<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 2, 1999
Commission File Number: 0-18059
----------------
Parametric Technology Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
128 TECHNOLOGY DRIVE, WALTHAM, MA 02453
(Address of principal executive offices, including zip code)
(781) 398-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
There were 267,378,673 shares of our common stock outstanding on January 2,
1999.
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PARAMETRIC TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended January 2, 1999
<TABLE>
<CAPTION>
Page
Number
------
<C> <S> <C>
Cover.................................................................. i
Index.................................................................. ii
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
January 2, 1999............................................... 1
Consolidated Statements of Income for the three months ended
January 3, 1998 and January 2, 1999........................... 2
Consolidated Statements of Cash Flows for the three months
ended January 3, 1998 and January 2, 1999..................... 3
Notes to the Consolidated Financial Statements................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities and Use of Proceeds..................... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signature.............................................................. 15
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, January 2,
1998 1999
------------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 205,971 $ 196,804
Short-term investments............................ 131,405 133,650
Accounts receivable, net.......................... 189,275 195,740
Other current assets.............................. 67,130 76,653
----------- -----------
Total current assets............................ 593,781 602,847
Marketable investments.............................. 88,807 69,642
Property and equipment, net......................... 62,241 64,375
Other assets........................................ 88,011 123,980
----------- -----------
Total assets.................................... $ 832,840 $ 860,844
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 34,520 $ 33,009
Accrued expenses.................................. 92,742 74,739
Accrued compensation and severance................ 81,856 73,747
Deferred revenue.................................. 145,376 153,150
Income taxes...................................... 65,048 82,233
----------- -----------
Total current liabilities....................... 419,542 416,878
Other liabilities................................... 54,081 52,760
Deferred income taxes............................... 31,780 31,788
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares au-
thorized; none issued............................ -- --
Common stock, $0.01 par value; 350,000 shares au-
thorized; 272,277
shares issued for both periods.................... 2,723 2,723
Additional paid-in capital........................ 1,528,647 1,535,459
Treasury stock, at cost, 4,135 and 4,898 shares... (43,134) (66,949)
Accumulated deficit............................... (1,157,628) (1,111,380)
Accumulated other comprehensive loss (Note 4)..... (3,171) (435)
----------- -----------
Total stockholders' equity...................... 327,437 359,418
----------- -----------
Total liabilities and stockholders' equity...... $ 832,840 $ 860,844
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
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PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
----------------------
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
Revenue:
License................................................ $ 158,258 $ 136,080
Service................................................ 100,610 114,037
--------- ---------
Total revenue...................................... 258,868 250,117
--------- ---------
Cost of revenue:
License................................................ 4,803 4,489
Service................................................ 36,603 42,122
--------- ---------
Total cost of revenue.............................. 41,406 46,611
--------- ---------
Gross profit............................................. 217,462 203,506
--------- ---------
Operating expenses:
Sales and marketing.................................... 96,206 96,112
Research and development............................... 25,279 29,173
General and administrative............................. 15,454 16,564
Amortization of intangible assets...................... 395 1,731
Acquisition and nonrecurring charges (Note 2).......... -- 13,829
--------- ---------
Total operating expenses........................... 137,334 157,409
--------- ---------
Operating income......................................... 80,128 46,097
Other income (expense), net.............................. (5,878) 1,944
--------- ---------
Income before income taxes............................... 74,250 48,041
Provision for income taxes............................... 32,117 18,050
--------- ---------
Net income............................................... $ 42,133 $ 29,991
========= =========
Earning per share (Note 3):
Basic.................................................. $ 0.16 $ 0.11
Diluted................................................ $ 0.15 $ 0.11
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
--------------------
January January
3, 1998 2, 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 42,133 $ 29,991
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization........................ 6,864 12,283
Deferred income taxes................................ 1,020 --
Charge for purchased in-process research and
development......................................... -- 10,600
Changes in assets and liabilities which provided
(used) cash, net of effects of purchased businesses:
Accounts receivable................................ (4,834) (8,291)
Accounts payable and accrued expenses.............. 861 (18,997)
Accrued compensation and severance................. (15,067) (8,218)
Deferred revenue................................... 8,854 7,208
Income taxes....................................... 7,760 17,193
Other current assets............................... (20,710) (4,099)
Other noncurrent assets and liabilities............ 9,585 (6,823)
--------- ---------
Net cash provided by operating activities................ 36,466 30,847
--------- ---------
Cash flows from investing activities:
Additions to property and equipment.................... (5,652) (8,536)
Changes in other assets................................ 302 (2,440)
Purchases of investments............................... (89,556) (11,705)
Proceeds from sales and maturities of investments...... 128,572 24,993
--------- ---------
Net cash provided by investing activities................ 33,666 2,312
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock................. 13,377 4,493
Purchases of treasury stock............................ -- (49,963)
Repayment of long-term obligations..................... (11) --
--------- ---------
Net cash provided (used) by financing activities......... 13,366 (45,470)
--------- ---------
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 ................. (1,685) 3,144
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 93,380 (9,167)
Cash and cash equivalents, beginning of period........... 168,609 205,971
--------- ---------
Cash and cash equivalents, end of period................. $ 261,989 $ 196,804
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Parametric Technology Corporation and its wholly owned
subsidiaries and have been prepared by us in accordance with generally
accepted accounting principles. Our fiscal year end is September 30. Certain
reclassifications have been made to the prior year's statements to conform
with the fiscal 1999 presentation. The year end consolidated balance sheet was
derived from our audited financial statements. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of our financial position, results of operations, and
cash flows at the dates and for the periods indicated. While we believe that
the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on Form
10-K for the fiscal year ended September 30, 1998.
The results of operations for the three month period ended January 2, 1999 are
not necessarily indicative of the results expected for the remainder of the
fiscal year. The results of operations and cash flows for the three month
period ended January 3, 1998 have been restated to reflect the merger with
Computervision Corporation in January 1998, which was accounted for as a
pooling of interests.
2. ACQUISITION AND NONRECURRING CHARGES
InPart. In October 1998, we acquired all of the outstanding stock of InPart
Design, Inc. (InPart) by issuing 2.0 million shares of our common stock. In
addition, we reserved 386,000 shares of common stock for outstanding InPart
options assumed. Based upon certain conditions, we may be obligated to issue
additional shares in September 1999. InPart is the developer of DesignSuiteTM,
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. The acquisition was accounted for as a purchase.
Accordingly, we allocated the purchase price of $38.8 million to the assets
acquired and liabilities assumed based on our estimates of fair value. The
fair values assigned to intangible assets acquired consisted of purchased in-
process research and development (R&D), developed technology, customer lists,
an assembled workforce, and trade names. 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. The operating results of InPart
have been included in our results of operations from the date of acquisition.
Our purchase of InPart did not require the presentation of pro forma
information.
In the opinion of management, the purchased in-process R&D had not yet reached
technological feasibility and had no alternative future use. Accordingly, we
recorded a nonrecurring charge of $10.6 million during the first quarter of
1999. This charge was not deductible for income taxes. The value assigned to
purchased in-process R&D, which was calculated pursuant to the Securities and
Exchange Commission's recent guidance regarding in-process R&D allocations,
was determined by identifying research projects for which technological
feasibility had not been established. The value was determined by estimating
the stage of completion of the purchased in-process R&D, estimating the
resulting net cash flows from the products developed, and discounting the net
cash flows back to their present value. The discount rate used included a
factor that took into account the uncertainty surrounding the successful
development of the purchased in-process technology. If these projects are not
successfully developed, future revenue and profitability may be adversely
affected. Additionally, the value of other intangible assets acquired may
become impaired.
Sales Force Reorganization. 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
4
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PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Of the
$3.2 million charge, $2.6 million was paid during the quarter. As of January
2, 1999, the remaining $645,000 was included in accrued compensation. We
expect to pay the remaining amount during the second quarter of 1999.
3. EARNINGS PER SHARE
Basic earnings per share (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 and other dilutive potential shares. The following
table presents the calculation for both basic and diluted EPS:
<TABLE>
<CAPTION>
Three months ended
---------------------
January 3, January 2,
1998 1999
---------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net income......................................... $42,133 $29,991
======= =======
Weighted average shares outstanding................ 267,344 268,429
Dilutive effect of employee stock options.......... 7,692 4,933
Contingently issuable shares related to InPart
acquisition....................................... -- 418
------- -------
Diluted shares outstanding......................... 275,036 273,780
======= =======
Basic EPS.......................................... $ 0.16 $ 0.11
Diluted EPS........................................ $ 0.15 $ 0.11
</TABLE>
Options to purchase 14.5 million shares for the three months ended January 3,
1998 and 17.9 million shares for the three months ended January 2, 1999 were
outstanding but were excluded from the computations of diluted shares
outstanding because the price of the options was greater than the average
market price of the common stock for the period reported.
4. COMPREHENSIVE INCOME
Effective October 1, 1998, we adopted Statement of Financial Accounting
Standards (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. Our total comprehensive income is as
follows:
<TABLE>
<CAPTION>
Three months ended
---------------------
January 3, January 2,
1998 1999
---------- ----------
(in thousands)
<S> <C> <C>
Comprehensive income:
Net income........................................ $ 42,133 $ 29,991
Other comprehensive income (loss):
Foreign currency translation adjustments.......... (1,485) 2,420
Unrealized gain on investments.................... 129 316
-------- --------
Total comprehensive income.......................... $ 40,777 $ 32,727
======== ========
</TABLE>
5
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which requires the reporting of operating segments, major customers, and
geographic financial information. In February 1998, the FASB issued Statement
of Financial Accounting Standards No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits, which enhances the disclosure
requirements for pensions and other postretirement benefits. We will adopt
SFAS No. 131 and SFAS No. 132 in our fiscal year ending September 30, 1999. We
anticipate that the adoption of these statements will not have a material
effect on our financial condition or results of operations.
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. We adopted SOP 97-2 during the quarter ended
January 2, 1999. The adoption of this statement did not have a material effect
on our revenue recognition policies or on our results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that all derivative
instruments be recorded on the balance sheet at their fair values. Changes in
the fair value of derivatives are recorded in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. We will
adopt SFAS No. 133 for our fiscal year ending September 30, 2000. We
anticipate that the adoption of this statement will not have a material effect
on our financial condition or results of operations.
6. SUBSEQUENT EVENT
In January 1999, we announced our offer to acquire all of the outstanding
capital shares of Division Group plc (Division) for approximately $46 million
in cash or stock. Division, headquartered in Bristol, England, and San Diego,
California, is a leading developer of product data visualization, simulation,
and integration tools. We expect to complete the acquisition in our second
quarter, subject to satisfaction of certain conditions including regulatory
approvals and acceptance by holders of 90% of the Division shares, which
condition may be waived by us if the offer is accepted by holders of a
majority of Division shares. At February 1, 1999, we had purchased 22% of the
Division shares and had commitments for acceptance for an additional 37% of
the Division shares. The acquisition will be accounted for as a purchase. We
anticipate that a portion of the purchase price will be allocated to purchased
in-process R&D.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company
Parametric Technology Corporation develops, markets, and supports a
comprehensive suite of integrated product development and information
management software. Our mechanical design automation product family automates
product development, from conceptual design through production. Our enterprise
information management solutions accelerate the flow of product data from
engineering to other critical areas of an enterprise. Our solutions are
complemented by the strength and experience of our professional services
organization, which provides training, consulting, and support to customers
worldwide.
Forward-Looking Statement
This Quarterly Report on Form 10-Q 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 are discussed below and additional factors
are contained in Important Risk Factors Affecting Results included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations which is filed as part of Exhibit 13.1 to our 1998 Annual Report on
Form 10-K and is incorporated herein by reference.
Results of Operations
The following is an overview of our results of operations:
. Total revenue was $258.9 million for the first quarter of 1998 and $250.1
million for the first quarter of 1999.
. Our year-over-year first quarter revenue declined 3%, reflecting a 14%
decrease in software license revenue offset by a 13% increase in service
revenue.
. Excluding acquisition and nonrecurring charges, our net income increased 1%
to $42.7 million for the first quarter of 1999.
7
<PAGE>
The following table shows certain consolidated financial data as a percentage
of our total revenue for the first quarter of 1998 and 1999.
<TABLE>
<CAPTION>
Three months ended
---------------------
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
Total revenue...................................... 100% 100%
--- ---
Cost of revenue:
License.......................................... 2 2
Service.......................................... 14 17
--- ---
Total cost of revenue.............................. 16 19
--- ---
Gross profit....................................... 84 81
--- ---
Operating expenses:
Sales and marketing.............................. 37 38
Research and development......................... 10 12
General and administrative....................... 6 7
Amortization of intangible assets................ -- 1
Acquisition and nonrecurring charges............. -- 5
--- ---
Total operating expenses........................... 53 63
--- ---
Operating income................................... 31 18
--- ---
Other income (expense), net........................ (2) 1
--- ---
Income before income taxes......................... 29 19
Provision for income taxes......................... 13 7
--- ---
Net income......................................... 16% 12%
=== ===
Excluding acquisition and nonrecurring charges:
Operating income................................. 31% 24%
Net income....................................... 16% 17%
</TABLE>
REVENUE. We derived our revenue primarily from software used in the mechanical
segment of the computer-aided design, manufacturing, and engineering industry.
License revenue decreased 14% for the first quarter of 1999 compared to the
first quarter of 1998. Among other factors, this decrease is attributable to
the implementation of our sales force reorganization during the first quarter
of 1999, which reduced sales productivity during the quarter, and to weaker
than anticipated results in the Asia/Pacific region, particularly Japan. In
addition, the average price of our software in the first quarter of 1999
decreased from the comparable 1998 period due primarily to our repricing and
repackaging initiative announced in August 1998. Product unit sales increased
7% during the same period.
8
<PAGE>
Our service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services, and has a lower gross
profit margin than license revenue. Service revenue increased 13% for the
first quarter of 1999 compared to the first quarter of 1998. This increase is
primarily the result of growth in our installed customer base and increased
training and consulting services performed for these customers. We expect
service revenue to continue to increase in both absolute dollars and as a
percentage of total revenue for the remainder of 1999.
[bar chart depicting Revenue by Type:
Q1 98: License - $158.3 million; Service - $100.6 million
Q1 99: License - $136.1 million; Service - $114.0 million]
We derived 55% and 54% of our total revenue from sales to international
customers for the first quarter of 1998 and 1999, respectively. Our 1999 first
quarter revenue in both North America and Europe remained relatively flat
compared to the first quarter of 1998 while revenue in the Asia/Pacific region
decreased 20%, due in part to the weakness in capital spending in that region.
[bar chart depicting Revenue by Geography:
U.S. Q1 98 - $115.6 million; Q1 99 - $116.0 million
Europe Q1 98 - $98.6 million; Q1 99 - $98.6 million
Asia/Pacific Q1 98 - $44.7 million; Q1 99 - $35.5 million]
We remain cautious in our overall outlook for the remainder of 1999 because
the impact of our various strategic initiatives, designed to provide a
foundation for future growth, is uncertain. These initiatives include the
repricing and repackaging of our core Pro/ENGINEER(R) product line that we
undertook in the fourth quarter of 1998 and the following initiatives
implemented in the first quarter of 1999: our sales force reorganization,
which included our appointment of Rand A Technology Corporation as our
exclusive distributor to small businesses in
9
<PAGE>
the U.S. and Europe; and our Windchill pilot program, which is designed to
allow customers to use the Windchill technology on a test basis at a reduced
price in order to promote market awareness in the enterprise information
management industry. We anticipate that total revenue will remain relatively
flat for the next quarter and look for growth to begin during the second half
of 1999. However, the level of total revenue will be affected by the success
of the initiatives outlined above, together with the factors discussed under
Important Risk Factors Affecting Results included in Exhibit 13.1 to our 1998
Annual Report on Form 10-K.
COST OF REVENUE. Our cost of license revenue consists of costs associated with
reproducing and distributing software and documentation, royalties, and the
amortization of capitalized computer software costs. Cost of license revenue
as a percent of total revenue was 2% for the first quarter of 1998 and 1999.
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 costs of
service revenue resulted primarily from growth in the staffing necessary to
generate and support increased worldwide service revenue and provide ongoing
quality customer support to our installed base. We anticipate continued growth
in both service revenue and staffing necessary to support its growth.
SALES AND MARKETING. Our sales and marketing expenses primarily include
salaries, sales commissions, travel, and facility costs. These costs were flat
for the first quarter of 1998 compared to the first quarter of 1999,
principally due to the sales force reorganization. Total sales and marketing
employees were 2,398 at January 3, 1998, 2,440 at September 30, 1998 and 2,180
at January 2, 1999. We expect our worldwide sales and marketing organization
for the remainder of 1999 to remain at or below the September 30, 1998 level
due to the sales force reorganization.
RESEARCH AND DEVELOPMENT. 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 first quarter of 1998, research and
development expenses increased 16% in the first quarter of 1999. This increase
is primarily attributable to our continued investment in the Windchill product
line and our InPart acquisition in the first quarter of 1999. We expect our
investment in research and development to increase in absolute dollars in
1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include
costs of our corporate, finance, information technology, human resources, and
administrative functions. These costs increased 7% in the first quarter of
1999 compared to the first quarter of 1998 primarily due to an increase in
costs incurred related to Year 2000 compliance.
10
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS. These costs include the amortization of
assets acquired related to operating expenses, including goodwill, customer
lists, assembled work force, and trade names. The increased amortization of
$1.3 million resulted from our acquisitions of InPart and ICEM in the past
year.
[bar chart depicting Operating expenses:
Sales and Marketing: Q1 98-$96.2 million; Q1 99-$96.1 million
Research and Development: Q1 98-$25.3 million; Q1 99-$29.2 million
General and Administrative: Q1 98-$15.5 million; Q1 99-$16.6 million
Amortization of Intangible Assets Q1 98-$0.4 million; Q1 99-$1.7 million
Acquisition and Nonrecurring Charges Q1 98- 0 ; Q1 99-$13.8 million]
ACQUISITION AND NONRECURRING CHARGES. InPart. In October 1998, we acquired all
of the outstanding stock of InPart Design, Inc. (InPart) by issuing 2.0
million shares of our common stock. In addition, we reserved 386,000 shares of
our common stock for outstanding InPart options assumed. InPart is the
developer of DesignSuite TM, 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. The acquisition was accounted for
as a purchase. Accordingly, we allocated the purchase price of $38.8 million
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,
customer lists, an assembled workforce, and trade names. 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. The operating
results of InPart have been included in our results of operations from the
date of acquisition.
In the opinion of management, the purchased in-process R&D had not yet reached
technological feasibility and had no alternative future use. Accordingly, we
recorded a nonrecurring charge of $10.6 million during the first quarter of
1999. This charge was not deductible for income taxes. The value assigned to
purchased in-process R&D, which was calculated pursuant to the Securities and
Exchange Commission's (SEC) recent guidance regarding in-process R&D
allocations, was determined by identifying research projects for which
technological feasibility had not been established. The value was determined
by estimating the stage of completion of the purchased in-process R&D,
estimating the resulting net cash flows from the products developed, and
discounting the net cash flows back to their present value. The estimates were
based on the following major assumptions:
. Aggregate revenue was estimated to begin late in 1999 and to grow at a
compound rate of 70%.
. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 22% to 11%. These
percentages were based on InPart's average historical cost of revenue and
reflect future economies of scale.
11
<PAGE>
. 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.
The net cash flows also considered net working capital requirements and
capital spending needs related to the purchased in-process technology. The 28%
rate used to discount net cash flows for the purchased in-process technology
to its present value was based on the weighted average cost of capital and
took into account the uncertainty surrounding the successful development of
the purchased in-process technology. If these projects are not successfully
developed, future revenue and profitability may be adversely affected and the
value of other intangible assets acquired may become impaired
Sales Force Reorganization. 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. Of the
$3.2 million charge, $2.6 million was paid during the quarter. As of January
2, 1999, the remaining $645,000 was included in accrued compensation. We
expect to pay the remaining amount during the second quarter of 1999.
OTHER INCOME (EXPENSE). Our other income (expense) includes interest income,
interest expense, costs of 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. For the first quarter of 1998, we reported other expense
of $5.9 million compared to other income of $1.9 million for the first quarter
of 1999. The change is primarily due to the elimination of interest expense on
debt that was paid in the second quarter of 1998.
INCOME TAXES. Our effective tax rate for the first quarter of 1998 was 43%
compared with 38% for the corresponding period in 1999. The difference between
our effective tax rate and the statutory federal income tax rate of 35% was
due primarily to the charge for purchased in-process R&D in the first quarter
of 1999 and losses of Computervision in the first quarter of 1998, neither of
which were deductible for tax purposes.
EMPLOYEES. The number of worldwide employees was 4,721 at January 3, 1998
compared with 4,911 at September 30, 1998 and 4,803 at January 2, 1999. The
increase over the prior year was a result of growth in our services
organization and in the research and development group, primarily through
acquisitions. The decrease from year end is primarily the result of the sales
force reorganization during the first quarter of 1999.
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
fluctuations in our employee base, capital assets needs, stock repurchases,
acquisitions, and financing needs, in the first quarter of 1998 and 1999.
As of January 2, 1999, cash and investments totaled $400.1 million, down from
$426.2 million at September 30, 1998. The primary reason for the decrease in
cash and investments during the quarter ending January 2, 1999 was the
purchase of $50 million of treasury stock, partially offset by 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 $36.5 million in the first
quarter of 1998, compared to $30.8 million for the first quarter of 1999, net
of cash expenditures for nonrecurring charges of $13.0 million in the first
quarter of 1999.
12
<PAGE>
In the first quarter of 1998 and 1999, we acquired $5.7 million and $8.5
million, respectively, of capital equipment consisting principally of computer
equipment, software, and office equipment.
We generated net cash from financing activities during the first quarter of
1998 of $13.4 million from the issuance of common stock under our stock plans.
We used net cash for financing activities during the first quarter of 1999 to
purchase $50.0 million of treasury stock, offset by $4.5 million of proceeds
from the issuance of common stock under our stock plans. Through January 2,
1999 we had repurchased 8.0 million of the 20.0 million shares authorized by
the Board of Directors to be repurchased.
In January 1999, we announced our offer to acquire all of the outstanding
capital shares of Division Group plc (Division) for approximately $46 million
in cash or stock. Division, headquartered in Bristol, England, and San Diego,
California, is a leading developer of product data visualization simulation,
and integration tools. We expect to complete the acquisition in our second
quarter, subject to satisfaction of certain conditions including regulatory
approvals and acceptance by holders of 90% of the Division shares, which
condition may be waived by us if the offer is accepted by holders of a
majority of the Division shares. At February 1, 1999 we had purchased 22% of
the Division shares and had commitments for acceptance for an additional 37%
of the Division shares. The acquisition will be accounted for as a purchase.
We anticipate that a portion of the purchase price will be allocated to
purchased in-process R&D.
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 requirements for working capital, capital
expenditures, and financing, including the proposed Division acquisition,
through at least September 30, 1999.
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 5 to the unaudited consolidated financial statements included herein.
Year 2000 Computer Systems Compliance
Concerns have been widely expressed regarding the inability of certain
computer programs to process date information 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. We are continuing to implement our Year 2000 readiness program
according to the plan described in Management's Discussion and Analysis of
Financial Condition and Results of Operations included as part of Exhibit 13.1
to our 1998 Annual Report on Form 10-K and incorporated herein by reference.
During the first quarter of 1999 we incurred costs of $1.0 million for our
Year 2000 compliance program and we estimate that another $2.0 to $5.0 million
will be required for our compliance effort.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro making the euro their common legal currency. The
legacy currencies are scheduled to remain legal tender in the participating
countries as denominations of the euro between January 1, 1999 and January 1,
2002 (the Transition Period). We are currently evaluating the business
implications of full conversion to the euro. At this time, we do not believe
that the conversion to the euro will have a material impact on our business
during the Transition Period.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as disclosed in this report on Form 10-Q, there have been no
significant changes in our market risk exposure as described in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included as part of Exhibit 13.1 to our 1998 Annual Report on Form 10-K and
incorporated herein by reference.
PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain class action lawsuits were filed in the fourth quarter of fiscal 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 fiscal 1998. These actions seek
unspecified damages. We believe the claims are without merit, and we intend to
defend them vigorously. We cannot predict the ultimate resolution of these
actions at this time, however, 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 2, 1998, in connection with our acquisition of InPart Design, Inc.,
we issued 2.0 million shares of our common stock to the stockholders of InPart
in exchange for all of their outstanding common stock. 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 5. OTHER INFORMATION
On January 21, 1999, we announced our intention to offer cash or stock valued
at approximately $46 million to acquire all of the outstanding capital shares
of Division Group plc (Division). We made our formal offer through our wholly
owned subsidiary in the United Kingdom on January 28, 1999. We are not making
the offer in the United States. Division is a leading developer of product
data visualization, simulation and integration tools. It is headquartered in
Bristol, England, and San Diego, California.
We expect to complete the acquisition in our second quarter, subject to
satisfaction of certain conditions including regulatory approvals and
acceptance by holders of 90% of the Division shares, which condition may be
waived by us if the offer is accepted by holders of a majority of the Division
shares. At February 1, 1999, we had purchased 22% of the Division shares and
had commitments for acceptances for an additional 37% of the Division shares.
This acquisition will be accounted for as a purchase. We anticipate that a
portion of the purchase price will be allocated to purchased in-process
research and development.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
27.1* Financial Data Schedule for the period ended January 2, 1999.
99.1 Annual Report to Stockholders for the fiscal year ended September 30,
1998 (which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated in this Quarterly Report on
Form 10-Q) (Exhibit 13.1 to our 1998 Annual Report on Form 10-K).
</TABLE>
- --------
* Indicates document filed herewith.
For our documents incorporated by reference, references are to File No. 0-
18059.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ending January 2, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PARAMETRIC TECHNOLOGY CORPORATION
/s/ Edwin J. Gillis
By___________________________________
Edwin J. Gillis
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 9, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT FOR THE QUARTER ENDED
JANUARY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JAN-02-1999
<CASH> 196,804
<SECURITIES> 133,650
<RECEIVABLES> 202,520
<ALLOWANCES> 6,780
<INVENTORY> 0
<CURRENT-ASSETS> 602,847
<PP&E> 142,105
<DEPRECIATION> 77,730
<TOTAL-ASSETS> 860,844
<CURRENT-LIABILITIES> 416,878
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0
0
<COMMON> 2,723
<OTHER-SE> 356,695
<TOTAL-LIABILITY-AND-EQUITY> 860,844
<SALES> 136,080
<TOTAL-REVENUES> 250,117
<CGS> 4,489
<TOTAL-COSTS> 46,611
<OTHER-EXPENSES> 157,409
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<INCOME-PRETAX> 48,041
<INCOME-TAX> 18,050
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