UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(cid:95)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(cid:134)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006.
or
For the transition period from
to
Commission file number: 0-24786
Aspen Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
Ten Canal Park
Cambridge, Massachusetts
(Address of Principal Executive Offices)
04-2739697
(I.R.S. Employer
Identification Number)
02141
(Zip Code)
Registrant’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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:134) No (cid:95)
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 (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)
Accelerated Filer (cid:95)
Non-accelerated Filer (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:134) No (cid:95)
As of December 31, 2005, the aggregate market value of common stock (the only outstanding class of common equity of
the Registrant) held by nonaffiliates of the Registrant was $319,758,462 based on a total of 40,733,562 shares of common
stock held by nonaffiliates and on a closing price of $7.85 on December 31, 2005 for the common stock as reported on the
Nasdaq Global Market.
As of March 9, 2007, 87,749,130 shares of common stock were outstanding.
TABLE OF CONTENTS
Explanatory Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
ii
1
4
28
28
41
48
This Amendment No. 2 on Form 10-K, which we refer to as this Form 10-K/A, amends and restates
portions of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 as originally filed with
the SEC on September 28, 2006, which we refer to as the original Form 10-K, and our Amendment No. 1
to our Annual Report on Form 10-K as filed with the SEC on November 14, 2006, which we refer to as the
first Form 10-K/A.
Aspen is our registered trademark.
This Form 10-K/A contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to
identify forward-looking statements. Readers are cautioned that all forward-looking statements involve
risks and uncertainties, many of which are beyond our control, including the factors set forth under
“Item 1A. Risk Factors” in the original Form 10-K. 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/A. 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.
i
Purpose of this Form 10-K/A (Third Restatement)
EXPLANATORY NOTES
Subsequent to our issuance of the restatement of the consolidated financial statements for the year
ended June 30, 2006, and in the course of preparing the condensed consolidated financial statements for
the three and six months ended December 31, 2006, we identified errors in the accounting for foreign
currency denominated transactions in the fiscal years ended June 30, 2002 through 2006. We incorrectly
accounted for transaction gains and losses on intercompany balances denominated in currencies other than
the functional currency as if such balances were of a long term investment nature and included the impact
as a component of accumulated other comprehensive income (loss) rather than earnings. These
transaction gains and losses should have been included in earnings as the conditions for accounting for
these intercompany balances as a long term investment were not met. In addition, we identified errors in
the recording of purchase accounting in other than the functional currency of the acquired entity. These
purchase accounting adjustments should have been denominated in the currency of the applicable
subsidiary and translated to United States Dollars and were incorrectly recorded as United States Dollar
denominated net assets in the consolidated financial statements. Accordingly, translation of the balance
sheet position related to the purchase accounting allocations and translation impact of the amortization of
intangible assets was not properly recorded.
In addition, we identified other errors in the course of preparing the condensed consolidated financial
statements for the three and six months ended December 31, 2006. These errors related to the timing of
recognition of service revenue and facility leasing costs, and losses on sale of assets and elimination of
accounts receivable and offsetting deferred revenues for amounts due from customers that have not met
revenue recognition criteria as of June 30, 2006. The tax effect of correcting all of the above errors
required further adjustments and we added disclosure relative to reseller relationships in Note 13 to the
financial statements.
In order to correct the errors, we are restating our financial statements for the fiscal years ended
June 30, 2004, 2005 and 2006, in order to reflect (a) foreign currency transaction gains of $3.8 million,
losses of $3.1 million, and losses of $4.4 million, respectively, (b) additional amortization of technology
related intangible assets of $0.7 million, $1.1 million, and $1.5 million, respectively, (c) additional facility
lease costs of less than $0.1 million per fiscal year, (d) for the year ended June 30, 2006, a reduction in
service revenues of $0.4 million, (e) for the year ended June 30, 2004, an increase in loss on sales and
disposals of assets of $0.1 million, (f) income tax provision increases of $0.1 million and decreases of
$1.5 million and $2.0 million, respectively, and, (g) the reduction of accounts receivable and offsetting
reduction in deferred revenues of $6.5 million at June 30, 2006 to eliminate the gross presentation of
amounts due from customers that had not met revenue recognition criteria, and the related balance sheet
adjustments. We refer to this as the third restatement. These errors had a cumulative effect of decreasing
net loss by $2.9 million, net of income taxes, for the periods prior to fiscal 2004, which is reflected in the
July 1, 2003 beginning accumulated deficit.
This Form 10-K/A is being filed for the purpose of restating our consolidated financial statements
below for the years ended June 30, 2004, 2005 and 2006. See Note 17 to the consolidated financial
statements under the caption “Third Restatement” for a discussion of the third restatement. This Form 10-
K/A updates the information provided in Items 6, 7, 8, 9A and 15 of the first Form 10-K/A for the effects
of the third restatement. This Form 10-K/A has not been updated for events occurring after the filing of
the previous Form 10-K/A, except to reflect the third restatement.
ii
Second Restatement
The following describes the second restatement reflected in the first Form 10-K/A. We refer to this as the
second restatement. This description has not changed in any material respect from the explanatory note
provided in the first Form 10-K/A.
In the course of preparing our condensed consolidated financial statements for the three months
ended September 30, 2006, we identified errors in the accounting for stock-based compensation and
certain revenue transactions in the fiscal year ended June 30, 2006. The stock-based compensation error
was due to a calculation error associated with forfeiture rates upon the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123R), as of July 1, 2005.
In order to correct these errors, we restated our financial statements for the fiscal year ended June 30,
2006 in order to reflect (a) additional stock-based compensation expense of approximately $1.4 million and
(b) additional revenues of approximately $0.3 million. These errors had no effect on the fiscal year ended
June 30, 2004 or 2005. See Note 17 to the consolidated financial statements under the caption “Second
Restatement” for a discussion of the second restatement.
First Restatement
The following describes the first restatement reflected in the original Form 10-K. We refer to this as the first
restatement. This description has not changed in any material respect from the explanatory note provided in the
original Form 10-K.
In connection with the preparation of financial statements for the fiscal year ended June 30, 2006, a
subcommittee of independent members of our board of directors reviewed our accounting treatment for
all stock options granted since we completed our initial public offering in fiscal 1995. Based upon the
subcommittee’s review, the Audit Committee and management determined that certain option grants
during fiscal years 1995 through 2004 were accounted for improperly, and concluded that stock-based
compensation associated with certain grants was misstated in fiscal years 1995 through 2005, and in the
nine months ended March 31, 2006. The subcommittee identified errors related to the determination of
the measurement dates for grants of options allocated among a pool of employees when the specific
number of options to be awarded to specific employees had not yet been finalized, and other measurement
date errors. As a result of the errors in determining measurement dates, we also recorded payroll
withholding tax-related adjustments for certain options formerly classified as Incentive Stock Option (ISO)
grants under Internal Revenue Service regulations. These options were determined to have been granted
with an exercise price below the fair market value of our stock on the actual grant date, so do not qualify
for ISO tax treatment. The disqualification of ISO classification and the resulting conversion to non-
qualified status results in additional withholding taxes on exercise of those options. We recorded estimated
payroll withholding tax charges of $0.5 million, $0.2 million, and $1.2 million for the years ended
June 30, 2004, 2005, and 2006, respectively, in connection with the disqualification of such ISO tax
treatment. The stock-based compensation charges, including the aforementioned withholding tax
adjustments, increased net loss for the fiscal years ended June 30, 1997, 1998, 1999, 2000, 2001, 2002, 2003,
2004, 2005, and the nine months ended March 31, 2006 by $0.2 million, $1.5 million, $10.0 million,
$7.0 million, $10.4 million, $11.5 million, $9.5 million, $7.2 million, $0.5 million, and $ 1.0 million,
respectively.
In addition, as a result of the errors in determining measurement dates, certain options were
determined to have been granted with an exercise price below the fair market value of our stock on the
actual grant date. These discounted options vesting subsequent to December 2004 result in nonqualified
deferred compensation for purposes of Section 409A of the Internal Revenue Code, and holders are
subject to an excise tax on the value of the options in the year in which they vest. We have concluded that it
is probable we will either implement a plan to assist the affected employees for the amount of this tax, or
iii
adjust the terms of the original option grant which would also have financial statement ramifications. As
such, we recorded an estimated liability of approximately $1.0 million in the fourth quarter of fiscal 2006 in
connection with this contingency.
The restatement of prior year financial statements also included the adjustments for other errors
identified after the applicable period had been reported. Such errors were not previously recorded because
we believed the amount of any such errors, both individually and in the aggregate, were not material to our
consolidated financial statements. These errors related to the timing of revenue recognition, losses on sales
and disposals of assets, interest income, and the calculation of foreign currency gains and losses.
As a result of the foregoing, we restated our financial statements as of June 30, 2005 and for the fiscal
years ended June 30, 2004 and 2005 in our consolidated financial statements, in the original Form 10-K.
We show the effects of the first restatement on our financial statements for the years ended June 1999,
2000, 2001, 2002 and 2003 in Item 6, “Selected Financial Data.” We show the effects of the third
restatement on our finanical statements for the years ended June 30, 2002 and 2003 in Item 6, “Selected
Financial Data”.
We have not amended and we do not intend to amend any of our other previously filed annual reports
on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the first, second or third
restatements, except for the filing of this Form 10-K/A and the Form 10-Q/A for the quarter ended
September 30, 2006. For this reason, the consolidated financial statements and related financial
information contained in such previously filed reports should not be relied upon.
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Consolidated Balance Sheet
Data:
Cash and cash equivalents . . . .
Working capital . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . .
Long-term obligations, less
2002
As Restated(2)(4)
2003
As Restated(2)(4)
June 30,
2004
As Restated(2)
2005
As Restated(1)
2006
As Restated(1)
(In thousands)
$ 33,571
43,567
538,219
$ 51,567
36,409
377,422
$ 107,633
14,694
354,404
$ 68,149
2,586
246,430
$ 86,272
24,743
274,636
current maturities. . . . . . . . . .
92,135
89,911
1,952
338
149
Redeemable convertible
preferred stock . . . . . . . . . . . .
—
57,537
106,761
121,210
125,475
Total stockholders’ equity
(deficit) . . . . . . . . . . . . . . . . . .
223,321
33,985
30,474
(46,169 )
(14,555)
(1) See Note 17 to the Notes to the Consolidated Financial Statements for a discussion of the
restatements.
(2) The restated amounts for these years are unaudited. The unaudited financial results for 1997 and
1998, which are not presented here, the unaudited financial results for 1999, 2000 and 2001, which are
presented below in condensed form, and the selected consolidated financial data for 2002 and 2003,
presented above, have been restated to reflect adjustments related to the restatement described in
“Explanatory Notes—First Restatement” above, and in Note 17 of the Notes to Consolidated
Financial Statements. The restatement adjustments affecting these periods primarily related to
compensation expense associated with the stock option review, and result in an increased loss
applicable to common stockholders for the fiscal years ended June 30, 1997, 1998, 1999, 2000, 2001,
2002 and 2003 of $0.2 million, $1.5 million, $10.0 million, $7.0 million, $10.4 million, $11.5 million and
$10.5 million, respectively. The selected consolidated financial data for 2002 and 2003, presented
above, have also been restated to reflect adjustments related to the restatements described in
“Explanatory Notes—Third Restatement” above, and in Note 17 of the Notes to Consolidated
Financial Statements. The restatement adjustments affecting these periods primarily related to
foreign currency transaction gains on intercompany balances, and result in a decreased loss applicable
to common shareholders for the years ended June 30, 2002 and 2003 of $3.0 million and $2.8 million,
respectively. In the consolidated financial statements for the year ended June 30, 2004 these
cumulative amounts are reflected as adjustments to the beginning balances of the accumulated deficit
of Stockholders’ Equity in the Statement of Stockholders’ Equity (Deficit) and Comprehensive
Income (Loss).
(3) The adjustments related to the year ended June 30, 2002 relate to compensation expense associated
with the stock option review. Of the adjustments related to the year ended June 30, 2003, $9.5 million
related to compensation expense associated with the stock option review and $1.0 million related to
other adjustments. These adjustments are further described in “Explanatory Notes—First
Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements.
(4) Of the adjustments related to the year ended June 30, 2002, $3.0 million related to foreign currency
transaction gains on intercompany balances and less than $0.1 million related to other adjustments.
Of the adjustments related to the year ended June 30, 2003, $2.9 million related to foreign currency
transaction gains on intercompany balances, net of income taxes, and was offset by $0.1 million related
to other adjustments. These adjustments are further described in “Explanatory Notes—Third
Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements.
2
Basic and diluted 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/A. We have never declared or paid cash dividends on our common stock.
Restatement of Financial Results for Periods Prior to Fiscal 2002
The financial information set forth below reflects the restatement of our financial statements for the
years ended June 30, 1999, 2000 and 2001 for the items discussed in “Explanatory Notes—First
Restatement” above and in Note 17 of the Notes to Consolidated Financial Statements. The restatement
also affects periods prior to fiscal 1999, for which the impact on the net loss for these periods is
approximately $1.7 million in the aggregate. All adjustments for these periods relate to compensation
expense associated with the stock option review.
1999
Year Ended June 30,
2000
2001
As
Previously
Reported
$ 219,688
126,684
Adjustments
$ —
(3,680 )
As
Restated(1)
$ 219,688
123,004
As
Previously
Reported Adjustments
$ 261,070
165,047
$ —
(2,528)
As
Restated(1)
$ 261,070
162,519
As
Previously
Reported
$ 314,937
183,820
Adjustments
$ —
(3,741 )
As
Restated(1)
$ 314,937
180,079
(47,775 )
$ (27,626 )
(9,985 )
$ (9,985 )
(57,760)
(4,218)
($37,611) $ (3,226)
(7,013)
$ (7,013)
(11,231)
$ (10,239)
(44,347)
$ (36,809)
(10,389 )
$ (10,389 )
(54,736)
$ (47,198)
Total revenues . . . .
Gross profit . . . . . .
Income (loss) from
operations. . . . . .
Net income (loss) . .
Diluted net income
(loss) per share . .
$
(1.01 )
$ (0.36 )
$
(1.37) $
(0.10)
$ (0.23)
$
(0.33)
$
(1.23)
$
(0.35 )
$
(1.58)
(1) The Consolidated Financial Statements as of and for the years ended June 30, 1999, 2000 and 2001 were previously audited by Arthur
Andersen LLP. The restated amounts for these years were derived from restated financial statements that have not been audited.
Restatement of Pro Forma Disclosures of Stock-Based Compensation for Periods Prior to Fiscal 2004
The financial information set forth below reflects the restatement of our pro forma disclosures made
in accordance with Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based
Compensation” for the years ended June 30, 1999, 2000, 2001, 2002 and 2003 for the items discussed in
“Explanatory Notes” above and in Note 17 of the Notes to Consolidated Financial Statements.
Income (loss) attributable to common
shareholders (in thousands)
—As reported . . . . . . . . . . . . . . . . . . . . . . . .
Less: Stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects . . . . . .
Add: Stock-based compensation expense
included in reported net income (loss).
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) attributable to common
shareholders per share
—Basic and diluted—
As reported . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . .
1999
2000
2001
2002
2003
All amounts as restated
$ (37,611) $ (10,239) $ (47,198) $ (90,819 ) $ (156,067)
(30,483)
(30,558)
(36,043)
(33,228 )
(24,081)
9,985
9,515
10,389
$ (58,109) $ (33,784) $ (72,852) $ (112,553 ) $ (170,633)
11,494
7,013
$
(1.37) $
(2.11)
(0.36) $
(1.20)
(1.58) $
(2.43)
(2.81 ) $
(3.48 )
(4.06)
(4.43)
3
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations gives effect to the restatements discussed in Note 17 to the Consolidated Financial Statements.
Overview
We are a leading supplier of integrated software and services to the process industries, which consist
of oil and gas, petroleum, chemicals, pharmaceuticals and other industries that manufacture and produce
products from a chemical process. We provide a comprehensive, integrated suite of software applications
that utilize proprietary empirical models of chemical manufacturing processes to improve plant and
process design, economic evaluation, production, production planning and scheduling, and operational
performance, and an array of services designed to optimize the utilization of these products by our
customers.
Restatements of Financial Results
First Restatement
In connection with the preparation of financial statements for the fiscal year ended June 30, 2006, a
subcommittee of independent members of our board of directors reviewed our accounting treatment for
all stock options granted since we completed our initial public offering in fiscal 1995. Based upon the
subcommittee’s review, the Audit Committee and management determined that certain option grants
during fiscal years 1995 through 2004 were accounted for improperly, and concluded that stock-based
compensation associated with certain grants was misstated in fiscal years 1995 through 2005, and in the
nine months ended March 31, 2006. The subcommittee identified errors related to the determination of
the measurement dates for grants of options allocated among a pool of employees when the specific
number of options to be awarded to specific employees had not yet been finalized, and other measurement
date errors. As a result of the errors in determining measurement dates, we also recorded payroll
withholding tax-related adjustments for certain options formerly classified as Incentive Stock Option (ISO)
grants under Internal Revenue Service regulations. These options were determined to have been granted
with an exercise price below the fair market value of our stock on the actual grant date, so do not qualify
for ISO tax treatment. The disqualification of ISO classification and the resulting conversion to non-
qualified status results in additional withholding taxes on exercise of those options. We recorded estimated
payroll withholding tax charges of $0.5 million, $0.2 million, and $1.2 million for the years ended June 30,
2004, 2005, and 2006, respectively, in connection with the disqualification of such ISO tax treatment. The
stock-based compensation charges, including the aforementioned withholding tax adjustments, increased
net loss for the fiscal years ended June 30, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, and the nine
months ended March 31, 2006 by $0.2 million, $1.5 million, $10.0 million, $7.0 million, $10.4 million,
$11.5 million, $9.5 million, $7.2 million, $0.5 million, and $1.0 million, respectively.
In addition, as a result of the errors in determining measurement dates, certain options were
determined to have been granted with an exercise price below the fair market value of our stock on the
actual grant date. These discounted options vesting subsequent to December 2004 result in nonqualified
deferred compensation for purposes of Section 409A of the Internal Revenue Code, and holders are
subject to an excise tax on the value of the options in the year in which they vest. We have concluded that it
is probable we will either implement a plan to assist the affected employees for the amount of this tax, or
adjust the terms of the original option grant which would also have financial statement ramifications. As
such, we recorded an estimated liability of approximately $1.0 million in the fourth quarter of fiscal 2006 in
connection with this contingency.
The restatement of prior year financial statements relating to option grants also includes the
adjustments for other errors identified after the applicable period had been reported. We refer to this as
4
the first restatement. The adjustments for such other errors were not previously recorded because we
believed the amount of any such errors, both individually and in the aggregate, were not material to our
consolidated financial statements. These errors related to the timing of revenue recognition, losses on sales
and disposals of assets, interest income, and the calculation of foreign currency gains and losses.
Second Restatement
In the course of preparing the condensed consolidated financial statements for the three months
ended September 30, 2006, we identified errors in the accounting for stock-based compensation and
certain revenue transactions in the fiscal year ended June 30, 2006. The stock-based compensation error
was due to a calculation error associated with forfeiture rates upon the adoption of SFAS No. 123R, as of
July 1, 2005.
In order to correct these errors, we have restated our financial statements for the fiscal year ended
June 30, 2006 in order to reflect (a) additional stock-based compensation expense of approximately
$1.4 million and (b) additional revenues of approximately $0.3 million. We refer to this as the second
restatement. These errors had no effect on the fiscal years ended June 30, 2004 or 2005.
Third Restatement
Subsequent to our issuance of the restatement of the consolidated financial statements for the year
ended June 30, 2006, and in the course of preparing the condensed consolidated financial statements for
the three and six months ended December 31, 2006, we identified errors in the accounting for foreign
currency denominated transactions in the fiscal years ended June 30, 2002 through 2006. We incorrectly
accounted for transaction gains and losses on intercompany balances denominated in currencies other than
the functional currency as if such balances were of a long term investment nature and included the impact
as a component of accumulated other comprehensive income (loss) rather than earnings. These
transaction gains and losses should have been included in earnings as the conditions for accounting for
these intercompany balances as a long term investment were not met. In addition, we identified errors in
the recording of purchase accounting entries in other than the functional currency of the acquired entity.
These purchase accounting adjustments should have been denominated in the currency of the applicable
subsidiary and translated to United States Dollars and were incorrectly recorded as United States Dollar
denominated net assets in the consolidated financial statements. Accordingly, translation of the balance
sheet position related to the purchase accounting allocations and translation impact of the amortization of
intangible assets was not properly recorded.
In addition, we identified other errors in the course of preparing the condensed consolidated financial
statements for the three and six months ended December 31, 2006. These errors related to the timing of
recognition of service revenue and facility leasing costs, and losses on sale of assets and elimination of
accounts receivable and deferred revenue for amounts due from customers that have not met revenue
recognition criteria as of June 30, 2006. The tax effect of correcting all of the above errors required further
adjustments.
In order to correct these errors, we are restating our financial statements for the fiscal years ended
June 30, 2004, 2005 and 2006, in order to reflect (a) foreign currency transaction gains of $3.8 million,
losses of $3.1 million, and losses of $4.4 million, respectively, (b) additional amortization of technology
related intangible assets of $0.7 million, $1.1 million, and $1.5 million, respectively, (c) additional facility
lease costs of less than $0.1 million per fiscal year, (d) for the year ended June 30, 2006, a reduction in
service revenues of $0.4 million, (e) for the year ended June 30, 2004, an increase in loss on sales and
disposals of assets of $0.1 million (f) income tax provision increases of $0.1 million and decreases of
$1.5 million and of $2.0 million, respectively, and, (g) the reduction of accounts receivable and offsetting
reduction in deferred revenues of $6.5 million at June 30, 2006 to eliminate the gross presentation of
5
amounts due from customers that had net revenue recognition criteria, and the related balance sheet
adjustments. We refer to this as the third restatement. These errors had a cumulative effect of decreasing
net loss by $2.9 million, net of income taxes, for the periods prior to June 30, 2003 which is reflected in the
July 1, 2003 beginning accumulated deficit.
Effects of Restatements
As a result of the foregoing, we have restated our financial statements as of June 30, 2005 and 2006
and for the fiscal years ended June 30, 2004, 2005 and 2006 in our consolidated financial statements,
beginning on page F-3. We show the effects of the first, second and third restatements on our financial
statements for the years ended June 1999, 2000, 2001, 2002 and 2003 in Item 6, “Selected Financial Data.”
We show the effects of the restatements on each of the quarters in the years ended June 30, 2005 and 2006
in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Quarterly Data.”
Significant Events—Year Ended June 30, 2006
Following mediation, on November 16, 2005, we and the plaintiffs on behalf of putative class
members, defined to include all persons who purchased our common stock between October 29, 1999 and
March 15, 2005, inclusive, whom we refer to collectively as the “Class”, entered into a Stipulation and
Agreement of Compromise, Settlement and Release of Securities Action, which we refer to as the
“Stipulation,” which was filed with the Court on the same date providing, among other things, for
settlement and release of all direct and indirect claims of the Class concerning matters covered by the
Stipulation. On December 12, 2005, the Court granted preliminary approval of the settlement provided for
in the Stipulation. After notice to the Class and hearing, on March 6, 2006, the Court granted final
approval of the settlement, and the class action lawsuit was dismissed with prejudice. We entered into the
Stipulation to resolve the matter and without acknowledging any fault, liability or wrongdoing of any kind.
There has been no adverse determination by the Court against us or any of the other defendants in the
case.
Pursuant to the terms of the settlement, we paid $1.9 million and our insurance carrier paid
$3.7 million into a settlement fund for a total of $5.6 million. Our $1.9 million payment was recorded in
general and administrative expenses in the quarter ended September 30, 2005. All costs of preparing and
distributing notices to members of the Class and administration of the settlement, together with all fees
and expenses awarded to plaintiffs’ counsel and certain other expenses, will be paid out of the settlement
fund, which will be maintained by an escrow agent under the Court’s supervision.
6
Summary of Restructuring Accruals
Restructuring charges originally arising in Q4 FY05
In May 2005, we initiated a plan to consolidate several corporate functions and to reduce our
operating expenses. The plan to reduce operating expenses primarily resulted in headcount reductions, and
also included the termination of a contract and the consolidation of facilities. These actions resulted in an
aggregate restructuring charge of $3.8 million, recorded in the fourth quarter of fiscal 2005. During the
year ended June 30, 2006, we recorded an additional $1.8 million related to headcount reductions,
relocation costs and facility consolidations associated with the May 2005 plan that did not qualify for
accrual at June 30, 2005.
As of June 30, 2006, there was $0.6 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. The components of the restructuring plan are as follows (in
thousands):
Fiscal 2005 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2005. . . . . . . . . . .
Restructuring charge . . . . . . . . . . . . . . . . . . .
Restructuring charge—Accretion . . . . . . . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . .
Expected final payment date . . . . . . . . . . . . . .
Employee
Severance,
Benefits, and
Related Costs
Closure/
Consolidation
of Facilities
$
$
84
—
84
614
1
(600)
99
3,465
(1,005)
2,460
1,157
21
(3,125)
513
$
May 2007 December 2006
$
Contract
Termination
Costs
$ 300
(300 )
—
—
—
—
—
Total
$ 3,849
(1,305)
2,544
1,771
22
(3,725)
$ 612
Restructuring charges originally arising in Q4 FY04
In June 2004, we initiated a plan to reduce our operating expenses in order to better align our
operating cost structure with the then-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 $23.5 million, recorded in the fourth quarter of fiscal 2004. During the year ended
June 30, 2005, we recorded $14.4 million related to headcount reductions and facility consolidations
associated with the June 2004 restructuring plan that did not qualify for accrual at June 30, 2004. In
addition, we recorded $0.4 million in restructuring charges related to the accretion of the discounted
restructuring accrual and a $0.8 million decrease to the accrual related to changes in estimates of
severance benefits and sublease terms. During the year ended June 30, 2006, we recorded a $0.7 million
increase to the accrual primarily due to a change in the estimate of future operating costs and sublease
assumptions associated with the facilities.
7
As of June 30, 2006, there was $7.0 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. The components of the restructuring plan are as follows (in
thousands):
Fiscal 2004 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . .
Fiscal 2004 payments . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . .
Accrued expenses, June 30, 2004. . . . . .
Restructuring charge . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . .
Fiscal 2005 payments. . . . . . . . . . . . . .
Restructuring charge—Accretion . . .
Change in estimate—Revised
assumptions. . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2005. . . . . .
Change in estimate—Revised
assumptions. . . . . . . . . . . . . . . . . . . .
Restructuring charge—Accretion . . .
Fiscal 2006 payments . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . .
Expected final payment date . . . . . . . . .
Closure/
Consolidation
of Facilities and
Contract exit costs
Employee
Severance,
Benefits, and
Related Costs
$
$
20,484
(8,435)
—
12,049
9,132
—
(12,915)
446
(287)
8,425
1,191
(280)
—
911
4,349
—
(4,534)
3
(497)
232
643
432
(2,645)
6,855
27
—
(67)
192
September 2012 December 2006
$
$
Asset
Impairments
$ 1,776
—
(1,776 )
—
968
(968 )
—
—
Total
$ 23,451
(8,715)
(1,776)
12,960
14,449
(968)
(17,449)
449
—
—
(784)
8,657
—
—
—
$ —
670
432
(2,712)
$ 7,047
Restructuring charges originally arising in Q2 FY03
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 had been affected the most by the 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 $28.7 million. During fiscal 2004, we recorded a $4.9 million decrease to
the accrual related to revised assumptions associated with lease exit costs, particularly the buyout of a
remaining lease obligation, and severance obligations. During fiscal 2005 and fiscal 2006, we recorded
$7.0 million and $1.0 million increases, respectively to the accrual primarily due to a change in the estimate
of the facility vacancy term, extending to the term of the lease.
8
As of June 30, 2006, there was $10.0 million remaining in accrued expenses relating to the remaining
lease payments. The components of the restructuring plan are as follows (in thousands):
Fiscal 2003 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . .
Additional impairment of assets . . . . . . . . . . . .
Fiscal 2003 payments . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2003. . . . . . . . . . . . . .
Fiscal 2004 payments . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . .
Accrued expenses, June 30, 2004. . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . .
Accrued expenses, June 30, 2005. . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . . . . . . .
Expected final payment date . . . . . . . . . . . . . . . . .
Closure/
Consolidation
of Facilities
$
17,347
—
(3,548)
13,799
(2,567)
(4,507)
6,725
(2,266)
7,239
11,698
1,116
(2,848)
$
9,966
September 2012
Employee
Severance,
Benefits, and
Related
Costs
$ 10,028
—
(7,297)
2,731
(2,170)
(269)
292
(63)
(69)
160
(95)
(65)
$ —
Impairment
of Assets and
Disposition
Costs
$ 1,278
302
—
1,580
(770 )
(134 )
676
(403 )
(195 )
78
—
(78 )
$ —
Total
$ 28,653
302
(10,845)
18,110
(5,507)
(4,910)
7,693
(2,732)
6,975
11,936
1,021
(2,991)
$ 9,966
Restructuring charges originally arising in Q4 FY02
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 $13.2 million. During fiscal 2004, we recorded a $1.5 million decrease to the accrual
related to revised assumptions associated with lease exit costs, particularly the buyout of a remaining lease
obligation, and severance obligations. During fiscal 2005, we recorded a $0.2 million increase to the accrual
due to changes in estimates of sublease assumptions and severance settlements. During fiscal 2006, we
recorded a $0.1 million increase to the accrual due to changes in estimates of sublease assumptions.
9
As of June 30, 2006, there was $0.5 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. The components of the restructuring plan are as follows (in
thousands):
Fiscal 2002 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2002 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2002. . . . . . . . . . . . . . . . . . .
Fiscal 2003 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2003. . . . . . . . . . . . . . . . . . .
Fiscal 2004 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . . . . . . .
Accrued expenses, June 30, 2004. . . . . . . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions. . . . . . . .
Accrued expenses, June 30, 2005. . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . . . . . . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . . . . . . . . . . . .
Expected final payment date . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Estimates and Judgments
Closure/
Consolidation
of Facilities
Employee
Severance,
Benefits, and
Related Costs
$
$
4,901
—
4,901
(695)
4,206
(1,302)
(1,221)
1,683
(994)
93
782
75
(375)
482
8,285
(1,849 )
6,436
(4,748 )
1,688
(1,060 )
(320 )
308
(284 )
87
111
—
(66 )
45
September 2012 December 2006
$
$
Total
$ 13,186
(1,849)
11,337
(5,443)
5,894
(2,362)
(1,541)
1,991
(1,278)
180
893
75
(441)
527
$
Our consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of our financial statements requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. We base our estimates on historical experience and various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions. The significant accounting policies that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:
• revenue recognition for both software licenses and fixed-fee consulting services;
• impairment of long-lived assets, goodwill and intangible assets;
• accrual of legal fees associated with outstanding litigation;
• accounting for income taxes;
• allowance for doubtful accounts;
• accounting for securitization of installments receivable;
• restructuring accruals; and
• accounting for stock-based compensation.
10
Revenue Recognition—Software Licenses
We recognize software license revenue in accordance with SOP No. 97-2, “Software Revenue
Recognition”, as amended by SOP No. 98-4 and SOP No. 98-9, as well as the various interpretations and
clarifications of those statements. When we provide professional services considered not essential to the
functionality of the software, and for which Vendor Specific Objective Evidence of fair value, or VSOE,
has been established, we recognize revenue for the delivered software when the basic criteria of SOP 97-2
are met. VSOE has been established, in most instances, for Software Maintenance Services, Training and
professional services rates. When we provide professional services that are considered essential to the
functionality of the software, we recognize revenue when the basic criteria of SOP 97-2 are met and when
the services have been completed. When we provide professional services, which involve significant
production, modification or customization of the licensed software, we recognize such revenue and any
related software licenses in accordance with SOP 81-1, “Accounting for Performance of Construction Type
and Certain Performance Type Contracts”. These statements all require that four basic criteria must be
satisfied before software license revenue can be recognized:
• persuasive evidence of an arrangement between ourselves and a third party exists;
• delivery of our product has occurred;
• the sales price for the product is fixed or determinable; and
• collection of the sales price is reasonably assured.
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. These
two criteria are particularly relevant to reseller transactions where, specifically, revenue is only recognized
upon delivery to the end user, since the determination of whether the fee is fixed or determinable and
whether collection is probable is more difficult. 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.
Revenue Recognition—Fixed-Fee Consulting Services
We recognize revenue associated with fixed-fee service contracts in accordance with the proportional
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’s estimates, revenue recognized in future periods could be adversely
affected.
Impairment of Long-lived Assets, Goodwill and Intangible Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” we review the carrying value of long-lived assets 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. Historically, actual
11
results have occasionally differed from our estimated future cash flow estimates. In the future, actual
results may differ materially from these estimates, and accordingly cause a full impairment of our long-
lived assets.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we conduct at least an
annual assessment on December 31st of the carrying value of our goodwill assets, which is based on either
estimates of future income from the reporting units or estimates of the market value of the units, based on
comparable recent transactions. These estimates of future income are based upon historical results,
adjusted to reflect our best estimate of future markets and operating conditions, and are continuously
reviewed based on actual operating trends. Historically, 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’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’s judgment and
estimates and could result in the impairment of all or substantially all of our long-lived assets, intangible
assets and goodwill, which totaled $49.0 million as of June 30, 2006.
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 estimating our
actual current tax liabilities together with the 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. Deferred tax
assets also result from unused operating loss carryforwards, research and development tax credit
carryforwards and foreign tax credit carryforwards. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase
or decrease this allowance in a period, the impact will be included in the tax provision in our statement of
operations.
Significant management judgment is required in determining any valuation allowance recorded
against these deferred tax assets and liabilities. 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. Since that
point, we have provided a full valuation allowance for all U.S. domiciled net deferred tax assets.
12
Allowance for Doubtful Accounts
We make judgments as to our ability to collect outstanding receivables and provide allowances for the
portion of receivables for which collection is doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. In determining these 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 do not reflect the future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be required for all or substantially all of certain receivable balances.
Accounting for Securitization of Installments Receivable
We made judgments with respect to several variables associated with our June 2005 securitization
transaction that had a significant impact on the valuation of our retained interest in the sold receivables, as
well as the calculation of the loss on the transaction. These judgments include the discount rate used to
value the retained interest in the sold receivables, and estimates of rates of default. In determining these
factors, we consulted third parties with respect to fair market discount rates, and analyzed our historical
collection experience to default rates and collection timing. If the historical collection data do not reflect
the future ability to collect outstanding receivables, the value of our retained interest may fluctuate.
Accounting for Restructuring Accruals
We follow SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In
accounting for these obligations, we are required to make assumptions related to the amounts of employee
severance, benefits, and related costs and to the time period over which facilities will remain vacant,
sublease terms, sublease rates and discount rates. We base our estimates and assumptions on the best
information available at the time the obligation has arisen. These estimates are reviewed and revised as
facts and circumstances dictate; changes in these estimates could have a material effect on the amount
accrued on the balance sheet.
Accounting for Stock-Based Compensation
We adopted SFAS No. 123(R), “Share-Based Payment,” effective July 1, 2005. Under the fair value
provisions of this statement, stock-based compensation cost is measured at the grant date based on the
value of the award and is recognized as expense over the vesting period. SFAS 123(R) requires significant
judgment and the use of estimates, particularly for assumptions such as stock price volatility and expected
option lives, as well as expected option forfeiture rates to value stock-based compensation in net income. If
actual results differ significantly from these estimates, stock-based compensation expense and our results
of operations could fluctuate significantly.
13
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,
2005
2006
2004
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible assets . . . . . . . . . . . . . . . . . . . . .
Impairment of technology related intangible and computer software
development assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.6 % 48.0 % 52.1%
52.0
52.4
100.0
100.0
47.9
100.0
4.7
30.6
2.4
1.0
38.7
61.3
30.6
18.1
10.3
0.3
6.0
(0.2 )
65.2
6.3
30.6
3.0
—
39.9
60.1
35.7
17.5
18.3
—
9.2
5.3
86.0
5.7
24.8
2.9
—
33.4
66.6
28.9
15.1
14.5
—
1.4
0.3
60.2
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3.9 )
(25.9 )
6.4
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before provision for income taxes and equity in earnings from
joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2
(1.5 )
1.5
2.3
(1.6 )
(1.3 )
1.7
(0.3)
(1.1)
(1.7 )% (26.5 )%
6.7%
Comparison of Fiscal 2006 to Fiscal 2005
Revenues. Revenues are derived from software licenses, consulting services and maintenance and
training. Total revenues for fiscal 2006 increased 8.6% to $293.1 million from $270.0 million in fiscal 2005.
Total revenues from customers outside the United States were $167.0 million or 56.9% of total revenues
and $162.7 million or 60.3% of total revenues for fiscal 2006 and 2005, respectively. The geographical mix
of revenues can vary from period to period.
Software license revenues represented 52.1% and 48.0% of total revenues for fiscal 2006 and 2005,
respectively. Revenues from software licenses in fiscal 2006 increased 17.9% to $152.8 million from
$129.6 million in fiscal 2005. 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. Our new customer base is less significant since we believe that we already have the significant
players in the process industries as existing customers. We believe that the increase principally reflected
14
strength in our energy end-market, as well as continued strength in our chemicals and engineering &
construction end-markets, combined with the increased efforts and time that our management were able to
dedicate to software license activities, and the increased willingness of our customers to make investments
in our products, following the resolution of the Federal Trade Commission, or FTC, proceedings and the
audit committee investigation in fiscal 2005.
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 were relatively unchanged
at $140.4 million for fiscal 2006 and fiscal 2005 as a 1.8% decline in the consulting services business was
offset by an increase in maintenance and training revenues. Consulting services declined due to the
December 2004 sale of a portion of our consulting business to Honeywell, as part of our settlement with
the FTC.
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 2006 decreased to
$16.8 million from $16.9 million in fiscal 2005. Cost of software licenses as a percentage of revenues from
software licenses decreased to 11.0% for fiscal 2006 from 13.0% for fiscal 2005. The reduction in cost as a
percentage of revenue is due to the increase in revenue over a base of costs, of which many are fixed in
nature.
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 2006 decreased 12.2% to $72.7 million from $82.7 million for fiscal 2005. Cost of service and
other, as a percentage of revenues from service and other, decreased to 51.6% for fiscal 2006 from 58.9%
for fiscal 2005. The decrease in cost is primarily due to decreased payroll costs of $8.9 million and
decreased rent and facility costs of $3.5 million related to reductions in headcount and facility
consolidations offset in part by increases of $3.1 million in reimbursable costs and $2.1 million in
stock-based compensation costs.
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 was $8.6 million and
$8.2 in fiscal 2006 and fiscal 2005, respectively. The increase is primarily the result of changes in foreign
currency translation rates affecting amortization expense incurred in subsidiaries operating in currencies
other than the U.S. dollar.
Selling and Marketing. Selling and marketing expenses for fiscal 2006 decreased 12.2% to
$84.5 million from $96.3 million for fiscal 2005, declining as a percentage of total revenues to 28.9% from
35.7%. The reduction in cost is primarily due to a decrease in payroll costs of $4.0 million, lower rent and
facility costs of $5.9 million, lower marketing and advertising costs of $2.2 million, lower travel expenses of
$1.5 million and a $2.7 million decrease in advertising costs related to AspenWorld, which took place in
October 2004, partially offset by a $3.1 million increase in stock-based compensation costs.
Research and Development. Research and development expenses consist of personnel and outside
consultancy costs required to conduct our product development efforts. Research and development
expenses for fiscal 2006 decreased 6.2% to $44.3 million from $47.3 million for fiscal 2005, and decreased
as a percentage of total revenues to 15.1% from 17.5%. The decrease is primarily attributable to a
$0.7 million decrease in payroll costs, a $1.7 million reduction in consultant costs, a $1.0 million reduction
in depreciation, and a $0.5 million decrease in rent and facility costs, partially offset by a $1.2 million
decrease in software development costs eligible for capitalization and a $1.6 million increase in stock-based
compensation costs.
15
We capitalized software development costs that amounted to 13.9% of our total engineering costs
during fiscal 2006, as compared to 15.3% in fiscal 2005. These percentages will vary from quarter to
quarter and year to year, depending upon the stage of development for the various projects in a given
period.
General and Administrative. General and administrative expenses consist primarily of salaries of
administrative, executive, financial and legal personnel, and outside professional fees. General and
administrative expenses for fiscal 2006 decreased 13.8% to $42.5 million from $49.3 million for fiscal 2005,
and decreased as a percentage of total revenues to 14.5% from 18.3%. This decrease is due to a
$7.1 million reduction in legal, accounting and consulting costs associated with the internal investigation by
the audit committee, a $1.9 million decrease in payroll costs, and a $1.0 million reduction in rent and
facility costs, partially offset by a $3.3 million increase in stock-based compensation costs and increased
recruiting costs of $0.7 million.
Restructuring Charges and FTC Legal Costs. During fiscal 2006 we recorded an additional
$1.8 million related to headcount reductions, relocation costs and facility consolidations associated with
the May 2005 plan that did not qualify for accrual at June 30, 2005. The remaining $2.2 million relates to
revisions of estimates associated with lease exit costs and accretion of the discounted restructuring accruals
under previous restructuring plans. During fiscal 2005, we recorded $25.0 million in restructuring charges
and FTC legal costs. Of this amount, $14.4 million related to headcount reductions and facility
consolidations associated with the June 2004 restructuring plan that did not qualify for accrual at June 30,
2004, $3.8 million related to the May 2005 restructuring charge, $0.4 million related to the accretion of
discounted restructuring accruals, and $6.5 million related to adjustments to prior restructuring accruals,
all offset by $0.2 million in FTC legal cost, related to the FTC challenge of our acquisition of Hyprotech.
Loss (Gain) on Sales of Assets. Losses and gains on sales and disposals of assets primarily result from
our programs to sell installment receivable contracts and from disposals of fixed assets. Loss on sales of
assets was a $0.9 million loss in fiscal 2006 as compared to a $14.3 million loss in fiscal 2005. This decline is
due to the absence of the $14.6 million loss incurred on the securitization of installments receivable in
fiscal 2005.
Interest Income. Interest income is generated from investment of excess cash 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
$5.0 million for fiscal 2006 as compared to $6.2 million in fiscal 2005. This decrease primarily is due to the
securitization of approximately $71.2 million of our installments receivable in June 2005, which
significantly lowered the average carrying balance of our installments receivable.
Interest Expense. Interest expense was incurred under our convertible debentures and through the
course of other financing transactions. Interest expense in fiscal 2006 decreased to $1.0 million from
$4.2 million in fiscal 2005. This decrease in interest expense resulted from the retirement of our convertible
debentures in June 2005.
16
Foreign currency exchange gain (loss). Foreign currency exchange gains and losses are primarily
incurred as a result of the revaluation of intercompany accounts denominated in foreign currencies and
reflect movement in period end exchange rates. The revaluation adjustments are primarily related to
unrealized gains and losses on intercompany balances that have not settled in cash. In fiscal 2006 we
recorded a foreign currency exchange loss of $3.4 million, compared to a $3.6 million loss in fiscal 2005.
Provision for/Benefit from Income Taxes. We recorded a provision for income taxes of $6.7 million for
fiscal 2006, primarily related to foreign taxes. We recorded a provision for income taxes of $2.0 million for
fiscal 2005 and provided a full valuation allowance against the net operating losses generated during fiscal
2005.
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 likely than 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 likely than 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.
Comparison of Fiscal 2005 to Fiscal 2004
Revenues. Total revenues for fiscal 2005 decreased 18.8% to $270.0 million from $332.4 million in
fiscal 2004. Total revenues from customers outside the United States were $162.7 million or 60.3% of total
revenues and $190.8 million or 57.4% of total revenues for fiscal 2005 and 2004, respectively. The
geographical mix of revenues can vary from period to period.
Software license revenues represented 48.0% and 47.6% of total revenues for fiscal 2005 and 2004,
respectively. Revenues from software licenses in fiscal 2005 decreased 18.3% to $129.6 million from
$158.2 million in fiscal 2004. 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. We believe that the decrease was primarily due to distractions caused by the ongoing
uncertainty of the FTC proceedings, our audit committee investigation, changes in sales management and
delays in purchasing from customers.
Revenues from service and other for fiscal 2005 decreased 19.5% to $140.4 million from $174.3 million
for fiscal 2004. These decreases were attributable primarily to the consulting services business. Consulting
services decreased due to the general low-level of licenses of our supply chain products during the two
most recent fiscal years. Our consulting services are more heavily linked to the implementation of our
supply chain products than they are to our other products. We believe that the decrease was also due to
distractions caused by the ongoing uncertainty of the FTC proceedings and our audit committee
investigation.
Cost of Software Licenses. Cost of software licenses for fiscal 2005 increased 8.3% to $16.9 million
from $15.6 million in fiscal 2004. Cost of software licenses as a percentage of revenues from software
licenses increased to 13.0% for fiscal 2005 from 9.8% for fiscal 2004. The cost increase is primarily due to
an increase in amortization of computer software development costs of $0.9 million. The increase in the
amortization of computer software development costs is related to several significant product releases,
including aspenONE in December 2004.
Cost of Service and Other. Cost of service and other for fiscal 2005 decreased 18.7% to $82.7 million
from $101.8 million for fiscal 2004. Cost of service and other, as a percentage of revenues from service and
17
other, increased to 58.9% for fiscal 2005 from 58.4% for fiscal 2004. The decrease in cost is primarily due
to decreased payroll costs of $10.7 million related to reductions in headcount, as well as a decrease in
reimbursable expenses of $5.5 million and a $2.3 million reduction in stock-based compensation.
Amortization of Technology Related Intangible Assets. Amortization expense for fiscal 2005 increased
3.1% to $8.2 million from $8.0 million for fiscal 2004. The increase is primarily the result of changes in
foreign currency translation rates affecting amortization expense incurred in subsidiaries operating in
currencies other than the U.S. dollar.
Selling and Marketing. Selling and marketing expenses for fiscal 2005 decreased 5.4% to
$96.3 million from $101.8 million for fiscal 2004, while increasing as a percentage of total revenues to
35.7% from 30.6%. The decrease in cost is primarily due to a decrease in payroll costs of $6.0 million
attributable to the headcount reductions effected in the June 2004 restructuring plan and a $1.7 million
decrease in stock-based compensation expense, offset by an increase in advertising costs of $2.6 million
related to AspenWorld, which took place in October 2004.
Research and Development. Research and development expenses for fiscal 2005 decreased 21.4% to
$47.3 million from $60.1 million for fiscal 2004, and decreased as a percentage of total revenues to 17.5%
from 18.1%. The decrease is primarily attributable to a $5.6 million decrease in payroll costs and a $2.7
million decrease in facilities related costs associated with the June 2004 restructuring plan, and a
$2.1 million decrease in consulting costs, partially offset by a decline in stock-based compensation expense
of $1.1 million.
We capitalized software development costs that amounted to 15.3% of our total engineering costs
during fiscal 2005, as compared to 11.2% in fiscal 2004. These percentages will vary from quarter to
quarter, depending upon the stage of development for the various projects in a given period. This increase
is primarily due to the significant amount of effort associated with the development and release of
AspenONE in December 2004 and AspenONE 2004.1 in May 2005.
General and Administrative. General and administrative expenses for fiscal 2005 increased 43.4% to
$49.3 million from $34.4 million for fiscal 2004, and increased as a percentage of total revenues to 18.3%
from 10.3%. This increase is due to a $7.1 million increase in legal, accounting and consulting costs
associated with the internal investigation by the audit committee, $3.8 million in litigation defense and
settlement costs related to KBC, a $1.9 million increase in audit and consulting fees associated with the
Sarbanes-Oxley Act, specifically our Section 404 efforts, and $3.4 million in contract and employment
termination costs, offset in part by a $1.5 million decline in stock-based compensation expense.
Long-Lived Asset Impairment Charges. In fiscal 2004, this amount consisted of $1.0 million in
impairment charges based on our decision 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.
Restructuring Charges and FTC Legal Costs. During fiscal 2005, we recorded $25.0 million in
restructuring charges and FTC legal costs. Of this amount, $14.4 million related to headcount reductions
and facility consolidations associated with the June 2004 restructuring plan that did not qualify for accrual
at June 30, 2004, $3.8 million related to the May 2005 restructuring charge, $0.4 million related to the
accretion of discounted restructuring accruals, and $6.5 million related to adjustments to prior
restructuring accruals, all offset by $0.2 million in FTC legal costs, related to the FTC challenge of our
acquisition of Hyprotech.
In May 2005, we initiated a plan to consolidate several corporate functions and to reduce our
operating expenses. The plan to reduce operating expenses primarily resulted in headcount reductions, and
also included the termination of a contract and the consolidation of facilities. These actions resulted in an
18
aggregate restructuring charge of $3.8 million, recorded in the fourth quarter of fiscal 2005. The
components of the restructuring plan are as follows:
Closure/consolidation of facilities: Approximately $0.1 million of the restructuring charge relates to
the termination of a facility lease. The facility lease had a remaining term of two years. The amount
accrued is an estimate of the remaining obligation under the lease, reduced by expected income from the
sublease of the underlying properties.
Employee severance, benefits and related costs: Approximately $3.4 million of the restructuring charge
relates to the reduction in headcount. Approximately 130 employees, or 10% of the workforce, were
eliminated under the restructuring plan. The employees were primarily located in North America and
Europe. All business units were affected, including services, sales and marketing, research and
development, and general and administrative.
Contract termination costs: Approximately $0.3 million of the restructuring charge relates to charges
associated with the termination of a contract for a future user conference. The contract was terminated in
June 2005.
Loss (Gain) on Sales of Assets. Loss (gain) on sales of assets was a $14.3 million loss in fiscal 2005 as
compared to $0.7 million gain in fiscal 2004. This decrease is primarily due to the loss of $14.6 million
incurred on the June 2005 securitization of installments receivable.
Interest Income. Interest income was $6.2 million for fiscal 2005 as compared to $7.3 million in fiscal
2004. This decrease primarily is due to the increased sale of receivables and lower license revenues,
resulting in the decrease of installments receivable balance.
Interest Expense. Interest expense in fiscal 2005 decreased to $4.2 million from $4.9 million in fiscal
2004. This decrease in interest expense results from the elimination of interest bearing debt, such as the
retirement of a portion of the convertible debentures in January 2004, March 2004 and May 2004, and the
retirement of the remaining portion in June 2005.
Foreign currency exchange gain (loss). Foreign currency exchange gains and losses are primarily
incurred as a result of the revaluation of intercompany accounts denominated in foreign currencies and
reflect movement in period end exchange rates. The revaluation adjustments are primarily related to
unrealized gains and losses on related intercompany balances that have not settled in cash.
In fiscal 2005 we recorded a foreign currency exchange loss of $3.6 million, compared to a $4.8 million
gain in fiscal 2004. This increase was due to favorable exchange rate fluctuations.
Provision for/Benefit from Income Taxes. We recorded a provision for income taxes of $2.0 million for
fiscal 2005, primarily related to foreign taxes. We recorded a provision for income taxes of $20.2 million for
fiscal 2004. The provision for fiscal 2004 includes a $14.6 million valuation allowance against U.S.
domiciled net deferred tax assets and a $6.8 million provision primarily related to foreign taxes.
Additionally, as part of a change in the Japan-US tax treaty, the Japanese withholding tax law was repealed
effective July 1, 2004 and provided approximately $1.5 million of income tax relief to the Company as of
the enactment date of the tax law change which occurred in the quarter ended March 31, 2004. We
provided a full valuation allowance against the net operating losses generated during fiscal 2004 and 2005.
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 likely than 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 likely than 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
19
deferred tax asset to determine if such asset is realizable. In fiscal 2004, we concluded, in accordance with
SFAS No. 109, that we should record a valuation allowance on a significant portion of our deferred tax
asset under the “more likely than not” test and therefore increased the amount of the valuation allowance.
See Note 10 to Consolidated Financial Statements.
Equity in earnings from joint ventures. Equity in earnings from joint ventures was a $0.4 million loss in
fiscal 2004. These losses relate to net losses incurred by certain joint ventures in which we have an equity
interest. These investments were liquidated during fiscal 2005, and there were no material gains or losses
realized.
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 involve
the services of 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’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.
The following tables presents previously reported and restated quarterly consolidated statement of
operations data for fiscal 2005 and 2006. These data are unaudited but, in our opinion, reflect all
adjustments necessary for a fair presentation of these data in accordance with US GAAP. See
“—Restatements of Financial Results” above and Note 17 to the Notes to the Consolidated Financial
Statements for a discussion of the first, second, and third restatements.
20
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22
Quarter ended September 30, 2005
First Restatement
Second
Restatement
Third
Restatement
Stock-based
Compensation
and Related
Tax
Adjustments
As
Previously
Reported
Other
Adjustments Adjustments Adjustments
As Restated
(1)
(In thousands, except per share data)
$ 24,317
35,736
60,053
$ —
—
—
$ (280)
—
(280)
$ —
61
61
$ —
—
—
$ 24,037
35,797
59,834
—
55
—
55
93
—
—
93
(55)
(373)
40
26
30
—
—
96
(151)
—
—
(151)
—
(151)
—
$ (151)
(12)
(12)
106
—
—
82
(455)
665
459
669
(10)
659
—
$ 659
$ 0.02
—
$ 0.02
—
—
44
—
44
17
83
35
138
—
—
256
(239)
—
—
(239)
—
(239)
—
$ (239)
—
—
324
324
(324)
—
—
10
—
—
10
(334)
—
(3,093 )
(3,427 )
959
(2,468 )
—
$ (2,468 )
3,875
17,343
2,106
23,324
36,510
18,758
10,183
10,469
2,199
61
41,670
(5,160)
816
(3,297)
(7,641)
309
(7,332)
(3,778)
$ (11,110)
$ (0.01)
$ (0.06 )
$
(0.26)
—
—
43,237
$ (0.01)
$ (0.06 )
$
(0.26)
—
—
43,237
Revenues:
Software licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible assets. . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and
marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,782
17,244
1,782
22,808
37,245
18,647
10,134
10,185
2,199
61
41,226
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . .
(3,981)
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . . . . . . .
Income (loss) before provision for taxes . . . . . . . . . . . . . . .
Benefit from (provision for) income taxes. . . . . . . . . . . . . .
Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount and dividend. . . . . . .
Income (loss) applicable to common stockholders. . . . . . . .
Basic income (loss) per share applicable to common
151
(663)
(4,493)
(640)
(5,133)
(3,778)
$ (8,911)
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.21)
$ (0.00)
Basic weighted average shares outstanding . . . . . . . . . . . . .
43,237
—
Diluted income (loss) per share applicable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.21)
$ (0.00)
Diluted weighted average shares outstanding . . . . . . . . . . .
43,237
—
23
Quarter ended December 31, 2005
First Restatement
Second
Restatement
Third
Restatement
Stock-based
Compensation
and Related
Tax
Adjustments
As
Previously
Reported
Other
Adjustments Adjustments Adjustments
As Restated
(1)
(In thousands, except per share data)
$ 41,690
34,701
76,391
$ —
—
—
$ 180
—
180
$ —
50
50
$ —
—
—
—
—
355
355
(355)
—
—
9
—
—
9
(364)
—
(244)
(608)
80
(528)
—
$ (528 )
—
53
—
53
(3)
111
44
181
—
—
336
(339)
—
—
(339)
—
(339)
—
$ (339)
$ (0.01)
$ (0.01 )
—
—
$ (0.00)
$ (0.01 )
—
—
$ 41,870
34,751
76,621
4,244
17,962
2,128
24,334
52,287
20,759
11,826
10,101
995
316
43,997
8,290
754
811
9,855
(2,011)
7,844
(3,843)
$ 4,001
$ 0.09
43,753
$ 0.08
52,765
—
—
—
—
180
(12)
(12)
—
—
—
(24)
204
510
—
714
(11)
703
—
$ 703
$ 0.01
—
$ 0.01
—
—
50
—
50
(50)
36
23
27
—
—
86
(136)
—
—
(136)
—
(136)
—
$ (136)
Revenues:
Software licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible assets. . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and
marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . . . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . .
4,244
17,859
1,773
23,876
52,515
20,624
11,771
9,884
995
316
43,590
8,925
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . . . . . . . .
Income (loss) before provision for taxes . . . . . . . . . . . . . . . .
Benefit from (provision for) income taxes. . . . . . . . . . . . . . .
Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount and dividend. . . . . . . .
Income (loss) applicable to common stockholders. . . . . . . . .
244
1,055
10,224
(2,080)
8,144
(3,843)
$ 4,301
Basic income (loss) per share applicable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.10
$ (0.00)
Basic weighted average shares outstanding . . . . . . . . . . . . . .
43,753
—
Diluted income (loss) per share applicable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.08
$ (0.00)
Diluted weighted average shares outstanding . . . . . . . . . . . .
52,765
—
24
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1
(
Liquidity and Capital Resources
In fiscal 2006, operating activities provided $19.9 million of cash as net income, excluding non-cash
expenses for stock-based compensation and depreciation and amortization, was partially offset by cash
payments related to restructuring, legal and financial accruals and an increase in installments receivable. In
fiscal 2004 and 2005, operating activities provided $40.9 million and $25.9 million of cash, respectively.
In fiscal 2006, investing activities used $10.5 million of cash primarily as a result of the capitalization
of computer software development costs and the ordinary purchases of property and equipment. In fiscal
2004 and 2005, investing activities used $7.6 million and $11.8 million of cash, respectively.
In fiscal 2006, financing activities provided $8.5 million of cash primarily due to exercise of stock
options, partially offset by payment of preferred stock dividends. In fiscal 2004 and 2005, financing
activities provided $22.2 million of cash and used $53.7 million of cash, respectively.
Historically, we have financed our operations principally through cash generated from public offerings
of our convertible debentures and common stock, private offerings of our preferred stock and common
stock, operating activities, and the sale of installment contracts to third parties.
On June 15, 2005, we paid $58.2 million to retire all of the outstanding principal amount of our
convertible debentures, together with interest accrued thereon. We funded this payment with
(a) $8.6 million of our existing cash, (b) $5.8 million obtained from our sales of installments receivable
under our existing receivables programs with Silicon Valley Bank and GE Capital Corporation, and
(c) $43.8 million through the sale of additional installments receivable under the arrangement described
below.
On June 15, 2005, we securitized outstanding installment software license receivables totaling
$71.2 million. Such securitization was structured in a manner so that the securitization qualified as a sale.
We received $43.8 million of cash and retained an interest in the sold receivables valued at $16.6 million.
We also retained certain limited recourse obligations relative to the receivables valued at approximately
$1.0 million. Overall, the transaction (including $2.1 million in aggregate fees and expenses, including fees
of the lenders’ agent and fees of our outside legal counsel and financial advisors) resulted in a loss of
$14.6 million in the quarter ended June 30, 2005 and was recorded as a loss on sales and disposals of assets
in the accompanying consolidated statement of operations. We expect that these installments receivable
will generate approximately $17.5 million and $14.0 million of cash flows during fiscal years 2007 and 2008
that we would have received, if not for the securitization of these receivables. This transaction allowed us
to accelerate the collection of cash associated with our installments receivable. From time to time, it is
likely that we will engage in other securitization transactions.
In August 2003, we issued and sold 300,300 shares of Series D-1 preferred, along with WD warrants to
purchase up to 6,006,006 shares of common stock, for an aggregate purchase price of $100.0 million.
Concurrently, we paid $30.0 million and 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 outstanding
Series B preferred. The Series D preferred earns cumulative dividends at an annual rate of 8%, that are
payable when and if declared by the board, in cash or, subject to certain conditions, common stock. Each
share of Series D preferred currently is convertible into 100 shares of common stock, subject to anti-
dilution and other adjustments. On May 16, 2006, holders of the Series D converted 30,000 Series D
preferred shares into 3,000,000 shares of common stock. At the time of the conversion, we also made a
cash payment of $2.4 million to settle the accrued dividends on the converted shares. As a result, the shares
of Series D preferred currently are convertible into an aggregate of 33,336,400 shares of common stock.
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.
26
We have had arrangements to sell installments receivable to three financial institutions, General
Electric Capital Corporation, Bank of America and Silicon Valley Bank. We sold certain installment
contracts for aggregate proceeds of approximately $97.6 million and $77.1 million during fiscal 2005 and
2006, respectively. As of June 30, 2006, there was in excess of $60 million in additional availability under the
arrangements. We expect to continue to have the ability to sell receivables, as the collection of the sold
receivables will reduce the outstanding balance, and the availability under the arrangements can be
increased. At June 30, 2006, we had a partial recourse obligation that was within the range of $0.1 million to
$1.5 million.
In January 2003, we executed a loan arrangement with Silicon Valley Bank. This arrangement
provides a line of credit of up to the lesser of (1) $15.0 million or (2) 70% of eligible domestic receivables,
and a line of credit of up to the lesser of (1) $10.0 million or (2) 80% of eligible foreign receivables. The
lines of credit bear interest at the bank’s prime rate (8.25% at June 30, 2006). We are required to maintain
a $4.0 million compensating cash balance with the bank, or be subject to an unused line fee and collateral
handling fees. The lines of credit will initially be collateralized by nearly all of our assets, and upon
achieving certain net income targets, the collateral will be reduced to a lien on our accounts receivable. We
are required to meet certain financial covenants, including minimum tangible net worth, minimum cash
balances and an adjusted quick ratio. As of June 30, 2006, there were $8.5 million in letters of credit
outstanding under the line of credit, and there was $11.8 million available for future borrowing. As of
June 30, 2006, we were in compliance with the tangible net worth and adjusted quick ratio covenants. The
loan arrangement expires in January 2007. We are currently in negotiations to either: (i) extend this line of
credit with our current lender and amend the terms of the facility; or (ii) obtain a facility from another
lender.
As of June 30, 2006, we had cash and cash equivalents totaling $86.3 million. Our commitments as of
June 30, 2006 consisted of capital lease obligations and leases for our headquarters and other facilities.
Other than these, there were no other commitments for capital or other expenditures. Our obligations
related to these items at June 30, 2006 are as follows (in thousands):
Operating leases . . . . . . . . . . . . . . . .
Debt obligations . . . . . . . . . . . . . . . .
Total commitments . . . . . . . . . . . . .
2007
$ 9,680
247
$ 9,927
2008
$ 7,437
149
$ 7,586
2009
$ 7,570
—
$ 7,570
2010
$ 7,406
—
$ 7,406
2011
$ 6,460
—
$ 6,460
Thereafter
$ 14,834
—
$ 14,834
Total
$ 53,387
396
$ 53,783
We believe our current cash balances, together with availability of sales of our installment contracts
and cash flows from our operations will be sufficient to meet our working capital and capital expenditure
requirements for at least fiscal 2007. 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, including those further described in “Item 1A. Risk Factors.” 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.
27
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 2007.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertain Tax Positions,” an
Interpretation of FAS 109 (FIN 48), which clarifies the criteria for recognition and measurement of
benefits from uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit when it is
“more-likely-than-not”, based on the technical merits, that the position would be sustained upon
examination by a taxing authority. The amount to be recognized should be measured as the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. Furthermore, any change in the recognition,
derecognition or measurement of a tax position should be recognized in the interim period in which the
change occurs. We expect to adopt FIN 48 as of July 1, 2007, and any change in net assets as a result of
applying the Interpretation will be recognized as an adjustment to retained earnings on that date. We are
in the process of evaluating our uncertain tax positions in accordance with FIN 48.
Item 8.
Financial Statements and Supplementary Data
The consolidated financial statements of Aspen Technology, Inc. are filed as a part of this
Form 10-K/A beginning on page F-1 and are incorporated herein by reference.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. Our management, with the participation of our chief executive
officer and our current chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2006, the final day of the fiscal year covered by this Form 10-K/A. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management, including our chief executive officer (who also was our then-acting chief financial
officer), had previously concluded that our disclosure controls and procedures were not effective at the
reasonable assurance level as of June 30, 2006 because of the existence of four material weaknesses
described in 1) through 4) under “Management’s Report on Internal Control over Financial Reporting” in
the original Form 10-K. In connection with the second restatement of our consolidated financial
statements described in Note 17 to the consolidated financial statements, our current management,
including our chief executive officer and our current chief financial officer, determined that a new material
weakness in internal control over the calculation and review of forfeiture rates affecting its stock-based
compensation expense also existed as of June 30, 2006. In connection with the third restatement of our
consolidated financial statements described in Note 17 to the consolidated financial statements, our
current management, including our chief executive officer and our current chief financial officer, have
determined that an additional material weakness in internal control over the accounting for foreign
28
currency transactions related to the consolidation of our foreign subsidiaries also existed as of June 30,
2006. In connection with this filing on Form 10-K/A management re-evaluated the effectiveness of
disclosure controls and procedures and concluded that disclosure controls and procedures were not
effective. Additionally, management has revised its report on internal control over financial reporting as
described below.
Management’s Report on Internal Control Over Financial Reporting and Attestation of Independent
Registered Public Accounting Firm (as Revised). Management’s revised report on our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), including the
description of material weaknesses in our internal control over financial reporting as of June 30, 2006 and
the remedial measures we are undertaking to address those material weaknesses and the independent
registered public accounting firm’s related audit report are included below.
Changes in Internal Control Over Financial Reporting. We previously reported six material
weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act), which were described in Item 9A and Management’s Report on Internal Control Over
Financial Reporting in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, which we
filed on September 13, 2005. A material weakness is a significant deficiency (as defined in Public Company
Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
During the first three quarters of the year ended June 30, 2006, we reported on Form 10-Q material
changes made to our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to address our previously reported material weaknesses. During the
fourth quarter, management completed testing to assess the effectiveness of its remedial measures and
based on that testing has concluded in the fourth quarter that three of the previously reported material
weaknesses no longer constitute material weaknesses as of June 30, 2006. For the three remaining items
which management believes still constitute material weaknesses as of June 30, 2006, we have made changes
in our internal controls over financial reporting as they relate to these control areas, but there continues to
be additional work required for us to conclude that these control areas are operating such that they no
longer constitute material weaknesses.
A discussion of the changes reported on Form 10-Q in previous quarters and their impact on our
previously reported material weaknesses is included below. The following three previously reported
material weaknesses no longer constituted material weaknesses as of June 30, 2006:
1)
Inadequate staffing and ineffective training and communication within the accounting and finance
organization.
• We increased the staffing and level of expertise of our accounting and finance organization,
including hiring a vice president corporate controller, a director of corporate accounting, a manager
of financial reporting, a manager of revenue operations, a credit and collections manager, an
accounts payable manager, a sales tax analyst, and additional general accountants in general ledger,
payroll, and collections in our Cambridge, Massachusetts headquarters, as well as a manager of
revenue operations for the Asia Pacific region.
• We consolidated our North American accounting operations into a single shared service center at
our Cambridge, Massachusetts headquarters.
• We implemented procedures under which we hold periodic meetings of cross-functional teams to
improve communication and provide additional training.
29
• We held several training sessions on revenue recognition and internal credit policies for regional
sales personnel, sales and executive management and new finance management.
During the fourth quarter of 2006, management concluded that the remedial measures described
above were sufficient such that inadequate staffing and ineffective training and communication within the
accounting and finance organization no longer constituted a material weakness as of June 30, 2006.
2)
Ineffective revenue recognition controls.
• We took steps to improve our procedures relating to approving revenue arrangements sold through
foreign agents, including redefining the identification, approval, recording and monitoring
processes for agents and their commissions, and increasing coordination amongst our internal
functional organizations.
• We completed an inventory of software currently held by our resellers.
• We implemented a policy requiring each customer to provide written confirmation of acceptance of
ongoing maintenance.
• We enhanced our documentation regarding our pricing policies relating to consulting services and
software maintenance services.
During the fourth quarter of 2006, management concluded that the remedial measures described
above were sufficient such that ineffective revenue recognition controls no longer constituted a material
weakness as of June 30, 2006.
3)
Inadequate controls over bank accounts.
• We enhanced our existing policies and procedures related to the maintenance of bank accounts to
include a periodic evaluation of our existing accounts, and closed accounts and updated bank
signatory authorizations as appropriate for our business.
• We implemented policies and procedures to ensure bank accounts are included in our general
ledger chart of accounts on a timely basis.
During the fourth quarter of 2006, management concluded that the remedial measures described
above were sufficient such that inadequate controls over bank accounts no longer constituted a material
weakness as of June 30, 2006.
30
The three remaining previously reported material weaknesses which management believes require
further work and still constituted material weaknesses as of June 30, 2006, as well as the related significant
changes to internal controls over financial reporting, are as follows:
1)
Inadequate financial statement preparation and review procedures.
• We significantly increased the number and expertise of experienced supervisory personnel within
the accounting and finance organization.
• We implemented procedures under which we hold periodic meetings of cross-functional teams to
improve communication and provide additional training.
• We enhanced our existing monthly closing meetings to include a formal planning and financial
review process, and have extended attendance at those meetings to a broader group of senior
financial management and staff.
• We implemented policies and procedures to identify and add accounts, including bank accounts, to
our general ledger chart of accounts on a timely basis.
• We enhanced our existing policies and procedures relating to general ledger account
reconciliations, including establishment of a formal escalation method to notify senior financial
management of accounts that have unreconciled or unadjusted variances.
• We implemented formal policies and procedures to ensure that our accounting and analysis of
intangible assets, reserves and accruals are adequately supported and documented.
• We have implemented procedures for the timely preparation of memoranda to support all non-
routine transactions.
Although the remedial measures implemented above improved our financial statement preparation
and review as of June 30, 2006, certain of our processes and systems require further work and are
dependent upon the recruiting and training of a number of qualified staff that were hired late in the fiscal
year. As a result, certain controls over our periodic financial close process were not in place for a sufficient
duration or were not effective as of June 30, 2006. Specifically, we did not have effective controls and
procedures as of June 30, 2006 with respect to the (a) review of manual journal entries recorded at the
consolidated level; (b) timely disposition of required adjustments identified through the period-end
account analysis and reconciliation process, and (c) accounting for complex non-routine transactions.
This material weakness over our period financial close process as of June 30, 2006 is discussed further
in “Management’s Report on Internal Control Over Financial Reporting (as revised)” included below.
2)
Ineffective and inadequate controls over the accounts receivable function.
• We enhanced our policies and procedures relating to determining the creditworthiness of new and
existing customers.
• We improved our policies and procedures to ensure that accurate invoices are submitted to
customers and that all invoices paid by customers are recorded accurately and timely in our records.
• We enhanced our bad debt policies to clarify when reserves and write-offs are required and have
implemented procedures designed to assess the proper valuation of our accounts receivable
reserves.
• We engaged external collections agencies and legal counsel to assist with the collection of certain
outstanding accounts receivable.
Although the remedial measures implemented above improved the internal controls over our
accounts receivable function as of June 30, 2006, our accounts receivable reconciliation and review
31
procedures require further work. As a result, controls in the accounts receivable function over the process
to record customer invoice payments timely and accurately were not effective as of June 30, 2006.
Specifically, we did not have effective procedures and controls over our accounts receivable function to
provide reasonable assurance that all customer invoice payments are being recorded timely and accurately,
and reflected as liabilities in those cases where we collected cash from customers relating to invoices
previously sold to financial institutions.
This material weakness over controls in our accounts receivable function to record customer invoice
payments timely and accurately as of June 30, 2006 is discussed further in “Management’s Report on
Internal Control Over Financial Reporting (as revised)” included below.
3)
Inadequate controls over the accounting for taxes.
• We implemented policies and procedures for the determination, review and documentation of
income tax and sales tax liabilities and deferred income tax assets and liabilities as well as for
preparing income tax provision calculations.
• We increased the level of review of all quarterly and annual tax accounts and calculations.
Although the remedial measures implemented above improved our controls over the accounting for
taxes, further work is required to develop effective controls over the accounting for our income tax
provision, income tax liabilities and deferred income tax accounts and related disclosures. As a result,
controls over the accounting for income taxes were not adequate to prevent or detect a material
misstatement of our financial position or results of operations as of June 30, 2006. Specifically, we did not
have effective design or operational controls over the accounting for income taxes to provide reasonable
assurance that the relevant income tax accounts and related disclosures can be prepared in accordance
with generally accepted accounting principles.
This material weakness over the accounting for income taxes as of June 30, 2006 is discussed further in
“Management’s Report on Internal Control Over Financial Reporting (as revised)” included below.
In addition, during the fourth quarter, management identified one new material weakness in internal
control over the accrual of goods and services received as of June 30, 2006. As a result, controls over the
accrual of goods and services received were not effective as of June 30, 2006 to provide reasonable
assurance that all goods and services received are being recorded timely and completely.
This material weakness over the accrual of goods and services received as of June 30, 2006 is discussed
further in “Management’s Report on Internal Control Over Financial Reporting (as revised)” included
below.
In November 2006, our current management, including our chief executive officer and our current
chief financial officer, identified a new material weakness in internal control over the calculation and
review of forfeiture rates affecting stock-based compensation expense for the year ended June 30, 2006.
Specifically, we did not have effective operational and review controls in place to provide reasonable
assurance that the calculation of stock-based compensation expense reflected accurate forfeiture rates
under the provisions of FASB Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (SFAS No. 123R), which was adopted on July 1, 2005. This control deficiency resulted in the
restatement of the consolidated financial statements for the year ended June 30, 2006 as described in
Note 17 to the consolidated financial statements under the caption “Second Restatement.” This material
weakness relating to the calculation and review of forfeiture rates affecting stock-based compensation
expense for the year ended June 30, 2006 is discussed further in “Management’s Report on Internal
Control Over Financial Reporting (as revised)” included below.
In February 2007, our current management, including our chief executive officer and our current chief
financial officer, identified an additional material weakness in internal control over the accounting for
32
foreign currency transactions related to the consolidation of our foreign subsidiaries. Specifically, we did
not have adequate controls and procedures to ensure that (a) transaction gains and losses on intercompany
balances denominated in currencies other than the functional currency were properly accounted for in
earnings instead of accumulated other comprehensive income (loss) and (b) translation of all foreign
denominated balances, including those generated from the application of purchase accounting, is
accounted for in the functional currency of the applicable entity and translated at the appropriate current
exchange rates. This control deficiency resulted in the restatement of the consolidated financial statements
for the years ended June 30, 2004, 2005 and 2006 as described in Note 17 to the consolidated financial
statements under the caption “Third Restatement.” This material weakness relating to the classification of
foreign currency transaction gains and losses for the years ended June 30, 2004, 2005 and 2006 is discussed
further in “Management’s Report on Internal Control over Financial Reporting (as revised)” included
below.
Remediation
Management has identified the following measures to address the material weaknesses described
above and in Management’s Report on Internal Control Over Financial Reporting (as revised) included
below.
In order to improve controls over the periodic financial close process, we intend to:
• Upgrade our existing financial applications, which will allow management to streamline the
capturing of relevant data, improve the general ledger and entity account level reporting structures
and enhance the information query and reporting capability for the consolidated books worldwide;
• Implement enhanced controls to review all manual journal entries recorded at the consolidated
level prior to posting;
• Implement enhanced controls to reconcile subsidiary-level books to the consolidated books;
• Simplify the legal entity structure;
• Implement improved processes and procedures to ensure that all reconciling items identified in
balance sheet account reconciliations are accounted for properly and timely;
• Implement procedures to help ensure that the proper accounting of all complex non-routine
transactions is researched, detailed in memoranda and reviewed by senior management prior to
recording; and
• Continue to assess the adequacy and expertise of the finance and accounting staff on a global basis.
In order to improve controls in the accounts receivable function over the process to record customer
invoice payments timely and accurately, we intend to:
• Implement improved accounts receivable reconciliation and review procedures to ensure all cash
receipts are timely applied to applicable accounts receivables balances and to timely record the
appropriate liability in the case where the receivable has been sold to a financial institution.
• Assess the adequacy of the accounting applications deployed to service accounts receivable which
have been sold.
In order to improve controls over the accounting for income taxes, we intend to:
• Further enhance our policies and procedures for determining and documenting income tax
liabilities and deferred income tax assets and liabilities, as well as for preparing income tax
provision calculations;
• Further increase the level of review of all quarterly and annual tax accounts and calculations;
• Improve the internal reporting of financial account balances to the tax department.
• Increase the number of personnel with specialized corporate and international tax expertise in the
tax department.
33
In order to improve controls over the accrual of goods and services received, we intend to:
• Complete the final phase of a system implementation that will allow for accurate and timely reports
of open purchase orders;
• Implement additional reviews of open purchase orders for appropriate accounting treatment in
each reporting period; and
• Implement improved processes and procedures to allow for communication of any known liabilities
to finance management so they can be recorded timely and accurately.
In order to improve controls over the calculation and review of forfeiture rates affecting stock-based
compensation expense we intend to:
• Adjust the calculation methodology for our stock-based compensation expense to include accurate
forfeiture rates under the provisions of SFAS No. 123R; and
• Increase the level of management review of our stock-based compensation expense calculations to
ensure forfeiture rates are accurately reflected under the provisions of SFAS No. 123R.
In order to improve controls over the accounting for foreign currency transactions related to the
consolidation of our foreign subsidiaries we intend to:
• Make changes to the financial closing process to ensure that translation and transaction gains and
losses related to our foreign subsidiaries are prepared and reviewed in accordance with generally
accepted accounting principles; and
• Review and document our intentions to settle balances between subsidiaries denominated in
currencies other than the U.S. dollar.
If the remedial measures described above are insufficient to address any of the six identified material
weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are
discovered in the future, we may fail to meet our future reporting obligations on a timely basis, our
financial statements may contain material misstatements, our operating results may be harmed, we may be
subject to class action litigation, and our common stock may be delisted from The Nasdaq Global Market.
For example, material weaknesses that remain unremediated could result in material post-closing
adjustments in future financial statements. Any failure to address the identified material weaknesses or any
additional material weaknesses or significant deficiencies in our internal control could also adversely affect
the results of the periodic management evaluations regarding the effectiveness of our “internal control
over financial reporting” that are required to be included in our annual reports on Form 10-K. Internal
control deficiencies could also cause investors to lose confidence in our reported financial information. We
can give no assurance that the measures we have taken to date or any future measures will remediate the
material weaknesses identified or that any additional material weaknesses will not arise in the future due to
a failure to implement and maintain adequate internal control over financial reporting or circumvention of
these controls. In addition, even if we are successful in strengthening our controls and procedures, those
controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair
presentation of our financial statements or SEC reports.
34
Management’s Report on Internal Control over Financial Reporting (as Revised)
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for our company. Internal control over financial reporting is defined
in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under
the supervision of, a company’s principal executive and principal financial officers and effected by the
company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In connection with the original filing of our 2006 Annual Report filed on Form 10-K, management,
including our chief executive officer (who was also our then-acting chief financial officer), assessed the
effectiveness of our internal controls over financial reporting as of June 30, 2006. In connection with this
assessment, we identified the following four material weaknesses in internal control over financial
reporting as of June 30, 2006. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Inadequate and ineffective controls over the periodic financial close process
1)
We did not have effective design or operational controls and procedures that provided reasonable
assurance that financial statements could be prepared in accordance with generally accepted
accounting principles. Specifically, we did not have adequate controls and procedures with respect to
the (a) review of manual journal entries recorded at the consolidated level; (b) timely disposition of
required adjustments identified through the period-end account analysis and reconciliation process,
and (c) accounting for complex non-routine transactions. As a result of this identified weakness,
material post closing adjustments were identified and posted to our books and records and financial
statements. These adjustments, which are reflected in our financial statements as of and for the year
ended June 30, 2006 (as set forth below and incorporated by reference in Item 8 of this Form 10-K/A),
caused changes in assets, liabilities, stockholders’ equity, revenues, and expenses.
2)
Inadequate and ineffective controls in the accounts receivable function over the process to record
customer invoice payments timely and accurately
We did not have effective design or operational controls and procedures over our accounts receivable
function to provide reasonable assurance that all customer invoice payments are being recorded
35
timely and accurately, and reflected as liabilities in those cases where we collected cash from
customers relating to invoices previously sold to financial institutions. As a result of this identified
weakness, material post-closing adjustments were posted to our books and records and financial
statements. These adjustments, which are reflected in our financial statements as of and for the year
ended June 30, 2006, caused changes to accounts receivable and accrued expenses.
3)
Inadequate and ineffective controls over the accounting for income taxes
We did not have adequate design or operational controls over the accounting for income taxes to
provide reasonable assurance that the relevant income tax accounts and related disclosures can be
prepared in accordance with generally accepted accounting principles. As a result of this identified
weakness, post-closing adjustments have been posted to our books and records and our financial
statements. These adjustments, which are reflected in the accompanying financial statements for the
year ended June 30, 2006, caused changes to income taxes payable, deferred income tax assets and
liabilities, the income tax provision, and additional paid-in capital.
4)
Inadequate and ineffective controls over accrual of goods and services received
We did not have effective operational controls in place to provide reasonable assurance that all goods
and services received are being recorded timely and completely. As a result of this identified
weakness, material post-closing adjustments were posted to our books and records and financial
statements. These adjustments, which are reflected in the accompanying financial statements as of and
for the year ended June 30, 2006, caused changes to unbilled services, property and leasehold
improvements, accounts payable, service and other revenue, cost of services, and operating expenses.
In November 2006, our current management, including our chief executive officer and our current
chief financial officer identified a new material weakness in internal control over the calculation and
review of forfeiture rates affecting stock-based compensation expense for the year ended June 30, 2006,
described below. This control deficiency resulted in the restatement of the consolidated financial
statements for the year ended June 30, 2006 as described in Note 17 to the consolidated financial
statements under the caption “Second Restatement.”
5)
Inadequate and ineffective controls over the calculation and review of forfeiture rates affecting stock-
based compensation expense
We did not have effective design or operational controls in place to provide reasonable assurance that
the calculation of stock-based compensation expense reflected accurate forfeiture rates under the
provisions of SFAS No. 123R, which was adopted on July 1, 2005. This control deficiency resulted in
the restatement of the consolidated financial statements for the year ended June 30, 2006 as described
in Note 17 to the consolidated financial statements under the caption “Second Restatement”.
In February 2007, our current management, including our chief executive officer and our current chief
financial officer, identified an additional material weakness in internal control over the accounting for
foreign currency transactions related to the consolidation of our foreign subsidiaries. This control
deficiency resulted in the restatement of the consolidated financial statements for the years ended June 30,
2004, 2005 and 2006 and prior periods as described in Note 17 to the consolidated financial statements
under the caption “Third Restatement.”
6)
Inadequate controls over the accounting for foreign currency transactions related to the consolidation
of our foreign subsidiaries.
We did not have adequate controls and procedures to ensure that (a) transaction gains and losses on
intercompany balances denominated in currencies other than the functional currency were properly
accounted for in earnings instead of accumulated other comprehensive income (loss) and
(b) translation of all foreign denominated balances, including those generated from the application of
36
purchase accounting, is accounted for in the functional currency of the applicable entity and translated
at the appropriate current exchange rates. As a result of these identified weaknesses, material post-
closing adjustments were recorded to our books and records and financial statements. This control
deficiency resulted in the restatement of the consolidated financial statements for the years ended
June 30, 2004, 2005 and 2006 as described in Note 17 to the consolidated financial statements under
the caption “Third Restatement.”
In connection with management’s assessment of the effectiveness of internal control over financial
reporting in the Company’s original filing of its 2006 Annual Report on Form 10-K, management,
including our chief executive officer (who was our then-acting chief financial officer), had previously
concluded that our internal control over financial reporting was not effective at the reasonable assurance
level as of June 30, 2006 because of the existence of the four material weaknesses described in 1) through
4) above. In connection with the restatement of the Company’s consolidated financial statements described
in Note 17 to the consolidated financial statements under the caption “Second Restatement”, our current
management, including our chief executive officer and our current chief financial officer, have determined
that the material weakness described in 5) above over the calculation and review of forfeiture rates
affecting stock-based compensation expense also existed as of June 30, 2006. In connection with the
restatement of our consolidated financial statements described in Note 17 to the consolidated financial
statements under the caption “Third Restatement,” our current management, including our chief executive
officer and our current chief financial officer, have determined the material weakness described in 6)
above over the accounting for foreign currency transactions related to the consolidation of our foreign
subsidiaries also existed as of June 30, 2006. Accordingly, management has revised this report on internal
control over financial reporting to include the additional material weaknesses. In making this revised
assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control-Integrated Framework. Based on this revised assessment as
of June 30, 2006, management has concluded that our internal control over financial reporting was not
effective based on those criteria, because of the six material weaknesses described above.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued a report on
our revised assessment of our internal control over financial reporting. This report appears on page 37.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Aspen Technology, Inc.
Cambridge, Massachusetts
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting (as revised), that Aspen Technology, Inc. and subsidiaries (the
“Company”) did not maintain effective internal control over financial reporting as of June 30, 2006,
because of the effect of the material weaknesses identified in management’s revised assessment based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to error
or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weaknesses have been identified and
included in management’s revised assessment:
1.
Inadequate and ineffective controls over the periodic financial close process.
The Company did not have effective design or operational controls and procedures that provided
reasonable assurance that financial statements could be prepared in accordance with generally
accepted accounting principles. Specifically, the Company did not have adequate controls and
38
procedures with respect to the (a) review of manual journal entries recorded at the consolidated level;
(b) timely disposition of required adjustments identified through the period-end account analysis and
reconciliation process, and (c) accounting for complex non-routine transactions. As a result of these
identified weaknesses, material post closing adjustments were identified and posted to the Company’s
books and records and financial statements. These adjustments, which are reflected in the Company’s
financial statements as of and for the year ended June 30, 2006, caused changes in assets, liabilities,
stockholders’ equity, revenues and expenses. Such weaknesses could continue to impact the balances
in all of the accounts previously mentioned.
2.
Inadequate and ineffective controls in the accounts receivable function over the process to record customer
invoice payments timely and accurately.
The Company did not have effective design or operational controls over the accounts receivable
function to provide reasonable assurance that all customer invoice payments are being recorded
timely and accurately, and reflected as liabilities in those cases where the Company collected cash
from customers relating to invoices previously sold to financial institutions. As a result of these
identified weaknesses, material post-closing adjustments were posted to the Company’s books and
records and financial statements. These adjustments, which are reflected in the Company’s financial
statements as of and for the year ended June 30, 2006, caused changes to accounts receivable and
accrued expenses. Such weaknesses could continue to impact the balances in all of the accounts
previously mentioned.
3.
Inadequate and ineffective controls over the accounting for income taxes.
The Company did not have adequate design or operational controls over the accounting for
income taxes to provide reasonable assurance that the relevant income tax accounts and related
disclosures can be prepared in accordance with generally accepted accounting principles. As a result
of these identified weaknesses, post-closing adjustments have been posted to the Company’s books
and records and its financial statements. These adjustments, which are reflected in the accompanying
financial statements for the year ended June 30, 2006, caused changes to income taxes payable,
deferred income tax assets and liabilities, the income tax provision, and additional paid-in capital.
Such weaknesses could continue to impact the balances in the accounts previously mentioned.
4.
Inadequate and ineffective controls over accrual of goods and services.
The Company did not have adequate design or operational controls in place to provide
reasonable assurance that all goods and services received are being recorded timely and completely.
As a result of these identified weaknesses, material post-closing adjustments were posted to the
Company’s books and records and financial statements. These adjustments, which are reflected in the
financial statements as of and for the year ended June 30, 2006, caused changes to unbilled services,
property and leasehold improvements, accounts payable, service and other revenue, cost of services,
and operating expenses. Such weaknesses could continue to impact the balances in all of the accounts
previously mentioned.
5.
Inadequate and ineffective controls over the calculation and review of forfeiture rates affecting stock-based
compensation.
The Company did not have effective design or operational controls in place to provide reasonable
assurance that the calculation of stock-based compensation expense reflected accurate forfeiture rates
under the provisions of Statement of Financial Accounting Standards No. 123(R) Share-Based
Payment, which was adopted on July 1, 2005. These identified weaknesses resulted in a material
adjustment to increase stock-based compensation and additional paid-in capital. This material
weakness contributed to the restatement of the previously reported consolidated financial statements
39
for the year ended June 30, 2006, as discussed in Note 17 to the consolidated financial statements
under the caption “Second Restatement.”
6.
Inadequate controls over accounting for foreign currency transactions related to the consolidation of foreign
subsidiaries.
The Company did not have adequate design or operational controls to ensure that (a) transaction
gains and losses on intercompany balances denominated in currencies other than the functional
currency were properly accounted for in earnings instead of accumulated other comprehensive
income (loss) and (b) translation of all foreign denominated balances, including those generated from
the application of purchase accounting, is accounted for in the functional currency of the applicable
entity and translated at the appropriate current exchange rates. As a result of these identified
weaknesses, material post-closing adjustments were recorded to the Company’s books and records
and financial statements. These adjustments, which are reflected in the Company’s financial
statements as of and for the year ended June 30, 2006, caused changes in foreign exchange gains and
losses, amortization of technology related intangible assets, and changes to the translation of balance
sheets at the appropriate exchange rates. Such weaknesses could continue to impact the balances in all
of the accounts previously mentioned. This control deficiency resulted in the restatement of the
consolidated financial statements for the years ended June 30, 2004, 2005 and 2006 as described in
Note 17 to the consolidated financial statements under the caption “Third Restatement.”
These material weaknesses were considered in determining the nature, timing, and extent of audit
tests applied in our audit of the consolidated financial statements as of and for the year ended June 30,
2006 (as restated), of the Company and this report does not affect our report on such restated financial
statements.
In our opinion, management’s revised assessment that the Company did not maintain effective
internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the
material weaknesses described above on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of June 30, 2006, based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended June 30, 2006 (as
restated), of the Company and our report dated September 28, 2006 (November 14, 2006 as to the effects
of the restatement discussed in Note 17 under the caption “Second Restatement” and March 14, 2007 as to
the effects of the restatement discussed in Note 17 under the caption “Third Restatement”) expressed an
unqualified opinion on those financial statements and includes explanatory paragraphs relating to the
restatement of the Company’s consolidated financial statements described in Note 17 and the adoption of
Statement of Financial Accounting Standard No. 123(R) Share-Based Payment described in Note 8.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 28, 2006 (November 14, 2006 as to the effects of the material weakness related to forfeiture
rates used to calculate stock-based compensation expense and March 14, 2007 as to the effects of the
material weakness related to accounting for foreign currency transactions discussed in Management’s
Report on Internal Control over Financial Reporting (as revised))
40
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Description
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Balance Sheets (restated) as of June 30, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Operations (restated) for the years ended June 30, 2004, 2005 and 2006. . . . . . . . . .
Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) (restated) for
the years ended June 30, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows (restated) for the years ended June 30, 2004, 2005 and 2006. . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
F-4
F-5
F-6
F-7
(a)(2)
Financial Statement Schedules
All 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)
3.2(2)
4.1(3)
4.2(2)
4.3(4)
4.4(5)
4.5(6)
4.6(7)
4.7(8)
Certificate of Incorporation of Aspen Technology, Inc., as amended.
By-laws of Aspen Technology, Inc.
Specimen Certificate for Shares of Aspen Technology, Inc.’s common stock, $.10 par
value.
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.
4.10(9)
Form of Warrant of Aspen Technology, Inc. dated as of May 9, 2002.
4.11(1)
Form of WD Common Stock Purchase Warrant of Aspen Technology, Inc. dated as of
August 14, 2003.
41
4.12(1)
10.1(10)
10.2(11)
10.3(11)
10.4(10)
10.5(10)
10.6(12)
10.7(10)†
10.8(16)
10.9(32)
10.10(13)
10.11(13)
10.12(25)
10.13(25)
10.14(13)
10.15(13)
10.16(13)
10.17(14)
Form of WB Common Stock Purchase Warrant of Aspen Technology, Inc. dated as of
August 14, 2003.
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 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.
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.
Vendor Program Agreement, dated March 29, 1990, 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.
Letter Agreement, dated March 25, 1992, between Aspen Technology, Inc. and Sanwa
Business Credit Corporation.
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).
Amended and Restated Direct Finance and Services Addendum to Letter Agreement,
effective December 30, 2004, by and among Aspen Technology, Inc. Fleet Business
Credit LLC, Fleet Business Credit (UK) Limited, and Fleet Business Credit
(Deutschland) GmbH.
Loan and Security Agreement, dated as of January 30, 2003, by and among Silicon
Valley Bank and Aspen Technology, Inc., AspenTech, Inc. and Hyprotech Company.
Export-Import Bank Loan and Security Agreement, dated as of January 30, 2003, by
and among Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
Export-Import Bank Borrower Agreement, dated as of April 1, 2005, by and between
Aspen Technology, Inc. and AspenTech Inc. in favor of the Export-Import Bank of the
United States and Silicon Valley Bank.
Promissory Note (Ex-Im), dated April 1, 2005, by and between Aspen Technology, Inc.
and AspenTech, Inc. in favor of Silicon Valley Bank.
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.
Security Agreement, dated as of January 30, 2003, by and between Silicon Valley Bank
and AspenTech Securities Corporation.
Unconditional Guaranty, dated as of January 30, 2003, by AspenTech Securities
Corporation in favor of Silicon Valley Bank.
First Loan Modification Agreement, effective as of June 27, 2003, by and among
Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
42
10.18(14)
10.19(26)
10.20(26)
10.21(25)
10.22(25)
10.23(27)
10.24(27)
10.25(27)
10.26(27)
10.27(27)
10.28(27)
10.29(27)
10.30(24)
10.31(26)
10.32(28)
10.33(29)
10.34(15)
10.35(15)
10.36(1)
10.37(1)
10.38(17)
Pledge Agreement, effective as of June 27, 2003, by Aspen Technology, Inc. in favor of
Silicon Valley Bank.
First Loan Modification Agreement (Exim), dated as of September 10, 2004, by and
among Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank.
Second Loan Modification Agreement, dated as of September 10, 2004, by and among
Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank.
Fourth Loan Modification Agreement, dated April 1, 2005 by and among Silicon
Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
Third Loan Modification Agreement (Exim), dated as of April 1, 2005, by and among
Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
Sixth Loan Modification Agreement, dated as of June 15, 2005, by and among Aspen
Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
Fourth Loan Modification Agreement—EXIM, dated as of June 15, 2005, by and
among Aspen Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
Partial Release and Acknowledgement Agreement, dated as of June 15, 2005, by and
among Aspen Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
Loan Agreement, dated as of June 15, 2005, among Aspen Technology, Inc., Aspen
Technology Receivables II LLC, Guggenheim Corporate Funding, LLC and the
lenders named therein
Security Agreement, dated as of June 15, 2005, between Aspen Technology
Receivables II LLC and Guggenheim Corporate Funding, LLC
Purchase and Sale Agreement, dated as of June 15, 2005, between Aspen
Technology, Inc. and Aspen Technology Receivables I LLC
Purchase and Resale Agreement, dated as of June 15, 2005, between Aspen
Technology Receivables I LLC and Aspen Technology Receivables II LLC
Non-Recourse Receivables Purchase Agreement, dated December 31, 2003, between
Silicon Valley Bank and Aspen Technology, Inc.
Second Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
September 30, 2004, by and between Silicon Valley Bank and Aspen Technology, Inc.
Third Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
December 31, 2004, by and between Silicon Valley Bank and Aspen Technology, Inc.
Fifth Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
March 31, 2005, by and between Silicon Valley Bank and Aspen Technology, Inc.
Securities Purchase Agreement dated June 1, 2003 by and among Aspen
Technology, Inc. and the Purchasers listed therein.
Repurchase and Exchange Agreement dated as of June 1, 2003 by and among Aspen
Technology, Inc. and the Holders named therein.
Investor Rights Agreement dated as of August 14, 2003 by and among Aspen
Technology, Inc. and the Stockholders Named therein.
Management Rights Letter dated as of August 14, 2003 by and among Aspen
Technology, Inc. and the entities named therein.
Amended and Restated Registration Rights Agreement dated as of March 19, 2002
between Aspen Technology, Inc. and the Purchasers named therein.
43
10.39(10)
Equity Joint Venture Contract between Aspen Technology, Inc. and China
Petrochemical Technology Company.
10.40(28)+ Purchase and Sale Agreement, dated October 6, 2004, by and among Aspen
Technology, Inc., Hyprotech Company, AspenTech Canada Ltd., and Hyprotech
UK Ltd. (collectively, the “AspenTech Parties”) and Honeywell International Inc.,
Honeywell Control Systems Limited and Honeywell Limited-Honeywell Limitee
(collectively, the “Honeywell Parties”).
10.41(28)+ Amendment No. 1 to the Purchase and Sale Agreement, dated October 6, 2004 by and
among the AspenTech Parties and the Honeywell Parties.
10.42(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between Aspen
Technology, Inc. and Honeywell International, Inc.
10.43(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
AspenTech Canada Ltd. and Honeywell Limited-Honeywell Limitee.
10.44(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
Hyprotech Company and Honeywell Limited-Honeywell Limitee.
10.45(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
AspenTech Ltd. and Honeywell Control Systems Limited.
10.46(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
Hyprotech UK Ltd. and Honeywell Control Systems Limited.
10.47(10)*
1988 Non-Qualified Stock Option Plan, as amended.
10.48(18)*
1995 Stock Option Plan.
10.49(27)* Amended and Restated 1995 Directors Stock Option Plan.
10.50(18)*
1995 Employees’ Stock Purchase Plan.
10.51(19)*
1998 Employees’ Stock Purchase Plan.
10.52(20)* Amendment No. 1 to 1998 Employees’ Stock Purchase Plan.
10.53(21)*
1996 Special Stock Option Plan.
10.54(34)* Restated 2001 Stock Option Plan.
10.55(30)*
2005 Stock Incentive Plan.
10.56(10)* Form of Employee Confidentiality and Non-Competition Agreement.
10.57(31)*
10.58(23)*
10.59(3)*
Employment Agreement, dated as of December 7, 2004, between Aspen
Technology, Inc. and Mark E. Fusco.
Employment Agreement, dated April 1, 2002, by and between Aspen Technology, Inc.
and C. Steven Pringle
Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and
C. Steven Pringle.
10.60(23)* Offer Letter, dated June 16, 2003, by and between Aspen Technology, Inc. and
Charles F. Kane.
10.61(23)*
10.62(14)*
10.63(14)*
Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and
Manolis Kotzabasakis.
Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc.
and C. Steve Pringle.
Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc.
and Charles F. Kane.
44
10.64(14)*
Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc.
and Manolis Kotzabasakis.
10.65(32)* Amendment No. 1 to Employment and Change of Control Agreement, dated as of
October 28, 2005, between Aspen Technology, Inc. and Mark E. Fusco.
10.66(32)* Aspen Technology, Inc. Executive Annual Incentive Bonus Plan FY06
10.67(32)* Aspen Technology, Inc. Operations Executives Plan FY06
10.68(33)* Aspen Technology, Inc. Executive Annual Incentive Bonus Plan FY07
10.69(33)* Aspen Technology, Inc. Operations Executives Plan FY07
10.70(22)
10.71(17)
10.72(34)
10.73(34)
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.
Amended and Restated Securities Purchase Agreement dated as of March 19, 2002
between Aspen Technology, Inc. and the Purchasers named therein.
Tenth Loan Modification Agreement, dated as of September 14, 2006, between Silicon
Valley Bank and Aspen Technology, Inc.
Sixth Loan Modification Agreement (EXIM) , dated as of September 14, 2006,
between Silicon Valley Bank and Aspen Technology, Inc.
14.1(32)
Code of Conduct and Business Ethics
21.1(34)
Subsidiaries of Aspen Technology, Inc.
23.1
Consent of Deloitte & Touche LLP
24.1(34)
Power of Attorney.
31.1
31.2
32.1
32.2
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 Principal Financial and Accounting 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 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.
Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
August 21, 2003 (filed on August 22, 2003), and incorporated herein by reference.
(2) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
March 12, 1998 (filed on March 27, 1998), and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 1 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. (filed on June 12, 1998), and incorporated herein by reference.
(4) Previously filed as an exhibit to Amendment No. 2 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on November 8, 2001, and incorporated herein by reference.
(5) Previously filed as an exhibit to Amendment No. 3 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on February 12, 2002, and incorporated herein by reference.
45
(6) Previously filed as an exhibit to Amendment No. 4 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on March 20, 2002, and incorporated herein by reference.
(7) Previously filed as an exhibit to Amendment No. 5 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on May 31, 2002, and incorporated herein by reference.
(8) Previously filed as an exhibit to Amendment No. 6 to Form 8-A of Aspen Technology, Inc. filed on
June 2, 2003, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
June 5, 2002 (filed on June 7, 2002), and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registration Statement on Form S-1 of Aspen Technology, Inc.
(Registration No. 33-83916) (filed on September 13, 1994), and incorporated herein by reference.
(11) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2000, and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registration Statement on Form S-1 of Aspen Technology, Inc.
(Registration No. 33-88734) (filed on January 29, 1995), and incorporated herein by reference.
(13) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2002, and incorporated herein by reference.
(14) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2003, and incorporated herein by reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. filed on
June 2, 2003, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2002, and incorporated herein by reference.
(17) Previously filed as an exhibit to the Current Report on Form 8-K filed by Aspen Technology, Inc. on
March 19, 2002, and incorporated herein by reference.
(18) Previously filed as an exhibit to the Registration Statement on Form S-8 of Aspen Technology, Inc.
(Registration No. 333-11651) (filed on September 9, 1996), and incorporated herein by reference.
(19) Previously filed as an exhibit to the Registration Statement on Form S-8 of Aspen Technology, Inc.
(Registration No. 333-44575) (filed on January 20, 1998), and incorporated herein by reference.
(20) Previously filed as an exhibit to the Definitive Proxy Statement on Schedule 14A of Aspen
Technology, Inc. filed November 13, 2000, and incorporated herein by reference.
(21) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 1997, and incorporated herein by reference.
(22) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
May 31, 2002 (filed on May 31, 2002), and incorporated herein by reference.
(23) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
July 11, 2003 (filed on July 11, 2003), and incorporated herein by reference.
(24) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2003, and incorporated herein by reference.
(25) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2005, and incorporated herein by reference.
46
(26) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended September 30, 2004, and incorporated herein by reference.
(27) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
June 15, 2005 (filed on June 20, 2005), and incorporated herein by reference.
(28) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2004, and incorporated herein by reference.
(29) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2005, and incorporated herein by reference.
(30) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
May 26, 2005 (filed on June 2, 2005), and incorporated herein by reference.
(31) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
December 21, 2004 (filed on December 23, 2004), and incorporated herein by reference.
(32) Previously filed as an exhibit to the Annual report on Form 10-K of Aspen Technology, Inc. for the
year ended June 30, 2005, and incorporated herein by reference.
(33) Previously files as an exhibit to the Current Report on Form 8-K of aspen Technology, Inc. dated
June 29, 2006 (filed on July 6, 2006), and incorporated by reference.
(34) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2006 (filed on September 28, 2006), and incorporated herein by reference.
†
*
Confidential treatment requested as to certain portions
Management contract or compensatory plan
47
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 on Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
ASPEN TECHNOLOGY, INC.
Date: March 14, 2007
By:
/s/ MARK E. FUSCO
Mark E. Fusco
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment No. 2 on
Form 10-K/A has been signed below by the following persons on behalf of the registrant and in the
capacities indicated as of March 14, 2007.
Signature
Title
/s/ MARK E. FUSCO
Mark E. Fusco
/s/ BRADLEY T. MILLER
Bradley T. Miller
/s/ STEPHEN M. JENNINGS
Stephen M. Jennings
/s/ DONALD P. CASEY
Donald P. Casey
/s/ GARY E. HAROIAN
Gary E. Haroian
/s/ JOAN C. MCARDLE
Joan C. McArdle
/s/ DAVID M. MCKENNA
David M. McKenna
/s/ MICHAEL PEHL
Michael Pehl
President, Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
48
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements:
Balance Sheets (Restated) as of June 30, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations (Restated) for the years ended June 30, 2004, 2005 and 2006 . . . . . . . . . . . F-4
Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) (Restated) for the
years ended June 30, 2004, 2005 and 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows (Restated) for the years ended June 30, 2004, 2005 and 2006. . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Aspen Technology, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of Aspen Technology, Inc. and
subsidiaries (the “Company”) as of June 30, 2005 and 2006, and the related consolidated statements of
operations, stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the
three years in the period ended June 30, 2006. 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 audits.
We conducted our audits in accordance with the standards of the 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, such consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2005 and 2006, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 17, the accompanying consolidated financial statements have been restated.
As discussed in Note 8 to the consolidated financial statements, effective July 1, 2005 the Company
adopted Statement of Financial Accounting Standards No. 123(R) Share-Based Payment, based on the
modified prospective application transition method.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting as of
June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
September 28, 2006 (November 14, 2006 as to the effects of the material weakness related to forfeiture
rates used to calculate stock-based compensation expense and March 14, 2007 as to the effects of the
material weakness related to accounting for foreign currency transactions discussed in Management’s
Report on Internal Control over Financial Reporting (as revised)) expressed an unqualified opinion on
management’s assessment of the effectiveness of the Company’s internal control over financial reporting
and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting
because of material weaknesses.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 28, 2006 (November 14, 2006 as to the effects of the restatement discussed in Note 17 under the
caption “Second Restatement” and March 14, 2007 as to the effects of the restatement discussed in
Note 17 under the caption “Third Restatement”)
F-2
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
2005
(As restated,
see Note 17)
2006
(As restated,
see Note 17)
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $4,653 in 2005 and $5,110 in 2006 . . . . . . . . . . . .
Unbilled services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term installments receivable, net of unamortized discount of $345 in 2005 and
$650 in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term installments receivable, net of unamortized discount of $2,846 in 2005 and $7,786 in 2006 . . . . . . . . .
Retained interest in sold receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and leasehold improvements, at cost:
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—Accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software development costs, net of accumulated amortization of $37,734 in 2005 and $46,891 in 2006 .
Purchased intellectual property, net of accumulated amortization of $1,531 in 2005 and $2,096 in 2006 . . . . . . . .
Other intangible assets, net of accumulated amortization of $39,189 in 2005 and $50,221 in 2006 . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Notes 11, 12, 13 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series D redeemable convertible preferred stock, $0.10 par value—
Authorized—367,000 shares in 2005 and 2006
Issued and outstanding—363,364 shares in 2005 and 333,364 shares in 2006 (Liquidation preference of
$ 68,149
51,528
9,826
5,355
692
11,156
146,706
18,445
16,667
12,033
25,725
7,143
5,723
50,624
39,433
11,191
17,411
730
14,371
16,899
1,354
2,656
$ 246,430
$
1,042
5,086
80,720
57,272
144,120
338
2,093
1,695
23,143
—
$ 86,272
49,163
8,518
12,123
—
9,179
165,255
35,681
19,010
11,213
20,552
6,960
6,046
44,771
36,097
8,674
15,456
165
6,711
18,035
3,097
2,552
$ 274,636
$
247
4,613
77,716
57,936
140,512
149
2,609
—
20,446
—
$139,470 as of June 30, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121,210
125,475
Stockholders’ equity (deficit):
Common stock, $0.10 par value—
Authorized—120,000,000 shares
Issued—43,299,816 shares in 2005 and 49,090,499 shares in 2006
Outstanding—43,066,352 shares in 2005 and 48,857,035 shares in 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost—233,464 shares of common stock in 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,330
402,799
(455,417 )
(414 )
3,046
(513 )
(46,169 )
$ 246,430
4,909
430,811
(457,977)
—
8,215
(513)
(14,555)
$ 274,636
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2004
(As restated,
see Note 17)
Years Ended June 30,
2005
(As restated,
see Note 17)
(In thousands, except per share data)
2006
(As restated,
see Note 17)
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible assets . . . . . . . . .
Impairment of technology related intangible and computer
$ 158,150
174,296
332,446
$ 129,621
140,373
269,994
$ 152,773
140,375
293,148
15,577
101,823
7,976
16,864
82,744
8,220
16,805
72,690
8,559
software development assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,250
128,626
—
107,828
—
98,054
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,820
162,166
195,094
Operating costs:
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived asset impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . . . . . . . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . . . . . . . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,806
60,111
34,380
967
20,085
(747)
216,602
96,275
47,276
49,315
—
24,960
14,314
232,140
84,505
44,322
42,529
—
3,993
898
176,247
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,782)
(69,974 )
18,847
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss).. . . . . . . . . . . . . . . . . . . . . .
Income (loss) before provision for income taxes and equity
in earnings from joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses from joint ventures . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount and dividend . . . . . . . . . .
Income (loss) attributable to common shareholders . . . . . . . . . .
Basic and diluted income (loss) per share attributable to
7,296
(4,940)
4,832
6,204
(4,170 )
(3,599 )
5,034
(985)
(3,360)
(5,594)
(20,239)
(351)
(26,184)
(6,358)
$ (32,542)
(71,539 )
(2,031 )
—
(73,570 )
(14,450 )
$ (88,020 )
19,536
(6,713)
—
12,823
(15,383)
$ (2,560)
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted weighted average shares outstanding . . . . . . .
$
(0.80)
40,575
$
(2.08 )
42,381
$
(0.06)
44,627
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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.
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2004
(As restated,
see Note 17)
Years Ended June 30,
2005
(As restated,
see Note 17)
(In thousands)
2006
(As restated,
see Note 17)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction (gains) losses on intercompany accounts . . . . . . . . . . . . . . . . . . . . . . .
Loss on securitization of installments receivable. . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discount on retained interest in sold receivables. . . . . . . . . . . . . . . . .
Asset impairment charges and write-offs under restructuring charges . . . . . . . . . .
(Gain) loss on the disposal of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on repurchase of convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term installments receivable, including proceeds from securitization . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchase of property and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized computer software development costs . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in the purchase of businesses, net of cash acquired . . . . . . . . . . . . . . . .
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Issuance of Series D redeemable convertible preferred stock and common stock
warrants, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of Series B redeemable convertible preferred stock. . . . . . . . . . . . . . .
Payment of convertible preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of amounts owed to Accenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under employee stock purchase plans. . . . . . . . . . . . . .
Exercise of stock options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of long-term debt and capital lease obligations . . . . . . . . . . . . . . . . . . . .
Repayment of convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of non-cash financing activities:
Accretion of discount on Series D redeemable convertible preferred stock . . . . . .
Accrual of dividend on Series D redeemable convertible preferred stock. . . . . . . .
Issuance of common stock in settlement of Series B convertible preferred
stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in conversion of Series D redeemable convertible
preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash purchases of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flows related to acquisition:
Fair value of assets acquired, excluding cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment in connection with the acquisition, net of cash acquired. . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(26,184)
$(73,570 )
$ 12,823
27,569
(3,823)
—
6,703
—
6,018
(170)
(299)
4,285
27,057
604
3,476
15,233
5,623
(20,718)
(4,482)
40,892
(2,711)
1,096
(8,247)
2,432
(200)
(7,630)
89,341
(30,000)
(296)
(10,068)
3,022
4,121
—
(4,733)
(29,196)
22,191
613
56,066
51,567
$ 107,633
$ 6,569
$ 5,967
$ 3,181
$ 8,690
$
$
$
$
$
598
—
96
525
(200)
325
25,999
3,118
14,585
1,524
(40 )
1,190
(271 )
—
(2,744 )
(1,230 )
5,704
(1,374 )
39,735
(2,042 )
3,697
11,651
25,932
(5,160 )
1,954
(8,545 )
(59 )
—
23,870
4,436
—
8,230
(2,343)
—
898
—
(2,992)
(4,540)
1,168
1,649
(23,729)
(3,903)
7,047
(2,697)
19,917
(3,457)
—
(7,111)
104
—
(11,810 )
(10,464)
—
—
—
—
1,853
3,607
—
(2,436 )
(56,745 )
(53,721 )
115
(39,484 )
107,633
$ 68,149
$ 2,700
$ 4,116
$ 3,758
$ 10,692
$
$
$
$
$
—
—
72
—
—
—
—
—
(2,439)
—
839
10,989
119
(984)
—
8,524
146
18,123
68,149
$ 86,272
$ 7,821
$ 1,240
$ 3,865
$ 11,518
$ —
$ 8,680
107
$
$ —
—
$ —
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations
Aspen Technology, Inc. (the Company) and its subsidiaries are a leading supplier of integrated
software and services to the process industries, which consist of oil and gas, petroleum, chemicals,
pharmaceutical and other industries that manufacture and produce products from a chemical process. The
Company develops software to design, operate, manage and optimize its customers’ key business processes.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the results of operations of the Company
and its wholly owned subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
(b) 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
Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of
three months or less. Cash and cash equivalents as of June 30, 2005 and 2006 were as follows (in
thousands):
Description
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . .
(d) Derivative Instruments and Hedging
June 30, 2005
June 30, 2006
Fair
Value
$ 57,127
11,022
$ 68,149
Amortized
Cost
$ 57,127
11,022
$ 68,149
Fair
Value
$ 37,220
49,052
$ 86,272
Amortized
Cost
$ 37,220
49,052
$ 86,272
The Company follows the provisions of Statement of Financial Accounting Standards (SFAS)
No. 133, “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’s change in fair value is immediately recognized in
earnings.
Forward foreign exchange contracts are used primarily by the Company to hedge certain balance
sheet exposures resulting from changes in foreign currency exchange rates. Such exposures have
historically resulted from portions of the Company’s installments receivable that are denominated in
currencies other than the U.S. dollar, primarily the Euro, Japanese Yen, Canadian Dollar and the British
F-7
Pound Sterling. In addition, the Company incurred an exposure as part of the June 2005 securitization of
installments receivable, in that the Company is obligated, in the form of a guarantee, to cover the exposure
in the installments receivable that were transferred to its subsidiary, resulting from changes in foreign
currency exchange rates.
The foreign exchange contracts are entered into to hedge recorded installments receivable, both held
and securitized, 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.
The Company’s guarantee to cover the exposure in the securitized installments receivable represents
an embedded derivative. The Company calculates the value of this guarantee at each balance sheet date,
and if the value of the guarantee represents an obligation, the fair value is recorded as a liability. As of
June 30, 2005 and 2006, the value of this embedded derivative represented an asset to the Company, and as
such, no entry was recorded.
At June 30, 2006, the Company had effectively hedged $27.3 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 to hedge foreign currency risk. The gross value of the held and
securitized long-term installments receivable that were denominated in foreign currency was $28.5 million
at June 30, 2005 and $40.3 million at June 30, 2006. The installments receivable as of June 30, 2006 mature
at various times through December 2011. 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. During fiscal
2004, 2005 and 2006 the net gain recognized in the consolidated statements of operations was not material.
The following table provides information about the Company’s foreign currency derivative financial
instruments outstanding as of June 30, 2006. The information is provided in U.S. dollar amounts, as
presented in the Company’s consolidated financial statements. The table presents the notional amount (at
contract exchange rates) and the weighted average contractual foreign currency rates:
Currency
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
British Pound Sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canadian Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swiss Franc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notional
Amount
$ 17,021
3,603
3,501
2,819
345
$ 27,289
Estimated
Fair
Value*
(In thousands)
$ 17,746
3,704
3,360
2,890
327
$ 28,027
Average
Contract
Rate
1.25
1.82
111.18
1.14
1.22
*
The estimated fair value is derived from the estimated amount at which the contracts could be settled
based on the spot rates as of June 30, 2006. The market risk associated with these instruments
resulting from currency exchange rate movements is expected to offset the market risk of the
underlying installments being hedged. The credit risk is that the Company’s banking counterparties
may be unable to meet the terms of the agreements. The Company minimizes such risk by limiting its
counterparties to major financial institutions. In addition, the potential risk of loss with any one party
resulting from this type of credit risk is monitored. Management does not expect any loss as a result of
default by other parties. However, there can be no assurances that the Company will be able to
mitigate market and credit risks described above.
F-8
(e) Depreciation and Amortization
The Company provides for depreciation and amortization, primarily computed using the straight-line
method, by charges to operations in amounts estimated to allocate the cost of the assets over their
estimated useful lives, as follows:
Asset Classification
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . 3 years
Purchased software . . . . . . . . . . . . . . . . . . . . . . . . . 3-5 years
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . 3-10 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . Life of lease or asset, whichever is shorter
Estimated Useful Life
Depreciation expense was $13.0 million, $9.7 million and $5.7 million for the years ended June 30,
2004, 2005 and 2006, respectively.
(f) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position (SOP) No. 97-2,
“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 that the Company charges its customers when the 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 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 revenues are recognized under the residual method in
arrangements in which software is licensed with professional services, training and maintenance and
support services. Consulting services do not generally involve customizing or modifying the licensed
software, but rather involve helping customers deploy the software to their specific business processes. As
the services provided are not essential to the functionality of the software and are described in the
agreement such that the total price of the arrangement would be expected to vary as the result of the
inclusion or exclusion of the services, the Company accounts separately for the services element of the
arrangement. Occasionally, the Company provides professional services considered essential to the
functionality of the software and recognizes revenue for such professional services and any related
software licenses when the basic criteria of SOP 97-2 are met and when the services has been completed.
When the Company provides professional services, which involve significant production, modification or
customization of the licensed software, it recognizes such revenue and any related software licenses in
accordance with SOP 81-1, “Accounting for Performance of Construction Type and Certain Performance
Type Contracts” using either the percentage-of-completion method using zero estimate of profit
methodology until such service project is complete or the completed-contract method. 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.
F-9
The Company has a practice of licensing its products through resellers in certain regions. For software
licensed through these distribution channels, revenue is recognized at the time of delivery to the end
customer, when persuasive evidence of an arrangements exists, the fee is fixed or determinable and
collection is reasonably assured.
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 generally does not provide specified upgrades to its customers in connection
with the licensing of its software products.
Service revenues from fixed-price contracts where the services are not essential to the functionality of
the software are recognized using the proportional 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. In
accordance with the Emerging Issues Task Force (EITF) 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.
(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. In accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or otherwise Marketed,” 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 amortization expense charged to operations
was approximately $6.5 million, $8.0 million and $9.2 in fiscal 2004, 2005 and 2006, respectively. During the
year ended June 30, 2004, the Company recorded impairment charges of $3.3 million associated with the
capitalized computer software development costs of certain products (see Note 2(m)).
(h) Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated in accordance with
SFAS No. 52, “Foreign Currency Translation.” The determination of functional currency is based on the
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.
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’ equity (deficit) in the accompanying consolidated balance sheets. All foreign
currency transaction gains or losses are included in the foreign currency exchange gain (loss) line item in
the accompanying consolidated statements of operations.
F-10
(i) Net Income (Loss) per Share
Basic earnings per share was determined by dividing income (loss) attributable to common
shareholders by the weighted average common shares outstanding during the period. Diluted earnings per
share was determined by dividing 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 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 and basic and diluted
weighted average shares outstanding are as follows (in thousands, except per share data):
Income (loss) attributable to common shareholders . . . . . . . . . . . . . . . . .
Basic and Diluted weighted average common shares outstanding . . . . .
Basic and Diluted income (loss) per share attributable to
2004
Years Ended June 30,
2005
$ (32,542) $ (88,020 ) $ (2,560)
44,627
42,381
40,575
2006
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.80) $
(2.08 ) $ (0.06)
The following potential common shares were excluded from the calculation of dilutive weighted
average shares outstanding as their effect would be anti-dilutive (in thousands):
Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividend, to be settled in common stock . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended June 30,
2005
36,336
20,129
—
3,727
60,192
2004
36,336
21,457
1,071
1,197
60,061
2006
33,336
18,542
—
2,169
54,047
(j) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are
principally cash and cash equivalents, 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 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, 2005 and 2006, the Company had no customers that
represented 10% of total accounts and installments receivable.
(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 it is probable that a loss has been incurred. Provisions are
made based upon a specific review of all significant outstanding invoices and an analysis of historical write-
off rates. In determining these provisions, the Company analyzes its historical collection experience and
current economic trends.
F-11
The following table summarizes allowance for doubtful accounts activity for the years ended June 30,
2004, 2005 and 2006:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,503
2,404
(1,210)
$ 3,697
2004
2005
(In thousands)
$ 3,697
2,223
(1,267 )
$ 4,653
2006
$ 4,653
2,180
(1,723)
$ 5,110
(l) Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, installments
receivable, accounts payable, long-term obligations and foreign exchange contracts. The estimated fair
value of these financial instruments approximates their carrying value.
(m) Intangible Assets, Goodwill and Impairment of Long-Lived Assets
Intangible assets subject to amortization consist of the following at June 30, 2005 and 2006
(in thousands):
June 30, 2005
June 30, 2006
Asset Class
Acquired technology . . . . . . . . . . . . . . . . . . . . . .
Uncompleted contracts . . . . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Useful Life
Gross
Carrying
Amount
3-5 years $ 50,321
2,249
4 years
758
10 years
232
3-12 years
$ 53,560
Accumulated
Amortization
Gross
Carrying
Amount
$ 36,038 $ 53,586
2,356
758
232
$ 39,189 $ 56,932
2,228
720
203
Accumulated
Amortization
$46,896
2,356
758
211
$ 50,221
Aggregate amortization expense for intangible assets subject to amortization was $8.0 million,
$8.2 million and $8.6 million for the years ended June 30, 2004, 2005 and 2006, respectively, and is
expected to be $6.7 million during the year ending June 30, 2007.
The changes in the carrying amount of the goodwill by reporting unit for the years ended June 30,
2005 and 2006 were as follows (in thousands):
Asset Class
Carrying amount as of June 30, 2004 . . . . . . . . . . . . . . . . . . .
Effect of exchange rates used for translation . . . . . . . . . .
Carrying amount as of June 30, 2005 . . . . . . . . . . . . . . . . . . .
Effect of exchange rates used for translation . . . . . . . . . .
Carrying amount as of June 30, 2006 . . . . . . . . . . . . . . . . . . .
License
$ 2,364
(1)
2,363
(5)
$ 2,358
Reporting Unit
Consulting
Services
$ 513
—
513
—
$ 513
Maintenance
and
Training
$ 13,316
707
14,023
1,141
$ 15,164
Total
$ 16,193
706
16,899
1,136
$ 18,035
The Company tests goodwill for impairment annually at the reporting unit level using a fair value
approach in accordance with the provisions of SFAS 142, “Goodwill and other Intangible Assets.” The
Company conducted its annual impairment test at December 31, 2004 and 2005 and determined that
goodwill was not impaired in fiscal years 2005 and 2006. The Company’s next annual impairment test will
occur on December 31, 2006. If an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment
between annual tests.
F-12
The Company evaluates it long-lived assets, which include property and leasehold improvements,
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.
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 these 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
development efforts were considered impaired as a result of the consolidation decisions made in the fourth
quarter product offering review.
(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 (deficit)
and comprehensive income (loss). The components of accumulated other comprehensive income (loss) as
of June 30, 2005 and 2006 are made up of cumulative translation adjustments.
(o) Accounting for Stock-Based Compensation
The Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R))
effective July 1, 2005. Under the fair value provisions of this statement, stock-based compensation cost is
measured at the grant date based on the value of the award and is recognized as expense over the vesting
period. SFAS 123(R) requires significant judgment and the use of estimates, particularly for assumptions
such as stock price volatility and expected option lives, as well as expected option forfeiture rates to value
stock-based compensation in net income. If actual results differ significantly from these estimates, stock-
based compensation expense and our results of operations could be materially impacted. See Note 8,
“Stock-Based Compensation”, in the notes to consolidated financial statements for more discussion.
(p) Income Taxes
Deferred income taxes are recognized based on temporary differences between the financial
statement and tax bases of assets and liabilities. 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
F-13
income, limitations of availability of net operating loss carryforwards, and other matters in making this
assessment.
Income taxes are provided on undistributed earnings of foreign subsidiaries where such earnings are
expected to be remitted 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 taxes 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
reasonably estimated.
(r) Advertising costs
The Company charges advertising costs to expense as the costs are incurred. The Company recorded
advertising expenses of $4.0 million, $7.3 million and $2.0 million during the years ended June 30, 2004,
2005 and 2006, respectively. As of June 30, 2005 and 2006, the Company had no prepaid advertising on the
accompanying consolidated balance sheets.
(s) Accounting for Restructuring Accruals
The Company follows SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.”
In accounting for these obligations, we are required to make assumptions related to the amounts of
employee severance, benefits, and related costs and to the time period over which facilities will remain
vacant, sublease terms, sublease rates and discount rates. We base our estimates and assumptions on the
best information available at the time the obligation has arisen. These estimates are reviewed and revised
as facts and circumstances dictate; changes in these estimates could have a material effect on the amount
accrued on the balance sheet.
(t) Recently Issued Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertain Tax Positions”, an
Interpretation of FAS 109 (FIN 48), which clarifies the criteria for recognition and measurement of
benefits from uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit when it is
“more-likely-than-not”, based on the technical merits, that the position would be sustained upon
examination by a taxing authority. The amount to be recognized, given the “more likely than not”
threshold was passed, should be measured as the largest amount of tax benefit that is greater than
50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge
of all relevant information. Furthermore, any change in the recognition, derecognition or measurement of
a tax position should be recognized in the interim period in which the change occurs. The Company
expects to adopt FIN 48 as of July 1, 2007, and any change in net assets as a result of applying the
Interpretation will be recognized as an adjustment to retained earnings on that date. The Company is in
the process of evaluating its uncertain tax positions in accordance with FIN 48. The impact cannot
currently be estimated.
F-14
(u) Reclassifications
Certain prior year financial statement line items have been combined so as to conform with the
current year presentation; specifically, unearned revenue and deferred revenue were previously reported
separately and have been combined as deferred revenue in the current year presentation.
(3) Restructuring Charges and FTC Legal Costs
Restructuring charges and FTC legal costs consist of the following (in thousands):
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTC legal costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended June 30,
2005
$ 25,118
(158 )
$ 24,960
2004
$ 15,193
4,892
$ 20,085
2006
$ 3,993
—
$ 3,993
During fiscal 2006, the Company recorded $4.0 million in restructuring charges. Of this amount, $1.8
million related to headcount reductions, relocation costs and facility consolidation costs associated with the
May 2005 plan that did not qualify for accrual at June 30, 2005, $1.7 million from adjustments to prior
restructuring accruals and $0.5 million from the accretion of discounted restructuring accruals.
(a) Restructuring charges originally arising in Q4 FY05.
In May 2005, the Company initiated a plan to consolidate several corporate functions and to reduce its
operating expenses. The plan to reduce operating expenses primarily resulted in headcount reductions, and
also included the termination of a contract and the consolidation of facilities. These actions resulted in an
aggregate restructuring charge of $3.8 million, recorded in the fourth quarter of fiscal 2005. During the
year ended June 30, 2006, the Company recorded an additional $1.8 million related to headcount
reductions, relocation costs and facility consolidations associated with the May 2005 plan that did not
qualify for accrual at June 30, 2005.
As of June 30, 2006, there was $0.6 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. During the year ended June 30, 2006, the following activity was
recorded (in thousands):
Fiscal 2005 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2005. . . . . . . . . . .
Restructuring charge . . . . . . . . . . . . . . . . . . .
Restructuring charge—Accretion . . . . . . . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . . . .
Expected final payment date . . . . . . . . . . . . . .
Employee
Severance,
Benefits, and
Related Costs
Closure/
Consolidation
of Facilities
$
$
84
—
84
614
1
(600)
99
3,465
(1,005)
2,460
1,157
21
(3,125)
513
$
May 2007 December 2006
$
Contract
Termination
Costs
$ 300
(300 )
—
—
—
—
$ —
Total
$ 3,849
(1,305)
2,544
1,771
22
(3,725)
$ 612
Closure/consolidation of facilities: Approximately $0.1 million and $0.6 million of the restructuring
charges recorded in fiscal 2005 and 2006, respectively, related to the termination of a facility lease.
The facility lease had a remaining term of two years. The amount accrued is an estimate of the
remaining obligation under the lease, reduced by expected income from the sublease of the underlying
properties.
F-15
Employee severance, benefits and related costs: Approximately $3.5 million and $1.2 million of the
restructuring charges recorded in fiscal 2005 and 2006, respectively, related to the reduction in
headcount. Approximately 130 employees, or 10% of the workforce, were eliminated under the
restructuring plan. The employees were primarily located in North America and Europe. All business
units were affected, including services, sales and marketing, research and development, and general
and administrative.
Contract termination costs: Approximately $0.3 million of the restructuring charge related to charges
associated with the termination of a contract for a future user conference. The contract was
terminated in June 2005.
(b) Restructuring charges originally arising in Q4 FY04
During fiscal 2004, the Company recorded $15.2 million in net restructuring charges. Of this amount,
$23.5 million is associated with a June 2004 restructuring plan, which is offset by $8.3 million in
adjustments to prior restructuring accruals and deferred rent balances.
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 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
$23.5 million, recorded in the fourth quarter of fiscal 2004. During the year ended June 30, 2005, the
Company recorded $14.4 million related to headcount reductions and facility consolidations associated
with the June 2004 restructuring plan that did not qualify for accrual at June 30, 2004. In addition, the
Company recorded $0.4 million in restructuring charges related to the accretion of the discounted
restructuring accrual and a $0.8 million decrease to the accrual related to changes in estimates of
severance benefits and sublease terms. During the year ended June 30, 2006 the Company recorded a
$0.7 million increase to the accrual primarily due to a change in the estimate of future operating costs and
sublease assumptions associated with the facilities.
F-16
As of June 30, 2006, there was $7.0 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. During the year ended June 30, 2006, the following activity was
recorded (in thousands):
Fiscal 2004 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . .
Fiscal 2004 payments . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . .
Accrued expenses, June 30, 2004. . . . . .
Restructuring charge . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . .
Fiscal 2005 payments. . . . . . . . . . . . . .
Restructuring charge—Accretion . . .
Change in estimate—Revised
assumptions. . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2005. . . . . .
Change in estimate—Revised
assumptions. . . . . . . . . . . . . . . . . . . .
Restructuring charge—Accretion . . .
Fiscal 2006 payments . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . .
Expected final payment date . . . . . . . . .
Closure/
Consolidation
of Facilities and
Contract exit costs
Employee
Severance,
Benefits, and
Related Costs
$
$
20,484
(8,435)
—
12,049
9,132
—
(12,915)
446
(287)
8,425
1,191
(280)
—
911
4,349
—
(4,534)
3
(497)
232
643
432
(2,645)
6,855
27
—
(67)
192
September 2012 December 2006
$
$
Asset
Impairments
$ 1,776
—
(1,776 )
—
968
(968 )
—
—
Total
$ 23,451
(8,715)
(1,776)
12,960
14,449
(968)
(17,449)
449
—
—
(784)
8,657
—
—
—
$ —
670
432
(2,712)
$ 7,047
Closure/consolidation of facilities: Approximately $20.5 million and $9.1 million of the fiscal 2004 and
2005 restructuring charges, respectively, related to the termination of facility leases and other lease related
costs. The costs recorded in fiscal 2005 related to termination activities did not qualify for accrual as of
June 30, 2004. 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 $1.2 million and $4.4 million of the
fiscal 2004 and 2005 restructuring charges, respectively, related to the reduction in headcount. In the
aggregate, approximately 147 employees, or 9% of the workforce, were eliminated under the restructuring
plan implemented by management. The fiscal 2005 restructuring charge related to employees had not been
notified in a manner that would allow for accrual as of June 30, 2004. Such notification occurred in Q1,
2005. 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 and $1.0 million of the fiscal 2004 and 2005
restructuring charges, respectively, related 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.
(c) Restructuring charges originally arising in Q2 FY03
In October 2002, management initiated a plan to further reduce operating expenses in response to
first quarter revenue results that were below expectations and to general economic uncertainties. The plan
F-17
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 $28.7 million. During fiscal 2004, the Company recorded a $4.9 million
decrease to the accrual related to revised assumptions associated with lease exit costs, particularly the
buyout of a remaining lease obligation, and severance benefit obligations. During fiscal 2005 and fiscal
2006, the Company recorded $7.0 million and $1.0 million increases, respectively to the accrual primarily
due to a change in the estimate of the facility vacancy term, extending to the term of the lease.
As of June 30, 2006, there was $10.0 million remaining in accrued expenses relating to the remaining
lease payments. The components of the restructuring plan are as follows (in thousands):
Fiscal 2003 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . .
Additional impairment of assets . . . . . . . . . . . .
Fiscal 2003 payments . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2003. . . . . . . . . . . . . .
Fiscal 2004 payments . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . .
Accrued expenses, June 30, 2004. . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions. . .
Accrued expenses, June 30, 2005. . . . . . . . . . . . . .
Change in estimate—Revised assumptions. . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . . . . . . .
Expected final payment date . . . . . . . . . . . . . . . . .
Closure/
Consolidation
of Facilities
$
17,347
—
(3,548)
13,799
(2,567)
(4,507)
6,725
(2,266)
7,239
11,698
1,116
(2,848)
$
9,966
September 2012
Employee
Severance,
Benefits, and
Related
Costs
$ 10,028
—
(7,297)
2,731
(2,170)
(269)
292
(63)
(69)
160
(95)
(65)
$ —
Impairment
of Assets and
Disposition
Costs
$ 1,278
302
—
1,580
(770 )
(134 )
676
(403 )
(195 )
78
—
(78 )
$ —
Total
$ 28,653
302
(10,845)
18,110
(5,507)
(4,910)
7,693
(2,732)
6,975
11,936
1,021
(2,991)
$ 9,966
Closure/consolidation of facilities: Approximately $17.4 million of the restructuring charge related 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 sublessors. The revisions to the accrual that occurred in
fiscal 2004 relate to revisions made to sublease assumptions and to the buyout of a remaining lease
obligation and the revisions to the accrual that occurred in fiscal 2005 relate to revised estimates with
respect to the facility vacancy term.
Employee severance, benefits and related costs: Approximately $10.0 million of the restructuring
charge related 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 revisions to the accrual that occurred in fiscal 2004 relate to revisions of estimates of
severance terms and benefit levels.
F-18
Impairment of assets and disposition costs: Approximately $1.3 million of the restructuring charge
related 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 revisions to the accrual that
occurred in fiscal 2004 relate to changes in estimates of ongoing costs of disposal activities.
(d) Restructuring charges originally arising in Q4 FY02
In the fourth quarter of fiscal 2002, management initiated a plan to reduce operating expenses and to
restructure operations around the Company’s two primary product lines, engineering software and
manufacturing/supply chain software. The Company 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 $13.2 million. During fiscal 2004, the Company recorded a $1.5 million
decrease to the accrual related to revised assumptions associated with lease exit costs, particularly the
buyout of a remaining lease obligation, and severance obligations. During fiscal 2005, the Company
recorded a $0.2 million increase to the accrual due to changes in estimates of sublease assumptions and
severance settlements. During fiscal 2006, the Company recorded a $0.1 million increase to the accrual due
to changes in sublease assumptions.
As of June 30, 2006, there was $0.5 million remaining in accrued expenses relating to the remaining
severance obligations and lease payments. The components of the restructuring plan are as follows (in
thousands):
Fiscal 2002 Restructuring Plan
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2002 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2002. . . . . . . . . . . . . . . . . . .
Fiscal 2003 payments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2003. . . . . . . . . . . . . . . . . . .
Fiscal 2004 payments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . . . . . . .
Accrued expenses, June 30, 2004. . . . . . . . . . . . . . . . . . .
Fiscal 2005 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . . . . . . .
Accrued expenses, June 30, 2005. . . . . . . . . . . . . . . . . . .
Change in estimate—Revised assumptions . . . . . . . .
Fiscal 2006 payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, June 30, 2006. . . . . . . . . . . . . . . . . . .
Expected final payment date . . . . . . . . . . . . . . . . . . . .
Closure/
Consolidation
of Facilities
Employee
Severance,
Benefits, and
Related
Costs
$
$
4,901
—
4,901
(695)
4,206
(1,302)
(1,221)
1,683
(994)
93
782
75
(375)
482
8,285
(1,849 )
6,436
(4,748 )
1,688
(1,060 )
(320 )
308
(284 )
87
111
—
(66 )
45
September 2012 December 2006
$
$
Total
$ 13,186
(1,849)
11,337
(5,443)
5,894
(2,362)
(1,541)
1,991
(1,278)
180
893
75
(441)
527
$
Closure/consolidation of facilities: Approximately $4.9 million of the restructuring charge related 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. The revisions 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, and to the
buyout of a remaining lease obligation.
F-19
Employee severance, benefits and related costs: Approximately $8.3 million of the restructuring charge
related 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 revisions 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 related to the write-off of
prepaid royalties related to third-party software products that the Company will no longer support and sell.
(4) Line of Credit
In January 2003, the Company executed a Loan Arrangement with Silicon Valley Bank. This
arrangement provides a line of credit of up to the lesser of (i) $15.0 million or (ii) 70% of eligible domestic
receivables, and a line of credit of up to the lesser of (i) $10.0 million or (ii) 80% of eligible foreign
receivables. The lines of credit bear interest at the bank’s prime rate (8.25% at June 30, 2006). The
Company needs to maintain a $4.0 million compensating cash balance with the bank, or it is subject to an
unused line fee and collateral handling fees. The lines of credit initially were collateralized by nearly all of
the assets of the Company, and upon the Company’s achieving certain net income targets, the collateral
would be reduced to a lien on the accounts receivable. The Company is required to meet certain financial
covenants, including minimum tangible net worth, minimum cash balances and an adjusted quick ratio.
As of June 30, 2006, there were $8.5 million in letters of credit outstanding under the line of credit,
and there was $11.8 million available for future borrowing. On September 15, 2006, the Company executed
an amendment to the Loan Arrangement that adjusted the terms of certain financial covenants. The Loan
Arrangement expires in January 2007.
(5) Accrued Expenses and Other Liabilities
Accrued expenses in the accompanying consolidated balance sheets consist of the following (in
thousands):
Royalties and outside commissions . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll and payroll-related. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to financing companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2005
$ 12,777
13,047
8,833
16,662
12,009
17,392
$ 80,720
2006
$ 10,288
21,784
4,965
11,407
11,918
17,354
$ 77,716
Other liabilities in the accompanying consolidated balance sheets consist of the following
(in thousands):
Restructuring accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalties and outside commissions . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2005
$ 15,197
5,255
2,691
—
$ 23,143
2006
$ 13,191
4,321
2,534
400
$ 20,446
F-20
(6) Long-Term Obligations
Long-term obligations consist of the following at June 30, 2005 and 2006 (in thousands):
Note payable incurred in connection with an acquisition, payable in quarterly
installments of approximately $273, plus interest at 6% per year through
January 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable of a UK subsidiary due in monthly installments of approximately
$50 plus interest at 9% per year, through March 2008 . . . . . . . . . . . . . . . . . . . .
Less—Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2006
$ 803
—
577
1,380
1,042
$ 338
396
396
247
$ 149
Maturities of these long-term obligations are as follows (in thousands):
Years Ending June 30,
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 247
149
$ 396
In June 1998, the Company sold $86.3 million of debentures to qualified institutional buyers. During
fiscal 2004, the Company used 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 the Debentures. In
June 2005, the Company paid $58.2 million to retire the entire outstanding principal amount of the
Debentures, together with interest accrued thereon.
The Company recorded interest expense associated with these debentures of $4.5 million and
$2.9 million in the years ended June 30, 2004 and 2005, respectively.
(7) Preferred Stock
The Company’s Board of Directors is authorized, subject to any limitations prescribed by law, without
further stockholder approval, to issue, from time to time, up to an aggregate of 10,000,000 shares of
preferred stock in one or more series. Each such series of preferred stock shall have such number of
shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges,
which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences and conversion rights, as shall be determined by the Board of Directors in a
resolution or resolutions providing for the issuance of such series. Any such series of preferred stock, if so
determined by the Board of Directors, may have full voting rights with the common stock or 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 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.
F-21
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.
The value of total consideration paid to the holders 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 and dividend line of the accompanying consolidated 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 three of the
Company’s current directors.
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, 2006, the Company has accrued $28.5 million in dividends on the Series D Preferred.
Each share of Series D Preferred is convertible at any time into a number of shares of common stock
equal to its stated value divided by the then-effective conversion price. The stated value is currently
$333.00 per share and is subject to adjustment in the event of any stock dividend, stock split, reverse stock
split, recapitalization, or like occurrences. The current conversion price is $3.33 per share. Each share of
Series D Preferred currently is convertible into 100 shares of common stock. The Series D Preferred have
F-22
anti-dilution rights that will adjust the conversion ratio downwards in the event that the Company issues
certain additional securities at a price per share less than the conversion price then in effect.
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.
The Series D Preferred is subject to redemption at the option of the Company, at any time after
August 2006 at a price of $416.25 per share plus any accumulated and unpaid dividends if, among other
things, the average trading price of the Company’s common stock exceeds $7.60 per share for 45
consecutive days. If the Company makes such an election, the holders of the Series D Preferred may elect
to convert their Series D Preferred shares into shares of common stock rather than have them redeemed.
On May 16, 2006, the Holders of the Series D Preferred converted 30,000 shares into 3,000,000 shares
of common stock. At the time of the conversion the Company also paid $2.4 million in dividends on the
converted shares. As of June 30, 2006, the Series D Preferred is convertible into 33,336,400 shares of
common stock.
In the accompanying consolidated statements of operations, the accretion of preferred stock discount
and dividend consist of the following (in thousands):
Accrual of dividend on Series B preferred. . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discount on Series B preferred . . . . . . . . . . . . . . . . . . . . . . . .
Gain on retirement of Series B preferred, net of warrant modification
charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual of dividend on Series D preferred . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discount on Series D preferred. . . . . . . . . . . . . . . . . . . . . . . .
Years Ended June 30,
2005
2006
2004
(296)
(643)
—
—
—
—
6,452
(8,690)
(3,181)
—
—
(11,518)
(10,692 )
(3,865)
(3,758 )
$ (6,358) $ (14,450 ) $ (15,383)
(8) Stock-Based Compensation
The Company issues stock options to its employees and outside directors and provides employees the
right to purchase stock pursuant to stockholder approved stock option and employee stock purchase
programs. Option awards are generally granted with an exercise price equal to the market price of the
Company’s stock at the date of grant; those options generally vest over four years and have 7 and 10-year
contractual terms.
Effective July 1, 2005, the Company adopted the provisions of SFAS No. 123(R), using the
Statement’s modified prospective application method. Prior to July 1, 2005, the Company followed
Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for its stock-based compensation. Under the provisions of SFAS No. 123(R),
the Company recognizes the fair value of stock-based compensation in net income, over the requisite
service period of the individual grantees, which generally equals the vesting period. All of the Company’s
stock-based compensation is accounted for as equity instruments and there have been no liability awards
granted. The Company’s policy is to issue new shares upon exercise of stock options.
The Company has elected the modified prospective transition method for adopting SFAS 123(R), and
consequently prior periods have not been modified. Under this method, the provisions of SFAS 123(R)
apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards
not yet vested at the date of adoption shall be recognized in net income in the periods after the date of
adoption using the same valuation method (i.e, Black-Scholes) and assumptions determined under the
original provisions of SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123) as disclosed in
F-23
previous filings. Under the provisions of SFAS 123(R), the Company recorded $8.4 million of stock-based
compensation for the year ended June 30, 2006, respectively, included in the following categories (in
thousands):
Recorded as expense:
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized computer software development costs:. . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,442
2,534
1,239
3,015
8,230
148
$ 8,378
The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock
compensation granted after the adoption of SFAS 123(R). The weighted-average fair values of the options
granted under the stock option plans and shares subject to purchase under the employee stock purchase
plan were $4.20 and $4.73, respectively, for the year ended June 30, 2006 using the following assumptions:
Average risk-free interest rate. . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30, 2006
Stock Option
Plans
Stock Purchase
Plan
4.56%
4.02 %
None
6.0 Years
None
0.5 Years
85%
42 %
The dividend yield of zero is based on the fact that the Company has never paid cash dividends on
common stock and has no present intention to pay cash dividends. Expected volatility is based on the
historical volatility of the Company’s common stock over the period commensurate with or longer than the
expected life of the options. The risk-free interest rate is the U.S. Treasury Strips rate over a period
commensurate with the expected life of the options on the date of grant. The expected life was calculated
using the method outlined in SEC Staff Accounting Bulletin Topic 14.D.2, “Expected Term,” as the
Company’s historical experience does not provide a reasonable basis for the expected term of the option.
F-24
A summary of option activity under all stock option plans in fiscal 2004, 2005 and 2006 follows:
Outstanding, June 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, June 30, 2004. . . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at June 30, 2006. . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
8,414,382
6,278,204
(1,321,997)
(101,435)
(904,061)
12,365,093
4,076,825
(1,271,047)
(2,681,580)
(1,451,575)
11,037,716
3,147,500
(2,602,564)
(1,177,311)
(944,892)
9,460,449
5,402,058
Weighted
Average
Exercise
Price
$ 11.35
3.04
3.12
4.74
16.55
7.52
6.18
2.84
3.54
14.78
8.56
5.74
4.22
4.99
15.11
$ 7.37
$ 8.76
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
($000)
7.0
5.7
$ 52,820
$ 22,648
The following tables summarize information about stock options outstanding and exercisable under
the 1995 Plan, the 1995 Directors’ Plan, the 1996 Plan, the Petrolsoft Plan, the 2001 Plan and the 2005 Plan
at June 30, 2006:
Range of Exercise Prices
$2.21-$4.33. . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.33-8.67. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.67-13.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.00-17.34. . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.34-21.67. . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.67-26.01. . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.01-30.34. . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.34-34.68. . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.68-39.01. . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.01-43.34. . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable, June 30, 2005 . . . . . . . . . . . . . .
Exercisable, June 30, 2004 . . . . . . . . . . . . . .
Options
Outstanding
at June 30,
2006
1,932,900
5,658,956
245,845
1,279,868
15,438
88,500
150,540
27,386
24,000
37,016
9,460,449
Weighted
Average
Remaining
Contractual
Life
6.4
8.3
7.5
3.0
3.9
3.2
1.5
2.6
4.0
3.5
7.0
Weighted
Average
Exercise
Price
$ 2.81
5.93
10.80
14.05
20.63
23.69
28.94
31.28
38.50
40.04
$ 7.37
Options
Exercisable
at June 30,
2006
1,430,466
2,251,252
97,592
1,279,868
15,438
88,500
150,540
27,386
24,000
37,016
5,402,058
7,094,332
7,464,123
Weighted
Average
Exercise
Price
$ 2.82
6.33
10.29
14.05
20.63
23.69
28.94
31.28
38.50
40.04
$ 8.76
$ 10.37
$ 10.48
As of June 30, 2006, the total compensation cost related to unvested awards not yet recognized was
$16.7 million. The weighted average period over which this will be recognized is approximately three years.
The total intrinsic value of options exercised during the year ended June 30, 2006 was $14.9 million. The
F-25
Company received $11.0 million from option exercises during the year ended June 30, 2006; a $0.1 million
tax benefit was realized for tax deductions from option exercises during the year ended June 30, 2006.
Prior to July 1, 2005, the Company’s employee stock compensation plans were accounted for in
accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (APB 25) and related interpretations. The Company elected the disclosure-only alternative
permitted under SFAS No. 123 for fixed stock-based awards to employees.
Under APB 25, compensation expense was measured as of the date the number of shares and exercise
price become fixed. Generally, this occurred on the grant date, in which case the stock option was
accounted for as a fixed award as of the date of grant. Compensation expense associated with fixed awards
was measured as the difference between the fair market value of our stock on the date of grant and the
grant recipient’s exercise price, which was the intrinsic value of the award on that date. Stock
compensation expense was recognized over the vesting period using the ratable method, whereby an equal
amount of expense was recognized for each year of vesting. The Company recognized stock-based
compensation charges of $6.7 million and $0.4 million in the years ended June 30, 2004 and 2005
associated with the amortization to compensation expense related to stock option awards that had an
intrinsic value on the date of grant.
SFAS 123(R) requires the presentation of pro forma information for the comparative period prior to
the adoption as if all of the Company’s employee stock options had been accounted for under the fair value
method of the original SFAS 123. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation to the prior-year periods (in thousands, except per share data).
Income (loss) attributable to common shareholders (in thousands)
—As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects . . . . . . . . . . . . . . . . . . . .
Add: Stock-based compensation expense included in reported net
2004
2005
$ (32,542 ) $ (88,020)
(21,949 )
(9,344)
income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,703
1,524
$ (47,788 ) $ (95,840)
Income (loss) attributable to common shareholders per share
—Basic and diluted—
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.80 ) $
(1.18 )
(2.08)
(2.26)
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:
Risk free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
3.27 – 3.50%
None
5-7 Years
99%
2005
3.49 – 4.17%
None
5 Years
100%
The weighted average fair value per option granted was $2.51 and $4.74 for the years ended June 30,
2004 and 2005, respectively.
F-26
The fair value of the shares issued under the employee stock purchase plan 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:
Risk free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
3.49 – 3.50%
None
6 months
42%
2005
3.49 – 4.17%
None
6 months
42%
The weighted average fair value of shares issued under the employee stock purchase plan was $4.46
and $1.96 for the years ended June 30, 2004 and 2005, respectively
In May 2005, the shareholders approved the establishment of the 2005 Stock Incentive Plan (the 2005
Plan), which provides for the reservation of up to 4,000,000 shares of common stock for issuance under the
2005 Plan. The 2005 Plan provides for the grant of incentive and nonqualified stock options and other
stock-based awards, including the grant of shares based upon certain conditions, the grant of securities
convertible into common stock and the grant of stock appreciation rights. Restricted stock and other stock-
based awards granted under the 2005 Plan may not exceed, in the aggregate, 2,000,000 shares of common
stock. As of June 30, 2006, there were 3,925,000 shares of common stock available for issuance subject to
awards under the 2005 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, 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 nearest
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, 2006, there were 786,950 shares of common stock available for grant under
the 2001 Plan.
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. Stock options become exercisable
over varying periods and expire no later than 10 years from the date of grant. As of June 30, 2006, there
were 119,252 shares available for grant under the 1996 Plan.
In October 1997, the Company’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 by 2,000,000 and 3,000,000
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’s
compensation. Under the plan, the Company issued 976,960 shares in 2003, 315,751 shares in 2005, and
188,119 shares in 2006. As of June 30, 2006, there were 2,645,939 shares available for future issuance under
the 1998 Employee Stock Purchase Plan as amended. In addition, on July 1, 2006, the Company issued
61,395 shares under the 1998 Employee Stock Purchase Plan.
F-27
(9) Common Stock
(a) 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 shares of the Company’s
common stock. Warrants to purchase 1,260 shares expired unexercised through June 30, 2005 and the
remaining warrants expired unexercised in April 2006.
In connection with the February and March 2002 sales of Series B 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 previously in Note 7. 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 at an exercise price of $4.08 per share. As of June 30, 2006, none of these warrants had been
exercised. Such warrants will expire in fiscal 2007.
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 at a price of $13.20 per share. In
August 2003, the 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,
2006, 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, 2006, none of these warrants had been exercised. In July 2006, 6,006,006 warrants were
exercised in a cashless exercise, resulting in the issuance of 4,369,336 shares of the Company’s common
stock.
A summary of the Company’s outstanding common stock warrants at June 30, 2006 is as follows:
Warrant:
Series B warrants. . . . . . . . . . . . . . . . . . . . .
Private placement warrants . . . . . . . . . . . .
Series D warrants(1) . . . . . . . . . . . . . . . . . .
Total outstanding at June 30, 2006. . . .
Outstanding
791,044
1,023,474
7,267,286
9,081,804
Expiration
Date
Exercise
Price
$ 4.08 Feb – Mar 2007
$ 9.76
$ 3.33
May 2007
Aug 2010
(1) After the exercise of 6,006,006 Series D warrants in July 2006, 1,261,280 Series D warrants and
3,075,798 total warrants were outstanding.
(b) 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 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).
F-28
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.
(10) Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for
Income Taxes.” Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is
measured based on the difference between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates.
Income (loss) before provision for income taxes consists of the following (in thousands):
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
Years Ended June 30,
2005
$ (9,999) $ (66,270 ) $ 15,505
4,031
$ (5,594) $ (71,539 ) $ 19,536
(5,269 )
4,405
2006
The provisions for income taxes shown in the accompanying consolidated statements of operations are
composed of the following (in thousands):
Federal—
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State—
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign—
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended June 30,
2005
2004
2006
$ —
20,333
$ —
45
$ —
—
739
1,823
778
—
990
—
14,205
(16,861)
$ 20,239
4,028
(2,820 )
$ 2,031
8,718
(2,995)
$ 6,713
F-29
The provision for income taxes differs from that based on the federal statutory rate due to the
following (in thousands):
Federal tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilization of net operating loss carryforward. . . . . . . . . . . . . . . . . . . . . . . .
Tax effect resulting from foreign activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits generated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent differences, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of tax attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for tax contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2006
Years Ended June 30,
2005
$ (1,958) $ (25,038 ) $ 6,837
566
(5,711)
2,365
(1,000)
3,408
(48)
2,317
(2,021)
$ 6,713
541
—
1,423
(1,397 )
425
12,410
—
13,667
$ 2,031
1,688
—
(9,566)
(1,193)
1,337
—
4,319
25,612
$ 20,239
The approximate tax effect of each type of temporary difference and carry forward is as follows
(in thousands):
Deferred tax assets:
Revenue related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state loss carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring accruals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Revenue related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
June 30,
2005
2006
$
456
14,023
42,288
7,150
21,004
13,552
5,838
2,089
257
106,657
(104,611 )
2,046
$
3,253
12,531
47,014
5,087
18,301
10,281
4,276
2,467
2,477
105,687
(102,590)
3,097
1,721
(3,416 )
(1,695 )
351
$
—
—
—
3,097
Upon customer payment of certain foreign receivables, withholding taxes are withheld by customers
and remitted to local tax authorities. Under current U.S. tax law, these withholding taxes may be creditable
against U.S. taxes payable subject to certain limitations. The Company has recorded a full valuation
allowances against these credits, and will recognize the benefit of these credits only when it is more likely
than not that these deferred tax assets will be realized. The withholding taxes are included in the foreign
tax provision as they are withheld and remitted. Utilization of the taxes as foreign tax credits is recorded as
a reduction of the domestic tax expense in the period it is more likely than not that these deferred tax
assets will be realized.
As of June 30, 2006, the Company had net operating loss (NOL) carryforwards for U.S. federal and
state income tax purposes of approximately $148.6 million and $51.7 million, respectively, and foreign net
F-30
operating loss carryforwards of approximately $17.1 million. The Company had federal tax credits and
state tax credits of approximately $14.5 million and $3.6 million, respectively. The tax credits and NOL
carryforwards expire at various dates from 2007 through 2025. The Company has determined that it
underwent an ownership change (as defined under section 382 of the Internal Revenue Code of 1986, as
amended) during the year ended June 30, 2004. As such, the recognition of the Company’s federal NOLs
and tax credits 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 those
of section 382. Due to the uncertainty surrounding the realization and timing of these tax attributes, the
Company has recorded a valuation allowance of approximately $104.6 million and $102.6 million as of
June 30, 2005 and 2006, respectively.
(11) Operating Leases
The Company leases its facilities and various office equipment under noncancelable operating leases
with terms in excess of one year. Rent expense charged to operations was approximately $11.7 million,
$9.3 million and $7.5 million for the years ended June 30, 2004, 2005 and 2006, respectively. Future
minimum lease payments under these leases as of June 30, 2006, net of sub-lease income of $1.8 million,
$1.8 million, $0.7 million, $0.6 million, and $0.4 million for the years ended June 30, 2007, 2008, 2009, 2010,
and 2011, respectively, are as follows (in thousands):
Years ended June 30,
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 9,680
7,437
7,570
7,406
6,460
14,834
$ 53,387
The Company has issued approximately $8.3 million of standby letters of credit in connection with
certain facility leases that expire through 2016.
(12) Sale of Installments Receivable
(a) Traditional Activities
Installments receivable represent the present value of future payments related to the financing of
noncancelable term and perpetual license agreements that provide for payment in installments, 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, 2004, 2005, and 2006 ranged from 7.0% to 8.0%.
The Company has arrangements to sell certain of its installments receivable to three financial
institutions. The Company has sold, and treated as sales certain of its installment contracts for aggregate
proceeds of $54.9 million, $97.6 million and $77.1 million during fiscal 2004, 2005 and 2006, respectively.
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.
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’s contracts with the financial institutions. Collections of these receivables reduce the Company’s
F-31
recourse obligations, as defined in the contracts. The Company’s potential recourse obligation related to
these contracts is within the range of $0.1 million to $1.5 million. In addition, the Company is obligated to
pay additional costs to the financial institutions in the event of default by the customer.
(b) Securitization of Installments Receivable
Initial Transaction
On June 15, 2005, the Company securitized certain outstanding installment software license
receivables (which receivables were not sold in the traditional sales described above) with a net carrying
value of $71.2 million. Such securitization was structured in a manner so that the securitization qualified as
a sale. The Company received $43.8 million of cash and retained an interest in the sold receivables valued
at $16.6 million. It also retained certain limited recourse obligations relative to the receivables valued at
approximately $1.0 million. Overall, the transaction (including $2.1 million in aggregate fees and expenses,
including fees of the lenders’ agent and fees of the Company’s outside legal counsel and financial advisors)
resulted in a loss of $14.6 million in the quarter ended June 30, 2005 and was recorded as a loss on sales
and disposals of assets in the accompanying consolidated statement of operations.
The amount of the loss was based on the previous carrying amount of the financial assets involved in
the transfer, allocated between the assets sold and the retained interests based on their relative fair value
at the date of transfer.
As noted above, the retained interest in the sold receivables was recorded at its fair market value of
$16.6 million at the time of the transaction and was (and currently is) classified as a long-term asset on the
Company’s consolidated balance sheet. The Company estimates fair value based on the present value of
future expected cash flows based on using management’s best estimates of key assumptions, principally
credit losses, and discount rates commensurate with the risks involved.
The Company retained the servicing rights relative to the receivables and receives annual servicing
fees of $0.1 million per year. The benefits of servicing are just adequate to compensate the servicer for its
responsibilities, and thus no servicing asset or liability has been recorded.
In connection with the above transaction, the Company incurred an obligation to guaranty that the
proceeds from all foreign denominated installments receivable included in the securitized pool will be
equal to the U.S. dollar value on the initial contract date. The fair value of this obligation, as of the
transaction date and as of June 30, 2005 and 2006 was not material and has thus been accorded no value.
Ongoing Retained Interests
The Company values its retained interest in sold receivables in accordance with the guidance of EITF
No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interest in Securitized Financial Assets.” Accordingly, its retained interest is being accreted through
interest income over the anticipated life of the retained interest. The accretion methodology is assessed
quarterly and any diminution in value is recoded directly to the statement of operations.
F-32
Key economic assumptions used in subsequently measuring potential impairment in the carrying value
of the Company’s retained interests in the software license receivables at June 30, 2005 and 2006 and the
effect on the fair value of those interests from adverse changes in those assumptions are as follows (in
thousands, except for annualized rates):
Balance sheet carrying value of retained interest in sold receivables . . . . . . . . . . . . .
June 30,
2005
$ 16,667
2006
$ 19,010
Expected credit losses (annual rate):
Impact on fair value of 10% adverse change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact on fair value of 20% adverse change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.82 %
(48 ) $
(96 ) $
0.82%
(34)
(68)
Residual cash flow discount rate (annual rate):
Impact on fair value of 10% adverse change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact on fair value of 20% adverse change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.0 %
16.0%
$ (923 ) $ (774)
$ (1,790 ) $ (1,512)
These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value
based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a
particular assumption is calculated without changing any other assumption; in reality, changes in one
assumption may result in changes in another, which may magnify or counteract the sensitivities. Further,
this analysis does not assume any impact resulting from management’s intervention to mitigate these
variations.
(13) Commitments and Contingencies
(a) FTC Settlement
On December 21, 2004, the FTC approved the Company’s proposed consent decree, which
constituted a complete and final settlement of the FTC’s complaint against the Company relating to its
acquisition of Hyprotech in May 2002. The FTC’s approval also constituted approval of the transactions
contemplated by the purchase and sale agreement that the Company and its subsidiaries Hyprotech
Company, AspenTech Canada Ltd., AspenTech Ltd. and Hyprotech UK Ltd. entered into on October 6,
2004 with Honeywell International, Inc. and its subsidiaries Honeywell Control Systems Limited and
Honeywell Limited-Honeywell Limitee. The Company previously completed the sale of its AXSYS
product line to Bentley Systems Incorporated on July 21, 2004, as set forth in the FTC consent decree. The
Company recorded a $0.3 million gain related to this sale.
On December 23, 2004, the Company and its subsidiaries completed the transactions with Honeywell
contemplated by the October 6, 2004 purchase agreement, which relates to the sale of the Company’s
operator training business and ownership of rights to the intellectual property to the Hyprotech
engineering products to Honeywell International. Under the terms of the transactions:
• the Company retains a perpetual, worldwide, royalty-free license to the entire Hyprotech
engineering software product line and has the right to continue to develop and sell the Hyprotech
engineering products, other than AXSYS which was sold to Bentley Systems;
• the Company retains its customer licenses for HYSYS and related products;
• the Company retains all rights in its Aspen RefSYS and Aspen Oil & Gas solutions;
• the Company agreed to a cash payment of approximately $6.0 million from Honeywell in
consideration of the transfer of the Company’s operator training services business, the Company’s
covenant not-to-compete in the operator training business for three years, and the transfer of
F-33
ownership of the intellectual property of the Company’s Hyprotech engineering products,
$1.2 million of which is subject to holdback and may be released upon the resolution of any
adjustments for uncollected billed accounts receivable and unbilled accounts receivable;
• the Company transferred and Honeywell assumed, as of the closing date, approximately $4 million
in accounts receivable relating to the operator training business; and
• the Company entered into a two-year support agreement with Honeywell under which the Company
agrees to provide Honeywell with source code to new releases of the Hyprotech products provided
to customers under standard software maintenance services agreements.
The Honeywell transaction resulted in a deferred gain of $0.2 million, which is subject to a potential
increase of $1.2 million upon resolution of the holdback payment and will be amortized over the two-year
life of the support agreement.
(b) KBC Settlement
On October 1, 2004, the Company, together with its subsidiaries AspenTech, Inc. and Hyprotech
Company, entered into a Settlement Agreement with KBC Advanced Technologies Plc, KBC Advanced
Technologies Inc. and AEA Technology Plc. Pursuant to the settlement agreement, the parties agreed to
settle (1) the arbitration proceedings in England relating to a contract dispute involving the parties and
(2) the legal proceedings filed by KBC in state district court in Houston, Texas against the Company and
Hyprotech Company.
As part of the settlement, KBC recognized the Company’s right to develop, market and license Aspen
RefSYS, and the Company recognized KBC’s right to develop, market and license HYSYS.Refinery, their
respective refinery-wide simulation products. The Company licensed commercial, object code, copies of
Aspen HYSYS, Aspen PIMS, and Aspen Orion to KBC for use as part of KBC’s consulting services
business, without the right to sublicense. In addition, the Company paid KBC $3.75 million in lieu of costs
incurred in the dispute. This charge was recorded in fiscal 2005 in general and administrative expenses.
(c) Litigation
U.S. Attorney’s Office Investigation and Wells Notice
In October 2004, the audit committee of the Company’s board of directors commenced a detailed
investigation of the accounting for certain software license and service agreement transactions entered into
with certain alliance partners and other customers during fiscal years 2000 through 2002 (and later, fiscal
2000 to 2004), which investigation concluded in March 2005. On October 29, 2004, the Company
announced that it had received a subpoena from the U.S. Attorney’s Office for the Southern District of
New York requesting documents relating to transactions to which the Company was a party during the
2000 to 2002 time frame, associated documents dating from January 1, 1999, and additional materials.
On June 9, 2006, the Company announced that it had received a “Wells Notice” letter from the SEC
of possible civil enforcement action regarding the Company’s originally filed financial statements for fiscal
years 2000 through 2004, which the Company restated in March 2005 following the conclusion of the audit
committee’s review. In addition, on July 7, 2006, the Company announced that three of its former
executive officers had each received a Wells Notice letter regarding the same matter.
The Company has cooperated fully with the subpoena requests and in the investigation by the U.S.
Attorney’s Office and the SEC. The investigation by the U.S. Attorney’s Office is ongoing in coordination
with the SEC, to which the audit committee had initially reported the initiation of the audit committee’s
investigation. The Company is currently unable to determine whether resolution of these matters will have
a material adverse impact on its financial position or results of operations, or reasonably estimate the
F-34
amount of the loss, if any, that may result from resolution of these matters. However, the ultimate outcome
could have a material adverse effect on the Company’s financial position or results of operations.
Class Action Suits
In November 2004, two putative class action lawsuits were filed against the Company in the United
States District Court for the District of Massachusetts, captioned, respectively, Fener v. Aspen
Technology, Inc., et. al., Civil Action No. 04-12375 (D. Mass.) (filed Nov. 9, 2004) and Stockmaster v.
Aspen Technology, Inc., et. al., Civil Action No. 04-12387 (D. Mass.) (filed Nov. 10, 2004), (“the
Class Actions”). The Class Actions allege, among other things, that the Company violated Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder in connection with various statements about its
financial condition for fiscal years 2000 through 2004. On February 2, 2005, the Court consolidated the
cases under the caption Aspen Technology, Inc. Securities Litigation, Civil Action No. 04-12375
(D. Mass.), and appointed The Operating Engineers and Construction Industry and Miscellaneous
Pension Fund (Local 66) and City of Roseville Employees’ Retirement System as lead plaintiff, purporting
to represent a putative class of persons who purchased Aspen Technology, Inc. common stock between
January 25, 2000 and October 29, 2004. On August 26, 2005, the plaintiffs filed a consolidated amended
complaint containing allegations materially similar to the prior complaints and expanding the class action
period.
Following mediation, on November 16, 2005, the Company and the plaintiffs on behalf of putative
class members, defined to include all persons who purchased our common stock between October 29, 1999
and March 15, 2005, inclusive, (the “Class”), entered into a Stipulation and Agreement of Compromise,
Settlement and Release of Securities Action, which (the “Stipulation”). The Stipulation was filed with the
Court on the same date and provided, among other things, for settlement and release of all direct and
indirect claims of the Class concerning matters covered by the Stipulation. On December 12, 2005, the
Court granted preliminary approval of the settlement provided for in the Stipulation. After notice to the
Class and after the hearing, on March 6, 2006, the Court granted final approval of the settlement, and the
class action lawsuit was dismissed with prejudice. The Company entered into the Stipulation to resolve the
matter and without acknowledging any fault, liability or wrongdoing of any kind. There has been no
adverse determination by the Court against the Company or any of the other defendants in the case.
Members of the Class who opted out of the settlement (representing 1,457,969 shares of common
stock, or less than 1% of the shares putatively purchased during the Class Action period) may bring their
own individual actions, (“Opt Out Claims”). To date, state law Opt Out Claims, including claims of fraud,
statutory treble damages, deceptive practices, and/or rescissory damages liability, based on the restated
results of one or more fiscal periods included in the restated financial statements referenced in the
Class Action, have been filed in Massachusetts Superior Court. The Company has responded by motion to
dismiss on the grounds that the claims fail properly to state a claim. If not dismissed or settled on terms
acceptable to us, the Company plans to defend the Opt Out Claims vigorously.
Pursuant to the terms of the Class Action settlement, the Company paid $1.9 million and its insurance
carrier paid $3.7 million into a settlement fund for a total of $5.6 million. The Company’s $1.9 million
payment was recorded in general and administrative expenses in the quarter ended September 30, 2005.
All costs of preparing and distributing notices to members of the Class and administration of the
settlement, together with all fees and expenses awarded to plaintiffs’ counsel and certain other expenses,
will be paid out of the settlement fund, which will be maintained by an escrow agent under the Court’s
supervision.
F-35
On September 6, 2006, the Company also announced that, in connection with the preparation of
financial statements for the fiscal year-ended June 30, 2006, a subcommittee of independent directors was
appointed to review the Company’s accounting treatment for stock option grants for prior years. Following
that announcement, the Company and certain of its officers and directors were named defendants in a
purported federal securities class action lawsuits filed in Massachusetts federal district court, alleging
violations of the Exchange Act and claiming material misstatements concerning its financial condition and
results. In response to the Company’s motion to dismiss the complaint, the parties stipulated to voluntary
dismissal of the plaintiff’s claims with prejudice on September 26, 2006 without any payment by the
Company.
Derivative Suit
On December 1, 2004, a putative derivative action lawsuit was filed as a related action to the first filed
of the Class Actions (described above) in the United States District Court for the District of
Massachusetts, captioned Caviness v. Evans, et al., Civil Action No. 04-12524 (D. Mass.), (the “Derivative
Action”). The complaint, as subsequently amended, alleged, among other things, that the former and
current director and officer defendants caused the Company to issue false and misleading financial
statements, and brought derivative claims for the following: breach of fiduciary duty for insider trading;
breach of fiduciary duty; abuse of control; gross mismanagement; waste of corporate assets; and unjust
enrichment.
On August 18, 2005, the Court granted defendants’ motion to dismiss the Derivative Action for failure
of the plaintiff to make a pre-suit demand on the Company’s board of directors to take the actions
referenced in the Derivative Action complaint.
On April 12, 2005, the Company received a letter on behalf of another shareholder, demanding that
the board of directors of the Company take actions substantially similar to those referenced in the
Derivative Action. On February 28, 2006, the Company received a letter on behalf of Mr. Caviness,
demanding that the Company take actions referenced in the Derivative Action complaint. The board of
directors responded to both of the foregoing letters that the board has taken the letters under advisement
pending further regulatory investigation developments, which the board continues to monitor and with
which the Company continues to cooperate. In its responses, the board also requested confirmation of
each person’s status as a stockholder of Aspen Technology, Inc., and, with respect to the most recent letter,
also referred the purported stockholder to the March 6, 2006 final approval of the settlement of direct and
indirect claims of the Class in the Class Actions.
Other
From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the
ordinary course of business. The outcome of these matters is currently not determinable, and there can be
no assurance that such matters will not have a material adverse effect on the Company’s consolidated
financial position, results of operations, or cash flows.
(d) Other
The Company has entered into an employment agreement with its president and chief executive
officer providing for the payment of cash and other benefits in certain situations of his voluntary or
involuntary termination, including following a change in control. Payment under this agreement would
consist of a lump sum equal to approximately two times (1) his annual base salary plus (2) the average of
his annual bonus for the three preceding fiscal years. The agreement also provides that the payments
would be increased in the event that it would subject him to excise tax as a parachute payment under the
Internal Revenue Code. The increase would be equal to the additional tax liability imposed on him as a
result of the payment.
The Company has entered into agreements with two executive officers, providing for severance
payments in the event that the executive is terminated by the Company other than for cause. Payments
under these agreements consist of continuation of base salary for a period of 12 months. The Company has
F-36
also entered into an agreement with its former chairman and founder pursuant to which, in the event of a
change in control, all amounts due to him for the remainder of the term of his agreement become
immediately due and payable.
The Company maintains strategic alliance relationships with third parties, including resellers, agents
and systems integrators (collectively “Agents” or “Agent”) that market, sell and/or integrate the
Company's products and services. The cessation or termination of certain relationships, by the Company or
an Agent, may subject the Company to material liability and/or expense. This material liability and/or
expense includes potential payments due upon the termination or cessation of the relationship by the
Company or an Agent, costs related to the establishment of a direct sales presence or development of a
new Agent in the territory.
No such events of termination or cessation have occurred. The Company is not able to reasonably
estimate the amount of any such liability and/or expense if such event were to occur, given the range of
factors that could affect the ultimate determination of the liability. Actual payments could be in the range
of zero to twenty million dollars. If the Company reacquires the territorial rights for an applicable sales
territory and establishes a direct sales presence, future commissions otherwise payable to an Agent for
existing customer maintenance contracts and other intangible assets may be assumed from the Agent. If
any of the foregoing were to occur, the Company may be subject to litigation and liability such that its
operating results, cash flows and financial condition could be materially and adversely affected.
(14) 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, including making matching contributions up to a maximum of 6%
of an employee’s pretax contribution. During the fiscal years ended June 30, 2004, 2005 and 2006, the
Company made matching contributions of approximately $0.1 million, $1.0 million and $0.8 million,
respectively. These contributions, which vested immediately, were expensed in each respective year.
(15) Joint Ventures and Other Investments
In November 2000, the Company invested $0.6 million in a global chemical business-to-business e-
commerce company supporting major chemical companies in Asia. This investment entitles the Company
to a minority interest in this 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, 2006, the Company has determined that an other than temporary impairment has not occurred.
This investment is included in other assets in the accompanying consolidated balance sheet as of June 30,
2005 and 2006.
In the accompanying consolidated statements of operations for the year ended June 30, 2004, the
Company has recognized losses of approximately $0.4 million, as its portion of the losses from a joint
venture that was dissolved in 2005 and from its investment in a Cyprus-based company that was
surrendered in fiscal 2005.
(16) Segment and Geographic Information
The Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise
and related Information,” which establishes standards for reporting information about operating segments
in 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’s chief operating decision maker is the Chief Executive Officer of the Company.
F-37
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’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):
Year ended June 30, 2004—
Revenues from external customers . . . . . . . . . . . . . . . . . .
Controllable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controllable margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended June 30, 2005—
Revenues from external customers . . . . . . . . . . . . . . . . . .
Controllable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controllable margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended June 30, 2006—
Revenues from external customers . . . . . . . . . . . . . . . . . .
Controllable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controllable margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License
Consulting
Services
Maintenance
and Training
Total
$ 158,150
66,825
$ 91,325
$ 96,512
69,854
$ 26,658
$ 77,784
14,323
$ 63,461
$ 332,446
151,002
$181,444
$ 129,621
64,225
$ 65,396
$ 65,248
53,835
$ 11,413
$ 75,125
16,299
$ 58,826
$ 269,994
134,359
$135,635
$ 152,773
66,045
$ 86,728
$ 63,919
47,093
$ 16,826
$ 76,456
14,715
$ 61,741
$ 293,148
127,853
$165,295
(1) The Controllable Margins reported reflect only the expenses of the line of business and do not
represent the actual margins for each operating segment since they do not contain an allocation for
selling and marketing, general and administrative, development and other corporate expenses
incurred in support of the line of business.
Profit Reconciliation:
Total controllable margin for reportable segments . . . . . . . . . . . . . . . .
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative and overhead. . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on sales and disposals of assets . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income and expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before (provision for) benefit from income taxes and
equity in earnings from joint ventures . . . . . . . . . . . . . . . . . . . . . . . . .
F-38
2006
2004
Years Ended June 30
2005
(In thousands)
$135,635
(80,349 )
(85,986 )
—
(24,960 )
(14,314 )
$ (1,565 )
$181,444
(90,907)
(79,764)
(4,217)
(20,085)
747
7,188
$165,295
(70,716)
(70,841)
—
(3,993)
(898)
689
$ (5,594) $ (71,539 ) $ 19,536
Geographic Information:
Domestic and export sales as a percentage of total revenues are as follows:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended June 30,
2005
2004
39.7 %
42.8%
37.2
33.0
5.8
4.6
17.3
19.6
100.0% 100.0 % 100.0 %
2006
42.9 %
30.5
5.3
21.3
During the years ended June 30, 2004, 2005 and 2006 there were no customers that individually
represented greater than 10% of the Company’s total revenue.
The Company has long-lived assets of approximately $20.6 million that reside in the United States,
and $28.4 million that reside in other geographic locations as of June 30, 2006.
Revenues for the Company’s North American, European and Asian operations are as follows for the
years ended June 30 (in thousands). The Company has intercompany distribution arrangements with its
subsidiaries. The basis for these arrangements, disclosed below as transfers between geographic locations,
is cost plus a specified percentage for services and a commission rate for sales generated in the geographic
region.
2004 . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . .
North
America
$ 240,280
$ 180,465
$ 215,588
Europe
$ 83,427
$ 75,035
$ 60,201
Asia
$ 16,825
$ 17,916
$ 19,165
Eliminations Consolidated
$ 332,446
$ 269,994
$ 293,148
$ (8,086)
$ (3,422)
$ (1,806)
(17) Restatements of Consolidated Financial Statements
First Restatement
In connection with the preparation of consolidated financial statements for the fiscal year ended
June 30, 2006, a subcommittee of independent members of the board of directors reviewed the Company’s
accounting treatment for all stock options granted since the Company completed its initial public offering
in fiscal 1995. Based upon the subcommittee’s review, the Audit Committee and Company management
determined that certain option grants during fiscal years 1995 through 2004 were accounted for
improperly, and concluded that stock-based compensation associated with certain grants was misstated in
fiscal years 1995 through 2005, and in the nine months ended March 31, 2006. The subcommittee identified
errors related to the determination of the measurement dates for grants of options allocated among a pool
of employees when the specific number of options to be awarded to specific employees had not yet been
finalized, and other measurement date errors. As a result of the errors in determining measurement dates,
the Company has also recorded payroll withholding tax-related adjustments for certain options formerly
classified as Incentive Stock Option (ISO) grants under Internal Revenue Service regulations. These
options were determined to have been granted with an exercise price below the fair market value of the
Company’s stock on the actual grant date, so do not qualify for ISO tax treatment. The disqualification of
ISO classification and the resulting conversion to non-qualified status results in additional withholding
taxes on exercise of those options. The Company recorded estimated payroll withholding tax charges of
$0.5 million, $0.2 million, and $1.2 million for the years ended June 30, 2004, 2005, and 2006, respectively,
in connection with the disqualification of such ISO tax treatment. The stock-based compensation charges,
including the aforementioned withholding tax adjustments, increased the net loss by $7.2 million and
$0.5 million for the years ended June 30, 2004 and 2005, and resulted in compensation charges totaling
$50.1 million for the periods prior to fiscal 2004, which is reflected in the July 1, 2003 beginning
accumulated deficit.
F-39
In addition, as a result of the errors in determining measurement dates, certain options were
determined to have been granted with an exercise price below the fair market value of the Company’s
stock on the actual grant date. These discounted options vesting subsequent to December 2004 result in
nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code, and
holders are subject to an excise tax on the value of the options in the year in which they vest. Management
has concluded that it is probable the Company will either implement a plan to assist the affected
employees for the amount of this tax, or adjust the terms of the original option grant which would also
have financial statement ramifications. As such, the Company recorded an estimated liability of
approximately $1.0 million in the fourth quarter of fiscal 2006 in connection with this contingency.
The restatement of prior year financial statements also includes the adjustments for other errors
identified after the applicable period had been originally reported. Such errors were not previously
recorded because the Company believed the amount of any such errors, both individually and in the
aggregate, were not material to the Company’s consolidated financial statements. These errors related to
the timing of revenue recognition, losses on sales and disposals of assets, interest income, and the
calculation of foreign currency gains and losses.
Second Restatement
Subsequent to the issuance of the consolidated financial statements for the fiscal year ended June 30,
2006, and in the course of preparing the condensed consolidated financial statements for the three months
ended September 30, 2006, the Company identified errors in the accounting for stock-based compensation
and certain revenue transactions in the fiscal year ended June 30, 2006. The stock-based compensation
error was due to a calculation error associated with forfeiture rates upon the adoption of SFAS No. 123R,
as of July 1, 2005.
In order to correct these errors, the Company has restated its financial statements for the fiscal year
ended June 30, 2006 in order to reflect (a) additional stock-based compensation expense of approximately
$1.4 million and (b) additional revenues of approximately $0.3 million. These errors had no effect on the
fiscal year ended June 30, 2004 or 2005.
Third Restatement
Subsequent to the Company’s issuance of restated consolidated financial statements for the year
ended June 30, 2006, and in the course of preparing the condensed consolidated financial statements for
the three and six months ended December 31, 2006, the Company identified errors in the accounting for
foreign currency denominated transactions in the years ended June 30, 2002 through 2006, and the three
months ended September 30, 2005 and 2006. The Company incorrectly accounted for transaction gains and
losses on intercompany balances denominated in currencies other than the functional currency as if such
balances were of a long term investment nature and included the impact as a component of accumulated
other comprehensive income (loss) rather than earnings. These transaction gains and losses should have
been included in earnings as the conditions for accounting for these intercompany balances as long term
investments were not met. In addition, the Company identified errors in the recording of purchase
accounting in other than the functional currency of the acquired entity. These purchase accounting
adjustments should have been denominated in the currency of the applicable subsidiary and translated to
United States Dollars and were incorrectly recorded as United States Dollar denominated net assets in the
consolidated financial statements. Accordingly, translation of the balance sheet position related to the
purchase accounting allocations and translation impact of the amortization of intangible assets was not
properly recorded.
In addition, the Company identified other errors in the course of preparing the condensed
consolidated financial statements for the three and six months ended December 31, 2006. These errors
related to the timing of recognition of service revenue and facility leasing costs, losses on sale of assets and
inappropriate gross presentation of receivables and deferred revenue for customers that did not meet
F-40
revenue recognition criteria. The tax effect of correcting all of the above errors required further
adjustments. The Company also added disclosure relative to reseller relationships in Note 13.
In order to correct these errors, the Company has restated its financial statements for the fiscal
years ended June 30, 2004, 2005 and 2006, in order to reflect (a) foreign currency transaction gains of
$3.8 million, losses of $3.1 million, and losses of $4.4 million, respectively, (b) additional amortization of
technology related intangible assets of $0.7 million, $1.1 million, and $1.5 million, respectively,
(c) additional facility lease costs of less than $0.1 million per fiscal year, (d) for the year ended June 30,
2006, a reduction in service revenues of $0.4 million, (e) for the year ended June 30, 2004 an increase in
loss on sales and disposals of assets of $0.1 million, (f) income tax provision increase of $0.1 million and
decrease of $1.5 million and of $2.0 million, respectively, and (g) the reduction of accounts receivable and
offsetting reduction in deferred revenues of $6.5 million at June 30, 2006 to eliminate the gross
presentation of amounts due from customers that had not met revenue recognition criteria. These errors
had a cumulative effect of decreasing net loss by $2.9 million, net of income taxes, for the periods prior to
fiscal 2004, which is reflected in the July 1, 2003 beginning accumulated deficit.
Effects of Restatements
As a result of the foregoing, the Company has restated its financial statements as of June 30, 2005 and
2006 and for the fiscal years ended June 30, 2004, 2005 and 2006. The first and third restatement also
affected periods prior to fiscal 2004 which are reflected in the opening accumulated deficit and other
comprehensive loss of the Company as of June 30, 2003.
The effect of the restatements are summarized as follows:
Originally reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Restatement
2004
Income (loss) attributable
to common shareholders
2005
(In thousands)
$ (28,164) $ (83,822) $ 2,963
2006
Accumulated
deficit
July 1, 2003
$ (286,742)
Stock compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,199)
(50)
(515)
(887)
—
—
(50,051)
(936)
Second Restatement
Stock compensation forfeiture rate. . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
(1,355 )
250
Third Restatement
Foreign currency transaction related . . . . . . . . . . . . . . .
Foreign currency translation related. . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,823
(706)
(165)
(81)
(3,118)
(1,108)
(38)
1,468
(4,436 )
(1,489 )
(486 )
1,993
—
—
2,119
(108)
(16)
879
As restated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (32,542) $ (88,020) $ (2,560 )
$ (334,855)
F-41
Revenue and Expense Adjustments
Set forth below are the adjustments to the Company’s previously issued statements of operations for
the fiscal years ended June 30, 2004, 2005 and 2006 (amounts in thousands).
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,661
174,335
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
332,996
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As
Previously
Reported
Year ended June 30, 2004
First Restatement
Third
Restatement
Stock-based
Compensation
and Related
Payroll
Withholding
Tax
Other
As
Adjustments Adjustments Adjustments Restated
$ —
—
—
$ (511)
(39)
(550)
$ —
—
—
$ 158,150
174,296
332,446
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of technology related intangible and
computer software development assets . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . .
Long-lived asset impairment charges . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations. . . . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . .
Income (loss) before provision for income
taxes and equity in earnings from joint ventures .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
Equity in losses from joint ventures . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount and
15,577
99,183
—
2,557
7,270
—
—
83
—
—
—
15,577
101,823
706
7,976
3,250
125,280
207,716
100,028
58,955
32,727
967
20,085
(879)
211,883
(4,167)
7,296
(4,940)
252
(1,559)
(19,896)
(351)
(21,806)
—
2,557
(2,557)
1,826
1,204
1,612
—
—
—
4,642
(7,199)
—
—
—
(7,199)
—
—
(7,199)
—
83
(633)
3,250
—
(706 ) 128,626
(706 ) 203,820
(48)
(48)
8
—
—
—
(88)
(545)
—
—
757
—
—
33
—
—
132
165
(871 )
—
—
3,823
101,806
60,111
34,380
967
20,085
(747)
216,602
(12,782)
7,296
(4,940)
4,832
212
(262)
—
(50)
2,952
(81 )
—
2,871
(5,594)
(20,239)
(351)
(26,184)
dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,358)
—
—
—
(6,358)
Income (loss) attributable to common
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (28,164)
$ (7,199)
$ (50)
$ 2,871
$ (32,542)
Basic income (loss) per share attributable to
common shareholders . . . . . . . . . . . . . . . . . . . . . . . $
(0.69)
$ (0.18)
$ (0.00)
$ 0.07
$
(0.80)
Diluted income (loss) per share attributable to
common shareholders . . . . . . . . . . . . . . . . . . . . . . . $
Basic weighted average shares outstanding . . . . . . .
Diluted weighted average shares outstanding . . . . .
(0.69)
40,575
40,575
$ (0.18)
—
—
$ (0.00)
—
—
$ 0.07
—
—
$
(0.80)
40,575
40,575
F-42
Year ended June 30, 2005
First Restatement
Third
Restatement
Stock-based
Compensation
and Related
Payroll
Withholding
Tax
As
Other
Previously
Reported Adjustments Adjustments Adjustments Restated
As
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,233
140,334
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269,567
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
—
—
$ 388
39
427
$ — $ 129,621
— 140,373
— 269,994
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of technology related intangible and
computer software development assets . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . .
Long-lived asset impairment charges . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations. . . . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . .
Income (loss) before provision for income
taxes and equity in earnings from joint ventures .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
Equity in losses from joint ventures . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount and
16,864
82,638
7,112
—
106,614
162,953
96,187
47,236
49,175
—
24,907
13,635
231,140
(68,187)
6,143
(4,170)
618
(65,596)
(3,776)
—
(69,372)
—
189
—
—
189
(189)
136
88
102
—
—
—
326
(515)
—
—
—
(515)
—
—
(515)
—
(83)
—
—
16,864
82,744
—
1,108
8,220
$
—
(83)
510
—
—
1,108 107,828
(1,108 ) 162,166
(48)
(48)
—
—
53
679
636
(126)
61
—
(1,099)
(1,164)
277
—
(887)
96,275
—
47,276
—
49,315
38
—
—
24,960
—
—
14,314
38 232,140
(69,974)
6,204
(4,170)
(3,599)
(1,146 )
—
—
(3,118 )
(4,264 )
1,468
—
(2,796 )
(71,539)
(2,031)
—
(73,570)
dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,450)
—
—
—
(14,450)
Income (loss) attributable to common
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (83,822)
$ (515)
$ (887)
$ (2,796 ) $ (88,020)
Basic income (loss) per share attributable to
common shareholders . . . . . . . . . . . . . . . . . . . . . . . $
(1.98)
$ (0.01)
$ (0.02)
$ (0.07 ) $
(2.08)
Diluted income (loss) per share attributable to
common shareholders . . . . . . . . . . . . . . . . . . . . . . . $
Basic weighted average shares outstanding . . . . . . .
Diluted weighted average shares outstanding . . . . .
(1.98)
42,381
42,381
$ (0.01)
—
—
$ (0.02)
—
—
$ (0.07 ) $
—
—
(2.08)
42,381
42,381
F-43
Year ended June 30, 2006
Second
Restatement
Third
Restatement
As
Previously
Reported Adjustments Adjustments Restated
As
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152,686 $
140,564
293,250
Cost of revenues:
Cost of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of technology related intangible assets . . . . . . . . .
Impairment of technology related intangible and computer
software development assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs:
Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived asset impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and FTC legal costs . . . . . . . . . . . . . . . . . .
Loss (gain) on sales and disposals of assets . . . . . . . . . . . . . . . . . .
Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before provision for income taxes and equity in
earnings from joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses from joint ventures . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,805
72,492
7,070
—
96,367
196,883
84,010
44,139
41,916
—
3,993
898
174,956
21,927
5,034
(985)
1,076
27,052
(8,706)
—
18,346
87
250
337
—
198
—
—
198
139
$ — $ 152,773
140,375
293,148
(439 )
(439 )
— 16,805
— 72,690
8,559
1,489
—
1,489
(1,928 )
—
98,054
195,094
— 84,505
495
— 44,322
183
47
566
42,529
—
—
—
—
—
3,993
—
—
898
47
1,244
176,247
(1,975 )
(1,105)
18,847
—
—
5,034
—
—
(985)
— (4,436 )
(3,360)
(1,105)
—
—
(1,105)
(6,411 )
1,993
—
(4,418 )
19,536
(6,713)
—
12,823
— (15,383)
Accretion of preferred stock discount and dividend . . . . . . . . . .
Income (loss) attributable to common shareholders . . . . . . . . . . $ 2,963 $ (1,105 ) $ (4,418 ) $ (2,560)
Basic income (loss) per share attributable to common
(15,383)
—
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.07 $
(0.03) $ (0.10 ) $
(0.06)
(0.03) $ (0.09 ) $
—
— (9,144 )
(0.06)
— 44,627
44,627
Diluted income (loss) per share attributable to common
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.06 $
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . .
44,627
53,771
F-44
Assets:
Accounts receivable, net of
allowance for doubtful
accounts. . . . . . . . . . . . . .
Prepaid expenses and other
current assets . . . . . . . . .
Total current assets . . . . . .
Long-term installments
Property and leasehold
improvements, net of
accumulated
depreciation . . . . . . . . . .
Other intangible assets. . . .
Goodwill . . . . . . . . . . . . . . .
Deferred tax asset. . . . . . . .
Total assets . . . . . . . . . . . . .
Liabilities:
Accrued expenses . . . . . . . .
Deferred revenue . . . . . . . .
Total current liabilities. . . .
Deferred tax liability . . . . .
Stockholders’ equity
(deficit):
Additional paid-in capital .
Accumulated deficit . . . . . .
Deferred compensation . . .
Accumulated other
comprehensive income
(loss) . . . . . . . . . . . . . . . .
Total stockholders’ equity
(deficit) . . . . . . . . . . . . . .
Total liabilities and
stockholders’
equity (deficit) . . . . . . . .
Balance Sheet Adjustments
The following is a summary of the impact of the financial statement adjustments on the Company’s
previously reported consolidated balance sheets as of June 30, 2005 and 2006 (in thousands).
As
Previously
Reported
June 30, 2005
Third
First
Restatement
Restatement
Adjustments Adjustments
As
Restated
June 30, 2006
As
Previously
Reported Adjustments Adjustments Restated
Second
Restatement
Third
Restatement
As
$ 52,254 $
(152) $ (574) $ 51,528 $ 55,654 $ — $ (6,491 ) $ 49,163
11,483
147,759
(184)
(336)
(143)
(717)
11,156
146,706
8,813
171,380
receivable . . . . . . . . . . . .
19,425
(980)
—
18,445
35,681
366
(6,125)
9,179
165,255
—
35,681
—
—
—
—
—
—
—
—
11,388
12,123
14,729
1,354
244,242
79,321
58,334
143,783
2,760
(432)
—
—
—
(1,748)
235
2,248
2,170
—
3,936
1,272
(488)
784
127
(574)
(447)
— (1,065)
11,191
14,371
16,899
1,354
246,430
80,720
57,272
144,120
1,695
8,351
5,131
14,917
1,595
274,238
77,033
64,238
146,131
1,309
323
1,580
3,118
1,502
398
8,674
6,711
18,035
3,097
274,636
77,716
57,936
140,512
—
—
(250)
(250)
—
683
(6,052)
(5,369)
(1,309)
345,278
(398,727)
—
57,521
(59,639)
(414)
— 402,799
429,456
(455,417) (455,403)
—
(414)
2,949
—
1,355
(1,105)
—
—
(1,469)
—
430,811
(457,977)
—
547
—
2,499
3,046
(330)
—
8,545
8,215
(49,085)
(2,532)
5,448
(46,169)
(21,881)
250
7,076
(14,555)
244,242
(1,748)
3,936
246,430
274,238
—
398
274,636
F-45
EXHIBIT INDEX
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)
4.5(6)
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.
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.
4.10(9)
Form of Warrant of Aspen Technology, Inc. dated as of May 9, 2002.
4.11(1)
Form of WD Common Stock Purchase Warrant of Aspen Technology, Inc. dated as of
August 14, 2003.
4.12(1)
Form of WB Common Stock Purchase Warrant of Aspen Technology, Inc. dated as of
August 14, 2003.
10.1(10)
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(11)
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(11)
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(10)
System License Agreement between Aspen Technology, Inc. and the Massachusetts
Institute of Technology, dated March 30, 1982, as amended.
10.5(10)
Vendor Program Agreement, dated March 29, 1990, between Aspen Technology, Inc. and
General Electric Capital Corporation.
10.6(12)
Rider No. 1, dated December 14, 1994, to Vendor Program Agreement between Aspen
Technology, Inc. and General Electric Capital Corporation.
10.7(10)† Letter Agreement, dated March 25, 1992, between Aspen Technology, Inc. and Sanwa
Business Credit Corporation.
10.8(16)
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).
10.9(32)
Amended and Restated Direct Finance and Services Addendum to Letter Agreement,
effective December 30, 2004, by and among Aspen Technology, Inc. Fleet Business Credit
LLC, Fleet Business Credit (UK) Limited, and Fleet Business Credit (Deutschland)
GmbH.
10.10(13) Loan and Security Agreement, dated as of January 30, 2003, by and among Silicon Valley
Bank and Aspen Technology, Inc., AspenTech, Inc. and Hyprotech Company.
10.11(13) Export-Import Bank Loan and Security Agreement, dated as of January 30, 2003, by and
among Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
10.12(25) Export-Import Bank Borrower Agreement, dated as of April 1, 2005, by and between
Aspen Technology, Inc. and AspenTech Inc. in favor of the Export-Import Bank of the
United States and Silicon Valley Bank.
10.13(25) Promissory Note (Ex-Im), dated April 1, 2005, by and between Aspen Technology, Inc. and
AspenTech, Inc. in favor of Silicon Valley Bank.
10.14(13) 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.
10.15(13) Security Agreement, dated as of January 30, 2003, by and between Silicon Valley Bank and
AspenTech Securities Corporation.
10.16(13) Unconditional Guaranty, dated as of January 30, 2003, by AspenTech Securities
Corporation in favor of Silicon Valley Bank.
10.17(14) First Loan Modification Agreement, effective as of June 27, 2003, by and among Silicon
Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
10.18(14) Pledge Agreement, effective as of June 27, 2003, by Aspen Technology, Inc. in favor of
Silicon Valley Bank.
10.19(26) First Loan Modification Agreement (Exim), dated as of September 10, 2004, by and among
Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank.
10.20(26) Second Loan Modification Agreement, dated as of September 10, 2004, by and among
Aspen Technology, Inc., AspenTech, Inc. and Silicon Valley Bank.
10.21(25) Fourth Loan Modification Agreement, dated April 1, 2005 by and among Silicon Valley
Bank, Aspen Technology, Inc. and AspenTech, Inc.
10.22(25) Third Loan Modification Agreement (Exim), dated as of April 1, 2005, by and among
Silicon Valley Bank, Aspen Technology, Inc. and AspenTech, Inc.
10.23(27) Sixth Loan Modification Agreement, dated as of June 15, 2005, by and among Aspen
Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
10.24(27) Fourth Loan Modification Agreement—EXIM, dated as of June 15, 2005, by and among
Aspen Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
10.25(27) Partial Release and Acknowledgement Agreement, dated as of June 15, 2005, by and
among Aspen Technology, Inc., Aspentech, Inc. and Silicon Valley Bank
10.26(27) Loan Agreement, dated as of June 15, 2005, among Aspen Technology, Inc., Aspen
Technology Receivables II LLC, Guggenheim Corporate Funding, LLC and the lenders
named therein
10.27(27) Security Agreement, dated as of June 15, 2005, between Aspen Technology Receivables II
LLC and Guggenheim Corporate Funding, LLC
10.28(27) Purchase and Sale Agreement, dated as of June 15, 2005, between Aspen Technology, Inc.
and Aspen Technology Receivables I LLC
10.29(27) Purchase and Resale Agreement, dated as of June 15, 2005, between Aspen Technology
Receivables I LLC and Aspen Technology Receivables II LLC
10.30(24) Non-Recourse Receivables Purchase Agreement, dated December 31, 2003, between
Silicon Valley Bank and Aspen Technology, Inc.
10.31(26) Second Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
September 30, 2004, by and between Silicon Valley Bank and Aspen Technology, Inc.
10.32(28) Third Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
December 31, 2004, by and between Silicon Valley Bank and Aspen Technology, Inc.
10.33(29) Fifth Amendment to Non-Recourse Receivables Purchase Agreement, dated as of
March 31, 2005, by and between Silicon Valley Bank and Aspen Technology, Inc.
10.34(15) Securities Purchase Agreement dated June 1, 2003 by and among Aspen Technology, Inc.
and the Purchasers listed therein.
10.35(15) Repurchase and Exchange Agreement dated as of June 1, 2003 by and among Aspen
Technology, Inc. and the Holders named therein.
10.36(1)
Investor Rights Agreement dated as of August 14, 2003 by and among Aspen
Technology, Inc. and the Stockholders Named therein.
10.37(1)
Management Rights Letter dated as of August 14, 2003 by and among Aspen
Technology, Inc. and the entities named therein.
10.38(17) Amended and Restated Registration Rights Agreement dated as of March 19, 2002
between Aspen Technology, Inc. and the Purchasers named therein.
10.39(10) Equity Joint Venture Contract between Aspen Technology, Inc. and China Petrochemical
Technology Company.
10.40(28)+ Purchase and Sale Agreement, dated October 6, 2004, by and among Aspen
Technology, Inc., Hyprotech Company, AspenTech Canada Ltd., and Hyprotech UK Ltd.
(collectively, the “AspenTech Parties”) and Honeywell International Inc., Honeywell
Control Systems Limited and Honeywell Limited-Honeywell Limitee (collectively, the
“Honeywell Parties”).
10.41(28)+ Amendment No. 1 to the Purchase and Sale Agreement, dated October 6, 2004 by and
among the AspenTech Parties and the Honeywell Parties.
10.42(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between Aspen
Technology, Inc. and Honeywell International, Inc.
10.43(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
AspenTech Canada Ltd. and Honeywell Limited-Honeywell Limitee.
10.44(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between Hyprotech
Company and Honeywell Limited-Honeywell Limitee.
10.45(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between
AspenTech Ltd. and Honeywell Control Systems Limited.
10.46(28)+ Hyprotech License Agreement, dated as of December 23, 2004, by and between Hyprotech
UK Ltd. and Honeywell Control Systems Limited.
10.47(10)*
1988 Non-Qualified Stock Option Plan, as amended.
10.48(18)*
1995 Stock Option Plan.
10.49(27)* Amended and Restated 1995 Directors Stock Option Plan.
10.50(18)*
1995 Employees’ Stock Purchase Plan.
10.51(19)*
1998 Employees’ Stock Purchase Plan.
10.52(20)* Amendment No. 1 to 1998 Employees’ Stock Purchase Plan.
10.53(21)*
1996 Special Stock Option Plan.
10.54(34)* Restated 2001 Stock Option Plan.
10.55(30)*
2005 Stock Incentive Plan
10.56(10)* Form of Employee Confidentiality and Non-Competition Agreement.
10.57(31)* Employment Agreement, dated as of December 7, 2004, between Aspen Technology, Inc.
and Mark E. Fusco.
10.58(23)* Employment Agreement, dated April 1, 2002, by and between Aspen Technology, Inc. and
C. Steven Pringle
10.59(3)* Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and
C. Steven Pringle.
10.60(23)* Offer Letter, dated June 16, 2003, by and between Aspen Technology, Inc. and Charles F.
Kane.
10.61(23)* Letter Agreement, dated June 24, 2003, by and between Aspen Technology, Inc. and
Manolis Kotzabasakis.
10.62(14)* Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and
C. Steve Pringle.
10.63(14)* Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and
Charles F. Kane.
10.64(14)* Letter Amendment, dated August 18, 2003, by and between Aspen Technology, Inc. and
Manolis Kotzabasakis.
10.65(32)* Amendment No. 1 to Employment and Change of Control Agreement, dated as of
October 28, 2005, between Aspen Technology, Inc. and Mark E. Fusco.
10.66(32)* Aspen Technology, Inc. Executive Annual Incentive Bonus Plan FY06
10.67(32)* Aspen Technology, Inc. Operations Executives Plan FY06
10.68(33)* Aspen Technology, Inc. Executive Annual Incentive Bonus Plan FY07
10.69(33)* Aspen Technology, Inc. Operations Executives Plan FY07
10.70(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.
10.71(17) Amended and Restated Securities Purchase Agreement dated as of March 19, 2002
between Aspen Technology, Inc. and the Purchasers named therein.
10.72(34) Tenth Loan Modification Agreement, dated as of September 14, 2006, between Silicon
Valley Bank and Aspen Technology, Inc.
10.73(34) Sixth Loan Modification Agreement (EXIM) , dated as of September 14, 2006, between
Silicon Valley Bank and Aspen Technology, Inc.
14.1(32)
Code of Conduct and Business Ethics
21.1(34)
Subsidiaries of Aspen Technology, Inc.
23.1
Consent of Deloitte & Touche LLP.
24.1(34)
Power of Attorney.
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 Acting Principal Financial and Accounting Officer pursuant to Exchange
Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
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 Acting Principal Financial and Accounting Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
August 21, 2003 (filed on August 22, 2003), and incorporated herein by reference.
(2) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
March 12, 1998 (filed on March 27, 1998), and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 1 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. (filed on June 12, 1998), and incorporated herein by reference.
(4) Previously filed as an exhibit to Amendment No. 2 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on November 8, 2001, and incorporated herein by reference.
(5) Previously filed as an exhibit to Amendment No. 3 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on February 12, 2002, and incorporated herein by reference.
(6) Previously filed as an exhibit to Amendment No. 4 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on March 20, 2002, and incorporated herein by reference.
(7) Previously filed as an exhibit to Amendment No. 5 to the Registration Statement on Form 8-A of
Aspen Technology, Inc. filed on May 31, 2002, and incorporated herein by reference.
(8) Previously filed as an exhibit to Amendment No. 6 to Form 8-A of Aspen Technology, Inc. filed on
June 2, 2003, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
June 5, 2002 (filed on June 7, 2002), and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registration Statement on Form S-1 of Aspen Technology, Inc.
(Registration No. 33-83916) (filed on September 13, 1994), and incorporated herein by reference.
(11) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2000, and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registration Statement on Form S-1 of Aspen Technology, Inc.
(Registration No. 33-88734) (filed on January 29, 1995), and incorporated herein by reference.
(13) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2002, and incorporated herein by reference.
(14) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2003, and incorporated herein by reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. filed on
June 2, 2003, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2002, and incorporated herein by reference.
(17) Previously filed as an exhibit to the Current Report on Form 8-K filed by Aspen Technology, Inc. on
March 19, 2002, and incorporated herein by reference.
(18) Previously filed as an exhibit to the Registration Statement on Form S-8 of Aspen Technology, Inc.
(Registration No. 333-11651) (filed on September 9, 1996), and incorporated herein by reference.
(19) Previously filed as an exhibit to the Registration Statement on Form S-8 of Aspen Technology, Inc.
(Registration No. 333-44575) (filed on January 20, 1998), and incorporated herein by reference.
(20) Previously filed as an exhibit to the Definitive Proxy Statement on Schedule 14A of Aspen
Technology, Inc. filed November 13, 2000, and incorporated herein by reference.
(21) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 1997, and incorporated herein by reference.
(22) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
May 31, 2002 (filed on May 31, 2002), and incorporated herein by reference.
(23) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
July 11, 2003 (filed on July 11, 2003), and incorporated herein by reference.
(24) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2003, and incorporated herein by reference.
(25) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2005, and incorporated herein by reference.
(26) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended September 30, 2004, and incorporated herein by reference.
(27) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
June 15, 2005 (filed on June 20, 2005), and incorporated herein by reference.
(28) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended December 31, 2004, and incorporated herein by reference.
(29) Previously filed as an exhibit to the Quarterly Report on Form 10-Q of Aspen Technology, Inc. for the
fiscal quarter ended March 31, 2005, and incorporated herein by reference.
(30) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
May 26, 2005 (filed on June 2, 2005), and incorporated herein by reference.
(31) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc. dated
December 21, 2004 (filed on December 23, 2004), and incorporated herein by reference.
(32) Previously filed as an exhibit to the Annual report on Form 10-K of Aspen Technology, Inc. for the
year ended June 30, 2005, and incorporated herein by reference.
(33) Previously filed as an exhibit to the Current Report on Form 8-K of Aspen Technology, Inc., dated
June 29, 2006 (filed on July 6, 2006), and incorporated herein by reference.
(34) Previously filed as an exhibit to the Annual Report on Form 10-K of Aspen Technology, Inc. for the
fiscal year ended June 30, 2006 (filed on September 28, 2006), and incorporated herein by reference.
† Confidential treatment requested as to certain portions
* Management contract or compensatory plan
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-11651, 333-21593,
333-42536, 333-42538, 333-42540, 333-71872, 333-80225, 333-117637, 333-117638, 333-118952 and
333-128423 on Form S-8 and Registration Statement Nos. 333-90066 and 333-109807 on Form S-3 of
Aspen Technology, Inc. of our report on the consolidated financial statements of Aspen Technology, Inc.
dated September 28, 2006 (November 14, 2006 as to the effects of the restatement discussed in Note 17
under the caption “Second Restatement” and March 14 as to the effects of the restatement discussed in
Note 17 under the caption “Third Restatement”) (which report expresses an unqualified opinion and
includes explanatory paragraphs relating to the restatements of the Company’s consolidated financial
statements described in Note 17 and the adoption of Statement of Financial Accounting Standards
No. 123(R) Share-Based Payment described in Note 8) and of our report relating to management’s report
on the effectiveness of internal control over financial reporting dated September 28, 2006 (November 14,
2006 as to the effect of the material weakness related to forfeiture rates used to calculate stock-based
compensation expense and March 14, 2007 related to the accounting for foreign currency transactions
related to the consolidation of foreign subsidiaries discussed in Management’s Report on Internal Control
over Financial Reporting (as revised)) (which report expresses an adverse opinion on the effectiveness of
the Company’s internal control over financial reporting because of material weaknesses), appearing in this
Annual Report on Form 10-K/A of Aspen Technology, Inc. for the year ended June 30, 2006.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 14, 2007
Exhibit 31.1
I, Mark E. Fusco, certify that:
CERTIFICATIONS
1.
I have reviewed this Amendment No. 2 of the annual report on Form 10-K/A of Aspen
Technology, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2007
/s/ MARK E. FUSCO
Mark E. Fusco
President and Chief Executive Officer
Exhibit 31.2
I, Bradley T. Miller, certify that:
CERTIFICATIONS
1.
I have reviewed this Amendment No. 2 of the annual report on Form 10-K/A of Aspen
Technology, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2007
/s/ BRADLEY T. MILLER
Bradley T. Miller
Senior Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with Amendment No. 2 of the Annual Report on Form 10-K/A of Aspen
Technology, Inc. (the “Company”) for the period ended June 30, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), the undersigned, Mark E. Fusco, President and
Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: March 14, 2007
/s/ MARK E. FUSCO
Mark E. Fusco
President and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with Amendment No. 2 of the Annual Report on Form 10-K/A of Aspen
Technology, Inc. (the “Company”) for the period ended June 30, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), the undersigned, Bradley T. Miller, Senior Vice
President and Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: March 14, 2007
/s/ BRADLEY T. MILLER
Bradley T. Miller
Senior Vice President and Chief Financial Officer