EXHIBIT 13.1
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Parametric Technology Corporation
Parametric Technology Corporation is the leading supplier of software tools used
to automate the mechanical development of a product from its conceptual design
through its release into manufacturing.
Any forward-looking statements, including projections about growth and the
Company's markets or business, are based on certain assumptions made by
management. Important information about the basis for those assumptions is
contained in "Important Factors Regarding Future Results" beginning on page 25.
RESULTS OF OPERATIONS
- ---------------------
For the fiscal year ended September 30, 1996, the Company's revenue and net
income excluding nonrecurring charges increased 52% and 61%, respectively, over
the previous fiscal year. Net income excludes nonrecurring charges in fiscal
1996 of $32,119,000 related to the acquisition of Reflex technology from
Greenshire License Co. NV ("Reflex") and the nonrecurring charges in fiscal 1995
of $10,438,000 related to the merger of Rasna Corporation ("Rasna") into the
Company and $19,000,000 related to its acquisition of the Conceptual Design and
Rendering System ("CDRS") software business from Evans & Sutherland Computer
Corporation. Net income excluding the nonrecurring charges as a percentage of
revenue was 26% in fiscal 1996 compared to 25% in fiscal 1995. Including the
nonrecurring charges, the Company's net income as a percentage of revenue was
23%, 20% and 26% in fiscal 1996, 1995 and 1994, respectively.
The following table sets forth certain consolidated financial data as a
percentage of revenue for the fiscal years ended September 30, 1996, 1995 and
1994.
Year ended September 30,
------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
License 74.8% 73.1% 77.3%
Service 25.2 26.9 22.7
- --------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
- --------------------------------------------------------------------------------
Cost of revenue:
License 0.8 0.8 0.8
Service 8.6 8.4 7.1
- --------------------------------------------------------------------------------
Total cost of revenue 9.4 9.2 7.9
- --------------------------------------------------------------------------------
Gross profit 90.6 90.8 92.1
Operating expenses:
Sales and marketing 39.8 41.6 40.4
Research and development 6.6 6.5 7.5
General and administrative 4.8 5.2 5.5
Acquisition and related costs 5.3 7.4 --
- --------------------------------------------------------------------------------
Total operating expenses 56.5 60.7 53.4
- --------------------------------------------------------------------------------
Operating income 34.1 30.1 38.7
Other income, net 1.9 2.3 2.0
- --------------------------------------------------------------------------------
Income before income taxes 36.0 32.4 40.7
Provision for income taxes 13.0 12.8 15.2
- --------------------------------------------------------------------------------
Net income 23.0% 19.6% 25.5%
================================================================================
Excluding acquisition and related costs:
Operating income 39.5% 37.6% 38.7%
Net income 26.4% 25.0% 25.5%
================================================================================
Revenue
The Company derives its revenue from the sale and support of software used in
the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing
and engineering) industry. Revenue growth in fiscal 1996 and 1995 reflects the
continued worldwide acceptance of the Company's products and services and the
Company's ongoing investment in expanding its worldwide direct sales force.
Consistent with fiscal 1995, the Company licensed 91% of its products directly
to end-user customers and 9% via third-party distributors in fiscal 1996.
21
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Parametric Technology Corporation
License and service revenue for fiscal years 1996, 1995 and 1994 were:
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
License $448,699 56% $288,349 40% $206,243
Percentage of
total revenue 75% 73% 77%
Service $151,423 43% $105,961 74% $ 60,731
Percentage of
total revenue 25% 27% 23%
Total revenue $600,122 52% $394,310 48% $266,974
The increase in license revenue results from an increase in the number of seats
of software licensed and from a higher price realized per seat. A seat of
software generally consists of the Company's core product, Pro/ENGINEER(R),
together with several other software modules, configured to serve the needs of a
single end user. The Company licensed approximately 23,000 seats of software in
fiscal 1996, an increase of 45% from fiscal 1995's 15,900 seats, which was 35%
higher than fiscal 1994's 11,800 seats. The increase in the number of seats
licensed was achieved as a result of continued market penetration of the
Company's products. The average price per seat during fiscal 1996 was
approximately $19,500, compared with an average price of approximately $18,100
in 1995 and $17,500 in 1994. The average price per seat has increased as a
result of customers purchasing configurations of Pro/ENGINEER seats containing
more modules and an increase in the percentage of the Company's revenue derived
from international markets, where the prices are typically higher than in North
America.
Service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. This revenue increased
during both fiscal 1996 and 1995 as a result of the growth in the Company's
installed customer base and, to a lesser extent, increased training and
consulting services performed for these customers. The smaller increase in
training and consulting revenue is a result of the Company outsourcing a portion
of these services to third parties to allow the Company to focus its resources
on increasing its installed base.
Sales by geographic region for fiscal years 1996, 1995 and 1994 were:
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
North America $264,880 34% $197,839 31% $151,491
Percentage of
total revenue 44% 50% 57%
Europe $207,811 55% $133,873 61% $ 83,172
Percentage of
total revenue 35% 34% 31%
Asia/Pacific $127,431 104% $ 62,598 94% $ 32,311
Percentage of
total revenue 21% 16% 12%
The Company derived 56%, 50% and 43% of its revenue from sales to international
customers in fiscal 1996, 1995 and 1994, respectively. The increase in
international revenue is primarily attributable to continued international
acceptance of the Company's products and services, the establishment of new
subsidiaries and sales offices, and the growth in the sales force in Europe and
Asia/Pacific. Export sales were $84,537,000, $45,147,000 and $37,244,000 in
fiscal 1996, 1995 and 1994, respectively.
The Company expects that total revenue will increase in fiscal 1997 from
continued penetration in the mechanical CAD/CAM/CAE industry, and that
international revenue will continue to account for a significant portion of that
total growth. Although the Company expects revenues to grow in fiscal 1997,
there can be no assurance that quarterly revenue growth rates or geographical
growth rates will be comparable with those achieved in fiscal 1996.
Cost of Revenue
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Cost of license $ 4,642 39% $ 3,348 65% $ 2,028
Percentage of
license revenue 1% 1% 1%
Cost of service $51,812 57% $32,970 73% $19,004
Percentage of
service revenue 34% 31% 31%
Cost of license revenue consists of the amortization of capitalized computer
software costs and costs associated with reproducing software on compact disks,
printing user manuals, royalties, packaging and shipping. The absolute increase
in cost of license revenue is a result of the increase in the number of seats
licensed during each of the last three fiscal years. Cost of service revenue
includes costs associated with training and consulting personnel, such as
salaries and related costs and
22
travel, and costs related to software maintenance, including costs incurred for
customer support personnel and the release of maintenance updates. Increases in
cost of service revenue resulted primarily from growth in the staffing necessary
to generate and support increased worldwide service revenue and provide ongoing
quality customer support to its increasing installed base.
Operating Expenses
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Sales and
marketing $238,860 46% $163,918 52% $107,940
Percentage of
total revenue 40% 42% 40%
Research and
development $ 39,476 54% $ 25,591 29% $ 19,882
Percentage of
total revenue 7% 6% 7%
General and
administrative $ 28,557 40% $ 20,414 38% $ 14,758
Percentage of
total revenue 5% 5% 6%
Acquisition and
related costs $ 32,119 $ 29,438 --
Sales and Marketing
Sales and marketing expenses primarily include salaries, sales commissions,
travel and facility costs. While sales and marketing expenses as a percentage of
revenue have remained relatively constant during the three most recent fiscal
years, the absolute increases in these expenses were due principally to
worldwide expansion of the sales force and sales commissions associated with
higher revenue. Total sales and marketing headcount increased to 1,645 in fiscal
1996 from 1,098 in fiscal 1995 and 790 in fiscal 1994. International sales and
marketing expenses represented 58% of total sales and marketing expenses in
fiscal 1996, compared with 52% in 1995 and 45% in 1994. These increases are
consistent with the growth in international revenue. The Company expects to
continue the growth of its worldwide sales and marketing organization during
fiscal 1997, reflecting the Company's commitment to focus its resources on
increasing its installed base and to continue to expand its global market
penetration.
Research and Development
The Company continued to make significant investments in research and
development, consisting principally of salaries and benefits, expenses
associated with product translations, costs of computer equipment used in
software development, and facility expenses. The Company believes that research
and development expenditures are essential to maintaining its competitive
position in the CAD/CAM/CAE market and expects the expenditure levels to
increase in absolute dollars in fiscal 1997.
General and Administrative
General and administrative expenses include the costs of corporate, finance,
information technology, human resources and administrative functions of the
Company. The absolute increases in these expenses were principally due to the
hiring of additional employees, primarily in the international offices,
necessary to support the Company's worldwide growth and in the information
technology area as the Company expanded its efforts to upgrade its internal
management information systems. In fiscal 1997, the Company currently expects
that general and administrative expenses will continue to remain relatively
constant as a percentage of revenue.
Acquisition and Related Costs
In conjunction with the Reflex acquisition in the fourth quarter of fiscal 1996,
the Company recorded a nonrecurring charge of $32,119,000 related to the write-
off of purchased research and development in process. In the fourth quarter of
fiscal 1995, the Company recorded a nonrecurring charge of $10,438,000, which
included approximately $6,028,000 for transaction fees, $1,722,000 for
severance-related expenses and $2,688,000 related to integration costs and
lease and distributor termination costs in conjunction with the Rasna merger. In
conjunction with the CDRS acquisition in the third quarter of fiscal 1995, the
Company recorded a nonrecurring charge of $19,000,000 related to the write-off
of purchased research and development in process.
Other Income
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Other income, net $11,501 27% $9,029 69% $5,342
Other income, net, primarily includes interest income and expense and foreign
currency gains and losses. Interest income increased to $13,914,000 in fiscal
1996 from $10,159,000 in fiscal 1995 and $4,642,000 in fiscal 1994 due primarily
to higher interest-bearing cash and investment balances. As the international
portion of its business continues to increase, a growing percentage of the
Company's revenue and expenses
23
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Parametric Technology Corporation
is transacted in foreign currencies. To minimize, where possible, foreign
exchange gains or losses from fluctuations in foreign exchange rates related to
specific foreign currency denominated receivables, the Company has a hedging
program, which involves the use of forward foreign exchange contracts in the
primary European and Asian currencies. Gains (losses) resulting from foreign
currency transactions, including the results of the hedging program, were
($1,389,000), ($781,000) and $222,000 in fiscal 1996, 1995 and 1994,
respectively.
Income Taxes and Net Income
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Provision for
income taxes $ 78,247 56% $50,298 24% $40,615
Effective income
tax rate 36% 39% 37%
Net income $137,910 78% $77,362 14% $68,089
The difference between the effective and statutory federal tax rate was due
primarily to the benefits of tax-exempt interest income and the foreign sales
corporation, offset by the impact of state income taxes and, in fiscal 1995, the
nondeductible acquisition costs associated with the Rasna merger.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
(Dollars in
thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Cash, cash
equivalents
and investments $456,112 48% $308,248 46% $211,049
Working capital $416,058 31% $317,702 38% $229,878
Net cash provided
by operating
activities $229,724 93% $119,017 41% $ 84,452
Net cash used
by investing
activities $(144,511) 2% $(141,270) 491% $(23,897)
Net cash provided
(used) by
financing
activities $(25,926) (202)% $ 25,354 138% $ 10,669
Net cash generated by operating activities and proceeds from issuance of the
Company's stock under stock plans provided sufficient resources to fund the
Company's headcount growth, capital assets needs, stock repurchases and
acquisitions in all periods presented.
The increase in fiscal 1996 and 1995 in cash and cash equivalents provided
by operations was due to the higher income before depreciation and amortization,
the increases in accounts payable and accrued expenses, accrued compensation,
income taxes and deferred revenue, offset by the increase in accounts
receivable. Even though accounts receivable increased in absolute dollars by
$39,040,000 in fiscal 1996, days sales outstanding was 60 days compared to 61
days in fiscal 1995.
Excluding the investment of excess cash, investing activities used cash to
primarily purchase property and equipment in all three fiscal years and to
acquire technology and businesses in fiscal 1996 and 1995. In fiscal 1996, 1995
and 1994, the Company acquired $29,650,000, $12,868,000 and $8,705,000,
respectively, of capital equipment consisting principally of computer equipment,
software and office equipment. The increase was a result of the growth in
employee headcount, continued expansion of its worldwide sales and support
operations and increased investment in information technologies and in computer
workstations to keep field and development employees current with changes in the
hardware and software marketplace. In fiscal 1997, the Company expects to spend
at least as much as was spent in fiscal 1996; however, the level of spending
will be dependent on various factors, including the growth of the business and
general economic conditions.
Net cash was used by financing activities to primarily repurchase
$66,563,000 of the Company's stock in fiscal 1996, offset by proceeds of
$40,763,000 from the issuance of the Company's common stock under stock plans.
In fiscal 1995 and 1994, net cash was provided by financing activities primarily
from the proceeds from issuance of the Company's common stock under stock plans.
On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allows the Company to repurchase up to 6,000,000 shares
of its common stock. The Company intends to repurchase these shares to partially
offset the dilution caused by the exercise of stock options under the Company's
option plans and the purchase of shares under the employee stock purchase plan.
During fiscal 1996, the Company repurchased 1,779,000 shares, of which 23,000
remained in treasury at September 30, 1996. Since the inception of the plan, the
Company has repurchased 2,093,000 shares. Ongoing repurchases will be funded
through the use of available cash, cash generated from operations, and cash
received for stock option exercises and employee stock purchase plan purchases.
24
On July 10, 1996, the Company acquired project modeling and management
software (Reflex) technology from Greenshire License Co. NV for $32,119,000,
which included the issuance of 113,000 shares of the Company's common stock with
a fair value of $5,000,000 at the time of the acquisition and $5,000,000 payable
in the fourth quarter of fiscal 1997. Payments of $22,119,000 in fiscal 1996
were from the Company's existing cash balances. The acquisition has been
accounted for as a purchase. The purchase price was allocated to purchased
research and development in process, as no other tangible or intangible assets
were identified. The purchased research and development in process had not
reached technological feasibility, had no alternative future use and was valued
using expected future cash flows, discounted for risks and uncertainties related
to the target markets and the completion of the products that will ultimately be
marketed by the Company. As a result, at the date of acquisition, the
$32,119,000 allocated to purchased research and development in process was
recorded as a nonrecurring charge.
On August 1, 1995, the Company acquired Rasna by merging it into the
Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995.
Based on the number of shares of Rasna common stock outstanding, the Company
issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its
common stock for outstanding Rasna stock options assumed. The merger was
accounted for as a pooling of interests.
On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of the CDRS software business operated by the Design
Software Division of Evans & Sutherland Computer Corporation for approximately
$33,507,000 in cash, which was paid by the Company from its existing cash
balances. The acquisition has been accounted for as a purchase. The purchase
price has been allocated to the assets acquired, including certain intangible
assets, such as purchased computer software and research and development in
process, based on their respective fair values. The excess of the purchase price
over the estimated fair value of the net assets acquired has been recorded as
goodwill ($7,703,000), which is being amortized on a straight-line basis over
seven years.
The Company believes that existing cash and short-term investment balances,
together with cash generated from operations and issuance of the Company's
common stock under stock plans, will be sufficient to meet the Company's working
capital, financing and capital expenditure requirements through at least fiscal
1997.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 defines a fair-value method of accounting for
employee stock options or similar equity instruments and encourages companies to
adopt that method of accounting beginning in fiscal 1997 for the Company.
However, FAS 123 also allows companies to continue to use the intrinsic value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company expects to
continue to account for stock options and purchases in accordance with APB 25,
but beginning in fiscal 1997 will also make pro-forma disclosures of net income
and earnings per share as if the fair-value-based method of accounting defined
in FAS 123 had been applied.
IMPORTANT FACTORS REGARDING FUTURE RESULTS
- ------------------------------------------
Information provided by the Company, including information contained in this
Annual Report, or by its spokespersons from time to time may contain forward-
looking statements concerning projected financial performance, market and
industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, are based on the assumptions and
expectations of the Company's management at the time such statements are made.
The Company cautions investors that its performance (and, therefore, any
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.
Fluctuations in Operating Results
While the Company's sales cycle varies substantially from customer to customer,
a high percentage of the Company's revenue is expected to be realized in the
third month of each fiscal quarter and tends to be concentrated in the latter
half of that month. The Company's orders early in a quarter will not generally
be large enough to assure that it will meet its revenue targets for any
particular quarter. In addition, the Company's operating expenses are based on
expected future revenue and are relatively fixed for the short term.
Accordingly, the
25
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Parametric Technology Corporation
Company's quarterly results may be difficult to predict until the end of the
quarter, and a shortfall in shipments or contract orders at the end of any
particular quarter may cause the results for that quarter to fall short of
anticipated levels. In turn, this could adversely impact the market price of the
Company's stock and the ability of the Company to meet its working capital,
financing and capital expenditure requirements.
Stock Market Volatility
Market prices for securities of software companies have generally been volatile.
In particular, the market price of the Company's common stock has been and may
continue to be subject to significant fluctuations as a result of factors
affecting the computer industry or the securities markets in general. These
factors include, but are not limited to, quarterly variations, announcements of
technological innovations by the Company or competitors, changes in prices by
the Company or competitors, change in product mix, and change in revenue or
revenue growth rates for geographic areas or products.
In addition, a large percentage of the Company's common stock traditionally
has been held by institutional investors. Consequently, actions with respect to
the Company's common stock by certain of these institutional investors could
have a significant impact on the market price for the stock. For more
information, please see the Company's proxy statement with respect to its most
recent annual meeting of stockholders and Schedules 13D and 13G filed with the
U.S. Securities and Exchange Commission with respect to the Company's common
stock.
Market Growth
Any Company projections of revenue growth are based on the assumptions that the
Company will be able to continue to penetrate the relevant market and add to its
industry leadership position and that the mechanical CAD/CAM/CAE market will
continue to grow at a predicted annual rate. Failure of these assumptions to
materialize could adversely impact the Company's operating results.
Rapid Technological and Market Changes
The mechanical CAD/CAM/CAE industry is highly competitive, and is characterized
by rapid technological advances. Accordingly, the Company's ability to realize
its expectations will depend on its success at enhancing its current offerings,
licensing technology from third parties, developing new products and services
that keep pace with developments in technology and meet evolving customer
requirements, and delivering those products through appropriate distribution
channels. This will require, among other things, correctly anticipating customer
needs, hiring and retaining personnel with the necessary skills and creativity,
providing adequate funding for the development efforts, and managing
distribution channels effectively.
Failure by the Company to anticipate or respond adequately to technological
developments, particularly those by competitors which could make the Company's
technology obsolete or noncompetitive, and customer requirements, significant
delays in the development, production, testing, marketing, or availability of
new or enhanced products or services, or the failure of customers to accept such
products or services, could adversely affect the Company's competitive position
and operating results.
Possibility of New Product Delays
As is common in the computer software industry, the Company may from time to
time experience delays in its product development and "debugging" efforts.
Significant delays in developing, completing or shipping new or enhanced
products could adversely affect the Company's financial performance. Among other
things, such delays could cause the Company to incorrectly predict the fiscal
quarter in which revenue from the shipment of the new or enhanced product will
be realized and give the Company's competitors a greater opportunity to market
competing products.
Management of Growth Through Acquisitions
The Company's product range and customer base have increased in the recent past
due in part to acquisitions. The Company may acquire additional businesses or
product lines in the future. The probability of success of any acquisition may
be dependent upon the Company's ability to integrate the acquired business or
products successfully and to retain key personnel associated with the
acquisition. Failure to do so, or a material increase in the cost of
integration, could cause actual results to differ from those projected in
management's forward-looking statements.
Competition
The Company believes that the principal bases for competition in its markets are
product functionality, price/performance characteristics, product portability,
ease of product use, sales and marketing strength, support services and
corporate reputation. In particular, the Company believes that the current
success of its Pro/ENGINEER product line is due in part to the mechanical
26
and functional superiority of such products over competitive offerings. The
Company is aware of ongoing efforts by competitors, some of whom have greater
resources than the Company, to develop equivalent or superior technology and
market these products at lower prices. Should a competitor successfully bring
such a product to market and be able to sell it at a lower price in the future,
the Company's operating results could be adversely affected. The Company's
future success will depend in a large part on its ability to license additional
products and services to its existing customer base as well as the installed
customer bases of traditional mechanical CAD/CAM/CAE suppliers.
Dependence on Key Personnel
The Company's success depends upon its ability to attract and retain highly
skilled technical, managerial and sales personnel. While the Company has not to
date experienced any significant difficulty in hiring or retaining qualified
personnel, competition for such personnel in the computer industry in general,
and the mechanical CAD/CAM/CAE industry in particular, is intense. Management's
projections necessarily assume that the Company will continue to attract and
retain such personnel, and the failure to do so could have a material adverse
effect on the Company's ability to develop and market competitive products and
its ability to achieve projected operating results.
Risks Associated with International Business
A significant and growing portion of the Company's business comes from outside
the United States. A consequence of the increased international business is that
a growing percentage of the Company's revenue and expenses is denominated in
foreign currencies, which subjects the Company's results of operations to
foreign exchange fluctuations. Although the Company enters into forward exchange
contracts to offset a portion of the foreign exchange fluctuations,
unanticipated foreign events may materially and adversely affect its results.
Additional risks associated with international business include, but are not
limited to, unexpected changes in regulatory practices and tariffs, staffing and
managing foreign operations, longer collection cycles in certain areas,
potential changes in tax laws, greater difficulty in protecting intellectual
property rights, and general economic and political conditions.
Protection of Intellectual Property and Other Proprietary Rights
The Company regards its software products as proprietary and attempts to protect
its intellectual property rights by relying on copyrights, trademarks, patents,
and common law safeguards, including trade secret protection, as well as
restrictions on disclosures and transferability in its agreements with other
parties. Although the Company intends to protect its intellectual property
rights, there can be no assurance that the laws of all jurisdictions in which
the Company's products are or may be developed, manufactured or sold will afford
the same protections to its products and intellectual property, or will be
enforced or enforceable by the Company, to the same extent as under the laws of
the United States. The software industry is characterized by frequent litigation
regarding copyright, patent and other intellectual property rights. While the
Company has not, to date, had any significant claims of such nature asserted
against it, there can be no assurance that third parties will not assert such
claims against the Company with respect to existing or future products or that,
if asserted, such claims would be resolved in a satisfactory manner. In the
event of litigation to determine the validity of any third-party claims, such
litigation could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company.
27
Consolidated Balance Sheet
- ------------------------------------------------------------------------------
Parametric Technology Corporation
September 30,
---------------------------------
(amounts in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $201,614 $145,638
Short-term investments 232,602 162,610
Accounts receivable, net of allowance for doubtful accounts of $2,910 and $2,733 117,273 80,405
Other current assets 10,561 11,079
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 562,050 399,732
Marketable investments 21,896 --
Property and equipment, net 36,517 19,811
Other assets 38,754 34,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $659,217 $453,727
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 39,416 $ 19,578
Accrued compensation 32,186 19,821
Deferred revenue 56,420 37,953
Income taxes 17,970 4,678
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 145,992 82,030
Other liabilities 793 768
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value;
5,000 shares authorized; none issued -- --
Common stock, $.01 par value; 215,000 shares authorized;
127,452 and 125,129 shares issued 1,275 1,251
Additional paid-in capital 207,039 155,497
Foreign currency translation adjustment (1,316) 1,710
Retained earnings 306,638 212,471
Treasury stock, at cost, 23 and 0 shares (1,164) --
Unrealized loss on investments (40) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 512,432 370,929
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $659,217 $453,727
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
28
Consolidated Statement of Income
- -------------------------------------------------------------------------------
Parametric Technology Corporation
Year ended September 30,
--------------------------------------------
(amounts in thousands, except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Revenue:
License $448,699 $288,349 $206,243
Service 151,423 105,961 60,731
- -----------------------------------------------------------------------------------------------------------------
Total revenue 600,122 394,310 266,974
- -----------------------------------------------------------------------------------------------------------------
Cost of revenue:
License 4,642 3,348 2,028
Service 51,812 32,970 19,004
- -----------------------------------------------------------------------------------------------------------------
Total cost of revenue 56,454 36,318 21,032
- -----------------------------------------------------------------------------------------------------------------
Gross profit 543,668 357,992 245,942
- -----------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 238,860 163,918 107,940
Research and development 39,476 25,591 19,882
General and administrative 28,557 20,414 14,758
Acquisition and related costs 32,119 29,438 --
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 339,012 239,361 142,580
- -----------------------------------------------------------------------------------------------------------------
Operating income 204,656 118,631 103,362
Interest income 13,914 10,159 4,642
Other income (expense), net (2,413) (1,130) 700
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 216,157 127,660 108,704
Provision for income taxes 78,247 50,298 40,615
- -----------------------------------------------------------------------------------------------------------------
Net income $137,910 $ 77,362 $ 68,089
=================================================================================================================
Net income per share $ 1.04 $ 0.60 $ 0.54
=================================================================================================================
Weighted average number of common and dilutive
common equivalent shares outstanding 133,211 129,046 125,051
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
29
Consolidated Statement of Stockholders' Equity
- --------------------------------------------------------------------------------
Parametric Technology Corporation
Foreign
Additional currency Unrealized Total
Common stock paid-in translation Retained Treasury stock loss on stockholders'
-------------- --------------
(amounts in thousands) Shares Amount capital adjustment earnings Shares Cost investments equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993 115,649 $1,156 $ 83,023 $ 156 $ 70,320 $154,655
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for
services and exercise of warrants 92 1 154 155
Issuance of common stock under
stock plans 4,924 49 13,966 14,015
Income-tax benefit related to
incentive stock option plan 16,326 16,326
Purchase of common stock
for treasury or retirement (16) -- (96) (314) $(4,356) (4,452)
Issuance of treasury stock under
stock plans (2,896) 314 4,356 1,460
Foreign currency translation adjustment 930 930
Net income 68,089 68,089
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 120,649 1,206 113,373 1,086 135,513 0 0 251,178
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services 35 -- 46 46
Issuance of common stock under
stock plans 4,517 46 26,127 26,173
Income-tax benefit related to
incentive stock option plan 16,040 16,040
Foreign currency translation adjustment 578 578
Net income 77,362 77,362
Elimination of Rasna's net activity
for the three months ended
December 31, 1994 (72) (1) (89) 46 (404) (448)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 125,129 1,251 155,497 1,710 212,471 0 0 $ 0 370,929
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock under
stock plans 2,210 23 19,084 19,107
Issuance of common stock for
acquisition 113 1 4,999 5,000
Income-tax benefit related to
incentive stock option plan 27,459 27,459
Purchase of common stock for treasury (1,779) (66,563) (66,563)
Issuance of treasury stock under
stock plans (43,743) 1,756 65,399 21,656
Foreign currency translation adjustment (3,026) (3,026)
Unrealized loss on investments (40) (40)
Net income 137,910 137,910
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 127,452 $1,275 $207,039 $(1,316) $306,638 (23) $(1,164) $(40) $512,432
===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
30
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Parametric Technology Corporation
Year ended September 30,
-----------------------------------------------------
(amounts in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $137,910 $ 77,362 $ 68,089
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,800 9,466 4,814
Deferred income taxes (6,420) (10,599) (1,304)
Charge for purchased research and development in process 32,119 19,000 --
Changes in assets and liabilities net of effects from acquisitions:
Increase in accounts receivable (39,040) (13,129) (23,753)
(Increase) decrease in other current assets 88 (2,334) 2,045
(Increase) decrease in other assets 205 (4,378) 1,032
Increase in accounts payable and accrued expenses 15,377 5,660 3,621
Increase in accrued compensation 12,687 3,131 5,061
Increase in deferred revenue 19,420 16,436 7,028
Increase in income taxes 40,578 18,402 17,819
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 229,724 119,017 84,452
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment, net (29,650) (12,868) (8,705)
Payments for acquisitions (22,119) (33,507) --
Additions to capitalized computer software costs (815) (1,132) (912)
Proceeds from sale of investments 244,645 171,163 68,828
Purchases of investments (336,572) (264,926) (83,108)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (144,511) (141,270) (23,897)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations (126) (175) (209)
Short-term borrowings, net -- (600) (300)
Proceeds from issuance of common stock 40,763 26,129 15,534
Purchases of treasury stock (66,563) -- (4,356)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (25,926) 25,354 10,669
- ------------------------------------------------------------------------------------------------------------------------------------
Elimination of Rasna's net cash activity for the
three months ended December 31, 1994 -- (112) --
Effects of exchange rate changes on cash (3,311) 447 937
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 55,976 3,436 72,161
Cash and cash equivalents at beginning of year 145,638 142,202 70,041
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $201,614 $145,638 $142,202
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
31
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parametric Technology Corporation
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the financial statements. Certain amounts
in the fiscal 1995 and 1994 financial statements have been reclassified to
conform to the fiscal 1996 presentation.
On August 1, 1995, the Company completed its merger with Rasna Corporation
("Rasna"), a developer and marketer of software products for mechanical
computer-aided engineering. The merger was accounted for as a pooling of
interests. Accordingly, the accompanying consolidated financial statements have
been retroactively combined to reflect this transaction.
Due to the differing year ends of the Company and Rasna, financial
information for dissimilar fiscal years has been combined. Rasna's results of
operations for its fiscal years ended December 31, 1994 and 1993, were combined
with the Company's results of operations for the fiscal years ended September
30, 1994 and 1993, respectively. Balance sheet information as of September 30,
1994 includes the financial position of Rasna as of December 31, 1994 and the
Company as of September 30, 1994. Accordingly, Rasna's results of operations for
the three months ended December 31, 1994 (including revenue, operating income
and net income of $6,832,000, $548,000, and $404,000, respectively) were
duplicated in the combined statements of income for fiscal 1995 and 1994.
Therefore, Rasna's net income for one of the three-month periods ended December
31, 1994 was eliminated from stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Foreign Currency Translation
Foreign currency financial statements of international subsidiaries, where the
local currency is the functional currency, are translated using exchange rates
in effect at period end for assets and liabilities and at average rates during
the period for results of operations. The resulting foreign currency translation
adjustments are reflected as a separate component of stockholders' equity. For
international subsidiaries where the U.S. dollar is the functional currency,
monetary assets and liabilities are translated using exchange rates in effect at
period end, nonmonetary assets and liabilities are translated at historical
rates, and results of operations are translated at average rates for the period.
The resulting foreign currency translation adjustments are included in income.
Any gains or losses from foreign exchange transactions are included in income.
Currency losses of $1,389,000 and $781,000 and currency gains of $222,000 were
recognized in fiscal 1996, 1995 and 1994, respectively.
Revenue Recognition
Revenue is derived from the licensing of computer software products and from
service revenue consisting of training, consulting and maintenance. License
revenue is recognized upon shipment, unless collection is not reasonably
assured. Revenue from software maintenance contracts is recognized ratably over
the contract period, and other service revenue is recognized upon performance.
Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Short-term investments are those
with maturities in excess of three months but less than one year. Marketable
investments are those with maturities in excess of one year but less than two
years. All cash equivalents and short-term and marketable investments have been
classified as available for sale and are reported at fair value with unrealized
gains and losses included in stockholders' equity.
The Company invests its nonoperating cash in debt instruments of financial
institutions, government entities and corporations, and mutual funds. The
Company has established guidelines relative to credit ratings, diversification
and maturities that maintain safety and liquidity. The Company has not
experienced any losses on its investments.
Concentration of Credit Risk
The Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. The Company's customer base consists of
large numbers of geographically diverse customers dispersed across many
industries. As a result, concentration of credit risk with respect to trade
receivables is not significant.
Forward Foreign Exchange Contracts
The Company enters into transactions denominated in foreign currencies and
includes the exchange gain or loss arising from such transactions in other
income (expense). The Company enters into forward exchange contracts to hedge
specific foreign currency denominated receivables, which require the Company to
exchange foreign currencies for U.S. dollars at maturity at rates agreed to at
inception of the contracts. As of September 30, 1996 and 1995, the Company had
approximately $11,766,000 and $1,389,000, respectively, of foreign exchange
contracts outstanding. All contracts mature within one year. At September 30,
1996 and for all fiscal years presented, gains
32
and losses associated with exchange rate fluctuations on forward foreign
exchange contracts are immaterial. Cash flows from the forward exchange
contracts are classified with the related receivables.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-
line method over the estimated useful lives, typically three years. Leasehold
improvements are amortized over the shorter of the useful lives or the remaining
terms of the related leases. Property and equipment under capital leases are
amortized over the lesser of the lease terms or the estimated useful lives.
Maintenance and repairs are charged to expense when incurred; additions and
improvements are capitalized.
Upon retirement or sale, the cost of the disposed asset and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is credited or charged to income.
Capitalized Computer Software Costs and Intangible Assets
The Company incurs costs to develop computer software to be licensed or
otherwise marketed to customers. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed in the period incurred unless these costs qualify for capitalization.
Capitalized computer software costs are amortized over the economic lives of the
related products, typically three years, beginning at their initial shipment
date. Capitalized computer software costs of $3,174,000 and $4,380,000, included
in other assets, are net of accumulated amortization of $5,672,000 and
$3,651,000 at September 30, 1996 and 1995, respectively. Amortization charged to
expense was $2,021,000, $1,334,000 and $665,000 for the fiscal years ended
September 30, 1996, 1995 and 1994, respectively.
Purchased software of $3,400,000 and intangible assets of $11,083,000
(including goodwill of $7,703,000) capitalized in fiscal 1995 were attributable
to the acquisition of the Conceptual Design and Rendering System ("CDRS")
software business operated by the Design Software Division of Evans & Sutherland
Computer Corporation. These assets, included in other assets, are amortized on a
straight-line basis, over three and seven years, respectively. Amortization
charges related to intangible assets, the majority of which were reflected in
general and administrative expenses, totaled $1,580,000 and $725,000 for the
fiscal years ended September 30, 1996 and 1995, respectively.
The Company evaluates the net realizable value of capitalized computer
software costs and intangible assets on an ongoing basis relying on a number of
factors including operating results, business plans, budgets and economic
projections.
Income per Common Share
Income per common share is computed based upon the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Fully
diluted and primary earnings per common share are the same amounts for each of
the years presented. Dilutive common equivalent shares consist of stock options
and are calculated using the treasury stock method.
B. ACQUISITIONS
- --------------------------------------------------------------------------------
On July 10, 1996, the Company acquired project modeling and management software
("Reflex") technology from Greenshire License Co. NV for $32,119,000, which
included the issuance of 113,000 shares of the Company's common stock with a
fair value of $5,000,000 at the time of the acquisition and $5,000,000 payable
in the fourth quarter of fiscal 1997. Payments of $22,119,000 in fiscal 1996
were from the Company's existing cash balances. The acquisition has been
accounted for as a purchase. The purchase price was allocated to purchased
research and development in process, as no other tangible or intangible assets
were identified. The purchased research and development in process had not
reached technological feasibility, had no alternative future use, and was valued
using expected future cash flows, discounted for risks and uncertainties related
to the target markets and the completion of the products that will ultimately be
marketed by the Company. As a result, at the date of acquisition, the
$32,119,000 allocated to purchased research and development in process was
recorded as a nonrecurring charge. The operating results of Reflex have not been
material in relation to those of the Company, and are included in the Company's
consolidated results of operations from the date of acquisition.
On August 1, 1995, the Company acquired Rasna by merging it into the
Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995.
Based on the number of shares of Rasna common stock outstanding, the Company
issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its
common stock for outstanding Rasna stock options assumed. The merger was
accounted for as a pooling of interests. In conjunction with the Rasna merger,
the Company recorded a nonrecurring charge of $10,438,000, which included
approximately $6,028,000 for transaction fees, $1,722,000 for severance-related
expenses, and $2,688,000 related to integration costs and lease and distributor
termination costs. At September 30, 1996, accrued expenses include $500,000 for
future cash outlays associated with this nonrecurring charge.
The following information shows revenue and net income of the separate
companies during the periods preceding the combination. Adjustments recorded to
conform with the accounting policies of the companies were not material to the
consolidated financial statements.
33
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parametric Technology Corporation
Nine months ended Year ended
(in thousands) July 1, 1995 September 30, 1994
- -------------------------------------------------------------------------
Revenue:
Parametric $252,566 $244,256
Rasna 22,500 22,718
- -------------------------------------------------------------------------
Total $275,066 $266,974
=========================================================================
Net income:
Parametric $ 54,809 $ 66,915
Rasna 2,267 1,174
- -------------------------------------------------------------------------
Total $ 57,076 $ 68,089
=========================================================================
On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of CDRS for $33,507,000 in cash, which was paid by the
Company from its existing cash balances. The acquisition was accounted for as a
purchase. The purchase price has been allocated to the assets acquired,
including certain intangible assets, such as purchased computer software and
research and development in process, based on their respective fair values. The
excess of the purchase price over the estimated fair value of the net assets
acquired has been recorded as goodwill ($7,703,000), which is being amortized on
a straight-line basis over seven years. In conjunction with the acquisition in
the third quarter, the Company recorded a nonrecurring charge of $19,000,000
related to the write-off of purchased research and development in process.
CDRS's results of operations have been included in the consolidated results of
operations since the date of acquisition.
C. Investments
- --------------------------------------------------------------------------------
The following is a summary of investments held as available-for-sale:
September 30, 1996
---------------------------------------------
Gross Gross Estimated
unrealized unrealized fair
(in thousands) Cost gains losses value
- -------------------------------------------------------------------------
Municipal debt
securities $269,728 $240 $(270) $269,698
Mutual funds 20,422 - - 20,422
Auction rate
preferred stock 40,287 10 (10) 40,287
U.S. government
debt securities 13,233 10 (20) 13,223
- -------------------------------------------------------------------------
Total investments $343,670 $260 $(300) $343,630
=========================================================================
Amounts included
in cash and cash
equivalents $ 89,132 $ 10 $ (10) $ 89,132
Amounts included
in short-term
investments 232,522 250 (170) 232,602
Amounts included
in marketable
investments 22,016 - (120) 21,896
- -------------------------------------------------------------------------
Total investments $343,670 $260 $(300) $343,630
=========================================================================
September 30, 1995
---------------------------------------------
Gross Gross Estimated
unrealized unrealized fair
(in thousands) Cost gains losses value
- -------------------------------------------------------------------------
Municipal debt
securities $191,310 $170 $(170) $191,310
Mutual funds 26,417 - - 26,417
Auction rate
preferred stock 30,328 - - 30,328
U.S. government
debt securities 11,074 - - 11,074
Corporate debt
securities 1,022 - - 1,022
- -------------------------------------------------------------------------
Total investments $260,151 $170 $(170) $260,151
=========================================================================
Amounts included in
cash and cash
equivalents $ 97,541 - - $ 97,541
Amounts included in
short-term
investments 162,610 $170 $(170) 162,610
- -------------------------------------------------------------------------
Total investments $260,151 $170 $(170) $260,151
=========================================================================
Fair values have been determined through information obtained from market
sources and management estimates. Realized gains and losses on the sale of each
type of security for the years ended September 30, 1996, 1995 and 1994, were
immaterial. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.
D. PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment consists of:
September 30,
---------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------
Computer hardware and software $ 55,825 $ 31,583
Furniture and fixtures 6,530 3,633
Leasehold improvements 4,501 2,672
- -------------------------------------------------------------------------
66,856 37,888
Less: accumulated depreciation
and amortization (30,339) (18,077)
- -------------------------------------------------------------------------
Total $ 36,517 $ 19,811
=========================================================================
Depreciation expense totaled $13,171,000, $7,663,000 and $5,007,000 for the
fiscal years ended September 30, 1996, 1995 and 1994, respectively. At September
30, 1996 and 1995, property and equipment (principally computer hardware)
includes assets under capital leases of $312,000 and $211,000, less accumulated
amortization of $167,000 and $75,000, respectively.
34
E. INCOME TAXES
- --------------------------------------------------------------------------------
In fiscal 1994, the Company adopted the provisions of the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), on a
prospective basis. Adoption of FAS 109 by the Company did not have a material
impact on the Company's consolidated financial statements. Under FAS 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences, utilizing current tax rates, of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets are recognized, net of any valuation allowance, for the estimated future
tax effects of deductible temporary differences and tax operating loss and
credit carryforwards. Deferred tax expense represents the change in the deferred
tax asset or liability balances.
The provision for income taxes consists of the following:
Year ended September 30,
---------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------
Federal income taxes:
Current $57,880 $30,257 $32,213
Deferred (7,730) 7,068 232
- ------------------------------------------------------------------------
50,150 37,325 32,445
- ------------------------------------------------------------------------
State income taxes:
Current 10,719 6,113 5,800
Deferred 529 1,997 (94)
- ------------------------------------------------------------------------
11,248 8,110 5,706
- ------------------------------------------------------------------------
Foreign income taxes:
Current 16,068 3,329 2,464
Deferred 781 1,534 --
- ------------------------------------------------------------------------
16,849 4,863 2,464
- ------------------------------------------------------------------------
Total $78,247 $50,298 $40,615
========================================================================
The differences between statutory federal income taxes and the provision for
income taxes are as follows:
Year ended September 30,
----------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------
Statutory federal income taxes $75,655 $44,681 $38,046
State income taxes, net of
federal tax benefit 7,311 5,386 3,709
Tax-exempt interest income (3,600) (2,744) (1,324)
Tax benefit of foreign sales
corporation (6,308) (3,357) (1,856)
Other, net 5,189 4,006 2,040
- -------------------------------------------------------------------------
Subtotal 78,247 47,972 40,615
Nondeductible acquisition costs -- 2,326 --
- -------------------------------------------------------------------------
Total $78,247 $50,298 $40,615
=========================================================================
The components of the net deferred tax asset are as follows:
September 30,
---------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 2,901 $ 1,904
Net operating loss carryforwards 1,882 5,308
Amortization of intangible assets 18,565 8,301
Research and development credit
carryforwards 409 1,138
Other 1,018 1,344
- -------------------------------------------------------------------------
Total deferred tax assets 24,775 17,995
- -------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software (563) (641)
Other (643) (205)
- -------------------------------------------------------------------------
Total deferred tax liabilities (1,206) (846)
- -------------------------------------------------------------------------
Valuation allowance (662) (662)
- -------------------------------------------------------------------------
Net deferred tax asset $22,907 $16,487
=========================================================================
The net operating loss carryforwards of $5,381,000 at September 30, 1996 expire
between fiscal 1998 and 2000. Ownership changes, as defined in the Internal
Revenue Code of 1986, as amended, limit the amount of the net operating loss
carryforwards that can be utilized annually. The research and development credit
carryforwards expire between fiscal 2006 and 2010. The Company has recorded a
valuation allowance for the tax benefit of certain foreign net operating loss
carryforwards since realization of these future benefits is not sufficiently
assured at September 30, 1996.
F. COMMON STOCK
- --------------------------------------------------------------------------------
On February 8, 1996, the stockholders approved an amendment to the Company's
Articles of Organization to increase the number of authorized shares of the
Company's common stock from 75,000,000 to 215,000,000. On November 14, 1996, the
Company's Board of Directors approved, subject to stockholder approval, an
amendment to the Company's Articles of Organization to increase the number of
authorized shares of the Company's common stock from 215,000,000 to 350,000,000.
On February 8, 1996, the Company's Board of Directors declared a one-for-one
stock dividend on all shares of common stock, which was payable on February 29,
1996 to all stockholders of record on February 22, 1996. These financial
statements and related notes have been retroactively adjusted, as appropriate,
to reflect this one-for-one stock dividend.
On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allows the Company to repurchase up to 6,000,000 shares
of its common stock. The Company intends to repurchase these shares to partially
offset the dilution caused by the exercise of stock options under the Company's
option plans and the purchase of shares under the
35
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parametric Technology Corporation
employee stock purchase plan. During fiscal 1996, the Company repurchased
1,779,000 shares at a cost of $66,563,000, of which 23,000 remained in treasury
at September 30, 1996. Since the inception of the plan, the Company has
repurchased 2,093,000 shares.
G. STOCK OPTIONS
- --------------------------------------------------------------------------------
Under the 1987 Incentive Stock Option Plan (the "1987 Stock Option Plan"), the
Board of Directors may grant options to key employees to purchase shares at an
option exercise price equal to the fair market value on the date of grant. The
options are exercisable at such times, in installments or otherwise, as the
Board of Directors may determine. Generally, these options vest ratably over a
period of four years and expire ten years from the date of grant. The 1987 Stock
Option Plan limits the number of shares that may be granted to any eligible
employee in any fiscal year to 1,000,000. In fiscal 1996, the stockholders
approved an increase in the number of shares issuable under this plan from
42,792,000 to 48,792,000 and to change the designation of persons eligible to
receive options under the 1987 Stock Option Plan to include consultants.
On November 14, 1996, the Board of Directors approved, subject to
stockholder approval, the 1997 Incentive Stock Option Plan (the "1997 Stock
Option Plan") for which 6,000,000 shares of common stock have been reserved. The
1997 Stock Option Plan will replace and have terms and conditions similar to
those contained in the 1987 Stock Option Plan. No additional options will be
granted under the 1987 Stock Option Plan, but the rights and privileges of
holders of outstanding options under the 1987 Stock Option Plan will continue
under the terms of that plan.
Under the 1992 Director Stock Option Plan (the "1992 Director Plan"),
640,000 shares of common stock have been reserved. The purpose of the 1992
Director Plan is to attract and retain qualified persons who are not also
officers or employees of the Company (the "Eligible Directors") to serve as
Directors of the Company and to encourage stock ownership in the Company by such
Directors. Options granted under the 1992 Director Plan, at an option price
equal to the fair market value on the date of grant, shall become exercisable in
four equal annual installments following the date of grant if, and only if, the
optionee is a Director of the Company on such anniversary date. The options
expire ten years from the date of grant. Options to purchase 80,000 shares of
common stock were granted in fiscal 1995 to Eligible Directors of the Company.
In fiscal 1996, the stockholders approved the 1996 Director Stock Option
Plan (the "1996 Director Plan") for which 180,000 shares of common stock have
been reserved. The 1996 Director Plan replaces the 1992 Director Plan. The terms
of the 1996 Director Plan are essentially the same as the 1992 Director Plan,
except that each Eligible Director is automatically granted options to purchase
20,000 shares of common stock at the time of initial election to the Board of
Directors; and immediately following the meeting of stockholders every year,
each Eligible Director continuing in office after such meeting will
automatically be granted options to purchase 5,000 shares of common stock. No
additional options will be granted under the 1992 Director Plan, but the rights
and privileges of holders of outstanding options under the 1992 Director Plan
are not adversely affected by the 1996 Director Plan.
In conjunction with the Rasna merger, the Company assumed 1,045,000
outstanding options on August 1, 1995. These assumed options were granted at
prices equal to the fair market value at the date of grant, become exercisable
in installments (generally ratably over four years), and expire ten years from
the date of grant. The Company does not intend to issue any additional options
under the Rasna stock option plan.
The following table summarizes stock option transactions under all
plans:
Stock option
Shares prices
- ----------------------------------------------------------------------------
Outstanding at September 30, 1993 16,190,024 $ .01 -$18.75
Granted and assumed 4,517,354 3.06 - 17.38
Canceled (790,558) .04 - 18.75
Exercised (5,065,562) .01 - 15.50
- ----------------------------------------------------------------------------
Outstanding at September 30, 1994 14,851,258 .01 - 18.75
Granted and assumed 6,418,626 3.06 - 30.13
Canceled (883,518) .82 - 30.13
Exercised (4,324,704) .01 - 18.75
- ----------------------------------------------------------------------------
Outstanding at September 30, 1995 16,061,662 .01 - 30.13
Granted 5,139,750 33.50 - 48.75
Canceled (1,381,180) .81 - 42.75
Exercised (3,842,020) .01 - 30.13
- ----------------------------------------------------------------------------
Outstanding at September 30, 1996 15,978,212 $ .01 -$48.75
============================================================================
Options exercisable at
September 30, 1996 4,554,130
Options available for grant at
September 30, 1996 4,784,949
Stock options are accounted for in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, no compensation cost has been recorded in connection with stock
option grants under the Company's stock option and employee stock purchase
plans. During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 defines a fair-value method of accounting for
employee stock options or similar equity instruments and encourages companies to
adopt that method of accounting beginning in
36
fiscal 1997 for the Company. However, FAS 123 also allows companies to continue
to use the intrinsic value method of accounting prescribed by APB 25. The
Company expects to continue to account for stock options and purchases in
accordance with APB 25, but beginning in fiscal 1997 will also make pro-forma
disclosures of net income and earnings per share as if the fair-value-based
method of accounting defined in FAS 123 had been applied.
H. STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
The 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") enables
eligible employees to purchase the Company's common stock at 85% of the fair
market value of the stock on the date an offering commences or on the date an
offering terminates, whichever is lower. The 1991 Purchase Plan covers
substantially all employees, subject to certain limitations. Each employee may
elect to have up to 10% of his or her base pay withheld and applied toward the
purchase of shares in such offering (provided that the aggregate amount of his
or her base pay withheld may not exceed $10,000 in any fiscal year). The 1991
Purchase Plan covers an aggregate of up to 2,000,000 shares of common stock to
be issued and sold to participating employees of the Company through a series of
six-month offerings, beginning April 1, 1991. Purchases under the 1991 Purchase
Plan for fiscal 1996, 1995 and 1994 were 169,425, 154,722 and 172,568 shares,
generating proceeds to the Company of $4,906,000, $2,459,000 and $2,031,000,
respectively. At September 30, 1996, approximately 1,110,000 shares of common
stock were reserved for purchases under the 1991 Purchase Plan.
I. EMPLOYEE BENEFIT PLAN
- --------------------------------------------------------------------------------
The Board of Directors in 1989 adopted the Parametric Technology Corporation
401(k) Savings Plan (the "Plan"), which is intended to qualify under Section
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all employees. Each employee may elect to contribute to the Plan,
through payroll deductions, up to 15% of his or her salary, subject to certain
limitations. The Company makes matching contributions on behalf of each
participating employee in an amount equal to 50% of the amount contributed by
the employee up to a maximum 10% employee contribution. The employee's
entitlement to such Company contributions vests at a rate of 25% per year of
service. For the fiscal years ended September 30, 1996, 1995 and 1994 the
Company made matching contributions to the Plan which totaled $1,867,000,
$1,034,000 and $738,000, respectively.
J. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Cash paid for interest during the fiscal years ended September 30, 1996, 1995
and 1994 was $169,000, $37,000 and $125,000, respectively. Cash paid for income
taxes in fiscal 1996, 1995 and 1994 was $38,853,000, $40,281,000 and
$22,279,000, respectively. During fiscal 1996, 1995 and 1994, the Company
acquired $114,000, $108,000 and $76,000 of fixed assets under capital leases,
respectively.
K. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Leasing Arrangements
The Company leases its office facilities and certain equipment under operating
leases expiring at various dates through fiscal 2003. The Company also leases
computer equipment under capital leases which expire through fiscal 1999.
At September 30, 1996, future minimum lease payments under capital and
operating leases with initial or remaining terms of one or more years are as
follows:
Capital Operating
(in thousands) leases leases
- -------------------------------------------------------------------------
1997 $ 92 $23,174
1998 68 13,024
1999 2 7,453
2000 -- 4,672
2001 -- 3,287
Subsequent to 2001 -- 2,182
- -------------------------------------------------------------------------
Total minimum lease payments 162 $53,792
=======
Less amounts representing interest (13)
- ------------------------------------------------------------
Present value of net minimum lease payments $149
============================================================
Rental expense under operating leases was $21,520,000, $15,186,000 and
$11,122,000 for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that resolving these
matters will not have a material adverse impact on the Company's financial
position or its results of operations.
37
- -------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parametric Technology Corporation
L. SEGMENT AND GEOGRAPHIC INFORMATION
- --------------------------------------------------------------------------------
The Company is engaged in one industry segment: the development, marketing and
support of software products for the mechanical segment of the CAD/CAM/CAE
(computer-aided design, manufacturing and engineering) industry.
The Company licenses products to customers on a worldwide basis. Sales
and marketing operations outside the United States are conducted principally
through the Company's foreign sales subsidiaries throughout Europe and
Asia/Pacific.
Intercompany sales and transfers between geographic areas are accounted
for at prices which are designed to be representative of unaffiliated party
transactions.
(amounts in thousands)
Year ended September 30,
- ------------------------------------
1996 North America Europe Asia/Pacific Corporate Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated customers
License $182,494 $115,424 $ 75,970 $373,888
Service 82,386 43,804 15,507 141,697
Revenue from unaffiliated export
Europe 48,583 48,583
Asia/Pacific 35,954 35,954
Intercompany revenue 167,800 29,006 18,835 $(215,641) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 517,217 188,234 110,312 (215,641) 600,122
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 182,656 12,048 9,952 204,656
Other income (expense) 1,177 (418) (17) $ 10,759 11,501
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 183,833 11,630 9,935 10,759 216,157
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 564,107 65,612 37,282 328,037 (335,821) 659,217
=================================================================================================================================
1995 North America Europe Asia/Pacific Corporate Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated customers
License $134,412 $ 76,871 $ 36,739 $248,022
Service 63,427 28,484 9,230 101,141
Revenue from unaffiliated export
Europe 28,518 28,518
Asia/Pacific 16,629 16,629
Intercompany revenue 92,339 19,422 7,306 $(119,067) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 335,325 124,777 53,275 (119,067) 394,310
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 112,620 2,547 3,464 118,631
Other income (expense) 1,794 (790) (226) $ 8,251 9,029
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 114,414 1,757 3,238 8,251 127,660
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 403,247 46,224 19,263 242,568 (257,575) 453,727
=================================================================================================================================
1994 North America Europe Asia/Pacific Corporate Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated customers
License $112,744 $ 47,312 $ 14,418 $174,474
Service 38,747 13,139 3,370 55,256
Revenue from unaffiliated export
Europe 22,721 22,721
Asia/Pacific 14,523 14,523
Intercompany revenue 47,353 11,982 4,400 $ (63,735) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 236,088 72,433 22,188 (63,735) 266,974
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 100,093 777 2,492 103,362
Other income (expense) 2,276 (638) (120) $ 3,824 5,342
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 102,369 139 2,372 3,824 108,704
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 281,444 24,678 9,934 173,317 (184,248) 305,125
=================================================================================================================================
38
- -------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
Parametric Technology Corporation
To the Stockholders and Board of Directors of Parametric Technology Corporation:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Parametric
Technology Corporation as of September 30, 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Parametric Technology
Corporation as of September 30, 1995 and for each of the two years in the period
ended September 30, 1995 were audited by other auditors whose report dated
October 19, 1995, except as to Notes F and G which are as of November 17, 1995,
expressed an unqualified opinion on those statements, which was based in part on
the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes, examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Parametric Technology Corporation as of September 30, 1996, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 16, 1996
39
- ------------------------------------------------------
Selected Financial Data /(1)/
- --------------------------------------------------------------------------------
Parametric Technology Corporation
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended September 30,
---------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue $600,122 $394,310 $266,974 $179,311 $ 98,377
Operating income 204,656 118,631 103,362 66,502 30,818
Net income 137,910 77,362 68,089 43,470 21,036
Net income per share /(2)/ 1.04 0.60 0.54 0.36 0.18
Weighted average number of common and dilutive
common equivalent shares outstanding /(2)/ 133,211 129,046 125,051 122,424 119,055
Total assets 659,217 453,727 305,125 190,975 119,259
Working capital 416,058 317,702 229,878 137,581 73,464
Stockholders' equity 512,432 370,929 251,178 154,655 85,895
Excluding acquisition and related costs /(3)/:
Net income 158,402 98,500 68,089 43,470 21,036
Net income per share /(2)/ 1.19 0.76 0.54 0.36 0.18
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal quarter ended
--------------------------------------------------------------
September 30, June 29, March 30, December 30,
(in thousands, except per share and stock price data) 1996 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue $177,128 $157,104 $140,493 $125,397
Gross profit 160,607 143,014 127,104 112,943
Operating income 38,664 62,173 55,086 48,733
Net income 26,433 41,620 36,837 33,020
Net income per share /(2)/ 0.20 0.31 0.28 0.25
Excluding acquisition and related costs /(3)/:
Net income 46,925 41,620 36,837 33,020
Net income per share /(2)/ 0.35 0.31 0.28 0.25
Common stock prices /(4)/:
High 51.63 48.75 39.13 35.63
Low 37.38 34.38 27.13 27.38
Fiscal quarter ended
--------------------------------------------------------------
September 30, July 1, April 1, December 31,
(in thousands, except per share and stock price data) 1995 1995 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue $119,244 $105,195 $91,023 $78,848
Gross profit 108,092 95,725 82,291 71,884
Operating income 34,931 19,492 34,349 29,859
Net income 21,035 13,816 22,736 19,775
Net income per share /(2)/ 0.16 0.11 0.18 0.16
Excluding acquisition and related costs /(3)/:
Net income 30,241 25,748 22,736 19,775
Net income per share /(2)/ 0.23 0.20 0.18 0.16
Common stock prices /(4)/:
High 31.63 25.13 21.88 18.50
Low 24.50 18.22 16.25 15.75
/(1)/ All financial information presented here has been retroactively restated
to reflect the fiscal 1995 Rasna merger which has been accounted for as a
pooling of interests. See Note A of Notes to Consolidated Financial Statements
for additional information.
/(2)/ Per-share data and weighted average number of common and dilutive common
equivalent shares outstanding have been retroactively adjusted to reflect the
one-for-one stock dividends on all shares of capital stock declared by the
Company's Board of Directors on February 4, 1992, February 4, 1993 and
February 8, 1996, effective February 25, 1992, February 25, 1993 and
February 29, 1996, respectively.
/(3)/ The acquisition and related costs consist of $32,119,000 in the fourth
quarter of fiscal 1996 related to the acquisition of Reflex technology from
Greenshire License Co. NV, $10,438,000 related to the merger of Rasna
Corporation into the Company in the fourth quarter of fiscal 1995 and
$19,000,000 in the third quarter of fiscal 1995 related to its acquisition of
the Conceptual Design and Rendering System software business from Evans &
Sutherland Computer Corporation. See Note B of Notes to Consolidated Financial
Statements for additional information.
/(4)/ The common stock of the Company is traded on the Nasdaq National Market
under the symbol "PMTC". The common stock prices shown are based on the Nasdaq
daily closing stock price.
40
Supplemental Financial Information
- --------------------------------------------------------------------------------
Parametric Technology Corporation
The Company has not paid cash dividends on its common stock and has
historically retained earnings for use in its business. The Company intends to
review its policy with respect to the payment of dividends from time to time;
however, there can be no assurance that any dividends will be paid in the
future.
On September 30, 1996, the number of stockholders of record of the
Company's common stock was 2,619.
Investor Information
- --------------------------------------------------------------------------------
Requests for information about the Company should be directed to: John W.
Hudson, Vice President of Investor Relations, Parametric Technology
Corporation, 128 Technology Drive, Waltham, MA 02154. Telephone: (617)
398-5000.
Report on Form 10-K
Stockholders may obtain additional financial information about Parametric
Technology from the Company's Report on Form 10-K filed with the Securities
and Exchange Commission. Copies are available from the Company without
charge upon written request.
Annual Meeting
The Annual Meeting of Stockholders will be held on February 13, 1997 at 9:00
a.m. at: Parametric Technology Corporation, 128 Technology Drive, Waltham,
MA 02154.
Stock Listing
Nasdaq National Market Symbol: PMTC
General Counsel
Palmer & Dodge LLP, Boston, MA
Independent Accountants
Coopers & Lybrand L.L.P., Boston, MA
Transfer Agent and Registrar
American Stock Transfer & Trust Company, New York, NY
For updated financial information, visit our website at www.ptc.com
Directors
- --------------------------------------------------------------------------------
Steven C. Walske
Chairman and Chief Executive Officer,
Parametric Technology Corporation
C. Richard Harrison
President and Chief Operating Officer,
Parametric Technology Corporation
Robert N. Goldman
Chief Executive Officer and President,
Object Design Inc., a software developer
Donald K. Grierson
Chief Executive Officer and President,
ABB Vetco Gray, Inc., an oil services business
Oscar B. Marx, III
Chief Executive Officer and President,
TMW Enterprises, a start-up venture in the autoparts industry
Michael E. Porter
Professor, Harvard Business School, an educational institution
Noel G. Posternak
Senior Partner, Posternak, Blankstein & Lund L.L.P., a law firm
Corporate Officers
- --------------------------------------------------------------------------------
Steven C. Walske
Chairman of the Board of Directors and Chief Executive Officer
C. Richard Harrison
President and Chief Operating Officer
Edwin J. Gillis
Executive Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
Michael E. McGuinness
Executive Vice President of Sales
Kirk D. Bowman
Senior Vice President of Business Development
Robert C. Gremley
Senior Vice President, Professional Services
Donald R. Henrich
Senior Vice President of Marketing
Thomas W. Jensen, Ph.D.
Senior Vice President of Research and Development
Martha L. Durcan
Vice President, Corporate Counsel and Clerk
James F. Kelliher
Vice President of Finance and Assistant Treasurer
John G. Mokas
Controller
Design: Beagan Design Photography: Rubenstein Photography Printing:
Daniels Printing
Pro/ENGINEER and Parametric Technology Corporation are registered
trademarks and all product names in the PTC product family and the PTC logo
are trademarks of Parametric Technology Corporation in the United States and
other countries. All other companies and products referenced herein have
trademarks or registered trademarks of their respective holders.