 2.5
Cost of services and other ...................... 7,458 13.0 22,949 22.1 48,702 27.0
Selling and marketing ........................... 23,233 40.4 34,691 33.5 53,517 29.7
Research and development ........................ 11,375 19.8 20,208 19.5 31,153 17.3
General and administrative ...................... 5,132 8.9 9,565 9.2 15,933 8.8
Charge for in-process research
and development ................................. -- -- 24,421 23.6 8,664 4.8
Costs related to acquisition .................... 950 1.6 -- -- -- --
-------- ---- -------- ---- ------- ----
50,947 88.6 115,310 111.3 162,507 90.1
-------- ---- -------- ---- ------- ----
Income (loss) from operations ... 6,551 11.4 (11,701) (11.3) 17,792 9.9
Foreign currency exchange gain (loss) ............. 34 0.1 (223) (0.3) (236) (0.1)
Income on equity in joint ventures ............... 22 -- 10 -- 26 --
Interest income ................................... 3,095 5.4 3,666 3.5 5,323 2.9
Interest expense .................................. (561) (1.0) (1,323) (1.2) (151) (0.1)
-------- ---- -------- ---- ------- ----
Income (loss) before provision for income taxes 9,141 15.9 (9,571) (9.3) 22,754 12.6
Provision for income taxes ........................ 3,725 6.5 5,614 5.4 9,599 5.3
-------- ---- -------- ---- ------- ----
Net income (loss) ............... $ 5,416 9.4% ($ 15,185) (14.7%) $13,155 7.3%
======== ==== ======== ==== ======= ====
20
22
COMPARISON OF FISCAL 1997 TO FISCAL 1996
The Company acquired DMCC and Setpoint in the third quarter of fiscal
1996 and have subsequently taken steps to integrate and reorganize the
operations. The operations of DMCC and Setpoint at the time of acquisition were
roughly the same size as AspenTech. As a result, the Company's operations for
fiscal 1997 and fiscal 1996 are not directly comparable. In addition the Company
acquired and subsequently integrated four companies in the second quarter of
fiscal 1997: B-Jac International, the Process Control Division of Cambridge
Controls Limited, the planning and scheduling software group of Bechtel
Corporation (PIMS), and Basil Joffe and Associates, Inc. The operations of all
these acquisitions individually and combined is immaterial to the Company's
historical statements.
Revenues. Revenues are derived from software licenses and services.
Total revenues for fiscal 1997 increased 74.0% to $180.3 million from $103.6 in
fiscal 1996.
Software license revenues represented 53.9% and 63.4% of total revenues
in fiscal 1997 and 1996, respectively. Revenues from software licenses in fiscal
1997 increased 48.1% to $97.2 million from $65.6 million in fiscal 1996. The
growth in software license revenues was attributable both to internal growth in
existing operations and to additional licenses entered into by the acquired
subsidiaries. The internal growth in software license revenues was attributable
to renewals of software licenses covering existing users, the expansion of
existing customer relationships through licenses covering additional users and
additional software products, and, to a lesser extent, the addition of new
customers. The decrease in software license as a percentage of total revenues
was attributable to the growth of service revenues resulting from the Company's
acquisitions of DMCC and Setpoint.
Total revenues from customers outside the United States were $94.3
million or 52.3% of total revenues and $47.1 million, or 45.4% of total revenues
for fiscal 1997 and 1996, respectively.
Revenues from services and other consist of consulting services,
post-contract support on software licenses, training and sales of documentation.
Since the acquisitions of DMCC and Setpoint, the Company has generated a
significantly greater amount of consulting services for the analysis, design and
automation of process manufacturing plants. As a result of the acquisitions and
the subsequent expansion of the combined services execution capability, revenues
from services and other for fiscal 1997 increased 118.8% to $83.1 million from
$38.0 million in fiscal 1996.
Neither the Company's joint venture and similar activities, nor any
discounting or similar activities has historically had a material effect on the
Company's revenues.
Cost of Software Licenses. Cost of software licenses consists of
royalties, amortization of previously capitalized software costs, costs related
to delivery of software (including disk duplication and third party software
costs), printing of manuals and packaging. Cost of software licenses for fiscal
1997 increased 30.6% to $4.5 million from $3.5 million in fiscal 1996. Cost of
software licenses as a percentage of revenues from software licenses decreased
to 4.7% in fiscal 1997 from 5.3% in fiscal 1996. This decrease was due to the
spreading of fixed production and delivery costs over a larger revenue base and
to the generation of a greater portion of sales having minimal third-party
royalty costs.
Cost of Services and Other. Cost of services and other consists of the
cost of execution of application consulting services, technical support
services, the cost of training services and the cost of manuals sold separately.
Cost of services and other in fiscal 1997 increased 112.2% to $48.7 million from
$22.9 million in fiscal 1996. Cost of services and other as a percentage of
revenues from services and other decreased to 58.6% in fiscal 1997 from 60.4% in
fiscal 1996. The percentage decrease reflected not only a change in mix of
services provided by the Company but improvement in the efficiency of project
execution.
Selling and Marketing. Selling and marketing expenses in fiscal 1997
increased 54.3% to $53.5 million from $34.7 million in fiscal 1996 while
decreasing as a percentage of total revenues to 29.7% from 33.5%. The percentage
decrease in costs reflects the Company's leveraging of its worldwide sales and
technical sales force to market all of the Company's products and services. The
Company continues to invest in sales personnel and regional sales offices to
improve the Company's geographic proximity to its customers, to maximize the
penetration of existing accounts and to add new customers.
Research and Development. Research and development expenses consist
primarily of personnel and outside consultancy costs required to conduct the
Company's product development efforts. Capitalized research and development
costs are amortized over a three-year period. Research and development costs in
fiscal 1997 increased 54.2% to $31.2 million from $20.2 in fiscal 1996 while
decreasing as a percentage of total revenues to 17.3% from 19.5%. The increase
in costs principally reflects investment in a suite of next generation products
from overlapping technology purchased through the series of acquisitions and a
continued investment in the
21
23
Company's core modeling products. The Company capitalized 7.1% and 4.3% of its
total research and development costs during 1997 and 1996 respectively.
General and Administrative. General and administrative expenses consist
primarily of salaries of administrative, executive, financial, and legal
personnel, outside professional fees and amortization of intangibles. General
and administrative expense in fiscal 1997 increased 66.6% to $15.9 million from
$9.6 million in fiscal 1996, and decreased as a percentage of total revenues to
8.8% from 9.2% in fiscal 1996. The decrease is the result of improvement in the
efficiency of the administrative group over an increasing revenue base.
Charge for In-Process Research and Development. In the second quarter
of fiscal 1997, the Company recognized a non-recurring charge of $8.7 million
for the write-off of in-process research and development in connection with the
acquisitions of the Process Control Division of Cambridge Controls, LTD., the
planning and scheduling software group of Bechtel Corporation , and Basil Joffe
and Associates, Inc. The Company recognized a similar charge during the third
quarter of fiscal 1996 of $24.4 million in connection with its acquisition of
DMCC and Setpoint.
Interest Income. Interest income is generated primarily from the sale
of software pursuant to installment contracts for off-line modeling software.
Under these contracts, the Company offers customers the option to make annual
payments for term licenses instead of a single license fee payment at the
beginning of the license term. A substantial majority of the off-line modeling
customers elect to license these products through installment contracts. The
Company believes this election is made principally because the customers prefer
to pay for the Company's off-line modeling products out of their operating
budget, rather than out of their capital budgets. Included in the annual
payments is an implicit interest charge based upon the interest rate established
by the Company at the time of the license. The Company sells a portion of the
installment contracts to unrelated financial institutions. The interest earned
by the Company on the installment contract portfolio in any one year is the
result of the implicit interest established by the Company on installment
contracts and the size of the contract portfolio. Interest income in fiscal 1997
increased 45.2% to $5.3 million from $3.7 million in fiscal 1996. Interest
income increased as a result of investment of the net proceeds of the Company's
public offering completed in June 1996 and a larger installment contract
portfolio.
Interest Expense. Interest expense is generated from interest charged
on the Company's line of credit, subordinated notes payable to the Massachusetts
Capital Resource Company, a promissory note issued in connection with the
Setpoint acquisition, and capital lease obligations. Interest expense in fiscal
1997 decreased to $0.2 million from $ 1.3 million in fiscal 1996. This decrease
reflects the repayment at the end of fiscal 1996 of borrowings under the
Company's line of credit, the subordinated notes and the promissory note issued
in connection with the acquisition of Setpoint.
Provision for Income Taxes. The effective tax rate in fiscal 1997 and
1996 is calculated as a percentage of income before taxes, exclusive of the
non-recurring charges for in-process research and development. The effective tax
rate decreased in fiscal 1997 to 36.0% of pretax income from 37.8% in fiscal
1996. This decrease is primarily due to utilization of various tax credits and
carryforwards.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
The Company acquired DMCC and Setpoint in the third quarter of fiscal
1996 in purchase transactions and has subsequently taken steps to integrate and
reorganize the operations of AspenTech and its new subsidiaries. As a result,
the Company's operating results for fiscal 1996 and fiscal 1995 are not directly
comparable. The results of the Company's operations for fiscal 1996 are not
representative of results of operations of the combined entities for subsequent
periods. For fiscal 19