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 29, 1997 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 127,563,454 - -------------------------------------- ----------------------------- Class Outstanding at March 29, 1997 Total number of pages: 12 Exhibit index appears on page 12
PARAMETRIC TECHNOLOGY CORPORATION INDEX ----- <TABLE> <CAPTION> Page ---- <S> <C> PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheet 3 March 29, 1997 and September 30, 1996 Consolidated Statement of Income 4 Three and six months ended March 29, 1997 and March 30, 1996 Consolidated Statement of Cash Flows 5 Six months ended March 29, 1997 and March 30, 1996 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 10 Item 6 Exhibits 10 SIGNATURE 11 </TABLE> 2
PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEET (amounts in thousands) <TABLE> <CAPTION> ASSETS March 29, 1997 September 30, 1996 -------------- ------------------ (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $212,088 $201,614 Short-term investments 289,528 232,602 Accounts receivable, net 138,439 117,273 Other current assets 16,347 10,561 -------- -------- Total current assets 656,402 562,050 Marketable investments -- 21,896 Property and equipment, net 40,745 36,517 Other assets 45,395 38,754 -------- -------- Total assets $742,542 $659,217 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 45,592 $ 39,416 Accrued compensation 35,540 32,186 Deferred revenue 70,431 56,420 Income taxes 31,962 17,970 -------- -------- Total current liabilities 183,525 145,992 Other liabilities 744 793 Stockholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized; none issued -- -- Common stock, $.01 par value; 350,000 shares authorized; 128,148 and 127,452 shares issued 1,281 1,275 Additional paid-in capital 230,952 207,039 Retained earnings 362,955 306,638 Treasury stock, at cost, 585 and 23 shares (32,081) (1,164) Other equity (4,834) (1,356) -------- -------- Total stockholders' equity 558,273 512,432 -------- -------- Total liabilities and stockholders' equity $742,542 $659,217 ======== ======== </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 29, March 30, March 29, March 30, 1997 1996 1997 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenue: License $147,054 $103,420 $285,496 $194,850 Service 50,958 37,073 96,017 71,040 -------- -------- -------- -------- Total revenue 198,012 140,493 381,513 265,890 -------- -------- -------- -------- Cost of revenue: License 2,737 987 4,728 1,766 Service 15,824 12,402 31,381 24,077 -------- -------- -------- -------- Total cost of revenue 18,561 13,389 36,109 25,843 -------- -------- -------- -------- Gross profit 179,451 127,104 345,404 240,047 -------- -------- -------- -------- Operating expenses: Sales and marketing 77,263 56,303 148,924 106,754 Research and development 13,292 8,901 25,426 16,726 General and administrative 9,719 6,814 18,424 12,748 -------- -------- -------- -------- Total operating expenses 100,274 72,018 192,774 136,228 -------- -------- -------- -------- Operating income 79,177 55,086 152,630 103,819 Other income, net 2,450 2,651 5,075 5,674 -------- -------- -------- -------- Income before income taxes 81,627 57,737 157,705 109,493 Provision for income taxes 28,569 20,900 55,196 39,636 -------- -------- -------- -------- Net income $ 53,058 $ 36,837 $102,509 $ 69,857 ======== ======== ======== ======== Net income per share $ 0.39 $ 0.28 $ 0.76 $ 0.53 ====== ====== ====== ====== Weighted average number of common and dilutive common equivalent shares outstanding 135,328 133,329 135,212 132,982 ======== ======== ======== ======== </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 29, 1997 March 30, 1996 ----------------- --------------- <S> <C> <C> Cash flows from operating activities: Net income $ 102,509 $ 69,857 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,338 6,297 Deferred income taxes 754 5,698 Changes in assets and liabilities: Increase in accounts receivable (26,498) (13,357) Increase in other current assets (3,466) (6,900) (Increase) decrease in other assets (958) 1,626 Increase in accounts payable and accrued expenses 7,672 8,128 Increase in accrued compensation 4,536 2,396 Increase in deferred revenue 16,157 6,989 Increase in income taxes 28,158 9,177 --------- --------- Net cash provided by operating activities 139,202 89,911 --------- --------- Cash flows from investing activities: Additions to property and equipment, net (13,427) (16,252) Additions to capitalized and purchased software costs (814) (400) Proceeds from sale of investments 113,702 30,193 Purchases of investments (156,811) (107,795) --------- --------- Net cash used by investing activities (57,350) (94,254) --------- --------- Cash flows from financing activities: Repayment of long-term obligations (91) (63) Proceeds from issuance of common stock 28,185 19,311 Purchases of treasury stock (95,020) (25,538) --------- --------- Net cash provided (used) by financing activities (66,926) (6,290) --------- --------- Effects of exchange rate changes on cash (4,452) (1,582) --------- --------- Net increase (decrease) in cash and cash equivalents 10,474 (12,215) Cash and cash equivalents at beginning of period 201,614 145,638 --------- --------- Cash and cash equivalents at end of period $ 212,088 $ 133,423 ========= ========= </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, 1996. The results of operations for the three-month and six-month periods ended March 29, 1997 are not necessarily indicative of the results expected for the full fiscal year. 2. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share for the three-month and six-month periods ended March 29, 1997 would have been $.42 and $.80 per share, respectively as compared with $.29 and $.55 per share for the corresponding periods in fiscal 1996. The impact of SFAS No. 128 on the calculation of diluted net income per share for these quarters is not expected to be materially different from primary earnings per share. The Company plans to adopt SFAS No. 128 in its first quarter for fiscal 1998 and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Parametric Technology Corporation is the CAD/CAM/CAE (computer-aided design, manufacturing and engineering) industry's leading supplier of software tools used to automate the mechanical development of a product from its conceptual design through its release into manufacturing. Information provided by the Company, including information contained in this Quarterly Report on Form 10-Q, or by its spokespersons from time to time may contain forward-looking statements concerning projected financial performance, industry segment growth, product development and commercialization or other aspects of future operations. In particular, the statements in this Report concerning anticipated revenue, geographical growth rates and projected expenses made pursuant to the safe harbor established by recent securities legislation are based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Important information about the basis for those assumptions including factors that may cause actual results to vary from those forecast are discussed below and are also contained in "Important Factors Regarding Future Results" included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the 1996 Annual Report to Stockholders, incorporated herein by reference. RESULTS OF OPERATIONS Revenue, including license and service revenues, for the three-month and six- month periods ended March 29, 1997 was $198,012,000 and $381,513,000, respectively, compared with $140,493,000 and $265,890,000 for the three-month and six-month periods ended March 30, 1996. These totals represent increases of 41% for the three-month period and 43% for the six-month period over the corresponding periods in fiscal 1996. Net income, as a percentage of revenue, was 27% for the three-month and six-month periods ended March 29, 1997 compared to 26% in the corresponding periods in fiscal 1996. This represents an increase in net income of 44% and 47% from the three-month and six-month periods ended March 30, 1996. The Company derives its revenue from the sale and support of software used in the mechanical segment of the CAD/CAM/CAE industry. Revenue growth in the three- month and six-month periods ended March 29, 1997 reflects the continued worldwide acceptance of the Company's products and services and the Company's ongoing investment in expanding its worldwide direct sales force. License revenue was $147,054,000 and $285,496,000 for the three-month and six-month periods ended March 29, 1997, a 42% and 47% increase from $103,420,000 and $194,850,000 for the corresponding periods in fiscal 1996. This growth results from an increase in the number of seats of software licensed and from a higher price realized per seat. A seat of software generally consists of various software products configured to serve the needs of a single end user. The Company licensed 7,475 and 14,459 seats of software respectively in the three- month and six-month periods ended March 29, 1997, an increase of 37% and 38% from 5,446 and 10,454 seats of software in the comparable periods in fiscal 1996. The increase in the number of seats licensed was achieved as a result of continued market penetration of the Company's products. The average price per seat during the three months and six months ended March 29, 1997 was $19,700, compared with an average price of $19,000 and $18,600 for the same periods in fiscal 1996. The average price per seat has increased as a result of customers purchasing configurations of seats containing more modules and an increase in the percentage of the Company's revenue derived from international markets, where the prices have typically been higher than in North America. Service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. Service revenue was $50,958,000 and $96,017,000 for the three-month and six-month periods ended March 29, 1997, an increase of 37% and 35% from $37,073,000 and $71,040,000 for the comparable periods in fiscal 1996. The increase in service revenue is a result of the growth in the Company's installed customer base and, to a lesser extent, increased training and consulting services performed for these customers. The Company derived 56% and 57% of revenue from sales to international customers in the three-month and six-month periods ended March 29, 1997, compared with 55% and 54% for the same periods in fiscal 1996. The increase in international revenue is primarily attributable to continued international acceptance of the Company's products and services and the growth 7
in the sales force in Europe and Asia/Pacific, although revenue derived from Japan was weaker than anticipated due in part to the strengthening of the dollar in relationship to the yen. The Company has taken measures to strengthen results in the Asia/Pacific region and anticipates that total revenue will increase throughout fiscal 1997 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; however, growth in international revenue will continue to be affected by foreign exchange rates and the stronger dollar's impact on the Company's ability to forecast quarter to quarter results. Although the Company expects revenues to grow throughout fiscal 1997, there can be no assurance that quarterly revenue growth rates and/or geographical growth rates will be comparable with those achieved in the three-month and six-month periods ended March 29, 1997. The rate of continued revenue growth throughout the remainder of fiscal 1997 depends upon the strength of the U.S. dollar as well as the Company's ability to implement recent measures taken to strengthen results in the Asia/Pacific region, to adequately manage the Company's exposure to foreign currency fluctuations, to continue to penetrate the mechanical segment of the CAD/CAM/CAE industry, to attract and retain skilled personnel, and to deliver timely product enhancements. Cost of license revenue consists of the amortization of capitalized computer software costs and costs associated with reproducing software, printing user manuals, royalties, packaging and shipping. The increase in cost of license revenue is a result of the increase in the number of seats licensed and the royalty costs associated with those licenses during the three-month and six- month periods ended March 29, 1997 as compared to the corresponding periods in fiscal 1996. Cost of service revenue includes the costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. The increase in 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 the Company's increasing installed base. Combined, these expenses increased to $18,561,000 and $36,109,000 for the three-month and six-month periods ended March 29, 1997 from $13,389,000 and $25,843,000 for the corresponding periods in fiscal 1996. Total cost of revenue as a percentage of revenue remained stable between 9% and 10% for both the three-month and six-month periods ended March 29, 1997 and the corresponding periods in fiscal 1996. Sales and marketing expenses primarily include salaries, sales commissions, travel and facility costs. Sales and marketing expenses increased to $77,263,000 and $148,924,000 for the three-month and six-month periods ended March 29, 1997 from $56,303,000 and $106,754,000 for the corresponding period in fiscal 1996. These costs decreased as a percentage of revenue to 39% for both the three-month and six-month periods ended March 29, 1997, compared with 40% for the comparable periods in fiscal 1996. The absolute increase in these expenses was due primarily to worldwide expansion of the sales force and sales commissions associated with higher revenue. Total sales and marketing headcount increased to 1,877 at March 29, 1997, an increase of 36% from 1,379 at March 30, 1996. The Company expects to continue the growth of its worldwide sales and marketing organization during fiscal 1997, reflecting the Company's commitment to focus its resources on increasing its installed base and to continue to expand its global market penetration. The Company's ability to meet this expectation depends upon its ability to attract and retain highly skilled technical, managerial and sales personnel. The Company continued to make significant investments in research and development, consisting principally of salaries and benefits, expenses associated with product translations, costs of computer equipment used in software development, and facility expenses. Research and development expenses increased to $13,292,000 and $25,426,000 for the three-month and six-month periods ended March 29, 1997 from $8,901,000 and $16,726,000 for the corresponding periods in fiscal 1996. Total research and development expenses increased to 7% of revenue for the three-month and six-month periods ended March 29, 1997, compared with 6% for the same periods in fiscal 1996. The Company believes that research and development expenditures are essential to maintaining its competitive position in the mechanical CAD/CAM/CAE industry and expects the expenditure levels to increase in absolute dollars throughout fiscal 1997. General and administrative expenses include the costs of corporate, finance, information technology, human resources and administrative functions of the Company. These expenses increased to $9,719,000 and $18,424,000 for the three- month and six-month periods ended March 29, 1997 from $6,814,000 and $12,748,000 for the corresponding periods in fiscal 1996. General and administrative expenses as a percentage of revenue remained constant at 5% for the three-month and six-month periods ended March 29, 1997 and March 30, 1996. The absolute increase in these expenses was primarily due to the hiring of additional employees necessary to support the Company's worldwide growth. 8
Other income, net, primarily includes interest income and expense and foreign currency gains and losses. Other income decreased to $2,450,000 and $5,075,000 for the three-month and six-month periods ended March 29, 1997 compared with $2,651,000 and $5,674,000 for the corresponding periods in fiscal 1996. As the international portion of the Company's business continues to increase, a growing percentage of the Company's revenue and expenses is transacted in foreign currencies. In order to reduce its exposure to fluctuations in foreign exchange rates, the Company engages in hedging transactions involving the use of forward foreign exchange contracts in the primary European and Asian currencies. The Company's effective tax rate for the three-month and six-month periods ended March 29, 1997 was 35%, compared with 36.2% for the same periods in fiscal 1996. The difference between the effective and statutory federal tax rate was due primarily to the benefits of tax-exempt interest income and the tax benefits from the use of the foreign sales corporation, offset by the impact of state income taxes. The number of worldwide employees increased 32% to 3,133 at March 29, 1997 compared with 2,365 at March 30, 1996. Employment increased significantly to support higher revenues and international expansion, with the largest portion of this growth occurring in the sales department. LIQUIDITY AND CAPITAL RESOURCES As of March 29, 1997, the Company had $212,088,000 of cash and cash equivalents and $289,528,000 of investments. Net cash generated by operating activities and proceeds from issuance of the Company's stock under stock plans provided sufficient resources to fund the Company's headcount growth, capital asset needs and stock repurchases for the six months ended March 29, 1997. Net cash provided by operating activities, consisting primarily of net income from operations before depreciation and amortization and increases in working capital, was $139,202,000 for the six-month period ended March 29, 1997 compared with $89,911,000 for the corresponding period in fiscal 1996. Net cash used by investing activities totaled $57,350,000 for the six-month period ended March 29, 1997, compared with $94,254,000 for the corresponding period in fiscal 1996. The decrease is principally due to the proceeds from the sale of investments and the timing associated with those investments. Investment activities consisted primarily of purchases and sales of investments, and additions to property and equipment. The Company acquired $13,427,000 of capital equipment consisting primarily of computer equipment, software, and office equipment to meet the needs resulting from the growth in employee headcount, continued expansion of its worldwide sales and support operations and increased investment in information technologies and in computer workstations to keep field and development employees current with changes in the hardware and software marketplace. For the remainder of fiscal 1997, the Company plans to continue spending at current levels; however, the level of spending will be dependent on various factors, including the growth of the business and general economic conditions. Financing activities, consisting primarily of proceeds from issuance of common stock offset by the purchases of treasury stock, used $66,926,000 for the six months ended March 29, 1997 and $6,290,000 for the six months ended March 30, 1996. The 1997 increase was due principally to higher stock repurchases under the Company's stock repurchase program. 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 three-month and six-month periods ended March 29, 1997, the Company repurchased 977,000 and 1,757,000 shares at a cost of $54,898,500 and $95,020,000, respectively, of which 585,000 remained in treasury on March 29, 1997. Since the inception of the plan, the Company has repurchased 3,850,000 shares. Ongoing repurchases will be funded through the use of available cash, cash generated from operations and cash received from stock option exercises and employee stock purchase plan purchases. The Company believes that existing cash and short-term investment balances, together with cash generated from operations and issuance of the Company's common stock under stock plans, will be sufficient to meet the Company's currently projected working capital, financing and capital expenditure requirements through at least fiscal 1997, subject to the risks and uncertainties referred to herein. 9
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 13, 1997, the stockholders of the Company (1) elected Donald K. Grierson, Oscar B. Marx, III, and Noel G. Posternak as Class I directors of the Company to hold office until the 2000 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 215,000,000 to 350,000,000; and (3) approved the Company's 1997 Incentive 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: Donald K. Grierson 116,245,374 261,337 -- -- Oscar B. Marx, III 116,245,522 261,189 -- -- Noel G. Posternak 116,243,029 263,682 -- -- (2) Approval of Amendment to Articles of Organization: 110,016,910 5,519,638 231,276 738,887 (3) Approval of 1997 Incentive Stock Option Plan: 106,776,634 8,950,735 289,669 489,673 ITEM 6: Exhibits 10.1 1997 Incentive Stock Option Plan 10.2 Amended and Restated Severance Agreement with Steven C. Walske, dated February 13, 1997 10.3 Amended and Restated Severance Agreement with C. Richard Harrison, dated February 13, 1997 10.4 Amended and Restated Severance Agreement with Edwin J. Gillis, dated February 13, 1997 13.1 Annual Report to Stockholders for the fiscal year ended September 30, 1996 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Quarterly Report on Form 10-Q). </TABLE> 10
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 8, 1997 by: /S/ Edwin J. Gillis ------------------------------------ Edwin J. Gillis Executive Vice President of Finance and Administration, Chief Financial Officer and Treasurer 11
EXHIBIT INDEX 10.1* 1997 Incentive Stock Option Plan, as approved by the Stockholders of the Company on February 13, 1997; filed herewith. 10.2* Amended and Restated Severance Agreement with Steven C. Walske, dated February 13, 1997; filed herewith. 10.3* Amended and Restated Severance Agreement with C. Richard Harrison, dated February 13, 1997; filed herewith. 10.4* Amended and Restated Severance Agreement with Edwin J. Gillis, dated February 13, 1997; filed herewith. 13.1 Annual Report to Stockholders for the fiscal year ended September 30, 1996 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Quarterly Report on Form 10-Q); filed as Exhibit 13.1 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference. ___________ *Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates.