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: JUNE 28, 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
incorporation or organization) Number)
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 127,375,563
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Class Outstanding at June 28, 1997
Total number of pages: 31
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
June 28, 1997 and September 30, 1996
Consolidated Statement of Income 4
Three and nine months ended June 28, 1997 and
June 29, 1996
Consolidated Statement of Cash Flows 5
Nine months ended June 28, 1997 and June 29, 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 6 Exhibits 10
SIGNATURE 11
2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(amounts in thousands)
ASSETS June 28, 1997 September 30, 1996
-------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $223,642 $201,614
Short-term investments 301,466 232,602
Accounts receivable, net 145,721 117,273
Other current assets 21,695 10,561
-------- --------
Total current assets 692,524 562,050
Marketable investments -- 21,896
Property and equipment, net 44,332 36,517
Other assets 44,507 38,754
-------- --------
Total assets $781,363 $659,217
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 36,739 $ 39,416
Accrued compensation 38,658 32,186
Deferred revenue 76,687 56,420
Income taxes 33,351 17,970
-------- --------
Total current liabilities 185,435 145,992
Other liabilities 741 793
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 237,038 207,039
Retained earnings 394,725 306,638
Treasury stock, at cost, 773 and 23 shares (34,035) (1,164)
Other equity (3,822) (1,356)
-------- --------
Total stockholders' equity 595,187 512,432
-------- --------
Total liabilities and stockholders' equity $781,363 $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 Nine Months Ended
------------------ ---------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenue:
License $149,372 $117,836 $434,868 $312,686
Service 57,742 39,268 153,759 110,308
-------- -------- -------- --------
Total revenue 207,114 157,104 588,627 422,994
-------- -------- -------- --------
Cost of revenue:
License 1,320 1,160 6,048 2,926
Service 18,189 12,930 49,570 37,007
-------- -------- -------- --------
Total cost of revenue 19,509 14,090 55,618 39,933
-------- -------- -------- --------
Gross profit 187,605 143,014 533,009 383,061
-------- -------- -------- --------
Operating expenses:
Sales and marketing 80,136 62,916 229,060 169,670
Research and development 13,715 10,499 39,141 27,225
General and administrative 10,198 7,426 28,622 20,174
-------- -------- -------- --------
Total operating expenses 104,049 80,841 296,823 217,069
-------- -------- -------- --------
Operating income 83,556 62,173 236,186 165,992
Other income, net 2,837 3,063 7,912 8,737
-------- -------- -------- --------
Income before income taxes 86,393 65,236 244,098 174,729
Provision for income taxes 30,205 23,616 85,401 63,252
-------- -------- -------- --------
Net income $ 56,188 $ 41,620 $158,697 $111,477
======== ======== ======== ========
Net income per share $ 0.42 $ 0.31 $ 1.18 $ 0.84
======== ======== ======== ========
Weighted average number of
common and dilutive
common equivalent shares
outstanding 132,897 134,426 134,683 133,175
======== ======== ======== =======
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)
Nine Months Ended
-----------------------------------
June 28, 1997 June 29, 1996
------------------- --------------
Cash flows from operating activities:
Net income $ 158,697 $ 111,477
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,338 12,043
Deferred income taxes 1,701 2,684
Changes in assets and liabilities:
Increase in accounts receivable (31,939) (23,968)
Increase in other current assets (9,267) (959)
(Increase) decrease in other assets (1,671) 1,879
Increase (decrease) in accounts payable and accrued expenses (1,548) 11,484
Increase in accrued compensation 7,503 5,679
Increase in deferred revenue 21,366 11,652
Increase in income taxes 35,668 22,508
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Net cash provided by operating activities 196,848 154,479
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (21,642) (25,040)
Additions to capitalized and purchased software costs (842) (645)
Proceeds from sale of investments 286,398 160,850
Purchases of investments (341,231) (229,151)
--------- ---------
Net cash used by investing activities (77,317) (93,986)
--------- ---------
Cash flows from financing activities:
Repayment of long-term obligations (102) (92)
Proceeds from issuance of common stock 41,858 26,348
Purchases of treasury stock (135,066) (45,404)
--------- ---------
Net cash used by financing activities (93,310) (19,148)
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Effects of exchange rate changes on cash (4,193) (3,235)
--------- ---------
Net increase in cash and cash equivalents 22,028 38,110
Cash and cash equivalents at beginning of period 201,614 145,638
--------- ---------
Cash and cash equivalents at end of period $ 223,642 $ 183,748
========= =========
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 nine-month periods ended
June 28, 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 nine-month periods ended June 28, 1997 would have
been $.44 and $1.24 per share, respectively, as compared with $.33 and $.88 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 reported earnings per share. The
Company plans to adopt SFAS No. 128 in its first quarter of 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
nine-month periods ended June 28, 1997 was $207,114,000 and $588,627,000,
respectively, compared with $157,104,000 and $422,994,000 for the three-month
and nine-month periods ended June 29, 1996. These totals represent increases of
32% for the three-month period and 39% for the nine-month period over the
corresponding periods in fiscal 1996. Net income, as a percentage of revenue,
was 27% for the three-month and nine-month periods ended June 28, 1997 compared
to 26% in the corresponding periods in fiscal 1996. This represents an increase
in net income of 35% and 42% from the three-month and nine-month periods ended
June 29, 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 nine-month periods ended June 28, 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 $149,372,000 and $434,868,000 for the three-month and nine-month
periods ended June 28, 1997, a 27% and 39% increase from $117,836,000 and
$312,686,000 for the corresponding periods in fiscal 1996. This growth results
from an increase in the number of seats of software licensed. A seat of
software generally consists of various software products configured to serve the
needs of a single end user. The Company licensed 7,611 and 22,070 seats of
software respectively in the three-month and nine-month periods ended June 28,
1997, an increase of 29% and 35% from 5,892 and 16,346 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.
Service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. Service revenue was
$57,742,000 and $153,759,000 for the three-month and nine-month periods ended
June 28, 1997, an increase of 47% and 39% from $39,268,000 and $110,308,000 for
the comparable periods in fiscal 1996. The increase in service revenue is a
result of the growth in the Company's increased installed customer base and, to
a lesser extent, increased training and consulting services performed for these
customers.
The Company derived 53% and 55% of revenue from sales to international
customers in the three-month and nine-month periods ended June 28, 1997,
compared with 56% and 55% for the same periods in fiscal 1996. The decrease in
the percentage of revenue derived from international sales is primarily
attributable to weaker revenues in Japan due principally to internal execution
issues and to a lesser extent the strengthening of the dollar in relation to the
yen and the major European currencies. The Company has taken measures to
strengthen the sales and support infrastructure in Japan and to rebuild capacity
in order to re-accelerate revenue growth in this region. The Company
anticipates that total revenue will increase for the
7
remainder of fiscal 1997 from continued sales in the mechanical CAD/CAM/CAE
industry, particularly in view of the strong growth in North America. However,
growth in international revenue will continue to be affected by weaker revenues
in Japan and foreign exchange rates. These factors also affect 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 prior periods. The rate of continued revenue
growth throughout the remainder of fiscal 1997 depends upon the strength of the
U.S. dollar in relation to foreign currencies as well as the Company's ability
to implement recent measures taken to strengthen results in Japan, 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 primarily a result of the increase in the number of seats licensed
and the royalty costs associated with those licenses during the three-month and
nine-month periods ended June 28, 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 the 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 $19,509,000 and
$55,618,000 for the three-month and nine-month periods ended June 28, 1997 from
$14,090,000 and $39,933,000 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 nine-month periods ended June 28, 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
$80,136,000 and $229,060,000 for the three-month and nine-month periods ended
June 28, 1997 from $62,916,000 and $169,670,000 for the corresponding periods in
fiscal 1996. These costs decreased as a percentage of revenue to 39% for both
the three-month and nine-month periods ended June 28, 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 2,026 at June 28, 1997, an increase of 33% from 1,524 at June 29,
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 expanding worldwide
acceptance for its products. 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 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
$13,715,000 and $39,141,000 for the three-month and nine-month periods ended
June 28, 1997 from $10,499,000 and $27,225,000 for the corresponding periods in
fiscal 1996. Total research and development expenses were 7% of revenue for the
three-month and nine-month periods ended June 28, 1997, compared with 7% and 6%
for the same periods in fiscal 1996.
General and administrative expenses include the costs of corporate, finance,
information technology, human resources and administrative functions of the
Company. These expenses increased to $10,198,000 and $28,622,000 for the three-
month and nine-month periods ended June 28, 1997 from $7,426,000 and $20,174,000
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 nine-month periods ended June 28, 1997 and June 29, 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, contract
costs associated with managing the Company's foreign exchange exposure and
foreign currency gains and losses. Other income decreased to $2,837,000 and
$7,912,000 for the three-month and nine-month periods ended June 28, 1997
compared with $3,063,000 and $8,737,000 for the corresponding periods in fiscal
1996. As the Company's international 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 nine-month periods
ended June 28, 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 30% to 3,346 at June 28, 1997
compared with 2,573 at June 29, 1996. Employment increased significantly to
support higher revenues and international expansion, with the largest portion of
this growth occurring in the sales and marketing organization.
LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 1997, the Company had $223,642,000 of cash and cash
equivalents and $301,466,000 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 nine months ended June 28, 1997. Net
cash provided by operating activities, consisting primarily of net income from
operations before depreciation and amortization and increases in working
capital, was $196,848,000 for the nine-month period ended June 28, 1997,
compared with $154,479,000 for the corresponding period in fiscal 1996. Net
cash used by investing activities totaled $77,317,000 for the nine-month period
ended June 28, 1997, compared with $93,986,000 for the corresponding period in
fiscal 1996. The decrease is principally due to the timing of the purchases and
sales of investments. The Company acquired $21,642,000 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
$93,310,000 for the nine months ended June 28, 1997 and $19,148,000 for the nine
months ended June 29, 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 nine-month periods ended June 28,
1997, the Company repurchased 907,500 and 2,664,500 shares at a cost of
$40,046,000 and $135,066,000, respectively, of which 773,000 remained in
treasury on June 28, 1997. Since the inception of the plan, the Company has
repurchased 4,757,500 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 the next twelve months.
9
PART II - OTHER INFORMATION
ITEM 6: Exhibits
10.1 Severance Agreement with Michael E. McGuinness, dated May 15, 1997.
10.2 Severance Agreement with John D. McMahon, dated May 15, 1997.
10.3 Consulting Agreement with Michael E. Porter, dated November 17, 1995.
10.4 Amendment #1 to Consulting Agreement with Michael E. Porter, dated May
15, 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 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: August 11, 1997 by: /S/ Edwin J. Gillis
------------------------
Edwin J. Gillis
Executive Vice President,
Chief Financial Officer and
Treasurer
11
EXHIBIT INDEX
10.1* Severance Agreement with Michael E. McGuinness, dated May 15, 1997; filed
herewith.
10.2* Severance Agreement with John D. McMahon, dated May 15, 1997; filed
herewith.
10.3* Consulting Agreement with Michael E. Porter, dated November 17, 1995;
filed herewith.
10.4* Amendment #1 to Consulting Agreement with Michael E. Porter, dated May
15, 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 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.
12