-----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, MbgnCDUCCvwX3APWfE5uuRmDAFo8pjS8EOPqgwLpwl/G25g2MOpFyGsUecmmY6MC y0RK0KKXoEEXT8f0PGTlPg== 0000927016-99-002116.txt : 19990519 0000927016-99-002116.hdr.sgml : 19990519 ACCESSION NUMBER: 0000927016-99-002116 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990518 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-Q SEC ACT: SEC FILE NUMBER: 000-18059 FILM NUMBER: 99629775 BUSINESS ADDRESS: STREET 1: 128 TECHNOLOGY DR CITY: WALTHAM STATE: MA ZIP: 02453 BUSINESS PHONE: 7813985000 MAIL ADDRESS: STREET 1: 128 TECHNOLOGY CORP CITY: WALTHAM STATE: MA ZIP: 02453 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: April 3, 1999 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] There were 270,742,007 shares of our common stock outstanding on April 3, 1999. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PARAMETRIC TECHNOLOGY CORPORATION INDEX TO FORM 10-Q For the Quarter Ended April 3, 1999
Page Number ------ Cover.................................................................. i Index.................................................................. ii PART I--FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and April 3, 1999....................................................... 1 Consolidated Statements of Income for the three and six months ended April 4, 1998 and April 3, 1999......................... 2 Consolidated Statements of Cash Flows for the six months ended April 4, 1998 and April 3, 1999............................... 3 Notes to the Consolidated Financial Statements................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14 PART II--OTHER INFORMATION Item 1. Legal Proceedings............................................. 14 Item 2. Changes in Securities and Use of Proceeds..................... 15 Item 4. Submission of Matters to a Vote of Security Holders........... 15 Item 6. Exhibits and Reports on Form 8-K.............................. 15 Signature.............................................................. 16
PART I--FINANCIAL INFORMATION PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, April 3, 1998 1999 ------------- ----------- ASSETS Current assets: Cash and cash equivalents......................... $ 205,971 $ 236,264 Short-term investments............................ 131,405 87,625 Accounts receivable, net.......................... 189,275 204,991 Other current assets.............................. 67,130 73,375 ----------- ----------- Total current assets............................ 593,781 602,255 Marketable investments.............................. 88,807 22,030 Property and equipment, net......................... 62,241 61,363 Goodwill and other intangible assets, net........... 16,781 163,546 Other assets........................................ 71,230 81,274 ----------- ----------- Total assets.................................... $ 832,840 $ 930,468 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 34,520 $ 37,192 Accrued expenses.................................. 92,742 73,966 Accrued compensation and severance................ 81,856 57,403 Deferred revenue.................................. 145,376 184,122 Income taxes...................................... 65,048 60,298 ----------- ----------- Total current liabilities....................... 419,542 412,981 Other liabilities................................... 54,081 52,062 Deferred income taxes............................... 31,780 31,688 Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares au- thorized; none issued............................ -- -- Common stock, $0.01 par value; 350,000 shares au- thorized; 272,277 shares issued for both periods. 2,723 2,723 Additional paid-in capital........................ 1,528,647 1,553,753 Treasury stock, at cost, 4,135 and 1,535 shares... (43,134) (22,044) Accumulated deficit............................... (1,157,628) (1,098,091) Accumulated other comprehensive loss (Note 4)..... (3,171) (2,604) ----------- ----------- Total stockholders' equity...................... 327,437 433,737 ----------- ----------- Total liabilities and stockholders' equity...... $ 832,840 $ 930,468 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 1 PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Three months ended Six months ended -------------------- ------------------ April 4, April 3, April 4, April 3, 1998 1999 1998 1999 --------- --------- -------- -------- Revenue: License.............................. $ 162,558 $ 141,125 $320,816 $277,205 Service.............................. 101,513 122,123 202,123 236,160 --------- --------- -------- -------- Total revenue...................... 264,071 263,248 522,939 513,365 --------- --------- -------- -------- Costs and expenses: Cost of license revenue.............. 3,443 2,997 7,962 7,136 Cost of service revenue.............. 33,827 47,567 70,430 89,283 Sales and marketing.................. 92,811 103,161 189,018 199,273 Research and development............. 20,682 30,310 45,961 59,483 General and administrative........... 12,314 15,248 27,768 31,812 Amortization of goodwill and other intangible assets................... 679 3,607 1,358 6,094 Acquisition and nonrecurring charges (Note 2)............................ 76,800 39,518 76,800 53,347 --------- --------- -------- -------- Total costs and expenses........... 240,556 242,408 419,297 446,428 --------- --------- -------- -------- Operating income....................... 23,515 20,840 103,642 66,937 Other income (expense), net............ (371) 728 (6,249) 2,672 --------- --------- -------- -------- Income before income taxes and extraordinary loss.................... 23,144 21,568 97,393 69,609 Provision for income taxes............. 20,069 11,019 52,185 29,069 --------- --------- -------- -------- Income before extraordinary loss....... 3,075 10,549 45,208 40,540 Extraordinary loss, net of income tax benefit of $2,183..................... (19,017) -- (19,017) -- --------- --------- -------- -------- Net income (loss)...................... $ (15,942) $ 10,549 $ 26,191 $ 40,540 ========= ========= ======== ======== Earnings per share (Note 3): Basic: Income before extraordinary loss..... $ 0.01 $ 0.04 $ 0.17 $ 0.15 Extraordinary loss................... (0.07) -- (0.07) -- --------- --------- -------- -------- Net income (loss).................... $ (0.06) $ 0.04 $ 0.10 $ 0.15 ========= ========= ======== ======== Diluted: Income before extraordinary loss..... $ 0.01 $ 0.04 $ 0.16 $ 0.15 Extraordinary loss................... (0.07) -- (0.07) -- --------- --------- -------- -------- Net income (loss).................... $ (0.06) $ 0.04 $ 0.09 $ 0.15 ========= ========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 2 PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six months ended ------------------- April 4, April 3, 1998 1999 --------- -------- Cash flows from operating activities: Net income.............................................. $ 26,191 $ 40,540 Adjustments to reconcile net income to net cash flows from operating activities: Extraordinary loss on early extinguishment of debt.... 19,017 -- Non-cash portion of nonrecurring charges.............. 12,778 4,693 Depreciation and amortization......................... 13,694 25,170 Deferred income taxes................................. 2,223 -- Charge for purchased in-process research and development.......................................... -- 38,244 Changes in assets and liabilities which provided (used) cash, net of effects of purchased businesses: Accounts receivable................................. 4,302 (16,050) Accounts payable and accrued expenses............... 25,955 (27,522) Accrued compensation and severance.................. (15,329) (25,083) Deferred revenue.................................... 8,244 35,074 Income taxes........................................ 2,108 (4,395) Other current assets................................ (22,823) (655) Other noncurrent assets and liabilities............. 16,402 (8,005) --------- -------- Net cash provided by operating activities................. 92,762 62,011 --------- -------- Cash flows from investing activities: Additions to property and equipment..................... (10,496) (15,234) Changes in other assets................................. -- (4,111) Purchases of investments................................ (162,345) (26,078) Proceeds from sales and maturities of investments....... 380,090 131,721 Payments for acquisition of businesses, net of cash acquired............................................... -- (70,344) --------- -------- Net cash provided by investing activities................. 207,249 15,954 --------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................. 51,703 14,934 Purchases of treasury stock............................. -- (64,973) Repayment of short-term debt............................ (34,933) -- Repayment of long-term obligations...................... (240,761) -- --------- -------- Net cash used by financing activities..................... (223,991) (50,039) --------- -------- 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................... (753) 2,367 --------- -------- Net increase in cash and cash equivalents................. 86,834 30,293 Cash and cash equivalents, beginning of period............ 168,609 205,971 --------- -------- Cash and cash equivalents, end of period.................. $ 255,443 $236,264 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 3 PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by us in accordance with generally accepted accounting principles. Our fiscal year end is September 30. Certain reclassifications have been made to the prior year's statements to conform with the fiscal 1999 presentation. The year end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations, and cash flows at the dates and for the periods indicated. While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 1998. The results of operations for the three and six month periods ended April 3, 1999 are not necessarily indicative of the results expected for the remainder of the fiscal year. 2. ACQUISITIONS AND NONRECURRING CHARGES ACQUISITIONS 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. The merger was accounted for as a pooling of interests. In connection with the Computervision merger, we incurred a nonrecurring charge of $76.8 million for merger-related integration, consolidation, and transaction costs in the second quarter of 1998. For additional information see Note B to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 1998. InPart. In October 1998, we acquired all of the outstanding stock of InPart Design, Inc. by issuing 2.0 million shares of our common stock. In addition, we reserved 386,000 shares of common stock for outstanding InPart options assumed. Based upon certain conditions, we may be obligated to issue up to $15.0 million worth of additional shares in September 1999. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price of $38.1 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $741,000 for net liabilities assumed, $10.6 million for purchased in-process research and development (R&D), $4.1 million for developed technology, $1.1 million for customer lists, $200,000 for an assembled workforce, and $300,000 for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $22.5 million. Division. In March 1999, we acquired Division Group plc for $34.5 million in cash and 591,000 shares of our common stock. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price of $48.1 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $555,000 for net assets acquired, $9.0 million for purchased in-process R&D, $3.3 million for developed technology, $2.0 million for customer lists, $970,000 for an assembled workforce, and $2.5 million for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $29.8 million. auxilium. In March 1999, we acquired all of the outstanding stock of auxilium inc. in exchange for 2.6 million shares of our common stock and $39.4 million in cash. In addition, we reserved 1.1 million shares of common stock for outstanding auxilium options assumed. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price of $101.7 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $182,000 for net liabilities assumed, $18.6 million for 4 PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchased in-process R&D, $700,000 for developed technology, $5.0 million for customer lists, $630,000 for an assembled workforce, and $6.0 million for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $70.9 million. The operating results of InPart, Division, and auxilium have been included in our results of operations from the date of each acquisition. Our purchases of InPart, Division, and auxilium did not require the presentation of pro forma information. In the opinion of management, the purchased in-process R&D for the acquisitions of InPart, Division, and auxilium had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded nonrecurring charges of $10.6 million in the first quarter of 1999 and $27.6 million in the second quarter of 1999. The values assigned to purchased in-process R&D, which were calculated pursuant to the Securities and Exchange Commission's recent guidance regarding in-process R&D allocations, were determined by identifying research projects for which technological feasibility had not been established. The values of the purchased in-process R&D were determined by estimating the stage of completion, including consideration of the complexity of the work completed, the costs incurred and the projected costs to complete, the contribution of any core technology and other acquired assets, and the projected product introduction dates, estimating the resulting net cash flows from the products developed, and discounting the net cash flows back to their present value. The discount rates used included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology for each acquisition. If these projects are not successfully developed, future revenue and profitability may be adversely affected. Additionally, the value of other intangible assets acquired, which aggregated $150.0 million, may become impaired. NONRECURRING CHARGES Sales Force Reorganizations. During the first quarter of 1999, we reorganized our sales force to provide a more focused approach to the unique product and service requirements of our customers. In connection with this action, we incurred a restructuring charge of $3.2 million for the severance and termination benefits of approximately 170 people who had been terminated during the first quarter of 1999 in accordance with management's plan. Of the $3.2 million charge, $2.6 million was paid during the first quarter of 1999 and the remaining $645,000 was paid during the second quarter of 1999. During the second quarter of 1999, we incurred a restructuring charge of $5.8 million for the severance and termination benefits of approximately 150 people primarily in connection with the integration of our sales and related support groups. We expect to pay these amounts over the remaining two quarters of 1999. Facility Consolidation and Asset Impairment. During the second quarter of 1999, we incurred a restructuring charge of $1.4 million for the consolidation of certain excess leased facilities. Also, in the second quarter we recorded an impairment loss of $4.7 million on certain intangible assets related to our industrial design activities. Due to recent acquisitions and the development of new technology, the carrying value of these assets was impaired. 3. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options using the "treasury stock" method and other dilutive potential shares. The following table presents the calculation for both basic and diluted EPS: 5 PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three months ended Six months ended -------------------- ----------------- April 4, April 3, April 4, April 3, 1998 1999 1998 1999 --------- --------- -------- -------- (in thousands, except per share data) Net income (loss).................. $ (15,942) $ 10,549 $ 26,191 $ 40,540 ========= ========= ======== ======== Weighted average shares outstanding....................... 269,347 267,955 268,419 268,314 Dilutive effect of employee stock options........................... 10,724 7,532 9,170 6,577 --------- --------- -------- -------- Diluted shares outstanding......... 280,071 275,487 277,589 274,891 ========= ========= ======== ======== Basic EPS.......................... $ (0.06) $ 0.04 $ 0.10 $ 0.15 Diluted EPS........................ $ (0.06) $ 0.04 $ 0.09 $ 0.15
Options to purchase 4.1 million shares for the second quarter and first six months of 1998, and 10.9 and 14.4 million shares for the second quarter and first six months of 1999, were outstanding but were excluded from the computation of diluted shares outstanding because the price of the options was greater than the average market price of the common stock for the period reported. 4. COMPREHENSIVE INCOME (LOSS) Effective October 1, 1998, we adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which requires presentation of the components of comprehensive income, including unrealized gains and losses on investments, foreign currency translation adjustments, and minimum pension liability adjustments. Our total comprehensive income (loss) was ($14.5) million and $8.4 million for the second quarter of 1998 and 1999, and $26.3 million and $41.1 million for the first six months of 1998 and 1999, respectively. 5. NEW ACCOUNTING PRONOUNCEMENTS In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides guidance on applying generally accepted accounting principles on recognizing revenue in software transactions. Certain provisions of SOP 97-2 have been deferred by SOP 98-4 and SOP 98-9. We adopted SOP 97-2 during the first quarter of 1999. The adoption of this statement did not have a material effect on our revenue recognition policies or on our results of operations. Additionally, we anticipate that the adoption of the deferred provisions of this statement will not have a material effect on our results of operations. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Company Parametric Technology Corporation develops, markets, and supports a comprehensive suite of integrated product development and information management software. Our mechanical design automation product family automates product development from conceptual design through production. Our enterprise information management solutions accelerate the flow of product data from engineering to other critical areas of an enterprise. Our solutions are complemented by the strength and experience of our professional services organization, which provides training, consulting, and support to customers worldwide. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that describe our anticipated financial results and growth based on our current plans and assumptions. Important information about the basis for these plans and assumptions and certain factors that may cause our actual results to differ materially from these statements are discussed below and additional factors are contained in Important Risk Factors Affecting Results which is included as Exhibit 99.1 to this Form 10-Q and is incorporated herein by reference. Results of Operations The following is an overview of our results of operations: . Total revenue was $263.2 million for the second quarter of 1999 compared to $264.1 million for the second quarter of 1998. Total revenue was $513.4 million for the first six months of 1999 compared to $522.9 million for the first six months of 1998. . Our year-over-year second quarter revenue was basically flat, reflecting a 13% decrease in software license revenue offset by a 20% increase in service revenue. Our year-over-year six month revenue declined 2%, reflecting a 14% decrease in software license revenue offset by a 17% increase in service revenue. . Excluding acquisition and nonrecurring charges and the extraordinary loss, our net income was $42.8 million for the second quarter of 1999, a decrease of 35% from the second quarter of 1998, and $85.5 million for the first six months of 1999, a 21% decrease from the first six months of 1998. . After giving effect to acquisition and nonrecurring charges and the extraordinary loss, our net income was $10.5 million for the second quarter of 1999 compared to a net loss of ($15.9) million for the second quarter of 1998. 7 The following table shows certain consolidated financial data as a percentage of our total revenue for the second quarter and first six months of both 1998 and 1999.
Three months ended Six months ended ------------ ----------------- April 4, April 3, April 4, April 3, 1998 1999 1998 1999 -------- -------- -------- -------- Revenue: License........................... 62% 54% 61% 54% Service........................... 38 46 39 46 --- --- --- --- Total revenue....................... 100 100 100 100 Costs and expenses: Cost of license revenue........... 1 1 2 1 Cost of service revenue........... 13 18 13 18 Sales and marketing............... 35 39 36 39 Research and development.......... 8 12 9 12 General and administrative........ 5 6 5 6 Amortization of goodwill and other intangible assets................ -- 1 -- 1 Acquisition and nonrecurring charges.......................... 29 15 15 10 --- --- --- --- Total costs and expenses............ 91 92 80 87 --- --- --- --- Operating income.................... 9 8 20 13 Other income (expense), net......... -- -- (1) 1 --- --- --- --- Income before income taxes and extraordinary loss................. 9 8 19 14 Provision for income taxes.......... 8 4 10 6 --- --- --- --- Income before extraordinary loss.... 1 4 9 8 Extraordinary loss.................. (7) -- (4) -- --- --- --- --- Net income (loss)................... (6)% 4% 5% 8% === === === === Excluding acquisition and nonrecurring charges and extraordinary loss: Operating income.................. 38 % 23% 35% 23% Net income........................ 25 % 16% 21% 17%
REVENUE. We derived our revenue primarily from software used in the mechanical segment of the computer-aided design, manufacturing, and engineering industry. License revenue decreased $21.4 million for the second quarter of 1999 compared to the second quarter of 1998 and $43.6 million for the first six months of 1999 compared to the same period in 1998. There are several factors that contributed to the decrease, including the following. The transitional effects of our sales force reorganization implemented in the first quarter of 1999, including the appointment of Rand A Technology Corporation as our exclusive distributor to small businesses in the U.S. and Europe, reduced sales productivity during the second quarter and the first six months of 1999. The average price of our software decreased in the second quarter and first six months of 1999 from the comparable 1998 periods, due primarily to our repricing and repackaging initiative announced in August 1998. While, product unit sales increased 3% in the second quarter of 1999 compared to the second quarter of 1998, and 5% in the first six months of 1999 compared to the first six months of 1998, this increase was not sufficient to offset the impact of the decrease in the average price of our software. The decrease in license revenue, however, was partially offset by stronger results in Japan in the second quarter of 1999 as compared to the same period in 1998. 8 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 $20.6 million for the second quarter of 1999 compared to the second quarter of 1998, and increased $34.0 million for the first six months of 1999 compared to the first six months of 1998. These increases are primarily the result of growth in our installed customer base and increased training and consulting services performed for these customers. We expect service revenue to continue to increase in absolute dollars for the remainder of 1999. We derived 55% and 63% of our total revenue from sales to international customers for the second quarter of 1998 and 1999, respectively. For the first six months of 1998 and 1999, we derived 55% and 58% of our revenue from sales to international customers, respectively. The increase in international revenue for both the second quarter and the first six months of 1999 is primarily due to a large order received from a customer in Japan. [REVENUE BY GEOGRAPHY CHART APPEARS HERE] U.S. Q2 98 - $117.9 million; Q2 99 - $97.4 million Europe Q2 98 - $107.9 million; Q2 99 - $96.9 million Asia/Pacific Q2 98 - $ 38.3 million; Q2 99 - $68.9 million U.S. First 6 months 98-$233.6 million; First 6 months 99-$213.4 million Europe First 6 months 98-$206.4 million; First 6 months 99-$195.5 million Asia/Pacific First 6 months 98-$ 83.0 million; First 6 months 99-$104.4 million We remain cautious in our overall outlook because the impact of our various strategic initiatives, designed to provide a foundation for future growth, is uncertain. These initiatives include: (i) the repricing and repackaging of our core Pro/ENGINEER(R) product line that we undertook in the fourth quarter of 1998; (ii) our sales force reorganization in the first quarter of 1999, which included the formation of a specific sales force for larger, multinational customers and included the appointment of Rand, who is in the process of developing its marketing, sales and distribution networks; (iii) the introduction of our Windchill pilot program in the first quarter of 1999, which makes the Windchill technology available to customers on a test basis at a reduced price in order to promote market awareness of the product; and (iv) the recent integration of our Windchill sales force into our major and primary accounts sales groups in order to provide our customers a single contact for all products. In the near term, these initiatives may result in longer and less predictable sales cycles and result in a greater dependence on consummating larger transactions in general. Our revenue growth and the level of our total revenue will be affected by the success of these initiatives, together with the factors discussed under Important Risk Factors Affecting Results included as Exhibit 99.1 to this Form 10-Q. COSTS AND EXPENSES. Our operating expenses are based on anticipated future revenue and are relatively fixed for the short term. We are incurring expenses that would support revenues in excess of current levels in order to implement our strategic initiatives, particularly as they relate to Windchill products. Although these expense levels have adversely affected net income, we believe these initiatives will provide a foundation for future growth. COST OF LICENSE REVENUE. Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation, royalties, and the amortization of internally developed software. Cost of license revenue as a percent of total revenue was 1% for the second quarters of both 1998 and 1999, and 2% and 1% for the first six months of 1998 and 1999, respectively. 9 COST OF SERVICE REVENUE. Our cost of service revenue includes costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. For both the second quarter of 1999 and the first six months of 1999, cost of service revenue as a percent of total revenue has increased to 18% from 13% in the corresponding periods in 1998. The increase in cost of service revenue resulted primarily from growth in the staffing necessary to generate and support increased worldwide service revenue and provide ongoing quality customer support to our installed base. We anticipate continued growth in both service revenue and staffing necessary to support its growth. SALES AND MARKETING. Our sales and marketing expenses primarily include salaries, sales commissions, travel, and facility costs. These costs have increased $10.4 million and $10.3 million for the second quarter of 1999 and for the first six months of 1999, respectively, compared to the same periods of 1998, primarily due to the growth of the Windchill sales force and the associated costs of establishing the pilot programs, partially offset by the sales force reorganizations. Total sales and marketing employees were 2,364 at April 4, 1998, 2,440 at September 30, 1998, and 2,194 at April 3, 1999. We expect our worldwide sales and marketing organization for the remainder of 1999 to remain below the September 30, 1998 level due to the restructuring of the sales organization designed to better address customer needs. 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 second quarter and first six months of 1998, research and development expenses increased 47% and 29% in the comparable periods of 1999. This increase is primarily attributable to our continued investment in Windchill products, including our InPart acquisition in the first quarter of 1999 and the Division and auxilium acquisitions in the second quarter of 1999. GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include costs of our corporate, finance, information technology, human resources, and administrative functions. These costs increased $2.9 million in the second quarter of 1999 compared to the second quarter of 1998 and $4.0 million for the first six months of 1999 compared to the same period in 1998. These increases represent our continued investment in information technology, including Year 2000 expenditures, and the integration of acquired companies. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. These costs include the amortization of intangible assets acquired, including developed technology, goodwill, customer lists, assembled work force, and trade names. The increased amortization of $2.9 million and $4.7 million for the second quarter and the first six months of 1999 compared to the similar periods in 1998 resulted from our recent acquisitions. Acquisition And Nonrecurring Charges. Acquisitions: Computervision. In January 1998, we merger with Computervision Corporation by issuing 11.6 million shares of common stock in exchange for all of the outstanding common stock of Computervision. The merger was accounted for as a pooling of interests. In connection with the merger, we incurred a nonrecurring charge of $76.8 million for merger-related integration, consolidation, and transaction costs in the second quarter of 1998. The charge included $18.1 million of severance and termination benefits related to the elimination of approximately 450 positions, $12.7 million for the write-off of assets, $8.2 million for transaction costs, $17.4 million of contract costs associated with revised estimates, $7.2 million for the closing of leased facilities, and $13.2 million of lease termination and other costs. For additional information see Note B to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 1998. InPart. In October 1998, we purchased InPart Design, Inc., a developer of DesignSuite(TM), a web-based repository of 3D mechanical component data, as well as the developer of enterprise software applications focused on web-based component and supplier management, and founded in 1996. We allocated the purchase price of 10 $38.1 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $741,000 for net liabilities assumed, $10.6 million for purchased in-process research and development (R&D), $4.1 million for developed technology, $1.1 million for customer lists, $200,000 for an assembled workforce, and $300,000 for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $22.5 million. Division. In March 1999, we purchased Division Group plc, a developer of enterprise product data visualization, simulation, and integration tools. We allocated the purchase price of $48.1 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $555,000 for net assets acquired, $9.0 million for purchased in- process R&D, $3.3 million for developed technology, $2.0 million for customer lists, $970,000 for an assembled workforce, and $2.5 million for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $29.8 million. auxilium. In March 1999, we purchased auxilium inc., a developer of web-based software tools for the integration of legacy systems, databases, and applications, and founded in 1997. We allocated the purchase price of $101.7 million to the assets acquired and liabilities assumed based on our estimates of fair value. The values assigned included $182,000 for net liabilities assumed, $18.6 million for purchased in-process R&D, $700,000 for developed technology, $5.0 million for customer lists, $630,000 for an assembled workforce, and $6.0 million for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $70.9 million. In the opinion of management, the purchased in-process R&D for the acquisitions of InPart, Division, and auxilium had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded nonrecurring charges of $10.6 million in the first quarter of 1999 and $27.6 million in the second quarter of 1999. The values assigned to purchased in-process R&D, which were calculated pursuant to the Securities and Exchange Commission's recent guidance regarding in-process R&D allocations, were determined by identifying research projects for which technological feasibility had not been established. The values of the purchased in-process R&D were determined by estimating the stage of completion, including consideration of the complexity of the work completed, the costs incurred and the projected costs to complete, the contribution of any core technology and other acquired assets, and the projected product introduction dates, estimating the resulting net cash flows from the products developed, and discounting the net cash flows back to their present value. For each acquisition, the estimates were based on the following major assumptions: InPart: . Revenue was estimated to begin late in 1999 and to grow based on industry growth rates and Inpart's specific product offerings. . Cost of revenue for the purchased in-process technology, expressed as a percentage of revenue, was estimated to decline from 22% to 11% based on InPart's average historical cost of revenue and reflecting future economies of scale. . Selling, general, and administrative expense, as a percentage of revenue, was estimated to be 99% in 1999, reflecting an initial investment in the marketing of the in-process technology, and declining to 40% thereafter. These amounts were based on industry average historical selling, general, and administrative costs. Division: . Revenue was based on industry growth rates and Division's specific product offerings. . Cost of revenue for the purchased in-process technology, expressed as a percentage of revenue, was estimated to be 15% based on Division's average historical cost of revenue. . Selling, general, and administrative expense, as a percentage of revenue, was estimated to be 47% in 1999, reflecting an initial investment in the marketing of the in-process technology, and declining to 41% thereafter. These amounts were based on industry average historical selling, general, and administrative costs. 11 auxilium: . Revenue was based on industry growth rates and auxilium's specific product offerings. . Cost of revenue for the purchased in-process technology, expressed as a percentage of revenue, was estimated to be between 32% and 26% based on auxilium's average historical cost of revenue. . Selling, general, and administrative expense, as a percentage of revenue, was estimated to be 53% in 1999, reflecting an initial investment in the marketing of the in-process technology, and declining to 40% thereafter. These amounts were based on industry average historical selling, general, and administrative costs. The net cash flows also considered net working capital requirements and capital spending needs related to the purchased in-process technology. The rates used to discount net cash flows for the purchased in-process technology to its present value for the Inpart (28%), Division (25%), and auxilium (26% to 30%) acquisitions were based on the weighted average cost of capital and took into account the uncertainty surrounding the successful development of the purchased in-process technology for each acquisition. If these projects are not successfully developed, future revenue and profitability may be adversely affected and the value of other intangible assets acquired may become impaired. Nonrecurring Charges: Sales Force Reorganizations. During the first quarter of 1999, we reorganized our sales force to provide a more focused approach to the unique product and service requirements of our customers. In connection with this action, we incurred a restructuring charge of $3.2 million for the severance and termination benefits of approximately 170 people who had been terminated during the first quarter of 1999 in accordance with management's plans. Of the $3.2 million charge, $2.6 million was paid during the first quarter of 1999 and the remaining $645,000 was paid during the second quarter of 1999. During the second quarter of 1999, we incurred a restructuring charge of $5.8 million for the severance and termination benefits of approximately 150 people primarily in connection with the integration of our sales and related support groups. We expect to pay these amounts over the remaining two quarters of 1999. Facility Consolidation and Asset Impairment. During the second quarter of 1999, we incurred a restructuring charge of $1.4 million for the consolidation of certain excess leased facilities. Also, in the second quarter we recorded an impairment loss of $4.7 million on certain intangible assets related to our industrial design activities. Due to recent acquisitions and the development of new technology, the carrying value of these assets was impaired. OTHER INCOME (EXPENSE). Our other income (expense) includes interest income, interest expense, costs of hedging contracts, the gain or loss from the translation of results for subsidiaries for which the U.S. dollar is the functional currency, and other charges incurred in connection with financing customer contracts. For the second quarter of 1998, we reported other expense of $371,000 compared to other income of $728,000 for the second quarter of 1999. For the first six months of 1998, we reported other expense of $6.2 million compared to other income of $2.7 million for the first six months of 1999. The changes are primarily due to the elimination of interest expense on the Computervision debt that was paid in the second quarter of 1998. INCOME TAXES. Our effective tax rate for the first six months of 1998 was 54% compared with 42% for the corresponding period in 1999. The difference between our effective tax rate and the statutory federal income tax rate of 35% was due primarily to the charges for purchased in-process R&D in the first and second quarters of 1999 and losses of Computervision in the first quarter of 1998, neither of which were deductible for tax purposes. Excluding the effects of the charges for purchased in-process R&D, our effective tax rate for the first six months of 1999 was 31%. EXTRAORDINARY LOSS. In connection with the Computervision merger, we assumed a revolving note payable and long-term debt obligations. During the second quarter of 1998, we paid $275.7 million for settlement of the outstanding note, debt obligations, accrued interest, and related fees, and we incurred an extraordinary after-tax loss of $19.0 million related to the write-off of deferred financing costs and other prepayment costs associated with this debt. 12 EMPLOYEES. The number of worldwide employees was 4,547 at April 4, 1998 compared with 4,911 at September 30, 1998 and 5,051 at April 3, 1999. The increase over the prior year was a result of growth in our services organization and in the research and development group, primarily through acquisitions. Liquidity and Capital Resources Our operating activities, the proceeds from our issuance of stock under stock plans, and existing cash and investments provided sufficient resources to fund fluctuations in our employee base, capital asset needs, stock repurchases, acquisitions, and financing needs in the first half of 1998 and 1999. As of April 3, 1999, cash and investments totaled $345.9 million, down from $426.2 million at September 30, 1998. The primary reasons for the decrease in cash and investments during the first six months of 1999 were the repurchase of $65.0 million of common stock and the $70.3 million of payments for acquisitions, partially offset by net cash provided by operating activities. Cash generated from operating activities was $92.8 million in the first six months of 1998, compared to $62.0 million for the first six months of 1999, net of cash expenditures for nonrecurring charges of $6.3 million in the first six months of 1999. In the first six months of 1998 and 1999, we acquired $10.5 million and $15.2 million, respectively, of capital equipment consisting principally of computer equipment, software, and office equipment. We used net cash for financing activities during the first six months of 1998 to repay $275.7 million of Computervision debt and related interest and fees, offset by $51.7 million from the issuance of common stock under our stock plans. We used net cash for financing activities during the first six months of 1999 to repurchase $65.0 million of common stock, offset by $14.9 million of proceeds from the issuance of common stock under our stock plans. Through April 3, 1999 we had repurchased 9.1 million of the 20.0 million shares authorized by the Board of Directors to be repurchased. We believe that existing cash and investments together with cash generated from operations and the issuance of common stock under our stock plans will be sufficient to meet our requirements for working capital, capital expenditures, and financing through at least September 30, 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 5 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding the inability of certain computer programs to properly process certain date information, particularly beyond the year 1999. These concerns focus on the impact of the Year 2000 problem on business operations and the potential costs associated with identifying and addressing the problem. State of Readiness. We have developed a Year 2000 readiness plan focusing on: (i) assessing the readiness of our product offerings, internal business systems, and major vendors and suppliers; (ii) addressing known risks; and (iii) planning and budgeting for reasonably likely contingencies. We have completed testing our current product offerings for Year 2000 compliance. Some limited testing of newly acquired products is ongoing. Based on our review to date, we believe that our current product offerings are Year 2000 compliant. We have conducted only limited testing of products that are no longer offered, and thus the Year 2000 compliance of such products is generally not known. Many of these untested products are 13 previous releases of current offerings. Our customers can upgrade many of these products to achieve Year 2000 compliance. We are also in the process of reviewing and upgrading our internal information technology and business systems, both domestically and internationally, to ensure Year 2000 readiness. This process is complete with respect to the majority of our mission critical systems. We expect to continue testing our internal systems and to undertake necessary corrective measures throughout calendar 1999. Finally, we have commenced a program to survey the Year 2000 readiness of our major vendors and suppliers, with a particular focus on the Year 2000 readiness of our mission critical vendors and suppliers. This process is complete with respect to the majority of our mission critical vendors and suppliers. We expect to continue our survey program through out calendar 1999 and where we believe that a particular vendor or supplier poses unacceptable Year 2000 risks, we will identify an alternative supply source. Cost of Year 2000 Compliance. Costs incurred in our Year 2000 compliance effort include the allocation of personnel to testing our products and systems as well as to upgrading internal systems. During the second quarter of 1999, we incurred costs of approximately $1.0 million and we estimate that another $1.0-4.0 million may be spent on our compliance project. Costs will be expensed as incurred. While our compliance evaluation and remediation project is not yet complete, we do not at this time foresee a material impact on our business or operating results from the Year 2000 problem. We cannot, of course, predict the nature or materiality of the impact on our operations or operating results of Year 2000 disruption by parties over whom we have no control. Furthermore, the purchasing patterns of our customers or potential customers may be affected by Year 2000 issues if they must expend significant resources to correct their own systems. As a result they may have fewer funds available to purchase our products and services. Risk of Year 2000 Issues and Contingency Plans. Our worst case Year 2000 scenarios would include: (i) undetected errors or uncorrected defects in our current product offerings; (ii) corruption of data contained in our internal information systems; and (iii) the failure of infrastructure services provided by third parties and government agencies (e.g., electricity, phone/fax service, internet/email services, etc.). We are in the process of reviewing our contingency planning in all of these areas and expect the plans to include, among other things, the availability of support personnel to assist with customer support issues, manual "work arounds" for internal software failure, and substitution of systems, if needed. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in our financial market risk exposure as described in Management's Discussion and Analysis of Financial Condition and Results of Operations included as part of Exhibit 13.1 to our 1998 Annual Report on Form 10-K and incorporated herein by reference. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain class action lawsuits were filed in the fourth quarter of 1998 against us and certain of our current and former officers and directors in the U.S. District Court in Massachusetts claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of 1998. The plaintiffs in these lawsuits joined together to file a consolidated and amended complaint in the second quarter of 1999. These actions seek unspecified damages. We believe the claims made in the amended complaint are without merit, and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions at this time; however, there can be no assurance that the litigation will not have a material adverse impact on our financial condition or results of operations. 14 We are also subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these matters will not have a material adverse impact on our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Beginning in March 1999, in connection with our acquisition of Division Group plc, we issued 591,000 shares of our common stock to certain stockholders of Division who elected to accept stock rather than cash in exchange for their Division shares in accordance with our offer to acquire all of the outstanding share capital of Division. On March 8, 1999, in connection with our acquisition of auxilium inc., we issued 2.6 million shares of our common stock to the stockholders of auxilium in exchange for a portion of their outstanding common stock. The offers and sales of our common stock in our acquisition of auxilium and certain of the offers and sales of our common stock in our acquisition of Division were exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933 because they did not involve a public offering. The remainder of the offers and sales of our common stock relating to our acquisition of Division were exempt from registration requirements pursuant to Regulation S under the Securities Act of 1933 because they involved offshore transactions. We used the services of Goldman Sachs International in connection with our offer to acquire the stock of Division. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders of the Company held on February 11, 1999, the stockholders of the Company elected C. Richard Harrison and Robert N. Goldman as Class III directors of the Company to hold office until the 2002 Annual Meeting of Stockholders (subject to the election and qualification of their successors and to their earlier death, resignation or removal). No other nominations were made. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statement, and both nominees were elected with the following vote:
Election of Votes Withheld Directors Votes For or Opposed ----------- ----------- -------------- C. Richard Harrison 240,513,683 3,318,023 Robert N. Goldman 241,010,384 2,821,322
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Agreement and Plan of Reorganization dated as of March 8, 1999 by and among Parametric Technology Corporation, Northstar Acquisition Corporation, auxilium inc. and the stockholders of auxilium inc. (Exhibit 2.1 to our Current Report on Form 8-K filed March 23, 1999). 10.1*# Amendment #4 to the Consulting Agreement, as amended, with Michael E. Porter dated February 11, 1999. 27.1* Financial Data Schedule for the period ended April 3, 1999. 99.1* Important Risk Factors Affecting Results. 99.2 Annual Report to Stockholders for the fiscal year ended September 30, 1998 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated in this Quarterly Report on Form 10-Q) (Exhibit 13.1 to our 1998 Annual Report on Form 10-K).
15 - -------- * Indicates document filed herewith. # Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. For our documents incorporated by reference, references are to File No. 0- 18059. (b) Reports on Form 8-K On March 23, 1999, we filed a Current Report on Form 8-K reporting our acquisition of auxilium inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PARAMETRIC TECHNOLOGY CORPORATION /s/ Edwin J. Gillis By: _________________________________ Edwin J. Gillis Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: May 17, 1999 16 EX-10.1 2 AMENDMENT #4 TO CONSULTING AGREEMENT EXHIBIT 10.1 AMENDMENT #4 TO CONSULTING AGREEMENT This Amendment #4 To Consulting Agreement, dated as of February 11, 1999, 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 principal business address at 128 Technology Drive, Waltham, Massachusetts 02453 (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 3.5: 3.5 Consultant is engaged pursuant to this Amendment #4 to Consulting Agreement, to participate in ten (10) top management seminars, including Chief Information Officer (CIO) seminars, consistent with the purposes and scope which Consultant was previously engaged to provide under Sections 3.2, 3.3 and 3.4 of the Consulting Agreement. Article 4 Compensation And Expenses, is hereby amended by adding the following Section 4.6: 4.6 Option grant for services to be performed under Section 3.5. In connection with those services to be performed pursuant to this Amendment #4 to Consulting Agreement (as described in Section 3.5 above), Consultant shall receive an option to purchase 100,000 shares of PTC's common stock, $.01 par value per share, under the terms of the Stock Option Agreement dated February 11, 1999 between PTC and the Consultant attached hereto. IN WITNESS WHEREOF, the parties have executed this Amendment #4 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. 022545 100,000 Shares PARAMETRIC TECHNOLOGY CORPORATION 1997 Incentive Stock Option Plan Nonstatutory Stock Option Certificate February 11, 1999 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: 100,000 Option Price: $14.1875 Date of Grant: February 11, 1999 Expiration: February 11, 2004 Exercisability Schedule: on or after April 5, 1999, as to 50% of the shares, on or after July 5, 1999, as to 50% of the 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. 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-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 3, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-30-1999 APR-03-1999 236,264 87,625 210,784 5,793 0 602,255 153,988 92,625 930,468 412,981 0 2,723 0 0 431,014 930,468 277,205 513,365 7,136 96,419 350,009 0 0 69,609 29,069 40,540 0 0 0 40,540 0.15 0.15
EX-99.1 4 IMPORTANT RISK FACTORS AFFECTING RESULTS Exhibit 99.1 IMPORTANT RISK FACTORS AFFECTING RESULTS The following are some of the factors that could affect our future results. They should be considered in connection with evaluating forward-looking statements contained in this Quarterly Report on Form 10-Q and otherwise made by us or on our behalf, since these factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. OUR OPERATING RESULTS FLUCTUATE WITHIN EACH QUARTER AND FROM QUARTER-TO-QUARTER MAKING OUR FUTURE REVENUES AND OPERATING RESULTS DIFFICULT TO PREDICT. 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. Moreover, our sales force reorganizations in 1999, implemented in part to increase our average order size, have resulted in longer and more unpredictable sales cycles. Accordingly, our quarterly results may be difficult or impossible to predict prior to the end of the quarter. Any inability to obtain large orders or 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. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE, WHICH MAY MAKE IT HARDER TO RESELL YOUR SHARES AT THE TIME AND AT A PRICE THAT IS FAVORABLE TO YOU. 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 Securities and Exchange Commission with respect to our common stock. OUR ASSUMPTIONS ABOUT MARKET GROWTH IN THE CAD/CAM/CAE INDUSTRY MAY BE INCORRECT, WHICH COULD NEGATIVELY IMPACT OUR OPERATING RESULTS. Any of our projections for revenue growth assume that the overall demand for products in the mechanical computer aided design, manufacturing, and engineering (CAD/CAM/CAE) industry will continue to grow. There could be an adverse impact on our operating results in any quarter if this assumption proves to be incorrect. IF WE ARE UNABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL OR OTHER CHANGES IN THE MARKET FOR CAD/CAM/CAE OR ENTERPRISE INFORMATION MANAGEMENT SOFTWARE, OUR PRODUCTS COULD BECOME LESS COMPETITIVE. The mechanical CAD/CAM/CAE and enterprise information management markets 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; . our ability to price our products competitively; and . our ability to deliver those products through appropriate distribution channels. This will require, among other things, that we: . hire and retain personnel with the necessary skills and creativity; . provide adequate funding for development efforts; . manage distribution channels effectively; and . license appropriate technology from third parties. 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. 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 will depend in part on the market's evaluation of its ease of use, its full capability and functionality, and its ability to support a large user base. Since Windchill only became available in the latter half of fiscal 1998, it is not possible to assess the market's acceptance at this time. 2 WE MAY EXPERIENCE DELAYS IN DEVELOPING AND DEBUGGING OUR PRODUCTS. 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. WE MAY NOT BE ABLE TO IMPLEMENT NEW INITIATIVES SUCCESSFULLY. We had 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 products, which have a longer sales cycle than our other products, and the success of our Windchill pilot program, which promotes market awareness of the product; . the success of our sales force reorganization initiatives, including Rand's success with sales to smaller customers and the integration of the Windchill sales force into our other existing sales teams; . market reaction to the repricing and repackaging of our Pro/ENGINEER product line; . our ability to penetrate industry segments that represent growth opportunities; and . our continued 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 our Windchill products; . our ability to generate and fill current software license orders; . our ability to adequately manage exposure to foreign currency movements; and . Rand's ability to perform under the master distributor agreement, including its ability to recruit resellers, build a distributor network and continue to penetrate the CAD/CAM/CAE market. WE MAY NOT BE SUCCESSFUL IN INTEGRATING RECENTLY ACQUIRED BUSINESSES OR PRODUCTS. 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 research and development (R&D). 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 3 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 allocations are appropriate, if the SEC were to require us to change an allocation, this would result in a higher amortization expense, which would adversely impact our future operating results. INCREASING COMPETITION IN THE MECHANICAL CAD/CAM/CAE MARKETPLACE MAY REDUCE OUR REVENUES. ALSO, AS A RELATIVELY NEW ENTRANT IN THE MARKET FOR ENTERPRISE INFORMATION MANAGEMENT SOFTWARE, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST ESTABLISHED PRODUCTS. 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 products expand 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. WE ARE DEPENDENT ON KEY PERSONNEL WHOSE LOSS COULD CAUSE DELAYS IN OUR PRODUCT DEVELOPMENT AND SALES EFFORTS. Our success depends upon our ability to attract and retain highly skilled technical, managerial, and sales personnel. 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. WE DEPEND ON SALES FROM OUTSIDE THE UNITED STATES WHICH COULD BE ADVERSELY AFFECTED BY CHANGES IN THE INTERNATIONAL MARKETS. 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. WE MAY NOT BE ABLE TO OBTAIN COPYRIGHT OR PATENT PROTECTION FOR THE SOFTWARE PRODUCTS WE DEVELOP. Our software products are proprietary. 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 4 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 ARE CURRENTLY DEFENDING A SECURITIES CLASS ACTION LAWSUIT IN WHICH WE COULD BE LIABLE FOR DAMAGES. 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. The plaintiffs in these lawsuits have joined together to file a consolidated and amended complaint. We believe the claims made in the amended complaint are without merit, and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions at this time; however, 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 PROBLEMS COULD CAUSE INTERRUPTION OR FAILURE WITH RESPECT TO OUR PRODUCT OFFERINGS, OUR INTERNAL COMPUTER SYSTEMS AND THOSE OF OUR CRITICAL VENDORS AND SUPPLIERS. Our operations and results could be adversely affected if our current product offerings or internal systems are not made Year 2000 compliant or if the major vendors or suppliers with whom we deal are not Year 2000 ready and cannot be easily replaced. In addition, purchases by our customers could be affected if they must expend significant resources to correct their own systems. OUR OPERATIONS IN EUROPE MAY BE AFFECTED BY THE EUROPEAN UNION'S CONVERSION TO A COMMON CURRENCY. The conversion of major European countries to a common legal currency creates uncertainties for companies like us that do significant business in Europe. These uncertainties include technical adaptation of internal systems to accommodate euro-denominated transactions, long-term competitive implications of the conversion, and the effect on market risk with respect to financial instruments. 5 -----END PRIVACY-ENHANCED MESSAGE-----