-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U2R8Y0WBC9J3KIydrWIfaKYX2jeyk/wMUc8odG8jsKyMUR5ZkgSqyrW99pV4o7Qq SMinPiR93lbzkX5P2RedSw== 0000927016-98-004367.txt : 19981230 0000927016-98-004367.hdr.sgml : 19981230 ACCESSION NUMBER: 0000927016-98-004367 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAMETRIC TECHNOLOGY CORP CENTRAL INDEX KEY: 0000857005 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042866152 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18059 FILM NUMBER: 98777280 BUSINESS ADDRESS: STREET 1: 128 TECHNOLOGY DR CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 7813985000 MAIL ADDRESS: STREET 1: 128 TECHNOLOGY CORP CITY: WALTHAM STATE: MA ZIP: 02154 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-18059 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 02453 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (781) 398-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Securities registered pursuant to Section 12(b) of the Act: Section 12(g) of the Act: None Common Stock, $.01 par value per share (Title of Class) Indicate by check mark whether the registrant has (i) 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 (ii) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of our voting stock held by non-affiliates was approximately $3,802,373,342 on October 31, 1998 based on the last reported sale price of our common stock on the Nasdaq Stock Market on that day. There were 269,423,460 shares of our common stock outstanding on October 31, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of our Annual Report to Stockholders for the fiscal year ended September 30, 1998 (1998 Annual Report to Stockholders) are incorporated by reference into Parts I and II. Portions of the definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held February 11, 1999 (1999 Proxy Statement) are incorporated by reference into Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PARAMETRIC TECHNOLOGY CORPORATION FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I. Item 1. Business............................................................................... 3 Item 2. Properties............................................................................. 6 Item 3. Legal Proceedings...................................................................... 7 Item 4. Submission of Matters to a Vote of Security Holders.................................... 7 Item 4A. Executive Officers of the Registrant................................................... 7 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 8 Item 6. Selected Financial Data................................................................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 8 Item 8. Financial Statements and Supplementary Data............................................ 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 8 PART III. Item 10. Directors and Executive Officers of the Registrant..................................... 8 Item 11. Executive Compensation................................................................. 9 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 9 Item 13. Certain Relationships and Related Transactions......................................... 9 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 9 Signatures...................................................................................... 10
2 IMPORTANT RISK FACTORS REGARDING FUTURE RESULTS Information we provide, including information contained in this Annual Report on Form 10-K, or by our spokespersons from time to time, may contain forward-looking statements about projected financial performance, market and industry segment growth, product development, and commercialization, or other aspects of our future operations. These statements are based on the assumptions and expectations of our management at the time such statements are made. We caution you that our performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to those discussed here, may cause our future results to differ materially from those projected in any forward-looking statement. Important information about these factors and the basis for these assumptions is contained in "Important Risk Factors Affecting Results" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders, which section is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. PART I ITEM 1: BUSINESS GENERAL Parametric Technology Corporation (PTC), incorporated in Massachusetts in 1985, 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. MERGERS AND ACQUISITIONS In January 1998, we merged with Computervision Corporation, a leading provider of product design and development software and services, by issuing 11.6 million shares of our common stock in exchange for all of the outstanding common stock of Computervision. The merger is intended to qualify as a tax- free reorganization and has been accounted for as a pooling of interests. Accordingly, we have restated our consolidated financial statements to include the accounts and operations of Computervision for all years presented in this Annual Report on Form 10-K. Unless otherwise indicated, this discussion and the consolidated financial statements and notes to consolidated financial statements (Notes) reflect that restatement. The Computervision merger strengthened our customer base, particularly in the automotive, aerospace, and shipbuilding industries, and broadened our strategic business relationships with companies such as Airbus Industrie, BMW Rolls-Royce, Fiat, General Electric, Lockheed Martin, Raytheon, and Rolls- Royce Aerospace. The Computervision merger also provided an opportunity for us to expand our data management technology and infrastructure, and added depth and experience to our worldwide professional services organization. In June 1998, we acquired ICEM Technologies, a division of Control Data Systems, Inc., for approximately $41 million in cash. Headquartered in Frankfurt, Germany, ICEM provides advanced surfacing and reverse engineering software tools used by body and styling engineers in the automotive and aerospace industries. We accounted for the acquisition as a purchase, and we included the operating results of ICEM in our results from the date of its acquisition. 3 In October 1998, we acquired all of the outstanding stock of InPart Design, Inc. by issuing 2.4 million shares of common stock. InPart, located in Saratoga, CA, provides a comprehensive library of standard mechanical parts over the Internet that helps manufacturers improve product development cycles and reduce component expenses. Because we share InPart's vision regarding the future of Web-based enterprise applications, the acquisition provided us an opportunity to strengthen our development and technical expertise in this area. We will account for the acquisition as a purchase. PRODUCTS AND SERVICES Mechanical CAD/CAM/CAE (computer-aided design, manufacturing and engineering) software solutions encompass a broad spectrum of engineering disciplines essential to the development of virtually all manufactured products, ranging from consumer products to jet aircraft. Manufacturers compete on the basis of cost, time to market, and product performance criteria, which are significantly affected by the quality and length of the product development process. Our mechanical CAD/CAM/CAE products, including Pro/ENGINEER(R) and CADDS(R)5, and our functional simulation software, Pro/MECHANICA(R), offer high-performance, fully integrated solutions which enable end-users to reduce their time to market and manufacturing costs for their products and to improve product quality by easily evaluating multiple design alternatives. We believe that our mechanical design automation solutions offer better price/performance, greater functionality, and more complete integration of multiple engineering disciplines than other available mechanical CAD/CAM/CAE products. The newest member of the Pro/ENGINEER family, Pro/DESKTOP(TM), is an entry level, Windows(R)-native product development tool. Pro/DESKTOP offers an easily accessible, innovative design system that, integrated with Pro/ENGINEER, provides customers a completely scalable, interoperable suite of associative design solutions that meet the needs of users throughout the product development continuum. This cross-organization suite gives our customers the unique ability to engage a broader range of participants in the product development process and to extend the use of their product information assets throughout the enterprise. Through our acquisition of ICEM Technologies, we have added a premier Class A surface modeling product, ICEM Surf(TM), to our mechanical design automation solutions. ICEM Surf is used in the automotive industry by nearly all major manufacturers for modeling of high-quality, Class A surfaces as well as in the industrial design, tool design, and consumer product markets. In June 1998, we announced that our information management products, Pro/INTRALINK(R) and Optegra(R), would be complemented by Windchill(TM), our new product and process management solution. Windchill uses a unique, Web- centric approach to solving today's mission-critical product and process management challenges. By capitalizing on the inherent benefits of the Web manageability, usability, and low cost implementation Windchill offers customers a significant advantage in their efforts to improve their product differentiation and organizational effectiveness. Windchill delivers a common infrastructure that helps companies achieve sustained competitive advantage through more effective product life cycle management. The Windchill product currently comprises Windchill Foundation(TM), an information framework with a consistent architecture that includes document management, life cycle management, workflow, and vaulting capabilities; Windchill PDM(TM), which includes applications that address product structure, alternate views, and change management; and Windchill Information Modeler(TM), an information modeling and development environment. As a result of our acquisition of InPart Design, Inc., we now offer DesignSuite(TM), an Internet-based library of three dimensional CAD parts. DesignSuite contains two and three dimensional geometry, technical specifications, and component selection software that allows mechanical engineers to download more than 250,000 certified part designs via the Internet, saving valuable time and expense. The technology solutions offered by our mechanical design and information management products are enhanced by our professional services organization (PSO), which is committed to providing the expertise to meet the implementation, education, and technical support requirements of every type of company and user--in eight 4 major support centers and more than 50 educational facilities worldwide. From developing Pro/ENGINEER deployment plans, to creating customized training courses, to implementing Web-based, enterprise-wide, product information systems, our PSO works with customers to accelerate their migration to a more efficient, collaborative development environment. PRODUCT DEVELOPMENT The mechanical CAD/CAM/CAE industry is characterized by rapid technological advances. Our ability to develop new products rapidly is facilitated by the modular structure of our software code, which enables functional capabilities used in existing products to be accessed and utilized by new software modules, thereby reducing the amount of new code required to develop additional products. The major benefit of this approach is rapid development of new functionality. Our Windchill product line expands the breadth of our offerings into enterprise product information and process management. This developing industry is characterized by new technologies, including Internet-centric, Java-based, object-oriented software. The Windchill product depends upon these new technologies as well as certain third-party technologies. We work closely with our customers to define improvements and enhancements to be integrated into our products. Using this approach, customers become involved in the product design process to validate feasibility and to influence functionality early in the product's life-cycle. In addition, our Cooperative Software Program (CSP) provides the mechanism and environment to facilitate the integration of complementary products with our product lines. Through our open software toolkit, CSP members can build tightly integrated solutions that satisfy the various requirements of our customers. Our research and development expenses were $79.6 million in fiscal 1996, $93.3 million in fiscal 1997, and $93.4 million in fiscal 1998. SALES AND MARKETING We derived most of our revenue from products distributed directly to our end-user customers with the remainder offered through third-party distributors. No single customer accounted for more than 10% of our revenue in any of the last three fiscal years. In the fourth quarter of 1998, we initiated a worldwide reorganization of our sales force and PSO. This initiative, which was implemented in October 1998, was designed to refocus our sales and services organizations on major accounts, primary accounts, and Windchill accounts. As part of this initiative, we signed a multi-year agreement with Rand A Technology Corporation (Rand) to become the master distributor of our core products to small businesses. This agreement gives Rand the rights to distribute certain CAD/CAM/CAE products and their related maintenance services to the small business segment throughout North America and Europe. In August 1998, we repackaged and repriced our core Pro/ENGINEER product line. We now offer a base package called Pro/ENGINEER-Foundation which can be augmented with up to 24 functionally defined extensions to accommodate a full range of process automation and complexity requirements from an individual user to an entire enterprise. Information about our foreign and domestic operations and export sales, and the risks thereof, may be found in Note M and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 1998 Annual Report to Stockholders, included in Exhibit 13.1 to this Annual Report on Form 10-K and incorporated herein by reference. 5 COMPETITION There are an increasing number of competitive mechanical CAD/CAM/CAE products. We compete most directly with products developed by Dassault and marketed by Dassault and IBM, products marketed by Unigraphics Solutions, and products developed and marketed by Structural Dynamics Research Corporation. Our Windchill product line expands the breadth of our offerings into enterprise product information and process management. We are a relatively new entrant into this area and may be competing with more mature products that may have an established customer base as well as greater functionality. PROPRIETARY RIGHTS Our software products are proprietary to PTC. We protect our intellectual property rights by relying on copyrights, trademarks, patents, and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, there can be no assurance that the laws of all relevant jurisdictions will afford the same protections to our products and intellectual property as the laws of the United States. The software industry is characterized by frequent litigation regarding copyright, patent, and other intellectual property rights. While we have not, to date, had any significant claims of this type asserted against us, there can be no assurance that someone will not assert such claims against us with respect to existing or future products or that, if asserted, we would prevail in such claims. In the event a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we ultimately prevail. We believe that, due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are more important to establishing and maintaining a technology leadership position within the industry than are the various legal protections surrounding our technology. We believe that our products and technology do not infringe any existing proprietary rights of others, although there can be no assurance that third parties will not assert infringement claims in the future. Parametric Technology Corporation, Pro/ENGINEER, Pro/MECHANICA, Pro/INTRALINK, CADDS, and Optegra are registered trademarks of PTC or our subsidiaries in the United States and/or other countries. Parametric Technology, PTC, the PTC logo, and all product names in the PTC product family are trademarks of PTC or our subsidiaries in the United States and other countries. All other companies and products referenced herein have trademarks or registered trademarks of their respective holders. BACKLOG We generally ship our products within 30 days after acceptance of a customer purchase order and execution of a software license agreement. Accordingly, we do not believe that our backlog at any particular point in time is indicative of future sales levels. EMPLOYEES As of September 30, 1998, we had 4,911 employees, including 2,440 in sales, marketing, and support activities; 1,078 in customer support, training, and consulting; 435 in management, finance, and administration; and 958 in product development. Of these employees, 2,280 were located throughout the United States and 2,631 were located in foreign countries. ITEM 2: PROPERTIES Our executive offices are located in approximately 302,000 square feet of office space in Waltham, Massachusetts. We also lease 229 offices in the United States and internationally through our foreign subsidiaries, predominately as sales and/or support offices and for development work. Of our total 2,146,000 6 square feet of leased facilities, 1,387,000 are located in the U.S. and 759,000 are located outside the U.S. Several of our leased facilities were acquired in our merger with Computervision, including 696,000 square feet of office space in Bedford, Massachusetts. Of the leased facilities acquired in the Computervision merger, approximately 273,000 square feet are vacant. As described in Notes B and H, certain of these facilities have been included in our restructuring provision. We are seeking alternate uses for such facilities including subleasing and early lease terminations. We believe that our facilities are adequate for our present needs, but will continue to evaluate the need for additional space as the requirements of our business change. ITEM 3: LEGAL PROCEEDINGS Certain class action lawsuits were filed in the fourth quarter of fiscal 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 fiscal 1998. These actions seek unspecified damages. We believe the claims are without merit, and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions 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 our results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter of fiscal 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers are:
NAME AGE POSITION ---- --- -------- Steven C. Walske........ 46 Chairman of the Board of Directors and Chief Executive Officer C. Richard Harrison..... 43 President and Chief Operating Officer Edwin J. Gillis......... 50 Executive Vice President, Chief Financial Officer, and Treasurer James P. Baum........... 34 Executive Vice President, Engineering, Research & Development Barry F. Cohen.......... 54 Executive Vice President, Marketing Francis J. Cusick....... 43 Senior Vice President, Finance David R. Friedman....... 37 Vice President, General Counsel, and Clerk James F. Kelliher....... 39 Senior Vice President, Business Development
Mr. Walske has been Chairman of the Board of Directors since August 1994 and Chief Executive Officer and a director since he joined PTC in December 1986. Mr. Walske was President of PTC from December 1986 to August 1994. Mr. Harrison has been President, Chief Operating Officer, and a director since August 1994. Mr. Harrison had served as Senior Vice President of Sales and Distribution from September 1991 until August 1994. Mr. Gillis has been Executive Vice President since October 1996 and Chief Financial Officer and Treasurer since October 1995. Mr. Gillis had served as Senior Vice President of Finance and Administration from October 1995 to September 1996. Prior to joining PTC, Mr. Gillis was Senior Vice President of Finance and Operations and Chief Financial Officer at Lotus Development Corporation from August 1991 until September 1995. Mr. Baum has been Executive Vice President, Engineering, Research & Development since October 1998. Mr. Baum had served as Senior Vice President, Product Development from February 1998 to September 1998, Senior Vice President, Information Technology and Manufacturing Applications from May 1997 to January 1998, Senior Vice President, Product Marketing from December 1996 to April 1997, Vice President, Technical Marketing from October 1995 to November 1996, and Director of Design/Manufacturing Applications from May 1993 to September 1995. 7 Mr. Cohen has been Executive Vice President, Marketing since January 1998. Prior to joining PTC, Mr. Cohen was Senior Vice President, Human Development and Organizational Productivity at Computervision Corporation from November 1993 to January 1998. Mr. Cusick has been Senior Vice President of Finance since November 1998. Prior to joining PTC, Mr. Cusick was Divisional Finance Director at Ascend Communications, Inc. from July 1997 to September 1998 and Corporate Controller at Cascade Communications Corp. from April 1994 to June 1997. Mr. Friedman has served as Vice President, General Counsel, and Clerk since October 1998. Prior to that, Mr. Friedman served as Associate Corporate Counsel from September 1996 to September 1998. Prior to joining PTC, Mr. Friedman was a Partner at the law firm of Palmer and Dodge LLP from January 1994 to August 1996. Mr. Kelliher has been Senior Vice President of Business Development since November 1998. Mr. Kelliher had served as Senior Vice President of Finance from June 1997 to October 1998, Vice President of Finance from December 1994 until June 1997, Director of Corporate Finance from November 1994 to December 1994, and Chief Financial Officer of Europe from May 1993 to November 1994. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to this item may be found in the sections captioned "Quarterly Financial Information" and "Supplemental Financial Information" appearing in our 1998 Annual Report to Stockholders. Such information is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ITEM 6: SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Five Year Summary of Selected Financial Data" appearing in our 1998 Annual Report to Stockholders. Such information is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in our 1998 Annual Report to Stockholders. Such information is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in our 1998 Annual Report to Stockholders. Such information is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item may be found in the consolidated financial statements and the sections captioned "Notes to Consolidated Financial Statements," "Report of Independent Accountants," and "Quarterly Financial Information" appearing in our 1998 Annual Report to Stockholders. Such information is filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to our directors may be found in the section captioned "Election of Directors" appearing in our 1999 Proxy Statement. Such information is incorporated herein by reference. Information with 8 respect to our Executive Officers may be found under the section captioned "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION Information with respect to this item may be found in the sections captioned "Director Compensation" and "Compensation of Executive Officers" appearing in our 1999 Proxy Statement. Such information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the section captioned "Principal Stockholders" appearing in our 1999 Proxy Statement. Such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item may be found under the headings "Certain Business Relationships" and "Compensation Committee Interlocks and Insider Participation" in the section captioned "Compensation of Executive Officers" appearing in our 1999 Proxy Statement. Such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Form 10-K 1. Financial Statements --Consolidated Balance Sheets as of September 30, 1997 and 1998* --Consolidated Statements of Income for the years ended September 30, 1996, 1997, and 1998* --Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1997, and 1998* --Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996, 1997, and 1998* --Notes to Consolidated Financial Statements* --Reports of Independent Accountants for the years ended September 30, 1996**, 1997, and 1998*. 2. Financial Statement Schedules --Reports of Independent Accountants for the years ended September 30, 1996**, 1997, and 1998 --Schedule II--Valuation and Qualifying Accounts --Schedules other than the one listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. 3. Exhibits --As part of this Annual Report on Form 10-K, we hereby file and incorporate by reference the Exhibits listed in the Exhibit Index immediately preceding such Exhibits. (b) Reports on Form 8-K None. (c) Exhibits As part of this Annual Report on Form 10-K, we hereby file the Exhibits listed in the Exhibit Index immediately preceding such Exhibits. (d) Financial Statement Schedules As part of this Annual Report on Form 10-K, we hereby file the financial statement schedule listed in Item 14(a)2 above. - -------- * Referenced information is contained in our 1998 Annual Report to Stockholders, filed as part of Exhibit 13.1 herewith and incorporated herein by reference. ** Report of Arthur Andersen LLP for Computervision Corporation for the year ended December 31, 1996 is filed herewith. 9 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 ON THE 28TH DAY OF DECEMBER, 1998. PARAMETRIC TECHNOLOGY CORPORATION /s/ Steven C. Walske By: _________________________________ STEVEN C. WALSKE CHAIRMAN AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY We, the undersigned officers and directors of Parametric Technology Corporation, hereby severally constitute Edwin J. Gillis and David R. Friedman, Esq., and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below any and all subsequent amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED BELOW.
SIGNATURE TITLE DATE --------- ----- ---- (i) Principal Executive Officer: /s/ Steven C. Walske Chairman and Chief December 28, 1998 ______________________________________ Executive Officer STEVEN C. WALSKE (ii) Principal Financial and Account- ing Officer: /s/ Edwin J. Gillis Executive Vice President, December 28, 1998 ______________________________________ Chief Financial Officer, EDWIN J. GILLIS and Treasurer (iii) Board of Directors: /s/ Steven C. Walske Director December 28, 1998 ______________________________________ STEVEN C. WALSKE /s/ C. Richard Harrison Director December 20, 1998 ______________________________________ C. RICHARD HARRISON /s/ Robert N. Goldman Director December 19, 1998 ______________________________________ ROBERT N. GOLDMAN /s/ Donald K. Grierson Director December 19, 1998 ______________________________________ DONALD K. GRIERSON
10 /s/ Oscar B. Marx, III Director December 19, 1998 ______________________________________ OSCAR B. MARX, III /s/ Michael E. Porter Director December 19, 1998 ______________________________________ MICHAEL E. PORTER /s/ Noel G. Posternak Director December 18, 1998 ______________________________________ NOEL G. POSTERNAK
11 EXHIBIT INDEX
EXHIBIT NUMBER ------- 2.1 --Agreement and Plan of Reorganization dated as of November 3, 1997 by and among PTC, PTC Acquisition Corporation, and Computervision Corporation (filed as Exhibit 2.1 to our Current Report on Form 8-K dated November 4, 1997 and incorporated herein by reference). 3.1(a) --Restated Articles of Organization of PTC (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996 and incorporated herein by reference). 3.1(b) --Articles of Amendment to Restated Articles of Organization (filed as Exhibit 4.1(b) to PTC's Registration Statement on Form S-8 (Registration No. 333-22169) and incorporated herein by reference). 3.2 --By-Laws, as amended and restated, of PTC (filed as Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.1* --Parametric Technology Corporation 1997 Incentive Stock Option Plan (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.2* --Parametric Technology Corporation 1987 Incentive Stock Option Plan of PTC, as amended (filed as Exhibit 10.2 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.3 --Lease dated May 22, 1987 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.4 to PTC's Registration Statement on Form S-1 (Registration No. 33-31620) and incorporated herein by reference). 10.4* --Employment Letter with Steven C. Walske dated October 17, 1986 (filed as Exhibit 10.12 to our Company's Registration Statement on Form S-1 (Registration No. 33-31620) and incorporated herein by reference). 10.5* --Amended and Restated Severance Agreement with Steven C. Walske dated February 13, 1997 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.6 --Lease Amendment No. 1 dated March 10, 1988 by and between PTC and the Trustees of 128 Technology Trust; filed herewith. 10.7 --Lease Amendment No. 2 dated November 9, 1988 by and between PTC and the Trustees of 128 Technology Trust; filed herewith. 10.8 --Lease Amendment No. 3 dated November 8, 1989 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.9 --Lease Amendment No. 4 dated January 21, 1991 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). 10.10* --Parametric Technology Corporation 1992 Director Stock Option Plan, as amended (filed as Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.11 --Lease Amendment No. 5 dated March 6, 1992 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.18 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference). 10.12 --Lease Amendment No. 5A dated November 18, 1992 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.19 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference).
12
EXHIBIT NUMBER ------- 10.13 --Lease Amendment No. 6 dated June 8, 1993 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1993 and incorporated herein by reference). 10.14* --Severance Agreement with Barry F. Cohen dated February 1, 1998 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 1998 and incorporated herein by reference). 10.15* --Amended and Restated Severance Agreement with C. Richard Harrison dated February 13, 1997 (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.16 --Lease Amendment No. 7 dated April 14, 1994 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1994 and incorporated herein by reference). 10.17 --Lease Amendment No. 8 dated July 19, 1995 by and between PTC and the Trustees of 128 Technology Trust (filed as Exhibit 10.23 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference). 10.18* --Amended and Restated Severance Agreement with Edwin J. Gillis dated February 13, 1997 (filed as Exhibit 10. 4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.19* --Parametric Technology Corporation 1996 Directors Stock Option Plan, as amended (filed as Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.20 --Lease Amendment No. 9 dated January 23, 1996 by and between PTC and the Trustees of 128 Technology Trust; filed herewith. 10.21* --Consulting Agreement with Michael E. Porter dated November 17, 1995, (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated herein by reference). 10.22* --Amendment #1 to Consulting Agreement with Michael E. Porter dated May 15, 1997 (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated herein by reference). 10.23* --Amendment #2 to Consulting Agreement with Michael E. Porter dated January 6, 1998 (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 1998 and incorporated herein by reference). 10.24* --Amendment #3 to Consulting Agreement with Michael E. Porter dated July 20, 1998; filed herewith. 10.25 --Lease Amendment No. 10 dated May 10, 1996 by and between PTC and the Trustees of 128 Technology Trust; filed herewith. 10.26 --Lease Amendment No. 11 dated January 24, 1997 by and between PTC and the Trustees of 128 Technology Trust; filed herewith. 10.27* --Computervision Corporation 1992 Stock Option Plan as amended September 15, 1994, April 18, 1995 and December 5, 1996 (filed as Exhibit 10.3 to the Annual Report on Form 10-K of Computervision Corporation for the fiscal year ended December 31, 1996 (File No. 1- 7760/0-20290) and incorporated herein by reference). 10.28 --Amended and Restated Lease Agreement dated as of January 1, 1995 between United Trust Fund Limited Partnership and (filed as Exhibit 10.20 to the Annual Report on Form 10-K of Computervision Corporation for the fiscal year ended December 31, 1995 and incorporated herein by reference).
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EXHIBIT NUMBER ------- 13.1 --Parametric Technology Corporation 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 by reference in this Annual Report on Form 10-K); filed herewith. 21.1 --Subsidiaries of PTC; filed herewith. 23.1 --Report of PricewaterhouseCoopers LLP; filed herewith. 23.2 --Consent of PricewaterhouseCoopers LLP; filed herewith. 23.3 --Report of Arthur Andersen LLP; filed herewith. 23.4 --Consent of Arthur Andersen LLP; filed herewith. 27.1 --Financial Data Schedule for the year ended September 30, 1998; filed herewith. 27.2 --Restated Financial Data Schedule for the years ended September 30, 1996 and 1997; filed herewith. 27.3 --Restated Financial Data Schedule for the quarters ended December 28, 1996 and January 3, 1998; filed herewith.
- -------- * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates. 14 SCHEDULE II PARAMETRIC TECHNOLOGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Column A Column B Column C Column D Column E Additions --------------------- Balance Balance at Charged to Charged to at end beginning costs and other of Description of period expenses accounts Deductions (1) period - ---------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, 1998 Allowance for doubtful accounts $5,887 7,322 - (5,525) $7,684 YEAR ENDED SEPTEMBER 30, 1997 Allowance for doubtful accounts $5,839 1,433 - (1,385) $5,887 YEAR ENDED SEPTEMBER 30, 1996 Allowance for doubtful accounts $6,356 1,616 - (2,133) $5,839
(1) Uncollectible accounts written off, net of recoveries. EX-10.6 2 LEASE AMENDMENT NO. 1 DATED 3/10/88 EXHIBIT 10.6 March 10, 1988 128 TECHNOLOGY CENTER --------------------- OFFICE LEASE ------------ PARAMETRIC TECHNOLOGY CORPORATION --------------------------------- AMENDMENT NO. 1 --------------- Reference is made to the Lease (the "Lease") by and between DOMINIC J. SARACENO, KURT W. SARACENO, AND EDWARD R. WERNER, trustees of the 128 Technology Trust under a Declaration of Trust dated October 12, 1983, recorded in Middlesex County Registry of Deeds Southern District Book 15268 Page 65 (hereinafter "Lessor", which expression shall include its heirs, executors, successors and assigns where the context so admits), and Parametric Technology Corporation a Massachusetts corporation having a principal place of business at 128 Technology Drive, Waltham, Massachusetts 02154 (hereinafter "Lessee", which expression shall include its successors and assigns or executors and administrators where the context so admits). Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For a good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follows: 1. ARTICLE I, REFERENCE DATA, is hereby amended as follows: . NEW AREA: 7,849 Additional Square Feet, as shown on Exhibit A attached. . BASE RENT: $18.00 per square foot for the original space (10,230 square feet). NEW AREA: $17.00 per square foot for the first year, $17.50 per square foot for the second year. . RENT SCHEDULE: 3,000 square feet available March 10, 1988 thru September 9, 1988 - Monthly Rent - $4,250.00 5,000 square feet available September 10, 1988 thru March 9, 1989 - Monthly Rent - $7,083.33 7,849 square feet available March 10, 1989 thru June 30, 1992 - Monthly Rent - $11,446.46 . TERM: The Term for the entire Premises leased is extended to June 30, 1992. . RENT COMMENCEMENT: Upon substantial completion of space. . TERM COMMENCEMENT: March 10, 1988 . LESSEE PARKING: Four (4) assigned parking spaces in the covered area. . TENANT IMPROVEMENTS: Turnkey according the plan dated march 1, 1988. Of the 3,052 rentable square feet shown on the plan, Kurt-Saracen Associates may lease this space to Cortex until March 9, 1989. In all other respects, the terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect and unamended. Lessee acknowledges and agrees that this Amendment shall not be binding upon Lessor until an original of this Amendment, executed by Lessor, is delivered to Lessee. Lessee shall not be entitled to rely on any rights set forth herein until such a fully executed Amendment is delivered to Lessee. Executed as a sealed instrument this 10th day of March, 1988. LESSOR 128 TECHNOLOGY TRUST /s/ Dom J. Saraceno, as Trustee ------------------------------- Dom J. Saraceno, as Trustee aforesaid /s/ Kurt W. Saraceno, as Trustee -------------------------------- Kurt W. Saraceno, as Trustee aforesaid /s/ Edward R. Werner, as Trustee -------------------------------- Edward R. Werner, as Trustee aforesaid LESSEE PARAMETRIC TECHNOLOGY CORPORATION BY /s/ Steven C. Walske -------------------- OFFICE President --------- EX-10.7 3 LEASE AMENDMENT NO. 2 DATED 11/9/88 EXHIBIT 10.7 November 9, 1988 128 TECHNOLOGY CENTER --------------------- OFFICE LEASE ------------ PARAMETRIC TECHNOLOGY CORPORATION --------------------------------- AMENDMENT NO. 2 --------------- Reference is made to the Lease (the "Lease") by and between DOMINIC J. SARACENO, KURT W. SARACENO, and EDWARD R. WERNER, trustees of the 128 Technology Trust under a Declaration of Trust dated October 12, 1983, recorded in Middlesex County Registry of Deeds Southern District Book 15268 Page 65 (hereinafter "Lessor", which expression shall include its heirs, executors, successors and assigns where the context so admits), and Parametric Technology Corporation, a Massachusetts corporation having a principal place of business at 128 Technology Drive, Waltham, Massachusetts 02154 (hereinater "Lessee", which expression shall include its successors and assigns or executors and administrators where the context so admits). Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For a good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follow: 1. ARTICLE 1, REFERENCE DATA, is hereby amended as follows: -------------- . NEW AREA II: 9625 Additional Square Feet, as shown on Exhibit A attached. . BASE RENT: $18.00 per square foot for the new area (9,625 square feet). . RENT SCHEDULE: 2,125 square feet. Rent Commencement: November 9, 1988. Annual Rent: $38,250.00. Monthly Rent: $3,187.50 2,500 square feet. Rent Commencement: June 1, 1989. Annual Rent: $45,000.00 Monthly Rent: $3,750.00 2,500 square feet Rent Commencement: September 1, 1989 Annual Rent: $45,000 Monthly Rent: $3,750.00 . TERM: The Term for the entire Premises leased (27,704 square feet) is extended to June 30, 1993. ------ . LESSEE PARKING: Six (6) assigned parking spaces in the covered area. . TENANT IMPROVEMENTS: Space will be taken as shown on Exhibit A. In all other respects, by amending Article I with the corresponding changes to Articles III and IV, the terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect and unamended. Lessee acknowledges and agrees that this Amendment shall not be binding upon Lessor until an original of this Amendment, executed by Lessor, is delivered to Lessee. Lessee shall not be entitled to rely on any rights set forth herein until such a fully executed Amendment is delivered to Lessee. Executed as a sealed instrument this 9th day of November, 1988. LESSOR 128 TECHNOLOGY TRUST /s/ Dom J. Saraceno ------------------------------------- Dom J. Saraceno, as Trustee aforesaid /s/ Kurt W. Saraceno -------------------------------------- Kurt W. Saraceno, as Trustee aforesaid /s/ Edward R. Werner -------------------------------------- Edward R. Werner, as Trustee aforesaid LESSEE PARAMETRIC TECHNOLOGY CORPORATION BY: /s/ Steven C. Walske OFFICE: President EX-10.20 4 LEASE AMENDMENT NO. 9 DATED 1/23/96 EXHIBIT 10.20 128 TECHNOLOGY CENTER PARAMETRIC TECHNOLOGY CORPORATION AMENDMENT NO. 9 Reference is made to the original Lease dated June 1, 1987 and subsequently amended March 10, 1988, November 9, 1988, November 8, 1989, January 21, 1991, March 10, 1992, November 25, 1992, June 8, 1993, April 14, 1994 and July 19, 1995 collectively (the "Lease") by and between 128 Technology Trust under a Declaration of Trust dated October 12. 1983 recorded in Middlesex County Registry of Deeds Southern District, Book 15268, Page 65 (hereinafter "Lessor", which expression shall include its heirs, executors, successors, and assigns where the context so admits), and Parametric Technology Corporation, a Massachusetts corporation having a principal place of business at 128 Technology Drive, Waltham, Massachusetts 02154 (hereinafter "Lessee", which expression shall include its successors and assigns or executors and administrators where the context so admits). Term defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For good and valuable consideration, the receipt of legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follows: 1. RENTABLE AREA OF THE DEMISED PREMISES: 168,992 SQUARE FEET 2. RENTABLE AREA OF THE BUILDING: 217,500 SQUARE FEET 3. The Base Rent for the Demised Premises shall be as set forth on Exhibit A attached hereto. 4. The "BGS OPTION" set forth in Amendment No. 7 (April 14, 1994) of the Lease shall be modified to incorporate the terms and conditions set forth in Section 5 and Section 6 of the Settlement Agreement dated as of December 7, 1995 between Lessor and Lessee. The date by which Lessee must give written notice of Lessee's election to exercise its option shall be changed from December 31, 1995 to February 29, 1996. 5. Section 8.3 shall be deleted in its entirety and the following shall be substituted therefor: "8.3 Lessee shall make no alterations, improvements, or additions to the demised premises of a structural nature. Lessee may make only non-structural alterations and only after obtaining Lessor's prior written consent, which consent may be conditioned upon the removal of such alterations by Lessee at the expiration or other termination of this Lease. All such alterations by Lessee shall be done in good and workmanlike manner and by Lessor or its affiliates at competitive costs. At the expiration or other termination of this Lease, Lessor shall have the option to require Lessee either (i) to remove any alterations made by Lessee without Lessor's consent and restore the demised premises to the condition in which they were in at the beginning of the Term, or (ii) to have the demised premises remain in their altered condition with all improvements and additions made with or without Lessor's consent becoming the property of the Lessor, except as to improvements or additions which are personal property of Lessee, have been identified as such to the Lessor and are removable without damage to the demised premises." In all other respects, the terms and provisions of the Lease and subsequent amendments are hereby ratified and confirmed and remain in full force and effect and unamended. Executed as a sealed instrument this 23rd day of January, 1996. LESSOR: 128 Technology Trust By: /s/ Dominic J. Saraceno ----------------------- Dominic J. Saraceno As Trustee of 128 Technology Trust By: /s/ Kurt W. Saraceno -------------------- Kurt W. Saraceno As Trustee of 128 Technology Trust LESSEE: PARAMETRIC TECHNOLOGY CORPORATION By: /s/ Edwin J. Gillis ------------------- Title: Sr. V.P. /CFO EX-10.24 5 AMENDMENT NO. 3 TO CONSULTING AGREEMENT EXHIBIT 10.24 AMENDMENT #3 TO CONSULTING AGREEMENT This Amendment #3 To Consulting Agreement, dated July 20, 1998, hereby amends the terms of that certain Consulting Agreement dated November 17, 1995, as amended, (hereinafter "Consulting Agreement") by and between Parametric Technology Corporation, a Massachusetts corporation, having its principle business address at 128 Technology Drive, Waltham, Massachusetts 02154 (hereinafter "PTC") and Michael E. Porter, an individual currently residing at 44 Green Hill Road, Brookline, Massachusetts 02146 (hereinafter "Consultant"). Article 3 Services To Be Performed By Consultant, is hereby amended by adding the following Section 3.4: 3.4 Consultant is engaged pursuant to this Amendment #3 to Consulting Agreement, to participate in five (5) additional top management seminars consistent with the purposes and scope of those seminars which Consultant was previously engaged to provide under Sections 3.2 and Sections 3.3 of the Consulting Agreement. Article 4 Compensation And Expenses, is hereby amended by adding the following Section 4.5: 4.5 Option grant for services to be performed under Section 3.4. In connection with those services to be performed pursuant to this Amendment #3 to Consulting Agreement (as described in Section 3.4 above), Consultant shall receive an option to purchase 30,000 shares of PTC's common stock, $.01 par value per share, under the terms of the Stock Option Agreement dated July 20, 1998 between PTC and the Consultant attached hereto. IN WITNESS WHEREOF, the parties have executed this Amendment #3 to Consulting Agreement as of the date and year first above written. Consultant Parametric Technology Corporation /S/ Michael E. Porter /S/ Steven C. Walske - ---------------------------------- ----------------------------------- Michael E. Porter Steven C. Walske Chairman and Chief Executive Officer No. 017091 30,000 Shares PARAMETRIC TECHNOLOGY CORPORATION 1997 Incentive Stock Option Plan Nonstatutory Stock Option Certificate July 20, 1998 Parametric Technology Corporation (the "Company"), a Massachusetts corporation, hereby grants to the person named below an option to purchase shares of Common Stock, $0.01 par value, of the Company (the "Option") under and subject to the Company's 1997 Incentive Stock Option Plan (the "Plan") exercisable on the following terms and conditions set forth below and those attached hereto and in the Plan: Name of Optionholder: Michael E. Porter Social Security Number ###-##-#### Number of Shares: 30,000 Option Price: $ 14.5625 Date of Grant: July 20, 1998 Exercisability Schedule: On or after October 20, 1998, as to 6,000 shares, on or after January 20, 1999, as to 6,000 additional shares, on or after April 20, 1999, as to 6,000 additional shares, on or after July 20, 1999, as to 6,000 additional shares, on or after October 20, 1999, as to 6,000 additional shares, provided that Optionholder's consulting agreement with the Company is not terminated earlier, in which event the Option, (i) to the extent exercisable at the date of such termination, may not be exercised as to any shares after the expiration of seven (7) months from the date of such termination, and (ii) to the extent not exercisable at the date of such termination, shall be canceled as to any such shares effective on the date of such termination. This Option shall not be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). By acceptance of this Option, the Optionholder agrees to the terms and conditions set forth above and those attached hereto and in the Plan. OPTIONHOLDER PARAMETRIC TECHNOLOGY CORPORATION By: /S/ Michael E. Porter By: /S/ Edwin J. Gillis --------------------------------- ------------------------------- Optionholder Executive Vice President - CFO PARAMETRIC TECHNOLOGY CORPORATION 1997 INCENTIVE STOCK OPTION PLAN Nonstatutory Stock Option Terms And Conditions 1. Plan Incorporated by Reference. This Option is issued pursuant to the ------------------------------ terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Corporate Counsel of the Company. 2. Option Price. The price to be paid for each share of Common Stock ------------ issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate. 3. Exercisability Schedule. This Option may be exercised at any time and ----------------------- from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. 4. Method of Exercise. To exercise this Option, the Optionholder shall ------------------ deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery or a payment commitment of a financial or brokerage institution, as the Committee may approve. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised. 5. No Right To Employment. No person shall have any claim or right to be ---------------------- granted an Option. Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Participant or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor any Option hereunder shall confer upon any employee of the Company or of any Affiliate any right with respect to the continuance of his/her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign any employee from one position to another within the Company or any Affiliate. 6. Effect of Grant. Participant shall not earn any Options granted --------------- hereunder until such time as all the conditions put forth herein and in the Plan which are required to be met in order to exercise the Option have been fully satisfied. 7. Recapitalization, Mergers, Etc. As provided in the Plan, in the event ------------------------------ of corporate transactions affecting the Company's outstanding Common Stock, the number and kind of shares subject to this Option and the exercise price hereunder shall be equitably adjusted. If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period. 8. Option Not Transferable. This Option is not transferable by the ----------------------- Optionholder otherwise than by will or the laws of descent and distribution, and is exercisable, during the Optionholder's lifetime, only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer. 9. Termination of Employment or Engagement. If the Optionholder's status --------------------------------------- as an employee or consultant of (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason (voluntary or involuntary) and the period of exercisability for a particular Option following such termination has not been specified by the Board, each such Option then held by that Participant shall expire to the extent not previously exercised ten (10) calendar days after such Participant's employment or engagement is terminated, except that - ------ ---- (a) If the Participant is on military, sick leave or other bona fide ---- ---- leave of absence (such as temporary employment by the federal government), his or her employment or engagement with the Company will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Participant's right to reemployment or the survival of his or her service arrangement with the Company is guaranteed either by statute or by contract; otherwise, the Participant's employment or engagement will be deemed to have terminated on the 91st day of such leave. (b) If the Participant's employment is terminated by reason of his or her retirement from the Company at normal retirement age, each Option then held by the Participant, to the extent exercisable at retirement, may be exercised by the Participant at any time within three (3) months after such retirement unless terminated earlier by its terms. (c) If the Participant's employment or engagement is terminated by reason of his or her death, each Option then held by the Participant, to the extent exercisable at the date of death, may be exercised at any time within one year after that date (unless terminated earlier by its terms) by the person(s) to whom the Participant's option rights pass by will or by the applicable laws of descent and distribution. (d) If the Participant's employment or engagement is terminated by reason of his or her becoming permanently and totally disabled, each Option then held by the Participant, to the extent exercisable upon the occurrence of permanent and total disability, may be exercised by the Participant at any time within one (1) year after such occurrence unless terminated earlier by its terms. For purposes hereof, an individual shall be deemed to be "permanently and totally disabled" if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Any determination of permanent and total disability shall be made in good faith by the Company on the basis of a report signed by a qualified physician. 10. Compliance with Securities Laws. It shall be a condition to the ------------------------------- Optionholder's right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issuance upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law. 11. Payment of Taxes. The Optionholder shall pay to the Company, or ---------------- make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of this Option, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder. Adopted November 14, 1996 EX-10.25 6 LEASE AMENDMENT NO. 10 DATED 5/10/96 EXHIBIT 10.25 May 3, 1996 128 TECHNOLOGY CENTER PARAMETRIC TECHNOLOGY CORPORATION AMENDMENT NO. 10 Reference is made to the original Lease dated June 1, 1987 and subsequently amended March 10, 1998, November 9, 1988, November 8, 1989, January 21, 1991, March 10, 1992, November 25, 1992, June 8, 1993, April 14, 1994, July 19, 1995 and January 23, 1996 collectively (the "Lease") by and between 128 Technology Trust under a Declaration of Trust dated October 12, 1993, recorded in Middlesex County Registry of Deeds Southern District, Book 15268, Page 65 (hereinafter "Lessor", which expression shall include its heirs, executors, successors, and assigns where the context so admits), and Parametric Technology Corporation, a Massachusetts corporation having a principal place of business at 128 Technology Drive, Waltham, Massachusetts, 01254 (hereinafter "Lessee", which expression shall include its successors and assigns or executors and administrators where to context so admits). Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For good and valuable consideration, the receipt of legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follows: NEW AREA A 2,751 rentable square feet formerly occupied by Barnstable EXPANSION SPACE: Corporation, Suite No. 3, 2nd floor, 125 Technology Drive, Waltham, Massachusetts. AVAILABILITY: May 1, 1996. RENT COMMENCEMENT: May 1, 1996. RENTAL RATE: $22.00 per rentable square foot (As Is). AREA B EXPANSION 1,105 rentable square feet presently occupied by Hickory OPTION SPACE: Travel, Suite No. 2, 125 Technology Drive, Waltham, Massachusetts. AVAILABILITY: April 1, 1997 or sooner with 30 days written notice from Lessor to Lessee. RENT COMMENCEMENT: Upon availability. RENTAL RATE: $22.00 per rentable square foot (As Is). TERM: Upon occupancy through October 31, 2001, subject to cancel- lation by either party upon written notice to the other by 10/31/98. TAX & OPERATING EXPENSE BASE YEAR: 1996. In all other respect, the terms and provisions of the Lease and subsequent amendments are hereby ratified and confirmed and remain in full force and effect and unamended. Executed as a sealed instrument this 10th day of May,1996. LESSOR: 128 TECHNOLOGY TRUST BY: /s/ Dominic J. Saraceno ----------------------- Dominic J. Saraceno, as Trustee of 128 Technology Trust BY: /s/ Kurt W. Saraceno -------------------- Kurt W. Saraceno, as Trustee of 18 Technology Trust LESSEE: PARAMETRIC TECHNOLOGY CORPORATION BY: /s/ Martha L. Durcan -------------------- Martha L. Durcan TITLE: V.P. /Corporate Counsel ----------------------- EX-10.26 7 LEASE AMENDMENT NO. 11 DATED 1/24/97 EXHIBIT 10.26 January 24, 1997 128 TECHNOLOGY CENTER PARAMETRIC TECHNOLOGY CORPORATION AMENDMENT NO. 11 Reference in made to the original Lease dated June 1, 1987, and subsequently amended March 10, 1988, November 9, 1988, November 8, 1989, January 21, 1991, March 10, 1992, November 25, 1992, June 8, 1993, April 14, 1994, July 19, 1995, January 9, 1996, and May 10, 1996 collectively (the "Lease") by and between Wells Avenue Senior Holdings LLC, a Massachusetts limited liability company (hereinafter "Lessor", which expression shall include its heirs, executors, successors, and assigns where the context so admits), and Parametric Technology Corporation, a Massachusetts corporation having a principal place of business at 128 Technology Drive, Waltham, Massachusetts, 02154 (hereinafter "Lessee", which expression shall include its successors and assigns or executors and administrators where to context so admits). Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For good and valuable consideration, the receipt of legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follows: NEW AREA 44,652 rentable square feet formerly occupied by BGS EXPANSION SPACE: Systems, Inc., 125 Technology Drive, Waltham, Massachusetts. AVAILABILITY: February 1, 1997 RENT COMMENCEMENT: Upon Availability (February 1, 1997) RENTAL RATE: $22.00 per rentable square foot. TENANT IMPROVEMENT ALLOWANCE: $75,000. In addition Landlord shall restore millwork to Tenant's reasonable satisfaction. In furtherance of the provisions of Section 5 of the Settlement Agreement dated December 7, 1995, the work associated with the improvements to the Premises shall be performed and coordinated by Tenant. Tenant shall compute the cost and the value of such improvements and shall from time to time submit evidence of payment therefor to the Landlord. Within 10 business days of the receipt of each such evidence of payment, Landlord shall reimburse Tenant or the cost of such improvements in an amount equal to $75,000. TERM: Five (5) years (Not subject to cancellation option). TAX & OPERATING EXPENSE BASE YEAR: 1992. SUBLETTING & Exhibit B (see enclosure) of the Settlement Agreement ASSIGNMENT: shall amend Article XII of the Lease and will govern all space leased by Parametric including the BGS option space. CLEANING Exhibit D of the Lease shall be replaced by the SPECIFICATIONS: following cleaning specifications. Lavatories-Nightly: Sweep and wash floors using a disinfectant cleaner. Wash and polish all mirrors, shelves, brightwork and enameled surfaces. Wash and shine all flushometers, piping, and toilet seat hinges. Wash and wipe dry both sides of all toilet seats. Wash and disinfect all basins, bowls and urinals. Wipe down all tile walls, partitions, dispensers and receptacles. Change waste paper liners. Dust and clean all powder room fixtures. Empty and clean all paper towel and sanitary napkin receptacles. Remove wastepaper and refuse from the premises. Refill all toilet paper, paper towel, soap and sanitary napkin dispensers. Lavatories-Monthly: Machine scrub with brush all tile floors. Scrub and disinfect all tile walls and partitions. Dust and wash all ventilation grilles. Materials to be supplied by Landlord unless otherwise arranged with Janitronics. Office Areas-Nightly: Remove trash; replace liners as needed. Wash out trash baskets as needed. Remove fingerprints from doors, walls, light switches, etc. Vacuum all carpeting. Vacuum all floor mats. Damp mop all tile floors. Remove waste to designated area. Damp wipe all table tops to remove smudges and beverage stains - cafe/coffee stations. Remove carpet stains as needed - upon request (but will be proactive). Clean entrance door glass. Upon completion of work shut off all lights and secure doors. Office Areas-Weekly: Dust all horizontal surfaces such as file cabinets, partitions, picture frames, window sills, etc. Office Areas-Monthly: Vacuum all carpet edges and corners. Spot clean all interior glass partitions. Office Areas-Quarterly: Clean baseboards. Vacuum chair seats. Dust chair rails, bases and seats. Lobby And Common Areas - -Nightly: Empty all trash receptacles; clean receptacle as needed. Replace liners as needed. Remove waste to designated area. Empty and wipe clean all cigarette urns and ashtrays; replace sand and water as needed. Empty trash receptacle below cigarette urns. Vacuum all carpets. Vacuum all floor mats; wash as required. Clean all entrance doors. Clean and shine all mullions and metal work. Remove stains and fingerprints form walls, doors, light switches, etc. Clean building directory. Clean and disinfect all water fountains. Clean all baseboards. Vacuum elevator carpets; remove stains as needed. Vacuum and wash all elevator tracks. Clean, wash and shine all doors, walls and metal work in elevators. Wash and clean all kitchen tables, counter tops in food areas and break rooms. Customer Visit Area Building 138-Nightly: Clean and polish conference room furniture - conference tables, credenza, terminal tables. Clean all white boards. Clean glass display case, Empty all waste receptacles. Replace liners. Remove carpet stains as needed - upon request (but will be proactive). Lobby, Common Areas And Customer Visit Area-Weekly: Clean baseboards and window sills. Remove fingerprints from walls, doors, and light switches. Clean wood stair rails. Lobby, Common Areas And Customer Visit Area-Monthly: Vacuum all upholstered furniture. VCT tile floors - damp mop nightly Monthly: Spray buff all tile floors. Quarterly: Strip/seal all tile floors. Lobby Stone Floors: Strip/seal twice per year. Yearly: Wash all partition glass. Landlord has reviewed the provisions of this revised cleaning specification and represents to Tenant that the estimated cost of the work to be performed does not exceed the current cost of the cleaning services being provided to the Premises. In all other respect, the terms and provisions of the Lease and subsequent amendments are hereby ratified and confirmed and remain in full force and effect and unamended. Executed as a sealed instrument the 29 day of January, 1997. LESSOR: WELLS AVENUE SENIOR HOLDINGS, LLC BY: /s/ Kurt W. Saraceno -------------------- Kurt W. Saraceno, President LESSEE: PARAMETRIC TECHNOLOGY CORPORATION BY: /s/ Martha L. Durcan -------------------- TITLE: MARTHA L. DURCAN V.P./CORPORATE COUNSEL ---------------------- EX-13.1 8 ANNUAL REPORT EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- PARAMETRIC TECHNOLOGY CORPORATION Parametric Technology Corporation (PTC) 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. Unless otherwise indicated, all references to a year reflect our fiscal year which ends on September 30. FORWARD-LOOKING STATEMENTS This Annual Report 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 is contained below in "Important Risk Factors Affecting Results." COMPUTERVISION MERGER In January 1998, we merged with Computervision Corporation by issuing 11.6 million shares of our common stock in exchange for all of the outstanding common stock of Computervision. The merger is intended to qualify as a tax-free reorganization and has been accounted for as a pooling of interests. Accordingly, we have restated our consolidated financial statements to include the accounts and operations of Computervision for all years presented in this Annual Report. Unless otherwise indicated, this discussion and the accompanying consolidated financial statements and notes to the consolidated financial statements (Notes) reflect that restatement. In July 1997, Computervision sold a majority interest in its other services business unit, which had generated other services revenue and costs in 1996 and 1997. Because of the sale, the results of this business have been excluded from the following discussion for all years presented. See Notes B and C. RESULTS OF OPERATIONS The following is an overview of our results of operations: . Total software revenue was $902.9 million for 1996, $979.8 million for 1997, and $1,018.0 million for 1998. . Our year-over-year software revenue growth rate declined from 33% in 1996 to 9% in 1997 and 4% in 1998. . Excluding acquisition, nonrecurring, and extraordinary charges in all years presented, our year-over-year net income decreased 21% in 1997 from $182.3 million in 1996 to $144.4 million in 1997 and increased 37% to $197.6 million in 1998. The following table shows certain consolidated financial data as a percentage of our total revenue for the last three years. The results of the Computervision other services business unit have been omitted from the table. September 30, - -------------------------------------------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------- Total revenue 100% 100% 100% - -------------------------------------------------------------------------- Cost of revenue: License 2 2 2 Service 13 13 13 - -------------------------------------------------------------------------- Total cost of revenue 15 15 15 - -------------------------------------------------------------------------- Gross profit 85 85 85 - -------------------------------------------------------------------------- Operating expenses: Sales and marketing 37 40 39 Research and development 9 10 9 General and administrative 6 6 6 Acquisition and nonrecurring charges 5 5 10 - -------------------------------------------------------------------------- Total operating expenses 57 61 64 - -------------------------------------------------------------------------- Operating income 28 24 21 - -------------------------------------------------------------------------- Interest expense (4) (4) (1) Interest income 2 2 2 Other expense, net -- (1) (1) - -------------------------------------------------------------------------- Income before income taxes 26 21 21 Provision for income taxes 9 12 10 - -------------------------------------------------------------------------- Income before extraordinary charge 17 9 11 Extraordinary charge, net -- -- 2 - -------------------------------------------------------------------------- Net income 17% 9% 9% - -------------------------------------------------------------------------- Excluding acquisition, nonrecurring, and extraordinary charges: Operating income 33% 29% 31% - -------------------------------------------------------------------------- Net income 20% 15% 19% - -------------------------------------------------------------------------- 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- REVENUE We derived our revenue primarily from software used in the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing, and engineering) industry. Our overall rate of revenue growth declined in 1997 and 1998 from historic levels due to a decrease in the rate of growth of license revenue. License revenue increased 5% in 1997, reflecting continued worldwide acceptance of our products and services, and decreased 6% in 1998, reflecting, among other factors, a change in the mix of our product offerings, weaker than anticipated results in the Asia/Pacific region, the strengthening of the U.S. dollar against most major European and Asia/Pacific currencies, especially the Japanese yen, and a reduction in the average price of our software, due in part to the repricing and repackaging initiative for our core Pro/ENGINEER product line that we undertook in the fourth quarter of 1998. Product unit sales remained relatively constant during the last three fiscal years. In addition to our repricing and repackaging initiative, in June 1998 we introduced our new Windchill information management software and in the fourth quarter of 1998 we announced a restructuring of our worldwide sales force and our agreement with Rand A Technology Corporation under which, beginning in 1999, Rand will manage all of our sales to small businesses in the United States and Europe. These initiatives were designed to provide a foundation for future growth. The attention devoted to their initial implementation by sales management, however, may have had an unanticipated negative effect upon license revenue in 1998. Since these initiatives began late in 1998 and will continue into 1999, their impact on our results is not yet known. Consequently, we remain cautious in our overall outlook for 1999, with flat revenue anticipated over the first half of the year. Factors affecting our revenues and operating results are listed under "Important Risk Factors Affecting Results" below. REVENUE BY TYPE (in millions) for fiscal 1996, 1997, and 1998 * License @ Service [BAR CHART] We licensed over 90% of our products directly to end-user customers in each of the last three fiscal years. The balance was licensed through third-party distributors. The percentage of our products that we license through third-party distributors may change in the future as a result of the restructuring of our worldwide sales force and our agreement with Rand. Our service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services and has a lower gross profit margin than license revenue. Service revenue increased 16% in 1997 and 22% in 1998. This increase is the result of growth in our installed customer base and increased training and consulting services performed for these customers, offset by a decline in the Computervision-installed base. We expect service revenue to continue to increase in both absolute dollars and as a percentage of total revenue in 1999. We derived 62%, 57%, and 56% of our total revenue from sales to international customers in 1996, 1997, and 1998, respectively. The decrease in the percentage of revenue derived from international sales since 1996 is attributable primarily to: (i) the strengthening of the dollar in relation to the yen and the major European currencies; (ii) the reluctance of Computervision customers, which were predominantly overseas, to acquire additional licenses as a result of Computervision's deteriorating financial condition prior to the merger; and (iii) weaker than anticipated results in the Asia/Pacific region. Direct export sales were $130.8 million, $148.5 million, and $115.2 million in 1996, 1997, and 1998, respectively. REVENUE BY GEOGRAPHY (in millions) for North America, Europe and Asia/Pacific * 1996 @ 1997 # 1998 [BAR CHART] 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- COST OF REVENUE Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation, royalties, and the amortization of capitalized computer software costs. Cost of license revenue as a percent of total revenue has been 2% for each of the last three years. 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. The increase in our cost of service revenue resulted primarily from growth in the staffing necessary to generate and support increased worldwide service revenue and to provide ongoing quality customer support to our installed base. Cost of service revenue as a percent of total revenue has been 13% for each of the last three years. OPERATING EXPENSES All operating expense categories, including cost of revenue, in 1996, 1997, and 1998 were impacted by the acquisition and restructuring nonrecurring charges taken. See Note B. SALES AND MARKETING Our sales and marketing expenses primarily include salaries, sales commissions, travel, and facility costs. These costs increased 17% in 1997 and 2% in 1998 with the 1997 change principally due to worldwide expansion of the sales force and sales commissions associated with the sale of software and training and consulting services. Total sales and marketing employees were 2,152 in 1996, 2,395 in 1997, and 2,440 in 1998. We expect our worldwide sales and marketing organization to remain at or below the 1998 level given that sales to small businesses will be managed by Rand A Technology Corporation under an agreement beginning in 1999. International sales and marketing expenses represented 63% of total sales and marketing expenses in 1996, 62% in 1997, and 59% in 1998. 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 prior years, research and development expenses increased 17% in 1997 and were flat in 1998. The steady level of spending in 1998 compared to 1997 is primarily attributable to the impact of workforce reductions and lower depreciation related to write-offs of excess fixed assets associated with the Computervision merger offset by our continued investment in research and development, particularly in relation to the Windchill product line. We expect our investment in research and development to increase in absolute dollars in 1999. GENERAL AND ADMINISTRATIVE Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, and administrative functions. These costs increased 12% in 1997 and decreased 5% in 1998. The increase in 1997 resulted primarily from the hiring of additional employees and spending to upgrade internal information management systems. The decrease in these expenses in 1998 was principally due to the impact of workforce reductions and lower depreciation related to write-offs of excess fixed assets associated with the Computervision merger. OPERATING EXPENSES (in millions) for Sales and Marketing, Research and Development, General and Administrative, and Acquisition and Nonrecurring Charges * 1996 @ 1997 # 1998 [BAR CHART] 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- ACQUISITION AND NONRECURRING CHARGES ICEM. In June 1998, we acquired ICEM Technologies (ICEM), a division of Control Data Systems, Inc., for approximately $41 million in cash. Headquartered in Frankfurt, Germany, ICEM provides advanced surfacing and reverse engineering software tools used by body and styling engineers in the automotive and aerospace industries. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price to the assets acquired and liabilities assumed based on our estimates of fair value. The fair value assigned to intangible assets acquired consisted of purchased in-process research and development (R&D), developed technology, an assembled workforce, and trade names. The amounts allocated to tangible and intangible assets acquired less the liabilities assumed exceeded the purchase price by approximately $7 million. This excess value over the purchase price was allocated to reduce proportionately the values assigned to long-term assets and purchased in-process R&D in determining their values. The values assigned included $2.1 million for net assets acquired, $28.9 million for purchased in-process R&D, $8.0 million for developed technology, $1.6 million for an assembled workforce, and $1.0 million for trade names. The operating results of ICEM have been included in our results of operations from the date of acquisition. In the opinion of management, the purchased in-process R&D had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded a nonrecurring charge of $28.9 million during the third quarter of 1998. The value assigned to purchased in-process R&D was determined by identifying research projects for which technological feasibility had not been established. The value was determined by estimating the costs to develop the purchased in-process R&D into commercially viable products, estimating the resulting net cash flows from such products, and discounting the net cash flows back to their present value. The estimates were based on the following major assumptions: . Aggregate revenue was estimated to grow at a compound rate of 33% over the first five years and 14% thereafter. . Cost of revenue for the purchased in-process technology, expressed as a percentage of revenue, was estimated to decline from 20% to 10% through 2006. These percentages were based on ICEM's average historical cost of revenue, and reflect future economies of scale. . Cost to complete the purchased in-process technology was estimated to be $1.5 million for 1998, $4.4 million for 1999, and $600,000 for 2000. . Selling, general, and administrative expenses were estimated to be 29% of revenue for all periods, consistent with ICEM's historical average. The net cash flows also considered net working capital requirements and capital spending needs related to the purchased in-process technology. The 24% rate we used to discount net cash flows for the in-process technology to present value was based on the weighted average cost of capital and took into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. Computervision. In connection with the Computervision merger, we incurred a nonrecurring charge of $76.8 million for merger-related integration, consolidation, and transaction costs. 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. Most of these costs, except for certain contract costs and costs related to leased facilities, were incurred in 1998. We also incurred an extraordinary after-tax charge of $19.0 million related to the write-off of deferred financing costs and other prepayment costs associated with our payment of $275.7 million for indebtedness of Computervision existing at the time of the merger. See Notes B and G. Our results for 1997 include a nonrecurring charge of $45.0 million related to the restructuring of the Computervision software business in order to reduce costs and improve operating results in future periods by reducing personnel by approximately 300 positions and closing certain facilities. Our results for 1996 include a nonrecurring charge of $14.5 million, which includes $11.0 million of restructuring costs associated with the implementation of ongoing cost savings, primarily personnel reductions of approximately 100 positions in R&D, sales and marketing, and closing certain facilities. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Reflex. In July 1996, we acquired project modeling and management software (Reflex) technology from Greenshire License Co. for $32.1 million. Of the total purchase price, we issued 226,000 shares of our common stock with a fair value of $5.0 million at the time of the acquisition and paid cash of $22.1 million in 1996 and $5.0 million in 1997. The acquisition was accounted for as a purchase. The fair value assigned to intangible assets acquired consisted of in-process R&D related to a research project, which had not yet reached technological feasibility and had no alternative future uses. As a result, at the date of acquisition, the $32.1 million allocated to purchased in-process R&D was recorded as a nonrecurring charge. The value was determined by estimating the costs to develop the purchased in-process R&D into a commercially viable product, estimating the resulting net cash flows from such product, and discounting the net cash flows back to their present value. The net cash flows also considered net working capital requirements and capital spending needs related to the in-process products. The discount rate of 30% used for Reflex took into account the uncertainty surrounding the successful development of the purchased in-process technology. The assumptions we used reflected the fact that Reflex did not have any other assets or revenue, and was a development-stage enterprise. The operating results of Reflex have been included in our results of operations from the date of acquisition. INTEREST EXPENSE Our interest expense related primarily to debt incurred by Computervison prior to the merger that we paid off in the second quarter of 1998. See Note G. INTEREST INCOME Interest income relates to the earnings on the investment of our excess cash balance in various financial instruments. The 1997 increase in interest income was due primarily to higher average investment balances. The 1998 increase resulted from higher average annual yields. OTHER EXPENSE A large portion of our revenue and expenses is transacted in foreign currencies. In order to reduce our exposure to fluctuations in foreign exchange rates, from time to time we engage in hedging transactions involving the use of foreign exchange forward contracts and foreign exchange option contracts in the primary European and Asian currencies. Our other expense increased primarily due to the costs of the 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. See Note A. INCOME TAXES Our effective income tax rate was 34% in 1996, 57% in 1997, and 48% in 1998. The difference between our effective and the statutory federal tax rate was due primarily to the nondeductibility of certain expenses included in the acquisition-related charges in 1998 and losses of Computervision in 1997. See Note F. EXTRAORDINARY CHARGE The extraordinary charge incurred in 1998 related to the early repayment of the debt that Computervision had incurred prior to our merger. See Note G. 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 our employee growth, capital asset needs, stock repurchases, acquisitions, and debt repayment, in all years presented. As of September 30, 1998, cash and investments totaled $426.2 million, down from $568.7 million at September 30, 1997. The primary reason for the decrease in cash and investments during 1998 was the repayment of $275.7 million of Computervision debt. Our investment portfolio is diversified among security types, industries, and individual issuers. Our investments are generally liquid and investment grade. The portfolio is primarily invested in short-term securities to minimize interest rate risk and to facilitate rapid deployment in the event of immediate cash needs. Cash generated from operating activities was $237.0 million in 1996, $195.8 million in 1997, and $181.9 million in 1998, net of cash expenditures for nonrecurring charges of $12.0 million in 1996, $38.9 million in 1997, and $62.3 million in 1998. In 1996, 1997, and 1998, we acquired $41.1 million, $36.2 million, and $35.8 million, respectively, of capital equipment consisting principally of computer equipment, software, and office equipment. We spent $23.2 million in 1996, $5.0 million in 1997, and $40.6 million in 1998 to acquire businesses. These expenditures were partially offset by $30.1 million received from the sale of a Computervision business unit in June 1997. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------- OPERATIONS - ---------- We used net cash for financing activities in 1996, 1997, and 1998, primarily to repurchase $66.6 million, $184.8 million, and $50.0 million, respectively, of our stock, and to pay off the Computervision debt in 1998 of $275.7 million. These expenditures were partially offset by proceeds of $43.8 million, $66.3 million, and $70.4 million in 1996, 1997, and 1998, respectively, from the issuance of our common stock under our stock plans. As a result of the exchange of certain stock options held by non-executive employees, we expect proceeds from stock option exercises to be lower in 1999. See Note J. In May 1994, we announced that our Board of Directors had authorized a plan allowing us to repurchase up to 6.0 million shares of our common stock. In September 1997, our Board of Directors increased that number to 12.0 million. In October 1997, in anticipation of the Computervision merger, we suspended repurchases and the Board of Directors rescinded its authorization of the repurchase program in November 1997. Under the program, we repurchased a total of 11.6 million shares at a cost of $260.0 million. In September 1998, our Board of Directors authorized a new share repurchase program for the repurchase of up to 20.0 million shares. During 1998, we purchased 4.7 million shares at a cost of $50.0 million. The repurchased shares will be used to issue shares for stock option exercises, employee stock purchase plans, and potential acquisitions. We believe that existing cash and short-term investments together with cash generated from operations and the issuance of common stock under our stock plans will be sufficient to meet our working capital, financing, and capital expenditure requirements through at least 1999. 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 A. FINANCIAL RISK MANAGEMENT We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results. Our primary exposure has been related to local currency revenue and operating expenses in Europe and the Asia/Pacific region. Historically, we have hedged currency exposures associated with certain accounts receivable denominated in local currencies and certain anticipated foreign currency revenue transactions. The goal of our hedging activity is to offset the impact of currency fluctuations on certain local currency accounts receivable and foreign currency revenue transactions. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. Outstanding forward foreign exchange contracts at September 30, 1998 matured within one month, and did not have a material impact on our financial results. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value at the balance sheet date due to the short maturities of these instruments. We maintain investment portfolio holdings of various issuers, types, and maturities. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses included in stockholders' equity. Given the short maturities and investment grade quality of the portfolio holdings at September 30, 1998, a sharp rise in interest rates should not have a material adverse impact on the fair value of our investment portfolio. As a result, we do not currently hedge these interest rate exposures. The following table presents hypothetical changes in fair values in our financial instruments at September 30, 1998 that are sensitive to changes in interest rates. Our modeling technique measures the change in fair value arising from selected potential changes in interest rates. Movements in interest rates of plus or minus 50 basis points ("BP") and 100 BP reflect immediate hypothetical shifts in the fair value of these investments. Fair value represents the market principal plus accrued interest and dividends of certain interest-rate-sensitive securities considered cash equivalents or investments for financial reporting purposes at September 30, 1998. Valuation of No Valuation of securities given change in securities given an interest rate interest an interest rate Type of security decrease rates increase - -------------------------------------------------------------------------------- (in millions) (100 BP) (50 BP) 50 BP 100 BP - -------------------------------------------------------------------------------- Municipal debt securities $241 $240 $239 $238 $237 Mutual funds 13 12 12 12 11 - -------------------------------------------------------------------------------- Total $254 $252 $251 $250 $248 - -------------------------------------------------------------------------------- 30 A 50-BP move in the Federal Funds Rate has occurred in eight of the last 40 quarters. There has not been a 100-BP movement in the Federal Funds Rate in any of the last 40 quarters. IMPORTANT RISK FACTORS AFFECTING RESULTS We caution you that our performance is subject to risks and uncertainties. There are a variety of important factors like those that follow that may cause our future results to differ materially from those projected in any of our forward-looking statements made in this Annual Report or otherwise. FLUCTUATIONS IN OPERATING RESULTS While our sales cycle varies substantially from customer to customer, we usually realize a high percentage of our revenue in the third month of each fiscal quarter and this revenue tends to be concentrated in the latter half of that month. Our orders early in a quarter will not generally occur at a rate which, if sustained throughout the quarter, would be sufficient to assure that we will meet our revenue targets for any particular quarter. Accordingly, our quarterly results may be difficult or impossible to predict prior to the end of the quarter. Any inability to obtain orders in large volumes or to make shipments in the period immediately preceding the end of any particular quarter may cause the results for that quarter to fall short of our revenue targets. In addition, our operating expenses are based on expected future revenue and are relatively fixed for the short term. As a result, a revenue shortfall in any quarter could cause our earnings for that quarter to fall below expectations as well. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our stock. Because our sales incentive structure is weighted more heavily toward the end of the fiscal year, the rate of revenue growth for the first quarter historically has been lower than that for the fourth quarter of the immediately preceding fiscal year. This incentive structure also makes it more difficult to predict first quarter results. In addition, the levels of quarterly or annual software revenue in general, or for particular geographic areas, may not be comparable to those achieved in previous periods. STOCK MARKET VOLATILITY Market prices for securities of software companies have generally been volatile. In particular, the market price of our common stock has been and may continue to be subject to significant fluctuations. In addition, a large percentage of our common stock traditionally has been held by institutional investors. Consequently, actions with respect to our common stock by certain of these institutional investors could have a significant impact on the market price of the stock. For more information, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the U.S. Securities and Exchange Commission (SEC) with respect to our common stock. MARKET GROWTH Any of our projections for revenue growth assume that the overall demand for products in the mechanical CAD/CAM/CAE industry will continue to grow. There could be an adverse impact on our operating results in any quarter in which this assumption proves to be incorrect. RAPID TECHNOLOGICAL AND MARKET CHANGES The mechanical CAD/CAM/CAE and enterprise information management industries are highly competitive and are characterized by rapid technological advances. Accordingly, our ability to realize our expectations will depend on: . our success at enhancing our current offerings . our ability to develop new products and services that keep pace with developments in technology . our ability to meet evolving customer requirements, especially ease-of-use requirements . our ability to deliver those products through appropriate distribution channels, and . our ability to license technology from third parties. This will require, among other things, that we: . correctly anticipate customer needs and price our products competitively . hire and retain personnel with the necessary skills and creativity . provide adequate funding for development efforts, and . manage distribution channels effectively. In addition, our CAD/CAM/CAE software has historically been available on a variety of platforms. We are aware of efforts by competitors to focus on single platform applications, particularly Windows-based platforms. There can be no assurance that we will continue to have a competitive advantage with multiple platform applications. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------- OPERATIONS - ---------- We continue to enhance our existing products by releasing updates. Those product updates will be less frequent than in the past to permit customers to absorb changes more effectively. Our competitive position and operating results could suffer if: . we fail to anticipate or to respond adequately to customer requirements or to technological developments, particularly those of our competitors . we delay the development, production, testing, marketing, or availability of new or enhanced products or services, or . customers fail to accept such products or services. The success of our new Windchill product line will depend in part on the market's evaluation of its ease of use, its full functionality, and its ability to support a large user base. Since this product line only became available in the latter half of 1998, it is not possible to assess the market's acceptance of this product line at this time. POSSIBILITY OF NEW PRODUCT DELAYS As is common in the computer software industry, we may from time to time experience delays in our product development and "debugging" efforts. Our financial performance could be hurt by significant delays in developing, completing, or shipping new or enhanced products. Among other things, such delays could cause us to incorrectly predict the fiscal quarter in which we will realize revenue from the shipment of the new or enhanced products and give our competitors a greater opportunity to market competing products. SUCCESSFUL IMPLEMENTATION OF NEW INITIATIVES We have a history of rapid growth and development as an organization. Part of our success has resulted from our ability to implement new initiatives. Our future operating results will continue to depend upon: . the success of our efforts to integrate Computervision's operations on a worldwide basis . market acceptance of the new Windchill product line, which has a longer sales cycle than our other products . the success of our sales force reorganization initiative, including Rand's success with sales to smaller customers . market reaction to the repricing and repackaging of our Pro/ENGINEER product line, and . our ability to increase revenue growth in the Asia/Pacific region. Additionally, our success could also be affected by our ability to: . develop additional applications for the Windchill product line . generate and fill current software license orders, and . adequately manage exposure to foreign currency movements. RISKS ASSOCIATED WITH ACQUISITIONS We have increased our product range and customer base in the recent past, due in part to acquisitions. We may acquire additional businesses or product lines in the future. The success of any acquisition may be dependent upon our ability to integrate the acquired business or products successfully and to retain key personnel and customers associated with the acquisition. If we fail to do so, or if the costs of or length of time for integration increase significantly, it could cause our actual results to differ from those projected in our forward-looking statements. In addition, acquisitions may result in the allocation of purchase price to in-process R&D. For example, for the year ended September 30, 1998, we recorded in-process R&D expense of approximately $28.9 million in connection with our acquisition of ICEM. The SEC has recently raised issues regarding the methodologies used and allocation of purchase price to in-process R&D and has required some companies to adjust or restate prior periods to reduce allocations to in-process R&D, thereby increasing intangible assets and future amortization expense. While we believe that our in-process R&D allocation is appropriate, if the SEC were to require us to change the allocation, this would result in a higher amortization expense, which would adversely impact our future operating results. COMPETITION There are an increasing number of competitive mechanical CAD/CAM/CAE products. Increased competition and market acceptance of these products could have a negative effect on our pricing and revenues, which could adversely affect our operating results. Our Windchill product line expands the breadth of our offerings into product information management. We are a relatively new entrant into this area and may be competing with more mature products that may have an established customer base as well as greater functionality. DEPENDENCE ON KEY PERSONNEL Our success depends upon our ability to attract and retain highly skilled technical, managerial, and sales personnel. While we have not experienced any significant difficulty in hiring or retaining 32 qualified personnel to date, competition for such personnel in the high technology industry is intense. We assume that we will continue to be able to attract and retain such personnel. The failure to do so, however, could have a material adverse effect on our future operating results. RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS A significant portion of our business comes from outside the United States. Accordingly, our performance could be adversely affected by ongoing economic uncertainties in the Asia/Pacific region and other world economies. Another consequence of significant international business is that a large percentage of our revenue and expenses are denominated in foreign currencies which fluctuate in value. Although we may enter into foreign exchange forward contracts and foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may materially impact our results. Other risks associated with international business include: . unexpected changes in regulatory practices and tariffs . staffing and managing foreign operations . longer collection cycles in certain areas . potential changes in tax laws . greater difficulty in protecting intellectual property rights, and . general economic and political conditions. PROTECTION OF INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Our software products are proprietary to PTC. We protect our intellectual property rights by relying on copyrights, trademarks, patents, and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, there can be no assurance that the laws of all relevant jurisdictions will afford the same protections to our products and intellectual property as the laws of the United States. The software industry is characterized by frequent litigation regarding copyright, patent, and other intellectual property rights. While we have not, to date, had any significant claims of this type asserted against us, there can be no assurance that someone will not assert such claims against us with respect to existing or future products or that, if asserted, we would prevail in such claims. In the event a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we ultimately prevail. LEGAL PROCEEDINGS Certain class action lawsuits have been filed against us and certain of our current and former officers and directors claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of 1998. We believe the claims are without merit and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions 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. 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 are in the process of testing our current product offerings for Year 2000 compliance. Based on our review to date, we believe that our principal product offerings are largely Year 2000-compliant in their current versions. While testing of our current product offerings is complete, we are still in the process of making modifications to those currently offered systems that are not compliant and anticipate that these corrections will be complete by March 31, 1999. We are conducting 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 expected to be complete by March 31, 1999 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. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------------- OPERATIONS - ---------- 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 expected to be complete by March 31, 1999. 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. We have identified approximately $3.0 million in costs already incurred and estimate that another $3.0 to $6.0 million may be spent on our compliance project. Costs are 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 service, Internet 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. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the euro, making the euro their common legal currency on that date. There will be a transition period between January 1, 1999 and January 1, 2002, during which the old currencies will remain legal tender in the participating countries as denominations of the euro. During the transition period, public and private parties may pay for goods and services using either the euro or the participating country's former currency on a no compulsion, no prohibition basis. Conversion rates, however, will no longer be computed directly from one former currency to another. Instead, a triangular process will apply whereby an amount denominated in one former currency will first be converted into the euro. The resultant euro-denominated amount will then be converted into the second former currency. We are currently evaluating the business implications of conversion to the euro, including technical adaptation of information technology and other systems to accommodate euro-denominated transactions, long-term competitive implications of the conversion, and the effect on market risk with respect to financial instruments. At this time, we do not believe that the euro's introduction will have a material impact on our business during the transition period. 34 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- PARAMETRIC TECHNOLOGY CORPORATION
September 30, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 168,609 $ 205,971 Short-term investments 354,516 131,405 Accounts receivable, net of allowance for doubtful accounts of $5,887 and $7,684 196,021 189,275 Other current assets 42,782 67,130 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 761,928 593,781 Marketable investments 45,580 88,807 Property and equipment, net 56,797 62,241 Other assets 94,027 88,011 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 958,332 $ 832,840 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable, current portion of long-term debt, and capital lease obligations $ 39,477 $ -- Accounts payable 38,305 34,520 Accrued expenses 99,142 92,742 Accrued compensation, severance, and related expenses 91,709 81,856 Deferred revenue 114,149 145,376 Income taxes 67,847 65,048 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 450,629 419,542 Long-term debt, less current portion 213,526 -- Other liabilities 54,182 54,081 Deferred income taxes 39,203 31,780 Commitments and contingencies (Note H) - ------------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000 shares authorized; none issued -- -- Common stock, $.01 par value; 350,000 shares authorized; 267,967 and 272,277 shares issued 2,680 2,723 Additional paid-in capital 1,450,132 1,528,647 Treasury stock, at cost, 1,048 and 4,135 shares (24,169) (43,134) Accumulated deficit (1,229,149) (1,157,628) Other equity 1,298 (3,171) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 200,792 327,437 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 958,332 $ 832,840 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 35 CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
September 30, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ REVENUE: License $ 613,427 $ 644,726 $ 609,239 Service 289,510 335,068 408,731 - ------------------------------------------------------------------------------------------------------------------------------------ Total software revenue 902,937 979,794 1,017,970 Other services revenue 174,384 82,224 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 1,077,321 1,062,018 1,017,970 - ------------------------------------------------------------------------------------------------------------------------------------ COST OF REVENUE: License 21,024 19,450 19,915 Service 119,560 131,136 137,025 Other services 134,686 74,808 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total cost of revenue 275,270 225,394 156,940 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS PROFIT 802,051 836,624 861,030 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Sales and marketing 332,429 388,857 395,732 Research and development 79,620 93,329 93,382 General and administrative 54,453 60,915 58,130 Acquisition and nonrecurring charges 46,619 45,000 105,766 Other services operating and nonrecurring charges 29,201 19,188 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total operating expenses 542,322 607,289 653,010 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 259,729 229,335 208,020 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense 32,706 34,069 13,329 Interest income (15,664) (18,261) (19,131) Other expense, net 2,263 7,843 9,815 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary loss 240,424 205,684 204,007 Provision for income taxes 80,857 118,024 98,293 - ------------------------------------------------------------------------------------------------------------------------------------ Income before extraordinary loss 159,567 87,660 105,714 Extraordinary loss, net of income tax benefit of $2,183 (Note G) -- -- (19,017) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 159,567 $ 87,660 $ 86,697 ==================================================================================================================================== EARNINGS PER SHARE (NOTE A): Basic: Income before extraordinary loss $ 0.60 $ 0.33 $ 0.39 Extraordinary loss -- -- (0.07) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 0.60 $ 0.33 $ 0.32 ==================================================================================================================================== Diluted: Income before extraordinary loss $ 0.57 $ 0.32 $ 0.38 Extraordinary loss -- -- (0.07) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 0.57 $ 0.32 $ 0.31 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 36 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- PARAMETRIC TECHNOLOGY CORPORATION
September 30, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 159,567 $ 87,660 $ 86,697 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 -- 6,634 15,876 Depreciation and amortization 43,174 38,418 29,930 Deferred income taxes (6,403) 2,195 5,526 Provision for loss on accounts receivable 1,616 1,433 5,822 Gain on sale of a business unit -- (1,255) -- Charge for purchased in-process research and development 35,619 -- 28,941 Changes in assets and liabilities which provided (used) cash, net of effects of purchased businesses: Accounts receivable (51,750) 230 766 Accounts payable and accrued expenses (1,399) 7,085 (2,720) Accrued compensation, severance, and related expenses 8,447 3,581 (10,999) Deferred revenue 20,775 19,533 30,276 Income taxes 23,670 50,859 19,387 Other current assets and liabilities 4,085 (15,624) (32,841) Other noncurrent assets and liabilities (438) (4,977) (13,789) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 236,963 195,772 181,889 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (41,129) (36,179) (35,794) Additions to capitalized and purchased software costs (815) (965) -- Acquisition of businesses (23,189) (5,000) (40,599) Purchases of investments (336,572) (577,499) (413,522) Proceeds from sales and maturities of investments 244,645 423,988 593,406 Proceeds from sale of a business unit, net -- 30,100 -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities (157,060) (165,555) 103,491 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of short-term debt 465 29,426 -- Repayment of short-term debt -- -- (34,933) Repayment of long-term obligations (6,486) (5,044) (240,761) Proceeds from issuance of common stock 43,823 66,250 70,440 Purchases of treasury stock (66,563) (184,780) (49,972) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by financing activities (28,761) (94,148) (255,226) - ------------------------------------------------------------------------------------------------------------------------------------ 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 (7,580) (7,639) (4,359) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 43,562 (71,570) 37,362 Cash and cash equivalents, beginning of year 196,617 240,179 168,609 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 240,179 $ 168,609 $ 205,971 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 37 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
September 30, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK Balance, beginning of year $ 2,612 $ 2,659 $ 2,680 Issued for employee stock purchase and option plans 45 18 43 Issuance of common stock for acquisition 2 -- -- Other items related to acquired company -- 3 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year 2,659 2,680 2,723 - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 1,337,809 1,392,388 1,450,132 Issued for employee stock purchase and option plans 22,122 10,995 57,218 Tax benefit related to stock option plans 27,459 35,894 21,297 Issuance of common stock for acquisition 4,998 -- -- Other items related to acquired company -- 10,855 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year 1,392,388 1,450,132 1,528,647 - ------------------------------------------------------------------------------------------------------------------------------------ TREASURY STOCK Balance, beginning of year -- (1,164) (24,169) Repurchased (66,563) (184,780) (49,972) Issued for employee stock purchase and option plans 65,399 161,775 31,007 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year (1,164) (24,169) (43,134) - ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED DEFICIT Balance, beginning of year (1,320,879) (1,204,509) (1,229,149) Net income 159,567 87,660 86,697 Treasury shares issued for employee stock purchase and option plans (43,743) (106,538) (14,913) Minimum pension liability adjustment 546 (5,762) (20,473) Change in year end of acquired company -- -- 20,210 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year (1,204,509) (1,229,149) (1,157,628) - ------------------------------------------------------------------------------------------------------------------------------------ CUMMULATIVE TRANSLATION ADJUSTMENT Balance, beginning of year 13,652 6,314 1,251 Foreign currency translation adjustment (7,338) (5,063) (5,411) Change in year end of acquired company -- -- 439 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year 6,314 1,251 (3,721) - ------------------------------------------------------------------------------------------------------------------------------------ UNREALIZED GAIN (LOSS) ON INVESTMENTS Balance, beginning of year -- (40) 47 Unrealized gain (loss) on investments (40) 87 503 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year (40) 47 550 - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity $ 195,648 $ 200,792 $ 327,437 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Parametric Technology Corporation develops, markets, and supports a comprehensive suite of integrated product development and information management software. We operate in a single industry segment--computer software and related services. BASIS OF PRESENTATION Our fiscal year-end is September 30. The consolidated financial statements include the parent company and its wholly owned subsidiaries, including those operating outside the U.S. All significant intercompany balances and transactions have been eliminated in the financial statements. Certain reclassifications have been made for consistent presentation. We prepare our financial statements under generally accepted accounting principles that require management to make estimates and assumptions that affect the amounts reported and the related disclosures. Actual results could differ from these estimates. As described in Note B, in January 1998, we merged with Computervision Corporation. The merger was accounted for as a pooling of interests. Accordingly, the accompanying consolidated financial statements and notes have been restated for all periods presented. FOREIGN CURRENCY TRANSLATION For our foreign operations where the functional currency is the local currency, we translate assets and liabilities at rates in effect at the balance sheet date and record translation adjustments in stockholders' equity. For our foreign operations where the U.S. dollar is the functional currency, we translate monetary assets and liabilities using exchange rates in effect at the balance sheet date and nonmonetary assets and liabilities at historical rates and record translation adjustments in income. We translate income statement amounts at average rates for the period. Transaction gains and losses are recorded in other expense in the statement of income. REVENUE RECOGNITION Our revenue is derived from the licensing of computer software products and from service revenue consisting of training, consulting, and maintenance. License revenue is recognized upon shipment, unless collection is not reasonably assured. Revenue from software maintenance contracts is recognized ratably over the contract period. Revenue from consulting and training is recognized upon performance. Other service revenue is recognized ratably over the contractual period. CASH, CASH EQUIVALENTS, AND INVESTMENTS Our cash is invested in debt instruments of financial institutions, government entities, corporations, and mutual funds. We have established guidelines relative to credit ratings, diversification, and maturities that maintain safety and liquidity. Our cash equivalents include highly liquid investments with maturity periods of three months or less when purchased. Our short-term investments include those investments with maturities in excess of three months but less than one year. Our marketable investments are those with maturities in excess of one year but less than two years. Our cash equivalents and short-term and marketable investments are classified as available for sale and reported at fair value with unrealized gains and losses included in stockholders' equity. We have not had any significant losses related to our investments. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value due to their short maturities. Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade receivables, and derivatives. Our cash, cash equivalents, investments, and derivatives are held with financial institutions with high credit standings. Our customer base consists of large numbers of geographically diverse customers dispersed across many industries. As a result, concentration of credit risk with respect to trade receivables is not significant. TRANSFER OF FINANCIAL ASSETS We offer our customers the option to purchase software and services through payment plans, financing, or leasing contracts. In general, we transfer future payments under certain of these contracts to financing institutions on a non-recourse basis. We record such transfers as sales of the related accounts receivable when we surrender control of such receivables under the provisions of Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Fair market value of all service assets and liabilities were immaterial for all periods. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- DERIVATIVES Derivatives are financial instruments whose value is derived from one or more underlying financial instruments, such as foreign currency. We enter into derivative transactions, specifically foreign exchange forward (forward) contracts and foreign exchange option (option) contracts, to manage our exposure to fluctuations in foreign exchange rates. The contracts are primarily in European currencies and Japanese yen and have maturities less than one year. Any derivative we enter into is designated at inception as a hedge of risks associated with specific assets, liabilities, or future commitments and is monitored to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on changes in its market value being highly correlated with changes in market value of the underlying hedged items. We do not enter into or hold derivatives for trading or speculative purposes. We use forward contracts to hedge specific foreign currency denominated receivables. These contracts, which are one year or less in length, require us to exchange foreign currencies for U.S. dollars at maturity at rates agreed to at inception of the contracts. We enter into transactions denominated in foreign currencies and include the exchange gain or loss arising from such transactions in other expense. As of September 30, 1997 and 1998, we had approximately $50.2 million and $49.8 million, respectively, of forward contracts outstanding. Unrealized and realized gains and losses associated with exchange-rate fluctuations on forward contracts are immaterial for all periods presented. Cash flows from forward contracts are classified with the related receivables. From time to time, we purchase option contracts to limit potential losses from adverse exchange-rate movements on certain anticipated revenue transactions. Premiums to purchase option contracts are capitalized in other current assets and amortized to other expense over the life of the contract. Gains on option contracts, if any, are included in license and service revenue in the period in which the related local-currency revenue is reported. These amounts were immaterial for all periods presented. There were no outstanding option contracts at September 30, 1997 or 1998. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, typically three to eight years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. Property and equipment under capital leases are amortized over the lesser of the lease terms or their estimated useful lives. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income. COMPUTER SOFTWARE COSTS We incur costs to develop and purchase computer software to be licensed or otherwise marketed to customers. Development costs incurred in the research and development of new software products and enhancements to existing products are expensed in the period incurred, unless these costs qualify for capitalization. Capitalized computer software costs are amortized over the economic lives of the related products, typically three to five years, beginning at their initial shipment date. Capitalized computer software costs of $1.7 million and $8.7 million, net of accumulated amortization of $8.0 million and $9.9 million, are included in other assets at September 30, 1997 and 1998. Amortization charged to expense was $3.7 million, $2.6 million, and $1.9 million for 1996, 1997, and 1998. INTANGIBLE ASSETS Included in our other assets are values attributable to intangible assets acquired, such as goodwill and trademarks, which are amortized over seven years, and assembled workforces, which are amortized over five to seven years. Amortization charges related to intangible assets, the majority of which were recorded in general and administrative expenses, totaled $1.7 million for 1996, and $1.6 million for 1997 and 1998. Management regularly evaluates the net realizable value of long-lived assets, including property and equipment, computer software costs, and intangible assets, relying on a number of factors including operating results, business plans, budgets, and economic projections. INCOME TAXES Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of these differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized, net of valuation allowances, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. 40 - -------------------------------------------------------------------------------- EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share (EPS). This standard requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerators and denominators of basic and diluted EPS calculations. We adopted this standard during the first quarter of fiscal 1998. Accordingly, all prior period EPS data has been restated to conform to the provisions of SFAS No. 128. Basic 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. The following table, adjusted for stock dividends, presents the calculation for both basic and diluted EPS: September 30, - -------------------------------------------------------------------------------- (in thousands, except per share data) 1996 1997 1998 - -------------------------------------------------------------------------------- Net income $159,567 $ 87,660 $ 86,697 - -------------------------------------------------------------------------------- Weighted average shares outstanding 264,061 266,389 268,977 Dilutive effect of employee stock options 13,582 11,803 8,287 - -------------------------------------------------------------------------------- Diluted shares outstanding 277,643 278,192 277,264 - -------------------------------------------------------------------------------- Basic earnings per share $ 0.60 $ 0.33 $ 0.32 Diluted earnings per share 0.57 0.32 0.31 - -------------------------------------------------------------------------------- Options to purchase shares of the Company's common stock of 1.8 million shares for 1996, 6.3 million shares for 1997, and 11.7 million shares for 1998 were outstanding but were not included in the computations of diluted EPS because the price of the options was greater than the average market price of the common stock for the period reported. STOCK-BASED COMPENSATION We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. Under APB No. 25, no compensation cost is recognized because the option price is equal to the market price of the underlying stock on the date of grant. An alternative method of accounting is SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS No. 123, employee stock options are valued at the grant date using a valuation model, and compensation cost is recognized ratably over the vesting period. The impact of recording stock-based compensation under the provisions of SFAS No. 123 is disclosed in Note J. NEW ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and the display of comprehensive income and its components (revenue, expenses, gains, and losses). During 1997, the FASB also issued SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. We will adopt SFAS No. 130 and SFAS No. 131 in fiscal 1999 and do not expect that the adoptions will have a material impact on the consolidated financial statements. 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 in recognizing revenue on software transactions and supersedes SOP 91-1, Software Revenue Recognition. We will adopt SOP 97-2 in fiscal 1999 and do not anticipate any material impact on our revenue recognition policies or on our results of operations. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. We will adopt SFAS No. 133 in fiscal 2000. Our management anticipates that the adoption of SFAS No. 133 will not have a significant effect on our consolidated financial statements. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- B. ACQUISITIONS AND NONRECURRING CHARGES ACQUISITIONS ICEM. In June 1998, we acquired ICEM Technologies (ICEM), a division of Control Data Systems, Inc., for approximately $41 million in cash. Headquartered in Frankfurt, Germany, ICEM provides advanced surfacing and reverse-engineering software tools used by body and styling engineers in the automotive and aerospace industries. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price to the assets acquired and liabilities assumed based on our estimates of fair value. The fair value assigned to intangible assets acquired consisted of purchased in-process research and development (R&D), developed technology, an assembled workforce, and trade names. The amounts allocated to tangible and intangible assets acquired less the liabilities assumed exceeded the purchase price by approximately $7 million. This excess value over the purchase price was allocated to reduce proportionately the values assigned to long-term assets and purchased in-process R&D in determining their values. The values assigned included $2.1 million for net assets acquired, $28.9 million for purchased in-process R&D, $8.0 million for developed technology, $1.6 million for an assembled workforce, and $1.0 million for trade names. The operating results of ICEM have been included in our results of operations from the date of acquisition. Our purchase of ICEM did not require presentation of pro forma information. In the opinion of management, the purchased in-process R&D had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded a nonrecurring charge of $28.9 million during the third quarter of 1998. The value assigned to purchased in-process R&D was determined by identifying research projects for which technological feasibility had not been established. The value was determined by estimating the costs to develop the purchased in-process R&D into commercially viable products, estimating the resulting net cash flows from such products, and discounting the net cash flows back to their present value. The discount rate used included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. Computervision. In January 1998, we merged with Computervision Corporation by issuing 11.6 million shares of common stock in exchange for all of the outstanding common stock of Computervision. In connection with the Computervision merger, we incurred a nonrecurring charge of $76.8 million for merger-related integration, consolidation, and transaction costs in 1998, which are described in the acquisition and nonrecurring charges activity table below. As our fiscal year-end differed from Computervision's, we combined financial information for dissimilar year-ends. Balance sheet information as of September 30, 1997 includes our financial position as of September 30, 1997 and Computervision's as of December 31, 1997. Computervision's results of operations for its fiscal years ended December 31, 1996 and December 31, 1997 were combined with our results of operations for the fiscal years ended September 30, 1996 and September 30, 1997. In order to conform Computervision's fiscal year-end to ours, Computervision's results of operations for the three months ended December 31, 1997 were combined with our results of operations for the three months ended January 3, 1998. Computervision's net loss of $20.2 million for the three months ended December 31, 1997, which has been included in the consolidated statements of income for the fourth quarter of fiscal 1997 and the first quarter of fiscal 1998, has been reflected as an adjustment to our beginning balance of fiscal 1998 accumulated deficit. Due to the change in Computervision's year-end, their cash flow activity for the three-month period ended December 31, 1997 has been shown as a separate component of the cash flow statement. Adjustments recorded to conform Computervision's accounting policies to ours were not material to the consolidated financial statements. The following table shows revenue and net income of the separate companies during the period preceding the combination: Three months ended January 3, - -------------------------------------------------------------------------------- (in thousands) 1998 - -------------------------------------------------------------------------------- Revenue: Parametric Technology $223,007 Computervision 35,861 - -------------------------------------------------------------------------------- Combined revenue $258,868 - -------------------------------------------------------------------------------- Net income (loss): Parametric Technology $ 62,343 Computervision (20,210) - -------------------------------------------------------------------------------- Combined net income $ 42,133 - -------------------------------------------------------------------------------- 42 - -------------------------------------------------------------------------------- Reflex. In July 1996, we acquired project modeling and management software (Reflex) technology from Greenshire License Co. for $32.1 million. Of the total purchase price, we issued 226,000 shares of our common stock with a fair value of $5.0 million at the time of the acquisition and paid cash of $22.1 million in 1996 and $5.0 million in 1997. The acquisition was accounted for as a purchase. The fair value assigned to intangible assets acquired consisted of in-process R&D related to a research project, which had not yet reached technological feasibility and had no alternative future uses. As a result, at the date of acquisition, the $32.1 million allocated to purchased in-process R&D was recorded as a nonrecurring charge. The value was determined by estimating the costs to develop the purchased in-process R&D into a commercially viable product, estimating the resulting net cash flows from such product, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. The operating results of Reflex have been included in our consolidated results of operations from the date of acquisition. Our purchase of Reflex did not require presentation of pro forma information. NONRECURRING CHARGES Other nonrecurring charges related to actions taken as a result of cost saving initiatives implemented during 1996 and 1997 by Computervision. These restructuring costs were accrued and charged to expense in accordance with management plans. We anticipate that a substantial portion of the remaining nonrecurring amounts will be paid during 1999, except for certain long-term obligations, principally related to facilities. The following table summarizes all our acquisition and nonrecurring charges: ACQUISITION AND NONRECURRING CHARGES ACTIVITY September 30, - -------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - -------------------------------------------------------------------------------- Beginning balance $ 72,500 $ 71,500 $ 70,983 - -------------------------------------------------------------------------------- Charges to operations: Employee severance and termination benefits 10,000 20,000 18,110 Purchased in-process R&D 35,619 -- 28,941 Asset write-offs -- 6,634 12,737 Facility closures and related costs 1,000 18,000 7,158 Additional costs to meet existing contract obligations -- -- 17,400 Transaction costs -- -- 8,154 Lease terminations and other -- 366 13,266 - -------------------------------------------------------------------------------- Total charges to operations 46,619 45,000 105,766 - -------------------------------------------------------------------------------- Costs incurred: Employee severance and termination benefits -- (11,449) (22,753) Purchased in-process R&D (35,619) -- (28,941) Asset write-offs -- (6,634) (12,737) Facility closures and related costs (12,000) (27,114) (17,573) Additional costs to meet existing contract obligations -- -- (8,026) Transaction costs -- -- (7,977) Lease terminations and other -- (320) (9,141) - -------------------------------------------------------------------------------- Total costs incurred (47,619) (45,517) (107,148) - -------------------------------------------------------------------------------- Ending balance $ 71,500 $ 70,983 $ 69,601 ================================================================================ Cash expenditures: Employee severance and termination benefits $ -- $ 11,449 $ 22,753 Facility closures and related costs 12,000 27,114 17,573 Additional costs to meet existing contract obligations -- -- 8,026 Transaction costs -- -- 7,977 Lease terminations and other -- 320 6,002 - -------------------------------------------------------------------------------- Total cash expenditures $ 12,000 $ 38,883 $ 62,331 ================================================================================ Number of employee severances 100 300 450 ================================================================================ As of September 30, 1998, of the $69.6 million remaining in accrued restructuring and nonrecurring charges, $35.8 million was included in accrued expenses, $13.9 million was included in accrued compensation, and $19.9 million was included in other liabilities. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- C. SALE OF A BUSINESS UNIT In July 1997, Computervision sold a majority interest in its other services business unit, which provided hardware support services, to CVSI, Inc. for $32.6 million in cash. Due to the sale of this business unit in 1997, we have presented the revenue and expense of the other services business as a separate operating item under the caption other services in our statements of income. Other services operating and nonrecurring charges include the operating expenses of the other services business and nonrecurring charges of $5.0 million in 1996 and $7.0 million in 1997 related to the prior proposed sale of this business unit. D. INVESTMENTS The fair values of our investments have been determined through information obtained from market sources and management estimates. We use a specific identification cost method to determine the gross realized gains and losses on the sale of our securities. Realized gains and losses on the sale of investments were immaterial for 1996, 1997, and 1998. September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 - -------------------------------------------------------------------------------- Amortized Gross Gross Estimated cost unrealized unrealized fair value gains losses - -------------------------------------------------------------------------------- Municipal debt securities $357,372 $ 233 $ (165) $357,440 Mutual funds 9,812 -- -- 9,812 Auction rate preferred stock 36,874 1 (2) 36,873 Corporate debt securities 11,106 3 (23) 11,086 - -------------------------------------------------------------------------------- Total investments $415,164 $ 237 $ (190) $415,211 ================================================================================ Amounts included in: Cash and cash equivalents $ 15,115 $ -- $ -- $ 15,115 Short-term investments 354,567 133 (184) 354,516 Marketable investments 45,482 104 (6) 45,580 - -------------------------------------------------------------------------------- Total investments $415,164 $ 237 $ (190) $415,211 ================================================================================ September 30, - -------------------------------------------------------------------------------- (in thousands) 1998 - -------------------------------------------------------------------------------- Amortized Gross Gross Estimated cost unrealized unrealized fair value gains losses - -------------------------------------------------------------------------------- Municipal debt securities $238,296 $954 $(404) $238,846 Mutual funds 12,435 -- -- 12,435 - -------------------------------------------------------------------------------- Total investments $250,731 $954 $(404) $251,281 ================================================================================ Amounts included in: Cash and cash equivalents $ 31,069 $ -- $ -- $ 31,069 Short-term investments 131,145 379 (119) 131,405 Marketable investments 88,517 575 (285) 88,807 - -------------------------------------------------------------------------------- Total investments $250,731 $954 $ (404) $ 251,281 ================================================================================ E. PROPERTY AND EQUIPMENT Our property and equipment consisted of the following: September 30, - ------------------------------------------------------------------------------- (in thousands) 1997 1998 - ------------------------------------------------------------------------------- Computer hardware and software $ 96,582 $106,770 Furniture and fixtures 9,549 13,542 Leasehold improvements 32,796 10,725 - -------------------------------------------------------------------------------- Gross property and equipment 138,927 131,037 Accumulated depreciation and amortization (82,130) (68,796) - -------------------------------------------------------------------------------- Net property and equipment $ 56,797 $ 62,241 ================================================================================ At September 30, 1997, property and equipment included assets under capital leases of $12.0 million, net of accumulated depreciation of $8.3 million. There were no capital leases as of September 30, 1998. Depreciation expense was $34.9 million in 1996, $30.6 million in 1997, and $26.4 million in 1998. 44 F. INCOME TAXES Our income before taxes consisted of the following: September 30, - ------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - ------------------------------------------------------------------------------- Domestic $211,779 $290,640 $191,518 Foreign 28,645 (84,956) 12,489 - ------------------------------------------------------------------------------- Total $240,424 $205,684 $204,007 - ------------------------------------------------------------------------------- Our provision for income taxes consisted of the following: September 30, - ------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - ------------------------------------------------------------------------------- Current: Federal $57,880 $ 82,201 $70,787 State 10,811 18,280 10,756 Foreign 18,569 13,582 11,224 - ------------------------------------------------------------------------------- 87,260 114,063 92,767 - ------------------------------------------------------------------------------- Deferred: Federal (7,730) 3,677 4,806 State 529 119 720 Foreign 798 165 -- - ------------------------------------------------------------------------------- (6,403) 3,961 5,526 - ------------------------------------------------------------------------------- Total provision for income taxes $80,857 $118,024 $98,293 - ------------------------------------------------------------------------------- The reconciliation between the statutory federal income tax rate and our effective income tax rate is shown below. September 30, - ------------------------------------------------------------------------------- 1996 1997 1998 - ------------------------------------------------------------------------------ Statutory federal income tax rate 35% 35% 35% State income taxes, net of federal tax benefit 3 6 4 Tax exempt interest income (1) (2) (2) Benefit of foreign sales corporations (3) (4) (4) Other, net -- -- 1 - ------------------------------------------------------------------------------ Effective tax rate before non-benefited items: 34 35 34 Losses -- 22 3 Acquisition-related charges -- -- 11 - ------------------------------------------------------------------------------ Effective income tax rate 34% 57% 48% - ------------------------------------------------------------------------------ We paid $39.8 million in 1996, $55.6 million in 1997, and $71.3 million in 1998 for income taxes. The significant temporary differences that create deferred tax assets and liabilities are shown below. September 30, - ------------------------------------------------------------------------------ (in thousands) 1997 1998 - ------------------------------------------------------------------------------ Deferred tax assets: Reserves not currently deductible $ 8,786 $ 7,088 Restructuring reserves not currently deductible 15,771 14,687 Net operating loss carryforwards 143,799 94,198 Amortization of intangible assets 14,979 11,177 Capitalized research and development 4,477 4,141 Other 4,291 2,619 - ------------------------------------------------------------------------------ Total deferred tax assets 192,103 133,910 Valuation allowance (132,472) (85,935) - ------------------------------------------------------------------------------ Total deferred tax assets 59,631 47,975 - ------------------------------------------------------------------------------ Deferred tax liabilities: Investment in foreign subsidiaries (38,393) (31,193) Other (1,813) (2,884) - ------------------------------------------------------------------------------ Total deferred tax liabilities (40,206) (34,077) - ------------------------------------------------------------------------------ Net deferred tax assets $ 19,425 $ 13,898 - ------------------------------------------------------------------------------ For U.S. tax return purposes, net operating losses (NOLs) and tax credit carryforwards are generally available to be carried forward to future years. However, the Internal Revenue Code limits a corporation's use of NOLs and tax credits after a change of more than 50% of the ownership of the corporation. Our merger with Computervision in January 1998 changed their ownership more than 50%. This change limits our usage of the Computervision NOLs to $14.0 million per year, and $196.0 million cumulatively through 2011. There are other limitations imposed on the utilization of such NOLs that will further restrict the recognition of such tax benefits. We have foreign NOLs that are also subject to various limitations. Due to these limitations, we have recorded a valuation allowance for the tax benefit of a majority of NOLs since realization of these future benefits is not sufficiently assured. During 1998, we reduced our valuation allowance $46.5 million primarily due to changes in ownership related to the Computervision merger. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- G. DEBT Our debt outstanding in 1997 consisted of the obligations of Computervision. As described below, all such obligations were paid during the second quarter of fiscal 1998. The total cash outlay for settlement of these obligations plus accrued interest and related fees was $275.7 million. We incurred an extraordinary after-tax charge of $19.0 million related to the write-off of deferred financing costs and other prepayment costs associated with the payment of these debt obligations. We paid interest of $27.3 million in 1996, $29.6 million in 1997, and $10.7 million in 1998. September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 - -------------------------------------------------------------------------------- Short-term: Notes payable to banks $ 2,228 Revolving credit facility 30,475 - -------------------------------------------------------------------------------- Total short-term debt 32,703 - -------------------------------------------------------------------------------- Long-term: 11 3/8% Senior Subordinate Notes 175,000 8% Convertible Subordinated Debentures, net of unamortized discount of $14,563 34,047 Other 11,253 - -------------------------------------------------------------------------------- Total debt 220,300 Less current maturities (6,774) - -------------------------------------------------------------------------------- Long-term debt $213,526 - -------------------------------------------------------------------------------- Notes payable to banks consisted of borrowings of our international subsidiaries under certain lines of credit. These borrowings were at prevailing or negotiated rates. In November 1997, Computervision entered into a $47.3 million revolving credit facility with a lending institution. The credit facility, which replaced all prior credit facilities, had a term of 18 months and was secured by substantially all of the assets of Computervision. The weighted average interest rate on outstanding borrowings was 8.5%. On January 13, 1998, we paid $34.9 million for settlement of the outstanding balance on the revolving credit facility plus accrued interest and related fees. The 11 3/8% Senior Subordinate Notes had a maturity date of August 15, 1999 and accrued interest semi-annually on February 15 and August 15. After August 15, 1997, the notes were redeemable in whole or part at our option at 101.896% of the principal plus accrued interest through the date of redemption. In February 1998, we paid $188.0 million for redemption of the notes plus accrued interest. The 8% Convertible Subordinate Debentures, due December 1, 2009, were convertible into cash at the rate of 33.3% of the principal amount at any time prior to maturity at the option of the holder. No material conversions occurred during 1996, 1997, or 1998. The debentures accrued interest semi-annually on June 1 and December 1. In February 1998, we paid $49.4 million for settlement in full of the debentures plus accrued interest. H. COMMITMENTS AND CONTINGENCIES LEASING ARRANGEMENTS We lease office facilities and certain equipment under operating leases expiring at various dates through fiscal 2014. In addition to rent, certain leases require us to pay directly for taxes, insurance, maintenance, and other operating expenses. Rent expense, net of sublease income, was $61.6 million in 1996, $60.0 million in 1997, and $45.0 million in 1998. At September 30, 1998, our future minimum lease payments under noncancellable operating leases with remaining terms of one or more years are as follows: September 30, - -------------------------------------------------------------------------------- (in thousands) 1998 - -------------------------------------------------------------------------------- 1999 $ 61,761 2000 42,382 2001 23,576 2002 16,375 2003 14,554 Thereafter 53,435 - -------------------------------------------------------------------------------- Total minimum lease payments $ 212,083 - -------------------------------------------------------------------------------- As a result of Computervision's cost saving initiatives in prior years and our merger with Computervision, certain leased facilities were considered excess. As of September 30, 1998, the excess facility obligations were $41.9 million. LEGAL PROCEEDINGS Certain class action lawsuits have been filed against us and certain of our current and former officers and directors claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of 1998. We believe the claims are without merit and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions 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. 46 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 consolidated financial statements. I. STOCKHOLDERS' EQUITY PREFERRED STOCK We may issue up to 5.0 million shares of our preferred stock in one or more series. Our Board of Directors is authorized to fix the rights and terms for each such series without additional shareholder approval. As of September 30, 1997 and 1998, there were no outstanding shares of preferred stock. COMMON STOCK Our Articles of Organization authorize us to issue up to 350 million shares of our common stock. Shares of common stock outstanding are shown below. September 30, - ------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - ------------------------------------------------------------------------------- Beginning balance 261,139 265,859 266,919 Common stock issued 4,766 2,062 4,310 Treasury shares repurchased (3,558) (7,439) (4,734) Treasury shares issued 3,512 6,437 1,647 - ------------------------------------------------------------------------------- Ending balance 265,859 266,919 268,142 - ------------------------------------------------------------------------------- On February 8, 1996 and on February 12, 1998, our Board of Directors declared a one-for-one stock dividend on our common stock to all stockholders of record on February 22, 1996 and February 27, 1998, respectively. Our financial statements and notes have been retroactively adjusted to reflect both stock dividends. In September 1997, our Board of Directors authorized an increase in the number of shares available for repurchase from 6.0 million to 12.0 million. During 1996 we repurchased 3.6 million shares at a cost of $66.6 million. During 1997, we repurchased 7.4 million shares at a cost of $184.8 million. Treasury stock repurchases were suspended during a portion of 1998 in connection with the Computervision merger. In September 1998, our Board of Directors authorized a new plan that allows us to repurchase up to 20.0 million shares of our common stock. In the fourth quarter of 1998, we repurchased 4.7 million shares at a cost of $50.0 million. The repurchased shares will be used to issue shares for stock option exercises, employee stock purchase plans, and potential acquisitions. J. STOCK PLANS EMPLOYEE STOCK PURCHASE PLAN We offer an employee stock purchase plan for all eligible employees. Under the plan, up to 4.0 million shares of our common stock may be purchased at 85% of the lower of the fair market value of the stock on the first or the last day of each six-month offering period. Each employee may elect to have up to 10% of his or her base pay withheld and applied toward the purchase of shares in such offering, up to a maximum of ten thousand dollars withheld in any year. During 1996, 1997, and 1998, employees purchased 339,000, 353,000, and 677,000 shares at average prices of $14.45, $18.41, and $11.36. At September 30, 1998, we had reserved 1.2 million shares for issuance under this plan. STOCK OPTION PLANS We have stock option plans for employees, directors, officers, and consultants that provide for issuance of nonqualified and incentive stock options. The option exercise price is typically the fair market value at the date of grant. These options generally vest over four years and expire ten years from the date of grant. As of September 30, 1998, 4.5 million options were available for grant and 53.4 million shares of common stock were reserved for future issuance under stock option plans. In conjunction with the Computervision merger on January 12, 1998, we reserved 1.6 million shares of our common stock for outstanding Computervision options assumed. These assumed options were granted at prices equal to the fair market value at the date of grant, become exercisable generally in annual installments over four to five years, and expire ten years from the date of grant. In July 1998, our Board of Directors approved a one-for-one stock option exchange program that provided employees the opportunity to exchange stock options previously granted for new options with a current market price and new vesting period. Executive officers and directors were not eligible to participate in the program. The new options were priced at $13.63 based on the closing price of our common stock as reported by Nasdaq on August 3, 1998, vest in equal installments over four years from the August 3, 1998 grant date, and expire on August 3, 2008. A total of 20.0 million options with exercise prices ranging from $15.06 to $33.50 per share were exchanged under the program. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The exchange of such options is presented in the following table of stock option activity as cancellations and subsequent grants: September 30, - -------------------------------------------------------------------------------- (shares in thousands) 1996 1997 1998 - -------------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price - -------------------------------------------------------------------------------- Outstanding: Beginning balance 33,173 $ 9.06 33,184 $13.54 38,234 $18.67 Granted 10,694 20.87 16,249 24.71 40,190 17.91 Cancelled (2,893) 11.69 (3,694) 21.05 (24,254) 25.85 Exercised (7,790) 5.42 (7,505) 8.14 (5,282) 12.01 - -------------------------------------------------------------------------------- Ending balance 33,184 $ 13.54 38,234 $18.67 48,888 $15.03 - -------------------------------------------------------------------------------- Exercisable 9,480 $ 8.01 9,751 $12.36 11,418 $14.53 - -------------------------------------------------------------------------------- Certain employees have disposed of stock acquired through the exercise of incentive stock options earlier than the mandatory holding period required for such options. These dispositions, together with the tax benefits realized from the exercise of nonqualified stock options, create tax benefits that have been recorded as increases to additional paid-in capital. For various price ranges, information for options outstanding and exercisable at September 30, 1998 was as follows: (shares in thousands) Outstanding Options Exercisable Options - -------------------------------------------------------------------------------- Weighted average Weighted Weighted Range of remaining average average exercise prices Shares life (years) price Shares price - -------------------------------------------------------------------------------- $ 0.10-12.27 12,020 7.63 $ 9.07 5,469 $ 8.36 12.28-13.63 19,743 9.84 13.63 -- -- 13.64-21.38 8,327 7.82 16.22 3,370 16.26 21.39-29.47 8,322 8.51 24.04 2,324 23.61 29.48-72.55 476 9.19 45.82 255 48.19 - -------------------------------------------------------------------------------- $ 0.10-72.55 48,888 8.73 $15.03 11,418 $ 14.53 - -------------------------------------------------------------------------------- VALUATION OF STOCK PLANS We have not recognized compensation expense in connection with stock option grants under our plans. However, had compensation expense for stock option and employee stock purchase plans been determined based on fair value at the grant dates as prescribed by SFAS No. 123, pro forma net income and earnings per share would have been: September 30, - -------------------------------------------------------------------------------- (in thousands, except per share amounts) 1996 1997 1998 - -------------------------------------------------------------------------------- Pro forma net income $126,717 $36,725 $9,824 Pro forma earnings per share: Basic $ 0.48 $ 0.14 $ 0.04 Diluted 0.47 0.14 0.04 - -------------------------------------------------------------------------------- The pro forma disclosures above include the amortization of the fair value of all options vested between 1996 and 1998, regardless of the grant date. If only options granted after 1996 were valued, as prescribed by SFAS No. 123, pro forma net income and pro forma diluted EPS would have been $148.5 million and $0.55 for 1996, $54.2 million and $0.20 for 1997, and $22.4 million and $0.09 for 1998. The effects on pro forma disclosures of applying SFAS No. 123 are not necessarily representative of the effects on pro forma disclosures of future years. The fair value of options granted has been estimated at the date of grant using the Black-Scholes option-pricing model, assuming the following weighted-average assumptions: September 30, - -------------------------------------------------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------------- Expected life (years) 5.0 5.0 6.0 Risk-free interest rates 6.0% 6.2% 5.6% Volatility 40% 40% 50% Dividend yield -- -- -- - -------------------------------------------------------------------------------- The weighted-average fair value of stock options granted was $8.68 in 1996, $11.17 in 1997, and $9.95 in 1998. The expected life used for stock purchase plans was six months. The weighted- average fair value of shares granted under the stock purchase plan was $4.63 in 1996, $6.13 in 1997, and $7.77 in 1998. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable measure of the fair value of its options. 48 K. EMPLOYEE BENEFIT PLANS We offer a savings plan (PTC plan) to eligible employees. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Participating employees may defer up to 15% of their pre-tax salary, but not more than statutory limits. We contribute 50% of the amount contributed by the employee, up to a maximum of 10% of the employee's earnings. Our matching contributions vest at a rate of 25% per year of service. We made matching contributions of $1.9 million, $2.3 million, and $3.2 million in 1996, 1997, and 1998. U.S. employees of Computervision who completed one year of service were eligible to participate in a savings plan (CV plan), which is intended to qualify under Section 401(k) of the Internal Revenue Code. Computervision's matching contributions, based on the employee's contributions and length of service, were $1.9 million for 1996 and $1.5 million for 1997. We will make a matching contribution to the CV plan for 1998 in the second quarter of fiscal 1999. Beginning April 1, 1998, participants of the CV plan began contributing to the PTC plan and no further contributions were made into the CV plan. We will merge the assets of the CV plan into the PTC plan in the first quarter of fiscal 1999. L. PENSION PLANS We maintain a defined benefit pension plan covering certain employees of Computervision. Benefits are based upon length of service and average compensation, and generally vest after five years of service. Accrued pension costs have been included in other liabilities. U.S. PENSION PLAN Effective April 1990, the benefits under the U.S. pension plan were frozen indefinitely. We contribute all amounts deemed necessary on an actuarial basis to satisfy Internal Revenue Service funding requirements. Based upon the actuarial valuations, we contributed $4.9 million in 1996, $5.0 million in 1997, and $3.8 million in 1998. Due to the changes in actuarial assumptions and underperformance of plan investments, as shown below, we were required to record a minimum pension liability adjustment of $5.8 million in 1997 and $7.8 million in 1998. Plan assets consist primarily of money market and pooled fund investments with several banks. FOREIGN PENSION PLANS The accrued international pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We increased our minimum pension liability related to our foreign plans by $13.0 million in 1998 due to the changes in actuarial assumptions and underperformance of plan investments, as shown below. Plan assets consist of investments in equities and guaranteed investment contracts with several insurance companies and banks. The following tables present the actuarial assumptions used in accounting for the pension plans: U.S. Plan September 30, - -------------------------------------------------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------------- Discount rate 7.5% 7.0% 6.3% Rate of increase in future compensation -- -- -- Rate of return on plan assets 7.5% 7.5% 7.5% - -------------------------------------------------------------------------------- Foreign Plans - -------------------------------------------------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------------- Discount rate 4.0 to 8.5% 4.0 to 7.5% 3.5 to 6.3% Rate of increase in future compensation 3.5 to 6.0% 3.3 to 5.5% 3.0 to 5.0% Rate of return on plan assets 4.5 to 9.0% 4.0 to 9.0% 3.5 to 8.5% - -------------------------------------------------------------------------------- The actuarially computed components of net periodic pension cost are shown below: U.S. Plan September 30, - -------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - -------------------------------------------------------------------------------- Service cost of benefits earned during the period $ -- $ -- $ -- Interest cost of projected benefit obligation 2,607 2,771 2,262 Actual return on plan assets (1,247) (1,482) (916) Net amortization and deferral (11) (110) (276) - -------------------------------------------------------------------------------- Net periodic pension cost $ 1,349 $ 1,179 $1,070 - -------------------------------------------------------------------------------- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Foreign Plans - -------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - -------------------------------------------------------------------------------- Service cost of benefits earned during the period $ 2,269 $ 1,572 $ 1,012 Interest cost of projected benefit obligation 3,097 2,660 2,249 Actual return on plan assets (3,779) (3,070) 39 Net amortization and deferral 579 233 (2,419) - -------------------------------------------------------------------------------- Net periodic pension cost $ 2,166 $ 1,395 $ 881 - -------------------------------------------------------------------------------- The following tables display the funded status of the defined benefit plans: U.S. Plan September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 1998 - -------------------------------------------------------------------------------- Accumulated benefit obligation $ 42,366 $ 50,622 - -------------------------------------------------------------------------------- Vested benefit obligation 42,366 50,622 - -------------------------------------------------------------------------------- Projected benefit obligation $ 42,366 $ 50,622 Plan assets at fair value 28,564 31,742 - -------------------------------------------------------------------------------- Projected benefit obligation more than plan assets 13,802 18,880 Unrecognized net loss (13,756) (21,596) Unrecognized net prior service cost -- -- Minimum pension liability adjustment 13,756 21,596 - -------------------------------------------------------------------------------- Accrued pension cost $ 13,802 $ 18,880 - -------------------------------------------------------------------------------- Foreign Plans - -------------------------------------------------------------------------------- (in thousands) 1997 1998 - -------------------------------------------------------------------------------- Accumulated benefit obligation $ 40,091 $ 50,688 - -------------------------------------------------------------------------------- Vested benefit obligation 39,159 49,759 - -------------------------------------------------------------------------------- Projected benefit obligation $ 41,449 $ 51,958 Plan assets at fair value 34,522 35,179 - -------------------------------------------------------------------------------- Projected benefit obligation more than plan assets 6,927 16,779 Unrecognized net loss (2,365) (11,212) Unrecognized net prior service cost -- (353) Minimum pension liability adjustment -- 12,986 - -------------------------------------------------------------------------------- Accrued pension cost $ 4,562 $ 18,200 - -------------------------------------------------------------------------------- M. GEOGRAPHIC INFORMATION September 30, - -------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 - -------------------------------------------------------------------------------- Revenue: North America $ 780,011 $ 900,922 $ 770,964 Europe 420,174 379,682 387,006 Asia/Pacific 189,306 189,315 133,175 Eliminations (312,170) (407,901) (273,175) - -------------------------------------------------------------------------------- Total revenue $1,077,321 $1,062,018 $1,017,970 - -------------------------------------------------------------------------------- Operating income (loss): North America $ 205,789 $ 286,418 $ 184,342 Europe 44,062 (55,993) 19,018 Asia/Pacific 9,878 (1,090) 4,660 - -------------------------------------------------------------------------------- Total operating income $ 259,729 $ 229,335 $ 208,020 - -------------------------------------------------------------------------------- Identifiable assets: North America $ 620,864 $ 727,693 $ 587,360 Europe 188,241 122,178 166,378 Asia/Pacific 66,241 63,451 46,182 Corporate 328,037 399,769 412,218 Eliminations (335,821) (354,759) (379,298) - -------------------------------------------------------------------------------- Total identifiable assets $ 867,562 $ 958,332 $ 832,840 - -------------------------------------------------------------------------------- We license products to customers worldwide. Our sales and marketing operations outside the United States are conducted principally through our foreign sales subsidiaries throughout Europe and the Asia/Pacific region. Intercompany sales and transfers between geographic areas are accounted for at prices that are designed to be representative of unaffiliated party transactions. Total export sales were $130.8 million, $148.5 million, and $115.2 million, in 1996, 1997, and 1998. N. SUBSEQUENT EVENT In October 1998, we acquired all of the outstanding stock of InPart Design, Inc. (InPart) by issuing 2.4 million shares of common stock. The acquisition will be accounted for as a purchase. Accordingly, the purchase price will be allocated to all identifiable assets and liabilities of InPart. We expect to allocate a portion of the purchase price to purchased in-process R&D that will be written off as a one-time charge in the first quarter of fiscal 1999. Based upon certain conditions of the agreement, we may be obligated to issue additional shares in September 1999. InPart, located in Saratoga, CA, provides a comprehensive library of standard mechanical parts over the Internet that helps manufacturers improve product development cycles and reduce component expenses. 50 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF PARAMETRIC TECHNOLOGY CORPORATION: In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Parametric Technology Corporation and its subsidiaries at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Computervision Corporation, which statements reflect total revenue of $477.2 million for the year ended December 31, 1996. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Computervision Corporation, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts October 26, 1998 51 SELECTED FINANCIAL DATA (1) - --------------------------------------------------------------------------------
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA September 30, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1994 1995 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------- Revenue $ 840,611 $ 901,384 $1,077,321 $1,062,018 $1,017,970 Operating income 162,814 199,306 259,729 229,335 208,020 Net income 77,860 100,178 159,567 87,660 86,697 Earnings per share: (2) Basic 0.32 0.39 0.60 0.33 0.32 Diluted 0.30 0.37 0.57 0.32 0.31 Total assets 568,309 700,644 867,562 958,332 832,840 Working capital 91,232 235,197 356,109 311,299 174,239 Long-term liabilities, less current portion 477,300 325,209 301,423 306,911 85,861 Stockholders' equity (deficit) (258,235) 33,194 195,648 200,792 327,437 Pro forma: (3) Revenue $ 553,153 $ 680,911 $ 902,937 $ 979,794 $1,017,970 Operating income 111,915 191,641 295,851 286,107 313,786 Net income 26,961 92,143 182,342 144,432 197,568 Earnings per share: (2) Basic 0.11 0.36 0.69 0.54 0.73 Diluted 0.10 0.34 0.66 0.52 0.71 - ------------------------------------------------------------------------------------------------------------------------------- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) December 28, March 29, June 28, September 30, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1996 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------- Revenue $ 261,310 $ 286,487 $ 258,191 $ 256,030 Gross profit 191,402 215,574 211,833 217,815 Operating income 47,300 27,907 74,889 79,239 Net income (loss) 15,507 (6,710) 38,586 40,277 Earnings per share: (2) Basic 0.06 (0.03) 0.14 0.15 Diluted 0.06 (0.03) 0.14 0.15 Pro forma: (3) Revenue $ 224,862 $ 249,600 $ 249,302 $ 256,030 Gross profit 188,448 210,707 212,238 217,815 Operating income 57,059 73,039 76,770 79,239 Net income 25,266 38,422 40,467 40,277 Earnings per share: (2) Basic 0.09 0.14 0.15 0.15 Diluted 0.09 0.14 0.15 0.15 Common stock prices: (4) High $ 28.19 $ 31.25 $ 24.44 $ 26.75 Low 24.13 23.25 19.66 20.63 - ------------------------------------------------------------------------------------------------------------------------------- January 3, April 4, July 4, September 30, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------- Revenue $ 258,868 $ 264,071 $ 245,001 $ 250,030 Gross profit 217,462 226,518 207,402 209,648 Operating income 80,128 23,515 35,851 68,526 Net income (loss) 42,133 (15,942) 15,209 45,297 Earnings per share: (2) Basic 0.16 (0.06) 0.06 0.17 Diluted 0.15 (0.06) 0.05 0.17 Pro forma: (3) Revenue $ 258,868 $ 264,071 $ 245,001 $ 250,030 Gross profit 217,462 226,518 207,402 209,648 Operating income 80,128 100,315 64,817 68,526 Net income 42,133 65,963 44,175 45,297 Earnings per share: (2) Basic 0.16 0.24 0.16 0.17 Diluted 0.15 0.24 0.16 0.17 Common stock prices: (4) High $ 26.38 $ 34.31 $ 34.94 $ 16.56 Low 19.94 23.00 16.06 9.75 - -------------------------------------------------------------------------------------------------------------------------------
(1) All financial information has been retroactively restated to reflect the mergers with Rasna in 1995 and Computervision in 1998 (Note B). (2) Per-share data has been retroactively adjusted to reflect the one-for-one stock dividends in 1993, 1996, and 1998 (Note I). (3) The pro forma results exclude: (i) acquisition and related costs of $29.4 million in 1995, $35.6 million in 1996, $76.8 million in the second quarter of 1998, and $28.9 million in the third quarter of 1998 (Note B); (ii) restructuring costs of $11.0 million in 1996 and $45.0 million in the second quarter of 1997 (Note B); (iii) the results of Computervision's other services business unit (Note C); and (iv) extraordinary charges of $7.9 million in 1995 and $19.0 million in the second quarter of 1998 (Note G). (4) Our common stock is traded on the Nasdaq National Market under the symbol "PMTC." The common stock prices shown are based on the Nasdaq daily closing stock price. 52 SUPPLEMENTAL FINANCIAL INFORMATION We have not paid cash dividends on our common stock and have historically retained earnings for use in our business. We intend to review our policy with respect to the payment of dividends from time to time; however, there can be no assurance that any dividends will be paid in the future. On September 30, 1998, our common stock was held by 6,721 shareholders of record. Investor Information Requests for information about PTC should be directed to: John Hudson, Vice President of Investor Relations, Parametric Technology Corporation, 128 Technology Drive, Waltham, MA 02453. Telephone: (781) 398-5000. Report on Form 10-K Stockholders may obtain additional financial information about Parametric Technology from our Report on Form 10-K filed with the Securities and Exchange Commission. Copies are available without charge upon written request. Annual Meeting The Annual Meeting of Stockholders will be held on February 11, 1999 at 9:00 A.M. at: Parametric Technology Corporation, 128 Technology Drive, Waltham, MA 02453. Stock Listing Nasdaq National Market Symbol: PMTC Internet Access www.ptc.com General Counsel Palmer & Dodge LLP, Boston, MA Independent Accountants PricewaterhouseCoopers LLP, Boston, MA Transfer Agent and Registrar American Stock Transfer & Trust Company Directors Steven C. Walske, Chairman and Chief Executive Officer, Parametric Technology Corporation C. Richard Harrison, President and Chief Operating Officer, Parametric Technology Corporation Robert N. Goldman, Chief Executive Officer and President, Object Design, Inc., a software developer Donald K. Grierson, Chief Executive Officer and President, ABB Vetco Gray, Inc., an oil services business Oscar B. Marx, III, Chief Executive Officer and President, TMW Enterprises, Inc., an autoparts business Michael E. Porter, Professor, Harvard Business School, an educational institution Noel G. Posternak, Senior Partner, Posternak, Blankstein & Lund, L.L.P., a law firm Corporate Officers Steven C. Walske, Chairman and Chief Executive Officer C. Richard Harrison, President and Chief Operating Officer Edwin J. Gillis, Executive Vice President, Chief Financial Officer, and Treasurer James P. Baum, Executive Vice President, Engineering, Research & Development Barry F. Cohen, Executive Vice President, Marketing Francis J. Cusick, Senior Vice President, Finance David R. Friedman, Vice President, General Counsel, and Clerk James F. Kelliher, Senior Vice President, Business Development EX-21.1 9 SUBSIDIARIES OF PTC EXHIBIT 21.1 Subsidiaries of Parametric Technology Corporation -------------------------------------------------
NAME PLACE OF INCORPORATION InPart Design, Inc. California Computervision Corporation Delaware Concentus Technology Corporation Delaware CV Finance Holding, Inc. Delaware CV International Holding, Inc. Delaware ICEM Technologies, Inc. Delaware Parametric Holdings Inc. Delaware Parametric International, Inc. Delaware Parametric Technology International, Inc. Delaware Windchill Technology, Inc. Delaware Computervision Securities Corporation Massachusetts Parametric Securities Corporation Massachusetts PTC International, Inc. Massachusetts Computervision Australian Operations Pty Limited Australia Parametric Technology Australia Pty Limited Australia Parametric Technology Gesellschaft m.b.H. Austria Parametric Foreign Sales Corporation Barbados Computervision Belgium N.V. Belgium Parametric Technology (Belgium) b.v.b.a. Belgium Computervision (Bermuda) Limited Bermuda Parametric Technology Brasil Ltda. Brazil Computervision (Canada) Inc. Canada Parametric Technology (Canada) Ltd. Canada Parametric Technology (C.R.) s.r.o. Czech Republic Computervision Danmark A/S Denmark Parametric Technology (Denmark) A/S Denmark Oy Computervision Ab Finland Parametric Technology (Finland) Oy Finland Parametric Technology S.A. France ICEM Holdings GmbH Germany ICEM Technologies GmbH Germany Parametric Technology GmbH Germany Computervision Asia Ltd. Hong Kong Computervision Service Ltd. Hong Kong Parametric Technology (Hong Kong) Limited Hong Kong Computervision Research & Development (India) Private Limited India Computervision Software Products (India) Private Limited India Parametric Technology (India) Private Limited India Parametric Technology (Republic of Ireland) Limited Ireland Parametric Technology Israel Ltd. Israel Computervision S.p.A. Italy Parametric Technology Italia S.r.l. Italy Nihon Computervision Corporation Japan Nihon Parametric Technology K.K. Japan Parametric Korea Co., Ltd. Korea CV Holding (Mauritius) Ltd. Mauritius Parametric Technology Mexico S.A. de C.V. Mexico Parametric Technology New Zealand Limited New Zealand
NAME PLACE OF INCORPORATION Computervision Norge AS Norway Parametric Technology Norway AS Norway Computervision Sp. z o.o. Poland Parametric Technology Poland Sp. z o.o Poland Parametric Technology Portugal-Computadores, Lda. Portugal Computervision TOO Russia Computervision Asia Pte Ltd Singapore Parametric Technology Singapore Pte Ltd Singapore Parametric Technology (Slovakia) s.r.o. Slovakia Parametric Technology South Africa (Proprietary) Limited South Africa Computervision Espana, S.A. Spain Parametric Technology Espana, S.A. Spain Computervision Sverge AB Sweden PTC Sweden AB Sweden Parametric Technology (Schweiz) AG Switzerland Parametric Technology (Taiwan) Limited Taiwan Computervision B.V. The Netherlands Computervision Finance B.V. The Netherlands Computervision International Distribution B.V. The Netherlands Extended Vision Logistics International B.V. The Netherlands Parametric Technology Europe B.V. The Netherlands Parametric Technology Nederland B.V. The Netherlands 3rd Angle Limited United Kingdom Computervision Limited United Kingdom Computervision Pensions Limited United Kingdom ICEM Systems (UK) Limited United Kingdom Parametric Technology (UK) Limited United Kingdom Rasna U.K. Limited United Kingdom
EX-23.1 10 REPORT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.1 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Parametric Technology Corporation Our audits of the consolidated financial statements referred to in our report dated October 26, 1998 appearing in the 1998 Annual Report to Stockholders of Parametric Technology Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) and the report of other auditors also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, based on our audits and the report of other auditors, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts October 26, 1998 EX-23.2 11 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Parametric Technology Corporation on Form S-8 (File Nos. 333-01297, 333- 01299, 33-52044, 33-89528, 33-61485, 333-38629, 333-28495, 333-22169, 333- 44701 and 333-56287) of our reports dated October 26, 1998, on our audits of the consolidated financial statements and financial statement schedule of Parametric Technology Corporation as of September 30, 1998 and 1997, and for the years ended September 30, 1998, 1997 and 1996, which reports are included or incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts December 28, 1998 EX-23.3 12 REPORT OF ARTHUR ANDERSEN LLP EXHIBIT 23.3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Computervision Corporation: We have audited the consolidated balance sheet of Computervision Corporation and subsidiaries as of December 31, 1996 and the related consolidated statements of income, stockholders' deficit and cash flows for the year ended December 31, 1996. These consolidated financial statements (not presented herein) are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Computervision Corporation and subsidiaries as of December 31, 1996 and the results of their operations and their cash flows in the year ended December 31, 1996 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) of the filing on Form 10-K of Computervision Corporation for the year ended December 31, 1996 (not presented herein) is for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule (not presented herein) has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts March 27, 1997 (except with respect to the matter discussed in Note 4, as to which the date is April 15, 1997 and the matters discussed in Note 15, as to which the date is January 12, 1998) EX-23.4 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated March 27, 1997 (except with respect to the matter discussed in Note 4, as to which the date is April 15, 1997 and the matters discussed in Note 15, as to which the date is January 12, 1998) included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (File Nos. 333-01297, 333-01299, 33-52044, 33-89528, 33-61485, 333-38629, 333-28495, 333-22169, 333-44701, and 333-56287). /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts December 28, 1998 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT FOR THE YEAR ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1998 SEP-30-1998 205,971 131,405 196,959 7,684 0 593,781 131,037 68,796 832,840 419,542 0 0 0 2,723 324,714 832,840 609,239 1,017,970 19,915 156,940 645,688 7,322 13,329 204,007 98,293 105,714 0 19,017 0 86,697 0.32 0.31
EX-27.2 15 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE PARAMETRIC TECHNOLOGY CORPORATION ANNUAL REPORT FOR THE YEARS ENDED SEPTEMBER 30, 1997, AND 1996, AND THE COMPUTERVISION CORPORATION ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS SEP-30-1996 SEP-30-1997 SEP-30-1996 SEP-30-1997 240,179 168,609 232,602 354,516 225,621 201,908 5,839 5,887 0 0 726,591 761,928 193,409 138,927 125,837 82,130 867,562 958,332 370,482 450,629 217,346 213,526 0 0 0 0 2,659 2,680 192,989 198,112 867,562 958,332 613,427 644,726 1,077,321 1,062,018 21,024 19,450 275,270 225,394 540,706 605,856 1,616 1,433 32,706 34,069 240,424 205,684 80,857 118,024 159,567 87,660 0 0 0 0 0 0 159,567 87,660 0.60 0.33 0.57 0.32 ALL SUMMARY FINANCIAL DATA HAS BEEN RESTATED FOR THE MERGER WITH COMPUTERVISION CORPORATION IN JANUARY 1998, WHICH WAS ACCOUNTED FOR AS A POOLING OF INTERESTS, AND THE STOCK DIVIDENDS EFFECTIVE FEBRUARY 29, 1996 AND MARCH 6, 1998. ALL EPS DATA HAS BEEN RESTATED TO CONFORM WITH THE PROVISIONS OF SFAS NO. 128, EARNINGS PER SHARE.
EX-27.3 16 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PARAMETRIC TECHNOLOGY CORPORATION AND COMPUTERVISION CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS SEP-30-1997 SEP-30-1998 DEC-28-1996 JAN-03-1998 202,385 261,989 283,674 321,718 208,058 205,027 5,839 5,887 0 0 722,486 847,292 200,522 144,992 133,487 88,730 857,683 1,033,365 374,217 422,747 217,367 213,526 0 0 0 0 2,664 2,682 183,629 289,561 857,683 1,033,365 150,051 158,258 261,310 258,868 4,068 4,802 69,908 41,405 144,102 137,336 0 0 5,166 5,878 42,134 74,249 26,627 32,116 15,507 42,133 0 0 0 0 0 0 15,507 42,133 0.06 0.16 0.06 0.15 ALL SUMMARY FINANCIAL DATA HAS BEEN RESTATED FOR THE MERGER WITH COMPUTERVISION CORPORATION IN JANUARY 1998, WHICH WAS ACCOUNTED FOR AS A POOLING OF INTERESTS, AND THE STOCK DIVIDENDS EFFECTIVE FEBRUARY 29, 1996 AND MARCH 6, 1998. ALL EPS DATA HAS BEEN RESTATED TO CONFORM WITH THE PROVISIONS OF SFAS NO. 128, EARNINGS PER SHARE.
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