UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: September 30,
1999
Commission File Number: 0-18059
PARAMETRIC TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of
incorporation or organization)
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04-2866152
(I.R.S. Employer
Identification Number)
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128 Technology Drive, Waltham, MA 02453
(Address of principal executive offices, including zip
code)
(781) 398-5000
(Registrant's telephone number, including area code)
Securities
registered pursuant to
Section 12(b) of the Act:
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Securities
registered pursuant to
Section 12(g) of the Act:
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None
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Common Stock, $.01 par value per share
(Title of Class)
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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. YES x
NO ¨
The aggregate market value of our voting stock held by non-affiliates
was approximately $5,134,659,216 on October 29, 1999 based on the last
reported sale price of our common stock on The Nasdaq Stock Market on that
day. There were 271,068,732 shares of our common stock outstanding on that
day.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the
Annual Meeting of Stockholders to be held February 10, 2000 (2000 Proxy
Statement) are incorporated by reference into Part III.
PARAMETRIC TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K FOR
FISCAL YEAR 1999
Table of Contents
PART I. |
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Item 1.
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Business
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1 |
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Item 2.
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Properties
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6 |
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Item 3.
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Legal Proceedings
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6 |
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Item 4.
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Submission of Matters to a Vote of Security Holders
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PART II. |
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Item 5.
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Market for Registrant's Common Equity and Related Stockholder
Matters
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Item 6.
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Selected Financial Data
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Item 7.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures about Market
Risk
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Item 8.
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Financial Statements and Supplementary Data
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23 |
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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PART III. |
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Item 10.
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Directors and Executive Officers of the Registrant
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and
Management
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Item 13.
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Certain Relationships and Related Transactions
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PART IV. |
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Item 14.
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Exhibits, Financial Statement Schedules and Reports on Form
8-K
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24 |
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25 |
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27 |
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30 |
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APPENDIX A |
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F-1 |
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F-5 |
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F-23 |
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F-24 |
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F-24 |
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking
statements that describe our anticipated financial results and growth
based on our plans and assumptions. Important information about the
basis for these plans and assumptions and certain factors that may cause
our actual results to differ materially from these statements is
discussed in this report and contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning
on page 7 below.
PART I
Introduction
Parametric Technology Corporation (PTC), founded in 1985 and
headquartered in Waltham, MA, develops, markets and supports
collaborative product commerce (CPC) and flexible engineering solutions
that help companies shape innovation and achieve sustained competitive
advantage. These solutions leverage our leadership in providing software
that streamlines engineering processes, improves product quality,
optimizes product information management and reduces cost and
time-to-market cycles. Our CPC and flexible engineering software
solutions are complemented by the strength and experience of our
professional services organization, which provides training, consulting,
implementation and support to customers worldwide.
CPC solutions include software and services that use Internet
technologies to permit individuals using different computer-based tools
in different locations with different roles in the commercialization of
a product to collaboratively develop, build and manage products
throughout their entire lifecycle. CPC subsumes many smaller, previously
isolated markets that address various phases of the product lifecycle,
such as product data management (PDM), component and supplier management
(CSM), visualization and digital mockup, computer-aided design,
manufacturing and engineering (CAD/CAM/CAE), enterprise application
integration (EAI), program and project management, manufacturing
planning and maintenance, repair and overhaul (MRO).
Historically, our core business focus has been to provide
mechanical CAD/CAM/CAE solutions to customers through our flagship
Pro/ENGINEER® design software, and we remain committed to providing
our customers with industry-leading flexible engineering solutions based
on this software. We believe, however, that there is growing demand for
CPC solutions from manufacturers who, in order to stay competitive, must
deliver more custom-tailored goods faster and at lower prices while
relying more than ever before on geographically dispersed and dynamic
supply chains. In order to pursue this opportunity, we have expanded our
focus to encompass CPC solutions offered by our Web-based Windchill®
information management software. This expanded focus allows us to
increase the business impact our customers derive from our flexible
engineering solutions and provides our customers with the additional
tools they need to elevate their products into enterprise assets and to
leverage these assets into new business opportunities.
Products and Services
Our Windchill Factor! e-Series is a comprehensive set of
business software solutions for CPC. Built around Windchill's federated,
Web-based architecture, the Windchill Factor! e-Series enables
manufacturers to leverage the Internet in their product development and
delivery process from customer driven engineer-to-order through
development, manufacturing and retirement, allowing manufacturers to
create innovative new products, deliver those products to market faster
and manage the complexities of an evolving supply chain. The Windchill
Factor! e-Series currently includes the:
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Collaboration Factor! which provides an
environment where businesses can share valuable product and process
information, regardless of where that information resides or in what
format it is.
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Product
Planning Factor! which enables businesses to meet the
increasing demand for custom-tailored products by providing the means
to define flexible engineered-to-order products, supply
customer-specific portals and easily identify existing variation for
reuse.
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Engineering Factor! which optimizes the product
innovation and design environment to reduce concept-to-design cycle
times and improve team collaboration by linking directly with the
engineering team using CAD/CAM and PDM tools.
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Sourcing
Factor! which gives manufacturers the ability to reduce
global procurement and product development costs by standardizing and
consolidating part and supplier information using our InPart
component and supplier management technology.
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Product
Management Factor! which offers a complete set of enterprise
scalable PDM functionality to promote concurrent engineering and to
create a single source of product information available to all
functional organizations, so that they receive the information they
need when they need it.
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Manufacturing Planning Factor! which integrates a
company's product development and design with its manufacturing
processes by creating and maintaining detailed process plans and
executing production analysis and process simulation. This solution
allows companies to increase information capture and reuse, optimize
manufacturing processes and share this knowledge across the
enterprise.
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Production
Factor! which integrates Windchill with market-leading
enterprise resource planning systems allowing the exchange of part
master, bill of material and engineering change information between
Windchill and those systems.
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Customization Factor! which lets manufacturers
rapidly create and deploy customized Windchill lifecycle applications
allowing them to leverage their own internal processes and practices
into a competitive advantage.
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Our family of mechanical CAD/CAM/CAE software solutions, the PTC
i-Series , encompasses a broad spectrum of engineering
disciplines essential to the development of virtually all manufactured
products, ranging from consumer products to jet aircraft. Manufacturers
compete on the basis of cost, time to market and product performance
criteria, which are significantly affected by the quality and length of
the product development process. The PTC i-Series offers
high-performance, fully integrated solutions available on all leading
hardware platforms, including Windows® native solutions, that enable
end-users to reduce their time to market and manufacturing costs for
their products and to improve product quality by easily evaluating
multiple design alternatives and sharing data with bi-directional
associativity. The PTC i-Series includes:
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Pro/ENGINEERour cornerstone mechanical design
automation suite for 3D solid modeling with next generation behavioral
modeling technology. Behavioral modeling is a knowledge management
capability that provides a unique method of capturing engineers'
innovations by generating objective-driven design solutions that then
may be automatically optimized and re-used on subsequent designs,
enabling companies to create more innovative, differentiated and
functional products more quickly and easily than ever
before.
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Pro/MECHANICA®our functional simulation
software which allows users to evaluate and optimize the mechanical
performance of product designs in real-world situations, reducing the
need for expensive physical prototypes and enhancing overall product
quality.
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Pro/DESKTOP
our entry-level desktop modeling tool offering low
cost, easy to use feature-based modeling, conceptual design and
drafting that, when integrated with Pro/ENGINEER, provides a
completely scalable, interoperable suite of associative design
solutions that meet the needs of users throughout the product
development continuum.
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DIVISIONour suite of visualization
solutions ranging from readily deployable 2D and 3D viewing and
redlining, to digital virtual mockup, behavior simulation and
total-body virtual reality immersion.
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ICEM Surf
and CDRSour advanced, interactive surfacing and
styling tools. ICEM Surf is a premier Class A surface modeling product
used in the automotive industry by nearly all major manufacturers for
modeling high-quality, Class A surfaces as well as in the industrial
design, tool
design and consumer product markets. CDRS is a complete set of
integrated tools for quickly creating realistic images with free-form
surfaces that can be used throughout the product design cycle to
evaluate, explore and communicate ideas to management and
clients.
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InPart
our Internet-based library of CAD parts containing 2D
& 3D geometry, technical specifications and component selection
software that allows mechanical engineers to download nearly 1 million
certified part designs via the Internet, saving valuable time and
expense.
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CADDS®5iour 3D mechanical design
software acquired in the Computervision merger that offers
production-proven product development tools spanning concept, design,
analysis, drafting and manufacturing and is relied upon by many of the
world's largest discrete manufacturing companies for the design and
engineering of airplanes, ships and automobiles.
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Pro/NC
PTC's manufacturing suite offering feature-based computer-aided
manufacturing tools that significantly reduce the time for generating
tooling over traditional approaches.
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The PTC i-Series solutions benefit from the unique level
of interoperability provided by our Associative Topology Bus (ATB)
technology which allows for the exchange of data between various CAD
tools without the loss of any design geometry. When changes occur, the
ATB propagates those changes through the other PTC i-Series
members, automatically updating affected deliverables, such as drawings
and tooling.
Our CPC and flexible engineering software solutions are enhanced
by our professional services organization (PSO) which is committed to
providing the expertise needed to meet the consulting, education and
technical support requirements of every type of company and userin
nine major support centers and more than 70 educational facilities
worldwide. Our PSO, which has been one of the fastest growing areas of
our business, focuses on:
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Consulting
Services designed to transform a company's business process into a
competitive advantage by evaluating and recommending the tools and
practices needed to create more productive engineering and information
management environments, including long-range planning, process
improvement, system implementation and product program
strategies.
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Education
Services offering expert, comprehensive and efficient training
programs for our entire product line tailored to the needs of each
student and combining hands-on and classroom training.
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Technical
Support Services providing fast, accurate answers to software and
product development questions through a variety of resources which are
available worldwide.
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Product Development
In order to be competitive in the CPC and flexible engineering
marketplace, we must continually provide our customers with new software
and service solutions. As a result we have increased our spending on
research and development, and we are constantly looking for
opportunities to acquire new technologies suited to our customers'
needs.
Our ability to develop new mechanical CAD/CAM/CAE products
rapidly is facilitated by the modular structure of our software code,
which enables functional capabilities used in existing products to be
accessed and utilized by new software modules, thereby reducing the
amount of new code required to develop additional products. The major
benefit of this approach is rapid development of new functionality. Our
Windchill products expand the breadth of our offerings into CPC. This
developing industry is characterized by new technologies, including
Internet-centric, Java-based, object-oriented software. The Windchill
products depend upon these new technologies as well as certain licensed
third-party technologies.
We work closely with our customers to define improvements and
enhancements to be integrated into our products. Using this approach,
customers become involved in the product design process to validate
feasibility and to influence functionality early in the product's
life-cycle. We promoted various early adopter and pilot
programs for our Windchill software that allowed us to focus our
development efforts on addressing our customers' most pressing needs. In
addition, we recently launched our new Enterprise Software Partners
(ESP) program as the successor to our Cooperative Software Program
(CSP). The ESP program is designed to provide partners with access to
the Windchill Factor! e-Series and the PTC i-Series and provides
the mechanism and environment to facilitate the integration of
complementary products with our product lines. Through our open software
toolkit, ESP members can build tightly integrated solutions that satisfy
the various requirements of our customers.
Our research and development expenses were $93.2 million in 1997,
$93.2 million in 1998 and $124.1 in 1999.
Acquisitions
In fiscal 1999, we made three important acquisitions that
enhanced our flexible engineering and CPC product offerings.
First, in October 1998, we acquired InPart Design, Inc., a
privately held company located in Saratoga, CA. InPart provides a
comprehensive library of standard mechanical parts over the Internet
that help manufacturers improve product development cycles and reduce
component expenses. In addition to this and related CSM technology,
InPart brought with it a vision regarding the future of Web-based
enterprise applications that mirrored our own, and provided us an
opportunity to strengthen our development and technical expertise in
this area.
Second, in March 1999, we acquired Division Group plc, a publicly
held developer of enterprise product data visualization, simulation and
integration tools, with headquarters in Bristol, UK and San Diego, CA.
Division's Web-centric visualization technology includes enterprise
viewing tools that allow users in a company to view product data
regardless of where it was created or where it resides and high-end
virtual mockup and simulation tools for engineers, including flythrough
and reality simulation.
Third, in March 1999, we purchased auxilium inc., a privately
held developer of Web-based software tools for the integration of legacy
systems, databases and applications located in Mendota Heights, MN. The
core auxilium technology is Info*Engine®, an EAI application
designed to facilitate interoperability between PDM and enterprise
resource planning (ERP) applications, client-server data bases and
legacy information systems, providing connectivity between engineering,
planning, manufacturing, purchasing, suppliers and
customers.
Sales and Marketing
We derived most of our revenue from products distributed directly
by our sales force to our end-user customers with the remainder offered
through third-party distributors. In the future, certain of our products
will be available over the Internet. No single customer accounted for
more than 10% of our revenue in any of the last three fiscal
years.
In 1999, we implemented a worldwide reorganization of our sales
and professional services organizations. This initiative was designed to
refocus our sales and services organizations on larger accounts and
required a shift from geography-based, product specific sales and
services to named-account, solution-oriented sales and services. Because
enterprise level, solution-oriented sales and service targets a
different audience within our manufacturing customers and requires a
different set of sales skills, the reorganization has required
significant personnel changes, and is still in the process of
completion. As part of our reorganization, we signed a multi-year
agreement with Rand A Technology Corporation (Rand) to become the master
distributor of our core mechanical design products to small businesses.
This agreement gives Rand the rights to distribute certain products and
their related maintenance services to the small business segment
throughout North America and Europe.
Information about our foreign and domestic operations and export
sales, and the risks thereof, may be found in Note M to the consolidated
financial statements and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
beginning on page 7 below.
Competition
CPC is a relatively new industry, and we are a relatively new
entrant. There are a number of companies already offering solutions that
address specific functional areas within CPC such as: Agile Software
Corp., Dassault Systemes, Inso Corporation, Matrix One and Structural
Dynamics Research Corporation for PDM solutions; Aspect Development for
part sourcing solutions; Vitria Technology, Inc. for enterprise
application integration; and Dassault Systemes and Engineering
Animation, Inc. for visualization and mock-up solutions. We also face
competition from companies that are developing these solutions in-house.
In addition, larger, more well known enterprise-solution companies with
established customer bases may enter the CPC market and offer more
complete solutions. There are also an increasing number of competitive
mechanical CAD/CAM/CAE products. In this area, we compete most directly
with products developed by Dassault Systems and marketed by IBM and
products developed by Unigraphics and marketed by EDS and Structural
Dynamics Research Corporation.
Proprietary Rights
Our software products and our other trademarks, including our
company names, product names and logos, are proprietary. We protect our
intellectual property rights in these items by relying on copyrights,
trademarks, patents and common law safeguards, including trade secret
protection, as well as restrictions on disclosures and transferability
contained in our agreements with other parties. Despite these measures,
there can be no assurance that the laws of all relevant jurisdictions
will afford adequate protection to our products and other intellectual
property. The software industry is characterized by frequent litigation
regarding copyright, patent and other intellectual property rights.
While we have not, to date, had any significant claims of this type
asserted against us, there can be no assurance that someone will not
assert such claims against us with respect to existing or future
products or other intellectual property or that, if asserted, we would
prevail in such claims. In the event a lawsuit of this type is filed, it
could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not we ultimately
prevail.
We believe that, due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our
personnel are as important to establishing and maintaining a technology
leadership position within the industry as are the various legal
protections surrounding our technology. We believe that our products,
technology and trademarks do not infringe any existing proprietary
rights of others, although there can be no assurance that third parties
will not assert infringement claims in the future.
Parametric Technology Corporation, Computervision, Pro/ENGINEER,
Pro/MECHANICA, Windchill, CADDS, InPart and Info*Engine are registered
trademarks of PTC or our subsidiaries in the United States and/or other
countries. Parametric Technology, PTC, the PTC logo and all product
names in the PTC product family are trademarks of PTC or our
subsidiaries in the United States and/or other countries.
Backlog
We generally ship our products within 30 days after acceptance of
a customer purchase order and execution of a software license agreement.
Accordingly, we do not believe that our backlog at any particular point
in time is indicative of future sales levels.
Employees
As of September 30, 1999, we had 4,998 employees, including 1,980
in sales, marketing and support activities; 1,427 in customer support,
training and consulting; 476 in general and administration; and 1,115 in
product development. Of these employees, 2,410 were located
throughout the United States and 2,588 were located in foreign
countries.
Our executive offices are currently located in approximately
302,000 square feet of leased office space in Waltham, MA. We also lease
217 offices in the United States and internationally through our foreign
subsidiaries, predominately as sales and/or support offices and for
development work. Of our total of approximately 2,081,000 square feet of
leased facilities, approximately 1,376,000 is located in the U.S. and
705,000 is located outside the U.S. Several of our leased facilities
were acquired in our merger with Computervision, including 686,000
square feet of office space in Bedford, MA. Approximately 616,000 square
feet is not used for our current operations. As described in Notes B and
H to the consolidated financial statements, these facilities have been
included in our restructuring provisions. We have engaged in a
subleasing and early lease termination initiative to employ alternate
uses for these facilities.
In December 1999, we sold land and certain improvements under
construction and entered into a lease covering approximately 381,000
square feet of office space in the Boston area that will allow us to
consolidate and replace our Waltham operations. Occupancy and rent
should begin in December 2000 and expire in December 2012, subject to
completion of construction. We believe that our facilities are adequate
for our present needs, but will continue to evaluate the need for
additional space, as the requirements of the business
change.
ITEM 3: Legal Proceedings
Certain class action lawsuits were filed by shareholders in the
fourth quarter of 1998 against us and certain of our current and former
officers and directors in the U.S. District Court in Massachusetts
claiming violations of the federal securities laws based on alleged
misrepresentations regarding our anticipated revenue and earnings for
the third quarter of 1998. The plaintiffs in these lawsuits joined
together to file a consolidated and amended complaint in the second
quarter of 1999. The consolidated and amended complaint seeks
unspecified damages. We believe the claims made in the consolidated and
amended complaint are without merit, and we intend to defend them
vigorously. In the third quarter of 1999 we filed a motion to dismiss
the consolidated and amended complaint. We cannot predict the outcome of
this motion or the ultimate resolution of this action at this time, and
there can be no assurance that the litigation will not have a material
adverse impact on our financial condition or results of
operations.
We are also subject to various legal proceedings and claims that
arise in the ordinary course of business. We currently believe that
resolving these matters will not have a material adverse impact on our
financial condition or results of operations.
ITEM 4: Submission of Matters to a Vote of Security
Holders
No matters were submitted to a vote of security holders during
the last quarter of fiscal 1999.
PART II
ITEM 5: Market for Registrant's Common Equity and
Related Stockholder Matters
Information with respect to this item may be found in the section
captioned "Quarterly Financial Information" on page F-24
below.
On September 30, 1999, our common stock was held by 9,184
shareholders of record. We have not paid cash dividends on our common
stock and have historically retained earnings for use in our business.
We intend to review our 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.
As of September 30, 1999, we issued an additional 600,000 shares
of our common stock to stockholders of InPart Design, Inc. pursuant to
our acquisition agreement with them. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933
because it did not involve a public offering.
ITEM 6: Selected Financial Data
Information with respect to this item may be found in the section
captioned "Five Year Summary of Selected Financial Data" on page F-24
below.
ITEM 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
In January 1998, we completed a merger with Computervision
Corporation that has been accounted for as a pooling of interests.
Accordingly, we have restated our consolidated financial statements to
include the accounts and operations of Computervision for all periods
prior to the merger presented in this Annual Report on Form 10-K. Unless
otherwise indicated, this discussion and the accompanying consolidated
financial statements and notes to the consolidated financial statements
(Notes) reflect that restatement. In July 1997, Computervision sold its
hardware support services business unit which had generated other
services revenue and costs in 1997. Because of the sale, the results
from this business have been excluded from the following discussion for
all years presented. See Notes B and C. Unless otherwise indicated, all
references to a year reflect our fiscal year that ends on September
30.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking
statements that describe our anticipated financial results and growth
based on our plans and assumptions. Important information about the
basis for these plans and assumptions and certain factors that may cause
our actual results to differ materially from these statements is
contained below and in "Important Factors That May Affect Future
Results" beginning on page 16.
Business Overview
Historically, our core business focus has been to provide
mechanical CAD/CAM/CAE solutions to customers through our flagship
Pro/ENGINEER® design software, and while we remain committed to
providing our customers with industry leading flexible engineering
solutions based on this software, we believe that there is growing
demand for collaborative product commerce (CPC) solutions from
manufacturers who, in order to stay competitive, must deliver more
custom-tailored goods faster and at lower prices while relying more than
ever before on geographically dispersed and dynamic supply chains. CPC
solutions include software and services that use Internet technologies
to permit individualsno matter what role they have in the
commercialization of a product, no matter what computer-based tools they
use, no matter where they are located geographically or in the supply
chainto collaboratively develop, build and manage products
throughout their entire lifecycle. In order to pursue this opportunity,
we expanded our focus in 1999 to encompass the complete CPC solution
offered by our Web-based Windchill® information management software.
This expanded focus going forward allows us to increase the business
impact our customers derive from our flexible engineering solutions and
provides our customers with the additional tools they need to elevate
their products into enterprise assets and to leverage these assets into
new business opportunities.
Results of Operations
The following is an overview of our results of operations for the
last three years:
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Total revenue
was $979.8 million for 1997, $1,018.0 million for 1998 and $1,057.6
million for 1999.
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Our
year-to-year revenue growth rate was 4% in 1998 and 1999.
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Income before
extraordinary loss in 1998 increased $18.1 million, or 21%, between
1997 and 1998, and $13.6 million, or 13%, between 1998 and
1999.
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Pro forma net
income, which excludes the amortization of goodwill and intangible
assets, acquisition and nonrecurring charges and the extraordinary
loss, was $146.2 million in 1997, $199.4 million in 1998 and $184.4
million in 1999.
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The following table shows certain consolidated financial data as
a percentage of our total revenue for the last three years. The results
of the Computervision other services business unit have been omitted
from the table.
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September
30,
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1997
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1998
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1999
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Revenue: |
License |
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66 |
% |
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60 |
% |
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53 |
% |
Service |
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34 |
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40 |
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47 |
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Total revenue |
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100 |
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100 |
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100 |
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Costs and
expenses: |
Cost of license
revenue |
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2 |
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2 |
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1 |
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Cost of service
revenue |
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13 |
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13 |
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18 |
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Sales and
marketing |
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40 |
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39 |
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39 |
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Research and
development |
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9 |
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9 |
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12 |
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General and
administrative |
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6 |
|
|
6 |
|
|
6 |
|
Amortization of goodwill and
other intangible assets |
|
0 |
|
|
0 |
|
|
2 |
|
Acquisition and nonrecurring
charges |
|
5 |
|
|
10 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses |
|
75 |
|
|
79 |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
25 |
|
|
21 |
|
|
17 |
|
Interest
expense |
|
(4 |
) |
|
(1 |
) |
|
0 |
|
Interest
income |
|
2 |
|
|
2 |
|
|
1 |
|
Other expense,
net |
|
(1 |
) |
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income
taxes |
|
22 |
|
|
21 |
|
|
17 |
|
Provision for income
taxes |
|
12 |
|
|
10 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Income before
extraordinary loss |
|
10 |
|
|
11 |
|
|
11 |
|
Extraordinary loss,
net |
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
10 |
% |
|
9 |
% |
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
Pro forma,
excluding amortization of goodwill and intangible assets, acquisition
and
nonrecurring charges and extraordinary
loss: |
|
Operating income |
|
29 |
% |
|
31 |
% |
|
24 |
% |
Net income |
|
15 |
% |
|
20 |
% |
|
17 |
% |
We derived our revenue primarily from software and services
related to the mechanical segment of the CAD/CAM/CAE industry. In 1999,
8% of our revenue was derived from software and services related to our
Windchill CPC solution.
License revenue decreased 6% in 1998 and 8% in 1999. Several
factors, including those described below, contributed to these
decreases. In August 1998 we repackaged and repriced our core
Pro/ENGINEER design software. The average selling price of this software
decreased by 7% in 1998 and by 16% in 1999 due primarily to this
repricing and repackaging. Product unit sales were flat in 1998 and up
1% in 1999; however, the increase in unit sales was not sufficient to
offset the impact of the decrease in the average price of our software.
In addition, we reorganized our sales force during 1999 from a
territorial focus to a named-account focus in order to move to a more
strategic, solutions-oriented selling approach. In the near-term, the
disruption in our sales force caused by the reorganization resulted in
lower sales capacity and lower productivity in 1999 compared to 1998 and
1997. Also, in October 1998, Rand A Technology Corporation became our
exclusive distributor to small businesses in the U.S. and Europe, and,
as described below, its performance was impacted by the transition
required by this new relationship. Moreover, in 1998, we experienced
weaker than anticipated results in the Asia/Pacific region. Additional
factors affecting our revenues and operating results are listed under
"Important Factors That May Affect Future Results"
below.
We licensed over 90% of our products directly to end-user
customers in each of the last three fiscal years. The balance was
licensed through third-party distributors. The percentage of our
CAD/CAM/CAE products that we license through third-party distributors
may increase in the future.
Our service revenue is derived from the sale of software
maintenance contracts and the performance of training and consulting
services. Service revenue, which has a lower gross profit margin than
license revenue, accounted for 34% of total revenue in 1997, and
increased to 40% in 1998 and 47% in 1999. Service revenue increased 22%
in 1998 and 21% in 1999. This increase is the result of growth in our
installed customer base and increased training and consulting services
performed for these customers offset by a decline in the Computervision
installed base. We expect service revenue to continue to increase in
absolute dollars in 2000.
We derived 57%, 56% and 56% of our total revenue from sales to
international customers in 1997, 1998 and 1999, respectively. Direct
export sales were $148.5 million, $115.2 million and $166.2 million in
1997, 1998 and 1999, respectively.
[Chart Showing Revenue By Geography (in
millions)]
|
1997
|
1998
|
1999
|
U.S. |
$424.3
|
$449.9
|
$464.4
|
Europe |
364.2
|
408.1
|
390.0
|
Asia/Pacific |
191.2
|
160.0
|
203.2
|
Over the past year, we implemented several strategic initiatives
designed to provide a foundation for future growth. These initiatives
included the repricing and repackaging of our Pro/ENGINEER product line
that we undertook in the fourth quarter of 1998; the reorganization of
our sales force during 1999 as part of our transition to a more
strategic, solutions-oriented approach to sales and service; and our
investment in the start up of our Windchill CPC solutions. As the
transformation of our sales force continues to take shape and our
Windchill CPC solutions continue to gain market acceptance, we expect to
see future growth. Given the transitional nature of these initiatives,
however, the timing and magnitude of that growthand therefore
near-term resultsremain uncertain. In addition, these initiatives,
especially our emphasis on larger, more enterprise-wide solutions, have
resulted in longer and less predictable sales cycles and, at least in
the short term, increased our dependence on consummating larger
transactions in general. Our revenue growth and the level of our total
revenue will be affected by the success of this approach and these
initiatives, together with the factors referred to below under
"Important Factors That May Affect Future Results."
In the first quarter of 1999, as part of our effort to focus our
sales force on larger accounts, we appointed Rand as our exclusive
distributor of mechanical design products to small businesses (i.e.,
those with revenues of $10 million and below). Rand is in the process of
developing its marketing, sales and distribution networks and has faced
increased competition from low-priced products. In the third quarter of
1999, we expanded the size of Rand's sales opportunities by appointing
it as a non-exclusive distributor for a broader segment of small
businesses in the U.S. and Germany. Providing this broader base of
business opportunity should assist Rand in further developing its
network and growing sales of our products. Our results could be
adversely affected if Rand is unable to achieve certain sales levels or
if it is unable to make existing and future minimum quarterly revenue
payments.
All cost and expense categories in 1997, 1998 and 1999 were
impacted by the acquisition and nonrecurring charges taken. See Note B.
Our operating expenses are based on anticipated future revenue and are
relatively fixed for the short term. We are incurring expenses that
would support revenues in excess of current levels in order to implement
our strategic initiatives, particularly as they relate to our Windchill
CPC solutions. Although these expense levels have adversely affected net
income, we continue to believe that these initiatives will provide a
foundation for future growth.
Our cost of license revenue consists of costs associated with
reproducing and distributing software and documentation and the payment
of royalties. Cost of license revenue as a percent of license revenue
has been 3% for each of the last three years.
Our 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. The increase in our cost of service revenue resulted primarily
from growth in the staffing necessary to generate increased worldwide
service revenue and to provide ongoing high-quality customer support to
our growing installed base. Cost of service revenue as a percent of
service revenue has been 39%, 34% and 39% in 1997, 1998 and 1999,
respectively. This increase reflects our investment in the staffing
necessary to support our new product offerings, principally our
Windchill CPC solutions.
Our sales and marketing expenses primarily include salaries and
benefits, sales commissions, travel and facility costs. These costs
increased 2% in 1998 and 3% in 1999 primarily due to the growth of the
sales force related to our Windchill CPC solutions, partially offset by
reductions associated with the sales force reorganizations. Total sales
and marketing employees were 2,395 in 1997, 2,440 in 1998 and 1,980 in
1999. The higher costs in 1999 are due to the higher average cost per
sales employee. International sales and marketing expenses represented
62% in 1997, 59% in 1998 and 57% in 1999 of total sales and marketing
expenses.
Our research and development expenses consist principally of
salaries and benefits, expenses associated with product translations,
costs of computer equipment used in software development and facility
expenses. Compared to the prior years, research and development expenses
were flat in 1998 and increased 33% in 1999. The flat level of spending
in 1998 compared to 1997 is primarily attributable to the impact of
workforce reductions associated with the Computervision merger offset by
our continued investment in research and development, particularly in
relation to our Windchill CPC solutions. The increase in 1999 compared
to 1998 is primarily attributable to our continued investment in
Windchill CPC solutions, including our InPart, Division and auxilium
acquisitions in 1999. We expect our investment in research and
development to increase in absolute dollars in 2000.
|
General
and Administrative
|
Our general and administrative expenses include the costs of our
corporate, finance, information technology, human resources and
administrative functions. These costs decreased 5% in 1998 and increased
10% in 1999. The decrease in these expenses in 1998 was principally due
to the impact of workforce reductions and lower depreciation related to
fixed asset write-offs associated with our merger with Computervision.
The increase in 1999 represents our continued investment in information
technology and the integration of acquired companies.
[Chart Showing Cost and Expenses (in
millions)]
|
1997
|
1998
|
1999
|
Cost of License Revenue |
$ 18.3
|
$ 15.3
|
$ 16.5
|
Cost of Service Revenue |
131.1
|
140.6
|
191.1
|
Sales and Marketing |
388.5
|
395.4
|
407.9
|
Research and Development |
93.2
|
93.2
|
124.1
|
General and Administrative |
59.8
|
57.0
|
62.9
|
Amortization of Goodwill and Intangible assets |
2.7
|
2.7
|
22.9
|
Acquisition and Nonrecurring Charges |
45.0
|
105.8
|
53.3
|
|
Amortization of Goodwill and Other Intangible
Assets
|
These costs represent the amortization of intangible assets
acquired, including developed technology, goodwill, customer lists,
assembled work force and trade names. The increased amortization of
$20.2 million in 1999 compared to 1997 and 1998 resulted from our 1999
acquisitions.
|
Acquisition and Nonrecurring Charges
|
Computervision. In January 1998, we
merged with Computervision Corporation by issuing 11.6 million shares of
common stock in exchange for all of the outstanding common stock of
Computervision. In connection with the merger, we incurred a
nonrecurring charge of $76.8 million for merger-related integration,
consolidation and transaction costs in the second quarter of 1998. The
charge included $18.1 million of severance and termination benefits
related to the elimination of approximately 450 positions, $12.7 million
for the write-off of assets, $8.2 million for transaction costs, $17.4
million of contract costs associated with revised estimates, $7.2
million for the closing of leased facilities and $13.2 million of lease
termination and other costs. For additional information see Note
B.
ICEM. In June 1998, we acquired
ICEM Technologies, a division of Control Data Systems, Inc. for $40.6
million in cash. Headquartered in Frankfurt, Germany, ICEM provides
advanced surfacing and reverse engineering software tools used by body
and styling engineers in the automotive and aerospace industries. The
acquisition was accounted for as a purchase. Accordingly, we allocated
the purchase price to the assets acquired and liabilities assumed based
on our estimates of fair value. The amounts allocated to tangible and
intangible assets acquired less the liabilities assumed exceeded the
purchase price by approximately $7.0 million. This excess value over the
purchase price was allocated to reduce proportionately the values
assigned to long-term assets and purchased in-process research and
development (R&D) in determining their
values. The values assigned included $2.1 million for net assets acquired,
$28.9 million for purchased in-process R&D, $8.0 million for
developed technology, $1.6 million for an assembled workforce and $1.0
million for trade names.
InPart. In October 1998, we
purchased InPart Design, Inc., a developer of DesignSuite, a Web-based
repository of 3D mechanical component data, as well as the developer of
enterprise software applications focused on Web-based component and
supplier management, which was founded in 1996. We allocated the
purchase price of $38.1 million to the assets acquired and liabilities
assumed based on our estimate of fair value. The values assigned
included $741,000 for net liabilities assumed, $10.6 million for
purchased in-process R&D, $4.1 million for developed technology,
$1.1 million for customer lists, $200,000 for an assembled workforce and
$300,000 for trade names. The excess purchase price over the amounts
allocated to assets acquired and liabilities assumed was recorded as
goodwill of $22.5 million.
Division. In March 1999, we
purchased Division Group plc, a developer of enterprise product data
visualization, simulation and integration tools. We allocated the
purchase price of $48.1 million to the assets acquired and liabilities
assumed based on our estimates of fair value. The values assigned
included $555,000 for net assets acquired, $9.0 million for purchased
in-process R&D, $3.3 million for developed technology, $2.0 million
for customer lists, $970,000 for an assembled workforce and $2.5 million
for trade names. The excess purchase price over the amounts allocated to
assets acquired and liabilities assumed was recorded as goodwill of
$29.8 million.
auxilium. In March 1999, we
purchased auxilium inc., a developer of Web-based software tools for the
integration of legacy systems, databases and applications, which was
founded in 1997. We allocated the purchase price of $101.7 million to
the assets acquired and liabilities assumed based on our estimates of
fair value. The values assigned included $182,000 for net liabilities
assumed, $18.6 million for purchased in-process R&D, $700,000 for
developed technology, $5.0 million for customer lists, $630,000 for an
assembled workforce and $6.0 million for trade names. The excess
purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $70.9
million.
In the opinion of management, the purchased in-process R&D
for the acquisitions of ICEM, InPart, Division and auxilium had not yet
reached technological feasibility and had no alternative future use.
Accordingly, we recorded nonrecurring charges of $28.9 million during
the third quarter of 1998 related to ICEM, $10.6 million in the first
quarter of 1999 related to InPart and $27.6 million in the second
quarter of 1999 related to Division and auxilium. The values assigned to
purchased in-process R&D were determined by identifying research
projects for which technological feasibility had not been established.
The values of the purchased in-process R&D were determined by
estimating the stage of completion, including consideration of the
complexity of the work completed, the costs incurred and the projected
costs to complete, the contribution of any core technology and other
acquired assets and the projected product introduction dates, estimating
the resulting net cash flows from the products developed and discounting
the net cash flows back to their present value. For each acquisition,
the estimates were based on the following major assumptions:
ICEM:
|
|
Revenue was estimated to grow at a compound rate of 33% over
the first five years and 14% thereafter.
|
|
|
Cost of
revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 20% to 10%
through 2006 based on ICEM's average historical cost of revenue and
reflect future economies of scale.
|
|
|
Selling,
general and administrative expenses were estimated to be 29% of
revenue for all periods, consistent with ICEM's historical
average.
|
InPart:
|
|
Revenue was
estimated to begin late in 1999 and to grow based on industry growth
rates and Inpart's specific product offerings.
|
|
|
Cost of
revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 22% to 11% based
on InPart's average historical cost of revenue and reflect future
economies of scale.
|
|
|
Selling,
general and administrative expenses, as a percentage of revenue, were
estimated to be 99% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40%
thereafter. These amounts were based on industry average historical
selling, general and administrative costs.
|
Division:
|
|
Revenue was
based on industry growth rates and Division's specific product
offerings.
|
|
|
Cost of
revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be 15% based on Division's
average historical cost of revenue.
|
|
|
Selling,
general and administrative expenses, as a percentage of revenue, were
estimated to be 47% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 41%
thereafter. These amounts were based on industry average historical
selling, general and administrative costs.
|
auxilium:
|
|
Revenue was
based on industry growth rates and auxilium's specific product
offerings.
|
|
|
Cost of
revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be between 32% and 26% based
on auxilium's average historical cost of revenue.
|
|
|
Selling,
general and administrative expenses, as a percentage of revenue, were
estimated to be 53% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40%
thereafter. These amounts were based on industry average historical
selling, general and administrative costs.
|
The net cash flows also considered net working capital
requirements and capital spending needs related to the purchased
in-process technology. The rates used to discount net cash flows for the
purchased in-process technology to its present value for the ICEM (24%),
Inpart (28%), Division (25%) and auxilium (26% to 30%) acquisitions were
based on the weighted average cost of capital and took into account the
uncertainty surrounding the successful development of the purchased
in-process technology for each acquisition. If these projects are not
successfully developed, future revenue and profitability may be
adversely affected, and the value of intangible assets acquired may
become impaired.
Nonrecurring Charges
Computervision. Our results for
1997 include a nonrecurring charge of $45.0 million related to the
restructuring of the Computervision software business in order to reduce
costs and improve operating results in future periods by reducing
personnel by approximately 300 positions and closing certain
facilities.
Sales Force Reorganizations. During
the first quarter of 1999, we reorganized our sales force to provide a
more focused approach to the unique product and service requirements of
our customers. In connection with this action, we incurred a
restructuring charge of $3.2 million for the severance and termination
benefits of approximately 170 people who had been terminated during the
first quarter of 1999 in accordance with management's plans. During the
second quarter of 1999, we incurred a restructuring charge of $5.8
million primarily for the severance and termination benefits of
approximately 150 people in connection with the integration of our sales
and related support groups. All amounts related to terminated employees
were paid in 1999.
Facility Consolidation and Asset Impairment.
During the second quarter of 1999, we incurred a restructuring
charge of $1.4 million for the consolidation of certain excess leased
facilities. Also, in the second quarter we
recorded an impairment loss of $4.7 million on certain intangible assets
related to our industrial design (CDRS) activities. Due to recent
acquisitions and the development of new technology, the carrying value
of these assets was impaired.
Our interest expense in 1997 and 1998 related primarily to debt
incurred by Computervision prior to the merger that we paid off in the
second quarter of 1998. See Note G.
Interest income relates to the earnings on the investment of our
excess cash balance in various financial instruments. The 1998 increase
in interest income of 5% resulted from higher average annual yields
compared to 1997. The 41% decrease in interest income in 1999 compared
to 1998 resulted from lower average annual yields and lower average cash
balances of approximately $140 million.
A large portion of our revenue and expenses is transacted in
foreign currencies. In order to reduce our exposure to fluctuations in
foreign exchange rates, from time to time we engage in hedging
transactions involving the use of foreign exchange forward contracts and
foreign exchange option contracts in the primary European and Asian
currencies. Our other expense includes the costs of the hedging
contracts, the gain or loss from the translation of results for
subsidiaries for which the U.S. dollar is the functional currency and
other charges incurred in connection with financing customer contracts.
See Note A.
Our effective income tax rate was 57% in 1997, 48% in 1998 and
34% in 1999. The higher effective tax rate in 1997 and 1998 over the
statutory federal tax rate (35%) was due primarily to the
non-deductibility of certain expenses included in the acquisition and
nonrecurring charges in 1998 as well as the net operating losses of
Computervision incurred principally in 1997 which could not be
benefited. The lower effective tax rate in 1999 resulted primarily from
the use of Computervision net operating losses, partially offset by the
non-deductibility of certain acquisition-related charges. Excluding
non-benefited net operating losses and acquisition and
nonrecurring charges, our tax rate was 35% in 1997, 34% in 1998 and 27%
in 1999. See Note F.
In connection with the Computervision merger, we assumed a
revolving note payable and long-term debt obligations. During the second
quarter of 1998, we paid $275.7 million for settlement of the
outstanding note, debt obligations, accrued interest and related fees,
and we incurred an extraordinary after-tax loss of $19.0 million related
to the write-off of deferred financing costs and other prepayment costs
associated with this debt. See Note G.
Liquidity and Capital Resources
Our operating activities, the proceeds from our issuance of stock
under stock plans and existing cash and investments provided sufficient
resources to fund our employee base, capital asset needs, stock
repurchases, acquisitions and financing needs, in all years
presented.
As of September 30, 1999, cash and investments totaled $353.9
million, down from $426.2 million at September 30, 1998. The primary
reasons for the decrease in cash and investments during 1999 were the
repurchase of $90.0 million of common stock, the $72.9 million of
payments for two of the acquisitions during the year and the $35.2
million of payments to acquire property and equipment partially offset
by the net cash provided by operating activities. Our investment
portfolio is diversified among security types, industries and individual
issuers. Our investments are generally liquid and investment grade. The
portfolio is primarily invested in short-term securities to minimize
interest rate risk and to facilitate rapid deployment in the event of
immediate cash needs.
Cash generated from operating activities was, $195.8 million in
1997, $181.9 million in 1998 and $150.8 million in 1999, including cash
expenditures for nonrecurring charges of $38.9 million in 1997, $62.3
million in 1998 and $34.2 million in 1999.
In 1997, 1998 and 1999, we acquired $36.2 million, $35.8 million
and $35.2 million, respectively, of capital equipment consisting
principally of computer equipment, software and office equipment. We
spent $5.0 million in 1997, $40.6 million in 1998 and $72.9 million in
1999 to acquire businesses. These expenditures were partially offset by
$30.1 million received from the sale of a Computervision business unit
in June 1997. In the third quarter of 1999 we purchased ModelCHECK, a
software productivity tool for the Pro/ENGINEER product line, for $20
million. In December 1999, we sold land and certain improvements under
construction for approximately $31 million and entered into a lease
covering approximately 381,000 square feet of office space in the Boston
area that will allow us to consolidate and replace our Waltham
operations. Occupancy and rent should begin in December 2000 and expire
in December 2012, subject to completion of construction.
We used net cash for financing activities in 1997, 1998 and 1999,
primarily to repurchase $184.8 million, $50.0 million and $90.0 million,
respectively, of our stock, and to pay off the Computervision debt in
1998 of $275.7 million. These expenditures were partially offset by
proceeds of $66.3 million, $70.4 million and $23.9 million, in 1997,
1998 and 1999, respectively, from the issuance of our common stock under
our stock plans.
In May 1994, we announced that our Board of Directors had
authorized a plan allowing us to repurchase up to 6.0 million shares of
our common stock. In September 1997, our Board of Directors increased
that number to 12.0 million. In October 1997, in anticipation of the
Computervision merger, we suspended repurchases and the Board of
Directors ultimately rescinded its authorization of the repurchase
program in November 1997. Under the program, we repurchased a total of
11.6 million shares at a cost of $260.0 million. In September 1998, our
Board of Directors authorized a new plan that allows us to repurchase of
up to 20.0 million shares. Through September 30, 1999, we purchased 11.0
million shares at a cost of $139.9 million. The repurchased shares will
be used to issue shares for stock option exercises, employee stock
purchase plans and potential acquisitions.
We believe that existing cash and short-term investments together
with cash generated from operations and the issuance of common stock
under our stock plans will be sufficient to meet our working capital,
financing and capital expenditure requirements through at least
2000.
Year 2000 Compliance
Concerns have been widely expressed regarding the inability of
certain computer programs to properly process certain date information,
particularly beyond the year 1999. These concerns focus on the impact of
the "Year 2000 problem" on business operations and the potential costs
associated with identifying and addressing the problem.
State of Readiness. We developed a
Year 2000 readiness plan focusing on: (i) assessing the readiness of our
product offerings, internal business systems and major vendors and
suppliers; (ii) addressing known risks; and (iii) planning and budgeting
for reasonably likely contingencies.
We have completed testing our current product offerings for Year
2000 compliance, and based on our review we believe that our current
product offerings are Year 2000-compliant. Some limited testing of newly
acquired products is ongoing. We conducted only limited testing of
products that are no longer offered, and thus the Year 2000 compliance
of such products is generally not known. Many of these untested products
are previous releases of current offerings. Our customers can upgrade
many of these products to achieve Year 2000 compliance.
We have also reviewed and upgraded our internal information
technology and business systems, both domestically and internationally,
to ensure Year 2000 readiness.
Finally, we have surveyed the Year 2000 readiness of our major
vendors and suppliers, with a particular focus on assuring the Year 2000
readiness of our mission critical vendors and suppliers.
Cost of Year 2000 Compliance. Costs
incurred in our Year 2000 compliance effort include the allocation of
personnel to testing our products and systems as well as to upgrading
internal systems. During 1999, we incurred costs of approximately $4.0
million on our compliance project. Costs were expensed as incurred. We
do not at this time foresee a material impact on our business or
operating results from the Year 2000 problem. We cannot, of course,
predict the nature or materiality of the impact on our operations or
operating results of Year 2000 disruption by parties over whom we have
no control. Furthermore, the purchasing patterns of our customers or
potential customers may be affected by Year 2000 issues if they must
expend significant resources to correct their own systems. As a result,
they may have fewer funds available to purchase our products and
services.
Risk of Year 2000 Issues and Contingency Plans.
Our worst case Year 2000 scenarios would include: (i)
undetected errors or uncorrected defects in our current product
offerings; (ii) corruption of data contained in our internal information
systems that would inhibit core business functions; and (iii) the
failure of infrastructure services provided by third parties and
government agencies (e.g., electricity, phone/fax service,
internet/email, shipping and banking services, etc.). We have
contingency plans in all of these areas that include among other things,
the availability of support personnel to assist with customer support
issues, manual "work arounds" for internal software failure and
substitution of systems, if needed.
New Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we
will be required to comply with certain changes in accounting rules and
regulations. See Note A.
Important Factors That May Affect Future
Results
The following are some of the factors that could affect our
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Annual Report on Form 10-K
and otherwise made by us or on our behalf, because these factors could
cause actual results and conditions to differ materially from those
projected in forward-looking statements.
I. Operational
Considerations
|
Our
operating results fluctuate within each quarter and from
quarter-to-quarter making our future revenues and operating results
difficult to predict
|
While our sales cycle varies substantially from customer to
customer, we usually realize a high percentage of our revenue in the
third month of each fiscal quarter, and this revenue tends to be
concentrated in the latter half of that month. Our orders early in a
quarter will not generally occur at a rate which, if sustained
throughout the quarter, would be sufficient to assure that we will meet
our revenue targets for any particular quarter. Moreover, our sales
force reorganizations in 1999 and our shift in business emphasis to a
more solutions-oriented sales processundertaken in part to
increase our average order sizehave resulted in longer and more
unpredictable sales cycles for products and services. Accordingly, our
quarterly results may be difficult or impossible to predict prior to the
end of the quarter. Any inability to obtain large orders or orders in
large volumes or to make shipments or perform services in the period
immediately preceding the end of any particular quarter may cause the
results for that quarter to fall short of our revenue targets. In
addition, our operating expenses are based on expected future revenue
and are relatively fixed for the short term. As a result, a revenue
shortfall in any quarter could cause our earnings for that quarter to
fall below expectations as well. Any failure to meet our quarterly
revenue or earnings targets could adversely impact the market price of
our stock.
Other factors that may also cause quarter-to-quarter revenue and
earnings fluctuation, include the following:
|
|
our sales
incentive structure is weighted more heavily toward the end of the
fiscal year, and the rate of revenue growth for the first quarter
historically has been lower and more difficult to predict than that
for the fourth quarter of the immediately preceding fiscal year;
and
|
|
|
variability
in the levels of professional service revenues and the mix of our
license and service revenues.
|
In addition, the levels of quarterly or annual software or
service revenue in general, or for particular geographic areas, may not
be comparable to those achieved in previous periods.
|
We may not
be able to implement new initiatives successfully
|
We have had a history of rapid growth and development as an
organization. Part of our success has resulted from our ability to
implement new initiatives. Our future operating results will continue to
depend upon:
|
|
the success of our sales force reorganization initiatives,
including
|
|
- |
our shift
from point sales to solution sales,
|
|
- |
our shift
from geography-based to named-account sales,
|
|
- |
the ability
of our sales reps to learn and sell our full product line,
and
|
|
- |
Rand's
ability to perform, including building a distributor network and
competing successfully in the small business segment of the mechanical
CAD/CAM/CAE arena
|
|
|
our ability
to anticipate and meet evolving customer requirements in the CPC arena
and successfully deliver products and services at an enterprise level;
and
|
|
|
our ability
to identify and penetrate additional industry segments that represent
growth opportunities.
|
|
We may not
be successful in integrating recently acquired businesses or
products
|
We have increased our product range and customer base in the
recent past due in part to acquisitions. We may acquire additional
businesses or product lines in the future. The success of any
acquisition may be dependent upon our ability to integrate the acquired
business or products successfully and to retain key personnel and
customers associated with the acquisition. If we fail to do so, or if
the costs of or length of time for integration increase significantly,
it could negatively affect our business.
In addition, acquisitions may result in the allocation of
purchase price to in-process R&D. The Securities and Exchange
Commission (SEC) has raised issues regarding the methodologies used and
allocation of purchase price to in-process R&D and has required some
companies to adjust or restate prior periods to reduce allocations to
in-process R&D, thereby increasing intangible assets and future
amortization expense. While we believe that our in-process R&D
allocations are appropriate, if the SEC were to require us to change an
allocation, this would result in a higher amortization expense, which
would adversely impact our operating results.
|
We are
dependent on key personnel whose loss could cause delays in our
product development and sales efforts
|
Our success depends upon our ability to attract and retain highly
skilled technical, managerial and sales personnel. Competition for such
personnel in the high technology industry is intense. We assume that we
will continue to be able to attract and retain such personnel. The
failure to do so, however, could have a material adverse effect on our
business.
|
We must
continually modify and enhance our products to keep pace with changing
technology, and we may experience delays in developing and debugging
our software
|
We must continually modify and enhance our products to keep pace
with changes in computer software, hardware and database technology, as
well as emerging standards in the Internet software industry. Our
ability to remain competitive will depend on our ability to:
|
|
enhance our
current offerings and develop new products and services that keep pace
with technological developments through
|
|
- |
internal
research and development,
|
|
- |
acquisition
of technology, and
|
|
- |
strategic
partnerships;
|
|
|
meet evolving
customer requirements, especially ease-of-use;
|
|
|
provide
adequate funding for development efforts; and
|
|
|
license
appropriate technology from third parties.
|
Also, as is common in the computer software industry, we may from
time to time experience delays in our product development and
"debugging" efforts. Our performance could be hurt by significant delays
in developing, completing or shipping new or enhanced products. Among
other things, such delays could cause us to incorrectly predict the
fiscal quarter in which we will realize revenue from the shipment of the
new or enhanced products and give our competitors a greater opportunity
to market competing products.
|
We may be
unable to price our products competitively or distribute them
effectively
|
Our success is tied to our ability to price our products and
services competitively and to deliver them efficiently, including our
ability to:
|
|
provide
products with functionality that our customer want at a price they can
afford;
|
|
|
build
appropriate direct distribution channels;
|
|
|
utilize the
Internet for sales; and
|
|
|
build
appropriate indirect distribution channels through Rand or
others.
|
|
We depend
on sales from outside the United States that could be adversely
affected by changes in the international markets
|
A significant portion of our business comes from outside the
United States. Accordingly, our performance could be adversely affected
by economic downturns in Europe or the Asia/Pacific region. Another
consequence of significant international business is that a large
percentage of our revenues and expenses are denominated in foreign
currencies that fluctuate in value. Although we may enter into foreign
exchange forward contracts and foreign exchange option contracts to
offset a portion of the foreign exchange fluctuations, unanticipated
events may have a material impact on our results. Other risks associated
with international business include:
|
|
changes in
regulatory practices and tariffs;
|
|
|
staffing and
managing foreign operations, including the difficulties in providing
cost-effective, equity-based compensation to attract skilled
workers;
|
|
|
longer
collection cycles in certain areas;
|
|
|
potential
changes in tax and other laws;
|
|
|
greater
difficulty in protecting intellectual property rights; and
|
|
|
general
economic and political conditions.
|
We may not be able to obtain copyright or patent protection
for the software products we develop or our other
trademarks
Our software products and our other trademarks, including our
company names, product names and logos, are proprietary. We protect our
intellectual property rights in these items by relying on copyrights,
trademarks, patents and common law safeguards, including trade secret
protection, as well as restrictions on disclosures and transferability
contained in our agreements with other parties. Despite these measures,
there can be no assurance that the laws of all relevant jurisdictions
will afford adequate protection to our products and other intellectual
property. The software industry is characterized by frequent litigation
regarding copyright, patent and other intellectual property rights.
While we have not, to date, had any significant claims of this type
asserted against us, there can be no assurance that someone will not
assert such claims against us with respect to existing or future
products or other intellectual property or that, if asserted, we would
prevail in such claims. In the event a lawsuit of this type is filed, it
could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not we ultimately
prevail.
II. Mechanical CAD/CAM/CAE-Related
Considerations
Increasing competition in the mechanical CAD/CAM/CAE
marketplace may reduce our revenues
There are an increasing number of competitive mechanical
CAD/CAM/CAE products. Increased competition and market acceptance of
these products could have a negative effect on our pricing and revenues
for these products, which could have a material adverse affect on our
results.
In addition, our CAD/CAM/CAE software is capable of performing on
a variety of platforms. Several of our competitors focus on single
platform applications, particularly Windows-based platforms. There can
be no assurance that we will have a competitive advantage with multiple
platform applications.
We continue to enhance our existing products by releasing
updates. Our competitive position and operating results could suffer
if:
|
|
we fail to
anticipate or to respond adequately to customer requirements or to
technological developments, particularly those of our
competitors;
|
|
|
we delay the
development, production, testing, marketing or availability of new or
enhanced products or services; or
|
|
|
customers
fail to accept such products or services.
|
Our assumptions about growth in the CAD/CAM/CAE industry may
be incorrect
Our revenue projections make certain assumptions about growth in
the mechanical CAD/CAM/CAE industry. There could be a material adverse
affect on our operating results in any quarter if these assumptions
prove to be incorrect.
III. CPC and Windchill Strategy
Considerations
We are implementing a new strategy to capitalize on an
Internet-based, business-to-business market opportunity known as
Collaborative Product Commerce (CPC). It may be that our assumptions
about the CPC market opportunity are wrong, which could adversely affect
our results
We have identified Collaborative Product Commerce as a new market
opportunity for us, and have devoted significant resources toward
capitalizing on that opportunity. CPC solutions include software and
services that use Internet technologies to permit employees, customers,
suppliers and others to collaboratively develop, build and manage
products throughout their entire lifecycle. Because the market for
software products that allow companies to collaborate on product
information on an enterprise-wide level is newly emerging and because
companies have not traditionally linked customers and suppliers in this
process directly, we cannot be certain as to the size of this market,
whether it will grow, or whether companies will elect to utilize our
products rather than attempt to develop applications internally or
through other sources.
In addition, companies that have already invested substantial
resources in other methods of sharing product information in the
design-through-manufacture process may be reluctant to adopt a new
approach that may replace, limit or compete with their existing systems
or methods. We expect that we will continue to need to pursue intensive
marketing and sales efforts to educate prospective customers about the
uses and benefits of our products. Demand for and market acceptance of
our products will be affected by the success of these
efforts.
Our Windchill software, which is central to our CPC strategy,
is relatively new and is not yet well established in the
marketplace
The success of our CPC strategy will depend in large part on the
ability of our Windchill solutions to meet customer expectations,
especially with respect to:
|
|
full
capability and functionality;
|
|
|
ability to
support a large user base; and
|
|
|
quality and
efficiency of the services we perform relating to implementation and
customization.
|
The software is still in the initial stages of customer
installation and implementation. If our customers cannot successfully
implement large-scale deployments or if they determine that we are
unable to accommodate large-scale deployments, our operating results may
be affected.
In addition, implementing a Windchill software solution on an
enterprise level takes longer and requires greater expertise than does
installing our other products. Our Windchill software must integrate
with existing computer systems and software programs used by our
customers and their partners. Because we are one of the first companies
to offer a CPC solution, many customers will be facing these integration
issues for the first time, particularly in the context of collaborating
with members of the extended enterprise, including customers and supply
chain partners. Our customers could become dissatisfied with our
products or services if integrations prove to be difficult, costly or
time consuming, and our ability to recognize service revenue could be
impaired.
Competition among providers of CPC solutions may increase,
which may reduce our profits and limit or reduce our market
share
The market for CPC solutions is new, highly fragmented, rapidly
changing and increasingly competitive. We expect competition to
intensify, which could result in price reductions for our products and
services, reduced gross margins and loss of market share. Our primary
competition comes from:
|
|
in-house
development efforts by potential customers or partners;
|
|
|
other vendors
of engineering information management software; and
|
|
|
larger, more
well-known enterprise software providers seeking to extend the
functionality of their products to encompass CPC.
|
In addition, our professional services organization may face
increasing competition for follow-on customization services from other
third-party consultants and service providers.
If use of the Internet does not continue to develop or
reliably support the demands placed on it by electronic commerce, we may
experience a loss of sales
Our success depends upon continued growth in the use of the
Internet as a medium of commerce. Although the Internet is experiencing
rapid growth in the overall number of users, this growth is a recent
phenomenon and may not continue. Furthermore, the use of the Internet
for commerce is still relatively new. As a result, a sufficiently broad
base of companies and their supply chain partners may not adopt or
continue to use the Internet as a medium of exchanging product
information. Our CPC strategy would be seriously harmed if:
|
|
use of the
Internet does not continue to increase or increases more slowly than
expected;
|
|
|
the
infrastructure for the Internet does not effectively support
enterprises and their supply chain partners;
|
|
|
the Internet
does not create a viable commercial marketplace, thereby inhibiting
the development of electronic commerce and reducing the demand for our
products; or
|
|
|
concerns over
the secure transmission of confidential information over public
networks inhibit the growth of the Internet as a means of conducting
commercial transactions.
|
Our CPC strategy will also be seriously harmed if the Internet
infrastructure is not able to support the demands placed on it by
increased usage or the limited capacity of networks to transmit large
amounts of data, or if delays in the development or adoption of new
equipment standards or protocols required to handle increased levels of
Internet activity, or increased governmental regulation, cause the
Internet to lose its viability as a means of communication between
manufacturers and their customers and supply chain partners.
IV. Other
Considerations
Our stock price, which may reflect an Internet valuation, has
been highly volatile; this may make it harder to resell your shares at
the time and at a price that is favorable to you
Market prices for securities of software companies have generally
been volatile. In particular, the market price of our common stock has
been and may continue to be subject to significant
fluctuations.
In addition, our expanded focus on delivering Internet-based
solutions may cause us to be viewed, in part, as an Internet company.
The trading prices of Internet stocks in general are unusually high
under conventional valuation standards such as price-to-earnings and
price-to-sales ratios and have experienced fluctuations unrelated or
disproportionate to the operating performance of these companies. The
trading prices and valuations of these stocks, and of ours, may not be
sustained. Any negative change in the public's perception of the
prospects of Internet or e-commerce companies, or of PTC as an Internet
company, could depress our stock price regardless of our
results.
Also, a large percentage of our common stock traditionally has
been held by institutional investors. Consequently, actions with respect
to our common stock by certain of these institutional investors could
have a significant impact on the market price of the stock. For more
information, please see our proxy statement with respect to our most
recent annual meeting of stockholders and Schedules 13D and 13G filed
with the SEC with respect to our common stock.
|
We are
currently defending a securities class action lawsuit in which we
could be liable for damages
|
Certain class action lawsuits were filed by shareholders in the
fourth quarter of 1998 against us and certain of our current and former
officers and directors in the U.S. District Court in Massachusetts
claiming violations of the federal securities laws based on alleged
misrepresentations regarding our anticipated revenue and earnings for
the third quarter of 1998. The plaintiffs in these lawsuits joined
together to file a consolidated and amended complaint in the second
quarter of 1999. The consolidated and amended complaint seeks
unspecified damages. We believe the claims made in the consolidated and
amended complaint are without merit, and we intend to defend them
vigorously. In the third quarter of 1999 we filed a motion to dismiss
the consolidated and amended
complaint. We cannot predict the outcome of this motion or the ultimate
resolution of this action at this time, and there can be no assurance
that the litigation will not have a material adverse impact on our
financial condition or results of operations.
|
Year 2000
problems could cause interruption or failure with respect to our
product offerings, our internal computer systems and those of our
critical vendors and suppliers
|
Our operations and results could be adversely affected if our
current product offerings or internal systems are not made Year 2000
compliant or if the major vendors or suppliers with whom we deal are not
Year 2000 ready and cannot be easily replaced. In addition, purchases by
our customers could be affected if they must expend significant
resources to correct their own systems.
|
Our
operations in Europe may be affected by the European Union's
conversion to a common currency
|
The conversion of major European countries to a common legal
currency creates uncertainties for companies like us that do significant
business in Europe. These uncertainties include technical adaptation of
internal systems to accommodate euro-denominated transactions, long-term
competitive implications of the conversion and the effect on market risk
with respect to financial instruments.
ITEM 7A: Quantitative and Qualitative Disclosures
about Market Risk
We face exposure to financial market risks, including adverse
movements in foreign currency exchange rates and changes in interest
rates. These exposures may change over time as business practices evolve
and could have a material adverse impact on our financial results. Our
primary exposure has been related to local currency revenue and
operating expenses in Europe and the Asia/Pacific region. Historically,
we have hedged currency exposures associated with certain accounts
receivable denominated in local currencies and certain anticipated
foreign currency revenue transactions. The goal of our hedging activity
is to offset the impact of currency fluctuations on certain local
currency accounts receivable and 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, we could experience unanticipated currency gains or losses.
Outstanding forward foreign exchange contracts at September 30, 1999
matured within three months, and did not have a material impact on our
financial results.
The carrying amounts reflected in the consolidated balance sheets
for cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value at the balance sheet date due to the short
maturities of these instruments.
We maintain 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 market value with unrealized gains or losses included in
stockholders' equity. Given the short maturities and investment grade
quality of the portfolio holdings at September 30, 1999, a sharp rise in
interest rates should not have a material adverse impact on the fair
value of our investment portfolio. As a result, we do not currently
hedge these interest rate exposures.
The following table presents hypothetical changes in fair values
in our financial instruments at September 30, 1999 that are sensitive to
changes in interest rates. Our modeling technique measures the change in
fair value arising from selected potential changes in interest rates.
Movements in interest rates of plus or minus 50 basis points (BP) and
100 BP reflect immediate hypothetical shifts in the fair value of these
investments. Fair value represents the market principal plus accrued
interest and dividends of certain interest-rate-sensitive securities
considered cash equivalents or investments for financial reporting
purposes at September 30, 1999.
Type of Security
|
|
Valuation of
securities given an
interest rate decrease
|
|
No change
in
interest rates
|
|
Valuation of
securities given an
interest rate increase
|
(in millions) |
|
(100 BP)
|
|
(50 BP)
|
|
|
50 BP
|
|
100 BP
|
Municipal debt
securities |
|
$ 75 |
|
$ 74 |
|
$ 74 |
|
$ 74 |
|
$ 73 |
Mutual
funds |
|
15 |
|
15 |
|
15 |
|
15 |
|
15 |
Commercial
paper |
|
29 |
|
29 |
|
29 |
|
29 |
|
29 |
Government
agencies |
|
39 |
|
39 |
|
39 |
|
39 |
|
39 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$158 |
|
$157 |
|
$157 |
|
$157 |
|
$156 |
|
|
|
|
|
|
|
|
|
|
|
The Federal Reserve has adjusted the Federal Funds Rate by a 50
BP move eight times during the last 40 quarters, whereas they have never
adjusted the Federal Funds Rate by a 100 BP move during the same period.
The last 50 BP move occurred in February 1995.
ITEM 8: Financial Statements and Supplementary
Data
The consolidated financial statements and notes to the
consolidated financial statements are attached as APPENDIX A
below.
ITEM 9: Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10: Directors and Executive Officers of the
Registrant
Information with respect to our directors may be found in the
sections captioned "Proposal 1: Elect Three Directors" and "Who Are
Our Directors" appearing in our 2000 Proxy Statement. Such information
is incorporated herein by reference.
Our executive officers are:
Name
|
|
Age
|
|
Position
|
Steven C.
Walske |
|
47 |
|
Chairman of the Board of Directors and
Chief Executive Officer |
C. Richard
Harrison |
|
44 |
|
President and Chief Operating
Officer |
Edwin J.
Gillis |
|
51 |
|
Executive Vice President, Chief
Financial Officer and Treasurer |
James P.
Baum |
|
35 |
|
Executive Vice President, Engineering,
Research and Development |
Barry F.
Cohen |
|
55 |
|
Executive Vice President,
Marketing |
David R.
Friedman |
|
38 |
|
Senior Vice President, General Counsel
and Clerk |
James F.
Kelliher |
|
40 |
|
Senior Vice President, Business
Development |
Mr. Walske has been Chairman of the Board of Directors since
August 1994 and Chief Executive Officer and a director since he joined
PTC in December 1986. Mr. Walske was President of PTC from December 1986
to August 1994.
Mr. Harrison has been President and Chief Operating Officer since
August 1994. Mr. Harrison had served as Senior Vice President of Sales
and Distribution from September 1991 until August 1994.
Mr. Gillis has been Executive Vice President since October 1996
and Chief Financial Officer and Treasurer since October 1995. Mr. Gillis
had served as Senior Vice President of Finance and Administration from
October 1995 to September 1996. Prior to joining PTC, Mr. Gillis was
Senior Vice President of Finance and Operations and Chief Financial
Officer at Lotus Development Corporation from August 1991 until
September 1995.
Mr. Baum has been Executive Vice President, Engineering,
Research and Development since October 1998. Mr. Baum had served as
Senior Vice President in various product development and marketing roles
from December 1996 to September 1998. Prior to that he was Vice
President, Technical Marketing from October 1995 to November 1996 and
Director of Design/Manufacturing Applications from May 1993 to September
1995.
Mr. Cohen has been Executive Vice President, Marketing since
January 1998. Prior to joining PTC, Mr. Cohen was Senior Vice President,
Human Development and Organizational Productivity at Computervision
Corporation from November 1993 to January 1998.
Mr. Friedman has served as Senior Vice President, General Counsel
and Clerk since October 1999. Mr. Friedman had served as Vice President,
General Counsel and Clerk from October 1998 to September 1999 and as
Associate Corporate Counsel from September 1996 to September 1998. Prior
to joining PTC, Mr. Friedman was a Partner at the law firm of Palmer
& Dodge LLP from January 1994 to August 1996.
Mr. Kelliher has been Senior Vice President of Business
Development since November 1998. Mr. Kelliher had served as Senior Vice
President of Finance from June 1997 to October 1998, Vice President of
Finance from December 1994 until June 1997, Director of Corporate
Finance from November 1994 to December 1994 and Chief Financial Officer
of Europe from May 1993 to November 1994.
ITEM 11: Executive Compensation
Information with respect to executive compensation may be found
under the headings captioned How We Compensate Our Directors
and Information About Executive Compensation appearing in
our 2000 Proxy Statement. Such information is incorporated herein by
reference.
ITEM 12: Security Ownership of Certain Beneficial
Owners and Management
Information with respect to security ownership may be found under
the heading captioned Information About PTC Common Stock Ownership
appearing in our 2000 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 13: Certain Relationships and Related
Transactions
Information with respect to this item may be found under the
heading Information About Certain Insider Relationships
appearing in our 2000 Proxy Statement. Such information is incorporated
herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
|
(a)
Documents Filed as Part of Form 10-K
|
|
|
Consolidated
Balance Sheets as of September 30, 1998 and 1999
|
|
|
Consolidated
Statements of Income for the years ended September 30, 1997, 1998 and
1999
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 1997, 1998
and 1999
|
|
|
Consolidated
Statements of Stockholders Equity for the years ended September
30, 1997, 1998 and 1999
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended September 30,
1997, 1998 and 1999
|
|
|
Notes to
Consolidated Financial Statements
|
|
|
Report of
Independent Accountants for the years ended September 30, 1997, 1998
and 1999
|
|
2. Financial Statement
Schedules
|
|
Schedule II
Valuation and Qualifying Accounts
|
|
Schedules other than
the one listed above have been omitted since they are either
not
|
|
required, not applicable, or the information is otherwise
included.
|
|
As part of this
Annual Report on Form 10-K, we hereby file and incorporate by
reference
|
|
the
Exhibits listed in the Exhibit Index immediately preceding such
Exhibits.
|
None.
As part of this Annual Report on Form 10-K, we hereby file the
Exhibits listed in the attached Exhibit Index.
(d) Financial Statement Schedules
|
As part of this Annual Report on Form 10-K, we hereby file the
financial statement schedule listed in Item 14(a)2 above.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on the 17th day of December, 1999.
|
PARAMETRIC
TECHNOLOGY
CORPORATION
|
|
|
|
|
By
|
/S
/ STEVEN
C. WALSKE
Steven C. Walske,
|
|
|
Chairman and Chief Executive Officer |
POWER OF ATTORNEY
We,
the undersigned officers and directors of Parametric Technology
Corporation, hereby severally constitute Edwin J. Gillis and David R.
Friedman, Esq., and each of them singly, our true and lawful attorneys
with full power to them, and each of them singly, to sign for us and in
our names in the capacities indicated below any and all subsequent
amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated
below.
Signature
|
|
Title
|
|
Date
|
|
|
(i)
Principal Executive Officer: |
|
|
|
/s/ STEVEN
C. WALSKE
Steven C. Walske |
|
Chairman and Chief Executive
Officer |
|
December 17, 1999 |
(ii)
Principal Financial and Accounting
Officer: |
|
|
|
/s/
EDWIN
J. GILLIS
Edwin J. Gillis |
|
Executive Vice
President, Chief
Financial Officer and Treasurer |
|
December 17,
1999 |
|
|
(iii)
Board of Directors: |
|
|
|
|
|
/s/
STEVEN
C. WALSKE
Steven C. Walske |
|
Director |
|
December 17,
1999 |
|
|
/s/ C.
RICHARD
HARRISON
C. Richard Harrison |
|
Director |
|
December 17,
1999 |
|
|
/s/
ROBERT
N. GOLDMAN
Robert N. Goldman |
|
Director |
|
December 16,
1999 |
|
|
/s/
DONALD
K. GRIERSON
Donald K. Grierson |
|
Director |
|
December 17,
1999 |
|
|
/s/
OSCAR
B. MARX
, III
Oscar B. Marx,
III |
|
Director |
|
December 17,
1999 |
|
|
/s/
MICHAEL
E. PORTER
Michael E. Porter |
|
Director |
|
December 17,
1999 |
|
|
/s/
NOEL
G. POSTERNAK
Noel G. Posternak |
|
Director |
|
December 17,
1999 |
Exhibit
Number
|
2.1(a) |
|
|
|
Agreement and
Plan of Reorganization dated as of November 3, 1997 by and
among Parametric
Technology Corporation, PTC Acquisition and Computervision
Corporation (filed as
Exhibit 2.1 to our Current Report on Form 8-K filed November 4,
1997 and incorporated herein
by reference). |
|
2.1(b) |
|
|
|
Agreement and
Plan of Reorganization dated as of March 8, 1999 by and among
Parametric
Technology Corporation, Northstar Acquisition Corporation,
auxilium inc. and the stockholders
of auxilium inc. (filed as Exhibit 2.1 to our Current Report on
Form 8-K filed March 23, 1999
and incorporated herein by reference). |
|
3.1(a) |
|
|
|
Restated
Articles of Organization of Parametric Technology Corporation
adopted February 4,
1993 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended
March 30, 1996 and incorporated herein by reference). |
|
3.1(b) |
|
|
|
Articles of
Amendment to Restated Articles of Organization adopted February
9, 1996 (filed as
Exhibit 4.1(b) to our Registration Statement on Form S-8
(Registration No. 333-01297) and
incorporated herein by reference). |
|
3.1(c) |
|
|
|
Articles of
Amendment to Restated Articles of Organization adopted February
13, 1997 (filed
as Exhibit 4.1(b) to our Registration Statement on Form S-8
(Registration No. 333-22169) and
incorporated herein by reference). |
|
3.2 |
|
|
|
By-Laws, as
amended and restated, of Parametric Technology Corporation
(filed herewith). |
|
10.1* |
|
|
|
Parametric
Technology Corporation 1997 Incentive Stock Option Plan (filed
as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 29, 1997 and
incorporated herein by reference). |
|
10.2* |
|
|
|
Parametric
Technology Corporation 1987 Incentive Stock Option Plan, as
amended (filed
herewith). |
|
10.3* |
|
|
|
Parametric
Technology Corporation 1992 Director Stock Option Plan, as
amended (filed as
Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal
year ended September 30, 1996
and incorporated herein by reference). |
|
10.4* |
|
|
|
Parametric
Technology Corporation 1996 Directors Stock Option Plan, as
amended (filed
herewith). |
|
10.5* |
|
|
|
Computervision
Corporation 1992 Stock Option Plan as amended September 15,
1994, April 18,
1995 and December 5, 1996 (filed as Exhibit 10.3 to the Annual
Report on Form 10-K of
Computervision Corporation for the fiscal year ended December 31,
1996 (File No. 1-7760/0-20290)
and incorporated herein by reference). |
|
10.6* |
|
|
|
Employment
Letter with Steven C. Walske dated October 17, 1986 (filed as
Exhibit 10.12 to
our Registration Statement on Form S-1 (Registration No.
33-31620) and incorporated herein
by reference). |
|
10.7* |
|
|
|
Amended and
Restated Severance Agreement with Steven C. Walske dated
February 13, 1997
(filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended
March 9, 1997 and incorporated herein by reference). |
|
10.8* |
|
|
|
Amended and
Restated Severance Agreement with C. Richard Harrison dated
February 13,
1997 (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended
March 29, 1997 and incorporated herein by reference). |
|
10.9* |
|
|
|
Amended and
Restated Severance Agreement with Edwin J. Gillis dated
February 13, 1997
(filed as Exhibit 10. 4 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended
March 29, 1997 and incorporated herein by reference). |
Exhibit
Number
|
10.10* |
|
|
|
Severance
Agreement with Barry F. Cohen dated February 1, 1998 (filed as
Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended April
4, 1998 and incorporated
herein by reference). |
|
10.11* |
|
|
|
Consulting
Agreement with Michael E. Porter dated November 17, 1995 (filed
as Exhibit 10.3 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1997 and incorporated
herein by reference). |
|
10.12* |
|
|
|
Amendment #1 to
Consulting Agreement with Michael E. Porter dated May 15, 1997
(filed as
Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 28, 1997
and incorporated herein by reference). |
|
10.13* |
|
|
|
Amendment #2 to
Consulting Agreement with Michael E. Porter dated January 6,
1998 (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended April 4, 1998 and
incorporated herein by reference). |
|
10.14* |
|
|
|
Amendment #3 to
Consulting Agreement with Michael E. Porter dated July 20, 1998
(filed as
Exhibit 10.24 to our Annual Report on Form 10-K for the fiscal
year ended September 30, 1998
and incorporated herein by reference). |
|
10.15* |
|
|
|
Amendment #4 to
the Consulting Agreement with Michael E. Porter dated February
11, 1999
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended April 3,
1999 and incorporated herein by reference). |
|
10.16 |
|
|
|
Lease dated May
22, 1987 by and between PTC and the Trustees of 128 Technology
Trust (filed
as Exhibit 10.4 to our Registration Statement on Form S-1
(Registration No. 33-31620) and
incorporated herein by reference). |
|
10.17 |
|
|
|
Lease Amendment
No. 1 dated March 10, 1988 by and between PTC and the Trustees
of 128
Technology Trust (filed as Exhibit 10.6 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference). |
|
10.18 |
|
|
|
Lease Amendment
No. 2 dated November 9, 1988 by and between PTC and the
Trustees of 128
Technology Trust (filed as Exhibit 10.7 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference). |
|
10.19 |
|
|
|
Lease Amendment
No. 3 dated November 8, 1989 by and between PTC and the
Trustees of 128
Technology Trust (filed as Exhibit 10.8 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1996 and incorporated herein by
reference). |
|
10.20 |
|
|
|
Lease Amendment
No. 4 dated January 21, 1991 by and between PTC and the
Trustees of 128
Technology Trust (filed as Exhibit 10.7 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1997 and incorporated herein by
reference). |
|
10.21 |
|
|
|
Lease Amendment
No. 5 dated March 6, 1992 by and between PTC and the Trustees
of 128
Technology Trust (filed as Exhibit 10.18 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1992 (File No. 0-18059) and incorporated
herein by reference). |
|
10.22 |
|
|
|
Lease Amendment
No. 5A dated November 18, 1992 by and between PTC and the
Trustees of
128 Technology Trust (filed as Exhibit 10.19 to our Annual Report
on Form 10-K for the fiscal
year ended September 30, 1992 (File No. 0-18059) and incorporated
herein by reference). |
|
10.23 |
|
|
|
Lease Amendment
No. 6 dated June 8, 1993 by and between PTC and the Trustees of
128
Technology Trust (filed as Exhibit 10.21 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1993 (File No. 0-18059) and incorporated
herein by reference). |
Exhibit
Number
|
10.24 |
|
|
|
Lease Amendment
No. 7 dated April 14, 1994 by and between PTC and the Trustees
of 128
Technology Trust (filed as Exhibit 10.22 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1994 (File No. 0-18059) and incorporated
herein by reference). |
|
10.25 |
|
|
|
Lease Amendment
No. 8 dated July 19, 1995 by and between PTC and the Trustees
of 128
Technology Trust (filed as Exhibit 10.23 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1995 and incorporated herein by
reference). |
|
10.26 |
|
|
|
Lease Amendment
No. 9 dated January 23, 1996 by and between PTC and the
Trustees of 128
Technology Trust (filed as Exhibit 10.20 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference). |
|
10.27 |
|
|
|
Lease Amendment
No. 10 dated May 10, 1996 by and between PTC and the Trustees
of 128
Technology Trust (filed as Exhibit 10.25 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference). |
|
10.28 |
|
|
|
Lease Amendment
No. 11 dated January 24, 1997 by and between PTC and the
Trustees of 128
Technology Trust (filed as Exhibit 10.26 to our Annual Report on
Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference). |
|
10.29 |
|
|
|
Lease Amendment
No. 12 dated December 4, 1998 by and between PTC and the
Trustees of 128
Technology Trust (filed herewith). |
|
10.30 |
|
|
|
Lease Amendment
No. 13 dated December 8, 1998 by and between PTC and the
Trustees of 128
Technology Trust (filed herewith). |
|
10.31 |
|
|
|
Amended and
Restated Lease Agreement dated as of January 1, 1995 between
United Trust Fund
Limited Partnership and (filed as Exhibit 10.20 to the Annual
Report on Form 10-K of
Computervision Corporation for the fiscal year ended December 31,
1995 and incorporated
herein by reference). |
|
21.1 |
|
|
|
Subsidiaries of
Parametric Technology Corporation (filed herewith). |
|
23.1 |
|
|
|
Consent of
PricewaterhouseCoopers LLP (filed herewith). |
|
27.1 |
|
|
|
Financial Data
Schedule for the year ended September 30, 1999 (filed
herewith). |
*
|
Identifies a management contract or compensatory
plan or arrangement in which an executive officer or director
of PTC participates.
|
PARAMETRIC TECHNOLOGY
CORPORATION
VALUATION AND QUALIFYING
ACCOUNTS
Col
A
|
|
Col
B
|
|
Col
C
|
|
Col
D
|
|
Col
E
|
|
|
|
|
Additions
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Charged to
Other
Accounts
|
|
Deductions (1)
|
|
Balance at
End of
Period
|
|
|
(in
thousands) |
YEAR
ENDED SEPTEMBER 30, 1999 |
|
Allowance for doubtful accounts |
|
$7,684 |
|
4,445 |
|
|
|
(5,729 |
) |
|
$6,400 |
YEAR
ENDED SEPTEMBER 30, 1998 |
Allowance for doubtful accounts |
|
$5,887 |
|
7,322 |
|
|
|
(5,525 |
) |
|
$7,684 |
YEAR
ENDED SEPTEMBER 30, 1997 |
Allowance for doubtful accounts |
|
$5,839 |
|
1,433 |
|
|
|
(1,385 |
) |
|
$5,887 |
(1)
|
Uncollectible accounts written-off, net of
recoveries.
|
APPENDIX A
PARAMETRIC TECHNOLOGY
CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
September 30, |
|
|
1998 |
|
1999 |
ASSETS |
|
|
|
Current
assets: |
Cash and cash
equivalents |
|
$
205,971 |
|
|
$
239,789 |
Short-term
investments |
|
131,405 |
|
|
101,217 |
Accounts
receivable, net of allowance for doubtful accounts of $7,684 and
$6,400 |
|
189,275 |
|
|
221,889 |
Prepaid
expenses |
|
26,683 |
|
|
47,068 |
Other current
assets |
|
40,447 |
|
|
95,141 |
|
|
|
|
|
|
|
Total current
assets |
|
593,781 |
|
|
705,104 |
|
Marketable
investments |
|
88,807 |
|
|
12,889 |
Property and
equipment, net |
|
62,241 |
|
|
64,176 |
Goodwill, net of
accumulated amortization of $3,786 and $20,464 |
|
3,877 |
|
|
113,011 |
Other intangible
assets, net of accumulated amortization of $6,218 and
$9,233 |
|
13,257 |
|
|
53,836 |
Other
assets |
|
39,097 |
|
|
67,604 |
|
|
|
|
|
|
|
Total
assets |
|
$
801,060 |
|
|
$1,016,620 |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
Current
liabilities: |
|
|
|
Accounts
payable |
|
$
34,520 |
|
|
$
40,879
|
Accrued
expenses |
|
92,742 |
|
|
67,135 |
Accrued
compensation and severance |
|
81,856 |
|
|
55,590 |
Deferred
revenue |
|
145,376 |
|
|
213,059 |
Income
taxes |
|
65,048 |
|
|
80,520 |
|
|
|
|
|
|
|
Total current
liabilities |
|
419,542 |
|
|
457,183 |
|
Other
liabilities |
|
46,014 |
|
|
38,333 |
|
Commitments and
contingencies (Note H) |
|
|
|
|
Stockholders'
equity: |
|
|
|
Preferred stock,
$0.01 par value; 5,000 shares authorized; none issued |
|
|
|
|
|
|
Common stock,
$0.01 par value; 350,000 shares authorized; 272,277 shares
issued for both periods |
|
2,723 |
|
|
2,723 |
Additional
paid-in capital |
|
1,528,647 |
|
|
1,583,846 |
Treasury stock,
at cost, 4,135 and 2,113 shares |
|
(43,134 |
) |
|
(27,727) |
Accumulated
deficit |
|
(1,123,399 |
) |
|
(1,022,357) |
Accumulated
other comprehensive loss |
|
(29,333 |
) |
|
(15,381) |
|
|
|
|
|
|
|
Total
stockholders' equity |
|
335,504 |
|
|
521,104 |
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity |
|
$
801,060 |
|
|
$1,016,620 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
PARAMETRIC TECHNOLOGY
CORPORATION
CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share
data)
|
|
Year ended
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
Revenue: |
License |
|
$
644,726 |
|
|
$
609,239 |
|
|
$
561,220 |
|
Service |
|
335,068 |
|
|
408,731 |
|
|
496,381 |
|
|
|
|
|
|
|
|
|
|
|
Total software
revenue |
|
979,794 |
|
|
1,017,970 |
|
|
1,057,601 |
|
Other services
revenue (Note C) |
|
82,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
1,062,018 |
|
|
1,017,970 |
|
|
1,057,601 |
|
|
|
|
|
|
|
|
|
|
|
Costs and
expenses: |
Cost of license
revenue |
|
18,318 |
|
|
15,299 |
|
|
16,508 |
|
Cost of service
revenue |
|
131,136 |
|
|
140,625 |
|
|
191,147 |
|
Cost of other
services revenue (Note C) |
|
74,808 |
|
|
|
|
|
|
|
Sales and
marketing |
|
388,513 |
|
|
395,352 |
|
|
407,936 |
|
Research and
development |
|
93,189 |
|
|
93,162 |
|
|
124,131 |
|
General and
administrative |
|
59,815 |
|
|
57,031 |
|
|
62,852 |
|
Amortization of
goodwill and other intangible assets |
|
2,716 |
|
|
2,715 |
|
|
22,888 |
|
Acquisition and
nonrecurring charges |
|
45,000 |
|
|
105,766 |
|
|
53,347 |
|
Other services
operating and nonrecurring charges (Note C) |
|
19,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses |
|
832,683 |
|
|
809,950 |
|
|
878,809 |
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
229,335 |
|
|
208,020 |
|
|
178,792 |
|
Interest
expense |
|
34,069 |
|
|
13,329 |
|
|
622 |
|
Interest
income |
|
(18,261 |
) |
|
(19,131 |
) |
|
(11,283 |
) |
Other expense,
net |
|
7,843 |
|
|
9,815 |
|
|
8,211 |
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and extraordinary loss |
|
205,684 |
|
|
204,007 |
|
|
181,242 |
|
Provision for income taxes |
|
118,024 |
|
|
98,293 |
|
|
61,949 |
|
|
|
|
|
|
|
|
|
|
|
Income before
extraordinary loss |
|
87,660 |
|
|
105,714 |
|
|
119,293 |
|
Extraordinary loss, net of income tax benefit
of $2,183 (Note G) |
|
|
|
|
(19,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$
87,660 |
|
|
$
86,697 |
|
|
$
119,293 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share (Note A): |
Basic: |
|
|
|
|
|
|
|
|
|
Income before
extraordinary loss |
|
$
0.33 |
|
|
$
0.39 |
|
|
$
0.44 |
|
Extraordinary
loss |
|
|
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$
0.33 |
|
|
$
0.32 |
|
|
$
0.44 |
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
Income before
extraordinary loss |
|
$
0.32 |
|
|
$
0.38 |
|
|
$
0.43 |
|
Extraordinary
loss |
|
|
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$
0.32 |
|
|
$
0.31 |
|
|
$
0.43 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
PARAMETRIC TECHNOLOGY
CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
|
|
Year ended
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
Cash flows from
operating activities: |
Net income |
|
$
87,660 |
|
|
$
86,697 |
|
|
$119,293 |
|
Adjustments to reconcile net income to net cash
flows from operating activities: |
Extraordinary loss on early
extinguishment of debt |
|
|
|
|
19,017 |
|
|
|
|
Non-cash portion of
nonrecurring charges |
|
6,634 |
|
|
15,876 |
|
|
4,693 |
|
Depreciation and
amortization |
|
38,418 |
|
|
29,930 |
|
|
62,283 |
|
Deferred income
taxes |
|
2,195 |
|
|
5,526 |
|
|
(16,914 |
) |
Provision for loss on
accounts receivable |
|
1,433 |
|
|
5,822 |
|
|
4,445 |
|
Gain on sale of a business
unit |
|
(1,255 |
) |
|
|
|
|
|
|
Charge for purchased
in-process research and development |
|
|
|
|
28,941 |
|
|
38,244 |
|
Changes in assets and
liabilities which provided (used) cash, net of effects of
purchased
businesses: |
Accounts receivable |
|
230 |
|
|
766 |
|
|
(35,393 |
) |
Accounts payable and accrued expenses |
|
7,085 |
|
|
(2,720 |
) |
|
(35,663 |
) |
Accrued compensation and severance |
|
3,581 |
|
|
(10,999 |
) |
|
(26,898 |
) |
Deferred revenue |
|
19,533 |
|
|
30,276 |
|
|
64,012 |
|
Income taxes |
|
50,859 |
|
|
19,387 |
|
|
16,556 |
|
Other current assets |
|
(15,624 |
) |
|
(32,841 |
) |
|
(35,109 |
) |
Other noncurrent assets and liabilities |
|
(4,977 |
) |
|
(13,789 |
) |
|
(8,708 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating activities |
|
195,772 |
|
|
181,889 |
|
|
150,841 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities: |
Additions to property and
equipment |
|
(36,179 |
) |
|
(35,794 |
) |
|
(35,246 |
) |
Additions to other
intangible assets |
|
(965 |
) |
|
|
|
|
(24,133 |
) |
Acquisitions of
businesses |
|
(5,000 |
) |
|
(40,599 |
) |
|
(72,925 |
) |
Construction in
progress |
|
|
|
|
|
|
|
(28,284 |
) |
Purchases of
investments |
|
(577,499 |
) |
|
(413,522 |
) |
|
(95,416 |
) |
Proceeds from sales and
maturities of investments |
|
423,988 |
|
|
593,406 |
|
|
196,918 |
|
Proceeds from sale of a
business unit, net |
|
30,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided (used) by investing activities |
|
(165,555 |
) |
|
103,491 |
|
|
(59,086 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities: |
Proceeds from issuance of
common stock |
|
66,250 |
|
|
70,440 |
|
|
23,866 |
|
Purchases of treasury
stock |
|
(184,780 |
) |
|
(49,972 |
) |
|
(89,968 |
) |
Issuance of short-term
debt |
|
29,426 |
|
|
|
|
|
|
|
Repayment of short-term
debt |
|
|
|
|
(34,933 |
) |
|
|
|
Repayment of long-term
obligations |
|
(5,044 |
) |
|
(240,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by
financing activities |
|
(94,148 |
) |
|
(255,226 |
) |
|
(66,102 |
) |
|
|
|
|
|
|
|
|
|
|
Elimination of
net cash activity of acquired company for the three months ended
December 31,
1997 |
|
|
|
|
11,567 |
|
|
|
|
Effect of
exchange rate changes on cash |
|
(7,639 |
) |
|
(4,359 |
) |
|
8,165 |
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents |
|
(71,570 |
) |
|
37,362 |
|
|
33,818 |
|
Cash and cash
equivalents, beginning of year |
|
240,179 |
|
|
168,609 |
|
|
205,971 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents, end of year |
|
$
168,609 |
|
|
$
205,971 |
|
|
$239,789 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
PARAMETRIC TECHNOLOGY
CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
(in thousands)
|
|
Year ended
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
Common
stock |
Balance
beginning of year |
|
$
2,659 |
|
|
$
2,680 |
|
|
$
2,723 |
|
Issued for employee stock
purchase and option plans |
|
18 |
|
|
43 |
|
|
|
|
Other |
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of year |
|
2,680 |
|
|
2,723 |
|
|
2,723 |
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital |
Balance
beginning of year |
|
1,392,388 |
|
|
1,450,132 |
|
|
1,528,647 |
|
Issued for employee stock
purchase and option plans |
|
10,995 |
|
|
57,218 |
|
|
7,812 |
|
Tax benefit related to stock
option plans |
|
35,894 |
|
|
21,297 |
|
|
2,500 |
|
Issuance of common stock for
acquisitions |
|
|
|
|
|
|
|
44,887 |
|
Other |
|
10,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of year |
|
1,450,132 |
|
|
1,528,647 |
|
|
1,583,846 |
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock |
Balance
beginning of year |
|
(1,164 |
) |
|
(24,169 |
) |
|
(43,134 |
) |
Repurchased |
|
(184,780 |
) |
|
(49,972 |
) |
|
(89,968 |
) |
Issued for employee stock
purchase and option plans |
|
161,775 |
|
|
31,007 |
|
|
42,117 |
|
Issuance of treasury stock
for acquisitions |
|
|
|
|
|
|
|
63,258 |
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of year |
|
(24,169 |
) |
|
(43,134 |
) |
|
(27,727 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit |
Balance
beginning of year |
|
(1,196,515 |
) |
|
(1,215,393 |
) |
|
(1,123,399 |
) |
Net income |
|
87,660 |
|
|
86,697 |
|
|
119,293 |
|
Treasury shares issued for
employee stock purchase and option plans |
|
(106,538 |
) |
|
(14,913 |
) |
|
(18,251 |
) |
Change in year end of
acquired company |
|
|
|
|
20,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of year |
|
(1,215,393 |
) |
|
(1,123,399 |
) |
|
(1,022,357 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss |
Balance
beginning of year |
|
(1,720 |
) |
|
(8,699 |
) |
|
(29,333 |
) |
Foreign currency translation
adjustment |
|
(3,291 |
) |
|
(3,232 |
) |
|
3,596 |
|
Unrealized gain (loss) on
investments |
|
57 |
|
|
327 |
|
|
(478 |
) |
Minimum pension liability
adjustment |
|
(3,745 |
) |
|
(17,729 |
) |
|
10,834 |
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of year |
|
(8,699 |
) |
|
(29,333 |
) |
|
(15,381 |
) |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity |
|
$
204,551 |
|
|
$
335,504 |
|
|
$
521,104 |
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME |
(in
thousands) |
|
|
|
Year ended September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
Comprehensive income: |
Net
income |
|
$
87,660 |
|
|
$
86,697 |
|
|
$
119,293 |
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax provision
(benefit): |
Foreign currency
translation adjustment, net of tax of ($1,772), ($1,740) and
$1,936 |
|
(3,291 |
) |
|
(3,232 |
) |
|
3,596 |
|
Unrealized gain
(loss) on securities, net of tax of $30, $176 and
($257) |
|
57 |
|
|
327 |
|
|
(478 |
) |
Minimum pension
liability adjustment, net of tax of ($2,017), ($2,744) and
$1,301 |
|
(3,745 |
) |
|
(17,729 |
) |
|
10,834 |
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) |
|
(6,979 |
) |
|
(20,634 |
) |
|
13,952 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$
80,681 |
|
|
$
66,063 |
|
|
$
133,245 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of
Significant Accounting Policies
Parametric Technology Corporation develops,
markets and supports a comprehensive suite of integrated product
development and information management software. We operate in a
single industry segmentcomputer software and related
services.
Our fiscal year-end is September 30. The
consolidated financial statements include the parent company and
its wholly owned subsidiaries, including those operating outside
the U.S. All significant intercompany balances and transactions
have been eliminated in the financial statements. Certain
reclassifications have been made for consistent presentation. We
prepare our financial statements under generally accepted
accounting principles that require management to make estimates
and assumptions that affect the amounts reported and the related
disclosures. Actual results could differ from these
estimates.
As described in Note B, in January 1998, we
merged with Computervision Corporation. The merger was accounted
for as a pooling of interests. Accordingly, the accompanying
consolidated financial statements and notes have been restated
for all periods presented.
|
Foreign Currency Translation
|
For our foreign operations where the functional
currency is the local currency, we translate assets and
liabilities at rates in effect at the balance sheet date and
record translation adjustments in stockholders' equity. For our
foreign operations where the U.S. dollar is the functional
currency, we translate monetary assets and liabilities using
exchange rates in effect at the balance sheet date and
nonmonetary assets and liabilities at historical rates and
record translation adjustments in income. We translate income
statement amounts at average rates for the period. Transaction
gains and losses are recorded in other expense in the statement
of income.
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 on
recognizing revenue in software transactions. Certain provisions
of SOP 97-2 have been deferred by SOP 98-4 and SOP 98-9. We
adopted SOP 97-2 during the first quarter of 1999. The adoption
of this statement did not have a material effect on our revenue
recognition policies or on our results of operations.
Additionally, we anticipate that the adoption of the deferred
provisions of this statement will not have a material effect on
our results of operations.
Our 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 contract execution, provided all shipment
obligations have been met, fees are fixed or determinable and
collection is probable. Revenue from software maintenance
contracts is recognized ratably over the contract period.
Revenue from consulting and training is recognized upon
performance. Other services revenue is recognized ratably over
the contractual period.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Cash, Cash Equivalents and
Investments
|
Our cash is invested in debt instruments of
financial institutions, government entities, corporations and
mutual funds. We have established guidelines relative to credit
ratings, diversification and maturities that maintain safety and
liquidity. Our cash equivalents include highly liquid
investments with maturity periods of three months or less when
purchased. Our short-term investments include those investments
with maturities in excess of three months but less than one
year. Our marketable investments are those with maturities in
excess of one year but less than two years. Our cash equivalents
and short-term and marketable investments are classified as
available for sale and reported at fair value with unrealized
gains and losses included in the accumulated other comprehensive
loss component of stockholders' equity. We have not had any
significant losses related to our investments.
|
Concentration of Credit Risk and Fair Value
of Financial Instruments
|
The amounts reflected in the consolidated balance
sheets for cash and cash equivalents, accounts receivable and
accounts payable approximate their fair value due to their short
maturities. Financial instruments that potentially subject us to
concentration of credit risk consist primarily of investments,
trade receivables and derivatives. Our cash, cash equivalents,
investments and derivatives are held with financial institutions
with high credit standings. Our 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 except for a
receivable from our master distributor, which accounts for 13%
of total receivables as of September 30, 1999.
|
Transfer of Financial Assets
|
We offer our customers the option to purchase
software and services through payment plans, financing or
leasing contracts. In general, we transfer future payments under
certain of these contracts to financing institutions on a
non-recourse basis. We record such transfers as sales of the
related accounts receivable when we surrender control of such
receivables under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. Fair market value of all service assets and
liabilities were immaterial for all periods.
Derivatives are financial instruments whose value
is derived from one or more underlying financial instruments,
such as foreign currency. We enter into derivative transactions,
specifically foreign exchange forward contracts and foreign
exchange option contracts, to manage our exposure to
fluctuations in foreign exchange rates. The contracts are
primarily in European currencies and Japanese yen and have
maturities less than one year. Any derivative we enter into is
designated at inception as a hedge of risks associated with
specific assets, liabilities, or future commitments and is
monitored to determine if it remains an effective hedge. The
effectiveness of the derivative as a hedge is based on changes
in its market value being highly correlated with changes in
market value of the underlying hedged items. We do not enter
into or hold derivatives for trading or speculative
purposes.
We use forward exchange contracts to hedge
specific foreign currency denominated receivables. These
contracts, which are one year or less in length, require us to
exchange foreign currencies for U.S. dollars at maturity at
rates agreed to at inception of the contracts. We enter into
transactions denominated in foreign currencies and include the
exchange gain or loss arising from such transactions in other
expense. As of September 30, 1998 and 1999, we had approximately
$49.8 million and $190.0 million, respectively, of forward
contracts outstanding. Unrealized and realized gains and losses
associated with exchange rate fluctuations on forward contracts
are immaterial for all periods presented. Cash flows from
forward contracts are classified with the related
receivables.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
From time to time, we purchase foreign exchange
option contracts to limit potential losses from adverse
exchange-rate movements on certain anticipated revenue
transactions. Premiums to purchase option contracts are
capitalized in other assets and amortized to other expense over
the life of the contract. Gains on option contracts, if any, are
included in license and service revenue in the period in which
the related local currency revenue is reported. There were no
outstanding option contracts at September 30, 1998 or
1999.
Property and equipment are recorded at cost and
depreciated using the straight-line method over their estimated
useful lives. Computer hardware and software are typically
amortized over three to five years, and furniture and fixtures
three to eight years. Leasehold improvements are amortized over
the shorter of their 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 their estimated
useful lives. Maintenance and repairs are charged to expense
when incurred; additions and improvements are capitalized. When
an item is sold or retired, the cost and related accumulated
depreciation is relieved, and the resulting gain or loss, if
any, is recognized in income.
|
Goodwill and Other Intangible
Assets
|
Goodwill and other intangible assets includes the
values attributable to intangible assets acquired. Goodwill is
amortized over five to seven years and other intangible assets,
such as assembled workforces, customer lists and developed
technology, are amortized over three to five years, and
trademarks, which is also included in other intangible assets,
are amortized over seven years.
We incur 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 to five years, beginning at their initial
shipment date. Net capitalized computer software costs are
included in other assets and were immaterial at September 30,
1998 and 1999. Amortization charged to cost of license revenue
was $869,000, $521,000 and $220,000 for fiscal 1997, 1998 and
1999, respectively.
Management regularly evaluates the net realizable
value of long lived assets including property and equipment,
computer software costs and goodwill and other intangible assets
relying on a number of factors including operating results,
business plans, budgets and economic projections.
Our 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 these differences are reported as
deferred tax assets and liabilities. Deferred tax assets are
recognized, net of valuation allowances, for the estimated
future tax effects of deductible temporary differences and tax
operating loss and credit carryforwards. Changes in deferred tax
assets and liabilities are recorded in the provision for income
taxes.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Basic EPS is calculated by dividing net income by
the weighted average number of shares outstanding during the
period. Diluted EPS is calculated by dividing net income by the
weighted average number of shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock"
method. The following table, adjusted for stock dividends,
presents the calculation for both basic and diluted
EPS:
|
|
Year ended September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands, except per share data) |
Net
income |
|
$
87,660 |
|
$
86,697 |
|
$
119,293 |
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
266,389 |
|
268,977 |
|
269,526 |
Dilutive effect of employee stock options |
|
11,803 |
|
8,287 |
|
5,549 |
|
|
|
|
|
|
|
Diluted shares outstanding |
|
278,192 |
|
277,264 |
|
275,075 |
|
|
|
|
|
|
|
Basic
earnings per share |
|
$
0.33 |
|
$
0.32 |
|
$
0.44 |
Diluted earnings per share |
|
$
0.32 |
|
$
0.31 |
|
$
0.43 |
Options to purchase shares of our common stock of
6.3 million shares for 1997, 11.7 million shares for 1998 and
18.2 million shares for 1999 were outstanding but were not
included in the computations of diluted EPS because the price of
the options was greater than the average market price of the
common stock for the period reported.
We account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25), and related interpretations. Under APB No. 25, no
compensation cost is recognized because the option price is
equal to the market price of the underlying stock on the date of
grant. An alternative method of accounting is SFAS No. 123,
Accounting for Stock-Based Compensation. Under SFAS No.
123, employee stock options are valued at the grant date using a
valuation model, and compensation cost is recognized ratably
over the vesting period. The impact of recording stock-based
compensation under the provisions of SFAS No. 123 is disclosed
in Note J.
|
New Accounting
Pronouncements
|
Effective October 1, 1998, we adopted SFAS No.
130, Reporting Comprehensive Income, which requires
presentation of the components of comprehensive income,
including unrealized gains and losses on investments, foreign
currency translation adjustments and minimum pension liability
adjustments.
In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133 requires companies to recognize
all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes
in fair value, gains or losses, depends on the intended use of
the derivative and its resulting designation. Originally, the
statement had been effective for all quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities, which postponed the adoption of SFAS No.
133 until fiscal years beginning after June 15, 2000. We plan to
implement SFAS No. 133 in our fiscal year 2001. We believe that
the adoption of this statement will not have a significant
effect on our consolidated financial statements.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Acquisitions and
Nonrecurring Charges
In January 1998, we merged with Computervision
Corporation by issuing 11.6 million shares of common stock in
exchange for all of the outstanding common stock of
Computervision. In connection with the merger, we incurred a
nonrecurring charge of $76.8 million for merger-related
integration, consolidation and transaction costs, which are
described in the acquisition and nonrecurring charges activity
table below.
As our fiscal year-end differed from
Computervision's, we combined financial information for
dissimilar year-ends. Computervision's results of operations for
its fiscal year ended December 31, 1997 were combined with our
results of operations for the fiscal year ended September 30,
1997. In order to conform Computervision's fiscal year-end to
ours, Computervision's results of operations for the three
months ended December 31, 1997 were combined with our results of
operations for the three months ended January 3, 1998.
Computervision's net loss of $20.2 million for the three months
ended December 31, 1997, which has been included in the
consolidated statements of income for the fourth quarter of
fiscal 1997 and the first quarter of fiscal 1998, has been
reflected as an adjustment to our beginning balance of fiscal
1998 accumulated deficit. Due to the change in Computervision's
year-end, their cash flow activity for the three-month period
ended December 31, 1997 has been shown as a separate component
of the cash flow statement. Adjustments recorded to conform
Computervision's accounting policies to ours were not material
to the consolidated financial statements. The following table
shows revenue and net income of the separate companies during
the period preceding the combination:
|
|
Three Months Ended
January 3, 1998 |
Revenue: |
|
(in thousands) |
Parametric Technology |
|
$223,007 |
|
Computervision |
|
35,861 |
|
|
|
|
|
Combined revenue |
|
$258,868 |
|
|
|
|
|
Net
income (loss): |
Parametric Technology |
|
$
62,343 |
|
Computervision |
|
(20,210 |
) |
|
|
|
|
Combined net income |
|
$
42,133 |
|
|
|
|
|
In June 1998, we acquired ICEM Technologies
(ICEM), a division of Control Data Systems, Inc., for $40.6
million in cash. Headquartered in Frankfurt, Germany, ICEM
provides advanced surfacing and reverse-engineering software
tools used by body and styling engineers in the automotive and
aerospace industries. The acquisition was accounted for as a
purchase. Accordingly, we allocated the purchase price to the
assets acquired and liabilities assumed based on our estimates
of fair value. The fair value assigned to intangible assets
acquired consisted of purchased in-process research and
development (R&D), developed technology, an assembled
workforce and trade names. The amounts allocated to tangible and
intangible assets acquired less the liabilities assumed exceeded
the purchase price by approximately $7.0 million. This excess
value over the purchase price was allocated to reduce
proportionately the values assigned to long-term assets and
purchased in-process R&D in determining their values. The
values assigned included $2.1 million for net assets acquired,
$28.9 million for purchased in-process R&D, $8.0 million for
developed technology, $1.6 million for an assembled workforce
and $1.0 million for trade names.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 1998, we acquired all of the
outstanding stock in InPart Design, Inc. by issuing 2.0 million
shares of our common stock. As of September 30, 1999, we issued
600,000 additional shares to satisfy certain contingent
conditions, which were included in the purchase price described
below. In addition, we reserved 386,000 shares of common stock
for outstanding InPart options assumed. The acquisition was
accounted for as a purchase. Accordingly, we allocated the
purchase price of $38.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The
values assigned included $741,000 for net liabilities assumed,
$10.6 million for purchased in-process R&D, $4.1 million for
developed technology, $1.1 million for customer lists, $200,000
for an assembled workforce and $300,000 for trade names. The
excess purchase price over the amounts allocated to assets
acquired and liabilities assumed was recorded as goodwill of
$22.5 million.
In March 1999, we acquired Division Group plc for
$37.3 million in cash and 593,000 shares of our common stock.
The acquisition was accounted for as a purchase. Accordingly, we
allocated the purchase price of $48.1 million to the assets
acquired and liabilities assumed based on our estimates of fair
value. The values assigned included $555,000 for net assets
acquired, $9.0 million for purchased in-process R&D, $3.3
million for developed technology, $2.0 million for customer
lists, $970,000 for an assembled workforce and $2.5 million for
trade names. The excess purchase price over the amounts
allocated to assets acquired and liabilities assumed was
recorded as goodwill of $29.8 million.
In March 1999, we acquired all of the outstanding
stock of auxilium inc. in exchange for 2.6 million shares of our
common stock and $39.4 million in cash. In addition, we reserved
1.1 million shares of common stock for outstanding auxilium
options assumed. The acquisition was accounted for as a
purchase. Accordingly, we allocated the purchase price of $101.7
million to the assets acquired and liabilities assumed based on
our estimates of fair value. The values assigned included
$182,000 for net liabilities assumed, $18.6 million for
purchased in-process R&D, $700,000 for developed technology,
$5.0 million for customer lists, $630,000 for an assembled
workforce and $6.0 million for trade names. The excess purchase
price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $70.9
million.
The operating results of ICEM, InPart, Division
and auxilium have been included in our results of operations
from the date of each acquisition. Our purchases of ICEM,
InPart, Division and auxilium did not require the presentation
of pro forma information.
In the opinion of management, the purchased
in-process R&D for the acquisitions of ICEM, InPart,
Division and auxilium had not yet reached technological
feasibility and had no alternative future use. Accordingly, we
recorded nonrecurring charges of $28.9 million during the third
quarter of 1998 related to ICEM, $10.6 million in the first
quarter of 1999 related to InPart and $27.6 million in the
second quarter of 1999 related to Division and auxilium. The
values assigned to purchased in-process R&D were determined
by identifying research projects for which technological
feasibility had not been established. The values of the
purchased in-process R&D were determined by estimating the
stage of completion, including consideration of the complexity
of the work completed, the costs incurred and the projected cost
to complete, the contribution of any core technology and other
acquired assets and the projected product introduction dates,
estimating the resulting net cash flows from the products
developed and discounting the net cash flows back to their
present value. The discount rates
used included a factor that took into account the uncertainty
surrounding the successful development of the purchased
in-process technology for each acquisition. If these projects
are not successfully developed, future revenue and profitability
may be adversely affected, and the value of intangible assets
acquired, which aggregated $160.6 million, may become
impaired.
Nonrecurring charges include actions taken as a
result of cost saving initiatives implemented during 1997 by
Computervision. These restructuring costs were accrued and
charged to expense in accordance with management plans. The
remaining nonrecurring amounts, principally related to
facilities, will be paid through 2014.
|
Sales Force Reorganizations
|
During the first quarter of 1999, we reorganized
our sales force to provide a more focused approach to the unique
product and service requirements of our customers. In connection
with this action, we incurred a restructuring charge of $3.2
million for the severance and termination benefits of
approximately 170 people who had been terminated during the
first quarter of 1999 in accordance with management's plan.
During the second quarter of 1999, we incurred a restructuring
charge of $5.8 million primarily for the severance and
termination benefits of approximately 150 people in connection
with the integration of our sales and related support groups.
All amounts related to terminated employees were paid in
1999.
|
Facility Consolidation and Asset
Impairment
|
During the second quarter of 1999, we incurred a
restructuring charge of $1.4 million for the consolidation of
certain excess leased facilities. Also, in the second quarter we
recorded an impairment loss of $4.7 million on certain
intangible assets related to our industrial design (CDRS)
activities. Due to recent acquisitions and the development of
new technology, the carrying value of these assets was
impaired.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes all of our
acquisition and nonrecurring charges:
|
|
September 30,
|
Acquisition
and Nonrecurring Charges Activity |
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Beginning balance |
|
$
71,500 |
|
|
$
70,983 |
|
|
$
69,601 |
|
|
|
|
|
|
|
|
|
|
|
Charges to operations: |
Employee
severance and termination benefits |
|
20,000 |
|
|
18,110 |
|
|
8,242 |
|
Purchased in-process R&D |
|
|
|
|
28,941 |
|
|
38,244 |
|
Asset
write-offs |
|
6,634 |
|
|
12,737 |
|
|
4,693 |
|
Facility
closures and related costs |
|
18,000 |
|
|
7,158 |
|
|
1,912 |
|
Additional costs to meet existing contract
obligations |
|
|
|
|
17,400 |
|
|
|
|
Transaction costs |
|
|
|
|
8,154 |
|
|
|
|
Lease
terminations and other |
|
366 |
|
|
13,266 |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
Total
charges to operations |
|
45,000 |
|
|
105,766 |
|
|
53,347 |
|
|
|
|
|
|
|
|
|
|
|
Costs
incurred: |
Employee
severance and termination benefits |
|
(11,449 |
) |
|
(22,753 |
) |
|
(11,422 |
) |
Purchased in-process R&D |
|
|
|
|
(28,941 |
) |
|
(38,244 |
) |
Asset
write-offs |
|
(6,634 |
) |
|
(12,737 |
) |
|
(4,693 |
) |
Facility
closures and related costs |
|
(27,114 |
) |
|
(17,573 |
) |
|
(17,475 |
) |
Additional costs to meet existing contract
obligations |
|
|
|
|
(8,026 |
) |
|
(4,100 |
) |
Transaction costs |
|
|
|
|
(7,977 |
) |
|
|
|
Lease
terminations and other |
|
(320 |
) |
|
(9,141 |
) |
|
(1,154 |
) |
|
|
|
|
|
|
|
|
|
|
Total
costs incurred |
|
(45,517 |
) |
|
(107,148 |
) |
|
(77,088 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$
70,983 |
|
|
$
69,601 |
|
|
$
45,860 |
|
|
|
|
|
|
|
|
|
|
|
Cash
expenditures: |
Employee
severance and termination benefits |
|
$
11,449 |
|
|
$
22,753 |
|
|
$
11,422 |
|
Facility
closures and related costs |
|
27,114 |
|
|
17,573 |
|
|
17,475 |
|
Additional costs to meet existing contract
obligations |
|
|
|
|
8,026 |
|
|
4,100 |
|
Transaction costs |
|
|
|
|
7,977 |
|
|
|
|
Lease
terminations and other |
|
320 |
|
|
6,002 |
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
Total
cash expenditures |
|
$
38,883 |
|
|
$
62,331 |
|
|
$
34,151 |
|
|
|
|
|
|
|
|
|
|
|
Number of employee severances |
|
300 |
|
|
450 |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 1999, of the $45.9 million
remaining in accrued acquisition and nonrecurring charges, $25.7
million was included in current liabilities and $20.2 million in
other liabilities.
C. Sale of a Business
Unit
In July 1997, Computervision sold the majority
interest in its other services business unit, which provided
hardware support services, to CVSI. Inc. for $32.6 million in
cash. Due to the sale of this business unit, we have presented
the revenue and expense of the other services business as a
separate operating item under other services in our statements
of income. Other services operating and nonrecurring charges
includes the operating expenses of the other services business
and nonrecurring charges of $7.0 million in 1997 related to a
prior proposed sale of this business unit.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D.
Investments
The fair values of our investments have been
determined through information obtained from market sources and
management estimates. We use a specific identification cost
method to determine the gross realized gains and losses on the
sale of our securities. Realized gains and losses on the sale of
investments were immaterial for 1997, 1998 and 1999.
|
|
September 30, 1998
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated
fair value
|
|
|
(in thousands) |
Municipal debt securities |
|
$238,296 |
|
$954 |
|
$(404 |
) |
|
$238,846 |
Mutual funds |
|
12,435 |
|
|
|
|
|
|
12,435 |
|
|
|
|
|
|
|
|
|
|
Total
investments |
|
$250,731 |
|
$954 |
|
$(404 |
) |
|
$251,281 |
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
Cash and
cash equivalents |
|
$
31,069 |
|
$
|
|
$
|
|
|
$
31,069 |
Short-term investments |
|
131,145 |
|
379 |
|
(119 |
) |
|
131,405 |
Marketable investments |
|
88,517 |
|
575 |
|
(285 |
) |
|
88,807 |
|
|
|
|
|
|
|
|
|
|
Total
investments |
|
$250,731 |
|
$954 |
|
$(404 |
) |
|
$251,281 |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 1999
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated
fair value
|
|
|
(in thousands) |
Municipal debt securities |
|
$
74,061 |
|
$76 |
|
$(225 |
) |
|
$
73,912 |
Mutual funds |
|
14,909 |
|
|
|
|
|
|
14,909 |
Commercial paper |
|
29,034 |
|
|
|
(18 |
) |
|
29,016 |
Government agencies |
|
39,256 |
|
3 |
|
(21 |
) |
|
39,238 |
|
|
|
|
|
|
|
|
|
|
Total
investments |
|
$157,260 |
|
$79 |
|
$(264 |
) |
|
$157,075 |
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
Cash and
cash equivalents |
|
$
42,969 |
|
$
|
|
$
|
|
|
$
42,969 |
Short-term investments |
|
101,355 |
|
77 |
|
(215 |
) |
|
101,217 |
Marketable investments |
|
12,936 |
|
2 |
|
(49 |
) |
|
12,889 |
|
|
|
|
|
|
|
|
|
|
Total
investments |
|
$157,260 |
|
$79 |
|
$(264 |
) |
|
$157,075 |
|
|
|
|
|
|
|
|
|
|
E. Property and
Equipment
Our property and equipment consisted of the
following:
|
|
September 30,
|
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Computer hardware and software |
|
$106,770 |
|
|
$
136,580 |
|
Furniture and fixtures |
|
13,542 |
|
|
15,605 |
|
Leasehold improvements |
|
10,725 |
|
|
14,651 |
|
|
|
|
|
|
|
|
Gross
property and equipment |
|
131,037 |
|
|
166,836 |
|
Accumulated depreciation and amortization |
|
(68,796 |
) |
|
(102,660 |
) |
|
|
|
|
|
|
|
Net
property and equipment |
|
$
62,241 |
|
|
$
64,176 |
|
|
|
|
|
|
|
|
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Depreciation expense was $30.6 million in 1997,
$26.4 million in 1998 and $33.3 million in 1999. There were no
capital leases as of September 30, 1998 or 1999.
F. Income
Taxes
Our income before taxes consisted of the
following:
|
|
September 30, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
(in thousands) |
Domestic |
|
$290,640 |
|
|
$191,518 |
|
|
$211,580 |
|
Foreign |
|
(84,956 |
) |
|
12,489 |
|
|
(30,338 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$205,684 |
|
|
$204,007 |
|
|
$181,242 |
|
|
|
|
|
|
|
|
|
|
|
Our provision for income taxes consisted of the
following:
|
|
|
September 30, |
|
|
1997 |
|
1998 |
|
1999 |
Current: |
|
(in thousands) |
Federal |
|
$
82,201 |
|
|
$
70,787 |
|
|
$
59,191 |
|
State |
|
18,280 |
|
|
10,756 |
|
|
9,250 |
|
Foreign |
|
13,582 |
|
|
11,224 |
|
|
10,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
114,063 |
|
|
92,767 |
|
|
78,863 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
Federal |
|
3,677 |
|
|
4,806 |
|
|
(17,553 |
) |
State |
|
119 |
|
|
720 |
|
|
(2,250 |
) |
Foreign |
|
165 |
|
|
|
|
|
2,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,961 |
|
|
5,526 |
|
|
(16,914 |
) |
|
|
|
|
|
|
|
|
|
|
Total
provision for income taxes |
|
$118,024 |
|
|
$
98,293 |
|
|
$
61,949 |
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income
tax rate and our effective income tax rate is shown
below:
|
|
|
|
|
|
|
September 30, |
|
|
1997 |
|
1998 |
|
1999 |
Statutory federal income taxes |
|
35 |
% |
|
35 |
% |
|
35 |
% |
State
income taxes, net of federal tax benefit |
|
6 |
|
|
4 |
|
|
3 |
|
Tax
exempt interest income |
|
(2 |
) |
|
(2 |
) |
|
(2 |
) |
Benefit of foreign sales corporations |
|
(4 |
) |
|
(4 |
) |
|
(1 |
) |
Valuation allowance |
|
|
|
|
|
|
|
(9 |
) |
Other, net |
|
|
|
|
1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate before non-benefited
items: |
|
35 |
|
|
34 |
|
|
27 |
|
Losses |
|
22 |
|
|
3 |
|
|
|
|
Acquisition-related charges |
|
|
|
|
11 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
57 |
% |
|
48 |
% |
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
We paid $55.6 million in 1997, $71.3 million in
1998 and $57.7 million in 1999 for income taxes.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The significant temporary differences that
create deferred tax assets and liabilities are shown
below:
|
|
September 30,
|
|
|
1998
|
|
1999
|
Deferred tax
assets: |
|
(in thousands) |
Reserves
not currently deductible |
|
$
7,088 |
|
|
$
2,407 |
|
Restructuring reserves not currently
deductible |
|
14,687 |
|
|
9,503 |
|
Net
operating loss carryforwards |
|
94,198 |
|
|
91,569 |
|
Amortization of intangible assets |
|
11,177 |
|
|
15,679 |
|
Depreciation |
|
1,658 |
|
|
1,824 |
|
Capitalized research and development |
|
4,141 |
|
|
3,606 |
|
Other |
|
961 |
|
|
3,438 |
|
|
|
|
|
|
|
|
Gross
deferred tax assets |
|
133,910 |
|
|
128,026 |
|
Valuation allowance |
|
(85,935 |
) |
|
(63,828 |
) |
|
|
|
|
|
|
|
Total
deferred tax assets |
|
$
47,975 |
|
|
$
64,198 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
Investment in foreign subsidiaries |
|
(31,193 |
) |
|
(28,512 |
) |
Deferred
revenue |
|
|
|
|
(2,585 |
) |
Other |
|
(2,884 |
) |
|
(2,289 |
) |
|
|
|
|
|
|
|
Total
deferred tax liabilities |
|
(34,077 |
) |
|
(33,386 |
) |
|
|
|
|
|
|
|
Net
deferred tax assets |
|
$
13,898 |
|
|
$
30,812 |
|
|
|
|
|
|
|
|
For U.S. tax return purposes, net operating
losses (NOLs) and tax credit carryforwards are generally
available to be carried forward to future years. However, the
Internal Revenue Code limits a corporations use of NOLs
and tax credits after a change of more than 50% of the ownership
of the corporation. Our merger with Computervision in January
1998 changed their ownership more than 50%. This change limits
our usage of the Computervision NOLs to $14.0 million per year
and $196.0 million cumulatively through 2011. There are other
limitations imposed on the utilization of such NOLs that will
further restrict the recognition of such tax benefits. We have
foreign NOLs that are also subject to various limitations. Due
to these limitations, we recorded a valuation allowance for the
tax benefit of a majority of NOLs since realization of these
future benefits was not sufficiently assured. During 1998 and
1999, we reduced our valuation allowance $46.5 million and $22.1
million, respectively, primarily due to changes in ownership
related to the Computervision merger in 1998 and anticipated
future benefits from the utilization of certain NOLs in
1999.
G.
Debt
In connection with the Computervision merger, we
acquired debt obligations, which were paid in full during the
second quarter of fiscal 1998. The total cash outlay for
settlement of these obligations plus accrued interest and
related fees was $275.7 million. We incurred an extraordinary
after-tax loss of $19.0 million related to the write-off of
deferred financing costs and other prepayment costs associated
with the payment of these debt obligations. We paid interest of
$29.6 million in 1997 and $10.7 million in 1998 related in these
debt obligations.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H.
Commitments and Contingencies
We lease office facilities and certain equipment
under operating leases expiring at various dates through 2014.
In addition to rent, certain leases require us to pay directly
for taxes, insurance, maintenance and other operating expenses.
Lease expense, net of sublease income, was $60.0 million in
1997, $45.0 million in 1998 and $54.6 million in 1999. At
September 30, 1999, our future minimum lease payments under
noncancellable operating leases with remaining terms of one or
more years are as follows:
|
|
September 30, 1999 |
|
|
(in thousands) |
2000 |
|
$ 67,819
|
2001 |
|
42,459
|
2002 |
|
27,205
|
2003 |
|
21,554
|
2004 |
|
16,619
|
Thereafter |
|
48,337
|
|
|
|
Total
minimum lease payments |
|
$223,993
|
|
|
|
As a result of Computervision's cost saving
initiatives in prior years and our merger with Computervision,
certain leased facilities were considered excess. As of
September 30, 1999, the excess facility obligation reserves were
$31.5 million.
In December 1999, we sold land and certain
improvements under construction for approximately $31 million
and entered into a lease covering approximately 381,000 square
feet of office space in the Boston area that will allow us to
consolidate and replace our Waltham operations. Occupancy and
rent should begin in December 2000 and expire in December 2012,
subject to completion of construction.
Certain class action lawsuits were filed by
shareholders in the fourth quarter of 1998 against us and
certain of our current and former officers and directors in the
U.S. District Court in Massachusetts claiming violations of the
federal securities laws based on alleged misrepresentations
regarding our anticipated revenue and earnings for the third
quarter of 1998. The plaintiffs in these lawsuits joined
together to file a consolidated and amended complaint in the
second quarter of 1999. The consolidated and amended complaint
seeks unspecified damages. We believe the claims made in the
consolidated and amended complaint are without merit, and we
intend to defend them vigorously. In the third quarter of 1999
we filed a motion to dismiss the consolidated and amended
complaint. We cannot predict the outcome of this motion or the
ultimate resolution of this action at this time, and there can
be no assurance that the litigation will not have a material
adverse impact on our financial condition or results of
operations.
We are also subject to various legal proceedings
and claims that arise in the ordinary course of business. We
currently believe that resolving these matters will not have a
material adverse impact on our financial condition or results of
operations.
I. Stockholders'
Equity
We may issue up to 5.0 million shares of our
preferred stock in one or more series. Our Board of Directors is
authorized to fix the rights and terms for each such series
without additional shareholder approval. As of September 30,
1998 and 1999, there were no outstanding shares of preferred
stock.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our Articles of Organization authorize us to
issue up to 350 million shares of our common stock. Shares of
common stock outstanding are shown below:
|
|
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Beginning balance |
|
265,859 |
|
|
266,919 |
|
|
268,142 |
|
Common stock issued |
|
2,062 |
|
|
4,310 |
|
|
|
|
Treasury shares repurchased |
|
(7,439 |
) |
|
(4,734 |
) |
|
(6,270 |
) |
Treasury shares issued |
|
6,437 |
|
|
1,647 |
|
|
8,292 |
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
266,919 |
|
|
268,142 |
|
|
270,164 |
|
|
|
|
|
|
|
|
|
|
|
On February 12, 1998, our Board of Directors
declared a one-for-one stock dividend on our common stock to all
stockholders of record on February 27, 1998. Our consolidated
financial statements and notes have been retroactively adjusted
to reflect this stock dividend.
In September 1997, our Board of Directors
authorized an increase in the number of shares available for
repurchase from 6.0 million to 12.0 million. During 1997, we
repurchased 7.4 million shares at a cost of $184.8 million.
Treasury stock repurchases were suspended during a portion of
1998 in connection with the Computervision merger. In September
1998, our Board of Directors authorized a new plan that allows
us to repurchase up to 20.0 million shares. Through September
30, 1999, we repurchased 11.0 million shares at a cost of $139.9
million. Our treasury stock is held on a first in, first out
cost basis. The repurchased shares will be used to issue shares
for stock option exercises, employee stock purchase plans and
potential acquisitions.
J. Stock
Plans
|
Employee
Stock Purchase Plans |
We offer an employee stock purchase plan for all
eligible employees. Under the plan, up to 4.0 million shares of
our common stock may be purchased at 85% of the lower of the
fair market value of the stock on the first or the last day of
each six-month offering period. 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, up to a maximum of ten
thousand dollars withheld in any year. During fiscal 1997, 1998
and 1999, employees purchased 353,000, 677,000 and 1.0 million
shares at average prices of $18.41, $11.36 and $9.20,
respectively.
On September 16, 1999, our Board of Directors
approved a new employee stock purchase plan that terminates on
September 30, 2009. The terms of this plan are similar to the
prior plan, except that employee purchases in any year are
limited to the lesser of $25,000 worth of stock, determined by
the fair market value of the common stock at the time the
offering begins, or 15% of his or her base pay. We have reserved
2.0 million shares of common stock for issuance under this new
plan.
We have stock option plans for employees,
directors, officers and consultants that provide for issuance of
nonqualified and incentive stock options. The option exercise
price is typically the fair market value at the date of grant.
These options generally vest over four years and expire ten
years from the date of grant. As of September 30, 1999, 7.9
million shares were available for grant and 59.0 million shares
were reserved for future issuance under stock option
plans.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In conjunction with the Computervision merger on
January 12, 1998, we reserved 1.6 million shares of our common
stock for outstanding Computervision options assumed. These
assumed options were granted at prices equal to the fair market
value at the date of grant, become exercisable generally in
annual installments over four to five years and expire ten years
from the date of grant.
In July 1998, our Board of Directors approved a
one-for-one stock option exchange program that provided
employees the opportunity to exchange stock options previously
granted for new options with a current market price and new
vesting period. Executive officers and directors were not
eligible to participate in the program. The new options were
priced at $13.63 based on the closing price of our common stock
as reported by the Nasdaq Stock Market on August 3, 1998, vest
in equal installments over four years from the August 3, 1998
grant date and expire on August 3, 2008. A total of 20.0 million
options with exercise prices ranging from $15.06 to $33.50 per
share were exchanged under the program. The exchange of such
options is presented in the following table of stock option
activity as cancellations and subsequent grants:
|
|
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Shares
|
|
Weighted
average
exercise
price
|
Outstanding: |
|
(shares in thousands) |
Beginning balance |
|
33,184 |
|
|
$13.54 |
|
38,234 |
|
|
$18.67 |
|
48,888 |
|
|
$15.03 |
Granted
and assumed |
|
16,249 |
|
|
24.71 |
|
40,190 |
|
|
17.91 |
|
17,169 |
|
|
13.28 |
Cancelled |
|
(3,694 |
) |
|
21.05 |
|
(24,254 |
) |
|
25.85 |
|
(8,564 |
) |
|
16.75 |
Exercised |
|
(7,505 |
) |
|
8.14 |
|
(5,282 |
) |
|
12.01 |
|
(2,058 |
) |
|
7.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance |
|
38,234 |
|
|
$18.67 |
|
48,888 |
|
|
$15.03 |
|
55,435 |
|
|
$14.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
9,751 |
|
|
$12.36 |
|
11,418 |
|
|
$14.53 |
|
19,687 |
|
|
$14.50 |
Certain employees have disposed of stock acquired
through the employee stock purchase plan and the exercise of
incentive stock options earlier than the mandatory holding
period required. These dispositions, together with the tax
benefits realized from the exercise of nonqualified stock
options, create tax benefits that have been recorded as
increases to additional paid-in capital.
For various price ranges, information for options
outstanding and exercisable at September 30, 1999 was as
follows:
|
|
Outstanding Options
|
|
Exercisable Options
|
Range of
exercise prices
|
|
Shares
|
|
Weighted
average
remaining
life (years)
|
|
Weighted
average
exercise
price
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
|
(shares in thousands) |
$
0.09-12.44 |
|
14,184 |
|
7.26 |
|
$
9.30 |
|
7,048 |
|
$
8.66 |
12.45-13.63 |
|
16,686 |
|
8.85 |
|
13.62 |
|
4,129 |
|
13.62 |
13.64-15.69 |
|
14,283 |
|
8.87 |
|
15.24 |
|
2,865 |
|
14.99 |
15.70-30.28 |
|
10,010 |
|
7.32 |
|
21.61 |
|
5,455 |
|
21.46 |
30.29-72.55 |
|
272 |
|
6.83 |
|
42.51 |
|
190 |
|
42.71 |
|
|
|
|
|
|
|
|
|
|
|
$
0.09-72.55 |
|
55,435 |
|
8.16 |
|
$14.52 |
|
19,687 |
|
$14.50 |
|
|
|
|
|
|
|
|
|
|
|
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We have not recognized compensation expense in
connection with stock option grants under our plans. However,
had compensation expense for stock option and employee stock
purchase plans been determined based on fair value at the grant
dates as prescribed by SFAS No. 123, pro forma net income and
earnings per share would have been:
|
|
September 30, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
(in thousands, except
per share amounts) |
Pro
forma net income |
|
$36,725 |
|
|
$9,824 |
|
|
$32,848 |
|
Pro
forma earnings per share: |
Basic |
|
$
0.14 |
|
|
$
0.04 |
|
|
$
0.12 |
|
Diluted |
|
$
0.14 |
|
|
$
0.04 |
|
|
$
0.12 |
|
|
The pro forma disclosures above include the amortization
of the fair value of all options vested between 1996 and 1999,
regardless of the grant date. If only options granted after
1996 were valued, as prescribed by SFAS No. 123, pro forma net
income and pro forma diluted EPS would have been $54.2 million
and $0.20 for 1997, $22.4 million and $0.09 for 1998 and $39.4
million and $0.14 for 1999. 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. The fair value of options granted has been
estimated at the date of grant using the Black-Scholes
option-pricing model assuming the following weighted-average
assumptions:
|
|
|
September 30, |
|
|
1997 |
|
1998 |
|
1999 |
Expected life (years) |
|
5.0 |
|
|
6.0 |
|
|
6.0 |
|
Risk-free interest rates |
|
6.2 |
% |
|
5.6 |
% |
|
5.0 |
% |
Volatility |
|
40 |
% |
|
50 |
% |
|
50 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
The weighted average fair value of employee stock
options granted was $11.17 in 1997, $9.95 in 1998 and $7.96 in
1999. The expected life used for stock purchase plans was six
months. The weighted average fair value of shares granted under
the stock purchase plan was $6.13 in 1997, $7.77 in 1998 and
$3.80 in 1999.
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 our 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 our options.
K. Employee
Benefit Plans
We offer a savings plan (PTC plan) to eligible
employees. The plan is intended to qualify under Section 401(k)
of the Internal Revenue Code. Participating employees may defer
up to 15% of their pre-tax compensation, as defined, but not
more than statutory limits. We contribute 50% of the amount
contributed by the employee, up to a maximum of 10% of the
employee's earnings. Our matching contributions vest at a rate
of 25% per year of service. We made matching contributions of
$2.3 million, $3.2 million and $4.7 million in 1997, 1998 and
1999, respectively.
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
U.S. employees of Computervision who completed
one year of service were eligible to participate in a savings
plan (CV plan), which is intended to qualify under Section
401(k) of the Internal Revenue Code. Our matching contributions,
based on the employee's contributions and length of service,
were $1.5 million for 1997 and $144,000 for 1998. Beginning
April 1, 1998, participants of the CV plan began contributing to
the PTC plan and no further contributions were made into the CV
plan. The assets of the CV plan were merged into the PTC plan in
the first quarter of fiscal 1999.
L. Pension
Plans
We maintain a defined benefit pension plan
covering certain employees of Computervision. Benefits are based
upon length of service and average compensation and generally
vest after five years of service. Accrued pension costs have
been included in other liabilities.
Effective April 1, 1990, the benefits under the
U.S. pension plan were frozen indefinitely. We contribute all
amounts deemed necessary on an actuarial basis to satisfy
Internal Revenue Service funding requirements. Based upon the
actuarial valuations, we contributed $5.0 million in 1997, $3.8
million in 1998 and $13.7 million in 1999. Due to the changes in
actuarial assumptions and underperformance of plan investments,
as shown below, we were required to record a minimum pension
liability adjustment of $5.8 million in 1997 and $7.8 million in
1998. This minimum pension liability was reduced by $3.7 million
in 1999 due to contributions and fund performance. Plan assets
consist primarily of money market and pooled fund investments
with several banks.
The accrued international pension cost was
actuarially computed using assumptions applicable to each
subsidiary plan and economic environment. We adjusted our
minimum pension liability related to our foreign plans due to
the changes in actuarial assumptions and performance of plan
investments, as shown below. Plan assets consist of investments
in equities and guaranteed investment contracts with several
insurance companies and banks.
The following table presents the actuarial
assumptions used in accounting for the pension
plans:
|
|
U.S. Plan
|
|
Foreign Plans
|
|
|
1997
|
|
1998
|
|
1999
|
|
1997
|
|
1998
|
|
1999
|
Discount rate |
|
7.0 |
% |
|
6.3 |
% |
|
7.5 |
% |
|
6.0 to
7.5 |
% |
|
5.8 to
6.3 |
% |
|
6.3 to
6.5 |
% |
Rate
of increase in future compensation |
|
|
|
|
|
|
|
|
|
|
3.3 to
5.5 |
% |
|
3.0 to
5.0 |
% |
|
3.5 to
5.0 |
% |
Rate
of return on plan assets |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
|
7.0 to
9.0 |
% |
|
6.8 to
8.5 |
% |
|
6.3 to
7.0 |
% |
The actuarially computed components of net
periodic pension cost are show below:
|
|
U.S. Plan
|
|
Foreign Plans
|
|
|
1997
|
|
1998
|
|
1999
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Service costs of benefits earned during the
period |
|
$
|
|
|
$
|
|
|
$
|
|
|
$
1,233 |
|
|
$
853 |
|
|
$
6 |
|
Interest cost of projected benefit
obligation |
|
2,771 |
|
|
2,262 |
|
|
3,224 |
|
|
2,551 |
|
|
2,189 |
|
|
2,853 |
|
Expected return on plan assets |
|
(1,973 |
) |
|
(1,721 |
) |
|
(2,568 |
) |
|
(2,800 |
) |
|
(2,344 |
) |
|
(2,698 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
13 |
|
|
17 |
|
Recognized actuarial loss |
|
381 |
|
|
529 |
|
|
1,191 |
|
|
|
|
|
(35 |
) |
|
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic pension cost |
|
$
1,179 |
|
|
$
1,070 |
|
|
$
1,847 |
|
|
$
1,001 |
|
|
$
676 |
|
|
$
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following tables display the change in
benefit obligation, plan assets and funded status:
|
|
U.S. Plan
|
|
Foreign Plans
|
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Beginning benefit obligation |
|
$
42,366 |
|
|
$50,622 |
|
|
$
39,036 |
|
|
$50,051 |
|
Service cost |
|
|
|
|
|
|
|
853 |
|
|
6 |
|
Interest cost |
|
2,262 |
|
|
3,224 |
|
|
2,189 |
|
|
2,853 |
|
Employee contributions |
|
|
|
|
|
|
|
239 |
|
|
|
|
Actuarial loss (gain) |
|
7,564 |
|
|
(3,006 |
) |
|
6,771 |
|
|
(5,001 |
) |
Foreign exchange impact |
|
|
|
|
|
|
|
1,381 |
|
|
(2,254 |
) |
Benefits paid |
|
(1,570 |
) |
|
(1,797 |
) |
|
(418 |
) |
|
(3,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending benefit obligation |
|
$
50,622 |
|
|
$49,043 |
|
|
$
50,051 |
|
|
$42,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning plan assets at fair value |
|
$
28,564 |
|
|
$31,742 |
|
|
$
33,761 |
|
|
$34,770 |
|
Actual return on plan assets |
|
916 |
|
|
2,087 |
|
|
(39 |
) |
|
5,989 |
|
Employer contributions |
|
3,832 |
|
|
13,719 |
|
|
103 |
|
|
5 |
|
Employee contributions |
|
|
|
|
|
|
|
239 |
|
|
|
|
Foreign exchange impact |
|
|
|
|
|
|
|
1,001 |
|
|
(1,107 |
) |
Benefits paid |
|
(1,570 |
) |
|
(1,797 |
) |
|
(295 |
) |
|
(3,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending plan assets at fair value |
|
31,742 |
|
|
45,751 |
|
|
34,770 |
|
|
36,607 |
|
Benefit obligation at end of year |
|
50,622 |
|
|
49,043 |
|
|
50,051 |
|
|
42,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
(18,880 |
) |
|
(3,292 |
) |
|
(15,281 |
) |
|
(5,873 |
) |
Unrecognized actuarial loss (gain) |
|
21,596 |
|
|
17,880 |
|
|
11,212 |
|
|
2,048 |
|
Unrecognized prior service cost |
|
|
|
|
|
|
|
353 |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
prepaid (accrued) benefit cost |
|
$
2,716 |
|
|
$14,588 |
|
|
$
(3,716 |
) |
|
$(3,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amounts recognized
in the balance sheet:
|
|
U.S. Plan
|
|
Foreign Plans
|
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Accrued benefit liability |
|
$(18,880 |
) |
|
$(3,292 |
) |
|
$(16,702 |
) |
|
$(8,039 |
) |
Intangible asset |
|
|
|
|
|
|
|
353 |
|
|
324 |
|
Accumulated other comprehensive income |
|
21,596 |
|
|
17,880 |
|
|
12,633 |
|
|
4,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount recognized |
|
$
2,716 |
|
|
$14,588 |
|
|
$
(3,716 |
) |
|
$(3,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
PARAMETRIC TECHNOLOGY
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
M. Geographic
Information
During 1999, we adopted 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. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and
in assessing performance. Our chief operating decision-making
group is our executive officers.
While we are predominately a computer software
company, our business is organized geographically. Data for the
geographic regions in which we operate is presented
below:
|
|
September 30,
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands) |
Software revenue: |
|
|
North
America |
|
$424,273 |
|
$
449,931 |
|
$
464,445 |
Europe |
|
364,154 |
|
408,057 |
|
389,969 |
Asia/Pacific |
|
191,366 |
|
159,982 |
|
203,187 |
|
|
|
|
|
|
|
Total
revenue |
|
$979,793 |
|
$1,017,970 |
|
$1,057,601 |
|
|
|
|
|
|
|
Long-lived assets: |
North
America |
|
$
52,217 |
|
$
47,910 |
|
$
165,212 |
Europe |
|
13,455 |
|
26,878 |
|
66,826 |
Asia/Pacific |
|
18,422 |
|
18,979 |
|
23,503 |
|
|
|
|
|
|
|
Total
long-lived assets |
|
$
84,094 |
|
$
93,767 |
|
$
255,541 |
|
|
|
|
|
|
|
We license products to customers worldwide. Our
sales and marketing operations outside the United States are
conducted principally through our foreign sales subsidiaries
throughout Europe and the Asia/Pacific region. Intercompany
sales and transfers between geographic areas are accounted for
at prices that are designed to be representative of unaffiliated
party transactions. Total exports were $148.5 million, $115.2
million and $166.2 million in 1997, 1998 and 1999,
respectively.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
PARAMETRIC TECHNOLOGY CORPORATION:
In our opinion, the consolidated financial
statements listed in the index appearing under Item 14(a)(1)
present fairly, in all material respects, the financial position
of Parametric Technology Corporation and its subsidiaries at
September 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
|
PRICEWATERHOUSE
COOPERS
LLP
|
Boston, Massachusetts
October 18, 1999, except for Note H,
as to which the date is December 15,
1999
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
|
|
September 30,
|
|
|
1995
|
|
1996
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands, except per share data) |
Revenue |
|
$901,384 |
|
$1,077,321 |
|
$1,062,018 |
|
$1,017,970 |
|
$1,057,601 |
Operating income |
|
199,306 |
|
259,729 |
|
229,335 |
|
208,020 |
|
178,792 |
Net
income |
|
100,178 |
|
159,567 |
|
87,660 |
|
86,697 |
|
119,293 |
Earnings per share:(2) |
Basic |
|
0.29 |
|
0.60 |
|
0.33 |
|
0.32 |
|
0.44 |
Diluted |
|
0.37 |
|
0.57 |
|
0.32 |
|
0.31 |
|
0.43 |
Total
assets |
|
718,887 |
|
889,241 |
|
919,129 |
|
801,060 |
|
1,016,620 |
Working capital |
|
235,197 |
|
356,109 |
|
311,299 |
|
174,239 |
|
247,921 |
Long
term liabilities, less current portion |
|
343,452 |
|
323,102 |
|
263,949 |
|
46,014 |
|
38,333 |
Stockholders' equity |
|
33,194 |
|
195,648 |
|
204,551 |
|
335,504 |
|
521,104 |
Pro
forma:(3) |
Revenue |
|
$680,911 |
|
$
902,937 |
|
$
979,794 |
|
$1,017,970 |
|
$1,057,601 |
Operating
income |
|
192,320 |
|
298,567 |
|
288,823 |
|
316,501 |
|
255,027 |
Net
income |
|
92,587 |
|
184,106 |
|
146,196 |
|
199,359 |
|
184,356 |
Earnings per
share:(2) |
Basic |
|
0.36 |
|
0.70 |
|
0.55 |
|
0.74 |
|
0.68 |
Diluted |
|
0.34 |
|
0.66 |
|
0.53 |
|
0.72 |
|
0.67 |
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (1)
|
|
January 3,
1998
|
|
April 4,
1998
|
|
July 4,
1998
|
|
September
30,
1998
|
|
|
(in thousands, except per share data) |
Revenue |
|
$258,868 |
|
$264,071 |
|
|
$245,001 |
|
$250,030 |
Operating income |
|
80,128 |
|
23,515 |
|
|
35,851 |
|
68,526 |
Net
income (loss) |
|
42,133 |
|
(15,942 |
) |
|
15,209 |
|
45,297 |
Earnings per share:(2) |
Basic |
|
0.16 |
|
(0.06 |
) |
|
0.06 |
|
0.17 |
Diluted |
|
0.15 |
|
(0.06 |
) |
|
0.05 |
|
0.17 |
Pro
forma:(3) |
Operating
income |
|
$
80,807 |
|
$100,994 |
|
|
$
65,260 |
|
$
69,440 |
Net
income |
|
42,581 |
|
66,411 |
|
|
44,467 |
|
45,900 |
Earnings per
share:(2) |
Basic |
|
0.16 |
|
0.25 |
|
|
0.16 |
|
0.17 |
Diluted |
|
0.15 |
|
0.24 |
|
|
0.16 |
|
0.17 |
Common stock prices:(4) |
High |
|
$
26.38 |
|
$
34.31 |
|
|
$
34.94 |
|
$
16.56 |
Low |
|
19.94 |
|
23.00 |
|
|
16.06 |
|
9.75 |
|
|
January 2,
1999
|
|
April 3,
1999
|
|
July 3,
1999
|
|
September
30,
1999
|
|
|
(in thousands, except per share data) |
Revenue |
|
$250,117 |
|
$263,248 |
|
$264,140 |
|
$280,096 |
Operating income |
|
46,097 |
|
20,840 |
|
49,747 |
|
62,108 |
Net
income |
|
29,991 |
|
10,549 |
|
35,419 |
|
43,334 |
Earnings per share:(2) |
Basic |
|
0.11 |
|
0.04 |
|
0.13 |
|
0.16 |
Diluted |
|
0.11 |
|
0.04 |
|
0.13 |
|
0.16 |
Pro
forma:(3) |
Operating
income |
|
$
62,414 |
|
$
63,964 |
|
$
58,244 |
|
$
70,405 |
Net
income |
|
44,850 |
|
45,904 |
|
42,917 |
|
50,685 |
Earnings per
share:(2) |
Basic |
|
0.17 |
|
0.17 |
|
0.16 |
|
0.19 |
Diluted |
|
0.16 |
|
0.17 |
|
0.16 |
|
0.18 |
Common stock prices:(4) |
High |
|
$
18.13 |
|
$
21.00 |
|
$
19.38 |
|
$
16.19 |
Low |
|
8.94 |
|
12.50 |
|
11.94 |
|
13.00 |
(1)
|
All financial information has been
retroactively restated to reflect the mergers with Rasna in
1995 and Computervision in 1998 (Note B).
|
(2)
|
Per share data has been retroactively adjusted
to reflect the one-for-one stock dividends in 1996 and 1998
(Note I).
|
(3)
|
The pro forma results exclude (i) the
amortization of goodwill and intangible assets; (ii)
acquisition and related costs of $29.4 million in 1995, $35.6
million in 1996, $76.8 million in the second quarter of 1998,
$28.9 million in the third quarter of 1998, $10.6 million in
the first quarter of 1999 and $27.6 million in the second
quarter of 1999 (Note B); (iii) nonrecurring charges of $11.0
million in 1996, $45.0 million in 1997, $3.2 million in the
first quarter of 1999 and $11.9 million in the second quarter
of 1999 (Note B); (iv) the results of Computervision's other
services business unit (Note C); and (v) extraordinary losses
of $7.9 million in 1995 and $19.0 million in the second
quarter of 1998 (Note G).
|
(4)
|
Our common stock is traded on the Nasdaq
National Market under the symbol "PMTC". The common stock
prices are based on the Nasdaq Stock Market daily closing
stock price.
|