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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-24786
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ASPEN TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2739697
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
TEN CANAL PARK 02141
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 949-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: Common stock,
$.10 par value 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
As of September 18, 1998, the aggregate market value of Common Stock (the
only outstanding class of common equity of the registrant) held by nonaffiliates
of the registrant was $593,684,059, based on a total of 23,570,583 shares of
Common Stock held by nonaffiliates and on a closing price of $25.1875 for the
Common Stock as reported on the Nasdaq National Market.
As of September 18, 1998, 24,672,008 shares of Common Stock were
outstanding.
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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,
1998. Portions of such proxy statement are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 1A. Risk Factors................................................ 15
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K.................................................... 36
SIGNATURES............................................................ 40
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Unless the context otherwise requires, references in this Form 10-K to
"AspenTech" or the "Company" are to Aspen Technology, Inc. and its subsidiaries.
ASPEN PLUS, ASPENTECH, MIMI, RT-OPT and SPEEDUP are registered trademarks of the
Company, and 1STQUALITY, ASPEN ADVISOR, ASPEN PIMS, BATCH PLUS, CIMVIEW,
CIMWORK, DMCPLUS, DYNAPLUS, INFOPLUS.21, OTISS and PLANTELLIGENCE are trademarks
of the Company.
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This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Readers are cautioned that all forward-looking statements involve
risks and uncertainties, many of which are beyond the control of the Company,
including the factors set forth under "Item. 1A. Risk Factors." Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate and
there can be no assurance that actual results will be the same as those
indicated by the forward-looking statements included in this Form 10-K. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Moreover, the Company assumes no obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
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PART I
ITEM 1. BUSINESS
AspenTech is the leading supplier of software and service solutions used by
companies in the process industries to design, operate and manage their
manufacturing processes. The process industries include manufacturers of
chemicals, petrochemicals, petroleum products, pharmaceuticals, pulp and paper,
electric power, food and beverages, consumer products, and metals and minerals.
AspenTech offers a comprehensive, integrated suite of process manufacturing
optimization solutions that help process manufacturers enhance profitability by
improving efficiency, productivity, capacity utilization, safety and
environmental compliance throughout the entire manufacturing life-cycle, from
research and development to engineering, planning and scheduling, procurement,
production and distribution. In addition to its software solutions, AspenTech
offers systems implementation, advanced process control, real-time optimization
and other consulting services through its staff of 481 project engineers. As
part of its strategy to offer the broadest, most integrated suite of process
manufacturing optimization solutions, AspenTech has acquired businesses from
time to time to obtain technologies and expertise that complement or enhance its
core solutions. AspenTech currently has more than 750 customers worldwide,
including 44 of the 50 largest chemical companies, 17 of the 20 largest
petroleum refiners and 16 of the 20 largest pharmaceutical companies.
INDUSTRY BACKGROUND
Companies in the process industries manufacture products in the form of
bulk solids, liquids and gases by using production methods involving chemical
reactions, combustion, mixing, separation, heating, cooling and similar
processes. The process industries encompass manufacturers of chemicals,
petrochemicals, petroleum products, pharmaceuticals, pulp and paper, electric
power, food and beverages, consumer products, and metals and minerals. Companies
in a number of other industries, such as semiconductor manufacturing, utilize
production techniques with characteristics similar to those underlying process
manufacturing.
In recent years, intensifying global competition and more stringent
environmental and safety regulations have placed increased pressure on the
profitability of companies in the process industries. The profitability of these
companies depends substantially upon the costs of raw materials, energy and
capital; accordingly, the management and utilization of these inputs
significantly affect the companies' financial results. Unlike labor-intensive
businesses, which can materially change the scale of their business operations
by adjusting the sizes of their labor forces, process manufacturers must focus
on improving their production methods in order to increase output, lower costs
and reduce waste. Because of the large volumes typically produced by process
manufacturers, even a relatively small reduction in raw material or energy
requirements or a relatively small improvement in throughput or product yields
can have a dramatic impact on the profitability of the manufacturing process.
Improvement of production methods in the process industries requires a
thorough understanding of chemical engineering analysis, the fundamental
discipline underlying the manufacturing processes. Due to the number of
variables involved, chemical engineering analysis is complex and calculation
intensive. Because of this complexity, many process manufacturers are seeking
technology-based solutions to aid them in their process manufacturing decisions,
with the objective of moving toward optimization of their production processes
under existing process and equipment constraints.
Increasingly sophisticated process manufacturing optimization solutions
have been introduced to assist process manufacturers in optimizing the design,
operation and management of their manufacturing processes. In designing
manufacturing processes, engineers use tools on desktop computers to simulate a
new or existing process and to optimize tradeoffs between variables such as
capital investment and operating costs. During operation of the manufacturing
process, plant operators rely on automation systems installed in the plant to
control and optimize the manufacturing process by, for example, accepting a
lower yield to increase overall throughput. To manage the production process,
plant managers use information systems to perform tasks such as planning and
scheduling of production, analysis and reporting of performance, and yield
accounting. Although early versions of process manufacturing optimization
solutions were limited in scope and compli-
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cated to use, the availability of increasingly powerful, affordable computers
and networks and sophisticated intuitive graphical user interfaces has expanded
the capabilities of the solutions and the market of potential users.
Process manufacturing optimization solutions include applications to
address a broad range of manufacturing activities, including the following:
[DIAGRAM, CONSISTING OF THREE BOXES CONTAINING THE FOLLOWING LANGUAGE, WITH
ARROWS POINTING FROM LEFT TO RIGHT BETWEEN THE BOXES:]
DESIGN OPERATE MANAGE
Process Modeling Advanced Process Control Process Information Management
Design Analysis & Optimization Real-time Optimization Production Scheduling & Planning
Process Improvements Operator Training Quality Assurance
Plant Retrofits Environmental, Health & Safety
Compliance
Many process manufacturers have implemented solutions to automate processes
outside the actual methods of production. For many years, companies in the
process industries have sought to control their production processes by
deploying distributed control systems ("DCS"), which use computer hardware
systems, communication networks and industrial instruments to measure, record
and automatically control process variables during production. More recently,
process manufacturers have automated key business processes through the
implementation of enterprise resource planning ("ERP") solutions that enhance
their ability to manage resources across the enterprise and enable them to
integrate front- and back-office business functions. DCS and ERP solutions
generally do not, however, incorporate the detailed chemical engineering
knowledge of the process required to optimize the operation and management of
the production process.
Process manufacturers are increasingly seeking a complete, integrated
family of process manufacturing optimization software products and services that
can be used to improve their efficiency and productivity throughout the entire
manufacturing life-cycle, while at the same time establishing links with the
process manufacturers' existing DCS and ERP solutions.
THE ASPENTECH ADVANTAGE
AspenTech is the leading supplier of software and service solutions that
enable companies in the process industries to optimize the design, operation and
management of their manufacturing processes. AspenTech's comprehensive suite of
solutions helps process manufacturers enhance profitability by improving
efficiency, productivity, capacity utilization, safety and environmental
compliance throughout the entire manufacturing life-cycle. AspenTech believes
its customers increasingly view their investments in its solutions as strategic
because of the substantial potential economic benefits these solutions offer and
the broad range of production issues they address. The Company's competitive
advantage is based on the following key attributes:
TECHNOLOGY LEADERSHIP. AspenTech believes it is the technology leader
among providers of process manufacturing optimization solutions. The Company has
achieved this technology leadership through internal research and development
and strategic acquisitions and partnerships. For example, the Company obtained
the leading advanced process control and optimization technologies through its
acquisitions of Dynamic Matrix Control Corporation ("DMCC") and Setpoint, Inc.
("Setpoint") in 1996. In 1997, AspenTech introduced Batch Plus, a commercialized
version of recipe-based simulation functionality developed in collaboration with
Merck & Co., Inc. AspenTech has integrated acquired technologies with existing
products in order to offer solutions that include the best features and
functionality of both. Moreover, the Company has designed its software solutions
to operate on all major operating system platforms used by process manufacturers
and to be compatible with all major distributed control systems.
BROADEST SUITE OF INTEGRATED SOLUTIONS. AspenTech believes its solutions
represent the most complete suite of integrated software and services available
for the design, operation and management of manufacturing processes in the
process industries. Process manufacturers are able to use AspenTech's solutions
across every stage of the manufacturing life-cycle, from research and
development to engineering, planning and scheduling,
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procurement, production and distribution. The Company is continuing to integrate
its software products in order to further increase the ability of its customers
to share models and data across different AspenTech software solutions. In
October 1997, AspenTech announced the introduction of Plantelligence, a
framework within which AspenTech has begun to offer integrated solutions
designed to address specific functional problems, such as production planning or
purchasing raw material feedstocks. Plantelligence is being developed to permit,
for example, a buyer for a petroleum refinery to determine how much it will cost
to refine a specific boatload of crude oil under then-current operating
conditions. This information can then be used to help the buyer decide whether
it is economically desirable to purchase that crude oil at then-prevailing
prices. The buyer can perform these analyses using a single graphical user
interface, without needing to understand the individual AspenTech software
solutions used to perform the analysis.
UNPARALLELED PROCESS INDUSTRY EXPERTISE. Over the past 17 years, AspenTech
has established a reputation as a leading source of process manufacturing
optimization expertise. AspenTech's significant base of chemical engineering and
process manufacturing experience and knowledge serves as the foundation for the
proprietary solution methods, physical property models and data estimation
techniques embodied in its software solutions. AspenTech has enhanced its
knowledge and understanding of process manufacturing optimization solutions over
time through extensive interaction with its customers, which have performed
millions of simulations using AspenTech software. These customer relationships
have also enabled AspenTech to identify and develop or acquire solutions that
best meet the needs of its customers. To complement its software expertise,
AspenTech has assembled a staff of 481 project engineers to provide
implementation, advanced process control, real-time optimization and other
consulting services to its customers. AspenTech believes this large engineering
team provides an important source of competitive differentiation.
STRATEGY
AspenTech's principal objective is to extend its leadership in providing
solutions for process manufacturers to optimize the design, operation and
management of their manufacturing processes. AspenTech's strategy to achieve
this objective includes the following key elements:
EXTEND TECHNOLOGY LEADERSHIP POSITION. AspenTech believes that it offers
the most technologically advanced solutions available for the design, operation
and management of manufacturing processes, particularly in the areas of process
simulation, advanced process control, real-time optimization, scheduling and
planning, and process information management. In order to extend the
technological leadership of its individual software solutions, AspenTech intends
to continue to invest in research and development and to identify and pursue
opportunities for strategic acquisitions of complementary technologies and
expertise. The Company believes that additional use of its individual software
solutions in recent years has provided process manufacturers with increased
evidence of the economic benefits that may be obtained from implementation of
those solutions. The Company believes, however, that further integration of the
Company's individual software solutions will provide process manufacturers with
even greater economic benefits. To capitalize on this opportunity, the Company
intends to continue to integrate its individual software solutions and to
further develop Plantelligence.
LEVERAGE INSTALLED CUSTOMER BASE. AspenTech has historically derived a
significant portion of its revenue from additional sales to its existing
customers, which it believes are significantly underpenetrated with respect to
its solutions. AspenTech currently has more than 750 customers worldwide,
including 44 of the 50 largest chemical companies, 17 of the 20 largest
petroleum refiners and 16 of the 20 largest pharmaceutical companies. AspenTech
considers its relationships with its existing customers to be an important
corporate asset. AspenTech believes it has significant opportunities to continue
to derive additional revenue from its existing customers by increasing the
number of users of currently licensed software, licensing additional software
modules and applications, offering consulting services to supplement licensed
software, and cross-selling complementary solutions.
INCREASE PENETRATION ACROSS PROCESS INDUSTRIES. In recent years, AspenTech
has taken advantage of strategic acquisitions and partnership arrangements to
extend its customer base beyond its early leadership in the chemicals industry
to include a significant market share of the petroleum, petrochemicals and
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pharmaceuticals industries. Many companies in other process industries confront
the same imperatives and opportunities that face chemical, petroleum,
petrochemical and pharmaceutical companies. The Company is extending its
customer base to include companies in other process industries, particularly the
pulp and paper, electric power, metals and minerals, and food and beverage
industries, as well companies in the semiconductor industry. In expanding its
presence in a targeted process industry, the Company's approach is to first seek
to establish relationships with a small number of technologically advanced
companies in the industry. The Company then gains expertise in the targeted
process industry through the hiring of a core group of personnel with
significant experience in that industry or through acquisitions or partnering
arrangements. In addition, where necessary, AspenTech refines its solutions
based on feedback from its initial customers in order to address the specific
needs of the industry. AspenTech believes that opportunities to expand the use
of its technology in additional vertical markets are increasing as the benefits
of its solutions are becoming more widely understood by process manufacturers.
PURSUE STRATEGIC ACQUISITIONS. AspenTech intends to continue to seek
strategic acquisitions that will provide it with complementary products and
technologies, as well as with additional engineering personnel to perform
consulting services and software development. Since May 1995, AspenTech has
completed 14 acquisitions that have provided the Company with, or significantly
enhanced, its capabilities in the areas of process information management,
advanced process control and optimization, advanced planning and scheduling, and
supply chain management. The Company believes that its acquisition of Chesapeake
Decision Sciences, Inc. ("Chesapeake") in May 1998 will enable the Company to
offer supply chain management solutions that augment its existing suite of
solutions and will provide the Company with cross-selling opportunities in
additional process industries. See "-- Software and Service
Solutions -- Acquisitions of Software and Service Solutions."
PARTNER WITH COMPLEMENTARY PROCESS INDUSTRY SUPPLIERS. AspenTech believes
that process manufacturers are increasingly seeking process manufacturing
optimization solutions that will be compatible with their existing technologies
and enable them to implement seamless enterprise-wide solutions. In response to
this trend, the Company has completed a certified interface with the SAP R/3 ERP
solution and has also completed interfaces with all major DCS, including those
offered by The Foxboro Company and Honeywell Inc. From time to time, AspenTech
enters into working relationships with other industry vendors, including
companies with which the Company sometimes competes, on a customer-by-customer
basis. AspenTech has entered into partnering agreements with DCS vendors such as
Elsag Bailey, Inc. and Yokagawa Electric Corporation to provide process
manufacturing optimization solutions for their customers, and with a limited
number of consulting and solutions vendors. For example, the Company has
partnered with Intergraph Corporation, a computer-aided design company, to
provide integrated process and plant design solutions. The Company expects to
enter into additional partnering arrangements with providers of complementary
products and services, including process licensors, DCS suppliers, engineering
and construction firms, and industry consulting firms.
SOFTWARE AND SERVICE SOLUTIONS
AspenTech offers a comprehensive suite of software and service solutions
that enable process manufacturers to optimize the design, operation and
management of their manufacturing processes. AspenTech's solutions capture
process knowledge in consistent, accurate and reliable models that customers can
use as the basis for decision-making across the entire manufacturing life-cycle
and provide vital functionality for elements of the manufacturing process that
other software applications, such as ERP and DCS software, do not address.
Certain of AspenTech's software solutions can be linked with ERP solutions and
DCS to improve a customer's ability to gather, analyze and use information
across the entire process manufacturing life-cycle. To enable its customers to
take full advantage of its software solutions, AspenTech also offers
comprehensive expert consulting, training and support services.
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PROCESS DESIGN SOFTWARE SOLUTIONS
AspenTech offers a number of software solutions for the design and analysis
of new and existing manufacturing facilities and processes. The following table
describes the Company's principal process design software solutions and their
applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
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Aspen Plus........................... Rigorous steady-state modeling Used to design processes,
system for simulating evaluate process changes and
chemically-based manufacturing analyze "what-if" scenarios.
processes involving vapors,
liquids, solids and
electrolytes with a library of
equipment and physical
property models.
DynaPlus/SPEEDUP..................... Rigorous modeling system for Used to examine process
simulating processes under operability, safety and
changing (dynamic) conditions control as operating
with a library of equipment parameters fluctuate during
and controller models. plant startup and shutdown and
other transient conditions.
Batch Plus........................... Batch process modeling system Used to scale-up and design
for recipe-based processes. new processes, and to analyze
the production of one batch or
an entire batch plant.
Aspen Zyqad.......................... System for integrating, Used to integrate and automate
automating and managing data, work flow between engineers
applications and activities in designing new process plants
the engineering work process. or improving existing
facilities.
Layered on top of these core, integrated applications are a number of
separately licensed modules that focus on specialized types of analysis for
modeling polymer processes, heat exchanger equipment, separation systems, batch
distillation columns, adsorption processes and other complex systems. All of
these process design software solutions can operate in Windows. Aspen Plus and
SPEEDUP also run on DEC VMS and UNIX.
AspenTech typically licenses its process design software solutions for a
term of three to five years. The annual cost for a single user of one of
AspenTech's process design software solutions ranges from $10,000 to $30,000,
depending on the solution, the license term and the number of licensed users.
The license fee includes a separate maintenance component that covers customer
support, upgrades, revisions and enhancements during the term of the license.
Implementation of AspenTech's process design software solutions does not
typically require substantial consulting services, although services may be
provided for customized model designs and process synthesis.
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PROCESS OPERATION SOFTWARE SOLUTIONS
AspenTech offers several solutions that enable customers to better control
and optimize actual plant operations on a real-time basis. The following table
describes the Company's principal process operation software solutions and their
applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
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Aspen RT-Opt......................... Real-time optimization system. Used to identify plant
adjustments in order to
optimize operations on a
real-time basis.
DMCplus.............................. Advanced process control Used to tightly control actual
system using multi-variable plant operations at multiple
model-predictive control operating constraints.
technology.
OTISS................................ System for developing operator Used to train operators to
training simulators. better manage daily plant
operations and respond to
abnormal situations.
Aspen RT-Opt operates on DEC VMS and UNIX. DMCplus operates on Windows, DEC
VMS and UNIX. OTISS operates on UNIX, Hewlett-Packard and Sun Solaris.
AspenTech typically licenses its process operation software solutions for
terms of 99 years. The list price for a 99-year license of Aspen RT-Opt or
DMCplus generally ranges from $50,000 to $200,000, depending on the solution and
on whether the license covers a single process unit or an entire facility. The
list price for a 99-year license of OTISS is approximately $50,000. Maintenance
of process operation software solutions is available under separate contracts.
Implementation of AspenTech's process operation software solutions
typically requires substantial consulting services.
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PROCESS MANAGEMENT SOFTWARE SOLUTIONS
AspenTech offers a number of solutions for the management of a broad range
of business activities related to manufacturing, from what, how and when to
create products, to raw material procurement, to current plant optimization, to
product distribution. The following table describes AspenTech's principal
process management software solutions and their respective applications:
SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
----------------- ----------------------------------- -----------------------------------
InfoPlus.21........ Process information management Used to compare real-time and
system with a real-time database of historical information generated by
historical information. plant systems to present a unified
view of plant operations.
MIMI............... Supply chain management system, Used to identify best supply chain
including demand management, decisions to maximize asset
inventory control and available-to- utilization, minimize raw material
promise. costs, maximize product values and
control inventories.
Aspen PIMS......... Linear programming-based economic Used to identify short-term and
planning and scheduling system. strategic decisions on feedstock
purchases, capacity utilization and
production planning.
Aspen ADVISOR...... Yield-accounting solution. Used to track inventory and
material movements into, through
and out of processing plants, in
order to enable manufacturers to
report production data accurately
to ERP and other business systems.
1stQuality......... System to address issues in polymer Used to integrate the management,
manufacturing. usage and monitoring of operating
conditions to reduce transition
time, improve product consistency
and monitor process compliance.
All of the Company's process management software solutions can operate in
Windows.
AspenTech typically licenses InfoPlus.21, MIMI, Aspen ADVISOR and
1stQuality for terms of 99 years and typically licenses Aspen PIMS for a term of
5 years or 25 years. The list price for an entry-level 99-year InfoPlus.21
license is approximately $50,000 and varies depending on the number of points of
data being collected. The list price for an entry-level 99-year multi-user site
license for MIMI is approximately $220,000. The list price for a license of
Aspen PIMS modules ranges from $10,000 to $200,000, depending on the solution
and the license term. The list price for an entry-level 99-year Aspen ADVISOR
license ranges from $50,000 to $200,000, depending on the number of nodes, and
the list price for an entry-level 99-year 1stQuality license is approximately
$150,000 per plant.
Implementation of AspenTech's process management software solutions
typically requires consulting services, although not to the same extent as its
process operation software solutions.
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CONSULTING SERVICES
AspenTech offers implementation, advanced process control, real-time
optimization and other consulting services in order to provide its customers
with complete solutions. Although customers frequently can use AspenTech's
process design software solutions without assistance from AspenTech, many of the
projects in which customers deploy AspenTech's process operation software
solutions and process management software solutions are sufficiently complex
that customers require assistance from AspenTech in order to take full advantage
of the benefits of those solutions. Customers that obtain consulting services
from AspenTech typically engage AspenTech to provide such services over periods
of between 1 day and 24 months. AspenTech generally charges customers for
consulting services on a fixed-price basis, but charges customers for certain
services, primarily on-site advanced process control and optimization services,
on a time-and-materials basis.
AspenTech employs a staff of 481 project engineers to provide consulting
services to its customers. AspenTech believes this large team of experienced and
knowledgeable project engineers provides an important source of competitive
differentiation. AspenTech primarily hires as project engineers individuals who
have obtained doctoral or master's degrees in chemical engineering or a related
discipline or who have significant relevant industry experience. AspenTech
employees include experts in fields ranging from thermophysical properties,
distillation, adsorption processes, polymer processes, industrial reactor
modeling, the identification of empirical models for process control or
analysis, large scale optimization, supply distribution systems modeling and
scheduling methods.
Historically, most licensees of AspenTech's planning and scheduling
solutions and a limited number of licensees of process information management
systems have obtained implementation consulting services from third-party
vendors. AspenTech intends to continue to develop relationships with third-party
consultants in order to provide a secondary channel of consulting services to
support the Company's process management software solutions.
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ACQUISITIONS OF SOFTWARE AND SERVICE SOLUTIONS
As part of its strategy to offer the broadest, most integrated suite of
software and service solutions for the design, operation and management of
manufacturing processes, AspenTech from time to time acquires businesses to
obtain technologies and expertise that complement or enhance AspenTech's core
solutions. AspenTech typically combines acquired technologies with its
pre-existing products in order to offer solutions that include the best features
and functionality of both. The Company provides an upward migration path and
support for any discontinued products.
AspenTech has completed 15 acquisitions that have provided the Company
with, or significantly enhanced, its capabilities in the areas of process
information management, advanced process control and optimization, advanced
planning and scheduling, and supply chain management. The following table
describes AspenTech's acquisitions to date:
BUSINESS ACQUIRED DATE ACQUIRED SOLUTION ACQUIRED OR ENHANCED
----------------- ----------------- ------------------------------------
Prosys Technology Limited........... October 16, 1991 SPEEDUP
Industrial Systems, Inc. ........... May 25, 1995 Components of InfoPlus.21
Dynamic Matrix Control
Corporation....................... January 5, 1996 Components of DMCplus and Aspen
RT-Opt
Setpoint, Inc. ..................... February 9, 1996 Components of DMCplus, Aspen RT-Opt
and InfoPlus.21
B-JAC International, Inc. .......... October 1, 1996 Heat exchanger modeler
Process Control Division of
Cambridge Control Limited......... October 8, 1996 Consulting service capabilities for
advanced process control and
optimization
Basil Joffe Associates, Inc. and
PIMS division of Bechtel
Corporation....................... December 31, 1996 Aspen PIMS
NeuralWare, Inc. ................... August 27, 1997 Neural network technology and tools
integrated with Aspen Plus, DMCplus
and InfoPlus.21
The SAST Corporation Limited........ August 28, 1997 OTISS and consulting service
capabilities
Cimtech S.A./N.V. .................. February 27, 1998 Components of InfoPlus.21
Contas Process Control S.r.L. ...... February 27, 1998 Consulting service capabilities for
advanced process control and
optimization
IISYS, Inc. ........................ March 6, 1998 Aspen ADVISOR
Zyqad Limited....................... March 16, 1998 Aspen Zyqad
Chesapeake Decision Sciences,
Inc. ............................. May 27, 1998 MIMI
Treiber Controls, Inc. ............. May 29, 1998 Software and consulting service
capabilities for advanced process
control and optimization
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TECHNOLOGY AND PRODUCT DEVELOPMENT
AspenTech's software and service solutions combine AspenTech's
sophisticated modeling capabilities, based on fundamental chemical engineering
principles, with its extensive experience with a broad variety of manufacturing
processes in the chemicals, petrochemicals, petroleum, pharmaceuticals and other
industries. AspenTech's technology enables customers not only to design models
for particular manufacturing processes but also to use those models to operate
and manage those manufacturing processes. AspenTech's models employ advanced
mathematical algorithms developed by employees of AspenTech and others, such as
the dynamic matrix control algorithm for multi-variable, model-based predictive
control and the inside-out algorithm for simulating distillation. AspenTech has
used these advanced algorithms to develop proprietary models that provide highly
accurate representations of the chemical and physical properties of a broad
range of materials typically encountered in the chemicals, petroleum, and other
process industries.
AspenTech has also created rigorous models of a variety of equipment used
in these process manufacturing facilities, such as heat exchangers, distillation
columns and compressors. AspenTech believes that the development and refinement
of highly accurate models such as those developed by AspenTech require a
thorough understanding of both the fundamental chemistry underlying
manufacturing processes and the technology of modeling. AspenTech has been able
to develop and refine its models only as a result of its close familiarity with
millions of simulations by its customers. AspenTech believes that few companies
have a base of knowledge and experience in the process modeling industry as
extensive as that of AspenTech.
AspenTech's most important product development objective is to build upon
the technical leadership of its software solutions, both individually and as
integrated solutions. Product development activities are currently focused 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 suite of software solutions,
and integrating those software products with other tools. As of June 30, 1998,
AspenTech employed a product development staff of 391 persons.
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CUSTOMERS
AspenTech software solutions are installed at more than 750 customers
worldwide. The following table sets forth a selection of AspenTech's customers,
whose agreements with AspenTech produced at least $250,000 in fees to AspenTech
in fiscal 1997 or 1998:
CHEMICALS
Air Products & Chemicals, Inc.
Allied Signal, Inc.
BASF AG
Bayer AG
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc.
Elf Atochem
Equistar Chemicals LP
Hoechst AG
Huls AG
Huntsman Corporation
Imperial Chemical Industries plc
Mitsubishi Chemical Corporation
Rhone-Poulenc Industrialisation
Sasol Industries (Pty.) Ltd.
Shell International Chemie Mij B.V.
Union Carbide Chemicals and Plastics
Company, Inc
Wellman, Inc.
Westlake Management Services Corporation
CONSUMER PRODUCTS
3M Company
The Goodyear Tire & Rubber Company
The Procter & Gamble Company
Unilever Research
ELECTRIC POWER
British Nuclear Fuels plc
FOOD AND BEVERAGE
Cargill Incorporated
General Mills, Inc.
Nestle UK Ltd.
METALS AND MINERALS
Phelps Dodge
Aluminum Company of America
PETROLEUM PRODUCTS
Agip Petroli S.p.A.
Amoco Corporation
Arco Products Company
British Petroleum
Chevron Corporation
Citgo Petroleum Corporation
Exxon Company U.S.A.
Instituto Mexicano del Petroleo
Marathon Oil Company
Mobil Oil Corporation
Neste Oy
Pemex Gas y Petroquimica Basica
Petroleus de Venezuela, S.A.
Phillips Petroleum Company
Repsol Petroleo SA
RVI
Shell Oil Company
Star Enterprise
Sun Refining and Marketing Company
Sunoco Inc.
Texaco Refining & Marketing Company
UOP
Valero Refining Company
PHARMACEUTICALS
Genentech, Inc.
Hoffman-LaRoche, Inc.
Merck & Co., Inc.
Novartis Pharma A.G.
PULP AND PAPER
Buckeye Cellulose Corporation
Weyerhaeuser Company
SEMICONDUCTORS
Cypress Corporation
LSI Logic Corporation
Rockwell International Corporation
AspenTech's customers also include a number of engineering and construction
firms, such as Bechtel Corporation, Fluor Daniel, Inc. and The M.W. Kellogg
Company, which have entered into software license agreements with AspenTech and
which offer products and services to the process industries.
For fiscal 1996, 1997 and 1998, international revenues accounted for
approximately 42.0%, 50.0% and 45.4%, respectively, of AspenTech's total
revenues. No individual customer represented more than 10% of AspenTech's total
revenues in fiscal 1996, 1997 or 1998. There can be no assurance that any of the
customers listed above will continue to license software or purchase services
from AspenTech beyond the term of any existing agreement.
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SALES AND MARKETING
AspenTech employs a value-based sales approach, offering customers a
comprehensive suite of software and service solutions that enhance the
efficiency and productivity of their process manufacturing operations. AspenTech
has increasingly focused on selling its solutions as a strategic investment by
its customers and therefore targets its principal sales efforts at senior
management levels, including chief executive officers and senior decision-makers
in manufacturing, operations and technology.
Because the complexity and cost of AspenTech's solutions often result in a
sales cycle of between six and nine months, AspenTech believes that the
development of long-term, consultative relationships with its customers is
essential to a successful selling strategy. To develop these relationships,
AspenTech organizes its worldwide sales force by industry and appoints a single
sales account manager to be responsible for AspenTech's relationship with each
customer. In order to market the specific functionality and other complex
technical features of AspenTech's software solutions, each sales account manager
leads a specialized team of regional account managers, technical sales engineers
and product specialists organized for each sales and marketing effort.
AspenTech's technical sales engineers typically have advanced degrees in
chemical engineering or related disciplines and actively consult with the
customer's plant engineers who would be the ultimate users of AspenTech's
solutions. Product specialists share their detailed knowledge of the specific
features of AspenTech's software solutions. Each sales team also includes
participants from AspenTech's business development group who determine the scope
and price of service solutions offered to customers.
In order to market AspenTech's newly acquired supply chain management
software solutions, AspenTech intends to utilize its existing sales and
marketing organization for sales to AspenTech's existing clients and to assemble
a separate team for sales to supply chain software customers. AspenTech expects
that this team will be able to identify opportunities to cross-sell AspenTech's
other software solutions to customers in industries outside AspenTech's
traditional process industry markets.
AspenTech believes that its seasoned direct sales force, consisting of 123
individuals as of June 30, 1998, and its ability to sell at senior levels within
customer organizations are important competitive advantages. AspenTech has
established direct sales offices in key geographic areas where there are high
concentrations of potential business, including New Jersey, Texas, Brussels,
Cambridge (England), Dusseldorf, Hong Kong, Paris, Singapore and Tokyo. In
geographic areas of lower customer concentration, AspenTech uses sales agents
and other resellers to leverage its direct sales force and to provide local
coverage and first-line support.
The Company also supplements its direct sales efforts with a variety of
marketing initiatives, including public relations activities, campaigns to
promote awareness among industry analysts, user groups and the Company's
triennial conference, AspenWorld. AspenWorld has become a prominent forum for
industry participants, including process manufacturing executives and analysts,
to discuss emerging technologies and other process engineering solutions and to
attend seminars led by industry experts. The AspenWorld 97 conference, held in
October 1997, attracted more than 1,400 participants.
AspenTech also licenses its software solutions at a substantial discount to
universities that agree to use its solutions in teaching and research. AspenTech
believes that students' familiarity with its solutions will stimulate future
demand once the students enter the workplace. Currently, more than 550
universities use the Company's software solutions in undergraduate instruction.
COMPETITION
AspenTech faces three primary sources of competition: commercial vendors of
software products for one or more elements in the design, operation and
management of manufacturing processes; vendors of hardware that offer software
solutions in order to add value to their proprietary DCS; and large companies in
the process industries that have developed their own proprietary software
solutions. AspenTech believes that suppliers of individual software solutions
are under intensifying pressure to offer integrated functionality beyond their
traditional applications and that, at the same time, process manufacturers are
increasingly concluding that it is no longer efficient or economical for them to
continue to develop or support internally developed software. Certain
competitors also supply related hardware products to existing and potential
customers of AspenTech
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and may have established relationships that afford those competitors an
advantage in supplying software and services to those customers. AspenTech
believes, however, that customers prefer to select best-in-class software
solutions, independent of their selection of underlying industrial automation
hardware platforms. AspenTech does not offer its solutions with any particular
hardware and designs its software products to operate effectively on systems
manufactured by all major hardware vendors. As the market for manufacturing
process optimization solutions consolidates further, AspenTech believes that its
exclusive focus on developing and marketing best-in-class software and services
will continue to provide a competitive advantage.
Because of the breadth of its software and service offerings, AspenTech
faces competition from different vendors depending on the solution in question.
AspenTech competes with respect to the largest number of its solutions with
Simulation Sciences, Inc., a subsidiary of Siebe plc. With respect to particular
software solutions, AspenTech also competes with Chemstations, Inc., Hyprotech,
Ltd. (a subsidiary of AEA Technology plc), OSI Software, Inc., The Foxboro
Company and Wonderware Corporation (both of which are subsidiaries of Siebe
plc), the Simcon division of ABB Asea Brown Boveri (Holding) Ltd., and several
smaller competitors, such as Pavilion Technologies, Inc. With the acquisition of
Chesapeake, AspenTech now competes with established commercial vendors of supply
chain management software, including i2 Technologies, Inc. and Manugistics
Group, Inc.
A number of vendors of ERP software products, such as Baan Company N.V.,
J.D. Edwards Inc., Oracle Corporation, PeopleSoft, Inc. and SAP A.G., have
announced their intentions to enter or expand their presence in the market for
supply chain management solutions. AspenTech also expects to encounter
increasing competition from DCS vendors, such as Honeywell Inc., as they expand
their software and service offerings to include additional aspects of process
manufacturing.
In recent years, there has been consolidation in the markets in which
AspenTech competes that has expanded the breadth of product and service
offerings by certain of AspenTech's competitors, such as the acquisitions by
Siebe plc of Simulation Sciences, Inc. and Wonderware Corporation. As a result
of this consolidation and the expansion of DCS and ERP vendors into additional
markets, AspenTech from time to time may compete with divisions of companies
with which it collaborates on other occasions, such as Honeywell Inc. and Siebe
plc. There can be no assurance that AspenTech's efforts to compete and cooperate
simultaneously with these or other companies will be successful. The further
consolidation of existing competitors or the emergence of new competitors could
have a material adverse effect on AspenTech's business, operating results and
financial condition.
AspenTech's continued success depends on its ability to compete effectively
with its commercial competitors and to persuade prospective customers to use
AspenTech'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 can be no assurance that AspenTech will be able to maintain
its competitive position.
INTELLECTUAL PROPERTY
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, the 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.
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The laws of certain countries in which the Company's products are licensed
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. In fiscal 1996, 1997
and 1998, the Company derived approximately 42.0%, 50.0% and 45.4% of its total
revenues, respectively, 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 Company's business,
operating results and financial condition. The Company could incur substantial
costs in protecting and enforcing its intellectual property rights. Moreover,
from time to time third parties may assert patent, trademark, copyright and
other intellectual property rights to technologies that are important to the
Company. In such an event, the Company may be required to incur significant
costs in litigating a resolution to the asserted claims. There can be no
assurance that such a resolution would not require that the Company pay damages
or obtain a license of a third party's proprietary rights in order to continue
licensing its products as currently offered or, if such a license is required,
that it will be available on terms acceptable to the Company.
AspenTech believes that, due to the rapid pace of innovation within the
industry, factors such as the technological and creative expertise of its
personnel, the quality of its products, the quality of its technical support and
training courses, and the frequency of software product enhancements are more
important to establishing and maintaining a technology leadership position
within the industry than the various legal protections for its software products
and technology. See "Item 1A. Risk Factors -- Dependence on Proprietary
Technology."
EMPLOYEES
As of June 30, 1998, AspenTech had a total of 1,518 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 principal
founder of the Company and its Chairman and Chief Executive Officer, its other
executive officers, and certain engineering, technical, managerial and marketing
personnel. The Company believes that its future success will also depend on its
continuing ability to attract, motivate and retain additional highly skilled
engineering, technical, managerial and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that AspenTech will be
successful in attracting, assimilating and retaining the personnel it requires
to continue to grow and operate profitably.
ITEM 1A. RISK FACTORS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating the Company and its business.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND CASH FLOW
The Company's operating results and cash flow have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, including purchasing patterns, timing of introductions of new solutions
and enhancements by the Company and its competitors, and fluctuating economic
conditions. Because license fees for the Company's software products are
substantial and the implementation of the Company's solutions often requires the
services of the Company's engineers over an extended period of time, the sales
process for the Company's solutions is lengthy and can exceed one year.
Accordingly, software
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revenue is difficult to predict, and the delay of any order could cause the
Company's quarterly revenues to fall substantially below expectations. Moreover,
to the extent that the Company succeeds in shifting customer purchases away from
individual software solutions and toward integrated suites of its software and
service solutions, the likelihood of delays in ordering may increase and the
effect of any delay may become more pronounced.
The Company ships software products within a short period after receipt of
an order and usually does not have a material backlog of unfilled orders of
software products. Consequently, revenues from software licenses in any quarter
are substantially dependent on orders booked and shipped in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
been derived from license agreements that have been consummated in the final
weeks of the quarter. Therefore, even a short delay in the consummation of an
agreement may cause revenues to fall below expectations for that quarter. Since
the Company's expense levels are based in part on anticipated 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
disproportionately adverse effect on net income. The Company expects that these
factors will continue to affect its operating results for the foreseeable
future.
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 total 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. Although the Company has generated a
profit for the first quarter of each of fiscal 1997 and fiscal 1998, the Company
expects that it will continue to experience declines in total revenues and net
income in the first fiscal quarter as compared to the immediately preceding
fiscal quarter. Because of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is possible that in one or more
future quarters the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the Common
Stock would likely be materially adversely affected. As a result principally of
slower-than-anticipated growth in the Company's services revenue and
higher-than-expected levels of expenses throughout the AspenTech organization in
the fiscal quarter ended June 30, 1998, the Company's operating results in the
fiscal quarter and fiscal year ended June 30, 1998 were below the expectations
of certain public market analysts and investors. From July 27, 1998, the date on
which the Company preliminarily announced its estimated results for the fiscal
quarter and year ended June 30, 1998, through the close of business on September
18, 1998, the price per share of Common Stock, as reported by the Nasdaq
National Market, decreased from $48.25 to $25.1875.
The Company derives a substantial portion of its total revenues from
service engagements and a majority of these engagements have been undertaken on
a fixed-price basis. The Company bears the risk of cost overruns and inflation
in connection with fixed-price engagements, and as a result, any of these
engagements may be unprofitable.
LIMITED SUPPLY OF QUALIFIED PROJECT ENGINEERS
The Company derives a substantial portion of its total revenues from
services, particularly projects involving advanced process control and
optimization and similar projects. These projects can be extremely complex and
in general only highly qualified, highly educated project engineers have the
necessary training and skills to complete these projects successfully. In order
to continue to staff its current and future projects, the Company will need to
attract, motivate and retain a significant number of highly qualified, highly
educated chemical and other project engineers. The Company primarily hires as
project engineers individuals who have obtained a doctoral or master's degree in
chemical engineering or a related discipline or who have significant relevant
industry experience. As a result, the pool of potential qualified employees is
relatively small, and the Company faces significant competition for these
employees, from not only the Company's direct competitors but also the Company's
clients, academic institutions and other enterprises. Many of these competing
employers are able to offer potential employees significantly greater
compensation and benefits or more
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attractive lifestyle choices, career paths or geographic locations than the
Company. The failure to recruit and retain a significant number of qualified
project engineers could have a material adverse effect on the Company's
business, operating results and financial condition. Moreover, increasing
competition for these engineers may also result in significant increases in the
Company's labor costs, which could have a material adverse effect on the
Company's business, operating results and financial condition.
INTEGRATION OF CHESAPEAKE AND OTHER RECENTLY ACQUIRED COMPANIES
Through its acquisitions of Chesapeake and several smaller companies in
1998, the Company has expanded its product and service offerings, has entered
new markets and has increased its scope of operations and the number of its
employees. The continued successful integration of Chesapeake and these other
companies into the Company's operations is critical to the Company's future
financial performance. This integration will require that the Company, among
other things, integrate more closely the companies' software products and
technologies, retain key employees, assimilate diverse corporate cultures,
further integrate management information systems, consolidate the acquired
operations and manage geographically dispersed operations, each of which could
pose significant challenges. To succeed in the market for supply chain
management solutions, the Company must also invest additional resources,
primarily in the areas of sales and marketing, to extend name recognition and
increase market share. The diversion of the attention of management created by
the integration process, any disruptions or other difficulties encountered in
the integration process, and unforeseen liabilities or unanticipated problems
with the acquired businesses could have a material adverse effect on the
business, operating results and financial condition of the Company. The
difficulty of combining these companies may be increased by the need to
integrate personnel, and changes effected in the combination may cause key
employees to leave. There can be no assurance that these acquisitions will
provide the benefits expected by the Company or that the Company will be able to
integrate and develop the operations of Chesapeake and these other companies
successfully. Any failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition.
COMPETITION
The Company faces three primary sources of competition: commercial vendors
of software products for one or more elements in the design, operation and
management of manufacturing processes; vendors of hardware that offer software
solutions in order to add value to their proprietary DCS; and large companies in
the process industries that have developed their own proprietary software
solutions. Because of the breadth of its software and service offerings, the
Company faces competition from different vendors depending on the solution in
question. The Company competes with respect to the largest number of its
solutions with Simulation Sciences, Inc., a subsidiary of Siebe plc. With
respect to particular software solutions, the Company also competes with
Chemstations, Inc., Hyprotech, Ltd. (a subsidiary of AEA Technology plc), The
Foxboro Company and Wonderware Corporation (both of which are subsidiaries of
Siebe plc), OSI Software, Inc., the Simcon division of ABB Asea Brown Boveri
(Holding) Ltd., and several smaller competitors, such as Pavilion Technologies,
Inc. With the acquisition of Chesapeake, the Company now competes with
established commercial vendors of supply chain management software, including i2
Technologies, Inc. and Manugistics Group, Inc. A number of vendors of ERP
software products, such as Baan Company N.V., J.D. Edwards Inc., Oracle
Corporation, PeopleSoft, Inc., and SAP A.G., have announced their intentions to
enter or expand their existing presence in the market for supply chain
management solutions. The Company also expects to encounter increasing
competition from DCS solution vendors, such as Honeywell Inc., as they expand
their software and service offerings to include additional aspects of process
manufacturing. Moreover, in recent years, there has been consolidation in the
markets in which the Company competes that has expanded the breadth of product
and service offerings by certain of the Company's competitors, such as the
acquisitions by Siebe plc of Simulation Sciences, Inc. and Wonderware
Corporation. As a result of this consolidation and the expansion of DCS and ERP
vendors into additional markets, the Company from time to time may compete with
divisions of companies with which it collaborates on other occasions, such as
Honeywell Inc. and Siebe plc. There can be no assurance that the Company's
efforts to compete and cooperate simultaneously with these or other companies
will be successful. The further consolidation of existing competitors or the
emergence of new competitors could have a material adverse effect
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on the Company's business, operating results and financial condition. Certain
competitors also supply related hardware products to existing and potential
customers of the Company and may have established relationships that afford
those 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 can be no assurance that the Company will be
able to maintain its competitive position.
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
An element of the Company's business strategy is to continue to pursue
strategic acquisitions that will provide it with complementary products,
services and technologies and with additional engineering personnel. The
identification and pursuit of these acquisition opportunities and the
integration of acquired personnel, products, technologies and businesses require
a significant amount of management time and skill. There can be no assurance
that 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. In light of the consolidation
trend in the Company's industry, the Company expects to face competition for
acquisition opportunities, which may substantially increase the cost of any
acquisition consummated by the Company. There can also be no assurance that any
future acquisition will not have a material adverse effect upon the Company's
operating results as a result of non-recurring charges associated with the
acquisition or as a result of integration problems in the fiscal quarters
following consummation of the acquisition. Acquisitions may also expose the
Company to additional risks, including diversion of management's attention,
failure to retain key acquired personnel, assumption of legal or other
liabilities and contingencies, and amortization of goodwill and other acquired
intangible assets, some or all of which could have a material adverse effect on
the Company's business, operating results and financial condition. Moreover,
customer dissatisfaction with, or problems caused by, the performance of any
acquired technologies could have a material adverse impact on the reputation of
the Company as a whole. In addition, there can be no assurance that acquired
businesses will achieve anticipated revenues and earnings. The Company may use
Common Stock or Preferred Stock or may incur 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.
CONCENTRATION OF REVENUES IN THE CHEMICALS, PETROCHEMICALS AND PETROLEUM
INDUSTRIES
The Company derives a substantial majority of its total revenues from
companies in the chemicals, petrochemicals and petroleum industries.
Accordingly, the Company's future success depends upon the continued demand for
process manufacturing optimization software and services by companies in these
industries. The chemicals, petrochemicals and petroleum industries are highly
cyclical. The Company believes that worldwide economic downturns and pricing
pressures experienced by chemical, petrochemical and petroleum companies in
connection with cost-containment measures and environmental regulatory pressures
have in the past led to worldwide delays and reductions in certain capital and
operating expenditures by many of these companies. There can be no assurance
that these industry patterns, as well as general domestic and foreign economic
conditions and other factors affecting spending by companies in these
industries, will not have a material adverse effect on the Company's business,
operating results and financial condition.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The market for software and services for process manufacturing optimization
is characterized by rapidly changing technology and continuing improvements in
computer hardware, operating systems, programming tools, programming languages
and database technology. The Company's future success will depend on its ability
to enhance its current software products and services, integrate its current and
future software offerings, modify its products to operate on additional or new
operating platforms or systems, and develop in a timely and cost-effective
manner new software and services that meet changing market conditions, including
evolving
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customer needs, new competitive software and service offerings, emerging
industry standards and changing technology. The Company has announced its
intention to further integrate its software products with each other and to
integrate those products with ERP, DCS and other business software solutions.
The Company believes additional development will be necessary before its
products are fully integrated with each other and with these other solutions,
particularly with respect to ERP solutions. In the past, the Company has
experienced delays in the development and enhancement of new and existing
products, particularly the Windows version of Aspen Plus, and has on occasion
postponed scheduled delivery dates for certain of its products. There can be no
assurance that the Company will be able to meet customers' expectations with
respect to product development, enhancement and integration or that the
Company's software and services will otherwise address adequately the needs of
customers. Like many other software products, the Company's software has on
occasion contained undetected errors or "bugs." Because new releases of the
Company's software products are initially installed only by a selected group of
customers, any errors or "bugs" in those new releases may not be detected for a
number of months after the delivery of the software. 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.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on Lawrence B.
Evans, the principal founder of the Company and its Chairman and Chief Executive
Officer, its other executive officers, and certain engineering, 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-person life insurance on any of its executive officers
or other key employees. In addition to the need to recruit qualified project
engineers, the Company believes that its future success will also 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, motivating and retaining the personnel it requires to
continue to grow and operate profitably.
PRODUCT LIABILITY
The sale and implementation of certain of the Company's software products
and services, particularly in the areas of advanced process control and
optimization, may entail the risk of product liability claims. The Company's
software products and services are used in the design, operation and management
of manufacturing processes at large facilities, and any failure of 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 in the Company's
agreements may not be effective as a result of federal, state or local laws or
ordinances or unfavorable judicial decisions. A substantial product liability
claim against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
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, the 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 has 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
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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 licensed
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. In fiscal 1996, 1997
and 1998, the Company derived approximately 42.0%, 50.0% and 45.4% of its total
revenues, respectively, 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 Company's business, operating results and
financial condition. 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, if at all.
MANAGEMENT OF GROWTH
The Company has experienced substantial growth in recent years 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. This
growth has resulted in increased responsibilities for the Company's management.
To manage its growth effectively, the Company must continue to expand its
management team, attract, motivate and retain employees, including qualified
project engineers, and implement and improve its operating and financial
systems. There can be no assurance that the Company's current management systems
will be adequate or that the Company will be able to manage the Company's recent
or future growth successfully. Any failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.
INTERNATIONAL OPERATIONS
In fiscal 1996, 1997 and 1998, the Company derived approximately 42.0%,
50.0% and 45.4% of its total revenues, respectively, 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 for the foreseeable future. The Company's operations outside the United
States are subject to additional 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.
In addition, the Company currently is unable to determine the effect, if any,
that recent economic downturns in Asia, particularly Japan, or the adoption and
use of the euro, the single European currency to be introduced in January 1999,
will have on the Company's business. 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 operating results 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
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22
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, operating results and financial
condition.
DEPENDENCE ON INCREASED MARKET PENETRATION
Increased use in the process industries of software and services for
process manufacturing optimization 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
increase market penetration. These factors include product performance, accuracy
of results, reliability, breadth and integration of product offerings, scope of
applications, and ease of implementation and use. 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software applications are
designed to accept only two digit entries in the date code field used to
identify years. These date code fields will need to be modified to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with "year
2000" requirements. Significant uncertainty exists in the software industry
concerning the potential effects of failure to comply with such requirements.
The Company has developed a testing and compliance program to ascertain
whether and to what extent the Company may need to update its software products
to become year 2000 compliant. The Company does not intend to test or modify all
prior versions of its software products, current products used on year 2000 non-
compliant systems, custom applications developed by or for customers, or certain
current software products that the Company plans to replace with either new
software products or year 2000 compliant releases by the end of 1999. Certain of
the Company's software products are currently year 2000 compliant; however, the
Company has not completed testing on many of the other software products that it
intends to test. There can be no assurance that the Company will complete in a
timely manner the testing of such software products or the development of any
updates necessary to render such software products year 2000 compliant. Although
the Company has obtained representations as to year 2000 compliance from the
sellers of certain of its recently acquired technologies, there can be no
assurance that the Company will not encounter year 2000 problems arising from
these technologies or any other technologies that the Company may acquire in the
future. Moreover, the ability of the Company's software products to comply with
year 2000 requirements depends in part upon the availability of year 2000
compliant versions of operating systems and software applications used by or
with the Company's products. Any delay in developing or offering, or the failure
to develop or offer year 2000 compliant products or any necessary updates to
existing products, could result in delays in the purchasing of the Company's
products and services or in reduced demand for those products and services, and
could also result in errors that materially impair the utility of one or more of
the Company's products, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company does not expect the costs associated with its year 2000 compliance
program to be material, there can be no assurance that unidentified year 2000
problems will not cause the Company to incur material expenses in responding to
such problems or otherwise have a material adverse effect on the Company's
business, operating results and financial condition. Moreover, customer
purchasing patterns may be affected by year 2000 issues as customers delay
purchases in anticipation of the future release of year 2000 compliant products
or releases, and as customers expend significant resources to upgrade their
current software systems and applications for year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company.
The Company has reviewed certain internal systems and future system plans
on a preliminary basis to assess year 2000 compliance. The Company expects that
its internal system development plans will address
21
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the year 2000 issue and will correct any existing non-compliant systems without
the need to accelerate the overall information systems implementation plans. The
Company believes that the cost of any modifications will not be material. The
Company's ability to implement its information systems plan and to make the
necessary modifications or replacements may be adversely affected by a number of
factors outside the control of the Company, including the availability and cost
of trained personnel and the ability of such personnel to acquire year 2000
compliant systems and otherwise to locate and correct all relevant computer
codes. The Company is also conducting an additional assessment of its systems
and operations in order to more fully identify and plan for any year 2000 risks,
although it believes that its business would not be materially affected by the
failure of any internal systems to be year 2000 compliant. If there are
unidentified dependencies on internal systems to operate the business, or if any
required modifications are not completed on a timely basis or are more costly to
implement than currently anticipated, the Company's business, financial
condition or results of operations could be materially adversely affected.
NEW ACCOUNTING STANDARD
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company adopted for software license agreements entered
into with customers on or after January 1, 1998. This statement provides
accounting standards for software revenue recognition. The Company believes that
its revenue recognition policies comply with SOP 97-2; however, unanticipated
changes or new interpretations by the AICPA of SOP 97-2 could require changes in
the Company's revenue recognition practices, which could have a material adverse
effect on the Company's operating results and financial condition.
POTENTIAL VOLATILITY OF PRICE OF COMMON STOCK
The equity markets have from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, and those
fluctuations have often been unrelated to the operating performance of
particular companies. In addition, factors such as the financial performance of
the Company, 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 Common Stock. From July 27, 1998, the date on which the Company
preliminarily announced its estimated results for the fiscal quarter and year
ended June 30, 1998, through the close of business on September 18, 1998, the
price per share of Common Stock, as reported by the Nasdaq National Market,
decreased from $48.25 to $25.1875. See "-- Fluctuations in Quarterly Operating
Results and Cash Flow."
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCES OF PREFERRED STOCK; STOCKHOLDER RIGHTS PLAN
The Company's Certificate of Incorporation, its By-Laws and certain
Delaware laws contain provisions that may discourage acquisition bids for the
Company and that may deprive stockholders of certain opportunities to 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 adopted a stockholder rights plan, which may
deter or delay attempts to acquire the Company or accumulate shares of Common
Stock. Except for the stockholder rights plan, the Company has no present plans
to designate or issue any shares of Preferred Stock.
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ITEM 2. PROPERTIES
AspenTech's principal offices occupy approximately 110,000 square feet of
office space in Cambridge, Massachusetts. AspenTech's lease of its principal
offices expires on September 30, 2002. AspenTech and its subsidiaries also own
or lease office space in New Providence, New Jersey; Houston, Texas; Midlothian,
Virginia; Bothell, Washington; Brussels, Belgium; Calgary, Alberta, Canada;
Cambridge, England; Warrington, England; Hong Kong; Tokyo, Japan; Best, The
Netherlands; Singapore; and other locations where additional sales and customer
support offices are located. AspenTech believes that its existing facilities are
adequate for its current needs and its needs for the reasonably foreseeable
future and that, if additional space is needed, such space will be available on
acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
AspenTech is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is 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.
HIGH LOW
------- -------
FISCAL 1997:
First Quarter............................................. $36.375 $20.000
Second Quarter............................................ 42.500 29.625
Third Quarter............................................. 41.000 25.750
Fourth Quarter............................................ 39.625 24.750
FISCAL 1998:
First Quarter............................................. $46.250 $29.500
Second Quarter............................................ 39.875 27.875
Third Quarter............................................. 43.375 23.500
Fourth Quarter............................................ 51.000 38.250
HOLDERS
As of June 30, 1998, there were 1,172 holders of record of the Company's
Common Stock.
DIVIDENDS
The Company has never declared or paid cash dividends on its capital stock,
although one of the Company's subsidiaries paid dividends to its stockholders
prior to its acquisition by the Company in fiscal 1995. 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.
SALES OF UNREGISTERED SECURITIES
During fiscal 1998, AspenTech issued shares of its Common Stock to the
former equity holders of seven corporations and other business entities, in
exchange for all of the outstanding equity securities of those entities, as
follows:
SHARES OF
COMMON
BUSINESS ACQUIRED DATE ACQUIRED STOCK ISSUED
- ----------------- ----------------- ------------
NeuralWare, Inc.............................. August 27, 1997 26,502
The SAST Corporation Limited................. August 28, 1997 288,330
Cimtech S.A./N.V............................. February 27, 1998 118,299
Contas Process Control S.r.L................. February 27, 1998 21,975
Zyqad Limited................................ March 16, 1998 171,337
Chesapeake Decision Sciences, Inc............ May 27, 1998 2,961,959
Treiber Controls, Inc........................ May 29, 1998 140,000
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All of these shares were issued in transactions exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended. Certain of these shares
have been subsequently registered pursuant to shelf registration statements
filed with the Securities and Exchange Commission in accordance with
registration rights arrangements entered into in connection with the
acquisitions.
On June 17, 1998, AspenTech completed the sale of $86,250,000 aggregate
principal amount of its 5 1/4% Convertible Subordinated Debentures due June 15,
2005 (the "Debentures"). The Debentures were sold by the Company to Goldman,
Sachs, & Co., NationsBanc Montgomery Securities LLC and William Blair & Company,
L.L.C. (the "Initial Purchasers"), which offered and sold the Debentures to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
of 1933, as amended. The Company initially offered $75,000,000 aggregate
principal amount of Debentures and sold an additional $11,250,000 aggregate
principal amount of Debentures pursuant to the Initial Purchasers' exercise of
an over-allotment option.
The Debentures were offered at a price of 100% of principal amount, or
$86,250,000. The net proceeds received by the Company from the sale of the
Debentures, after deducting underwriting commissions of $3,018,750 (but before
deducting expenses of the offering), totalled $83,231,250. The Company intends
to use the net proceeds for working capital and other general corporate
purposes. The Company may use a portion of the net proceeds to acquire or invest
in one or more new technologies, products or businesses that expand, complement
or are otherwise related to the Company's current business and software and
service solutions.
The Debentures are convertible into shares of Common Stock at any time
prior to the close of business on the maturity date, unless previously redeemed
or repurchased, at a conversion price of approximately $52.97 per share of
Common Stock (equivalent to a conversion rate of 18.9791 shares per $1,000
principal amount of Debentures), subject to adjustment in certain events.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated balance sheet data as of June 30, 1997 and 1998
and the selected consolidated statement of income data for each of the years
ended June 30, 1996, 1997 and 1998 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, and are included elsewhere in this Form
10-K. The selected consolidated balance sheet data as of June 30, 1994, 1995 and
1996 and the selected consolidated statement of income data for the years ended
June 30, 1994 and 1995 have been derived from the Company's Consolidated
Financial Statements, which also have been audited by Arthur Andersen LLP but
are 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."
YEAR ENDED JUNE 30,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Software licenses................... $37,725 $49,479 $ 70,199 $103,179 $139,390
Services and other.................. 11,682 16,540 44,619 90,891 113,165
------- ------- -------- -------- --------
Total revenues........................ 49,407 66,019 114,818 194,070 252,555
------- ------- -------- -------- --------
Expenses:
Cost of software licenses........... 2,795 3,080 3,992 5,539 8,178
Cost of services and other.......... 8,824 10,052 27,220 54,006 68,490
Selling and marketing............... 18,912 24,276 36,610 56,034 74,926
Research and development............ 9,193 12,652 22,310 33,580 43,553
General and administrative.......... 5,005 5,679 10,715 17,072 20,208
Charge for in-process research and
development...................... -- -- 24,421 8,664 8,472
Costs related to acquisitions....... -- 950 -- -- 4,984
------- ------- -------- -------- --------
Total expenses........................ 44,729 56,689 125,268 174,895 228,811
------- ------- -------- -------- --------
Income (loss) from operations......... 4,678 9,330 (10,450) 19,175 23,744
Foreign currency exchange gain
(loss).............................. (56) 34 (223) (236) (454)
Income (loss) on equity in joint
ventures............................ (39) 22 10 26 45
Interest income....................... 1,799 3,138 3,745 5,556 5,727
Interest expense...................... (524) (561) (1,323) (151) (377)
------- ------- -------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes........................ 5,858 11,963 (8,241) 24,370 28,685
Provision for income taxes............ 2,116 4,854 6,146 10,169 14,049
------- ------- -------- -------- --------
Net income (loss)(1).................. $ 3,742 $ 7,109 $(14,387) $ 14,201 $ 14,636
======= ======= ======== ======== ========
Diluted net income (loss) per
share(2)............................ $ 0.26 $ 0.42 $ (0.83) $ 0.63 $ 0.59
Basic net income (loss) per
share(2)............................ $ 0.45 $ 0.46 $ (0.83) $ 0.66 $ 0.63
Weighted average shares outstanding --
diluted(2).......................... 14,318 17,113 17,432 22,707 24,883
Weighted average shares outstanding --
basic(2)............................ 8,340 15,321 17,432 21,368 23,415
(footnotes appear on page 27)
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JUNE 30,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash-equivalents........... $ 2,932 $ 6,290 $ 14,773 $ 18,284 $ 78,694
Working capital..................... 8,546 31,377 72,560 73,789 172,866
Total assets........................ 45,066 83,259 168,986 203,545 342,882
Long-term obligations, less current
maturities....................... 2,576 4,087 706 462 90,635
Total stockholders' equity.......... 19,284 45,824 104,477 137,414 165,016
- ---------------
(1) The Company has never declared or paid cash dividends on its capital stock,
although one of the Company's subsidiaries paid dividends to its
stockholders prior to its acquisition by the Company in fiscal 1995.
(2) Computed as described in Note 2(i) of Notes to Consolidated Financial
Statements. In February 1998, the Commission issued Staff Accounting
Bulletin No. 98, which revised the Commission's guidance for calculating
earnings per share with respect to equity security issuances before an
initial public offering and is effective for fiscal years ending after
December 15, 1997. The Company has restated its weighted average shares
outstanding for the periods prior to its initial public offering in 1994 for
Staff Accounting Bulletin No. 98. This change did not affect diluted
earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its founding in 1981, the Company has developed and marketed software
and services to companies in the process industries. The Company's revenues have
increased each year since 1983, when the Company introduced the commercial
version of its Aspen Plus process design software solution. In addition to
internally generated growth, the Company has acquired 14 businesses since May
1995, including Industrial Systems, Inc. ("ISI") in the fourth quarter of fiscal
1995, DMCC and Setpoint in the third quarter of fiscal 1996, and Chesapeake in
the fourth quarter of fiscal 1998.
The Company acquired DMCC, Setpoint and three other, less material
businesses in transactions accounted for as purchases. The Company's results of
operations include the results of operations of DMCC, Setpoint and these three
other companies only for periods subsequent to their respective dates of
acquisition. As of result, period-to-period comparisons of the Company's results
of operations may not be meaningful. See Note 3 of Notes to Consolidated
Financial Statements.
The Company acquired ISI, Chesapeake and seven other businesses in
transactions accounted for as poolings of interests. Of these acquisitions, only
the acquisitions of ISI and Chesapeake were material to the Company's financial
condition and results of operations. Accordingly, the Company has restated its
consolidated financial statements to reflect the historic operations of ISI and
Chesapeake but not the other, immaterial businesses.
The Company typically licenses its process design software solutions for
terms of 3 to 5 years, its process operation software solutions for terms of 99
years, its planning and scheduling software solutions for terms of 5 or 25
years, and its other process management software solutions for terms of 99
years. See "Item 1. Business -- Software and Service Solutions."
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 support agreement. 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.
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29
Prior to fiscal 1996, the Company derived the substantial majority of its
total revenues from the licensing of software products. Since the acquisitions
of DMCC and Setpoint in the third quarter of fiscal 1996, the Company has
generated a significantly greater amount of service revenues related to the
implementation of its software solutions, particularly in connection with
projects involving advanced process control and real-time optimization. For
fiscal 1998, the Company derived 55.2% of its total revenues from the licensing
of software products and 44.8% of its total revenues from the provision of
services. The Company generally charges customers for consulting services on a
fixed-price basis, but charges customers for certain services, primarily on-site
advanced process control and optimization services, on a time-and-materials
basis. 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-materials 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 revenue in 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 acquisitions accounted for as
purchases. The net balance of these intangible assets as of June 30, 1998 was
$12.9 million and is being amortized over periods ranging from 5 to 12 years.
The amortization from completed acquisitions that was charged to operations was
$2.5 million for fiscal 1997 and $2.7 million for fiscal 1998 and will be
$692,000 for each of the next 11 quarters and $340,000 for each of the next
succeeding 8 quarters.
The Company's operating results for the fourth quarter of fiscal 1998 were
adversely affected by the level of telecommunications and overhead charges
incurred across the Company. These charges, which are allocated to various cost
and expense line items in the Company's statements of operation, did not
materially increase any particular cost or expense. In the aggregate, however,
the level of these expenses contributed to the Company's reporting
lower-than-planned net income for the fiscal quarter and year ended June 30,
1998.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain consolidated statement of operations data for the periods indicated:
YEAR ENDED JUNE 30,
-----------------------
1996 1997 1998
----- ----- -----
Revenues:
Software licenses......................................... 61.1% 53.2% 55.2%
Service and other......................................... 38.9 46.8 44.8
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
----- ----- -----
Expenses:
Cost of software licenses................................. 3.5 2.9 3.2
Cost of service and other................................. 23.7 27.8 27.1
Selling and marketing..................................... 31.9 28.9 29.7
Research and development.................................. 19.4 17.3 17.2
General and administrative................................ 9.3 8.8 8.0
Charge for in-process research and development............ 21.3 4.5 3.4
Costs related to acquisitions............................. -- -- 2.0
----- ----- -----
Total expenses.............................................. 109.1 90.2 90.6
----- ----- -----
Income (loss) from operations............................... (9.1) 9.8 9.4
Interest income........................................... 3.3 2.9 2.3
Interest expense.......................................... (1.2) (0.1) (0.1)
Other income (expense), net............................... (0.1) (0.1) (0.2)
----- ----- -----
Income (loss) before provision for income taxes............. (7.1) 12.5 11.4
Provision for income taxes................................ 5.4 5.2 5.6
----- ----- -----
Net income (loss)........................................... (12.5)% 7.3% 5.8%
===== ===== =====
COMPARISON OF FISCAL 1998 TO FISCAL 1997
REVENUES. Revenues are derived from software licenses and services. Total
revenues for fiscal 1998 increased 30.1% to $252.6 million from $194.1 million
in fiscal 1997.
Software license revenues represented 55.2% and 53.2% of total revenues for
fiscal 1998 and 1997, respectively. Revenues from software licenses in fiscal
1998 increased 35.1% to $139.4 million from $103.2 million in fiscal 1997. The
growth in software license revenues was attributable to software license
renewals covering existing users, the expansion of existing customer
relationships through licenses covering additional users, licenses of additional
software products, and, to a lesser extent, to the addition of new customers.
Total revenues from customers outside the United States were $114.7 million
or 45.4% of total revenues and $97.0 million or 50.0% of total revenues for
fiscal 1998 and 1997, respectively. The geographical mix of revenues can vary
from quarter to qu