SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: MARCH 29, 1997 Commission File Number: 0-18059
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PARAMETRIC TECHNOLOGY CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2866152
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
128 TECHNOLOGY DRIVE, WALTHAM, MA 02154
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(Address of principal executive offices, including zip code)
(617) 398-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 127,563,454
- -------------------------------------- -----------------------------
Class Outstanding at March 29, 1997
Total number of pages: 12
Exhibit index appears on page 12
PARAMETRIC TECHNOLOGY CORPORATION
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheet 3
March 29, 1997 and September 30, 1996
Consolidated Statement of Income 4
Three and six months ended March 29, 1997 and
March 30, 1996
Consolidated Statement of Cash Flows 5
Six months ended March 29, 1997 and March 30, 1996
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits 10
SIGNATURE 11
2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(amounts in thousands)
ASSETS March 29, 1997 September 30, 1996
-------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $212,088 $201,614
Short-term investments 289,528 232,602
Accounts receivable, net 138,439 117,273
Other current assets 16,347 10,561
-------- --------
Total current assets 656,402 562,050
Marketable investments -- 21,896
Property and equipment, net 40,745 36,517
Other assets 45,395 38,754
-------- --------
Total assets $742,542 $659,217
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 45,592 $ 39,416
Accrued compensation 35,540 32,186
Deferred revenue 70,431 56,420
Income taxes 31,962 17,970
-------- --------
Total current liabilities 183,525 145,992
Other liabilities 744 793
Stockholders' equity:
Preferred stock, $.01 par value;
5,000 shares authorized; none issued -- --
Common stock, $.01 par value;
350,000 shares authorized;
128,148 and 127,452 shares issued 1,281 1,275
Additional paid-in capital 230,952 207,039
Retained earnings 362,955 306,638
Treasury stock, at cost, 585 and 23 shares (32,081) (1,164)
Other equity (4,834) (1,356)
-------- --------
Total stockholders' equity 558,273 512,432
-------- --------
Total liabilities and stockholders' equity $742,542 $659,217
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
-------------------- --------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenue:
License $147,054 $103,420 $285,496 $194,850
Service 50,958 37,073 96,017 71,040
-------- -------- -------- --------
Total revenue 198,012 140,493 381,513 265,890
-------- -------- -------- --------
Cost of revenue:
License 2,737 987 4,728 1,766
Service 15,824 12,402 31,381 24,077
-------- -------- -------- --------
Total cost of revenue 18,561 13,389 36,109 25,843
-------- -------- -------- --------
Gross profit 179,451 127,104 345,404 240,047
-------- -------- -------- --------
Operating expenses:
Sales and marketing 77,263 56,303 148,924 106,754
Research and development 13,292 8,901 25,426 16,726
General and administrative 9,719 6,814 18,424 12,748
-------- -------- -------- --------
Total operating expenses 100,274 72,018 192,774 136,228
-------- -------- -------- --------
Operating income 79,177 55,086 152,630 103,819
Other income, net 2,450 2,651 5,075 5,674
-------- -------- -------- --------
Income before income taxes 81,627 57,737 157,705 109,493
Provision for income taxes 28,569 20,900 55,196 39,636
-------- -------- -------- --------
Net income $ 53,058 $ 36,837 $102,509 $ 69,857
======== ======== ======== ========
Net income per share $ 0.39 $ 0.28 $ 0.76 $ 0.53
====== ====== ====== ======
Weighted average number of
common and dilutive
common equivalent shares
outstanding 135,328 133,329 135,212 132,982
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
Six Months Ended
----------------------------------
March 29, 1997 March 30, 1996
----------------- ---------------
Cash flows from operating activities:
Net income $ 102,509 $ 69,857
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,338 6,297
Deferred income taxes 754 5,698
Changes in assets and liabilities:
Increase in accounts receivable (26,498) (13,357)
Increase in other current assets (3,466) (6,900)
(Increase) decrease in other assets (958) 1,626
Increase in accounts payable and accrued expenses 7,672 8,128
Increase in accrued compensation 4,536 2,396
Increase in deferred revenue 16,157 6,989
Increase in income taxes 28,158 9,177
--------- ---------
Net cash provided by operating activities 139,202 89,911
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (13,427) (16,252)
Additions to capitalized and purchased software costs (814) (400)
Proceeds from sale of investments 113,702 30,193
Purchases of investments (156,811) (107,795)
--------- ---------
Net cash used by investing activities (57,350) (94,254)
--------- ---------
Cash flows from financing activities:
Repayment of long-term obligations (91) (63)
Proceeds from issuance of common stock 28,185 19,311
Purchases of treasury stock (95,020) (25,538)
--------- ---------
Net cash provided (used) by financing activities (66,926) (6,290)
--------- ---------
Effects of exchange rate changes on cash (4,452) (1,582)
--------- ---------
Net increase (decrease) in cash and cash equivalents 10,474 (12,215)
Cash and cash equivalents at beginning of period 201,614 145,638
--------- ---------
Cash and cash equivalents at end of period $ 212,088 $ 133,423
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, and have been
prepared by the Company in accordance with generally accepted accounting
principles. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1996.
The results of operations for the three-month and six-month periods ended
March 29, 1997 are not necessarily indicative of the results expected for the
full fiscal year.
2. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share for the three-month and six-month periods ended March 29, 1997 would have
been $.42 and $.80 per share, respectively as compared with $.29 and $.55 per
share for the corresponding periods in fiscal 1996. The impact of SFAS No. 128
on the calculation of diluted net income per share for these quarters is not
expected to be materially different from primary earnings per share. The Company
plans to adopt SFAS No. 128 in its first quarter for fiscal 1998 and at that
time all historical net income per share data presented will be restated to
conform to the provisions of SFAS No. 128.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Parametric Technology Corporation is the CAD/CAM/CAE (computer-aided design,
manufacturing and engineering) industry's leading supplier of software tools
used to automate the mechanical development of a product from its conceptual
design through its release into manufacturing.
Information provided by the Company, including information contained in this
Quarterly Report on Form 10-Q, or by its spokespersons from time to time may
contain forward-looking statements concerning projected financial performance,
industry segment growth, product development and commercialization or other
aspects of future operations. In particular, the statements in this Report
concerning anticipated revenue, geographical growth rates and projected expenses
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. Important information about the basis for those assumptions
including factors that may cause actual results to vary from those forecast are
discussed below and are also contained in "Important Factors Regarding Future
Results" included in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section in the 1996 Annual Report to
Stockholders, incorporated herein by reference.
RESULTS OF OPERATIONS
Revenue, including license and service revenues, for the three-month and six-
month periods ended March 29, 1997 was $198,012,000 and $381,513,000,
respectively, compared with $140,493,000 and $265,890,000 for the three-month
and six-month periods ended March 30, 1996. These totals represent increases of
41% for the three-month period and 43% for the six-month period over the
corresponding periods in fiscal 1996. Net income, as a percentage of revenue,
was 27% for the three-month and six-month periods ended March 29, 1997 compared
to 26% in the corresponding periods in fiscal 1996. This represents an increase
in net income of 44% and 47% from the three-month and six-month periods ended
March 30, 1996.
The Company derives its revenue from the sale and support of software used in
the mechanical segment of the CAD/CAM/CAE industry. Revenue growth in the three-
month and six-month periods ended March 29, 1997 reflects the continued
worldwide acceptance of the Company's products and services and the Company's
ongoing investment in expanding its worldwide direct sales force. License
revenue was $147,054,000 and $285,496,000 for the three-month and six-month
periods ended March 29, 1997, a 42% and 47% increase from $103,420,000 and
$194,850,000 for the corresponding periods in fiscal 1996. This growth results
from an increase in the number of seats of software licensed and from a higher
price realized per seat. A seat of software generally consists of various
software products configured to serve the needs of a single end user. The
Company licensed 7,475 and 14,459 seats of software respectively in the three-
month and six-month periods ended March 29, 1997, an increase of 37% and 38%
from 5,446 and 10,454 seats of software in the comparable periods in fiscal
1996. 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 the three months and six months ended March 29, 1997 was $19,700,
compared with an average price of $19,000 and $18,600 for the same periods in
fiscal 1996. The average price per seat has increased as a result of customers
purchasing configurations of seats containing more modules and an increase in
the percentage of the Company's revenue derived from international markets,
where the prices have typically been higher than in North America.
Service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. Service revenue was
$50,958,000 and $96,017,000 for the three-month and six-month periods ended
March 29, 1997, an increase of 37% and 35% from $37,073,000 and $71,040,000 for
the comparable periods in fiscal 1996. The increase in service revenue is 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 Company derived 56% and 57% of revenue from sales to international
customers in the three-month and six-month periods ended March 29, 1997,
compared with 55% and 54% for the same periods in fiscal 1996. The increase in
international revenue is primarily attributable to continued international
acceptance of the Company's products and services and the growth
7
in the sales force in Europe and Asia/Pacific, although revenue derived from
Japan was weaker than anticipated due in part to the strengthening of the dollar
in relationship to the yen. The Company has taken measures to strengthen results
in the Asia/Pacific region and anticipates that total revenue will increase
throughout 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; however, growth in international
revenue will continue to be affected by foreign exchange rates and the stronger
dollar's impact on the Company's ability to forecast quarter to quarter results.
Although the Company expects revenues to grow throughout fiscal 1997, there can
be no assurance that quarterly revenue growth rates and/or geographical growth
rates will be comparable with those achieved in the three-month and six-month
periods ended March 29, 1997. The rate of continued revenue growth throughout
the remainder of fiscal 1997 depends upon the strength of the U.S. dollar as
well as the Company's ability to implement recent measures taken to strengthen
results in the Asia/Pacific region, to adequately manage the Company's exposure
to foreign currency fluctuations, to continue to penetrate the mechanical
segment of the CAD/CAM/CAE industry, to attract and retain skilled personnel,
and to deliver timely product enhancements.
Cost of license revenue consists of the amortization of capitalized computer
software costs and costs associated with reproducing software, printing user
manuals, royalties, packaging and shipping. The increase in cost of license
revenue is a result of the increase in the number of seats licensed and the
royalty costs associated with those licenses during the three-month and six-
month periods ended March 29, 1997 as compared to the corresponding periods in
fiscal 1996. Cost of service revenue includes the costs associated with
training and consulting personnel, such as salaries and related costs and
travel, and costs related to software maintenance, including costs incurred for
customer support personnel and the release of maintenance updates. The increase
in 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 the Company's increasing installed
base. Combined, these expenses increased to $18,561,000 and $36,109,000 for the
three-month and six-month periods ended March 29, 1997 from $13,389,000 and
$25,843,000 for the corresponding periods in fiscal 1996. Total cost of revenue
as a percentage of revenue remained stable between 9% and 10% for both the
three-month and six-month periods ended March 29, 1997 and the corresponding
periods in fiscal 1996.
Sales and marketing expenses primarily include salaries, sales commissions,
travel and facility costs. Sales and marketing expenses increased to
$77,263,000 and $148,924,000 for the three-month and six-month periods ended
March 29, 1997 from $56,303,000 and $106,754,000 for the corresponding period in
fiscal 1996. These costs decreased as a percentage of revenue to 39% for both
the three-month and six-month periods ended March 29, 1997, compared with 40%
for the comparable periods in fiscal 1996. The absolute increase in these
expenses was due primarily to worldwide expansion of the sales force and sales
commissions associated with higher revenue. Total sales and marketing headcount
increased to 1,877 at March 29, 1997, an increase of 36% from 1,379 at March 30,
1996. 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. The Company's ability to meet this
expectation depends upon its ability to attract and retain highly skilled
technical, managerial and sales personnel.
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. Research and development expenses
increased to $13,292,000 and $25,426,000 for the three-month and six-month
periods ended March 29, 1997 from $8,901,000 and $16,726,000 for the
corresponding periods in fiscal 1996. Total research and development expenses
increased to 7% of revenue for the three-month and six-month periods ended March
29, 1997, compared with 6% for the same periods in fiscal 1996. The Company
believes that research and development expenditures are essential to maintaining
its competitive position in the mechanical CAD/CAM/CAE industry and expects the
expenditure levels to increase in absolute dollars throughout fiscal 1997.
General and administrative expenses include the costs of corporate, finance,
information technology, human resources and administrative functions of the
Company. These expenses increased to $9,719,000 and $18,424,000 for the three-
month and six-month periods ended March 29, 1997 from $6,814,000 and $12,748,000
for the corresponding periods in fiscal 1996. General and administrative
expenses as a percentage of revenue remained constant at 5% for the three-month
and six-month periods ended March 29, 1997 and March 30, 1996. The absolute
increase in these expenses was primarily due to the hiring of additional
employees necessary to support the Company's worldwide growth.
8
Other income, net, primarily includes interest income and expense and foreign
currency gains and losses. Other income decreased to $2,450,000 and $5,075,000
for the three-month and six-month periods ended March 29, 1997 compared with
$2,651,000 and $5,674,000 for the corresponding periods in fiscal 1996. As the
international portion of the Company's business continues to increase, a growing
percentage of the Company's revenue and expenses is transacted in foreign
currencies. In order to reduce its exposure to fluctuations in foreign exchange
rates, the Company engages in hedging transactions involving the use of forward
foreign exchange contracts in the primary European and Asian currencies.
The Company's effective tax rate for the three-month and six-month periods
ended March 29, 1997 was 35%, compared with 36.2% for the same periods in fiscal
1996. The difference between the effective and statutory federal tax rate was
due primarily to the benefits of tax-exempt interest income and the tax benefits
from the use of the foreign sales corporation, offset by the impact of state
income taxes.
The number of worldwide employees increased 32% to 3,133 at March 29, 1997
compared with 2,365 at March 30, 1996. Employment increased significantly to
support higher revenues and international expansion, with the largest portion of
this growth occurring in the sales department.
LIQUIDITY AND CAPITAL RESOURCES
As of March 29, 1997, the Company had $212,088,000 of cash and cash
equivalents and $289,528,000 of investments. 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
asset needs and stock repurchases for the six months ended March 29, 1997. Net
cash provided by operating activities, consisting primarily of net income from
operations before depreciation and amortization and increases in working
capital, was $139,202,000 for the six-month period ended March 29, 1997 compared
with $89,911,000 for the corresponding period in fiscal 1996. Net cash used by
investing activities totaled $57,350,000 for the six-month period ended March
29, 1997, compared with $94,254,000 for the corresponding period in fiscal 1996.
The decrease is principally due to the proceeds from the sale of investments and
the timing associated with those investments. Investment activities consisted
primarily of purchases and sales of investments, and additions to property and
equipment. The Company acquired $13,427,000 of capital equipment consisting
primarily of computer equipment, software, and office equipment to meet the
needs resulting from 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. For the remainder of fiscal 1997, the Company plans to continue
spending at current levels; however, the level of spending will be dependent on
various factors, including the growth of the business and general economic
conditions. Financing activities, consisting primarily of proceeds from issuance
of common stock offset by the purchases of treasury stock, used $66,926,000 for
the six months ended March 29, 1997 and $6,290,000 for the six months ended
March 30, 1996. The 1997 increase was due principally to higher stock
repurchases under the Company's stock repurchase program.
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 the three-month and six-month periods ended March 29,
1997, the Company repurchased 977,000 and 1,757,000 shares at a cost of
$54,898,500 and $95,020,000, respectively, of which 585,000 remained in treasury
on March 29, 1997. Since the inception of the plan, the Company has repurchased
3,850,000 shares. Ongoing repurchases will be funded through the use of
available cash, cash generated from operations and cash received from stock
option exercises and employee stock purchase plan purchases.
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
currently projected working capital, financing and capital expenditure
requirements through at least fiscal 1997, subject to the risks and
uncertainties referred to herein.
9
PART II - OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on February 13,
1997, the stockholders of the Company (1) elected Donald K. Grierson, Oscar B.
Marx, III, and Noel G. Posternak as Class I directors of the Company to hold
office until the 2000 Annual Meeting of Stockholders (subject to the election
and qualification of their successors and to their earlier death, resignation or
removal) and no other nominations were made; (2) approved an amendment to the
Company's Articles of Organization increasing the number of authorized shares of
the Company's common stock from 215,000,000 to 350,000,000; and (3) approved the
Company's 1997 Incentive Stock Option Plan. The votes were as follows:
Votes withheld Broker
Votes for or opposed Abstentions non-votes
------------- ------------------- ---------------- ------------
(1) Election of Directors:
Donald K. Grierson 116,245,374 261,337 -- --
Oscar B. Marx, III 116,245,522 261,189 -- --
Noel G. Posternak 116,243,029 263,682 -- --
(2) Approval of Amendment
to Articles of Organization: 110,016,910 5,519,638 231,276 738,887
(3) Approval of 1997
Incentive Stock Option Plan: 106,776,634 8,950,735 289,669 489,673
ITEM 6: Exhibits
10.1 1997 Incentive Stock Option Plan
10.2 Amended and Restated Severance Agreement with Steven C. Walske, dated February 13, 1997
10.3 Amended and Restated Severance Agreement with C. Richard Harrison, dated February 13, 1997
10.4 Amended and Restated Severance Agreement with Edwin J. Gillis, dated February 13, 1997
13.1 Annual Report to Stockholders for the fiscal year ended September 30, 1996 (which is not
deemed to be "filed" except to the extent that portions thereof are expressly incorporated
by reference in this Quarterly Report on Form 10-Q).
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAMETRIC TECHNOLOGY CORPORATION
Date: May 8, 1997 by: /S/ Edwin J. Gillis
------------------------------------
Edwin J. Gillis
Executive Vice President of Finance
and Administration, Chief Financial
Officer and Treasurer
11
EXHIBIT INDEX
10.1* 1997 Incentive Stock Option Plan, as approved by the Stockholders of the
Company on February 13, 1997; filed herewith.
10.2* Amended and Restated Severance Agreement with Steven C. Walske, dated
February 13, 1997; filed herewith.
10.3* Amended and Restated Severance Agreement with C. Richard Harrison, dated
February 13, 1997; filed herewith.
10.4* Amended and Restated Severance Agreement with Edwin J. Gillis, dated
February 13, 1997; filed herewith.
13.1 Annual Report to Stockholders for the fiscal year ended September 30,
1996 (which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated by reference in this
Quarterly Report on Form 10-Q); filed as Exhibit 13.1 to the Annual
Report on Form 10-K for the fiscal year ended September 30, 1996 and
incorporated herein by reference.
___________
*Identifies a management contract or compensatory plan or arrangement in which
an executive officer or director of the Company participates.