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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: September 30, 2001
Commission File Number: 0-18059
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PARAMETRIC TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Securities registered pursuant to
Section 12(b) of the Act: Section 12(g) of the Act:
None Common Stock, $.01 par value per share
(Title of Class)
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Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of our voting stock held by non-affiliates was
approximately $1,823,291,263 on October 31, 2001 based on the last reported
sale price of our common stock on The Nasdaq Stock Market on that day. There
were 260,537,639 shares of our common stock outstanding on that day.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the Annual
Meeting of Stockholders to be held February 14, 2002 (2002 Proxy Statement) are
incorporated by reference into Part III.
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PARAMETRIC TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2001
Table of Contents
Page
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PART I.
Item 1. Business............................................................................. 1
Item 1A. Executive Officers of the Registrant................................................. 6
Item 2. Properties........................................................................... 6
Item 3. Legal Proceedings.................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................................. 7
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 7
Item 6. Selected Financial Data.............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 23
Item 8. Financial Statements and Supplementary Data.......................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 24
PART III.
Item 10. Directors and Executive Officers of the Registrant................................... 24
Item 11. Executive Compensation............................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 26
Item 13. Certain Relationships and Related Transactions....................................... 26
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 26
Signatures........................................................................... 27
Exhibit Index........................................................................ 28
APPENDIX A
Consolidated Financial Statements.................................................... F-1
Notes to Consolidated Financial Statements........................................... F-5
Report of Independent Accountants.................................................... F-23
Five Year Summary of Selected Financial Data......................................... F-24
Quarterly Financial Information...................................................... F-24
i
Forward-Looking Statements
Statements in this Annual Report on Form 10-K about our anticipated financial
results and growth, as well as about the development of our products and our
markets, are forward-looking statements that are based on our current plans and
assumptions. Important information about the basis for these plans and
assumptions and certain factors that may cause our actual results to differ
materially from these statements is discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 7
below, and generally throughout this report.
PART I
ITEM 1: Business
Introduction
Parametric Technology Corporation (PTC), founded in 1985 and headquartered in
Needham, MA, develops, markets and supports collaborative product development
(CPD) software solutions that help manufacturers improve the competitiveness of
their products and product development processes. Our solutions, which include
a suite of mechanical computer-aided design tools (our design solutions) and a
range of Internet-based collaboration technologies (our collaboration and
control solutions), enable manufacturing companies to create virtual computer
based products (digital products), collaborate on designs within the enterprise
and throughout the extended supply chain, and control the digital product
information throughout the product lifecycle. This results in streamlined
engineering processes, improved product quality, optimized product information
management and reduced cost and time-to-market cycles. Our CPD software
solutions are complemented by the strength and experience of our Global
Services Organization, as well as our systems integrators and other strategic
partners, who provide training, consulting, ancillary product offerings,
implementation and support to customers worldwide.
Our CPD software and services solutions permit individuals--regardless of their
roles in the commercialization of a product, the computer-based tools they use,
or their location geographically or in the supply chain--to participate in and
impact the product development process across the manufacturing value chain.
Our design solutions provide our customers with industry-leading product
development, manufacturing and engineering design tools. With our collaboration
and control solutions we cover many smaller, previously isolated markets that
address various phases of the product lifecycle, such as product data
management (PDM), component and supplier management (CSM), visualization and
digital mockup, enterprise application integration (EAI), program and project
management, manufacturing planning and maintenance, repair and overhaul (MRO).
Products and Services
PTC has aligned its two business units under a common product strategy to meet
the changing needs of manufacturers. The strategy allows PTC to capitalize on
existing product synergies and offer fully leveraged solutions that enable the
creation, collaboration and control of digital product information across the
extended design chain.
DESIGN SOLUTIONS
Our family of engineering design software encompasses a broad spectrum of
engineering disciplines essential to the development of virtually all
manufactured products, ranging from consumer products to jet aircraft.
Manufacturers compete on the basis of cost, time to market and product
performance criteria, which are significantly affected by the quality and
length of the product development process. These tools offer high-performance,
fully integrated solutions available on all leading hardware platforms
(including Windows(R) native
1
solutions) that enable end-users to reduce their time to market and
manufacturing costs for their products and to improve product quality by easily
evaluating multiple design alternatives and sharing data with bi-directional
associativity. Our design software suite includes our Pro/ENGINEER(R) family of
solutions, as well as other products for design, surfacing, visualization, and
analysis. Our design suite includes:
Pro/ENGINEER(R)--our cornerstone mechanical design automation technology is
based on the industry's most robust, parametric, feature-based solid
modeler--enabling changes made during the design process to be associatively
updated throughout the design. These features, along with its "Designed for
Windows XP(R)" user-interface, allow companies to create more innovative,
differentiated and functional products more quickly and easily than ever
before.
Pro/COLLABORATE(TM)--launched in 2001, a service for active Pro/ENGINEER
customers based on PTC(R) ProjectLink(TM). The service allows engineers to
share information and actively collaborate across the design chain in a
hosted application environment. The service is intended to further
differentiate Pro/ENGINEER from competitive design offerings and to provide
Pro/ENGINEER users with a sample of the functionality available through our
Windchill-based software solutions.
Pro/MECHANICA(R)--our functional simulation software allows users to
evaluate and optimize the mechanical performance of product designs in
real-world situations, reducing the need for expensive physical prototypes
and enhancing overall product quality.
Pro/INTRALINK(R)--our workgroup management solution for product development
using Pro/ENGINEER. It lets Pro/ENGINEER users facilitate design team
collaboration and manages the power of Pro/ENGINEER associativity. Its
dynamic collaborative environment supports the rapid and effective design
approach of Pro/ENGINEER.
Pro/DESKTOP(R)--our conceptual engineering solution which delivers industry
proven modeling technology within an instantly familiar user interface and
enables rapid and efficient capture of product design ideas. Associative
interoperability with Pro/ENGINEER makes Pro/DESKTOP the perfect tool for
engineers working together or within a collaborative design environment.
Granite(TM) One--a licensable software development kernel based on the
geometry, feature, graphics and data exchange capabilities at the core of
Pro/ENGINEER. Granite One is an open platform that enables interoperability
between CAD, CAM and CAE products.
COLLABORATION AND CONTROL SOLUTIONS
These offerings are a comprehensive set of business software technologies for
collaboration and control throughout the product lifecycle. Built around the
Windchill(R) federated, Net-native architecture, these offerings enable
manufacturers to leverage the Internet in their product development and
delivery process from conception through product retirement. These tools enable
manufacturers to deliver innovative new products to market faster and manage
the complexities of product development throughout an evolving supply chain.
Windchill(R) Enterprise
The Windchill Enterprise software solution set is highly customizable with core
capabilities in:
Collaboration. Provides an environment where businesses can share valuable
product and process information throughout the extended enterprise,
regardless of where that information resides or in what format it is.
2
Product Planning. Enables businesses to meet the increasing demand for
custom-tailored products while minimizing the overall number of product
variations. This is accomplished by providing the means to define
engineered-to-order products, supply customer-specific portals and easily
identify existing variations for future reuse.
Engineering. Optimizes the product innovation and design environment to
reduce concept-to-design cycle times and improve team collaboration by
linking directly with the engineering team using MCAD interface and PDM
tools.
Sourcing. Gives manufacturers the ability to reduce global procurement and
product development costs by standardizing and consolidating part and
supplier information. The solution enables companies to identify re-usable
parts, commercially available solutions and preferred sources.
Product Management. Offers a complete set of enterprise scalable PDM
functionality to promote concurrent engineering and to create a single
source of product information available to all functional organizations,
facilitating product change management throughout the entire product life
cycle.
Manufacturing. Integrates a company's product development and design with
its manufacturing processes by creating and maintaining detailed process
plans and executing production analysis and process simulation. This
solution allows companies to increase information capture and reuse,
optimize manufacturing processes and share this knowledge across the
enterprise.
Production. Integrates Windchill with market-leading enterprise resource
planning systems allowing the exchange of valuable product-related
information including part masters, bills of material and engineering change
information, between Windchill and those systems.
Customization. Lets manufacturers create and deploy customized Windchill
lifecycle applications allowing them to leverage their own internal
processes and practices into a competitive advantage.
PTC(R) Solutions
In 2001, we announced a plan to introduce a family of interactive solutions
that are designed to address specific business critical manufacturing
functions. These solutions include pre-configured, fully integrated
applications that utilize the Net-native Windchill architecture, as well as
components of our Pro/ENGINEER design solutions. The solutions require little
customization and can be implemented quickly. In calendar 2001, PTC launched
three of these solutions:
PTC(R) ProjectLink(TM)--our Net-native workspace tool that advances the
ability of geographically and organizationally dispersed project teams to
collaborate on highly iterative design projects.
PTC(R) PartsLink(TM)--our interactive product catalog solution that gives
suppliers of electronic and mechanical products the ability to publish and
distribute technical product information, including product design models,
directly to their customers in an interactive Net-native catalog environment.
PTC(R) DynamicDesignLink(TM)--our collaborative application engineering
solution that enables the interactive definition of semi-custom products.
The product provides a manufacturer's application engineers, sales reps,
distributors, dealers and even customers the ability to customize engineered
products over the Web.
GLOBAL SERVICES ORGANIZATION
Our CPD solutions are complemented by our systems integrators, resellers and
strategic partners, as well as our Global Services Organization, which is
committed to providing the expertise needed to meet the consulting,
3
implementation, education and technical support requirements of our
customers--in seven major support centers and more than 70 educational
facilities worldwide. Our Global Services Organization focuses on:
Education services offering expert, comprehensive and efficient training
programs to customers and partners on our entire product line based upon PTC's
Precision Learning formula. Programs can be tailored to the needs of each
student and combine hands-on, web-based and classroom training and
self-evaluation.
Consulting services designed to transform a company's business process into a
competitive advantage by evaluating and recommending the strategy, process,
tools and practices needed to create more productive engineering and
information management environments, including long-range planning, process
improvement, system implementation and product program strategies.
Technical support services providing fast, accurate answers to software and
product development questions through a variety of global resources.
Product Development
In order for our CPD products to be competitive, we must provide our customers
with new and innovative software and service solutions. As a result, we
continue to spend on research and development, and we are regularly looking for
opportunities to acquire new technologies suited to our customers' needs. We
must also efficiently manage our development resources to ensure that the
appropriate balance, based on both product development plans and customer
demand, is reached between product lines.
Our ability to rapidly develop new design products is facilitated by the
modular structure of our software code. This enables functional capabilities of
existing products to be utilized by new software modules, thereby reducing the
amount of new code required to develop additional products. The major benefit
of this approach is rapid development of new functionality. Our Windchill
technology expands the breadth of our offerings allowing a comprehensive CPD
solution. Our industry is characterized by new technologies, including
Internet-centric, Java-based, object-oriented software. The Windchill-based
products depend upon these new technologies as well as certain licensed
third-party technologies.
We work closely with our customers to define improvements and enhancements to
be integrated into our products. Using this approach, customers become involved
in the product design process to validate feasibility and to influence
functionality early in the product life cycle. In addition, we maintain both
hardware and software partner programs. These programs are designed to provide
partners with access to our products and provide the mechanism and environment
to facilitate the integration of complementary products with our product lines.
Through our partner programs, members receive the tools necessary to build
tightly integrated solutions that satisfy the various requirements of our
customers.
Our fiscal year research and development expenses were $124.1 million in 1999,
$143.8 million in 2000 and $148.9 million in 2001.
Sales and Marketing
We derived most of our revenue from products distributed directly by our sales
force to our end-user customers. The remainder of our products are offered
through third-party distributors and we also sell certain of our design
products over the Internet. No single customer accounted for more than 10% of
our revenue in any of the last three fiscal years.
Within our direct sales force, we have created geographic divisions focused on
the Americas and on international sales. Within these geographic divisions
there are both major and primary accounts focused units. The major
4
accounts unit is further segmented into vertical industries based on regional
characteristics. In addition, we continue to broaden our indirect distribution
channel through alliances with systems integrators, resellers and other
strategic partners. The systems integrators will work in tandem with our direct
sales force to locate and target potential CPD opportunities. We have also
signed agreements with over 150 resellers as distributors of our core
engineering design products and intend to expand their breadth of product
offerings. This program gives our resellers the rights to distribute certain
products and their related maintenance services throughout North America,
Europe and parts of Asia/Pacific.
Information about our foreign and domestic operations, and the risks thereof,
may be found in Note L to the consolidated financial statements and the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 7 below.
Competition
Our CPD solutions compete in a relatively new industry, sometimes called
collaborative product commerce (CPC), and there are a number of companies
offering solutions that address specific functional areas covered by our CPD
tools such as: Dassault Systemes, the former Structural Dynamics Research
Corporation (SDRC), recently acquired by Electronic Data Systems (EDS), and
MatrixOne for PDM solutions; Agile Software Corp., for bill of material
management; i2 Technologies Inc. for part sourcing solutions; and Dassault
Systemes and EDS for visualization and mock-up solutions. The market for our
CPD solutions is also affected by companies that are developing these solutions
in-house. In addition, larger, better-known enterprise-solution companies with
established customers may enter the CPC market and offer more complete
solutions. For example, SAP has begun to offer a "PLM" solution that controls
product data within the larger framework of its ERP solution. In our
traditional MCAD market, we compete most directly with products developed by
Dassault Systemes and products developed by the former Unigraphics and SDRC
(both of which have been acquired by EDS). For smaller manufacturing
businesses, we, along with our resellers, compete with products from companies
like Solidworks Corporation, a subsidiary of Dassault Systemes, and Autodesk,
Inc.
Proprietary Rights
Our software products and our 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.
We believe that, due to the rapid pace of innovation within our industry,
factors such as the technological and creative skills of our personnel are as
important to establishing and maintaining a technology leadership position
within the industry as are the various legal protections surrounding our
technology. We believe that our products, technology and trademarks do not
infringe any existing proprietary rights of others, although there can be no
assurance that third parties will not assert infringement claims in the future.
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.
5
PTC, the PTC Logo, Parametric Technology Corporation, The Product Development
Company, Product Development Means Business, Create Collaborate Control,
Pro/ENGINEER, Pro/DESKTOP, Pro/INTRALINK, Pro/MECHANICA, Granite, Windchill,
PTC ProjectLink, PTC PartsLink, PTC DynamicDesignLink and all product names in
the PTC product family are trademarks or registered trademarks of PTC or our
subsidiaries in the United States and/or other countries.
Backlog
We generally ship our products within 30 days after acceptance of a customer
purchase order and execution of a software license agreement. A high percentage
of our revenue has historically been generated in the third month of each
fiscal quarter, and this revenue tends to be concentrated in the later part of
that month. Accordingly, orders may exist at the end of a quarter that have not
been shipped and not recognized as revenue. We do not believe that our backlog
at any particular point in time is indicative of future sales levels.
Employees
As of September 30, 2001, we had 4,533 employees, including 1,646 in sales,
marketing and support activities; 1,243 in customer support, training and
consulting; 478 in general and administration; and 1,166 in product
development. Of these employees, 2,129 were located throughout the United
States and 2,404 were located in foreign countries.
ITEM 1A: Executive Officers of the Registrant
Information about our executive officers is incorporated by reference from Part
III, ITEM 10 of this Annual Report.
ITEM 2: Properties
We lease 149 offices in the United States and internationally through our
foreign subsidiaries, predominately as sales and/or support offices and for
development work. Of our total of approximately 1,352,000 square feet of leased
facilities used in operations, approximately 724,000 square feet are located in
the U.S. and 628,000 square feet are located in foreign countries. In December
1999, we sold land and certain improvements under construction and entered into
a lease covering approximately 381,000 square feet of office space in Needham,
Massachusetts to consolidate our Massachusetts facilities. Occupancy and rent
began in December 2000 and the lease expires in December 2012, subject to
certain renewal rights. Several of our leased facilities were acquired in our
merger with Computervision, including 503,000 square feet of office space in
Bedford, Massachusetts still under lease. Approximately 498,000 square feet is
not used for our current operations and is primarily subleased to other
entities. As described in Notes B and F to the consolidated financial
statements, these facilities have been included in our restructuring
provisions. We continue to engage in subleasing and early lease termination
initiatives to employ alternate uses for these facilities. We believe that our
facilities are adequate for our present needs.
ITEM 3: Legal Proceedings
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 plantiffs have not appealed, which
should conclude the litigation.
6
We are also subject to various legal proceedings and claims that arise in the
ordinary course of business. We currently believe that resolving these matters
will not have a material adverse impact on our financial condition or results
of operations.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last quarter
of fiscal 2001.
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters
Information with respect to this item may be found in the section captioned
"Quarterly Financial Information" on page F-24 below.
On September 30, 2001, our common stock was held by 6,080 shareholders of
record. We have not paid cash dividends on our common stock and have
historically retained earnings for use in our business. We intend to review our
policy with respect to the payment of dividends from time to time; however,
there can be no assurance that any dividends will be paid in the future.
ITEM 6: Selected Financial Data
Information with respect to this item may be found in the section captioned
"Five Year Summary of Selected Financial Data" on page F-24 below.
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Statements in this Annual Report on Form 10-K about our anticipated financial
results and growth, as well as about the development of our products and our
markets, are forward-looking statements that are based on our current plans and
assumptions. Important information about the basis for these plans and
assumptions and certain factors that may cause our actual results to differ
materially from these statements is contained below and in "Important Factors
That May Affect Future Results" beginning on page 16. Unless otherwise
indicated, all references to a year reflect our fiscal year that ends on
September 30.
Business Overview
Historically, our core business focus has been to provide design solutions to
customers through our flagship Pro/ENGINEER(R) design software, and we continue
to provide our customers with industry leading engineering design solutions
based on this software. We believe that there is a growing demand for
collaborative product development (CPD) 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. CPD solutions include design/creation, collaboration
and control software tools 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, or their location geographically in
the supply chain--to collaboratively design, develop, build and manage products
throughout their entire lifecycle. In 1998 we introduced our web-based
Windchill(R) information management and collaboration software which works
across the complete product lifecycle, from product planning and design through
manufacturing, distribution and retirement. In 2001, we announced a plan to
introduce a series of point solutions that utilize the web-based
7
Windchill architecture, each designed to address business-critical
manufacturing functions. In the second quarter of 2001, we introduced the first
of these solutions, PTC(R) ProjectLink(TM), a web-based workspace tool that
advances the ability of geographically and organizationally dispersed project
teams to collaborate on highly iterative design projects. In the fourth quarter
of 2001, we introduced PTC(R) PartsLink(TM), a web-based interactive product
catalog solution, that gives suppliers of electronic and mechanical products
the ability to publish and distribute technical product information, including
product design models, directly to their customers in an interactive, web-based
catalog environment. In the first quarter of 2002, we introduced PTC(R)
DynamicDesignLink(TM), a web-based collaborative application engineering
solution that enables a manufacturer's application engineers, sales reps,
distributors, dealers and even customers the ability to customize engineered
products over the web. These three solutions are part of our overall PTC
solutions strategy to provide a complete portfolio of CPD solutions that
address specific business challenges that occur at various points in the
product lifecycle. Further solutions are expected to follow in fiscal 2002.
In 2000, we reorganized ourselves into Windchill and MCAD business units in
order to provide more discrete product line focus and accountability and to
improve our overall profitability. In 2001, these business units were combined
under a common product strategy in order to capitalize on existing synergies
while continuing to maintain individual solution development. In line with this
strategy, both business units, including research and development, product
marketing, and operations, now report to our Executive Vice President, Software
Products and Chief Technology Officer who is responsible for the strategic
vision and execution of all of our solutions.
All of our solutions continue to be distributed primarily through our direct
sales force. In tandem with our direct sales force, we utilize an inside sales
group focused predominately on telesales and existing accounts. Our indirect
distribution channel has been broadened over the last fiscal year 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 CPD opportunities. We have also increased
the number of distributors for our design solutions to provide greater
geographic coverage. 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.
Results of Operations
The following is an overview of our results of operations for the last three
years:
. Total revenue was $1,057.6 million for 1999, $928.4 million for 2000 and
$934.6 million for 2001.
. Our year-over-year revenue decreased 12% from 1999 to 2000 and increased
1% from 2000 to 2001.
. Windchill-based solutions revenue increased from $81.3 million in 1999
to $174.7 million in 2000 and to $213.9 million in 2001.
. Design solutions revenue decreased from $976.3 million in 1999 to $753.7
million in 2000 and to $720.7 million in 2001.
. Acquisition, nonrecurring charges and write-down of investments were
$53.3 million in 1999, $21.5 million in 2000 and $52.9 million in 2001.
. Amortization of goodwill and other intangible assets was $22.9 million
in 1999, $38.4 million in 2000 and $37.9 million in 2001.
. Net income (loss) was $119.3 million in 1999, ($4.0) million in 2000 and
($8.2) million in 2001.
. Pro forma net income, which excludes the amortization of goodwill and
intangible assets, acquisition and nonrecurring charges and write-down
of investments, was $184.4 million in 1999, $38.9 million in 2000 and
$57.1 million in 2001.
8
The following table shows certain consolidated financial data as a percentage
of our total revenue for the last three years.
September 30,
-------------
1999 2000 2001
---- ---- ----
Revenue:
License.......................................................................... 53% 41% 41%
Service.......................................................................... 47 59 59
--- --- ---
Total revenue................................................................ 100 100 100
--- --- ---
Costs and expenses:
Cost of license revenue.......................................................... 1 2 2
Cost of service revenue.......................................................... 18 25 25
Sales and marketing.............................................................. 39 45 41
Research and development......................................................... 12 15 16
General and administrative....................................................... 6 8 8
Amortization of goodwill and other intangible assets............................. 2 4 4
Acquisition and nonrecurring charges............................................. 5 2 4
--- --- ---
Total costs and expenses..................................................... 83 101 100
--- --- ---
Operating income (loss) 17 (1) --
Interest income.................................................................. 1 1 1
Other expense, net............................................................... (1) -- (1)
Write-down of investments........................................................ -- -- (1)
--- --- ---
Income (loss) before income taxes................................................... 17 -- (1)
Provision (benefit) for income taxes............................................. 6 -- --
--- --- ---
Net income (loss)................................................................... 11% --% (1)%
=== === ===
Pro forma, excluding amortization of goodwill and intangible assets, acquisition and
nonrecurring charges and write-down of investments:
Operating income.................................................................... 24% 6% 8%
Net income.......................................................................... 17% 4% 6%
Revenue
Total Revenue
Our revenue consists of software license revenue and service revenue. Overall,
our total revenue increased 1% in 2001 compared to 2000 after a decrease of 12%
in 2000 compared to 1999. Total revenue in 2001 and 2000 reflects an increase
in our total Windchill-based solutions revenue and a decrease in our total
design solutions revenue. Total revenue was adversely affected by increased
weakness in the global manufacturing economy and the impact of the strong
dollar overseas.
We derived 56%, 59% and 56% of our total revenue from sales to international
customers in 1999, 2000 and 2001, respectively. The decrease in international
revenue as a percentage of overall revenue in 2001 is a result of increased
revenue in the North America region and decreased international revenue due in
part to weakness in demand as a result of weakening economic conditions in
Europe and to unfavorable foreign currency rate fluctuations compared to 2000.
Total license revenue increased 1% in 2001 compared to 2000 and decreased 33%
in 2000 compared to 1999. Service revenue, which is derived from the sale of
software maintenance contracts and the performance of training and consulting
services, accounted for 47% of total revenue in 1999 and 59% in both 2000 and
2001. Service revenue, which has a lower gross profit margin than license
revenue, increased 1% in 2001 and 11% in 2000, primarily due to growth in our
installed customer base and increased training and consulting services
performed for Windchill-based solutions.
9
Windchill-based Solutions Revenue
Total revenue from our Windchill-based solutions grew 22% in 2001 compared to
2000 and 115% in 2000 compared to 1999. In order to meet what we believe is a
large market opportunity for CPD solutions, we have channeled, over the past
two years, significant resources into our Windchill technology. As a result of
our expanded focus on providing CPD solutions, license revenue for our
collaboration and control software increased 3% in 2001 compared to 2000 and
65% in 2000 compared to 1999. License revenue was adversely affected by the
lack of larger customer commitments in the second half of fiscal 2001,
reflecting the impact of the weakness in the global manufacturing economy.
Service revenue increased 44% in 2001 compared to 2000 and 229% in 2000
compared to 1999. While we continue to derive our overall license and service
revenue primarily from our design solutions, our collaboration and control
solutions are continuing to comprise an increasing percentage of revenue.
Moreover, due to our growing installed customer base for our Windchill-based
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.
In order to most effectively deploy the resources needed to distribute and
implement our collaboration and control solutions, we have started to develop
and introduce Windchill-based point solutions targeted at specific business
critical CPD processes. These point solutions will allow us to offer software
solutions that can be both easily and quickly implemented. We have also entered
into business relationships with leading system integrators and other strategic
consultants. While these initiatives may limit opportunities for additional
services revenue, we believe that offering such point solutions and entering
into these relationships will best serve to expand the coverage of our CPD
software solutions, generate additional license revenue and provide necessary
expertise for their implementation and support.
Design Solutions Revenue
Total revenue from our mechanical and engineering software tools (our design
solutions) decreased 4% in 2001 compared to 2000 and 23% in 2000 compared to
1999. Total license revenue for our design solutions remained flat in 2001
compared to 2000 and decreased 43% in 2000 compared to 1999. Service revenue
decreased 7% in 2001 compared to 2000 and 1% in 2000 compared to 1999.
Pro/ENGINEER software unit sales decreased by 1% in 2001 and 40% in 2000 and
the average selling price of this software increased 1% in 2001 and decreased
by 6% in 2000. Reasons for relative flatness in our design solutions revenue
growth include: increased competition in the industry from native
Windows(R)based products offering more limited functionality at lower cost, our
transfer of resources to our Windchill-based solutions, which reduced the sales
capacity for our design solutions product line and contributed to a loss of
market share, a decline in large dollar license transactions with existing
customers, weakness in the global manufacturing economy, the impact of the
strong dollar overseas, and a decrease in service revenue attributable to a
decline in license sales.
As part of our continued efforts to improve profitability, over the past
several quarters we entered into arrangements with over 150 new distributors
for our design solutions. We expect the percentage of our design solutions 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 1999
and 2000, we licensed over 90% and in 2001 we licensed approximately 87% of our
products directly to end-user customers. The balance was licensed through
third-party distributors. Concentration of credit risk with respect to trade
receivables is not significant except for a receivable from our largest
distributor, which accounts for 12% and 7% of total receivables as of September
30, 2000 and 2001, respectively.
10
[CHART]
1999 2000 2001
US 464.4 378.6 408.4
EUROPE 390.0 341.9 308.5
ASIA/PACIFIC 203.2 208.0 217.7
Outlook
Looking forward, our overall performance will depend on our ability to
successfully execute our common product strategy, including the ability to
provide our customers with an integrated, rapidly deployable and easily usable
suite of software solutions that enable creation, collaboration and control
across the extended design chain with a proven return on investment. Our
success also depends on other factors, including our ability to optimize our
sales coverage through, among other things, employment of our systems
integrator partners, resellers and inside sales teams, and our ability to
improve customer satisfaction and build customer references. We believe that
good progress was made on these initiatives in 2001 that will provide a
foundation for success. We also expect, however, that the weakness in the
global manufacturing economy will likely continue to impact our revenue by
causing our customers to reduce or defer their expenditures for software or
services. Additional factors affecting our revenues and operating results are
identified under "Important Factors That May Affect Future Results" below.
Costs and Expenses
All cost and expense categories in 1999, 2000 and 2001 were impacted by the
acquisition and/or nonrecurring charges taken in those periods. See Note B of
"Notes to Consolidated Financial Statements". Our operating expenses are based
on anticipated future revenue and are largely fixed for the short term. Given
the lower than expected revenues, we reduced our headcount to 4,725 at the end
of 2000 and to approximately 4,250 at the end of the first quarter of 2002. As
a result, we recorded nonrecurring charges of $21.5 million in 2000 and $42.6
million in 2001 and we expect to incur an additional nonrecurring charge in the
first quarter of 2002 of approximately $6 million to complete the restructuring
initiatives commenced in the fourth quarter of 2001. These restructuring
initiatives, partially offset by a planned increase in marketing programs, are
expected to result in a fixed cost savings of approximately $60 million in 2002
(see "Nonrecurring Charges" below).
Costs and expenses, excluding amortization of goodwill and other intangible
assets and acquisition and nonrecurring charges, increased 9% to $876.7 million
in 2000 from $802.6 million in 1999 but decreased 2% to $857.1 million in 2001.
Cost of License Revenue
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 $16.5 million, $16.7 million and $15.7
11
million, for 1999, 2000 and 2001, respectively. Cost of license revenue as a
percentage of license revenue was 3% for 1999 and 4% for both 2000 and 2001.
Cost of Service Revenue
Our cost of service revenue includes costs associated with training and
consulting personnel, such as salaries and related costs and travel, and costs
related to software maintenance, including costs incurred for customer support
personnel and the release of maintenance updates. Cost of service revenue as a
percentage of service revenue was 39%, 42% and 43% in 1999, 2000 and 2001,
respectively. This increase reflects our continued investment in the staffing
necessary to support our new product offerings, principally our Windchill-based
solutions and our continued investment over the last year in our systems
integrator alliances and programs.
Sales and Marketing
Our sales and marketing expenses primarily include salaries and benefits, sales
commissions, travel and facility costs. These costs increased 2% in 2000 and
decreased 9% in 2001, primarily due to the implementation of our strategy to
broaden our indirect distribution channel through alliances with systems
integrators, resellers and other strategic partners. Total sales and marketing
employees were 1,980 in 1999, 1,702 in 2000 and 1,646 in 2001. The higher costs
in 2000 are due to the higher average cost per sales employee, as we are hiring
a more experienced CPD-focused sales force. International sales and marketing
expenses represented 57% in 1999, 58% in 2000 and 51% in 2001 of total sales
and marketing expenses.
Research and Development
Our research and development expenses consist principally of salaries and
benefits, expenses associated with product translations, costs of computer
equipment used in software development and facility expenses. Compared to the
prior years, research and development expenses increased 16% in 2000 and 4% in
2001. The increase in 2000 and 2001 is primarily attributable to our continued
investment in Windchill-based solutions, as well as our InPart, Division and
auxilium acquisitions in 1999.
General and Administrative
Our general and administrative expenses include the costs of our corporate,
finance, information technology, human resources and administrative functions.
These costs increased 13% in 2000 and 5% in 2001. 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.
12
[CHART]
1999 2000 2001
Cost of license revenue 16.5 16.7 15.7
Cost of service revenue 191.1 228.3 236.8
Sales and marketing 407.9 416.7 380.9
Research and development 124.1 143.8 148.9
General and administrative 62.9 71.3 74.7
Amortization of goodwill and
intangible assets 22.9 38.4 37.9
Acquisition and nonrecurring
charges 53.3 21.5 42.6
Amortization of Goodwill and Other Intangible Assets
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 2% in 1999 and 4% in both 2000 and 2001. The increase in
amortization of $15.5 million in 2000 compared to 1999 resulted principally
from our 1999 acquisitions of InPart, Division and auxilium.
Acquisitions
InPart. In October 1998, we purchased InPart Design, Inc., a developer of
DesignSuite, a Web-based repository of 3D mechanical component data, as well as
the developer of enterprise software applications focused on Web-based
component and supplier management, which was founded in 1996. We allocated the
purchase price of $38.1 million to the assets acquired and liabilities assumed
based on our estimate of fair value. The values assigned included $741,000 for
net liabilities assumed, $10.6 million for purchased in-process R&D and $5.7
million for other intangible assets. The excess purchase price over the amounts
allocated to assets acquired and liabilities assumed was recorded as goodwill
of $22.5 million.
Division. In March 1999, we purchased Division Group plc, a developer of
enterprise product data visualization, simulation and integration tools. We
allocated the purchase price of $48.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The values assigned
included $555,000 for net assets acquired, $9.0 million for purchased
in-process R&D and $8.8 million for other intangible assets. The
13
excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $29.8 million.
auxilium. In March 1999, we purchased auxilium inc., a developer of Web-based
software tools for the integration of legacy systems, databases and
applications, which was founded in 1997. We allocated the purchase price of
$101.7 million to the assets acquired and liabilities assumed based on our
estimates of fair value. The values assigned included $182,000 for net
liabilities assumed, $18.6 million for purchased in-process R&D and $12.3
million for other intangible assets. The excess purchase price over the amounts
allocated to assets acquired and liabilities assumed was recorded as goodwill
of $70.9 million.
In the opinion of management, the purchased in-process R&D for the acquisitions
of InPart, Division and auxilium had not yet reached technological feasibility
and had no alternative future use. Accordingly, we recorded nonrecurring
charges of $10.6 million in the first quarter of 1999 related to InPart and
$27.6 million in the second quarter of 1999 related to Division and auxilium.
The values assigned to purchased in-process R&D were determined by identifying
research projects for which technological feasibility had not been established.
The values of the purchased in-process R&D were determined by estimating the
stage of completion, including consideration of the complexity of the work
completed, the costs incurred and the projected costs to complete, the
contribution of any core technology and other acquired assets and the projected
product introduction dates, estimating the resulting net cash flows from the
products developed and discounting the net cash flows back to their present
value.
The net cash flows also considered net working capital requirements and capital
spending needs related to the purchased in-process technology. The rates used
to discount net cash flows for the purchased in-process technology to its
present value for the InPart (28%), Division (25%) and auxilium (26% to 30%)
acquisitions were based on the weighted average cost of capital and took into
account the uncertainty surrounding the successful development of the purchased
in-process technology for each acquisition. The InPart, Division and auxilium
technology are integrated into our Windchill-based solutions products.
Nonrecurring Charges
In 1999, we reorganized our sales force and, in connection with this action,
incurred nonrecurring charges of $9.0 million for the severance and termination
benefits of approximately 320 people who were terminated during 1999 in
connection with the integration of our sales and related support groups. All
amounts related to terminated employees were paid in 1999. In 1999, we also
incurred a nonrecurring charge of $1.4 million for the consolidation of certain
excess leased facilities and we recorded an impairment loss of $4.7 million on
certain intangible assets related to our industrial design (CDRS) activities.
Due to acquisitions and the development of new technology, the carrying value
of these assets was impaired.
In the third quarter of 2000, we recorded nonrecurring charges of $21.5
million, primarily associated with the reorganization of the company into
business units and with the development and execution of plans to reduce our
cost structure and improve profitability. The nonrecurring charge is comprised
of $11.9 million for severance and termination benefits of approximately 280
people who were terminated during the third quarter of 2000 and $9.6 million
for facility consolidations. Amounts not yet paid at September 30, 2001 related
to the nonrecurring charge were $1.8 million for facilities and are expected to
be paid within the next twelve months.
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 non-cash portion of this
nonrecurring charge is $4.0 million. Amounts not yet paid at September 30, 2001
related to the nonrecurring charge were $1.0 million and are expected to be
paid within the next twelve months.
In the third quarter of 2001, we recorded nonrecurring charges of $3.8 million,
primarily associated with a reduction in force to reduce our cost structure and
improve profitability. The nonrecurring charge is comprised of
14
$3.8 million for severance and termination benefits of approximately 100 people
who were notified or terminated during the third quarter of 2001. Amounts not
yet paid at September 30, 2001 related to the nonrecurring charge were $500,000
for severance and are expected to be paid within the next twelve months.
In the fourth quarter of 2001, we recorded nonrecurring charges of $32.6
million, primarily associated with a further reduction in force to reduce our
cost structure and improve profitability. The nonrecurring charge is comprised
of $21.8 million for severance and termination benefits of approximately 620
people who were notified or terminated during the fourth quarter of 2001 and
$10.8 million primarily for facility consolidations. Amounts not yet paid at
September 30, 2001 related to the nonrecurring charge were $26.2 million. We
expect to pay approximately $20.0 million within the next twelve months.
Write-down of Investments
In 2001, we recorded a $10.4 million write-down on several equity investments
to reflect other than temporary declines in valuation and an unsettled
near-term market outlook. At September 30, 2000 and 2001, equity investments
included in other long-term assets were $12.4 million and $2.0 million,
respectively.
Interest Income
Interest income relates to the earnings on the investment of our excess cash
balances in various financial instruments. The 24% decrease in interest income
in 2001 compared to 2000 resulted primarily from lower average cash balances.
The 17% increase in interest income in 2000 compared to 1999 resulted primarily
from higher average annual yields and higher average cash balances.
Other Expense
A large portion of our revenue and expenses is transacted in foreign
currencies. In order to reduce our exposure to fluctuations in foreign exchange
rates we routinely engage in hedging transactions involving the use of foreign
currency forward contracts and, from time-to-time, foreign currency option
contracts primarily in euro and Asian currencies. Our other expense includes
the costs of the hedging contracts, the gain or loss from the translation of
results for subsidiaries for which the U.S. dollar is the functional currency
and other charges, primarily related to financing costs. See ITEM 7A below and
Note A of "Notes to Consolidated Financial Statements."
Income Taxes
Our effective tax rate was 34% in 1999, (21)% in 2000 and (24)% in 2001. The
lower effective tax rate in 1999 from the statutory federal tax rate of 35%
resulted primarily from the use of Computervision net operating losses,
partially offset by the non-deductibility of certain acquisition-related
charges and foreign net operating losses which could not be benefited. The
reduced effective tax rate benefit in 2000 resulted primarily from the
non-deductibility of certain acquisition-related amortization and foreign net
operating losses which could not be benefited. The reduced effective tax rate
benefit in 2001 resulted primarily from the non-deductibility of certain
acquisition-related amortization and foreign net operating losses and tax
credit carryforwards which could not be benefited, partially offset by a
decrease in deferred tax liabilities related to foreign subsidiaries.
15
Liquidity and Capital Resources
Our operating activities, the proceeds from our issuance of stock under stock
plans and existing cash and investments provided sufficient resources to fund
our employee base, capital asset needs, stock repurchases, acquisitions and
financing needs, in all years presented. 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.
As of September 30, 2001, cash and investments totaled $249.1 million, down
from $375.1 million at September 30, 2000. The decrease in cash and investments
during 2001 consisted of $131.7 million for the repurchase of treasury stock
and $64.4 million in expenditures to acquire property and equipment and other
intangible assets partially offset by cash generated from operating activities
of $51.1 million and proceeds from the issuance of common stock under our stock
plans of $24.2 million. Cash expenditures for nonrecurring charges were $34.2
million in 1999, $30.3 million in 2000 and $24.4 million in 2001. Cash
generated from operating activities was $150.8 million in 1999, $51.9 million
in 2000 and $51.1 million in 2001. In 2001, the cash generated from operating
activities consisted of $82.6 million of net income before depreciation and
amortization and the non-cash portion of the nonrecurring charges and
write-down of investments, partially offset by $31.5 million of cash utilized
from assets and liabilities.
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 to consolidate
our Massachusetts facilities. The lease expires in December 2012, subject to
certain renewal rights.
In 1999, 2000 and 2001 we acquired $59.4 million, $39.8 million and $64.4
million, respectively, of capital equipment and other intangible assets. The
capital expenditures for 2001 include approximately $28.2 million, primarily
for tenant improvements and furniture and fixtures related to our facility
consolidation in Massachusetts. The remaining expenditures consisted primarily
of computer equipment, software and office equipment. We spent $72.9 million in
1999 and $7.9 million in 2000 to acquire businesses.
We used net cash for financing activities in 1999, 2000 and 2001, primarily to
repurchase $90.0 million, $90.0 million and $131.7 million, respectively, of
our stock. These expenditures were partially offset by proceeds of $23.9
million, $79.6 million and $24.2 million in 1999, 2000 and 2001, respectively,
from the issuance of our common stock under our stock plans. Through September
2001, we had repurchased, at a cost of $361.7 million, 30.5 million shares of
the 40.0 million shares authorized by the Board of Directors to be repurchased
under our repurchase program. The repurchased shares will be used for stock
options exercises, employee stock purchase plans and acquisitions. At September
30, 2001, 15.5 million shares were held in treasury.
We believe that existing cash and short-term investments together with cash
generated from operations and the issuance of common stock under our stock
plans will be sufficient to meet our working capital, financing and capital
expenditure requirements through at least 2002.
New Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be
required to comply with certain changes in accounting rules and regulations.
See Note A of "Notes to Consolidated Financial Statements".
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 Annual Report on Form 10-K and
16
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.
I. Operational Considerations
Our operating results fluctuate within each quarter and from quarter-to-quarter
making our future revenues and operating results difficult to predict
While our sales cycle varies substantially from customer to customer, we
usually realize a high percentage of our revenue in the third month of each
fiscal quarter, and this revenue tends to be concentrated in the 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
transition from a one product to a multi-product company, our increased
utilization of distributors and systems integrators and our shift in business
emphasis to a more solutions-oriented sales process--undertaken in part to
increase our average order size--have resulted in more unpredictable and often
longer 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:
. our sales incentive structure is weighted more heavily toward the end of
the fiscal year, and the rate of revenue growth for the first quarter
historically has been lower and more difficult to predict than that for
the fourth quarter of the immediately preceding fiscal year;
. variability in the levels of professional service revenues and the mix
of our license and service revenues;
. declines in license revenue may adversely affect the size of our
installed base and our level of service revenue; and
. the increased utilization of third parties, such as systems integrators,
resellers, strategic partners and application service providers, as
distribution mechanisms for our software products and related services,
may lessen the control we have over any particular sales cycle.
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.
General economic and political conditions may impact our results
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. We may be especially prone to this as a result of the
relatively large license transactions we have historically relied upon.
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 demand for software caused by a prolonged slowdown of the economy
would result in decreased revenue or lower revenue growth rates.
Recent political/social events, including the September 11, 2001 tragedy, have
put further pressure on economic conditions both domestically and
internationally. The potential turmoil that may result from such events
contributes to the uncertainty of the economic climate, further reducing
predictability and our ability to develop and implement long-term strategies
and business models. In light of the foregoing, the impact of these or future
17
similar events may have a materially adverse impact on our business, operating
results, and financial position.
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:
. the successful implementation of a unified CPD product strategy,
including the realignment of internal functions, the management of
multiple development and distribution processes and effective mitigation
of disruption that may result from organizational change;
. our ability to deliver an integrated and comprehensive suite of
solutions and to capitalize on existing synergies through a common
product strategy;
. our ability to appropriately allocate and implement cost cutting
measures that increase profitability while maintaining adequate
resources for effective and coordinated organizational performance;
. the success of our sales force reorganization initiatives, including:
-- the effectiveness of our organizational sales model,
-- the ability of our sales reps to learn and sell our products, and
-- Rands' and other distributors' ability to perform;
. our ability to anticipate and meet evolving customer requirements in the
CPD arena and successfully deliver products and services at an
enterprise level;
. our ability to broaden indirect distribution channels through alliances
with systems integrators, resellers, strategic partners and application
service providers and our effective management of a balanced sales model
that optimizes sales coverage and most effectively utilizes these third
parties;
. our ability to develop rapidly implementable point solutions that
adequately address specific business challenges; and
. our ability to identify and penetrate additional industry sectors that
represent growth opportunities.
. our ability to execute on customer satisfaction initiatives and programs
in order to retain our customer base.
We may not be successful in integrating recently acquired businesses or products
We have increased our product range and customer base in the recent past due in
part to acquisitions. We may acquire additional businesses or product lines in
the future. The success of any acquisition may be dependent upon our ability to
integrate the acquired business or products successfully and to retain key
personnel and customers associated with the acquisition. If we fail to do so,
or if the costs of or length of time for integration increase significantly, it
could negatively affect our business.
We are dependent on key personnel whose loss could cause delays in our product
development and sales efforts
Our success depends upon our ability to attract and retain highly skilled
technical, managerial and sales personnel. Competition for such personnel in
the high technology industry is intense. We assume that we will continue to be
able to attract and retain such personnel. The failure to do so, however, could
have a material adverse effect on our business.
We must continually modify and enhance our products to keep pace with changing
technology, and we may experience delays in developing and debugging our
software
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:
18
. enhance our current offerings and develop new products and services that
keep pace with technological developments through:
-- internal research and development,
-- acquisition of technology, and
-- strategic partnerships;
. meet evolving customer requirements, especially ease-of-use;
. provide adequate funding for development efforts; and
. license appropriate technology from third parties.
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.
We may be unable to price our products competitively or distribute them
effectively
Our success is tied to our ability to price our products and services
competitively and to deliver them efficiently, including our ability to:
. provide products with functionality that our customers want at a price
they can afford;
. build appropriate direct distribution channels;
. utilize the Internet for sales; and
. build appropriate indirect distribution channels through Rand or others.
We depend on sales from outside the United States that could be adversely
affected by changes in the international markets
A significant portion of our business comes from outside the United States.
Accordingly, our performance could be adversely affected by economic downturns
in Europe or the Asia/Pacific region. Another consequence of significant
international business is that a large percentage of our revenues 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:
. changes in regulatory practices and tariffs;
. staffing and managing foreign operations, including the difficulties in
providing cost-effective, equity-based compensation to attract skilled
workers;
. longer collection cycles in certain areas;
. potential changes in tax and other laws;
. greater difficulty in protecting intellectual property rights; and
. general economic and political conditions.
We may not be able to obtain copyright or patent protection for the software
products we develop or our other trademarks
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,
19
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. Design Solutions Related Considerations
Increasing competition in the computer aided design marketplace may reduce our
revenues
There are an increasing number of competitive design products. Despite our
belief that our products are technologically superior, some competitive
products have reached a level of functionality whereby product differentiation
is less likely, in and of itself, to dislodge incumbent design 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 revenues for our products, which could
have a material adverse affect on our results.
In addition, our design software is capable of performing on a variety of
platforms. Several of our competitors focus on single platform applications,
particularly Windows(R)-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:
. we fail to anticipate or to respond adequately to customer requirements
or to technological developments, particularly those of our competitors;
. we delay the development, production, testing, marketing or availability
of new or enhanced products or services;
. customers fail to accept such products or services; or
. we fail to execute our common product strategy initiative.
Growth in the computer aided design industry appears to have slowed
Growth in certain segments of the computer aided design 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 CPD solutions will allow us to differentiate our design
solutions 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.
III. Collaborate & Control Solutions and Overall CPD Related Considerations
We are attempting to capitalize on a web-based, business-to-business market
opportunity known as Collaborative Product Commerce or Collaborative Product
Development(CPD). It may be that our assumptions about this market opportunity
are wrong, which could adversely affect our results
20
We have identified CPD as a new market opportunity for us, and have devoted
significant resources toward capitalizing on that opportunity. Our CPD
solutions are targeted at this market and include software and services that
utilize Internet technologies to permit employees, customers, suppliers and
others to collaboratively develop, build, distribute 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 technology, which is central to our CPD strategy, is relatively
new and is not yet well established in the marketplace
The success of our CPD strategy will depend in large part on the ability of our
Windchill-based solutions to meet customer expectations, especially with
respect to:
. measuring and understanding the benefits of Windchill, including return
on investment and value creation;
. ease and rapidity of installation;
. ease of use;
. full capability, functionality and performance;
. ability to support a large, diverse and geographically dispersed user
base; and
. quality and efficiency of the services we perform relating to
implementation and customization.
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 affected. We are also pursuing a strategy to provide a series of
easily deployable CPD point solutions that address specific business
challenges. With this strategy, PTC is converging Pro/ENGINEER and Windchill
technologies to develop solutions that help manufacturers create, collaborate,
and control product information throughout the entire product lifecycle. If we
are unable to provide these solutions or are unable to meet customer
expectations, our overall revenue may be adversely impacted.
Further, our 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 CPD 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 affected. Moreover, due to the
emerging nature of the industry and technology, reference accounts become
essential to the sales process. Accordingly, if our customers become
dissatisfied, future business and revenues may be adversely affected.
We intend to utilize third parties, such as system integrators, resellers,
strategic partners and application service providers, for the distribution and
implementation of Windchill-based software, which may result in management
difficulties and customer retention problems
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
21
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 ability to enter into definitive agreements with appropriate third
parties that can deliver our products in appropriate markets;
. the third party's ability to learn, promote and implement our products;
and
. the effective coordination and management of joint activities (including
sales, marketing, development, implementation and support) in order to
deliver products and services that meet customer requirements.
Competition may increase, which may reduce our profits and limit or reduce our
market share
The market for our CPD software 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-house development efforts by potential customers or partners;
. other vendors of engineering information management software; and
. larger, more well-known enterprise software providers seeking to extend
the functionality of their products to encompass CPD.
In addition, our Global Services Organization may face increasing competition
for follow-on customization and training services from other third-party
consultants and service providers.
If use of the Internet does not continue to develop or reliably support the
demands placed on it by electronic commerce, we may experience a loss of sales
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 CPD strategy would be seriously harmed if:
. use of the Internet does not continue to increase or increases more
slowly than expected;
. the infrastructure for the Internet does not effectively support
enterprises and their supply chain partners;
. the Internet does not create a viable commercial marketplace, thereby
inhibiting the development of electronic commerce and reducing the
demand for our products; or
. concerns over the secure transmission of confidential information over
public networks inhibit the growth of the Internet as a means of
collaborating across enterprises and/or conducting commercial
transactions.
Our CPD 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.
Certain of our Windchill-based solutions provide CPD capabilities on Internet
exchanges, portals and marketplaces. Accordingly, their 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.
22
IV. Other Considerations
Our stock price, which may reflect an Internet valuation, has been highly
volatile; this may make it harder to resell your shares at the time and at a
price that is favorable to you
Market prices for securities of software companies have generally been
volatile. In particular, the market price of our common stock has been and may
continue to be subject to significant fluctuations.
In addition, our expanded focus on delivering web-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, may not 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.
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk
We face exposure to financial market risks, including adverse movements in
foreign currency exchange rates and changes in interest rates. These exposures
may change over time as business practices evolve and could have a material
adverse impact on our financial results. Our primary exposure has been related
to local currency revenue and operating expenses in Europe and the Asia/Pacific
region. Historically, we have hedged currency exposures associated with certain
accounts receivable denominated in local currencies and certain anticipated
foreign currency net cash flows. The goal of our hedging activity is to offset
the impact of currency fluctuations on certain local currency accounts
receivable and foreign currency net cash flows. The success of this activity
depends upon forecasts of transaction activity denominated in various
currencies. To the extent that these forecasts are overstated or understated
during periods of currency volatility, we could experience unanticipated
currency gains or losses. Outstanding forward foreign currency contracts at
September 30, 2001 matured within three months, and did not have a material
impact on our financial results.
The carrying amounts reflected in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value at the balance sheet date due to the short maturities of these
instruments.
We maintain investment portfolio holdings of various issuers, types and
maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair market value with
unrealized gains or losses included in stockholders' equity. Given the short
maturities and investment grade quality of the portfolio holdings at September
30, 2001, a sharp rise in interest rates should not have a material adverse
impact on the fair value of our investment portfolio.
The following table presents hypothetical changes in fair values in our
financial instruments at September 30, 2001 that are sensitive to changes in
interest rates. Our modeling technique measures the change in fair value
arising from selected potential changes in interest rates. Movements in
interest rates of plus or minus 50 basis points (BP) and 100 BP reflect
immediate hypothetical shifts in the fair value of these investments. Fair
value represents the market principal plus accrued interest and dividends of
certain interest-rate-sensitive securities considered cash equivalents or
investments for financial reporting purposes at September 30, 2001.
23
Valuation of Valuation of
Securities given an Securities given an
Type of Security interest rate decrease interest rate increase
---------------- ---------------------- No change in ----------------------
(100 BP) (50 BP) interest rates 50 BP 100 BP
(in millions) -------- ------- -------------- ----- ------
Municipal debt securities $17 $17 $17 $17 $17
Mutual funds............. 47 47 47 47 47
Commercial paper......... 12 11 11 11 11
Government agencies...... 16 16 16 16 16
--- --- --- --- ---
Total................. $92 $91 $91 $91 $91
=== === === === ===
The Federal Reserve has adjusted the Federal Funds Rate by a 50 BP move ten
times during the last 40 quarters, whereas they have never adjusted the Federal
Funds Rate by a 100 BP move during the same period. The last 50 BP move
occurred in September 2001.
ITEM 8: Financial Statements and Supplementary Data
The consolidated financial statements and notes to the consolidated financial
statements are attached as APPENDIX A below.
ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10: Directors and Executive Officers of the Registrant
Information with respect to our directors may be found in the sections
captioned "PROPOSAL: Elect Two Directors" and "Who Are Our Directors" appearing
in our 2002 Proxy Statement. Such information is incorporated herein by
reference.
Our executive officers are:
Name Age Position
---- --- --------
C. Richard Harrison 46 Chief Executive Officer and President
Trenton H. Brown... 37 Executive Vice President, International Sales
Barry F. Cohen..... 57 Executive Vice President, Marketing and Human Resources
Paul J. Cunningham. 39 Executive Vice President, Americas Sales
Edwin J. Gillis.... 53 Executive Vice President, Chief Financial Officer and Treasurer
James E. Heppelmann 37 Executive Vice President, Software Products and Chief Technology
Officer
Kevin P. Wrenn..... 36 Executive Vice President, Global Services
Thomas L. Beaudoin. 48 Senior Vice President, Finance
David R. Friedman.. 40 Senior Vice President, General Counsel and Clerk
Mr. Harrison has been Chief Executive Officer and President since March 2000.
Prior to that, Mr. Harrison served as President and Chief Operating Officer
since August 1994.
Mr. Brown has been Executive Vice President, International Sales since July
2000. Mr. Brown was Divisional Vice President, Asia Pacific from April 2000 to
July 2000 and Sector Vice President from October 1999 to April 2000. Prior to
that, he was Area Vice President-Sales from October 1998 to October 1999 and
Regional Director
24
from April 1998 to October 1998. He also served as District Manager from
December 1997 to April 1998. Prior to joining PTC, Mr. Brown served as District
Manager of Nalco Chemical Inc. from September 1989 to December 1997.
Mr. Cohen has been Executive Vice President, Marketing and Human Resources
since December 2000 and Executive Vice President, Marketing since January 1998.
Prior to joining PTC, Mr. Cohen was Senior Vice President, Human Development
and Organizational Productivity at Computervision Corporation from November
1993 to January 1998.
Mr. Cunningham has served as Executive Vice President, Americas Sales since
July 2000 and from October 1998 to June 2000 he was Executive Vice President,
Primary Sales. Mr. Cunningham was Senior Vice President, European Sales from
April 1997 to October 1998 and Senior Vice President, North America West Sales
from October 1996 to April 1997.
Mr. Gillis has been Executive Vice President since October 1996 and Chief
Financial Officer and Treasurer since October 1995. Mr. Gillis had served as
Senior Vice President of Finance and Administration from October 1995 to
September 1996.
Mr. Heppelmann has been Executive Vice President, Software Products and Chief
Technology Officer since June 2001. Prior to that he was Executive Vice
President, General Manager--Windchill Solutions From November 2000 to June
2001. He had served as Executive Vice President and General Manager of
Windchill Netmarkets from July 2000 to November 2000 and Senior Vice President
of Windchill from January 1998 to July 2000. Prior to joining PTC, Mr.
Heppelmann was Vice President of Marketing and Chief Technology Officer of
Windchill Technology, Inc. from October 1996 to January 1998.
Mr. Wrenn has been Executive Vice President, Global Services since October
2001. Prior to that he served as Senior Vice President, Windchill Global
Services from June 2000 to October 2001 and Vice President, Windchill
Consulting Services from October 1998 to June 2000. Mr. Wrenn was Vice
President, Far East Global Services from February 1997 to October 1998 and
Director, North America MCAD Consulting from October 1996 to February 1997.
Mr. Beaudoin has been Senior Vice President, Finance since October 2000. Prior
to joining PTC, Mr. Beaudoin was Chief Financial Officer, Infinite Supply at i2
Technologies Inc. from June 2000 to September 2000. Mr. Beaudoin has served in
the following positions at Compaq Computer Corporation: Vice President Finance,
Enterprise from July 1999 to June 2000; Vice President, Services from January
1998 to July 1999; and, Vice President, Asia Pacific from January 1995 to
January 1998.
Mr. Friedman has served as Senior Vice President, General Counsel and Clerk
since October 1999. Mr. Friedman had served as Vice President, General Counsel
and Clerk from October 1998 to September 1999 and as Associate Corporate
Counsel from September 1996 to September 1998. Prior to joining PTC, Mr.
Friedman was a Partner at the law firm of Palmer & Dodge LLP from January 1994
to August 1996.
ITEM 11: Executive Compensation
Information with respect to executive compensation may be found under the
headings captioned "How We Compensate Our Directors" and "Information About
Executive Compensation" appearing in our 2002 Proxy Statement. Such information
is incorporated herein by reference.
25
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership may be found under the heading
captioned "Information About PTC Common Stock Ownership" appearing in our 2002
Proxy Statement. Such information is incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
Information with respect to this item may be found under the heading
"Information About Certain Insider Relationships" appearing in our 2002 Proxy
Statement. Such information is incorporated herein by reference.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of Form 10-K
1. Financial Statements
-- Consolidated Balance Sheets as of September 30, 2000 and 2001
-- Consolidated Statements of Income for the years ended September
30, 1999, 2000 and 2001
-- Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 2000 and 2001
-- Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 2000 and 2001
-- Consolidated Statements of Comprehensive Income for the years
ended September 30, 1999, 2000 and 2001
-- Notes to Consolidated Financial Statements
-- Report of Independent Accountants
2. Financial Statement Schedules
-- Schedules have been omitted since they are either not required,
not applicable, or the information is otherwise included.
3. Exhibits
-- As part of this Annual Report on Form 10-K, we hereby file and
incorporate by reference the Exhibits listed in the Exhibit
Index immediately preceding such Exhibits.
(b) Reports on Form 8-K
None.
(c) Exhibits
As part of this Annual Report on Form 10-K, we hereby file the Exhibits listed
in the attached Exhibit Index.
(d) Financial Statement Schedules
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 26th day of
December, 2001.
PARAMETRIC TECHNOLOGY CORPORATION
/s/ C. Richard Harrison
By___________________________________
C. Richard Harrison,
Chief Executive Officer and
President
POWER OF ATTORNEY
We, the undersigned officers and directors of Parametric Technology
Corporation, hereby severally constitute Edwin J. Gillis and David R. Friedman,
Esq., and each of them singly, our true and lawful attorneys with full power to
them, and each of them singly, to sign for us and in our names in the
capacities indicated below any and all subsequent amendments to this report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated below.
Signature Title Date
--------- ----- ----
(i) Principal Executive Officer:
/s/ C. Richard Harrison December 26, 2001
Chief Executive Officer and
C. Richard Harrison President
(ii) Principal Financial and Accounting
Officer:
/s/ Edwin J. Gillis Executive Vice President, Chief December 26, 2001
Financial Officer and Treasurer
Edwin J. Gillis
(iii) Board of Directors:
/s/ Noel G. Posternak Chairman of the Board of December 26, 2001
Directors
Noel G. Posternak
/s/ C. Richard Harrison Director December 26, 2001
C. Richard Harrison
/s/ Robert N. Goldman Director December 26, 2001
Robert N. Goldman
/s/ Donald K. Grierson Director December 18, 2001
Donald K. Grierson
/s/ Oscar B. Marx, III Director December 26, 2001
Oscar B. Marx, III
/s/ Michael E. Porter Director December 26, 2001
Michael E. Porter
27
EXHIBIT INDEX
Exhibit
Number
------
2.1 -- Agreement and Plan of Reorganization dated as of March 8, 1999 by and among Parametric
Technology Corporation, Northstar Acquisition Corporation, auxilium inc. and the stockholders of
auxilium inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed March 23, 1999 and
incorporated herein by reference).
3.1(a) -- Restated Articles of Organization of Parametric Technology Corporation adopted February 4,
1993 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 30, 1996 and incorporated herein by reference).
3.1(b) -- Articles of Amendment to Restated Articles of Organization adopted February 9, 1996 (filed as
Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-01297) and
incorporated herein by reference).
3.1(c) -- Articles of Amendment to Restated Articles of Organization adopted February 13, 1997 (filed as
Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-22169) and
incorporated herein by reference).
3.1(d) -- Articles of Amendment to Restated Articles of Organization adopted February 10, 2000 (filed as
Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000 and
incorporated herein by reference).
3.1(e) -- Certificate of Vote of Directors establishing Series A Junior Participating Preferred Stock (filed as
Exhibit 3.1(e) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000
and incorporated herein by reference).
3.2 -- By-Laws, as amended and restated, of Parametric Technology Corporation (filed as Exhibit 3.2 to
our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 and incorporated
herein by reference).
4.1 -- Rights Agreement effective as of January 5, 2001 between Parametric Technology Corporation
and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to our Annual Report on
Form 10-K for the fiscal year ended September 30, 2000 and incorporated herein by reference).
10.1* -- Parametric Technology Corporation 2000 Equity Incentive Plan (filed as Exhibit 10.7 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000 and incorporated herein
by reference).
10.2* -- Parametric Technology Corporation 1997 Incentive Stock Option Plan (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated
herein by reference).
10.3* -- Amendment to Parametric Technology Corporation 1997 Incentive Stock Option Plan (filed as
Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001
and incorporated herein by reference).
10.4* -- Parametric Technology Corporation 1987 Incentive Stock Option Plan, as amended (filed as
Exhibit 10.2 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.5* -- Parametric Technology Corporation 1992 Director Stock Option Plan, as amended (filed as
Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996
and incorporated herein by reference).
28
Exhibit
Number
------
10.6* -- Parametric Technology Corporation 1996 Directors Stock Option Plan, as amended (filed as
Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.7* -- Computervision Corporation 1992 Stock Option Plan as amended September 15, 1994, April 18,
1995 and December 5, 1996 (filed as Exhibit 10.3 to the Annual Report on Form 10-K of
Computervision Corporation for the fiscal year ended December 31, 1996 (File No. 1-7760/0-
20290) and incorporated herein by reference).
10.8* -- Amended and Restated Severance Agreement with C. Richard Harrison dated February 10, 2000
(filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
2000 and incorporated herein by reference).
10.9* -- Amended and Restated Severance Agreement with Edwin J. Gillis dated February 10, 2000 (filed
as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000
and incorporated herein by reference).
10.10* -- Severance Agreement with Barry F. Cohen dated February 10, 2000 (filed as Exhibit 10.5 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000 and incorporated herein
by reference).
10.11* -- Amended and Restated Severance Agreement with Paul J. Cunningham dated November 15, 2001
(filed herewith).
10.12* -- Severance Agreement with James E. Heppelmann dated May 18, 2000 (filed as Exhibit 10.12 to
our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 and incorporated
herein by reference).
10.13* -- Severance Agreement with Trenton H. Brown dated February 15, 2001 (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001 and incorporated
herein by reference).
10.14* -- Severance Agreement with Kevin P. Wrenn dated November 15, 2001 (filed herewith)
10.15* -- Consulting Agreement with Michael E. Porter dated November 17, 1995 (filed as Exhibit 10.3 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated
herein by reference).
10.16* -- Amendment #1 to Consulting Agreement with Michael E. Porter dated May 15, 1997 (filed as
Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and
incorporated herein by reference).
10.17* -- Amendment #2 to Consulting Agreement with Michael E. Porter dated January 6, 1998 (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 1998 and
incorporated herein by reference).
10.18* -- Amendment #3 to Consulting Agreement with Michael E. Porter dated July 20, 1998 (filed as
Exhibit 10.24 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1998
and incorporated herein by reference).
10.19* -- Amendment #4 to the Consulting Agreement with Michael E. Porter dated February 11, 1999
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3,
1999 and incorporated herein by reference).
29
Exhibit
Number
------
10.20* -- Amendment #5 to the Consulting Agreement with Michael E. Porter dated February 10, 2000
(filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
2000 and incorporated herein by reference).
10.21* -- Amendment #6 to the Consulting Agreement with Michael E. Porter dated September 14, 2000
(filed as Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.22* -- Amendment #7 to the Consulting Agreement with Michael E. Porter dated May 16, 2001 (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001 and
incorporated herein by reference)
10.23 -- Lease dated December 14, 1999 by and between PTC and Boston Properties Limited Partnership
(filed as Exhibit 10.21 to our Annual Report on Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.24 -- Amended and Restated Lease Agreement dated as of January 1, 1995 between United Trust Fund
Limited Partnership and (filed as Exhibit 10.20 to the Annual Report on Form 10-K of
Computervision Corporation for the fiscal year ended December 31, 1995 (File No. 0-18059) and
incorporated herein by reference).
21.1 -- Subsidiaries of Parametric Technology Corporation (filed herewith).
23.1 -- Consent of PricewaterhouseCoopers LLP (filed herewith).
--------
* Identifies a management contract or compensatory plan or arrangement in
which an executive officer or director of PTC participates.
30
APPENDIX A
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
------------------------
2000 2001
----------- -----------
A S S E T S
------------
Current assets:
Cash and cash equivalents................................................... $ 325,872 $ 217,369
Short-term investments...................................................... 22,969 13,906
Accounts receivable, net of allowance for doubtful accounts of $6,270 and
$5,635.................................................................... 183,804 185,444
Prepaid expenses............................................................ 47,727 38,473
Other current assets........................................................ 48,061 60,496
----------- -----------
Total current assets.................................................... 628,433 515,688
Marketable investments......................................................... 26,300 17,823
Property and equipment, net.................................................... 66,879 91,501
Goodwill, net of accumulated amortization of $45,771 and $72,132............... 88,034 62,356
Other intangible assets, net of accumulated amortization of $22,864 and $35,779 43,645 30,482
Other assets................................................................... 71,592 79,988
----------- -----------
Total assets............................................................ $ 924,883 $ 797,838
=========== ===========
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
------------------------------------------------------------------
Current liabilities:
Accounts payable............................................................ $ 30,944 $ 28,640
Accrued expenses............................................................ 47,801 55,016
Accrued compensation and severance.......................................... 52,112 68,936
Deferred revenue............................................................ 231,495 207,044
----------- -----------
Total current liabilities............................................... 362,352 359,636
Other liabilities.............................................................. 33,989 38,500
Commitments and contingencies (Note F)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued...... -- --
Common stock, $0.01 par value; 500,000 shares authorized; 276,053 shares
issued.................................................................... 2,761 2,761
Additional paid-in capital.................................................. 1,641,513 1,643,626
Treasury stock, at cost, 6,456 and 15,515 shares............................ (66,647) (173,504)
Accumulated deficit......................................................... (1,036,456) (1,045,096)
Accumulated other comprehensive loss........................................ (12,629) (28,085)
----------- -----------
Total stockholders' equity.............................................. 528,542 399,702
----------- -----------
Total liabilities and stockholders' equity.............................. $ 924,883 $ 797,838
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year ended September 30,
------------------------------
1999 2000 2001
---------- -------- --------
Revenue:
License............................................. $ 561,220 $378,618 $381,882
Service............................................. 496,381 549,796 552,724
---------- -------- --------
Total revenue................................. 1,057,601 928,414 934,606
---------- -------- --------
Costs and expenses:
Cost of license revenue............................. 16,508 16,718 15,734
Cost of service revenue............................. 191,147 228,266 236,837
Sales and marketing................................. 407,936 416,665 380,902
Research and development............................ 124,131 143,763 148,942
General and administrative.......................... 62,852 71,263 74,683
Amortization of goodwill and other intangible assets 22,888 38,432 37,942
Acquisition and nonrecurring charges (Note B)....... 53,347 21,534 42,568
---------- -------- --------
Total costs and expenses...................... 878,809 936,641 937,608
---------- -------- --------
Operating income (loss).............................. 178,792 (8,227) (3,002)
Interest income..................................... (11,283) (13,228) (10,049)
Other expense, net.................................. 8,833 10,068 7,554
Write-down of investments........................... -- -- 10,354
---------- -------- --------
Income (loss) before income taxes.................... 181,242 (5,067) (10,861)
Provision (benefit) for income taxes................ 61,949 (1,087) (2,647)
---------- -------- --------
Net income (loss) $ 119,293 $ (3,980) $ (8,214)
========== ======== ========
Earnings (loss) per share (Note A):
Basic............................................... $ 0.44 $ (0.01) $ (0.03)
Diluted............................................. $ 0.43 $ (0.01) $ (0.03)
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended September 30,
-----------------------------
1999 2000 2001
-------- -------- ---------
Cash flows from operating activities:
Net income (loss)........................................................................... $119,293 $ (3,980) $ (8,214)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Non-cash portion of nonrecurring charges and write-down of investments..................... 4,693 2,499 14,404
Depreciation and amortization.............................................................. 62,283 78,769 76,370
Deferred income taxes...................................................................... (16,914) (4,838) (15,039)
Provision for loss on accounts receivable.................................................. 4,445 7,589 2,930
Charge for purchased in-process research and development................................... 38,244 -- --
Changes in assets and liabilities which provided (used) cash, net of effects of purchased
businesses:
Accounts receivable....................................................................... (35,393) 29,427 (4,570)
Accounts payable and accrued expenses..................................................... (35,663) (19,210) 15,552
Accrued compensation and severance........................................................ (26,898) (7,218) 14,723
Deferred revenue.......................................................................... 64,012 18,436 (24,451)
Income taxes.............................................................................. 16,556 (55,601) (1,818)
Other current assets and prepaid expenses................................................. (35,109) 6,245 (10,583)
Other noncurrent assets and liabilities................................................... (8,708) (267) (8,225)
-------- -------- ---------
Net cash provided by operating activities..................................................... 150,841 51,851 51,079
-------- -------- ---------
Cash flows from investing activities:
Additions to property and equipment......................................................... (35,246) (37,032) (61,388)
Additions to other intangible assets........................................................ (24,133) (2,784) (2,982)
Acquisitions of businesses.................................................................. (72,925) (7,922) --
Construction in progress.................................................................... (28,284) (4,106) --
Proceeds from sale of construction in progress.............................................. -- 30,836 --
Purchases of investments.................................................................... (95,416) (53,732) (38,048)
Proceeds from sales and maturities of investments........................................... 196,918 115,262 55,681
-------- -------- ---------
Net cash provided (used) by investing activities.............................................. (59,086) 40,522 (46,737)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock...................................................... 23,866 79,621 24,232
Purchases of treasury stock................................................................. (89,968) (90,020) (131,708)
-------- -------- ---------
Net cash used by financing activities......................................................... (66,102) (10,399) (107,476)
-------- -------- ---------
Effect of exchange rate changes on cash....................................................... 8,165 4,109 (5,369)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents.......................................... 33,818 86,083 (108,503)
Cash and cash equivalents, beginning of year.................................................. 205,971 239,789 325,872
-------- -------- ---------
Cash and cash equivalents, end of year........................................................ $239,789 $325,872 $ 217,369
======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Year ended September 30,
-------------------------------------
1999 2000 2001
----------- ----------- -----------
Common stock
Balance--beginning of year.............................................. $ 2,723 $ 2,723 $ 2,761
Issued for employee stock purchase and option plans.................. -- 38 --
----------- ----------- -----------
Balance--end of year.................................................... 2,723 2,761 2,761
----------- ----------- -----------
Additional paid-in capital
Balance--beginning of year.............................................. 1,528,647 1,583,846 1,641,513
Issued for employee stock purchase and option plans.................. 7,812 40,148 --
Tax benefit related to stock option plans............................ 2,500 17,519 2,113
Issuance of treasury stock for acquisitions.......................... 44,887 -- --
----------- ----------- -----------
Balance--end of year.................................................... 1,583,846 1,641,513 1,643,626
----------- ----------- -----------
Treasury stock
Balance--beginning of year.............................................. (43,134) (27,727) (66,647)
Repurchased.......................................................... (89,968) (90,020) (131,708)
Issued for employee stock purchase and option plans.................. 42,117 51,100 24,851
Issuance of treasury stock for acquisitions.......................... 63,258 -- --
----------- ----------- -----------
Balance--end of year.................................................... (27,727) (66,647) (173,504)
----------- ----------- -----------
Accumulated deficit
Balance--beginning of year.............................................. (1,123,399) (1,022,357) (1,036,456)
Net income (loss).................................................... 119,293 (3,980) (8,214)
Treasury shares issued for employee stock purchase and option plans.. (18,251) (10,119) (426)
----------- ----------- -----------
Balance--end of year.................................................... (1,022,357) (1,036,456) (1,045,096)
----------- ----------- -----------
Accumulated other comprehensive loss
Balance--beginning of year.............................................. (29,333) (15,381) (12,629)
Foreign currency translation adjustment.............................. 3,596 2,483 (4,076)
Unrealized gain (loss) on securities and derivatives................. (478) 80 170
Minimum pension liability adjustment................................. 10,834 189 (11,550)
----------- ----------- -----------
Balance--end of year.................................................... (15,381) (12,629) (28,085)
----------- ----------- -----------
Total stockholders' equity.............................................. $ 521,104 $ 528,542 $ 399,702
=========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended September 30,
---------------------------
1999 2000 2001
-------- ------- --------
Comprehensive income:
Net income (loss)........................................................................ $119,293 $(3,980) $ (8,214)
-------- ------- --------
Other comprehensive income (loss), net of tax provision (benefit):
Foreign currency translation adjustment, net of tax of $1,936, $1,337, ($2,194)....... 3,596 2,483 (4,076)
Unrealized gain (loss) on securities and derivatives, net of tax of ($257), $43, $92.. (478) 80 170
Minimum pension liability adjustment, net of tax of $1,301, ($170), ($5,030).......... 10,834 189 (11,550)
-------- ------- --------
Other comprehensive income (loss)........................................................ 13,952 2,752 (15,456)
-------- ------- --------
Comprehensive income (loss).............................................................. $133,245 $(1,228) $(23,670)
======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Business
Parametric Technology Corporation (PTC), founded in 1985 and headquartered in
Needham, MA, develops, markets and supports collaborative product development
(CPD) software solutions that help manufacturers improve the competitiveness of
their products and product development processes. These solutions, which
include a suite of mechanical computer-aided design tools and a range of
Internet-based collaboration technologies, enable manufacturing companies to
create digital products, collaborate on designs within the enterprise and
throughout the extended supply chain, and control the digital product
information throughout the product lifecycle, resulting in streamlined
engineering processes, improved product quality, optimized product information
management and reduced cost and time-to-market cycles. Our CPD software
solutions are complemented by the strength and experience of our Global
Services Organization, as well as our systems integrators and other strategic
partners, who provide training, consulting, ancillary product offerings,
implementation and support to customers worldwide. We operate in a single
industry segment-computer software and related services.
Basis of Presentation
Our fiscal year-end is September 30. The consolidated financial statements
include the parent company and its wholly owned subsidiaries, including those
operating outside the U.S. All intercompany balances and transactions have been
eliminated in the financial statements. Certain reclassifications have been
made for consistent presentation. We prepare our financial statements under
generally accepted accounting principles that require management to make
estimates and assumptions that affect the amounts reported and the related
disclosures. Actual results could differ from these estimates.
Foreign Currency Translation
For our foreign operations where the functional currency is the local currency,
we translate assets and liabilities at rates in effect at the balance sheet
date and record translation adjustments in stockholders' equity. As of
September 30, 2000 and 2001, a cumulative translation adjustment gain of $3.7
million and a loss of $416,000, net of tax, is included in the accumulated
other comprehensive income (loss) component of stockholders' equity. For our
foreign operations where the U.S. dollar is the functional currency, we
translate monetary assets and liabilities using exchange rates in effect at the
balance sheet date and nonmonetary assets and liabilities at historical rates
and record translation adjustments in other expense in the statement of income.
We translate income statement amounts at average rates for the period.
Transaction gains and losses are recorded in other expense in the statement of
income.
Revenue Recognition
Our revenue is derived from the licensing of computer software products and
from service revenue consisting of training, consulting and maintenance.
License revenue is recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable, and collection is
probable. Revenue from software maintenance contracts is recognized ratably
over the contract period. Revenue from consulting and training is recognized as
performed. Revenue from software maintenance contracts, consulting and training
is included in services revenue in the accompanying statements of income.
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. We adopted SAB 101, as amended, in the
fourth quarter of fiscal 2001 as required. The adoption of SAB 101 did not have
a material effect on our consolidated financial statements.
F-5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash, Cash Equivalents and Marketable Investments
Our cash is invested in debt instruments of financial institutions, government
entities, corporations and mutual funds. We have established guidelines
relative to credit ratings, diversification and maturities that are intended to
maintain safety and liquidity. Our cash equivalents include highly liquid
investments with maturity periods of three months or less when purchased. Our
short-term investments include those investments with maturities in excess of
three months but less than one year. Our marketable investments are those with
maturities in excess of one year but less than two years. Our cash equivalents
and short-term and marketable investments are classified as available for sale
and reported at fair value with an unrealized loss of $40,000, net of tax, and
an unrealized gain of $130,000, net of tax, included in the accumulated other
comprehensive income (loss) component of stockholders' equity as of September
30, 2000 and 2001, respectively.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the consolidated balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value due to their short maturities. Financial instruments that potentially
subject us to concentration of credit risk consist primarily of investments,
trade receivables and derivatives. Our cash, cash equivalents, investments and
derivatives are held with financial institutions with high credit standings.
Our customer base consists of large numbers of geographically diverse customers
dispersed across many industries. As a result, concentration of credit risk
with respect to trade receivables is not significant except for a receivable
from our largest distributor, which accounts for 12% and 7% of total
receivables as of September 30, 2000 and 2001, respectively.
Trade Accounts Receivable Allowance for Doubtful Accounts
Our allowance for doubtful accounts was $6.4 million, $6.3 million and $5.6
million as of September 30, 1999, 2000 and 2001, respectively. Uncollectible
trade accounts receivable written-off, net of recoveries, was $5.7 million,
$7.7 million and $3.6 million for 1999, 2000 and 2001, respectively.
Transfers of Financial Assets
We offer our customers the option to purchase software and services through
payment plans. In general, we transfer future payments under certain of these
contracts to third-party financing institutions on a non-recourse basis. We
record such transfers as sales of the related accounts receivable when we
surrender control of such receivables under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
Derivatives
Effective October 1, 2000, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS No. 133) which established accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in a hedging relationship or not, are
required to be recorded on the balance sheet at fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met, and that the
company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The effectiveness of the derivative
as a hedging instrument is based on changes in its market value being highly
correlated with changes in the market value of the underlying hedged item.
Derivatives are financial instruments whose value is derived from one or more
underlying financial instruments, such as foreign currency. We enter into
derivative transactions, specifically foreign currency forward contracts
F-6
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and foreign currency option contracts, to manage our exposure to fluctuations
in foreign exchange rates. The contracts are primarily in European currencies
and Japanese yen and have maturities of less than one year. Any derivative we
enter into is designated at inception as a hedge of risks associated with
specific assets, liabilities or future commitments and is monitored to
determine if it remains an effective hedge. We do not enter into or hold
derivatives for trading or speculative purposes.
We routinely use forward contracts to hedge specific foreign
currency-denominated receivables. These contracts, which are not designated as
hedging instruments under SFAS No. 133, have maturities of less than three
months and require us to exchange foreign currencies for U.S. dollars at
maturity at rates agreed to at inception of the contracts. All foreign currency
transactions and all outstanding forward contracts are marked-to-market at the
end of each accounting period with unrealized gains and losses recorded in
other expenses in the statement of income. As of September 30, 2000 and 2001,
we had outstanding forward contracts of approximately $116.0 million and $149.4
million, respectively. Net unrealized and realized gains and losses associated
with exchange rate fluctuations on forward contracts and the underlying foreign
currency exposure being hedged were immaterial for all periods presented.
We also use foreign currency option contracts, with maturities of less than
three months, to hedge specific forecasted net cash flow transactions that are
derived from international revenue levels. These hedges are designated as
effective cash flow hedging instruments under SFAS No. 133 and are
marked-to-market at the end of each accounting period. The premiums to purchase
option contracts are capitalized in other assets and recorded in other expense
in the statement of income over the life of the contract. The effective portion
of the changes in the fair value of the option contracts are recorded in other
comprehensive income, and subsequently recognized in license and service
revenue in the period in which the forecasted transactions occurs. As of
September 30, 2000 and 2001, there were no foreign currency option contracts
outstanding. The adoption of SFAS No. 133 did not have a material effect on our
consolidated financial statements.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Computer hardware and
software are typically amortized over three to five years, and furniture and
fixtures three to eight years. Leasehold improvements are amortized over the
shorter of their useful lives or the remaining terms of the related leases.
Property and equipment under capital leases are amortized over the lesser of
the lease terms or their estimated useful lives. Maintenance and repairs are
charged to expense when incurred; additions and improvements are capitalized.
When an item is sold or retired, the cost and related accumulated depreciation
is relieved, and the resulting gain or loss, if any, is recognized in income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets include the values attributable to
intangible assets acquired and are amortized using the straight-line method.
Goodwill is amortized over five to seven years and other intangible assets,
such as assembled workforces, customer lists and developed technology, are
amortized over three to five years. Trademarks, which are also included in
other intangible assets, are amortized over seven years.
Management regularly evaluates the net realizable value of long lived assets
including property and equipment, computer software costs and goodwill and
other intangible assets relying on a number of factors including operating
results, business plans, budgets and economic projections.
Computer Software Costs
We incur costs to develop computer software to be licensed or otherwise
marketed to customers. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed in the period incurred, unless these costs qualify for capitalization.
Capitalized computer software costs related to internal development efforts are
not material.
F-7
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Revenue
Deferred revenue primarily relates to software maintenance agreements with
customers for which the services have not been provided. The liability
associated with performing these services is included in deferred revenue and,
if not yet paid, the related amount is included in other current assets.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain
items of income and expense are not reported in tax returns and financial
statements in the same year. The tax effect of these differences are reported
as deferred tax assets and liabilities. Deferred tax assets are recognized, net
of valuation allowances, for the estimated future tax effects of deductible
temporary differences and tax operating loss and credit carryforwards. Changes
in deferred tax assets and liabilities are recorded in the provision for income
taxes.
Earnings Per Share (EPS)
Basic EPS is calculated by dividing net income by the weighted average number
of shares outstanding during the period. Diluted EPS is calculated by dividing
net income by the weighted average number of shares outstanding plus the
dilutive effect, if any, of outstanding stock options using the "treasury
stock" method. The following table presents the calculation for both basic and
diluted EPS:
Year ended September 30,
-------------------------------
1999 2000 2001
-------- -------- --------
(in thousands, except per share)
Net income (loss)........................ $119,293 $ (3,980) $ (8,214)
======== ======== ========
Weighted average shares outstanding...... 269,526 273,081 264,441
Dilutive effect of employee stock options 5,549 -- --
-------- -------- --------
Diluted shares outstanding............... 275,075 273,081 264,441
======== ======== ========
Basic earnings (loss) per share.......... $ 0.44 $ (0.01) $ (0.03)
Diluted earnings (loss) per share........ $ 0.43 $ (0.01) $ (0.03)
Options to purchase shares of our common stock of 18.2 million shares for 1999,
13.3 million shares for 2000 and 41.2 million shares for 2001 were outstanding
but were not included in the computations of diluted EPS because the exercise
prices of the options were greater than the average market price of the common
stock for the period reported. Due to the net loss for 2000 and 2001, the
dilutive effect of an additional 8.5 million and 2.5 million shares,
respectively was excluded from the computation of diluted EPS, as the effect
would have been anti-dilutive.
Stock-Based Compensation
We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and related interpretations. Under APB No.
25, no compensation cost is recognized because the option price is equal to the
market price of the underlying stock on the date of grant. An alternative
method of accounting is SFAS No. 123, Accounting for Stock-Based Compensation.
Under SFAS No. 123, employee stock options are valued at the grant date using a
valuation model, and compensation cost is recognized ratably over the vesting
period. The impact of recording stock-based compensation under the provisions
of SFAS No. 123 is disclosed in Note I.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires
that ratable amortization of
F-8
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
goodwill be replaced with periodic tests of the goodwill's impairment and that
certain intangible assets other than goodwill be amortized over their useful
lives. SFAS No. 141 is effective for all business combinations initiated after
June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001. We will not be required to adopt SFAS
No. 142 until fiscal 2003; however, early adoption is allowed in fiscal 2002.
We have not determined if we will elect early adoption of SFAS No. 142.
B. Acquisitions, Nonrecurring Charges and Write-down of Investments
Acquisitions
InPart
In October 1998, we acquired all of the outstanding stock in InPart Design,
Inc. by issuing 2.0 million shares of our common stock. As of September 30,
1999, we issued 600,000 additional shares to satisfy certain contingent
conditions, which were included in the purchase price described below. In
addition, we reserved 386,000 shares of common stock for outstanding InPart
options assumed. The acquisition was accounted for as a purchase. Accordingly,
we allocated the purchase price of $38.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The values assigned
included $741,000 for net liabilities assumed, $10.6 million for purchased
in-process R&D and $5.7 million for other intangible assets. The excess
purchase price over the amounts allocated to assets acquired and liabilities
assumed was recorded as goodwill of $22.5 million.
Division
In March 1999, we acquired Division Group plc for $37.3 million in cash and
593,000 shares of our common stock. The acquisition was accounted for as a
purchase. Accordingly, we allocated the purchase price of $48.1 million to the
assets acquired and liabilities assumed based on our estimates of fair value.
The values assigned included $555,000 for net assets acquired, $9.0 million for
purchased in-process R&D and $8.8 million for other intangible assets. The
excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $29.8 million.
auxilium
In March 1999, we acquired all of the outstanding stock of auxilium inc. in
exchange for 2.6 million shares of our common stock and $39.4 million in cash.
In addition, we reserved 1.1 million shares of common stock for outstanding
auxilium options assumed. The acquisition was accounted for as a purchase.
Accordingly, we allocated the purchase price of $101.7 million to the assets
acquired and liabilities assumed based on our estimates of fair value. The
values assigned included $182,000 for net liabilities assumed, $18.6 million
for purchased in-process R&D and $12.3 million for other intangible assets. The
excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $70.9 million.
The operating results of InPart, Division and auxilium have been included in
our results of operations from the date of each acquisition. Our purchases of
InPart, Division and auxilium did not require the presentation of pro forma
information.
In the opinion of management, the purchased in-process R&D for the acquisitions
of InPart, Division and auxilium had not yet reached technological feasibility
and had no alternative future use. Accordingly, we recorded nonrecurring
charges of $10.6 million in the first quarter of 1999 related to InPart and
$27.6 million in the second quarter of 1999 related to Division and auxilium.
The values assigned to purchased in-process R&D were determined by identifying
research projects for which technological feasibility had not been established.
F-9
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The values of the purchased in-process R&D were determined by estimating the
stage of completion, including consideration of the complexity of the work
completed, the costs incurred and the projected cost to complete, the
contribution of any core technology and other acquired assets and the projected
product introduction dates, estimating the resulting net cash flows from the
products developed and discounting the net cash flows back to their present
value. The discount rates used included a factor that took into account the
uncertainty surrounding the successful development of the purchased in-process
technology for each acquisition
Write-down of Investments
In 2001, we recorded a $10.4 million non-cash write-down on several equity
investments, included in other long-term assets, to reflect other than
temporary declines in valuation and an unsettled near-term market outlook. At
September 30, 2000 and 2001, equity investments were $12.4 million and $2.0
million, respectively.
Nonrecurring Charges
In 1999, we reorganized our sales force and, in connection with this action,
incurred nonrecurring charges of $9.0 million for the severance and termination
benefits of approximately 320 people who were terminated during 1999 in
connection with the integration of our sales and related support groups. All
amounts related to terminated employees were paid in 1999. Also in 1999, we
incurred a nonrecurring charge of $1.4 million for the consolidation of certain
excess leased facilities and we recorded an impairment loss of $4.7 million on
certain intangible assets related to our industrial design (CDRS) activities.
Due to recent acquisitions and the development of new technology, the carrying
value of these assets was impaired.
In 2000, we recorded nonrecurring charges of $21.5 million, primarily
associated with our reorganization into business units and with the development
and execution of management's plans to reduce our cost structure and improve
profitability. The nonrecurring charge is comprised of $11.9 million for
severance and termination benefits of approximately 280 people who were
notified or terminated during the third quarter of 2000 and $9.6 million for
facility consolidations.
In 2001, we recorded nonrecurring charges of $42.6 million, primarily
associated with a reduction in force to reduce our cost structure and improve
profitability and a write-down of assets related to a focus shift in our
content aggregation business. The nonrecurring charge is comprised of $25.7
million for severance and termination benefits of approximately 720 people who
were notified or terminated in 2001, $9.9 million for facility consolidations,
and $7.0 million primarily for a write-down of assets related to a focus shift
in certain products. Of the $42.6 million of nonrecurring charges, $4.0 million
is non-cash related.
F-10
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes all of our acquisition and nonrecurring charges
activity:
September 30,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Beginning balance..................................... $ 69,601 $ 45,860 $ 34,586
-------- -------- --------
Charges to operations:
Employee severance and termination................. 8,242 11,908 25,652
Purchased in-process R&D........................... 38,244 -- --
Asset write-offs................................... 4,693 920 4,049
Facility closures and related costs................ 1,912 8,706 9,879
Lease terminations, contract obligations and other. 256 -- 2,988
-------- -------- --------
Total charges to operations........................... 53,347 21,534 42,568
-------- -------- --------
Costs incurred:
Employee severance and termination benefits........ (11,422) (9,934) (14,035)
Purchased in-process R&D........................... (38,244) -- --
Asset write-offs................................... (4,693) (920) (4,049)
Facility closures and related costs................ (17,475) (17,966) (8,688)
Lease terminations, contract obligations and other. (5,254) (3,988) (1,035)
-------- -------- --------
Total costs incurred.................................. (77,088) (32,808) (27,807)
-------- -------- --------
Ending balance........................................ $ 45,860 $ 34,586 $ 49,347
======== ======== ========
Cash expenditures:
Employee severance and termination benefits........ $ 11,422 $ 8,354 $ 14,638
Facility closures and related costs................ 17,475 17,966 8,688
Lease terminations, contract obligations and other. 5,254 3,988 1,035
-------- -------- --------
Total cash expenditures............................... $ 34,151 $ 30,308 $ 24,361
======== ======== ========
Number of employee severances......................... 320 280 720
======== ======== ========
As of September 30, 2001, of the $49.3 million remaining in accrued acquisition
and nonrecurring charges, $37.8 million was included in current liabilities and
$11.5 million in other liabilities, principally for facility and severance
costs.
F-11
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
C. Investments
The fair values of our investments have been determined through information
obtained from market sources and management estimates. We use a specific
identification cost method to determine the gross realized gains and losses on
the sale of our securities. Realized gains and losses on the sale of
investments were immaterial for 1999, 2000 and 2001. The table below does not
include equity investments included in other long-term assets.
September 30, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Municipal debt securities.... $ 57,778 $25 $(54) $ 57,749
Mutual funds................. 68,219 -- -- 68,219
Government agencies.......... 18,767 11 (44) 18,734
-------- --- ---- --------
Total investments............ $144,764 $36 $(98) $144,702
======== === ==== ========
Amounts included in:
Cash and cash equivalents. $ 95,433 $-- $ -- $ 95,433
Short-term investments.... 23,000 23 (54) 22,969
Marketable investments.... 26,331 13 (44) 26,300
-------- --- ---- --------
Total investments............ $144,764 $36 $(98) $144,702
======== === ==== ========
September 30, 2001
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Municipal debt securities.... $16,958 $ 9 $(24) $16,943
Mutual funds................. 46,751 -- -- 46,751
Commercial paper............. 11,280 118 (4) 11,394
Government agencies.......... 16,181 102 (1) 16,282
------- ---- ---- -------
Total investments............ $91,170 $229 $(29) $91,370
======= ==== ==== =======
Amounts included in:
Cash and cash equivalents. $59,641 $ -- $ -- $59,641
Short-term investments.... 13,898 13 (5) 13,906
Marketable investments.... 17,631 216 (24) 17,823
------- ---- ---- -------
Total investments............ $91,170 $229 $(29) $91,370
======= ==== ==== =======
F-12
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. Property and Equipment
Our property and equipment consisted of the following:
September 30,
-------------------
2000 2001
-------- ---------
(in thousands)
Computer hardware and software........... $128,686 $ 141,661
Furniture and fixtures................... 15,885 19,773
Leasehold improvements................... 16,671 33,674
-------- ---------
Gross property and equipment............. 161,242 195,108
Accumulated depreciation and amortization (94,363) (103,607)
-------- ---------
Net property and equipment............... $ 66,879 $ 91,501
======== =========
Depreciation expense was $33.3 million in 1999, $35.9 million in 2000 and $35.6
million in 2001. There were no capital leases as of September 30, 2000 or 2001.
E. Income Taxes
Our income (loss) before taxes consisted of the following:
September 30,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Domestic.................................. $211,580 $(22,801) $(34,064)
Foreign................................... (30,338) 17,734 23,203
-------- -------- --------
Total..................................... $181,242 $ (5,067) $(10,861)
======== ======== ========
Our provision (benefit) for income taxes consisted of the following:
September 30
---------------------------
1999 2000 2001
-------- ------- --------
(in thousands)
Current:
Federal................................ $ 59,191 $(9,046) $ (7,963)
State.................................. 9,250 (3,858) 2,546
Foreign................................ 10,422 16,655 17,809
-------- ------- --------
78,863 3,751 12,392
-------- ------- --------
Deferred:
Federal................................ (17,553) (8,028) (13,523)
State.................................. (2,250) 4,301 (1,945)
Foreign................................ 2,889 (1,111) 429
-------- ------- --------
(16,914) (4,838) (15,039)
-------- ------- --------
Total provision (benefit) for income taxes $ 61,949 $(1,087) $ (2,647)
======== ======= ========
F-13
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation between the statutory federal income tax rate and our
effective income tax rate is shown below:
September 30,
---------------
1999 2000 2001
---- ---- ----
Statutory federal income taxes................ 35% (35)% (35)%
State income taxes, net of federal tax benefit 3 6 4
Tax exempt interest income.................... (2) (36) (7)
Benefit of foreign sales corporations......... (1) (1) (2)
Valuation allowance........................... (9) (93) 86
Acquisition-related charges................... 7 157 93
Investment in foreign subsidiaries............ -- -- (161)
Other, net.................................... 1 (19) (2)
-- --- ----
Effective income tax rate..................... 34% (21)% (24)%
== === ====
We paid $57.7 million in 1999, $52.0 million in 2000 and $6.9 million in 2001
for income taxes.
The significant temporary differences that create deferred tax assets and
liabilities are shown below:
September 30,
------------------
2000 2001
-------- --------
(in thousands)
Deferred tax assets:
Reserves not currently deductible............... $ 5,921 $ 9,819
Restructuring reserves not currently deductible. 14,673 20,296
Net operating loss carryforwards................ 84,980 78,089
Foreign tax credits............................. -- 7,605
Amortization of intangible assets............... 10,435 8,448
Depreciation.................................... 2,274 2,389
Other........................................... 1,747 1,647
-------- --------
Gross deferred tax assets.......................... 120,030 128,293
Valuation allowance................................ (59,137) (68,487)
-------- --------
Total deferred tax assets.......................... $ 60,893 $ 59,806
-------- --------
Deferred tax liabilities:
Investment in foreign subsidiaries.............. (25,308) (7,776)
Deferred revenue................................ (2,313) (2,125)
Other........................................... (7,298) (8,892)
-------- --------
Total deferred tax liabilities..................... (34,919) (18,793)
-------- --------
Net deferred tax assets............................ $ 25,974 $ 41,013
======== ========
For U.S. tax return purposes, net operating losses (NOLs) and tax credit
carryforwards are generally available to be carried forward to future years.
However, the Internal Revenue Code limits a corporation's use of NOLs and tax
credits after a change of more than 50% of the ownership of the corporation.
Our merger with Computervision in January 1998 changed its ownership more than
50%. This change limits our usage of the Computervision NOLs to $14.0 million
per year and $196.0 million cumulatively through 2011, plus any built-in
F-14
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
gains which existed at the time of the ownership change. There are other
limitations imposed on the utilization of such NOLs that could further restrict
the recognition of such tax benefits. We have foreign NOLs that are also
subject to various limitations. Due to these limitations, we recorded a
valuation allowance for the tax benefit of a majority of NOLs since realization
of these future benefits was not sufficiently assured. During 2000, we reduced
our valuation allowance $4.7 million primarily due to anticipated future
benefits from the utilization of certain NOLs in 2000 and during 2001 we
increased our valuation allowance $9.4 million due to the uncertainty of
utilization of certain foreign net operating losses and tax credit
carryforwards.
F. Commitments and Contingencies
Leasing Arrangements
We lease office facilities and certain equipment under operating leases
expiring at various dates through 2014. In addition to rent, certain leases
require us to pay directly for taxes, insurance, maintenance and other
operating expenses. Lease expense, net of sublease income, was $54.6 million in
1999, $54.1 million in 2000 and $56.9 million in 2001. At September 30, 2001,
our future minimum lease payments under noncancellable operating leases with
remaining terms of one or more years are as follows:
September 30,
2001
--------------
(in thousands)
2002........................ $ 53,089
2003........................ 39,489
2004........................ 27,668
2005........................ 25,281
2006........................ 21,485
Thereafter.................. 105,049
--------
Total minimum lease payments $272,061
========
As a result of Computervision's cost saving initiatives in prior years, our
merger with Computervision and our cost saving initiatives in 1999, 2000 and
2001, certain leased facilities were considered excess. As of September 30,
2001 we had $29.2 million reserved for facility obligations in excess of
sublease income.
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 to consolidate
our Massachusetts facilities. Occupancy and rent began in December 2000 and the
lease expires in December 2012, subject to certain renewal rights. As of
September 30, 2000 and 2001, we have letters of credit outstanding of
approximately $25.5 million and $9.1 million primarily related to the lease of
the new facility.
Legal Proceedings
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
F-15
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
motion to dismiss and entered an order dismissing the consolidated action with
prejudice. The applicable appeal period has expired and the plantiffs 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.
G. Stockholders' Equity
Preferred Stock
We may issue up to 5.0 million shares of our preferred stock in one or more
series. Our Board of Directors is authorized to fix the rights and terms for
any series of preferred stock without additional shareholder approval. As of
September 30, 2000 and 2001, there were no outstanding shares of preferred
stock.
In November 2000, our Board of Directors authorized and designated 500,000
shares of preferred stock as Series A Junior Participating Preferred Stock for
issuance pursuant to our Shareholder Rights Plan (discussed below in Note H).
Common Stock
Our Articles of Organization authorize us to issue up to 500 million shares of
our common stock. Shares of common stock outstanding are shown below:
September 30,
-------------------------
1999 2000 2001
------- ------- -------
(in thousands)
Beginning balance.......... 268,142 270,164 269,597
Common stock issued........ -- 3,776 --
Treasury shares repurchased (6,270) (7,727) (11,811)
Treasury shares issued..... 8,292 3,384 2,752
------- ------- -------
Ending balance............. 270,164 269,597 260,538
======= ======= =======
In September 1998, our Board of Directors authorized a plan that allows us to
repurchase up to 20.0 million shares. In July 2000, our Board of Directors
authorized an additional 20.0 million shares to be repurchased. Through
September 30, 2001, we repurchased 30.5 million shares at a cost of $361.7
million. Our treasury stock is held on a first in, first out cost basis. The
repurchased shares are used to issue shares for stock option exercises,
employee stock purchase plans and potential acquisitions.
H. Shareholder Rights Plan
In November 2000, our Board of Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one share purchase right (a "Right") for
each outstanding share of our common stock to stockholders of record at the
close of business on January 5, 2001. Each share of common stock newly issued
after that date also will carry with it one Right. Each Right will entitle the
record holder to purchase from us one one-thousandth of a share of our Series A
Junior Participating Preferred Stock at an exercise price of $60.00 per unit
subject to adjustment. The Rights become exercisable ten (10) days after the
earlier of our announcement that a person has acquired 15% or more of our
outstanding common stock or an announcement of a tender offer
F-16
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which would result in a person or group acquiring 15% or more of our common
stock; in either case, the Board of Directors can extend the 10 day period. If
we have not redeemed or exchanged the Rights and a person becomes the
beneficial owner of 15% or more of our common stock (a "Triggering Event"),
each holder of a Right will have the right to purchase shares of our common
stock having a value equal to two times the exercise price of the Right. If, at
any time following the Triggering Event, we are acquired in a merger or other
business combination transaction in which we are not the surviving corporation
or more than 50% of its assets or earning power is sold to a person or group,
each holder of a Right shall have the right to purchase shares of common stock
of the acquiring person, group or company having a value equal to two times the
exercise price of the Right. The Rights expire on January 5, 2011, and may be
redeemed by us for $.001 per Right.
I. Stock Plans
Employee Stock Purchase Plans
We offer an employee stock purchase plan for all eligible employees. Under the
current plan, which qualifies as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code, shares of our common stock can be
purchased at 85% of the lower of the fair market value of the stock on the
first or the last day of each six-month offering period. Employee purchases in
any year are limited to the lesser of $25,000 worth of stock, determined by the
fair market value of the common stock at the time the offering begins, or 15%
of his or her base pay. The shareholders have approved that 10.0 million shares
of common stock be reserved for issuance under the plan. During fiscal 1999,
2000 and 2001, employees purchased 1.0 million, 757,000 and 1.2 million shares
at average prices of $9.20, $11.67 and $8.30, respectively.
Stock Option Plans
We have stock option plans for employees, directors, officers and consultants
that provide for issuance of nonqualified and incentive stock options. The
option exercise price is typically the fair market value at the date of grant.
These options generally vest over four years and expire ten years from the date
of grant. As of September 30, 2001, 11.7 million shares were available for
grant and 66.2 million shares granted and outstanding were reserved under stock
option plans.
September 30,
---------------------------------------------------
1999 2000 2001
---------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
(shares in thousands)
Outstanding:
Beginning balance... 48,888 $15.03 55,435 $14.52 60,619 $14.30
Granted and assumed. 17,169 13.28 21,413 13.41 15,173 8.75
Cancelled........... (8,564) 16.75 (10,429) 15.08 (8,047) 14.34
Exercised........... (2,058) 7.03 (5,800) 12.22 (1,576) 9.19
------ ------ ------- ------ ------ ------
Ending Balance...... 55,435 $14.52 60,619 $14.30 66,169 $13.16
====== ====== ======= ====== ====== ======
Exercisable............ 19,687 $14.50 23,110 $15.30 32,701 $14.89
Certain employees have disposed of stock acquired through the employee stock
purchase plan and the exercise of incentive stock options earlier than the
mandatory holding period required for certain tax treatment. These
dispositions, together with the tax benefits realized from the exercise of
nonqualified stock options, create tax benefits that have been recorded as
increases to additional paid-in capital.
F-17
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For various price ranges, information for options outstanding and exercisable
at September 30, 2001 was as follows:
Outstanding Options Exercisable Options
---------------------------------------- -----------------------
Weighted Average
Remaining Life Weighted Average Weighted Average
Shares (years) Exercise Price Shares Exercise Price
------ ---------------- ---------------- ------ ----------------
(shares in thousands)
$ 0.09- 8.06 11,327 8.93 $ 5.71 1,743 $ 6.28
8.07- 9.94 10,604 7.81 9.48 5,749 9.52
9.95-12.44 9,365 7.66 11.62 3,451 11.32
12.45-13.63 11,941 7.22 13.51 7,538 13.60
13.64-15.69 10,689 7.27 15.30 5,480 15.19
15.70-24.00 10,524 6.37 21.21 7,468 21.46
24.01-72.55 1,719 6.21 28.19 1,272 28.40
------ ---- ------ ------ ------
$ 0.09-72.55 66,169 7.52 $13.16 32,701 $14.89
====== ==== ====== ====== ======
Valuation of Stock Plans
We have not recognized compensation expense in connection with stock option
grants to employees, directors and officers under our plans. We have recognized
compensation expense of $927,000 in 1999, $652,000 in 2000 and $236,000 in 2001
in connection with stock option grants to consultants as prescribed by APB No.
25 and FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25. However,
had compensation expense for stock option and employee stock purchase plans
been determined based on fair value at the grant dates as prescribed by SFAS
No. 123, pro forma net income (loss) and earnings (loss) per share would have
been:
September 30,
--------------------------
1999 2000 2001
------- -------- --------
(in thousands, except per
share amounts)
Pro forma net income (loss)......... $32,848 $(89,566) $(94,718)
Pro forma earnings (loss) per share:
Basic............................ $ 0.12 $ (0.33) $ (0.36)
Diluted.......................... $ 0.12 $ (0.33) $ (0.36)
The pro forma disclosures above include the amortization of the fair value of
all options vested between 1996 and 2001, regardless of the grant date. The
effects on pro forma disclosures of applying SFAS No. 123 are not necessarily
representative of the effects on pro forma disclosures of future years.
F-18
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted has been estimated at the date of grant using
the Black-Scholes option-pricing model assuming the following weighted-average
assumptions:
September 30,
-------------
1999 2000 2001
---- ---- ----
Expected life (years)... 6.0 6.0 6.0
Risk-free interest rates 5.0% 6.2% 5.0%
Volatility.............. 50% 50% 75%
Dividend yield.......... -- -- --
The weighted average fair value of employee stock options granted was $7.96 in
1999, $7.46 in 2000 and $5.86 in 2001. The expected life used for stock
purchase plans was six months. The weighted average fair value of shares
granted under the stock purchase plan was $3.80 in 1999, $4.10 in 2000 and
$4.56 in 2001.
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable measure of the fair value of our
options.
J. Employee Benefit Plan
We offer a savings plan (PTC plan) to eligible employees. The plan is intended
to qualify under Section 401(k) of the Internal Revenue Code. Participating
employees may defer up to 15% of their pre-tax compensation, as defined, but
not more than statutory limits. We contribute 50% of the amount contributed by
the employee, up to a maximum of 10% of the employee's earnings. Our matching
contributions vest at a rate of 25% per year of service. We made matching
contributions of $4.7 million, $5.1 million and $5.5 million in 1999, 2000 and
2001, respectively.
K. Pension Plans
We maintain a defined benefit pension plan covering certain employees of
Computervision. Benefits are based upon length of service and average
compensation and generally vest after five years of service. Accrued pension
costs have been included in other liabilities.
U.S. Pension Plan
Effective April 1, 1990, the benefits under the U.S. pension plan were frozen
indefinitely. We contribute all amounts deemed necessary on an actuarial basis
to satisfy Internal Revenue Service funding requirements. Based upon the
actuarial valuations, we contributed $13.7 million in 1999, $0 in 2000 and $1.4
million in 2001. The minimum pension liability increased $13.2 million in 2001
due primarily to a change in the discount rate actuarial assumption to 7.0%
from 7.5% and the underperformance of plan assets during 2001. Plan assets
consist primarily of indexed funds.
Foreign Pension Plans
The accrued international pension cost was actuarially computed using
assumptions applicable to each subsidiary plan and economic environment. We
adjusted our minimum pension liability related to our foreign plans due to the
changes in actuarial assumptions and performance of plan investments, as shown
below. Plan assets consist of investments in equities and guaranteed investment
contracts with several insurance companies and banks.
F-19
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the actuarial assumptions used in accounting for
the pension plans:
U.S. Plan Foreign Plans
-------------- -----------------------------
1999 2000 2001 1999 2000 2001
---- ---- ---- ----------- ----------- -----
Discount rate.......................... 7.5% 7.5% 7.0% 6.3 to 6.5% 6.3 to 6.5% 6.0%
Rate of increase in future compensation -- -- -- 3.5 to 5.0% 3.5 to 5.0% 3.25%
Rate of return on plan assets.......... 7.5% 7.5% 7.5% 6.3 to 7.0% 5.3 to 7.0% 5.0%
The actuarially computed components of net periodic pension cost are show below:
U.S. Plan Foreign Plans
------------------------- -------------------------
1999 2000 2001 1999 2000 2001
------- ------- ------- ------- ------- -------
(in thousands)
Service costs of benefits earned during the period $ -- $ -- $ -- $ 6 $ -- $ --
Interest cost of projected benefit obligation..... 3,224 3,663 3,778 2,853 2,542 1,907
Expected return on plan assets.................... (2,568) (3,389) (3,487) (2,698) (2,192) (1,318)
Amortization of prior service cost................ -- -- -- 17 17 15
Recognized actuarial loss......................... 1,191 950 897 381 165 36
------- ------- ------- ------- ------- -------
Net periodic pension cost......................... $ 1,847 $ 1,224 $ 1,188 $ 559 $ 532 $ 640
======= ======= ======= ======= ======= =======
The following tables display the change in benefit obligation, plan assets and
funded status:
U.S. Plan Foreign Plans
----------------- ----------------
2000 2001 2000 2001
------- -------- ------- -------
(in thousands)
Beginning benefit obligation....... $49,043 $ 51,716 $42,480 $30,785
Service cost....................... -- -- -- --
Interest cost...................... 3,663 3,778 2,542 1,907
Actuarial loss (gain).............. 358 3,596 (1,681) 1,854
Foreign exchange impact............ -- -- (4,552) 385
Benefits paid...................... (1,348) (1,424) (8,004) (2,205)
------- -------- ------- -------
Ending benefit obligation.......... $51,716 $ 57,666 $30,785 $32,726
======= ======== ======= =======
Beginning plan assets at fair value $45,751 $ 46,686 $36,607 $25,478
Actual return on plan assets....... 2,283 (7,044) 320 59
Employer contributions............. -- 1,441 5 --
Foreign exchange impact............ -- -- (3,573) 94
Benefits paid...................... (1,348) (1,424) (7,881) (2,087)
------- -------- ------- -------
Ending plan assets at fair value... 46,686 39,659 25,478 23,544
Benefit obligation at end of year.. 51,716 57,666 30,785 32,726
------- -------- ------- -------
Funded status...................... (5,030) (18,007) (5,307) (9,182)
Unrecognized actuarial loss........ 18,394 31,625 1,952 5,045
Unrecognized prior service cost.... -- -- 272 258
------- -------- ------- -------
Net prepaid (accrued) benefit cost. $13,364 $ 13,618 $(3,083) $(3,879)
======= ======== ======= =======
F-20
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the amounts recognized in the balance sheet:
U.S. Plan Foreign Plans
----------------- -----------------
2000 2001 2000 2001
------- -------- ------- --------
(in thousands)
Accrued benefit liability............. $(5,030) $(18,007) $(7,036) $(10,768)
Intangible asset...................... -- -- 272 258
Accumulated other comprehensive income 18,394 31,625 3,681 6,631
------- -------- ------- --------
Net amount recognized................. $13,364 $ 13,618 $(3,083) $ (3,879)
======= ======== ======= ========
L. Segment Information
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 solutions (Design
solutions), including our flagship Pro/ENGINEER(R) design software, which
provides engineering solutions to our customers and (2) our Windchill(R)
software, which provides collaborative information management solutions to our
customers using Internet technologies.
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 2001, our financial reporting focuses on the revenue and operating
income (loss) for our design solutions and Windchill-based 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:
September 30,
--------------------------------
1999 2000 2001
---------- --------- ---------
Revenue:
Design solutions:
License revenue......................... $ 504,696 $ 285,475 $ 285,709
Service revenue......................... 471,561 468,210 435,023
---------- --------- ---------
Total Design solutions revenue.......... 976,257 753,685 720,732
Windchill-based solutions:
License revenue......................... 56,524 93,142 96,173
Service revenue......................... 24,820 81,587 117,701
---------- --------- ---------
Total Windchill-based solutions revenue. 81,344 174,729 213,874
---------- --------- ---------
Total revenue........................... $1,057,601 $ 928,414 $ 934,606
========== ========= =========
Operating income (loss): (1)
Design solutions........................ $ 706,166 $ 470,619 $ 451,453
Windchill-based solutions............... (51,588) 6,565 (707)
Distribution expenses (2)............... (412,934) (416,121) (381,566)
---------- --------- ---------
Product segment operating income (3)....... 241,644 61,063 69,180
Unallocated expenses (4)................... (62,852) (69,290) (72,182)
---------- --------- ---------
Total operating income (loss).............. $ 178,792 $ (8,227) $ (3,002)
========== ========= =========
F-21
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--------
(1) For 1999, 2000 and 2001, Windchill-based solutions operating loss includes
$38.2 million, $4.9 million and $10.8 million, respectively, of acquisition
and nonrecurring charges. For 1999, 2000 and 2001, design solutions
operating income includes $4.7 million, $5.1 million and $15.6 million,
respectively, of acquisition and nonrecurring charges.
(2) Distribution expenses represent certain sales and marketing expenses
incurred in support of the product segments.
(3) The product segment operating income reflects only the direct controllable
expenses of each product segment. The product segment operating income
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.
(4) Unallocated expenses represent certain corporate and general administrative
expenses incurred in support of the product segments.
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:
September 30,
----------------------------
1999 2000 2001
---------- -------- --------
Revenue:
North America................... $ 464,445 $378,564 $408,422
Europe.......................... 389,969 341,859 308,452
Asia/Pacific.................... 203,187 207,991 217,732
---------- -------- --------
Total revenue............... $1,057,601 $928,414 $934,606
========== ======== ========
Long-lived assets:
North America................... $ 165,212 $155,236 $162,013
Europe.......................... 66,826 51,955 38,498
Asia/Pacific.................... 23,503 22,527 18,013
---------- -------- --------
Total long-lived assets..... $ 255,541 $229,718 $218,524
========== ======== ========
We license products to customers worldwide. Our sales and marketing operations
outside the United States are conducted principally through our foreign sales
subsidiaries throughout Europe and the Asia/Pacific region. Intercompany sales
and transfers between geographic areas are accounted for at prices that are
designed to be representative of unaffiliated party transactions. Total exports
were $166.2 million, $81.5 million and $61.7 million in 1999, 2000 and 2001,
respectively.
F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Parametric Technology Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows, stockholders' equity, and
comprehensive income present fairly, in all material respects, the financial
position of Parametric Technology Corporation and its subsidiaries at September
30, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 15, 2001
F-23
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
September 30,
---------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- -------- --------
(in thousands, except per share data)
Revenue.................................... $1,062,018 $1,017,970 $1,057,601 $928,414 $934,606
Operating income (loss).................... 229,335 208,020 178,792 (8,227) (3,002)
Net income (loss).......................... 87,660 86,697 119,293 (3,980) (8,214)
Earnings (loss) per share:(2)
Basic................................... 0.33 0.32 0.44 (0.01) (0.03)
Diluted................................. 0.32 0.31 0.43 (0.01) (0.03)
Total assets............................... 919,129 801,060 1,016,620 924,883 797,838
Working capital............................ 311,299 174,239 247,921 266,081 156,052
Long term liabilities, less current portion 263,949 46,014 38,333 33,989 38,500
Stockholders' equity....................... 204,551 335,504 521,104 528,542 399,702
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
January 1, April 1, July 1, September 30,
2000 2000 2000 2000
------------ --------- -------- -------------
(in thousands, except per share data)
Revenue................... $239,037 $227,105 $227,254 $235,018
Operating income (loss)... 13,976 (8,401) (22,112) 8,310
Net income (loss)......... 10,381 (5,846) (15,427) 6,912
Earnings (loss) per share:
Basic.................. 0.04 (0.02) (0.06) 0.03
Diluted................ 0.04 (0.02) (0.06) 0.03
Common stock prices: (3)
High................... $ 32.88 $ 31.94 $ 11.63 $ 13.81
Low.................... 13.94 19.06 8.00 9.94
December 30, March 31, June 30, September 30,
2000 2001 2001 2001
------------ --------- -------- -------------
(in thousands, except per share data)
Revenue................... $234,944 $245,130 $229,093 $225,439
Operating income (loss)... 16,001 17,400 (4,230) (32,173)
Net income (loss)......... 12,254 7,121 (2,685) (24,904)
Earnings (loss) per share:
Basic.................. 0.05 0.03 (0.01) (0.10)
Diluted................ 0.05 0.03 (0.01) (0.10)
Common stock prices: (3)
High................... $ 14.50 $ 16.63 $ 13.99 $ 12.65
Low.................... 9.22 8.97 8.09 4.60
--------
(1) In January 1998, we completed a merger with Computervision Corporation that
has been accounted for as a pooling of interests. Accordingly, we have
restated all financial information to reflect the merger.
(2) Per share data has been retroactively adjusted to reflect the one-for-one
stock dividends in 1998.
(3) Our common stock is traded on the Nasdaq National Market under the symbol
"PMTC". The common stock prices are based on the Nasdaq Stock Market daily
closing stock price.
F-24