PTC - 10-Q quarterly report FY

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

 

 

 

 

 

 

 

 

 

 

 

There were 264,178,703 shares of our common stock outstanding on March 31, 2001.

 

 

PARAMETRIC TECHNOLOGY CORPORATION

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

PARAMETRIC TECHNOLOGY CORPORATION

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

PARAMETRIC TECHNOLOGY CORPORATION

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

PARAMETRIC TECHNOLOGY CORPORATION

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

PARAMETRIC TECHNOLOGY CORPORATION

 

 

 

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. The year end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

 

The results of operations for the three and six month periods ended March 31, 2001 are not necessarily indicative of the results expected for the remainder of the fiscal year.

 

 

In the second quarter of 2001, we recorded nonrecurring charges of $6.1 million, primarily associated with a write-down of assets related to a focus shift in our content aggregation business. The nonrecurring charge includes $4.0 million of impairment charges for purchased software and other intangible assets and $2.1 million of costs to transition that business. Additionally, we have recorded an $8.7 million write-down on several equity investments that had been carried at cost to reflect recent, other than temporary, declines in valuation and an unsettled near-term market outlook. Of the $14.8 million of nonrecurring charges and write-down of investments, $12.7 million is non-cash related. The cash expenses for this charge are expected to be incurred within the next six months.

 

 

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, if any, of outstanding stock options using the “treasury stock” method. The following table presents the calculation for both basic and diluted EPS:

 

 

Options to purchase 2.0 million and 4.0 million shares for the second quarter and first six months of 2000 and 24.1 million and 36.3 million shares for the second quarter and first six months of 2001, 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. For the second quarter of 2000, the dilutive effect of an additional 14.9 million options was excluded from the computation of diluted EPS as the effect was anti-dilutive with the loss.

 

 

 

4.    Derivatives

 

We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. We use derivatives to hedge foreign currency cash flows on a continuing basis for periods consistent with our net asset and forecasted exposures. We use foreign currency forward and option contracts to hedge a portion of our forecasted transactions. Changes in their fair value are carried in accumulated other comprehensive income (loss) until the underlying forecasted transaction occurs. As of March 31, 2001, a gain of approximately $629,000 is included in accumulated other comprehensive income. Our derivative contracts generally mature within six months. We recorded expenses of approximately $60,000 and $1.5 million from option contracts in the second quarter and first six months of 2001, respectively.

 

 

In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements, which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 is effective for the fourth quarter of our fiscal 2001. We do not expect the implementation of SAB 101 to have a significant effect on our consolidated financial statements.

 

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 replaces SFAS No. 125 but it carries over most of SFAS No. 125’s provisions. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. We believe the adoption of this statement will not have a significant effect on our consolidated financial statements.

 

 

We operate within a single industry segment—computer software and related services. We have two major product categories within that one segment: (1) our computer aided design, manufacturing and engineering (MCAD) solutions, including our flagship Pro/ENGINEER® design software, which provides engineering solutions to our customers and (2) our Web-based Windchill® software, which provides collaborative information management solutions to our customers using Internet technologies. These collaborative product commerce (CPC) solutions permit customers to collaboratively develop, build and manage products throughout their entire lifecycle. Our products are sold worldwide by our sales force and distributors.

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is our executive officers. Our executive officers make financial decisions and resource allocations based in part on our product segments.

 

Effective in fiscal 2001, our financial reporting focuses on the revenue and operating income (loss) for our MCAD solutions and Windchill solutions product segments. We do not allocate certain sales, marketing or

 

 

 

administrative expenses to our product segments, as these activities are managed separately. The revenue and operating income (loss) attributable to these product segments are included below:

 

 

(1) The product segment operating income (loss) reflects only the direct controllable expenses of each product segment. The operating income (loss) reported does not represent the total operating results for each product segment as it does not contain an allocation of certain sales, marketing, corporate and general administrative expenses incurred in support of the product segments.

 

(2) Distribution expenses represent certain sales and marketing expenses incurred in support of the product segments.

 

(3) Unallocated expenses represent certain corporate and general administrative expenses incurred in support of the product segments.

 

(4) For the three and six months ended March 31, 2001, Windchill solutions operating loss includes $5.6 million of nonrecurring charges and the MCAD solutions operating income includes $500,000 of nonrecurring charges.

 

While we are predominately a computer software company, our business is organized geographically. Data for the geographic regions in which we operate is presented below:

 

 

Total long-lived assets by geographic region have not changed significantly from September 30, 2000.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

This Quarterly Report on Form 10-Q contains forward-looking statements about our anticipated financial results and growth based on our plans and assumptions. Important information about the bases for these plans and assumptions and certain factors that may cause our actual results to differ materially from these statements are contained below and in “Important Factors That May Affect Future Results” beginning on page 15.

 

 

Historically, our core business focus has been to provide computer aided design, manufacturing and engineering (MCAD) solutions to customers through our flagship Pro/ENGINEER® design software, and we remain committed to providing our customers with industry-leading engineering solutions based on this software. Additionally, we believe that there is growing demand for additional collaborative product commerce (CPC) solutions from manufacturers who, in order to stay competitive, must deliver more custom-tailored goods faster and at lower prices while relying more than ever before on geographically dispersed and dynamic supply chains. These CPC solutions include software and services that utilize Internet technologies to permit individuals—regardless of their role in the commercialization of a product, the computer-based tools they use, their location geographically or in the supply chain—to collaboratively design, develop, build and manage products throughout their entire lifecycle. In order to pursue this opportunity, we expanded our focus in 1999 to encompass a complete CPC solution and introduced our Web-based Windchill® information management and collaboration software. We have continued our CPC focus and will do so for the foreseeable future. This expanded focus allows us to increase the business impact our customers derive from our engineering MCAD solutions and provides our customers with the additional tools they need to elevate their products into enterprise assets and to leverage these assets into new business opportunities.

 

Over the past year, we implemented a number of strategic actions designed to improve profitability and provide a foundation for growth. For example, in order to provide more discrete product line focus and accountability we created, in the third quarter of 2000, separate business units with overall responsibility for our different product lines. Each business unit is responsible for research and development, marketing, professional services, customer support and indirect sales. The reorganization resulted in the creation of the following business units:

 

 

 

All of our solutions continue to be distributed primarily through our direct sales force. Our direct sales force, which is aligned along major and primary accounts, has been separated into geographic divisions for the domestic market and for sales outside the United States. Our indirect distribution channel has also been broadened over the last six months through alliances with system integrators, resellers and other strategic partners. The system integrator partners have begun to work in tandem with our direct sales force to locate and target potential CPC opportunities. We have also increased the number of distributors for our MCAD solutions to provide greater geographic coverage and specialized focus on discrete products. While we do not expect these distributor relationships to have any significant immediate impact, we expect the broadening of our distribution channel will, over time, yield greater market penetration.

 

 

The following is an overview of our results of operations in the second quarter:

 

 

 

 

 

 

 

 

The following table shows certain consolidated financial data as a percentage of our total revenue for the second quarter and first six months of 2000 and 2001.

 

 

 

 

Our revenue consists of software license revenue and service revenue. Overall, our total revenue increased 8% and 3% for the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively. Total revenue growth was primarily a result of increases in license revenue and service revenue from our Windchill solutions. Our service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. Service revenue, which has a lower gross profit margin than license revenue, accounted for 56% and 57% of total revenue in the second quarter and first six months of 2001 compared to 61% and 59% of total revenue in the second quarter and first six months of 2000, respectively.

 

We derived 59% and 57% of our total revenue from sales to international customers in the second quarter and first six months of 2001 compared to 62% and 59% of our total revenue in the second quarter and first six months of 2000, respectively. The decrease in international revenue as a percentage of overall revenue is a result of increased revenue in the North America region and from decreased European revenue due in part to unfavorable foreign currency rate fluctuations from corresponding periods in 2000.

 

[BAR CHART APPEARS HERE]
FIRST 6 FIRST 6
Q2 2000 Q2 2001 MONTHS 2000 MONTHS 2001
------- ------- ----------- -----------
NORTH AMERICA $ 85.7 $ 101.4 $ 191.9 $ 208.4
EUROPE $ 85.4 $ 79.6 $ 174.5 $ 156.6
ASIA/PACIFIC $ 56.0 $ 64.2 $ 99.8 $ 115.1

 

 

 

Total revenue from our Windchill solutions grew 41% and 36% for the second quarter and first six months of 2001 compared to the second quarter and first six months of 2000, respectively. As a result of our expanded focus on providing CPC solutions, license revenue for our Windchill software increased 45% and 23% for the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively, and service revenue increased 37% and 51% for the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively. While we continue to derive our license and service revenue primarily from our MCAD solutions, our Windchill solutions are continuing to comprise an increasing percentage of revenue. In order to meet what we believe is a large market opportunity for overall CPC solutions we have channeled, over the past two years, significant resources into the Windchill product line. Moreover, due to our growing installed customer base for our Windchill solutions, Windchill solutions related service revenue has increased in both absolute terms and as a percentage of overall service revenue. This emphasis on larger, more enterprise-wide solutions has however, resulted in longer and less predictable sales cycles and more complex service engagements.

 

 

Total revenue from our MCAD solutions increased 1% for the second quarter compared to the corresponding period in 2000 but declined 4% during the first six months of 2001 compared to the first six months of 2000, respectively. Total license revenue for our MCAD solutions increased 16% and 4% for the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively, and service revenue decreased 8% and 9% for the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively. Pro/ENGINEER unit sales increased 1% and 2% in the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively, and the average selling price of this software increased by 1% in both the second quarter and first six months of 2001 compared to the corresponding periods in 2000, respectively. Reasons for relative flatness in MCAD revenue growth include: increased competition in the MCAD industry from native Windows®-based products offering more limited functionality at lower costs, our transfer of resources to our Windchill solutions, which reduced the sales capacity for the MCAD product line and contributed to a loss of market share for MCAD, some weakness with existing customers, and a decrease in service revenue attributable to a decline in license sales experienced in previous quarters.

 

As part of our continued efforts designed to improve profitability, during the first half of 2001 we entered into arrangements with over eighty new distributors for our MCAD solutions and now have over 120 distributors worldwide. We expect the percentage of our MCAD products that we license through third-party distributors may increase in the future as we continue to enter into new reseller and other distribution agreements. In each of the last three fiscal years, we licensed over 90% of our products directly to end-user customers. The balance was licensed through third-party distributors, primarily Rand A Technology Corporation, our full service MCAD distributor. Our results could be adversely affected if Rand is unable to achieve certain sales levels or make existing or future payments.

 

 

Looking forward, our overall revenue levels will be dependent on our ability to successfully balance our efforts between our MCAD and Windchill businesses. Our challenge is to effectively manage and improve performance in our MCAD business while continuing to aggressively pursue growth opportunities through our Windchill solutions. Toward this end, we believe that our initiatives in building separate business units and expanding our alliances and indirect distribution channels are having a positive impact on our transformation from a one product company to a multi-product company. Our efforts may however, be impacted by the current weakening of the economy, which may defer or delay expenditures for software and services. While these conditions have caused us to take a near-term cautious view on our revenue and earnings outlook, we nevertheless are confident that over the long-term our initiatives will have a positive effect. Additional factors affecting our revenues and operating results are identified under “Important Factors That May Affect Future Results” below.

 

 

Given the lower than expected revenue in the first two quarters of 2000, we reduced our existing cost structure during the third quarter of 2000 to improve profitability. As a result of these actions, costs and expenses, excluding nonrecurring charges, decreased 6% to $221.6 million and 4% to $440.5 million in the second quarter and first six months of 2001 compared to $235.5 million and $460.6 million in the second quarter and first six months of 2000, respectively.

 

 

Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation and the payment of royalties. Cost of license revenue was $3.1 million and $6.9 million, for the second quarter and first six months of 2001, respectively, and $4.6 million and $8.7 million for the second quarter and first six months of 2000, respectively. As a percentage of license revenue, cost of license revenue was 3% for both periods of 2001 and 5% for both periods of 2000.

 

 

Our cost of service revenue includes costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. Cost of service revenue as a percentage of service revenue was 44% for both the second quarter and first six months of 2001 and 43% and 42% for the second quarter and first six months of 2000, respectively. This increase reflects our continued investment in the staffing necessary to support our new product offerings, principally our Windchill solutions.

 

 

Our sales and marketing expenses primarily include salaries and benefits, sales commissions, travel and facility costs. These costs decreased 12% in both the second quarter and first six months of 2001, compared to 2000 primarily due to our reorganization into business units in the third quarter of 2000 and the implementation of our strategy to broaden our indirect distribution channel through alliances with system integrators, resellers and other strategic partners. Total sales and marketing employees decreased 6% from 1,851 at April 1, 2000 to 1,733 at March 31, 2001.

 

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. These costs remained at relatively consistent levels, with a decrease of 1% and an increase of 2% for the second quarter and first six months of 2001, respectively, compared to 2000.

 

 

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources and administrative functions. These costs remained flat in the second quarter and increased 7% in the first six months of 2001 compared to 2000. This increase reflects our continued investment in information technology infrastructure, investments in business process improvements and costs associated with supporting service revenue, which have been increasing as a proportion of our total revenue.

 

 

These costs represent the amortization of intangible assets acquired, including developed technology, goodwill, customer lists, assembled work force and trade names. Amortization of goodwill and other intangible assets as a percentage of total revenue was 4% for the second quarters and first six months of both 2001 and 2000.

 

 

In the second quarter of 2001, we recorded nonrecurring charges of $6.1 million, primarily associated with a write-down of assets related to a focus shift in our content aggregation business. The nonrecurring charge includes $4.0 million of impairment charges for purchased software and other intangible assets and $2.1 million of costs to transition that business. Additionally, we have recorded an $8.7 million write-down on several equity investments that had been carried at cost to reflect recent, other than temporary, declines in valuation and an unsettled near-term market outlook. Of the $14.8 million of nonrecurring charges and write-down of investments, $12.7 million is non-cash related. The cash expenses for this charge are expected to be incurred within the next six months.

 

 

Our other income, net 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 and first six months of 2001, we reported other income of $1.3 million and $2.6 million compared to $0.4 million and $1.0 million for the second quarter and first six months of 2000. This increase is due primarily to lower charges incurred in connection with financing customer contracts, partially offset by higher hedging related costs.

 

 

Our effective tax rate was 29% for the second quarters and first six months of both 2001 and 2000. The difference between our effective tax rate and the statutory federal income tax rate of 35% was due primarily to lower foreign effective tax rates and the use of the net operating losses of Computervision Corporation, which we acquired in 1998, partially offset by the non-deductibility of certain acquisition and nonrecurring charges.

 

 

The number of worldwide employees was 4,809 at March 31, 2001 compared to 5,151 at April 1, 2000. The decrease over the prior year is primarily a result of terminations associated with the reorganization into business units initiated during the third quarter of 2000.

 

Liquidity and Capital Resources

 

Our operating activities, the proceeds from our issuance of stock under employee stock plans and existing cash and investments provided sufficient resources to fund our employee base, capital asset needs, stock repurchases, acquisitions and financing needs in the first half of both 2001 and 2000.

 

As of March 31, 2001, cash and investments totaled $303.1 million, down from $375.1 million at September 30, 2000. The primary reasons for the decrease in cash and investments during the first six months of 2001 were $81.7 million for the repurchase of treasury stock, $40.7 million in expenditures to acquire property and equipment and other intangible assets, partially offset by cash generated from operating activities of $44.1 million and proceeds from the issuance of common stock under our stock plans of $10.5 million. 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.

 

In the first six months of 2001, cash generated from operating activities was $44.1 million, including $32.1 million generated from net income and the non-cash portion of the nonrecurring charge and write-down of investments. In the first six months of 2001, cash utilized from assets and liabilities was $26.1 million, including $10.1 million utilized for accrued compensation, $11.0 million for other current and noncurrent assets, $8.4 million for accounts receivable and $14.1 million for deferred revenue, partially offset by cash generated of $14.3 million for accounts payable and accrued expenses and $3.2 million for income taxes.

 

In the first six months of 2001, we acquired $39.4 million of capital equipment compared to $22.3 million for the corresponding period in 2000. The capital expenditures in the first six months of 2001 include approximately $27.1 million primarily for tenant improvements and furniture and fixtures related to the new facility. Most of the required tenant improvement and furniture and fixture capital expenditures related to the new facility were incurred in the first six months of 2001. The remaining expenditure for the first six months of 2001, and the entire amount for the first six months of 2000, consisted principally of computer equipment, software and office equipment. We utilized $71.2 million of cash for financing activities during the first six months of 2001, which was comprised of $81.7 million for the repurchase of 6.6 million shares of common stock, partially offset by $10.5 million from the issuance of common stock under our stock plans. Through March 31, 2001, we had repurchased 25.3 million of the 40.0 million shares authorized by the Board of Directors to be repurchased under our repurchase program. The repurchased shares under the repurchase program will be used for stock option exercises, employee stock purchase plans and acquisitions. The level of repurchases during the remainder of 2001 will be determined by management.

 

In December 1999, we sold land and certain improvements under construction for $30.8 million and entered into an operating lease covering approximately 381,000 square feet of office space in Needham, Massachusetts. We consolidated our Waltham, Massachusetts operations into this facility during the first six months of 2001. The lease expires in December 2012, subject to certain renewal rights.

 

We believe that existing cash and short-term investments together with cash generated from operations and the issuance of common stock under our employee stock plans will be sufficient to meet our working capital, financing and capital expenditure requirements through at least the end of the current fiscal year.

 

 

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 herein.

 

Important Factors That May Affect Future 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, because these factors could cause actual results and conditions to differ materially from those projected in forward-looking statements.

 

 

 

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 later part 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 reorganization into business units, our shift in business emphasis to a more solutions-oriented sales process —undertaken in part to increase our average order size—and our transition from a one product to a multi-product company have resulted in longer and more unpredictable sales cycles for products and services. Accordingly, our quarterly results may be difficult to predict prior to the end of the quarter. Any inability to obtain large orders or orders in large volumes or to make shipments or perform services 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.

 

Other factors that may also cause quarter-to-quarter revenue and earnings fluctuation include the following:

 

 

 

 

 

In addition, the levels of quarterly or annual software or service revenue in general, or for particular geographic areas, may not be comparable to those achieved in previous periods.

 

 

Our revenue growth and profitability depends on the overall demand for software and related services. This demand can be adversely affected by unfavorable economic conditions, as customers reduce or defer spending on information technology improvements. Accordingly, general economic and business conditions may affect our future operating results. If the recent unfavorable economic conditions continue, the economic slowdown has the potential to materially and adversely affect us. A softening of demand for software caused by a prolonged slowdown of the economy may result in decreased revenue or lower revenue growth rates.

 

We may not be able to implement new initiatives successfully

 

Part of our success in the past has resulted from our ability to implement new initiatives. Our future operating results will continue to depend upon:

 

 

 

 

 

 

 

 

 

 

 

 

 

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 negatively affect our business.

 

 

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 business.

 

 

We must continually modify and enhance our products to keep pace with changes in computer software, hardware and database technology, as well as emerging standards in the Internet software industry. Our ability to remain competitive will depend on our ability to:

 

 

 

 

 

 

 

 

Also, as is common in the computer software industry, we may from time to time experience delays in our product development and “debugging” efforts. Our 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.

 

 

Our success is tied to our ability to price our products and services competitively and to deliver them efficiently, including our ability to:

 

 

 

 

 

 

A significant portion of our business comes from outside the United States. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Asia/Pacific region. Another consequence of significant international business is that a large percentage of our revenue and expenses are denominated in foreign currencies that 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 have a material impact on our results. Other risks associated with international business include:

 

 

 

 

 

 

 

 

Our software products and our other trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items 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 adequate protection to our products and other intellectual property. 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 other intellectual property 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. Certain of our products also contain technology developed and licensed from third parties. We may likewise be susceptible to infringement claims with respect to these third party technologies.

 

II. MCAD-Related Considerations

 

 

There are an increasing number of competitive MCAD products. Despite our belief that our products are technologically superior, some competitive products have reached a level of functionality at which product differentiation is less likely, in and of itself, to dislodge incumbent MCAD systems, given the training and other startup costs associated with system replacement. Increased competition and market acceptance of these competitive products could have a negative effect on pricing and revenue for our products, which could have a material adverse affect on our results.

 

In addition, our MCAD software is capable of performing on a variety of platforms. Several of our competitors focus on single platform applications, particularly Windows®-based platforms. There can be no assurance that we will have a competitive advantage with multiple platform applications.

 

We continue to enhance our existing products by releasing updates. Our competitive position and operating results could suffer if:

 

 

 

 

 

Growth in certain segments of the MCAD industry appears to have slowed and, coupled with decreased functional differentiation among flexible engineering tools, may affect our ability to penetrate the market for new customers and recapture our market share. Over the long term, we believe our emphasis on CPC solutions will allow us to differentiate our engineering products from the competition and invigorate sales of those products. However, the strategy may not be successful or may take longer than we plan. There could be a material adverse affect on our operating results in any quarter if these assumptions prove to be incorrect.

 

 

 

We have identified CPC as a new market opportunity for us, and have devoted significant resources toward capitalizing on that opportunity. CPC solutions include software and services that utilize Internet technologies to permit employees, customers, suppliers and others to collaboratively develop, build and manage products throughout their entire lifecycle. Because the market for software products that allow companies to collaborate on product information on an enterprise-wide level is newly emerging and because companies have not traditionally linked customers and suppliers in this process directly, we cannot be certain as to the size of this market, whether it will grow, or whether companies will elect to utilize our products rather than attempt to develop applications internally or through other sources.

 

In addition, companies that have already invested substantial resources in other methods of sharing product information in the design-through-manufacture process may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or methods. We expect that we will continue to need to pursue intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our products. Demand for and market acceptance of our products will be affected by the success of these efforts.

 

Our Windchill software, which is central to our CPC strategy, is relatively new and is not yet well established in the marketplace

 

The success of our CPC strategy will depend in large part on the ability of our Windchill solutions to meet customer expectations, especially with respect to:

 

 

 

 

 

 

 

The software is still relatively new. If our customers cannot successfully deploy large-scale implementation projects or if they determine that we or our partners are unable to accommodate large-scale deployments, our operating results may be adversely affected.

 

In addition, implementing a Windchill software solution on an enterprise level takes longer and requires greater expertise than does installing our other products. Our Windchill software must integrate with existing computer systems and software programs used by our customers and their partners. Because we are one of the first companies to offer a CPC solution, many customers will be facing these integration issues for the first time, particularly in the context of collaborating with members of the extended enterprise, including customers and supply chain partners. Our customers could become dissatisfied with our products or services if integrations prove to be difficult, costly or time consuming, and our operating results may be adversely affected.

 

 

As an enterprise solution, Windchill may require large-scale organizational implementations that in today’s marketplace are often performed by third parties. We have entered into and are currently developing additional relationships with third parties and intend to continue to do so. Using third parties to both implement and promote our products can result in a reduction in our control to both drive the sales process and service our customers. In addition, the successful utilization of third parties will depend on:

 

 

 

 

 

Our Windchill based software solutions, when hosted by a third party information technology provider, are accessed by a customer over the Internet. In this hosted environment, the Windchill software and customer data reside and operate on the third party’s hosting servers and associated networks. Service level dissatisfaction, delays or interruptions in service, data integrity faults or other problems with the performance of a third party’s hosting service could adversely affect our relationship with our customers, which could have an adverse effect on our business.

 

Competition among providers of CPC solutions may increase, which may reduce our profits and limit or reduce our market share

 

The market for CPC solutions is new, highly fragmented, rapidly changing and increasingly competitive. We expect competition to intensify, which could result in price reductions for our products and services, reduced gross margins and loss of market share. Our primary competition comes from:

 

 

 

 

In addition, our global services organization may face increasing competition for follow-on customization services from other third-party consultants and service providers.

 

 

Our success depends upon continued growth in the use of the Internet as a medium of commerce. Although the Internet is experiencing rapid growth in the overall number of users, this growth is a recent phenomenon and may not continue. Furthermore, the use of the Internet for commerce is still relatively new. As a result, a sufficiently broad base of companies and their supply chain partners may not adopt or continue to use the Internet as a medium of exchanging product information. Our CPC strategy would be seriously harmed if:

 

 

 

 

 

Our CPC strategy will also be seriously harmed if the Internet infrastructure is not able to support the demands placed on it by increased usage or the limited capacity of networks to transmit large amounts of data, or if delays in the development or adoption of new equipment standards or protocols required to handle increased levels of Internet activity, or increased governmental regulation, cause the Internet to lose its viability as a means of communication between manufacturers and their customers and supply chain partners.

 

Our Windchill ProjectLink solution provides CPC capabilities on Internet exchanges, portals and marketplaces. Accordingly, its success will be highly dependent upon the success of the Internet as a viable collaboration medium and on our successful development and integration of the technologies necessary to offer tools for exchanges, portals, and other forms of internet marketplaces that are acceptable to customers and suitable for the evolving nature of the Internet.

 

 

 

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, our expanded focus on delivering Internet-based solutions may cause us to be viewed, in part, as an Internet company. Until the third quarter of 2000, the trading prices of Internet stocks in general were unusually high under conventional valuation standards such as price-to-earnings and price-to-sales ratios. Since then, they have experienced fluctuations unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, cannot be predicted. Negative changes in the public’s perception of the prospects of Internet or e-commerce companies, or of PTC as an Internet company, could depress our stock price regardless of our results.

 

Also, a large percentage of our common stock traditionally has been held by institutional investors. Purchases and sales of 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 SEC with respect to our common stock.

 

 

Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Item 7A: “Quantitative and Qualitative Disclosures About Market Risk” to our 2000 Annual Report on Form 10-K.

 

 

 

Certain class action lawsuits were filed by shareholders 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. An amended complaint, consolidating these lawsuits into one action, was filed in the second quarter of 1999, seeking unspecified damages. In the third quarter of 1999, we filed a motion to dismiss the consolidated action.

 

On March 29, 2001, the U.S. District Court for the District of Massachusetts granted our motion to dismiss and entered an order dismissing the consolidated action with prejudice. The applicable appeal period has expired and the plaintiffs have not appealed, which should conclude the litigation.

 

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.

 

 

At the annual meeting of Stockholders of the Company held on February 15, 2001, the stockholders of the Company (1) elected Noel G. Posternak and Michael E. Porter as Class II directors of the Company to hold office until the 2004 Annual Meeting (subject to the election and qualification of their successors and to their earlier death, resignation or removal) and no other nominations were made; and (2) approved an amendment to increase the number of shares of common stock available for issuance under the Company’s 2000 Employee Stock Purchase Plan from 2,000,000 to 10,000,000 shares. The votes were as follows:

 

 

 

(a) Exhibits

 

10.1 Severance Agreement with Trent Brown dated February 15, 2001.

 

10.2 Amendment to Parametric Technology Corporation 1997 Incentive Stock Option Plan.

 

(b) Reports on Form 8-K

 

No reports on Form 8-K were filed during the quarter ended March 31, 2001.

 

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.

 

 

 

Date:    May 15, 2001