Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

** **

**x****     ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the quarterly periodended September 30, 2010**

** **

**or**

** **

**o****        ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the transition periodfrom                  to                  **

 

**Commission File Number:000-24786**

 

**ASPEN TECHNOLOGY, INC.**

(Exact name of registrant as specified inits charter)

 

| **Delaware**                                                    | ** ** | **04-2739697**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of

incorporation or organization) | ** ** | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **200 Wheeler Road**

**Burlington,  Massachusetts**            | ** ** | **01803**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |

 

**(781) 221-6400**

(Registrant’s telephone number, includingarea code)

 

----

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:  Yes x  No  ̈

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                 |   | Accelerated filer x         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer o                   |   | Smaller reporting company o |
| (Do not check if a smaller reporting  company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):  Yes o  No x

 

Asof October 25, 2010, there were 93,057,516 shares of the registrant’scommon stock (par value $0.10 per share) outstanding.

 

 

 

----

Table of Contents

 

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                   | ** ** | **Page** |
|------------|----------------------------------------------------------------------------------------------|------------|----------|
|       | PART I -  FINANCIAL INFORMATION                                                         |       |     |
|       |                                                                                         |       |     |
| Item 1.    | Financial  Statements.                                                                       |       | 3        |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations. |       | 18       |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk.                                 |       | 35       |
| Item  4.   | Controls  and Procedures.                                                                    |       | 36       |
|       | PART II  - OTHER INFORMATION                                                            |       |     |
| Item  1.   | Legal  Proceedings.                                                                          |       | 37       |
| Item 1A.   | Risk  Factors.                                                                               |       | 39       |
| Item 6.    | Exhibits.                                                                                    |       | 49       |
|       | SIGNATURES                                                                                   |       | 50       |

 

Our registered trademarks include ASPENONE,ASPEN PLUS, ASPENTECH, the AspenTech logo, DMCPLUS, HTFS, HYSYS and INFOPLUS.21.

 

2

----

Table of Contents

 

**PART I - FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements.**

*** ***

***Condensed Consolidated Financial Statements(unaudited)***

** **

**ASPENTECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited and inthousands, except per share data)**

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** |
| ** **                                | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Revenue:**                              |       |                             |       |   |   |
| Subscription                              |       | $                                | 9,656      |   | $ | 25 |   |
| Software                                  |       | 9,311                            |       | 11,082 |   |
| Total subscription and software           |       | 18,967                           |       | 11,107 |   |
| Services and other                        |       | 24,133                           |       | 28,689 |   |
| Total revenue                             |       | 43,100                           |       | 39,796 |   |
| **Cost of revenue:**                      |       |                             |       |   |   |
| Subscription and software                 |       | 2,122                            |       | 1,773 |   |
| Services and other                        |       | 11,126                           |       | 15,696 |   |
| Total cost of revenue                     |       | 13,248                           |       | 17,469 |   |
| Gross profit                              |       | 29,852                           |       | 22,327 |   |
| **Operating expenses:**                   |       |                             |       |   |   |
| Selling and marketing                     |       | 20,351                           |       | 20,552 |   |
| Research and development                  |       | 12,575                           |       | 10,894 |   |
| General and administrative                |       | 16,557                           |       | 15,414 |   |
| Restructuring charges                     |       | 77                               |       | 271 |   |
| Total operating expenses                  |       | 49,560                           |       | 47,131 |   |
| Loss from operations                      |       | (19,708                          | )          | (24,804 | ) |
| Interest income                           |       | 3,702                            |       | 5,449 |   |
| Interest expense                          |       | (1,244                           | )          | (2,411 | ) |
| Other income, net                         |       | 2,664                            |       | 2,269 |   |
| Loss before income taxes                  |       | (14,586                          | )          | (19,497 | ) |
| Provision for income taxes                |       | (882                             | )          | (1,565 | ) |
| Net loss                                  |       | $                                | (15,468    | ) | $ | (21,062 | ) |
| **Loss per common share:**                |       |                             |       |   |   |
| Basic                                     |       | $                                | (0.17      | ) | $ | (0.23 | ) |
| Diluted                                   |       | $                                | (0.17      | ) | $ | (0.23 | ) |
| **Weighted average shares  outstanding:** |       |                             |       |   |   |
| Basic                                     |       | 92,689                           |       | 90,107 |   |
| Diluted                                   |       | 92,689                           |       | 90,107 |   |

 

See accompanying notes to these unauditedcondensed consolidated financial statements.

 

3

----

Table of Contents

 

**ASPENTECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(Unaudited and inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| Current assets:                                                                                                                                                                                                                                                                                |       |                   |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                      |       | $                      | 123,161    |              | $          | 124,945 |   |
| Accounts receivable, net of allowance  for doubtful accounts of $4,958 and $4,685                                                                                                                                                                                                              |       | 26,190                 |       | 31,738            |       |
| Current portion of installments  receivable, net of allowance for doubtful accounts of $1,166 and $1,119                                                                                                                                                                                       |       | 53,291                 |       | 51,729            |       |
| Current portion of collateralized  receivables                                                                                                                                                                                                                                                 |       | 23,923                 |       | 25,675            |       |
| Unbilled services                                                                                                                                                                                                                                                                              |       | 2,144                  |       | 1,860             |       |
| Prepaid expenses and other current  assets                                                                                                                                                                                                                                                     |       | 7,468                  |       | 5,236             |       |
| Prepaid income taxes                                                                                                                                                                                                                                                                           |       | 429                    |       | 7,468             |       |
| Deferred tax assets                                                                                                                                                                                                                                                                            |       | 1,678                  |       | 1,632             |       |
| Total current assets                                                                                                                                                                                                                                                                           |       | 238,284                |       | 250,283           |       |
| Non-current installments receivable, net  of allowance for doubtful accounts of $1,196 and $1,196                                                                                                                                                                                              |       | 70,205                 |       | 76,869            |       |
| Non-current collateralized receivables                                                                                                                                                                                                                                                         |       | 23,194                 |       | 25,755            |       |
| Property, equipment and leasehold  improvements, net of accumulated depreciation of $29,576 and $29,769                                                                                                                                                                                        |       | 7,677                  |       | 8,057             |       |
| Computer software development costs, net  of accumulated amortization of $67,654 and $67,251                                                                                                                                                                                                   |       | 2,188                  |       | 2,367             |       |
| Goodwill                                                                                                                                                                                                                                                                                       |       | 17,839                 |       | 17,361            |       |
| Non-current deferred tax assets                                                                                                                                                                                                                                                                |       | 11,758                 |       | 11,597            |       |
| Other non-current assets                                                                                                                                                                                                                                                                       |       | 2,629                  |       | 2,424             |       |
| Total assets                                                                                                                                                                                                                                                                                   |       | $                      | 373,774    |              | $          | 394,713 |   |
|                                                                                                                                                                                                                                                                                           |       |                   |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                  |       |                   |       |              |       |
| Current liabilities:                                                                                                                                                                                                                                                                           |       |                   |       |              |       |
| Current portion of secured borrowing                                                                                                                                                                                                                                                           |       | $                      | 27,836     |              | $          | 30,424 |   |
| Accounts payable                                                                                                                                                                                                                                                                               |       | 4,707                  |       | 6,092             |       |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                                 |       | 34,295                 |       | 49,890            |       |
| Income taxes payable                                                                                                                                                                                                                                                                           |       | 1,486                  |       | 1,161             |       |
| Deferred revenue                                                                                                                                                                                                                                                                               |       | 72,873                 |       | 67,852            |       |
| Current deferred tax liability                                                                                                                                                                                                                                                                 |       | 424                    |       | 398               |       |
| Total current liabilities                                                                                                                                                                                                                                                                      |       | 141,621                |       | 155,817           |       |
| Long-term secured borrowing                                                                                                                                                                                                                                                                    |       | 43,377                 |       | 45,711            |       |
| Long-term deferred revenue                                                                                                                                                                                                                                                                     |       | 28,568                 |       | 19,427            |       |
| Non-current deferred tax liability                                                                                                                                                                                                                                                             |       | 953                    |       | 956               |       |
| Other non-current liabilities                                                                                                                                                                                                                                                                  |       | 31,285                 |       | 31,832            |       |
| Commitments and contingencies (Note 11)                                                                                                                                                                                                                                                        |       |                   |       |              |       |
| Series D redeemable convertible  preferred stock, $0.10 par value— Authorized— 3,636 shares at  September 30, 2010 and June 30, 2010 

Issued and outstanding— none at  September 30, 2010 and June 30, 2010                                           |       | —                 |       | —            |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| Common stock, $0.10 par value—  Authorized—210,000,000 shares 

Issued— 93,285,818 shares at September 30, 2010 and  92,668,280 shares at June 30, 2010 

Outstanding— 93,052,354 shares at September 30, 2010 and  92,434,816 shares at June 30, 2010 |       | 9,329                  |       | 9,267             |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                     |       | 517,706                |       | 515,729           |       |
| Accumulated deficit                                                                                                                                                                                                                                                                            |       | (406,506               | )          | (391,038          | )          |
| Accumulated other comprehensive income                                                                                                                                                                                                                                                         |       | 7,954                  |       | 7,525             |       |
| Treasury stock, at cost—233,464 shares  of common stock at September 30, 2010 and June 30, 2010                                                                                                                                                                                 |       | (513                   | )          | (513              | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                |       | 127,970                |       | 140,970           |       |
| Total liabilities and stockholders’  equity                                                                                                                                                                                                                                               |       | $                      | 373,774    |              | $          | 394,713 |   |

 

See accompanying notes to these unauditedcondensed consolidated financial statements.

 

4

----

Table of Contents

 

**ASPEN TECHNOLOGY, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited and inthousands)**

 
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**           | ** ** |
| ** **                                                                                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                                      |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (15,468    | ) | $ | (21,062 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                              |       | 1,361                            |       | 1,974 |   |
| Net foreign currency (gain) loss                                                           |       | (2,179                           | )          | 21 |   |
| Stock-based compensation                                                                   |       | 2,697                            |       | 1,907 |   |
| Loss on the disposal of property,  equipment and leasehold improvements                    |       | —                           |       | 39 |   |
| Deferred income taxes                                                                      |       | 46                               |       | 66 |   |
| Provision for bad debts                                                                    |       | 717                              |       | 218 |   |
| Changes in assets and liabilities:                                                         |       |                             |       |   |   |
| Accounts receivable                                                                        |       | 5,241                            |       | 13,226 |   |
| Unbilled services                                                                          |       | (287                             | )          | (2,539 | ) |
| Prepaid expenses, other assets and prepaid  income taxes                                   |       | 4,791                            |       | 500 |   |
| Installments and collateralized  receivables                                               |       | 11,901                           |       | 13,277 |   |
| Income taxes payable                                                                       |       | 208                              |       | (816 | ) |
| Accounts payable, accrued expenses and  other liabilities                                  |       | (16,646                          | )          | (9,057 | ) |
| Deferred revenue                                                                           |       | 14,006                           |       | (3,027 | ) |
| Net cash provided by (used in) operating  activities                                       |       | 6,388                            |       | (5,273 | ) |
| Cash flows from investing activities:                                                      |       |                             |       |   |   |
| Purchase of property, equipment and  leasehold improvements                                |       | (588                             | )          | (873 | ) |
| Capitalized computer software  development costs                                           |       | (176                             | )          | (270 | ) |
| Net cash used in investing activities                                                      |       | (764                             | )          | (1,143 | ) |
| Cash flows from financing activities:                                                      |       |                             |       |   |   |
| Exercise of stock options                                                                  |       | 137                              |       | — |   |
| Proceeds from secured borrowings                                                           |       | 1,924                            |       | — |   |
| Repayment of secured borrowings                                                            |       | (9,341                           | )          | (5,906 | ) |
| Payment of tax withholding obligations related  to restricted stock                        |       | (796                             | )          | (93 | ) |
| Net cash used in financing activities                                                      |       | (8,076                           | )          | (5,999 | ) |
| Effects of exchange rate changes on cash  and cash equivalents                             |       | 668                              |       | (833 | ) |
| Decrease in cash and cash equivalents                                                      |       | (1,784                           | )          | (13,248 | ) |
| Cash and cash equivalents, beginning of  period                                            |       | 124,945                          |       | 122,213 |   |
| Cash and cash equivalents, end of period                                                   |       | $                                | 123,161    |   | $ | 108,965 |   |
|                                                                                       |       |                             |       |   |   |
| Supplemental disclosure of cash flow  information:                                         |       |                             |       |   |   |
| Interest paid                                                                              |       | 1,581                            |       | 2,415 |   |
| Income tax (refund) paid, net                                                              |       | (6,496                           | )          | 2,978 |   |

 

See accompanying notes to these unauditedcondensed consolidated financial statements.

 

5

----

Table of Contents

 

**NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  Interim UnauditedCondensed Consolidated Financial Statements**

 

Theaccompanying interim unaudited condensed consolidated financial statements(Interim Financial Statements) of Aspen Technology, Inc. and itssubsidiaries have been prepared on the same basis as our annual consolidatedfinancial statements.  We condensed oromitted certain information and footnote disclosures normally included in ourannual consolidated financial statements. Such Interim Financial Statements have been prepared in conformity withU.S. generally accepted accounting principles (GAAP), as defined in theFinancial Accounting Standards Board (FASB) Accounting Standards Codification(ASC) 270, for interim financial information and with the instructions toRule 10-01 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by GAAP for complete financialstatements.  It is suggested that theseInterim Financial Statements be read in conjunction with the auditedconsolidated financial statements for the year ended June 30, 2010, whichare contained in our Annual Report on Form 10-K, as previously filed withthe U.S. Securities and Exchange Commission (SEC). In the opinion ofmanagement, all adjustments, consisting of normal and recurring adjustments,considered necessary for a fair presentation of the financial position, resultsof operations, and cash flows at the dates and for the periods presented havebeen included and all intercompany accounts and transactions have beeneliminated in consolidation. The results of operations for the three monthsended September 30, 2010 are not necessarily indicative of the results tobe expected for subsequent quarters or for the full fiscal year.

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions. These estimates and assumptions affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenue and expense during the reporting period. Actual resultscould differ from those estimates.

 

Unlessthe context requires otherwise, references to we, our and us refer to AspenTechnology, Inc. and our subsidiaries.

 

**2.   Significant Accounting Policies**

 

***Revenue Recognition***

 

We generate revenue from the followingsources: (1) licensing software products; (2) providing post contractsupport (referred to as SMS) and training; and (3) providing professionalservices. We sell our software products to end users under fixed-term andperpetual licenses. As a standard business practice, we offer extended paymentterm options for our fixed-term license contracts, which are generally payableon an annual basis. Certain of our fixed-term license agreements includeproduct mixing rights that allow customers the flexibility to change oralternate the use of multiple products included in the license arrangementafter those products are delivered to the customer. We refer to thesearrangements as token arrangements. Tokens are fixed units of measure. Theamount of software usage is limited by the number of the tokens purchased bythe customer.

 

Prior to fiscal 2010, we primarilyexecuted software license arrangements with contractual provisions thatresulted in the “upfront” recognition of license revenue upon delivery of thesoftware products, provided all other revenue recognition requirements weremet. Beginning in July 2009, we began offering our aspenONE subscriptionoffering, which provides customers with access to all products within theaspenONE suite or suites they license. As part of the aspenONE subscriptionoffering, customers receive, for no additional fee, SMS for the term of thelicense and the right to unspecified future software products that may beintroduced into the licensed suite during the term of the arrangement. Underthe aspenONE subscription offering, we recognize revenue over the term of theagreement on a subscription, or “daily ratable” basis, beginning when the firstpayment is due, typically 30 days after signing the agreement, providedall other revenue recognition requirements are met. Beginning in July 2009,we also began bundling SMS for the full contract term on our point productlicense arrangements. Previously, SMS on our multi-year term point productarrangements was offered for an initial one-year period, and then renewedannually thereafter at the customers’ option (“legacy term license arrangements”).

 

Over the next several years, we expect totransition substantially all of our customers to our aspenONE subscriptionoffering or to point product arrangements with SMS bundled for the contractterm. During this transition period we may have arrangements where the softwareelement will be recognized upfront, including perpetual licenses and amendmentsto existing legacy term arrangements.  Wedo not expect revenue related to these sources to be significant in relation toour total revenue.

 

6

----

Table of Contents

 

Four basic criteria must be satisfiedbefore software license revenue can be recognized: persuasive evidence of anarrangement between us and an end user; delivery of our product has occurred;the fee for the product is fixed or determinable; and collection of the fee isprobable.

 

*Persuasive evidence ofan arrangement*—We use acontract signed by the customer as evidence of an arrangement for softwarelicenses and SMS. For professional services we use a signed contract and astatement of work to evidence an arrangement. In cases where both a signedcontract and a purchase order are required by the customer, we consider bothtaken together as evidence of the arrangement.

 

*Delivery of our product*—Software and the corresponding access keys are generallydelivered to customers via disk media with standard shipping terms of FreeCarrier, Aspen Technology’s warehouse (i.e., FCA, named place). Oursoftware license agreements do not contain conditions for acceptance.

 

*Fee is fixed ordeterminable*—We assesswhether a fee is fixed or determinable at the outset of the arrangement.Significant judgment is involved in making this assessment.

 

Under our upfront revenue model, we areable to demonstrate that the fees are fixed or determinable for allarrangements, including those for our term licenses that contain extendedpayment terms. We have an established history of collecting under the terms ofthese contracts without providing concessions to customers. In addition, wealso assess whether contract modifications to an existing term arrangementconstitute a concession. In making this assessment, significant analysis isperformed to ensure that no concessions are given. Our software licenseagreements do not include right of return or exchange.  For license arrangements executed under the upfrontrevenue model, we recognize license revenue upon delivery of the softwareproduct, provided all other revenue recognition requirements are met.

 

With the introduction of our aspenONEsubscription offering and the changes to the licensing terms of our pointproduct agreements sold on a fixed-term basis, we cannot assert that the feesin these arrangements are fixed or determinable because the rights provided tocustomers and the economics of the arrangements are not comparable to ourhistorical transactions with other customers under the upfront revenue model.As a result, the amount of revenue recognized for these newer arrangements willbe limited by the amount of customer payments that become due. For our aspenONEsubscription transactions, this results in the fees being recognized ratablyover the term of the contract. For our point product licenses sold with bundledSMS, this results in the license fee being recognized as each payment comesdue, while the allocated portion of the SMS revenue is recognized ratably overits annual term.

 

*Collection of fee isprobable*—We assess theprobability of collecting from each customer at the outset of the arrangementbased on a number of factors, including the customer’s payment history, itscurrent creditworthiness, economic conditions in the customer’s industry andgeographic location, and general economic conditions. If in our judgmentcollection of a fee is not probable, revenue is recognized as cash iscollected, provided all other conditions for revenue recognition have been met.

 

We allocate the arrangement considerationamong the elements included in our multi-element arrangements using theresidual method. Under the residual method, the vendor specific objectiveevidence, or VSOE, of the undelivered elements is deferred and the remainingportion of the arrangement fee for perpetual and term licenses is recognized asrevenue upon delivery of the software, assuming all other revenue recognitioncriteria are met. If VSOE does not exist for an undelivered element in anarrangement, revenue is deferred until such evidence does exist for theundelivered elements, or until all elements are delivered, whichever isearlier.

 

We have established VSOE of fair value forSMS and professional services, but not for our software products. We assessVSOE of fair value for SMS based on an analysis of standalone SMS renewalsusing the bell-shaped curve approach. We use the optional renewals of SMS onour legacy term license arrangements to support VSOE of fair value for SMSbundled in our new fixed-term point product arrangements. The license productofferings and the SMS in the legacy term license arrangements and the new pointproduct arrangements are the same.

 

As we are increasingly transitioning ourlegacy term license customers to point product arrangements with bundled SMSfor the entire term of the arrangement, and we no longer market legacy termlicense arrangements, we expect our population of standalone annual renewals todecrease over time. As a result, there will come a point in time where we willbe unable to support VSOE of fair value of SMS in our point productarrangements based on our legacy term license SMS renewals. When this occurs,we will be required to recognize revenue related to the license component onour point product arrangements ratably, on a subscription basis in a mannersimilar to the current recognition of subscription arrangements under ouraspenONE subscription offering. We expect the impact of a loss 

 

7

----

Table of Contents

 

ofVSOE of fair value for SMS to be immaterial to our results of operations, sincewe currently recognize license revenue on point product arrangements over theterm of the arrangement, annually, as payments become due.

 

**Subscription Revenue**

 

When a customer elects to license ourproducts under our aspenONE subscription offering, SMS is included for theentire term of the arrangement, and the customer receives the right to any new unspecifiedfuture software products that may be introduced into the licensed aspenONE softwaresuite. These agreements combine the right to use all software products within agiven product suite with SMS for the term of the arrangement. Due to ourobligation to provide unspecified future software products, we are required torecognize the revenue ratably (that is, on a daily ratable basis) over the termof the license, once the four revenue recognition criteria noted above are met.License and SMS revenue for arrangements sold under our aspenONE subscriptionoffering are combined and presented together as subscription revenue in theconsolidated statements of operations.

 

**Software Revenue**

 

Software revenue consists of all licensetransactions that do not contain rights to future unspecified software productsfor no additional fee. Specifically, it includes license revenue recognizedunder the upfront revenue model upon the delivery of the licensed products(i.e., both perpetual and term license arrangements); license revenuerecognized over the term of the license agreements for fixed-term contractsincluding point product licenses with SMS bundled for the entire license term;and other license revenue derived from transactions that are being recognizedover time as the result of not previously meeting one or more of therequirements for recognition under the upfront revenue model.

 

The license fees derived from the sale offixed-term point product arrangements with SMS included for the arrangementterm are recognized under the residual method, as payments come due. Therelated SMS is recognized over the term of the SMS agreement beginning with thedue date of the annual payment and is reported in services and other revenue onthe consolidated statement of operations. Occasionally, we expect certaincustomers to elect upfront payment terms. For these arrangements with upfrontpayment, all of the license revenue will be recognized upfront by applying theresidual method of accounting when the above four revenue recognitionrequirements have been met.

 

Perpetual license arrangements do notinclude the same rights as those provided to customers under the aspenONEsubscription offering. Accordingly, the license fees for perpetual licenseagreements will continue to be recognized upon delivery of the softwareproducts using the residual method provided all other revenue recognitionrequirements are met. The revenue attributable to perpetual software licensesis recognized in software revenue in the consolidated statement of operations.

 

**Services and Other**

 

**SMS Revenue**

 

For arrangements executed under theaspenONE subscription offering or where point product licenses are sold withSMS for the contract term, the customer commits to SMS for the entire term ofthe license arrangement. The revenue related to the SMS component of theaspenONE subscription offering is reported in subscription revenue in theconsolidated statements of operations. The revenue related to the SMS componentof point product licenses, for which we have VSOE, is reported in services andother revenue in the consolidated statement of operations.

 

Under the upfront revenue model, SMS istypically included with the license for the initial year of the license term.Under these arrangements, the fair value of SMS is deferred and subsequentlyamortized into services and other revenue in the consolidated statement ofoperations over the contractual term of the SMS arrangement. SMS renewals areat the option of the customer.

 

**Professional Services**

 

Professional services are provided tocustomers on a time-and-materials (T&M) or fixed-price basis and aregenerally recognized as the services are performed, assuming all other revenuerecognition criteria have been met. We recognize professional services fees forour T&M contracts based upon hours worked and contractually agreed-uponhourly rates. Revenue from fixed-price engagements is recognized using the proportionalperformance method 

 

8

----

Table of Contents

 

basedon the ratio of costs incurred to the total estimated project costs. We believethat costs are the best available measure of performance. Professional servicesrevenue is recognized within services and other revenue in the statement ofoperations. Project costs are based on standard rates, which vary by theconsultant’s professional level, plus all direct expenses incurred to completethe engagement that are not reimbursed by the client. All project costs areexpensed as incurred. The use of the proportional performance method isdependent upon our ability to reliably estimate the costs to complete aproject. We use historical experience as a basis for future estimates tocomplete current projects. Reimbursables received from customers forout-of-pocket expenses are recorded as revenue.

 

If the costs to complete a project are notestimable or the completion is uncertain, the revenue is recognized uponcompletion of the services. In those circumstances in which committedprofessional services arrangements are sold as a single arrangement with, or incontemplation of, a new license agreement, revenue is deferred and recognizedon a ratable basis over the longer of the period the services are performed orthe license term.

 

Occasionally, we provide professionalservices considered essential to the functionality of the software. We recognizethe combined revenue from the sale of the software and related services usingthe percentage-of-completion method. When these professional services arecombined with, and essential to, the functionality of an aspenONE subscriptiontransaction, the amount of combined revenue will be recognized over the longerof the subscription term or the period the professional services are provided.

 

In the past, we have occasionally beenrequired to commit unanticipated additional resources to complete projects,which have resulted in lower than anticipated income or losses on thosecontracts. We may experience similar situations in the future. Provisions forestimated losses on contracts are made during the period in which such lossesbecome probable and can be reasonably estimated.

 

**Installments Receivable**

 

Installmentsreceivable resulting from product sales under the upfront revenue model arediscounted to present value at prevailing market rates at the date the relatedcontract is signed. Finance fees are recognized using the effective interestmethod over the relevant license term and are classified as interest income.The amount of the installments receivable is split between current andnon-current in the consolidated balance sheets.

 

Underthe aspenONE subscription offering and for point product arrangements sold withSMS bundled for the entire license term, receivables are recorded when thepayments become due and payable. Payment amounts under extended payment termarrangements are not presented in the consolidated balance sheets as therelated arrangement fees are not fixed or determinable. As a result, allcontractual payments will be recorded as revenue on a gross basis in theconsolidated statements of operations either as subscription or software revenue.

 

**Deferred Revenue**

 

Underthe aspenONE subscription offering, customers receive SMS for the full contractterm, and receive rights to unspecified future products for no additionalfee.  As VSOE does not exist for both ofthese undelivered elements, we are required to recognize the revenue ratably(i.e., on a subscription basis) over the term of the license. Therefore,deferred revenue is recorded as each payment comes due and revenue isrecognized ratably over the associated license period.

 

Underthe upfront revenue model and point product arrangements, a portion of thearrangement fee is generally recorded as deferred revenue due to the inclusionof an undelivered element, typically SMS. The amount of revenue allocated toundelivered elements is based on the VSOE of fair value for those elementsusing the residual method and is earned and recognized as revenue as eachelement is delivered. Deferred revenue related to these transactions generallyconsists of SMS and represents payments received in advance of servicesrendered as of the balance sheet dates.

 

**Other Licensing Matters**

 

Ourstandard licensing agreements include a product warranty provision. Suchwarranties are accounted for in accordance with ASC 460, “Guarantees”(ASC 460). The likelihood that we will be required to make refunds tocustomers under such provisions is considered remote. Historically, any suchpayments have been de minimis.

 

Underthe terms of substantially all of our license agreements, we have agreed toindemnify customers for costs and damages arising from claims against suchcustomers based on, among other things, allegations that our software 

 

9

----

Table of Contents

 

productsinfringe the intellectual property rights of a third party. In most cases, inthe event of an infringement claim, we retain the right to (i) procure forthe customer the right to continue using the software product;(ii) replace or modify the software product to eliminate the infringementwhile providing substantially equivalent functionality; or (iii) ifneither (i) nor (ii) can be reasonably achieved, we may terminate thelicense agreement and provide a refund to the customer up to the license feespaid by the customer. Such indemnification provisions would be accounted for inaccordance with ASC 460. The likelihood that we will be required to makerefunds to customers under such provisions is considered remote. In most cases,and where legally enforceable, the indemnification is limited to the amountpaid by the customer.

 

***Legal fees and contingencies***

 

We accrue estimated liabilities for losscontingencies arising from claims, assessments, litigation and other sourceswhen it is probable that a liability has been incurred and the amount of theclaim assessment or damages can be reasonably estimated. We believe that wehave sufficient accruals to cover any obligations resulting from claims,assessments or litigation that have met this criteria.

 

***Other***

 

Forfurther information with regard to our “Significant Accounting Policies,”please refer to Note 2 of our Consolidated Financial Statements and Notesthereto included in our Annual Report on Form 10-K for the fiscal yearended June 30, 2010.

 

**3.  Goodwill**

 

The changes in the carrying amount ofgoodwill by reporting unit for the first quarter of fiscal 2011 were as follows(in thousands):

 
| ** **                                | ** ** | **Reporting Unit** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | ** **              | ** ** | **Professional** | ** ** | **Maintenance** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **License**             | ** ** | **Services** | ** ** | **and Training** | ** ** | **Total** | ** ** |
| **Asset Class**                           | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance as of June 30, 2010          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Goodwill                                  |       | $                       | 68,059     |   | $ | 5,102 |   | $ | 14,871 |   | $ | 88,032 |   |
| Accumulated impairment losses             |       | (65,569                 | )          | (5,102 | ) | — |   | (70,671 | ) |
|                                      |       | $                       | 2,490      |   | $ | — |   | $ | 14,871 |   | $ | 17,361 |   |
|                                      |       |                    |       |   |   |   |   |   |   |
| Effect of changes in currency translation |       | 12                      |       | — |   | 466 |   | 478 |   |
|                                      |       |                    |       |   |   |   |   |   |   |
| Balance as of September 30, 2010     |       |                    |       |   |   |   |   |   |   |
| Goodwill                                  |       | $                       | 68,071     |   | $ | 5,102 |   | $ | 15,337 |   | $ | 88,510 |   |
| Accumulated impairment losses             |       | (65,569                 | )          | (5,102 | ) | — |   | (70,671 | ) |
|                                      |       | $                       | 2,502      |   | $ | — |   | $ | 15,337 |   | $ | 17,839 |   |

 

We test goodwill for impairment annuallyat the reporting unit level using a fair value approach in accordance with theprovisions of ASC 350, “Intangibles—Goodwill and Other.” We conduct our annualimpairment test on December 31st of each year. The initial step requiresus to determine the fair value of each reporting unit and compare it to thecarrying value, including goodwill, of such reporting unit. If the fair valueexceeds the carrying value, no impairment loss is recognized. However, if thecarrying value of the reporting unit exceeds its fair value, the goodwill ofthe unit may be impaired. The amount of impairment, if any, is then measuredbased upon the estimated fair value of goodwill at the valuation date. Weperformed our annual impairment test for each reporting unit as ofDecember 31, 2009, and determined that the estimated fair valuessubstantially exceeded the carrying values. As such, no impairment losses wererecognized as a result of the analysis. If an event occurs or circumstanceschange that would more likely than not reduce the fair value of a reportingunit below its carrying value, goodwill will be evaluated for impairmentbetween annual tests.  No impairmentcharges were recorded during the quarter ended September 30, 2010, or theyear ended June 30, 2010.

 

**4.   Income Taxes**

 

Deferred income taxes are recognized basedon temporary differences between the financial statement and tax bases ofassets and liabilities. Deferred tax assets and liabilities are measured usingthe statutory tax rates and laws expected to apply to taxable income in theyears in which the temporary differences are expected to reverse. Valuationallowances are provided against net deferred tax assets if, based upon theavailable evidence, it is more 

 

10

----

Table of Contents

 

likelythan not that some or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income and the timing of the temporary differences becomingdeductible. Management considers, among other available information, scheduledreversals of deferred tax liabilities, projected future taxable income,limitations of availability of net operating loss carryforwards, and othermatters in making this assessment.

 

We do not provide deferred taxes onunremitted earnings of foreign subsidiaries since we intend to indefinitelyreinvest either currently or sometime in the foreseeable future. Unrecognizedprovisions for taxes on undistributed earnings of foreign subsidiaries, whichare considered indefinitely reinvested, are not material to our consolidatedfinancial position or results of operations. We are continuously subject toexamination by the IRS, as well as various state and foreign jurisdictions. TheIRS and other taxing authorities may challenge certain deductions and creditsreported by us on our income tax returns. In July 2006, the FASB issuedFIN 48, *Accounting for Uncertain TaxPositions*, (currently included as provisions of ASC Topic 740),which clarifies the criteria for recognition and measurement of benefits fromuncertain tax positions. Under FIN 48, an entity should recognize a taxbenefit when it is more likely than not, based on the technical merits, thatthe position would be sustained upon examination by a taxing authority. Theamount to be recognized, if the more likely than not threshold is passed,should be measured as the largest amount of tax benefit that is greater than50 percent likely to be realized upon the ultimate settlement with ataxing authority that has full knowledge of all relevant information.Furthermore, any change in the recognition, de-recognition or measurement of atax position should be recorded in the period in which the change occurs. Weaccount for interest and penalties related to uncertain tax positions as partof the provision for income taxes.

 

**5.   Fair Value**

 

Cash equivalents of $109.0 million arereported at fair value utilizing quoted market prices in identical markets, or“Level 1 Inputs.”

 

Financial instruments not measured orrecorded at fair value in the accompanying financial statements consist ofaccounts receivable, installments receivable, collateralized receivables,accounts payable and secured borrowings. The estimated fair value of accountsreceivable, installments receivable, collateralized receivables and accountspayable approximates the carrying value. The estimated fair value of securedborrowings exceeds the carrying value by $4.2 million as of September 30,2010. The fair value of secured borrowings was calculated using the marketapproach, utilizing interest rates that were indirectly observable in marketsfor similar liabilities.

 

**6.  SupplementaryBalance Sheet Information**

 

Accrued expensesand other current liabilities in the accompanying unaudited condensedconsolidated balance sheets consist of the following (in thousands):

 
| ** **                                             | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| Royalties and outside commissions                      |       | $                      | 5,088      |              | $          | 4,856 |   |
| Payroll and payroll-related                            |       | 9,792                  |       | 21,862            |       |
| Restructuring accruals                                 |       | 3,228                  |       | 4,266             |       |
| Amounts due to financing institutions  for collections |       | 1,816                  |       | 4,216             |       |
| Other                                                  |       | 14,371                 |       | 14,690            |       |
| Total accrued expenses and other current  liabilities  |       | $                      | 34,295     |              | $          | 49,890 |   |

 

Other non-currentliabilities in the accompanying unaudited condensed consolidated balance sheetsconsist of the following (in thousands):

 

11

----

Table of Contents

 
| ** **                          | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| Restructuring accruals              |       | $                      | 4,178      |              | $          | 4,248 |   |
| Deferred rent                       |       | 2,163                  |       | 2,193             |       |
| Royalties and outside commissions   |       | 3,094                  |       | 3,667             |       |
| Other                               |       | 21,850                 |       | 21,724            |       |
| Total other non-current liabilities |       | $                      | 31,285     |              | $          | 31,832 |   |

 

**7.  Stock-BasedCompensation**

 

*General Award Terms*

 

We issue stock options and restrictedstock units to our employees and outside directors, pursuant to stockholderapproved stock option plans. Option awards are generally granted with anexercise price equal to the market price of our stock at the date of grant;those options generally vest over four years and have 7 or 10-year contractualterms. Restricted stock units (RSUs) generally vest over four years.Historically, our practice has been to settle stock option exercises andrestricted stock vesting through newly-issued shares.

 

*Stock-Based CompensationAccounting*

 

We recognize compensation costs on astraight-line basis over the requisite service period for time-vested awards.Our stock-based compensation is principally accounted for as awards of equityinstruments. Our policy is to issue new shares upon the exercise of stockawards. We adopted the simplified method related to accounting for the taxeffects of share-based payment awards to employees under ASC 718, “Compensation—StockCompensation” (ASC 718). We use the “with-and-without” approach for determiningif excess tax benefits are realized under ASC 718.

 

Thecompensation committee completed its annual program grant for fiscal 2011 in July 2010.  The Board of Directors authorized andapproved the grant as of August 2, 2010 of 764,828 RSUs and 948,664 stockoptions under the 2010 Equity Incentive Plan and the 2005 Stock Incentive Plan.

 

Duringthe period from mid-September 2007 until November 9, 2009, and fromNovember 16, 2009 to December 21, 2009, we did not maintain ourstatus as a timely filer with the SEC and we were unable to issue stock-basedcompensation to our directors and employees. On October 29, 2009 the Boardof Directors approved the grant as of November 9, 2009 of 2,727,033 RSUsand 264,640 stock options under the 2005 Stock Incentive Plan and the 2001Stock Option Plan. Since we were not able to grant awards during the perioddescribed above, a portion of the awards were vested immediately upongrant.  The RSUs were valued at the stockprice on the date of grant.  We utilized the Black-Scholes valuationmodel for estimating the fair value of the options granted. No stock options were granted in the first quarter of fiscal 2010.

 

Theweighted-average fair value of the options granted under the stock option plansfor fiscal 2011 was calculated using the following Black-Scholesassumptions:

 
| ** **                                      | ** ** | **Three Months Ended  September 30, 2010** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Stock Option Plans**                               | ** ** |
| Weighted average fair value of options  granted |       | $4.83                                                          |       |
| Weighted average risk-free interest rate        |       | 1.4%                                                           |       |
| Expected dividend yield                         |       | Zero                                                           |       |
| Weighted average expected life                  |       | 4.5                                                            |       |
| Expected volatility range                       |       | 52.1% - 53.8%                                                  |       |
| Weighted average expected volatility            |       | 52.9%                                                          |       |

 

The dividend yieldof zero is based on the fact that we have never paid cash dividends on commonstock and have no present intention to pay cash dividends.  Expected volatility is based on thehistorical volatility of our common stock over the period commensurate with theexpected life of the options.  The risk-freeinterest rate is the

 

12

----

Table ofContents

 

U.S. Treasuryzero-coupon bond with a maturity commensurate with the expected life of theoptions on the date of grant.  In thefirst quarter of fiscal 2011 and in fiscal 2010, we calculated the estimatedlife considering historical exercise behavior, as well as anticipated futureevents that may affect volatility.

 

Thestock-based compensation expense and its classification (in thousands) in thestatements of operations for the three months ended September 30, 2010 and2009 were as follows:

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Recorded as expense:           |       |                                                 |       |   |   |
| Cost of service and other      |       | $                                                    | 253        |   | $ | 223 |   |
| Selling and marketing          |       | 896                                                  |       | 770 |   |
| Research and development       |       | 289                                                  |       | 141 |   |
| General and administrative     |       | 1,259                                                |       | 773 |   |
| Total stock-based compensation |       | 2,697                                                |       | 1,907 |   |
|                                |            |                                                      |            |  |  |  |  |

 

A summary of stockoption and RSU activity under all equity plans in the first quarter of fiscal2011 is as follows:

 
| ** **                                                 | ** ** | **Stock Options** | ** ** | **Restricted Stock Units**   | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **Shares**             | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  (in 000’s)** | ** ** | **Shares** | ** ** | **Weighted  Average  Grant  Date Fair  Value** | ** ** |
| Outstanding at June 30, 2010                          |       | 5,395,870              |       | $                                      | 7.61       |   |   |   |   |   | 1,512,263 |   | $ | 9.58 |   |
| Granted                                                    |       | 948,664                |       | $                                      | 10.93      |   |   |   |   |   | 764,828 |   | $ | 10.93 |   |
| Vested (RSUs)                                              |       |                   |       |                                   |       |   |   |   |   | (245,337 | ) | $ | 9.97 |   |
| Exercised                                                  |       | (24,141                | )          | $                                      | 5.68       |   |   |   |   |   |   |   |   |   |
| Cancelled / Forfeited                                      |       | (54,613                | )          | $                                      | 26.72      |   |   |   |   |   | (26,543 | ) | $ | 9.63 |   |
| Outstanding at September 30, 2010                     |       | 6,265,780              |       | $                                      | 7.59       |   | 5.29 |   | $ | 20,431 |   | 2,005,211 |   | $ | 10.04 |   |
|                                                       |       |                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Exercisable at September 30, 2010                     |       | 5,331,409              |       | $                                      | 7.01       |   | 4.51 |   | $ | 20,390 |   | — |   | — |   |
|                                                       |       |                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Vested and expected to vest as of  September 30, 2010 |       | 6,077,587              |       | $                                      | 7.49       |   | 5.15 |   | $ | 20,422 |   | 1,886,241 |   | $ | 10.04 |   |

 

The weighted average grant-date fair valueof RSUs granted during the first quarter of fiscal 2011 was $10.93; there wereno RSU grants in the first quarter of fiscal 2010.  In the first quarter of fiscal 2011 and 2010, thetotal fair value of shares vested from RSU grants was $2.4 million and $0.3million, respectively.

 

At September 30, 2010, the totalunrecognized compensation cost related to unvested stock options and RSUs was$4.5 million and $20.3 million, respectively, and is expected to be recordedover the next four years as the awards vest.

 

The totalintrinsic value of options exercised during the first quarter of fiscal 2011was $0.1 million.  There were no options exercised in the first quarter of fiscal2010. We received $0.1 million in cash proceeds from option exercisesduring the first quarter of fiscal 2011. We paid $0.8 million and $0.1 million for withholding taxes onvested RSUs during the first quarter of fiscal 2011 and 2010, respectively.

 

At September 30, 2010, common stock reservedfor future issuance or settlement under equity compensation plans was14.7 million shares.

 

**8.  Common Stock**

 

***Registration of Common Stock on Form S-1***

 

On September 28, 2010, we completed a secondarypublic offering of 18,000,000 shares of our common stock held by several fundsmanaged by Advent International Corporation (“Advent-managed funds”) as well as2,700,000 shares that were subject to an over-allotment option granted by theAdvent-managed funds to the underwriters of 

 

13

----

Table of Contents

 

the offering. The underwriters delivered the sharesto the purchasers on September 28, 2010. We did not receive any of the proceeds from this offering.

 

***Warrants***

 

We have issued warrants in connection withvarious financing activities. These warrants provide for net equity settlementand are accounted for in equity.

 

In August 2003, we received proceedsof $130.0 million from our issuance of 363,364 shares of Series D-1 andD-2 redeemable convertible preferred stock, along with warrants to purchase7,267,286 shares of common stock at an exercise price of $3.33 per share. In July 2006,6,006,006 warrants were exercised in a cashless exercise, resulting in theissuance of 4,369,336 shares of our common stock. In November 2007,warrants to purchase 630,640 shares of common stock were exercised in acashless exercise, resulting in the issuance of 500,203 shares of commonstock.  At June 30, 2010, warrantsto purchase 630,640 shares of common stock were outstanding and exercisable ata price of $3.33. On August 13, 2010, these remaining warrants wereexercised in a cashless exercise, resulting in the issuance of 424,753 sharesof our common stock.

 

**9.  Net Loss per CommonShare**

 

Basic loss per share is determined bydividing the loss by the weighted average common shares outstanding during theperiod. Diluted loss per share is determined by dividing the loss by dilutedweighted average shares outstanding during the period. Diluted weighted averageshares reflect the dilutive effect, if any, of potential common shares. To theextent their effect is dilutive, employee equity awards and warrants, based onthe treasury stock method, and other commitments to be settled in common stockare included in the calculation of diluted earnings (or income) per share. Forthe three months ended September 30, 2010 and 2009, all potential commonshares were anti-dilutive due to the net loss. The calculations of basic anddiluted loss per share and basic and diluted weighted average sharesoutstanding are as follows (in thousands, except per share data):

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | **Per Share** | ** ** | ** ** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **Loss**                         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| **Basic loss per share:**                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                        |       | $                                | (15,468    | ) | 92,689 |   | $ | (0.17 | ) | $ | (21,062 | ) | 90,107 |   | $ | (0.23 | ) |
| **Diluted loss per share:**                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Employee equity awards                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net loss giving effect to dilutive  adjustments |       | $                                | (15,468    | ) | 92,689 |   | $ | (0.17 | ) | $ | (21,062 | ) | 90,107 |   | $ | (0.23 | ) |

 

Thefollowing potential common shares were excluded from the calculation of dilutedweighted average shares outstanding because the exercise price of the employeeequity awards exceeded the average market price for our common stock and/ortheir inclusion would be anti-dilutive at the balance sheet date (inthousands):

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Employee equity awards |       | 8,246                                                |       | 8,258 |   |

 

**10.  Comprehensive Loss**

 

Comprehensiveloss is defined as the change in equity of a business enterprise during aperiod from transactions and other events and circumstances from non-ownersources. The components of comprehensive loss for the three months ended September 30,2010 and 2009 were as follows (in thousands):

 

14

----

Table of Contents

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Net loss                                 |       | $                                                    | (15,468    | ) | $ | (21,062 | ) |
| Foreign currency translation adjustments |       | 429                                                  |       | 1,599 |   |
| Total comprehensive loss                 |       | $                                                    | (15,039    | ) | $ | (19,463 | ) |

 

**11. Commitments andContingencies**

 

***(a)******                            ******ATME arbitration***

 

Prior to October 6, 2009, we had anexclusive reseller relationship covering certain countries in the Middle Eastwith AspenTech Middle East W.L.L., a Kuwaiti corporation (now known as AdvancedTechnology Middle East W.L.L.) that we refer to below as ATME. Under thereseller agreement, we had the right to terminate for a material breach in theevent of ATME’s willful misconduct or fraud. Effective October 6, 2009, weterminated the reseller relationship for material breach by ATME based oncertain actions of ATME. Under the reseller agreement, we had the right to terminatefor a material breach in the event of ATME’s willful misconduct or fraud.

 

On November 2, 2009, ATME commencedan action in the Queen’s Bench Division (Commercial Court) of the High Court ofJustice (England & Wales) captioned In The Matter Of An IntendedArbitration Between AspenTech Middle East W.L.L. and AspenTechnology, Inc., 2009 Folio 1436, seeking preliminary injunctive reliefrestraining us from taking any steps to impede ATME from serving as ourexclusive reseller in the countries covered by the reseller agreement withATME. We filed evidence in opposition to that request for relief onNovember 12, 2009. At a hearing on November 13, 2009, the courtdismissed ATME’s application for preliminary injunctive relief. The courtsealed an Order to this effect on November 23, 2009, and further orderedthat ATME pay our costs of claim.

 

Relatedly, on November 11, 2009, wefiled a request for arbitration against ATME in the International Court ofArbitration of the International Chamber of Commerce, captioned AspenTechnology, Inc. v. AspenTech Middle East W.L.L., Case No. 16732/VRO.Our request for arbitration asserted claims against ATME seeking a declarationthat ATME committed a material breach of our agreement and that our terminationof our agreement was lawful, and seeking damages for ATME’s willful misconductin connection with the reseller relationship. On November 18, 2009, ATMEfiled its answer to that request for arbitration and asserted counterclaimsagainst us seeking a declaratory judgment that we unlawfully terminated ouragreement with ATME and seeking damages for breach of contract by reason of ourpurported unlawful termination of our agreement. Our reply to thosecounterclaims was filed on or about December 18, 2009.

 

The reseller agreement with ATME containeda provision whereby we could be liable for a termination fee if the agreementwere terminated other than for material breach. This fee is to be calculatedbased on a formula contained in the reseller agreement that we believe wasoriginally developed based on certain assumptions about the future financialperformance of ATME, as well as ATME’s actual financial performance. Based onthe formula and the financial information provided to us by ATME, which we havenot had the opportunity to verify independently, a recent calculation based onthe formula would result in a termination fee of between $60 million and$77 million. Under the terminated reseller agreement, no termination feeis owed on termination for material breach. If we are found to have breachedthe terms of our agreement with ATME, we could be liable for the full value ofthe termination fee, which may be greater or less than the number indicatedabove. We intend to pursue our claims against ATME, and to defend the counterclaimsby ATME, vigorously.

 

On March 11, 2010, a Kuwaiti entity(known as ATME Group and affiliated with ATME) filed a lawsuit in a Kuwaiticourt naming as defendants ATME, us and a reseller newly appointed by us inKuwait. In this lawsuit, ATME Group claims that it was an exclusive resellerfor ATME in Kuwait and, as such, is entitled to damages resulting frompurported customer contracts in Kuwait. We intend to defend this actionvigorously.

 

***(b)******                                ******Class action and opt-outclaims***

 

InMarch 2006, we settled class action litigation, including relatedderivative claims, arising out of our originally filed consolidated financialstatements for fiscal 2000 through 2004, the accounting for which we restatedin March 

 

15

----

Table of Contents

 

2005.Certain members of the class (representing 1,457,969 shares of common stock (orless than 1% of the shares putatively purchased during the class actionperiod)) opted out of the settlement and had the right to bring their own stateor federal law claims against us, referred to as “opt-out” claims. Opt-outclaims were filed on behalf of the holders of approximately 1.1 million ofsuch shares. Two of these actions were settled and three were dismissed.

 

Thesettled actions include Herbert G. andEunice E. Blecker, et al. v. Aspen Technology, Inc., et al., filed in June 2006in the Business Litigation Session of the Massachusetts Superior Court forSuffolk County and docketed as Civ. A. No. 06-2357-BLS1. This action wasan opt-out claim asserted by persons who received 248,411 shares of our commonstock in an acquisition. Fact discovery in this action closed in July 2008,and a non-jury trial was conducted in November 2009. In January 2010,the court issued its order granting judgment in our favor and dismissing thecase. In February 2010, the plaintiffs filed a notice of appeal of thejudgment. We entered into a settlement agreement with the plaintiffs/appellantson October 28, 2010, providing for a dismissal of all claims withprejudice.

 

Theremaining action is 380544Canada, Inc., et al. v. Aspen Technology, Inc., filed onFebruary 15, 2007 in the federal district court for the Southern Districtof New York and docketed as Civ. A. No. 1:07-cv-01204-JFK in that court. The claims in this action include claims against us and one or more of ourformer officers alleging securities and common law fraud, breach of contract,deceptive practices and/or rescissory damages liability, based on the restatedresults of one or more fiscal periods included in our restated consolidatedfinancial statements referenced in the class action.  This action was brought by persons who purchased 566,665 shares of our common stock in aprivate placement. Certain motions to dismiss filed by other defendants wereresolved on May 5, 2009, and discovery is in process. The claims in the380544 Canada action are for damages totaling at least $4.0 million, notincluding claims for attorneys’ fees. We plan to defend the 380544 Canadaaction vigorously.

 

***(c)******                                 ******Other***

 

In the ordinary course of business, we arealso from time to time involved in lawsuits, claims, investigations,proceedings, and threats of litigation consisting of intellectual property,commercial and other matters. We are currently defending an April 2004claim by a customer for approximately $5.0 million that certain of oursoftware products and implementation services failed to meet its expectations,which we are defending vigorously.

 

**12.  Segment and Geographic Information**

 

Operating segments are defined ascomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker, ordecision making group, in deciding how to allocate resources and in assessingperformance. Our chief operating decision maker is our Chief Executive Officer.

 

The measurement of the controllable profitfor all segments was changed in 2010 to include a greater allocation ofexpenses related to bonuses from unallocated costs to controllable expenses.This change conformed to management’s current approach of cost allocation forinternal reporting purposes. All periods presented have been conformed tomanagement’s current measurement approach.

 

We have three operating segments: license,professional services, and maintenance and training. The chief operatingdecision maker assesses financial performance and allocates resources basedupon the three lines of business.

 

The license line of business is engaged inthe development and licensing of software. The professional services line ofbusiness offers implementation, advanced process control, real-timeoptimization and other professional services in order to provide its customerswith complete solutions. The maintenance and training line of business providescustomers with a wide range of support services that include on-site support,telephone support, software updates and various forms of training on how to useour products.

 

The accounting policies of the operatingsegments are the same as those described in Note 2. We do not track assets orcapital expenditures by operating segments. Consequently, it is not practicalto show assets, capital expenditures, depreciation or amortization by operatingsegments.

 

The following table presents a summary ofoperating segments (in thousands):

 

16

----

Table of Contents

 
| ** **                                  | ** ** | **License** | ** ** | **Maintenance,  Training,  and Other** | ** ** | **Professional  Services** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------------------------------------|------------|----------------------------|------------|-----------|------------|
| Three Months Ended September 30,  2010 |       |        |       |                                        |       |                       |       |      |       |
| Segment revenue                             |       | $           | 18,967     |                                        | $          | 17,470                     |       | $         | 6,663      |   | $ | 43,100 |   |
| Segment expenses                            |       | 14,393      |       | 3,137                                       |       | 5,940                      |       | 23,470    |       |
| Segment operating profit (1)                |       | $           | 4,574      |                                        | $          | 14,333                     |       | $         | 723        |   | $ | 19,630 |   |
| Three Months Ended September 30,  2009 |       |        |       |                                        |       |                       |       |      |       |
| Segment revenue                             |       | $           | 11,107     |                                        | $          | 18,990                     |       | $         | 9,699      |   | $ | 39,796 |   |
| Segment expenses                            |       | 14,492      |       | 3,724                                       |       | 9,971                      |       | 28,187    |       |
| Segment operating profit (1)                |       | $           | (3,385     | )                                           | $          | 15,266                     |       | $         | (272       | ) | $ | 11,609 |   |

 

----

(1)         TheSegment operating profits reported reflect only the direct expenses of theoperating segment and do not contain an allocation for selling and marketing,general and administrative, development, restructuring and other corporateexpenses incurred in support of the segments.

 

**Reconciliation to LossBefore Income Taxes**

 

The following table presents areconciliation of total segment operating profit to loss before income taxesfor the three months ended September 30, 2010 and 2009 (in thousands):

 
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Total segment operating profit for  reportable segments |       | $                                                    | 19,630     |   | $ | 11,609 |   |
| Cost of license                                         |       | (2,122                                               | )          | (1,773 | ) |
| Selling and marketing                                   |       | (3,237                                               | )          | (3,437 | ) |
| Research and development                                |       | (10,349                                              | )          | (9,010 | ) |
| General and administrative and overhead                 |       | (20,856                                              | )          | (20,015 | ) |
| Stock-based compensation                                |       | (2,697                                               | )          | (1,907 | ) |
| Restructuring charges                                   |       | (77                                                  | )          | (271 | ) |
| Other income, net                                       |       | 2,664                                                |       | 2,269 |   |
| Interest income (net)                                   |       | 2,458                                                |       | 3,038 |   |
| Loss before income taxes                                |       | $                                                    | (14,586    | ) | $ | (19,497 | ) |

 

**13.  Subsequent Events**

 

We evaluated events occurring between the end of ourfiscal quarter and the date the financial statements were issued.   There were no subsequent events to bedisclosed based on this evaluation.

 

17

----

Table of Contents

 

**Item 2. ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

Youshould read the following discussion in conjunction with our unauditedcondensed consolidated financial statements and related notes beginning on page 3.  In addition to historical information, thisdiscussion contains forward-looking statements that involve risks anduncertainties.  You should read “Item 1A.Risk Factors” for a discussion of important factors that could cause our actualresults to differ materially from our expectations.

 

Ourfiscal year ends on June 30, and references in this Quarterly Report to aspecific fiscal year are the twelve months ended June 30 of such year (forexample, “fiscal 2011” refers to the year ending June 30, 2011).

 

**Business Overview**

 

We are a leading global provider ofmission-critical process optimization software solutions, which are designed tomanage and optimize plant and process design, operational performance, andsupply chain planning. Our aspenONE software and related services have beendeveloped for companies in the process industries. Customers use our solutionsto improve their competitiveness and profitability by increasing throughput andproductivity, reducing operating costs, enhancing capital efficiency, anddecreasing working capital requirements.

 

We have more than 1,500 customersglobally. Our customers include manufacturers in process industries such asenergy, chemicals, pharmaceuticals, consumer packaged goods, power, metals andmining, pulp and paper, and biofuels, as well as engineering and constructionfirms that help design process manufacturing plants. As of June 30, 2010,our installed base included 19 of the 20 largest petroleum companies, all ofthe 20 largest chemical companies, and 15 of the 20 largest pharmaceuticalcompanies.

 

**Transition to theaspenONE Subscription Offering**

 

In fiscal 2010 we began offering ouraspenONE software under a subscription offering, under which a customer canaccess all products within a licensed suite (aspenONE Engineering or aspenONEManufacturing and Supply Chain). During the license term, a customer isentitled to receive post-contract support, which we refer to a SMS, as well asany software products introduced into the licensed suite. Revenue is recognizedover the term of a license agreement on a subscription, or “daily ratable”basis. We typically issue invoices annually, and we record each invoicedpayment as deferred revenue and then recognize revenue from that payment duedate over the applicable period. Uninvoiced future contractual payments are notrecorded on our consolidated balance sheet. We also continue to offer our customers the ability to licensespecifically defined sets of aspenONE products, referred to as point products,which in July 2009, we began licensing with SMS included for the entireterm. Revenue is recognized on these arrangements over the contract term, aspayments become due.

 

Prior to fiscal 2010, we offered term orperpetual licenses to point products without SMS included for the entire termof the arrangement. The majority of our license revenue was recognized under an“upfront revenue model,” in which the net present value of the aggregatelicense fees was recognized as revenue upon shipment of the point products. Wetypically invoiced customers annually and recorded the net present value ofuninvoiced payments as installments receivable. Customers typically receivedone year of SMS bundled with their license agreements and then could elect torenew SMS annually.  Revenue from SMS wasrecognized ratably over the period during which the SMS was delivered.

 

The transition to our aspenONEsubscription offering and the inclusion of SMS for the entire term of our pointproduct arrangements, have not changed the method or timing of our customerbilling or cash collections. Consequently, we do not expect a material changeto net cash provided by operating activities as a result of this transition.The principal accounting implications of the change in our licensing models areas follows:

 

·                  The majority of our license revenue is no longer recognized on anupfront basis.  Our license revenue forfiscal 2010 and the first quarter of fiscal 2011 was significantly less thanthe level achieved in previous fiscal years.  We do not expect to recognize levels ofrevenue comparable to prior fiscal years unless and until a significantmajority of our existing license agreements have been renewed under our newlicensing models. Because the timing of our incurrence of operating costs hasnot changed, the lower levels of revenue expected over the next few years willresult in significant operating and net losses.

 

·                  The amount of our installments receivable will decrease over time,as license agreements executed under our upfront revenue model reach the end oftheir terms.

 

18

----

Table of Contents

 

·                  The amount of our deferred revenue will increase over time, asinstallments for license transactions executed under our aspenONE subscriptionoffering are deferred and recognized on a subscription basis. We will not,however, realize a significant increase in deferred revenue until a substantialportion of the license agreements previously executed under our upfront revenuemodel has been renewed under our new term licensing model.

 

For additional information about therecognition of revenue under the upfront revenue model and our new licensingmodels, please refer to “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Revenue” contained in Part II, Item7 of our Form 10-K for our fiscal year ended June 30, 2010.  Because of the accounting implications of ouraspenONE subscription offering and the inclusion of SMS for the entire term ofour point product arrangements, we believe that, for the next several years, anumber of performance indicators based on U.S. generally accepted accountingprinciples, or GAAP, will be of limited value in assessing our performance,growth and financial condition. Accordingly, we are focusing on a number of otherbusiness metrics, including those described below under “—Key Business Metrics.”

 

**Revenue**

 

We generate revenue primarily from thefollowing sources:

 

·            *Software licenses. *Weprovide integrated process optimization software solutions designed for the processindustries. We license our software products on a term or perpetual basis, andwe offer extended payment options for our term license agreements thatgenerally require annual payments.

 

·                  *SMS and other.*  Our SMS business consists primarily of providingcustomer technical support and access to software fixes and upgrades. Weprovide customer technical support services throughout the world by our threeglobal call centers as well as via email and through our support website.  Our training business provides customers witha variety of training solutions, including on-site, Internet-based, andcustomized training.

 

·            *Professional services. *Weoffer professional services that include implementing and integrating ourtechnology with customers’ existing systems in order to improve their plant performanceand gain better operational data. Customers who use our professional servicestypically engage us to provide those services over periods of up to24 months. We charge customers for professional services on atime-and-materials or fixed-price basis.

 

**Key Components ofOperations**

 

***Revenue***

 

*Subscription Revenue.*  Subscription revenuerelates to the licensing of our products under our aspenONE subscriptionoffering, where SMS is included for the entire term of the arrangement and thecustomer receives the right to unspecified future software products that may beintroduced during the term of the arrangement for no additional fee. Licenseand SMS revenue for arrangements sold under our aspenONE subscription offeringare combined and presented together as subscription revenue in the consolidatedstatements of operations.

 

*Software Revenue.*  Software revenue consistsof all license transactions that do not contain rights to future unspecifiedsoftware products for no additional fee. Specifically, software revenueincludes:

 

·                  license revenue recognized under the upfront revenue model uponthe delivery of the licensed software (that is, both perpetual and term licenseagreements);

 

·                  license revenue recognized over the term of the licenseagreements, including point product licenses with SMS included for the entirelicense term, but excluding license revenue from license agreements executedunder our aspenONE subscription offering, which is recorded as subscriptionrevenue; and

 

·                  other license revenue derived from transactions that are beingrecognized over time as the result of not previously meeting one or more of therequirements for recognition under the upfront revenue model.

 

*Services and OtherRevenue.*  Our services and other revenue consistsprimarily of revenue related to professional services, SMS (other than SMSbundled with license agreements executed under our aspenONE subscriptionoffering, which is recorded as subscription revenue) and training. The amountand timing of this revenue depend on a number of factors, including:

 

19

----

Table of Contents

 

·                  the number, value and rate per hour of service transactions bookedduring the current and preceding periods;

 

·                  the number and availability of service resources actively engagedon billable projects;

 

·                  the timing of milestone acceptance for engagements contractuallyrequiring customer sign-off;

 

·                  the timing of negotiating and signing maintenance renewals;

 

·                  the timing of collection of cash payments when collectability isuncertain; and

 

·                  the size of the installed base of license contracts.

 

***Cost ofRevenue***

 

*Cost of Subscription andSoftware.*  The cost of subscription and software revenueconsists of royalties, amortization of capitalized software costs, distributionfees, the costs of providing SMS related to our aspenONE subscription offeringand costs related to delivery of software.

 

*Cost of Services andOther.* Our cost of services and other revenue consists primarily ofpersonnel-related and external consultant costs associated with providingprofessional services, SMS on arrangements not licensed on a subscription basisand training to customers. The costs of providing SMS for our aspenONEsubscription offering are included in cost of subscription and software.

 

***OperatingExpenses***

 

*Selling and MarketingExpense. *Selling expenses consist primarily of the personneland travel expenses related to the effort expended to license our products andservices to current and potential customers, as well as for overall managementof customer relationships. Marketing expenses include expenses needed topromote our company and our products and to acquire market research and measurecustomer opinions to help us better understand our customers and their businessneeds.

 

*Research and DevelopmentExpense*.  Research and development expenses primarilyconsist of personnel and external consultant expenses related to the creationof new products and to enhancements and engineeringchanges to existing products.

 

*General andAdministrative Expense.*  General and administrative expenses includethe costs of corporate and support functions, such as executive leadership andadministration groups, finance, legal, human resources and corporatecommunications, and other costs such as outside professional and consultantfees and provision for bad debts.

 

*Restructuring Charges.*  Restructuring chargesresult from the closure or consolidation of our facilities, or from qualifyingreductions in headcount.

 

***OtherIncome and Expenses***

 

*Interest Income.*  Interest income isrecorded for the accretion of interest on the installment payments of our termsoftware license contracts when revenue is recognized upfront at net presentvalue, and to a lesser extent from the investment of cash balances inshort-term instruments.

 

*Interest Expense.*  Interest expense consistsof charges primarily related to our secured borrowings. Secured borrowings arederived from our borrowing arrangements with unrelated financial institutions.

 

*Other Income (Expense),Net.* Other income (expense), net is comprised primarily of foreign currencyexchange gains (losses) generated from the settlement and remeasurement oftransactions denominated in currencies other than the functional currency ofour operating units. We may enter into foreign currency forward contracts toattempt to minimize the adverse impact related to unfavorable exchange ratemovements, although we have not done so since fiscal 2008. Our foreign currencyforward contracts have not been designated as hedging instruments and,therefore, do not qualify for fair value or cash flow hedge treatment under thecriteria of Accounting Standards Codification, or ASC, Topic 815, *Derivatives and Hedging*. Therefore, anyunrealized gains and losses on the foreign currency forward contracts, as wellas the underlying transactions we are attempting to shield from exchange ratemovements, are recognized as a component of other income (expense), net.

 

20

----

Table of Contents

 

*Provision for IncomeTaxes.* Provision for income taxes is comprised of the taxes currently payableas a result of domestic and foreign operations and the net tax effects ofbook-tax timing differences. We record interest and penalties related to incometax matters as income tax expense. We expect the amount of income tax expense,if any, to vary each reporting period depending upon fluctuations in ourtaxable income and our ability to utilize tax benefits from net losscarryforwards.

 

**Key Business Metrics**

 

***Background***

 

With the adoption of our new licensingmodels, which include our aspenONE subscription offering and the inclusion ofSMS for the entire term of our point product arrangements, our revenue has beensignificantly less than in preceding fiscal years. We expect that our revenuewill increase as customers renew their licensing arrangements under our newlicensing models. We do not expect to recognize levels of revenue comparable toprior fiscal years unless and until a significant majority of our existinglicense agreements have been renewed under our new licensing models. As aresult, we believe that, for the next few years, a number of our performanceindicators based on U.S. generally accepted accounting principles or GAAP,including revenue, gross profit, operating income (loss) and net income (loss),will be of limited value in assessing our performance, growth and financialcondition. Accordingly, we instead are focusing on certain non-GAAP and otherbusiness metrics, including the key metrics set forth below, to track ourbusiness performance. None of these metrics should be considered as an alternativeto any measure of financial performance calculated in accordance with GAAP.

 

To supplement our statements of cash flowspresented on a GAAP basis, we use the non-GAAP measure of free cash flow toanalyze cash flows generated from our operations. Management believes that thisfinancial measure is useful to investors because it permits investors to viewour performance using the same tools that management uses to gauge progress inachieving our goals. We believe this measure is also useful to investorsbecause it is an indication of cash flow that may be available to fund furtherinvestments in future growth initiatives and it is also useful as the basis forcomparing our performance with that of our competitors. To supplement ourpresentation of total cost of revenue and total operating costs presented on aGAAP basis, we use a non-GAAP measure of adjusted total costs, which excludescertain non-cash and non-recurring expenses. Management believes that thisfinancial measure is useful to investors because it demonstrates our commitmentto cost containment. The presentation of these non-GAAP measures is not meantto be considered in isolation or as an alternative to cash flows from operatingactivities as a measure of liquidity or as an alternative to total cost ofrevenue and total operating costs as a measure of our total costs.

 

***TotalTerm Contract Value***

 

*Total term contractvalue,* or TCV, is an estimate of therenewal value, as of a specific date, of our active portfolio of term licenseagreements. TCV is calculated by multiplying the terminal annual payment foreach active term license agreement by the original length of the existinglicense term, and then aggregating this amount for all active term licenseagreements. Accordingly, TCV represents the full renewal value of all of ourterm license agreements under the hypothetical assumption that all of thoseagreements are simultaneously renewed for the identical license terms and atthe same terminal annual payment amounts as the terminal payment of theoriginal contract.

 

TCV includes the value of SMS for anymulti-year license agreements for which SMS is committed for the entire licenseterm. TCV does not include any amounts for perpetual licenses, professionalservices, training or standalone renewal SMS. TCV is calculated using constantcurrency assumptions for agreements denominated in currencies other than U.S.dollars in order to remove the impact of currency fluctuations betweencomparison dates.

 

We believe TCV is a useful metric foranalyzing our business performance, particularly while we are transitioning toour aspenONE subscription offering and revenue comparisons between fiscalperiods do not reflect the actual growth rate of our business. Comparing TCVfor different dates provides insight into the growth and retention rate of ourbusiness during the period between those dates. TCV increases as the result of:

 

·                  new term license agreements with new or existing customers;

 

·                  renewals or modifications of existing license agreements that resultin higher license fees due to price escalation or an increase in the number oftokens (fixed units of software usage) or products licensed; and

 

·                  renewals of existing license agreements that increase the lengthof the license term.

 

21

----

Table of Contents

 

Therenewal of an existing license agreement will not increase TCV unless therenewal results in higher license fees or a longer license term. TCV isadversely affected by customer non-renewals and by renewals that result inlower license fees or a shorter license term. Our standard license termhistorically has been between five and six years, and we do not expect thisstandard term to change in the future. Many of our contracts have escalatingannual payments throughout the term of the arrangement. By calculating TCVbased on the terminal year annual payment, we are typically using the highestannual fee from the existing arrangement to calculate the hypothetical renewalvalue of our portfolio of term arrangements.

 

We estimate that TCV was $1.2 billionas of June 30, 2010. Our portfolio of active license agreements as of June 30,2010 reflected a mix of (a) license agreements that included SMS for theentire license term and (b) legacy license agreements that did not includeSMS. We estimate that TCV was $1.0 billion as of June 30, 2009. SMSwas not included as part of our term license arrangements prior to fiscal 2010,and no SMS was included in estimated TCV as of June 30, 2009. Forcomparability purposes, we estimated “license-only” TCV growth for fiscal 2010by removing the SMS portion of TCV as of June 30, 2010, using ourestablished VSOE rate of fair value for SMS. On this comparable “license-only”basis, we estimate that TCV grew by approximately 10% during fiscal 2010,principally as the result of an increase in the number of tokens or productslicensed. Overall, we estimate that TCV, with SMS included as of June 30,2010, increased by approximately 17% during fiscal 2010.

 

We estimate that TCV with SMS includedgrew 2.5% in the first quarter of fiscal 2011. On a comparable “license-only”basis, we estimate that TCV grew by approximately 1.5% in the first quarter offiscal 2011.

 

***Bookings***

 

*Bookings* represent the amount of contractually committed subscription andsoftware fees, including any bundled SMS. Bookings do not include (a) theamount of fees for professional services, training or standalone renewal SMS or(b) the amount of subscription and software fees remaining underpre-existing license agreements that were replaced prior to the scheduledexpiration date.

 

Bookings are a measure of the businessclosed during a period. The contractual arrangements that contribute tobookings represent binding payment commitments by customers over periods thattypically range from five to six years, although individual customercommitments can be for longer or shorter periods. The amount of bookings in aperiod is affected by the volume, duration and value of contracts renewedduring that period. The timing and value of contract renewals can have asignificant impact on quarter-over-quarter and year-over-year comparisons ofbookings. Therefore, short-term trends in bookings may not be indicative of thegrowth of the business. Accordingly, we also focus on bookings’ contribution togrowth in TCV and to growth in billings backlog and future cash collections.

 

The following table presents our bookingsfor the first quarter of fiscal 2011 and 2010 (in thousands):

 
| ** ** | ** ** | **Three Months Ended** | ** ** | **Period-to-Period ** | ** ** |
|------------|------------|----------------------------------|------------|----------------------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | **September 30,**     | ** ** | **Change** | ** ** |
| ** ** | ** ** | **2010**                         | ** ** | **2009**                   | ** ** | **$** | ** ** | **%** | ** ** |
| Bookings   |       | $                                | 74,416     |                       | $          | 39,027 |   | $ | 35,389 |   | 90.7 | % |
|            |            |                                  |            |                            |            |  |  |  |  |  |  |  |

 

The period-over-period increase inbookings is primarily attributable to the favorable adoption of our aspenONEsubscription offering and lower than normal prior year first quarterbookings.  During the first quarter offiscal 2010, we experienced lower than normal bookings primarily due to thesales cycle start-up time associated with the introduction of our aspenONEsubscription offering. As customers became more familiar with our new licensingmodel and our sales team had additional time to educate customers and completelicensing transactions, we experienced significantly higher bookings in theremainder of fiscal 2010, which continued into the first quarter of fiscal2011. Our bookings historically have been stronger in our second and fourthfiscal quarters and lowest in our first fiscal quarter, although there can besignificant variation in this pattern.

 

22

----

Table ofContents

 

***FutureCash Collections and Billings Backlog***

 

*Future cash collections* is the sum of billings backlog, accounts receivable, undiscountedinstallments receivable and undiscounted collateralized receivables. *Billings backlog* represents the aggregatevalue of uninvoiced bookings from prior and current periods.

 

Prior to fiscal 2010, the majority ofbookings was recognized as revenue in the period booked and reflected on ourbalance sheet as installments receivable, or if sold, as collateralizedreceivables. Installments receivable and collateralized receivables werediscounted to net present value at prevailing market rates at the time of thetransaction. Amounts collected for collateralized receivables are applied to paythe related secured borrowings and are not available for any otherexpenditures.

 

Under our aspenONE subscription offeringand for point product arrangements with SMS included for the entire term of thearrangement, extended contractual payments are not considered fixed ordeterminable and, as a result, are not included in installments receivable orcollateralized receivables. These future payments are included in billingsbacklog, which is not reflected on our consolidated balance sheets. We believefuture cash collections is a useful metric because it provides insight into thecash generation capability of our business. Under the upfront revenue model, wedid not previously monitor billings backlog or future cash collections since webelieved that accounts receivable, installments receivable, collateralizedreceivables and certain other measures were appropriate indicators of estimatedcash generation at that time.

 

Because a substantial majority of ourfuture bookings will reflect arrangements under our aspenONE subscriptionoffering, we expect billings backlog to grow over time and expect installmentsreceivable and collateralized receivables to decline. When all contracts havebeen renewed under our new licensing models, the only sources of cash that willcontinue to be excluded from future cash collections will be amountsattributable to professional services, training and any remaining standaloneSMS renewals.

 

The following table provides our futurecash collections as of the dates presented (in thousands):

 
| ** **                                               | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Billings backlog                                         |       | $                            | 435,942    |                    | $          | 389,354 |   |
| Accounts receivable, net                                 |       | 26,190                       |       | 31,738                  |       |
| Installments receivable, undiscounted  (non-GAAP) (1)    |       | 139,488                      |       | 147,315                 |       |
| Collateralized receivables, undiscounted  (non-GAAP) (1) |       | 51,223                       |       | 56,461                  |       |
| Future cash collections                                  |       | $                            | 652,843    |                    | $          | 624,868 |   |

 

----

(1)           Excludes unamortized discount.

 

The growth in billings backlog and futurecash collections in the first quarter of fiscal 2011 reflected our customers’continued adoption of our aspenONE subscription offering. We expect thatbillings backlog and future cash collections will continue to grow steadily aswe convert and renew existing customers to multi-year contracts, which nowinclude SMS for the full term of the arrangement. In addition, we are activelyengaged in transitioning customers from perpetual license arrangements to ournew licensing model. Prior to fiscal 2008, we licensed our aspenONEManufacturing and Supply Chain suite primarily on a perpetual basis, and as weconvert these customers to our new licensing model, their licensing fees andSMS will become part of billings backlog and future cash collections.

 

Installments and collateralizedreceivables are shown at net present value on our consolidated balance sheets.Future cash collections excludes the unamortized discount on installments andcollateralized receivables. Amounts collected for collateralized receivablesare applied to pay the related secured borrowings and are not available for anyother expenditures. We are providing the following reconciliation for theperiods presented to reconcile to undiscounted installments and collateralizedreceivables, as included in our future cash collections metric, with GAAPinstallment receivables, net and GAAP collateralized receivables, net (inthousands):

 

23

----

Table of Contents

 
| ** **                                           | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Installments receivable, undiscounted  (non-GAAP)    |       | $                            | 139,488    |                    | $          | 147,315 |   |
| Unamortized discount                                 |       | (15,992                      | )          | (18,717                 | )          |
| Installments receivable, net                         |       | $                            | 123,496    |                    | $          | 128,598 |   |
|                                                 |       |                         |       |                    |       |
| Collateralized receivables, undiscounted  (non-GAAP) |       | $                            | 51,223     |                    | $          | 56,461 |   |
| Unamortized discount                                 |       | (4,106                       | )          | (5,031                  | )          |
| Collateralized receivables, net                      |       | $                            | 47,117     |                    | $          | 51,430 |   |

 

***AdjustedTotal Costs***

 

The following table presents our totalcost of revenue and total operating expenses, as adjusted for stock-basedcompensation expense, for the indicated periods (in thousands):

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Period-to-Period ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**     | ** ** | **Change** | ** ** |
| ** **                      | ** ** | **2010**                         | ** ** | **2009**                   | ** ** | **$** | ** ** | **%** | ** ** |
| Total cost of revenue           |       | $                                | 13,248     |                       | $          | 17,469 |   | $ | (4,221 | ) | (24.2 | )% |
| Total operating expenses        |       | 49,560                           |       | 47,131                     |       | 2,429 |   | 5.2 |   |
| Total expenses                  |       | $                                | 62,808     |                       | $          | 64,600 |   | $ | (1,792 | ) | (2.8 | ) |
| Less:                           |       |                             |       |                       |       |   |   |   |   |
| Stock-based compensation        |       | $                                | (2,697     | )                          | $          | (1,907 | ) | $ | (790 | ) | 41.4 |   |
| Adjusted total costs (non-GAAP) |       | $                                | 60,111     |                       | $          | 62,693 |   | $ | (2,582 | ) | (4.1 | ) |

 

The decrease in adjusted total costs,which consists of total cost of revenue and total operating expenses, adjustedto exclude stock-based compensation, was primarily the result of lower expensesfor consultants and contractors of $2.5 million, audit and accounting of$1.6 million, professional service direct costs of $1.2 million, payroll andbenefits of $0.6 million and depreciation and amortization of $0.6million.  These expense decreases werepartially offset by increased legal and related expenses of $3.0 million,which included S-1 related expenses (expenses related to the secondary offeringof our common stock, effective as of September 22, 2010), and increasedexpenses for sales commissions of $0.4 million, royalty expense of $0.4million and third-party commissions of $0.3 million.

 

Stock-based compensation expense increased$0.8 million in the first quarter of fiscal 2011 compared to the correspondingperiod of the prior year.  During theperiod from mid-September 2007 until November 9, 2009 and fromNovember 16, 2009 to December 21, 2009, we did not maintain ourstatus as a timely filer with the SEC and we were unable to issue stock-basedcompensation to our directors and employees. As a result of this inability to issue stock-based compensation, therelated expense for the first quarter of fiscal 2010 was lower thannormal.  In the second quarter of fiscal2010, we became current with our filings and we issued 2.7 millionrestricted stock units and 0.3 million stock options to our directors andemployees.  Additionally, as part of ourannual grant, on August 2, 2010 we issued 0.8 million restrictedstock units and 0.9 million stock options to our directors andemployees.  The increase in stock-basedcompensation expense in the first quarter of fiscal 2011 is related to theincremental expense associated with these grants.

 

We expect the transition to the aspenONEsubscription offering to provide us with a significant opportunity tostandardize and further improve our sales and administrative processes.Overall, we expect adjusted total costs to remain relatively flat for fiscal2011 compared to the prior fiscal year.

 

***FreeCash Flow***

 

*Free cash flow* is calculated as net cash provided by operating activities lessthe sum of (a) purchase of property, equipment and leasehold improvementsand (b) capitalized computer software development costs.

 

Customer collections and, consequently,cash flow from operating activities and free cash flow are primarily driven bylicense and services billings, rather than recognized revenue. As a result, ourchanges in revenue recognition since the introduction of our aspenONEsubscription offering will not have an adverse impact on cash receipts. Untilexisting license contracts are renewed 

 

24

----

Table of Contents

 

andlicense related revenue returns to prior year levels, we believe free cash flowis a more relevant measure of our financial performance than income statementprofitability measures such as total revenue, gross profit, operating profitand net income. Additionally, we also believe that free cash flow is often usedby security analysts, investors and other interested parties in the evaluationof software companies.

 

The following table provides areconciliation of net cash flow to free cash flow provided by operatingactivities for the periods presented (in thousands):

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** ** |
| Net cash provided by (used in) operating  activities        |       | $                                | 6,388      |   | $ | (5,273 | ) |
| Purchase of property, equipment and  leasehold improvements |       | (588                             | )          | (873 | ) |
| Capitalized computer software  development costs            |       | (176                             | )          | (270 | ) |
| Free cash flow (non-GAAP)                                   |       | $                                | 5,624      |   | $ | (6,416 | ) |

 

Going forward, we expect free cash flow toincrease as customers continue to renew contracts that were previously paidupfront.  As part of our historicalcontract arrangements, customers could elect to pay for their term licensesupfront rather than over the contract term. The upfront payment would normallybe equal to the net present value of the annual cash payments, typicallydiscounted at an 8% rate. As the global economy deteriorated in 2009, some ofour customers changed from paying upfront to paying in installments.Additionally, during this period, we started selling our aspenONE forManufacturing and Supply Chain suite predominantly on a term basis rather thanon a perpetual basis, enabling our customers to pay in annual installmentsrather than upfront. These prior period practicesof upfront payments resulted in increased cash flow variability, both in theperiod of the payment, and the subsequent years of the contract term.  We have moved away from upfront payments in recent years, and as a result,we expect cash flows to normalize over the next several years.  Weanticipate the transition to normalized cash flow to be quicker than thetransition to normalized revenue.

 

We believe we will realize improved freecash flow as we benefit from the continued growth of our portfolio of termlicense contracts and our focused cost structure management.

 

**Critical Accounting Estimates and Judgments**

 

Our consolidated financial statements areprepared in accordance with GAAP. The preparation of our financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue, expenses and related disclosures. Webase our estimates on historical experience and various other assumptions thatwe believe to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

We believe that the assumptions andestimates associated with the following critical accounting policies have thegreatest potential impact on our consolidated financial statements:

 

·                  revenue recognition;

 

·                  impairment of long-lived assets, goodwill, and intangible assets;

 

·                  computer software development costs;

 

·                  loss contingencies; and

 

·                  accounting for income taxes.

 

***RevenueRecognition***

 

Four basic criteria must be satisfiedbefore license revenue can be recognized: persuasive evidence of an arrangementbetween us and an end user; delivery of our product has occurred; the fee forthe product is fixed or determinable; and collection of the fee is probable.Our management uses its judgment concerning the satisfaction of these fourbasic criteria, particularly the criteria relating to the determination ofwhether the arrangement fees are fixed or determinable and to thecollectability of the arrangement fees, during evaluation of each revenuetransaction.

 

*Fee is fixed ordeterminable*—We assesswhether a fee is fixed or determinable at the outset of the arrangement.Significant judgment is involved in making this assessment. Under our upfrontrevenue model, we are able to demonstrate that the fees are fixed ordeterminable for all arrangements, including those for our term licenses thatcontain extended payment terms. We have an established history of collectingunder the terms of these contracts 

 

25

----

Table of Contents

 

withoutproviding concessions to customers. In addition, we also assess whethercontract modifications to an existing term arrangement constitute a concession.In making this assessment, significant analysis is performed to ensure that noconcessions are given. Our software license agreements do not include right ofreturn or exchange.

 

With the introduction of our aspenONEsubscription offering and the changes to the licensing terms for point productslicensed on a fixed-term basis, we cannot assert that the fees in these newarrangements are fixed or determinable because the rights provided to customersand the economics of the arrangements are not comparable to our historicaltransactions with other customers under the upfront revenue model. As a result,the amount of revenue recognized for these arrangements will be limited by theamount of customer payments currently due. For our aspenONE licenses thisgenerally results in the fees being recognized ratably over the term of thecontracts. For our point product licenses with bundled SMS, this generallyresults in the license fee being recognized as each payment comes due, whilethe allocated portion of the SMS revenue is recognized ratably over its annualterm.

 

*Collection of fee isprobable*—We assess theprobability of collecting from each customer at the outset of the arrangementbased on a number of factors, including the customer’s payment history, itscurrent creditworthiness, economic conditions in the customer’s industry andgeographic location, and general economic conditions. If in our judgmentcollection of a fee is not probable, revenue is recognized as cash iscollected, provided all other conditions for revenue recognition have been met.

 

*VSOEof Fair Value for SMS and Professional Services*

 

We have established VSOE for SMS andprofessional services, but not for our software products. We assess VSOE offair value for SMS based on an analysis of standalone SMS renewals using thebell-shaped curve approach. We use the optional renewals of SMS on our legacyterm license arrangements to support VSOE of fair value for SMS bundled in ourfixed-term point product arrangements. The license product offerings and theSMS in the legacy term arrangements and the fixed-term point productarrangements are the same.

 

As we are increasingly transitioning ourlegacy term license customers to new point product arrangements with bundledSMS for the entire term of the arrangement and we no longer market legacy termlicense arrangements, we expect our population of standalone annual renewals todecrease over time. As a result, there will come a point in time where we willbe unable to support VSOE of fair value of SMS in our point productarrangements based on our legacy term license SMS renewals. When this occurs,we will be required to recognize revenue related to the license component onour point product arrangements ratably, on a subscription basis. Additionally,SMS revenue will be included as subscription revenue, in a manner similar tothe current recognition of subscription arrangements under our aspenONEsubscription offering. We expect the impact of a loss of VSOE of fair value forSMS to be immaterial to our results of operations, since we currently recognizelicense revenue on point product arrangements over the term of the arrangement,as payments become due.

 

*ProfessionalServices Revenue*

 

We provide professional services on atime-and-materials or fixed-price basis. We recognize professional servicesfees for time-and-materials contracts based upon hours worked and contractuallyagreed-upon hourly rates. We recognize revenue from fixed-price engagementsusing the proportional performance method, based on the ratio of costsincurred, substantially all of which are labor-related, to the total estimatedproject costs. The use of the proportional performance method depends upon ourability to reliably estimate the direct costs to complete a project. We usehistorical experience as a basis for future estimates to complete currentprojects. Additionally, management believes that costs are the best availablemeasure of performance. Reimbursable amounts received from customers forout-of-pocket expenses are recorded as revenue. If the costs to complete a projectare not estimable or the completion is uncertain, the revenue is recognizedupon completion of the services.

 

In the past, we have occasionally beenrequired to commit unanticipated additional resources to complete projects,which have resulted in lower than anticipated income or losses on thosecontracts. We may experience similar situations in the future. Provisions forestimated losses on contracts are made during the period in which such lossesbecome probable and can be reasonably estimated. To date, such losses have notbeen significant.

 

Pleaserefer to Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in Part II, Item 7 of our AnnualReport on Form 10-K for our fiscal year ended June 30, 2010 for adiscussion of our critical accounting policies and estimates related toimpairment of long-lived assets, goodwill, and intangible assets, computersoftware development costs, loss contingencies and accounting for income taxes.

 

26

----

Table of Contents

 

**Results of Operations**

 

***Comparisonof the Three Months Ended September 30, 2010 and 2009***

 

The following table sets forth the resultsof operations, percentage of net revenue and the period-to-period percentagechange in certain financial data for the three months ended September 30,2010 and 2009:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------------------|------------|------------|------------|
| ** **                      | ** ** | **September 30,**      | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **2010**               | ** ** | **2009**   | ** ** | **% Change** | ** ** |
| **Revenue:**                    |       |                   |       |       |       |   |   |   |   |   |   |
| Subscription                    |       | $                      | 9,656      |       | 22.4       | % | $ | 25 |   | 0.1 | % |   | *% |
| Software                        |       | 9,311                  |       | 21.6       |       | 11,082 |   | 27.8 |   | (16.0 | ) |
| Total subscription and software |       | 18,967                 |       | 44.0       |       | 11,107 |   | 27.9 |   | 70.8 |   |
| Services and other              |       | 24,133                 |       | 56.0       |       | 28,689 |   | 72.1 |   | (15.9 | ) |
| Total revenue                   |       | 43,100                 |       | 100.0      |       | 39,796 |   | 100.0 |   | 8.3 |   |
| **Cost of revenue:**            |       |                   |       |       |       |   |   |   |   |   |   |
| Subscription and software       |       | 2,122                  |       | 4.9        |       | 1,773 |   | 4.5 |   | 19.7 |   |
| Services and other              |       | 11,126                 |       | 25.8       |       | 15,696 |   | 39.4 |   | (29.1 | ) |
| Total cost of revenue           |       | 13,248                 |       | 30.7       |       | 17,469 |   | 43.9 |   | (24.2 | ) |
| Gross profit                    |       | 29,852                 |       | 69.3       |       | 22,327 |   | 56.1 |   | 33.7 |   |
| **Operating expenses:**         |       |                   |       |       |       |   |   |   |   |   |   |
| Selling and marketing           |       | 20,351                 |       | 47.2       |       | 20,552 |   | 51.6 |   | (1.0 | ) |
| Research and development        |       | 12,575                 |       | 29.2       |       | 10,894 |   | 27.4 |   | 15.4 |   |
| General and administrative      |       | 16,557                 |       | 38.4       |       | 15,414 |   | 38.7 |   | 7.4 |   |
| Restructuring charges           |       | 77                     |       | 0.2        |       | 271 |   | 0.7 |   | (71.6 | ) |
| Total operating expenses        |       | 49,560                 |       | 115.0      |       | 47,131 |   | 118.4 |   | 5.2 |   |
| Loss from operations            |       | (19,708                | )          | (45.7      | )          | (24,804 | ) | (62.3 | ) | (20.5 | ) |
| Interest income                 |       | 3,702                  |       | 8.6        |       | 5,449 |   | 13.7 |   | (32.1 | ) |
| Interest expense                |       | (1,244                 | )          | (2.9       | )          | (2,411 | ) | (6.1 | ) | (48.4 | ) |
| Other income, net               |       | 2,664                  |       | 6.2        |       | 2,269 |   | 5.7 |   | 17.4 |   |
| Loss before income taxes        |       | (14,586                | )          | (33.8      | )          | (19,497 | ) | (49.0 | ) | (25.2 | ) |
| Provision for income taxes      |       | (882                   | )          | (2.0       | )          | (1,565 | ) | (3.9 | ) | (43.6 | ) |
| Net loss                        |       | $                      | (15,468    | )          | (35.9      | )% | $ | (21,062 | ) | (52.9 | )% | (26.6 | )% |

 

----

**Not meaningful.*

 

*Revenue*

 

Total revenue in the first quarter offiscal 2011 increased by $3.3 million compared to the corresponding period ofthe prior year and was comprised of increased subscription revenue of $9.6million, partially offset by decreased software revenue and services and otherrevenue of $1.8 million and $4.6 million, respectively.

 

**SubscriptionRevenue**

 
| ** **              | ** ** | **Three Months Ended**               | ** ** | ** **                  | ** ** | ** ** | ** ** |
|-------------------------|------------|--------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **              | ** ** | **September 30,**                    | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                    | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Subscription revenue    |       | $                                    | 9,656      |                        | $          | 25         |       | $ | 9,631 |   | * |   |
| As a percent of revenue |       | 22.4                                 | %          | 0.1                         | %          |       |       |   |   |
|                         |            |                                      |            |                             |            |            |            |  |  |  |  |  |

 

----

**Not meaningful.*

 

27

----

Table of Contents

 

The increase in subscription revenue in thefirst quarter of fiscal 2011 is a result of a larger base of aspenONEsubscription bookings from previous quarters being recognized as revenue on a dailyratable basis in the current quarter. The minimal amount of subscriptionrevenue in the first quarter of fiscal 2010 was a result of subscriptionarrangements not being offered prior to fiscal 2010.  We expect subscription revenue to continue toincrease as customers renew existing contracts under our aspenONE subscriptionoffering and subscription contracts become a more significant portion of ourterm license portfolio.

 

**SoftwareRevenue**

 
| ** **              | ** ** | **Three Months Ended**               | ** ** | ** **                  | ** ** |
|-------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **September 30,**                    | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Software revenue        |       | $                                    | 9,311      |                        | $          | 11,082 |   | $ | (1,771 | ) | (16.0 | )% |
| As a percent of revenue |       | 21.6                                 | %          | 27.8                        | %          |   |   |   |   |
|                         |            |                                      |            |                             |            |  |  |  |  |  |  |  |

 

Of the total software revenue recorded inthe first quarter of fiscal 2011, $0.3 million related to legacyarrangements that were both booked and recognized in fiscal 2011;$2.5 million related to legacy arrangements that had previously beendeferred; $5.6 million related to point product arrangements with SMSincluded for the entire term; and, $0.9 million related to perpetualarrangements.  The decrease in softwarerevenue was attributable to a reduction in legacy software revenue of $7.5million, partially offset by increased revenue of $4.9 million related to pointproduct arrangements with SMS included for the entire term and $0.8 millionrelated to perpetual arrangements.

 

We expect legacy software revenue tocontinue to decrease and be replaced with subscription and point productsoftware revenue as legacy arrangements are renewed with our aspenONEsubscription or point product with bundled SMS offerings.  Going forward, we anticipate that most of oursoftware revenue will be recognized over the contract term, either on asubscription basis or as payments become due.  We do not expect revenue related to point products licensed on aperpetual basis to be a significant source of revenue in fiscal 2011.

 

**Servicesand Other Revenue**

 
| ** **                    | ** ** | **Three Months Ended**               | ** ** | ** **                  | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **September 30,**                    | ** ** | **Period-to-Period Change** | ** ** |
| ** **                    | ** ** | **2010**                             | ** ** | **2009**                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Professional services revenue |       | $                                    | 6,664      |                        | $          | 9,699 |   | $ | (3,035 | ) | (31.3 | )% |
| SMS and other revenue         |       | 17,469                               |       | 18,990                      |       | (1,521 | ) | (8.0 | )% |
| Services and other revenue    |       | $                                    | 24,133     |                        | $          | 28,689 |   | $ | (4,556 | ) | (15.9 | )% |
| As a percent of revenue       |       | 56.0                                 | %          | 72.1                        | %          |   |   |   |   |

 

Professional Services Revenue

 

The period-over-period decrease inprofessional services revenue primarily relates to decreased customer demandfor professional services, higher professional services revenue deferrals, anda $0.5 million decrease in project reimbursable revenues.  We often compete with a number of qualifiedcompetitors when bidding for professional service contracts, particularly indeveloped markets where our products are well established. Having a robustnetwork of providers that can provide professional services to support thedeployment and utilization of our software is beneficial to our licensing andSMS businesses. However, this competitive environment has had an unfavorableimpact on our professional services business.

 

28

----

Table of Contents

 

Under the aspenONE subscription offering,revenue from committed professional service arrangements that are sold as asingle arrangement with, or in contemplation of, a new aspenONE licensingtransaction is deferred and recognized on a ratable basis over the longer of(a) the period the services are performed and (b) the term of therelated software arrangement.  As ourtypical contract term approximates five years, professional services revenue onthese types of arrangements will usually be recognized over a longer periodthan under our upfront revenue model.  We deferred an additional $0.6 million in the first quarter of fiscal2011 related to professional services bundled with aspenONE subscriptionoffering transactions compared to the prior year comparable period.  Additionally, in the first quarter of fiscal2011, we deferred an additional $0.9 million of professional services revenuefor services on projects that did not meet all of the necessary revenuerecognition requirements. We expect professional services deferred revenuerelated to new aspenONE licensing transactions to continue to grow in fiscal2011. 

 

SMS and Other Revenue

 

The decrease in SMS and other revenue wasprimarily due to an increased percentage of SMS revenue being classified assubscription revenue related to customers transitioning to the aspenONEsubscription offering. Under the aspenONE subscription offering, SMS revenue isincluded in subscription revenue, whereas it was included in services and otherrevenue under the upfront revenue model.  Our SMS business has grown period-over-period,when considering both (i) the portion of SMS included in subscription revenueand (ii) SMS revenue, as reported within services and other revenue in theincome statement.

 

*Expenses*

** **

**Costof Subscription and Software Revenue**

 
| ** **                                 | ** ** | **Three Months Ended**               | ** ** | ** **                  | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                 | ** ** | **September 30,**                    | ** ** | **Period-to-Period Change** | ** ** |
| ** **                                 | ** ** | **2010**                             | ** ** | **2009**                    | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cost of subscription and software  revenue |       | $                                    | 2,122      |                        | $          | 1,773      |       | $ | 349 |   | 19.7 | % |
| Gross margin                               |       | 88.8                                 | %          | 84.0                        | %          |       |       |   |   |
|                                            |            |                                      |            |                             |            |            |            |  |  |  |  |  |

 

The period-over-period increase in cost ofsubscription and software revenue was primarily due to increases of$0.4 million in royalty costs during the period related to our licenseproducts and $0.6 million of higher costs associated with providing SMSfor the aspenONE suite of products, partially offset by decreases inamortization of capitalized software costs of $0.5 million.  We allocate a portion of SMS costs associatedwith providing services on our subscription products to cost of subscriptionand software revenue.  Prior to thetransition to the aspenONE subscription offering in fiscal 2010, none of thecosts associated with providing SMS were included within the cost ofsubscription and software.  As morecustomers transition to the aspenONE license model, SMS costs included in costof subscription and software will increase.

 

Amortization of capitalized software costsfor the first quarter of fiscal 2011 decreased $0.5 million compared tothe same period in fiscal 2010 as a result of previously capitalized itemsreaching the end of their useful life in fiscal 2011.

** **

**Costof Services and Other Revenue**

 
| ** **                         | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                         | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **                         | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cost of services and other revenue |       | $                                    | 11,126     |                             | $          | 15,696     |       | $ | (4,570 | ) | (29.1 | )% |
| Gross margin                       |       | 53.9                                 | %          | 45.3                             | %          |       |       |   |   |
|                                    |            |                                      |            |                                  |            |            |            |  |  |  |  |  |

 

29

----

Table of Contents

 

Cost of Professional Services Revenue

 

The largest component of the reduction incost of services and other revenue in the first quarter of fiscal 2011pertained to our professional services business, which accounted for$4.2 million of the period-over-period decrease. The decrease wasprimarily related to the reduction of staffing levels in the professionalservices organization, a decrease in professional service direct costs and thetiming of expense recognition on specific projects.

 

We reduced our staffing levels in fiscal2010 to better align our cost structure with the decreased demand forprofessional services.  Staffing levelsfor the first quarter of fiscal 2011 decreased approximately 10% compared tothe first quarter of fiscal 2010.  Thecost of professional services revenue also decreased approximately $0.9 milliondue to the timing of expense recognition related to two large professionalservice projects.

 

Cost of SMS and Other Revenue

 

Costs associated with SMS and otherrevenue decreased $0.4 million in the first quarter of fiscal 2011 as comparedto the same period in fiscal 2010, primarily related to the allocation of $0.6million of SMS costs associated with providing services on our subscriptionproducts to cost of subscription and software revenue. As the subscriptionbusiness grows, we expect the cost of SMS revenue to migrate from cost ofservices and other revenue to cost of subscription and software revenue.Currently it is not possible to predict the rate at which this migration willoccur, because that rate will be a function of adoption of our aspenONEsubscription offering. We do not have sufficient experience with the rate ofadoption to provide a meaningful forecast of this change. Eventually, we expectthe majority of our cost of SMS revenue to be accounted for in cost ofsubscription and software revenue.  Weexpect the reported gross profit margin of services and other revenue todecline over the next several years, as SMS revenue is reclassified tosubscription revenue, since SMS revenue has a high gross profit margin relativeto the other revenue streams included in services and other revenue.

 

**Sellingand Marketing Expense**

 
| ** **                    | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                    | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **                    | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Selling and marketing expense |       | $                                    | 20,351     |                             | $          | 20,552     |       | $ | (201 | ) | (1.0 | )% |
| As a percent of revenue       |       | 47.2                                 | %          | 51.6                             | %          |       |       |   |   |
|                               |            |                                      |            |                                  |            |            |            |  |  |  |  |  |

 

The decrease in selling and marketingexpense was predominantly the result of lower payroll and benefits expenses of$0.6 million, decreased rent and facility expenses of $0.2 million andlower bonus of $0.1 million, partially offset by an increase in commissions of$0.5 million and third-party commissions of $0.2 million. Selling and marketingpayroll and benefit expenses decreased in the first quarter of fiscal 2011primarily due to a 5% decrease in headcount compared to the first quarter offiscal 2010.  Commissions expenseincreased period-over-period as a result of higher bookings.

 

**Researchand Development Expense**

 
| ** **                       | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                       | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **                       | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| Research and development expense |       | $                                    | 12,575     |                             | $          | 10,894     |       | $ | 1,681 |   | 15.4 | % |
| As a percent of revenue          |       | 29.2                                 | %          | 27.4                             | %          |       |       |   |   |
|                                  |            |                                      |            |                                  |            |            |            |  |  |  |  |  |

 

The period-over-period change in researchand development expense was primarily the result of higher payroll and benefitrelated costs of $1.2 million.  Also contributingto the period over period increase in expense was higher bonus expense of$0.2 million, increased facility and IT-related costs of $0.2 millionand higher stock-based compensation expense of $0.1 million.

 

30

----

Table of Contents

 

**Generaland Administrative Expense**

 
| ** **                         | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                         | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **                         | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$**      | ** ** | **%** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| General and administrative expense |       | $                                    | 16,557     |                             | $          | 15,414     |       | $ | 1,143 |   | 7.4 | % |
| As a percent of revenue            |       | 38.4                                 | %          | 38.7                             | %          |       |       |   |   |
|                                    |            |                                      |            |                                  |            |            |            |  |  |  |  |  |

 

The increase in general and administrativeexpense is primarily attributable to $3.0 million of higher legal andrelated costs, $0.6 million of payroll and benefit expenses,$0.5 million of stock-based compensation and $0.5 million of bad debtexpense, partially offset by $2.2 million in cost reductions related toconsultants and contractors and decreases in audit and related expenses of $1.6 million.

 

The increase in legal fees in the firstquarter of fiscal 2011 as compared to the same period in fiscal 2010 was due toour increased use of external legal services during the fiscal year, includingservices related to the Form S-1 filed during the first quarter of fiscal2011.  The $0.6 million increase inpayroll and benefit expenses is related to increased average headcount,primarily within the finance organization, and to a lesser extent, annual wageincreases. We hired full-time finance personnel throughout fiscal 2010 toreplace and further reduce our reliance on more costly externalconsultants.  The $1.6 million decreasein audit and related expenses is primarily attributable to the timing of theaudits related to previous SEC filings. In the first quarter of fiscal 2010,significant costs were incurred associated with the audit and filing of all ofour fiscal 2009 Form 10-Q’s and Form 10-K.  The majority of the audit expense on thesefilings was incurred in the comparable period of the prior year. In the firstquarter of fiscal 2011, audit and related expenses were primarily associatedwith the audit and filing of the fiscal 2010 Form 10-K, and to a lesserextent, the filing of the Form S-1 and related amendments.

** **

**RestructuringCharges**

 
| ** **              | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** |
|-------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$** | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Restructuring charges   |       | $                                    | 77         |                             | $          | 271 |   | $ | (194 | ) | (71.6 | )% |
| As a percent of revenue |       | 0.2                                  | %          | 0.7                              | %          |   |   |   |   |
|                         |            |                                      |            |                                  |            |  |  |  |  |  |  |  |

 

The activity in restructuring charges wasthe result of accretion and adjustments to existing facilities-relatedrestructuring plans for changes in estimates.

 

**InterestIncome**

 
| ** **              | ** ** | **Three Months Ended**               | ** ** | ** **                       | ** ** |
|-------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$** | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income         |       | $                                    | 3,702      |                             | $          | 5,449 |   | $ | (1,747 | ) | (32.1 | )% |
| As a percent of revenue |       | 8.6                                  | %          | 13.7                             | %          |   |   |   |   |
|                         |            |                                      |            |                                  |            |  |  |  |  |  |  |  |

 

The period-over-period change in interestincome was primarily attributable to the continued decrease of ourcollateralized and installment receivables portfolios. We expect interestincome to continue to decrease going forward.

 

31

----

Table of Contents

 

**InterestExpense**

 
| ** **              | ** ** | **Three Months Ended**               | ** ** | ** **                  | ** ** |
|-------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **September 30,**                    | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Interest expense        |       | $                                    | (1,244     | )                           | $          | (2,411 | ) | $ | 1,167 |   | (48.4 | )% |
| As a percent of revenue |       | (2.9                                 | )%         | (6.1                        | )%         |   |   |   |   |
|                         |            |                                      |            |                             |            |  |  |  |  |  |  |  |

 

The period-over-period change in interestexpense was primarily attributable to lower average secured borrowing balances,resulting from the continued pay-down of our existing secured borrowingarrangements. We expect interest expense to continue to decrease going forward.

** **

**OtherIncome, Net**

 
| ** **              | ** ** | **Three Months Ended**     | ** ** | ** **                       | ** ** |
|-------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **              | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$** | ** ** | **%** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Other income, net       |       | $                                    | 2,664      |                             | $          | 2,269 |   | $ | 395 |   | 17.4 | % |
| As a percent of revenue |       | 6.2                                  | %          | 5.7                              | %          |   |   |   |   |
|                         |            |                                      |            |                                  |            |  |  |  |  |  |  |  |

 

The change in other income, net wasprimarily due to the change in foreign currency gains due to the strengtheningof the Japanese Yen, Pound Sterling, and Euro being offset by losses recognizedfrom the weakening of the Canadian dollar in the first quarter of fiscal 2011.The gain recorded in the first quarter of the prior fiscal year was primarilythe result of the strengthening of the Pound Sterling, Euro, Japanese Yen andCanadian dollar against the US dollar.

** **

**Provisionfor Income Taxes**

 
| ** **                 | ** ** | **Three Months Ended**     | ** ** | ** **                       | ** ** |
|----------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 30,**               | ** ** | **Period-to-Period Change** | ** ** |
| ** **                 | ** ** | **2010**                             | ** ** | **2009**                         | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Provision for income taxes |       | $                                    | (882       | )                                | $          | (1,565 | ) | $ | 683 |   | (43.6 | )% |
| As a percent of revenue    |       | (2.0                                 | )%         | (3.9                             | )%         |   |   |   |   |
|                            |            |                                      |            |                                  |            |  |  |  |  |  |  |  |

 

The decrease inprovision for income taxes was primarily due to lower current period stateincome taxes and a reduction in the reserve for FIN 48 liabilities, partiallyoffset by an increase in the foreign provision for income taxes. We made cashpayments totaling $1.4 million in the first quarter of fiscal year 2011, whichwere offset by cash refunds of $7.9 million.

** **

**Liquidity and CapitalResources**

*** ***

***Resources***

 

We historically have financed ouroperations with cash generated from operating activities and borrowings securedby our installment receivable contracts. As of September 30, 2010, our principal sources of liquidityconsisted of $123.2 million in cash and cash equivalents and up to$13.7 million of borrowing capacity under our credit facility. The amountof borrowing capacity available under the credit facility varies in accordancewith the terms of the agreement. We are not currently dependent upon short-termfunding.

 

We believe our existing cash and cashequivalents and our cash flow from operating activities will be sufficient tomeet our anticipated cash needs for at least the next twelve months. To theextent our cash and cash equivalents, cash flow from operating activities, andcredit facility borrowing are insufficient to fund our future activities, we 

 

32

----

Table of Contents

 

mayneed to raise additional funds through the financing of additional receivablesor from public or private equity or debt financings. We also may need to raiseadditional funds in the event we determine in the future to effect one or moreacquisitions of businesses, technologies and products. If additional funding isrequired, we may not be able to effect a receivable, equity or debt financingon terms acceptable to us or at all.

 

The following table summarizes our cashflow activities for the periods indicated (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** |
| ** **                                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Cash flow provided by (used in):           |       |                             |       |   |   |
| Operating activities                       |       | $                                | 6,388      |   | $ | (5,273 | ) |
| Investing activities                       |       | (764                             | )          | (1,143 | ) |
| Financing activities                       |       | (8,076                           | )          | (5,999 | ) |
| Effect of exchange rates on cash  balances |       | 668                              |       | (833 | ) |
| Decrease in cash and cash equivalents      |       | $                                | (1,784     | ) | $ | (13,248 | ) |

 

*OperatingActivities*

 

Cash generated by operating activities isour primary source of liquidity. Operating activities provided$6.4 million during the first quarter of fiscal 2011. This amount resultedfrom net loss of $15.5 million, adjusted for non-cash charges of$2.6 million, and a net $19.2 million source of cash due to decreasesin operating assets and increases in operating liabilities.

 

Non-cash items within net loss consistedprimarily of $2.7 million of stock-based compensation, $1.4 millionof depreciation and amortization and bad debt expense of $0.7 million, and wereoffset by $2.2 million of net unrealized foreign currency gains driven by theweakening of the U.S. dollar against the Japanese Yen, Pound Sterling, and Euroin the period.

 

Our cash balance increased in part due toa net $19.2 million decrease in operating assets and increase in operatingliabilities. The cash generated from this change consisted of (a) anincrease in deferred revenue of $14.0 million, (b) decreases ininstallment and collateralized receivables totaling $11.9 million,(c) a decrease in accounts receivable of $5.2 million, (d) adecrease in prepaid expenses and other assets of $4.8 million, and (e) anincrease in income taxes payable of $0.2 million.  These sources of cash were partially offsetby decreases in accounts payable, accrued expenses and other liabilitiestotaling $16.6 million and an increase in unbilled services of$0.3 million.

 

Looking ahead, we expect to continue togenerate positive cash flow from operations. We do not expect the adoption ofour aspenONE subscription offering to have a negative impact on our operatingcash flows because most of our existing contracts are already on an installmentterm basis. We anticipate that existing cash balances, together with fundsgenerated from operations, will be sufficient to finance our operations and meetour cash requirements for the foreseeable future.

* *

*InvestingActivities*

 

During the first quarter of fiscal 2011,we used $0.6 million of cash for capital expenditures, primarily relatedto computer hardware purchases. Additionally, we have ongoing efforts to enhance our information systemand implement internal control enhancements, which have been designed in partto assist in the remediation of our deficiencies in internal controls overfinancial reporting. We do not expect our investment in capital expenditures tobe materially different from our investments in prior fiscal years.

 

Capitalized software development costsdecreased $0.1 million in the first quarter of fiscal 2011 compared to fiscal2010.  We expect capitalized softwaredevelopment costs for the remainder of fiscal 2011 to be somewhat higher thanthe fiscal 2010 levels.

 

*FinancingActivities*

 

During the first quarter of fiscal 2011 weused $8.1 million of cash for financing activities.  We made net payments on secured borrowings of$7.4 million ($9.3 million of repayments offset by $1.9 million of proceeds); 

 

33

----

Table of Contents

 

paidwithholding taxes of $0.8 million on vested restricted stock units; andreceived proceeds of $0.1 million from the exercise of employee stockoptions during the first quarter of fiscal 2011.

 

The $7.4 million in net repayments ofsecured borrowings includes $2.4 million of payments for amounts that wereincluded in accrued expenses and other current liabilities at June 30,2010.  The $2.4 million represents thevalue of collateralized receivables from contracts that were superseded andreplaced with new arrangements in the fourth quarter of fiscal 2010.  Upon superseding these arrangements, thesecured borrowings that were collateralized by these receivables becameimmediately due and payable, and as such, were reclassified to currentliabilities.

 

Although our financing arrangements do notobligate us to replace superseded receivables, the terms on which we repurchaseand replace superseded receivables make it advantageous to do so.  It is our intention to structure suchreplacements so that they do not result in a net increase in our securedborrowings balance, although this is not always possible, given the timing andsize of the specific receivables involved. In the first quarter of fiscal 2011, the $1.9 million of proceeds wasused to replace the $2.4 million that had been superseded in the fourth quarterof fiscal 2010 and repaid in the first quarter. This exchange was shown as both a use and source of funds related tosecured borrowings on our statement of cash flows.

 

We did not finance any receivables to fundoperations in the first quarter of fiscal 2011, and we have not done so sincethe second quarter of fiscal 2008.  Weexpect the existing secured borrowings balances included in our consolidatedbalance sheet at September 30, 2010 to continue to decline during fiscal2011 and thereafter, as we continue the trend of not replacing securitizedborrowings as they are paid down.  Wehave continued to reduce our secured borrowings while maintaining our cashbalance (in thousands):

 
| **Consolidated Balance Sheet Data:** | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Cash and cash equivalents                           |       | $                            | 123,161    |                    | $          | 124,945 |   |
| Secured borrowings                                  |       | 71,213                       |       | 76,135                  |       |
|                                                     |            |                              |            |                         |            |  |  |

 

*CreditFacility*

 

We are party to a credit facilityarrangement with Silicon Valley Bank that we originally entered into in January 2003and have amended several times subsequently. This arrangement provides a lineof credit of up to the lesser of (i) $25.0 million or (ii) 50%to 80% of certain eligible receivables. The line of credit bears interest atthe greater of (i) the bank’s prime rate (4.0% at September 30, 2010)plus 0.5%, or (ii) 4.75%. If we maintain a $10.0 million compensatingcash balance with the bank, our unused line of credit fee will be 0.1875% perannum; otherwise it will be 0.375% per annum. The line of credit is collateralizedby substantially all of our assets, and we are required to meet certainfinancial covenants, including minimum tangible net worth, minimum cashbalances and an adjusted quick ratio. The terms of the loan arrangementrestrict our ability to pay dividends in cash.

 

We were in compliance with the terms ofthe credit facility as of September 30, 2010. In June 2010, weexecuted an amendment to the loan arrangement that extended the maturity dateof the credit facility to November 15, 2010.  We anticipate renewing our creditfacility.  In the event we decide not torenew our credit facility, we will be required to cash collateralize ouroutstanding letters of credit.

 

As of September 30, 2010, there were$4.7 million in letters of credit outstanding under the line of credit andno outstanding debt under the line of credit, and $13.7 million wasavailable for future borrowing. Our total borrowing through Silicon Valley Bankis limited to $95 million. In the event that we utilize the full$85 million available through the program, as described below, withSilicon Valley Bank, our total credit line could not exceed $10 million.

* *

*BorrowingsCollateralized by Receivable Contracts*

 

We maintain arrangements with GeneralElectric Capital Corporation and Silicon Valley Bank providing for borrowingsthat are secured by our installment and other receivable contracts, and forwhich limited recourse exists against us. Under these programs, we and thefinancial institution must agree to enter into each transaction and negotiatethe amount borrowed and interest rate secured by each receivable. The customers’payments of the underlying receivables fund the repayment of the relatedamounts borrowed. The weighted average interest rate on the secured borrowingswas 8.2% at September 30, 2010.

 

34

----

 

Table of Contents

 

The collateralized receivables earninterest income, and the secured borrowings accrue borrowing costs atapproximately the same interest rate.

 

Under these programs, we receivedaggregate cash proceeds of $1.9 million and $0 million during thefirst quarter of fiscal 2011and 2010, respectively. Since December 2007, wehave not sold any receivables for the purpose of raising cash, but we have soldsome large dollar receivables in order to fund the repurchase of several largegroups of smaller receivables previously sold to the banks, for the purpose ofsimplifying our administration of the programs and replacing previouslyfinanced receivables that have been superseded and repurchased.

 

We estimate that there was approximately$57.0 million available under the Silicon Valley Bank program atSeptember 30, 2010. As the collection of the collateralized receivablesand resulting payment of the borrowing obligation reduces the outstandingbalance, the availability under the arrangement can be increased. We expect tomaintain our access to cash under this arrangement.

 

Under the terms of these programs, we havetransferred the receivables to the financial institutions with limitedfinancial recourse to us. We can be required to repurchase the receivablesunder certain circumstances in case of specific defaults by us as set forth inthe program terms. Potential recourse obligations are primarily related to theSilicon Valley Bank arrangement, which requires us to pay interest to SiliconValley Bank for a limited period when the underlying customer has not paid bythe receivable due date. Other than the specific items noted above, thefinancial institution bears the credit risk of the customers associated withthe receivables the institution purchased.

 

**Recently AdoptedAccounting Pronouncements**

 

In September 2009, the FASB issued ASU No.2009-13 (previously Emerging Issues Task Force, or EITF, Issue No. 08-1, *Revenue Arrangements with Multiple Deliverables*).ASU No. 2009-13 superseded EITF 00-21, *Revenue Arrangements with Multiple Deliverables*, toeliminate the requirement that all undelivered elements have VSOE orthird-party evidence before an entity can recognize the portion of an overallarrangement fee that is attributable to items that already have been delivered.In the absence of VSOE or third-party evidence of the standalone selling pricefor one or more delivered or undelivered elements in a multiple-elementarrangement, entities will be required to estimate the selling prices of thoseelements. The overall arrangement fee will be allocated to each element (bothdelivered and undelivered items) based on their relative selling prices,regardless of whether those selling prices are evidenced by VSOE or third-partyevidence or are based on the entity’s estimated selling price. Application ofthe “residual method” of allocating an overall arrangement fee betweendelivered and undelivered elements will no longer be permitted upon adoption ofASU 2009-13. Additionally, the new guidance will require entities to disclosemore information about their multiple-element revenue arrangements. ASUNo. 2009-13 is effective prospectively for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. We adopted ASU No. 2009-13 onJuly 1, 2010. The adoption of ASU No. 2009-13 did not have a materialeffect on our financial position, results of operations or cash flows.

 

In September 2009, the FASB issued ASUNo. 2009-14 (previously EITF 09-3, *CertainRevenue Arrangements that Include Software Elements*). ASUNo. 2009-14 amends the scope of software revenue recognition to excludetangible products that contain both software and non-software components thatfunction together to deliver a product’s essential functionality. ASUNo. 2009-14 is effective prospectively for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. We adopted ASU No. 2009-14 onJuly 1, 2010. The adoption of ASU No. 2009-14 did not have a materialeffect on our financial position, results of operations or cash flows.

 

**Item 3.    Quantitative and Qualitative Disclosures About Market Risk.**

 

In the ordinary course of conductingbusiness, we are exposed to certain risks associated with potential changes inmarket conditions. These market risks include changes in currency exchangerates and interest rates. In order to manage the volatility of our moresignificant market risks, we may enter into derivative financial instrumentssuch as forward currency exchange contracts.

 

**Foreign Currency Exposure**

 

Foreign currency risk arises primarilyfrom the net difference between (a) non-U.S. dollar (non-USD) receiptsfrom customers outside the U.S. and (b) non-USD operating costs forsubsidiaries in foreign countries. We evaluate 

 

35

----

Table of Contents

 

theneed for hedges based on only the net exposure to foreign currencies. Wemeasure our net exposure to each currency for which we have either cash inflowsor outflows.  During the first quarter offiscal 2011, our largest exposures to foreign exchange rates existed primarilywith the Euro, Pound Sterling, Canadian Dollar, and Japanese Yen against theU.S. dollar. Based on the anticipated net exposures to these currencies, webelieve that our foreign currency risk is not large enough to warrant hedging,and as such there were no foreign currency exchange contracts outstanding atSeptember 30, 2010.

 

During the first quarter of fiscal 2011,we recorded $2.6 million of net foreign currency exchange gains related to thesettlement and remeasurement of transactions denominated in currencies otherthan the functional currency of our operating units.  During the first quarter of fiscal 2010, thecomparative foreign currency activity for similar non-functional currencydenominated transactions resulted in a gain of $2.3 million.  Our analysis of operating results transactedin various foreign currencies indicated that a hypothetical 10% change in theforeign currency exchange rates could have increased or decreased the consolidatedresults of operations for the first quarter of fiscal 2011 by approximately$0.7 million.

 

**Investment Portfolio**

 

We do not use derivative financialinstruments in our investment portfolio. We place our investments ininstruments that meet high credit quality standards, as specified in ourinvestment policy guidelines. We do not expect any material loss with respectto our investment portfolio from changes in market interest rates or creditlosses, as our investments consist primarily of money market accounts. AtSeptember 30, 2010, all of the instruments in our investment portfolio wereincluded in cash and cash equivalents.

 

**Item4.  Controls and Procedures**

 

***a)******            ******Disclosure controls and Procedures***

 

Our management, with the participation ofour chief executive officer and chief financial officer, evaluated theeffectiveness of our disclosure controls and procedures as ofSeptember 30, 2010. The term “disclosure controls and procedures,” asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct, means controls and other procedures of a company that are designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Securities Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Securities Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of September 30,2010, and due to the material weaknesses in our internal control over financialreporting described in our accompanying *Management’sReport on Internal Control over Financial Reporting*, our chiefexecutive officer and chief financial officer concluded that, as of such date,our disclosure controls and procedures were not effective.

 

***b) Changes in Internal Control OverFinancial Reporting***

 

During the quarter ended September 30,2010, no changes other than those in conjunction with certain remediationefforts described below, were identified to our internal control over financialreporting that materially affected, or were reasonably likely to materiallyaffect, our internal control over financial reporting.

 

***c) RemediationEfforts***

 

In the first quarter of fiscal 2011, wecontinued to implement the following measures that we initiated in fiscal 2010to improve our internal controls over the financial reporting process. We planto further enhance these measures in the remaining quarters in fiscal 2011.

 

·                  Redesigned our tax accounting function, process and relatedcontrols to ensure that our accounting for income taxes and related disclosurescan be completed accurately and in a timely manner; and

 

36

----

Table of Contents

 

·                  Reviewed our professional services business processes, redesignedand documented critical procedures and controls, in order to:

 

·                  Enhance presale review to help ensure that reliable revenueaccounting determinations are provided in a timely manner;

·                  Enhance management monitoring of project status to ensure that alldata that has revenue recognition impact are available and reviewed for thepurpose of recording professional services revenue completely, accurately andin a timely manner;

·                  Ensure that multiple-element arrangements where services arebundled with a license or other services arrangements are properly accountedfor; and

·                  Automate project accounting to have appropriately designed systemconfiguration controls to ensure that data and reports generated from thesystem can be relied upon for the purpose of accurately and timely recordingrevenue in accordance with GAAP.

 

***d) Remediation Plans***

 

We have made no significant changes in ourremediation plans during the quarter ended September 30, 2010 that couldmaterially affect, or are reasonably likely to materially affect, our internalcontrol over financial reporting. For further information with regard to our “RemediationPlans,” please refer to Item 9A of our Annual Report on Form 10-K forthe fiscal year ended June 30, 2010.

 

**PART II - OTHERINFORMATION**

 

**Item 1.    Legal Proceedings.**

 

**ATME Arbitration andLitigation**

 

Prior to October 6, 2009, we had anexclusive reseller relationship covering certain countries in the Middle Eastwith AspenTech Middle East W.L.L., a Kuwaiti corporation (now known as AdvancedTechnology Middle East W.L.L.) that we refer to below as ATME. Under thereseller agreement, we had the right to terminate for, among other things, amaterial breach in the event of ATME’s willful misconduct or fraud. EffectiveOctober 6, 2009, we terminated the reseller relationship for materialbreach by ATME based on certain actions of ATME.

 

On November 2, 2009, ATME commencedan action in the Queen’s Bench Division (Commercial Court) of the High Court ofJustice (England & Wales) captioned In The Matter Of An IntendedArbitration Between AspenTech Middle East W.L.L. and AspenTechnology, Inc., 2009 Folio 1436, seeking preliminary injunctive reliefrestraining us from taking any steps to impede ATME from serving as ourexclusive reseller in the countries covered by the reseller agreement withATME. We filed evidence in opposition to that request for relief onNovember 12, 2009. At a hearing on November 13, 2009, the courtdismissed ATME’s application for preliminary injunctive relief. The courtsealed an Order to this effect on November 23, 2009, and further orderedthat ATME pay our costs of claim.

 

Relatedly, on November 11, 2009, wefiled a request for arbitration against ATME in the International Court ofArbitration of the International Chamber of Commerce, captioned AspenTechnology, Inc. v. AspenTech Middle East W.L.L., Case No. 16732/VRO.Our request for arbitration asserted claims against ATME seeking a declarationthat ATME committed a material breach of our agreement and that our terminationof our agreement was lawful, and seeking damages for ATME’s willful misconductin connection with the reseller relationship. On November 18, 2009, ATMEfiled its answer to that request for arbitration and asserted counterclaimsagainst us seeking a declaratory judgment that we unlawfully terminated ouragreement with ATME and seeking damages for breach of contract by reason of ourpurported unlawful termination of our agreement. Our reply to thosecounterclaims was filed on December 18, 2009.

 

We expect a determination to be made inthe second half of fiscal 2011 with respect to the pending arbitration.However, we can provide no assurance as to the actual timing or outcome of thearbitration. In general, neither party will have the ability to appeal thedetermination reached. Regardless of the outcome, the proceedings may result insignificant legal expenses and may require significant attention and resourcesof management, all of which could result in losses and damages that have amaterial adverse effect on our business. The reseller agreement with ATMEcontained a provision whereby we could be liable for a termination fee if theagreement were terminated other than for material breach. This fee is to becalculated based on a formula contained in the reseller agreement that webelieve was originally developed based on certain assumptions about the futurefinancial performance of ATME, as 

 

37

----

Table of Contents

 

wellas ATME’s actual financial performance. Based on the formula and the financialinformation provided to us by ATME, which we have not yet verifiedindependently, a recent calculation based on the formula would result in atermination fee of between $60 million and $77 million. Under theterminated reseller agreement, no termination fee is owed on termination formaterial breach. If we are found to have breached the terms of our agreementwith ATME, we could be liable for the termination fee, the amount of which maybe greater or less than the number indicated above. If we are found liable, wewould incur damages that could have a material adverse effect on our cash flowand cash position. We intend to pursue our claims against ATME, and to defendthe counterclaim by ATME, vigorously.

 

On March 11, 2010, a Kuwaiti entity(known as ATME Group and affiliated with ATME) filed a lawsuit in a Kuwaiticourt naming as defendants ATME, us and a reseller newly appointed by us inKuwait. In this lawsuit, ATME Group claims that it was an exclusive resellerfor ATME in Kuwait and that it therefore is entitled to damages resulting frompurported customer contracts in Kuwait. We intend to defend this actionvigorously.

 

**Class Action and Opt-outClaims**

 

In March 2006, we settled class actionlitigation, including related derivative claims, arising out of our originallyfiled consolidated financial statements for fiscal 2000 through 2004, theaccounting for which we restated in March 2005. Certain members of the class(representing 1,457,969 shares of common stock (or less than 1% of the sharesputatively purchased during the class action period)) opted out of thesettlement and had the right to bring their own state or federal law claimsagainst us, referred to as “opt-out” claims. Opt-out claims were filed onbehalf of the holders of approximately 1.1 million of such shares. Two ofthese actions were settled and three were dismissed.

 

The settled actions include HerbertG. and Eunice E. Blecker, et al. v. Aspen Technology, Inc., et al., filedin June 2006 in the Business Litigation Session of the Massachusetts SuperiorCourt for Suffolk County and docketed as Civ. A. No. 06-2357-BLS1. Thisaction was an opt-out claim asserted by persons who received 248,411 shares ofour common stock in an acquisition. Fact discovery in this action closed inJuly 2008, and a non-jury trial was conducted in November 2009. In January2010, the court issued its order granting judgment in our favor and dismissingthe case. In February 2010, the plaintiffs filed a notice of appeal of thejudgment.   We entered into a settlementagreement with the plaintiffs/appellants on October 28, 2010, providing for adismissal of all claims with prejudice.

 

The remaining action is 380544Canada, Inc., et al. v. Aspen Technology, Inc., filed onFebruary 15, 2007 in the federal district court for the Southern Districtof New York and docketed as Civ. A. No. 1:07-cv-01204-JFK in that court. Theclaims in this action include claims against us and one or more of our formerofficers alleging securities and common law fraud, breach of contract,deceptive practices and/or rescissory damages liability, based on the restatedresults of one or more fiscal periods included in our restated consolidatedfinancial statements referenced in the class action.  This action was brought by persons whopurchased 566,665 shares of our common stock in a private placement. Certainmotions to dismiss filed by other defendants were resolved on May 5, 2009,and discovery is in process. The claims in the 380544 Canada action arefor damages totaling at least $4.0 million, not including claims forattorneys’ fees. We plan to defend the 380544 Canada action vigorously.

 

We can provide no assurance as to theoutcome of this case or the likelihood of the filing of additional opt-outclaims, and these claims may result in judgments against us for significantdamages. Regardless of the outcome, such litigation has resulted in the past,and may continue to result in the future, in significant legal expenses and mayrequire significant attention and resources of management, all of which couldresult in losses and damages that have a material adverse effect on ourbusiness.

 

**Other Proceedings**

 

In the ordinary course of business, we arealso from time to time involved in lawsuits, claims, investigations,proceedings, and threats of litigation consisting of intellectual property,commercial and other matters. The results of litigation and claims cannot bepredicted with certainty, and unfavorable resolutions are possible and couldmaterially affect our results of operations, cash flows or financial position.In addition, regardless of the outcome, litigation could have an adverse impacton us because of defense costs, diversion of management resources and otherfactors.

 

38

----

Table ofContents

 

While the outcome of these proceedings andclaims identified above cannot be predicted with certainty, there are no othermatters, as of September 30, 2010, that, in the opinion of management,might have a material adverse effect on our financial position, results of operationsor cash flows.

 

**Item 1A.    Risk Factors.**

 

*Investing in our commonstock involves a high degree of risk. You should carefully consider the risksand uncertainties described below before purchasing our common stock. The risksand uncertainties described below are not the only ones facing our company.Additional risks and uncertainties may also impair our business operations. Ifany of the following risks actually occurs, our business, financial condition,results of operations or cash flows would likely suffer. In that case, thetrading price of our common stock could fall, and you may lose all or part ofyour investment in our common stock.*

 

**Risks Related to OurBusiness**

 

***Wedepend on our aspenONE software for a substantial portion of our revenue, andour business will suffer if demand for, or usage of, our software declines forany reason or if existing customers do not renew under our aspenONEsubscription offering.***

 

Our aspenONE suites account for asignificant majority of our license revenue and will continue to do so for theforeseeable future. If demand for, or usage of, our software declines for anyreason or if existing customers do not renew under our aspenONE subscriptionoffering, our revenue would decline and our operating results would suffer. Asa result, our revenue could be adversely affected by:

 

·                  any decline in demand for or usage of our aspenONE suites;

 

·                  the failure of our aspenONE suites to achieve continued marketacceptance;

 

·                  the introduction of products and technologies that serve as areplacement or substitute for, or represent an improvement over, our aspenONEsuites;

 

·                  technological innovations that our aspenONE suites do not address;and

 

·                  our inability to release enhanced versions of our aspenONE suiteson a timely basis.

 

In July 2009 we introduced our aspenONEsubscription offering under which we recognize license revenue over the term ofa license contract. Our future success depends substantially on our customers’acceptance of our aspenONE subscription offering. We are not able to predictthe rate at which customers will renew under our aspenONE subscription offeringand therefore cannot predict the timing or amount of our future revenue orprofitability. If customers fail to renew under our aspenONE subscriptionoffering, we may lose customers, which would negatively impact our financialperformance. We intend to expend significant resources to continue to improveour aspenONE solutions and to train our customers in using our solutions, butthe successful development of our aspenONE subscription offering cannot bepredicted and we cannot guarantee we will succeed in these goals. Furthermore,customers may elect to continue to purchase our applications on a point productbasis, which could limit our ability to grow our business successfully.

 

***Ourrevenue and net income for fiscal 2010 and the first quarter of fiscal 2011were, and for the foreseeable future will be, adversely affected by thetransition to our aspenONE subscription offering.***

 

Our aspenONE subscription offering, whichwe introduced in July 2009, provides customers with access to all of theapplications within the aspenONE suite or suites they license and includessoftware maintenance and support, or SMS, for the term of the license contract.Prior to July 2009 we primarily recognized license revenue “upfront,” upon shipmentof software, on a net present value basis in the period in which a licensecontract was signed, not over the license term.

 

As a result of the transition to ouraspenONE subscription offering and the inclusion of SMS for the entire term ofour point product arrangements, our revenue for 2010 and the first quarter offiscal 2011 was significantly less than the level achieved in the precedingyears and we expect our license revenue will remain below that level forseveral more years. Our aspenONE subscription offering makes it difficult forus to increase our license revenue rapidly through additional bookings in aperiod, as license revenue from new customers will be recognized over theapplicable license term. Similarly, the full effect of a decline in bookings inany period would not be fully recognized in our revenue for that period, butwould negatively affect revenue in subsequent 

 

39

----

Table of Contents

 

quarters.Moreover, the marked decrease in revenue levels following our introduction ofour aspenONE subscription offering will not result in, or be accompanied by, acorresponding reduction in operating expenses. As a result, the change to ouraspenONE subscription offering will result in our reporting not onlysignificantly lower revenue but also large operating losses for at least thenear term and potentially several years. A number of the measures of financialperformance calculated in accordance with U.S. generally accepted accountingprinciples, or GAAP, and typically considered by investors for technologycompanies like ours will be of limited value in assessing our performance,growth and financial condition for the foreseeable future. Our announcement ofGAAP-based operating results, as well as our lack of visibility into futureoperating results, may have a significant adverse effect on the price of ourcommon stock.

 

***Inpreparing our consolidated financial statements, our management identified twomaterial weaknesses in our internal control over financial reporting, and ourfailure to remedy these or other material weaknesses identified as of September30, 2010 could result in material misstatements in our financial statements andthe loss of investor confidence in our reported financial information.***

 

Our management is responsible forestablishing and maintaining adequate internal control over our financialreporting, as defined in Rule 13a-15(f) under the Securities Exchange Act.Our management identified two material weaknesses in our internal control overfinancial reporting as of September 30, 2010. A material weakness is defined asa deficiency, or combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of our annual or interim financial statements will not beprevented or detected on a timely basis.

 

The material weaknesses identified bymanagement as of September 30, 2010 consisted of inadequate andineffective controls over income tax accounting and disclosure and controlsover the recognition of professional services revenue. As a result of thesematerial weaknesses, our management concluded as of September 30, 2010 thatour internal control over financial reporting was not effective based oncriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control—An IntegratedFramework* (September 1992).

 

We have been implementing and continue toimplement remedial measures designed to address these material weaknesses. Wecannot be certain that the measures we have taken are effective or will ensurethat restatements will not occur in the future. If these remedial measures areinsufficient to address these material weaknesses, or if additional materialweaknesses or significant deficiencies in our internal control are discoveredor occur in the future, our consolidated financial statements may containmaterial misstatements and we could be required to restate our financialresults.

 

Any failure to address the identifiedmaterial weaknesses or any additional material weaknesses in our internalcontrol could also adversely affect the results of the periodic managementevaluations regarding the effectiveness of our internal control over financialreporting that are required to be included in our annual reports onForm 10-K. Internal control deficiencies could also cause investors tolose confidence in our reported financial information. We can give no assurancethat the measures we have taken and plan to take in the future will remediatethe material weaknesses identified or that any additional material weaknessesor additional restatements of financial results will not arise in the future dueto a failure to implement and maintain adequate internal control over financialreporting or circumvention of these controls. In addition, even if we aresuccessful in strengthening our controls and procedures, in the future thosecontrols and procedures may not be adequate to prevent or identifyirregularities or errors or to facilitate the fair presentation of ourconsolidated financial statements.

 

***Arbitrationand litigation involving a former reseller in the Middle East may subject us tosubstantial damages and expenses.***

 

Prior to October 6, 2009, we had anexclusive reseller relationship covering certain countries in the Middle Eastwith AspenTech Middle East W.L.L., a Kuwaiti corporation (now known as AdvancedTechnology Middle East W.L.L.) that we refer to below as ATME. Under thereseller agreement, we had the right to terminate for, among other things, amaterial breach in the event of ATME’s willful misconduct or fraud. EffectiveOctober 6, 2009, we terminated the reseller relationship for material breachby ATME, based on certain actions of ATME.

 

On November 2, 2009, ATME commencedan action in the Queen’s Bench Division (Commercial Court) of the High Court ofJustice (England & Wales) captioned In The Matter Of An IntendedArbitration Between AspenTech Middle East W.L.L. and AspenTechnology, Inc., 2009 Folio 1436, seeking preliminary injunctive reliefrestraining 

 

40

----

Table of Contents

 

usfrom taking any steps to impede ATME from serving as our exclusive reseller inthe countries covered by the reseller agreement with ATME. We filed evidence inopposition to that request for relief on November 12, 2009. At a hearingon November 13, 2009, the court dismissed ATME’s application forpreliminary injunctive relief. The court sealed an Order to this effect onNovember 23, 2009, and further ordered that ATME pay our costs of claim.

 

Relatedly, on November 11, 2009, wefiled a request for arbitration against ATME in the International Court ofArbitration of the International Chamber of Commerce, captioned AspenTechnology, Inc. v. AspenTech Middle East W.L.L., Case No. 16732/VRO.Our request for arbitration asserted claims against ATME seeking a declarationthat ATME committed a material breach of our agreement and that our terminationof our agreement was lawful, and seeking damages for ATME’s willful misconductin connection with the reseller relationship. On November 18, 2009, ATMEfiled its answer to that request for arbitration and asserted counterclaimsagainst us seeking a declaratory judgment that we unlawfully terminated ouragreement with ATME and seeking damages for breach of contract by reason of ourpurported unlawful termination of our agreement. Our reply to thosecounterclaims was filed on December 18, 2009.

 

We expect a determination to be made inthe second half of fiscal 2011 with respect to the pending arbitration.However, we can provide no assurance as to the actual timing or outcome of thearbitration. In general, neither party will have the ability to appeal thedetermination reached. Regardless of the outcome, the proceedings may result insignificant legal expenses and may require significant attention and resourcesof management, all of which could result in losses and damages that have amaterial adverse effect on our business. The reseller agreement with ATMEcontained a provision whereby we could be liable for a termination fee if theagreement were terminated other than for material breach. This fee is to becalculated based on a formula contained in the reseller agreement that webelieve was originally developed based on certain assumptions about the futurefinancial performance of ATME, as well as ATME’s actual financial performance.Based on the formula and the financial information provided to us by ATME,which we have not yet verified independently, a recent calculation based on theformula would result in a termination fee of between $60 million and $77 million.Under the terminated reseller agreement, no termination fee is owed ontermination for material breach. If we are found to have breached the terms ofour agreement with ATME, we could be found liable for the termination fee, theamount of which may be greater or less than the number indicated above. If weare found liable, we would incur damages that could have a material adverseeffect on our cash flow and cash position.

 

On March 11, 2010, a Kuwaiti entity(known as ATME Group and affiliated with ATME) filed a lawsuit in a Kuwaiticourt naming as defendants ATME, us and a reseller newly appointed by us inKuwait. In this lawsuit, ATME Group claims that it was an exclusive resellerfor ATME in Kuwait and that it therefore is entitled to damages resulting frompurported customer contracts in Kuwait.

 

***Ouroperating results may suffer if customers in the energy, chemicals, engineeringand construction, or pharmaceuticals industries experience an economic downturnor other adverse events.***

 

We derive a majority of our revenue fromcompanies in the energy, chemicals, engineering and construction, andpharmaceutical industries. Accordingly, our future success depends upon thecontinued demand for process optimization software and related services bycompanies in these process industries. These industries are highly cyclical andhighly reactive to the price of oil, as well as general economic conditions.Adverse changes in these industries could and have caused delays and reductionsin information technology spending by our customers, which could lead toreductions, delays, postponements or cancellations of customer purchases of ourproducts and services, particularly the aspenONE Manufacturing and Supply Chainsuite, and in turn could negatively impact our operating results.

 

Because of the nature of their productsand manufacturing processes, companies in these process industries are subjectto heightened risk of adverse or even catastrophic environmental, safety andhealth accidents or incidents, such as the April 20, 2010 oil spill in the U.S.Gulf of Mexico. Further, our customers are often subject to ever-changingstandards and regulations, and the global nature of their operations cansubject them to numerous regulatory regimes. Legislation or regulations regardingthese areas may require us to make rapid changes in our products and services,and our inability to effect those changes could adversely impact our revenue,operating margins and other operating results. Any of the foregoing types ofevents that affects our customers may adversely impact their operations andinformation technology spending, which could have an adverse effect on ouroperating results.

 

41

----

Table of Contents

 

In addition, in the past, worldwideeconomic downturns and pricing pressures experienced by energy, chemical,pharmaceutical and other process industries have led to consolidations andreorganizations. These downturns, pricing pressures and reorganizations havecaused delays and reductions in capital and operating expenditures by many ofthese companies. These delays and reductions have reduced demand for productsand services like ours.

 

In addition, as the global economydeteriorated in 2009 and into 2010, some of our customers elected to changefrom paying for term licenses upfront to paying in installments over thecontract term, which deferred our receipt of cash from those customers. Arecurrence of these industry patterns, including any recurrence that may occurin connection with current global economic events, as well as general domesticand foreign economic conditions and other factors that reduce spending bycompanies in these industries, could harm our operating results in the future.There is no assurance that customers may not seek bankruptcy or other similarrelief from creditors, fail to pay amounts due to us, or pay those amounts moreslowly, any of which could adversely affect our results of operations.

 

***Unfavorableeconomic and market conditions or a lessening demand in the market for processoptimization software could adversely affect our operating results.***

 

Our business is influenced by a range offactors that are beyond our control and difficult or impossible to predict. Ifthe market for process optimization software grows more slowly than weanticipate, demand for our products and services could decline and ouroperating results could be impaired. Further, the state of the economy, whichdeteriorated in the recent broad recession, may deteriorate further in thefuture. Our operating results may be adversely affected by unfavorable globaleconomic and market conditions as well as a lessening demand for processoptimization software generally. Customer demand for our products isintrinsically linked to the strength of the economy. If weakness in theeconomies of the United States and other countries persists, many customers maydelay or reduce technology purchases. This could result in reductions in salesof our products, longer sales cycles, slower adoption of new technologies,increased price competition or reduced use of our products by our customers. Wewill lose revenue if demand for our products is reduced because potentialcustomers experience weak or deteriorating economic conditions, catastrophicenvironmental or other events and our business, results of operations,financial condition and cash flow from operations would likely be adverselyaffected.

 

***Themajority of our revenue and an increasing percentage of our operations areattributable to operations outside the United States, and our operating resultstherefore may be materially affected by the economic, political, regulatory andother risks of foreign operations.***

 

As of September 30, 2010, we had 28offices in 24 countries. We sell our products primarily through a direct salesforce located throughout the world. In the event that we are unable toadequately staff and maintain our foreign operations, we could facedifficulties managing our international operations.

 

Customers outside the United Statesaccounted for a significant amount of our total revenue in fiscal 2010 and2009. We anticipate that revenue from customers outside the United States willcontinue to account for a significant portion of our total revenue for theforeseeable future. Our operations outside the United States are subject toadditional risks, including:

 

·                  unexpected changes in regulatory requirements, exchange rates,tariffs and other barriers;

 

·                  political and economic instability and possible nationalization ofproperty by governments without compensation to the owners;

 

·                  less effective protection of intellectual property;

 

·                  requirements of foreign laws and other governmental controls;

 

·                  difficulties and delays in translating products and productdocumentation into foreign languages;

 

·                  difficulties and delays in negotiating software licenses compliantwith accounting revenue recognition requirements in the United States;

 

·                  difficulties in collecting trade accounts receivable in othercountries;

 

·                  adverse tax consequences; and

 

·                  the challenges of handling legal disputes in foreignjurisdictions.

 

42

----

Table of Contents

 

***Competitionfrom software offered by current competitors and new market entrants, as wellas from internally developed solutions by our customers, could adversely affectour ability to sell our software products and related services and could resultin pressure to price our products in a manner that reduces our margins.***

 

Our markets in general are highlycompetitive and differ among our principal product areas: engineering,manufacturing, and supply chain management. Our engineering software competeswith products of businesses such as ABB Ltd., Chemstations, Inc.,Honeywell International, Inc., Invensys plc, KBC AdvancedTechnologies plc, and Shell Global Solutions International BV. Ourmanufacturing software competes with products of companies such asABB Ltd., Honeywell International, Inc., Invensys plc,OSIsoft, Inc., Rockwell Automation, Inc., Siemens AG and YokogawaElectric Corporation. Our supply chain management software competes with productsof companies such as JDA Software Group, Inc., Oracle Corporation and SAPAG. In addition, we face challenges in selling our solutions to large companiesin the process industries that have internally developed their own proprietarysoftware solutions.

 

Many of our current and potentialcompetitors have greater financial, technical, marketing, service and otherresources than we have. As a result, these companies may be able to offer lowerprices, additional products or services, or other incentives that we cannotmatch or offer. These competitors may be in a stronger position to respond morequickly to new technologies and may be able to undertake more extensivemarketing campaigns. We believe they also have adopted and may continue topursue more aggressive pricing policies and make more attractive offers topotential customers, employees and strategic partners. For example, somecompetitors may be able to initiate relationships through sales andinstallations of hardware and then seek to expand their customer relationshipsby offering process optimization software at a discount. In addition, many ofour competitors have established, and may in the future continue to establish,cooperative relationships with third parties to improve their product offeringsand to increase the availability of their products in the marketplace.Competitors with greater financial resources may make strategic acquisitions toincrease their ability to gain market share or improve the quality ormarketability of their products.

 

Competition could seriously impede ourability to sell additional software products and related services on termsfavorable to us. Businesses may continue to enhance their internally developedsolutions, rather than investing in commercial software such as ours. Ourcurrent and potential commercial competitors may develop and market newtechnologies that render our existing or future products obsolete, unmarketableor less competitive. In addition, if these competitors develop products withsimilar or superior functionality to our products, we may need to decrease theprices for our products in order to remain competitive. If we are unable tomaintain our current pricing due to competitive pressures, our margins will bereduced and our operating results will be negatively affected. We cannot assureyou that we will be able to compete successfully against current or futurecompetitors or that competitive pressures will not materially adversely affectour business, financial condition and operating results.

 

***If wefail to develop new software products, enhance existing products and services,or penetrate new vertical markets, we will be unable to implement our growthstrategy successfully and our business could be seriously harmed.***

 

The maintenance and extension of ourmarket leadership and our future growth is largely dependent upon our abilityto develop new software products that achieve market acceptance with acceptableoperating margins. Enterprises are requiring their application software vendorsto provide greater levels of functionality and broader product offerings. Wemust continue to enhance our current product line and develop and introduce newproducts and services that keep pace with increasingly sophisticated customerrequirements and the technological developments of our competitors. Ourbusiness and operating results could suffer if we cannot successfully respondto the technological advances of competitors, or if our new products or productenhancements and services do not achieve market acceptance.

 

Under our business plan, we areimplementing a product strategy that unifies our software solutions under theaspenONE brand with differentiated aspenONE vertical solutions targeted atspecific process industry segments. We cannot assure you that our productstrategy will result in products that will meet market needs and achievesignificant market acceptance. If we fail to introduce new products that meetthe demands of our customers or our target markets, or if we fail to penetratenew vertical markets in the process industries, our revenue will likely grow ata slower rate than we anticipate and our financial condition could suffer.

 

43

----

Table of Contents

 

***Defectsor errors in our software products could harm our reputation, impair ourability to sell our products and result in significant costs to us.***

 

Our software products are complex and maycontain undetected defects or errors. We have not suffered significant harmfrom any defects or errors to date, but we have from time to time found defectsin our products and we may discover additional defects in the future. We maynot be able to detect and correct defects or errors before releasing products.Consequently, we or our customers may discover defects or errors after ourproducts have been implemented. We have in the past issued, and may in thefuture need to issue, corrective releases of our products to remedy defects orerrors. The occurrence of any defects or errors could result in:

 

·                  lost or delayed market acceptance and sales of our products;

 

·                  delays in payment to us by customers;

 

·                  product returns;

 

·                  injury to our reputation;

 

·                  diversion of our resources;

 

·                  legal claims, including product liability claims, against us;

 

·                  increased service and warranty expenses or financial concessions;and

 

·                  increased insurance costs.

 

Defectsand errors in our software products could result in claims for substantialdamages against us.

 

***We aresubject to a number of lawsuits and disputes arising out of the conduct of ourbusiness.***

 

We are subject to a number of lawsuits anddisputes arising out of the conduct of our business. Resolution of thesematters can be prolonged and costly, and the ultimate results or judgments areuncertain due to the inherent uncertainty in litigation and other proceedings.Moreover, our potential liabilities are subject to change over time due to newdevelopments, changes in settlement strategy or the impact of evidentiaryrequirements, and we may be required to pay damage awards or settlements thatcould have a material adverse effect on our results of operations, cash flows andfinancial condition.

 

In March 2006, we settled class actionlitigation, including related derivative claims, arising out of our originallyfiled consolidated financial statements for fiscal 2000 through 2004, theaccounting for which we restated in March 2005. Certain members of the class(representing 1,457,969 shares of common stock, or less than 1% of the sharesputatively purchased during the class action period) opted out of thesettlement and had the right to bring their own state or federal law claimsagainst us, referred to as “opt-out” claims. Opt-out claims were filed onbehalf of the holders of approximately 1.1 million of such shares. Two ofthese actions were settled and three were dismissed.

 

The settled actions include HerbertG. and Eunice E. Blecker, et al. v. Aspen Technology, Inc., et al., filedin June 2006 in the Business Litigation Session of the Massachusetts SuperiorCourt for Suffolk County and docketed as Civ. A. No. 06-2357-BLS1. Thisaction was an opt-out claim asserted by persons who received 248,411 shares ofour common stock in an acquisition. Fact discovery in this action closed inJuly 2008, and a non-jury trial was conducted in November 2009. In January2010, the court issued its order granting judgment in our favor and dismissingthe case. We entered into a settlement agreement with the plaintiffs/appellantson October 28, 2010, providing for a dismissal of all claims with prejudice.

 

The remaining action is 380544Canada, Inc., et al. v. Aspen Technology, Inc., filed onFebruary 15, 2007 in the federal district court for the SouthernDistrict of New York and docketed as Civ. A. No. 1:07-cv-01204-JFK in thatcourt.The claims in this action include claims against us and one or more ofour former officers alleging securities and common law fraud, breach ofcontract, deceptive practices and/or rescissory damages liability, based on therestated results of one or more fiscal periods included in our restatedconsolidated financial statements referenced in the class action.  This action was brought by persons whopurchased 566,665 shares of our common stock in a private placement. Certainmotions to dismiss filed by other defendants were resolved on May 5, 2009,and discovery is in process. The claims in the 380544 Canada action arefor damages totaling at least $4.0 million, not including claims forattorneys’ fees. We plan to defend the 380544 Canada action vigorously.

 

44

----

 

 

Table of Contents

 

We can provide no assurance as to theoutcome of this case or the likelihood of the filing of additional opt-outclaims, and these claims may result in judgments against us for significantdamages. Regardless of the outcome, such litigation has resulted in the past,and may continue to result in the future, in significant legal expenses and mayrequire significant attention and resources of management, all of which couldresult in losses and damages that have a material adverse effect on ourbusiness.

 

***We maybe subject to significant expenses and damages because of pending liabilityclaims and other claims related to our products and services.***

 

The sale and implementation of certain ofour software products and services, particularly in the areas of advancedprocess control and supply chain management, entail the risk of productliability claims and associated damages. Our software products and services areoften integrated with our customers’ networks and software applications and areused in the design, operation and management of manufacturing and supply chainprocesses at large facilities, often for mission critical applications.

 

Any errors, defects, performance problemsor other failures of our software could result in significant liability to usfor damages or for violations of environmental, safety and other laws andregulations. Our software products and implementation services could give riseto warranty and other claims. We are unable to determine whether resolution ofany of these matters will have a material adverse impact on our financialposition, cash flows or results of operations, or, in many cases, reasonablyestimate the amount of the loss, if any, that may result from the resolution ofthese matters.

 

Our agreements with customers generallycontain provisions designed to limit our exposure to potential productliability claims. It is possible, however, that the limitation of liabilityprovisions in our agreements may not be effective as a result of federal,foreign, state or local laws or ordinances or unfavorable judicial decisions. Asubstantial product liability judgment against us could materially andadversely harm our operating results and financial condition. Even if oursoftware is not at fault, a product liability claim brought against us could betime-consuming, costly to defend and harmful to our operations.

 

***Implementationof some of our products can be difficult and time-consuming, and customers maybe unable to implement those products successfully or otherwise achieve all ofthe potential benefits of the products.***

 

Some of our scheduling, productionmanagement and execution, and supply chain products must integrate with theexisting computer systems and software programs of our customers. This processcan be complex, time-consuming and expensive. As a result, some customers mayhave difficulty in implementing those products or be unable to implement themsuccessfully or otherwise achieve the products’ potential benefits. Delayed orineffective implementation of those software products or related services maylimit our revenue or may result in customer dissatisfaction, harm to ourreputation and customer unwillingness to pay the fees associated with theseproducts.

 

***We maysuffer losses on fixed-price professional service engagements.***

 

We undertake a portion of our professionalservice engagements on a fixed-price basis. Under these types of engagements,we bear the risk of cost overruns and inflation. In the past we haveexperienced cost overruns, which on occasion have been significant. Should thenumber of our fixed-price engagements increase in the future, we may experienceadditional cost overruns that could have a pronounced impact on our operatingresults.

 

***Fluctuationsin foreign currency exchange rates could result in declines in our reportedrevenue and operating results.***

 

In the first quarter of fiscal 2011, 24%of our total revenue was denominated in a currency other than the U.S. dollar.In addition, certain of our operating expenses incurred outside the UnitedStates are denominated in currencies other than the U.S. dollar. Our reportedrevenue and operating results are subject to fluctuations in foreign exchangerates. Foreign currency risk arises primarily from the net difference betweennon-U.S. dollar receipts from customers outside the United States and non-U.S.dollar operating expenses for subsidiaries in foreign countries. Currently, ourlargest exposures to foreign exchange rates exist primarily with the Euro,Pound Sterling, Canadian dollar and Japanese Yen against the U.S. dollar. Overrecent months, the value of foreign currencies against the U.S. dollar hasfluctuated dramatically. Since late fiscal 2008, we have not entered intoderivative financial instruments, such as forward currency exchange contracts,intended to manage the volatility of these market risks. We cannot predict theimpact of foreign currency fluctuations, and foreign currency fluctuations inthe 

 

45

----

Table of Contents

 

futuremay adversely affect our revenue and operating results. Any hedging policies wemay implement in the future may not be successful, and the cost of thosehedging techniques may have a significant negative impact on our operatingresults.

 

***If wefail to comply or are deemed to have failed to comply, with our ongoing FederalTrade Commission, or FTC, consent decree, our business may suffer.***

 

In December 2004, we entered into aconsent decree with the FTC with respect to a civil administrative complaintfiled by the FTC in August 2003 alleging that our acquisition of Hyprotechin May 2002 was anticompetitive in violation of Section 5 of theFederal Trade Commission Act and Section 7 of the Clayton Act. In July 2009,we announced that the FTC closed an investigation relating to the allegedviolations of the decree, and issued an order modifying the consent decree,which became final in August 2009. We are subject to ongoing complianceobligations under the FTC consent decree. There is no assurance that theactions required by the FTC’s modified order and related settlement withHoneywell will not require significant attention and resources of management,which could have a material adverse effect on our business. Further, if we failto comply, or are deemed to have failed to comply, with such consent decree,our business may suffer.

 

***We maynot be able to protect our intellectual property rights, which could make usless competitive and cause us to lose market share.***

 

We regard our software as proprietary. Ourstrategy is to rely on a combination of copyright, patent, trademark and tradesecret laws in the United States and other jurisdictions, and to rely onlicense and confidentiality agreements and software security measures tofurther protect our proprietary technology and brand. We have obtained orapplied for patent protection with respect to some of our intellectualproperty, but generally do not rely on patents as a principal means ofprotecting our intellectual property. We have registered or applied to registersome of our trademarks in the United States and in selected other countries. Wegenerally enter into non-disclosure agreements with our employees andcustomers, and historically have restricted third-party access to our softwaresource code and licenses, which we regard as proprietary information. Incertain cases, we have provided copies of source code to customers for thepurpose of special product customization or have deposited copies of the sourcecode in third-party escrow accounts as security for ongoing service and licenseobligations. In these cases, we rely on non-disclosure and other contractualprovisions to protect our proprietary rights.

 

The steps we have taken to protect ourproprietary rights may not be adequate to deter misappropriation of ourtechnology or independent development by others of technologies that aresubstantially equivalent or superior to our technology. Our intellectualproperty rights may expire or be challenged, invalidated or infringed upon bythird parties or we may be unable to maintain, renew or enter into new licenseson commercially reasonable terms. Any misappropriation of our technology ordevelopment of competitive technologies could harm our business and coulddiminish or cause us to lose the competitive advantages associated with ourproprietary technology, and could subject us to substantial costs in protectingand enforcing our intellectual property rights and/or temporarily orpermanently disrupt our sales and marketing of the affected products orservices. The laws of some countries in which our products are licensed do notprotect our intellectual property rights to the same extent as the laws of theUnited States. Moreover, in some non-U.S. countries, laws affectingintellectual property rights are uncertain in their application, which canaffect the scope of enforceability of our intellectual property rights.

 

***Third-partyclaims that we infringe the intellectual property rights of others may becostly to defend or settle and could damage our business.***

 

We cannot be certain that our software andservices do not infringe issued patents, copyrights, trademarks or otherintellectual property rights of third parties. Litigation regardingintellectual property rights is common in the software industry, and we may besubject to legal proceedings and claims from time to time, including claims ofalleged infringement of intellectual property rights of third parties by us orour licensees concerning their use of our software products and integrationtechnologies and services. Third parties may bring claims of infringementagainst us. Because our software is integrated with our customers’ networks andbusiness processes, as well as other software applications, third parties maybring claims of infringement against us, as well as our customers and othersoftware suppliers, if the cause of the alleged infringement cannot easily bedetermined.

 

Claims of alleged infringement may have amaterial adverse effect on our business and may discourage potential customersfrom doing business with us on acceptable terms, if at all. Defending againstclaims of

 

46

----

Table of Contents

 

infringementmay be time-consuming and may result in substantial costs and diversion ofresources, including our management’s attention to our business. Furthermore, aparty making an infringement claim could secure a judgment that requires us topay substantial damages. A judgment could also include an injunction or othercourt order that could prevent us from selling our software or require that were-engineer some or all of our products. Claims of intellectual propertyinfringement also might require us to enter costly royalty or licenseagreements. We may be unable to obtain royalty or license agreements on termsacceptable to us or at all. Our business, operating results and financialcondition could be harmed significantly if any of these events occurred, andthe price of our common stock could be adversely affected. Furthermore, formeremployers of our current and future employees may assert that our employeeshave improperly disclosed confidential or proprietary information to us. Inaddition, we have agreed, and may agree in the future, to indemnify certain ofour customers against claims that our software infringes upon the intellectualproperty rights of others. Although we carry general liability insurance, ourcurrent insurance coverage may not apply to, and likely would not protect usfrom, liability that may be imposed under any of the types of claims describedabove.

 

***If we arenot successful in attracting, integrating and retaining highly qualifiedpersonnel, we may not be able to successfully implement our business strategy.***

 

Our ability to establish and maintain aposition of technology leadership in the highly competitive software marketdepends in large part upon our ability to attract, integrate and retain highlyqualified managerial, sales, technical and accounting personnel. Competitionfor qualified personnel in the software industry is intense. We have from timeto time in the past experienced, and we expect to continue to experience in thefuture, difficulty in hiring and retaining highly skilled employees withappropriate qualifications. Our future success will depend in large part on ourability to attract, integrate and retain a sufficient number of highlyqualified personnel, and there can be no assurance that we will be able to doso.

 

***Ourability to raise capital in the future may be limited, and our failure to raisecapital when needed could prevent us from executing our business plan.***

 

We expect that our current cash and cashequivalents and cash flows from operations will be sufficient to meet ouranticipated cash needs for at least the next twelve months. We may need toobtain additional financing thereafter or earlier, however, if our currentplans and projections prove to be inaccurate or our expected cash flows proveto be insufficient to fund our operations because of lower-than-expectedrevenue, unanticipated expenses or other unforeseen difficulties.

 

Our ability to obtain additional financingwill depend on a number of factors, including market conditions, our operatingperformance, the quality of our receivables, and the availability of capital inthe credit markets. These factors may make the timing, amount, terms andconditions of any financing unattractive. If adequate funds are not available,or are not available on acceptable terms, we may have to forego strategicacquisitions or investments, reduce or defer our development activities ordelay our introduction of new products and services.

 

Any additional capital raised through thesale of equity or convertible debt securities may dilute the existingstockholder percentage ownership of our common stock. Furthermore, any newsecurities we issue may have rights, preferences and privileges superior to ourcommon stock. Capital raised through debt financings may require us to makeperiodic interest and principal payments and may impose potentially restrictivecovenants on the conduct of our business.

 

**Risks Related to OurCommon Stock**

 

***Ourcommon stock may experience substantial price and volume fluctuations.***

 

The equity markets have from time to timeexperienced extreme price and volume fluctuations, particularly in the hightechnology sector, and those fluctuations often have been unrelated to theoperating performance of particular companies. In addition, factors such ouraspenONE subscription offering, our financial performance, announcements oftechnological innovations or new products by us or our competitors, and marketconditions in the computer software or hardware industries, may have asignificant impact on the market price of our common stock.

 

In the past, following periods ofvolatility in the market price of a public company’s securities, securitiesclass action litigation has often been instituted against that company. Thistype of litigation against us could result in substantial liability and costsand divert management’s attention and resources.

 

47

----

Table of Contents

 

***Ourcorporate documents and provisions of Delaware law may prevent a change incontrol or management that stockholders may consider desirable.***

 

Section 203 of the Delaware GeneralCorporation Law, our charter and our by-laws contain provisions that mightenable our management to resist a takeover of our company. These provisionsinclude:

 

·                  limitations on the removal of directors;

 

·                  a classified board of directors, so that not all members of theboard are elected at one time;

 

·                  advance notice requirements for stockholder proposals andnominations;

 

·                  the inability of stockholders to act by written consent or to callspecial meetings;

 

·                  the ability of the board to make, alter or repeal our by-laws; and

 

·                  the ability of the board to designate the terms of and issue newseries of preferred stock without stockholder approval.

 

These provisions could:

 

·                  have the effect of delaying, deferring or preventing a change incontrol of our company or a change in our management that stockholders mayconsider favorable or beneficial;

 

·                  discourage proxy contests and make it more difficult forstockholders to elect directors and take other corporate actions; and

 

·                  limit the price that investors might be willing to pay in thefuture for shares of our common stock.

 

48

----

Table ofContents

 

**Item 6.  Exhibits.**

 
| ** **        | ** ** | ** **                                                                                                                                                                                                                            | ** ** | **Filed **          | ** ** | **Incorporated by Reference** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------------|
| **Exhibit ** | ** ** | ** **                                                                                                                                                                                                                            | ** ** | **with this ** | ** ** | ** **                              | ** ** | ** ** | ** ** | **Exhibit ** |
| **Number**        | ** ** | **Description**                                                                                                                                                                                                                       | ** ** | **Form 10-Q**       | ** ** | **Form**                                | ** ** | **Filing Date with SEC** | ** ** | **Number** |
|              |       |                                                                                                                                                                                                                                  |       |                     |       |                                    |   |   |   |   |
| 31.1              |       | Certification of  Principal Executive Officer pursuant to Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                      |       | X                        |       |                                    |   |   |   |   |
|              |       |                                                                                                                                                                                                                                  |       |                     |       |                                    |   |   |   |   |
| 31.2              |       | Certification of  Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                      |       | X                        |       |                                    |   |   |   |   |
|              |       |                                                                                                                                                                                                                                  |       |                     |       |                                    |   |   |   |   |
| 32.1              |       | Certification of  President and Chief Executive Officer and Executive Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | X                        |       |                                    |   |   |   |   |

 

49

----

Table of Contents

** **

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **                  | **ASPEN TECHNOLOGY, INC.** |
|-----------------------------|---------------------------------|
|                        |                            |   |
| Date: November 1, 2010 | By:                             | **/s/ MARK E. FUSCO** |
|                        |                            | **Mark E. Fusco***President and  Chief Executive Officer**(Principal  Executive Officer)* |
|                        |                            | ** ** |
|                        |                            |   |
| Date: November 1, 2010 | By:                             | **/s/ MARK P. SULLIVAN** |
|                        |                            | **Mark P. Sullivan***Executive Vice  President and Chief Financial Officer**(Principal  Financial and Accounting Officer)* |

 

50

----

Table ofContents

 

**EXHIBIT INDEX**

 
| ** **  | ** ** | ** **                                                                                                                                                                                                                            | ** ** | **Filed**          | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** **  |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                            | ** ** | **with this** | ** ** | **Incorporated by Reference** |
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                            | ** ** | **Form 10-**  | ** ** | ** **                              | ** ** | ** **                              | ** ** | **Exhibit** |
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                       | ** ** | **Q**              | ** ** | **Form**                                | ** ** | **Filing Date with SEC** | ** ** | **Number**  |
| ** **  | ** ** | ** **                                                                                                                                                                                                                            | ** ** | ** **         | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** **  |
| 31.1        |       | Certification of  Principal Executive Officer pursuant to Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                      |       | X                  |       |                                    |       |                                    |       |        |
|        |       |                                                                                                                                                                                                                                  |       |               |       |                                    |       |                                    |       |        |
| 31.2        |       | Certification of  Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                      |       | X                  |       |                                    |       |                                    |       |        |
|        |       |                                                                                                                                                                                                                                  |       |               |       |                                    |       |                                    |       |        |
| 32.1        |       | Certification of  President and Chief Executive Officer and Executive Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | X                  |       |                                    |       |                                    |       |        |

 

51

----