SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Form 10-K
| (Mark One) | ||
ý | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended June 30, | ||
or | ||
o | 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: 0-24786
Aspen Technology, Inc.
| Delaware | ||
(State or Other Jurisdiction of | 04-2739697 (I.R.S. Employer Identification Number) | |
Ten Canal Park Cambridge, Massachusetts | ||
| (Address of Principal Executive Offices) | 02141 (Zip Code) |
Registrant’sRegistrant's telephone number, including area code:
(617) 949-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.10 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 þý No o
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’sRegistrant'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. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
As of September 27, 2002,December 31, 2003, the aggregate market value of common stock (the only outstanding class of common equity of the Registrant) held by nonaffiliates of the Registrant was $35,719,598,$407,102,457, based on a total of 30,077,05239,678,602 shares of common stock held by nonaffiliates and on a closing price of $2.85$10.26 on December 31, 2003 for the common stock as reported on the Nasdaq National Market.
As of September 27, 2002, 38,155,7218, 2004, 41,849,717 shares of common stock were outstanding.
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, 2002.2004. Portions of such proxy statement are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
| PART IV | ||||||
| Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | |||||
| Signatures | ||||||
Aspen, Aspen Plus, AspenTech, DMCPlus and ICARUS HYSYS are our registered trademarks,trademarks. Aspen IP.21, Aspen MIMI, Aspen Operations Manager Suite, Aspen PIMS, Aspen RefSYS andAspen Zyqad Orion, Petrolsoft, PetroVantageand Plantelligenceare our trademarks.
This Form 10-K contains “forward-looking statements”"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”"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 our control, including the factors set forth under “Item"Item 1. Business — Business—Factors that may affect our operating results and stock price.”" Although we believe 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 us or any other person that our objectives and plans will be achieved. Moreover, we assume 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.
We are a leading supplier of integrated software and services to the process industries, which consist of oil and gas, petroleum, chemicals, pharmaceuticalpharmaceuticals and other industries that providemanufacture and produce products from a chemical process. We develop two types of software to design, operate, manage and optimize our customers’ key business processes: engineeringOur software and manufacturing/ supply chain software.
Our products, consisting of software and services are designed to improve a variety of business activities, including streamlining raw material procurement, optimizingplant and process design, economic evaluation, production, reducing the cost of delivering finished products toproduction planning and scheduling, and managing operational performance. These solutions help our customers and increasing returns from plant assets. These products enable customers to improve their competitiveness and profitability by increasing revenues, reducing operating costs, reducing working capital requirements and decreasing capital expenditures.
Specifically,We offer two principal product lines: engineering & innovation, and plant operations/supply chain. Each of these product lines accounted for approximately one-half of our total revenues in our fiscal year ended June 30, 2004.
more quickly. Our flagship engineering products include Aspen Plus, HYSYS and Aspen Zyqad.
The specificTo address challenges offacing companies in the process industries, demand dedicatedwe are developing solutions thatspecifically targeted at the emerging Enterprise Operations Management, or EOM, market. The EOM market bridges the gap between enterprise IT business systems and plant floor systems. Our EOM solutions broaden the scope of optimization across the entire enterprise by linking engineering, plant and business systems to improve visibility of a company's enterprise-wide operations. Much like the enterprise resource planning, or ERP, market evolved from providing individual, best-in-class applications to providing a streamlined integrated solution suite, the EOM market is evolving out of the industry's need to have a more integrated solution to manage day-to-day operations. The foundation of our EOM solutions is derived from our engineering and plant operations/supply chain solutions and are tailoreddesigned to help companies obtain real-time operational data and to forecast or simulate the needs of each vertical market. For example, the process industries have no standard bill of materials and customers often have to understand theeconomic impact of co-products and by-products in the production process. With over 20 years of process industry experience, we have developed domain expertise and extended the breadthpotential decisions. The Aspen Operations Manager Suite is a key element of our EOM solution and provides functionality such as role-based visualization, performance scorecarding, event management and integration infrastructure. Companies can use our EOM solutions to provide a strategic advantage to our customers.help quickly determine the most profitable action and gain operational efficiencies.
Our customer base of over 1,2001,500 process manufacturers includes 46 of the world’sworld's 50 largest chemical companies, 23 of the world’sworld's 25 largest petroleum refiners, 1819 of the world’sworld's 20 largest pharmaceutical companies and 17 of the world’sworld's 20 largest engineering and construction firms that serve the process industries. We have established a network of strategic relationships to leverage our internal sales and marketing efforts, enhance the breadth of our solutions and expand our
implementation capabilities. This network includes relationships with systems integrators such as Accenture and IBM Global Solutions, and technology providers such as Intergraph.Intergraph, Microsoft, Schlumberger and UOP.
Industry Background
The process industries consist of oil and gas, petroleum, chemicals, pharmaceutical and other industries that provide products from a chemical process. Process manufacturers face a number of significant challenges, including volatile raw materials prices, overcapacity, environmental and regulatory requirements, and managing complex global businesses.
To succeed in an increasingly competitive global environment, process manufacturers must simultaneously reduce costs and increase efficiency, responsiveness and customer satisfaction. Process manufacturers produce petroleum products, petrochemicals, polymers, specialty chemicals, pharmaceuticals, pulp and paper, electric power, food and beverages, consumer products and metals and minerals, using certain common production methods. These methods involve chemical reactions, combustion, mixing, separation, heating, cooling and similar processes to make products in the form of bulk solids, liquids, gases, powders and films. Because process manufacturing tends to be asset-intensive, increases in profitability in these industries depend substantially upon reducing the costs of raw materials, energy and capital. Given the large production volumes typical in the process industries and the relatively low profit margins characteristic of many sectors within the process industries, even relatively small reductions in raw material or energy requirements or small
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TheWe believe that the process industries pose significant challenges because of the complex activities and relationships, or valuesupply chains required to purchase raw materials, manufacture products, and deliver final products to customers. Factors that make it difficult for these companies to manage their value chainsoptimize these processes and to make optimal economic decisions include:include the following:
OverHistorically, technology solutions have played a major role in helping process companies to drive productivity improvements. In the last 20 years, companies1980s, this increase in efficiency came from the process industries have invested in a numberuse of technologiesdistributed control systems, or DCS, to improve their performance acrossautomate the enterprise.management of plant hardware. Process manufacturers initially automated their production processes by deploying distributed control systems, or DCS, which used computer hardware systems, communication networks and industrial instruments to measure, record and automatically control process variables. More recently, process
In the 1990s, productivity was enhanced by the adoption of ERP systems to streamline administrative functions. Process manufacturers have automated key business processes by implementing enterprise resource planning, or ERP systems, which are software solutions which enhancethat optimize the flow of business information across the enterprise. Although DCS and ERP solutions can be important components of a solution to improve manufacturing enterprise performance, they do not incorporate either the detailed chemical engineering knowledge essential to optimize the design and operation of related manufacturing processes or the plant performance data required to support more intelligent real-time decision making.
Following multiple mergers and acquisitions among process manufacturing companies, the global operations of process manufacturers global operations arebecame more complicated and difficult to manage. Theymanage, since they were managing more plant assets than ever before. As these companies expand, they require enterprise information technology, or IT, solutions that provide clear visibility to support mission-critical business decisions and that enable operational improvement across the entire organization.
With the widespread adoption of transactional ERP systems, thesemany companies are poised to capturecapturing a new wavesignificant amount of value by better leveraging information throughoutabout their enterprises.operational performance. However, even though ERP is acting as a "cash register" for their businesses and telling them what has happened in the past. Although these systems are improving information flow and streamlining internal transactions, their influence on day-to-day operational activities is limited. Our EOM solutions provide decision support tools that use real-time plant information to determine the best economic alternative for the enterprise. These decisions cannot be adequately made by simply analyzing historical data from our ERP or from disparate software applications that are not integrated together. By modeling future operational behavior, using consistent data and capturing transactional data, they are unable to provide the answers to the fundamental business questions process manufacturers face every day: How can they run their operations and develop their plant assets more effectively based on the information they get outmodels of their ERP systems?facilities, we are able to show our customers the path to capturing economic value and materially improve profitability.
To optimize performance, process manufacturers are demanding tools that enable them to fundamentally improve their highly complex production methods and processes. To meet these objectives, intelligent decision-support products must provide an accurate understanding of a plant’splant's capabilities, as well as accurate planning and collaborative forecasting information.
As process manufacturers have become more adept at using point solutionsproducts that optimize individual engineering and manufacturing/ plant operations/supply chain business processes, they increasingly are seeking additional performance improvements by integrating these products, both with one another and with DCS, ERP and other enterprise systems, to provide real-time, intelligent decision support. To achieve these objectives, companies are implementing manufacturing/ plant operations/supply chain solutions to integrate related business processes across a single production facility. Companies are also implementing integrated manufacturing / manufacturing/supply chain solutions to extend the solutions across multiple plants within an enterprise, by adding planning and scheduling functionality and extending integration beyond the enterprise walls.
Process manufacturers look to optimize their supply chains by reducing cycle times substantially, adjusting production quickly to meet changing customer requirements, synchronize key business processes with plants and customers across numerous geographies and time zones, and quote delivery dates more
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The AspenTech Advantage
AspenTech has been focused on developing software for the process industries for more than 20 years. Customers have learned to trust the knowledge and experience of our people and rely on the value our products deliver. Today, process companies are looking for enterprise solutions that are low risk, deliver maximum returns and support their strategic vision. With the proven value of our technologies, the strength of our partners, and our commitment to customer service, we are uniquely positioned to meet the needs of the marketplace. This industry experience and the breadth of our solution allow us to identify valuable new sources of profit for our customers, provide effective implementations with shorter time to benefit, optimize business processes and help our customers leverage more value from existing IT investments such as ERP systems.
By maintaining a clear focus on the needs of our markets, we are established as a key strategic supplier, with a strong leadership position in all of the major markets we serve. Our technologies are tailored to the complex business processes that lie at the heart of our customers’ operations, and which have a direct impact on their profitability.
We have built our reputation as a technology leader over nearly two decades by developing substantial domain expertise in chemical engineering, modeling, computer science and operations research. We believe we have achieved our market leadership in part by solving many challenging engineering, manufacturing and supply chain problems faced by the process industries.
Leading processProcess manufacturers use our solutions to improve their competitiveness, not only by reducing raw material and energy use, cycle time, inventory cost and time to market, but increasingly by synchronizing and streamlining key business processes. Our competitive advantage is based on the following key attributes:
Substantial Process Industry Expertise.process industry expertise.We By developing software for the process industries for more than 20 years, we believe we have amassed the world’sworld's largest collection of process industry domain knowledge to develop and implement our products. Our founders and executives have pioneered many of the most significant advances that today are considered industry-standard productssoftware applications across a wide variety of engineering, manufacturing and supply chain applications. Our services and development staff are well qualified to deliver value to our customers based on the practical experience gained from supporting IT installations for more than 1,2001,500 process manufacturers worldwide.
This significant base of chemical engineering expertise, process manufacturing experience and industry know-how serves as the foundation for the proprietary solution methods, physical property models and data estimation techniques embedded in our software solution. We continually enhance our software applications through extensive interaction with our customers, some of which have worked with our products over the past twenty years. To complement our software expertise, we have
assembled a staff of approximately 530400 project engineers to provide implementation, advanced process control, real-time optimization, supply chain management and other consulting services. We believe this consulting team is the largest of any competitive independent solution provider. Our expertise spans a number of the process industry’sindustry's vertical markets, from oil and gas, chemicals, petrochemicals and refining to pharmaceuticals, specialty chemicals and polymers, and others.
Large and Valuable Customer Base.valuable customer base.We view our customer base of more than 1,2001,500 process manufacturers as an important strategic asset and as evidence of one of the strongest franchises in the industry. We count among our customers 46 of the world’sworld's 50 largest chemical companies, 23 of the world’sworld's 25 largest petroleum refiners, and 1819 of the world’sworld's 20 largest pharmaceutical companies. We also have numerous leading customers in other vertical markets. In addition, 17 of the 20 largest engineering and construction firms that serve these industries use our design software. These relationships enable us to identify and develop or acquire solutions that best meet the needs of our customers, and they are a valuable part of our efforts to penetrate the process industries with new software solutions. OurWe believe that our customer base is underpenetrated in the use of strategic enterprise-wide products, particularly for our manufacturing/ plant operations/supply chain products. As process
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Rapid, High Returnhigh return on Investment.investment.We believe that customers purchase our products because theyour products provide rapid, demonstrable and significant returns on investment. Because of the large production volumes and relatively low profit margins typical in many of the process industries, even small improvements in productivity can generate substantial recurring benefits. First-year savings can exceed the software and implementation costs of our products. Our integrated solution, whether applied across a plant, an enterprise or an extended supply chain, can yield even greater returns. In addition, our products generate important organizational efficiencies and operational improvements, the dollar benefits of which can be difficult to estimate.quantify.
Complete, Integrated Solution.integrated solution.While some vendors offer stand-alone products that compete with one or more of our products, we believe we are the only provider that offers a comprehensive solution to process manufacturers that addresses key business processes across the value chain.enterprise and trading partners. Our solutions can be used on a stand-alone basis, integrated with one another or integrated with third-party applications. Customers can initially choose to implement a point solution or our integrated solution, which is scalable as the customer’scustomer's needs evolve. A key part of this integration and scalability is enabled by our Operations Manager Suite, which is an important differentiator from our competitors. Our manufacturing/ plant operations/supply chain offering integrates multiple business processes within a single plant, across the enterprise and with customers, suppliers and other trading partners. The breadth of our solutions expand the overall value we can bring to our customers and represent an important source of competitive differentiation.
Strategy
Our strategy is to leverage our leadership position inas a technology leader with both theour engineering and manufacturing/ plant operations/supply chain solutions and to developdeliver new, innovative solutions that will create economic value for our customerscustomers. To implement this strategy we intend to:
Profitably grow existing products into an integrated suite of scalable vertical industry solutions. We intend to increase the growth and profitability of our existing engineering and plant operations/supply chain product lines. Through the continued development of an integrated suite of scalable vertical industry modules built around key industry business processes, we believe that we will be unmatched by other competitorsable to provide a broader set of capabilities and deliver a higher value proposition to existing and prospective
customers. We recently launched our Aspen Oil & Gas vertical market solution, which combines several of our key technologies to provide an integrated solution to the upstream oil and gas industry.
Establish AspenTech as the Enterprise Operations Management solution provider of choice. As a result of the broad array of products we offer in our engineering & innovation and plant operations/supply chain product lines, we believe we are in a unique position to offer fully integrated solutions that use consistent data and models to provide enhanced visibility and decision-making based on accurate, real-time information. These systems can offer existing and new customers a virtual "operational cockpit" to monitor their key performance indicators, running their businesses using a true picture of their operations rather than estimates based on historical data. With these integrated solutions, we are enabling companies to embrace new strategies, creating demand-driven supply chains, lowering cost of IT ownership and being more responsive to market changes. The Aspen Operations Manager Suite, launched in 2003, is a key element of our EOM solution.
Invest selectively in new, high-value solutions. We intend to invest selectively in a few new solutions that unlock new sources of value for customers in all segments of the process industries. To deliver value in the marketplace.EOM market, we are introducing a few targeted applications that incorporate technology from both our engineering and manufacturing/supply chain product lines. These applications include:
Provide an open architecture, easy-to-integrate solution that lowers IT lifecycle cost of ownership. A key partcomponent of thisour EOM strategy is to integrate alldevelop and deploy an open architecture application platform that allows for easier integration between our applications and between third-party applications, provides consistent data and models across the enterprise and enhances workflow. Customer benefits of our productsapplication platform include lower integration and technologies to create enterprise-enabled solutions that enable integratedmaintenance costs, enhanced interoperability between a wide variety of applications, including ours, tightened linkage between operational decisions and financial impact by the use of consistent models and improved business processes.
Develop Innovative Enterprise Solutions.process execution by enhanced workflow. We are developing enterprise technologies designed to connect easily to other componentshave a current commercial release of the IT infrastructure and to be implemented in a series of steps, rather than one, large-scale implementation. These products will leverage our existing technologies, and will also include a number of new integration and business process products. We are seeking to become the first software vendor to assemble and offer all of the components required for an enterprise solution. We believe that customers will increasingly demand integrated solutions and that our development work will enable us to become a strategic software provider and provide products that other “niche” competitors are unable to match.
We are working closely with Accenture to further develop these products. Accenture is providing intellectual property, software development resources and business process expertise to augment our own domain expertise. Accenture is our most significant strategic partner as they are helping us develop and market our manufacturing/ supply chain products, as well as being our preferred implementerapplication platform in the chemicals and petroleum industries.marketplace.
Work Continue to forge strong relationships with Strategic Partners.strategic alliance partners.Partners Alliance partners are an important part of our strategy to help us accelerate our time to bring products to market and provide us with additional resources to implement enterprise solutions. Partners represented 16 percent of our software sales in our last fiscal yearWe have invested considerable time and an important part of our strategy is to see this increase substantially over the long-term. In addition toresources into our alliance with Accenture weto create new enterprise-enabled products for the process industry market. We believe that the success of these products will be an important driver of our future growth prospects. We also have a strategic systems integrator relationshiptechnology alliances with IBM Global SolutionsIntergraph, Microsoft, Schlumberger and a technology alliance in our engineering business with Intergraph. Our strategy isUOP. We intend to continue to work with a select number of strategic alliance partners that will help us deliver our vision of enterprise value to our key process industry customers.
Drive Two Product Lines: Engineering and Manufacturing/ Supply Chain. Our engineering and manufacturing/ supply chain product lines have different value propositions, different end users and are built on different technology components. While many of our customers buy both product lines, we believe the dynamics of each product line warrant a separate focus on each. We will drive our business as two distinct product lines, and we believe that this strategy will allow each product line to grow more quickly than if they
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Our engineering product line creates value for our customers by improving the way they develop and deploy physical plant assets and intellectual property assets. With our acquisition of Hyprotech in May 2002, we believe we are positioned to provide the process industries with even more value in their engineering operations. Currently, most customers use our software with separate engineering teams to create models for their petroleum and chemicals operations. We believe that by providing one unified model for both businesses, we will enable companies to drive greater efficiencies throughout their enterprises. We also believe that there are opportunities for efficiency increases by creating engineering solutions that make it easier for companies and their partners to collaborate. Our strategy is to use our combined expertise to develop new solutions that will help us to win new customers and better compete against other vendors.
Our manufacturing/ supply chain products focus on our customers’ day-to-day and strategic operational activities. These products help our customers run their supply chains, refineries and plants more efficiently, helping them make more profitable decisions. Working with Accenture, we believe we can offer the most technologically advanced family of manufacturing/ supply chain products. In addition to addressing a broad range of challenges faced by process manufacturers, we believe many of our solutions are best-in-class, including process simulation, advanced process control, real-time optimization, scheduling and planning, process information management and supply chain management. Because these applications form the core of our integrated solution, we are committed to broadening and enhancing the functionality of our best-in-class products.
Expand Competitive Differentiation Through Domain Knowledge.We possess an extensive pool of intellectual capital, with exceptional expertise in chemical engineering, computer science, operations research and other process-relevant disciplines. To differentiate and accelerate implementation of our integrated solution, we have created vertical market-focused business units to develop and commercialize unique, cost-effective solutions that offer our customers best practice approaches to common industry-specific challenges. In addition, the expertise and process industry know-how of our project engineers speeds customer implementation of our solutions. We intend to continue to identify additional opportunities to accelerate adoption of our integrated solution by leveraging our extensive domain knowledge.
Products: Software and Services
We provide software and services that enable our customers to make improvements across their enterprises. Our engineering software products are used on the engineer’sengineer's desktop and typically require a minimal amount of services. These solutions are typically sold on a term basis and represented approximately 68% of our fiscal 2004 software license revenues. Our manufacturing/ plant operations/supply chain products are used inthroughout the plant and across the supply chain and typically are services-intensive due to their complex nature. The following elements are key componentsThese solutions represented approximately 50% of our selling process and overall solution set.
Our major global process industry customers are increasingly looking to partner with a few strategic software providers that can help them operate efficiently and profitably. To ensure that we continue as one of
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We categorize our software into two main categories: engineering and manufacturing/ supply chain. Under these two categories fall three main product families. Our foundation products consist of our traditional market-leading point products for modeling and simulation, supply chain, advanced control and optimization and production and information management. They are the “engines” of our business process products, which is our second family of products. Our business process products automate the workflow for specific business processes and are pre-configured for a specific application. Our Aspen enterprise platform products provide the basic infrastructure to support business process automation across the enterprise and are based on leading industry standards. All three families of products work together to deliver substantial economic value for our customers.
We design our products to capture process knowledge in a consistent, accurate and reliable form based on models that customers can use as the basis for decision-making across the entire manufacturing life-cycle.decision making. These models and the associated knowledge captured in the supporting IT systems provide real-time, intelligent decision support across the entire process manufacturing enterprise. Our software products can be linked with a customer's existing ERP products and DCS systems to further improve a customer’scustomer's ability to gather, analyze and use this information across the process manufacturing life-cycle.life cycle.
Engineering.Engineering.In the process industries, maximizing profit begins with optimal design. Process manufacturers must be able to address a variety of challenging questions relating to strategic planning, collaborative engineering and debottleneckingde-bottlenecking and process improvement — improvement—from where they should locate their facilities, to how they can make their products at the lowest cost, to what is the best way to operate for maximum efficiency. To address these issues, they must improve asset optimization to enable faster, better execution of complex projects. Our engineering solutions help companies maximize their return on plant assets and collaborateenable collaboration with engineers on common models and projects. These products form the foundation for optimizing process manufacturers’manufacturers' supply chains and manufacturing facilities. By using our products to create and capture knowledge in the form of models, information can be re-used across the business. Profit improvements result from:
Our flagship engineering products in this area include Aspen Plus, Aspen HysysHYSYS and Aspen Zyqad. Our engineering tools are based on an open environment and are implemented on the Microsoft WindowsMicrosoft's operating system, while selected components are available for implementation on UNIX and VMS systems. Implementation of our engineering products does not typically require substantial consulting services, although services may be provided for customized model designs and process synthesis.
Plant Operations/supply chain.Manufacturing/ Supply Chain.Our manufacturing/ plant operations/supply chain products cover everything focus on optimizing companies' day-to-day process industry activities, enabling them to make smarter, more profitable decisions—from choosing the right raw materials, to producing them efficiently in theimproving plant performance, to delivering finished productsproduct in the most cost-effective manner possible. This broad scopemanner. We have several product families in the plant operations/supply chain product line that are specifically tailored to the business processes of business process requires that we have the appropriate breadtheach of products to help optimize these processes.our vertical markets.
The ever-changing nature of the process industries means new profit opportunities can appear at any time. To identify and seize these opportunities, process manufacturers must be able to increase their visibilityaccess to data and information across the value chain, optimize planning and collaborate across the value chain, and detect and exploit supply chain opportunities. Our manufacturing/ plant operations/supply chain products help companies develop their most optimal operating plans based on real-time demand and market trends. Business activities
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| decreased response times. |
The process industries’industries' typical production cycle offers many opportunities for optimizing profits. Process manufacturers must be able to address a wide range of issues driving execution efficiency and cost, from selecting the right feedstock and raw materials, to production scheduling, to identifying the right balance among customer satisfaction, costs and inventory. Our manufacturing/supply chain products support the execution of the optimal operating plan in real-time and include the key functions of sourcing, making and delivering physical products to customers.
In the process industries, the selection of the right raw material has a significant impact on product quality and profitability. Because many products in the process industries can be made from a variety of raw materials using different techniques, there typically is far greater complexity in process manufacturing than in discrete manufacturing. In this environment, process manufacturers must be able to make quick decisions as to which feedstock is the most profitable. Profit improvements come from:
The plant isIn order to take advantage of the centeremerging EOM market, we have developed a suite of uncertainty and cost inmodular vertical EOM solutions to address the major challenges of various process industries’ supply chains. Our integrated solution in the plant, Plantelligence, providesindustries. We have also developed a new suite called Aspen Operations Manager Suite, to enable real-time plant information to determine the optimum product mix at an individual manufacturing location, how a manufacturing facility’s production schedule should be adjusted to meet an unexpected change in customer demand and how to operate the plant within safety and environmental constraints. Plantelligence is designed to integrate with a plant’s hardware systems, ERP system andperformance management through seamless integration between our solutions, existing enterprise IT systems to optimize the operation of the plant. By uniting our products in a common framework, Plantelligenceand third-party applications. The Aspen Operations Manager Suite provides a comprehensive set of business improvements to process manufacturing plants. The applicable business processes include production scheduling, productionfunctionality such as role-based visualization, performance scorecarding, event management and production control. Profit improvements come from:an integration infrastructure. Key customers for the Aspen Operations Manager suite include Dupont, Conoco Phillips and Shell Oil.
Our solutions are designed to help customers with near-term activities such as determining how to best balance customer satisfaction, costs and inventory. They are also used to more effectively translate customer inquiries into orders, determine in real-time whether to commit to a new order and provide a reliable delivery date, and determine how to deliver an order to a customer in the most reliable manner and at the lowest cost. Profit improvements come from:
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Services
We offer implementation, advanced process control, real-time optimization and other consulting services in order to provide our customers with complete solutions. These services are primarily associated with the implementation of our plant operations/supply chain solutions. Customers typically usehave historically used our engineering solutions without implementation assistance. However, we are beginning to offer more engineering-related services to customers, so services relating to engineering may represent a higher percentage of our consulting revenue in the future. Customers that purchase manufacturing/ plant operations/supply chain products frequently require implementation assistance from us and our partners.
Customers who obtain consulting services from us typically engage us to provide such services over periods of up to 24 months. We generally charge customers for consulting services, ranging from supply chain to on-site advanced process control and optimization services, on a fixed-price basis or time-and-materials basis.
As of September 15, 2002,1, 2004, we employed a staff of approximately 530400 project engineers to provide consulting services to our customers. We believe this large team of experienced and knowledgeable project engineers provides an important source of competitive differentiation. We primarily hire as project engineers individuals who have obtained doctoral or master’smaster's degrees in chemical engineering or a related discipline or who have significant relevant industry experience. Our employees include experts in fields includingsuch as 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 our planning and scheduling products and a limited number of licensees of our process information management and supply chain management systems have obtained implementation consulting services from third-party vendors. Our strategy is to continue to develop and expand relationships with third-party consultants in order to provide a secondary channel of consulting services.
Partnerships
Our strategy is to establish partnerships with a few select companies -companies that offer a complementary set of technologies, services and industry expertise and holdthat help us deliver integrated EOM solutions to process manufacturers. Historically, most of our license sales have been generated through our direct sales force. A key strategic initiative is to increase the same beliefamount of our software license sales that process manufacturers can significantly improve their profitability by applying the right IT solutions strategically across their business enterprises. Among these leading partners are companies likederived from partners. Companies such as Accenture, Intergraph, Microsoft, Schulumberger and IBM Global Solutions, including the consulting practice it recently acquired from PricewaterhouseCoopers -world-class organizations thatUOP can help us deliver compelling, differentiated solutions to the compelling solutions our customers require,marketplace and can help us accelerate our growth within our target markets. This past year partners generated 16% of our software revenues, which was up from 10% in fiscal year 2001.
Our alliance with Accenture is an important example of the strategic value our partners provide. Together, we have identified the need for a new range of “next generation” products for the chemicals and petroleum industries. The products will enable our customers to build on their ERP investments and make a step-change in the way they run their supply chain and manufacturing operations, resulting in significant bottom-line benefits.
Developing these products requires extensive industry expertise. The task involves designing and building new business processes, and using technology to automate a range of functions across an organization. Achieving this objective requires leveraging the capabilities of our partners, including applying Accenture’s detailed business process knowledge to refine our solutions and incorporate the industry’s most innovative best-practices. Accenture has a track record of helping to develop new solutions in the process industries and the expertise it gained from its “IS Oil” initiative, in which it helped to tailor ERP software for the petroleum industry, will be an important component of creating new solutions that help us to penetrate the market.
The combined resources of both companies will not only enable us to get to market faster with these innovative new products, they will also allow us to market and implement them more effectively. Accenture’s
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Technology and Product Development
Our base of chemical engineering expertise, process manufacturing experience and industry know-how serves as the foundation for the proprietary solution methods, physical property models and industry-specific business process knowledge embedded in our software solutions. Our software and services solutions combine three of our core competencies:
Our product development activities are currently focused on strengthening the integration of our key products, expanding the set of business processes our software covers, exploiting web technology, and enhancing and simplifying the user interfaces. During fiscal 2002, 2003 and 2004, we incurred research and development costs of $74.5 million, $65.1 million and $59.1 million, respectively, which represented 23.2%, 20.2% and 18.1% of total revenue, respectively. As of September 15, 2002,1, 2004, we employed a product development staff of approximately 530390 people.
Customers
Our software solutions are installed at the facilities of more than 1,2001,500 customers worldwide. The following table sets forth a partial selection of our customers from whomwhich we generated at least $300,000 of revenues in fiscal 20012003 or 2002.2004. For fiscal 2002,2004, the percentage our license revenues consisted of the following: 52% inrevenue derived from specific vertical markets were as follows: 35% from refining and petrochemicals, 15% in polymers, 14% in life sciencesoil and specialtygas, 30% from chemicals, 10%20% from engineering and construction design firms, and 9% in15% from other segments of the process industries.industries, the largest of which were pharmaceutical and consumer package goods.
10Chemicals
Air Liquide
Air Products & Chemicals Inc.
DSM
BASF AG
BP
BOC Group
Celanese AG
Degussa AG
The Dow Chemical Company
Eastman
Huntsman Corporation
Mitsubishi Rayon Engineering
Mitsui Chemicals
Nova Chemicals, Ltd.
Sasol
Shell
Engineering and Construction
Bechtel Group
Fluor Enterprises
Foster Wheeler
Jacobs Engineering Group, Inc.
JGC Corporation
Lurgi GmbH
Technip-Coflexip
| Life Sciences and Specialty Chemicals Akzo Nobel Aventis Pharma Bayer Corporation Eli Lilly GlaxoSmithKline, Inc. Hercules, Inc. ICI Lonza Group Merck & Co. Owens Corning Pfizer |
Refining, Oil and Gas
BP
Chevron Corporation
Citgo Petroleum Corporation
ENI S.p.A
Exxon Mobil
Gary-Williams Energy Corp.
Lyondell Citgo Refining Company Ltd.
PDVSA
Petro-Canada
Phillips Petroleum Company
Repsol YPF
Saudi Aramco
Shell Oil Company
SK Corp Ltd.
Sinopec
StatOil
Sunoco Inc.
Total
Valero
Sales and Marketing
We employ a value-based sales approach, offering our customers a comprehensive suite of software and service products that enhance the efficiency and productivity of their process manufacturing operations. We have increasingly focused on selling our products as a strategic investment by our customers and therefore target our principal sales efforts at senior management levels, including chief executive officers and senior decision makers in manufacturing, operations and technology. We believe our development of new enterprise-enabled products and our alliance with Accenture will help us to continue to focus and deliver our message forto the chief executive, chief financial and chief information officers of our customers and that our ability to sell at senior levels within customer organizations is an important competitive advantage.customers.
Because the complexity and cost of our products often result in extended sales cycles, we believe that the development of long-term, consultative relationships with our customers is essential to a successful selling strategy. To develop these relationships, we have organized our worldwide sales around our two solution sets, engineering and manufacturing/supply chain, as well as focusing on a select number of worldwide strategic accounts.
In order to market the specific functionality and other complex technical features of our software products, each sales account manager and global account manager works with specialized teams of technical sales engineers and product specialists organized for each sales and marketing effort. Our technical sales
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We currently have 12three direct sales offices in cities in the United States and 21 direct sales offices in cities outside of the United States, including Barcelona, Beijing, Brussels, Calgary, Cambridge (England), Dusseldorf, Paris, Singapore and Tokyo. In geographic areas of lower customer concentration, we use sales agents and other resellers to leverage our direct sales force and to provide local coverage and first-line support. Our overall sales force, which consists of quota carrying sales account managers, sales services personnel, business support engineers, partner organization personnel, industry business unit professionals, marketing personnel and support staff, consisted of approximately 500320 persons on September 15, 2002.1, 2004.
We supplement our direct sales efforts with a variety of marketing initiatives, including public relations activities, campaigns to promote awareness among industry analysts, user groups and our triennialbi-annual conference, AspenWorld. AspenWorld has become a prominent forum for industry participants, including process manufacturing executives and analysts, to discuss emerging technologies and process industry technologies and to attend seminars led by industry experts. We will hold our next AspenWorld inconference from October 2002.11 through 15, 2004.
We also license our software products at a substantial discount to universities that agree to use our products in teaching and research. We believe that students’students' familiarity with our products will stimulate future demand once the students enter the workplace. Currently, more than 650 universities use our software products in undergraduate instruction.
Competition
Our markets are highly competitive. Bothcompetitive and are characterized by rapid technological change. We expect the intensity of competition in our engineering and manufacturing/ supply chain solutions compete with products of larger competitors with substantial resources. These competitors include businesses such as Simulation Sciences, a division of Invensys, the industrial automation control division of Honeywell, ABB, SAP, Manugistics, i2 Technologies, MDC Technology, Cadcentre, WinSim, Inc. (formerly ChemShare) and other public and privately held companies. We also face competition from large companiesmarkets to increase in the process industriesfuture as existing competitors enhance and expand their product and service offerings and as new participants enter the market. Increased competition may result in price reductions, reduced profitability and loss of market share. We cannot assure you that have developed their own proprietary software solutions. Wewe will be able to compete primarily on the basis of reputation, product reliability and performance, product features and benefits, price and post-sale service and support.
successfully against existing or future competitors. Some of our currentcustomers and companies with which we have strategic relationships also are, or in the future may be, competitors of ours.
Many of our competitors have significantly greater financial, marketing and other resources than we have. In addition, manyhave in a particular market segment or overall. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They also may adopt more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners.
Many of our current competitors have established, and may in the future may establish, cooperative relationships with third parties to improve their product offerings and to increase the availability of
their products to the marketplace. The entryIn addition, competitors may make strategic acquisitions to increase their ability to gain market share or improve the quality or marketability of new competitors or alliances into our markettheir products. These cooperative relationships and strategic acquisitions could reduce our market share, require us to lower our prices, or both. Many
Our primary competitors differ between our two principal product areas:
In addition, we face competition in all areas of our business from large companies in the process industries that have internally developed their own proprietary software solutions.
We believe the key competitive differentiator in our industry is the value, or return on investment, that our software and services provide. We seek to develop and offer an integrated suite of targeted, high-value vertical industry solutions that can be ableimplemented with relatively limited service requirements. We believe this approach provides us with a competitive advantage over many of our competitors, which offer software products that are more service-based. The principal competitive factors in our industry also include:
In addition, we are currently in the process of trying to settle a complaint filed against us by the Federal Trade Commission, or enhanceFTC. The FTC matter is discussed below under "Factors that may affect our operating results and stock price—Risks Related to Our Business." The settlement has not received, and may not receive, final approval from the FTC and the impact on our competitive position against current and future competitors.environment from this potential settlement is unlikely to be known until several months after the settlement has officially been approved.
Intellectual Property
We regard our software as proprietary and rely on a combination of copyright, patent, trademark and trade secret laws, license and confidentiality agreements, and software security measures to protect our proprietary rights. We have obtained or applied for patent protection in the United States with respect to some of our intellectual property, but generally do not rely on patents as a principal means of protecting intellectual property. We have registered or applied to register some of our significant trademarks in the United States and in selected other countries.
We generally enter into non-disclosure agreements with our employees and customers, and historically have restricted access to our software products’products' source codes, which we regard as proprietary information. In a few cases, we have provided copies of the source codes for products to customers solely for the purpose of special product customization and have deposited copies of the source codes for products in third-party escrow accounts as security for ongoing service and license obligations. In these cases, we rely on non-disclosure and other contractual provisions to protect our proprietary rights.
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The laws of many countries in which our products are licensed may not protect our products and intellectual property rights to the same extent as the laws of the United States. The laws of many countries in which we license our products protect trademarks solely on the basis of registration. We currently possess a limited number of trademark registrations in selected foreign jurisdictions and have applied for foreign copyright and patent registrations, which correspond to the United States trademarks, copyrights and patents described above, to protect our products in foreign jurisdictions where we conduct business.
The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of our technology or independent development by others of technologies that are substantially equivalent or superior to our technology. Any misappropriation of our technology or development of competitive technologies could harm our business. We could incur substantial costs in protecting and enforcing our 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 our business. In such an event, we may be required to incur significant costs in litigating a resolution to the asserted claims. The outcome of any litigation might require that we pay damages or obtain a license of a third party’sparty's proprietary rights in order to continue licensing our products as currently offered. If such a license were required, it might not be available on terms acceptable to us, or at all.
We believe that the success of our business depends more on the quality of our proprietary software products, technology, processes and know-how than on trademarks, copyrights or patents. While we consider our intellectual property rights to be valuable, we do not believe that our competitive position in the industry is dependent simply on obtaining legal protection for our software products and technology. Instead, we believe that the success of our business depends primarily on our ability to maintain a leadership position in developing our proprietary software products, technology, information, processes and know-how. Nevertheless, we attempt to protect our intellectual property rights with respect to our products and development processes through trademark, copyright and patent registrations, both foreign and domestic, whenever appropriate as part of our ongoing research and development activities.
Employees
As of September 15, 2002,1, 2004, we had a total of 2,2001,550 full-time employees. None of our employees is represented by a labor union, except that approximately 5021 employees of Hyprotech LTDUK Ltd belong to Prospect Union. We have experienced no work stoppages and believe that our employee relations are good.
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Factors that may affect our operating results and stock price
A numberInvesting in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties existdescribed below before purchasing our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could affectfall, and you may lose all or part of the money you paid to buy our future operating results, including the following.common stock.
The FTC has filed a complaint against us with respect to our acquisition of Hyprotech, and an adverse outcome would have a material adverse effect on our business, operating results and financial position.Our lengthy sales cycle makes it difficult to predict quarterly revenue levels and operating results.
On August 7, 2003, the staff of the FTC filed a civil administrative complaint alleging that our acquisition of Hyprotech in May 2002 was anticompetitive in violation of Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton Act. On July 15, 2004 the FTC announced that it had accepted a proposed consent decree for public comment. The public comment period ended August 13, 2004, and the FTC is currently considering whether to make the proposed consent decree final. For a further description of the background and proceedings for this matter, please see "Item 3. Legal Proceedings—FTC Complaint" below.
If the proposed consent decree is not approved by the FTC and is returned to litigation, and our acquisition of Hyprotech is determined to have violated the law, we would be subject to one of a variety of possible remedies, any of which would materially limit our ability to operate under our current business plan and would have a material adverse affect on our operating results and financial position.
We understand that the FTC has typically prevailed in merger challenges, and that, if this matter returns to litigation, there is a substantial probability that the FTC would prevail in its challenge to our acquisition of Hyprotech. Because of the length of the appeals process, the outcome of this matter may not be determined for several years. The likely outcome of this matter is not estimable at this time.
If the FTC were to prevail in this challenge, it could seek to impose one of a variety of remedies, any of which would have a material adverse effect on our ability to continue to operate under our current business plan and on our results of operations and financial position. These potential remedies include reversal of the Hyprotech acquisition such that we would no longer own Hyprotech or any of its assets, or mandatory licensing of Hyprotech software products and our other engineering software products to one or more companies, which could include one of our competitors. Potential remedies could also include creation of a new competitor through the divestiture of certain of our engineering software products, assets, technology, employees, and customer agreements. The price we would receive from a buyer or licensee is likely to be less than the price we originally paid.
In addition, Hyprotech products have become material to our business, including for example HYSYS.Process and HYSYS.Dynamics, and Hyprotech technologies have been incorporated into products that are material to our business strategy, including for example RefSYS. Moreover, former Hyprotech personnel now hold a variety of positions throughout our company, and we may experience a disruption of our operations if we were to lose the services of some of these personnel as a result of the enforcement of a remedy.
If the proposed consent decree is approved in present form or in amended form, there is no assurance that we will be able to complete a transaction within the time periods of the consent decree, and if a transaction is completed by us or by a trustee appointed by the FTC, there could be negative, adverse effects on our operations.
The FTC may approve the consent decree in its current form or it may request amendments to the consent decree. We are not required to accept amendments, but the FTC's approval of a consent decree may be dependent on amending it. If the consent decree is approved in its current form, we will have 60 or 90 days to complete a transaction. If we do not close a transaction within the applicable period then the FTC may appoint a trustee to find a buyer for approval by the FTC. If an FTC-approved acquirer closes a transaction with us under the terms of the consent decree, then there will be adverse effects on our operations, including, the loss of our current operator training business, the creation of a new competitor that acquires the divested assets, increased costs in supporting the products for the FTC-approved acquirer under a two year support agreement, and other terms and conditions that may be negotiated with an FTC-approved acquirer.
The FTC investigation and the related proceeding have had, and will continue to have, adverse effects on our operations.
The FTC investigation and the related proceeding have had, and will continue to have, the following adverse effects:
As of the filing date of this report, we have accrued $17.9 million to cover the cost of (1) professional service fees associated with our cooperation in the FTC's investigation since its commencement on June 7, 2002, and (2) estimated future professional services fees relating to the initial proceeding and our preparation in advance of such proceeding. If these estimates are insufficient to cover all future costs relating to the proceeding, we may need to accrue additional amounts, which may have a material adverse effect on our results of operations.
Our lengthy sales cycle makes it difficult to predict quarterly revenue levels and operating results.
Because license and implementation fees for our software products are substantial and the decision to purchase our products typically involves members of our customers’customers' senior management, the sales process for our solutions is lengthy and can exceed one year. Accordingly, the timing of our license revenues is difficult to predict, and the delay of an order could cause our quarterly revenues to fall substantially below expectations.our expectations and those of public market analysts and investors. Moreover, to the extent that we succeed in shifting customer purchases away from individual software products and toward more costly integrated suites of software and services, our sales cycle may lengthen, which could increase the likelihood of delays and cause the effect of a delay to become more pronounced. We have limited experience in forecasting the timing of sales of our integrated suites of software and services. Delays in sales could cause significant shortfalls in our revenues and operating results for any particular period.
Fluctuations in our quarterly revenues, operating results and cash flow may cause the market price of our common stock to fall.
Our revenues, operating results and cash flow have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control, including:
We ship software products within a short period after receipt of an order and typically do not have a material backlog of unfilled orders for software products. Consequently, revenues from software licenses in any quarter are substantially dependent on orders booked and shipped in that quarter. Historically, a majority of each quarter’squarter's revenues from software licenses has come from license agreements that have been entered into in the final weeks of the quarter. Therefore, even a short delay in the consummation of an agreement may cause our revenues to fall below expectations of public expectationsmarket analysts and investors for that quarter.
Since our expense levels are based in part on anticipated revenues, we may be unable to adjust our spending quickly enough to compensate for any revenue shortfall and any revenue shortfall would likely have a disproportionately adverse effect on our operating results. We expect that thesethe factors listed above will continue to affect our operating results for the foreseeable future. Because of the foregoing factors listed above, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
If, due to one or more of the foregoing factors or an unanticipated cause, our operating results fail to meet the expectations of public market analysts and investors in a future quarter, the market price of our common
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We derive a majority of our common stock, as reported bytotal revenues from customers in the Nasdaq National Market, decreased from $17.37 to $3.38.
We derive a majority of our total revenues from companies in the oil and gas, chemicals, petrochemicals and petroleum industries. Accordingly, our future success depends upon the continued demand for manufacturing optimization software and services by companies in these process manufacturing industries. The oil and gas, chemicals, petrochemicals and petroleum industries are highly cyclical and highly reactive to the price of oil, as well as general economic conditions. In the past, worldwide economic downturns and pricing pressures experienced by oil and gas, chemical, petrochemical and petroleum companies have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have caused delays and reductions in capital and operating expenditures by many of these companies. These delays and reductions have reduced demand for products and services like ours. A recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in these industries, could harm our operating results in the future.
If economic conditions and the markets for our products do not improve, sales of our product lines, particularly our manufacturing and supply chain product suites, will be adversely affected.
Adverse changes in the economy and continuing global uncertainty have caused delays and reductions in information technology spending by our customers and a consequent deterioration of the markets for our products and services, particularly our manufacturing/supply chain product suites. If these adverse economic conditions continue or worsen, we will experience further reductions, delays, and postponements of customer purchases that will negatively impact our revenue and operating results. If economic and political conditions and the market for our products do not improve and our revenues decline, our business could be harmed, and we may not be able to further reduce our costs to align them with these decreased revenues. If we do not compete successfully, we may lose market share. |
Our markets are highly competitive. Our engineering software competes with products of businesses such as Simulation Sciences a(a division of Invensys,Invensys), Chemstations, Shell Global Solutions, Honeywell, ABB, MDC Technology, Cadcentre,Aveva Group (formerly Cadcentre), WinSim Inc. (formerly ChemShare) and Process Systems Enterprise Ltd.Enterprise. Our manufacturing/supply chain software competes with products of companies such as Honeywell, Invensys, ABB, Rockwell, i2 Technologies, Manugistics and components of SAP's supply chain offering. As we expand our engineering solutions into the collaborative Process asset Lifecycle Management (PLM)process lifecycle management market and the EOM market, we may seeface competition from companies that we have not typically competed against in the past or competition from companies in areas where we have not competed in the past, such as Agile, PTC,Parametric Technology, SAP, Honeywell, ABB, Invensys, Siemens and EDS. Our manufacturing/ supply chain software competes with products of companies such as Honeywell’s Hi-Spec division, Invensys, ABB, Rockwell, i2 Technologies, Manugistics and certain components of SAP’s supply chain offering. We also face competition in all three areas of our business from large companies in the process industries that have internally developed their own proprietary software solutions.
SomeMany of our current competitors have significantly greater financial, marketing and other resources than we have. In addition, many of our current competitors have established, and may in the future continue to establish, cooperative relationships with third parties to improve their product offerings and to increase the availability of their products to the marketplace. The entryIn addition, competitors may make strategic acquisitions to increase their ability to gain market share or improve the quality or marketability of new competitors or alliances into our markettheir products. These cooperative relationships and strategic acquisitions could reduce our market share, require us to lower our prices, or both. ManyIncreased competition may result in price reductions, reduced profitability and loss of these factors are outside our control, andmarket share. We cannot assure you that we may notwill be able to maintaincompete successfully against existing or enhance our competitive position against current and future competitors.
We intend to continue to pursue strategic acquisitions that will provide us with complementary products, services and technologies and with additional personnel. The identification and pursuit of these acquisition opportunities and the integration of acquired personnel, products, technologies and businesses require a significant amount of management time and skill. There can be no assurance that we will identify suitable acquisition candidates, consummate any acquisition on acceptable terms or successfully integrate any acquired business into our operations. Additionally, in light of the consolidation trend in our industry, we expect to face competition for acquisition opportunities, which may substantially increase the cost of any potential acquisition.
We have experienced in the past, and may experience again in the future, problems integrating the operations of a newly acquired company with our own operations. Acquisitions also expose us to potential
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In particular, on May 31, 2002, we purchasedaddition, the capital stock of Hyprotech Ltd.FTC has accepted for public comment, but not yet made final, a proposed consent decree that would require us to divest our operator training business, the AXSYS business, and related subsidiaries of AEA for approximately £66.2 million (or approximately $96.6 million, based on the exchange rate as of May 9, 2002, the date of the agreement) in cash. The Hyprotech business operates globally and is the second largest acquisition we have made. The integration of the personnel, products and technologies of Hyprotech will require significant management time and skill, and our inabilityrights to complete the acquisition effectively and efficiently could cause our operating results to suffer.
We funded the Hyprotech acquisition substantiallyproduct line, maintain certain technical standards with respect to the Hyprotech product line for 5 years, and provide the FTC-approved acquirer of rights to the Hyprotech product line with all releases for the Hyprotech products for 2 years. If the consent decree is approved we could face competition from the proceeds of convertible preferred stock and common stock financings effected in 2002. We may issue additional equity securities or incur long-term indebtedness to finance future acquisitions. The issuance of equity securities could result in dilution to existing stockholders, while the use of cash reserves or significant debt financing could reduce our liquidity and weaken our financial condition.
By letter of June 7, 2002, the Federal Trade Commission, or FTC, informed us that it was conducting an investigation into the competitive effects of our recent acquisition of Hyprotech. The FTC may determine to challenge the acquisition through an administrative civil complaint seeking to declare the acquisition in violation of Section 7 of the Clayton Act or Section 5 of the FTC Act. If the FTC were to prevail in that challenge, it could seek to impose a wide variety of remedies, some of which may have a material adverse effect on our ability towe do not continue to operate undermake the technological advances required by the marketplace, our current business plans. These potential remedies include divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and our other engineering software products to one or more of our competitors.could be seriously harmed.
Enterprises are requiring their application software vendors to provide greater levels of functionality and broader product offerings. Moreover, competitors continue to make rapid technological advances in computer hardware and software technology and frequently introduce new products, services and enhancements. We must continue to enhance our current product line and develop and introduce new products and services that keep pace with increasingly sophisticated customer requirements and the technological developments of our competitors. Our business and
operating results could suffer if we cannot successfully respond to the technological advances of others or if our new products or product enhancements and services do not achieve market acceptance.
We must also satisfy increasingly sophisticated customer requirements. Under our business plan, we are investing significantly in the development of new business process products that are intended to anticipate and meet the emerging needs of our target market. We are focusing significantly on development of these new products, which means we will not invest as substantially in the continued enhancement of our current products. We cannot assure you that our new product development will result in products that will meet market needs and achieve significant market acceptance.
Moreover,If we are unable to successfully market our product development for the foreseeable future is expectedproducts to senior executives of potential customers, our revenue growth may be conducted substantially through co-development arrangements with Accenture LLP that we entered into in February 2002. Our previous development activities have been conducted primarily by our employees and consultants, and we have no previous experience in co-developing products with Accenture LLP. Our business and operating results will be seriously harmed if this co-development arrangement does not result in our being able to deliver timely products sought by companies in the process industries.
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| limited. |
With the development of our integrated manufacturing/supply chain solutions and the newour EOM solutions, we are developing with Accenture, we are increasingly focusedfrequently must focus on selling the strategic value of our technology to the highest executive levels of customer organizations, typically the chief executive officer, chief financial officer or chief information officer. We have limited experience in selling and marketing at these levels. If we are not successful at selling and marketing to senior executives, our revenue growth and operating results could suffer.be materially and adversely affected.
If we are unable to develop or maintain relationships with strategic partners, our revenue growth may be harmed.
An element of our growth strategy is to strategically partner with a few select third-party implementation partners whothat market and integrate our products. The most significant of these partnerships isIf our joint marketing and development alliancecurrent partners terminate their existing relationships with Accenture. Ifus, or if we do not adequately train a sufficient number of systems integrator partners, or if potential partners focus their efforts on integrating or co-selling competing products to the process industries, our future revenue growth could be limited and our operating results could be harmed.materially and adversely affected. If our partners fail to implement our solutions for our customers properly, the reputations of our solutionsproducts and services and our company could be harmed and we might be subject to claims by our customers. We intend to continue to establish business relationships with technology companies to accelerate the development and marketing of our solutions.products and services. To the extent that we are unsuccessful in maintaining our existing relationships and developing new relationships, our revenue growth may be harmed.
| materially and adversely affected.
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We may need to raise additional capital in order to fund the continued development and marketing of our solutions. We expect our current cash balances, cash-equivalents, short-term investments, availability of sales of our installment contracts and cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, we may need to obtain additional financing thereafter or earlier, if our current plans and projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties. An important part of our cash management program is the sale of receivables. Historically, we have had arrangements to sell long-term contracts to two financial institutions, General Electric Capital Corporation and Fleet Business Credit Corporation (formerly Sanwa Business Credit Corporation). These contracts represent amounts due over the life of existing term licenses. During fiscal 2002, installment contracts increased by $34.2 million to $108.7 million, net of $42.7 million of installment contracts sold to General Electric Credit Corporation and Fleet Business Credit Corporation. Our ability to continue these arrangements or replace them with similar arrangements is important to maintaining adequate funding. In addition, in August 2002, we amended several of the terms of our strategic alliance with Accenture, which will require us to make monthly cash payments totaling $11.1 million from August 2002 to July 2003, instead of the originally agreed-to stock payment in August 2002. Our ability to obtain additional financing will dependsuffer losses on a number of factors, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. In 2002, we have issued convertible preferred stock and common stock warrants that contain anti-dilution provisions, rights of first refusal and other terms that may limit or impair our ability to raise additional funds through future financings. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, reduce or defer our development activities, or delay our introduction of new products and services. Any of these actions may seriously harm our business and operating results.fixed-price engagements.
We derive a substantial portion of our total revenues from service engagements and a significant percentage of these engagements have been undertaken on a fixed-price basis. WeUnder these fixed-price engagements, we bear the risk of cost
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Our business may suffer if we fail to address the challenges associated with international operations. |
We derived approximately 50%one-half of our total revenues from customers outside the United States in each of the past three fiscal years.years ended June 30, 2002, 2003 and 2004. We anticipate that revenues from customers outside the United States will continue to account for a significant portion of our total revenues for the foreseeable future. Our operations outside the United States are subject to additional risks, including:
The impact of future exchange rate fluctuations on our operating results cannot be accurately predicted. In recent years, we have increased the extent to which we denominate arrangements with international customers in the currencies of the countries in which the software or services are provided. From time to time we have engaged in, and may continue to engage in, hedges of a significant portion of installment contracts denominated in foreign currencies. Any hedging policies implemented by us may not be successful, and the cost of these hedging techniques may have a significant negative impact on our operating results.
We may not be able to protect our intellectual property rights, which could make us less competitive and cause us to lose market share.
We regard our software as proprietary and rely on a combination of copyright, patent, trademark and trade secret laws, license and confidentiality agreements, and software security measures to protect our proprietary rights. We have registered or have applied to register several of our significant trademarks in the United States and in certain other countries. We generally enter into non-disclosure agreements with our employees and customers, and historically have restricted access to our software products’products' source codes, which we regard as proprietary information. In a few cases, we have provided copies of the source code for some of our products to customers solely for the purpose of special product customization and have deposited copies of the source code for some of our products in third-party escrow accounts as security for ongoing service and license obligations. In these cases, we rely on non-disclosure and other contractual provisions to protect our proprietary rights.
The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of our technology or independent development by others of technologies that are substantially equivalent or superior to our technology. Any misappropriation of our technology or development of competitive technologies could harm our business, and could force us to incur substantial costs in protecting and enforcing our intellectual property rights. The laws of some countries in which our products are licensed do not protect our products and intellectual property rights to the same extent as the laws of the United States.
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Third parties may assert patent, trademark, copyrightWe cannot be certain that our software and services do not infringe issued patents, copyrights, trademarks or other intellectual property rights to technologies that are important to us. In such an event,of third parties. Litigation regarding intellectual property rights is common in the software industry, and we may be requiredsubject to incur significantlegal proceedings and claims from time to time, including claims of alleged infringement of intellectual property rights of third parties by us or our licensees concerning their use of our software products and integration technologies and services. Although we believe that our intellectual property rights are sufficient to
allow us to market our software without incurring liability to third parties, third parties may bring claims of infringement against us. Because our software is integrated with our customers' networks and business processes, as well as other software applications, third parties may bring claims of infringement against us, as well as our customers and other software suppliers, if the cause of the alleged infringement cannot easily be determined. Such claims may be with or without merit. Claims of alleged infringement may have a material adverse effect on our business and may discourage potential customers from doing business with us on acceptable terms, if at all. Defending against claims of infringement may be time-consuming and may result in substantial costs in litigatingand diversion of resources, including our management's attention to our business. Furthermore, a resolutionparty making an infringement claim could secure a judgment that requires us to the asserted claims. The outcomepay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our software or require that we re-engineer some or all of any litigation couldour products. Claims of intellectual property infringement also might require us to pay damagesenter costly royalty or license agreements. We may be unable, however, to obtain aroyalty or license to a third party’s proprietary rights in order to continue licensing our products as currently offered. If such a license is required, it might not be availableagreements on terms acceptable to us or at all. Our business, operating results and financial condition could be harmed significantly if any of these events occurred, and the price of our common stock could be adversely affected. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed confidential or proprietary information to us. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our software infringes upon the intellectual property rights of others. We could incur substantial costs in defending ourselves and our customers against infringement claims. In the event of a claim of infringement, we, as well as our customers, may be required to obtain one or more licenses from third parties, which may not be available on acceptable terms, if at all. Defense of any lawsuit or failure to obtain any such required licenses could harm our business, operating results and financial condition and the price of our common stock. In addition, although we carry general liability insurance, our current insurance coverage may not apply to, and likely would not protect us from, all liability that may be imposed under these types of claims.
Because some of our software products incorporate technology licensed from, or provided by, third parties, the loss of our right to use that technology or defects in that third party technology could harm our business.
Some of our software products contain technology that is licensed from, or provided by, third parties. Any significant interruption in the supply or support of any such third-party software could adversely affect our sales, unless and until we can replace the functionality provided by the third-party software. Because some of our software incorporates software developed and maintained by third parties, we depend on these third parties to deliver and support reliable products, enhance our current software, develop new software on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. In other instances we provide third-party software with our current software, and we depend on these third parties to deliver reliable products, provide underlying product support and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could harm our business.
Our software is complex and may contain undetected errors.
Like many other complex software products, our software has on occasion contained undetected errors or “bugs.”"bugs." Because new releases of our software products are initially installed only by a selected group of customers, any errors or “bugs”"bugs" in those new releases may not be detected for a number of months after the delivery of the software. These errors could result in loss of customers, harm to our reputation, adverse publicity, loss of revenues, delay in market acceptance, diversion of development resources, increased insurance costs or claims against us by customers.
We may be subject to significant expenses and damages because of liability claims.
The sale and implementation of certain of our software products and services, particularly in the areas of advanced process control and optimization, may entail the risk of product liability claims. Our software products and services are often integrated with our customers' networks and software applications and are used in the design, operation and management of manufacturing processes at large facilities, and anyoften for mission critical applications. Any errors, defects, performance problems or other failure of our software could result in significant claims against us for damages or for violations of environmental, safety and other laws and regulations. In addition, the failure of our software to perform to customer expectations could give rise to warranty claims. Our agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions in our agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A substantial product liability claim against us could materially and adversely harm our operating results and financial condition. Even if our software is not at fault, a product liability claim brought against us could be time consuming, costly to defend and harmful to our operations. In addition, although we carry general liability insurance, our current insurance coverage may be insufficient to protect us from all liability that may be imposed under these types of claims.
Implementation of our products can be difficult and time-consuming, and customers may be unable to implement our products successfully or otherwise achieve the benefits attributable to our products.
Our products are intended to work with complex business processes. Some of our software, such as customized scheduling applications and integrated supply chain products, must integrate with the existing computer systems and software programs of our customers. This can be complex, time-consuming and expensive. As a result, some customers may have difficulty in implementing or be unable to implement these products successfully or otherwise achieve the benefits attributable to these products. Customers may also make claims against us relating to the functionality, performance or implementation of this software. Delayed or ineffective implementation of the software products or related services may limit our ability to expand our revenues and may result in customer dissatisfaction, harm to our reputation and may result in customer unwillingness to pay the fees associated with these products.
If we are not successful in attracting and retaining management team members and other highly qualified individuals in our industry, we may not be able to successfully implement our business strategy.
Our ability to establish and maintain a position of technology leadership in the highly competitive e-business software market depends in large part upon our ability to attract and retain highly qualified managerial, sales and technical personnel. We have historically relied on the services of Lawrence B. Evans, our principal founder and our Chairman, President and Chief Executive Officer. In March 2002, we announced a change in senior management effective October 1, 2002. David L. McQuillin, who will become our Chief Executive Officer in October 2002, has been serving as one of our co-chief operating officer and has not previously served as the chief executive officer of a publicly traded corporation. MostSeveral of our executive officers have not entered into an employment agreementagreements with us. In the future, we may experience the
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Our common stock may experience substantial price and volume fluctuations. |
The equity markets have from time to time experienced extreme price and volume fluctuations, particularly in the high technology sector, and those fluctuations have often been unrelated to the operating performance of particular companies. In addition, factors such as our financial performance, announcements of technological innovations or new products by us or our competitors, as well as
market conditions in the computer software or hardware industries, may have a significant impact on the market price of our common stock. Since April 5, 2002, the date on which we preliminarily announced our estimated results for the fiscal quarter ended March 31, 2002, the price per share of our common stock, as reported by the Nasdaq National Market, decreased from $17.90 to a low of $2.79 on August 9, 2002. On September 20, 2002, the last reported sale price of our common stock on the Nasdaq National Market was $3.38.
In the past, following periods of volatility in the market price of a public companiescompany's securities, securities class action litigation has often been instituted against companies. This type of litigation could result in substantial costs and a diversion of management’smanagement's attention and resources.
In 2002, we issuedOur common stockholders may experience further dilution as a result of provisions contained in our outstanding Series D convertible preferred stock together withand warrants.
The terms of our outstanding securities may result in substantial dilution to existing common stockholders. In August 2003, we issued 300,300 shares of Series D-1 convertible preferred stock, or Series D-1 preferred, and delivered cash and 63,064 shares of Series D-2 convertible preferred stock, or Series D-2 preferred, in consideration for the surrender of all of our outstanding Series B-I and B-II convertible preferred stock, or Series B preferred. Each share of our Series D-1 preferred and Series D-2 preferred, which we refer to collectively as Series D preferred, is currently convertible, at the holder's option, into 100 shares of our common stock and may be converted into additional shares of our common stock upon certain events as a result of antidilution provisions in our charter. In addition, we issued warrants to purchase up to 7,267,286 shares of common stock, which we refer to as the WD warrants, and exchanged existing warrants to purchase 791,044 shares of common stock.stock for warrants to purchase 791,044 shares of common stock, which we refer to as the WB warrants. The WD warrants and WB warrants are currently exercisable for an aggregate of 8,058,330 shares of our common stock and may be converted into additional shares upon certain events as a result of antidilution provisions in the warrants. The Series D preferred, together with the WD warrants and WB warrants, were issued to several investment partnerships managed by Advent International Corporation and to holders of our Series B preferred. We refer to these transactions as the Series D financing.
In addition to the Series D preferred and the WD and WB warrants, we currently have additional warrants outstanding 40,000that are exercisable to purchase 1,023,474 shares of Series B-I convertible preferredcommon stock at an exercise price of $9.76 per share and 20,0009,720 shares of common stock at an exercise price of $120.98. Our common stockholders would be subject to substantial dilution if the Series B-II convertibleD preferred is converted into common stock or if our outstanding warrants are exercised for common stock.
Each share of Series B-ID preferred is entitled to a cumulative dividend of 8.0% of the stated value per share of such Series D preferred per year, payable at the discretion of the board of directors or upon conversion of the Series D preferred to common stock or redemption of the Series D preferred. Accumulated dividends, when and B-II convertible preferredif declared by our board, could be paid in cash or, subject to specified conditions, common stock. If we elect to pay dividends in shares of common stock, is convertible intowe will issue a number of shares of common stock equal to the stated value, which initially is $1,000, dividedquotient obtained by a conversion price of $19.97 individing the casedividend payment by the volume weighted average of the Series B-1 convertible preferred stock and $17.66 in the case of the Series B-2 convertible preferred stock, subject to antidilution and other adjustments. If we issue additional shares of common stock, or instruments convertible or exchangeable for common stock, at an effective net price less than the lesser of (a) $17.75, in the case of the Series B-I convertible preferred stock, or $15.69 in the case of the Series B-II convertible preferred stock and (b) the then-applicable conversion price for such series, the conversion price for that series will be reduced to equal that effective net price. These adjustments do not apply to the issuance of common stock or such instruments in specified firm commitment underwritten public offerings, strategic arrangements, mergers or acquisitions, and grants and purchases of securities pursuant to equity incentive plans.
The Series B-I and B-II convertible preferred stock accrues dividends at an annual rate of 4% that is payable quarterly, commencing June 30, 2002, in either cash or common stock, at our option (subject to our satisfaction of specified conditions set forth in our charter). From August 6, 2003 until February 6, 2004, for the Series B-I convertible preferred stock, and from August 28, 2003 until February 17, 2004, for the Series B-II convertible preferred stock, holders may require that we redeem up to a total of 20,000 shares of Series B-I convertible preferred stock and 10,000 shares of Series B-II convertible preferred stock if the average closing pricesale prices of the common stock on the Nasdaq National Market for the 20 consecutive trading days, immediately preceding August 7, 2003 and August 28, 2003, respectively, or any date thereafter is belowending on the then-applicable conversion price. Beginning on February 8, 2004 and February 28, 2004, holders of Series B-I convertible preferred stock and Series B-II convertible preferred stock, respectively, may require that we redeem any or all of their shares. Any such redemption must be made in cash or stock, at our option (subject to our satisfaction of specified conditions set forth in our charter), at a price equalfourth trading day prior to the stated value plus accrued but unpaid dividends. required dividend payment date.
We will be requiredare obligated to redeem all of the then-outstanding Series B-I and B-II convertible preferred
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In May 2002, we sold 4,166,665 shares of common stock, together with five-year warrants to purchase up to 750,000 shares of common stock, in a private placement. In addition, we issued unit warrants, exercisable until July 23, 2002, that could result in the issuance of (a) up to an additional 2,083,333 shares of common stock and (b) five-year warrants to purchase up to an additional 375,000 shares of common stock, which expired unexercised. If we issue additional shares of common stock, or instruments convertible or exchangeableregister for common stock, in specified transactions at an effective net price less than the exercise price of any of the five-year warrants, then the exercise price of the warrants will be adjusted pursuant to a weighted average anti-dilution formula. As the result of these and other provisions, these warrants may be exercised at a price per share that may be less than the then-current market price of the stock, which may cause dilution to our existing common stockholders.
As a result of these and other provisions of the Series B-I and B-II convertible preferred stock and the warrants issued in the preferred and common stock financings, the Series B-I and B-II convertible preferred stock may be converted, and the warrants may be exercised, at a price per share that may be less than the then-current market price of the common stock, which may cause substantial dilution to our existing common stockholders. If the conversion price of the Series B-I and B-II convertible preferred stock or the exercise price of the warrants decreases as a result of antidilution provisions, the number ofpublic sale shares of common stock issuable pursuant to our outstanding Series D preferred and warrants, and sales of those shares may result in connection with any dividends conversion or redemption could increase significantly.
As parta decrease in the price of our obligationscommon stock.
We have granted rights to require that we register under these financings,the Securities Act the shares of common stock issuable upon the conversion of, or as dividends on, the Series D preferred and upon the exercise of either the WB warrants or WD warrants:
upon (a) conversion of the Series D-1 preferred and (b) exercise of the WD warrants issued to the holders of the Series D-1 preferred.
In addition, to the extent we elect to pay dividends on the Series D preferred in shares of our common stock, we are required to register such shares. Any sale of common stock into the public resalemarket by the holders of the Series B-I and B-II convertibleD preferred stock and common stock issued in the financingspursuant to a total of 13,776,392 shares of common stock, including shares issuable upon conversion of the Series B-I and B-II convertible preferred stock and exercise of the warrants and shares that may become issuable as a result of antidilution provisions. If all of these registered shares were to be issued (disregarding limitations on the right of a holder to acquire shares of common stock upon the conversion of Series B-I or B-II convertible preferred stock or the exercise of warrants if the conversion or exercise would result in this holder beneficially owning more than 4.99% of our outstanding common stock without first providing us proper notice), these shares would represent 36.11% shares of our common stock issued and outstanding as of September 27, 2002. Any sale of these shares of common stock into the public marketregistration statement could cause a decline in the trading price of our common stock.
Our repayment obligations under our convertible debentures or the repurchase of our convertible debentures in the open market could have a material adverse effect on our financial condition.
In June 1998, we completed a convertible debt offering of $86,250,000 in aggregate principal amount of our 51/4% convertible subordinated debentures due June 15, 2005, which we refer to as the convertible debentures. We set aside $45,000,000 of the Series D financing proceeds to redeem or repurchase, at or prior to maturity, a portion of the convertible debentures. Even assuming we apply all of the set-aside proceeds to redeem the convertible debentures, we will still be required to dedicate a substantial portion of our cash flows from operations, including from the sale of receivables, to repay the principal of and interest on the remaining convertible debentures. As of September 1, 2004, we had repurchased convertible debentures in the aggregate principal amount of $29,505,000. We may choose to repurchase additional convertible debentures in the open market, subject to compliance with applicable laws and approval of our board of directors. We cannot guarantee, however, that we will be able to effect these repurchases at favorable prices. Our further repurchases of convertible debentures will reduce the cash we have available to fund operations, research and product development, capital expenditures and other general corporate purposes. We have incurred net losses in the past and may incur losses in the future that may impair our ability to generate the cash required to meet our obligations under the convertible debentures. If we cannot generate sufficient cash to meet these obligations, we may be required to incur additional indebtedness or raise additional capital.
We may need to raise additional capital in the future and may not be able to secure adequate funds on terms acceptable to us or at all.
We expect that our current cash balances, cash-equivalents, short-term investments, proceeds from sales of installment contracts, funds available under our bank line of credit, and cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We may need to obtain additional financing thereafter or earlier, however, if our current plans and projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses, including those related to the FTC proceedings or their outcome, or other unforeseen difficulties.
Our sales of receivables are an important part of our cash management program. Historically, we have had arrangements to sell long-term contracts to two financial institutions, General Electric Capital Corporation and Fleet Business Credit Corporation, and in December 2003 we entered into a third such arrangement with Silicon Valley Bank. These contracts represent amounts due over the life of existing term licenses. During fiscal 2004, our installments receivable balance decreased to $89.2 million at June 30, 2004 from $108.1 million at June 30, 2003. Under the three arrangements, we sold installments receivable of $97.4 million during the fiscal year ended June 30, 2004. Our ability to continue these arrangements or replace them with similar arrangements is important to maintain adequate funding.
Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. In addition, the uncertain outcome of the FTC complaint impairs our ability to obtain additional financing. Until this complaint is resolved, or if any resolution is materially adverse to us, we expect our ability to obtain additional financing will be substantially impaired. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, reduce or defer our development activities, or delay our introduction of new products and services. Any of these actions may seriously harm our business and operating results.
The holders of our Series D preferred and WB and WD warrants own a substantial portion of our capital stock that may afford them significant influence over our affairs.
As of June 30, 2004, the Series D preferred (as converted to common stock) represented 42.3% of our outstanding common stock and the WB and WD warrants were exercisable for a number of shares representing 9.4% of our outstanding common stock (ignoring certain limitations on the ability to convert such shares or exercise such warrants). As a result, the holders of the Series D preferred and the WB and WD warrants, if acting together, would have the ability to delay or prevent a change in control of our company that may be favored by other stockholders and otherwise exercise significant influence over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including:
In addition, the holders of the Series D-1 preferred have elected four of our board members. Accordingly, the holders of our Series D-1 preferred may be able to exert substantial influence over matters submitted for board approval.
Our corporate documents and provisions of Delaware law may prevent a change in control or management that stockholders may consider desirable.
Section 203 of the Delaware General Corporation Law and our charter and by-laws contain provisions that might enable our management to resist a takeover of our company. These provisions could have the effect of delaying, deferring, or preventing a change in control of our company or a change in our management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Our principal offices occupy approximately 110,000 square feet of office space in Cambridge, Massachusetts. The lease of this office space expires on September 30, 2012. We have agreements to sub-lease 10,000 square feet of this space that expire through April 2008, and are actively seeking to sub-lease an additional 20,000 square feet of this space. We also lease space for our Houston, Texas facilities. This lease encompasses approximately 245,000150,000 square feet and expires March 1, 2012. In June 2004 we executed a buy-out of this lease, and in August 2004 we entered into a new lease in Houston that encompasses approximately 90,000 square feet and expires in July 2016. In addition to these two facilities we and our subsidiaries also own or lease office space in San Diego,Carlsbad, California; Rockville, Maryland; New Providence, New Jersey; Midlothian, Virginia; Bothell, Washington; LaHulpe, Belgium; Calgary, Alberta, Canada; Cambridge, England; Warrington, England; Didcot, England; Tokyo, Japan; Best, The Netherlands; Singapore; Beijing, China; Barcelona, Spain; and other locations where additional sales and customer support offices are located. We believe that our existing and planned facilities are adequate for our needs for the foreseeable future and that, if additional space is needed, such space will be available on acceptable terms.
FTC Complaint
ByIn May 2002, we acquired Hyprotech Ltd. and related subsidiaries of AEA Technology plc, an English private limited company, for a purchase price of £67.5 million. In June 2002, we received a letter of June 7, 2002,from the FTC informednotifying us that it was conductinghad commenced an investigation intoof the competitive effects of our recent acquisition of Hyprotech.the Hyprotech acquisition. Because the acquisition didwas not meet threshold requirements for pre-merger clearancereportable under the Hart Scott RodinoHart-Scott-Rodino Act, the FTC had not conducted any pre-merger review of the transaction. AfterHyprotech acquisition. In September 2002, after we had supplied initialcertain background information, the FTC on September 12,
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Because this investigation is in its early stages, we cannot be certain whetherthrough March 2003. On August 7, 2003, the FTC might seek any relief from us or the natureannounced that it had authorized its staff to file a civil administrative complaint alleging that our acquisition of any such relief that might be sought. The FTC may determine to challenge the acquisition through an administrative civil complaint seeking to declare the acquisitionHyprotech was anti-competitive in violation of Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton ActAct. The FTC staff filed its complaint the same day.
On July 15, 2004, the FTC announced that it had accepted a proposed consent decree for public comment. The public comment period ended August 13, 2004, and the FTC is currently considering whether to make the proposed consent decree final. The FTC may approve the proposed consent decree in its current form, require amendments to the proposed consent decree as a condition to approval, or Sectionreject the proposed consent decree and return the case to litigation or drop the case altogether. There is no time period within which the FTC must make its decision. A copy of the complaint, as well as information regarding the complaint and general information about the FTC's administrative procedures and possible remedies resulting from FTC merger challenges, can be found on the FTC's website at www.ftc.gov.
If the FTC approves the proposed consent decree in its current form, then we would be allowed to complete a sale to an FTC-approved buyer within 90 days of the order becoming final if we have entered into a definitive agreement with a potential buyer and submitted an application for approval of that buyer to the FTC within 5 days of the order being approved. If we have not identified a potential buyer, than we will have 60 days from the date on which the order becomes final to complete the sale required by the order. If we fail to close a transaction within the 60 or 90 day timeframes, then the FTC may appoint a trustee who will be empowered to find an acquirer of the assets offered under the consent decree. The trustee will have an initial one year period to complete the sale. This period may be extended at the FTC's discretion for up to two additional years.
Under the terms of the published proposed consent decree we would sell our operator training services business and rights to the Hyprotech product line to an FTC-approved buyer, maintain certain technical standards with respect to the Hyprotech product line for 5 years, and provide the FTC-approved buyer of rights to the Hyprotech product line with all releases for the Hyprotech products for 2 years. The proposed consent decree provides for us to obtain rights to the Hyprotech products from the FTC-approved buyer. The Hyprotech product AXSYS was sold to Bentley Systems, Inc. in accordance with the terms of the proposed consent decree. More detail on our specific obligations under the proposed consent decree is available on the FTC's website at http://www.ftc.gov/os/adjpro/d9310/040715do.pdf.
If the FTC rejects the proposed consent decree it would likely return the case to litigation. An administrative law judge would adjudicate the complaint in a trial-type proceeding. We are uncertain as to the length of the proceeding, but it could last in excess of a month. After the presentation of all of the evidence, the administrative law judge would issue a written opinion. The timing of the issuance of the opinion is uncertain and could take up to several months after the proceeding is concluded. Any decision of the administrative law judge may be appealed to the Commissioners of the FTC Act.by either the FTC staff or us. If a majority of the FTC Commissioners were to determine that we violated applicable law, we would have the right to appeal to a U.S. Court of Appeals. Appeals to U.S. Courts of Appeals are often lengthy proceedings and generally extend for a year or two. The FTC staff and we would have the right to petition the U.S. Supreme Court for review of any Court of Appeals decision. The Supreme Court accepts very few cases each year, and it is uncertain whether they would accept our case for review.
If the FTC were to prevail in thatthis challenge, it could seek to impose a wide variety of remedies, someany of which maywould have a material adverse effect on our ability to continue to operate under our current business plans.plans and on our results of operations. These potential remedies include the divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and our other engineering software products to one or more of our competitors. As of the filing date of this report, we have accrued $17.9 million to cover the cost of (1) professional service fees associated with our cooperation in the FTC's investigation since its commencement on June 7, 2002, and (2) estimated future professional services fees relating to the initial proceeding and our preparation in advance of such proceeding.
Litigation
On May 31, 2002, we acquired the capital stock of Hyprotech from AEA Technology plc. AEA Technology is engaged in arbitration proceedings in England over a contract dispute with KBC Advanced Technologies PLC, an English technology and consulting services company. The dispute remains in arbitration and concerns alleged breaches by each party of an agreement to develop and market a product known as HYSYS.Refinery. We indemnified AEA under the characterizationSale and Purchase Agreement with AEA dated May 10, 2002 against any costs, damages or expenses in respect of certain technology for purposesa claim brought by KBC alleging damages due to AEA's (a) failure to comply with its contractual obligations after the acquisition, (b) breach of calculating royalties, plus other contractual rightsnon-competition clauses with respect to Hysys.Refinery. Hysys.Refinery was retainedactivities occurring after the acquisition, (c) breach of certain obligations to KBC under its agreement by virtue of the acquisition, or (d) execution of the acquisition agreement. On March 31, 2003, the arbitrator delivered a partial decision in the arbitration, as a result of which we have not received any request under the indemnification agreement, nor do we expect to receive one. On April 22, 2004 the arbitrator delivered a further partial decision stating that (a) the contract between AEA Technologyand KBC had been terminated and that AEA and Hyprotech were in breach of the non-compete provisions contained in that agreement, and (b) for a period of three years from the date of the award, Hyprotech shall not directly or indirectly sell or market a product which competes with supportHYSYS.Refinery. A further hearing is scheduled for Hysys.Refinery to be provided December 2004, at which the arbitrator will determine whether there has been a breach
by Hyprotech pursuantof obligations relating to a contractconfidentiality. We believe that no such breach occurred. We are working with AEA Technology. Onin the resolution of this matter. It is too early to determine the likely outcome of this matter.
In addition, on September 11, 2002, we and Hyprotech were sued by KBC Advanced Technologiesfiled a separate complaint in state district court in Houston, Texas on issues related to the technology subject to review in the arbitration proceeding.against us and Hyprotech. KBC's claim alleges tortious interference with contract and existing business relations, tortious interference with prospective business relationships, conversion of intellectual property and civil conspiracy. KBC Advanced Technologies has requested actual and exemplary damages, costs and interest. We believe the causes of action to be without merit and will defend the case vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of fiscal 2002.2004.
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Item 5. Market for Registrant’sRegistrant's Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Nasdaq National Market under the symbol “AZPN.”"AZPN." The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the Nasdaq National Market.
| High | Low | ||||||||
Fiscal 2001: | |||||||||
| First Quarter | $ | 50.188 | $ | 28.000 | |||||
| Second Quarter | 45.750 | 23.250 | |||||||
| Third Quarter | 41.125 | 17.875 | |||||||
| Fourth Quarter | 28.380 | 12.850 | |||||||
Fiscal 2002: | |||||||||
| First Quarter | 25.09 | 7.79 | |||||||
| Second Quarter | 17.34 | 8.86 | |||||||
| Third Quarter | 23.43 | 14.16 | |||||||
| Fourth Quarter | 22.89 | 6.51 | |||||||
| | High | Low | |||||
|---|---|---|---|---|---|---|---|
| Fiscal 2003: | |||||||
| First Quarter | $ | 8.43 | $ | 2.69 | |||
| Second Quarter | 3.65 | 0.59 | |||||
| Third Quarter | 3.70 | 2.11 | |||||
| Fourth Quarter | 5.26 | 2.40 | |||||
| Fiscal 2004: | |||||||
| First Quarter | $ | 5.26 | $ | 2.27 | |||
| Second Quarter | 10.84 | 3.89 | |||||
| Third Quarter | 12.32 | 7.55 | |||||
| Fourth Quarter | 9.45 | 5.49 | |||||
Holders
As of September 25, 2002,1, 2004, there were approximately 1,4551,017 holders of our common stock.
Dividends
We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our earnings, if any, in the foreseeable future, except to the extent we elect to pay quarterly dividends on our convertible preferred stock in cash rather than in common stock. In addition, under the terms of our bank line of credit,January 2003 loan arrangement with Silicon Valley Bank, we are prohibited from paying any cash dividends on our stock, with the exception of dividends paid in common stock.stock or dividends on our preferred stock paid in cash, provided that we are not in default under the loan arrangement. Any future determination relating to our dividend policy will be made at the discretion of our Boardboard of Directorsdirectors and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as the board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about the securities authorized for issuance under our equity compensation plans as of June 30, 2004:
Equity Compensation Plan Information
| Number of | ||||||||||||
| securities remaining | ||||||||||||
| available for future | ||||||||||||
| issuance under | ||||||||||||
| Number of securities | equity compensation | |||||||||||
| to be issued upon | Weighted-average | plans (excluding | ||||||||||
| exercise of | exercise price of | securities reflected | ||||||||||
| outstanding options | outstanding options | in the first column) | ||||||||||
| Equity compensation plans, approved by security holders | 6,991,245 | $ | 15.29 | 3,753,642 | ||||||||
| Equity compensation plans, not approved by security holders | — | — | — | |||||||||
| Total | 6,991,245 | $ | 15.29 | 3,753,642 | ||||||||
| | (A) | (B) | (C) | ||||
|---|---|---|---|---|---|---|---|
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A) | ||||
| Equity compensation plans approved by security holders | 12,365,093 | $ | 7.52 | 4,410,787 | |||
| Equity compensation plans not approved by security holders | — | — | — | ||||
| Total | 12,365,093 | $ | 7.52 | 4,410,787 | |||
Amounts reflected in column (A) include an aggregate of 70,187 shares that are issuable upon exercise of outstanding options that we assumed in connection with various acquisitions. The weighted average exercise price of the excluded options is $10.55.
There areEquity compensation plans approved by security holders consist of our 1988 non-qualified stock option plan, our 1995 stock option plan, our 1995 directors plan, our 1998 employees' stock purchase plan, our 1996 special stock option plan and our 2001 stock option plan.
The securities remaining available for future issuance under equity compensation plans approved by our security holders consist of:
June 30,providedthat werethe number of shares purchasable under incentive stock options issued under anyour 1995 stock option plan may not exceed 6,000,000;
On July 1, 2004, the total number of shares of common stock issuable under our 2001 stock option plan increased by 2,080,000. Each of the options outstanding under these equity compensation plans. The shareholders have approved all equity compensation plans.plans has a term of ten years.
23
Recent Sales of Unregistered Securities
On May 9, 2002,During fiscal 2004, we entered into a securities purchase agreement pursuant to which we agreed to sell common stock and warrants to a small groupissued 19,399 shares upon the exercise of institutional and individual investorsoptions by participants in a private placement for an aggregate purchaseour Houston Consulting Group Stock Incentive Plan. The weighed average exercise price of approximately $50 million. We received approximately $43.2 million inthese options was $1.82. The proceeds from the institutional investors asexercise of May 9, 2002these options were used for working capital and received an additional $6.8 milliongeneral corporate purposes. In issuing these securities, we relied on the exemption from the individual investors as of May 30, 2002.
We used the net proceeds from the private placementregistration available pursuant to fund a portionSection 4(2) of the purchase price for our acquisition of Hyprotech.Securities Act.
Our obligations to the investors are contained in the securities purchase agreement, registration rights agreement and the warrants issued in connection with the private placement. The summary contained in this current report on Form 10-K does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions of those documents, copies of which are filed as exhibits to this Form 10-K.
Under the securities purchase agreement, we issued the following securities:
If we issue additional shares of common stock, or instruments convertible or exchangeable for common stock, at an effective net price less than the exercise price of any of the five-year warrants, then the exercise price of the warrants will be adjusted pursuant to a weighted-average anti-dilution formula. These adjustments do not apply, however, to the issuance of public offerings, strategic arrangements, mergers or acquisitions, and grants and purchases of securities pursuant to equity incentive plans.
Under the registration rights agreement, we have agreed to register for resale under the Securities Act the common stock issued in the private placement, as well as the common stock issuable upon exercises of the warrants issued in the private placement. We have agreed to use our best efforts to keep the registration statement covering the common stock (including the common stock issuable upon exercise of the warrants) effective, with limited exceptions, until July 23, 2004. If the registration statement is not maintained effective as required, we may be required to pay cash penalties to the investors and, if the deficiencies remain uncured, we may be required to repurchase all or a portion of the securities issued in the private placement.
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Item 6. Selected Financial Data
The following consolidated statement of operations data (other than pro forma data) for the years ended June 30, 2000, 20012002, 2003 and 20022004 and consolidated balance sheet data as of June 30, 20012003 and 20022004 have been derived from our consolidated financial statements that were audited by independent registered public accountants and are included elsewhere in this Form 10-K. The consolidated statement of operations data (other than pro forma data) for the years ended June 30, 19982000 and 19992001 and consolidated balance sheet data as of June 30, 1998, 19992000, 2001 and 20002002 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K and the discussion under “Item"Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.”
| Year Ended June 30, | |||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||||
| Revenues: | |||||||||||||||||||||
| Software licenses | $ | 140,857 | $ | 97,108 | $ | 132,843 | $ | 147,448 | $ | 133,913 | |||||||||||
| Service and other | 113,879 | 129,411 | 135,250 | 179,476 | 186,691 | ||||||||||||||||
| Total revenues | 254,736 | 226,519 | 268,093 | 326,924 | 320,604 | ||||||||||||||||
| Expenses: | |||||||||||||||||||||
| Cost of software licenses | 8,178 | 7,899 | 9,605 | 11,856 | 11,830 | ||||||||||||||||
| Cost of service and other | 68,677 | 83,905 | 85,193 | 114,595 | 119,972 | ||||||||||||||||
| Selling and marketing | 75,060 | 85,664 | 91,863 | 113,608 | 115,225 | ||||||||||||||||
| Research and development | 43,793 | 48,625 | 51,567 | 68,913 | 74,458 | ||||||||||||||||
| General and administrative | 20,250 | 23,503 | 24,736 | 30,643 | 34,258 | ||||||||||||||||
| Costs related to acquisitions | 4,984 | — | 1,547 | — | — | ||||||||||||||||
| Restructuring and other charges | — | 17,867 | — | 6,969 | 16,083 | ||||||||||||||||
| Charges for in-process research and development | 8,472 | — | — | 9,915 | 14,900 | ||||||||||||||||
| Total expenses | 229,414 | 267,463 | 264,511 | 356,499 | 386,726 | ||||||||||||||||
| Income (loss) from operations | 25,322 | (40,944 | ) | 3,582 | (29,575 | ) | (66,122 | ) | |||||||||||||
| Interest income | 5,784 | 10,092 | 9,847 | 10,268 | 6,768 | ||||||||||||||||
| Interest expense | (377 | ) | (5,677 | ) | (5,563 | ) | (5,469 | ) | (5,591 | ) | |||||||||||
| Write-off of investments | — | — | — | (5,000 | ) | (8,923 | ) | ||||||||||||||
| Foreign currency exchange loss | (454 | ) | (94 | ) | (118 | ) | (81 | ) | (1,073 | ) | |||||||||||
| Income on equity in joint ventures and realized gain on sales of investments | 45 | 19 | 4 | 750 | 180 | ||||||||||||||||
| Income (loss) before provision for (benefit from) income taxes | 30,320 | (36,604 | ) | 7,752 | (29,107 | ) | (74,761 | ) | |||||||||||||
| Provision for (benefit from) income taxes | 14,109 | (15,809 | ) | 2,324 | (8,732 | ) | 2,404 | ||||||||||||||
| Net income (loss) | 16,211 | (20,795 | ) | 5,428 | (20,375 | ) | (77,165 | ) | |||||||||||||
| Accretion of preferred stock discount and dividend | — | — | — | — | (6,301 | ) | |||||||||||||||
| Net income (loss) applicable to common stock holders | $ | 16,211 | $ | (20,795 | ) | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | ||||||||
| Pro forma net income (loss), reflecting provision for income taxes on Subchapter S-Corporation income | $ | 15,781 | $ | (22,066 | ) | ||||||||||||||||
| Diluted net income (loss) per share | $ | 0.59 | $ | (0.76 | ) | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||||
| Basic net income (loss) per share | $ | 0.62 | $ | (0.76 | ) | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||||
| Pro forma diluted net income (loss) per share | $ | 0.57 | $ | (0.80 | ) | ||||||||||||||||
| Weighted average shares outstanding — diluted | 27,524 | 27,476 | 30,785 | 29,941 | 32,308 | ||||||||||||||||
| Weighted average shares outstanding — basic | 26,056 | 27,476 | 28,221 | 29,941 | 32,308 | ||||||||||||||||
| | Year Ended June 30, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||
| | (In thousands, except per share data) | ||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Software licenses | $ | 132,843 | $ | 147,448 | $ | 133,913 | $ | 139,859 | $ | 152,270 | |||||||
| Service and other | 135,250 | 179,476 | 186,691 | 182,862 | 173,426 | ||||||||||||
| Total revenues | 268,093 | 326,924 | 320,604 | 322,721 | 325,696 | ||||||||||||
| Cost of revenues: | |||||||||||||||||
| Cost of software licenses | 9,605 | 11,856 | 11,830 | 13,916 | 15,566 | ||||||||||||
| Cost of service and other | 85,193 | 114,595 | 119,972 | 106,868 | 99,433 | ||||||||||||
| Amortization of technology related intangible assets | 1,225 | 2,926 | 5,042 | 8,219 | 7,270 | ||||||||||||
| Impairment of technology related intangible and computer software development assets | — | — | 1,169 | 8,704 | 3,250 | ||||||||||||
| Total cost of revenues | 96,023 | 129,377 | 138,013 | 137,707 | 125,519 | ||||||||||||
| Gross profit | 172,070 | 197,547 | 182,591 | 185,014 | 200,177 | ||||||||||||
Operating costs: | |||||||||||||||||
| Selling and marketing | 91,863 | 113,608 | 115,225 | 105,883 | 99,486 | ||||||||||||
| Research and development | 51,567 | 68,913 | 74,458 | 65,086 | 59,095 | ||||||||||||
| General and administrative | 23,511 | 27,717 | 29,216 | 28,462 | 31,714 | ||||||||||||
| Costs related to acquisitions | 1,547 | — | — | — | — | ||||||||||||
| Long lived asset impairment charges | — | — | — | 106,093 | 967 | ||||||||||||
| Restructuring charges and FTC legal costs | — | 6,969 | 14,914 | 41,080 | 20,833 | ||||||||||||
| Charges for in-process research and development | — | 9,915 | 14,900 | — | — | ||||||||||||
| Total operating costs | 168,488 | 227,122 | 248,713 | 346,604 | 212,095 | ||||||||||||
| Income (loss) from operations | 3,582 | (29,575 | ) | (66,122 | ) | (161,590 | ) | (11,918 | ) | ||||||||
| Interest income | 9,847 | 10,268 | 6,768 | 8,485 | 7,433 | ||||||||||||
Interest expense | (5,563 | ) | (5,469 | ) | (5,591 | ) | (7,132 | ) | (4,940 | ) | |||||||
| Write-off of investments | — | (5,000 | ) | (8,923 | ) | — | — | ||||||||||
| Foreign currency exchange gain (loss) | (118 | ) | (81 | ) | (1,073 | ) | (134 | ) | 413 | ||||||||
| Income (loss) on equity in joint ventures and realized gain (loss) on sales of assets | 4 | 750 | 180 | (462 | ) | 528 | |||||||||||
| Income (loss) before provision for (benefit from) income taxes | 7,752 | (29,107 | ) | (74,761 | ) | (160,833 | ) | (8,484 | ) | ||||||||
| Provision for (benefit from) income taxes | 2,324 | (8,732 | ) | 2,404 | — | 20,206 | |||||||||||
| Net income (loss) | 5,428 | (20,375 | ) | (77,165 | ) | (160,833 | ) | (28,690 | ) | ||||||||
| Accretion of preferred stock discount and dividend | — | — | (6,301 | ) | (9,184 | ) | (6,358 | ) | |||||||||
| Net income (loss) applicable to common stock holders | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | $ | (170,017 | ) | $ | (35,048 | ) | |||
Diluted net income (loss) per share | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |||
| Basic net income (loss) per share | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |||
| Weighted average shares outstanding—diluted | 30,785 | 29,941 | 32,308 | 38,476 | 40,575 | ||||||||||||
| Weighted average shares outstanding—basic | 28,221 | 29,941 | 32,308 | 38,476 | 40,575 | ||||||||||||
| | June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||
| | (In thousands) | ||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||
| Cash and cash-equivalents | $ | 49,371 | $ | 36,633 | $ | 33,571 | $ | 51,567 | $ | 107,677 | |||||
| Working capital | 169,380 | 127,414 | 76,120 | 41,938 | 16,140 | ||||||||||
| Total assets | 364,945 | 406,594 | 548,343 | 378,480 | 351,025 | ||||||||||
| Long-term obligations, less current maturities | 88,173 | 88,149 | 92,135 | 89,911 | 1,952 | ||||||||||
| Redeemable convertible preferred stock | — | — | — | 57,537 | 106,761 | ||||||||||
| Total stockholders' equity | 169,198 | 201,070 | 253,788 | 40,087 | 30,611 | ||||||||||
25
| June 30, | ||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash-equivalents | $ | 78,969 | $ | 34,039 | $ | 49,371 | $ | 36,633 | $ | 21,835 | ||||||||||
| Working capital | 173,589 | 153,987 | 169,380 | 127,414 | 69,111 | |||||||||||||||
| Total assets | 344,432 | 325,023 | 364,945 | 406,594 | 548,343 | |||||||||||||||
| Long-term obligations, less current maturities | 90,635 | 89,405 | 88,173 | 88,149 | 92,135 | |||||||||||||||
| Total stockholders’ equity | 166,557 | 145,750 | 169,198 | 201,070 | 253,788 | |||||||||||||||
Service and other revenues and cost of service and other for the yearsyear ended June 30, 1998, 1999 and 2000 do not reflect a reclassification for the reimbursement of out-of-pocket expenses, as required by Emerging Issues Task Force Issue No. 01-14, “Income"Income Statement Characterization of Reimbursements Received for “Out-of-Pocket’"Out-of-Pocket' Expenses Incurred”Incurred". It is impracticable to do so, as the information was not trackedcompiled during these periods. Reimbursable out-of-pocket expenses totaling $16,300 and $18,812 for the years ended June 30, 2001 and 2002, respectively, have been reclassified asthis period. The amounts included in service and other revenues and cost of service and other.other for the years ended June 30, 2001, 2002, 2003 and 2004 were $16.3 million, $18.8 million, $19.0 million and $16.9 million, respectively.
Basic and diluted net income (loss) per share and weighted average shares outstanding in the preceding table have been computed as described in note 2(i) to the consolidated financial statements included elsewhere in this Form 10-K. We have never declared or paid cash dividends on our common stock.
Pro forma net income (loss) and pro forma diluted net income (loss) per share assume that earnings for Petrolsoft, an acquired subchapter S-Corporation accounted for as a pooling-of-interests, were taxed at the Company’s effective tax rate.
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Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Since our founding in 1981, we have developed and marketed software and services to companies in the process industries. In addition to internally generated growth, we have acquired a number of businesses, including Hyprotech in the fourth quarter of fiscal 2002, Petrolsoft in the fourth quarter of fiscal 2000, ICARUS in the first quarter of fiscal 2001, Broner Systems in the second quarter of fiscal 2001, and the Houston Consulting Group and Coppermine LLC, a subsidiary of CPU that was formed to operate CPU’s process applications business, in the fourth quarter of fiscal 2001.
on May 31, 2002. We acquired Hyprotech ICARUS, Broner, the Houston Consulting Group and Coppermine in transactionsa transaction accounted for as purchases.a purchase. Our operating results include the operating results of these acquisitionsHyprotech only for periods subsequent to their respective datesthe date of acquisition. See note 4 to the consolidated financial statements included elsewhere in this Form 10-K. We acquired Petrolsoft in a transaction accounted for as a pooling-of-interests. Accordingly, our consolidated financial statements reflect the historic operations of Petrolsoft for all periods.
We typically license our engineering solutions for terms of three to five years and license our manufacturing/supply chain solutions for terms of 99 years. See “Item"Item 1. Business — Solutions:Business—Products: Software and Services.”"
Software license revenues, including license renewals, consists principally of revenues earned under fixed-term and perpetual software license agreements and is generally recognized upon shipment of the software if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence, or VSOE, of fair value exists for all undelivered elements. We determine VSOE based upon the price charged when the same element is sold separately. Maintenance and support VSOE represents a consistent percentage of the license fees charged to customers. Consulting services VSOE represents standard rates, which we charge our customers when we sell our consulting services separately. For an element not yet being sold separately, VSOE represents the price established by management having the relevant authority when it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. Revenues under license arrangements, which may include several different software products and
services sold together, are allocated to each element based on the residual method in accordance with American Institute of Certified Public Accountants, Statement of Position, or SOP, 98-9, “Software"Software Revenue Recognition, with Respect to Certain Transactions.”" Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized when earned. We have established sufficient VSOE for professional services, training and maintenance and support services. Accordingly, software license revenues are recognized under the residual method in arrangements in which software is licensed with professional services, training and maintenance and support services. We use installment contracts as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products or services.
Maintenance and support services revenues are recognized ratably over the life of the maintenance and support contract period. Maintenance and support services include telephone support and unspecified rights to product upgrades and enhancements. These services are typically sold for a one-year term and are sold either as part of a multiple element arrangement with software licenses or are sold independently at time of renewal. We do not provide specified upgrades to our customers in connection with the licensing of our software products.
Service revenues from fixed-price contracts are recognized using the percentage-of-completionproportional performance method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount thereof is provided currently. Service revenues from time-and-expense contracts and consulting and training revenues are recognized as the related services are performed. Services that have been performed but for which billings have not been made are recorded as unbilled services, and billings that have been recorded before the services have been performed are recorded as unearned revenue in the accompanying consolidated balance sheets.
27
In accordance with the Emerging Issues Task Force Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket' Expenses Incurred," reimbursement received for out-of-pocket expenses is recorded as revenue and not as a reduction of expenses.
We license our software in U.S. dollars and several foreign currencies. We hedge material foreign currency-denominated installments receivable with specific hedge contracts in amounts equal to those installments receivable. Historically, we experience minor foreign currency exchange gains or losses due to foreign exchange rate fluctuations, the impact of which have typically not been material in periods prior to the fourth quarter of fiscal 2002. During the fourth quarter of fiscal 2002, the U.S. Dollar weakened against European currencies, and we experienced foreign currency exchange losses primarily due to ineffective hedging of accounts receivable of our foreign subsidiaries, in particular Hyprotech and its subsidiaries, that were denominated in currencies other than the local functional currencies.material. We do not expect fluctuations in foreign currencies to have a significant impact on either our revenues or our expenses in the foreseeable future.
Our operating costs for the yearsSignificant Events—Year ended June 30, 20002004
On August 14, 2003, we issued and 2001 includesold 300,300 shares of Series D-1 preferred. We also delivered cash and 63,064 shares of Series D-2 preferred in consideration for the amortizationsurrender of intangible assets, including goodwill, arisingall of our outstanding Series B preferred. Each share of Series D preferred is currently convertible, at the holder's option, into 100 shares of our common stock and may be converted into additional shares of our common stock upon certain events as a result of antidilution provisions in our charter. In addition, we issued WD warrants to purchase up to 7,267,286 shares of common stock at a purchase price of $3.33 per share, and exchanged existing warrants to purchase 791,044 shares of common stock for WB warrants to purchase 791,044 shares of common stock at a purchase price of $4.08 per share.
During fiscal 2004, we used proceeds from acquisitions accounted for as purchases. The netthe Series D financing and the sale of installments receivable to repurchase and retire $29.5 million of our convertible debentures. In addition, we also paid $8.2 million to settle our remaining obligation to Accenture.
In December 2003, we executed a Non-Recourse Receivables Purchase Agreement with Silicon Valley Bank, pursuant to which we have the ability to sell receivables to the bank through January 1, 2005. Under the terms of this agreement, the total outstanding balance of these intangible assetssold receivables may not exceed $35.0 million at any one time. We have agreed to act as the bank's agent for collection of the sold receivables.
In June 2004, we executed a plan to reduce our operating costs, primarily involving the closure of certain facilities. This resulted in a restructuring charge totaling $15.9 million, included in restructuring charges and FTC legal costs (as described below).
Summary of Restructuring Accruals
Fiscal 2004
In June 2004, we initiated a plan to reduce our operating expenses in order to better align our operating cost structure with the current economic environment and to improve our operating margins. The plan to reduce operating expenses resulted in the consolidation of facilities, headcount reductions, and the termination of operating contracts. These actions resulted in an aggregate restructuring charge of $23.8 million, recorded in the fourth quarter of fiscal 2004.
As of June 30, 20012004, there was $44.0$13.3 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the year ended June 30, 2004, the following activity was being amortized over periods ranging from two to twelve years. The amortization from acquisitions that was charged to operations was $2.4 million for fiscal 2000 and $6.1 million for fiscal 2001.recorded (in thousands):
| | Closure/ Consolidation of Facilities and Contract exit costs | Employee Severance, Benefits, and Related Costs | Asset Impairments | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring charge | $ | 20,984 | $ | 1,046 | $ | 1,776 | $ | 23,806 | |||||
| Fiscal 2004 payments | (8,435 | ) | (280 | ) | — | (8,715 | ) | ||||||
| Impairment of assets | — | — | (1,776 | ) | (1,776 | ) | |||||||
| Accrued expenses, June 30, 2004 | $ | 12,549 | $ | 766 | $ | — | $ | 13,315 | |||||
| Expected final payment date | February 2007 | December 2004 | |||||||||||
Fiscal 2003
In October 2002, we initiated a plan to further reduce operating expenses in response to first quarter revenue results that were below expectations and to general economic uncertainties. In addition, we revised revenue expectations for the remainder of the fiscal year and beyond, primarily related to the manufacturing/supply chain product line, which has been affected the most by the current economic conditions. The plan to reduce operating expenses resulted in headcount reductions, consolidation of facilities, and discontinuation of development and support for certain non-critical products. These actions resulted in an aggregate restructuring charge of $16.1 million, recorded during the three months ended December 31, 2002. In June 2003 we reviewed our estimates to this plan and recorded a $12.0 million increase to the accrual, primarily due to revisions of the facility sub-lease assumptions, as well as increases to severance and other costs. During fiscal 2004, we recorded a $0.8 decrease to the accrual related to revised assumptions associated with lease exit costs and severance obligations, and recorded a payment of $4.1 million associated with the buyout of a remaining lease obligation.
As of June 30, 2004, there was $7.7 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the year ended June 30, 2004, the following activity was recorded (in thousands):
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Impairment of Assets and Disposition costs | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued expenses, June 30, 2003 | $ | 13,799 | $ | 2,731 | $ | 1,580 | $ | 18,110 | ||||||
| Fiscal 2004 payments | (2,567 | ) | (2,170 | ) | (770 | ) | (5,507 | ) | ||||||
| Adjustment—Facility lease buyout | (4,122 | ) | — | — | (4,122 | ) | ||||||||
| Adjustment—Revised assumptions | (385 | ) | (269 | ) | (134 | ) | (788 | ) | ||||||
| Accrued expenses, June 30, 2004 | $ | 6,725 | $ | 292 | $ | 676 | $ | 7,693 | ||||||
| Expected final payment date | December 2010 | April 2005 | April 2005 | |||||||||||
Fiscal 2002
In the fourth quarter of fiscal 2002, we initiated a plan to reduce operating expenses and to restructure operations around our two primary product lines, engineering software and manufacturing/supply chain software. We reduced worldwide headcount by approximately 10%, or 200 employees, closed and consolidated facilities, and disposed of certain assets, resulting in an aggregate restructuring charge of $14.4 million. During fiscal 2004, we recorded a $0.8 decrease to the accrual related to revised assumptions associated with lease exit costs and severance obligations, and recorded a payment of $0.7 million associated with the buyout of a remaining lease obligation. As of June 30, 2004, there was $2.0 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. During the year ended June 30, 2004, the following activity was recorded (in thousands):
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued expenses, June 30, 2003 | $ | 4,206 | $ | 1,688 | $ | 5,894 | |||||
| Fiscal 2004 payments | (1,302 | ) | (1,060 | ) | (2,362 | ) | |||||
| Adjustment—Facility lease buyout | (727 | ) | — | (727 | ) | ||||||
| Adjustment—Revised assumptions | (350 | ) | (498 | ) | (848 | ) | |||||
| Accrued expenses, June 30, 2004 | $ | 1,827 | $ | 130 | $ | 1,957 | |||||
| Expected final payment date | December 2010 | April 2005 | |||||||||
Fiscal 2001
In the third quarter of fiscal 2001, the FASB issued Statementrevenues realized were below expectations as customers delayed spending in the widespread slowdown in information technology spending and the deferral of Financial Accounting Standards (SFAS) No. 142, “Goodwilllate-quarter purchasing decisions. At that time, we also reduced our revenue expectations for the fourth quarter of fiscal year 2001 and Other Intangible Assets.” Under SFAS No. 142, companies no longer amortize goodwillfor the fiscal year 2002. Based on the reduced revenue expectations, management evaluated the business plan and made significant changes, resulting in a restructuring plan for our operations. This restructuring plan included a reduction in headcount, a substantial decrease in
discretionary spending and a sharpening of our e-business focus to emphasize our marketplace solutions. The restructuring plan resulted in a pre-tax charge totaling $7.0 million. During June 2004, the remaining balance of the accrual was paid, as we executed a buy-out of our remaining lease obligation. During the year ended June 30, 2004, the following activity was recorded (in thousands):
| | Closure/ Consolidation of Facilities | ||||
|---|---|---|---|---|---|
| Accrued expenses, June 30, 2003 | $ | 740 | |||
| Fiscal 2004 payments | (412 | ) | |||
| Adjustment—Facility lease buyout | (328 | ) | |||
| Accrued expenses, June 30, 2004 | $ | — | |||
Fiscal 1999
In the fourth quarter of fiscal 1999, we undertook certain other intangible assets with indefinite lives, but instead assess for impairment usingactions to restructure our business. The restructuring resulted from a fair-value-based test, on at least an annual basis. Effective July 1, 2001, we adopted SFAS No. 142 and stopped amortizinglower than expected level of license revenues which adversely affected fiscal year 1999 operating results. The license revenue shortfall resulted primarily from delayed decision making driven by economic difficulties among customers in certain of our core vertical markets. The restructuring plan resulted in a net carrying valuepre-tax restructuring charge totaling $17.9 million. As of $23.7June 30, 2004, there was $0.5 million of intangible assets. The amortization associated with these intangible assetsremaining in the accrued expenses relating to the restructuring. During the year ended June 30, 2004, the following activity was $1.0 million and $2.6 million for fiscal 2000 and 2001, respectively. Amortization expense related to intangible assets with definite lives existing as of July 1, 2001, that will continue to be amortized pursuant to SFAS No. 142 will range from approximately $1.3 million to $1.2 million per quarter in fiscal 2003 and from $1.2 million to $1.1 million per quarter in fiscal 2004. Thereafter, amortization expense related to existing acquired technology and other identifiable intangible assets will continue to decline through fiscal 2009.recorded (in thousands):
| | Closure/ Consolidation of Facilities | ||||
|---|---|---|---|---|---|
| Accrued expenses, June 30, 2003 | $ | 522 | |||
| Fiscal 2004 payments net of sublease receipts (lease payments) | (5 | ) | |||
| Accrued expenses, June 30, 2004 | $ | 517 | |||
| Expected final payment date | December 2004 | ||||
Critical Accounting Estimates and Judgments
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP).of America. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition — Recognition—Software Licenses
�� We recognize software license revenue in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)SOP No. 97-2, “Software"Software Revenue Recognition”Recognition", as amended by SOP No. 98-4 and SOP No. 98-9, as well as the various interpretations and clarifications of those statements. These statements require that four basic criteria must be satisfied before software license revenue can be recognized:
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Our management uses its judgment concerning the satisfaction of these criteria, particularly the criteria relating to the determination of whether the fee is fixed and determinable and the criteria relating to the collectibility of the receivables, particularly the installments receivable, relating to such sales. Should changes and conditions cause management to determine that these criteria are not met for certain future transactions, all or substantially all of the software license revenue recognized for such transactions could be deferred from revenue.deferred.
Revenue Recognition — Recognition—Consulting Services
We recognize revenue associated with fixed-fee service contracts in accordance with AICPA SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, using the percentage-of-completionproportional performance method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount of the anticipated loss is provided currently. Our management uses its judgment concerning the estimation of the total costs to complete the contract, considering a number of factors including the experience of the personnel that are performing the services and the overall complexity of the project. We have a significant amount of experience in the estimation of the total costs to complete a contract and have not typically recorded material losses related to these estimates. We do not expect the accuracy of our estimates to change significantly in the future. Should changes and conditions cause actual results to differ significantly from management’smanagement's estimates, revenue recognized in future periods could be adversely affected.
Impairment of Long-lived Assets, Goodwill and Intangible Assets
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 121, “Accounting144, "Accounting for the Impairment or Disposal of Long-Lived Assets, and Long-Lived Assets To Be Disposed Of”," we review the carrying value of long-lived assets and certain intangible assets periodically,when circumstances dictate that they should be reevaluated, based upon the expected future operating cash flows of our business. These future cash flow estimates are based on historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. ActualHistorically, actual results have occasionally differed from our estimated future cash flow estimates. In the future, actual results may differ materially from these estimates. We adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” as of July 1, 2002, which supercedes SFAS No. 121. We believe that the critical estimates, and judgments that will be applied after the adoptionaccordingly cause a full impairment of SFAS No. 144 will not be significantly different than those applied previously.our long-lived assets.
In accordance with SFAS No. 142, “Goodwill"Goodwill and Other Intangible Assets”,Assets," we conduct at least an annual assessment on January 1st of the carrying value of our goodwill assets. We most recently performed this assessment as of January 1, 2002. We obtain a third-party valuation of the reporting units associated with the goodwill assets, which is either based on either estimates of future income from the reporting units or estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. ActualHistorically, actual results have occasionally differed from our estimated future cash flow estimates. In the future, actual results may differ materially from these
estimates. In addition, the relevancy of recent transactions used to establish market value for our reporting units is based on management’smanagement's judgment.
During the year ended June 30, 2004, we recorded $4.2 million in charges related to the impairment of certain long-lived assets and technology related intangible and computer software development assets. The timing and size of future impairment charges involves the application of management’smanagement's judgment and estimates and could result in the write-offimpairment of all or substantially all of our long-lived assets, intangible assets and goodwill.goodwill, which totaled $73.4 million as of June 30, 2004.
Accrual of Legal Fees Associated with Outstanding Litigation
We accrue estimated future legal fees associated with outstanding litigation for which management has determined that it is probable that a loss contingency exists. This requires management to estimate the amount of legal fees that will be incurred in the defense of the litigation. These estimates are based heavily on our expectations of the scope, length to complete and complexity of the claims. Historically, as these factors have changed after our original estimates, we have adjusted our estimates accordingly. In the future, additional adjustments may be recorded as the scope, length or complexity of outstanding litigation changes.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax liabilities together with assessingthe assessment of temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Tax assets also result from net operating losses, research and development tax credits and foreign tax credits. We must then assess the likelihood that
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Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets.these amounts. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could result in a tax provision equal to the carrying value of our deferred tax assets. During the year ended June 30, 2004, we recorded a $14.6 million valuation allowance against our U.S. domiciled net deferred tax assets. This charge, however, had no impact on our cash flows.
Allowance for Doubtful Accounts
We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables whenfor which collection becomesis doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages,provisions, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts doesdo not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be required for all or substantially all of certain receivable balances.
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Results of Operations
The following table sets forth the percentages of total revenues represented by certain consolidated statement of operations data for the periods indicated:
| Year Ended June 30, | ||||||||||||||
| 2000 | 2001 | 2002 | ||||||||||||
| Revenues: | ||||||||||||||
| Software licenses | 49.6 | % | 45.1% | 41.8% | ||||||||||
| Service and other | 50.4 | 54.9 | 58.2 | |||||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | |||||||||||
| Expenses: | ||||||||||||||
| Cost of software licenses | 3.6 | 3.6 | 3.7 | |||||||||||
| Cost of service and other | 31.8 | 35.0 | 37.5 | |||||||||||
| Selling and marketing | 34.3 | 34.8 | 35.9 | |||||||||||
| Research and development | 19.2 | 21.1 | 23.2 | |||||||||||
| General and administrative | 9.2 | 9.4 | 10.7 | |||||||||||
| Costs related to acquisition | 0.6 | — | — | |||||||||||
| Restructuring and other charges | — | 2.1 | 5.0 | |||||||||||
| Charges for in-process research and development | — | 3.0 | 4.6 | |||||||||||
| Total expenses | 98.7 | 109.0 | 120.6 | |||||||||||
| Income (loss) from operations | 1.3 | (9.0 | ) | (20.6 | ) | |||||||||
| Interest income | 3.7 | 3.1 | 2.1 | |||||||||||
| Interest expense | (2.1 | ) | (1.7 | ) | (1.7 | ) | ||||||||
| Write-off of investments | — | (1.5 | ) | (2.9 | ) | |||||||||
| Other income (expense), net | 0.0 | 0.2 | (0.2 | ) | ||||||||||
| Income (loss) before provision for (benefit from) income taxes | 2.9 | (8.9 | ) | (23.3 | ) | |||||||||
| Provision for (benefit from) income taxes | 0.9 | (2.7 | ) | 0.8 | ||||||||||
| Net income (loss) | 2.0 | (6.2 | ) | (24.1 | ) | |||||||||
| Accretion of preferred stock discount and dividend | — | — | (1.9 | ) | ||||||||||
| Net income (loss) applicable to common stockholders | 2.0 | % | (6.2 | )% | (26.0 | )% | ||||||||
| | Year Ended June 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||
| Revenues: | ||||||||
| Software licenses | 41.8 | % | 43.3 | % | 46.8 | % | ||
| Service and other | 58.2 | 56.7 | 53.2 | |||||
| Total revenues | 100.0 | 100.0 | 100.0 | |||||
| Cost of revenues: | ||||||||
| Cost of software licenses | 3.7 | 4.3 | 4.8 | |||||
| Cost of service and other | 37.3 | 33.2 | 30.5 | |||||
| Amortization of technology related intangible assets | 1.6 | 2.5 | 2.2 | |||||
| Impairment of technology related intangible and computer software development assets | 0.4 | 2.7 | 1.0 | |||||
| Total cost of revenues | 43.0 | 42.7 | 38.5 | |||||
| Gross profit | 57.0 | 57.3 | 61.5 | |||||
| Operating costs: | ||||||||
| Selling and marketing | 36.0 | 32.8 | 30.6 | |||||
| Research and development | 23.2 | 20.2 | 18.2 | |||||
| General and administrative | 9.1 | 8.8 | 9.7 | |||||
| Long lived asset impairment charges | — | 32.9 | 0.3 | |||||
| Restructuring charges and FTC legal costs | 4.7 | 12.7 | 6.4 | |||||
| Charges for in-process research and development | 4.6 | — | — | |||||
| Total operating costs | 77.6 | 107.4 | 65.2 | |||||
| Income (loss) from operations | (20.6 | ) | (50.1 | ) | (3.7 | ) | ||
| Interest income | 2.1 | 2.6 | 2.3 | |||||
| Interest expense | (1.7 | ) | (2.2 | ) | (1.5 | ) | ||
| Write-off of investments | (2.9 | ) | — | — | ||||
| Other income (expense), net | (0.2 | ) | (0.1 | ) | 0.3 | |||
| Income (loss) before provision for income taxes | (23.3 | )% | (49.8 | )% | (2.6 | )% | ||
Comparison of Fiscal 20022004 to Fiscal 20012003
Revenues.
Revenues.Revenues are derived from software licenses, consulting services and maintenance and training. Total revenues for fiscal 2002 decreased 1.9%2004 increased 0.9% to $320.6$325.7 million from $326.9$322.7 million in fiscal 2001.2003. Total revenues from customers outside the United States were $146.9$186.5 million or 45.8%57.3% of total revenues and $159.5$172.5 million or 48.8%53.5% of total revenues for fiscal 20022004 and 2001,2003, respectively. The geographical mix of revenues can vary from period to period.
Software license revenues represented 41.8%46.8% and 45.1%43.3% of total revenues for fiscal 20022004 and 2001,2003, respectively. Revenues from software licenses in fiscal 2002 decreased 9.2%2004 increased 8.9% to $133.9$152.3 million from $147.4$139.9 million in fiscal 2001.2003. Software license revenues are 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. Lower softwareThis increase is primarily due to a modest increase in demand for products from our manufacturing/supply chain product line, as well as a modest increase in revenues from our customers
in the chemical manufacturing industry. For fiscal 2004, approximately 70% and 30% of our license revenuesrevenue was derived from products in the engineering product line and manufacturing/supply chain product line, respectively, as compared to approximately 75% and 25%, respectively, in fiscal 2002 were driven by significant delays in purchases by our customers in the process industries, due to the struggling economic environments in the United States and Europe, which resulted in license revenues for the whole fiscal year 2002 being lower than our initially anticipated levels, all of which was offset by software licenses revenues recorded by Hyprotech in fiscal 2002.
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2003.
Revenues from service and other consist of consulting services, post-contract support on software licenses, training and sales of documentation. Revenues from service and other for fiscal 2002 increased 4.0%2004 decreased 5.2% to $186.7$173.4 million from $179.5$182.9 million for fiscal 2001. Excluding2003. This decrease is attributable primarily to the consulting services business. Consulting services decreased due to a year over year $2.1 million decline in reimbursable out-of-pocket expenses, and due to the general low-level of $18.8 million and $16.3 million inlicenses of our manufacturing/supply chain products during the two most recent fiscal 2002 and 2001, respectively, revenues from service and other increased 2.9% or $4.7 million from fiscal 2001years. Our consulting services are more heavily linked to fiscal 2002.the implementation of our manufacturing/supply chain products than they are to our engineering products.
Cost of Software Licenses.Cost of software licenses consists of royalties, amortization of previously capitalized software costs, costs related to delivery of software, including disk duplication and third-party software costs, printing of manuals and packaging. Cost of software licenses for fiscal 2002 remained consistent with the prior year, decreasing2004 increased 11.9% to $11.8$15.6 million from $11.9$13.9 million in fiscal 2001.2003. Cost of software licenses as a percentage of revenues from software licenses increased to 8.8%10.2% for fiscal 20022004 from 8.0%10.0% for fiscal 2001.2003. The cost increase is primarily due to an increase in royalty costs of $0.9 million and amortization of computer software development costs of $0.9 million. The increase in the cost of software licenses as a percentage ofroyalties is attributable to higher license revenues from software licenses is the result of decreased license revenue, and the largely fixed natureincrease in the amortization of computer software development costs is due to two significant product releases, AES 12.1 and AMS 6.0, during the costs that are included in costfirst part of software licenses. Cost of software licenses contributed by Hyprotech was not significant inthis fiscal 2002.year.
Cost of Service and Other.Cost of service and other consists of the cost of execution of application consulting services, technical support expenses and the cost of training services. Cost of service and other for fiscal 2002 increased 4.7%2004 decreased 7.0% to $120.0$99.4 million from $114.6$106.9 million for fiscal 2001.2003. Cost of service and other, as a percentage of revenues from service and other, increaseddecreased to 64.3%57.3% for fiscal 20022004 from 63.8%58.4% for fiscal 2001.
Excluding2003. The decrease in cost is primarily due to decreased payroll costs of $2.5 million related to reductions in headcount, as well as a decrease in reimbursable out-of-pocket expenses of $18.8 million and $16.3 million in fiscal 2002 and 2001, respectively, cost of service and other increased 2.9% or $2.9 million from fiscal 2001 to fiscal 2002. In addition, cost$2.1 million. The costs of service and other as a percentage of revenues from service and other remainedrevenues are generally consistent increasingfrom period to 60.3%period, showing a modest decrease as our utilization rates have increased.
Amortization of Technology Related Intangible Assets. Amortization of technology related intangible assets consists of the amortization from intangible assets obtained in acquisitions. These assets are generally being amortized over a period of three to five years. Amortization expense for fiscal 20022004 decreased 11.5% to $7.3 million from 60.2%$8.2 million for fiscal 2003. The decrease is primarily due to the discontinued amortization of $5.3 million of intangible assets for which an impairment was recorded in the three months ended December 31, 2002.
Impairment of Technology Related Intangible and Computer Software Development Assets. Impairment of technology related intangible and computer software development assets consists of impairment charges related to assets that are directly involved in the production of revenue. In the fourth quarter of fiscal 2001. On this basis,2004, we recorded an impairment charge of $3.3 million related to management's decision to discontinue development of certain next generation manufacturing supply chain products. Management's decision was based on concerns about the increasefuture revenue projections for these products, and the assessment of costs remaining to bring these products to market. In fiscal 2003, we recorded an impairment charge of $8.7 million related to computer software development costs and intangible assets that were related to products that management had decided would not be sold or determined that their carrying values were in costexcess of service and other is consistenttheir fair values. The assets that will no longer be used were identified by management's decisions to either discontinue future development efforts associated with certain products. The carrying values of the remaining assets were compared to the fair values of those assets resulting in an impairment. The fair values were determined by forecasting the future net cash flows associated with the increase in revenues from service and other.products.
Selling and Marketing.Selling and marketing expenses for fiscal 2002 increased 1.4%2004 decreased 6.0% to $115.2$99.5 million from $113.6$105.9 million for fiscal 2001,2003, while increasingdecreasing as a percentage of total revenues to 35.9%30.6% from 34.8%32.8%. The increasedecrease is primarily due to a decrease in sellingadvertising costs of $5.0 million related to AspenWorld, which took place in fiscal 2003, and marketinga decrease in payroll and benefit costs was primarilyof $0.8 million attributable to an expense base that increasedthe headcount reductions effected in the initial part of fiscalOctober 2002 to support an expected higher license revenue level, including our investment in additional headcount to support our initiatives in the areas of expanding partnerships, in addition to sales and marketing expenses contributed by Hyprotech in June 2002. During fiscal 2002, we continued to selectively invest in sales personnel and regional sales offices to improve our geographic proximity to our customers. Fiscal 2002 also included additional expenses as compared to fiscal 2001 relating to our plans to expand certain new business initiatives, including PetroVantage.restructuring plan.
Research and Development.Research and development expenses consist of personnel and outside consultancy costs required to conduct our product development efforts. Capitalized research and development costs are amortized over the estimated remaining economic life of the relevant product, not to exceed three years. Research and development expenses for fiscal 2002 increased 8.0%2004 decreased 9.2% to $74.5$59.1 million from $68.9$65.1 million for fiscal 2001,2003, and increaseddecreased as a percentage of total revenues to 23.2%18.2% from 21.1%20.2%. The increase in costs wasdecrease is primarily attributable to a full year of$1.7 million decrease in depreciation and amortization related to assets written-off in December 2002, a $1.0 million decrease in salary and benefit costs relating to the June 2001 acquisitions of certain technology divisions of CPU and the Houston Consulting Group, non-capitalizable costs incurred in associationassociated with the Accenture Strategic Alliance,reductions in headcount from the October 2002 restructuring plan, a general increase$1.0 million decrease in normal development activitiesconsulting costs, and costs contributed by Hyprotecha $0.7 million decrease in June 2002. The increase in research and development expenses as a percentage of total revenues is primarily related to lower than anticipated revenues.travel costs.
We capitalized 11.7%software development costs that amounted to 11.4% of our total research and development costs during fiscal 2002. Of this amount, 3.0% related to internal costs and costs incurred by Accenture, as part of the Accenture Strategic Alliance. The remaining 8.7% related to our traditional development efforts,2004, as compared to 7.6%14.6% in fiscal 2001.2003. These percentages will vary from quarter to quarter, depending upon the stage of development for the various projects in a given period. This decrease is primarily due to the completion of product development activity related to two significant product releases during the first part of fiscal 2004.
General and Administrative.General and administrative expenses consist primarily of salaries of administrative, executive, financial and legal personnel, outside professional fees and amortization of identifiable intangibles. General and administrative expenses for fiscal 20022004 increased 11.8%11.4% to $34.3$31.7 million from $30.6$28.5 million for fiscal 2001,2003, and increased as a percentage of total revenues to 10.7%9.7% from 9.4%8.8%. Fiscal 2001 also includes $2.6This increase is due to a $6.5 million increase in legal costs associated with legal defense and loss contingencies associated with the amortizationKBC litigation and with the settlement of other litigation. This is offset by a $3.0 million decrease in salary and benefit costs associated with the reductions in headcount from the October 2002 restructuring plan.
Long Lived Asset Impairment Charges. In fiscal 2004, this amount consisted of $1.0 million in impairment charges based on our decisions to discontinue certain internal capital projects that had previously been put on hold. In addition, certain fixed assets that supported research and development efforts were considered impaired as a result of the product consolidation decisions made in the April 2004 product review. In October 2002, we determined that the goodwill should be tested for which there is no correspondingimpairment as a result of lowered revenue expectations and the overall decline in our market value. This amounted to a $74.7 million aggregate impairment charge, recorded in the fiscal 2003 accompanying consolidated statement of operations. Concurrent with the goodwill impairment review, we determined that several other assets were also impaired. This resulted in an additional $31.4 million in impairment charges in fiscal 2002, resulting in a comparative increase of $6.2 million or 22.2%. These increases were due
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Restructuring Charges and FTC Legal Costs. During fiscal 2004, we recorded $20.8 million in restructuring charges and FTC legal costs. Of this amount, $23.8 million is associated with a June 2004 restructuring plan, which is offset by $7.9 million in adjustments to prior restructuring accruals and deferred rent balances, and $4.9 million is FTC legal costs, related to the FTC challenge of Icarus, CPU and the Houston Consulting Group, an increaseour acquisition of Hyprotech.
In June 2004, we initiated a plan to reduce our bad debt reserve dueoperating expenses in order to better align our expense structure with the current economic environment and to improve our operating margins. This plan coincided with a reduction in our revenue projections for fiscal 2005. The plan to reduce operating expenses resulted in the consolidation of facilities, headcount reductions, and the termination of operating contracts. These actions resulted in an increaseaggregate restructuring charge of $23.8 million. This is
offset by $7.9 million in certain non-recurring professional feesadjustments to the prior restructuring accruals and costsdeferred rent balances, primarily related to the settlementbuy-out of minor litigation. Amortizationthe remaining obligation for our Houston facility, of intangible assets, including goodwillwhich portions had previously been vacated and included in fiscal 2001, was $5.2 million in fiscal 2002 and $6.1 million in fiscal 2001, respectively, a decrease of 14.8% in fiscal 2002 as compared to the prior year. General and administrative expenses contributed by Hyprotech were not significant in fiscal 2002.
Restructuring and Other Charges.During fiscal 2002, management undertook two separateprevious restructuring plans. The first occurred in August 2001 and amounted to $2.6 million, primarily related to severance. The second occurred in May 2002 and amounted to $14.4 million, related to severance, facility consolidations andcomponents of the write-offrestructuring plan are as follows:
Closure/consolidation of certain assets. In addition, during fiscal 2002, we revised estimates on previously recorded restructuring plans, resulting in a reversal of an aggregate $1.1facilities: Approximately $21.0 million of facility accruals and a $0.1 million increase to a severance settlement.
August 2001 restructuring plan. During August 2001, in light of economic uncertainties, management made a decision to adjust the business plan by reducing spending, which resulted in a restructuring charge relates to the termination of $2.6facility leases and other lease related costs. The facility leases had remaining terms ranging from several months to eight years. The amount accrued is an estimate of the remaining obligation under the lease or actual costs to buy-out leases, reduced by expected income from the sublease of the underlying properties.
Employee severance, benefits and related costs: Approximately $1.0 million primarily for severance.of the restructuring charge relates to the reduction in headcount. Approximately 10035 employees, or 5%2% of the workforce, were eliminated under the changes torestructuring plan. A majority of the employees were located in North America, although Europe was affected, as well. All business plan implemented by management. Areas impacted includedunits were affected, including services, sales and marketing, services, research and development, and general and administrative.
May 2002 restructuring plan. Impairment of assets: In the third quarter of fiscal 2002, revenues were lower than our expectations as customers delayed spending due to the general weakness in the economy. Like many other software companies, we reduced our revenue expectations for the fourth quarter and for the fiscal year 2003. Based upon the impact of these reduced revenue expectations, management evaluated our current business and made significant changes, resulting in a restructuring plan for our operations. This restructuring plan included a reduction in headcount, tighter cost controls, the close-down and consolidation of facilities, and the write-off of certain assets.
Adjustments to previously recorded restructuring charges. In March 2002, due to revised sub-lease assumptions at one of our facilities, we recorded a $0.5 million reversal to the restructuring accrual that had been recorded in the fourth quarter of fiscal 2001. In June 2002, due to revisions to the life of the expected sublease end dates for two facilities, we recorded $0.3 million reversals to both the restructuring accrual that had been recorded in the fourth quarter of fiscal 2001 and in the fourth quarter of fiscal 1999.
Charge for In-Process Research and Development.In connection with the acquisition of Hyprotech in May 2002, $14.9Approximately $1.8 million of the purchase price was allocatedrestructuring charge relates to in-process research and development projects based upon an independent appraisal. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.
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At the acquisition date, Hyprotech was conducting design, development, engineering and testing activitiescharges associated with the completionimpairment of its next-generation product. This project involved developing a new componentized architecture that would result in a next-generation software suite. In addition, design and development was in progress for the next release cycle for several of Hyprotech’s other products. At the acquisition date, the technologies under development ranged from 25 to 74 percent complete based on engineering man-month data and technological progress. Anticipated completion dates ranged from three months to two years at an estimated cost of $19.3 million.
In making this purchase price allocation, we considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items and an assessment of overall contributions, as well as project risks. The values assigned to purchased in-process technology were determined by estimating the costs to develop the acquired technologies into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present values. The revenue projections used to value the in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from the projects are based on estimates of cost of sales, operating expenses, and income taxes from the projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecasts and the risksfixed assets associated with the projected growthclosed/consolidated facilities. These assets were reviewed for impairment in accordance with SFAS No. 144, and profitability of the developmental projects, discount rates of 20 to 40 percent were considered appropriate for the in-process research and development. Risks related to the completionbe impaired because their carrying values were in excess of technology under development include the inherent difficulties and uncertainties in achieving technological feasibility, anticipated levels oftheir fair values. The fair values were determined based on a quoted market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets.price from a third party.
Interest Income.Interest income is generated from investment of excess cash in short-term and long-term investments and from the license of software pursuant to installment contracts. Under these installment contracts, we offer a customer the option to make annual payments for its term licenses instead of a single license fee payment at the beginning of the license term. Historically, a substantial majority of the asset optimization customers have elected to license these products through installment contracts. Included in the annual payments is an implicit interest rate established by us at the time of the license. As we sell more perpetual licenses for value chain solutions, these sales are being paid for in forms that are generally not installment contracts. If the mix of sales moves away from installment contracts, interest income in future periods will be reduced.
We sell a portion of the installment contracts to unrelated financial institutions. The interest earned by us on the installment contract portfolio in any one year is the result of the implicit interest rate established by us on installment contracts and the size of the contract portfolio. Interest income was $6.8$7.4 million for fiscal 20022004 as compared to $10.3$8.5 million in fiscal 2001.2003. This decrease primarily is due to the general declineaggressive collection of receivables and the increased sale of receivables, resulting in interest rates during fiscal 2002 which effected interest earned on installment contracts and our short-term investments.the decrease of installments receivable balance.
Interest Expense.Interest expense was incurred under our 5 1/4% convertible debentures, bank line of creditamounts owed to Accenture, and capital lease obligations. Interest expense in fiscal 2002 increased2004 decreased to $5.6$4.9 million from $5.5$7.1 million in fiscal 2001.2003. This decrease in interest expense results from the elimination of interest bearing debt, such as the payment of the obligation to Accenture in August 2003 and the repurchase and retirement of a portion of the convertible debentures in September 2003, January 2004, March 2004 and May 2004.
Write-off of Investment.During fiscal 2001 and 2002 we invested $10.8 million in Optimum Logistics Ltd. consisting of cash and stock, of which $2.1 was refunded in March 2002. This investment entitled us to a minority interest in Optimum Logistics and was accounted for using the cost method. During the fourth quarter of fiscal 2002, we determined that our investment in Optimum Logistics was impaired and this investment of $8.7 million was written-off, in addition to $0.2 million of other write-offs.
Foreign currency exchange loss.gain (loss).Foreign currency exchange gains and losses are primarily incurred through the revaluation of receivables denominated in foreign currencies. ForeignIn fiscal 2004 we recorded a foreign currency exchange gain of $0.4 million, compared to a $0.1 million loss in fiscal 2002 increased to $1.1 million from $0.1 million in fiscal 2001.2003. This increase was due to the weakening of the U.S. Dollar against European currenciesfavorable exchange rate fluctuations and translation losses attributable to Hyprotech’s receivables during the month of June for which we had not yet implemented an effective hedging policy.of foreign receivable balances.
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Income (Loss) on Equity in Joint Ventures and Realized Gain (Loss) on Sales of Investments.Assets. Income (loss) on equity in joint ventures and realized gain (loss) on sales of investmentsassets was $0.2a $0.5 million gain in fiscal 20022004 as compared to $0.8$0.5 million loss in fiscal 2001. In fiscal 2002 this consisted entirely of income on equity in joint ventures. In fiscal 2001, this2003. This increase is due primarily consisted of $0.6to a $0.5 million of realized gainsgain on the partial sale of two investmentsreceivables and $0.1a $0.2 million gain on the sale of income on equityland in joint ventures.Houston, Texas.
Provision for/Benefit from Income Taxes.We recorded a provision for income taxes of $2.4 million and a benefit from income taxes of $8.7$20.2 million for fiscal 2002 and 2001, respectively.2004. The provision for fiscal 2002 represents income taxes on income generated in certain foreign jurisdictions where we did not have operating loss carryforwards. We generated significant2004 includes a $14.6 million valuation allowance against U.S. domiciled net deferred tax loss carryforwards during both fiscal 2002 and 2001. The provision for fiscal 2002 also included a benefit from income taxesassets and a corresponding increase in$5.6 million provision primarily related to foreign taxes. We provided a full valuation allowance against the tax valuation of $8.7 million as discussed below.net operating losses generated during fiscal 2003 and 2004.
Under SFAS No. 109, a deferred tax asset related to the future benefit of a tax loss carryforward should be recorded unless we make a determination that it is “more"more likely than not”not" that such deferred tax asset would not be realized. Accordingly, a valuation allowance would be provided against the deferred tax asset to the extent that we cannot demonstrate that it is “more"more likely than not”not" that the deferred tax asset will be realized. In determining the amount of valuation allowance required, we consider numerous factors, including historical profitability, estimated future taxable income, the volatility of the historical earnings, and the volatility of earnings of the industry in which we operate. We periodically review our deferred tax asset to determine if such asset is realizable. In fiscal 2002,2004, we concluded, in accordance with SFAS No. 109, that we should not recognize the full valuerecord a valuation allowance on a significant portion of our deferred tax asset under the “more"more likely than not”not" test and therefore increased the amount of the valuation allowance. See Note 10 of Notes to Consolidated Financial Statements.
Comparison of Fiscal 20012003 to Fiscal 20002002
Revenues.
Revenues.Total revenues for fiscal 20012003 increased 21.9%0.7% to $326.9$322.7 million from $268.1$320.6 million in fiscal 2000.2002. Total revenues from customers outside the United States were $159.5$172.5 million or 48.8%53.5% of total revenues and $121.7$146.9 million or 45.4%45.8% of total revenues for fiscal 20012003 and 2000,2002, respectively. The geographical mix of revenues can vary from period to period.
Software license revenues represented 45.1%43.3% and 49.6%41.8% of total revenues for fiscal 20012003 and 2000,2002, respectively. Revenues from software licenses in fiscal 20012003 increased 11.0%4.4% to $147.4$139.9 million from $132.8$133.9 million in fiscal 2000. Higher2002. Greater software license revenues in fiscal 20012003 were driven by strongthe inclusion of software license revenue associated with Hyprotech, offset by an overall decline in demand for our manufacturing/supply chain products. Revenues and expenses associated with Hyprotech are included in our results from operations from the petroleum sectorMay 31, 2002 date of acquisition; for fiscal 2002 this includes the month of June 2002 and a 44% increase in sales infor fiscal 2003 this includes the first half of thefull fiscal year compared to the first half of fiscal 2000. In the second half of fiscal 2001, we saw a general delay in decision making from many customers, which resulted in license revenues for the whole fiscal year 2001 being lower than our initially anticipated levels, but still higher than license revenues in fiscal 2000.year.
Revenues from service and other for fiscal 2001 increased 32.7%2003 decreased 2.1% to $179.5$182.9 million from $135.3$186.7 million for fiscal 2000. Of this increase, $16.3 million2002. This decline in revenue is attributable toreflective of a decrease in consulting revenue, partially offset by the inclusion of reimbursable out-of-pocket expensesmaintenance revenue associated with Hyprotech. The decline in service and otherconsulting revenue primarily is related to the decline in demand for fiscal 2001. A corresponding amount is not reflected in fiscal 2000 as it would be impracticable to do so. In addition, the increase during fiscal 2001 reflects an improvement in our support and maintenance business resulting from the higher level of license revenues in fiscal 2001, as well as improvements in the pricing and utilization of ourmanufacturing/supply chain software products, along with which we typically sell consulting services business, particularly within the value chain portion.projects.
Cost of Software Licenses.Cost of software licenses for fiscal 20012003 increased 23.4%17.6% to $11.9$13.9 million from $9.6$11.8 million in fiscal 2000.2002. Cost of software licenses as a percentage of revenues from software licenses increased to 8.0%10.0% for fiscal 20012003 from 7.2%8.8% for fiscal 2000. The increase in the total cost of software licenses is2002. These increases are primarily the result of increased license revenue volume,a $3.3 million increase in royalties, primarily related to a royalty arrangement with Accenture, which was effective as well as increased fixed costs thatof the beginning of fiscal 2003, under which we incurred during fiscal 2001.pay royalties on the licensing of certain manufacturing/supply chain products.
Cost of Service and Other.Cost of service and other for fiscal 2001 increased 34.5%2003 decreased 10.9% to $114.6$106.9 million from $85.2$120.0 million for fiscal 2000.2002. Cost of service and other, as a percentage of
revenues from service and other, increaseddecreased to 63.8%58.4% for fiscal 20012003 from 63.0%64.3% for fiscal 2000. Cost2002. This decrease in absolute dollars is due to a decrease in consulting costs of $3.5 million and a decrease in salary and related costs of $4.5 million related to the reductions in headcount reflected in the restructuring charges of May 2002 and October 2002. The decrease as a percentage of service and other increasedrevenues was due to support the
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Amortization of Technology Related Intangible Assets. Amortization expense for fiscal 2003 increased 38.7% to $8.2 million from $5.0 million for fiscal 2002. The increase is attributableprimarily due to $16.3the intangible assets acquired as part of the Hyprotech acquisition in May 2002.
Impairment of technology related intangible and computer software development assets. In fiscal 2003, we recorded an impairment charge of $8.7 million related to computer software development costs and intangible assets that were related to products that management had decided would not be sold or determined that their carrying values were in reimbursable out-of-pocket expenses, as discussed above.
Selling and Marketing.Selling and marketing expenses for fiscal 2001 increased 23.7%2003 decreased 8.1% to $113.6$105.9 million from $91.9$115.2 million for fiscal 2000,2002, while increasingdecreasing as a percentage of total revenues to 34.8%32.8% from 34.3%35.9%. The increase in fiscal 2001 wasdecreases are attributable to an increased expense base to support a higher revenue level, particularly a higher license revenue level. We also continued to invest selectivelysalary and related costs of $8.2 million associated with the headcount reductions reflected in sales personnelthe restructuring charges of May 2002 and regional sales offices to improve our geographic proximity to our customers, to maximize the penetration of existing accountsOctober 2002, and to add new customers. The increase$2.6 million associated with travel and entertainment costs, partially offset by $4.9 million in costs also was attributable toassociated with our continued investment in developing our partnership channels and relationships,October 2002 AspenWorld conference, which occurs bi-annually, the roll-out of certain e-business technologies, including PetroVantage, our investment in user group meetings, the addition of a new sales training program, the launch of a new advertising strategy to generate greater company awareness and the additioninclusion of costs relatingassociated with Hyprotech, increases in certain foreign-based sales expenses where currencies strengthened as compared to our acquisitions in fiscal 2001. Thethe US dollar, and an increase in sales and marketing expenses as a percentage of total revenues is primarilycommissions related to lower than anticipated revenues.significantly higher license revenues in the three months ended September 30, 2002 as compared to the three months ended September 30, 2001.
Research and Development.Research and development expenses for fiscal 2001 increased 33.6%2003 decreased 12.6% to $68.9$65.1 million from $51.6$74.5 million for fiscal 2000,2002, and increaseddecreased as a percentage of total revenues to 21.1%20.2% from 19.2%23.2%. The increase in costs wasThese decreases are attributable to a $4.5 million decrease in salary and related costs related to the continued roll-outeffect of our asset optimizationreductions in headcount reflected in the restructuring charges of May 2002 and value chain solutions, includingOctober 2002, partially offset by the additioninclusion of costs relating to the acquisitions of ICARUSassociated with Hyprotech and Broner, and the other acquisitionsincreases in fiscal 2001, and other e-business technologies, including a significant portion of the $8.3 million invested in PetroVantage in fiscal 2001. The increase incertain foreign-based research and development expenses where currencies strengthened as a percentage of total revenues is primarily relatedcompared to lower than anticipated revenues.the US dollar.
We capitalized 7.6%software development costs that amounted to 14.6% of our total research and development costs during fiscal 20012003, as compared to 7.5%11.7% in fiscal 2000.2002. This increase is due to product development activity related to the Accenture co-development alliance, as well as a smaller level of overall research and development spending.
General and Administrative.General and administrative expenses for fiscal 2001 increased 23.9%2003 decreased 2.6% to $30.6$28.5 million from $24.7$29.2 million for fiscal 2000,2002, and increaseddecreased as a percentage of total revenues to 9.4%8.8% from 9.2%9.1%. These increases weredecreases are due primarily to the amortization of intangiblesa $2.4 million decrease in salary and related costs related to the acquisitionsreductions in headcount reflected in the restructuring charges of ICARUSMay 2002 and Broner,October 2002, offset by increases to our bad debt reserve and the inclusion of general and administrative costs associated with Hyprotech.
Long Lived Asset Impairment Charges. In October 2002, we determined that the goodwill should be tested for impairment as a result of lowered revenue expectations and the overall decline in our market value. This amounted to a $74.7 million aggregate impairment charge, recorded in the fiscal 2003 accompanying consolidated statement of operations. Concurrent with the goodwill impairment review, we determined that several other acquisitionsassets were also impaired. This resulted in an additional $31.4 million in impairment charges in fiscal 2001, as well as additional personnel hired2003, related to support our growth. Amortization of intangible assets, including goodwill, was $6.1 millionthe intellectual property purchased from Accenture in February 2002, internal capital projects and $2.4fixed assets.
Restructuring Charges and FTC Legal Costs. During fiscal 2003, we recorded $41.1 million in fiscal 2001restructuring charges and fiscal 2000, respectively,FTC legal costs. Of this amount, $28.1 million is associated with an increase of 154.1%October 2002 restructuring plan, and $13.0 million is FTC legal costs. In October 2002, we initiated a plan to further reduce operating expenses in fiscal 2001 as comparedresponse to the prior year.
Restructuringfirst quarter revenue results that were below expectations and Other Charges.to general economic uncertainties. In the third quarter of fiscal 2001, revenues were lower than our expectations as customers delayed spending due to the widespread slowdown in IT spending and the deferral of late-quarter purchasing decisions. Like many other software companies,addition, we reduced ourrevised revenue expectations for the fourth quarter and forremainder of the fiscal year 2002. Based upon the impact of these reduced revenue expectations, management evaluated our current business and made significant changes, resulting in a restructuring plan for our operations. This restructuring plan included a reduction in headcount, a substantial decrease in discretionary spending and a sharpening of our e-business focus to emphasize our marketplace solutions and PetroVantage.
Close-down/ consolidation of facilities:Approximately $2.8 million of the restructuring chargebeyond, primarily related to the terminationmanufacturing/supply chain product line, which had been affected the most by the current economic conditions. The plan to reduce operating expenses resulted in headcount reductions, consolidation of facilities, and discontinuation of development and support for certain non-critical products. These actions resulted in an aggregate restructuring charge of $16.1 million, recorded during the three months ended December 31, 2002. In June 2003 we reviewed our estimates to this plan and recorded a $12.0 million increase to the accrual, primarily due to revisions of the facility leasessub-lease assumptions, as well as increases to severance and other lease-related costs. The facility leases had remaining terms ranging from one month
Interest Income. Interest income was $8.5 million for fiscal 2003 as compared to six years. The amount accrued reflects our best estimate of the actual costs to buy-out leases or to sublease the underlying properties. Included$6.8 million in this amountfiscal 2002. This increase primarily is the write-off of certain assets, primarily leasehold improvements.
Employee severance, benefits and related costs:Approximately $3.2 million of the restructuring charge relateddue to the reductionincrease of installment contracts associated with Hyprotech.
Interest Expense. Interest expense in headcount. Approximately 100 employees, or 5% offiscal 2003 increased to $7.1 million from $5.6 million in fiscal 2002. This increase primarily is due to interest on the workforce, were eliminated under the changesamounts owed to Accenture.
Foreign currency exchange loss. Foreign currency exchange loss in fiscal 2003 decreased to $0.1 million from $1.1 million in fiscal 2002. This decrease was due to the business plan implemented by management. Areas impacted included sales and marketing, services, research and development, and general and administrative.
Write-offimplementation of assets:Approximately $1.0 million of the restructuring and other charges related to the write-off of the investment in e-business initiatives that were abandoned as a direct consequence of the change in business plan. The write-off was based on the residual amount remaining after our receipt of cash in winding-down some of the e-business initiatives in which we participated.
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Chargemore effective hedging policy for In-Process Research and Development.Hyprotech's receivables. In connection with the acquisitions of ICARUS, Broner, certain assets and technologies offiscal 2002, an Internet-based trading company, the Houston Consulting Group and Coppermine during fiscal 2001, approximately $9.9 million of the aggregate purchase prices were allocated to in-process research and development projects based upon independent appraisals. These allocations represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the dates of acquisition, the development of these projectseffective hedging policy had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition dates.been implemented.
At the acquisition date, ICARUS was conducting design, development, engineering and testing activities associated with the completion of its next-generation product. This project involved developing a framework that will unify ICARUS’ cost engine technology and user modules into one seamless architecture. At the acquisition date, the technologies under development ranged from 15 to 80 percent complete based on engineering man-month data and technological progress. Anticipated completion dates ranged from five to twelve months at an estimated cost of $0.5 million. During fiscal 2002, development of this product was completed, with costs incurred at or near the original estimate.
At the acquisition date, Broner was conducting design, development, engineering and testing activities associated with the completion of several new additions to their product suite. The addition of these modules broadened Broner’s product offerings to customers. At the acquisition date, the technologies under development ranged from 70 to 80 percent complete based on engineering man-month data and technological progress. Anticipated completion dates ranged from four to six months at an estimated cost of $0.4 million. During fiscal 2002, development of these products was completed, with costs incurred at or near the original estimates.
At the acquisition date, the Internet-based trading company from which we purchased certain assets and technology was conducting design, development, engineering and testing activities associated with the completion of its next-generation e-commerce solution. The effort entailed redirecting technology and productizing certain offerings to attract a broader base of customers. At the acquisition date, the technologies under development ranged from 60 to 80 percent complete based on engineering man-month data and technological progress. Anticipated completion dates ranged from two to four months at an estimated cost of $1.1 million. During fiscal 2002, development of this product was completed, with costs incurred at or near the original estimate.
At the acquisition date, the process applications division of CPU was conducting design, development, engineering and testing activities associated with its software, which facilitates integration of plant-centric applications in a real-time environment and connects to a range of applications, including our software, ERP systems and relational databases. At the acquisition date, the technologies under development ranged from 10 to 90 percent complete based on engineering man-month data and technological progress. Anticipated development costs are $0.3 million over a seven-month period. During fiscal 2002, development of these technologies was completed, with costs incurred at or near the original estimates.
At the acquisition date, the Houston Consulting Group was conducting design, development, engineering and testing activities associated with its Orion refinery scheduling software, which will extend our supply chain planning and scheduling solutions for the petroleum industry. The efforts consisted primarily of development of additional capabilities in the blending and scheduling aspects of the Orion product family. At the acquisition date, the technologies under development ranged from 15 to 35 percent complete based on engineering man-month data and technological progress. Anticipated development costs are $0.2 million over a five-month period. During fiscal 2002, development of this product was completed, with costs incurred at or near the original estimate.
In making each of these purchase price allocations, we considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items and an assessment of overall contributions, as well as project risks. The values assigned to purchased in-process technology were determined by estimating the costs to develop the acquired technologies into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present
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Write-off of Investment.In March 2000, we acquired 833,333 shares of e-Chemicals non-voting Series E Preferred Stock for $6.00 per share. This investment entitled us to a minority interest in e-Chemicals and was accounted for using the cost method. During the second quarter of fiscal 2001, we deemed our investment in the stock of e-Chemicals to be worthless and this investment of $5.0 million was written-off.
Income (Loss) on Equity in Joint Ventures and Realized Gain on Sales of Investments. Income (loss) on equity in joint ventures and realized gain on sales of investments was $750,000a $0.5 million loss in fiscal 20012003 as compared to $4,000$0.2 million in income in fiscal 2000. In2002. The loss in fiscal 2001, this primarily consisted of $655,000 of realized gains on2003 is related to losses in the partial sale of two investments and $95,000 of income on equity in joint ventures.ventures, caused by the general economic slowdown during the year.
Provision for/Benefit from Income Taxes. We provided a full valuation against the foreign and domestic benefit generated during fiscal 2003 and recorded a provision for income taxes of $2.4 million for fiscal 2002. The effectiveprovision for fiscal 2002 represents income taxes on income generated in certain foreign jurisdictions where we did not have operating loss carryforwards. We generated significant U.S. tax rateloss carryforwards during both fiscal 2003 and 2002. The provision for fiscal 2002 was comprised of an income tax provision related to foreign subsidiaries, a benefit from income taxes and an offsetting increase in fiscal 2001 was calculated as a percentage of income or loss before taxes. The effectivethe tax rate for each of fiscal 2001 and 2000 was 30.0%.valuation.
Quarterly Results
Our 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 us and our competitors, and fluctuating economic conditions. Because license fees for our software products are substantial and the implementation of our solutions often requires the services of our engineers over an extended period of time, the sales process for our
solutions is lengthy and can exceed one year. Accordingly, software revenues are difficult to predict, and the delay of any order could cause our quarterly revenues to fall substantially below expectations. Moreover, to the extent that we succeed in shifting customer purchases away from point solutions and toward integrated solutions, the likelihood of delays in ordering may increase and the effect of any delay may become more pronounced.
We ship software products within a short period after receipt of an order and usually do not have a material backlog of unfilled orders of software products. Consequently, revenues from software licenses, including license renewals, in any quarter are substantially dependent on orders booked and shipped in that quarter. Historically, a majority of each quarter’squarter'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 our expense levels are based in part on anticipated revenues, we may be unable to adjust spending in a timely manner to compensate for any revenue shortfall and any revenue shortfall would likely have a disproportionately adverse effect on net income. We expect that these factors will continue to affect our operating results for the foreseeable future.
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The following table presents selected quarterly consolidated statement of operations data for fiscal 20012003 and 2002.2004. These data are unaudited but, in our opinion, reflect all adjustments necessary for a fair presentation of these data in accordance with accounting principles generally accepted in the United States.
| Fiscal 2001 Quarter Ending | Fiscal 2002 Quarter Ending | |||||||||||||||||||||||||||||||||
| Sep. 30 | Dec. 31 | Mar. 31 | June 30 | Sep. 30 | Dec. 31 | Mar. 31 | June 30 | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||
| Software licenses | $ | 32,582 | $ | 40,630 | $ | 34,224 | $ | 40,012 | $ | 19,231 | $ | 39,939 | $ | 37,380 | $ | 37,363 | ||||||||||||||||||
| Service and other | 39,999 | 45,411 | 46,093 | 47,973 | 46,960 | 47,057 | 46,086 | 46,588 | ||||||||||||||||||||||||||
| Total revenues | 72,581 | 86,041 | 80,317 | 87,985 | 66,191 | 86,996 | 83,466 | 83,951 | ||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||
| Cost of software licenses | 2,565 | 2,999 | 3,141 | 3,151 | 2,444 | 3,054 | 3,165 | 3,167 | ||||||||||||||||||||||||||
| Cost of service and other | 25,413 | 28,898 | 29,589 | 30,695 | 30,142 | 30,261 | 29,969 | 29,600 | ||||||||||||||||||||||||||
| Selling and marketing | 24,718 | 27,704 | 29,340 | 31,846 | 26,624 | 28,451 | 29,521 | 30,629 | ||||||||||||||||||||||||||
| Research and development | 14,992 | 16,568 | 18,590 | 18,763 | 17,999 | 17,829 | 19,585 | 19,045 | ||||||||||||||||||||||||||
| General and administrative | 6,565 | 7,600 | 8,289 | 8,189 | 7,422 | 7,520 | 8,678 | 10,638 | ||||||||||||||||||||||||||
| Restructuring charges | — | — | — | 6,969 | 2,642 | — | (500 | ) | 13,941 | |||||||||||||||||||||||||
| Charges for in-process research and development | 5,000 | 2,615 | — | 2,300 | — | — | — | 14,900 | ||||||||||||||||||||||||||
| Total expenses | 79,253 | 86,384 | 88,949 | 101,913 | 87,273 | 87,115 | 90,418 | 121,920 | ||||||||||||||||||||||||||
| Income (loss) from operations | (6,672 | ) | (343 | ) | (8,632 | ) | (13,928 | ) | (21,082 | ) | (119 | ) | (6,952 | ) | (37,969 | ) | ||||||||||||||||||
| Interest income, net | 1,541 | 1,328 | 1,052 | 878 | 753 | 144 | 103 | 177 | ||||||||||||||||||||||||||
| Write-off of investments | — | (5,000 | ) | — | — | — | — | — | (8,923 | ) | ||||||||||||||||||||||||
| Other income (expense), net | (134 | ) | 252 | (99 | ) | 650 | (184 | ) | (171 | ) | (152 | ) | (386 | ) | ||||||||||||||||||||
| Income (loss) before provision for (benefit from) taxes | (5,265 | ) | (3,763 | ) | (7,679 | ) | (12,400 | ) | (20,513 | ) | (146 | ) | (7,001 | ) | (47,101 | ) | ||||||||||||||||||
| Provision for (benefit from) income taxes | (1,580 | ) | (1,128 | ) | (2,304 | ) | (3,720 | ) | (6,154 | ) | (44 | ) | (2,100 | ) | 10,702 | |||||||||||||||||||
| Net income (loss) | (3,685 | ) | (2,635 | ) | (5,375 | ) | (8,680 | ) | (14,359 | ) | (102 | ) | (4,901 | ) | (57,803 | ) | ||||||||||||||||||
| Accretion of preferred stock discount and dividend | — | — | — | — | — | — | (4,140 | ) | (2,161 | ) | ||||||||||||||||||||||||
| Net income (loss) applicable to common stockholders | $ | (3,685 | ) | $ | (2,635 | ) | $ | (5,375 | ) | $ | (8,680 | ) | $ | (14,359 | ) | $ | (102 | ) | $ | (9,041 | ) | $ | (59,964 | ) | ||||||||||
| Basic and diluted income (loss) applicable to common shareholders | $ | (0.13 | ) | $ | (0.09 | ) | $ | (0.18 | ) | $ | (0.28 | ) | $ | (0.45 | ) | $ | 0.00 | $ | (0.17 | ) | $ | (1.60 | ) | |||||||||||
| Basic and diluted weighted average shares outstanding | 29,181 | 29,747 | 30,186 | 30,572 | 31,760 | 31,748 | 31,948 | 37,438 | ||||||||||||||||||||||||||
| | Fiscal 2003 Quarter Ending | Fiscal 2004 Quarter Ending | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Sep. 30 | Dec. 31 | Mar. 31 | June 30 | Sep. 30 | Dec. 31 | Mar. 31 | June 30 | |||||||||||||||||||
| | (In thousands) | ||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||
| Software licenses | $ | 29,646 | $ | 36,781 | $ | 34,883 | $ | 38,549 | $ | 35,063 | $ | 37,759 | $ | 35,914 | $ | 43,534 | |||||||||||
| Service and other | 47,604 | 46,192 | 44,846 | 44,220 | 41,951 | 42,661 | 44,785 | 44,029 | |||||||||||||||||||
| Total revenues | 77,250 | 82,973 | 79,729 | 82,769 | 77,014 | 80,420 | 80,699 | 87,563 | |||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||
| Cost of software licenses | 3,335 | 3,511 | 2,891 | 4,179 | 3,617 | 4,315 | 3,854 | 3,780 | |||||||||||||||||||
| Cost of service and other | 28,008 | 26,823 | 25,745 | 26,292 | 24,632 | 24,246 | 25,345 | 25,210 | |||||||||||||||||||
| Amortization of technology related intangible assets | 2,402 | 2,103 | 1,892 | 1,822 | 1,832 | 1,842 | 1,806 | 1,790 | |||||||||||||||||||
| Impairment of technology related intangible and computer software development assets | — | 8,208 | — | 496 | — | — | — | 3,250 | |||||||||||||||||||
| Total cost of revenues | 33,745 | 40,645 | 30,528 | 32,789 | 30,081 | 30,403 | 31,005 | 34,030 | |||||||||||||||||||
| Gross profit | 43,505 | 42,328 | 49,201 | 49,980 | 46,933 | 50,017 | 49,694 | 53,533 | |||||||||||||||||||
| Operating costs: | |||||||||||||||||||||||||||
| Selling and marketing | 29,154 | 27,031 | 24,455 | 25,243 | 23,874 | 23,589 | 23,818 | 28,205 | |||||||||||||||||||
| Research and development | 17,745 | 15,997 | 15,727 | 15,617 | 16,006 | 14,294 | 14,234 | 14,561 | |||||||||||||||||||
| General and administrative | 7,419 | 6,820 | 7,001 | 7,222 | 6,908 | 6,325 | 6,292 | 12,189 | |||||||||||||||||||
| Long lived asset impairment charges | — | 106,093 | — | — | — | — | — | 967 | |||||||||||||||||||
| Restructuring charges and FTC legal costs | — | 20,943 | 2,100 | 18,037 | — | 2,000 | — | 18,833 | |||||||||||||||||||
| Total operating costs | 54,318 | 176,884 | 49,283 | 66,119 | 46,788 | 46,208 | 44,344 | 74,755 | |||||||||||||||||||
| Income (loss) from operations | (10,813 | ) | (134,556 | ) | (82 | ) | (16,139 | ) | 145 | 3,809 | 5,350 | (21,222 | ) | ||||||||||||||
| Interest income, net | 581 | 268 | 349 | 155 | 722 | 895 | 460 | 416 | |||||||||||||||||||
| Other income (expense), net | (501 | ) | (313 | ) | 64 | 154 | (228 | ) | 523 | 462 | 184 | ||||||||||||||||
| Income (loss) before provision for taxes | (10,733 | ) | (134,601 | ) | 331 | (15,830 | ) | 639 | 5,227 | 6,272 | (20,622 | ) | |||||||||||||||
| Provision for income taxes | — | — | — | — | 188 | 1,315 | 1,352 | 17,351 | |||||||||||||||||||
| Net income (loss) | (10,733 | ) | (134,601 | ) | 331 | (15,830 | ) | 451 | 3,912 | 4,920 | (37,973 | ) | |||||||||||||||
| Accretion of preferred stock discount and dividend | (2,234 | ) | (2,287 | ) | (2,291 | ) | (2,372 | ) | 3,852 | (3,352 | ) | (3,400 | ) | (3,458 | ) | ||||||||||||
| Net income (loss) applicable to common stockholders | $ | (12,967 | ) | $ | (136,888 | ) | $ | (1,960 | ) | $ | (18,202 | ) | $ | 4,303 | $ | 560 | $ | 1,520 | $ | (41,431 | ) | ||||||
| Basic income (loss) per share applicable to common shareholders | $ | (0.34 | ) | $ | (3.59 | ) | $ | (0.05 | ) | $ | (0.47 | ) | $ | .11 | $ | 0.01 | $ | 0.04 | $ | (1.00 | ) | ||||||
| Basic weighted average shares outstanding | 37,994 | 38,128 | 38,795 | 39,026 | 39,772 | 40,175 | 41,049 | 41,328 | |||||||||||||||||||
| Diluted income (loss) per share applicable to common shareholders | $ | (0.34 | ) | $ | (3.59 | ) | $ | (0.05 | ) | $ | (0.47 | ) | $ | .10 | $ | 0.01 | $ | 0.03 | $ | (1.00 | ) | ||||||
| Diluted weighted average shares outstanding | 37,994 | 38,128 | 38,795 | 39,026 | 59,437 | 50,315 | 51,907 | 41,328 | |||||||||||||||||||
Liquidity and Capital Resources
In fiscal 2004, operating activities provided $40.7 million of cash primarily due to income from operations, excluding non-cash charges, our commitment to both the aggressive collection of receivables and the increased sale of receivables, partially offset by the continuing cash payments related to the ongoing proceedings in connection with the anti-trust claims filed by the FTC with respect to our acquisition of Hyprotech, and our previous restructuring charges. In fiscal 2002 and 2003, operating activities used $8.1$8.0 million and provided $21.6 million of cash, respectively.
In fiscal 2004, investing activities used $8.0 million of cash primarily as a result of the net loss, which was offset in part by non-cash items such as depreciation and amortization, the write-offcapitalization of in-process research andcomputer software development associated with the Hyprotech acquisition,costs and the write-offordinary purchases of our investmentproperty and equipment, partially offset by the proceeds from the sale of land in Optimum Logistics. In addition, decreases to accounts receivable and installments receivable, and increases to accounts payable and accrued expenses offset the net loss.December 2003. In fiscal 20002002 and 2001, operating2003, investing activities provided $28.0used $102.3 million and used $13.4provided $7.5 million of cash, respectively.
In fiscal 2002, investing2004, financing activities used $102.3provided $22.2 million of cash primarily as a result of cash used in the purchase of Hyprotech, purchases of property and leasehold improvements, and an increase in computer
39
the convertible debentures. In fiscal 2002 and 2003, financing activities provided $107.2 million of cash primarily as a result of the issuance of Series B convertible preferred stock, common stock and warrants to purchase common stock. In fiscal 2000 and 2001, financing activities provided $9.0$107.1 million and $15.6used $11.6 million of cash, respectively.
Historically, we hadhave financed our operations principally through cash generated from public offerings of our 5 1/4% convertible debentures and common stock, however, during fiscal 2002, these sources were replaced with private offerings of our Series B convertible preferred stock and common stock, operating activities, and the sale of installment contracts to third parties.
In February and March 2002,August 2003, we issued and sold 40,000300,300 shares of Series B-I convertibleD-1 preferred, stock and 20,000 shares of Series B-II convertible preferred stock, togetheralong with WD warrants to purchase 791,044up to 6,006,006 shares of common stock, for an aggregate purchase price of $60.0$100.0 million. Our net proceeds from these transactions were $56.6Concurrently, we paid $30.0 million after deductingand issued 63,064 shares of Series D-2 preferred, along with WB and WD warrants to purchase up to 1,261,280 shares of common stock, to repurchase all of the placement agent fee and our other expenses in connection with the placement.outstanding Series B preferred. The Series BD preferred stock accruesearns cumulative dividends at an annual rate of 4%8%, that isare payable quarterly, commencing June 30, 2002,when and if declared by the board, in either cash or, subject to certain conditions, common stock, at our option (subject to our satisfaction of specified conditions set forth in our charter).stock. Each share of Series BD preferred stockcurrently is convertible into a number of100 shares of common stock, equal to the stated value, which initially is $1,000, divided by a conversion price of $19.97 and $17.66 for the Series B-I and Series B-II preferred stock, respectively, subject to anti-dilution and other adjustments. As a result, the shares of Series BD preferred stock initially werecurrently are convertible into an aggregate of approximately 3,135,47636,336,400 shares of common stock. The Series BD preferred stock is subject to mandatory redemption at the option of the holders as follows: 50% on February 7,or after August 14, 2009 to be paid in cash, stockand 50% on or both, at our option.after August 14, 2010.
In May 2002, we issued and sold 4,166,665 sharesAn aggregate of common stock together with warrants$45 million of working capital may be used to purchase common stock for an aggregate purchase pricerepay a portion of $50 million. Our net proceeds from this transaction were $48.0 million. We issued warrants with five-year lives to purchase up to 750,000 additional shares of common stockour convertible debentures at a price of $15.00 per share and also issued a second class of warrants that entitled the investors to purchase, on or prior to July 28, 2002, up to 2,083,333 sharesmaturity. During the year ended June 30, 2004, we repurchased and retired a face value of common stock at a price$29.5 million of $13.20, together with five year warrants to purchase an additional 375,000 shares of common stock at a price of $15.60. The second class of warrants expired unexercised.these convertible debentures.
Historically, we have had arrangements to sell long-term contractsinstallments receivable to two financial institutions, General Electric Capital Corporation and Fleet Business Credit Corporation (formerly Sanwa Business Credit Corporation).Corporation. These contracts represent amounts due over the life of existing term licenses. During fiscal 2002, installment contracts increased by $34.2 million to $108.7 million, net of2003 and 2004, we sold $42.7 million, of installment contracts sold to General Electric Credit Corporation$66.7 million and Fleet Business Credit Corporation. Included in this net increase is the addition of $40.9$54.9 million of installments receivable, respectively. As of June 30, 2004, there was approximately $50 million in connection withadditional availability under the acquisition of Hyprotech. During fiscal 2001, installment contracts increased by $21.3 millionarrangements. We expect to $74.5 million, net of $55.6 million of installment contracts soldcontinue to General Electric Capital Corporation and Fleet Business Credit Corporation. Included in this net increase ishave the addition of $7.2 million ofability to sell installments receivable, in connection withas the acquisitioncollection of ICARUS. During fiscal 2000, installment contracts decreased by $4.0 million to $53.2 million, net of $28.0 million of installment contractsthe sold to General Electric Capital Corporationreceivables will reduce the outstanding balance, and Fleet Business Credit Corporation. Ourthe availability under the arrangements with these two financial institutions provide for the sale of installment contracts up to a maximum of $160.0 million, subject to approval by the institutions, having certain recourse obligations.can be increased. At June 30, 2002 and2004, we had a partial recourse obligation that was within the range of $1.4 million to $4.1 million.
In December 2003, we executed a Non-Recourse Receivables Purchase Agreement with Silicon Valley Bank, pursuant to which we have the ability to sell receivables to the bank through January 1, 2005. Under the terms of this agreement the total outstanding balance of sold receivables may not exceed $35 million at any one time. We will act as the bank's agent for collection of the sold receivables. During the year ended June 30, 2001,2004, we sold receivables for aggregate proceeds of $42.5 million under this agreement and as of June 30, 2004 there was $5.0 million in remaining
availability. We may in the balance of the uncollected principal portion of thefuture establish new arrangements to sell additional installment contracts sold to these twoother financial institutions was $111.4 million and $108.5 million, respectively, for which we had partial recourse obligations of $7.2 million and $6.2 million, respectively. The availability under these arrangements will increase as the financial institutions receive payment on installment contracts previously sold.our cash position.
We maintainIn January 2003, we executed a $30.0 million secured bankLoan Arrangement with Silicon Valley Bank. This arrangement provides a line of credit expiring December 31, 2002, that provides for borrowings of specified percentagesup to the lesser of (i) $15.0 million or (ii) 70% of eligible domestic receivables, and a line of credit of up to the lesser of (i) $10.0 million or (ii) 80% of eligible foreign receivables. The lines of credit bear interest at the bank's prime rate (4.00% at June 30, 2004). We are required to maintain a $4.0 million compensating cash balance with the bank, or be subject to an unused line fee and collateral handling fees. The lines of credit will initially be collateralized by nearly all of our assets, and upon achieving certain net income targets, the collateral will be reduced to a lien on our accounts receivablereceivable. We are required to meet certain financial covenants, including minimum tangible net worth, minimum cash balances and eligible current installment contracts. Advancesan adjusted quick ratio. As of June 30, 2004, there were $11.9 million in letters of credit outstanding under the line of credit, bear interest at a rate equaland there was $7.4 million available for future borrowing. On September 10, 2004, we executed an amendment to the bank’s prime rate (4.75% atLoan Arrangement that adjusted the terms of certain financial covenants, and cured a default of the tangible net worth covenant as of June 30, 2002) or, at our option, a rate equal to a defined LIBOR (2.28% at June 30, 2002) plus a specified margin.
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As of June 30, 2002, we were not in compliance with certain of the above mentioned covenants. Subsequently, we received a waiver for such non-compliance, covering the period from June 30, 2002 to December 31, 2002. At June 30, 2002, there were no outstanding borrowings under the line of credit. We are currently in negotiations to either: (i) extend this line of credit with our current lender and amend the terms of the facility so that a pledge of short-term investment or cash are not required to secure borrowings; or (ii) obtain a facility from another lender.
As of June 30, 2002,2004, we had cash and cash-equivalents totaling $33.6 million, as well as short-term investments totaling $18.5$107.7 million. Our commitments as of June 30, 20022004 consisted primarily of the maturity of the convertible debentures on June 15, 2005, royalty commitments owed to Accenture, capital lease obligations, and leases on our headquarters and other facilities, as well as capital leases for software and equipment.facilities. Other than these, there were no other material commitments for capital or other expenditures. Our obligations related to these leasesitems at June 30, 20022004 are as follows (in thousands):
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | |||||||||||||||||||
| Non-cancellable leases | $ | 22,741 | $ | 16,948 | $ | 12,062 | $ | 11,792 | $ | 11,705 | $ | 46,456 | ||||||||||||
| | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating leases | $ | 12,744 | $ | 10,489 | $ | 9,561 | $ | 8,186 | $ | 7,597 | $ | 25,273 | $ | 73,850 | |||||||
| Capital leases and debt obligations | 1,850 | 963 | 224 | 183 | 181 | 401 | 3,802 | ||||||||||||||
| Accenture royalty commitment | 3,820 | — | — | — | — | — | 3,820 | ||||||||||||||
| Maturity of convertible debentures | 56,745 | — | — | — | — | — | 56,745 | ||||||||||||||
| Total commitments | $ | 75,159 | $ | 11,452 | $ | 9,785 | $ | 8,369 | $ | 7,778 | $ | 25,674 | $ | 138,217 | |||||||
We believe our current cash balances, availability of sales of our installment contracts, availability under the Silicon Valley Bank line of credit and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. However, we may need to obtain additional financing thereafter or earlier, if our current plans and projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties.difficulties, due to normal operations or FTC-related costs. In addition, we may seek to take advantage of favorable market conditions by raising additional funds from time to time through public or private security offerings, debt financings, strategic alliances or other financing sources. Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, reduce or defer our development activities, or delay our introduction of new products and services. Any of these actions may seriously harm our business and operating results.
Inflation
Inflation has not had a significant impact on our operating results to date and we do not expect inflation to have a significant impact during fiscal 2003.2005.
New Accounting Pronouncements
In November 2001,April 2003, the Emerging Issues Task Force (EITF) released Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”. This requires that reimbursement received for out-of-pocket expenses be recorded as revenue and not as a reduction of expenses. This is mandatory for periods beginning after December 15, 2001, thus we adopted the pronouncement during quarter ended March 31, 2002. Reimbursable out-of-pocket expenses totaling $16.3 million and $18.8 million in the years ended June 30, 2001 and 2002, respectively, have been reclassified as service and other revenue and cost of service and other. Because it is impracticable to do so, reimbursable out-of-pocket expenses have not been reclassified for the year ended June 30, 2000.
In August 2001, theFinancial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accounting for the Impairment or Disposal149, "Amendment of Long-Lived Assets”.Statement 133 on Derivative Instruments and Hedging Activities." This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetspronouncement amends and for Long-Lived Assets to Be Disposed Of”, and theclarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of
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In April 2002,January 2003, the FASB issued SFASInterpretation No. 145, “Rescission46 (FIN 46), "Consolidation of Variable Interest Entities," which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation of certain entities. In December 2003 the FASB Statements SFAS Nos. 4, 44 and 64, Amendmentrevised FIN 46. First, FIN 46 will require identification of FASB Statement No. 13 and Technical Corrections”. SFAS No. 145 rescinds Statement No. 4, “Reporting Gains and Lossesour participation in variable interest entities (VIE), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from Extinguishmentsa majority of Debt”, and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145its expected returns. FIN 46 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers”. SFAS No. 145 amends FASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting forsets forth certain lease modifications that have economic effectsdisclosure regarding interests in VIE that are similar to sale leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisiondeemed significant, even if consolidation is not required. Certain provisions of SFAS No. 145 relatedFIN 46, as revised, relating to the rescissionconsolidation of Statement No. 4 shall be applied in fiscal year beginningspecial-purpose entities are effective for periods ending after MayDecember 15, 2002.2003. The provisions of SFAS No. 145 related to Statement No. 13 should be for transactions occurring after May 15, 2002. Early application of the provisions of this Statement is encouraged. We do not expect the adoption of SFAS No. 145 willthese provisions did not have a significantan impact on our consolidatedfinancial position, results of operations or cash flows. The remaining provisions of FIN 46, as revised, relating to the consolidation or disclosure of all other VIE are effective for periods ending after March 15, 2004. The adoption of these provisions did not have an impact on our financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement supersedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. We are currently evaluating the impact that the adoption of SFAS No. 146 will have on our consolidated financial position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information relating to quantitative and qualitative disclosure about market risk is set forth in notes 2(c), 2(d), 2(h), 2(k)2(j) and 1211 to our consolidated financial statements included elsewhere in this Form 10-K and below under the captions “Investment Portfolio”"Investment Portfolio" and “Foreign"Foreign Exchange Hedging.”"
Investment Portfolio
We do not use derivative financial instruments in our investment portfolio. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. In addition, we limit the amount of credit exposure to any one issuer and the types of instruments approved for investment. We do not expect any material loss with respect to our investment portfolio. The following table
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Principal (Notional) Amounts by Expected Maturity in U.S. Dollars
| Fair Value | Maturing in Fiscal Year Ending June 30, | |||||||||||||||||||||||
| at | ||||||||||||||||||||||||
| June 30, | 2007 and | |||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | Thereafter | |||||||||||||||||||
| (In thousands, except interest rates) | ||||||||||||||||||||||||
| Cash Equivalents | $ | 33,571 | $ | 33,571 | — | — | — | — | ||||||||||||||||
| Weighted Average Interest Rate | 1.42 | % | 1.42 | % | — | — | — | — | ||||||||||||||||
| Investments | $ | 18,549 | $ | 13,389 | $ | 5,160 | — | — | — | |||||||||||||||
| Weighted Average Interest Rate | 2.44 | % | 2.22 | % | 3.01 | % | — | — | — | |||||||||||||||
| Total Portfolio | $ | 52,120 | $ | 46,960 | $ | 5,160 | — | — | — | |||||||||||||||
| Weighted Average Interest Rate | 1.89 | % | 1.65 | % | 3.01 | % | — | — | — | |||||||||||||||
| | | Maturing in Fiscal Year Ending June 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fair Value at June 30, 2004 | |||||||||||||
| | 2005 | 2006 | 2007 | 2008 | 2009 and Thereafter | |||||||||
| | (In thousands, except interest rates) | |||||||||||||
| Cash Equivalents | $ | 107,677 | $ | 107,677 | — | — | — | — | ||||||
| Weighted Average Interest Rate | 0.88 | % | 0.88 | % | — | — | — | — | ||||||
| Investments | $ | — | — | — | — | — | — | |||||||
| Weighted Average Interest Rate | — | — | — | — | — | — | ||||||||
| Total Portfolio | $ | 107,677 | $ | 107,677 | — | — | — | — | ||||||
| Weighted Average Interest Rate | 0.88 | % | 0.88 | % | — | — | — | — | ||||||
Impact of Foreign Currency Rate Changes
During fiscal 2002,2004, the U.S. dollar weakened against currencies for countries in which we have local operations, primarily in Europe, Canada and the Asia-Pacific region. The translation of our foreign entities’entities' assets and liabilities did not have a material impact on our consolidated operating results. Foreign exchange forward contracts are only purchased to hedge certain customer installments receivable amounts denominated in a foreign currency. The revaluation of accounts receivable at our foreign locations and at Hyprotech for the month of June, that were denominated in currencies other than the local currencies, resulted in net losses totaling $2.3 million in fiscal 2002. These losses were partially offset by the revaluation of two short-term loans from our U.S. headquarters to our foreign subsidiaries that were denominated in foreign currencies. These two loans were issued in May 2002, and were revalued as of June 30, 2002, resulting in an aggregate gain of $1.2 million.
Foreign Exchange Hedging
We enter into foreign exchange forward contracts to reduce our exposure to currency fluctuations on customer installments receivable denominated in foreign currencies. The objective of these contracts is to limit the impact of foreign currency exchange rate movement on our operating results. We do not use derivative financial instruments for speculative or trading purposes. We had $8.5$19.9 million of foreign exchange forward contracts denominated in Japanese, British, Swiss, Singapore and Euro currencies which represented underlying customer installments receivable transactions at the end of fiscal 2002. We adopted SFAS No. 133 in the first quarter of fiscal 2001. As a result, at2004. At each balance sheet date, the foreign exchange forward contracts and the related installments receivable denominated in foreign currencies are revalued based on the current market exchange rates. Resulting gains and losses are included in earnings or deferred as a component of other comprehensive income. These deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. Gains and losses related to these instruments for fiscal 20022004 were not material to our financial position. We do not anticipate any material adverse effect on our consolidated financial position, operating results or cash flows resulting from the use of these instruments. There can be no assurance, however, that these strategies will be effective or that transaction losses can be limited or forecasted accurately.
The following table provides information about our forward contracts, at the end of fiscal 2002,2004, to sell foreign currencies for U.S. dollars. All of these contracts relate to customer accounts and installments receivable. The table presents the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity date. The average contract rate approximates the weighted
average contractual foreign
43
| Average | Forward | |||||||||||
| Contract | Amount in | |||||||||||
| Currency | Rate | U.S. Dollars | Contract Origination Date | Contract Maturity Date | ||||||||
| (In thousands) | ||||||||||||
| Euro | 0.89 | $ | 2,817 | Various: Mar 01-Jun 02 | Various: Jul 02-May 04 | |||||||
| British Pound Sterling | 1.46 | 2,615 | Various: Jul 99-Jun 02 | Various: Jul 02-Jul 04 | ||||||||
| Japanese Yen | 118.61 | 2,528 | Various: Jul 99-Jun 02 | Various: Jul 02-Aug 04 | ||||||||
| Swiss Franc | 1.62 | 526 | Various: Jul 99-Jun 02 | Various: Jul 02-Dec 02 | ||||||||
| Singapore Dollar | 1.82 | 23 | Apr 02 | Jul 02 | ||||||||
| Total | $ | 8,509 | ||||||||||
| Currency | Average Contract Rate | Forward Amount in U.S. Dollars | Contract Origination Date | Contract Maturity Date | |||||
|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||
| Euro | 0.84 | $ | 10,431 | Various: Oct 03-Jun 04 | Various: Jul 04-Jul 05 | ||||
| Japanese Yen | 108.05 | 5,697 | Various: Apr 02-Jun 04 | Various: Jul 04-Jul 05 | |||||
| Canadian Dollar | 1.37 | 2,649 | Various: Oct 03-Jun 04 | Various: Jul 04-Jun 05 | |||||
| British Pound Sterling | 0.59 | 1,129 | Various: Jun 02-Jun 04 | Various: Jul 04-Jun 05 | |||||
| Total | $ | 19,906 | |||||||
In addition, in May 2002, as part of the acquisition of Hyprotech, we initiated loans with two of our foreign subsidiaries. The two loans, denominated in British pounds and Canadian dollars, were intended to be a natural hedge against foreign currency risk associated with installment receivable contracts acquired with Hyprotech that were denominated in a currency other than their functional currency. The loan denominated in British pounds was repaid in December 2003 and the loan denominated in Canadian dollars was repaid in January 2004.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements are listed in the Index to Consolidated Financial Statements filed in Item 15(a)(i) as part of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure
None.
On
Item 9A. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act) as of June 17, 2002,30, 2004. As part of the evaluation we dismissed Arthur Andersen LLP and engagedconsidered the report to our audit committee by our independent auditors, Deloitte & Touche, LLP, of a "material weakness" and a "reportable condition" under standards established by the American Institute of Certified Public Accountants regarding certain elements of our system of internal controls. Our independent auditors noted a material weakness with respect to serveour accounting for income taxes, due to errors in the computations of the provision for sales taxes, the domestic and foreign provision for income taxes, and the computation and classification of deferred income taxes. They also cited a reportable condition with respect to our property record-keeping processes that did not constitute a material weakness.
In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2004, as a result of the material weakness in our internal controls over financial reporting described in our auditors report, our disclosure controls and procedures were not effective with respect to our accounting for income taxes and required implementation of the changes discussed below. We have evaluated the impact of the internal control weakness and reportable condition discussed above. Based on our evaluation, we do not believe that the control weakness and reportable condition noted above led to any material misstatements in the consolidated financial statements included in this report.
The following initiatives are being taken to address the material weakness and reportable condition described above and were based on the recommendations of our independent public accountants. Neitherauditors in their letter to our audit committee:
While we are in the process of taking the foregoing steps, and, in addition, are developing and implementing a formal set of internal controls and procedures for eitherfinancial reporting in accordance with the SEC's proposed rules to adopt the internal control report requirements included in Section 404 of the past two fiscal years contained an adverse opinion or a disclaimerSarbanes-Oxley Act of opinion, or was qualified or modified as2002, in order to uncertainty, audit scope or accounting principles. The decisionaddress the adequacy of our disclosure controls and procedures, the efficacy of the steps we have taken to change accountants was approveddate and the steps we are still in the process of completing is subject to continued management review supported by confirmation and testing by management and by our board of directors, uponinternal and external auditors. As a result, additional changes will be made to our internal controls and procedures.
Other than the recommendation of its audit committee.
None
Item 10. Directors and Executive Officers of the Registrant
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 15A, to be filed with the SEC not later than October 28, 2002, under the heading “Election of Directors.”
Item 11. Executive Compensation
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2002, under the heading “Executive Officer Compensation.”
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2002, under the heading “Share Ownership of Principal Stockholders and Management.”
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2002,2004.
Item 11. Executive Compensation
The information required under this Item and not reported herein is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See "Securities Authorized for Issuance Under Equity Compensation Plans" in Part II of this Form 10-K.
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2004, under the heading “Related"Share Ownership of Principal Stockholders and Management."
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2004, under the heading "Related Party Transactions.”"
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Item 14. ControlsPrincipal Accountant Fees and ProceduresServices
Not applicable.The information required under this Item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the SEC not later than October 28, 2004, under the heading "Independent Public Accountants."
| Item 15. Exhibits and Financial Statement Schedules |
(a)(1)Financial Statements
| Description | Page | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Report of Independent Registered Public | F-2 | ||||||||
| Consolidated Financial Statements: | |||||||||
| Balance Sheets as of June 30, | F-3 | ||||||||
| Statements of Operations for the years ended June 30, | F-4 | ||||||||
| Statements of | F-5 | ||||||||
| Statements of Cash Flows for the years ended June 30, | F-8 | ||||||||
| Notes to Consolidated Financial Statements | F-9 | ||||||||
(a)(2)Financial Statement ScheduleSchedules
| Description | Page | ||||||
|---|---|---|---|---|---|---|---|
| Schedule | S-1 | ||||||
All other schedules are omitted because they are not required or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3)Exhibits
| 3 | .1(1) | Certificate of Incorporation of Aspen Technology, Inc. | ||
| 3 | .2(1) | By-laws of Aspen Technology, Inc. | ||
| 4 | .1(2) | Specimen Certificate for Shares of Aspen Technology, Inc.’s common stock, $.10 par value. | ||
| 4 | .2(1) | Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer and Trust Company, as Rights Agent, including related forms of the following: (a) Certificate of Designation of Series A Participating Cumulative Preferred Stock of Aspen Technology, Inc.; and (b) Right Certificate. | ||
| 4 | .3(17) | Amendment No. 1 dated as of October 26, 2001 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | ||
| 4 | .4(18) | Amendment No. 2 dated as of February 6, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | ||
| 4 | .5(19) | Amendment No. 3 dated as of March 19, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | ||
| 4 | .6(20) | Amendment No. 4 dated as of May 9, 2002 to Rights Agreement dated as of March 17, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | ||
| 4 | .7(3) | Indenture dated as of June 17, 1998 between Aspen Technology, Inc. and The Chase Manhattan Bank, as trustee, with respect to up to $86,250,000 principal amount of 5 1/4% Convertible Subordinated Debentures due June 15, 2005 of Aspen Technology, Inc. |
45
| 4 | .8(3) | Form of 5 1/4% Convertible Subordinated Debentures due June 15, 2005 of Aspen Technology, Inc. (included in Sections 2.2, 2.3 and 2.4 of the Indenture filed as Exhibit 4.1 to the Current Report on Form 8-K). | ||
| 4 | .9(26) | Certificate of Designations of the Series B-1 Convertible Preferred Stock and Series B-2 Convertible Preferred Stock. | ||
| 4 | .10(25) | Certificate of Designations of the Series B-I Convertible Preferred Stock and Series B-II Convertible Preferred Stock. | ||
| 4 | .11(25) | Certificate of Designations of the Series C Preferred Stock. | ||
| 4 | .16(24) | Form of Warrant of Aspen Technology, Inc. dated as of May 9, 2002. | ||
| 4 | .17(24) | Form of Unit Warrant of Aspen Technology, Inc. dated as of May 9, 2002. | ||
| 10 | .1(4) | Lease Agreement dated as of January 30, 1992 between Aspen Technology, Inc. and Teachers Insurance and Annuity Association of America regarding Ten Canal Park, Cambridge, Massachusetts. | ||
| 10 | .2(10) | First amendment to Lease Agreement dated May 5, 1997 between Aspen Technology, Inc. and Beacon Properties, L.P., successor-in-interest to Teachers Insurance and Annuity Association of America, regarding Ten Canal Park, Cambridge, Massachusetts. | ||
| 10 | .3(10) | Second Amendment to Lease Agreement dated as of August 14, 2000 between Aspen Technology, Inc. and EOP-Ten Canal Park, L.L.C., successor-in-interest to Beacon Properties, L.P. regarding Ten Canal Park, Cambridge, Massachusetts. | ||
| 10 | .4(4) | System License Agreement between Aspen Technology, Inc. and the Massachusetts Institute of Technology, dated March 30, 1982, as amended. | ||
| 10 | .5(4)† | Non-Equilibrium Distillation Model Development and License Agreement between Aspen Technology, Inc. and Koch Engineering Company, Inc., as amended. | ||
| 10 | .6(4)† | Letter, dated October 19, 1994, from Aspen Technology, Inc. to Koch Engineering Company, Inc., pursuant to which Aspen Technology, Inc. elected to extend the term of Aspen Technology, Inc.’s license under the Non-Equilibrium Distillation Model Development and License Agreement. | ||
| 10 | .7(4)† | Batch Distillation Computer Program Development and License Agreement between Process Simulation Associates, Inc. and Koch Engineering Company, Inc. | ||
| 10 | .8(4)† | Agreement between Aspen Technology, Inc. and Imperial College of Science, Technology and Medicine regarding Assignment of SPEEDUP. | ||
| 10 | .9(4) | Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| 10 | .10(6) | Rider No. 1, dated December 14, 1994, to Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| 10 | .11(27) | Rider No. 2, dated September 4, 2001, to Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| 10 | .11(4)† | Letter Agreement between Aspen Technology, Inc. and Sanwa Business Credit Corporation. | ||
| 10 | .12(4) | Equity Joint Venture Contract between Aspen Technology, Inc. and China Petrochemical Technology Company. | ||
| 10 | .13(7) | Further Amended and Restated Revolving Credit Agreement dated as of February 15, 1996 among Aspen Technology, Inc., Prosys Modeling Investment Corporation, Industrial Systems, Inc., Dynamic Matrix Control Corporation and Setpoint, Inc., as the Borrowers, the Lenders Parties thereto, and Fleet Bank of Massachusetts, N.A., as Agent and Lender, together with related forms of the following (each in the form executed by each of such Borrowers): | ||
| (a) Amended and Restated Revolving Credit Note. | ||||
| (b) Patent Conditional Assignment and Security Agreement. | ||||
| (c) Trademark Collateral Security Agreement. | ||||
| (d) Security Agreement. | ||||
| 10 | .14(14) | Credit Agreement between Fleet National Bank and Aspen Technology, Inc. dated October 27, 2000. |
46
| 10 | .15(10) | Letter dated September 21, 1999, from Fleet National Bank to Aspen Technology, Inc. and Deposit Pledge Agreement dated as of October 18, 1999 between Fleet National Bank and Aspen Technology, Inc. further amending the Revolving Credit Agreement. | ||
| 10 | .16(26) | Amendment No. 3, dated as of March 19, 2002, to Credit Agreement dated as of October 27, 2002 between Aspen Technology, Inc. and Fleet National Bank. | ||
| 10 | .16(16) | Registration Rights Agreement dated June 1, 2000 between Aspen Technology, Inc. and the former stockholders of Petrolsoft Corporation. | ||
| 10 | .17(10) | Registration Rights Agreement dated August 29, 2000 between Aspen Technology, Inc. and the former stockholders of ICARUS Corporation and ICARUS Services Limited. | ||
| 10 | .18(15) | Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and Michael B. Feldman. | ||
| 10 | .19(15) | Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and the former stockholders of Computer Processes Unlimited, L.L.C. | ||
| 10 | .20(25) | Registration Rights Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | ||
| 10 | .20(4) | 1988 Non-Qualified Stock Option Plan, as amended. | ||
| 10 | .21 | Amended and Restated Registration Rights Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named therein (filed as Exhibit to Current Report on Form 8-K filed by Aspen Technology, Inc. on March 19, 2002 and incorporated herein by reference). | ||
| 10 | .21(5) | 1995 Stock Option Plan. | ||
| 10 | .22(5) | 1995 Directors Stock Option Plan. | ||
| 10 | .23(5) | 1995 Employees’ Stock Purchase Plan. | ||
| 10 | .24(9) | 1998 Employees’ Stock Purchase Plan. | ||
| 10 | .25(12) | Amendment to 1998 Employees’ Stock Purchase Plan. | ||
| 10 | .26(8) | 1996 Special Stock Option Plan. | ||
| 10 | .27(12) | 2001 Stock Option Plan. | ||
| 10 | .28(13) | Petrolsoft Corporation Stock Option Plan | ||
| 10 | .29(4) | Form of Employee Confidentiality and Non-Competition Agreement. | ||
| 10 | .30(4) | Noncompetition, Confidentiality and Proprietary Rights Agreement between Aspen Technology, Inc. and Lawrence B. Evans. | ||
| 10 | .31(8) | Change in Control Agreement between Aspen Technology, Inc. and Lawrence B. Evans dated August 12, 1997. | ||
| 10 | .32(8) | Change in Control Agreement between Aspen Technology, Inc. and David McQuillin dated August 12, 1997. | ||
| 10 | .33(8) | Change in Control Agreement between Aspen Technology, Inc. and Stephen J. Doyle dated August 12, 1997. | ||
| 10 | .35(8) | Change in Control Agreement between Aspen Technology, Inc. and Mary A. Palermo dated August 12, 1997. | ||
| 10 | .36(11) | Change in Control Agreement between Aspen Technology, Inc and Lisa W. Zappala dated November 3, 1998. | ||
| 10 | .37(10) | Financing Partner Agreement between Aspen Technology, Inc. and IBM Credit Corporation dated June 15, 2000. | ||
| 10 | .39(21) | Security Agreement, effective as of August 16, 2002, between Aspen Technology, Inc. and Accenture. | ||
| 10 | .40(22) | Securities Purchase Agreement dated as of May 9, 2002 between Aspen Technology, Inc. and the Purchasers listed therein, and related Amendment dated June 5, 2002. | ||
| 10 | .42(23) | Share Purchase Agreement dated as of May 10, 2002 between Aspen Technology, Inc. and AEA Technology plc. |
47
| 10 | .43(26) | Stockholder Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | ||
| 10 | .44(25) | Amended and Restated Securities Purchase Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named therein. | ||
| 10 | .46(25) | Amendment No. 4, dated as of March 19, 2002, to Credit Agreement dated as of October 27, 2000 between Aspen Technology, Inc. and Fleet National Bank. | ||
| 10 | .47 | Employment Agreement between Aspen Technology, Inc. and Mary A. Palermo dated April 1, 2002. | ||
| 10 | .48 | Employment Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | ||
| 10 | .49 | Change in Control Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | ||
| 10 | .50 | Severance Agreement between Aspen Technology, Inc. and David L. McQuillin dated September 30, 2002. | ||
| 21 | .1 | Subsidiaries of Aspen Technology, Inc. | ||
| 23 | .1 | Consent of Deloitte & Touche LLP. | ||
| 24 | .1 | Power of Attorney (included in signature page to Form 10-K). |
| 3.1(1) | Certificate of Incorporation of Aspen Technology, Inc., as amended. | |
3.2(2) | By-laws of Aspen Technology, Inc. | |
4.1(3) | Specimen Certificate for Shares of Aspen Technology, Inc.'s common stock, $.10 par value. | |
4.2(2) | Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer and Trust Company, as Rights Agent, including related forms of the following: (a) Certificate of Designation of Series A Participating Cumulative Preferred Stock of Aspen Technology, Inc.; and (b) Right Certificate. | |
4.3(4) | Amendment No. 1 dated as of October 26, 2001 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | |
4.4(5) | Amendment No. 2 dated as of February 6, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | |
4.5(6) | Amendment No. 3 dated as of March 19, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | |
4.6(7) | Amendment No. 4 dated as of May 9, 2002 to Rights Agreement dated as of March 17, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | |
4.7(8) | Amendment No. 5 dated as of June 1, 2003 to Rights Agreement dated as of March 17, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | |
| |
4.8(9) | Indenture dated as | |
4.9(9) | Form of 51/4% Convertible Subordinated Debentures due June 15, 2005 of Aspen Technology, Inc. (included in Sections 2.2, 2.3 and 2.4 of the | |
4.9(10) | Form | |
4.10(1) | Form | |
4.11(1) | Form | |
48
10.1(11) | Lease Agreement dated as of January 30, 1992 between Aspen Technology, Inc. and Teachers Insurance and Annuity Association of America regarding Ten Canal Park, Cambridge, Massachusetts. | |
10.2(12) | First Amendment to Lease Agreement dated May 5, 1997 between Aspen Technology, Inc. and Beacon Properties, L.P., successor-in-interest to Teachers Insurance and Annuity Association of America, regarding Ten Canal Park, Cambridge, Massachusetts. | |
10.3(12) | Second Amendment to Lease Agreement dated as of August 14, 2000 between Aspen Technology, Inc. and EOP-Ten Canal Park, L.L.C., successor-in-interest to Beacon Properties, L.P. regarding Ten Canal Park, Cambridge, Massachusetts. | |
10.4(11) | System License Agreement between Aspen Technology, Inc. and the Massachusetts Institute of Technology, dated March 30, 1982, as amended. | |
10.9(11) | Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | |
10.10(13) | Rider No. 1, dated December 14, 1994, to Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | |
10.11(14) | Rider No. 2, dated September | |
10.12(11)† | Letter Agreement, dated March 25, 1992, between Aspen Technology, Inc. and Sanwa Business Credit Corporation. | |
10.13(20) | Third Amendment, effective as of March 28, 2003, to the Letter Agreement by and between Aspen Technology, Inc. and Fleet Business Credit, LLC (formerly Sanwa Business Credit Corporation). | |
10.14(11) | Equity Joint Venture Contract between Aspen Technology, Inc. and China Petrochemical Technology Company. | |
10.15(15) | Loan and Security Agreement, dated as of January 30, 2003, by and among Silicon Valley Bank and Aspen Technology, Inc., AspenTech, Inc. and | |
10.16(15) | Export-Import Bank Loan and Security Agreement, dated as of January 30, 2003, by | |
10.17(15) | Export-Import Bank Borrower Agreement, dated as of January 30, 2003, by and between Aspen Technology, Inc. and AspenTech Inc. in favor of the Export-Import Bank of the United States and Silicon Valley Bank. | |
10.18(15) | Promissory Note (Ex-Im), dated January 30, 2003, by and between Aspen Technology, Inc. and AspenTech, Inc. in favor of Silicon Valley Bank. | |
10.19(15) | Form of Negative Pledge Agreement, dated as | |
10.20(15) | Security Agreement, dated as of January 30, 2003, by and between Silicon Valley Bank and AspenTech Securities Corporation. | |
10.21(15) | Unconditional Guaranty, dated as of January 30, 2003, by AspenTech Securities Corporation in favor of Silicon Valley Bank. | |
10.22(16) | First Loan Modification Agreement, effective as of June 27, 2003, by and among Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc. | |
10.23(16) | Pledge Agreement, effective as of June 27, 2003, by Aspen Technology, Inc. in favor of Silicon Valley Bank. | |
10.24(32) | Non-Recourse Receivables Purchase Agreement, dated December 31, 2003, between Silicon Valley Bank and Aspen Technology, Inc. | |
10.26(17) | Securities Purchase Agreement dated June 1, 2003 by and among Aspen Technology, Inc. and the Purchasers listed therein. | |
10.27(17) | Repurchase and Exchange Agreement dated as of June 1, 2003 by and among Aspen Technology, Inc. and the Holders named therein. | |
10.28(18) | Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and Michael B. Feldman. | |
10.29(18) | Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and the former stockholders of Computer Processes Unlimited, L.L.C. | |
10.30(19) | Registration Rights Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | |
10.31(1) | Investor Rights Agreement dated as of August 14, 2003 by and among Aspen Technology, Inc. and the Stockholders Named therein. | |
10.32(1) | Management Rights Letter dated as of August 14, 2003 by and among Aspen Technology, Inc. and the entities named therein. | |
10.33(21) | Amended and Restated Registration Rights Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named therein. | |
10.34(11)* | 1988 Non-Qualified Stock Option Plan, as amended. | |
10.35(22)* | 1995 Stock Option Plan. | |
10.36(31)* | Amended and Restated 1995 Directors Stock Option Plan. | |
10.37(22)* | 1995 Employees' Stock Purchase Plan. | |
10.38(23)* | 1998 Employees' Stock Purchase Plan. | |
10.39(24)* | Amendment No. 1 to 1998 Employees' Stock Purchase Plan. | |
10.40(25)* | 1996 Special Stock Option Plan. | |
10.41(24)* | 2001 Stock Option Plan. | |
10.42(11)* | Form of Employee Confidentiality and Non-Competition Agreement. | |
10.43(11)* | Noncompetition, Confidentiality and Proprietary Rights Agreement between Aspen Technology, Inc. and Lawrence B. Evans. | |
10.44(16)* | Employment and Transition Agreement, dated as of June 30, 2003, by and between Aspen Technology, Inc. and Lawrence B. Evans. | |
10.45(24)* | Change in Control Agreement between Aspen Technology, Inc. and David McQuillin dated August 12, 1997. | |
10.46(26)* | Severance Agreement between Aspen Technology, Inc. and David L. McQuillin dated September 30, 2002. | |
10.47(15)* | Employment Agreement, dated as of November 26, 2002, by and between Aspen Technology, Inc. and David L. McQuillin. | |
10.48(30)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and David L. McQuillin. | |
10.49(26)* | Employment Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | |
10.50(26)* | Change in Control Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | |
10.51(16)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and Wayne Sim. | |
10.52(27)* | Change in Control Agreement between Aspen Technology, Inc. and Stephen J. Doyle dated August 12, 1997. | |
10.53(15)* | Employment Agreement, dated as of November 26, 2002, by and between Aspen Technology, Inc. and Stephen J. Doyle. | |
10.54(30)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and Stephen J. Doyle. | |
10.55(30)* | Employment Agreement, dated April 1, 2002, by and between Aspen Technology, Inc. and C. Steven Pringle | |
10.56(3)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and C. Steven Pringle. | |
10.57(30)* | Offer Letter, dated June 16, 2003, by and between Aspen Technology, Inc. and Charles F. Kane. | |
10.58(30)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and Manolis Kotzabasakis. | |
10.59(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and David L. McQuillin. | |
10.60(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Wayne Sim. | |
10.61(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Stephen J. Doyle. | |
10.62(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and C. Steve Pringle. | |
10.63(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Charles F. Kane. | |
10.64(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Manolis Kotzabasakis. | |
10.65(12) | Financing Partner Agreement between Aspen Technology, Inc. and IBM Credit Corporation dated June 15, 2000. | |
10.66(29) | Securities Purchase Agreement dated as of May 9, 2002 between Aspen Technology, Inc. and the | |
10.67(28) | Share Purchase Agreement dated as of May 10, 2002 between Aspen Technology, Inc. and AEA Technology plc. | |
10.68(19) | Stockholder Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | |
10.69(21) | Amended and Restated Securities Purchase Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named therein. | |
10.70 | First Loan Modification Agreement (Exim), dated as of September 10, 2004, by and among Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank. | |
10.71 | Second Loan Modification Agreement, dated as of September 10, 2004, by and among Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank. | |
21.1 | Subsidiaries of Aspen Technology, Inc. | |
23.1 | Consent of Deloitte & Touche LLP. | |
24.1 | Power of Attorney (included in signature page to | |
31.1 | Certification of President and Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Senior Vice President and Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as | |
32.1 | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as | |
On June 17, 2002, our board of directors, upon the recommendation of its Audit Committee, dismissed Arthur Andersen LLP as our independent public accountants and engaged Deloitte & Touche LLP, effective immediately, to serve as our independent public accountants for the fiscal year ending on June 30, 2002. The Andersen engagement partner and manager for our audits are no longer with Andersen and, as a result, we have unable, after reasonable efforts, to obtain the consent of Andersen to the incorporation by reference in our registration statements on Form S-3 with the file numbers 333-89710 and 333-90066 and our registration statements on Form S-8 with the file numbers 333-11651, 333-21593, 333-42536, 333-42358, 333-42540, 333-71872, 333-71874 and 333-80225 of the audit report of Andersen with respect to our financial statements as of June 30, 2001 and for the fiscal years ended June 30, 2001, and 2000. We have dispensed with the requirement under Section 7 of the Securities Act to file the consent of Andersen in reliance on Rule 437a under the Securities Act. Because Andersen has not consentedincorporated herein by reference.
(b)Reports on Form 8-K
On April 5, 2002, we filed athe Current Report on Form 8-K with respectof Aspen Technology, Inc. filed on June 2, 2003, and incorporated herein by reference.
On May 31, 2002, weRegistration Statement on Form S-3 of Aspen Technology, Inc. (Registration No. 333-63208) (filed on June 15, 2001), and incorporated herein by reference.
49
On June 7, 2002, we filed a Current Report on Form 8-K with respectfiled by Aspen Technology, Inc. on March 19, 2002, and incorporated herein by reference.
On June 18, 2002, weincorporated herein by reference.
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts, as of September 26, 2001.authorized.
| ASPEN TECHNOLOGY, INC. | ||
By: | /s/ |
| DAVID L. MCQUILLIN | |
| David L. McQuillin | |
| President and Chief Executive Officer |
I, Lawrence B. Evans, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Technology, Inc.;
| Date: September 13, 2004 | ||
Date: September 26, 2002
By: | |
/s/ | |
| CHARLES F. KANE | |
Senior Vice President and Chief |
I, Lisa W. Zappala, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Technology, Inc.;
| Date: September 13, 2004 | ||
Date: September 26, 2002
51
We, the undersigned officers and directors of Aspen Technology, Inc., hereby severally constitute and appoint Lawrence B. Evans, Lisa W. ZappalaDavid L. McQuillin, Charles F. Kane and Stephen J. Doyle, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K filed herewith and any and all amendments to said Annual Report and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable Aspen Technology, Inc. to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Annual Report and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of September 26, 2001.
| Signature | Title | |
|---|---|---|
| /s/ DAVID L. MCQUILLIN David L. McQuillin | President and Chief Executive Officer (Principal Executive Officer) | |
/s/ CHARLES F. KANE Charles F. Kane | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |
/s/ LAWRENCE B. EVANS Lawrence B. Evans | Chairman of the Board of Directors | |
/s/ DONALD P. CASEY Donald P. Casey | Director | |
/s/ MARK FUSCO Mark Fusco | Director | |
/s/ GARY E. HAROIAN Gary E. Haroian | Director | |
/s/ STEPHEN M. JENNINGS Stephen M. Jennings | Director | |
/s/ DOUGLAS A. KINGSLEY, JR. Douglas A. Kingsley, Jr. | Director | |
/s/ JOAN C. MCARDLE Joan C. McArdle | ||
Director | ||
/s/ MICHAEL PEHL | ||
| Director | ||
52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Report of Independent | F-2 | ||
Consolidated Financial Statements: | |||
Balance Sheets as of June 30, | F-3 | ||
Statements of Operations for the | F-4 | ||
Statements of | F-5 | ||
Statements of Cash Flows for the | F-8 | ||
Notes to Consolidated Financial Statements | F-9 | ||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheet of Aspen Technology, Inc. and subsidiaries as of June 30, 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit. The financial statements of Aspen Technology, Inc. and subsidiaries as of June 30, 2001 and for each of the two years in the period then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated August 3, 2001.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Aspen Technology, Inc. and subsidiaries as of June 30, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the financial statements of Aspen Technology, Inc. and subsidiaries as of June 30, 2001 and for the year then ended were audited by other auditors who have ceased operations. As described in Note 2(p), those financial statements have been reclassified to reflect reimbursements from customers for “Out-of-Pocket” expenses incurred as revenue rather than as a reduction of expenses. We audited the adjustments described in Note 2(p) that were applied to reclassify the 2001 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.
Boston,
Cambridge, Massachusetts
F-2
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Aspen Technology, Inc.’s filing on Form 10-K for the year ended June 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further discussion. The consolidated balance sheet as of June 30, 2000 and the consolidated statements of operations, stockholders’ equity and cash flows for the year ended June 30, 1999 referred to in this report have not been included in the accompanying financial statements or schedule.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspen Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Aspen Technology, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of June 30, 20002003 and 2001,2004, and the related consolidated statements of operations, stockholders’stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2001.2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aspen Technology, Inc. and subsidiariesthe Company as of June 30, 20002003 and 2001,2004, and the results of theirits operations and theirits cash flows for each of the three years in the period ended June 30, 20012004, in conformity with accounting principles generally accepted in the United States.States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
Boston, Massachusetts
September 13, 2004
F-3
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, | ||||||||||
| 2001 | 2002 | |||||||||
| (In thousands, except | ||||||||||
| share data) | ||||||||||
| ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 36,633 | $ | 33,571 | ||||||
| Short-term investments | 31,005 | 18,549 | ||||||||
| Accounts receivable, net of reserves of $1,905 in 2001 and $5,997 in 2002 | 86,737 | 95,418 | ||||||||
| Unbilled services | 29,652 | 30,569 | ||||||||
| Current portion of long-term installments receivable, net of unamortized discount of $1,752 in 2001 and $1,931 in 2002 | 31,094 | 40,404 | ||||||||
| Deferred tax asset | 3,252 | 2,929 | ||||||||
| Prepaid expenses and other current assets | 17,591 | 18,699 | ||||||||
| Total current assets | 235,964 | 240,139 | ||||||||
| Long-term installments receivable, net of unamortized discount of $8,437 in 2001 and $12,990 in 2002 | 43,428 | 68,318 | ||||||||
| Property and leasehold improvements, at cost: | ||||||||||
| Building and improvements | 4,639 | 2,241 | ||||||||
| Computer equipment | 45,465 | 48,184 | ||||||||
| Purchased software | 38,498 | 55,621 | ||||||||
| Furniture and fixtures | 16,090 | 17,552 | ||||||||
| Leasehold improvements | 8,243 | 10,078 | ||||||||
| 112,935 | 133,676 | |||||||||
| Less — Accumulated depreciation and amortization | 69,659 | 82,873 | ||||||||
| 43,276 | 50,803 | |||||||||
| Computer software development costs, net of accumulated amortization of $16,091 in 2001 and $20,804 in 2002 | 8,539 | 13,810 | ||||||||
| Purchased intellectual property, net of accumulated amortization of $1,974 in 2002 | — | 27,626 | ||||||||
| Other intangible assets, net of accumulated amortization of $9,970 in 2001 and $15,232 in 2002 | 19,612 | 41,105 | ||||||||
| Goodwill | 24,352 | 84,258 | ||||||||
| Deferred tax asset | 15,686 | 15,576 | ||||||||
| Other assets | 15,737 | 6,708 | ||||||||
| $ | 406,594 | $ | 548,343 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Current portion of long-term obligations | $ | 2,539 | $ | 5,334 | ||||||
| Obligation subject to common stock settlement | — | 11,100 | ||||||||
| Accounts payable | 7,114 | 16,852 | ||||||||
| Accrued expenses | 55,845 | 78,135 | ||||||||
| Unearned revenue | 18,711 | 20,983 | ||||||||
| Deferred revenue | 24,341 | 38,624 | ||||||||
| Total current liabilities | 108,550 | 171,028 | ||||||||
| Long-term obligations, less current portion | 1,899 | 5,885 | ||||||||
| 5 1/4% Convertible subordinated debentures | 86,250 | 86,250 | ||||||||
| Obligation subject to common stock settlement | — | 1,810 | ||||||||
| Deferred revenue, less current portion | 8,190 | 9,548 | ||||||||
| Deferred tax liability | — | 15,003 | ||||||||
| Other liabilities | 635 | 5,031 | ||||||||
| Commitments and contingencies (Notes 12, 13, 14 and 16) | ||||||||||
| Stockholders’ equity: | ||||||||||
| Series B convertible preferred stock, $0.10 par value — Authorized — 60,000 shares | ||||||||||
| Issued and outstanding — 60,000 shares in 2002 (Liquidation preference of $60,860) | — | 50,753 | ||||||||
| Common stock, $0.10 par value — Authorized — 40,000,000 shares | ||||||||||
| Issued — 31,576,924 shares in 2001 and 37,731,183 shares in 2002 | ||||||||||
| Outstanding — 31,346,494 shares in 2001 and 37,500,753 shares in 2002 | 3,157 | 3,773 | ||||||||
| Additional paid-in capital | 228,976 | 310,039 | ||||||||
| Accumulated deficit | (24,127 | ) | (107,593 | ) | ||||||
| Deferred compensation | (1,400 | ) | — | |||||||
| Notes receivable from stockholders | (283 | ) | — | |||||||
| Treasury stock, at cost — 230,430 shares of common stock | (502 | ) | (502 | ) | ||||||
| Accumulated other comprehensive income (loss) | (4,751 | ) | (2,682 | ) | ||||||
| Total stockholders’ equity | 201,070 | 253,788 | ||||||||
| $ | 406,594 | $ | 548,343 | |||||||
| | June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | |||||||
| | (In thousands, except share data) | ||||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 51,567 | $ | 107,677 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $3,692 in 2003 and $2,450 in 2004 | 77,725 | 52,667 | |||||||
| Unbilled services | 15,279 | 15,518 | |||||||
| Current portion of long-term installments receivable, net of unamortized discount of $2,033 in 2003 and $962 in 2004 | 34,720 | 21,475 | |||||||
| Deferred tax asset | 2,929 | 31 | |||||||
| Prepaid expenses and other current assets | 11,581 | 10,084 | |||||||
| Total current assets | 193,801 | 207,452 | |||||||
Long-term installments receivable, net of unamortized discount of $13,684 in 2003 and $14,161 in 2004 | 73,377 | 67,724 | |||||||
Property and leasehold improvements, at cost: | |||||||||
| Building and improvements | 1,663 | 1,828 | |||||||
| Computer equipment | 52,847 | 15,074 | |||||||
| Purchased software | 45,939 | 30,756 | |||||||
| Furniture and fixtures | 17,061 | 7,713 | |||||||
| Leasehold improvements | 10,506 | 7,924 | |||||||
| 128,016 | 63,295 | ||||||||
| Less—Accumulated depreciation and amortization | 96,858 | 44,631 | |||||||
| 31,158 | 18,664 | ||||||||
| Computer software development costs, net of accumulated amortization of $25,085 in 2003 and $29,795 in 2004 | 17,728 | 15,933 | |||||||
| Purchased intellectual property, net of accumulated amortization of $400 in 2003 and $966 in 2004 | 1,861 | 1,295 | |||||||
| Other intangible assets, net of accumulated amortization of $20,354 in 2003 and $28,161 in 2004 | 26,946 | 19,571 | |||||||
| Goodwill | 14,333 | 14,736 | |||||||
| Deferred tax asset | 13,831 | 2,492 | |||||||
| Other assets | 5,445 | 3,158 | |||||||
| $ | 378,480 | $ | 351,025 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current liabilities: | |||||||||
| Current portion of long-term obligations | $ | 3,849 | $ | 58,595 | |||||
| Amount owed to Accenture | 8,162 | — | |||||||
| Accounts payable | 8,622 | 7,689 | |||||||
| Accrued expenses | 73,472 | 76,895 | |||||||
| Unearned revenue | 20,492 | 14,783 | |||||||
| Deferred revenue | 37,266 | 33,025 | |||||||
| Deferred tax liability | — | 325 | |||||||
| Total current liabilities | 151,863 | 191,312 | |||||||
| Long-term obligations, less current portion | 89,911 | 1,952 | |||||||
| Deferred revenue, less current portion | 9,815 | 5,363 | |||||||
| Deferred tax liability | 13,258 | 4,220 | |||||||
| Other liabilities | 16,009 | 10,806 | |||||||
Commitments and contingencies (Notes 10, 11, 12 and 13) | |||||||||
Series B redeemable convertible preferred stock, $0.10 par value— | |||||||||
| Authorized, issued and outstanding—60,000 shares in 2003 | 57,537 | — | |||||||
| Series D redeemable convertible preferred stock, $0.10 par value— | |||||||||
| Authorized—367,000 shares in 2004 Issued and outstanding—363,364 shares in 2004 (Liquidation preference of $129,690 as of June 30, 2004) | — | 106,761 | |||||||
Stockholders' equity: | |||||||||
| Common stock, $0.10 par value—Authorized—120,000,000 shares Issued—39,279,268 shares in 2003 and 41,716,887 shares in 2004 Outstanding—39,045,804 shares in 2003 and 41,483,423 shares in 2004 | 3,929 | 4,173 | |||||||
| Additional paid-in capital | 315,726 | 338,804 | |||||||
| Accumulated deficit | (277,610 | ) | (312,658 | ) | |||||
| Treasury stock, at cost—233,464 shares of common stock in 2003 and 2004 | (513 | ) | (513 | ) | |||||
| Accumulated other comprehensive income (loss) | (1,445 | ) | 805 | ||||||
| Total stockholders' equity | 40,087 | 30,611 | |||||||
| $ | 378,480 | $ | 351,025 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended June 30, | ||||||||||||||
| 2000 | 2001 | 2002 | ||||||||||||
| (In thousands, except per share data) | ||||||||||||||
| Revenues: | ||||||||||||||
| Software licenses | $ | 132,843 | $ | 147,448 | $ | 133,913 | ||||||||
| Service and other | 135,250 | 179,476 | 186,691 | |||||||||||
| 268,093 | 326,924 | 320,604 | ||||||||||||
| Expenses: | ||||||||||||||
| Cost of software licenses | 9,605 | 11,856 | 11,830 | |||||||||||
| Cost of service and other | 85,193 | 114,595 | 119,972 | |||||||||||
| Selling and marketing | 91,863 | 113,608 | 115,225 | |||||||||||
| Research and development | 51,567 | 68,913 | 74,458 | |||||||||||
| General and administrative | 24,736 | 30,643 | 34,258 | |||||||||||
| Costs related to acquisitions | 1,547 | — | — | |||||||||||
| Restructuring and other charges | — | 6,969 | 16,083 | |||||||||||
| Charges for in-process research and development | — | 9,915 | 14,900 | |||||||||||
| 264,511 | 356,499 | 386,726 | ||||||||||||
| Income (loss) from operations | 3,582 | (29,575 | ) | (66,122 | ) | |||||||||
| Interest income | 9,847 | 10,268 | 6,768 | |||||||||||
| Interest expense | (5,563 | ) | (5,469 | ) | (5,591 | ) | ||||||||
| Write-off of investments | — | (5,000 | ) | (8,923 | ) | |||||||||
| Foreign currency exchange loss | (118 | ) | (81 | ) | (1,073 | ) | ||||||||
| Income on equity in joint ventures and realized gain on sale of investments | 4 | 750 | 180 | |||||||||||
| Income (loss) before provision for (benefit from) income taxes | 7,752 | (29,107 | ) | (74,761 | ) | |||||||||
| Provision for (benefit from) income taxes | 2,324 | (8,732 | ) | 2,404 | ||||||||||
| Net income (loss) | 5,428 | (20,375 | ) | (77,165 | ) | |||||||||
| Accretion of preferred stock discount and dividend | — | — | (6,301 | ) | ||||||||||
| Net income (loss) attributable to common shareholders | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | ||||||
| Net income (loss) attributable to common shareholders per share: | ||||||||||||||
| Diluted | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||
| Basic | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||
| Weighted average shares outstanding: | ||||||||||||||
| Diluted | 30,785 | 29,941 | 32,308 | |||||||||||
| Basic | 28,221 | 29,941 | 32,308 | |||||||||||
| | Years Ended June 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||||
| | (In thousands, except per share data) | |||||||||||
| Revenues: | ||||||||||||
| Software licenses | $ | 133,913 | $ | 139,859 | $ | 152,270 | ||||||
| Service and other | 186,691 | 182,862 | 173,426 | |||||||||
| Total revenues | 320,604 | 322,721 | 325,696 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of software licenses | 11,830 | 13,916 | 15,566 | |||||||||
| Cost of service and other | 119,972 | 106,868 | 99,433 | |||||||||
| Amortization of technology related intangible assets | 5,042 | 8,219 | 7,270 | |||||||||
| Impairment of technology related intangible and computer software development assets | 1,169 | 8,704 | 3,250 | |||||||||
| Total cost of revenues | 138,013 | 137,707 | 125,519 | |||||||||
| Gross profit | 182,591 | 185,014 | 200,177 | |||||||||
| Operating costs: | ||||||||||||
| Selling and marketing | 115,225 | 105,883 | 99,486 | |||||||||
| Research and development | 74,458 | 65,086 | 59,095 | |||||||||
| General and administrative | 29,216 | 28,462 | 31,714 | |||||||||
| Long-lived asset impairment charges | — | 106,093 | 967 | |||||||||
| Restructuring charges and FTC legal costs | 14,914 | 41,080 | 20,833 | |||||||||
| Charges for in-process research and development | 14,900 | — | — | |||||||||
| Total operating costs | 248,713 | 346,604 | 212,095 | |||||||||
| Income (loss) from operations | (66,122 | ) | (161,590 | ) | (11,918 | ) | ||||||
| Interest income | 6,768 | 8,485 | 7,433 | |||||||||
| Interest expense | (5,591 | ) | (7,132 | ) | (4,940 | ) | ||||||
| Write-off of investments | (8,923 | ) | — | — | ||||||||
| Foreign currency exchange gain (loss) | (1,073 | ) | (134 | ) | 413 | |||||||
| Income (loss) on equity in joint ventures and realized gain (loss) on sales of assets | 180 | (462 | ) | 528 | ||||||||
| Income (loss) before provision for income taxes | (74,761 | ) | (160,833 | ) | (8,484 | ) | ||||||
| Provision for income taxes | 2,404 | — | 20,206 | |||||||||
| Net income (loss) | (77,165 | ) | (160,833 | ) | (28,690 | ) | ||||||
| Accretion of preferred stock discount and dividend | (6,301 | ) | (9,184 | ) | (6,358 | ) | ||||||
| Net income (loss) attributable to common shareholders | $ | (83,466 | ) | $ | (170,017 | ) | $ | (35,048 | ) | |||
| Basic and diluted net income (loss) per share attributable to common shareholders | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |||
| Basic and diluted weighted average shares outstanding | 32,308 | 38,476 | 40,575 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
| Series B Convertible | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Retained | Notes | Other | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Earnings | Receivable | Comprehensive | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Carrying | Number of | $0.10 Par | Paid-in | (Accumulated | Deferred | From | Income | Number of | Stockholders’ | Income | |||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit) | Compensation | Stockholders | (Loss) | Shares | Cost | Equity | (Loss) | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, July 1, 1999 | — | $ | — | 27,807,152 | $ | 2,781 | $ | 154,219 | $ | (8,736 | ) | $ | — | $ | — | $ | (2,012 | ) | 230,430 | $ | (502 | ) | $ | 145,750 | ||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 384,864 | 38 | 3,822 | — | — | — | — | — | — | 3,860 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | 868,412 | 87 | 7,773 | — | — | — | — | — | — | 7,860 | ||||||||||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (444 | ) | — | — | — | — | — | (444 | ) | ||||||||||||||||||||||||||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | (904 | ) | — | — | (904 | ) | (904 | ) | ||||||||||||||||||||||||||||||||||||
| Unrealized market loss on investments, net of $90 tax effect | — | — | — | — | — | — | — | — | (129 | ) | — | — | (129 | ) | (129 | ) | ||||||||||||||||||||||||||||||||||||
| Tax benefit related to stock options | — | — | — | — | 7,777 | — | — | — | — | — | — | 7,777 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 5,428 | — | — | — | — | — | 5,428 | 5,428 | |||||||||||||||||||||||||||||||||||||||
| Comprehensive net income for the year ended June 30, 2000 | $ | 4,395 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2000 | — | — | 29,060,428 | 2,906 | 173,591 | (3,752 | ) | — | — | (3,045 | ) | 230,430 | (502 | ) | 169,198 | |||||||||||||||||||||||||||||||||||||
| Issuance of stock in the purchase of businesses and equity investment | — | — | 1,255,782 | 126 | 37,151 | — | — | — | — | — | — | 37,277 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 174,463 | 17 | 4,693 | — | — | — | — | — | — | 4,710 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and warrants | — | — | 991,751 | 99 | 11,802 | — | — | — | — | — | — | 11,901 | ||||||||||||||||||||||||||||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | (2,434 | ) | — | — | (2,434 | ) | (2,434 | ) | ||||||||||||||||||||||||||||||||||||
| Unrealized market gain on investments, net of $218 tax effect | — | — | — | — | — | — | — | — | 728 | — | — | 728 | 728 | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted common stock | — | — | 94,500 | 9 | 1,739 | — | (1,465 | ) | (283 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | — | — | 65 | — | — | — | — | 65 | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (20,375 | ) | — | — | — | — | — | (20,375 | ) | (20,375 | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive net loss for the year ended June 30, 2001 | $ | (22,081 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2001 | — | — | 31,576,924 | 3,157 | 228,976 | (24,127 | ) | (1,400 | ) | (283 | ) | (4,751 | ) | 230,430 | (502 | ) | 201,070 | |||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 313,337 | 31 | 5,275 | — | — | — | — | — | — | 5,306 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and warrants | — | — | 185,625 | 19 | 1,600 | — | — | — | — | — | — | 1,619 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B convertible preferred stock and common stock warrants, net of issuance costs | 60,000 | 48,544 | — | — | 8,044 | — | — | — | — | — | — | 56,588 | ||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature embedded in Series B convertible preferred stock | — | (3,232 | ) | — | — | 3,232 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants, net of issuance costs | — | — | 4,166,665 | 417 | 47,539 | — | — | — | — | — | — | 47,956 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in settlement of obligation subject to common stock settlement | — | — | 1,641,672 | 164 | 18,336 | — | — | — | — | — | — | 18,500 | ||||||||||||||||||||||||||||||||||||||||
| Return of escrowed shares issued to Optimum Logistics Ltd. | — | — | (58,540 | ) | (6 | ) | (2,084 | ) | — | — | — | — | — | — | (2,090 | ) | ||||||||||||||||||||||||||||||||||||
| Reversal of unvested and forfeited restricted common stock | — | — | (94,500 | ) | (9 | ) | (1,739 | ) | — | 1,209 | 283 | — | — | — | (256 | ) | ||||||||||||||||||||||||||||||||||||
| Accretion of discount on Series B convertible preferred stock | — | 5,441 | — | — | — | (5,441 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Accrual of Series B convertible preferred stock dividend | — | — | — | — | 860 | (860 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | 2,268 | — | — | 2,268 | 2,268 | |||||||||||||||||||||||||||||||||||||||
| Unrealized market gain on investments, net of $85 tax effect | — | — | — | — | — | — | — | — | (199 | ) | — | — | (199 | ) | (199 | ) | ||||||||||||||||||||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | — | — | 191 | — | — | — | — | 191 | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (77,165 | ) | — | — | — | — | — | (77,165 | ) | (77,165 | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive net loss for the year ended June 30, 2002 | $ | (75,096 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2002 | 60,000 | $ | 50,753 | 37,731,183 | $ | 3,773 | $ | 310,039 | $ | (107,593 | ) | $ | — | $ | — | $ | (2,682 | ) | 230,430 | $ | (502 | ) | $ | 253,788 | ||||||||||||||||||||||||||||
| | Series B Convertible Preferred Stock | | | | | | | | | | | | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | | | | | Accumulated Other Comprehensive Income Loss | Treasury Stock | | | ||||||||||||||||||||||||||||
| | | | | Notes Receivable From Stockholders | | Total Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||
| | Number of Shares | Carrying Value | Number of Shares | $0.10 Par Value | Additional Paid-in Capital | Accumulated Deficit | Deferred Compensation | Number of Shares | Cost | Stockholders' Equity | |||||||||||||||||||||||||||
| | (In thousands, except share data) | ||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2001 | — | $ | — | 31,576,924 | $ | 3,157 | $ | 228,976 | $ | (24,127 | ) | $ | (1,400 | ) | $ | (283 | ) | $ | (4,751 | ) | 230,430 | $ | (502 | ) | $ | 201,070 | |||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 313,337 | 31 | 5,275 | — | — | — | — | — | — | 5,306 | |||||||||||||||||||||||||
| Exercise of stock options and warrants | — | — | 185,625 | 19 | 1,600 | — | — | — | — | — | — | 1,619 | |||||||||||||||||||||||||
| Issuance of Series B convertible preferred stock and common stock warrants, net of issuance costs | 60,000 | 48,544 | — | — | 8,044 | — | — | — | — | — | — | 56,588 | |||||||||||||||||||||||||
| Beneficial conversion feature embedded in Series B convertible preferred stock | — | (3,232 | ) | — | — | 3,232 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Issuance of common stock and common stock warrants, net of issuance costs | — | — | 4,166,665 | 417 | 47,539 | — | — | — | — | — | — | 47,956 | |||||||||||||||||||||||||
| Issuance of common stock in settlement of obligation subject to common stock settlement | — | — | 1,641,672 | 164 | 18,336 | — | — | — | — | — | — | 18,500 | |||||||||||||||||||||||||
| Return of escrowed shares issued to Optimum Logistics Ltd | — | — | (58,540 | ) | (6 | ) | (2,084 | ) | — | — | — | — | — | — | (2,090 | ) | |||||||||||||||||||||
| Reversal of unvested and forfeited restricted common stock | — | — | (94,500 | ) | (9 | ) | (1,739 | ) | — | 1,209 | 283 | — | — | — | (256 | ) | |||||||||||||||||||||
| Accretion of discount on Series B convertible preferred stock | — | 5,441 | — | — | — | (5,441 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Accrual of Series B convertible preferred stock dividend | — | — | — | — | 860 | (860 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | 2,268 | — | — | 2,268 | 2,268 | ||||||||||||||||||||||||
| Unrealized market gain on investments, net of tax effect | — | — | — | — | — | — | — | — | (199 | ) | — | — | (199 | ) | (199 | ) | |||||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | — | — | 191 | — | — | — | — | 191 | |||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (77,165 | ) | — | — | — | — | — | (77,165 | ) | (77,165 | ) | |||||||||||||||||||||
| Comprehensive loss for the year ended June 30, 2002 | $ | (75,096 | ) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2002 | 60,000 | 50,753 | 37,731,183 | 3,773 | 310,039 | (107,593 | ) | — | — | (2,682 | ) | 230,430 | (502 | ) | 253,788 | ||||||||||||||||||||||
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
| | Series B Convertible Preferred Stock | | | | | | | | | | | | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | | | | | Accumulated Other Comprehensive Income Loss | Treasury Stock | | | |||||||||||||||||||
| | | | | Notes Receivable From Stockholders | | Total Comprehensive Income (Loss) | ||||||||||||||||||||||
| | Number of Shares | Carrying Value | Number of Shares | $0.10 Par Value | Additional Paid-in Capital | Accumulated Deficit | Deferred Compensation | Number of Shares | Cost | Stockholders' Equity | ||||||||||||||||||
| | (In thousands, except share data) | |||||||||||||||||||||||||||
| Balance, June 30, 2002 | 60,000 | 50,753 | 37,731,183 | 3,773 | 310,039 | (107,593 | ) | — | — | (2,682 | ) | 230,430 | (502 | ) | 253,788 | |||||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 759,771 | 76 | 3,217 | — | — | — | — | — | — | 3,293 | ||||||||||||||||
| Exercise of stock options | — | — | 56,934 | 6 | 144 | — | — | — | — | — | — | 150 | ||||||||||||||||
| Issuance of common stock in settlement of Series B convertible preferred stock dividend | — | — | 731,380 | 74 | (74 | ) | — | — | — | — | — | — | — | |||||||||||||||
| Accrual of Series B convertible preferred stock dividend | — | — | — | — | 2,400 | (2,400 | ) | — | — | — | — | — | — | |||||||||||||||
| Accretion of discount on Series B convertible preferred stock | — | 6,784 | — | — | — | (6,784 | ) | — | — | — | — | — | — | |||||||||||||||
| Modification of Series B convertible preferred stock | (60,000 | ) | (57,537 | ) | — | — | — | — | — | — | — | — | — | (57,537 | ) | |||||||||||||
| Reacquisition of common shares issued to CPU | — | — | — | — | — | — | — | — | — | 3,034 | (11 | ) | (11 | ) | ||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | 1,364 | — | — | 1,364 | 1,364 | |||||||||||||||
| Unrealized market gain on investments, net of tax effect | — | — | — | — | — | — | — | — | (127 | ) | — | — | (127 | ) | (127 | ) | ||||||||||||
| Net loss | — | — | — | — | — | (160,833 | ) | — | — | — | — | — | (160,833 | ) | (160,833 | ) | ||||||||||||
| Comprehensive loss for the year ended June 30, 2003 | $ | (159,596 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2003 | — | — | 39,279,268 | 3,929 | 315,726 | (277,610 | ) | — | — | (1,445 | ) | 233,464 | (513 | ) | 40,087 | |||||||||||||
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
| | Series B Convertible Preferred Stock | | | | | | | | | | | | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | | | | | Accumulated Other Comprehensive Income Loss | Treasury Stock | | | ||||||||||||||||||||||||||||
| | | | | Notes Receivable From Stockholders | | Total Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||
| | Number of Shares | Carrying Value | Number of Shares | $0.10 Par Value | Additional Paid-in Capital | Accumulated Deficit | Deferred Compensation | Number of Shares | Cost | Stockholders' Equity | |||||||||||||||||||||||||||
| | (In thousands, except share data) | ||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2003 | — | — | 39,279,268 | 3,929 | 315,726 | (277,610 | ) | — | — | (1,445 | ) | 233,464 | (513 | ) | 40,087 | ||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plans | — | — | 976,960 | 98 | 2,924 | — | — | — | — | — | — | 3,022 | |||||||||||||||||||||||||
| Exercise of stock options | — | — | 1,321,997 | 132 | 3,989 | — | — | — | — | — | — | 4,121 | |||||||||||||||||||||||||
| Net exercise of warrant to purchase common stock | — | — | 17,922 | 2 | (2 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Issuance of common stock in settlement of Series B redeemable convertible preferred stock dividend | — | — | 120,740 | 12 | (12 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Accrual of Series B redeemable convertible preferred stock dividend | — | — | — | — | 296 | (296 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Accretion of discount on Series B redeemable convertible preferred stock | — | — | — | — | — | (643 | ) | — | — | — | — | — | (643 | ) | |||||||||||||||||||||||
| Payment of dividend on Series B redeemable convertible preferred stock | — | — | — | — | (296 | ) | — | — | — | — | — | — | (296 | ) | |||||||||||||||||||||||
| Gain on retirement of Series B redeemable preferred stock | — | — | — | — | — | 6,452 | — | — | — | — | — | 6,452 | |||||||||||||||||||||||||
| Record value of warrants issued in conjunction with the issuance of Series D redeemable convertible preferred stock | — | — | — | — | 16,179 | — | — | — | — | — | — | 16,179 | |||||||||||||||||||||||||
| Accrual of Series D redeemable convertible preferred stock dividend | — | — | — | — | — | (8,690 | ) | — | — | — | — | — | (8,690 | ) | |||||||||||||||||||||||
| Accretion of discount on Series D redeemable convertible preferred stock | — | — | — | — | — | (3,181 | ) | — | — | — | — | — | (3,181 | ) | |||||||||||||||||||||||
| Translation adjustment, not tax effected | — | — | — | — | — | — | — | — | 2,250 | — | — | 2,250 | $ | 2,250 | |||||||||||||||||||||||
| Net loss | — | — | — | — | — | (28,690 | ) | — | — | — | — | — | (28,690 | ) | (28,690 | ) | |||||||||||||||||||||
| Comprehensive loss for the year ended June 30, 2004 | $ | (26,440 | ) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2004 | — | $ | — | 41,716,887 | $ | 4,173 | $ | 338,804 | $ | (312,658 | ) | $ | — | $ | — | $ | 805 | 233,464 | $ | (513 | ) | $ | 30,611 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended June 30, | ||||||||||||||||
| 2000 | 2001 | 2002 | ||||||||||||||
| (In thousands) | ||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | 5,428 | $ | (20,375 | ) | $ | (77,165 | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities — | ||||||||||||||||
| Depreciation and amortization | 16,327 | 24,099 | 25,763 | |||||||||||||
| Charges for in-process research and development | — | 9,915 | 14,900 | |||||||||||||
| Write-off of investments | — | 5,000 | 8,923 | |||||||||||||
| Deferred stock-based compensation | — | 65 | (65 | ) | ||||||||||||
| Gain on sale of property | — | (257 | ) | — | ||||||||||||
| Deferred income taxes | (6,201 | ) | (12,783 | ) | 896 | |||||||||||
| Write-off of assets related to restructuring | — | 1,159 | 1,169 | |||||||||||||
| Research and development costs subject to common stock settlement | — | — | 924 | |||||||||||||
| Changes in assets and liabilities — | ||||||||||||||||
| Accounts receivable | (7,977 | ) | (3,399 | ) | 1,591 | |||||||||||
| Unbilled services | (5,625 | ) | (7,277 | ) | 333 | |||||||||||
| Prepaid expenses and other current assets | (4,119 | ) | (417 | ) | (1,400 | ) | ||||||||||
| Long-term installments receivable | 4,021 | (8,845 | ) | 6,816 | ||||||||||||
| Accounts payable and accrued expenses | 18,555 | 5,195 | 8,865 | |||||||||||||
| Unearned revenue | 3,831 | 4,323 | 751 | |||||||||||||
| Deferred revenue | 3,774 | (9,786 | ) | (368 | ) | |||||||||||
| Net cash provided by (used in) operating activities | 28,014 | (13,383 | ) | (8,067 | ) | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of property and leasehold improvements | (9,682 | ) | (20,350 | ) | (12,940 | ) | ||||||||||
| Proceeds on sale of property | — | 2,438 | 1,725 | |||||||||||||
| Increase in computer software development costs | (4,082 | ) | (5,573 | ) | (7,986 | ) | ||||||||||
| Increase in other assets | (6,826 | ) | (1,693 | ) | (1,940 | ) | ||||||||||
| Decrease in short-term investments | 373 | 33,884 | 12,257 | |||||||||||||
| Increase (decrease) in other liabilities | 400 | (675 | ) | 36 | ||||||||||||
| Cash used in the purchase of businesses, net of cash acquired | (2,085 | ) | (21,746 | ) | (93,437 | ) | ||||||||||
| Net cash used in investing activities | (21,902 | ) | (13,715 | ) | (102,285 | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Issuance of common stock and common stock warrants, net of issuance costs | — | — | 47,956 | |||||||||||||
| Issuance of Series B convertible preferred stock and common stock warrants, net of issuance costs | — | — | 56,588 | |||||||||||||
| Issuance of common stock under employee stock purchase plans | 3,860 | 4,710 | 5,306 | |||||||||||||
| Exercise of stock options and warrants | 7,860 | 11,901 | 1,619 | |||||||||||||
| Payments of long-term debt and capital lease obligations | (2,266 | ) | (1,041 | ) | (4,305 | ) | ||||||||||
| Payment of dividends | (444 | ) | — | — | ||||||||||||
| Net cash provided by financing activities | 9,010 | 15,570 | 107,164 | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 210 | (1,210 | ) | 126 | ||||||||||||
| Increase (decrease) in cash and cash equivalents | 15,332 | (12,738 | ) | (3,062 | ) | |||||||||||
| Cash and cash equivalents, beginning of period | 34,039 | 49,371 | 36,633 | |||||||||||||
| Cash and cash equivalents, end of period | $ | 49,371 | $ | 36,633 | $ | 33,571 | ||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid for income taxes | $ | 806 | $ | 2,072 | $ | 1,955 | ||||||||||
| Cash paid for interest | $ | 4,972 | $ | 5,023 | $ | 4,841 | ||||||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||||||||||
| Accretion of discount on Series B convertible preferred stock | $ | — | $ | — | $ | 2,209 | ||||||||||
| Preferred stock dividend due to beneficial conversion feature of Series B convertible preferred stock | $ | — | $ | — | $ | 3,232 | ||||||||||
| Issuance of common stock in settlement of obligation subject to common stock settlement | $ | — | $ | — | $ | 18,500 | ||||||||||
| Supplemental disclosure of cash flows related to acquisitions: | ||||||||||||||||
| The Company acquired certain companies as described in Note 4. These acquisitions are summarized as follows: | ||||||||||||||||
| Fair value of assets acquired, excluding cash | $ | 2,360 | $ | 60,379 | $ | 140,141 | ||||||||||
| Payments in connection with the acquisitions, net of cash acquired | (2,085 | ) | (21,746 | ) | (93,437 | ) | ||||||||||
| Value of stock issued in connection with the acquisitions | — | (31,555 | ) | — | ||||||||||||
| Charge for in-process research and development | — | 9,915 | 14,900 | |||||||||||||
| Liabilities assumed | $ | 275 | $ | 16,993 | $ | 61,604 | ||||||||||
| | Years Ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||||||
| | (In thousands) | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) | $ | (77,165 | ) | $ | (160,833 | ) | $ | (28,690 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities— | ||||||||||||||
| Depreciation and amortization | 25,763 | 30,994 | 27,371 | |||||||||||
| Asset impairment charges and write-offs under restructuring charges | 1,169 | 113,447 | 6,018 | |||||||||||
| Charges for in-process research and development | 14,900 | — | — | |||||||||||
| Write-off of investments | 8,923 | — | — | |||||||||||
| Deferred stock-based compensation | (65 | ) | — | — | ||||||||||
| (Gain) loss on the disposal of property | — | 288 | (170 | ) | ||||||||||
| Gain on repurchase of convertible debt | — | — | (299 | ) | ||||||||||
| Deferred income taxes | 896 | — | 5,524 | |||||||||||
| Research and development costs subject to common stock settlement | 924 | 1,082 | — | |||||||||||
| Changes in assets and liabilities— | ||||||||||||||
| Accounts receivable | 1,591 | 20,861 | 26,733 | |||||||||||
| Unbilled services | 333 | 16,714 | 604 | |||||||||||
| Prepaid expenses and other current assets | (1,400 | ) | 7,338 | 3,457 | ||||||||||
| Long-term installments receivable | 6,816 | (1,587 | ) | 19,374 | ||||||||||
| Accounts payable and accrued expenses | 8,865 | (7,184 | ) | 919 | ||||||||||
| Unearned revenue | 751 | (1,240 | ) | (6,258 | ) | |||||||||
| Deferred revenue | (368 | ) | (2,283 | ) | (8,962 | ) | ||||||||
| Other liabilities | 36 | 3,969 | (5,203 | ) | ||||||||||
| Net cash provided by (used in) operating activities | (8,031 | ) | 21,566 | 40,418 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchase of property and leasehold improvements | (12,940 | ) | (4,746 | ) | (3,123 | ) | ||||||||
| Proceeds from sale of property | 1,725 | — | 1,096 | |||||||||||
| Capitalized computer software development costs | (7,986 | ) | (7,661 | ) | (7,317 | ) | ||||||||
| (Increase) decrease in other assets | (1,940 | ) | 1,323 | 2,432 | ||||||||||
| Decrease in short-term investments | 12,257 | 18,535 | — | |||||||||||
| Cash used in the purchase of businesses, net of cash acquired | (93,437 | ) | — | (200 | ) | |||||||||
| Net cash provided by (used in) investing activities | (102,321 | ) | 7,451 | (7,112 | ) | |||||||||
| Cash flows from financing activities: | ||||||||||||||
| Issuance of common stock and common stock warrants, net of issuance costs | 47,956 | — | — | |||||||||||
| Issuance of Series B convertible preferred stock and common stock warrants, net of issuance costs | 56,588 | — | — | |||||||||||
| Issuance of Series D redeemable convertible preferred stock and common stock warrants, net of issuance costs | — | — | 89,341 | |||||||||||
| Retirement of Series B redeemable convertible preferred stock | — | — | (30,000 | ) | ||||||||||
| Payment of Series B redeemable convertible preferred stock dividend | — | — | (296 | ) | ||||||||||
| Payment of amounts owed to Accenture | — | (8,433 | ) | (10,068 | ) | |||||||||
| Issuance of common stock under employee stock purchase plans | 5,306 | 3,293 | 3,022 | |||||||||||
| Exercise of stock options and warrants | 1,619 | 150 | 4,121 | |||||||||||
| Payments of long-term debt and capital lease obligations | (4,305 | ) | (6,603 | ) | (4,733 | ) | ||||||||
| Repurchase of convertible debt | — | — | (29,196 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 107,164 | (11,593 | ) | 22,191 | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 126 | 572 | 613 | |||||||||||
| Increase (decrease) in cash and cash equivalents | (3,062 | ) | 17,996 | 56,110 | ||||||||||
| Cash and cash equivalents, beginning of year | 36,633 | 33,571 | 51,567 | |||||||||||
| Cash and cash equivalents, end of year | $ | 33,571 | $ | 51,567 | $ | 107,677 | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Income taxes paid | $ | 1,955 | $ | 1,695 | $ | 6,569 | ||||||||
| Interest paid | $ | 4,841 | $ | 5,902 | $ | 5,967 | ||||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||||||||
| Accretion of discount on Series B redeemable convertible preferred stock | $ | 2,209 | $ | 6,784 | $ | 643 | ||||||||
| Accretion of discount on Series D redeemable convertible preferred stock | $ | — | $ | — | $ | 3,181 | ||||||||
| Preferred stock dividend due to beneficial conversion feature of Series B convertible preferred stock | $ | 3,232 | $ | — | $ | — | ||||||||
| Issuance of common stock in settlement of obligation subject to common stock settlement | $ | 18,500 | $ | — | $ | — | ||||||||
| Modification of Series B convertible preferred stock to Series B redeemable convertible preferred stock | $ | — | $ | 57,537 | $ | — | ||||||||
| Issuance of common stock in settlement of Series B convertible preferred stock dividend | $ | — | $ | 2,662 | $ | 598 | ||||||||
| Supplemental disclosure of cash flows related to acquisitions: | ||||||||||||||
| The Company acquired certain companies as described in Note 4. These acquisitions are summarized as follows: | ||||||||||||||
| Fair value of assets acquired, excluding cash | $ | 140,141 | $ | 3,027 | $ | 525 | ||||||||
| Payments in connection with the acquisitions, net of cash acquired | (93,437 | ) | — | (200 | ) | |||||||||
| Charge for in-process research and development | 14,900 | — | — | |||||||||||
| Liabilities assumed | $ | 61,604 | $ | 3,027 | $ | 325 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations
Aspen Technology, Inc. (the Company) and its subsidiaries (the Company) is a leading supplier of integrated software and services to the process industries, which consist of petroleum, chemicals, pharmaceutical and other industries that provide products from a chemical process. The Company develops two types of software to design, operate, manage and optimize its customers’customers' key business processes:processes- engineering software and manufacturing/supply chain manufacturing software.
(2) Significant Accounting Policies
(a) Principles of Consolidation(a) Principles of Consolidation
The accompanying consolidated financial statements include the results of operations of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
(b) Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents are stated at cost, which approximates market, and consist of short-term, highly liquid investments with original maturities of three months or less.
Securities purchased to be held for indefinite periods of time, and not intended at the time of purchase to be held until maturity, are classified as available-for-sale securities. Securities classified as available-for-sale are included in short-term investments and cash and cash equivalents and are recorded at market value in the accompanying consolidated financial statements. Unrealized gains and losses have been accounted for as a component of comprehensive income (loss). Realized investment gains and losses were not material in fiscal 2000, 20012002, 2003 or 2002.2004.
In the fourth quarter of fiscal 2001, a $2.0 million investment in Extricity Software, Inc. (Extricity) was converted into a marketable security when Extricity was purchased by Peregrine Systems (see Note 16).
Available-for-sale investmentsCash and cash equivalents as of June 30, 20012003 and 20022004 were as follows (in thousands):
| | | June 30, 2003 | June 30, 2004 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description | Contracted Maturity | Total Market Value | Total Amortized Cost | Total Market Value | Total Amortized Cost | ||||||||||
| Cash and cash equivalents: | |||||||||||||||
| Cash and cash equivalents | N/A | $ | 22,412 | $ | 22,412 | $ | 75,498 | $ | 75,498 | ||||||
| Money market funds | 0-3 months | 29,155 | 29,155 | 32,179 | 32,179 | ||||||||||
| Total cash and cash equivalents | $ | 51,567 | $ | 51,567 | $ | 107,677 | $ | 107,677 | |||||||
(d) Derivative Instruments and Hedging
| June 30, 2001 | June 30, 2002 | ||||||||||||||||||||
| Total | Total | Total | Total | ||||||||||||||||||
| Contracted | Market | Amortized | Market | Amortized | |||||||||||||||||
| Description | Maturity | Value | Cost | Value | Cost | ||||||||||||||||
Cash and cash equivalents: | |||||||||||||||||||||
| Cash and cash equivalents | N/A | $ | 25,599 | $ | 25,599 | $ | 21,835 | $ | 21,835 | ||||||||||||
| Money market funds | 0-3 months | 11,034 | 11,034 | 11,736 | 11,736 | ||||||||||||||||
| Total cash and cash equivalents | 36,633 | 36,633 | 33,571 | 33,571 | |||||||||||||||||
Short-term investments: | |||||||||||||||||||||
| Marketable securities | N/A | 211 | 211 | — | — | ||||||||||||||||
| Corporate and foreign bonds | 4-12 months | 6,020 | 6,011 | 13,389 | 13,381 | ||||||||||||||||
| Corporate and foreign bonds | 1-2 years | 24,774 | 24,457 | 5,160 | 5,151 | ||||||||||||||||
| Total short term investments | 31,005 | 30,679 | 18,549 | 18,532 | |||||||||||||||||
| $ | 67,638 | $ | 67,312 | $ | 52,120 | $ | 52,103 | ||||||||||||||
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Short-term investments totaling $14.7 million were held byThe Company follows the bank as compensating balances for outstanding lettersprovisions of credit as of June 30, 2001 and 2002.
Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS), No. 133, “Accounting"Accounting for Derivative Instruments and Hedging Activities.”" SFAS No. 133, as amended by SFAS No. 138, requires that all derivatives, including foreign currency exchange contracts, be
recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’sderivative's change in fair value is to be immediately recognized in earnings. The adoption of SFAS No. 133 resulted in an immaterial cumulative effect on income and other comprehensive income for the Company.
Forward foreign exchange contracts are used primarily by the Company to hedge certain balance sheet exposures resulting from changes in foreign currency exchange rates. Such exposures primarily result from portions of the Company’sCompany's installment receivables that are denominated in currencies other than the U.S. dollar, primarily the Japanese Yen and the British Pound Sterling. These foreign exchange contracts are entered into to hedge recorded installments receivable made in the normal course of business, and accordingly are not speculative in nature. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company hedges the majority of its installments receivable denominated in foreign currencies.
In addition, in May 2002, as part of the acquisition of Hyprotech Ltd. and related subsidiaries of AEA Technology plc (collectively, Hyprotech), the Company initiated loans with two foreign subsidiaries. The two loans, denominated in British pounds and Canadian dollars, were intended to be a natural hedge against foreign currency risk associated with installment receivable contracts acquired with Hyprotech that were denominated in a currency other than their functional currency. The loan denominated in British pounds was repaid in December 2003 and the loan denominated in Canadian dollars was repaid in January 2004.
At June 30, 2002,2004, the Company had effectively hedged $8.5$19.9 million of installments receivable and accounts receivable denominated in foreign currency. The Company does not hold or transact in financial instruments for purposes other than risk management.to hedge foreign currency risk. The gross value of the long-term installments receivable that were denominated in foreign currency was $4.7$25.2 million at June 30, 20012003 and $16.1$21.7 million at June 30, 2002, which includes $12.9 million of long-term installments acquired in the purchase of Hyprotech (as discussed in Note 4(a)).2004. The June 2002 installments receivable held as of June 2004 mature at various times through June 2006.November 2009. There have been no material gains or losses recorded relating to hedge contracts for the periods presented.
The Company records its foreign currency exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these hedge contracts are recognized in earnings. Gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts are designated to offset certain accounts and installments receivable and are recognized as other income or expense in the period in which the exchange rates change and offset the foreign currency losses and gains on the underlying exposures being hedged. During fiscal 2002, 2003 and 2004 the net gain recognized in the consolidated statementstatements of operations was $67,000.not material. A small portion of the forward foreign currency exchange contract is designated to hedge the future interest income of the related receivables. The ineffective portion of a derivative’sderivative's change in fair value is recognized currently through earnings regardless of whether the instrument is designated as a hedge. The gains and losses resulting from the impact of currency rate movements on forward currency exchange contracts are recognized in other comprehensive income for this portion of the hedge. During fiscal 2002,2004, net loss deferred in other comprehensive income was not material.
The following table provides information about the Company’sCompany's foreign currency derivative financial instruments outstanding as of June 30, 2002.2004. The information is provided in U.S. dollar amounts, as
presented
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in the Company’sCompany's consolidated condensed financial statements. The table presents the notional amount (at contract exchange rates) and the weighted average contractual foreign currency rates:
| Estimated | Average | ||||||||||||
| Notional | Fair | Contract | |||||||||||
| Currency | Amount | Value* | Rate | ||||||||||
| (In thousands) | |||||||||||||
| Euro | $ | 2,817 | $ | 3,183 | 0.89 | ||||||||
| British Pound Sterling | 2,615 | 2,736 | 1.46 | ||||||||||
| Japanese Yen | 2,528 | 2,368 | 118.61 | ||||||||||
| Swiss Franc | 526 | 574 | 1.62 | ||||||||||
| Singapore Dollar | 23 | 24 | 1.82 | ||||||||||
| Total | $ | 8,509 | $ | 8,885 | |||||||||
| Currency | Notional Amount | Estimated Fair Value* | Average Contract Rate | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||
| Euro | $ | 10,431 | $ | 10,700 | 0.84 | ||||
| Japanese Yen | 5,697 | 5,644 | 108.05 | ||||||
| Canadian Dollar | 2,649 | 2,721 | 1.37 | ||||||
| British Pound Sterling | 1,129 | 1,205 | 0.59 | ||||||
| Total | $ | 19,906 | $ | 20,270 | |||||
Payments on the abovehedged receivables due during fiscal 20032005 equal $6.9$19.8 million.
The Company provides for depreciation and amortization, primarily computed using the straight-line and declining balance methods,method, by charges to operations in amounts estimated to allocate the cost of the assets over their estimated useful lives, as follows:
| Asset Classification | Estimated Useful Life | ||||||
|---|---|---|---|---|---|---|---|
| Building and improvements | 7-30 years | ||||||
| Computer equipment | |||||||
| Purchased software | |||||||
| Furniture and fixtures | 3-10 years | ||||||
| Leasehold improvements | Life of lease or asset, whichever is shorter | ||||||
Depreciation expense was $15.1 million, $16.4 million and $13.1 million for the years ended June 30, 2002, 2003 and 2004, respectively. During the year ended June 30, 2004, the Company began the process of conducting a physical inventory of all its property and leasehold improvements. During the inventory process, a number of fully depreciated assets were identified as no longer being in service. As a result, the Company removed from the property and leasehold improvement accounts cost and accumulated depreciation of approximately $52.0 million. Since the assets had been fully depreciated, there was no material impact on the statement of operations.
(f) Revenue Recognition |
The Company recognizes revenue in accordance with Statement of Position (SOP) No. 97-2, “Software"Software Revenue Recognition,”" as amended and interpreted. License revenue, including license renewals, consists principally of revenue earned under fixed-term and perpetual software license agreements and is generally recognized upon shipment of the software if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence (VSOE) of fair value exists for all undelivered elements. The Company determines VSOE based upon the price charged when the same element is sold separately. Maintenance and support VSOE represents a consistent percentage of the license fees charged to customers. Consulting services VSOE represents standard rates whichthat the Company charges its customers when the
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company sells its consulting services separately. For an element not yet being sold separately, VSOE represents the price established by management having the relevant authority when it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. Revenue under license arrangements, which may include several different software products and services sold together, are allocated to each element based on the residual method in accordance with SOP 98-9, “Modification"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.”" Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized when earned. The Company has established sufficient VSOE for professional services, training and maintenance and support services. Accordingly, software license revenue isrevenues are recognized under the residual method in arrangements in which software is licensed with professional services, training and maintenance and support services. The Company uses installment contracts as a standard business practice and has a history of successfully collecting under the original payment terms without making concessions on payments, products or services.
Maintenance and support services are recognized ratably over the life of the maintenance and support contract period. Maintenance and support services include telephone support and unspecified rights to product upgrades and enhancements. These services are typically sold for a one-year term and are sold either as part of a multiple element arrangement with software licenses or are sold independently at time of renewal. The Company does not provide specified upgrades to its customers in connection with the licensing of its software products.
Service revenues from fixed-price contracts are recognized using the percentage-of-completionproportional performance method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount thereof is provided currently. Service revenues from time and expense contracts and consulting and training revenue are recognized as the related services are performed. Services that have been performed but for which billings have not been made are recorded as unbilled services, and billings that have been recorded before the services have been performed are recorded as unearned revenue in the accompanying consolidated balance sheets.
Installments receivable represent In accordance with the present valueEmerging Issues Task Force (EITF) Issue No. 01-14, "Income Statement Characterization of future payments related to the financingReimbursements Received for "Out-of-Pocket' Expenses Incurred," reimbursement received for out-of-pocket expenses is recorded as revenue and not as a reduction of noncancellable term and perpetual license agreements that provide for payment in installments, generally over a one- to five-year period. A portion of each installment agreement is recognized as interest income in the accompanying consolidated statements of operations. The interest rates utilized for the years ended June 30, 2000, 2001, and 2002 ranged from 7.0% to 9.0%.expenses.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” SAB 101 provides guidance on the recognition, disclosure and presentation of revenue in financial statements. The adoption of SAB 101 by the Company in the fourth quarter of the fiscal year ended June 30, 2001 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
(g) Computer Software Development Costs
Certain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Historically, inIn accordance with SFAS No. 86, “Accounting"Accounting for the Costs of Computer Software to be Sold, Leased, or otherwise Marketed”Marketed", the Company has defined the establishment of technological feasibility as the development of a working model. Beginning in May 2002, with the adoption of a new development process, the Company defines the establishment of technological feasibility as the completion of a detail program design. Amortization of capitalized computer software development costs is provided on a product-by-product basis using the straight-line method, beginning upon commercial release of the product, and continuing over the remaining estimated economic life of the product, not to exceed three years. Total
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amortization expense charged to operations was approximately $3.1$4.6 million, $4.1$5.1 million and $4.6$6.5 million in fiscal 2000, 20012002, 2003 and 2002,2004, respectively. During the years ended June 30, 2003 and 2004, the Company recorded impairment charges associated with the capitalized computer software development costs of certain products, totaling $2.9 million and $3.3 million, respectively (see Note 2(m)).
(h) Foreign Currency Translation
The financial statements of the Company’sCompany's foreign subsidiaries are translated in accordance with SFAS No. 52, “Foreign"Foreign Currency Translation���Translation". The determination of functional currency is based on the subsidiaries’subsidiaries' relative financial and operational independence from the Company. Foreign currency exchange gains or losses for certain wholly owned subsidiaries are credited or charged to the accompanying consolidated statements of operations since the functional currency of the subsidiaries is the U.S. dollar. Foreign currency transaction gains or losses are credited or charged to the accompanying consolidated statements of operations as incurred. Gains and losses from foreign currency translation related to entities whose functional currency is their local currency are credited or charged to the accumulated other comprehensive income (loss) account, included in stockholders’stockholders' equity in the accompanying consolidated balance sheets.
(i) Net Income (Loss) per Share
Basic earnings per share was determined by dividing net income (loss) attributable to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share was determined by dividing net income (loss) attributable to common shareholders by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, potential common shares include common stock options restricted stock and warrants, based on the treasury stock method, convertible debentures and preferred stock, based on the if-converted method, and other commitments to be settled in common stock. The calculations of basic and diluted net income (loss) per share attributable to common
shareholders per share and basic and diluted weighted average shares outstanding are as follows (in thousands, except per share data):
| Years Ended June 30, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| Net income (loss) attributable to common shareholders | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | ||||
| Basic weighted average common shares outstanding | 28,221 | 29,941 | 32,308 | |||||||||
| Weighted average potential common shares | 2,564 | — | — | |||||||||
| Diluted weighted average shares outstanding | 30,785 | 29,941 | 32,308 | |||||||||
| Basic net income (loss) attributable to common shareholders per share | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | ||||
| Diluted net income (loss) attributable to common shareholders per share | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | ||||
F-12
| | Years Ended June 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||
| Net income (loss) attributable to common shareholders | $ | (83,466 | ) | $ | (170,017 | ) | $ | (35,048 | ) | |
| Basic weighted average common shares outstanding | 32,308 | 38,476 | 40,575 | |||||||
| Weighted average potential common shares | — | — | — | |||||||
| Diluted weighted average shares outstanding | 32,308 | 38,476 | 40,575 | |||||||
| Basic net income (loss) per share attributable to common shareholders | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |
| Diluted net income (loss) per share attributable to common shareholders | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following dilutive effect of potential common shares waswere excluded from the calculation of dilutive weighted average shares outstanding as their effect would be anti-dilutive (in thousands):
| Years Ended June 30, | |||||||||||||
| 2000 | 2001 | 2002 | |||||||||||
| Convertible debt | 1,628 | 1,628 | 1,628 | ||||||||||
| Convertible preferred stock | — | — | 1,113 | ||||||||||
| Obligation subject to common stock settlement | — | — | 1,043 | ||||||||||
| Preferred stock dividend, to be settled in common stock | — | — | 23 | ||||||||||
| Options, restricted stock and warrants | — | 2,897 | 1,173 | ||||||||||
| Total | 1,628 | 4,525 | 4,980 | ||||||||||
| | Years Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | ||||
| Convertible preferred stock | 3,135 | 3,135 | 36,336 | ||||
| Options and warrants | 11,000 | 9,965 | 21,457 | ||||
| Convertible debt | 1,628 | 1,628 | 1,071 | ||||
| Obligation subject to common stock settlement | 1,549 | 1,159 | — | ||||
| Preferred stock dividend, to be settled in common stock | 116 | 121 | 1,197 | ||||
| Total | 17,428 | 16,008 | 60,061 | ||||
The preparation(j) Concentration of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and cash equivalents, short-term investments, accounts receivable and installments receivable. The Company places its cash and cash equivalents and investments in highly rated institutions. Concentration of credit risk with respect to receivables is limited to certain customers (end users and distributors) to which the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers, hedges specific foreign installments receivable and routinely sells its installments receivable to financial institutions with limited recourse and without recourse. As a result, the Company believes that the accounts and installments receivable credit risk exposure is limited. As of June 30, 20012003 and 2002,2004, the Company had no customers that represented 10% of total accounts and installments receivable.
(l)(k) Allowance for Doubtful Accounts
The Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful.it is probable that a loss has been incurred. Provisions
are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the ageand an analysis of the receivable.historical write-off rates. In determining these percentages,provisions, the Company analyzes its historical collection experience and current economic trends.
(l) Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, installments receivable, and foreign exchange contracts.contracts and the Company's 51/4% convertible subordinated debentures due June 15, 2005 (the Debentures). The estimated fair value of these financial instruments approximates their carrying value and, except for accounts receivable and installments receivable, is based primarily on market quotes.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement supercedes Accounting Principles Board (APB) Opinion No. 17,
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
“(m) Intangible Assets,” Goodwill and applies to goodwill and intangible assets previously acquired. Under this statement, goodwill as well as certain other intangible assets determined to have an indefinite life, are no longer being amortized. Instead, these assets are reviewed for impairment on a periodic basis.Impairment of Long-Lived Assets
Pursuant to this statement, the Company elected early adoption effective July 1, 2001. Accordingly, the Company stopped amortizing goodwill and acquired assembled workforce, now classified jointly as goodwill, associated with past acquisitions. The Company assessed these assets for impairment as of January 1, 2002 and believes that these assets are not impaired.
Intangible assets subject to amortization consist of the following at June 30, 20012003 and 20022004 (in thousands):
| June 30, 2001 | June 30, 2002 | |||||||||||||||||
| Gross | Gross | |||||||||||||||||
| Estimated | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||
| Asset Class | Useful Life | Amount | Amortization | Amount | Amortization | |||||||||||||
| Acquired technology | 3-5 years | $ | 27,714 | $ | 8,542 | $ | 53,469 | $ | 13,683 | |||||||||
| Uncompleted contracts | 4 years | 936 | 936 | 1,936 | 957 | |||||||||||||
| Trade name | 10 years | 766 | 425 | 766 | 498 | |||||||||||||
| Other | 3-12 years | 166 | 67 | 166 | 94 | |||||||||||||
| $ | 29,582 | $ | 9,970 | $ | 56,337 | $ | 15,232 | |||||||||||
| | | June 30, 2003 | June 30, 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Class | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
| Acquired technology | 3-5 years | $ | 44,352 | $ | 17,980 | $ | 44,737 | $ | 25,434 | |||||
| Uncompleted contracts | 4 years | 1,936 | 1,619 | 2,005 | 1,888 | |||||||||
| Trade name | 10 years | 766 | 569 | 758 | 644 | |||||||||
| Other | 3-12 years | 246 | 186 | 232 | 195 | |||||||||
| $ | 47,300 | $ | 20,354 | $ | 47,732 | $ | 28,161 | |||||||
Aggregate amortization expense for intangible assets subject to amortization was $1.4$5.3 million, $3.5$7.4 million and $5.3$7.6 million for the years ended June 30, 2000, 20012002, 2003 and 2002,2004, respectively, and is expected to be $9.8$7.4 million, $9.1 million, $9.0 million, $8.2$7.2 million and $4.8$5.0 million in each of the next fivethree fiscal years, respectively.
The changes in the carrying amount of the goodwill by reporting unit for the yearyears ended June 30, 20022003 and 2004 were as follows (in thousands):
| Reporting Unit | ||||||||||||||||
| Maintenance | ||||||||||||||||
| Consulting | and | |||||||||||||||
| Asset Class | License | Services | Training | Total | ||||||||||||
| Carrying amount as of June 30, 2001 | $ | 21,078 | $ | 944 | $ | 2,330 | $ | 24,352 | ||||||||
| Goodwill acquired during fiscal 2002 | 46,590 | 4,341 | 8,692 | 59,623 | ||||||||||||
| Effect of exchange rates used for translation | 245 | 11 | 27 | 283 | ||||||||||||
| Carrying amount as of June 30, 2002 | $ | 67,913 | $ | 5,296 | $ | 11,049 | $ | 84,258 | ||||||||
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | Reporting Unit | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Class | License | Consulting Services | Maintenance and Training | Total | ||||||||||
| Carrying amount as of June 30, 2002 | $ | 67,913 | $ | 5,296 | $ | 11,049 | $ | 84,258 | ||||||
| Purchase price adjustment—Hyprotech acquisition | 1,407 | 88 | 264 | 1,759 | ||||||||||
| Impairment charge | (69,323 | ) | (5,392 | ) | — | (74,715 | ) | |||||||
| Goodwill acquired during fiscal 2003 | 2,358 | 147 | 442 | 2,947 | ||||||||||
| Effect of exchange rates used for translation | 3 | 8 | 73 | 84 | ||||||||||
| Carrying amount as of June 30, 2003 | 2,358 | 147 | 11,828 | 14,333 | ||||||||||
| Goodwill acquired during fiscal 2004 | — | 366 | — | 366 | ||||||||||
| Effect of exchange rates used for translation | 6 | — | 31 | 37 | ||||||||||
| Carrying amount as of June 30, 2004 | $ | 2,364 | $ | 513 | $ | 11,859 | $ | 14,736 | ||||||
In October 2002, management determined that goodwill should be tested for impairment as a result of the following factors:
An independent third party valued the Company's three reporting units: license, consulting services, and maintenance and training. The valuation was based on an income approach, using a five-year present value calculation of income, and a market approach, using comparable company valuations. Based on this analysis, it was determined that the full values of the goodwill associated with the license reporting unit and acquired assembled workforce amortization expense, netconsulting services reporting unit were impaired. This resulted in a $74.7 million aggregate impairment charge included on the accompanying consolidated statement of tax, isoperations as follows:
| 2000 | 2001 | 2002 | |||||||||||
| Reported net income (loss) attributable to common shareholders | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | |||||
| Add back: Goodwill and acquired assembled workforce amortization | 727 | 1,840 | — | ||||||||||
| Adjusted net income (loss) | $ | 6,155 | $ | (18,535 | ) | $ | (83,466 | ) | |||||
| Basic income per common share | |||||||||||||
| Reported net income (loss) | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | |||||
| Goodwill and acquired assembled workforce amortization | 0.03 | 0.06 | — | ||||||||||
| Adjusted net income (loss) | $ | 0.22 | $ | (0.62 | ) | $ | (2.58 | ) | |||||
| Income per common share assuming full dilution | |||||||||||||
| Reported net income (loss) | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | |||||
| Goodwill and acquired assembled workforce amortization | 0.02 | 0.06 | — | ||||||||||
| Adjusted net income (loss) | $ | 0.20 | $ | (0.62 | ) | $ | (2.58 | ) | |||||
The Company evaluates it long-lived assets, which include property and leasehold improvements, and intangible assets and capitalized software development costs for impairment as events and circumstances indicate that the carrying amount may not be recoverable and at a minimum at each balance sheet date. The Company evaluates the realizability of its long-lived assets based on profitability and undiscounted cash flow expectations for the related asset or subsidiary. See Note 3
Fiscal 2004—During the fourth quarter of fiscal 2004, the Company completed a comprehensive review of its product offerings, in an effort to reduce duplicative efforts and cut costs. As a result, management decided to discontinue development of certain products, which resulted in an impairment of technology related intangible and computer software development assets of $3.3 million, related to the impairment of certain computer software development costs. These products were considered part of the next-generation manufacturing/supply chain products. Management's decision was based on concerns about the future revenue projections for discussion regardingthese products, and the assessment of costs remaining to bring these products to market.
During the fourth quarter of fiscal 2004, the Company recorded long-lived asset impairment charges of $1.0 million. This was partially due to management's decision, as part of the Company's June 2004 cost-cutting initiatives that resulted in the June 2004 restructuring plan, to discontinue certain internal capital projects that had previously been put on hold. In addition, certain fixed assets that supported research and other charges.development efforts were considered impaired as a result of the consolidation decisions made in the fourth quarter product offering review.
Fiscal 2003
The long-lived asset impairment charges primarily consisted of a $23.6 million charge related to the intellectual property purchased from Accenture in February 2002. The fair value of this asset was determined by forecasting the future net cash flows associated with the asset and then was compared to its carrying value. This intellectual property is used primarily in the development of manufacturing/supply chain software products, within the license line of business. The revenue expectations for the manufacturing/supply chain product line were significantly reduced by management, which prompted the review for impairment. The remaining $7.8 million charge consisted of fixed assets and internal capital projects that were considered to be impaired because they will either no longer be used or their carrying values were in excess of their fair values. The assets that will no longer be used were identified by management's decisions to discontinue future development efforts associated with certain products. The carrying values of the remaining assets were compared to the fair values of those assets resulting
in an impairment. The fair values were determined by forecasting the future net cash flows associated with the products.
Fiscal 2002—In June 2002, with the intent of lowering operating costs, the Company made a decision to standardize with a single provider for certain software products that are sold along with the Company's products. This decision resulted in the impairment of $1.2 million of prepaid royalty fees, which was recorded in the accompanying consolidated statement of operations as impairment of technology related intangible and computer software development assets.
(n) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is disclosed in the accompanying consolidated statements of stockholders’ equity.stockholders' equity and comprehensive income (loss). The components of accumulated other comprehensive income (loss) as of June 30, 20012003 and 20022004 are as follows (in thousands):made up of cumulative translation adjustments.
(o) Fair Value of Stock Options
| 2001 | 2002 | ||||||||
| Unrealized gain (loss) on investments, net of taxes | $ | 324 | $ | 127 | |||||
| Cumulative translation adjustment | (5,075 | ) | (2,809 | ) | |||||
| Total accumulated other comprehensive income (loss) | $ | (4,751 | ) | $ | (2,682 | ) | |||
In November 2001,The Company issues stock options to its employees and outside directors and provides employees the Emerging Issues Task Force (EITF) released Issue No. 01-14, “Income Statement Characterization of Reimbursements Receivedright to purchase stock pursuant to stockholder approved stock option and employee stock purchase plans, which are described more fully in Note 8. The Company accounts for ‘Out-of-Pocket’ Expenses Incurred”. This requires that reimbursement received for out-of-pocket expenses be recorded as revenuethese plans under the recognition and not as a reduction of expenses. This is mandatory for periods beginning after December 15, 2001; thus the Company adopted the pronouncement during quarter ended March 31, 2002. Reimbursable out-of-pocket expenses totaling $16.3 million and $18.8 million in the years ended June 30, 2001 and 2002, respectively, have been reclassified as service and other revenue and cost of service and other. Because it is impracticable to do so, reimbursable out-of-pocket expenses have not been reclassified for the year ended June 30, 2000.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisionsmeasurement principles of Accounting Principles Board Opinion No. 30, “Reporting25, "Accounting for Stock Issued to Employees", and has elected the Resultsdisclosure-only alternative under SFAS No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS No. 148. No material stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of Operations — Reporting the Effectsunderlying common stock on the date of Disposalgrant.
For pro forma disclosures, the estimated fair value of a Segmentthe options is amortized over the vesting period, typically four years, and the estimated fair value of a Business,the stock purchases is amortized over the six-month purchase period. The following table illustrates the effect on net income and Extraordinary, Unusualearnings per
share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based employee compensation (in thousands, except per share data):
| | 2002 | 2003 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) attributable to common shareholders (in thousands) | ||||||||||||
| —As reported | $ | (83,466 | ) | $ | (170,017 | ) | $ | (35,048 | ) | |||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (21,734 | ) | (14,566 | ) | (15,246 | ) | ||||||
| Pro forma | $ | (105,200 | ) | $ | (184,583 | ) | $ | (50,294 | ) | |||
| Net income (loss) attributable to common shareholders per share | ||||||||||||
| —Basic and diluted— | ||||||||||||
| As reported | $ | (2.58 | ) | $ | (4.42 | ) | $ | (0.86 | ) | |||
| Pro forma | (3.26 | ) | (4.80 | ) | (1.24 | ) | ||||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period:
| | 2002 | 2003 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Risk free interest rates | 3.91-4.39 | % | 2.78-4.15 | % | 3.27-3.50 | % | ||||
| Expected dividend yield | None | None | None | |||||||
| Expected life | 5 Years | 5 Years | 5-7 Years | |||||||
| Expected volatility | 72 | % | 125 | % | 99 | % | ||||
| Weighted average fair value per option | $ | 8.00 | $ | 2.63 | $ | 2.51 | ||||
(p) Income Taxes
Deferred income taxes are recognized based on temporary differences between the financial statement and Infrequently Occurring Eventstax bases of assets and Transactions”. Underliabilities. Deferred tax assets and liabilities are measured using the statutory tax rates and laws expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the timing of the temporary differences becoming deductible. Management considers, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations of availability of net operating loss carryforwards, and other matters in making this statement, one accounting model is requiredassessment.
Income taxes are provided on undistributed earnings of foreign subsidiaries where such earnings are expected to be usedremitted to the U.S. parent company. The Company determines annually the amount of unremitted earnings of foreign subsidiaries to invest indefinitely in its non-U.S. operations. Unrecognized provisions for long-lived assetstaxes on undistributed earnings of foreign subsidiaries, which are considered permanently invested, are not material to the Company's consolidated financial position or results of operations.
(q) Legal Fees
The Company accrues estimated future legal fees associated with outstanding litigation for which management has determined that it is probable that a loss contingency exists. Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of the claim assessment or damages can be disposed of by sale, whether previously held and used or newly acquired. This statement broadensreasonably estimated.
(r) Advertising costs
The Company charges advertising costs to expense as the presentation of discontinued operations to include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, andcosts are incurred. In some cases, in accordance with Accounting Principles Board (APB) Opinion No. 28, "Interim Financial Reporting," the advertising costs are amortized over several interim periods within thosea fiscal years.year, if the benefits to the expenditure extend beyond the period in which the costs are incurred. The Company does not expectrecorded advertising expenses of $11.9 million, $14.1 million and $4.0 million during the years ended June 30, 2002, 2003 and 2004, respectively. As of June 30, 2003 and 2004, the Company had $0.3 million and $0.8 million in prepaid advertising on the accompanying consolidated balance sheets.
(s) Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This pronouncement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement are effective for transactions that theare entered into or modified after June 30, 2003. The adoption of SFAS No. 144 will149 did not have a material effect on itsthe Company's consolidated financial position or results of operations.
In April 2002,January 2003, the FASB issued SFASInterpretation No. 145, “Rescission46 (FIN 46), "Consolidation of Variable Interest Entities," which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation of certain entities. In December 2003, the FASB Statements SFAS Nos. 4, 44 and 64, Amendmentrevised FIN 46. As revised, FIN 46 will require identification of FASB Statement No. 13 and Technical Corrections”. SFAS No. 145 rescinds Statement No. 4, “Reporting Gains and Lossesthe Company's participation in variable interest entities (VIE), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from Extinguishmentsa majority of Debt”, and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145its expected returns. FIN 46 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers”. SFAS No. 145 amends FASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting forsets forth certain lease modifications that have economic effectsdisclosure regarding interests in VIE that are similardeemed significant, even if consolidation is not required. Certain provisions of FIN 46, as revised, relating to sale leaseback transactions. SFAS No. 145 also amendsthe consolidation of special-purpose entities are effective for periods ending after December 15, 2003. The adoption of these provisions did not have an impact on the Company's financial position, results of operations or cash flows. The remaining provisions of FIN 46, as revised, relating to the consolidation or disclosure of all other existing authoritative pronouncementsVIE are effective for periods ending after March 15, 2004. The adoption of these provisions did not have an impact on the Company's financial position, results of operations or cash flows.
(t) Reclassifications
Certain amounts in the Company's consolidated balance sheets and consolidated statements of operations and cash flows have been reclassified to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisionconform to the current presentation.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement supersedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company is currently evaluating the effect that the adoption of SFAS No. 146 will have on its consolidated financial position and results of operations.
(3) Restructuring and Other Charges
(a) Fiscal 2004
During fiscal 2004, the Company recorded $20.8 million in restructuring charges and FTC legal costs. Of this amount, $23.8 million is associated with a June 2004 restructuring plan, which is offset by $7.9 million in adjustments to prior restructuring accruals and deferred rent balances, and $4.9 million is FTC legal costs.
In June 2004, the Company initiated a plan to reduce its operating expenses in order to better align its operating cost structure with the current economic environment and to improve its operating margins. This plan coincided with a reduction in management's revenue projections for fiscal 2005. The plan to reduce operating expenses resulted in the consolidation of facilities, headcount reductions, and the termination of operating lease contracts. These actions resulted in an aggregate restructuring charge of $23.8 million. The $7.9 million in adjustments to the prior restructuring accruals and deferred rent balances is primarily related to the buy-out of the Company's remaining lease obligation for its Houston facility, of which portions had previously been vacated by the Company and included in previous restructuring plans. The components of the restructuring plan are as follows (in thousands):
| | Closure/ Consolidation of Facilities and Contract exit costs | Employee Severance, Benefits, and Related Costs | Impairment of Assets | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring charge | $ | 20,984 | $ | 1,046 | $ | 1,776 | $ | 23,806 | ||||||
| Fiscal 2004 payments | (8,435 | ) | (280 | ) | — | (8,715 | ) | |||||||
| Impairment of assets | — | — | (1,776 | ) | (1,776 | ) | ||||||||
| Accrued expenses, June 30, 2004 | $ | 12,549 | $ | 766 | $ | — | $ | 13,315 | ||||||
Expected final payment date | February 2007 | December 2004 | ||||||||||||
Employee severance, benefits and related costs: Approximately $1.0 million of the restructuring charge relates to the reduction in headcount. Approximately 35 employees, or 2% of the workforce, were eliminated under the restructuring plan implemented by management. A majority of the employees were located in North America, although Europe was affected, as well. All business units were affected, including services, sales and marketing, research and development, and general and administrative.
Impairment of assets: Approximately $1.8 million of the restructuring charge relates to charges associated with the impairment of fixed assets associated with the closed and consolidated facilities. These assets were reviewed for impairment in accordance with SFAS No. 144, and were considered to be impaired because their carrying values were in excess of their fair values. The fair values were determined based on a quoted market price from a third party.
(b) Fiscal 2003
During fiscal 2003, the Company recorded $41.1 million in restructuring charges and FTC legal costs. Of this amount, $28.1 million is associated with an October 2002 restructuring plan, and $13.0 million is FTC legal costs, related to the FTC challenge of the Company's acquisition of Hyprotech.
In October 2002, management initiated a plan to further reduce operating expenses in response to first quarter revenue results that were below expectations and general economic uncertainties. In addition, management revised revenue expectations for the remainder of the fiscal year and beyond, primarily related to the manufacturing/supply chain product line, which has been affected the most by the current economic conditions. The plan to reduce operating expenses resulted in headcount reductions, consolidation of facilities, and discontinuation of development and support for certain non-critical products. These actions resulted in an aggregate restructuring charge of $16.1 million, recorded during the three months ended December 31, 2002. In June 2003, the Company reviewed its estimates to this plan and recorded a $12.0 million increase to the accrual, primarily due to revisions of
the facility sub-lease assumptions, as well as increases to severance and other costs. The components of the restructuring plan are as follows (in thousands):
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Impairment of Assets and Disposition Costs | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring charge | $ | 17,347 | $ | 10,028 | $ | 714 | $ | 28,089 | ||||||
| Net recovery/impairment of assets | — | — | 866 | 866 | ||||||||||
| Fiscal 2003 payments | (3,548 | ) | (7,297 | ) | — | (10,845 | ) | |||||||
| Accrued expenses, June 30, 2003 | 13,799 | 2,731 | 1,580 | 18,110 | ||||||||||
| Fiscal 2004 payments | (2,567 | ) | (2,170 | ) | (770 | ) | (5,507 | ) | ||||||
| Adjustment—Facility lease buyout | (4,122 | ) | — | — | (4,122 | ) | ||||||||
| Adjustment—Revised assumptions | (385 | ) | (269 | ) | (134 | ) | (788 | ) | ||||||
| Accrued expenses, June 30, 2004 | $ | 6,725 | $ | 292 | $ | 676 | $ | 7,693 | ||||||
Expected final payment date | December 2010 | April 2005 | April 2005 | |||||||||||
Closure/consolidation of facilities: Approximately $17.4 million of the restructuring charge relates to the termination of facility leases and other lease related costs. Of this amount, approximately $8.7 million was recorded in the three months ended December 31, 2002 and approximately $8.7 million was recorded as a result of the June 2003 increase to the accrual. The facility leases had remaining terms ranging from several months to eight years. The amount accrued is an estimate of the remaining obligation under the lease or actual costs to buy-out leases, reduced by expected income from the sublease of the underlying properties. The June 2003 increase to the accrual is primarily due to revised estimates related to sublease assumptions, as actual sublease rates have been significantly less than originally estimated and the Company has experienced delays contracting with sub-lessors. In June 2004, the remaining accrual associated with one of the leased facilities was paid, as the Company executed a buy-out of the remaining facility lease obligation as part of the June 2004 restructuring plan. The adjustments to the accrual that occurred in fiscal 2004 relate to revisions made to sublease assumptions.
Employee severance, benefits and related costs: Approximately $10.0 million of the restructuring charge relates to the reduction in headcount. Of this amount, approximately $8.2 million was recorded in the three months ended December 31, 2002 and approximately $1.8 million was recorded as a result of the June 2003 increase to the accrual. Approximately 400 employees, or 20% of the workforce, were eliminated under the restructuring plan implemented by management. All geographic regions and business units were affected, including services, sales and marketing, research and development, and general and administrative. The adjustments to the accrual that occurred in fiscal 2004 relate to revisions of estimates of severance terms and benefit levels.
Impairment of assets and disposition costs: Approximately $0.7 million of the restructuring charge relates to charges associated disposing of certain products and assets. This consisted of costs related to preparing certain development groups for divestment or closure, offset by a gain related to the cancellation of a note payable to a European government. The note payable was related to the research and development group that was divested as part of the restructuring plan. The adjustments to the
accrual that occurred in fiscal 2004 relate to revisions of estimates of ongoing costs of disposal activities.
(c) Fiscal 2002
In the third quarter of fiscal 2002, revenues were lower than our expectations as customers delayed spending due to the general weakness in the economy. Like many other software companies, weThe Company reduced our revenue expectations for the fourth quarter and for the fiscal year 2003. Based upon the impact of these reduced revenue expectations, management evaluated ourthe Company's current business and made significant changes, resulting in a restructuring plan for ourits operations. This restructuring plan included a reduction in headcount,
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tighter cost controls, and the close-down and consolidation of facilities, and the write-off of certain assets, andfacilities. The restructuring charge is broken-downbroken down as follows (in thousands):
| Employee | ||||||||||||||||
| Closedown/ | Severance, | |||||||||||||||
| Consolidation | Benefits, and | Write-off | ||||||||||||||
| of Facilities | Related Costs | of Assets | Total | |||||||||||||
| Restructuring charge | $ | 4,901 | $ | 8,285 | $ | 1,169 | $ | 14,355 | ||||||||
| Write-off of asset | — | — | (1,169 | ) | (1,169 | ) | ||||||||||
| Fiscal 2002 payments | — | (1,849 | ) | — | (1,849 | ) | ||||||||||
| Accrued expenses, June 30, 2002 | $ | 4,901 | $ | 6,436 | $ | — | $ | 11,337 | ||||||||
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring charge | $ | 4,901 | $ | 8,285 | $ | 13,186 | |||||
| Fiscal 2002 payments | — | (1,849 | ) | (1,849 | ) | ||||||
| Accrued expenses, June 30, 2002 | 4,901 | 6,436 | 11,337 | ||||||||
| Fiscal 2003 payments | (695 | ) | (4,748 | ) | (5,443 | ) | |||||
| Accrued expenses, June 30, 2003 | 4,206 | 1,688 | 5,894 | ||||||||
| Fiscal 2004 payments | (1,302 | ) | (1,060 | ) | (2,362 | ) | |||||
| Adjustment—Facility lease buyout | (727 | ) | — | (727 | ) | ||||||
| Adjustment—Revised assumptions | (350 | ) | (498 | ) | (848 | ) | |||||
| Accrued expenses, June 30, 2004 | $ | 1,827 | $ | 130 | $ | 1,957 | |||||
Expected final payment date | December 2010 | April 2005 | |||||||||
The Company expects that the remaining obligations will be paid-out by December 2010.
Close-down/ Closure/consolidation of facilities:Approximately $4.9 million of the restructuring charge relates to the termination of facility leases and other lease-related costs. The facility leases had remaining terms ranging from several months to nine years. The amount accrued is an estimate of the actual costs to buy-out leases or to sublease the underlying properties. In June 2004, the remaining accrual associated with one of the leased facilities was paid, as the Company executed a buy-out of the remaining facility lease obligation as part of the June 2004 restructuring plan. The adjustments to the accrual that occurred in fiscal 2004 relate to revisions made to sublease assumptions, as actual sublease rates have been significantly less than originally estimated and the Company has experienced delays contracting with sub-lessors.
Employee severance, benefits and related costs:Approximately $8.3 million of the restructuring charge relates to the reduction in headcount. Approximately 200 employees, or 10% of the workforce, were eliminated under the changes to the business plan implemented by management. Business units impacted included sales and marketing, services, research and development, and general and administrative, across all geographic areas. The adjustments to the accrual that occurred in fiscal 2004 relate to revisions of estimates of severance terms and benefit levels.
Write-off of assets:Approximately $1.2 million of the restructuring charge relates to the write-off of prepaid royalties related to third-party software products that the Company will no longer support and sell.
(d) Fiscal 2001
During August 2001, in light of further economic uncertainties, Company management made a decision to further reduce spending. This reduction primarily consisted of a reduction in worldwide headcount of approximately 100 employees, or 5% of the workforce, effecting such areas as sales and marketing, services, research and development and general and administrative. As a result of these measures, the Company recorded a restructuring charge of $2.6 million in the quarter ending September 30, 2001, as follows (in thousands):
| Employee | ||||||||||||
| Severance, | ||||||||||||
| Benefits, and | ||||||||||||
| Related Costs | Other | Total | ||||||||||
| Restructuring charge | $ | 2,466 | $ | 176 | $ | 2,642 | ||||||
| Fiscal 2002 payments | (2,457 | ) | (157 | ) | (2,614 | ) | ||||||
| Adjustment | 135 | — | 135 | |||||||||
| Accrued expenses, June 30, 2002 | $ | 144 | $ | 19 | $ | 163 | ||||||
The Company expects that the remaining obligations will be paid-out by September 2002.
The adjustment relates to the final settlement of employee severance obligations in excess of the original estimate.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the third quarter of fiscal 2001 the revenues realized by the Company were reduced from the Company’sCompany's expectations as customers delayed spending in the widespread slowdown in information technology spending and the deferral of late-quarter purchasing decisions. Like many other software companies, theThe Company reduced its revenue expectations for the fourth quarter and for the fiscal year 2002 until revenue visibility and predictability improved. Based on these reduced revenue expectations Company management evaluated the business plan and made significant changes, resulting in a restructuring plan for the Company’sCompany's operations. This restructuring plan included a reduction in headcount, a substantial decrease in discretionary spending and a sharpening of the Company’sCompany's e-business focus to emphasize its marketplace solutions, and resulted in a pre-tax restructuring charge totaling $7.0 million. The restructuring charge is broken down as follows (in thousands):
| Employee | ||||||||||||||||
| Closedown/ | Severance, | |||||||||||||||
| Consolidation | Benefits, and | Write-off | ||||||||||||||
| of Facilities | Related Costs | of Assets | Total | |||||||||||||
| Restructuring charge | $ | 2,774 | $ | 3,148 | $ | 1,047 | $ | 6,969 | ||||||||
| Write-off of asset | — | — | (1,047 | ) | (1,047 | ) | ||||||||||
| Fiscal 2001 payments | (114 | ) | (1,878 | ) | — | (1,992 | ) | |||||||||
| Accrued expenses, June 30, 2001 | 2,660 | 1,270 | — | 3,930 | ||||||||||||
| Adjustments — revised assumptions | (800 | ) | — | — | (800 | ) | ||||||||||
| Fiscal 2002 payments | (723 | ) | (1,217 | ) | — | (1,940 | ) | |||||||||
| Accrued expenses, June 30, 2002 | $ | 1,137 | $ | 53 | $ | — | $ | 1,190 | ||||||||
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Write-off of Assets | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring charge | $ | 2,774 | $ | 3,148 | $ | 1,047 | $ | 6,969 | ||||||
| Write-off of asset | — | — | (1,047 | ) | (1,047 | ) | ||||||||
| Fiscal 2001 payments | (114 | ) | (1,878 | ) | — | (1,992 | ) | |||||||
| Accrued expenses, June 30, 2001 | 2,660 | 1,270 | — | 3,930 | ||||||||||
| Adjustments—revised assumptions | (800 | ) | — | — | (800 | ) | ||||||||
| Fiscal 2002 payments | (723 | ) | (1,217 | ) | — | (1,940 | ) | |||||||
| Accrued expenses, June 30, 2002 | 1,137 | 53 | — | 1,190 | ||||||||||
| Fiscal 2003 payments | (397 | ) | (53 | ) | — | (450 | ) | |||||||
| Accrued expenses, June 30, 2003 | 740 | — | — | 740 | ||||||||||
| Fiscal 2004 payments | (412 | ) | — | — | (412 | ) | ||||||||
| Adjustment—Facility lease buyout | (328 | ) | — | — | (328 | ) | ||||||||
| Accrued expenses, June 30, 2004 | $ | — | $ | — | $ | — | $ | — | ||||||
The Company expects that the remaining obligations will be paid-out by March 2008.
Close-down/ Closure/consolidation of facilities:Approximately $2.8 million of the restructuring charge relates to the termination of facility leases and other lease-related costs. The facility leases had remaining terms ranging from one month to six years. The amount accrued reflects the Company’sCompany's best estimate of the actual costs to buy out the leases in certain cases of the net cost to sublease the properties in other cases. Included in this amount is the write-off of certain assets, primarily leasehold improvements. The adjustments to the accrual that occurred in fiscal 2002 relate to revisions made to sublease assumptions, as actual sub-lease assumptions.rates have been significantly less than originally estimated and the Company has experienced delays contracting with sub-lessors. In June 2004, the remaining accrual was paid, as the Company executed a buy-out of the remaining facility lease obligation as part of the June 2004 restructuring plan.
Employee severance, benefits and related costs:Approximately $3.2 million of the restructuring charge relates to the reduction in workforce. Approximately 100 employees, or 5% of the workforce, were eliminated under the changes to the business plan implemented by Company management. Areas impacted included sales and marketing, services, general and administrative, and research and development.
Write-off of assets:Approximately $1.0 million of the restructuring and other charges relates to the impairment of an investment in certain e-business initiatives that the Company will no longer support as a direct consequence of the change in business plan.
(e) Fiscal 1999
In the fourth quarter of fiscal 1999, the Company experienced a significant slow down in certain of its businesses due to difficulties that customers in its core vertical markets of refining, chemicals and petrochemicals were experiencing. These markets were experiencing a significant decrease in pricing for their products, which significantly reduced their revenues and related cash inflows. In turn, these companies began to reduce their capital spending and lengthened the evaluation and decision-making cycle for purchases. The impact of this on the Company was dramatic, lowering license revenues from expected levels by a significant amount. Based on these reduced revenues, Company management made significant changes to the business
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
plan, resulting in a restructuring plan. The restructuring plan
resulted in a pre-tax restructuring charge totaling $17.9 million. The restructuring and other charges are broken down as follows (in thousands):
| Employee | ||||||||||||||||||||
| Closedown/ | Severance, | |||||||||||||||||||
| Consolidation | Benefits, and | Write-off | ||||||||||||||||||
| of Facilities | Related Costs | of Assets | Other | Total | ||||||||||||||||
| Restructuring and other charges | $ | 10,224 | $ | 4,324 | $ | 3,060 | $ | 259 | $ | 17,867 | ||||||||||
| Write-off of assets, and other | (5,440 | ) | — | (3,060 | ) | (101 | ) | (8,601 | ) | |||||||||||
| Fiscal 1999 payments | (24 | ) | (2,386 | ) | — | (57 | ) | (2,467 | ) | |||||||||||
| Accrued expenses, June 30, 1999 | 4,760 | 1,938 | — | 101 | 6,799 | |||||||||||||||
| Fiscal 2000 payments | (1,408 | ) | (1,462 | ) | — | (97 | ) | (2,967 | ) | |||||||||||
| Accrued expenses, June 30, 2000 | 3,352 | 476 | — | 4 | 3,832 | |||||||||||||||
| Fiscal 2001 payments | (1,484 | ) | (126 | ) | — | — | (1,610 | ) | ||||||||||||
| Accrued expenses, June 30, 2001 | 1,868 | 350 | — | 4 | 2,222 | |||||||||||||||
| Adjustment — revised assumptions | (250 | ) | — | — | — | (250 | ) | |||||||||||||
| Fiscal 2002 payments | (1,243 | ) | (350 | ) | — | (4 | ) | (1,597 | ) | |||||||||||
| Accrued expenses, June 30, 2002 | $ | 375 | $ | — | $ | — | $ | — | $ | 375 | ||||||||||
| | Closure/ Consolidation of Facilities | Employee Severance, Benefits, and Related Costs | Write-off of Assets | Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring and other charges | $ | 10,224 | $ | 4,324 | $ | 3,060 | $ | 259 | $ | 17,867 | |||||||
| Write-off of assets, and other | (5,440 | ) | — | (3,060 | ) | (101 | ) | (8,601 | ) | ||||||||
| Fiscal 1999 payments | (24 | ) | (2,386 | ) | — | (57 | ) | (2,467 | ) | ||||||||
| Accrued expenses, June 30, 1999 | 4,760 | 1,938 | — | 101 | 6,799 | ||||||||||||
| Fiscal 2000 payments | (1,408 | ) | (1,462 | ) | — | (97 | ) | (2,967 | ) | ||||||||
| Accrued expenses, June 30, 2000 | 3,352 | 476 | — | 4 | 3,832 | ||||||||||||
| Fiscal 2001 payments | (1,484 | ) | (126 | ) | — | — | (1,610 | ) | |||||||||
| Accrued expenses, June 30, 2001 | 1,868 | 350 | — | 4 | 2,222 | ||||||||||||
| Adjustment—revised assumptions | (250 | ) | — | — | — | (250 | ) | ||||||||||
| Fiscal 2002 payments | (1,243 | ) | (350 | ) | — | (4 | ) | (1,597 | ) | ||||||||
| Accrued expenses, June 30, 2002 | 375 | — | — | — | 375 | ||||||||||||
| Fiscal 2003 net sublease receipts (lease payments) | 147 | — | — | — | 147 | ||||||||||||
| Accrued expenses, June 30, 2003 | 522 | — | — | — | 522 | ||||||||||||
| Fiscal 2004 payments net of sublease receipts (lease payments) | (5 | ) | — | — | — | (5 | ) | ||||||||||
| Accrued expenses, June 30, 2004 | $ | 517 | $ | — | $ | — | $ | — | $ | 517 | |||||||
| Expected final payment date | December 2004 | ||||||||||||||||
The Company expects that the remaining obligations will be paid-out by December 2004.
Close-down/ Closure/consolidation of facilities:Approximately $10.2 million of the restructuring charge relates to the termination of facility leases and other lease-related costs. The facility leases had remaining terms ranging from one month to six years. The amount accrued reflects the Company’sCompany's best estimate of actual costs to buy out the leases in certain cases or the net cost to sublease the properties in other cases. Included in this amount is the write-off of certain assets, primarily building and leasehold improvements and adjustments to certain obligations that relate to the closing of facilities. The adjustment ofto the accrual during fiscal 2022002 is due to a revisionrevisions in some of the original sublease assumptions.assumptions, as actual sub-lease terms have been longer than originally estimated.
Employee severance, benefits and related costs:Approximately $4.3 million of the restructuring charge relates to the reduction in workforce. Approximately 200 employees, or 12% of the workforce, were eliminated as the Company rationalized its product and service offerings against customer needs in various markets.
Write-off of assets: Approximately $3.1 million of the restructuring and other charge relates to the write-off of certain assets that had been determined to be of no further value to the Company as a direct consequence of the change in the business plans that have been made as a result of the restructuring. These business plan changes are the result of management’smanagement's assessment and
rationalization of certain non-core products and activities acquired in recent years. The write-off was based on management’smanagement's assessment of the current fair value of certain assets, including intangible assets, and their resale value, if any.
(4) Acquisitions and Dispositions
(a) Acquisitions During Fiscal Year 2004
In July 2003, the Company acquired 100% of APC Consulting, Inc. (APCC), a consulting services provider based in Houston, Texas, for a purchase price of approximately $0.5 million in cash. This acquisition was accounted for as a purchase, and accordingly, the results of operations from the date of acquisition are included in the Company's consolidated statements of operations commencing as of the acquisition date.
The purchase price was allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | ||||
|---|---|---|---|---|---|---|
| Goodwill | $ | 366 | — | |||
| Acquired technology | 79 | 3 years | ||||
| Customer contracts | 70 | 1 year | ||||
| 515 | ||||||
| Net fair value of tangible assets acquired, less liabilities assumed | 10 | |||||
| Total purchase price | $ | 525 | ||||
Pro forma information related to this acquisition is not presented, as the effect of this acquisition was not material.
(b) Acquisitions and Dispositions During Fiscal Year 2003
In January 2003, the Company acquired a portion of the salesforce of Soteica S.R.L. and purchased the exclusive marketing rights held by Soteica. Soteica was a salesagent of Hyprotech that held exclusive rights to market Hyprotech products in certain South and Latin American countries, including Argentina, Brazil, Mexico and Venezuela. The purchase price consists of 12 quarterly payments of $0.3 million beginning in April 2003, the net present value of which is $3.0 million. Allocation of the purchase price was based on an independent appraisal of the fair value of the net assets acquired.
The purchase price was allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | ||||
|---|---|---|---|---|---|---|
| Marketing rights | $ | 80 | 2 months | |||
| Goodwill | 2,947 | — | ||||
| 3,027 | ||||||
| Net fair value of tangible assets acquired, less liabilities assumed | — | |||||
| Total purchase price | $ | 3,027 | ||||
Pro forma information related to this acquisition is not presented, as the effect of this acquisition is not material.
On January 31, 2003, the Company completed the sale of the assets and liabilities associated with the Aspen Metals products. These products were originally acquired by the Company in the December 2000 acquisition of Broner Systems. The Company will receive an aggregate of £300,000 ($494,000 as of January 31, 2003), to be paid in four semi-annual installments from June 2003 to January 2005. The Company recorded a loss on the sale of the net assets of $0.9 million, which was included in the restructuring and other charge as discussed Note 3.
(c) Acquisitions During Fiscal Year 2002
On May 31, 2002, the Company acquired Hyprotech, Ltd. and related subsidiaries of AEA Technology plc (collectively, Hyprotech), a market leader in providing software and service solutions designed to improve profitability and operating performance for process industry clients by simulating plant design and operations. The Company acquired 100% of the outstanding capital of Hyprotech for a purchase price of approximately $106.1$105.0 million, consisting of $96.6 million in cash $1.1 million in accrued exit costs, and $8.4 million in transaction costs. This acquisition was accounted for as a purchase, and accordingly, the results
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of operations from the date of acquisition are included in the Company’sCompany's consolidated statements of operations commencing as of the acquisition date.
The purchase price was allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | |||||||
| Purchased in-process research and development | $ | 14,900 | — | ||||||
| Goodwill | 57,512 | — | |||||||
| Acquired technology | 23,800 | 5 years | |||||||
| Customer contracts | 1,000 | 4 years | |||||||
| 97,212 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | 16,284 | ||||||||
| 113,496 | |||||||||
| Less — Deferred taxes | 7,440 | ||||||||
| Total purchase price | $ | 106,056 | |||||||
| Description | Amount | Life | ||||
|---|---|---|---|---|---|---|
| Purchased in-process research and development | $ | 14,900 | — | |||
| Goodwill | 59,270 | — | ||||
| Acquired technology | 23,800 | 5 years | ||||
| Customer contracts | 1,000 | 4 years | ||||
| 98,970 | ||||||
| Net fair value of tangible assets acquired, less liabilities assumed | 13,474 | |||||
| 112,444 | ||||||
| Less—Deferred taxes | 7,440 | |||||
| Total purchase price | $ | 105,004 | ||||
In December 2002, the Company made adjustments to the purchase price allocation associated with the acquisition. These consisted of various adjustments to the opening balance sheet to accrue for certain obligations and contingencies and to write-off certain assets. These adjustments resulted in an approximately $1.8 million increase to goodwill.
The following table represents selected unaudited pro forma combined financial information for the Company and Hyprotech, assuming the companies had combined at the beginning of fiscal 20012002 (in thousands, except per share data):
| Years Ended June 30, | ||||||||
| 2001 | 2002(1) | |||||||
| Pro forma revenue | $ | 375,701 | $ | 366,426 | ||||
| Pro forma net income (loss) | (21,327 | ) | (69,811 | ) | ||||
| Pro forma net income (loss) applicable to common shareholders | (21,327 | ) | (76,112 | ) | ||||
| Pro forma earnings (loss) per share applicable to common shareholders | $ | (0.63 | ) | $ | (2.12 | ) | ||
| Pro forma weighted average common shares outstanding | 34,108 | 35,912 | ||||||
| | Years Ended June 30, 2002(1) | |||
|---|---|---|---|---|
| Pro forma revenue | $ | 366,426 | ||
| Pro forma net income (loss) | (69,811 | ) | ||
| Pro forma net income (loss) applicable to common shareholders | (76,112 | ) | ||
| Pro forma net income (loss) per share applicable to common shareholders | $ | (2.12 | ) | |
| Pro forma weighted average common shares outstanding | 35,912 | |||
Pro forma results are not necessarily indicative of either actual results of operations that would have occurred had the acquisition been made at the beginning of fiscal 20012002 or of future results.
On April 30, 2002, the Company acquired 100% of Richardson Engineering Services, Inc. (Richardson) and Skelton & Plummer Project Engineering, PTY Limited (S&P). Richardson is a provider of construction cost estimation software and data, while the group of employees acquired from S&P will expand the scope of sales and service in sub-Saharan Africa.
These acquisitions were accounted for as purchase transactions, and accordingly, the results of operations from the dates of acquisition are included in the Company’sCompany's consolidated condensed statements of operations commencing as of the acquisition dates. Total purchase price for these acquisitions was approximately $3.2 million, consisting of $3.1 million in cash and $0.1 million in acquisition-related costs.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The purchase prices were allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | |||||||
| Goodwill | $ | 2,112 | — | ||||||
| Acquired technology | 1,510 | 5 years | |||||||
| 3,621 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | (445 | ) | |||||||
| Total purchase price | $ | 3,176 | |||||||
| Description | Amount | Life | ||||
|---|---|---|---|---|---|---|
| Goodwill | $ | 2,111 | — | |||
| Acquired technology | 1,510 | 5 years | ||||
| 3,621 | ||||||
| Net fair value of tangible assets acquired, less liabilities assumed | (445 | ) | ||||
| Total purchase price | $ | 3,176 | ||||
Pro forma information related to these acquisitions is not presented, as the effect of these acquisitions was not material.
(b) Acquisitions During Fiscal Year 2001
On August 29, 2000, the Company acquired ICARUS Corporation and ICARUS Services Limited (together, ICARUS), a market leader in providing software that is used by process manufacturing industries to estimate plant capital costs and evaluate project economics. The Company acquired 100% of the outstanding shares and options to purchase shares of ICARUS for a purchase price of approximately $24.9 million, consisting of $12.4 million in shares of the Company’s stock, $9.0 million in cash and $2.1 million in promissory notes, and $1.4 million in transaction costs. This acquisition was accounted for as a purchase, and accordingly, the results of operations from the date of acquisition are included in the Company’s consolidated statements of operations commencing as of the acquisition date.
The purchase price was allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | |||||||
| Purchased in-process research and development | $ | 5,000 | — | ||||||
| Goodwill | 7,011 | 6 years | |||||||
| Acquired technology | 7,000 | 6 years | |||||||
| Other intangibles | 300 | 2 years | |||||||
| 19,311 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | 8,340 | ||||||||
| 27,651 | |||||||||
| Less — Deferred taxes | 2,701 | ||||||||
| Total purchase price | $ | 24,950 | |||||||
In the second quarter of fiscal 2001, the Company acquired the outstanding stock of Broner Systems (Broner) and certain assets of an internet-based trading company. These acquisitions were accounted for as purchase transactions, and accordingly, the results of operations from the dates of acquisition are included in the Company’s consolidated condensed statements of operations commencing as of the acquisition dates. Total purchase price for these acquisitions were approximately $10.9 million, consisting of $9.5 million in cash, $0.9 million in shares of the Company stock, and $0.5 million in acquisition-related costs. Broner specializes in advanced planning and scheduling software specifically designed for the metals industry.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The purchase prices were allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | |||||||
| Purchased in-process research and development | $ | 2,615 | — | ||||||
| Acquired technology | 4,400 | 3-5 years | |||||||
| Goodwill | 2,631 | 5-7 years | |||||||
| Other intangibles | 780 | 3 years | |||||||
| 10,426 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | 1,904 | ||||||||
| 12,330 | |||||||||
| Less — Deferred taxes | 1,434 | ||||||||
| Total purchase price | $ | 10,896 | |||||||
On June 15, 2001, the Company acquired the technology assets of the Houston Consulting Group and the process applications division of CPU, a New Orleans-based consulting firm. These acquisitions were accounted for as purchase transactions, and accordingly, the results of operations from the dates of acquisition are included in the Company’s consolidated condensed statements of operations commencing as of the acquisition dates. Total purchase price for these acquisitions was approximately $20.3 million, consisting of $17.5 million in shares of the Company’s stock, $1.2 million in cash, $0.8 million in stock options held by employees, as valued under the provisions of FIN 44, and $0.8 million in acquisition-related costs.
The purchase prices were allocated to the fair market value of assets acquired and liabilities assumed, as follows (in thousands):
| Description | Amount | Life | |||||||
| Purchased in-process research and development | $ | 2,300 | — | ||||||
| Goodwill | 9,856 | 5 years | |||||||
| Acquired technology | 7,900 | 3-5 years | |||||||
| Other intangibles | 500 | 3 years | |||||||
| 20,556 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | (273 | ) | |||||||
| Total purchase price | $ | 20,283 | |||||||
Pro forma information related to these acquisitions is not presented, as the effect of these acquisitions was not material.
(c) Acquisitions During Fiscal Year 2000
On June 1, 2000, the Company acquired Petrolsoft Corporation and subsidiary (Petrolsoft), a supplier of web-enabled supply chain software for the downstream petroleum industry. The Company exchanged 2,641,101 shares of its common stock for all of the outstanding shares of Petrolsoft. The Company placed 132,054 of these shares into escrow as security for indemnification obligations of Petrolsoft relating to representation, warranties and other matters, as defined. This merger was accounted for as a pooling-of-interests. Accordingly, the consolidated financial statements of the Company for fiscal 2000 had been restated to give retroactive effect to the combination of Petrolsoft. The Company incurred approximately $1.5 million
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of expenses related to this acquisition, which were charged to operations in the year ended June 30, 2000. Prior to the acquisition, Petrolsoft was an S-Corporation and subject only to certain state franchise taxes. As such, the consolidated financial statements reflect the historical Petrolsoft dividends that were distributed to the S-Corporation shareholders in accordance with Petrolsoft’s historical policy in order to meet the shareholders’ personal income tax obligations.
The following information details the results of operations of the Company and Petrolsoft for the year ended June 30, 2000 (in thousands, except for per share data):
| Revenue | |||||
| The Company | $ | 263,460 | |||
| Petrolsoft | 4,633 | ||||
| Combined | $ | 268,093 | |||
| Net income (loss) | |||||
| The Company | $ | 5,591 | |||
| Petrolsoft | (163 | ) | |||
| Combined | $ | 5,428 | |||
| Net income (loss) per share | |||||
| Diluted | |||||
| The Company | $ | 0.20 | |||
| Petrolsoft | $ | (0.06 | ) | ||
| Combined | $ | 0.18 | |||
| Net income (loss) per share | |||||
| Basic | |||||
| The Company | $ | 0.22 | |||
| Petrolsoft | $ | (0.06 | ) | ||
| Combined | $ | 0.19 | |||
On June 8, 2000, the Company acquired M2R, SA (M2R), a leading provider of manufacturing execution software for the life sciences and consumer packaged goods related industries. The Company acquired 100% of the outstanding shares of M2R for a purchase price of approximately $2.1 million. This acquisition was accounted for as a purchase, and accordingly, the results of operations from the date of acquisition are included in the Company’s consolidated statements of operations. Pro forma information
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related to this acquisition is not presented as it is not material. The purchase price was allocated to the fair market value of assets acquired and liabilities assumed as follows (in thousands):
| Description | Amount | Life | |||||||
| Acquired technology | $ | 1,230 | 3 years | ||||||
| Goodwill | 946 | 5 years | |||||||
| 2,176 | |||||||||
| Net book value of tangible assets acquired, less liabilities assumed | 184 | ||||||||
| 2,360 | |||||||||
| Less — Deferred taxes | 275 | ||||||||
| Total purchase price | $ | 2,085 | |||||||
(d) Purchase Price Allocation
Allocation of the purchase prices for all acquisitions were based on estimates of the fair value of the net assets acquired. The fair market value of significant intangible assets acquired was based on independent appraisals. In making each of these purchase price allocations, the Company considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items and an assessment of overall contributions, as well as project risks. The values assigned to purchased in-process technology were determined by estimating the costs to develop the acquired technologies into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present values. The revenue projections used to value the in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from the projects are based on estimates of cost of sales, operating expenses, and income taxes from the projects. The rates utilized to discount the net cash flows to their present value were based on estimated costs of capital calculations. Due to the nature of the forecasts and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 20 to 40 percent were considered appropriate for the in-process research and development. Risks related to the completion of technology under development include the inherent difficulties and uncertainties in achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets.
(5) Line of Credit
TheIn January 2003, the Company maintainsexecuted a $30.0 million secured bankLoan Arrangement with Silicon Valley Bank. This arrangement provides a line of credit expiring December 31, 2002, that provides for borrowings of specified percentagesup to the lesser of (i) $15.0 million or (ii) 70% of eligible domestic receivables, and a line of credit of up to the lesser of (i) $10.0 million or (ii) 80% of eligible foreign receivables. The lines of credit bear interest at the bank's prime rate (4.00% at June 30, 2004). The Company is required to maintain a $4.0 million compensating cash balance with the bank, or be subject to an unused line fee and collateral handling fees. The lines of credit will initially be collateralized by nearly all of the assets of the Company, and upon achieving certain net income targets, the collateral will be reduced to a lien on the accounts receivablereceivable. The Company is required to meet certain financial covenants, including minimum tangible net worth, minimum cash balances and eligible current installment contracts. Advancesan adjusted quick ratio. The Company capitalized $0.3 million in costs associated with the origination of the Loan Arrangement, which are being amortized to interest expense over the life of the agreement. The Loan Arrangement expires in January 2005.
As of June 30, 2004, there were $11.9 million in letters of credit outstanding under the line of credit, bear interest at a rate equal to the bank’s prime rate (4.75% at June 30, 2002) or, at the Company’s option, a rate equal to a defined LIBOR (2.28% at June 30, 2002) plus a specified margin. Any borrowings under the line of credit must be secured by a pledge of short-term investments or cash. The line of credit agreement requires us to provide the bank with certain periodic financial reports and to comply with certain financial tests, including maintenance of minimum levels of consolidated net worth and of the ratio of cash and cash equivalents, accounts receivable and current portion of our long term installments receivable to current liabilities.there was $7.4 million available for future borrowing. As of June 30, 2002,2004, the Company was not in compliance with certaindefault of the above mentioned covenants. Subsequently,tangible net worth covenant. On September 10, 2004, the Company received a waiver for such non-compliance, coveringexecuted an amendment to the period fromLoan Arrangement that adjusted the terms of certain financial covenants, and cured the default as of June 30, 20022004. The Loan Arrangement expires in January 2005, and the Company is currently in negotiations with the bank to December 31, 2002. At June 30, 2002, there were no outstanding borrowings underamend and extend the line of credit.agreement.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(6) Long-Term Obligations
Long-term obligations consist of the following at June 30, 20012003 and 20022004 (in thousands):
| 2001 | 2002 | |||||||
| Capital lease obligations related to the purchase of property and equipment due in various monthly installments of principal plus interest at interest rates ranging from 6.0% to 10.3% per year, maturing through February 2005 | $ | — | $ | 7,594 | ||||
| Mortgage payable of a UK subsidiary due in annual installments of approximately $91 plus interest at 6% per year | 885 | 866 | ||||||
| Note payable of a Belgian subsidiary with annual installments of approximately $126 through June 2012, plus interest ranging from 8.5% to 10%, payable in June 2010, 2011, and 2012 | 989 | 1,030 | ||||||
| Note payable of a UK subsidiary due in monthly installments of approximately $50 plus interest at 9% per year | — | 992 | ||||||
| Mortgages payable of a U.S. subsidiary due in aggregate monthly installments of $3 plus interest of 5.3% and 9.5% per year | — | 366 | ||||||
| Note payable to the former Richardson owners, due in fiscal 2003, interest payable at an annual rate of 12% | — | 188 | ||||||
| Convertible Debenture of a Belgian subsidiary due in fiscal 2003, interest payable at an annual rate of 6%. This note is convertible into approximately 7,500 shares of the Company’s common stock at the option of the holder | 189 | 74 | ||||||
| Credit arrangement of a Belgian subsidiary with a bank | 211 | — | ||||||
| Promissory note due to former Icarus shareholder in August 2001, interest payable at an annual rate equal to prime rate | 2,095 | — | ||||||
| Other obligations | 69 | 109 | ||||||
| 4,438 | 11,219 | |||||||
| Less — Current portion | 2,539 | 5,334 | ||||||
| $ | 1,899 | $ | 5,885 | |||||
| | 2003 | 2004 | ||||
|---|---|---|---|---|---|---|
| 51/4% Convertible subordinated debentures, mature on June 15, 2005 | $ | 86,250 | $ | 56,745 | ||
| Capital lease obligations due in various monthly installments of principal plus interest, maturing through February 2005 | 3,050 | $ | 406 | |||
| Note payable to Soteica incurred in connection with salesforce acquisition, payable in quarterly installments of approximately $273 plus interest at 6% per year | 2,777 | 1,819 | ||||
| Note payable of a UK subsidiary due in monthly installments of approximately $50 plus interest at 9% per year | 847 | 766 | ||||
| Mortgage payable of a UK subsidiary due in annual installments of approximately $100 plus interest at 6% per year | 836 | 811 | ||||
| 93,760 | 60,547 | |||||
| Less—Current portion | 3,849 | 58,595 | ||||
| $ | 89,911 | $ | 1,952 | |||
Maturities of these long-term obligations are as follows (in thousands):
| Years Ending June 30, | Amount | |||
| 2003 | $ | 5,334 | ||
| 2004 | 4,016 | |||
| 2005 | 689 | |||
| 2006 | 312 | |||
| 2007 | 300 | |||
| Thereafter | 568 | |||
| $ | 11,219 | |||
| Years Ending June 30, | Amount | ||
|---|---|---|---|
| 2005 | $ | 58,595 | |
| 2006 | 963 | ||
| 2007 | 224 | ||
| 2008 | 183 | ||
| 2009 | 181 | ||
| Thereafter | 401 | ||
| $ | 60,547 | ||
The mortgage payable of the UK subsidiary and the capital lease obligations are collateralized by the property and equipment to which they relate.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(7) 5 1/4% Convertible Subordinated Debentures
In June 1998, the Company sold $86.3 million of 5 1/4% Convertible subordinated debentures (the Debentures)the Debentures to qualified institutional buyers which mature on June 15, 2005. The Company has determined the fair value of the debentures based on the current trading prices to be $68.1 million at June 30, 2002.buyers. The Debentures are convertible into shares of the Company’sCompany's common stock at any time prior to June 15, 2005, unless previously redeemed or repurchased, at a conversion price of $52.97 per share, subject to adjustment in certain events. Interest on the Debentures is payable on June 15 and December 15 of each year. The Debentures are redeemable in whole or part at the option of the Company at any time on or after June 15, 2001 at the following redemption prices expressed as a percentage of principal plus accrued interest through the date of redemption:
| 12 Months | Redemption | |||
| Beginning June 15 of | Price | |||
| 2001 | 103.00 | % | ||
| 2002 | 102.25 | % | ||
| 2003 | 101.50 | % | ||
| 2004 | 100.75 | % | ||
| 12 Months Beginning June 15 of | Redemption Price | ||
|---|---|---|---|
| 2001 | 103.00 | % | |
| 2002 | 102.25 | % | |
| 2003 | 101.50 | % | |
| 2004 | 100.75 | % |
In the event of a change of control, as defined, each holder of the Debentures may require the Company to repurchase itsthe Debentures, in whole or in part, for cash or, at the Company’sCompany's option, for common stock (valued at 95% of the average last reported sale prices for the 5 trading days immediately preceding the repurchase date) at a repurchase price of 100% of the principal amount of the Debentures to be repurchased, plus accrued interest to the repurchase date. The Debentures are unsecured obligations subordinate in right of payment to all existing and future senior debt of the Company, as defined, and effectively subordinate in right of payment to all indebtedness and other liabilities of the Company’sCompany's subsidiaries. The Company has filed a shelf registration statement in respect of the Debentures and common stock issuable upon conversion thereof.
In connection with this financing,the sale and issuance of the Debentures, the Company incurred approximately $3.9 million of issuance costs. These costs have been classified as other assets in the accompanying consolidated balance sheets and are being amortized, as interest expense, over the term of the Debentures.
(8) Strategic alliance
On February 8, 2002 the Company entered into a strategic alliance with Accenture, focused on creating solutions for manufacturing and supply chain execution by chemical and petroleum manufacturers. The Company will work with Accenture to jointly market and promote the developed solutions in the chemicals and petroleum markets and Accenture will become a strategic implementation partner for these solutions. The Company purchased a nonexclusive perpetual license to certain intellectual property owned by Accenture and will purchase certain professional development services relating to the existing intellectual property, over the term of the agreement. The Company will pay $29.6 million for the intellectual property and up to $7.4 million for the services. Under the original terms of the agreement, these obligations were to be settled with the Company’s stock, based upon the 10-day average price of the stock as follow: $18.5 million on June 9, 2002, $11.1 million on August 30, 2002 and $7.4 million on July 1, 2003. In addition, in consideration for the development work, beginning July 1, 2002, the Company will pay Accenture a royalty on sales of the software relating to the alliance arrangement over a four-year period.
The Company recorded a $29.6interest expense associated with these debentures of $5.1 million, obligation subject to common stock settlement$5.1 million and a corresponding intellectual property asset$4.5 million in the accompanyingyears ended June 30, 2002, consolidated balance sheet. This asset is being amortized over its estimated life of five years.2003 and 2004, respectively.
During fiscal 2002,2004, the Company recorded $2.0used a portion of the proceeds from the Series D-1 and Series D-2 redeemable convertible preferred stock financing to repurchase and retire $29.5 million of amortization, of which $1.0 was charged to research and development costs and $1.0 million was capitalized as computer software development costs.the Debentures.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, based on the Accenture services provided during fiscal 2002, the Company recorded a $1.8 million long-term obligation, which is included in long-term debt and obligations on the accompanying March 31, 2002 consolidated condensed balance sheet. Of this amount, $0.9 million was charged to research and development costs and $0.9 million was capitalized as computer software development costs.
In contemplation of the Company’s issuance of these shares of common stock, Accenture and the Company entered into a registration rights agreement, under which the Company agreed to register the common stock for sale by Accenture under the Securities Act of 1933 and a stockholder agreement relating to, among other things, the voting and transfer of those shares.
On June 9, 2002, the Company issued 1,642,672 shares of common stock to Accenture, in settlement of the first payment of $18.5 million.
Subsequent to year-end, the Company entered into agreements to amend, effective as of August 16, 2002, several of the existing terms of its strategic alliance with Accenture. Among the amended terms, it was agreed that, the Company would pay the $11.1 million of licensing fees in a series of cash installments, rather than by a single cash payment or issuance of common stock on August 30, 2002. Accordingly, $1.1 million of this amount was paid in August 2002 and the remaining $10.0 million will be paid in installments due from November 2002 through July 2003. The unpaid balance of this obligation accrues interest at the rate of 1.5% per month and is secured by a pledge of the Company’s patents and software.
(9)(7) Preferred Stock
The Company’sCompany's Board of Directors is authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue, from time to time, up to an aggregate of 10,000,000 shares of preferred stock in one or more series. Each such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences and conversion rights, as shall be determined by the Board of Directors in a resolution or resolutions providing for the issuance of such series. Any such series of preferred stock, if so determined by the Board of Directors, may have full voting rights with the common stock or limited voting rights and may be convertible into common stock or another security of the Company.
Series B redeemable convertible preferred stock
In February and March 2002, the Company sold 40,000 shares of Series B-I convertible preferred stock (Series B-I Preferred), and 20,000 shares of Series B-II convertible preferred stock (Series B-II Preferred and, collectively with Series B-I Preferred, the Series B Preferred) together with (i) warrants to purchase 507,584 shares of common stock at an initial exercise price of $23.99 per share;share and (ii) warrants to purchase 283,460 shares of common stock at an initial exercise price of $20.64 per share, to three institutional investors for an aggregate purchase price of $60.0 million. The Company received approximately $56.6 million in net cash proceeds after closing costs.
Each share of Series B Preferred stock is entitled to vote on all matters in which holders of common stock are entitled to vote, receiving a number of votes equal (subject to certain limitations) to the number of shares of common stock into which it is then convertible.
The Series B Preferred stock accrues dividends at an annual rate of 4% that are payable quarterly, commencing June 30, 2002, in either cash or common stock, at the Company’s option (subject to the satisfaction of specified conditions). During the year ended June 30, 2002, the Company accrued $0.9 million associated with this dividend obligation, which was recorded in additional paid-in capital on the accompanying consolidated balance sheet. On July��1, 2002, the Company issued 116,452 shares of common stock in settlement of its dividend obligations through June 30, 2002.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Each share of Series B-I Preferred stock and Series B-II Preferred stock is convertible into a number of shares of common stock equal to its stated value (initially $1,000 per share) divided by a conversion price of $19.97 and $17.66, respectively. As a result, the shares of Series B-I Preferred and Series B-II Preferred stock initially are convertible into approximately 2,002,974 and 1,132,503 shares of common stock, respectively. If the Company issues additional shares of common stock, or instruments convertible or exchangeable for common stock, at an effective net price less than the lesser of (a) $17.75, with respect to the Series B-I Preferred stock, or $15.69 with respect to the Series B-II Preferred stock, and (b) the then-applicable conversion price, the conversion price for the Series B-I Preferred and Series B-II Preferred stock will be reduced to equal that effective net price. These adjustments do not apply to the issuance of common stock or such instruments in specified firm commitment underwritten public offerings, strategic arrangements, mergers or acquisitions, and grants and purchases of securities pursuant to equity incentive plans. Such rights to adjustment were waived with respect to the sale of Common Stock as discussed in Note 10(a). In addition, the conversion prices of the Series B Preferred stock are subject to equitable adjustment in the event of stock splits, stock dividends, distributions, subdivisions or combinations affecting common stock.
The Company may require holders to convert their shares of Series B Preferred stock into common stock if the closing price of the common stock has exceeded 135% of the conversion price for 20 consecutive trading days at any time after the effective date of a registration statement covering the common stock issuable upon conversion.
The Series B Preferred stock is subject to mandatory redemption on February 7, 2009. Beginning on August 7, 2003 and August 28, 2003, holders of Series B-I Preferred stock and Series B-II Preferred stock, respectively, may require that the Company redeem up to a total of 20,000 shares of Series B-1 Preferred stock and 10,000 shares of Series B-II Preferred stock if the average closing price of the common stock for the 20 consecutive trading days immediately preceding August 7, 2003 or August 28, 2003 or any date thereafter is below the then-applicable conversion price. Beginning on February 8, 2004 and February 28, 2004, holders of Series B-I Preferred stock and Series B-II Preferred stock, respectively, may require that the Company redeem any or all of their remaining shares of Series B Preferred stock. Any such redemption may be made in cash or stock, at the Company’s option (subject to the satisfaction of specified conditions set forth in the Company’s charter), at a price equal to the stated value, initially $1,000 per share, plus accrued but unpaid dividends.
In the event of a specified change of control, a holder either may require that the Company redeem shares of Series B Preferred stock at a price equal to 115% of the stated value, plus accrued but unpaid dividends, or may elect to convert shares of Series B Preferred stock into the consideration that the holder would have received had the holder converted the shares of Series B Preferred stock into common stock immediately before the change of control event. If the holder elects to have its Series B Preferred stock redeemed, the Company may either pay the redemption price in cash or elect to have the successor entity issue to the holder a new series of preferred stock with a stated value equal to the redemption price and containing terms substantially equivalent to the terms of the Series B Preferred stock.
The Company allocated the net consideration received from the sale of the Series B Preferred stock between the Series B Preferred stock and the warrants on the basis of the relative fair values at the date of issuance, allocating $8.0 million to the warrants. The warrants are exercisable at any time prior to the fifth anniversary of their issue date. The fair value of the common shares into which the Series B Preferred Stock iswas convertible on the date of issuance exceeded the proceeds allocated to the Series B
Preferred Stock by $3.2 million, resulting in a beneficial conversion feature that was recognized as an increase in additional paid-in-capital and as a discount to the Series B Preferred Stock.Preferred. This additional discount was immediately accreted through a charge to accumulated deficit.deficit in fiscal 2002. The remaining discount on the Series B Preferred was being accreted to its redemption value over the earliest period of redemption.
The Series B Preferred accrued dividends at an annual rate of 4% that were payable quarterly, commencing June 30, 2002, in either cash or common stock, at the Company's option (subject to the satisfaction of specified conditions). During fiscal 2003, the Company issued 731,380 shares of common stock in settlement of its dividend obligations through March 31, 2003. In July 2003, the Company issued 120,740 shares of common stock in settlement of its dividend obligations for the three months ended June 30, 2003.
In June 2003, the Company amended the terms of the Series B Preferred in conjunction with the Series D-1 and Series D-2 redeemable convertible preferred stock financing. This amendment gave the holders of the Series B Preferred the right to redeem their Series B Preferred shares for cash in certain circumstances that were outside of the Company's control. As a result of this redemption feature, the carrying value of the Series B Preferred was reclassified outside of stockholders' equity on the accompanying consolidated balance sheet. In August 2003, the Company repurchased all of the outstanding shares of Series B Preferred.
Series D redeemable convertible preferred stock
In August 2003, the Company issued and sold 300,300 shares of Series D-1 redeemable convertible preferred stock (Series D-1 Preferred), along with warrants to purchase up to 6,006,006 shares of common stock at a price of $3.33 per share, in a private placement to several investment partnerships managed by Advent International Corporation for an aggregate purchase price of $100.0 million. Concurrently, the Company paid cash of $30.0 million and issued 63,064 shares of Series D-2 convertible preferred stock (Series D-2 Preferred), along with warrants to purchase up to 1,261,280 shares of common stock at a price of $3.33 per share, to repurchase all of the outstanding Series B Preferred. In addition, the Company exchanged existing warrants to purchase 791,044 shares of common stock at an exercise price ranging from $20.64 to $23.99 held by the holders of the Series B Preferred, for new warrants to purchase 791,044 shares of common stock at an exercise price of $4.08. These transactions are referred to collectively as the Series D Preferred financing.
The Company incurred $10.7 million in costs related to the issuance of the Series D-1 and D-2 Preferred (together, the Series D Preferred) and allocated the net proceeds received between the Series D Preferred and the warrants on the basis of the relative fair values at the date of issuance, allocating $15.5 million of proceeds to the warrants. The warrants are exercisable at any time prior to the seventh anniversary of their issue date. The remaining discount on the Series D Preferred is being accreted to its redemption value over the earliest period of redemption. For fiscal 2002,
The value of total consideration paid to the Company accreted $2.2 millionholders of the Series B Preferred, consisting of cash, Series D-2 Preferred and warrants, was less than the carrying value of the Series B Preferred at the time of retirement. This resulted in a gain of $6.5 million, which the Company recorded in the accretion of preferred stock discount.discount and dividend line of the accompanying consolidated condensed statement of operations.
Each share of Series D Preferred is entitled to vote on all matters in which holders of common stock are entitled to vote, receiving a number of votes equal to the number of shares of common stock into which it is then convertible. In addition, holders of Series D-1 Preferred, as a separate class, are entitled to elect a certain number of directors, based on a formula as defined in the series D Preferred Certificate of Designations. The holders of the Series D-1 Preferred are entitled to elect a number of the Company's directors calculated as a ratio of the Series D-1 Preferred voting power as compared to the total voting power of the Company's common stock. The Series D-1 Preferred holders have elected four of the Company's current directors.
F-28 The Series D Preferred earns cumulative dividends at an annual rate of 8%, which are payable when and if declared by the Board of Directors, in cash or, subject to certain conditions, common stock. As of June 30, 2004, the Company has accrued $8.7 million in dividends on the Series D Preferred.
The Series D Preferred is subject to redemption at the option of the holders as follows: 50% on or after August 14, 2009 and 50% on or after August 14, 2010. The shares will be redeemed for cash at a price of $333.00 per share, plus accumulated but unpaid dividends.
In the accompanying consolidated statements of operations, the accretion of preferred stock discount and dividend consist of the following (in thousands):
| | Years Ended June 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||
| Beneficial conversion feature related to issuance of Series B Preferred | $ | (3,232 | ) | $ | — | $ | — | |||
| Accrual of dividend on Series B Preferred | (860 | ) | (2,400 | ) | (296 | ) | ||||
| Accretion of discount on Series B Preferred | (2,209 | ) | (6,784 | ) | (643 | ) | ||||
| Gain on retirement of Series B preferred, net of warrant modification charge | — | — | 6,452 | |||||||
| Accrual of dividend on Series D preferred | — | — | (8,690 | ) | ||||||
| Accretion of discount on Series D preferred | — | — | (3,181 | ) | ||||||
| $ | (6,301 | ) | $ | (9,184 | ) | $ | (6,358 | ) | ||
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(10)(8) Common Stock
(a) Common stock financing
In May 2002, the Company issued and sold 4,166,665 shares of common stock together with warrants to purchase common stock to a group of institutional investors and two individuals, for an aggregate purchase price of $50 million. The net proceeds from this transaction were $48.0 million. The Company issued warrants with five-year lives to purchase up to 750,000 additional shares of common stock at a price of $15.00 per share and also issued a second class of warrants that entitled the investors to purchase, on or prior to July 28, 2002, up to 2,083,333 shares of common stock at a price of $13.20, together with five year warrants to purchase an additional 375,000 shares of common stock at a price of $15.60. The second class of warrants expired unexercised.
(b) Warrants
In connection with the August 1997 acquisition of NeuralWare, Inc., the Company converted warrants to purchase NeuralWare common stock into warrants to purchase 10,980 and 6,618 shares of the Company’sCompany's common stock, respectively.stock. Warrants to purchase 1,2591,260 shares have expired through June 30, 2002.2004. All remaining warrants are currently exercisable with an exercise prices that range between $61.73 and $135.80price of $120.98 per share.
In connection with the February and March 2002 sales of Series B convertible preferred stock,Preferred, the Company issued warrants with five-year lives to purchase 791,044 shares of common stock at an exercise price ranging from $20.64 to $23.99 per share, as noted above in Note 9. In August 2003, in conjunction with the Series D Preferred financing, these warrants were exchanged for new warrants to purchase 791,044 shares of common stock as noted above in Note 9.at an exercise price of $4.08 per share. As of June 30, 2002,2004, none of these warrants had been exercised.
In connection with the May 2002 sale of common stock to private investors, the Company issued warrants to purchase up to 3,208,333 shares of common stock, as noted above in Note 10(a). As of June 30, 2002, none of these warrants had been exercised, and subsequent to June 30, 2002During fiscal 2003 the second class of warrants to purchase up to 2,458,333 shares of common stock expired unexercised. In August 2003, the remaining warrants were canceled, and new warrants were issued to purchase 1,152,665 shares at an exercise price of $9.76 per share, due to the impact of the Series D Preferred financing on the warrants' anti-dilution provisions. In January 2004, warrants to purchase 129,191 shares of common stock were exercised in a cashless exercise, resulting in the issuance of 17,922 shares of common stock. As of June 30, 2004, warrants to purchase 1,023,474 shares of common stock at an exercise price of $9.76 were exercisable.
In connection with the August 2003 Series D Preferred financing, the Company issued warrants with seven-year lives to purchase 7,267,286 shares of common stock at an exercise price of $3.33 per share. As of June 30, 2004, none of these warrants had been exercised.
(c) Stock Options
In December 2000, the shareholders approved the establishment of the 2001 Stock Option Plan (the 2001 Plan), which provides for the issuance of incentive stock options and nonqualified options. Under the 2001 Plan the Board of Directors may grant stock options to purchase up to an aggregate of 4,000,000 shares of common stock. At July 1, 2002, July 1, 2003 and July 1, 2004, the 2001 Plan was expanded to cover an additional 5% of the outstanding shares on the preceding June 30, rounded down to the neared number divisible by 10,000. In no event, however, may the number of shares subject to incentive options under the 2001 Option Plan exceed 8,000,000 unless the 2001 Plan is amended, and
approved, by the shareholders. As of June 30, 2004, there were 278,470 shares of common stock available for grant under the 2001 Plan. On July 1, 2004, the total number of shares of common stock issuable under the 2001 stock option plan increased by 2,080,000.
In November 1995, the Board of Directors approved the establishment of the 1995 Stock Option Plan (the 1995 Plan) and the 1995 Directors Stock Option Plan (the 1995 Directors Plan), which provided for the issuance of incentive stock options and nonqualified options. Under these plans, the Board of Directors may grant stock options to purchase up to an aggregate of 3,827,687 (as adjusted) shares of common stock. Shares available for grant under these plans were increased on July 1, 1996 and 1997 by an amount equal to 5% of the outstanding shares as of the preceding June 30. In December 1997, the shareholders approved an amendment to the 1995 Plan. The amendment provides for three annual increases in the number of shares for which options may be granted, beginning July 1, 1998 by an amount equal to 5% of the outstanding shares on the preceding June 30. On July 1, 1999 and 2000, the number of shares available under the 1995 Plan were increased by 1,247,711 shares and 1,442,398 shares, respectively. On December 7, 1999, the number of shares available under the 1995 Directors Plan were increased by 200,000. In December 1996, the shareholders of the Company approved the establishment of the 1996 Special Stock Option Plan (the 1996 Plan). This plan provides for the issuance of incentive stock options and nonqualified options to purchase up to 500,000 shares of common stock. The exercise price of options are granted at a price not less than 100% of the fair market value of the common stock on the date of grant. Stock options become exercisable over varying periods and expire no later than 10 years from the date of grant. As of June 30, 2002,2004, there were 274,973, 58,135 and 12,827459,560 shares of common stock available for grant under the 1995 Plan, 472,579 shares available for grant under the 1995 Directors Plan, and the 1996 Plan, respectively.
In connection with the acquisition of Petrolsoft during fiscal 2000, the Company assumed the Petrolsoft option plan (the Petrolsoft Plan). Under the Petrolsoft Plan, the Board of Directors of Petrolsoft was entitled
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to grant either incentive or nonqualified stock options for a maximum of 264,11050,648 shares of common stock to eligible employees, as defined. No future grants are available under the Petrolsoft Plan.
In December 2000, the shareholders approved the establishment of the 2001 Stock Option Plan (the 2001 Plan), which provides for the issuance of incentive stock options and nonqualified options. Under the 2001 Plan the Board of Directors may grant stock options to purchase up to an aggregate of 4,000,000 shares of common stock. At July 1, 2002 and July 1, 2003, the 2001 Plan will be expanded to cover an additional 5% of the outstanding shares on the preceding June 30, rounded down to the neared number divisible by 10,000. In no event, however, may the number of shares subject to incentive options under the 2001 Option Plan exceed 8,000,000 unless the 2001 Plan is amended, and approved, by the shareholders. As of June 30, 2002, there were 3,407,707 shares of common stock available for grant under the 20011996 Plan.
The following is a summary of stock option activity under the 1995 Plan, the 1995 Directors Plan, the 1996 Plan, the Petrolsoft Plan (as converted into options to purchase the Company’s stock) and the 2001 Planall stock option plans in fiscal 2000, 2001, 2002 and 2002:
| Weighted | |||||||||
| Average | |||||||||
| Number of | Exercise | ||||||||
| Shares | Price | ||||||||
| Outstanding, July 1, 1999 | 5,356,089 | $ | 14.11 | ||||||
| Options granted | 2,142,942 | 12.58 | |||||||
| Options exercised | (868,412 | ) | 9.05 | ||||||
| Options terminated | (309,811 | ) | 12.68 | ||||||
| Outstanding, June 30, 2000 | 6,320,808 | 14.32 | |||||||
| Options granted | 1,649,666 | 17.97 | |||||||
| Options exercised | (978,751 | ) | 12.11 | ||||||
| Options terminated | (181,086 | ) | 15.42 | ||||||
| Outstanding, June 30, 2001 | 6,810,637 | 15.37 | |||||||
| Options granted | 707,210 | 13.29 | |||||||
| Options exercised | (185,625 | ) | 8.73 | ||||||
| Options terminated | (340,977 | ) | 16.36 | ||||||
| Outstanding, June 30, 2002 | 6,991,245 | $ | 15.29 | ||||||
| Exercisable, June 30, 2002 | 4,576,844 | $ | 15.55 | ||||||
F-30
Number of
Shares Weighted
Average
Exercise
PriceOutstanding, June 30, 2001 6,810,637 $ 15.37 Options granted 707,210 13.29 Options exercised (185,625 ) 8.73 Options terminated (340,977 ) 16.36 Outstanding, June 30, 2002 6,991,245 15.29 Options granted 3,158,555 2.88 Options exercised (56,934 ) 2.56 Options terminated (1,678,484 ) 11.26 Outstanding, June 30, 2003 8,414,382 $ 11.35 Options granted 6,278,204 3.04 Options exercised (1,321,997 ) 3.12 Options terminated (1,005,496 ) 16.55 Outstanding, June 30, 2004 12,365,093 $ 7.52 Exercisable, June 30, 2004 7,464,123 $ 10.48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize information about stock options outstanding and exercisable under the 1995 Plan, the 1995 Directors’Directors' Plan, the 1996 Plan, the Petrolsoft Plan and the 2001 Plan at June 30, 2002:
| Weighted | ||||||||||||||||||||||
| Options | Average | Weighted | Options | Weighted | ||||||||||||||||||
| Outstanding | Remaining | Average | Exercisable | Average | ||||||||||||||||||
| Range of | at June 30, | Contractual | Exercise | at June 30, | Exercise | |||||||||||||||||
| Exercise Prices | 2002 | Life | Price | 2002 | Price | |||||||||||||||||
| $ 2.67 - $ 4.33 | 167,680 | 1.3 | $ | 3.17 | 167,680 | $ | 3.17 | |||||||||||||||
| 4.33 - 8.67 | 1,230,231 | 7.0 | 8.25 | 820,096 | 8.17 | |||||||||||||||||
| 8.67 - 13.00 | 208,764 | 6.6 | 10.51 | 144,197 | 10.50 | |||||||||||||||||
| 13.00 - 17.34 | 4,064,717 | 6.7 | 14.12 | 2,505,354 | 14.30 | |||||||||||||||||
| 17.34 - 21.67 | 211,188 | 8.2 | 19.87 | 91,282 | 20.19 | |||||||||||||||||
| 21.67 - 26.01 | 285,000 | 7.1 | 23.67 | 207,250 | 23.75 | |||||||||||||||||
| 26.01 - 30.34 | 490,474 | 5.6 | 29.08 | 412,308 | 29.04 | |||||||||||||||||
| 30.34 - 34.68 | 211,675 | 6.7 | 31.41 | 146,766 | 31.66 | |||||||||||||||||
| 34.68 - 39.01 | 55,500 | 7.9 | 38.25 | 36,218 | 38.28 | |||||||||||||||||
| 39.01 - 43.34 | 66,016 | 6.4 | 40.34 | 45,693 | 40.34 | |||||||||||||||||
| June 30, 2002 | 6,991,245 | 6.6 | $ | 15.29 | 4,544,779 | $ | 15.55 | |||||||||||||||
| Exercisable, June 30, 2001 | 3,257,982 | $ | 15.76 | |||||||||||||||||||
| Exercisable, June 30, 2000 | 2,840,369 | $ | 14.70 | |||||||||||||||||||
| Range of Exercise Prices | Options Outstanding at June 30, 2004 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Options Exercisable at June 30, 2004 | Weighted Average Exercise Price | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $2.21-$4.33 | 7,383,760 | 8.9 | $ | 2.80 | 2,769,649 | $ | 2.84 | |||||
| 4.33-8.67 | 1,212,192 | 6.1 | 7.71 | 995,066 | 8.04 | |||||||
| 8.67-13.00 | 222,691 | 5.9 | 9.91 | 155,658 | 10.27 | |||||||
| 13.00-17.34 | 2,831,079 | 4.6 | 14.14 | 2,828,379 | 14.14 | |||||||
| 17.34-21.67 | 45,563 | 5.7 | 24.05 | 45,563 | 20.63 | |||||||
| 21.67-26.01 | 138,500 | 4.6 | 24.05 | 138,500 | 24.05 | |||||||
| 26.01-30.34 | 317,540 | 3.5 | 29.09 | 317,540 | 29.09 | |||||||
| 30.34-34.68 | 147,752 | 4.7 | 31.48 | 147,752 | 31.48 | |||||||
| 34.68-39.01 | 29,000 | 5.9 | 38.18 | 29,000 | 38.18 | |||||||
| 39.01-43.34 | 37,016 | 5.5 | 40.04 | 37,016 | 40.04 | |||||||
| June 30, 2004 | 12,365,093 | 7.3 | $ | 7.52 | 7,464,123 | $ | 10.48 | |||||
| Exercisable, June 30, 2003 | 5,372,666 | $ | 13.72 | |||||||||
| Exercisable, June 30, 2002 | 4,544,779 | $ | 15.55 | |||||||||
(d) Fair Value of Stock Options
SFAS No. 123 “Accounting for Stock-Based Compensation” requires the measurement of the fair value of stock options to be included in the statement of income or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and elect the disclosure-only alternative under SFAS No. 123.
Had compensation cost for the Company’s option plans been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company’s net income (loss) attributable to common
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shareholders, and net income (loss) attributable to common shareholders per share would have been as follows:
| 2000 | 2001 | 2002 | ||||||||||||
| Net income (loss) attributable to common shareholders (in thousands) — | ||||||||||||||
| As reported | $ | 5,428 | $ | (20,375 | ) | $ | (83,466 | ) | ||||||
| Pro forma | (18,117 | ) | (46,029 | ) | (105,200 | ) | ||||||||
| Net income (loss) attributable to common shareholders per share — | ||||||||||||||
| Diluted — | ||||||||||||||
| As reported | $ | 0.18 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||
| Pro forma | (0.59 | ) | (1.54 | ) | (3.26 | ) | ||||||||
| Basic — | ||||||||||||||
| As reported | $ | 0.19 | $ | (0.68 | ) | $ | (2.58 | ) | ||||||
| Pro forma | (0.64 | ) | (1.54 | ) | (3.26 | ) | ||||||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period:
| 2000 | 2001 | 2002 | ||||||||||
| Risk free interest rates | 5.73 - 6.71% | 5.14 - 6.05% | 3.91 - 4.39% | |||||||||
| Expected dividend yield | None | None | None | |||||||||
| Expected life | 5 Years | 5 Years | 5 Years | |||||||||
| Expected volatility | 86% | 101% | 72% | |||||||||
| Weighted average fair value per option | $11.05 | $16.97 | $8.00 | |||||||||
(e) Employee Stock Purchase Plans
In October 1997, the Company’sCompany's Board of Directors approved the 1998 Employee Stock Purchase Plan, under which the Board of Directors may grant stock purchase rights for a maximum of 1,000,000 shares through September 30, 2007. In December 2000 and 2003, the shareholders voted to increase the number of shares eligible under the 1998 Employee Stock Purchase Plan toby 2,000,000 and 3,000,000 shares.shares, respectively.
Participants are granted options to purchase shares of common stock on the last business day of each semi-annual payment period for 85% of the market price of the common stock on the first or last business day of such payment period, whichever is less. The purchase price for such shares is paid through payroll deductions, and the current maximum allowable payroll deduction is 10% of each eligible employee’semployee's compensation. Under the plan, the Company issued 384,864, 174,463313,337, 759,771 and 313,337976,960 shares during fiscal 2000, 20012002, 2003 and 2002,2004, respectively. As of June 30, 2002,2004, there were 1,862,8363,149,530 shares available for future issuance under the 1998 Employee Stock Purchase Plan as amended. In addition, on July 1, 2002,2004, the Company issued 313,055210,241 shares under the 1998 Employee Stock Purchase Plan.
(f)(e) Stockholder Rights Plan
During fiscal 1998, the Board of Directors of the Company adopted a Stockholder Rights Agreement (the Rights Plan) and distributed one Right for each outstanding share of Common Stock. The Rights were issued to holders of record of Common Stock outstanding on March 12, 1998. Each share of Common Stock issued after March 12, 1998 will also include one Right, subject to certain
limitations. Each Right when it
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
becomes exercisable will initially entitle the registered holder to purchase from the Company one one-hundredth (1/100th) of a share of Series A Preferred Stock at a price of $175.00 (the Purchase Price).
The Rights will become exercisable and separately transferable when the Company learns that any person or group has acquired beneficial ownership of 15% or more of the outstanding Common Stock or on such other date as may be designated by the Board of Directors following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for outstanding Common Stock that could result in the offeror becoming the beneficial owner of 15% or more of the outstanding Common Stock. In such circumstances, holders of the Rights will be entitled to purchase, for the Purchase Price, a number of hundredths of a share of Series A Preferred Stock equivalent to the number of shares of Common Stock (or, in certain circumstances, other equity securities) having a market value of twice the Purchase Price. Beneficial holders of 15% or more of the outstanding Common Stock, however, would not be entitled to exercise their Rights in such circumstances. As a result, their voting and equity interests in the Company would be substantially diluted if the Rights were to be exercised.
The Rights expire in March 2008, but may be redeemed earlier by the Company at a price of $.01 per Right, in accordance with the provisions of the Rights Plan.
The Company amended the Rights Plan in June 2003 so that the terms of the Rights Plan would not be applicable to the securities issued as part of the Series D preferred financing or to any securities issued in the future pursuant to the preemptive rights granted as part of this financing.
(g)(f) Restricted Stock
In fiscal 2001, restricted stock covering 94,500 shares of the Company’sCompany's common stock was issued. The restricted stock is subject to vesting terms whereby the entire amount will vest upon the earlier of seven years from the date of grant or the attainment of certain performance goals, as defined.
Consideration of $3.00 per share was received for these shares, resulting in deferred compensation of $1.5 million based on the fair market value on the date of issuance of the restricted stock. Of this deferred compensation, $0.1 million and $0.2 million was expensed in fiscal 2001 and fiscal 2002, respectively. The consideration received was in the form of secured promissory notes from the holders of the restricted stock. These notes are subject to interest at an annual rate of 5.07%, are due seven years from the date of issuance and are secured by the restricted stock. The interest under these notes is subject to full recourse against the personal assets of the holders of the restricted stock.
In May 2002, the holders of the restricted stock were terminated from their employment with the Company. At the time of termination, the performance goals had not been attained, and none of the restricted stock had vested. In accordance with the terms of the restricted stock agreements, the Company repurchased the stock at the original purchase price of $3.00 per share. The Company recorded an entry to reverse the $1.2 million of unamortized deferred compensation and $0.3 million of the previously recognized compensation expense associated with the stock.
(h) Subsidiary Stock Options
In November 2001, the Board of Directors of PetroVantage, Inc. approved the establishment of the 2001 Stock Incentive Plan of PetroVantage, Inc. (the PetroVantage Plan). PetroVantage, Inc. is a wholly owned subsidiary of the Company, with 16,000,000 shares issued and outstanding as of June 30, 2001 and 2002. The PetroVantage Plan provides for the issuance of incentive stock options and nonqualified options of PetroVantage, Inc. Under the PetroVantage Plan the Board of Directors may grant stock options to purchase up to an aggregate of 4,000,000 shares of PetroVantage, Inc. common stock, representing 20% of the total potential shares outstanding. As of June 30, 2002, there were 1,603,000 shares of PetroVantage, Inc. common stock available for grant under the PetroVantage Plan. Since its inception, all options granted under the
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PetroVantage Plan were granted at fair market value on the date of grant. The following is a summary of stock option activity under the PetroVantage Plan in fiscal 2002:
| Weighted | |||||||||
| Number of | Average | ||||||||
| Shares of | Exercise | ||||||||
| PetroVantage | Price | ||||||||
| Options granted | 2,544,500 | $ | 0.19 | ||||||
| Options terminated | (147,500 | ) | 0.19 | ||||||
| Outstanding June 30, 2002 | 2,397,000 | $ | 0.19 | ||||||
| Exercisable June 30, 2002 | 989,892 | $ | 0.19 | ||||||
(11)(9) Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting"Accounting for Income Taxes.”" Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is
measured based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates.
Income (loss) before provision for (benefit from) income taxes consists of the following (in thousands):
| Years Ended June 30, | |||||||||||||
| 2000 | 2001 | 2002 | |||||||||||
| Domestic | $ | 5,824 | $ | (26,757 | ) | $ | (56,597 | ) | |||||
| Foreign | 1,928 | (2,350 | ) | (18,164 | ) | ||||||||
| Total | $ | 7,752 | $ | (29,107 | ) | $ | (74,761 | ) | |||||
| | Years Ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | ||||||||
| Domestic | $ | (56,597 | ) | $ | (92,488 | ) | $ | (8,951 | ) | ||
| Foreign | (18,164 | ) | (68,345 | ) | 467 | ||||||
| Total | $ | (74,761 | ) | $ | (160,833 | ) | $ | (8,484 | ) | ||
The provisions for (benefit from) income taxes shown in the accompanying consolidated statements of operations are composed of the following (in thousands):
| Years Ended June 30, | |||||||||||||
| 2000 | 2001 | 2002 | |||||||||||
| Federal — | |||||||||||||
| Current | $ | 223 | $ | (3,433 | ) | $ | — | ||||||
| Deferred | 544 | (5,255 | ) | — | |||||||||
| State — | |||||||||||||
| Current | 1,441 | (219 | ) | 142 | |||||||||
| Deferred | (1,092 | ) | (1,035 | ) | — | ||||||||
| Foreign — | |||||||||||||
| Current | 1,208 | 1,210 | 1,366 | ||||||||||
| Deferred | — | — | 896 | ||||||||||
| $ | 2,324 | $ | (8,732 | ) | $ | 2,404 | |||||||
F-34
| | Years Ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | ||||||||
| Federal— | |||||||||||
| Current | $ | — | $ | — | $ | — | |||||
| Deferred | — | — | 20,643 | ||||||||
| State— | |||||||||||
| Current | 142 | — | 748 | ||||||||
| Deferred | — | — | 1,823 | ||||||||
| Foreign— | |||||||||||
| Current | 1,366 | — | 13,934 | ||||||||
| Deferred | 896 | — | (16,942 | ) | |||||||
| $ | 2,404 | $ | — | $ | 20,206 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for (benefit from) income taxes differs from that based on the federal statutory rate due to the following (in thousands):
| Years Ended June 30, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| Provision | Benefit | Provision | ||||||||||
| Federal tax at statutory rate | $ | 2,634 | $ | (9,896 | ) | $ | (25,419 | ) | ||||
| State income tax, net of federal tax benefit | 230 | (828 | ) | 94 | ||||||||
| Tax effect resulting from foreign activities | 349 | 1,572 | 8,438 | |||||||||
| Tax credits generated | (1,882 | ) | (2,871 | ) | (3,660 | ) | ||||||
| Permanent differences, net | 599 | 630 | (234 | ) | ||||||||
| Acquisition costs | 394 | 239 | — | |||||||||
| Valuation allowance | — | 2,422 | 23,185 | |||||||||
| Provision for (benefit from) income taxes | $ | 2,324 | $ | (8,732 | ) | $ | 2,404 | |||||
| | Years Ended June 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||
| Federal tax at statutory rate | $ | (25,419 | ) | $ | (54,683 | ) | $ | (2,885 | ) | |
| State income tax, net of federal tax benefit | 94 | — | 1,697 | |||||||
| Tax effect resulting from foreign goodwill impairment | — | 17,129 | — | |||||||
| Tax effect resulting from foreign activities | 8,438 | 6,108 | (4,256 | ) | ||||||
| Tax credits generated | (3,660 | ) | (522 | ) | (1,193 | ) | ||||
| Permanent differences, net | (234 | ) | 48 | (1,070 | ) | |||||
| Valuation allowance | 23,185 | 31,920 | 27,913 | |||||||
| Provision for income taxes | $ | 2,404 | $ | — | $ | 20,206 | ||||
The components of the net deferred tax asset (liability) recognized in the accompanying consolidated balance sheets are as follows (in thousands):
| June 30, | ||||||||
| 2001 | 2002 | |||||||
| Deferred tax assets | $ | 32,356 | $ | 37,419 | ||||
| Deferred tax liabilities | (13,418 | ) | (33,917 | ) | ||||
| $ | 18,938 | $ | 3,502 | |||||
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The approximate tax effect of each type of temporary difference and carry forward is as follows (in thousands):
| June 30, | |||||||||
| 2001 | 2002 | ||||||||
| Deferred tax assets: | |||||||||
| Revenue related | $ | (2,503 | ) | $ | (8,106 | ) | |||
| US Income tax credits | 15,443 | 20,470 | |||||||
| US operating losses carryforward | 1,020 | 23,403 | |||||||
| Restructuring items | 5,178 | 6,040 | |||||||
| Nondeductible reserves and accruals | 5,490 | 8,429 | |||||||
| Intangible assets | (3,647 | ) | (4,736 | ) | |||||
| Other temporary differences | 1,722 | (45 | ) | ||||||
| 22,703 | 45,455 | ||||||||
| Valuation allowance | (3,765 | ) | (26,950 | ) | |||||
| 18,938 | 18,505 | ||||||||
| Deferred tax liabilities:(1) | |||||||||
| Revenue related | — | (21,534 | ) | ||||||
| Nondeductible reserves and accruals | — | (1,226 | ) | ||||||
| Intangible assets | — | 4,563 | |||||||
| Other temporary differences | — | 3,194 | |||||||
| — | (15,003 | ) | |||||||
| $ | 18,938 | $ | 3,502 | ||||||
| | June 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | ||||||
| Deferred tax assets: | ||||||||
| Revenue related | $ | 152 | $ | 2,238 | ||||
| Federal and state tax credits | 19,028 | 18,768 | ||||||
| Federal and state loss carryforwards | 18,943 | 23,405 | ||||||
| Foreign loss carryforwards | 4,368 | 6,583 | ||||||
| Restructuring accruals | 27,056 | 22,771 | ||||||
| Other reserves and accruals | 6,053 | 10,455 | ||||||
| Intangible assets | 10,879 | 9,526 | ||||||
| Property, plant and equipment | 1,019 | — | ||||||
| Other temporary differences | 1,592 | 1,704 | ||||||
| 89,090 | 95,450 | |||||||
| Valuation allowance | (78,273 | ) | (91,896 | ) | ||||
| 10,817 | 3,554 | |||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | (7,315 | ) | (4,219 | ) | ||||
| Property, plant and equipment | — | (1,032 | ) | |||||
| Other | — | (325 | ) | |||||
| (7,315 | ) | (5,576 | ) | |||||
| Net deferred tax assets | $ | 3,502 | $ | (2,022 | ) | |||
As of June 30, 2004, the Company had net operating loss (NOL) carryforwards for U.S. federal and state income tax purposes of approximately $72 million and $39 million, respectively, and foreign net operating loss carryforwards of approximately $20 million. The Company had federal tax credits and state tax credits of approximately $20 million and $3 million, respectively. The tax credits and net operating lossNOL carryforwards expire at various dates from 20032005 through 2023.2024. The Tax Reform ActCompany has determined that it underwent an ownership change (as defined under section 382 of the Internal Revenue Code of 1986, contains provisions that may limitas amended) during the net operating lossyear ended June 30, 2004. As such, the recognition of the Company's federal NOLs and tax credit carryforwards availablecredits may be limited. Moreover, an ownership change might have also occurred under the laws of certain states and foreign countries in which the Company has generated NOLs and tax credits. Accordingly, it is possible that these NOL and tax credits could also be limited under rules similar to be used in any given year in the eventthose of significant changes in ownership, as defined.section 382. Due to the uncertainty surrounding the realization and timing of these tax attributes, the Company has recorded a valuation allowance of approximately $3.8$78.3 million and $27.0$92.4 million as of June 30, 20012003 and 2002,2004, respectively.
Certain amounts on the above tables have been reclassified to conform to the current presentation.
(12)(10) Operating Leases
The Company leases its facilities and various office equipment under noncancellable operating leases with terms in excess of one year. Rent expense charged to operations was approximately $7.5
$12.3 million, $10.5$13.9 million
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and $12.3$11.7 million for the years ended June 30, 2000, 20012002, 2003 and 2002,2004, respectively. Future minimum lease payments under these leases as of June 30, 20022004 are as follows (in thousands):
| Amount | |||||
| Years Ending June 30, 2003 | $ | 17,407 | |||
| 2004. | 12,932 | ||||
| 2005. | 11,373 | ||||
| 2006. | 11,480 | ||||
| 2007. | 11,405 | ||||
| Thereafter | 45,888 | ||||
| $ | 110,485 | ||||
| | Amount | ||
|---|---|---|---|
| Years Ending June 30, 2005 | $ | 12,744 | |
| 2006 | 10,489 | ||
| 2007 | 9,561 | ||
| 2008 | 8,186 | ||
| 2009 | 7,597 | ||
| Thereafter | 25,273 | ||
| $ | 73,850 | ||
(13)(11) Sale of Installments Receivable
Installments receivable represent the present value of future payments related to the financing of noncancellable term and perpetual license agreements that provide for payment in installments, generally over a one- to five-year period. A portion of each installment agreement is recognized as interest income in the accompanying consolidated statements of operations. The interest rates utilized for the years ended June 30, 2002, 2003, and 2004 ranged from 7.0% to 9.0%.
The Company has arrangements to sell certain of its installments receivable to two financial institutions. These arrangements provide for the sale of up to a maximum of $160.0 million, subject to approval by the institutions, to be outstanding at any one time. The Company sold, with limited recourse, certain of its installment contracts for aggregate proceeds of $55.6$66.7 million and $42.7$54.9 million during fiscal 20012003 and 2002,2004, respectively. The financial institutions have certain recourse to the Company upon nonpayment by the customer under the installments receivable. The amount of recourse is determined pursuant to the provisions of the Company’sCompany's contracts with the financial institutions and varies depending on whether the customers under the installment contracts are foreign or domestic entities.institutions. Collections of these receivables reduce the Company’sCompany's recourse obligation.obligations, as defined. Generally, no gain or loss is recognized on the sale of the receivables due to the consistency of the discount rates used by the Company and the financial institutions.
At June 30, 2002,2004, there was approximately $50 million of additional availability under the balancearrangements. The Company expects that there will be continued ability to sell installments receivable, as the collection of the uncollected principal portion ofsold receivables will reduce the contracts sold was approximately $111.4 million.outstanding balance and the availability under the arrangements can be increased. The Company’sCompany's potential recourse obligation related to these contracts is approximately $7.2within the range of $1.4 million as of June 30, 2002.to $4.1 million. In addition, the Company is obligated to pay additional costs to the financial institutions in the event of default by the customer.
In December 2003, the Company entered into an arrangement to sell certain of its accounts receivable to a third financial institution, Silicon Valley Bank, pursuant to which the Company has the ability to sell receivables through January 1, 2005. Under this agreement, the total outstanding balance of sold receivables may not exceed $35.0 million at any one time. The Company has agreed to act as the bank's agent for collection of the sold receivables. During the year ended June 30, 2004, the Company sold receivables for aggregate proceeds of $42.5 million under this agreement. As of June 30, 2004 there was $5.0 million in availability.
(14)(12) Commitments and Contingencies
(a) FTC investigationcomplaint
By letter of JuneOn August 7, 2002,2003, the FTC informed the Companyannounced that it was conducting an investigation intohas authorized its staff to file a civil administrative complaint alleging that the competitive effects of its recent acquisition of Hyprotech. Because this investigation isHyprotech in its early stages, the Company cannot be certain whether the FTC might seek any relief or the nature of any such relief that might be sought. The FTC may determine to challenge the acquisition through an administrative civil complaintMay 2002 was anticompetitive and seeking to declare the acquisition in violation of Section 5 of the FTC Act and Section 7 of the Clayton ActAct. On July 15, 2004 the FTC announced that it had accepted a proposed consent decree for public comment. The public comment period ended August 13, 2004, and the FTC is currently considering whether to make the proposed consent decree final.
If the FTC approves the proposed consent decree in its current form, then the Company would be allowed to complete a sale to an FTC-approved buyer within 90 days of the order becoming final if it has entered into a definitive agreement with a potential buyer and submitted an application for approval of that buyer to the FTC within 5 days of the order being approved. If the Company has not identified a potential buyer, than it will have 60 days from the date on which the order becomes finale to complete the sale required by the order. If the Company fails to close a transaction within the 60 or Section90 day timeframes, then the FTC may appoint a trustee who will be empowered to find an acquirer of the assets offered under the consent decree. The trustee will have an initial one year period to complete the sale. This period may be extended at the FTC's discretion for up to two additional years.
Under the terms of the published proposed consent decree the Company would sell its operator training services business and rights to the Hyprotech product line to an FTC-approved buyer, maintain certain technical standards with respect to the Hyprotech product line for 5 years, and provide the FTC-approved buyer of rights to the Hyprotech product line with all releases for the Hyprotech products for 2 years. The proposed consent decree provides for the Company to obtain rights to the Hyprotech products from the FTC-approved buyer. The Hyprotech product AXSYS was sold to Bentley Systems, Inc. in accordance with the terms of the proposed consent decree.
If the FTC does not approve a consent decree then it will likely return the case to litigation where an administrative law judge will adjudicate the complaint in a trial-type proceeding if the Company does not reach a settlement with the FTC prior to the conclusion of this proceeding. Any decision of the administrative law judge may be appealed to the commissioners of the FTC Act.by either the FTC staff or the Company. Upon appeal, the commissioners will issue their own decision and order after reviewing legal briefs and hearing oral arguments. If the FTC commissioners rule against the Company, it may file a petition for review in a federal circuit court of appeals. If the court of appeals affirms the FTC's ruling, then the court will enter its own order of enforcement. Any decision of the court of appeals may be appealed by either the FTC, or by the Company, to the U.S. Supreme Court. The Company disagrees with the FTC that the acquisition of Hyprotech is anticompetitive and, if the matter returns to litigation, it intends to defend the proceedings vigorously.
It is not certain whether the FTC will approve the proposed consent decree in its present form or in an amended form acceptable to the Company. If the FTC approves a consent decree it is not certain whether the Company could successfully identify an acquirer acceptable to the FTC or negotiate acceptable terms. If the Company does not successfully close a transaction within the time periods set forth in the consent decree, then a trustee would be appointed by the FTC who could have up to three years to close a transaction. If the FTC does not approve a consent decree and the case is returned to litigation, then, because of the additional time to prepare for a trial, and the length of the appeals process, the final outcome of this matter may not be determined for several years. If the FTC were to prevail in thatthis challenge, it could seek to impose a wide variety of remedies, some of which maywould have
a material adverse effect on the Company’sCompany's ability to continue to operate under its current business plans.plan and on its results of operations. These potential remedies include the divestiture of Hyprotech, as well as mandatory licensing of Hyprotech software products and the Company’s other engineering software products to one or more of the Company's competitors. As of June 30, 2004, the Company had accrued $17.9 million to cover the cost of (1) professional service fees associated with its competitors.cooperation in the FTC's investigation since its commencement on June 7, 2002, and (2) estimated future professional services fees relating to negotiation of the proposed consent decree and implementation of the terms of a final consent decree.
(b) Litigation
On May 31, 2002, the Company acquired the capital stock of Hyprotech from AEA Technology plc. AEA Technology is engaged in arbitration proceedings in England over a contract dispute with KBC Advanced Technologies PLC, an English technology and consulting services company. The dispute remains in arbitration and concerns alleged breaches by each party of an agreement to develop and market a product known as HYSYS.Refinery. The Company indemnified AEA under the characterizationSale and Purchase Agreement with AEA dated May 10, 2002 against any costs, damages or expenses in respect of certain technology for purposesa claim brought by KBC alleging damages due to AEA's (a) failure to comply with its contractual obligations after the acquisition, (b) breach of calculating royalties, plus other contractual rightsnon-competition clauses with respect to Hysys.Refinery. Hysys.Refinery was retainedactivities occurring after the acquisition, (c) breach of certain obligations to KBC under its agreement by virtue of the acquisition, or (d) execution of the acquisition agreement. On March 31, 2003, the arbitrator delivered a partial decision in the arbitration, as a result of which the Company has not received any request under the indemnification agreement, nor does it expect to receive one. On April 22, 2004 the arbitrator delivered a further partial decision stating that (a) the contract between AEA Technologyand KBC had been terminated and that AEA and Hyprotech were in breach of the non-compete provisions contained in that agreement, and (b) for a period of three years from the date of the award, Hyprotech shall not directly or indirectly sell or market a product which competes with supportHYSYS.Refinery. A further hearing is scheduled for Hysys.Refinery to be providedDecember 2004, at which the arbitrator will determine whether there has been a breach by Hyprotech pursuantof obligations relating to a contractconfidentiality. The Company believes that no such breach occurred. The Company is working with AEA Technology. Onin the resolution of this matter. It is too early to determine the likely outcome of this matter.
In addition, on September 11, 2002, the Company and Hyprotech were sued by KBC Advanced Technologiesfiled a separate complaint in state district court in
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Houston, Texas on issues related toagainst the technology subject to review in the arbitration proceeding.Company and Hyprotech. KBC's claim alleges tortious interference with contract and existing business relations, tortious interference with prospective business relationships, conversion of intellectual property and civil conspiracy. KBC Advanced Technologies has requested actual and exemplary damages, costs and interest. The Company believes the causes of action to be without merit and will defend the case vigorously. Also, the Company has filed a counterclaim against KBC requesting actual and punitive damages and attorney fees. A trial date has been set for January 19, 2004. On August 25, 2003, KBC filed an additional complaint in the state district court in Houston, Texas against the Company and Hyprotech alleging breach of non-compete provisions and requesting injunctive relief preventing sale of the Company's product Aspen RefSYS. The Company believes the causes of action to be without merit and will defend the case vigorously. On September 15, 2003, the court set aside the application for injunction pending resolution of the arbitration in London. Following the London arbitrator's award of April 22, 2004 in relation to the non-compete, on May 7, 2004, the Houston court agreed to enter a judgment in Texas against Hyprotech on exactly the same terms as the arbitrator's
award against Hyprotech. The Houston court further stated that KBC may not bring any further claims against Hyprotech in Houston and that all such claims are reserved for the arbitrator in London. KBC has applied to the Houston court to have re-instated its application for injunctive relief against the Company. A hearing is scheduled for September 15, 2004 in Houston to resolve KBC's application. As of the filing date of this report, the Company has accrued $5.9 million to cover the cost of (1) professional service fees associated with our legal defense since its commencement and (2) estimated future costs relating to the matter.
(c) Other
The Company has entered into agreements with sixtwo executive officers providing for the payment of cash and other benefits in certain events of their voluntary or involuntary termination within three years following a change inof control. Payment under these agreements would consist of a lump sum equal to approximately three years oftimes each executive’sexecutive's annual taxable compensation. The agreements also provide that the paymentpayments would be increased in the event that it would subject the officer to excise tax as a parachute payment under the federal tax code.Internal Revenue Code. The increase would be equal to the additional tax liability imposed on the executive as a result of the payment. The Company has entered into a substantially similar agreement with a third executive officer, except that payment under this agreement would consist of a lump sum equal to approximately (i) twice this executive's annual taxable compensation if he is terminated within the first year following a change of control and (ii) this executive's annual taxable compensation if he is terminated within the second or third year following a change of control.
The Company has also entered into agreements with four executive officers, providing for severance payments in the event that the executive is terminated by the Company other than for cause. Payments under one of these agreements consist of continuation of base salary for a period of 18 months, payments under two of these agreements consist of continuation of base salary for a period of 12 months, and payments under the fourth agreement consist of continuation of base salary for a period of six months.
(15)(13) Retirement and Profit Sharing Plans
The Company maintains a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code covering all eligible employees, as defined. Under the plan, a participant may elect to defer receipt of a stated percentage of his or her compensation, subject to limitation under the Internal Revenue Code, which would otherwise be payable to the participant for any plan year. The Company may make discretionary contributions to this plan. During 1997, the plan, was modified to provide, among other changes, for the Company to makeincluding making matching contributions equal to 25% of pretax employee contributions up to a maximum of 6% of an employee’semployee's salary. During the fiscal years ended June 30, 2000, 20012002, 2003 and 2002,2004, the Company made matching contributions of approximately $1.0 million, $1.3 million, $0.1 million and $1.3$1.0 million, respectively.
Petrolsoft also maintained a defined contribution (401k) retirement plan covering all full-time employees. Under its plan, a participant may elect to defer receipt of a stated percentage of his or her compensation, subject to limitation under the Internal Revenue Code, which would otherwise be payable to the participant for any plan year. The plan provided for Petrolsoft to make matching contributions equal to 25% of pretax employee contributions up to a maximum of 6% of an employee’s salary. During the fiscal year ended June 30, 2000, Petrolsoft made matching contributions of approximately $14,000. This plan was merged with the Company’s plan as of July 1, 2000.
Petrolsoft also maintained a profit sharing plan for its employees whereby all eligible employees may receive a Board determined percentage of Petrolsoft’s taxable operating profits based on their employment tenure. During the fiscal year ended June 30, 2000, the total amount paid by Petrolsoft to its employees was approximately $61,000. This plan was terminated as of June 1, 2000.
The Company does not provide postretirement benefits to any employees as defined under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.
(16)(14) Joint Ventures and Other Investments
In May 1993, the Company entered into an Equity Joint Venture agreement with China Petrochemical Technology Company to form a limited liability company governed by the laws of the People’sPeople's Republic of China. This joint venture has the nonexclusive right to distribute the Company’s Company's
products within the People’sPeople's Republic of China. The Company invested $300,000$0.3 million on August 6, 1993, which represents a 25% equity interest in the joint venture as of June 30, 2002.2004.
In November 1993, the Company invested approximately $100,000$0.1 million in a Cyprus-based company, representing approximately a 14% equity interest. In December 1995, the Company exercised its option to increase its equity interest to 22.5%, acquiring additional shares for approximately $125,000.$0.1 million. In August 2000,fiscal 2001, a
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
third party invested in the entity and purchased a portion of the existing shareholders’shareholders' equity interests. As a result of this transaction, the Company’sCompany's equity interest increased to 31.58% and the Company recorded a gain on the sale of a portion of its interest of $225,000..
The Company is accounting for the above two investments using the equity method. The net investments of approximately $519,000$0.7 million and $815,000$0.3 million are included in other assets in the accompanying consolidated balance sheets as of June 30, 20012003 and 2002,2004, respectively. In the accompanying consolidated statements of operations for the years ended June 30, 2000, 2001,2002, 2003, and 2002,2004, the Company has recognized losses of approximately $4,000, $195,000$0.2 million, $0.5 million and $296,000$0.3 million, respectively, as its portion of the incomelosses from these joint ventures.
In March 2000, the Company and e-Chemicals entered into a Stock Purchase Agreement whereby the Company acquired 833,333 shares of e-Chemicals non-voting Series E Preferred Stock for $6.00 per share. This $5 million investment entitled the Company to a minority interest in e-Chemicals and was accounted for using the cost method. During the second quarter of fiscal 2001, the Company deemed this investment in the stock of e-Chemicals to be worthless and, as a result, this investment was written off. This write-off is included in the accompanying consolidated statement of operations for fiscal 2001.
During the quarter ended June 30, 2000, the Company made a $2.0 million investment in Extricity, a related party (see Note 18). This investment entitled the Company to a minority interest in Extricity and was initially accounted for using the cost method. In the fourth quarter of fiscal 2001 Extricity was purchased by Peregrine Systems (Peregrine), a publicly-traded company. In connection with this purchase, the Company’s investment was converted into 94,510 shares of Peregrine. The Company sold 85,059 ofdoes not have any commitments to provide additional funding to these shares in June 2001 and recorded a gain of $430,000 at that time. The remaining 9,451 shares held in Peregrine were placed in escrow as per the terms of the purchase agreement between Extricity and Peregrine.entities.
In November 2000, the Company invested $600,000$0.6 million in a global chemical B2B e-commerce site supporting major chemical companies in Asia. This investment entitles the Company to a minority interest in the B2B company and is accounted for using the cost method and, accordingly, is being valued at cost unless a permanent impairment in its value occurs or the investment is liquidated. As of June 30, 2002,2004, the Company has determined that a permanentan other than temporary impairment has not occurred. This investment is included in other assets in the accompanying consolidated balance sheet as of June 30, 20012003 and 2002.2004.
(15) Accrued Expenses and Other Liabilities
In December 2000, the Company made a $3.0 million investment in e-Catalysts, Inc. (e-Catalysts), a neutral marketplace for all trading partners in the catalyst industry including raw material suppliers, manufacturers, service providers and end users. This investment entitled the Company to a 33% interest in e-Catalysts and has been accounted for using the equity method. In connection with the restructuring plan in the fourth quarter of fiscal 2001(see Note 3(b)), the Company assessed its e-business strategy and elected to no longer support e-Catalysts. The decision to cease financial support for e-Catalysts resulted in an impairment in the value of the asset. The amount of such impairment was included in the restructuring charge recorded by the Company in the fourth quarter of fiscal 2001. Before the impairment, the Company recorded its portion of a $100,000 loss in the accompanying consolidated statements of operations in fiscal 2001.
In March 2001, the Company made an initial $8.3 million investment in Optimum Logistics Ltd. (Optimum), an internet-based open logistics system for bulk materials. This investment consisted of 219,515 shares of the Company’s stock, valued at $5.7 million on the date of the transaction, plus $2.6 million in cash. Subsequently, the Company provided additional funding in fiscal 2001 and 2002 totaling $2.4 million in cash. This investment entitled the Company to a minority interest in Optimum and was accounted for using the cost method and, accordingly, was being valued at cost unless a permanent impairment in its value occurs or the investment is liquidated. In March 2002, due to Optimum’s failure to achieve a third-party financing milestone, 58,540 shares of stock, valued at $2.1 million, were released from escrow and returned to the Company. In June 2002, the Company determined that a permanent impairment in the value of the asset had incurred, and the remaining investment of $8.7 million was written-off.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2001, the Company entered into a joint venture in Japan with a third party. The joint venture will operate in Japan and Korea and is designed to allow the Company to penetrate those markets more quickly than it could on its own, by using joint resources to sell licenses and to deploy those licenses using the local based services of the joint venture employees. The Company has a 50% ownership in this joint venture and has invested $868,000 as of June 30, 2002, with a commitment to invest an additional $333,000 to fund operations in the future. This investment is being accounted for using the equity method. The net investment of approximately $391,000 is included in other assets in the accompanying consolidated balance sheet as of June 30, 2002. In the accompanying consolidated statement of operations for the year ended June 30, 2002, the Company recognized approximately $477,000, as its portion of the loss from this joint venture.
(17) Accrued Expenses
Accrued expenses in the accompanying consolidated balance sheets consist of the following (in thousands):
| June 30, | ||||||||
| 2001 | 2002 | |||||||
| Income taxes | $ | 8,418 | $ | 4,914 | ||||
| Payroll and payroll-related | 12,008 | 15,920 | ||||||
| Royalties and outside commissions | 2,382 | 4,034 | ||||||
| Restructuring and other charges | 6,152 | 13,065 | ||||||
| Payable to financing companies | 12,902 | 9,923 | ||||||
| Acquisition costs | — | 8,180 | ||||||
| Amount owed to AEA Technology plc (former parent of Hyprotech) | — | 3,142 | ||||||
| Other | 13,983 | 18,957 | ||||||
| $ | 55,845 | $ | 78,135 | |||||
| | June 30, | |||||
|---|---|---|---|---|---|---|
| | 2003 | 2004 | ||||
| Royalties and outside commissions | $ | 14,677 | $ | 14,292 | ||
| Acquisition and legal-related | 13,005 | 7,333 | ||||
| Payroll and payroll-related | 12,998 | 14,191 | ||||
| Restructuring accruals | 12,257 | 17,309 | ||||
| Payable to financing companies | 4,332 | 1,333 | ||||
| Income taxes | 536 | 7,801 | ||||
| Other | 15,667 | 14,636 | ||||
| $ | 73,472 | $ | 76,895 | |||
Other liabilities in the accompanying consolidated balance sheets consist of the following (in thousands):
| | June 30, | |||||
|---|---|---|---|---|---|---|
| | 2003 | 2004 | ||||
| Restructuring accruals | $ | 13,009 | $ | 6,122 | ||
| Deferred rent | — | 3,913 | ||||
| Royalties and outside commissions | 3,000 | 771 | ||||
| $ | 16,009 | $ | 10,806 | |||
(18)(16) Related Party Transactions
A director of the Company provided advisory services to the Company as a director of PetroVantage during fiscal 2002.2002 and 2003. The Company made payments of $32,000 to the director as compensation for services rendered during fiscal 2002.
Smart Finance & Co., a company of which a former2002 and no payments in fiscal 2003. Separately, during fiscal 2003, the director of the Company is the President, provided advisorygeneral consulting services to the Company, in fiscal 2000 and 2001, for which payments of approximately $118,000 and $30,000, respectively, were made as compensation for services rendered.
On September 30, 1999, the Company entered into a “Software License Distribution and Strategic Relationship” agreement with Extricity, a leading provider of business-to-business e-commerce software. The Company partnered with Extricity to deliver e-commerce solutions that will enhance integration and automatemade payments totaling approximately $230,000 during the flow of information between disparate supply chain and enterprise resource planning systems and customers, suppliers and trading partners. The President and Chief Executive Officer of Extricity is the spouse of one of the Company’s former directors. During fiscal 2000 the Company paid $1.3 million in prepaid royalty fees to Extricity; an additional $0.7 million was paid in July 2000. The remaining asset related to this prepaid royalty was written-off as part of the Q4 FY02 restructuring plan.year.
(19)(17) Segment and Geographic Information
The Company follows the provisions of SFAS No. 131, “Disclosures"Disclosures about Segments of an Enterprise and related Information,”" which establishes standards for reporting information about operating segments in
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’sCompany's chief operating decision maker is the Chief Executive Officer of the Company.
The Company is organized geographically and by line of business. The Company has three major line of business operating segments: license, consulting services and maintenance and training. The Company also evaluates certain subsets of business segments by vertical industries as well as by product categories. While the Executive Management Committee evaluates results in a number of different ways, the line of business management structure is the primary basis for which it assesses financial performance and allocates resources.
The license line of business is engaged in the development and licensing of software. The consulting services line of business offers implementation, advanced process control, real-time optimization and other consulting services in order to provide its customers with complete solutions. The maintenance and training line of business provides customers with a wide range of support services that include on-site support, telephone support, software updates and various forms of training on how to use the Company’sCompany's products.
The accounting policies of the line of business operating segments are the same as those described in the summary of significant accounting policies. The Company does not track assets or capital
expenditures by operating segments. Consequently, it is not practical to show assets, capital expenditures, depreciation or amortization by operating segments.
The following table presents a summary of operating segments (in thousands):
| Maintenance | |||||||||||||||||
| Consulting | and | ||||||||||||||||
| License | Services | Training | Total | ||||||||||||||
| Year ended June 30, 2000 — | |||||||||||||||||
| Revenues from unaffiliated customers | $ | 132,843 | $ | 91,133 | $ | 44,117 | $ | 268,093 | |||||||||
| Controllable expenses | 46,315 | 69,343 | 10,757 | 126,415 | |||||||||||||
| Controllable margin(1) | $ | 86,528 | $ | 21,790 | $ | 33,360 | $ | 141,678 | |||||||||
| Year ended June 30, 2001 — | |||||||||||||||||
| Revenues from unaffiliated customers | $ | 147,448 | $ | 122,821 | $ | 56,655 | $ | 326,924 | |||||||||
| Controllable expenses | 55,059 | 88,860 | 13,438 | 157,357 | |||||||||||||
| Controllable margin(1) | $ | 92,389 | $ | 33,961 | $ | 43,217 | $ | 169,567 | |||||||||
| Year ended June 30, 2002 — | |||||||||||||||||
| Revenues from unaffiliated customers | $ | 133,913 | $ | 127,719 | $ | 58,972 | $ | 320,604 | |||||||||
| Controllable expenses | 60,869 | 90,421 | 11,602 | 162,892 | |||||||||||||
| Controllable margin(1) | $ | 73,044 | $ | 37,298 | $ | 47,370 | $ | 157,712 | |||||||||
| | License | Consulting Services | Maintenance and Training | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended June 30, 2002— | |||||||||||||
| Revenues from unaffiliated customers | $ | 133,913 | $ | 127,719 | $ | 58,972 | $ | 320,604 | |||||
| Controllable expenses | 60,869 | 90,421 | 11,602 | 162,892 | |||||||||
| Controllable margin(1) | $ | 73,044 | $ | 37,298 | $ | 47,370 | $ | 157,712 | |||||
| Year ended June 30, 2003— | |||||||||||||
| Revenues from unaffiliated customers | $ | 139,859 | $ | 103,741 | $ | 79,121 | $ | 322,721 | |||||
| Controllable expenses | 65,394 | 81,943 | 12,361 | 159,698 | |||||||||
| Controllable margin(1) | $ | 74,465 | $ | 21,798 | $ | 66,760 | $ | 163,023 | |||||
| Year ended June 30, 2004— | |||||||||||||
| Revenues from unaffiliated customers | $ | 152,270 | $ | 96,512 | $ | 76,914 | $ | 325,696 | |||||
| Controllable expenses | 64,952 | 67,214 | 14,573 | 146,739 | |||||||||
| Controllable margin(1) | $ | 87,318 | $ | 29,298 | $ | 62,341 | $ | 178,957 | |||||
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Profit Reconciliation:
| Years Ended June 30 | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| (In thousands) | ||||||||||||
| Total controllable margin for reportable segments | $ | 141,678 | $ | 169,567 | $ | 157,712 | ||||||
| Selling and marketing | (72,258 | ) | (96,467 | ) | (89,953 | ) | ||||||
| Research and development | (877 | ) | (12,587 | ) | (20,248 | ) | ||||||
| General and administrative and overhead | (63,414 | ) | (73,204 | ) | (82,650 | ) | ||||||
| Costs related to acquisitions | (1,547 | ) | — | — | ||||||||
| Restructuring and other charges | — | (6,969 | ) | (16,083 | ) | |||||||
| Charges for in-process research and development | — | (9,915 | ) | (14,900 | ) | |||||||
| Interest and other income and expense | 4,170 | 5,468 | 284 | |||||||||
| Write-off of investments | — | (5,000 | ) | (8,923 | ) | |||||||
| Income (loss) before provision for (benefit from) income taxes | $ | 7,752 | $ | (29,107 | ) | $ | (74,761 | ) | ||||
| | Years Ended June 30 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | |||||||
| | (In thousands) | |||||||||
| Total controllable margin for reportable segments | $ | 157,712 | $ | 163,023 | $ | 178,957 | ||||
| Selling and marketing | (89,953 | ) | (91,357 | ) | (88,587 | ) | ||||
| Research and development | (20,248 | ) | — | — | ||||||
| General and administrative and overhead | (82,650 | ) | (77,379 | ) | (77,238 | ) | ||||
| Asset impairment charges | (1,169 | ) | (114,797 | ) | (4,217 | ) | ||||
| Restructuring charges and FTC legal costs | (14,914 | ) | (41,080 | ) | (20,833 | ) | ||||
| Charges for in-process research and development | (14,900 | ) | — | — | ||||||
| Interest and other income and expense | 284 | 757 | 3,434 | |||||||
| Write-off of investments | (8,923 | ) | — | — | ||||||
| Income (loss) before provision for (benefit from) income taxes | $ | (74,761 | ) | $ | (160,833 | ) | $ | (8,484 | ) | |
Geographic Information:
Domestic and export sales as a percentage of total revenues are as follows:
| Years Ended June 30, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| United States | 54.6 | % | 51.2 | % | 54.2 | % | ||||||
| Europe | 27.5 | 27.7 | 28.4 | |||||||||
| Japan | 4.8 | 5.3 | 5.1 | |||||||||
| Other | 13.1 | 15.8 | 12.3 | |||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||
| | Years Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | ||||
| United States | 54.2 | % | 46.6 | % | 42.8 | % | |
| Europe | 28.4 | 30.2 | 33.0 | ||||
| Japan | 5.1 | 3.9 | 4.6 | ||||
| Other | 12.3 | 19.3 | 19.6 | ||||
| 100.0 | % | 100.0 | % | 100.0 | % | ||
During the years ended June 30, 2000, 20012002, 2003 and 20022004 there were no customers that individually represented greater than 10% of the Company’sCompany's total revenue.
Revenues, income (loss) from operations and identifiable assets for the Company’sCompany's North American, European and Asian operations are as follows (in thousands). The Company has intercompany distribution arrangements with its subsidiaries. The basis for these arrangements, disclosed below as transfers between
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
geographic locations, is cost plus a specified percentage for services and a commission rate for sales generated in the geographic region.
| | North America | Europe | Asia | Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended June 30, 2002— | ||||||||||||||||
| Revenues | $ | 272,776 | $ | 77,865 | $ | 18,504 | $ | (48,541 | ) | $ | 320,604 | |||||
| Identifiable assets | $ | 479,454 | $ | 97,561 | $ | 12,943 | $ | (176,014 | ) | $ | 413,944 | |||||
| Year ended June 30, 2003— | ||||||||||||||||
| Revenues | $ | 235,373 | $ | 106,725 | $ | 12,876 | $ | (32,253 | ) | $ | 322,721 | |||||
| Identifiable assets | $ | 528,304 | $ | 64,917 | $ | (6,959 | ) | $ | (266,789 | ) | $ | 319,473 | ||||
| Year ended June 30, 2004— | ||||||||||||||||
| Revenues | $ | 233,530 | $ | 83,427 | $ | 16,825 | $ | (8,086 | ) | $ | 325,696 | |||||
| Identifiable assets | $ | 603,851 | $ | 32,786 | $ | (4,229 | ) | $ | (331,713 | ) | $ | 300,695 | ||||
(18) Subsequent Event—Sale of AXSYS Product
| North | |||||||||||||||||||||
| America | Europe | Asia | Eliminations | Consolidated | |||||||||||||||||
| Year ended June 30, 2000 — | |||||||||||||||||||||
| Revenues | $ | 232,616 | $ | 59,456 | $ | 16,206 | $ | (40,185 | ) | $ | 268,093 | ||||||||||
| Identifiable assets | $ | 386,081 | $ | 54,982 | $ | 11,456 | $ | (103,456 | ) | $ | 349,063 | ||||||||||
| Year ended June 30, 2001 — | |||||||||||||||||||||
| Revenues | $ | 280,499 | $ | 72,332 | $ | 22,148 | $ | (48,055 | ) | $ | 326,924 | ||||||||||
| Identifiable assets | $ | 400,794 | $ | 49,907 | $ | 16,956 | $ | (113,691 | ) | $ | 353,966 | ||||||||||
| Year ended June 30, 2002 — | |||||||||||||||||||||
| Revenues | $ | 272,776 | $ | 77,865 | $ | 18,504 | $ | (48,541 | ) | $ | 320,604 | ||||||||||
| Identifiable assets | $ | 479,454 | $ | 97,561 | $ | 12,943 | $ | (176,014 | ) | $ | 413,944 | ||||||||||
F-43 In August 2004, under the terms of the proposed settlement with the FTC, the Company's AXSYS product was sold to Bentley Systems, Inc. The proceeds and gain recorded on the sale was not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of
We have audited the consolidated financial statements of Aspen Technology, Inc. and subsidiaries as of June 30, 2002 and for the year then ended, and have issued our report thereon dated August 13, 2002. Our audit also included the information related to the year ended June 30, 2002 appearing in the financial statement schedule listed in Item 14(a)-2. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Boston, Massachusetts
S-1
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Aspen Technology, Inc.’s filing on Form 10-K for the year ended June 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE
To Aspen Technology, Inc.
We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Aspen Technology, Inc. and subsidiaries. Annual Report to Shareholders, included in this Form 10-K, and have issued our report thereon dated August 3, 2001. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)-2 is the responsibility of the Company’s management, is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein, in relation to the basic financial statements taken as a whole.
Boston, Massachusetts
S-2
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
II—VALUATION AND QUALIFYING ACCOUNTS
| Description | Balance, Beginning of Period | Charged to Costs and Expenses | Deductions | Other(1) | Balance, End of Period | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||
| June 30, 2002 | $ | 1,905 | $ | 1,889 | $ | (141 | ) | $ | 2,344 | $ | 5,997 | |||||
| June 30, 2003 | 5,997 | 683 | (3,010 | ) | 22 | 3,692 | ||||||||||
| June 30, 2004 | 3,692 | 1,938 | (3,180 | ) | — | 2,450 | ||||||||||
| Balance, | Charged to | Balance, | |||||||||||||||||||
| Beginning of | Costs and | End of | |||||||||||||||||||
| Description | Period | Expenses | Deductions | Other(1) | Period | ||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| ALLOWANCE FOR DOUBTFUL ACCOUNTS: | |||||||||||||||||||||
| June 30, 2000. | $ | 1,288 | $ | 112 | $ | (11 | ) | $ | 50 | $ | 1,439 | ||||||||||
| June 30, 2001. | 1,439 | 23 | (175 | ) | 618 | 1,905 | |||||||||||||||
| June 30, 2002. | 1,905 | 1,889 | (141 | ) | 2,345 | 5,997 | |||||||||||||||
S-3
EXHIBIT INDEX
| 3.1(1) | Certificate of Incorporation of Aspen Technology, Inc., as amended. | |
| By-laws of Aspen Technology, Inc. | ||
| Specimen Certificate for Shares of Aspen Technology, Inc. | ||
| Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer and Trust Company, as Rights Agent, including related forms of the following: (a) Certificate of Designation of Series A Participating Cumulative Preferred Stock of Aspen Technology, Inc.; and (b) Right Certificate. | ||
| Amendment No. 1 dated as of October 26, 2001 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | ||
| Amendment No. 2 dated as of February 6, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | ||
| Amendment No. 3 dated as of March 19, 2002 to Rights Agreement dated as of March 12, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company. | ||
| Amendment No. 4 dated as of May 9, 2002 to Rights Agreement dated as of March 17, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | ||
| Amendment No. 5 dated as of June 1, 2003 to Rights Agreement dated as of March 17, 1998 between Aspen Technology, Inc. and American Stock Transfer & Trust Company, as Rights Agent. | ||
| 4.8(9) | Indenture dated as of June 17, 1998 between Aspen Technology, Inc. and The Chase Manhattan Bank, as trustee, with respect to up to $86,250,000 principal amount of 5 | |
| Form of 5 | ||
| Form of Warrant of Aspen Technology, Inc. dated as of May 9, 2002. | ||
| Form of | ||
| Form of WB Common Stock Purchase Warrant of Aspen Technology, Inc. dated as of August 14, 2003. | ||
| 10.1(11) | Lease Agreement dated as of January 30, 1992 between Aspen Technology, Inc. and Teachers Insurance and Annuity Association of America regarding Ten Canal Park, Cambridge, Massachusetts. | |
| First | ||
| Second Amendment to Lease Agreement dated as of August 14, 2000 between Aspen Technology, Inc. and EOP-Ten Canal Park, L.L.C., successor-in-interest to Beacon Properties, L.P. regarding Ten Canal Park, Cambridge, Massachusetts. | ||
| System License Agreement between Aspen Technology, Inc. and the Massachusetts Institute of Technology, dated March 30, 1982, as amended. | ||
S-4
| Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| Rider No. 1, dated December 14, 1994, to Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| Rider No. 2, dated September 4, 2001, to Vendor Program Agreement between Aspen Technology, Inc. and General Electric Capital Corporation. | ||
| Letter Agreement, dated March 25, 1992, between Aspen Technology, Inc. and Sanwa Business Credit Corporation. | ||
| 10.13(20) | Third Amendment, effective as of March 28, 2003, to the Letter Agreement by and between Aspen Technology, Inc. and Fleet Business Credit, LLC (formerly Sanwa Business Credit Corporation). | |
| 10.14(11) | Equity Joint Venture Contract between Aspen Technology, Inc. and China Petrochemical Technology Company. | |
| 10.16(15) | Export-Import Bank Loan and Security Agreement, dated | |
| Export-Import Bank Borrower Agreement, dated as of | ||
| 10.19(15) | Form of Negative Pledge Agreement, dated as of January 30, 2003, in favor of Silicon Valley Bank, executed by Aspen Technology, Inc., AspenTech, Inc. and Hyprotech Company. | |
| 10.20(15) | Security Agreement, dated as of January 30, 2003, by and between Silicon Valley Bank and AspenTech Securities Corporation. | |
| 10.22(16) | First Loan Modification Agreement, effective as of June 27, 2003, by and among Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc. | |
| 10.23(16) | Pledge Agreement, effective as of June 27, 2003, by Aspen Technology, Inc. in favor of Silicon Valley Bank. | |
| 10.24(32) | Non-Recourse Receivables Purchase Agreement, dated | |
| 10.26(17) | Securities Purchase Agreement dated June 1, 2003 by and among Aspen Technology, Inc. and the | |
| Repurchase and Exchange Agreement dated as of June 1, 2003 by and among Aspen Technology, Inc. and the Holders named therein. | ||
| 10.28(18) | Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and Michael B. Feldman. | |
| Registration Rights Agreement dated June 15, 2001 between Aspen Technology, Inc. and the former stockholders of Computer Processes Unlimited, L.L.C. | ||
| Registration Rights Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | ||
| Management Rights Letter dated as of August 14, 2003 by and among Aspen Technology, Inc. and the entities named therein. | ||
| 10.33(21) | Amended and Restated Registration Rights Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named | |
| 1988 Non-Qualified Stock Option Plan, as amended. | ||
| 10.35(22)* | 1995 Stock Option Plan. | |
| Amended and Restated 1995 Directors Stock Option Plan. | ||
| 1995 | ||
| 1998 | ||
| Amendment No. 1 to 1998 | ||
| 1996 Special Stock Option Plan. | ||
| 2001 Stock Option Plan. |
S-5
| Form of Employee Confidentiality and Non-Competition Agreement. | ||
| Noncompetition, Confidentiality and Proprietary Rights Agreement between Aspen Technology, Inc. and Lawrence B. Evans. | ||
| 10.44(16)* | Employment and Transition Agreement, dated as of June 30, 2003, by and between Aspen Technology, Inc. and Lawrence B. | |
| Change in Control Agreement between Aspen Technology, Inc. and David McQuillin dated August 12, 1997. | ||
| Severance Agreement between Aspen Technology, Inc. and David L. McQuillin dated September 30, 2002. | ||
| 10.47(15)* | Employment Agreement, dated as of November 26, 2002, by and between Aspen Technology, Inc. and David L. McQuillin. | |
| 10.48(30)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and David L. McQuillin. | |
| 10.49(26)* | Employment Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | |
| 10.50(26)* | Change in Control Agreement between Aspen Technology, Inc. and Wayne Sim dated May 9, 2002. | |
| 10.51(16)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and Wayne Sim. | |
| 10.52(27)* | Change in Control Agreement between Aspen Technology, Inc. and Stephen J. Doyle dated August 12, 1997. | |
| Employment Agreement, dated April 1, 2002, by and between Aspen Technology, Inc. and C. Steven Pringle | ||
| 10.56(3)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and C. Steven Pringle. | |
| 10.57(30)* | Offer Letter, dated June 16, 2003, by and between Aspen Technology, Inc. and Charles F. Kane. | |
| 10.58(30)* | Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and Manolis Kotzabasakis. | |
| 10.59(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and David L. McQuillin. | |
| 10.60(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Wayne Sim. | |
| 10.61(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Stephen J. Doyle. | |
| 10.62(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and C. Steve Pringle. | |
| 10.63(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Charles F. Kane. | |
| 10.64(16)* | Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and Manolis Kotzabasakis. | |
| 10.65(12) | Financing Partner Agreement between Aspen Technology, Inc. and IBM Credit Corporation dated June 15, 2000. | |
| Securities Purchase Agreement dated as of May 9, 2002 between Aspen Technology, Inc. and the Purchasers listed therein, and related Amendment dated June 5, 2002. | ||
| Share Purchase Agreement dated as of May 10, 2002 between Aspen Technology, Inc. and AEA Technology plc. | ||
| Stockholder Agreement dated as of February 8, 2002 between Aspen Technology, Inc. and Accenture LLP. | ||
| Amended and Restated Securities Purchase Agreement dated as of March 19, 2002 between Aspen Technology, Inc. and the Purchasers named therein. | ||
| 10.71 | Second Loan Modification Agreement, dated as of | |
| 21.1 | Subsidiaries of Aspen Technology, Inc. | |
| 23.1 | Consent of Deloitte & Touche LLP. | |
| 24.1 | Power of Attorney (included in signature page to Form 10-K). |
| 31.1 | Certification of President and Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
| Certification of Senior Vice President and Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as | ||
| 32.1 | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
S-6
S-7