SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended: March 30, 1996 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 Number) incorporation or organization) 128 Technology Drive, Waltham, MA 02154 ---------------------------------------- (Address of principal executive offices, including zip code) (617) 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 ------- ------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, par value $.01 per share 126,643,224 - -------------------------------------- ----------------------------- Class Outstanding at March 30, 1996 Total number of pages: 11 Exhibit index appears on page 11
PARAMETRIC TECHNOLOGY CORPORATION INDEX ----- <TABLE> <CAPTION> Page ---- <S> <C> <C> <C> Part I Financial Information Item 1 Financial Statements Consolidated Balance Sheet 3 March 30, 1996 and September 30, 1995 Consolidated Statement of Income 4 Three and six months ended March 30, 1996 and April 1, 1995 Consolidated Statement of Cash Flows 5 Six months ended March 30, 1996 and April 1, 1995 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of 7 Financial Condition and Results of Operations Part II Other Information Item 4 Submission of Matters to a Vote of Security Holders 9 Item 6 Exhibits 9 Signature 10 </TABLE> 2
PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEET (amounts in thousands) <TABLE> <CAPTION> ASSETS March 30, 1996 September 30, 1995 --------------- ------------------ (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $133,423 $145,638 Short-term investments 185,069 162,610 Accounts receivable, net of allowance for doubtful accounts of $2,649 and $2,733 92,150 80,405 Other current assets 15,369 11,079 -------- -------- Total current assets 426,011 399,732 Marketable investments 55,048 -- Property and equipment, net 31,419 19,811 Capitalized computer software costs, net 3,777 4,380 Other assets 24,661 29,804 -------- -------- Total assets $540,916 $453,727 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 27,391 $ 19,578 Accrued compensation 22,046 19,821 Deferred revenue 44,430 37,953 Income taxes 173 4,678 -------- -------- Total current liabilities 94,040 82,030 Other liabilities 802 768 Stockholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized; none issued -- -- Common stock, $.01 par value; 215,000 shares authorized; 126,733 and 125,129 shares issued 1,267 1,251 Additional paid-in capital 179,597 155,497 Cumulative translation adjustments (210) 1,710 Unrealized loss on investments (95) -- Retained earnings 268,651 212,471 Treasury stock, at cost, 90 and 0 shares (3,136) -- -------- -------- Total stockholders' equity 446,074 370,929 -------- -------- Total liabilities and stockholders' equity $540,916 $453,727 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3
PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENT OF INCOME (amounts in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------- ------------------- March 30, April 1, March 30, April 1, 1996 1995 1996 1995 --------- -------- --------- -------- <S> <C> <C> <C> <C> Revenue: License $103,420 $65,777 $194,850 $124,222 Service 37,073 25,246 71,040 45,649 -------- ------- -------- -------- Total revenue 140,493 91,023 265,890 169,871 -------- ------- -------- -------- Cost of revenue: License 987 1,211 1,766 1,785 Service 12,402 7,521 24,077 13,911 -------- ------- -------- -------- Total cost of revenue 13,389 8,732 25,843 15,696 -------- ------- -------- -------- Gross profit 127,104 82,291 240,047 154,175 -------- ------- -------- -------- Operating expenses: Sales and marketing 56,303 37,561 106,754 69,776 Research and development 8,901 5,790 16,726 11,161 General and administrative 6,814 4,591 12,748 9,030 -------- ------- -------- -------- Total operating expenses 72,018 47,942 136,228 89,967 -------- ------- -------- -------- Operating income 55,086 34,349 103,819 64,208 Other income, net 2,651 2,061 5,674 3,775 -------- ------- -------- -------- Income before income taxes 57,737 36,410 109,493 67,983 Provision for income taxes 20,900 13,674 39,636 25,472 -------- ------- -------- -------- Net income $ 36,837 $22,736 $ 69,857 $ 42,511 ======== ======= ======== ======== Net income per share $ 0.28 $ 0.18 $ 0.53 $ 0.33 ====== ====== ====== ====== Weighted average number of common and dilutive common equivalent shares outstanding 133,329 128,008 132,982 127,315 ======== ======= ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 4
PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (amounts in thousands) (unaudited) <TABLE> <CAPTION> Six Months Ended ---------------------------------- March 30, 1996 April 1, 1995 --------------- ----------------- <S> <C> <C> Cash flows from operating activities: Net income $ 69,857 $ 42,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,297 3,666 Deferred income taxes 5,698 (102) Changes in assets and liabilities: Increase in accounts receivable (13,357) (888) Increase in other current assets (6,900) (3,680) (Increase) decrease in other assets 1,626 (563) Increase in accounts payable and accrued expenses 8,128 866 Increase (decrease) in accrued compensation 2,396 (845) Increase in income taxes 9,177 5,504 Increase in deferred revenue 6,989 16,576 --------- --------- Net cash provided by operating activities 89,911 63,045 --------- --------- Cash flows from investing activities: Additions to property and equipment, net (16,252) (3,693) Additions to capitalized computer software costs (400) (622) Proceeds from sales of investments 30,193 47,038 Purchases of investments (107,795) (138,428) --------- --------- Net cash used by investing activities (94,254) (95,705) --------- --------- Cash flows from financing activities: Repayment of long-term obligations (63) (45) Proceeds from issuance of common stock 19,311 11,316 Purchases of treasury stock (25,538) -- --------- --------- Net cash provided (used) by financing activities (6,290) 11,271 --------- --------- Elimination of Rasna's net cash activity for the three months ended December 31, 1994 -- (112) Effect of exchange rate changes on cash (1,582) 1,029 --------- --------- Net decrease in cash and cash equivalents (12,215) (20,472) Cash and cash equivalents at beginning of period 145,638 142,202 --------- --------- Cash and cash equivalents at end of period $ 133,423 $ 121,730 ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
PARAMETRIC TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and have been prepared by the Company in accordance with generally accepted accounting principles. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. While the Company believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The results of operations for the three-month and six-month periods ended March 30, 1996 are not necessarily indicative of the results expected for the full fiscal year. 2. MARKETABLE INVESTMENTS Marketable investments, classified as available for sale, consist of investments in debt instruments of financial institutions, government entities and corporations with maturities in excess of one year, but less than two years. The Company has established guidelines relative to credit ratings, diversification and maturity that maintain safety and liquidity for these investments. 3. COMMON STOCK On February 8, 1996, the stockholders of the Company approved an increase in the number of authorized shares of the Company's common stock from 75,000,000 to 215,000,000. Also, on February 8, 1996, the Company's Board of Directors declared a one-for-one stock dividend on all shares of common stock, which became effective on February 29, 1996 to all stockholders of record on February 22, 1996. These financial statements and related notes have been retroactively adjusted, where appropriate, to reflect the one-for-one stock dividend. 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Parametric Technology Corporation is a leading supplier of software tools used to automate the mechanical development of a product from its conceptual design through its release into manufacturing. The Company derives its revenue from the license and support of software used in the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing and engineering) industry. RESULTS OF OPERATIONS Revenue, including license and service revenues, for the three-month and six- month periods ended March 30, 1996 was $140,493,000 and $265,890,000, respectively, compared with $91,023,000 and $169,871,000 for the three-month and six-month periods ended April 1, 1995. These totals represent increases of 54% for the three-month period and 57% for the six-month period over the corresponding periods in fiscal 1995. The increase in license revenue results from an increase in the number of seats of software licensed. A seat of software generally consists of the Company's core product, Pro/ENGINEER(R), together with several other software modules, configured to serve the needs of a single end-user. The increase in the number of seats licensed was achieved as a result of continued market penetration by the Company's products. The average price per seat during the three months and six months ended March 30, 1996 and April 1, 1995 was relatively stable. Service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. During the three-month and six-month periods ended March 30, 1996, service revenue was 26% and 27% of total revenue, respectively, compared to 28% and 27% during the three-month and six-month periods ended April 1, 1995. Revenue from outside of North America accounted for 55% and 54% of revenue for the three-month and six-month periods ended March 30, 1996, compared with 49% and 48% for the same periods in fiscal 1995. These increases are a result of the Company's continued investment in the international marketplace. The Company expects that total revenue will increase throughout fiscal 1996 from continued penetration in the mechanical CAD/CAM/CAE industry and that international revenue will continue to account for a significant portion of that total growth. Cost of license revenue consists of the amortization of capitalized computer software costs as well as material and overhead costs associated with compact disks, packaging and shipping. Cost of service revenue includes the costs associated with training, software maintenance and consulting revenues. Combined, these expenses increased to $13,389,000 and $25,843,000 for the three- month and six-month periods ended March 30, 1996 from $8,732,000 and $15,696,000 for the corresponding periods in fiscal 1995. Total cost of revenue as a percentage of revenue increased to 10% for both the three-month and six-month periods ended March 30, 1996 from 10% and 9% in the corresponding periods in fiscal 1995. The absolute and percentage increases in total cost of revenue resulted primarily from growth in staffing necessary to generate and support increased worldwide service revenue and material costs associated with increased revenue. Cost of service revenue, which is the largest component of total cost of revenue, increased 65% and 73% during the three-month and six-month periods ended March 30, 1996 from such costs in the corresponding periods in fiscal 1995, while the associated revenue increased 47% and 56%. Sales and marketing expenses increased to $56,303,000 and $106,754,000 for the three-month and six-month periods ended March 30, 1996 from $37,561,000 and $69,776,000 for the corresponding periods in fiscal 1995. These costs decreased as a percentage of revenue to 40% for both the three-month and six- month periods ended March 30, 1996, compared with 41% for the comparable periods in fiscal 1995. The absolute increase in these expenses was due primarily to worldwide expansion of the sales force and sales commissions associated with higher revenue. International sales and marketing expenses represented 55% and 58% of total sales and marketing expenses for the three-month and six-month periods ended March 30, 1996, compared with 48% for the same periods in fiscal 1995. The Company expects to continue the growth of its worldwide sales and marketing organization during future periods, reflecting the Company's commitment to expand its global market penetration. 7
Research and development expenses increased to $8,901,000 and $16,726,000 for the three-month and six-month periods ended March 30, 1996 from $5,790,000 and $11,161,000 for the corresponding periods in fiscal 1995. Total research and development expenses were 6% of revenue for the three-month and six-month periods ended March 30, 1996 compared with 6% and 7% for the same periods in fiscal 1995. The absolute increase in expenses resulted primarily from growth in the research and development staff. Software development costs of $200,000 and $400,000 during the three-month and six-month periods ended March 30, 1996 have been capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", compared with $87,000 and $622,000 in the corresponding periods in fiscal 1995. The amounts capitalized represent 2% of total research and development costs for both the three-month and six-month periods in fiscal 1996, compared with 1% and 5% during the same periods in fiscal 1995. Capitalized computer software costs are amortized over the economic useful lives of the related products, typically three years. General and administrative expenses include the costs of corporate, finance, information technology, human resources and administrative functions of the Company. These expenses increased to $6,814,000 and $12,748,000 for the three- month and six-month periods ended March 30, 1996 from $4,591,000 and $9,030,000 for the corresponding periods in fiscal 1995, but remained stable as a percentage of revenue at 5% for the three-month and six-month periods ended March 30, 1996 and April 1, 1995. The absolute increase in these expenses was primarily due to the hiring of additional employees necessary to support the Company's worldwide growth. Other income, net, primarily includes interest income and expense and foreign currency gains and losses. Interest income increased to $6,633,000 for the six- month period ended March 30, 1996 compared with $4,287,000 for the corresponding period in fiscal 1995 due primarily to higher interest-bearing cash and investment balances, which resulted from positive cash flows from operations and proceeds from stock option exercises. The Company's effective tax rate for the six-month period ended March 30, 1996 was 36.2%, compared with 37.5% for the same period in fiscal 1995. The difference between the effective and statutory federal rate was due primarily to the benefit of tax exempt interest income offset by the impact of state income taxes. The number of worldwide employees increased 41% to 2,365 at March 30, 1996 compared with 1,675 at April 1, 1995. Employment increased significantly to support higher revenues and international expansion, with the largest portion of this growth occurring in the sales and marketing department. LIQUIDITY AND CAPITAL RESOURCES As of March 30, 1996, the Company had $133,423,000 of cash and cash equivalents and $240,117,000 of investments. Net cash provided by operating activities, consisting primarily of net income from operations and the increases in income taxes and accounts payable and accrued expenses, offset by the increase in accounts receivable was $89,911,000 for the six-month period ended March 30, 1996 compared with $63,045,000 for the corresponding period in fiscal 1995. Investment activities consisted primarily of purchases and sales of investments and additions to property and equipment. Net cash used by investing activities totaled $94,254,000 for the six-month period ended March 30, 1996, compared with $95,705,000 for the corresponding period in fiscal 1995. Financing activities, consisting primarily of proceeds from issuance of common stock, offset by the purchases of treasury stock, used $6,290,000 for the six months ended March 30, 1996 and provided $11,271,000 for the six months ended April 1, 1995. On May 12, 1994, the Company announced that its Board of Directors had authorized a plan that allows the Company to repurchase up to 6,000,000 shares of its common stock. The Company intends to repurchase these shares to partially offset the dilution caused by the exercise of stock options under the Company's option plans and the purchase of shares under the employee stock purchase plan. During the six-month period ended March 30, 1996, the Company repurchased 590,000 shares at a cost of $25,538,000, of which 90,000 remained in treasury at March 30, 1996. Since the inception of the plan, the 8
Company has repurchased 904,000 shares. The Company expects to use available cash and cash generated from operations in future fiscal periods to fund any such repurchases. The Company believes that existing cash and investment balances together with cash generated from operations will be sufficient to meet the Company's working capital, financing and capital expenditure requirements through at least fiscal 1996. Part II - OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of the Company held on February 8, 1996, the stockholders of the Company (1) elected C. Richard Harrison and Robert N. Goldman as Class III directors of the Company to hold office until the 1999 Annual Meeting of Stockholders (subject to the election and qualification of their successors and to their earlier death, resignation or removal) and no other nominations were made; (2) approved an amendment to the Company's Articles of Organization increasing the number of authorized shares of the Company's common stock from 75,000,000 to 215,000,000; (3) approved amendments to the Company's 1987 Incentive Stock Option Plan increasing the number of shares of the Company's common stock authorized for issuance under the Stock Option Plan by 3,000,000 shares, and changing the designation of persons eligible to receive options under the Stock Option Plan to include consultants; and (4) approved the Company's 1996 Director Stock Option Plan. The votes were as follows: <TABLE> <CAPTION> Votes withheld Broker Votes for or opposed Abstentions non-votes -------------- -------------- ----------- --------- <S> <C> <C> <C> <C> (1) Election of Directors: C. Richard Harrison 56,388,898 612,868 -- -- Robert N. Goldman 56,391,082 610,684 -- -- (2) Approval of Amendment to Articles of Organization: 37,941,482 16,981,114 1,637,681 441,489 (3) Approval of Amendments to 1987 Incentive Stock Option Plan: 37,514,114 18,944,871 101,292 441,489 (4) Approval of 1996 Director Stock Option Plan: 41,035,504 15,344,886 179,887 441,489 </TABLE> Item 6: Exhibits 3.1 Restated Articles of Organization of the Company 99 Important Factors Regarding Future Results 9
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAMETRIC TECHNOLOGY CORPORATION Date: May 14, 1996 by: /S/ Edwin J. Gillis ------------------------------------------------ Edwin J. Gillis Senior Vice President of Finance and Administration, Chief Financial Officer and Treasurer 10
Exhibit Index 3.1 Restated Articles of Organization of the Company (filed originally as Exhibit 3.4 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1993 and filed in electronic format herewith pursuant to Rule 102(c) of Regulation S-T) 99 Important Factors Regarding Future Results; filed herewith. 11