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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 3, 1999
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
incorporation or organization) Identification Number)
128 Technology Drive, Waltham, MA 02453
(Address of principal executive offices, including zip code)
(781) 398-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
There were 269,257,473 shares of our common stock outstanding on July 3, 1999.
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Page
Number
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Cover.................................................................. i
Index.................................................................. ii
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and July
3, 1999....................................................... 1
Consolidated Statements of Income for the three and nine
months ended July 4, 1998 and July 3, 1999.................... 2
Consolidated Statements of Cash Flows for the nine months
ended July 4, 1998 and July 3, 1999........................... 3
Notes to the Consolidated Financial Statements................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
Part II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signature.............................................................. 16
ii
PART I--FINANCIAL INFORMATION
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, July 3,
1998 1999
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 205,971 $ 213,102
Short-term investments............................ 131,405 113,752
Accounts receivable, net.......................... 189,275 201,476
Other current assets.............................. 67,130 89,053
----------- -----------
Total current assets............................ 593,781 617,383
Marketable investments.............................. 88,807 3,982
Property and equipment, net......................... 62,241 62,294
Goodwill and other intangible assets, net........... 16,781 151,043
Other assets........................................ 71,230 104,049
----------- -----------
Total assets.................................... $ 832,840 $ 938,751
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 34,520 $ 39,328
Accrued expenses.................................. 92,742 71,247
Accrued compensation and severance................ 81,856 58,677
Deferred revenue.................................. 145,376 194,867
Income taxes...................................... 65,048 51,050
----------- -----------
Total current liabilities....................... 419,542 415,169
Other liabilities................................... 54,081 47,687
Deferred income taxes............................... 31,780 31,648
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares
authorized; none issued.......................... -- --
Common stock, $0.01 par value; 350,000 shares
authorized; 272,277 shares issued for both
periods.......................................... 2,723 2,723
Additional paid-in capital........................ 1,528,647 1,554,020
Treasury stock, at cost, 4,135 and 3,020 shares... (43,134) (39,859)
Accumulated deficit............................... (1,157,628) (1,068,759)
Accumulated other comprehensive loss (Note 4)..... (3,171) (3,878)
----------- -----------
Total stockholders' equity...................... 327,437 444,247
----------- -----------
Total liabilities and stockholders' equity...... $ 832,840 $ 938,751
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three months ended Nine months ended
----------------- ------------------
July 4, July 3, July 4, July 3,
1998 1999 1998 1999
-------- -------- -------- --------
Revenue:
License................................. $141,239 $132,189 $462,054 $409,394
Service................................. 103,762 131,951 305,886 368,111
-------- -------- -------- --------
Total revenue......................... 245,001 264,140 767,940 777,505
-------- -------- -------- --------
Costs and expenses:
Cost of license revenue................. 2,914 3,373 10,876 10,509
Cost of service revenue................. 34,638 50,064 105,068 139,347
Sales and marketing..................... 103,313 105,046 292,331 304,319
Research and development................ 24,130 32,439 70,091 91,922
General and administrative.............. 14,746 14,974 42,514 46,786
Amortization of goodwill and other
intangible assets...................... 443 8,497 1,801 14,591
Acquisition and nonrecurring charges
(Note 2)............................... 28,966 -- 105,766 53,347
-------- -------- -------- --------
Total costs and expenses.............. 209,150 214,393 628,447 660,821
-------- -------- -------- --------
Operating income.......................... 35,851 49,747 139,493 116,684
Other income (expense), net............... 2,114 852 (4,136) 3,524
-------- -------- -------- --------
Income before income taxes and
extraordinary loss....................... 37,965 50,599 135,357 120,208
Provision for income taxes................ 22,756 15,180 74,940 44,249
-------- -------- -------- --------
Income before extraordinary loss.......... 15,209 35,419 60,417 75,959
Extraordinary loss, net of income tax
benefit of $2,183........................ -- -- (19,017) --
-------- -------- -------- --------
Net income................................ $ 15,209 $ 35,419 $ 41,400 $ 75,959
======== ======== ======== ========
Earnings per share (Note 3):
Basic:
Income before extraordinary loss...... $ 0.06 $ 0.13 $ 0.22 $ 0.28
Extraordinary loss.................... -- -- (0.07) --
-------- -------- -------- --------
Net income............................ $ 0.06 $ 0.13 $ 0.15 $ 0.28
======== ======== ======== ========
Diluted:
Income before extraordinary loss...... $ 0.05 $ 0.13 $ 0.22 $ 0.28
Extraordinary loss.................... -- -- (0.07) --
-------- -------- -------- --------
Net income............................ $ 0.05 $ 0.13 $ 0.15 $ 0.28
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended
-------------------
July 4, July 3,
1998 1999
--------- --------
Cash flows from operating activities:
Net income.............................................. $ 41,400 $ 75,959
Adjustments to reconcile net income to net cash flows
from operating activities:
Extraordinary loss on early extinguishment of debt.... 19,017 --
Non-cash portion of nonrecurring charges.............. 12,153 4,693
Depreciation and amortization......................... 20,175 43,658
Deferred income taxes................................. 3,002 --
Charge for purchased in-process research and
development.......................................... 28,966 38,244
Changes in assets and liabilities which provided
(used) cash, net of effects of purchased businesses:
Accounts receivable................................. 10,106 (12,535)
Accounts payable and accrued expenses............... (6,845) (29,539)
Accrued compensation and severance.................. (7,677) (23,809)
Deferred revenue.................................... 15,927 45,819
Income taxes........................................ 7,298 (13,548)
Other current assets................................ (35,493) (11,991)
Other noncurrent assets and liabilities............. 14,352 (12,429)
--------- --------
Net cash provided by operating activities................. 122,381 104,522
--------- --------
Cash flows from investing activities:
Additions to property and equipment..................... (30,549) (23,534)
Changes in other assets................................. -- (25,233)
Purchases of investments................................ (284,725) (53,754)
Proceeds from sales and maturities of investments....... 450,954 150,487
Payments for acquisition of businesses, net of cash
acquired............................................... (40,599) (73,110)
--------- --------
Net cash provided (used) by investing activities.......... 95,081 (25,144)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 75,810 15,985
Purchases of treasury stock............................. -- (89,968)
Repayment of short-term debt............................ (34,933) --
Repayment of long-term obligations...................... (240,761) --
--------- --------
Net cash used by financing activities..................... (199,884) (73,983)
--------- --------
Elimination of net cash activity of acquired company for
the three months ended December 31, 1997................. 11,567 --
Effect of exchange rate changes on cash................... (3,728) 1,736
--------- --------
Net increase in cash and cash equivalents................. 25,417 7,131
Cash and cash equivalents, beginning of period............ 168,609 205,971
--------- --------
Cash and cash equivalents, end of period.................. $ 194,026 $213,102
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Parametric Technology Corporation and its wholly owned
subsidiaries and have been prepared by us in accordance with generally
accepted accounting principles. Our fiscal year end is September 30. Certain
reclassifications have been made to the prior year's statements to conform
with the fiscal 1999 presentation. The year end consolidated balance sheet was
derived from our audited financial statements. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of our financial position, results of operations, and
cash flows at the dates and for the periods indicated. While we believe that
the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on Form
10-K for the fiscal year ended September 30, 1998. The results of operations
for the three and nine month periods ended July 3, 1999 are not necessarily
indicative of the results expected for the remainder of the fiscal year.
2. ACQUISITIONS AND NONRECURRING CHARGES
ACQUISTIONS
Computervision. In January 1998, we acquired Computervision Corporation by
issuing 11.6 million shares of common stock in exchange for all of the
outstanding common stock of Computervision. The merger was accounted for as a
pooling of interests. In connection with the Computervision merger, we
incurred a nonrecurring charge of $76.8 million for merger-related
integration, consolidation, and transaction costs in the second quarter of
1998. For additional information see Note B to the consolidated financial
statements of our Annual Report on Form 10-K for the year ended September 30,
1998.
ICEM. In June 1998, we acquired ICEM Technologies, a division of Control Data
Systems, Inc. for approximately $41.0 million in cash. The acquisition was
accounted for as a purchase. As part of the acquisition, we recorded a
nonrecurring charge of $28.9 million for purchased in-process research and
development (R&D). For additional information see Note B to the consolidated
financial statements of our Annual Report on Form 10-K for the year ended
September 30, 1998.
InPart. In October 1998, we acquired all of the outstanding stock of InPart
Design, Inc. by issuing 2.0 million shares of our common stock. In addition,
we reserved 386,000 shares of common stock for outstanding InPart options
assumed. Based upon certain conditions, we may be obligated to issue up to
$15.0 million worth of additional shares in September 1999. The acquisition
was accounted for as a purchase. Accordingly, we allocated the purchase price
of $38.1 million to the assets acquired and liabilities assumed based on our
estimates of fair value. The values assigned included $741,000 for net
liabilities assumed, $10.6 million for purchased in-process R&D, $4.1 million
for developed technology, $1.1 million for customer lists, $200,000 for an
assembled workforce, and $300,000 for trade names. The excess purchase price
over the amounts allocated to assets acquired and liabilities assumed was
recorded as goodwill of $22.5 million.
Division. In March 1999, we acquired Division Group plc for $37.3 million in
cash, $2.8 million of which was paid in the third quarter of 1999, and 591,000
shares of our common stock. The acquisition was accounted for as a purchase.
Accordingly, we allocated the purchase price of $48.1 million to the assets
acquired and liabilities assumed based on our estimates of fair value. The
values assigned included $555,000 for net assets acquired, $9.0 million for
purchased in-process R&D, $3.3 million for developed technology, $2.0 million
for customer lists, $970,000 for an assembled workforce, and $2.5 million for
trade names. The excess purchase price over the amounts allocated to assets
acquired and liabilities assumed was recorded as goodwill of $29.8 million.
4
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
auxilium. In March 1999, we acquired all of the outstanding stock of auxilium
inc. in exchange for 2.6 million shares of our common stock and $39.4 million
in cash. In addition, we reserved 1.1 million shares of common stock for
outstanding auxilium options assumed. The acquisition was accounted for as a
purchase. Accordingly, we allocated the purchase price of $101.7 million to
the assets acquired and liabilities assumed based on our estimates of fair
value. The values assigned included $182,000 for net liabilities assumed,
$18.6 million for purchased in-process R&D, $700,000 for developed technology,
$5.0 million for customer lists, $630,000 for an assembled workforce, and $6.0
million for trade names. The excess purchase price over the amounts allocated
to assets acquired and liabilities assumed was recorded as goodwill of $70.9
million.
The operating results of ICEM, InPart, Division, and auxilium have been
included in our results of operations from the date of each acquisition. Our
purchases of ICEM, InPart, Division, and auxilium did not require the
presentation of pro forma information.
In the opinion of management, the purchased in-process R&D for the
acquisitions of InPart, Division, and auxilium had not yet reached
technological feasibility and had no alternative future use. Accordingly, we
recorded nonrecurring charges of $10.6 million in the first quarter of 1999
and $27.6 million in the second quarter of 1999. The values assigned to
purchased in-process R&D, which were calculated pursuant to the Securities and
Exchange Commission's recent guidance regarding in-process R&D allocations,
were determined by identifying research projects for which technological
feasibility had not been established. The values of the purchased in-process
R&D were determined by estimating the stage of completion, including
consideration of the complexity of the work completed, the costs incurred and
the projected cost to complete, the contribution of any core technology and
other aquired assets, and the projected product introduction dates, estimating
the resulting net cash flows from the products developed, and discounting the
net cash flows back to their present value. The discount rates used included a
factor that took into account the uncertainty surrounding the successful
development of the purchased in-process technology for each acquisition. If
these projects are not successfully developed, future revenue and
profitability may be adversely affected. Additionally, the value of other
intangible assets acquired, which aggregated $150.0 million, may become
impaired.
NONRECURRING CHARGES
Sales Force Reorganizations. During the first quarter of 1999, we reorganized
our sales force to provide a more focused approach to the unique product and
service requirements of our customers. In connection with this action, we
incurred a restructuring charge of $3.2 million for the severance and
termination benefits of approximately 170 people who had been terminated
during the first quarter of 1999 in accordance with management's plan. Of the
$3.2 million charge, $2.6 million was paid during the first quarter of 1999
and the remainder was paid during the second quarter of 1999. During the
second quarter of 1999, we incurred a restructuring charge of $5.8 million for
the severance and termination benefits of approximately 150 people primarily
in connection with the integration of our sales and related support groups. Of
the $5.8 million charge, $3.4 million was paid during third quarter of 1999.
We expect to pay the remaining amounts in the fourth quarter of 1999.
Facility Consolidation and Asset Impairment. During the second quarter of
1999, we incurred a restructuring charge of $1.4 million for the consolidation
of certain excess leased facilities. Also, in the second quarter we recorded
an impairment loss of $4.7 million on certain intangible assets related to our
industrial design activities. Due to recent acquisitions and the development
of new technology, the carrying value of these assets was impaired.
5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS
is calculated by dividing net income by the weighted average number of shares
outstanding plus the dilutive effect of outstanding stock options using the
"treasury stock" method and other dilutive potential shares. The following
table presents the calculation for both basic and diluted EPS:
Three months ended Nine months ended
------------------- -----------------
July 4, July 3, July 4, July 3,
1998 1999 1998 1999
--------- --------- -------- --------
(in thousands, except per share data)
Net income............................ $ 15,209 $ 35,419 $ 41,400 $ 75,959
========= ========= ======== ========
Weighted average shares outstanding... 271,475 270,019 269,500 268,772
Dilutive effect of employee stock
options.............................. 11,563 4,503 10,042 5,767
Contingently issuable shares related
to InPart acquisition................ -- 821 -- 821
--------- --------- -------- --------
Diluted shares outstanding............ 283,038 275,343 279,542 275,360
========= ========= ======== ========
Basic EPS............................. $ 0.06 $ 0.13 $ 0.15 $ 0.28
Diluted EPS........................... $ 0.05 $ 0.13 $ 0.15 $ 0.28
Options to purchase 2.0 million and 4.4 million shares for the third quarter
and first nine months of 1998, and 20.5 million and 18.2 million shares for
the third quarter and first nine months of 1999, were outstanding but were
excluded from the computation of diluted shares outstanding because the price
of the options was greater than the average market price of the common stock
for the period reported.
4. COMPREHENSIVE INCOME
Effective October 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires presentation
of the components of comprehensive income, including unrealized gains and
losses on investments, foreign currency translation adjustments, and minimum
pension liability adjustments. Our total comprehensive income was $12.3
million and $34.1 million for the third quarter of 1998 and 1999, and $38.6
million and $75.2 million for the first nine months of 1998 and 1999,
respectively.
5. NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides
guidance on applying generally accepted accounting principles on recognizing
revenue in software transactions. Certain provisions of SOP 97-2 have been
deferred by SOP 98-4 and SOP 98-9. We adopted SOP 97-2 during the first
quarter of 1999. The adoption of this statement did not have a material effect
on our revenue recognition policies or on our results of operations.
Additionally, we anticipate that the adoption of the deferred provisions of
this statement will not have a material effect on our results of operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our Company
Parametric Technology Corporation develops, markets, and supports a
comprehensive suite of integrated product development and information
management software. Our mechanical design automation product family automates
product development from conceptual design through production. Our enterprise
information management solutions accelerate the flow of product data from
engineering to other critical areas of an enterprise. Our solutions are
complemented by the strength and experience of our professional services
organization, which provides training, consulting, and support to customers
worldwide.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that
describe our anticipated financial results and growth based on our plans and
assumptions. Important information about the basis for these plans and
assumptions and certain factors that may cause our actual results to differ
materially from these statements are set forth below and in Important Risk
Factors Affecting Results which is included as Exhibit 99.1 to our Quarterly
Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated
herein by reference. Certain of these factors include: our ability to realize
revenue from the business opportunities in our most recently ended quarter
which we are continuing to pursue; market acceptance of the Windchill family
of products and the success of our Windchill sales efforts; the success of our
sales force reorganization initiatives, including Rand's success with sales to
smaller customers; our ability to compete with low-priced mechanical design
products and to maintain our level of market penetration for these products;
market reaction to the pricing and packaging of the Pro/ENGINEER(R) product
line; and our ability to develop and deliver new products and services that
keep pace with developments in technology and meet customer requirements.
Results of Operations
The following is an overview of our results of operations:
. Total revenue was $264.1 million for the third quarter of 1999 compared to
$245.0 million for the third quarter of 1998. Total revenue was $777.5
million for the first nine months of 1999 compared to $767.9 million for
the comparable period of 1998.
. Our year-over-year third quarter revenue increased 8%, reflecting a 6%
decrease in software license revenue offset by a 27% increase in service
revenue. Our year-over-year nine month revenue increased 1%, reflecting an
11% decrease in software license revenue offset by a 20% increase in
service revenue.
. Net income was $35.4 million for the third quarter of 1999 compared to
$15.2 million for the same period in 1998. For the first nine months of
1999 net income was $76.0 million compared to $41.4 million for the same
period in 1998.
. Pro forma net income, which excludes amortization of intangible assets,
acquisition and nonrecurring charges, and extraordinary items, was $42.9
million and $44.5 million for the third quarter of 1999 and 1998, and
$133.7 million and $153.5 million for the first nine months of 1999 and
1998, respectively.
7
The following table shows certain consolidated financial data as a percentage
of our total revenue for the third quarter and nine months of 1998 and 1999.
Three months ended Nine months ended
---------------------- --------------------
July 4, July 3, July 4, July 3,
1998 1999 1998 1999
--------- --------- -------- --------
Revenue:
License................ 58% 50% 60% 53%
Service................ 42 50 40 47
--------- --------- -------- --------
Total revenue............ 100 100 100 100
Costs and expenses:
Cost of license
revenue............... 1 1 1 1
Cost of service
revenue............... 14 19 14 18
Sales and marketing.... 42 40 38 39
Research and
development........... 10 12 9 12
General and
administrative........ 6 6 6 6
Amortization of
goodwill and other
intangible assets..... -- 3 -- 2
Acquisition and
nonrecurring charges.. 12 -- 14 7
--------- --------- -------- --------
Total costs and expenses. 85 81 82 85
--------- --------- -------- --------
Operating income......... 15 19 18 15
Other income (expense),
net..................... -- -- (1) 1
--------- --------- -------- --------
Income before income
taxes and extraordinary
loss.................... 15 19 17 16
Provision for income
taxes................... 9 6 10 6
--------- --------- -------- --------
Income before
extraordinary loss...... 6 13 7 10
Extraordinary loss....... -- -- (2) --
--------- --------- -------- --------
Net income............... 6% 13% 5% 10%
========= ========= ======== ========
Pro forma---excluding
amortization of
intangible assets,
acquisition and
nonrecurring charges,
and extraordinary loss:
Operating income....... 27% 22% 32% 24%
Net income............. 18% 16% 20% 17%
REVENUE. We derived our revenue primarily from software used in the mechanical
segment of the computer-aided design, manufacturing, and engineering industry.
Revenue from our enterprise information management product line, Windchill,
reached 10% of our total revenue for the third quarter of 1999. Overall,
license revenue decreased $9.1 million for the third quarter of 1999 compared
to the third quarter of 1998 and $52.7 million for the first nine months of
1999 compared to the same period in 1998. Several factors contributed to this
decrease, including the following. In August 1998 we repackaged and repriced
our core Pro/ENGINEER product line. The average selling price of this software
decreased by 17% for the third quarter of 1999 and 19% for the first nine
months of 1999 from the comparable 1998 periods due primarily to the repricing
and repackaging. Product unit sales increased 5% for the third quarter of 1999
and for the first nine months of 1999 compared to the same periods of 1998;
however, this increase was not sufficient to offset the impact of the decrease
in the average price of this software. In addition, we reorganized portions of
our sales force during the first nine months of 1999 in order to move to a
more strategic, solutions-oriented selling approach. This selling approach has
to date resulted in longer and less predictable sales cycles. The disruption
in our sales force caused by the reorganization resulted in lower sales
productivity for the third quarter and first nine months of 1999 compared to
the same period in 1998. Also, in October 1998, Rand A Technology Corporation
became our exclusive distributor to small businesses in the U.S. and Europe,
and, as described below, its performance to date has been disappointing.
Our service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. Service revenue,
which has a lower gross profit margin than license revenue, accounted
8
for 50% of our overall revenue for the third quarter of 1999. Service revenue
increased $28.2 million for the third quarter of 1999 compared to the third
quarter of 1998, and increased $62.2 million for the first nine months of 1999
compared to the first nine months of 1998. These increases are primarily the
result of growth in our installed customer base and increased training and
consulting services performed for these customers.
We derived 58% and 56% of our total revenue from sales to international
customers for the third quarter of 1998 and 1999, respectively. For the first
nine months of 1998 and 1999, we derived 56% and 58% of our revenue from sales
to international customers, respectively.
[GRAPH APPEARS HERE]
[bar chart depicting Revenue by Geography:
U.S. Q3 98 - $101.7 million; Q3 99 - $116.7 million
Europe Q3 98 - $104.0 million; Q3 99 - $ 97.5 million
Asia/Pacific Q3 98 - $ 39.3 million; Q3 99 - $ 49.9 million
U.S. First 9 months 98 - $335.3 million; First 9 months 99 - $330.0 million
Europe First 9 months 98 - $310.4 million; First 9 months 99 - $293.0 million
Asia/Pacific First 9 months 98 - $122.3 million; First 9 months 99 - $154.5 million]
Over the past year, we implemented several strategic initiatives designed to
provide a foundation for future growth. These initiatives included the
repricing and repackaging of our Pro/ENGINEER product line that we undertook
in the fourth quarter of 1998; the reorganization of our sales force during
the first nine months of 1999 as part of our transition to a more strategic,
solutions-oriented selling approach; and our investment in the start up of our
Windchill family of enterprise data management solutions. These initiatives,
especially our emphasis on larger, more enterprise-wide, solutions-oriented
sales, have resulted in longer and less predictable sales cycles and, at least
in the short term, increased our dependence on consummating larger
transactions in general. We continue to believe that these initiatives should
lead to future growth, but the timing and magnitude of that growth--and
therefore near-term results--remain uncertain. Our revenue growth and the
level of our total revenue will be affected by the success of this approach
and these initiatives, together with the factors referred to above under
"Forward-Looking Statements."
In the first quarter of 1999, as part of our effort to focus our sales force
on larger accounts, we appointed Rand as our exclusive distributor of
mechanical design products to small businesses (i.e., those with revenues of
$10 million and below). Rand has taken more time than expected to develop its
marketing, sales, and distribution networks, and has faced increased
competition from low-priced products. In the third quarter of 1999, we
expanded the size of Rand's sales opportunities by appointing it as a non-
exclusive distributor for a broader segment of small businesses in the U.S.
and Germany. Providing this broader base of business opportunity should assist
Rand in further developing its networks and growing sales of our products. Our
future results could be adversely affected if Rand is unable to achieve
certain sales levels or if it is unable to make existing and future minimum
quarterly revenue payments.
COSTS AND EXPENSES. Our operating expenses are based on anticipated future
revenue and are relatively fixed for the short term. We are incurring expenses
that would support revenues in excess of current levels in order to implement
our strategic initiatives, particularly as they relate to Windchill products.
Although these expense levels have adversely affected net income, we continue
to believe that these initiatives will provide a foundation for future growth.
COST OF LICENSE REVENUE. Our cost of license revenue consists of costs
associated with reproducing and distributing software and documentation,
royalties, and the amortization of internally developed, capitalized computer
software costs. Cost of license revenue as a percent of license revenue was 2%
and 3% for the third quarters of 1998 and 1999, and 2% and 3% for the first
nine months of 1998 and 1999, respectively.
9
COST OF SERVICE REVENUE. Our cost of service revenue includes costs associated
with training and consulting personnel, such as salaries and related costs and
travel, and costs related to software maintenance, including costs incurred
for customer support personnel and the release of maintenance updates. Cost of
service revenue as a percent of service revenue was 33% and 38% for the third
quarter of 1998 and 1999, and 34% and 38% for the first nine months of 1998
and 1999, respectively. 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 our installed base.
SALES AND MARKETING. Our sales and marketing expenses primarily include
salaries, sales commissions, travel, and facility costs. These costs have
increased $1.7 million for the third quarter of 1999 and $12.0 million for the
first nine months of 1999, compared to the same periods of 1998, primarily due
to the growth of the Windchill sales force, partially offset by the sales
force reorganizations. Total sales and marketing employees were 2,512 at July
4, 1998, 2,440 at September 30, 1998, and 2,056 at July 3, 1999.
RESEARCH AND DEVELOPMENT. Our research and development expenses consist
principally of salaries and benefits, expenses associated with product
translations, costs of computer equipment used in software development, and
facility expenses. Compared to the third quarter and first nine months of
1998, research and development expenses increased 34% and 31% in the
comparable periods of 1999. This increase is primarily attributable to our
continued investment in the Windchill product line, including our InPart
acquisition in the first quarter of 1999 and the Division and auxilium
acquisitions in the second quarter of 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include
costs of our corporate, finance, information technology, human resources, and
administrative functions. These costs were flat in the third quarter of 1999
compared to the third quarter of 1998 and increased $4.3 million for the first
nine months of 1999 compared to the same period in 1998. These increases
represent our continued investment in information technology and the
integration of acquired companies.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. These costs include the
amortization of intangible assets acquired, including developed technology,
goodwill, customer lists, assembled work force, and trade names. The increased
amortization of $8.1 million and $12.8 million for the third quarter and first
nine months of 1999 compared to the same periods in 1998 resulted from our
recent acquisitions.
ACQUISITION AND NONRECURRING CHARGES.
ACQUISITIONS:
Computervision. In January 1998, we acquired Computervision Corporation by
issuing 11.6 million shares of common stock in exchange for all of the
outstanding common stock of Computervision. The merger was accounted for as a
pooling of interests. In connection with the Computervision merger, we
incurred a nonrecurring charge of $76.8 million for merger-related
integration, consolidation, and transaction costs in the second quarter of
1998. The charge included $18.1 million of severance and termination benefits
related to the elimination of approximately 450 positions, $12.7 million for
the write-off of assets, $8.2 million for transaction costs, $17.4 million of
contract costs associated with revised estimates, $7.2 million for the closing
of leased facilities, and $13.2 million of lease termination and other costs.
For additional information see Note B to the consolidated financial statements
of our Annual Report on Form 10-K for the year ended September 30, 1998.
ICEM. In June 1998, we acquired ICEM Technologies, a division of Control Data
Systems, Inc. for approximately $41.0 million in cash. The acquisition was
accounted for as a purchase. As part of the acquisition, we recorded a
nonrecurring charge of $28.9 million for purchased in-process research and
development (R&D). For additional information see Note B to the consolidated
financial statements of our Annual Report on Form 10-K for the year ended
September 30, 1998.
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InPart. In October 1998, we purchased InPart Design, Inc., a developer of
DesignSuite(TM), a web-based repository of 3D mechanical component data, as
well as the developer of enterprise software applications focused on web-based
component and supplier management, which was founded in 1996. We allocated the
purchase price of $38.1 million to the assets acquired and liabilities assumed
based on our estimates of fair value. The values assigned included $741,000
for net liabilities assumed, $10.6 million for purchased in-process R&D, $4.1
million for developed technology, $1.1 million for customer lists, $200,000
for an assembled workforce, and $300,000 for trade names. The excess purchase
price over the amounts allocated to assets acquired and liabilities assumed
was recorded as goodwill of $22.5 million. Based upon certain conditions, we
may be obligated to issue up to $15.0 million worth of additional shares in
September 1999.
Division. In March 1999, we purchased Division Group plc, a developer of
enterprise product data visualization, simulation, and integration tools. We
allocated the purchase price of $48.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The values assigned
included $555,000 for net assets acquired, $9.0 million for purchased in-
process R&D, $3.3 million for developed technology, $2.0 million for customer
lists, $970,000 for an assembled workforce, and $2.5 million for trade names.
The excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $29.8 million.
auxilium. In March 1999, we purchased auxilium inc., a developer of web-based
software tools for the integration of legacy systems, databases, and
applications, and founded in 1997. We allocated the purchase price of $101.7
million to the assets acquired and liabilities assumed based on our estimates
of fair value. The values assigned included $182,000 for net liabilities
assumed, $18.6 million for purchased in-process R&D, $700,000 for developed
technology, $5.0 million for customer lists, $630,000 for an assembled
workforce, and $6.0 million for trade names. The excess purchase price over
the amounts allocated to assets acquired and liabilities assumed was recorded
as goodwill of $70.9 million.
In the opinion of management, the purchased in-process R&D for the
acquisitions of InPart, Division, and auxilium had not yet reached
technological feasibility and had no alternative future use. Accordingly, we
recorded nonrecurring charges of $10.6 million in the first quarter of 1999
and $27.6 million in the second quarter of 1999. The values assigned to
purchased in-process R&D, which were calculated pursuant to the Securities and
Exchange Commission's recent guidance regarding in-process R&D allocations,
were determined by identifying research projects for which technological
feasibility had not been established. The values of the purchased in-process
R&D were determined by estimating the stage of completion, including
consideration of the complexity of the work completed, the costs incurred and
the projected costs to complete, the contribution of any core technology and
other acquired assets, and the projected product introduction dates,
estimating the resulting net cash flows from the products developed, and
discounting the net cash flows back to their present value. For each
acquisition, the estimates were based on the following major assumptions:
InPart:
. Revenue was estimated to begin late in 1999 and to grow based on industry
growth rates and Inpart's specific product offerings.
. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 22% to 11% based on
InPart's average historical cost of revenue and reflect future economies of
scale.
. Selling, general, and administrative expenses, as a percentage of revenue,
was estimated to be 99% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40% thereafter.
These amounts were based on industry average historical selling, general,
and administrative costs.
Division:
. Revenue was based on industry growth rates and Division's specific product
offerings.
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. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be 15% based on Division's average
historical cost of revenue.
. Selling, general, and administrative expenses, as a percentage of revenue,
was estimated to be 47% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 41% thereafter.
These amounts were based on industry average historical selling, general,
and administrative costs.
auxilium:
. Revenue was based on industry growth rates and auxilium's specific product
offerings.
. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be between 32% and 26% based on
auxilium's average historical cost of revenue.
. Selling, general, and administrative expenses, as a percentage of revenue,
was estimated to be 53% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40% thereafter.
These amounts were based on industry average historical selling, general,
and administrative costs.
The net cash flows also considered net working capital requirements and
capital spending needs related to the purchased in-process technology. The
rates used to discount net cash flows for the purchased in-process technology
to its present value for the Inpart (28%), Division (25%), and auxilium (26%
to 30%) acquisitions were based on the weighted average cost of capital and
took into account the uncertainty surrounding the successful development of
the purchased in-process technology for each acquisition. If these projects
are not successfully developed, future revenue and profitability may be
adversely affected and the value of other intangible assets acquired may
become impaired.
NONRECURRING CHARGES:
Sales Force Reorganizations. During the first quarter of 1999, we reorganized
our sales force to provide a more focused approach to the unique product and
service requirements of our customers. In connection with this action, we
incurred a restructuring charge of $3.2 million for the severance and
termination benefits of approximately 170 people who had been terminated
during the first quarter of 1999 in accordance with management's plans. Of the
$3.2 million charge, $2.6 million was paid during the first quarter of 1999
and the remainder was paid during the second quarter of 1999. During the
second quarter of 1999, we incurred a restructuring charge of $5.8 million for
the severance and termination benefits of approximately 150 people primarily
in connection with the integration of our sales and related support groups. Of
the $5.8 million charge, $3.4 million was paid during the third quarter of
1999. We expect to pay the remaining amounts in the fourth quarter of 1999.
Facility Consolidation and Asset Impairment. During the second quarter of
1999, we incurred a restructuring charge of $1.4 million for the consolidation
of certain excess leased facilities. Also, in the second quarter we recorded
an impairment loss of $4.7 million on certain intangible assets related to our
industrial design activities. Due to recent acquisitions and the development
of new technology, the carrying value of these assets was impaired.
OTHER INCOME (EXPENSE). Our other income (expense) includes interest income,
interest expense, costs of hedging contracts, the gain or loss from the
translation of results for subsidiaries for which the U.S. dollar is the
functional currency, and other charges incurred in connection with financing
customer contracts. For the third quarter of 1998, we reported other income of
$2.1 million compared to other income of $852,000 for the third quarter of
1999. The decrease is primarily the result of a decrease in interest income
due to invested balances being on average approximately $150 million lower
during 1999 than 1998. For the first nine months of 1998, we reported other
expense of $4.1 million compared to other income of $3.5 million for the
comparable period of 1999. This change is primarily due to the elimination of
interest expense on the Computervision debt that was paid in the second
quarter of 1998.
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INCOME TAXES. Our effective tax rate for the first nine months of 1998 was 55%
compared with 37% for the corresponding period in 1999. The difference between
our effective tax rate and the statutory federal income tax rate of 35% was
primarily due to the charges for purchased in-process R&D in the first and
second quarters of 1999 and losses of Computervision in the first quarter of
1998, neither of which were deductible for tax purposes. On a pro forma basis,
which excludes amortization of intangible assets, acquisition and nonrecurring
charges, and extraordinary items, our effective tax rate for the first nine
months of 1999 was 30%.
EXTRAORDINARY LOSS. In connection with the Computervision merger, we assumed a
revolving note payable and long-term debt obligations. During the second
quarter of 1998, we paid $275.7 million for settlement of the outstanding
note, debt obligations, accrued interest, and related fees, and we incurred an
extraordinary after-tax loss of $19.0 million related to the write-off of
deferred financing costs and other prepayment costs associated with this debt.
EMPLOYEES. The number of worldwide employees was 4,899 at July 4, 1998
compared with 4,911 at September 30, 1998, and 5,038 at July 3, 1999. The
increase over the prior year was a result of growth in our services
organization and in the research and development group, primarily through
acquisitions.
Liquidity and Capital Resources
Our operating activities, the proceeds from our issuance of stock under stock
plans, and existing cash and investments provided sufficient resources to fund
fluctuations in our employee base, capital assets needs, stock repurchases,
acquisitions, and financing needs for the first nine months of 1998 and 1999.
As of July 3, 1999, cash and investments totaled $330.8 million, down from
$426.2 million at September 30, 1998. The primary reasons for the decrease in
cash and investments during the first nine months of 1999 were the repurchase
of $90.0 million of common stock and the $73.1 million of payments for
acquisitions, partially offset by net cash provided by operating activities.
Cash generated from operating activities was $122.4 million for the first nine
months of 1998, compared to $104.5 million for the first nine months of 1999,
net of cash expenditures for nonrecurring charges of $29.2 million in the
first nine months of 1999.
In the first nine months of 1998 and 1999, we acquired $30.5 million and $23.5
million, respectively, of capital equipment consisting principally of computer
equipment, software, and office equipment. In the third quarter of 1999, we
purchased a software productivity tool for the Pro/ENGINEER product line from
Rand for $20.0 million.
We used net cash for financing activities during the first nine months of 1998
to repay $275.7 million of Computervision debt and related interest and fees,
offset by $75.8 million from the issuance of common stock under our stock
plans. We used net cash for financing activities for the first nine months of
1999 to repurchase $90.0 million of common stock, offset by $16.0 million of
proceeds from the issuance of common stock under our stock plans. Through July
3, 1999, we had repurchased 11.0 million of the 20.0 million shares authorized
by the Board of Directors to be repurchased.
We believe that existing cash and investments together with cash generated
from operations and the issuance of common stock under our stock plans will be
sufficient to meet our requirements for working capital, capital expenditures,
and financing through at least the next twelve months.
New Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be
required to comply with certain changes in accounting rules and regulations.
See Note 5 to the unaudited consolidated financial statements included in this
Form 10-Q.
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Year 2000 Computer Systems Compliance
Concerns have been widely expressed regarding the inability of certain
computer programs to properly process certain date information, particularly
beyond the year 1999. These concerns focus on the impact of the Year 2000
problem on business operations and the potential costs associated with
identifying and addressing the problem.
State of Readiness. We have developed a Year 2000 readiness plan focusing on:
(i) assessing the readiness of our product offerings, internal business
systems, and major vendors and suppliers; (ii); addressing known risks; and
(iii) planning and budgeting for reasonably likely contingencies.
We have completed testing our current product offerings for Year 2000
compliance. Based on our review to date, we believe that our current product
offerings are Year 2000-compliant. Some limited testing of newly acquired
products is ongoing. We have conducted only limited testing of products that
are no longer offered, and thus the Year 2000 compliance of such products is
generally not known. Many of these untested products are previous releases of
current offerings. Our customers can upgrade many of these products to achieve
Year 2000 compliance.
We are also in the process of reviewing and upgrading our internal information
technology and business systems, both domestically and internationally, to
ensure Year 2000 readiness. This process is complete with respect to the
majority of our mission critical systems. We expect to continue testing our
internal systems and to undertake necessary corrective measures throughout
calendar 1999.
Finally, we have commenced a program to survey the Year 2000 readiness of our
major vendors and suppliers, with a particular focus on the Year 2000
readiness of our mission critical vendors and suppliers. This process is
complete with respect to the majority of our mission critical vendors and
suppliers. We expect to continue our survey program through out calendar 1999
and where we believe that a particular vendor or supplier poses unacceptable
Year 2000 risks, we will identify an alternative supply source.
Cost of Year 2000 Compliance. Costs incurred in our Year 2000 compliance
effort include the allocation of personnel to testing our products and systems
as well as to upgrading internal systems. During the third quarter of 1999, we
incurred costs of approximately $500,000, and we estimate that another $1.0-
2.0 million may be spent on our compliance project. Costs have been and will
be expensed as incurred. While our compliance evaluation and remediation
project is not yet complete, we do not at this time foresee a material impact
on our business or operating results from the Year 2000 problem. We cannot, of
course, predict the nature or materiality of the impact on our operations or
operating results of Year 2000 disruption by parties over whom we have no
control. Furthermore, the purchasing patterns of our customers or potential
customers may be affected by Year 2000 issues if they must expend significant
resources to correct their own systems. As a result they may have fewer funds
available to purchase our products and services.
Risk of Year 2000 Issues and Contingency Plans. Our worst case Year 2000
scenarios would include: (i) undetected errors or uncorrected defects in our
current product offerings; (ii) corruption of data contained in our internal
information systems; and (iii) the failure of infrastructure services provided
by third parties and government agencies (e.g., electricity, phone/fax
service, internet/email services, etc.). We are in the process of reviewing
our contingency planning in all of these areas and expect the plans to
include, among other things, the availability of support personnel to assist
with customer support issues, manual "work arounds" for internal software
failure, and substitution of systems, if needed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our financial market risk exposure
as described in Management's Discussion and Analysis of Financial Condition
and Results of Operations included as part of Exhibit 13.1 to our 1998 Annual
Report on Form 10-K and incorporated herein by reference.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain class action lawsuits were filed in the fourth quarter of 1998 against
us and certain of our current and former officers and directors in the U.S.
District Court in Massachusetts claiming violations of the federal securities
laws based on alleged misrepresentations regarding our anticipated revenue and
earnings for the third quarter of 1998. The plaintiffs in these lawsuits
joined together to file a consolidated and amended complaint in the second
quarter of 1999. The consolidated and amended complaint seeks unspecified
damages. We believe the claims made in the consolidated and amended complaint
are without merit, and we intend to defend them vigorously. In the third
quarter of 1999 we filed a motion to dismiss the consolidated and amended
complaint. We cannot predict the outcome of this motion or the ultimate
resolution of this action at this time, and there can be no assurance that the
litigation will not have a material adverse impact on our financial condition
or results of operations.
We are also subject to various legal proceedings and claims that arise in the
ordinary course of business. We currently believe that resolving these matters
will not have a material adverse impact on our financial condition or results
of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1* Financial Data Schedule for the period ended July 3, 1999.
99.1 Important Risk Factors Affecting Results (Exhibit 99.1 to our Quarterly
Report on Form 10-Q for the period ended April 3, 1999).
99.2 Annual Report to Stockholders for the fiscal year ended September 30,
1998 (which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated in this Quarterly Report on
Form 10-Q) (Exhibit 13.1 to our 1998 Annual Report on Form 10-K).
- --------
* Indicates document filed herewith.
For our documents incorporated by reference, references are to File No. 0-
18059.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Parametric Technology Corporation
/s/ Edwin J. Gillis
By: _________________________________
Edwin J. Gillis
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 16, 1999
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