<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1 to
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended: September 30, 1997
------------------
Commission File Number: 0-18059
-------
PARAMETRIC TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
128 Technology Drive, Waltham, MA 02154
---------------------------------------
(Address of principal executive offices, including zip code)
(781) 398-5000
---------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Securities registered pursuant to
Section 12(b) of the Act: Section 12(g) of the Act:
None Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (ii) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of October 31, 1997 was $4,478,147,410.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value per share 127,936,236
-------------------------------------- ----------------------
Class Outstanding at October 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1997 ("1997 Annual Report to Stockholders") are incorporated by
reference into Parts I and II.
Portions of the definitive Proxy Statement in connection with the Annual
Meeting of Stockholders to be held February 12, 1998 ("1998 Proxy Statement")
are incorporated by reference into Part III.
<PAGE>
The revised Exhibit 13.1, which is included herewith, is identical to the one
filed with the original Form 10-K except for the typographical error which
eliminated the following line found in the fiscal 1997 summary of investments
held as available-for-sale table in Note C. of this exhibit:
<TABLE>
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Auction rate
preferred stock 36,874 1 (2) 36,873
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAMETRIC TECHNOLOGY CORPORATION
Date: January 2, 1998 by: /s/ Edwin J. Gillis
---------------------------------
Edwin J. Gillis
Executive Vice President,
Chief Financial Officer and Treasurer
<PAGE>
EXHIBIT 13.1
PARAMETRIC TECH
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
- ------------------------------------
of Financial Condition and Results of Operations
Parametric Technology Corporation is the leading supplier of software tools used
to automate the mechanical development of a product from its conceptual design
through production.
Any forward-looking statements, including projections about growth and the
Company's business, are based on certain assumptions made by management.
Important information about the basis for those assumptions and factors that may
cause actual results to differ materially from those projected is contained in
"Proposed Acquisition" and "Important Factors Regarding Future Results."
Proposed Acquisition
On November 4, 1997, the Company announced that it had entered into an agreement
to acquire Computervision Corporation ("Computervision") in a stock-for-stock
transaction. Under the terms of the proposed transaction, each share of
Computervision common stock will be exchanged for .0866 shares of the Company's
common stock and Computervision will become a wholly-owned subsidiary of the
Company. The transaction is intended to be accounted for as a pooling of
interests and to qualify as a tax-free reorganization. Subject to several
conditions, including approval of Computervision's shareholders, the
transaction is expected to close in the second quarter of fiscal 1998. The
discussion and analysis below, except where otherwise noted, do not reflect the
effects of the transaction. As a pooling of interests, upon completion of the
transaction, the historic results of Computervision will be combined with those
of the Company. In addition, the Company expects to recognize a non-recurring
charge of approximately $75,000,000 to $95,000,000 related to certain merger-
related, debt prepayment, consolidation and integration expenses during the
quarter in which the transaction closes. Also, the Company will assume
approximately $240,000,000 in debt from Computervision, and expects to use cash
and short-term investment balances to repay a substantial portion of such debt.
Results of Operations
For the fiscal year ended September 30, 1997, the Company's revenue and net
income increased 35% and 38%, respectively, over the previous fiscal year,
excluding a non-recurring acquisition related charge in fiscal 1996. For the
fiscal year ended September 30, 1996, revenue and net income excluding non-
recurring acquisition related charges increased 52% and 61%, respectively, over
fiscal year 1995. For the fiscal year ended September 30, 1997, net income as a
percentage of revenue was 27% as compared to 26% and 25%, excluding the non-
recurring acquisition related charges, in fiscal 1996 and 1995, respectively.
Operating income as a percentage of revenue was 40% in fiscal 1997 compared to
39% and 38%, excluding the non-recurring acquisition related charges, in fiscal
1996 and 1995, respectively. Net income for fiscal year 1996 excludes a non-
recurring acquisition related charge of $32,119,000 related to the acquisition
of Reflex technology ("Reflex"). Net income for fiscal year 1995 excludes the
non-recurring acquisition related charges of $10,438,000 related to the merger
of Rasna Corporation ("Rasna") into the Company and $19,000,000 related to the
acquisition of the Conceptual Design and Rendering System ("CDRS") software
business. Including the non-recurring acquisition related charges, the Company's
net income as a percentage of revenue was 27%, 23% and 20% in fiscal 1997, 1996
and 1995, respectively.
The following table sets forth certain consolidated financial data as a
percentage of revenue for the fiscal years ended September 30, 1997, 1996 and
1995.
PARAMETRIC TECHNOLOGY CORPORATION 21
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<TABLE>
<CAPTION>
Year ended September 30,
- ------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
License 73.2% 74.8% 73.1%
Service 26.8 25.2 26.9
- ------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
- ------------------------------------------------------------------------
Cost of revenue:
License 1.0 0.8 0.8
Service 8.4 8.6 8.4
- ------------------------------------------------------------------------
Total cost of revenue 9.4 9.4 9.2
- ------------------------------------------------------------------------
Gross profit 90.6 90.6 90.8
Operating expenses:
Sales and marketing 38.8 39.8 41.6
Research and development 6.6 6.6 6.5
General and administrative 4.8 4.8 5.2
Non-recurring acquisition
and related costs - 5.3 7.4
- ------------------------------------------------------------------------
Total operating expenses 50.2 56.5 60.7
- ------------------------------------------------------------------------
Operating income 40.4 34.1 30.1
Other income, net 1.3 1.9 2.3
- ------------------------------------------------------------------------
Income before income taxes 41.7 36.0 32.4
Provision for income taxes 14.6 13.0 12.8
- ------------------------------------------------------------------------
Net income 27.1% 23.0% 19.6%
========================================================================
Excluding acquisition and related costs:
Operating income 40.4% 39.5% 37.6%
Net income 27.1% 26.4% 25.0%
========================================================================
</TABLE>
Revenue
The Company derives its revenue from the sale and support of software used in
the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing
and engineering) industry. In fiscal 1997, the Company licensed 93% of its
products directly to end-user customers and 7% via third-party distributors as
compared with 91% directly to end-user customers and 9% via third party
distributors in both fiscal 1996 and 1995. The overall revenue growth in fiscal
1997 and 1996 reflects the continued worldwide acceptance of the Company's
products and services and the Company's ongoing investment in expanding its
worldwide direct sales force.
License and service revenue for fiscal years 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
License $591,849 32% $448,699 56% $288,349
Percentage 73% 75% 73%
of total
revenue
Service $216,947 43% $151,423 43% $105,961
Percentage 27% 25% 27%
of total
revenue
Total revenue $808,796 35% $600,122 52% $394,310
</TABLE>
The increase in license revenue results from an increase in the number of
seats of software licensed and from a higher price realized per seat. A seat of
software generally consists of various software products configured to serve the
needs of a single end-user. The Company licensed approximately 29,950 seats of
software in fiscal 1997, an increase of 30% from fiscal 1996's 23,000 seats,
which was 45% higher than fiscal 1995's 15,900 seats. The increase in the number
of seats licensed was achieved as a result of continued market penetration of
the Company's products, with strong growth in fiscal 1997 in North America. The
decrease in license revenue growth from 56% to 32% is due in part to the lower
rate of growth of international license revenue. The average price per seat
during fiscal 1997 was approximately $19,800, compared with an average price of
approximately $19,500 in 1996 and $18,100 in 1995. The average price per seat
has increased as a result of customers purchasing configurations of software
seats containing more modules.
Service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. This revenue increased
during both fiscal 1997 and 1996 as a result of the growth in the Company's
installed customer base and, to a lesser extent, increased training and
consulting services performed for these customers.
22
<PAGE>
Sales by geographic region for fiscal years 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $370,676 40% $264,880 34% $197,839
Percentage 46% 44% 50%
of total
revenue
Europe $272,125 31% $207,811 55% $133,873
Percentage 34% 35% 34%
of total
revenue
Asia/Pacific $165,995 30% $127,431 104% $ 62,598
Percentage 20% 21% 16%
of total
revenue
</TABLE>
The Company derived 54%, 56% and 50% of its revenues from sales to
international customers in fiscal 1997, 1996 and 1995, respectively. Direct
export sales were $127,715,000, $84,537,000 and $45,147,000 in fiscal 1997, 1996
and 1995, respectively. The decrease in the percentage of revenue derived from
international sales from fiscal 1996 to fiscal 1997 is attributable primarily to
the strengthening of the dollar in relation to the yen and the major European
currencies and to weaker revenues in Japan due to internal execution issues. The
Company has taken measures to strengthen its sales and support infrastructure in
Japan and to rebuild capacity in order to re-accelerate revenue growth in this
region, but does not expect Japan's year-over-year revenue growth to contribute
to overall revenue growth until at least the second quarter of fiscal 1998.
The Company expects that total revenue will increase in fiscal 1998 from
continued penetration in the mechanical CAD/CAM/CAE industry. However, the rate
of continued revenue growth in fiscal 1998 depends upon the Company's ability to
implement recent measures taken to strengthen results in Japan, adequately
manage exposure to foreign currency fluctuations, continue to penetrate the
mechanical segment of the CAD/CAM/CAE industry, attract and retain skilled
personnel, and deliver timely product enhancements. In addition, there can be no
assurance that quarterly revenue growth rates or growth rates for particular
geographic areas will be comparable to those in fiscal 1997. Fiscal 1998
performance could also be affected by the efforts to integrate Computervision's
operations with those of the Company and the success of those integration
efforts.
Cost of Revenue
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of license $ 8,233 77% $ 4,642 39% $ 3,348
Percentage 1% 1% 1%
of license
revenue
Cost of service $68,259 32% $51,812 57% $32,970
Percentage 31% 34% 31%
of service
revenue
</TABLE>
Cost of license revenue consists of the amortization of capitalized
computer software costs, costs associated with reproducing and distributing
software and documentation, and royalties. The absolute increase in cost of
license revenue is a result of the increase in the number of seats licensed and
the variable costs associated with software media, documentation and royalties
during each of the last three fiscal years. Cost of service revenue includes
costs associated with training and consulting personnel, such as salaries and
related costs and travel, and costs related to software maintenance, including
costs incurred for customer support personnel and the release of maintenance
updates. Absolute increases in cost of service revenue resulted primarily from
growth in the staffing necessary to generate and support increased worldwide
service revenue and provide ongoing quality customer support to its increasing
installed base. As a percentage of revenue, total cost of revenue has remained
constant at 9% over the past three fiscal years.
Operating Expenses
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and
marketing $313,785 31% $238,860 46% $163,918
Percentage 39% 40% 42%
of total
revenue
Research and
development $ 53,236 35% $ 39,476 54% $ 25,591
Percentage 7% 7% 6%
of total
revenue
General and
administrative $ 38,699 36% $ 28,557 40% $ 20,414
Percentage 5% 5% 5%
of total
revenue
Non-recurring
acquisition and
related costs - $ 32,119 $ 29,438
</TABLE>
PARAMETRIC TECHNOLOGY CORPORATION 23
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
of Financial Condition and Results of Operations
Sales and Marketing
Sales and marketing expenses primarily include salaries, sales commissions,
travel and facility costs. These expenses also include programs aimed at
increasing revenues, such as advertising, trade shows, and various sales and
promotional seminar programs. While sales and marketing expenses as a percentage
of revenue have declined slightly over the three most recent fiscal years, the
absolute increases in these expenses were due principally to worldwide expansion
of the sales force and sales commissions associated with higher revenue. Total
sales and marketing headcount increased to 2,093 in fiscal 1997 from 1,645 in
fiscal 1996 and 1,098 in fiscal 1995. International sales and marketing expenses
represented 60% of total sales and marketing expenses in fiscal 1997, compared
with 58% in 1996 and 52% in 1995. The Company expects to continue the growth of
its worldwide sales and marketing organization during fiscal 1998, reflecting
the Company's commitment to focus its resources on expanding worldwide
acceptance for its products. The Company's ability to meet this expectation
depends primarily upon its ability to attract and retain highly skilled
technical, managerial and sales personnel.
Research and Development
The Company continued to make investments in research and development,
consisting principally of salaries and benefits, expenses associated with
product translations, costs of computer equipment used in software development
and facility expenses. The Company believes that research and development
expenditures are essential to maintaining its competitive position in the
CAD/CAM/CAE industry and expects the expenditure levels to increase in absolute
dollars in fiscal 1998. Research and development expenses as a percentage of
revenues remained consistent at 6.6% in fiscal 1997 as compared with 6.6% and
6.5% in fiscal 1996 and 1995, respectively.
General and Administrative
General and administrative expenses include the costs of the corporate, finance,
information technology, human resources and administrative functions of the
Company. The absolute increases in these expenses were principally due to the
hiring of additional employees necessary to support the Company's worldwide
growth, and in the information technology area as the Company upgraded its
internal management information systems. As a percentage of revenue, general and
administrative expenses were 4.8% in fiscal 1997 as compared with 4.8% and 5.2%
in fiscal 1996 and 1995, respectively.
Non-recurring Acquisition and Related Costs
The Company recorded a non-recurring acquisition related charge of $32,119,000
related to the write-off of purchased research and development in process in
conjunction with the Reflex acquisition in the fourth quarter of fiscal 1996. In
the fourth quarter of fiscal 1995, the Company recorded a non-recurring
acquisition related charge of $10,438,000 in conjunction with the Rasna merger
consisting primarily of transaction fees and costs associated with integrating
the businesses. In conjunction with the CDRS acquisition in the third quarter of
fiscal 1995, the Company recorded a non-recurring charge of $19,000,000 related
to the write-off of purchased research and development in process.
Other Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other income,
net $10,625 (8)% $11,501 27% $9,029
</TABLE>
Other income, net, primarily includes interest income, foreign currency
gains and losses, and the costs associated with managing the Company's foreign
exchange exposure. Interest income increased to $17,096,000 in fiscal 1997 from
$13,914,000 in fiscal 1996 and $10,159,000 in fiscal 1995 due primarily to
higher average cash and investment balances partially offset by lower average
annual returns. As the international portion of its business continues to
expand, a growing percentage of the Company's revenue and expenses is transacted
in foreign currencies. In order to reduce its exposure to fluctuations in
foreign exchange rates, the Company from time to time engages in hedging
transactions involving the use of forward foreign exchange contracts and foreign
exchange option contracts in the primary European and Asian currencies.
24
<PAGE>
Income Taxes and Net Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for
income taxes $118,024 51% $ 78,247 56% $50,298
Effective 35% 36% 39%
income
tax rate
Net income $219,185 59% $137,910 78% $77,362
</TABLE>
The difference between the effective and statutory federal tax rate was due
primarily to the benefits of tax exempt interest income and the income from
foreign sales corporation, offset by the impact of state income taxes and, in
fiscal 1995, the non-deductible acquisition costs associated with the Rasna
merger. The effective tax rate decreased to 35% in fiscal 1997 from 36% in
fiscal 1996 primarily due to tax credits.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(dollars in thousands) 1997 Change 1996 Change 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash
equivalents
and
investments $ 554,324 22% $ 456,112 48% $ 308,248
Working
capital $ 503,983 21% $ 416,058 31% $ 317,702
Net cash
provided
by operating
activities $ 266,335 16% $ 229,724 93% $ 119,017
Net cash used
by investing
activities $(188,285) (30)% $(144,511) (2)% $(141,270)
Net cash
provided
(used) by
financing
activities $(119,379) (360)% $ (25,926) (202)% $ 25,354
</TABLE>
Net cash generated by operating activities and proceeds from issuance of
the Company's stock under stock plans provided sufficient resources to fund the
Company's headcount growth, capital assets needs, stock repurchases and
acquisitions in all periods presented.
The increase in fiscal 1997 and 1996 in cash and cash equivalents provided
by operations was primarily due to higher net income before depreciation and
amortization, and increases in accounts payable and accrued expenses, accrued
compensation, income taxes and deferred revenue, offset by increases in accounts
receivable and other current assets.
Excluding the investment of excess cash, investing activities for the
periods presented used cash primarily to purchase property and equipment and to
acquire technology and businesses. In fiscal 1997, 1996 and 1995, the Company
acquired $28,809,000, $29,650,000 and $12,868,000, respectively, of capital
equipment consisting principally of computer equipment, computer software and
office equipment. In fiscal 1998, the Company expects to spend at least as much
as was spent in fiscal 1997, but the level of spending will be dependent on
various factors, including the growth of the business and general economic
conditions.
Net cash was used by financing activities in fiscal 1997 and 1996 primarily
to repurchase $184,780,000 and $66,563,000, respectively, of the Company's
stock, offset by proceeds of $65,514,000 and $40,763,000 from the issuance of
the Company's common stock under stock plans. In fiscal 1995, net cash was
provided by financing activities primarily from issuance of the Company's common
stock under stock plans.
On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allowed the Company to repurchase up to 6,000,000 shares
of its common stock. During fiscal 1997, the Company repurchased 3,720,000
shares at a cost of $184,780,000, of which 524,000 remained in treasury at
September 30, 1997, to partially offset the dilution caused by the exercise of
stock options under the Company's option plans and the purchase of shares under
the employee stock purchase plan. Since the inception of the plan, the Company
has repurchased 5,813,000 shares. The repurchases have been funded through the
use of available cash, cash generated from operations and cash received from
stock option exercises and stock purchase plan purchases. On September 11, 1997,
the Company announced that its Board of Directors had authorized an increase in
the number of shares of common stock that the Company may repurchase under the
repurchase program from 6,000,000 to 12,000,000 shares. In anticipation of the
Computervision acquisition, the Company has suspended repurchases and the Board
of Directors has rescinded authorization of the repurchase program.
PARAMETRIC TECHNOLOGY CORPORATION 25
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
On July 10, 1996, the Company acquired project modeling and management
software (Reflex) technology for $32,119,000, which included the issuance of
113,000 shares of the Company's common stock with a fair value of $5,000,000 at
the time of the acquisition. Payments of $5,000,000 in fiscal 1997 and
$22,119,000 in fiscal 1996 were from the Company's existing cash balances. The
acquisition has been accounted for as a purchase. The purchase price was
allocated to purchased research and development in process, as no other tangible
or intangible assets were identified. The purchased research and development in
process had not reached technological feasibility, had no alternative future use
and was valued using expected future cash flows, discounted for risks and
uncertainties related to the target markets and the completion of the products.
As a result, at the date of acquisition, the $32,119,000 allocated to purchased
research and development in process was recorded as a non-recurring charge.
The Company believes that existing cash and short-term investment balances
together with cash generated from operations and the issuance of the Company's
common stock under stock plans will be sufficient to meet the Company's working
capital, financing and capital expenditure requirements through at least fiscal
1998. Following completion of the Computervision acquisition, the Company
expects to use its existing cash and short-term investment balances to repay a
substantial portion of Computervision's $240,000,000 of debt and the $75,000,000
to $95,000,000 of merger-related, debt prepayment, consolidation and integration
expenses that will be recorded as a non-recurring charge.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 establishes a different method of computing net income per
share than is currently required under the provisions of Accounting Principles
Board Opinion No. 15. Under SFAS No. 128, the Company will be required to
present both basic net income per share and diluted net income per share. The
Company plans to adopt SFAS No. 128 in its first quarter of fiscal 1998 and at
that time all historical net income per share data presented will be restated as
follows to conform to the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
- ---------------------------------------------------
1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
Basic net income per share $1.72 $1.09 $0.63
Diluted net income per share $1.64 $1.04 $0.60
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending September 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. Management is currently evaluating
the effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 for its fiscal year ending September 30, 1999.
26
<PAGE>
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition." The Company will adopt SOP 97-2 for its fiscal year ending
September 30, 1999 and does not expect any material impact on its revenue
recognition policies.
Financial Risk Management
In January 1997, the U.S. Securities and Exchange Commission issued Financial
Reporting Release No. 48 which expands disclosure requirements for certain
derivative and other financial instruments. The Company adopted the sensitivity
analysis approach effective in the fourth quarter of fiscal 1997. The
sensitivity approach presents the hypothetical change in fair value resulting
from hypothetical changes in market rates.
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
been related to local currency revenue in Japan and Europe and local currency
operating expenses in Europe, Japan and Asia/Pacific. Historically, the Company
has hedged currency exposures associated with certain accounts receivable
denominated in local currencies and certain anticipated foreign currency revenue
transactions. The hedging activity undertaken by the Company is intended to
offset the impact of currency fluctuations on certain local currency accounts
receivable and certain anticipated foreign currency revenue transactions. The
success of this activity depends upon forecasts of transaction activity
denominated in various currencies. To the extent that these forecasts are
overstated or understated during periods of currency volatility, the Company
could experience unanticipated currency gains or losses.
Outstanding forward foreign exchange contracts at September 30, 1997 mature
within one month, and therefore movement in the exchange rates is not expected
to have a material impact on the Company's financial results.
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short maturities of these instruments. The fair values
represent estimates of possible value that may not be realized in the future.
The Company maintains investment portfolio holdings of various issuers,
types and maturities. These securities are generally classified as available for
sale, and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity. Given the short maturities and investment grade quality of the portfolio
holdings at September 30, 1997, a sharp rise in interest rates should not have a
material adverse impact on the fair value of the Company's investment portfolio.
As a result, the Company does not currently hedge these interest rate exposures.
The following table presents hypothetical changes in fair values in the
financial instruments held by the Company at September 30, 1997 that are
sensitive to changes in interest rates. These instruments are not leveraged and
are held for purposes other than trading. The modeling technique used measures
the change in fair values arising from selected potential changes in interest
rates. Market changes reflect immediate hypothetical shifts in the yield curve
of plus or minus 50 basis points ("BP"), and 100 BP. Fair values represent the
market principal plus accrued interest, dividends and certain interest rate-
sensitive securities considered cash, cash equivalents and investments for
financial reporting purposes at September 30, 1997.
PARAMETRIC TECHNOLOGY CORPORATION 27
<PAGE>
PARAMETRIC TECH
MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of
Operations
<TABLE>
<CAPTION>
Valuation of securities No change Valuation of securities
given an interest rate in interest given an interest rate
Type of security decrease of X basis points rates increase of X basis points
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) (100 BP) (50 BP) 50 BP 100 BP
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Municipal debt securities $360,908 $359,168 $357,440 $355,687 $353,947
Mutual funds 9,911 9,860 9,812 9,763 9,714
Auction rate preferred stock 37,239 37,056 36,873 36,689 36,505
Corporate debt securities 11,195 11,141 11,086 11,032 10,977
====================================================================================================================================
Total $419,253 $417,225 $415,211 $413,171 $411,143
====================================================================================================================================
</TABLE>
A 50-BP move in the Federal Funds Rate has occurred in 8 of the last 40
quarters; a 100-BP move in the Federal Funds Rate has not occurred in any of the
last 40 quarters.
Important Factors Regarding Future Results
Information provided by the Company, including information contained in this
Annual Report, or by its spokespersons from time to time may contain forward-
looking statements concerning projected financial performance, market and
industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, will be based on the assumptions
and expectations of the Company's management at the time such statements are
made. The Company cautions investors that its performance (and, therefore, any
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including, but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.
Fluctuations in Operating Results
While the Company's sales cycle varies substantially from customer to customer,
a high percentage of the Company's revenues are expected to be realized in the
third month of each fiscal quarter and tend to be concentrated in the latter
half of that month. The Company's orders early in a quarter will not generally
be large enough to assure that it will meet its revenue targets for any
particular quarter. In addition, the Company's operating expenses are based on
expected future revenue and are relatively fixed for the short term.
Accordingly, the Company's quarterly results may be difficult to predict until
the end of the quarter and a shortfall in shipments or contract orders at the
end of any particular quarter may cause the results for that quarter to fall
short of anticipated levels. In turn, this could adversely impact the market
price of the Company's stock.
Stock Market Volatility
Market prices for securities of software companies have generally been volatile.
In particular, the market price of the Company's common stock has been and may
continue to be subject to significant fluctuations as a result of factors
affecting the computer industry or the securities markets in general. These
factors include, but are not limited to, quarterly variations, announcements of
technological innovations by the Company or competitors, changes in prices by
the Company or competitors, changes in product mix and changes in revenue or
revenue growth rates for geographic areas or products.
In addition, a large percentage of the Company's common stock traditionally
has been held by institutional investors. Consequently, actions with respect to
the Company's common stock by certain of these institutional investors could
have a significant impact on the market price for the stock. For more
information, please see the Company's proxy statement with respect to its most
recent annual meeting of stockholders and Schedules 13D and 13G filed with the
U.S. Securities and Exchange Commission with respect to the Company's common
stock.
Market Growth
Any Company projections of revenue growth are based on the assumptions that the
Company will be able to continue to penetrate the relevant markets, execute
management initiatives, and that the mechanical CAD/CAM/CAE industry will
continue to grow at a predicted annual rate. Failure of these assumptions to
materialize could adversely impact the Company's operating results.
28
<PAGE>
Rapid Technological and Market Changes
The mechanical CAD/CAM/CAE industry is highly competitive, and is characterized
by rapid technological advances. Accordingly, the Company's ability to realize
its expectations will depend on its success at enhancing its current offerings,
licensing technology from third parties, developing new products and services
that keep pace with developments in technology and meeting evolving customer
requirements, and delivering those products through appropriate distribution
channels. This will require, among other things, correctly anticipating customer
needs, hiring and retaining personnel with the necessary skills and creativity,
providing adequate funding for the development efforts and managing distribution
channels effectively. In addition, the Company's software has historically been
available on a variety of platforms. However, the Company is aware of efforts by
competitors to focus on single platform applications. There can be no assurance
that multiple platform applications will provide the Company with any
competitive advantage.
The Company has continued to enhance its existing products through updated
product releases. The Company has recently announced that those product releases
will be less frequent in order to permit customers to more effectively absorb
upgrades. The Company's competitive position and operating results could be
adversely affected by failure to anticipate or respond adequately to customer
requirements or to technological developments, particularly those of our
competitors; or by significant delays in the development, production, testing,
marketing or availability of new or enhanced products or services; or by the
failure of customers to accept such products or services.
Possibility of New Product Delays
As is common in the computer software industry, the Company may from time to
time experience delays in its product development and "debugging" efforts.
Significant delays in developing, completing or shipping new or enhanced
products could adversely affect the Company's financial performance. Among other
things, such delays could cause the Company to incorrectly predict the fiscal
quarter in which revenue from the shipment of the new or enhanced product will
be realized and give the Company's competitors a greater opportunity to market
competing products.
Management of Growth Through Acquisitions
The Company's product range and customer base have increased in the recent past
due in part to acquisitions. The Company may acquire additional businesses or
product lines in the future. In particular, the Company has announced that it
has entered into an agreement to acquire Computervision, subject to several
factors including approval of Computervision's shareholders. The probability of
success of any acquisition may be dependent upon the Company's ability to
integrate the acquired business or products successfully and to retain key
personnel and customers associated with the acquisition. Failure to do so, or a
material increase in the cost of integration, could cause actual results to
differ from those projected in management's forward-looking statements.
Competition
The Company believes that the principal bases for competition in its markets are
product functionality, price/performance characteristics, product portability,
ease of product use, sales and marketing strength, support services and
corporate reputation. In particular, the Company believes that the current
success of its Pro/ENGINEER product line is due in part to the mechanical and
functional superiority of such products over competitive offerings. The Company
is aware of a number of efforts to develop technically equivalent competitive
products and to market these products at lower prices. Should a competitor
successfully bring such a product to market and be able to sell it at a lower
price in the future, the Company's operating results could be adversely
affected. In addition, the Company is aware of ongoing efforts by competitors,
some of whom have greater resources than the Company, to emulate the performance
and functionality of the Company's products, and competitors may develop
PARAMETRIC TECHNOLOGY CORPORATION 29
<PAGE>
Managements's Discussion and Analysis of Financial Condition and Results of
Operations
equivalent or superior technology. The Company's future success will depend in a
large part on its ability to license additional products and services to its
existing customer base as well as to the installed customer bases of traditional
mechanical CAD/CAM/CAE suppliers.
Dependence on Key Personnel
The Company's success depends upon its ability to attract and retain highly
skilled technical, managerial and sales personnel. While the Company has not to
date experienced any significant difficulty in hiring or retaining qualified
personnel, competition for such personnel in the computer industry in general,
and the mechanical CAD/CAM/CAE industry in particular, is intense. Management's
projections necessarily assume that the Company will continue to attract and
retain such personnel and the failure to do so could have a material adverse
effect on the Company's ability to develop and market competitive products and
its ability to achieve projected operating results.
Risks Associated with International Business
A significant and growing portion of the Company's business comes from outside
the United States. A consequence of increased international business is that a
growing percentage of the Company's revenue and expenses are denominated in
foreign currencies, which subjects the Company's results of operations to
foreign exchange fluctuations. Although the Company may enter into forward
foreign exchange contracts and foreign exchange option contracts to offset a
portion of the foreign exchange fluctuations, unanticipated events may
materially and adversely affect its results. Additional risks associated with
international business include, but are not limited to, unexpected changes in
regulatory practices and tariffs, staffing and managing foreign operations,
longer collection cycles in certain areas, potential changes in tax laws,
greater difficulty in protecting intellectual property rights and general
economic and political conditions.
Protection of Intellectual Property and Other Proprietary Rights
The Company regards its software products as proprietary and attempts to protect
its intellectual property rights by relying on copyrights, trademarks, patents
and common law safeguards, including trade secret protection, as well as
restrictions on disclosures and transferability in its agreements with other
parties. Although the Company intends to protect its intellectual property
rights, there can be no assurance that the laws of all jurisdictions in which
the Company's products are or may be developed, manufactured or sold will afford
the same protections to its products and intellectual property, or will be
enforced or enforceable by the Company, to the same extent as under the laws of
the United States. The software industry is characterized by frequent litigation
regarding copyright, patent and other intellectual property rights. While the
Company has not, to date, had any significant claims of such nature asserted
against it, there can be no assurance that third parties will not assert such
claims against the Company with respect to existing or future products or that,
if asserted, such claims would be resolved in a satisfactory manner. In the
event of litigation to determine the validity of any third party claims, such
litigation could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company.
30
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------
(amounts in thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $154,228 $201,614
Short-term investments 354,516 232,602
Accounts receivable, net of allowance for doubtful
accounts of $2,749 and $2,910 154,777 117,273
Other current assets 27,620 10,561
- ------------------------------------------------------------------------------
Total current assets 691,141 562,050
Marketable investments 45,580 21,896
Property and equipment, net 47,504 36,517
Other assets 48,198 38,754
- ------------------------------------------------------------------------------
Total assets $832,423 $659,217
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 36,417 $ 39,416
Accrued compensation 39,085 32,186
Deferred revenue 81,287 56,420
Income taxes 30,369 17,970
- ------------------------------------------------------------------------------
Total current liabilities 187,158 145,992
Other liabilities 470 793
Commitments and contingencies
- ------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 350,000 shares
authorized;
128,149 and 127,452 shares issued 1,281 1,275
Additional paid-in capital 253,201 207,039
Retained earnings 419,285 306,638
Treasury stock, at cost, 524 and 23 shares (24,169) (1,164)
Other equity (4,803) (1,356)
- ------------------------------------------------------------------------------
Total stockholders' equity 644,795 512,432
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $832,423 $659,217
==============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Parametric Technology Corporation
31
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year ended September 30,
- ------------------------------------------------------------------------------
(amounts in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
License $591,849 $448,699 $288,349
Service 216,947 151,423 105,961
- ------------------------------------------------------------------------------
Total revenue 808,796 600,122 394,310
- ------------------------------------------------------------------------------
Cost of revenue:
License 8,233 4,642 3,348
Service 68,259 51,812 32,970
- ------------------------------------------------------------------------------
Total cost of revenue 76,492 56,454 36,318
- ------------------------------------------------------------------------------
Gross profit 732,304 543,668 357,992
- ------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 313,785 238,860 163,918
Research and development 53,236 39,476 25,591
General and administrative 38,699 28,557 20,414
Non-recurring acquisition and related costs - 32,119 29,438
- ------------------------------------------------------------------------------
Total operating expenses 405,720 339,012 239,361
- ------------------------------------------------------------------------------
Operating income 326,584 204,656 118,631
Interest income 17,096 13,914 10,159
Other expense, net (6,471) (2,413) (1,130)
- ------------------------------------------------------------------------------
Income before income taxes 337,209 216,157 127,660
Provision for income taxes 118,024 78,247 50,298
- ------------------------------------------------------------------------------
Net income $219,185 $137,910 $ 77,362
==============================================================================
Net income per share $1.64 $1.04 $0.60
==============================================================================
Weighted average number of common and dilutive
common equivalent shares outstanding 133,558 133,211 129,046
==============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Unrealized Total
Common stock Additional currency Treasury stock gain/(loss) stock-
---------------- paid-in translation Retained ------------------ on invest- holders'
(amounts in thousands) Shares Amount capital adjustment earnings Shares Cost ments equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 120,649 $ 1,206 $113,373 $1,086 $ 135,513 - $ - $ - $251,178
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
for services 35 - 46 46
Issuance of common stock
under stock plans 4,517 46 26,127 26,173
Income tax benefit related
to incentive stock option
plan 16,040 16,040
Foreign currency
translation adjustment 578 578
Net income 77,362 77,362
Elimination of Rasna's
net activity for the
three months ended
December 31, 1994 (72) (1) (89) 46 (404) (448)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 125,129 1,251 155,497 1,710 212,471 - - - 370,929
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock plans 2,210 23 19,084 19,107
Issuance of common stock
for acquisition 113 1 4,999 5,000
Income tax benefit related
to incentive stock option
plan 27,459 27,459
Purchase of common stock
for treasury (1,779) (66,563) (66,563)
Issuance of treasury stock
under stock plans (43,743) 1,756 65,399 21,656
Foreign currency
translation adjustment (3,026) (3,026)
Unrealized loss on investments (40) (40)
Net income 137,910 137,910
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 127,452 1,275 207,039 (1,316) 306,638 (23) (1,164) (40) 512,432
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock plans 697 6 10,268 10,274
Income tax benefit related
to incentive stock option
plan 35,894 35,894
Purchase of common stock
for treasury (3,720) (184,780) (184,780)
Issuance of treasury stock
under stock plans (106,538) 3,219 161,775 55,237
Foreign currency
translation adjustment (3,534) (3,534)
Unrealized gain on investments 87 87
Net income 219,185 219,185
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 128,149 $1,281 $253,201 $(4,850) $419,285 (524) $(24,169) $ 47 $644,795
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Parametric Technology Corporation
33
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30,
- ---------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 219,185 $ 137,910 $ 77,362
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 22,377 16,800 9,466
Deferred income taxes 2,195 (6,420) (10,599)
Charge for purchased research and
development in process - 32,119 19,000
Changes in assets and liabilities net of
effects from acquisitions:
Increase in accounts receivable (52,139) (39,040) (13,129)
(Increase) decrease in other current
assets (14,646) 88 (2,334)
(Increase) decrease in other assets (4,223) 205 (4,378)
Increase in accounts payable and accrued
expenses 9,358 15,377 5,660
Increase in accrued compensation 8,439 12,687 3,131
Increase in deferred revenue 27,174 19,420 16,436
Increase in income taxes 48,615 40,578 18,402
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 266,335 229,724 119,017
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment, net (28,809) (29,650) (12,868)
Payments for acquisitions (5,000) (22,119) (33,507)
Additions to capitalized computer software
costs (965) (815) (1,132)
Proceeds from maturities of investments 423,988 244,645 171,163
Purchases of investments (577,499) (336,572) (264,926)
- ---------------------------------------------------------------------------------
Net cash used by investing activities (188,285) (144,511) (141,270)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations (113) (126) (175)
Short-term borrowings, net - - (600)
Proceeds from issuance of common stock 65,514 40,763 26,129
Purchases of treasury stock (184,780) (66,563) -
- ---------------------------------------------------------------------------------
Net cash provided (used) by financing
activities (119,379) (25,926) 25,354
- ---------------------------------------------------------------------------------
Elimination of Rasna's net cash activity for
the three months ended December 31, 1994 - - (112)
Effects of exchange rate changes on cash (6,057) (3,311) 447
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (47,386) 55,976 3,436
Cash and cash equivalents at beginning of year 201,614 145,638 142,202
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 154,228 $ 201,614 $ 145,638
=================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
Notes to Consolidated Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the financial statements. Certain
reclassifications have been made for consistent presentation.
On August 1, 1995, the Company completed its merger with Rasna Corporation
("Rasna"), a developer and marketer of software products for mechanical
computer-aided engineering. The merger was accounted for as a pooling of
interests. Accordingly, the accompanying consolidated financial statements have
been retroactively combined to reflect this transaction.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Foreign Currency Translation
Foreign currency financial statements of international subsidiaries, where the
local currency is the functional currency, are translated using exchange rates
in effect at period end for assets and liabilities and at average rates during
the period for results of operations. The resulting foreign currency translation
adjustments are reflected as a separate component of stockholders' equity. For
international subsidiaries where the U.S. dollar is the functional currency,
monetary assets and liabilities are translated using exchange rates in effect at
period end, nonmonetary assets and liabilities are translated at historical
rates and results of operations are translated at average rates for the period.
The resulting foreign currency translation adjustments are included in income.
Any gains or losses from foreign exchange transactions are included in income
and are immaterial for all periods presented.
Revenue Recognition
Revenue is derived from the licensing of computer software products and from
service revenue consisting of training, consulting and maintenance. License
revenue is recognized upon shipment, unless collection is not reasonably
assured. Revenue from software maintenance contracts is recognized ratably over
the contract period and other service revenue is recognized upon performance.
Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short maturities of these instruments.
Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Short-term investments are those
with maturities in excess of three months but less than one year. Marketable
investments are those with maturities in excess of one year but less than two
years. All cash equivalents and short-term and marketable investments have been
classified as available for sale and are reported at fair value with unrealized
gains and losses included in stockholders' equity.
The Company invests its non-operating cash in debt instruments of financial
institutions, government entities, corporations and mutual funds. The Company
has established guidelines relative to credit ratings, diversification and
maturities that maintain safety and liquidity. The Company has not experienced
any losses on its investments.
Concentration of Credit Risk
The Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. The Company's customer base consists of
large numbers of geographically diverse customers dispersed across many
industries. As a result, concentration of credit risk with respect to trade
receivables is not significant.
Parametric Technology Corporation 35
<PAGE>
Notes to Consolidated Financial Statements
Derivatives
The Company enters into forward foreign exchange contracts to hedge specific
foreign currency denominated receivables, which require the Company to exchange
foreign currencies for U.S. dollars at maturity at rates agreed to at inception
of the contracts. Exchange gains or losses arising from such transactions are
included in other expense. All forward foreign exchange contracts are designated
as effective hedges and are highly inversely correlated to the hedged item as
required by generally accepted accounting principles. As of September 30, 1997
and 1996, the Company had approximately $50,170,000 and $11,766,000,
respectively, of foreign exchange contracts outstanding. All contracts mature
within one year. At September 30, 1997 and for all fiscal years presented,
unrealized and realized gains and losses associated with exchange rate
fluctuations on forward foreign exchange contracts are immaterial. Cash flows
from the forward foreign exchange contracts are classified with the related
receivables.
The Company purchases foreign exchange option contracts from time to time
to limit potential losses from adverse exchange rate movements on certain
anticipated revenue transactions. The contracts are primarily in European
currencies and Japanese yen and have maturities of less than one year. All
foreign exchange option contracts are designated as hedges, the purpose of which
is to protect against the potential appreciation of the U.S. dollar for certain
anticipated revenue transactions. Premiums to purchase foreign exchange option
contracts are capitalized to other current assets and amortized to other expense
over the life of the contract. Gains on option contracts, if any, are included
in license and service revenues in the period in which the related local
currency revenue is reported. For 1997 these transactions were immaterial.
There were no outstanding option contracts at September 30, 1997.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-
line method over the estimated useful lives, typically three years. Leasehold
improvements are amortized over the shorter of the useful lives or the remaining
terms of the related leases. Property and equipment under capital leases are
amortized over the lesser of the lease terms or the estimated useful lives.
Maintenance and repairs are charged to expense when incurred; additions and
improvements are capitalized. Upon retirement or sale, the cost of the disposed
asset and the related accumulated depreciation are removed from the accounts and
any resulting gain or loss is credited or charged to income.
Capitalized Computer Software Costs and Intangible Assets
The Company incurs costs to develop computer software to be licensed or
otherwise marketed to customers. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed in the period incurred unless these costs qualify for capitalization.
Capitalized computer software costs are amortized over the economic lives of the
related products, typically three years, beginning at their initial shipment
date. Capitalized computer software costs of $1,687,000 and $3,174,000, included
in other assets, are net of accumulated amortization of $8,002,000 and
$5,672,000 at September 30, 1997 and 1996, respectively. Amortization charged to
expense was $2,329,000, $2,021,000 and $1,334,000 for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
In fiscal 1995, purchased software of $3,400,000 and intangible assets of
$11,083,000 (including goodwill of $7,703,000) were capitalized and were
attributable to the acquisition of the Conceptual Design and Rendering System
("CDRS") software business operated by the Design Software Division of Evans &
Sutherland Computer Corporation. These assets, included in other assets, are
amortized on a straight-line basis, over three and seven years, respectively.
Amortization charges related to intangible assets, the majority of which were
reflected in general and administrative expenses, totaled $1,570,000, $1,580,000
and $725,000 for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
The Company evaluates the net realizable value of capitalized computer
software costs and intangible assets on an ongoing basis relying on a number of
factors including operating results, business plans, budgets and economic
projections.
36
<PAGE>
Income Per Common Share
Income per common share is computed based upon the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Fully
diluted and primary earnings per common share are the same amounts for each of
the years presented. Dilutive common equivalent shares consist of stock options
and are calculated using the treasury stock method.
B. ACQUISITIONS
On July 10, 1996, the Company acquired project modeling and management software
("Reflex") technology from Greenshire License Co. for $32,119,000, which
included the issuance of 113,000 shares of the Company's common stock with a
fair value of $5,000,000 at the time of the acquisition. Payments of $5,000,000
in fiscal 1997 and $22,119,000 in fiscal 1996 were from the Company's existing
cash balances. The acquisition has been accounted for as a purchase. The
purchase price was allocated to purchased research and development in process as
no other tangible or intangible assets were identified. The purchased research
and development in process had not reached technological feasibility, had no
alternative future use and was valued using expected future cash flows,
discounted for risks and uncertainties related to the target markets and the
completion of the products. As a result, at the date of acquisition, the
$32,119,000 allocated to purchased research and development in process was
recorded as a non-recurring charge. The operating results of Reflex have not
been material in relation to those of the Company and are included in the
Company's consolidated results of operations from the date of acquisition.
On August 1, 1995, the Company acquired Rasna by merging it into the
Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995.
Based on the number of shares of Rasna common stock outstanding, the Company
issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its
common stock for outstanding Rasna stock options assumed. The merger was
accounted for as a pooling of interests. In conjunction with the Rasna merger,
the Company recorded a non-recurring charge of $10,438,000, which included
approximately $6,028,000 for transaction fees, $1,722,000 for severance related
expenses, and $2,688,000 related to integration costs and lease and distributor
termination costs.
The following information shows revenue and net income of the separate
companies during the period preceding the combination. Adjustments recorded to
conform the accounting policies of the companies were not material to the
consolidated financial statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine months ended
(in thousands) July 1, 1995
- --------------------------------------------------------------------------------
<S> <C>
Revenue:
Parametric $252,566
Rasna 22,500
- --------------------------------------------------------------------------------
$275,066
================================================================================
Net income:
Parametric $ 54,809
Rasna 2,267
- --------------------------------------------------------------------------------
$57,076
================================================================================
</TABLE>
On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of CDRS for $33,507,000 in cash, which was paid by the
Company from its existing cash balances. The acquisition was accounted for as a
purchase. The purchase price has been allocated to the assets acquired,
including certain intangible assets, such as purchased computer software and
research and development in process, based on their respective fair values. The
excess of the purchase price over the estimated fair value of the net assets
acquired has been recorded as goodwill ($7,703,000), which is being amortized on
a straight-line basis over seven years. In conjunction with the acquisition, the
Company recorded a non-recurring charge of $19,000,000 related to the write-off
of purchased research and development in process. CDRS's results of operations
have been included in the consolidated results of operations since the date of
acquisition.
Parametric Technology Corporation 37
<PAGE>
Notes to Consolidated Financial Statements
C. INVESTMENTS
The following is a summary of investments held as available-for-sale:
<TABLE>
<CAPTION>
September 30, 1997
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
unrealized unrealized fair
(in thousands) Cost gains losses value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal debt
securities $357,372 $233 $ (165) $357,440
Mutual funds 9,812 - - 9,812
Auction rate
preferred stock 36,874 1 (2) 36,873
Corporate debt
securities 11,106 3 (23) 11,086
- -----------------------------------------------------------------------------------------------
Total investments $415,164 $237 $ (190) $415,211
===============================================================================================
Amounts included in
cash and cash
equivalents $ 15,115 $ - $ - $ 15,115
Amounts included
in short-term
investments 354,567 133 (184) 354,516
Amounts included
in marketable
investments 45,482 104 (6) 45,580
- -----------------------------------------------------------------------------------------------
Total investments $415,164 $237 $ (190) $415,211
===============================================================================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
unrealized unrealized fair
(in thousands) Cost gains losses value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal debt
securities $269,728 $240 $ (270) $269,698
Mutual funds 20,422 - - 20,422
Auction rate
preferred stock 40,287 10 (10) 40,287
U.S. Government
debt securities 13,233 10 (20) 13,223
- -----------------------------------------------------------------------------------------------
Total investments $343,670 $260 $ (300) $343,630
===============================================================================================
Amounts included
in cash and cash
equivalents $ 89,132 $ 10 $ (10) $ 89,132
Amounts included
in short-term
investments 232,522 250 (170) 232,602
Amounts included
in marketable
investments 22,016 - (120) 21,896
- -----------------------------------------------------------------------------------------------
Total investments $343,670 $260 $ (300) $343,630
===============================================================================================
</TABLE>
Fair values have been determined through information obtained from market
sources and management estimates. Realized gains and losses on the sale of each
type of security for the years ended September 30, 1997, 1996 and 1995 were
immaterial. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.
D. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Computer hardware and software $ 76,098 $ 55,825
Furniture and fixtures 9,549 6,530
Leasehold improvements 8,503 4,501
- ------------------------------------------------------------------------------
94,150 66,856
==============================================================================
Less: accumulated depreciation
and amortization (46,646) (30,339)
- ------------------------------------------------------------------------------
Total $ 47,504 $ 36,517
==============================================================================
</TABLE>
Depreciation expense totaled $18,993,000, $13,171,000 and $7,663,000 for
the fiscal years ended September 30, 1997, 1996 and 1995, respectively. At
September 30, 1997 and 1996, property and equipment (principally computer
hardware) includes assets under capital leases of $175,000 and $312,000, less
accumulated amortization of $140,000 and $167,000, respectively.
E. INCOME TAXES
Income tax expense includes U.S. and international income taxes. Certain items
of income and expense are not reported in tax returns and financial statements
in the same year. The tax effect of this difference is reported as deferred
income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences, utilizing current tax rates, of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for the estimated future tax effects of deductible temporary differences and tax
operating loss and credit carryforwards. Deferred tax expense represents the
change in the deferred tax asset or liability balances.
38
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended September 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAXES:
Current $ 82,201 $57,880 $30,257
Deferred 3,677 (7,730) 7,068
- --------------------------------------------------------------------------------
85,878 50,150 37,325
- --------------------------------------------------------------------------------
STATE INCOME TAXES:
Current 18,280 10,719 6,113
Deferred 119 529 1,997
- --------------------------------------------------------------------------------
18,399 11,248 8,110
- --------------------------------------------------------------------------------
FOREIGN INCOME TAXES:
Current 13,582 16,068 3,329
Deferred 165 781 1,534
- --------------------------------------------------------------------------------
13,747 16,849 4,863
- --------------------------------------------------------------------------------
Total $118,024 $78,247 $50,298
================================================================================
</TABLE>
The differences between statutory federal income taxes and the provision
for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income taxes $118,024 $75,655 $44,681
State income taxes,
net of federal tax benefit 11,959 7,311 5,386
Tax exempt interest income (4,496) (3,600) (2,744)
Tax benefit of foreign
sales corporation (8,058) (6,308) (3,357)
Other, net 595 5,189 4,006
- --------------------------------------------------------------------------------
Subtotal 118,024 78,247 47,972
Non-deductible
acquisition costs - - 2,326
- --------------------------------------------------------------------------------
Total $118,024 $78,247 $50,298
================================================================================
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Reserves not currently deductible $ 2,117 $ 2,901
Depreciation 854 278
Net operating loss carryforwards 730 1,882
Amortization of intangible assets 14,979 18,565
Other 2,390 1,149
- --------------------------------------------------------------------------------
Total deferred tax assets 21,070 24,775
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Capitalized software (299) (563)
Other (1,163) (643)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (1,462) (1,206)
- --------------------------------------------------------------------------------
Valuation allowance (662) (662)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 18,946 $22,907
================================================================================
</TABLE>
The net operating loss carryforwards of $2,186,000 at September 30, 1997
will expire in fiscal 2000. Ownership changes, as defined in the Internal
Revenue Code of 1986, as amended, limit the amount of the net operating loss
carryforwards that can be utilized annually. The Company has recorded a
valuation allowance for the tax benefit of certain foreign net operating loss
carryforwards since realization of these future benefits is not sufficiently
assured at September 30, 1997.
F. COMMON STOCK
On February 13, 1997, the stockholders approved an amendment to the Company's
Articles of Organization to increase the number of authorized shares of the
Company's common stock from 215,000,000 to 350,000,000.
On February 8, 1996, the Company's Board of Directors declared a one-
for-one stock dividend on all shares of common stock, which became effective on
February 29, 1996 to all stockholders of record on February 22, 1996. These
financial statements and related notes have been retroactively adjusted, as
appropriate, to reflect this one-for-one stock dividend.
On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allowed the Company to repurchase up to 6,000,000 shares
of its common stock. During fiscal 1997, the Company repurchased 3,720,000
shares at a cost of $184,780,000, of which 524,000 remained in treasury at
September 30, 1997, to partially offset the dilution caused by the exercise of
stock options under the Company's option plans and the purchase of shares under
the employee stock purchase plan. During fiscal 1996, the Company repurchased
1,779,000 shares at a cost of $66,563,000. Since the inception of the plan, the
Company has repurchased 5,813,000 shares. On September 11, 1997, the Company
announced that its Board of Directors had authorized an increase in the number
of shares of common stock that the Company may repurchase under the repurchase
program from 6,000,000 to 12,000,000 shares. In anticipation of the
Computervision acquisition (see Note K), the Company has suspended repurchases
and the Board of Directors has rescinded authorization of the repurchase
program.
Parametric Technology Corporation 39
<PAGE>
Notes to Consolidated Financial Statements
G. STOCK PLANS
Stock Options
Under the 1987 Incentive Stock Option Plan (the "Stock Option Plan"), the Board
of Directors may grant options to key employees to purchase shares at an option
exercise price equal to the fair market value on the date of grant. The options
are exercisable at such times, in installments or otherwise, as the Board of
Directors may determine. Generally, these options vest ratably over a period of
four years and expire ten years from the date of grant. The Stock Option Plan
limits the number of options that may be granted to any eligible employee in any
fiscal year to 1,000,000 options. In fiscal 1996, the stockholders approved an
increase in the number of shares issuable under this plan from 42,792,000 to
48,792,000 and a change to the designation of persons eligible to receive
options under the Stock Option Plan to include consultants.
On February 13, 1997, the stockholders approved the 1997 Incentive Stock
Option Plan (the "1997 Stock Option Plan") for which 6,000,000 shares of common
stock have been reserved, and the Board of Directors also approved the 1997 Non-
Qualified Stock Option Plan (the "1997 Non-Qualified Plan") for which 3,100,000
shares of common stock have been reserved. The 1997 Stock Option Plan and the
1997 Non-Qualified Plan (collectively the "1997 Plans") replace and essentially
have the same terms and conditions as the Stock Option Plan. No additional
options will be granted under the Stock Option Plan, but the rights and
privileges of holders of outstanding options under the Stock Option Plan will
continue under the terms of that plan. Under the 1997 Plans, the Board of
Directors may grant options to employees and consultants to purchase shares at a
price equal to the fair market value on the date of grant. Persons subject to
Section 16 of the Exchange Act of 1934, as amended, are not eligible to receive
options under the 1997 Non-Qualified Plan. The options are exercisable at such
time, in installments or otherwise, as the Board of Directors may determine.
Generally, these options vest ratably over a period of four years and expire ten
years from the date of grant.
Under the 1992 Director Stock Option Plan (the "1992 Director Plan"),
640,000 shares of common stock have been reserved. The purpose of the 1992
Director Plan is to attract and retain qualified persons who are not also
officers or employees of the Company (the "Eligible Directors") to serve as
Directors of the Company and to encourage stock ownership in the Company by such
Directors. Options granted under the 1992 Director Plan, at an option price
equal to the fair market value on the date of grant, shall become exercisable in
four equal annual installments following the date of grant if, and only if, the
optionee is a Director of the Company on such anniversary date. The options
expire ten years from the date of grant. Options to purchase 80,000 shares of
common stock were granted in fiscal 1995 to Eligible Directors of the Company.
In fiscal 1996, the stockholders approved the 1996 Director Stock Option
Plan (the "1996 Director Plan") for which 180,000 shares of common stock have
been reserved. The 1996 Director Plan replaces the 1992 Director Plan. The terms
of the 1996 Director Plan are essentially the same as the 1992 Director Plan,
except that each Eligible Director is automatically granted options to purchase
20,000 shares of common stock at the time of initial election to the Board of
Directors, and immediately following the meeting of stockholders every year,
each Eligible Director continuing in office after such meeting will
automatically be granted options to purchase 5,000 shares of common stock. No
additional options will be granted under the 1992 Director Plan, but the rights
and privileges of holders of outstanding options under the 1992 Director Plan
are not adversely affected by the 1996 Director Plan.
In conjunction with the Rasna merger, the Company assumed 1,045,000
outstanding options on August 1, 1995. These assumed options were granted at
prices equal to the fair market value at the date of grant, become exercisable
in installments (generally ratably over four years) and expire ten years from
the date of grant. The Company does not intend to issue any additional options
under the Rasna stock option plan. At September 30, 1997, options remaining
under the assumed plan were approximately 173,000.
40
<PAGE>
The following table summarizes stock option transactions under all plans:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted
average
Shares exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
September 30, 1994 14,851,258 $10.32
- --------------------------------------------------------------------------------
Granted and
assumed 6,418,626 24.41
Canceled (883,518) 15.00
Exercised (4,324,704) 6.89
- --------------------------------------------------------------------------------
Outstanding at
September 30, 1995 16,061,662 16.72
- --------------------------------------------------------------------------------
Granted 5,139,750 38.82
Canceled (1,381,180) 21.93
Exercised (3,842,020) 10.38
- --------------------------------------------------------------------------------
Outstanding at
September 30, 1996 15,978,212 24.99
- --------------------------------------------------------------------------------
Granted 7,914,500 49.07
Canceled (1,614,834) 36.17
Exercised (3,737,492) 16.19
- --------------------------------------------------------------------------------
Outstanding at
September 30, 1997 18,540,386 $36.18
================================================================================
</TABLE>
Options available for grant at September 30, 1997 were 3,949,000. Options
exercisable at September 30, 1997 were 4,635,000 as compared with 4,554,000 and
2,354,000 for fiscal 1996 and 1995, respectively. The average exercise price for
options exercisable at September 30, 1997 was $22.57 as compared with $14.35 and
$8.19 for fiscal 1996 and 1995, respectively.
Certain employees have disposed of stock acquired through the exercise of
incentive stock options earlier than the mandatory holding period required for
such options. The tax benefits allowed to the Company because of these
dispositions, together with the tax benefits realized from the exercise of
nonqualified stock options, have been recorded as increases to additional
paid-in capital.
For various price ranges, weighted average information for options
outstanding at September 30, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
- --------------------------------------------------------------------------------
Weighted average
Range of per share remaining life Weighted average
exercise prices Shares (in years) exercise price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.01 - 11.31 887,295 3.67 $5.55
$11.32 - 21.81 4,282,215 7.06 18.55
$21.82 - 35.00 3,871,949 8.12 32.37
$35.01 - 45.25 3,812,702 9.35 43.93
$45.26 - 50.88 3,678,275 9.49 48.40
$50.89 - 60.56 2,007,950 9.15 54.93
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
- --------------------------------------------------------------------------------
Range of per share Weighted average
exercise prices Shares exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
$ 0.01 - 11.31 843,526 $ 5.55
$11.32 - 21.81 2,079,290 17.90
$21.82 - 35.00 1,217,990 31.60
$35.01 - 45.25 446,572 44.13
$45.26 - 50.88 47,241 48.51
$50.89 - 60.56 - -
- --------------------------------------------------------------------------------
</TABLE>
These options will expire if not exercised at specific dates ranging from
January 1998 to September 2007. A total of 22,489,136 shares of the Company's
common stock have been reserved for future issuance under stock option plans.
Stock Purchase Plan
The 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") enables
eligible employees to purchase the Company's common stock at 85% of the fair
market value of the stock on the date an offering commences or on the date an
offering terminates, whichever value is lower. The 1991 Purchase Plan covers
substantially all employees, subject to certain limitations. Each employee may
elect to have up to 10% of his or her base pay withheld and applied toward the
purchase of shares in such offering (provided that the aggregate amount of his
or her base pay withheld may not exceed $10,000 in any fiscal year). The 1991
Purchase Plan covers an aggregate of up to 2,000,000 shares of common stock to
be issued and sold to participating employees of the Company through a series of
six-month offerings, beginning April 1, 1991. Purchases under the 1991 Purchase
Plan for fiscal 1997, 1996 and 1995 were 176,705, 169,425 and 154,722 shares,
generating proceeds to the Company of $6,488,000, $4,906,000 and $2,459,000,
respectively. In fiscal 1997, the average purchase price was $36.82. At
September 30, 1997, approximately 933,000 shares of common stock were reserved
for purchases under the 1991 Purchase Plan.
Stock Plans Valuation
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123 - "Accounting for Stock-Based Compensation," issued in October 1995. In
accordance with SFAS No. 123, the Company applies Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its option plans,
and
Parametric Technology Corporation 41
<PAGE>
Notes to Consolidated Financial Statements
accordingly does not record compensation costs. Pro forma information regarding
net income and net income per share is required to be determined as if the
Company had accounted for its stock options (including shares issued under the
1991 Purchase Plan, collectively called "options") under the fair value method
of SFAS No. 123. The fair value of the options granted has been estimated at the
date of grant using a Black-Scholes option pricing model assuming an expected
life of five years (.5 years for 1991 Purchase Plan shares), no dividends,
volatility of .40, and risk-free interest rates of 6.2%, 6.0% and 6.5% in 1997,
1996 and 1995, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for options been determined based on the Black-Scholes option
pricing model at the grant date as prescribed by SFAS No. 123, pro forma
information would have been:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income -
as reported $219,185 $137,910 $77,362
Net income -
pro forma 168,250 105,060 59,844
Net income per share -
as reported 1.64 1.04 0.60
Net income per share -
pro forma 1.31 0.82 0.48
</TABLE>
The pro forma disclosures above include the amortization of the fair value
of all options vested during 1997, 1996 and 1995. If only options granted during
1997 and 1996 were valued, as prescribed by SFAS No. 123, pro forma net income
would have been $185,696,000 and $126,820,000, and pro forma net income per
share would have been $1.44 and $0.97 for 1997 and 1996, respectively.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value of employee stock
options granted during fiscal years 1997, 1996 and 1995 was $22.33, $17.35 and
$11.06 per share, respectively. The weighted average estimated fair value of
shares granted under the 1991 Purchase Plan during fiscal years 1997, 1996 and
1995 was $12.26, $9.25 and $5.04 per share, respectively.
The effects on pro forma disclosures of applying SFAS No. 123 are not
necessarily representative of the effects on pro forma disclosures of future
years.
H. EMPLOYEE BENEFIT PLAN
The Board of Directors in 1989 adopted the Parametric Technology Corporation
401(k) Savings Plan (the "Plan"), which is intended to qualify under Section
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all employees. Each employee may elect to contribute to the Plan,
through payroll deductions, up to 15% of his or her salary, subject to certain
limitations. The Company makes matching contributions on behalf of each
participating employee in an amount equal to 50% of the amount contributed by
the employee up to a maximum 10% employee contribution. The employee's
entitlement to such Company contributions vests at a rate of 25% per year of
service. For the fiscal years ended September 30, 1997, 1996 and 1995, the
Company made matching contributions to the Plan which totaled $2,293,000,
$1,867,000 and $1,034,000, respectively.
42
<PAGE>
I. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes in fiscal 1997, 1996 and 1995 was $55,037,000,
$38,853,000 and $40,281,000, respectively. During fiscal 1997, the Company did
not acquire any fixed assets under capital leases.
J. COMMITMENTS AND CONTINGENCIES
Leasing Arrangements
The Company leases its office facilities and certain equipment under operating
leases expiring at various dates through fiscal 2003. The Company also leases
computer equipment under capital leases that expire through fiscal 1999.
At September 30, 1997, future minimum lease payments under capital and
operating leases with initial or remaining terms of one or more years are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Capital Operating
(in thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $37 $34,214
1999 2 23,080
2000 - 13,047
2001 - 6,091
2002 - 3,134
Subsequent to 2002 - 2,236
- --------------------------------------------------------------------------------
Total minimum lease payments 39 $81,802
=======================
Less amounts
representing interest (2)
- ------------------------------------------------------
Present value of net
minimum lease payments $37
======================================================
</TABLE>
Rental expense under operating leases was $30,460,000, $21,520,000 and
$15,186,000 for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that resolving these
matters will not have a material adverse impact on the Company's financial
position or its results of operations.
K. SUBSEQUENT EVENT
On November 4, 1997, the Company announced that it had entered into an agreement
to acquire Computervision Corporation ("Computervision") in a stock-for-stock
transaction. Based on the November 3, 1997 closing price of the Company's stock,
the aggregate equity value of the transaction is approximately $260,000,000. The
Company will also assume approximately $240,000,000 in debt from Computervision.
Under the terms of the proposed transaction, each share of Computervision
common stock will be exchanged for .0866 shares of the Company's common stock
and Computervision will become a wholly-owned subsidiary of the Company. The
transaction is intended to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. Subject to several conditions, including
approval of Computervision's shareholders, the transaction is expected to close
in the second quarter of fiscal 1998. The Company expects to recognize a non-
recurring charge of approximately $75,000,000 to $95,000,000 related to certain
merger-related, debt prepayment, consolidation and integration expenses during
the quarter in which the transaction closes.
L. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is engaged in one industry segment: the development, marketing and
support of software products for the mechanical segment of the CAD/CAM/CAE
(computer-aided design, manufacturing and engineering) industry.
The Company licenses products to customers on a worldwide basis. Sales and
marketing operations outside the United States are conducted principally through
the Company's foreign sales subsidiaries throughout Europe and Asia/Pacific.
Intercompany sales and transfers between geographic areas are accounted for
at prices which are designed to be representative of unaffiliated party
transactions.
Parametric Technology Corporation 43
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
North America Europe Asia/Pacific Corporate Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Year ended September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers:
License $255,695 $146,164 $ 79,207 $481,066
Service 114,981 59,884 25,150 200,015
Revenue from unaffiliated export:
Europe 66,077 66,077
Asia/Pacific 61,638 61,638
Intercompany revenue 277,428 46,604 34,302 $(358,334) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 775,819 252,652 138,659 (358,334) 808,796
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 313,373 5,926 7,285 326,584
Other income (expense) (2,999) (567) 354 $ 13,837 10,625
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 310,374 5,359 7,639 13,837 337,209
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 666,334 75,019 46,060 399,769 (354,759) 832,423
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Year ended September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated customers:
License $182,494 $115,424 $ 75,970 $373,888
Service 82,386 43,804 15,507 141,697
Revenue from unaffiliated export:
Europe 48,583 48,583
Asia/Pacific 35,954 35,954
Intercompany revenue 167,800 29,006 18,835 $(215,641) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 517,217 188,234 110,312 (215,641) 600,122
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 182,656 12,048 9,952 204,656
Other income (expense) 1,177 (418) (17) $ 10,759 11,501
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 183,833 11,630 9,935 10,759 216,157
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 564,107 65,612 37,282 328,037 (335,821) 659,217
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Year ended September 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated customers:
License $134,412 $ 76,871 $ 36,739 $248,022
Service 63,427 28,484 9,230 101,141
Revenue from unaffiliated export:
Europe 28,518 28,518
Asia/Pacific 16,629 16,629
Intercompany revenue 92,339 19,422 7,306 $(119,067) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 335,325 124,777 53,275 (119,067) 394,310
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 112,620 2,547 3,464 118,631
Other income (expense) 1,794 (790) (226) $ 8,251 9,029
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 114,414 1,757 3,238 8,251 127,660
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 403,247 46,224 19,263 242,568 (257,575) 453,727
====================================================================================================================================
</TABLE>
44
<PAGE>
Report of Independent Accountants
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
PARAMETRIC TECHNOLOGY CORPORATION:
We have audited the accompanying consolidated balance sheets of Parametric
Technology Corporation as of September 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Parametric
Technology Corporation for the year ended September 30, 1995, were audited by
other auditors whose report dated October 19, 1995, except as to Notes F and G
which are as of November 17, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Parametric Technology Corporation as of September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 15, 1997, except for Note K,
as to which the date is November 4, 1997
Parametric Technology Corporation 45
<PAGE>
Selected Financial Data/(1)/
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $808,796 $600,122 $394,310 $266,974 $179,311
Operating income 326,584 204,656 118,631 103,362 66,502
Net income 219,185 137,910 77,362 68,089 43,470
Net income per share/(2)/ 1.64 1.04 0.60 0.54 0.36
Weighted average number of
common and dilutive
common equivalent shares
outstanding/(2)/ 133,558 133,211 129,046 125,051 122,424
Total assets 832,423 659,217 453,727 305,125 190,975
Working capital 503,983 416,058 317,702 229,878 137,581
Stockholders' equity 644,795 512,432 370,929 251,178 154,655
Excluding acquisition and related costs:/(3)/
Net income 219,185 158,402 98,500 68,089 43,470
Net income per share/(2)/ 1.64 1.19 0.76 0.54 0.36
<CAPTION>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) FISCAL QUARTER ENDED
- -------------------------------------------------------------------------------------------------------------
September 30, June 28, March 29, December 28,
(in thousands, except per share data) 1997 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $220,169 $207,114 $198,012 $183,501
Gross profit 199,295 187,605 179,451 165,953
Operating income 90,398 83,556 79,177 73,453
Net income 60,488 56,188 53,058 49,451
Net income per share/(2)/ 0.46 0.42 0.39 0.37
Common stock prices:/(4)/
High 53.50 48.88 62.50 56.38
Low 41.25 39.31 46.50 48.25
<CAPTION>
FISCAL QUARTER ENDED
- -------------------------------------------------------------------------------------------------------------
September 30, June 29, March 30, December 30,
(in thousands, except per share data) 1996 1996 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $177,128 $157,104 $140,493 $125,397
Gross profit 160,607 143,014 127,104 112,943
Operating income 38,664 62,173 55,086 48,733
Net income 26,433 41,620 36,837 33,020
Net income per share/(2)/ 0.20 0.31 0.28 0.25
Excluding acquisition and related costs:/(3)/
Net income 46,925 41,620 36,837 33,020
Net income per share/(2)/ 0.35 0.31 0.28 0.25
Common stock prices:/(4)/
High 51.63 48.75 39.13 35.63
Low 37.38 34.38 27.13 27.38
</TABLE>
(1) All financial information presented here has been retroactively restated to
reflect the fiscal 1995 Rasna merger that has been accounted for as a pooling of
interests. See Note A of Notes to Consolidated Financial Statements for
additional information.
(2) Per-share data and weighted average number of common and dilutive common
equivalent shares outstanding have been retroactively adjusted to reflect the
one-for-one stock dividends on all shares of capital stock declared by the
Company's Board of Directors on February 4, 1993 and February 8, 1996, effective
February 25, 1993 and February 29, 1996, respectively.
(3) The acquisition and related costs consist of $32,119 in the fourth quarter
of fiscal 1996 related to the acquisition of Reflex technology, $10,438 related
to the merger of Rasna Corporation into the Company in the fourth quarter of
fiscal 1995 and $19,000 in the third quarter of fiscal 1995 related to its
acquisition of the Conceptual Design and Rendering System software business. See
Note B of Notes to Consolidated Financial Statements for additional information.
(4) The common stock of the Company is traded on the Nasdaq National Market
under the symbol "PMTC". The common stock prices shown are based on the
Nasdaq daily closing stock price.
46
<PAGE>
Supplemental Financial Information
The Company has not paid cash dividends on its common stock and has historically
retained earnings for use in its business. The Company intends to review its
policy with respect to the payment of dividends from time to time; however,
there can be no assurance that any dividends will be paid in the future.
On September 30, 1997, the number of stockholders of record of the Company's
common stock was 4,489.
Investor Information
Requests for information about the Company
should be directed to:
John Hudson, Vice President of Investor Relations
Parametric Technology Corporation
128 Technology Drive, Waltham, MA 02154
Telephone: (781) 398-5000
Report on Form 10-K
Stockholders may obtain additional financial information about Parametric
Technology from the Company's Report on Form 10-K filed with the Securities and
Exchange Commission. Copies are available from the Company without charge upon
written request.
Annual Meeting
The Annual Meeting of Stockholders will be held on February 12, 1998 at 9:00
A.M. at: Parametric Technology Corporation, 128 Technology Drive, Waltham, MA
02154.
Stock Listing
Nasdaq National Market Symbol: PMTC
Internet Access
http://www.ptc.com
General Counsel
Palmer & Dodge LLP, Boston, MA
Independent Accountants
Coopers & Lybrand L.L.P., Boston, MA
Transfer Agent and Registrar
American Stock Transfer & Trust Company
Directors
Steven C. Walske
Chairman and Chief Executive Officer
Parametric Technology Corporation
C. Richard Harrison
President and Chief Operating Officer
Parametric Technology Corporation
Robert N. Goldman
Chief Executive Officer and President
Object Design Inc., a software developer
Donald K. Grierson
Chief Executive Officer and President
ABB Vetco Gray, Inc., an oil services business
Oscar B. Marx, III
Chief Executive Officer and President
TMW Enterprises, an autoparts business
Michael E. Porter
Professor
Harvard Business School, an educational institution
Noel G. Posternak
Senior Partner
Posternak, Blankstein & Lund L.L.P., a law firm
Corporate Officers
Steven C. Walske
Chairman of the Board of Directors and
Chief Executive Officer
C. Richard Harrison
President and Chief Operating Officer
Edwin J. Gillis
Executive Vice President of Finance and Administration
Chief Financial Officer and Treasurer
John D. McMahon
Executive Vice President of Worldwide Sales
James F. Kelliher
Senior Vice President of Finance
Martha L. Durcan
Vice President, Corporate Counsel and Clerk
John G. Mokas
Director of Treasury and Finance
and Assistant Treasurer
Parametric Technology Corporation, Pro/ENGINEER and Pro/MECHANICA are registered
trademarks of Parametric Technology Corporation in the United States and other
countries. Parametric Technology, PTC, the PTC logo, and all product names in
the PTC product family are trademarks of Parametric Technology Corporation in
the United States and other countries. All other companies and products
referenced herein have trademarks or registered trademarks of their respective
holders.
(C) Copyright 1997, Parametric Technology Corporation
Parametric Technology Corporation
