SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended: April 1, 1995 Commission File Number: 0-18059
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PARAMETRIC TECHNOLOGY CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
- - - - ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
128 Technology Drive, Waltham, MA 02154
----------------------------------------
(Address of principal executive offices, including zip code)
(617) 398-5000
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(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
---------- ----------
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 57,792,507
- - - - -------------------------------------- ----------------------------
Class Outstanding at April 1, 1995
Total number of pages: 11
1
PARAMETRIC TECHNOLOGY CORPORATION
INDEX
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Page
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Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheet 3
April 1, 1995 and September 30, 1994
Consolidated Statement of Income 4
Three and six months ended April 1, 1995 and April 2, 1994
Consolidated Statement of Cash Flows 5
Six months ended April 1, 1995 and April 2, 1994
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Report on Form 8-K 10
Signature 11
2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(amounts in thousands)
ASSETS April 1, 1995 September 30, 1994
-------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $118,252 $138,622
Short-term investments 160,322 68,847
Accounts receivable, net of allowance for doubtful
accounts of $2,175 and $2,034 60,060 57,554
Other current assets 9,528 5,933
-------- --------
Total current assets 348,162 270,956
Property and equipment, net 13,515 12,822
Capitalized computer software costs, net 1,424 1,182
Other assets 2,921 2,030
-------- --------
Total assets $366,022 $286,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,957 $ 11,564
Accrued compensation 14,461 14,577
Deferred revenue 33,366 15,776
Income taxes 1,774 2,356
-------- --------
Total current liabilities 62,558 44,273
Deferred income taxes 676 638
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized;
none issued -- --
Common stock, $.01 par value; 75,000 shares authorized;
57,793 and 56,917 shares issued 578 569
Additional paid-in capital 113,869 96,736
Cumulative translation adjustments 2,943 1,099
Valuation allowance for investments 85 --
Retained earnings 185,313 143,675
-------- --------
Total stockholders' equity 302,788 242,079
-------- --------
Total liabilities and stockholders' equity $366,022 $286,990
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(amounts in thousands, except per share data)
(unaudited)
Three months ended Six months ended
April 1, April 2, April 1, April 2,
1995 1994 1995 1994
-------- -------- -------- --------
Revenue:
License $60,945 $45,272 $114,879 $ 88,241
Service 22,580 12,750 40,662 23,299
------- ------- -------- --------
Total revenue 83,525 58,022 155,541 111,540
------- ------- -------- --------
Cost of revenue:
License 438 166 657 395
Service 6,962 3,887 13,038 7,474
------- ------- -------- --------
Total cost of revenue 7,400 4,053 13,695 7,869
------- ------- -------- --------
Gross profit 76,125 53,969 141,846 103,671
------- ------- -------- --------
Operating expenses:
Sales and marketing 33,989 23,055 62,478 44,169
Research and development 4,585 3,580 8,783 7,029
General and administrative 4,062 2,833 7,785 5,557
------- ------- -------- --------
Total operating expenses 42,636 29,468 79,046 56,755
------- ------- -------- --------
Operating income 33,489 24,501 62,800 46,916
Other income, net 2,081 923 3,714 1,828
------- ------- -------- --------
Income before income taxes 35,570 25,424 66,514 48,744
Provision for income taxes 13,303 9,508 24,876 18,231
------- ------- -------- --------
Net income $22,267 $15,916 $ 41,638 $ 30,513
======= ======= ======== ========
Net income per share $ 0.37 $ 0.27 $ 0.70 $ 0.52
====== ====== ====== ======
Weighted average number of common and dilutive
common equivalent shares outstanding 60,003 58,598 59,678 58,490
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
Six Months Ended
--------------------------------
April 1, 1995 April 2, 1994
------------- -------------
Cash flows from operating activities:
Net income $ 41,638 $ 30,513
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,555 2,270
Deferred income taxes (380) (276)
Changes in assets and liabilities:
Increase in accounts receivable (1,169) (10,770)
(Increase) decrease in other current assets (3,790) 2,175
Increase in other assets (313) (1,952)
Increase in accounts payable and accrued expenses 1,095 2,740
Increase (decrease) in accrued compensation (345) 2,233
Increase in income taxes 5,504 12,116
Increase in deferred revenue 17,058 4,640
--------- --------
Net cash provided by operating activities 62,853 43,689
--------- --------
Cash flows from investing activities:
Additions to property and equipment, net (3,662) (3,598)
Additions to capitalized computer software costs (622) (460)
Proceeds from sales of short-term investments 47,038 35,418
Purchases of short-term investments (138,428) (27,169)
--------- --------
Net cash provided (used) by investing activities (95,674) 4,191
--------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (19) (13)
Proceeds from employee stock option and purchase plans 11,064 6,449
--------- --------
Net cash provided by financing activities 11,045 6,436
--------- --------
Effect of exchange rate changes on cash 1,406 (130)
--------- --------
Net increase (decrease) in cash and cash equivalents (20,370) 54,186
Cash and cash equivalents at beginning of period 138,622 68,211
--------- --------
Cash and cash equivalents at end of period $ 118,252 $122,397
========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, and have been
prepared by the Company in accordance with generally accepted accounting
principles. Certain amounts in the fiscal 1994 consolidated financial
statements have been reclassified to conform to the fiscal 1995 presentation.
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 the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. While the Company believes 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 the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
The results of operations for the three-month and six-month periods ended
April 1, 1995 are not necessarily indicative of the results expected for the
full fiscal year.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
Effective October 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115"). Under this standard, the Company's
investments were classified as available-for-sale. In accordance with FAS 115,
investments classified as available-for-sale are reported at fair market value
and any unrealized gains or losses are recorded as part of stockholders' equity.
The cumulative effect of this adoption was immaterial as of October 1, 1994.
Prior period financial statements have not been restated to reflect this change
in accounting principle.
3. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made income tax payments of $21,900,000 and $6,181,000 during the
six months ended April 1, 1995 and April 2, 1994, respectively.
4. LINE OF CREDIT:
The Company had a $5,000,000 unsecured demand line of credit with a bank,
which expired on January 31, 1995. There were no borrowings under this line
during the six months ended April 1, 1995.
5. SUBSEQUENT EVENT:
On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of the Conceptual Design and Rendering System ("CDRS")
software business operated by the Design Software Division of Evans & Sutherland
Computer Corporation for approximately $34,500,000 in cash, which was paid by
the Company from its existing cash balances. The assets acquired consisted
primarily of computer software and related intellectual property rights,
contract and license rights, and computer equipment. The Company will make the
required disclosures related to this acquisition upon the completion of the
audit of the financial statements of CDRS and the valuation of the assets and
liabilities acquired. The Company plans to integrate the products of the CDRS
business with its current and future software product lines.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue, including license and service revenues, for the three-month and six-
month periods ended April 1, 1995 was $83,525,000 and $155,541,000,
respectively, compared with $58,022,000 and $111,540,000 for the three-month and
six-month periods ended April 2, 1994. These totals represent increases of 44%
for the three-month period and 39% for the six-month period over the
corresponding periods in fiscal 1994. The increase in license revenue results
from an increase in the number of seats of software licensed, offset by a lower
price realized per seat. A seat of software generally consists of the Company's
core product, Pro/ENGINEER(R), together with several other software modules,
configured to serve the needs of a single concurrent user. The number of seats
of software licensed during the three-month and six-month periods ended April 1,
1995 were approximately 3,400 and 6,700, compared with approximately 2,500 and
4,900 seats during the same periods in fiscal 1994. The increase in the number
of seats licensed was achieved due to continued market penetration of the
Company's products, particularly in international markets. The average price
per seat during the three months and six months ended April 1, 1995 was $17,900
and $17,100, compared with an average price of $18,100 and $18,000 for the same
periods in fiscal 1994. Service revenue is derived from the sale of software
maintenance contracts and the performance of training and consulting services.
This revenue increased during the three-month and six-month periods ended April
1, 1995 over the corresponding periods in fiscal 1994 as a result of the Company
providing these services to both new and existing customers. Revenue outside of
North America accounted for 51% and 50% of revenue for the three-month and six-
month periods ended April 1, 1995 compared with 46% and 43% for the same periods
in fiscal 1994. The Company expects that total revenue will continue to
increase throughout fiscal 1995 from continued penetration in the high-end
market, and that international revenue will continue to account for a
significant portion of that total growth. In January 1995, the Company began
selling Pro/JR./TM/ software, an entry-level version of its Pro/ENGINEER
mechanical design automation software which enables end-users to design simple
plastic and machined parts and assemblies. The new product did not have a
significant impact on the results of operations for the three months ended
April 1, 1995.
The number of worldwide employees increased 43% to 1,532 at April 1, 1995
compared with 1,074 at April 2, 1994. Employment increased significantly to
support higher revenues and international expansion, with the largest portion of
this growth occurring in the sales and marketing department and employees
associated with cost of revenue activities.
Cost of license revenue consists of the amortization of capitalized computer
software costs as well as material and overhead costs. Cost of service revenue
includes the costs associated with training, software maintenance and consulting
revenues. Combined, these expenses increased to $7,400,000 and $13,695,000 for
the three-month and six-month periods ended April 1, 1995 from $4,053,000 and
$7,869,000 for the corresponding periods in fiscal 1994. Total cost of revenue
as a percentage of revenue increased to 9% for the three-month and six month
periods ended April 1, 1995 from 7% in the corresponding periods in fiscal 1994.
The absolute and percentage increases in total cost of revenue resulted
primarily from the growth in staffing necessary to generate increased service
revenue and in material costs associated with increased revenue. Cost of
service revenue, which is the largest portion of total cost of revenue,
increased 79% and 74% during the three-month and six-month periods ended April
1, 1995 from the corresponding periods in fiscal 1994, while the associated
revenue increased 77% and 75%.
7
Sales and marketing expenses increased to $33,989,000 and $62,478,000 for the
three-month and six-month periods ended April 1, 1995 from $23,055,000 and
$44,169,000 for the corresponding periods in fiscal 1994. The increase in these
expenses was due principally to worldwide expansion and sales commissions
associated with higher revenue. Sales and marketing expenses as a percentage of
revenue increased to 41% and 40% for the three-month and six-month periods ended
April 1, 1995, compared with 40% for the comparable periods in fiscal 1994.
International sales and marketing expenses represented 52% and 53% of total
sales and marketing expenses for the three-month and six-month periods ended
April 1, 1995 compared with 44% for the comparable periods in fiscal 1994. The
Company expects to continue the growth of its worldwide sales and marketing
organization during future periods, reflecting the Company's commitment to
expand its global market penetration.
The Company continued to make investments in research and development,
consisting primarily of salaries, benefits and the costs of computer equipment.
Research and development expenses increased to $4,585,000 and $8,783,000 for the
three-month and six-month periods ended April 1, 1995 from $3,580,000 and
$7,029,000 for the corresponding periods in fiscal 1994. Research and
development expenses as a percentage of revenue were 5% and 6% for the three-
month and six-month periods ended April 1, 1995, compared with 6% for the same
periods in fiscal 1994. The absolute increase in these expenses resulted
primarily from growth in the research and development staff.
Software development costs of $87,000 and $622,000 have been capitalized
during the three-month and six-month periods ended April 1, 1995 in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," compared
with $260,000 and $460,000 in the corresponding periods in fiscal 1994. The
amounts capitalized represent 2% and 7% of total research and development costs
(including capitalized amounts) for the three-month and six-month periods in
fiscal 1995, compared with 7% and 6% during the same periods in fiscal 1994.
Capitalized computer software costs are amortized over the economic useful lives
of the related products, typically three years.
General and administrative expenses include the costs of corporate, finance,
human resources and administrative functions of the Company. These expenses
increased to $4,062,000 and $7,785,000 for the three-month and six-month periods
ended April 1, 1995 from $2,833,000 and $5,557,000 for the corresponding periods
in fiscal 1994, while remaining the same as a percentage of revenue at 5%. The
absolute increase in these expenses was primarily due to the hiring of
additional employees necessary to support the Company's worldwide growth.
Other income, net, primarily includes interest income and expense and foreign
currency gains and losses. Interest income increased to $4,248,000 for the six-
month period ended April 1, 1995 compared with $1,996,000 for the corresponding
period in fiscal 1994 due primarily to higher interest-bearing cash and short-
term investment balances, which resulted from positive cash flows from
operations and proceeds from stock option exercises, and rising interest rates.
The Company recognized $226,000 in foreign currency losses for the six-month
period ended April 1, 1995 compared with losses of $77,000 during the same
period in fiscal 1994.
The Company's effective tax rate for the six-month period ended April 1, 1995
was 37.4%, unchanged from the same period in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of April 1, 1995, the Company had $118,252,000 of cash and cash
equivalents and $160,322,000 of short-term investments. Effective October 1,
1994, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). Under this standard, the Company's investments were
classified as available-for-sale. In accordance with FAS 115, investments
classified as available-for-sale are reported at fair market value and any
unrealized gains or losses are recorded as part of stockholders' equity. The
cumulative effect of this adoption was immaterial as of October 1, 1994. Prior
period financial statements have not been restated to reflect this change in
accounting principle.
8
Net cash provided by operating activities, consisting primarily of net income
from operations and the increase in deferred revenue, totaled $62,853,000 for
the six-month period ended April 1, 1995 compared with $43,689,000 for the
corresponding period in fiscal 1994.
Investing activities consist primarily of purchases and sales of short-term
investments and additions to property and equipment. Net cash used by investing
activities totaled $95,674,000 for the six-month period ended April 1, 1995,
compared with net cash provided of $4,191,000 for the corresponding period in
fiscal 1994. Net cash provided by financing activities, consisting primarily of
proceeds from stock option exercises, was $11,045,000 and $6,436,000 for the six
months ended April 1, 1995 and April 2, 1994, respectively.
Due to the Company's strong cash position, the Company allowed a $5,000,000
unsecured demand line of credit with a bank to expire on January 31, 1995.
There were no borrowings under this line during the six months ended April 1,
1995.
On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allows the repurchase of its common stock. The plan
authorizes the Company to acquire up to 3,000,000 shares of its common stock
from time to time in the open market or through privately negotiated
transactions. The Company had repurchased 157,000 shares through April 1, 1995,
all of which were reissued by April 1, 1995 to satisfy stock option exercises
and employee stock purchases under Company plans. During the six months ended
April 1, 1995, the Company did not repurchase any of its shares of common stock.
The total amount of cash required in current and future periods to repurchase
the full number of shares authorized but not repurchased would be approximately
$114,000,000 based upon the closing stock price on March 31, 1995. The Company
expects to use available cash and cash generated from operations in future
fiscal periods to fund any such repurchases.
On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of the Conceptual Design and Rendering System ("CDRS")
software business operated by the Design Software Division of Evans & Sutherland
Computer Corporation for approximately $34,500,000 in cash, which was paid by
the Company from its existing cash balances. The assets acquired consisted
primarily of computer software and related intellectual property rights,
contract and license rights, and computer equipment. The Company will make the
required disclosures related to this acquisition upon the completion of the
audit of the financial statements of CDRS and the valuation of the assets and
liabilities acquired. The Company plans to integrate the products of the CDRS
business with its current and future software product lines.
The Company believes that existing cash and short-term investment balances
together with cash generated from operations will be sufficient to meet the
Company's working capital, financing and capital expenditure requirements
through at least fiscal 1995.
9
Part II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on February 9,
1995, the stockholders of the Company (1) elected Steven C. Walske and Michael
E. Porter as Class II directors of the Company to hold office until 1998 and
until their successors are duly elected and qualified and no other nominations
were made; (2) increased the number of shares of common stock authorized for
issuance under the Company's 1987 Incentive Stock Option Plan from 18,996,000 to
21,396,000 and limited the number of shares that may be granted to any eligible
employee under the Stock Option Plan in any fiscal year to 1,000,000 shares; (3)
added a series of nine additional six-month offerings, commencing six months
apart, beginning April 1, 1995 to the Company's 1991 Employee Stock Purchase
Plan and increased the number of shares of Common Stock authorized for issuance
under the Purchase Plan from 600,000 to 1,000,000; and (4) ratified the
selection by the board of directors of Price Waterhouse LLP as the Company's
independent accountants for the current fiscal year. The votes were as follows:
Votes withheld Broker
Votes for or opposed Abstentions non-votes
---------- -------------- ----------- ---------
(1) Election of directors:
Steven C. Walske 46,706,781 491,264 -- --
Michael E. Porter 46,711,189 486,856 -- --
(2) 1987 Incentive Stock Option Plan 36,288,090 10,682,591 140,923 86,441
(3) 1991 Employee Stock Purchase Plan 44,895,722 2,086,371 129,511 86,441
(4) Ratification of independent accountants 47,060,643 32,116 105,286 --
Item 5: Other Information
On May 9, 1995, the Company reported that Mark J. Gallagher would be
resigning from his positions as Senior Vice President of Finance and
Administration, Chief Financial Officer and Treasurer effective June 30, 1995,
but will remain with the Company through the end of the summer in order to
facilitate his successor's transition.
Item 6: Report on Form 8-K
On March 10, 1995, the Company filed a Current Report on Form 8-K announcing
the agreement to acquire substantially all of the assets and specified
liabilities of the Conceptual Design and Rendering System ("CDRS") software
business operated by the Design Software Division of Evans & Sutherland Computer
Corporation for approximately $34,500,000 in cash.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAMETRIC TECHNOLOGY CORPORATION
Date: May 15, 1995 by: /S/ Mark J. Gallagher
-----------------------
Mark J. Gallagher
Senior Vice President of Finance and
Administration, Chief Financial
Officer and Treasurer
11