-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MqT/7914KRnPtKwUVdsOk34xN73Hz0orDkmktieTYYOh1f6Oo04IFdDfF2/qmPrs GQAWwvxCtDNmvrBg61IsOA== 0000927016-97-003474.txt : 19971230 0000927016-97-003474.hdr.sgml : 19971230 ACCESSION NUMBER: 0000927016-97-003474 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAMETRIC TECHNOLOGY CORP CENTRAL INDEX KEY: 0000857005 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042866152 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18059 FILM NUMBER: 97745259 BUSINESS ADDRESS: STREET 1: 128 TECHNOLOGY DR CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6173985000 MAIL ADDRESS: STREET 1: 128 TECHNOLOGY CORP CITY: WALTHAM STATE: MA ZIP: 02154 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended: September 30, 1997 ------------------ Commission File Number: 0-18059 ------- PARAMETRIC TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2866152 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 128 Technology Drive, Waltham, MA 02154 --------------------------------------- (Address of principal executive offices, including zip code) (781) 398-5000 --------------------------------------- (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) Indicate by check mark whether the registrant has (i) 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 the voting stock held by nonaffiliates of the registrant as of October 31, 1997 was $4,478,147,410. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value per share 127,936,236 -------------------------------------- ---------------------- Class Outstanding at October 31, 1997 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended September 30, 1997 ("1997 Annual Report to Stockholders") are incorporated by reference into Parts I and II. Portions of the definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held February 12, 1998 ("1998 Proxy Statement") are incorporated by reference into Part III. Important Factors Regarding Future Results Information provided by the Company, including information contained in this Annual Report on Form 10-K, or by its spokespersons from time to time may contain forward-looking statements concerning projected financial performance, market and industry segment growth, product development and commercialization, or other aspects of future operations. Such statements are based on the assumptions and expectations of management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to those discussed herein, may cause the Company's future results to differ materially from those projected in any forward-looking statement. Important information about such factors and the basis for those assumptions is contained in "Proposed Acquisition" and "Important Factors Regarding Future Results" included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the 1997 Annual Report to Stockholders, which section is incorporated herein by reference, and in the "Risk Factors" section of the Company's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 12, 1997. PART I ITEM 1: Business General Parametric Technology Corporation (the "Company") develops, markets and supports Pro/ENGINEER(R) Solutions, a family of software products that automate the complete product development process within the mechanical computer-aided design, manufacturing and engineering ("CAD/CAM/CAE") industry. The Company's Pro/ENGINEER product line includes industrial design; mechanical design; functional simulation; production applications; information technology applications and implementation solutions. The Company focuses its marketing and sales efforts primarily on the electronic, aerospace, automotive, consumer products, medical equipment, industrial equipment, heavy equipment and telecommunications industries. Mechanical CAD/CAM/CAE is a complex process which 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. The Company's mechanical CAD/CAM/CAE products offer a high-performance, fully integrated solution which enables end-users to reduce the time to market and manufacturing costs for their products and to improve product quality by easily evaluating multiple design alternatives. The Company believes that its Pro/ENGINEER product line offers better price/performance, greater ease of use and more complete integration of multiple engineering disciplines than other available mechanical CAD/CAM/CAE products. The Company's Pro/ENGINEER product line is based on an innovative software architecture that incorporates a unique parametric, feature-based solid modeling technology. The Company's Pro/ENGINEER software uses a single data structure to capture changes made in any stage of the product development process and to automatically update designs and all engineering deliverables. The single data structure allows all changes to be propagated automatically throughout the product development process, enabling users to integrate multiple engineering activities in the mechanical design process and conduct them on a concurrent basis. In addition, as a result of the data structure of the Company's products, engineers can create, process, modify and store designs quickly and easily, in a highly efficient manner. The Pro/ENGINEER product line runs on all major UNIX(R) and Microsoft(R) Windows NT(TM) and Windows(R) 95 Operating System platforms, and is hardware-independent. The product is written in "C" programming language, which allows for portability from one standard workstation to another. 2 Proposed Acquisition On November 4, 1997, the Company announced that it had entered into an agreement to acquire Computervision Corporation ("Computervision") in a stock-for-stock transaction. Based on the November 3, 1997 closing price of the Company's common stock, the aggregate equity value of the transaction is approximately $260,000,000. The Company will also assume approximately $240,000,000 in debt from Computervision, and expects to use cash and short-term investment balances to repay a substantial portion of such debt. Under the terms of the proposed transaction, each share of Computervision common stock will be exchanged for .0866 shares of the Company's common stock. The transaction is intended to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. Upon closing, Computervision will become a wholly owned subsidiary of the Company. The transaction is subject to approval of Computervision's shareholders at a meeting called for January 12, 1998 and is expected to close promptly after such approval. The Company expects to recognize a non-recurring charge of approximately $75,000,000 to $95,000,000 related to certain merger-related, debt prepayment, consolidation and integration expenses during the quarter in which the transaction closes. The Company expects that the acquisition of Computervision will expand its business presence and make it more competitive in the high-end of the computer-aided design market in the automotive and aerospace industries. Computervision's products are also expected to broaden the Company's data management product offerings and permit it to offer enterprise-wide data management products that address the requirements of larger customers. Except where explicitly noted, the discussion in this Report does not give effect to the acquisition of Computervision. Product Development The mechanical CAD/CAM/CAE industry is characterized by rapid technological advances. The Company's ability to develop new products rapidly is facilitated by the modular structure of its software code, which enables functional subroutines used in existing products to be accessed and 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. There can be no assurance, however, that the Company will be successful in developing and marketing product enhancements or new products and modules that respond to technological changes by others, or that its new products will adequately address the needs of the marketplace. The Company works closely with its customers to define improvements and enhancements, which are then integrated into the products. Using this approach, customers become involved in the product design process to validate feasibility and to influence functionality early in the product's life-cycle. In addition, the Company's Cooperative Software Program ("CSP") provides the mechanisms and environment to facilitate the integration of complementary products with the Pro/ENGINEER product line. Through the Company's open software toolkit, the CSP members can build tightly integrated solutions that satisfy various requirements of the Company's customers. During the years ended September 30, 1997, 1996 and 1995, the Company incurred expenses of $53,236,000, $39,476,000 and $25,591,000, respectively, on research and development. Sales The Company derives most of its revenue from products distributed directly to its customers and the remainder through third-party distributors. The Company's sales force manages the activities of all distribution channels within a geographic area. As of September 30, 1997, the Company's sales and marketing organization consisted of 800 employees in the United States and 1,293 employees abroad. The Company has sales and/or support offices throughout the United States and in 34 foreign countries. Since inception, the Company has licensed software products for nearly 101,500 seats to more than 15,000 companies. A seat of software generally consists of the Company's core product, Pro/ENGINEER, together with several other software 3 modules, configured to serve the needs of a single end-user. End-users of the Company's products range from small companies to some of the world's largest manufacturing organizations. No single customer accounted for more than 10% of the Company's revenue in fiscal 1997 or prior years. Information with respect to foreign and domestic operations and export sales, 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" of the 1997 Annual Report to Stockholders, which financial statements and section are included in Exhibit 13.1 to this Annual Report on Form 10-K and incorporated herein by reference. Competition The Company competes most directly with the CADAM(R) and CATIA(R) products developed by Dassault and marketed by IBM(R), the UNIGRAPHICS(R) product marketed by EDS, the I/EMS(TM) product marketed by Intergraph Corporation and the I-DEAS Master Series(TM) product marketed by Structural Dynamics Research Corporation. The Company believes that the principal bases for competition in its markets are product functionality, price/performance characteristics, product portability, ease of product use, sales and marketing strength, support services and corporate reputation. The Company is aware of ongoing efforts by competitors, some of whom have greater resources than the Company, to develop technically equivalent or superior technology and market these products at lower prices. Should a competitor successfully bring such a product to market and be able to sell it at a lower price in the future, the Company's operating results could be materially adversely affected. The Company's future success will depend in a large part on its ability to license and sell additional products and services to its existing customer base as well as the installed customer bases of traditional mechanical CAD/CAM/CAE suppliers. Proprietary Rights The Company regards its software products as proprietary and attempts to protect its intellectual property rights by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability in its agreements with other parties. The Company typically distributes its products under software license agreements, which grant customers perpetual licenses to, rather than ownership of, the Company's products and which contain provisions protecting the Company's ownership of and the confidentiality of the underlying technology. The Company also limits access to and distribution of its software, documentation and other proprietary information. The source code of the Company's products is protected as a trade secret and as an unpublished copyright work. Despite these precautions, it may be possible to copy or otherwise obtain and use the Company's products or technology without authorization. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The Company believes that, due to the rapid pace of innovation within its industry, factors such as the technological and creative skills of its personnel are more important to establishing and maintaining a technology leadership position within the industry than are the various legal protections surrounding its technology. The Company believes that its products and technology 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. Parametric Technology Corporation, Pro/ENGINEER, and Pro/MECHANICA are registered trademarks of the Company in the United States and other countries. Parametric Technology, PTC, the PTC logo and all product names in the PTC product family are trademarks of the Company in the United States and other countries. Backlog The Company generally ships its products within 30 days after acceptance of a customer purchase order and execution of a software license agreement. Accordingly, the Company does not believe that its backlog at any particular point in time is indicative of future sales levels. Employees As of September 30, 1997, the Company had 3,432 employees, including 2,093 in sales, marketing and support activities; 567 in customer support, training and consulting; 310 in management, finance and administration; and 462 in product development. Of these employees, 1,707 were located throughout the United States and 1,725 were located in foreign countries. 4 ITEM 2: Properties The Company's executive offices are located in approximately 307,000 square feet of office space in Waltham, Massachusetts. The Company also leases 216 additional sales and/or support offices and development offices throughout the United States and, through its wholly owned subsidiaries, abroad. The Company believes that its facilities are adequate for its present needs, but will continue to evaluate the need for additional space, as the growth of the business requires. ITEM 3: Legal Proceedings None. 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 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers are:
Name Age Position ---- --- --------- Steven C. Walske 45 Chairman of the Board of Directors and Chief Executive Officer C. Richard Harrison 42 President and Chief Operating Officer Edwin J. Gillis 48 Executive Vice President of Finance and Administration, Chief Financial Officer and Treasurer John D. McMahon 42 Executive Vice President of Worldwide Sales Martha L. Durcan 38 Vice President, Corporate Counsel and Clerk James F. Kelliher 38 Senior Vice President of Finance John G. Mokas 38 Director of Treasury and Finance and Assistant Treasurer
Mr. Walske has been Chairman of the Board of Directors since August 1994 and Chief Executive Officer and a director of the Company since he joined the Company in December 1986. Mr. Walske was President of the Company from December 1986 to August 1994 and Clerk of the Company from December 1986 to February 1993. Mr. Harrison has been President and Chief Operating Officer since August 1994. Prior to that, Mr. Harrison served as Senior Vice President of Sales and Distribution from September 1991 until August 1994 and as Vice President of Sales and Distribution from May 1987 to September 1991. Mr. Gillis has been Executive Vice President of Finance and Administration since October 1996 and Chief Financial Officer and Treasurer since October 1995. Mr. Gillis served as Senior Vice President of Finance and Administration from October 1995 to September 1996. Prior to joining the Company, Mr. Gillis was Senior Vice President of Finance and Operations and Chief Financial Officer at Lotus Development Corporation from August 1991 until September 1995. Mr. McMahon has been Executive Vice President of Worldwide Sales since April 1997. Prior to that, Mr. McMahon served as Senior Vice President of European Sales from October 1996 to March 1997, Vice President of North American Operations from October 1994 to September 1996, Vice President of Western Operations from November 1993 to September 1994, and Vice President International Operations from October 1991 to October 1993. Ms. Durcan has served as Vice President since October 1993, Corporate Counsel since joining the Company in March 1992 and as Clerk since February 1993. Mr. Kelliher has been Senior Vice President of Finance since June 1997. Prior to that, Mr. Kelliher had served as Vice President of Finance from December 1994 until June 1997, Director of Corporate Finance from November 1994 to December 1994, Chief Financial Officer of Europe from May 1993 to November 1994, Manager of Finance and Assistant International Controller from February 1992 to May 1993, and Manager of Budget and Analysis from October 1991 to February 1992. 5 Mr. Mokas has been Director of Treasury and Finance and Assistant Treasurer since February 1997. Prior to that, Mr. Mokas served as Controller from August 1993 until February 1997. Prior to joining the Company, Mr. Mokas was a manager at Coopers & Lybrand L.L.P. from May 1988 to July 1993. 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 sections captioned "Quarterly Financial Information" and "Supplemental Financial Information" appearing in the 1997 Annual Report to Stockholders. Such information is incorporated herein by reference. 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" appearing in the 1997 Annual Report to Stockholders. Such information is incorporated herein by reference. ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in the 1997 Annual Report to Stockholders. Such information is incorporated herein by reference. ITEM 8: Financial Statements and Supplementary Data Information with respect to this item may be found on pages 31 through 45 and in the section entitled "Quarterly Financial Information" appearing in the 1997 Annual Report to Stockholders. Such information is incorporated herein by reference. ITEM 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On November 17, 1995, the Board of Directors of the Company, upon recommendation of its Audit Committee, approved a change in the Company's independent accountants from Price Waterhouse LLP to Coopers & Lybrand L.L.P. effective for the fiscal year ended September 30, 1996. Price Waterhouse LLP served as the Company's independent accountants for fiscal years 1992 through 1995. During these periods, the Company did not have any disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, nor did any reports issued by Price Waterhouse LLP contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. PART III ITEM 10: Directors and Executive Officers of the Registrant Information with respect to directors of the Company may be found in the sections captioned "Election of Directors" appearing in the 1998 Proxy Statement. Such information is incorporated herein by reference. Information with respect to Executive Officers of the Company may be found under the section captioned "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11: Executive Compensation Information with respect to this item may be found in the sections captioned "Director Compensation" and "Compensation of Executive Officers" appearing in the 1998 Proxy Statement. Such information is incorporated herein by reference. 6 ITEM 12: Security Ownership of Certain Beneficial Owners and Management Information with respect to this item may be found in the section captioned "Principal Stockholders" appearing in the 1998 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 headings "Certain Business Relationships" and "Compensation Committee Interlocks and Insider Trading" in the section captioned "Compensation of Executive Officers" appearing in the 1998 Proxy Statement. Such information is incorporated herein by reference. 7 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 Sheet as of September 30, 1997 and 1996* -Consolidated Statement of Income for the years ended September 30, 1997, 1996 and 1995* -Consolidated Statement of Stockholders' Equity for the years ended September 30, 1997, 1996 and 1995* -Consolidated Statement of Cash Flows for the years ended September 30, 1997, 1996 and 1995* -Notes to Consolidated Financial Statements* -Reports of Independent Accountants for the years ended September 30, 1997*, 1996* and 1995 2. Financial Statement Schedules -Reports of Independent Accountants for the years ended September 30, 1997, 1996 and 1995 -Schedule II - Valuation and Qualifying Accounts -Schedules other than the one listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. 3. Listing of Exhibits The Exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, and are incorporated herein by reference. (b) Reports on Form 8-K None. (c) Exhibits The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the attached Exhibit Index. (d) Financial Statement Schedules The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 14(a)2 as set forth above. - ---------- * Referenced information is contained in the 1997 Annual Report to Stockholders, filed as Exhibit 13.1 hereto. 8 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 24th day of December, 1997. PARAMETRIC TECHNOLOGY CORPORATION By /S/ Steven C. Walske ---------------------------- Steven C. Walske, Chairman and Chief Executive Officer POWER OF ATTORNEY ----------------- We, the undersigned officers and directors of Parametric Technology Corporation, hereby severally constitute Edwin J. Gillis and Martha L. Durcan, 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 on the 24th day of December, 1997.
Signature Title - --------- ----- /S/ Steven C. Walske Chief Executive Officer and Chairman of the Board - --------------------------- (Principal Executive Officer) Steven C. Walske /S/ C. Richard Harrison President, Chief Operating Officer and Director - --------------------------- C. Richard Harrison /S/ Edwin J. Gillis Executive Vice President of Finance and Administration, - --------------------------- Chief Financial Officer and Treasurer Edwin J. Gillis (Principal Financial Officer and Principal Accounting Officer) /S/ Robert N. Goldman Director - --------------------------- Robert N. Goldman /S/ Donald K. Grierson Director - --------------------------- Donald K. Grierson /S/ Oscar B. Marx, III Director - --------------------------- Oscar B. Marx, III Director - --------------------------- Michael E. Porter /S/ Noel G. Posternak Director - --------------------------- Noel G. Posternak
9 EXHIBIT INDEX ------------- Exhibit Number - ------- 2.1 - Agreement and Plan of Reorganization dated as of November 3, 1997 by and among the Company, PTC Acquisition Corporation, and Computervision Corporation (filed as Exhibit 2.1 to the Current Report on Form 8-K dated November 4, 1997 and incorporated herein by reference). 3.1(a) - Restated Articles of Organization of the Company (filed as Exhibit 3.1 to the 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 (filed as Exhibit 4.1(b) to the Company's Registration Statement on Form S-8 (File No. 333-22169) and incorporated herein by reference). 3.2 - By-Laws, as amended and restated, of the Company (filed as Exhibit 3.2 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.1* - 1997 Incentive Stock Option Plan of the Company (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.2* - 1987 Incentive Stock Option Plan of the Company, as amended (filed as Exhibit 10.2 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.3 - Lease dated May 22, 1987 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-31620) and incorporated herein by reference). 10.4* - Employment Letter with Steven C. Walske dated October 17, 1986 (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 33-31620) and incorporated herein by reference). 10.5* - Amended and Restated Severance Agreement with Steven C. Walske dated February 13, 1997 (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.6 - Lease Amendment dated November 8, 1989 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.7 - Lease Amendment dated January 21, 1991 by and between the Company and the Trustees of 128 Technology Trust; filed herewith. 10.8* - Parametric Technology Corporation 1992 Director Stock Option Plan, as amended (filed as Exhibit 10.10 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.9 - Lease Amendment dated March 6, 1992 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference). - ---------- *Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. 10 10.10 - Lease Amendment dated November 18, 1992 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference). 10.11 - Lease Amendment dated June 8, 1993 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1993 and incorporated herein by reference). 10.12* - Severance Agreement with Michael E. McGuinness dated May 15, 1997 (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated herein by reference). 10.13* - Amended and Restated Severance Agreement with C. Richard Harrison dated February 13, 1997 (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.14 - Lease Amendment dated April 14, 1994 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.22 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1994 and incorporated herein by reference). 10.15 - Lease Amendment dated January 19, 1995 by and between the Company and the Trustees of 128 Technology Trust (filed as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference). 10.16* - Amended and Restated Severance Agreement with Edwin J. Gillis dated February 13, 1997 (filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 and incorporated herein by reference). 10.17* - Parametric Technology Corporation 1996 Directors Stock Option Plan, as amended (filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference). 10.18* - Severance agreement with John D. McMahon dated May 15, 1997 (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated herein by reference). 10.19* - Consulting Agreement with Michael E. Porter dated November 17, 1995, and Amendment #1 thereto dated May 15, 1997 (filed as Exhibits 10.3 and 10.4, respectively, to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 and incorporated herein by reference). 10.20* - Employment Agreement with Michael E. McGuinness dated November 17, 1997; filed herewith. 13.1 - Annual Report to Stockholders for the fiscal year ended September 30, 1997 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K); filed herewith. 16.1 - Letter from Price Waterhouse LLP (filed as Exhibit 16.1 to the Current Report on Form 8-K dated November 17, 1995 and incorporated herein by reference). 21.1 - Subsidiaries of the Company; filed herewith. 23.1 - Report of Coopers & Lybrand L.L.P.; filed herewith. 23.2 - Consent of Coopers & Lybrand L.L.P.; filed herewith. - ---------- * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. 11 23.3 - Report of Price Waterhouse LLP; filed herewith. 23.4 - Report of Price Waterhouse LLP on Financial Statement Schedules; filed herewith. 23.5 - Consent of Price Waterhouse LLP; filed herewith. - ---------- * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. 12 SCHEDULE II PARAMETRIC TECHNOLOGY CORPORATION Valuation and Qualifying Accounts
(in thousands) - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - --------------------------------------------------------------------------------------------------------------------------------- Additions ----------------------------- Balance Charged to Balance at beginning costs and Charged to at end Description of period expenses other accounts Deductions (1) of period - --------------------------------------------------------------------------------------------------------------------------------- Year Ended September 30, 1997 Allowance for Doubtful Accounts. . . . . . $2,910 1,224 - (1,385) $2,749 Year Ended September 30, 1996 Allowance for Doubtful Accounts. . . . . . $2,733 1,404 - (1,227) $2,910 Year Ended September 30, 1995 Allowance for Doubtful Accounts. . . . . . $2,694 1,110 - (1,071) $2,733
- ---------------------------------------------- (1) Uncollectible accounts written off, net of recoveries. 13 EX-10.7 2 LEASE AMENDMENT 1/21/1991 Exhibit 10.7 January 21, 1991 128 TECHNOLOGY CENTER OFFICE LEASE PARAMETRIC TECHNOLOGY CORPORATION AMENDMENT NO. 4 --------------- Reference is made to the Lease dated June 1, 1987 and subsequently amended March 10, 1988, November 9, 1988 and November 8, 1989 collectively (the "Lease") by and between DOMINIC J. SARACENO, KURT W. SARACENO, and EDWARD R. WERNER, trustees of the 128 Technology Trust under a Declaration of Trust dated October 12, 1983, recorded in Middlesex County Registry of Deeds Southern District Book 15268 Page 65 (hereinafter "Lessor", which expression shall include its heirs, executors, successors and assigns where the context so admits), and Parametric Technology Corporation, a Massachusetts corporation having principal place of business at 128 Technology Drive Waltham, Massachusetts 02154 (hereinafter "Lessee", which expression shall include its successors and assigns or executors and administrators where the context so admits). Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. For a good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as follows: 1. ARTICLE I, REFERENCE DATA, is hereby amended as follows: -------------- . NEW RENTABLE 10,511 additional rentable square feet as AREA ("AREA IV") shown on Exhibit A attached hereto. . TOTAL RENTABLE AREA: 50,624 rentable square feet . BASE RENT FOR TOTAL RENTABLE $20.25/square foot (including tax and operating AREA: expense base). . TAX AND OPERATING $8.05/square foot on the total rentable EXPENSE BASE: area . RENT COMMENCEMENT: February 1, 1991 . TERMINATION FOR TOTAL RENTABLE AREA: December 31, 1993 . RENT SCHEDULE: $1,025,136.00 YEAR $ 85,428.00 MONTH . TENANT IMPROVEMENTS: To be paid by Lessee . OPTIONS FOR ADDITIONAL SPACE: 1st Option: Available under the following terms and conditions with written notice no later then March 31, 1991: Area: Approximately 10,000 rentable square feet Building: 125 Technology Drive Floor: First Floor Rental Rate: $20.25/rentable square foot Term: Additional six (6) months on the total rentable area Lease Termination: June 30, 1994 on total rentable area if 1st option is exercised Availability: No later then September 1, 1991 Rent Commencement: Between June 1, 1991 and September 1, 1991, depending on availability Tenant Improvements: To be paid by Lessee 2nd Option: Available under the following terms and conditions with written notice no later then February 1, 1992. Area: Approximately 10,000 rentable square feet Building: 125 Technology Drive Floor: First Floor Rental Rate: $22.00/rentable square foot for 2nd option space Term: Additional six (6) months on the total rentable area Lease Termination: June 30, 1994 if 1st option is not exercised, December 31, 1994 if 1st and second options are exercised Availability: Between June 1, 1992 and August 31, 1992 Rent Commencement: Upon Availability Tenant Improvements: To be paid by Lessee (see below) 3rd Option: Available under the following terms and conditions with written notice no later then December 31, 1992 under the following terms and conditions: Area: Approximately 10,000 rentable square feet Building: 125 Technology Drive Rental Rate: $22.00/s.f. for 3rd option area Term: Additional six (6) months on entire space, but in no event shall Lessee be able to exercise this option unless the remaining term for the total rentable area is greater then eighteen (18) months Lease Termination: June 30, 1994 if neither 1st nor 2nd options are exercised. December 31, 1994 if only 1st or 2nd option is exercised. June 30, 1995 if all three options are exercised. Availability: Between June 1, 1993 and August 31, 1993 Rent Commencement: Between June 1, 1993 and August 1, 1993, depending upon Availability Tenant Improvements: To be paid by Lessee (see below) Tenant improvements on all option space will be paid by Lessee. Kurt Saracen has demonstrated what a sample build out would cost (see plans, quantities and unit costs attached hereto as Exhibit "B"). Kurt Saracen will guarantee its construction costs on a per unit basis not to exceed those costs as represented in this estimate. Such guarantee to last for one year. Total actual costs for construction to be determined by final construction plans as approved by Parametric. If Lessee elects to build out space as shown in Exhibit B, the maximum tenant improvement cost shall be $35,760.00 for the first floor north pod, $65,730.00 for the first floor south pod and $25,670.00 for the second floor pod subject to reasonable unit cost increases after the one year guarantee. In all other respects, the terms and provisions of the Lease and subsequent amendments are hereby ratified and confirmed and remain in full force and effect and unamended. Lessee acknowledges and agrees that this Amendment shall not be binding upon either party until an original of this Amendment has been executed by both parties. Executed as a sealed instrument the 21st day of January, 1991. LESSOR 128 TECHNOLOGY TRUST /S/ Dominic J. Saraceno ------------------------------------------- Dominic J. Saraceno, as Trustee aforesaid /S/ Kurt W. Saraceno ------------------------------------------- Kurt W. Saraceno, as Trustee aforesaid /S/ Edward R. Werner ------------------------------------------- Edward R. Werner, as Trustee aforesaid LESSEE PARAMETRIC TECHNOLOGY CORPORATION By /S/ Steven C. Walske --------------------------------------- EXHIBIT A FLOOR PLANS
EXHIBIT B Floor 1 - ------- Demo - 288' 2,880 Dumpster 1,800 New Part 545 27,250 Doors - 22 14,300 Ceiling Work 4,000 SOUTH Vinyl 2,000 POD HVAC 2,000 Louver Drapes 1,500 Sprinkler 1,000 Outlets - 50 4,500 Switch - 25 2,000 Lights Relocated - 50 2,500 ------ $65,730 Dumpster 1,200 Demo - 100' 1,000 New Part 310 15,500 Doors - 14 9,100 Ceiling Work 1,000 NORTH Vinyl 1,000 POD HVAC 500 Louver Drapes 500 Sprinkler 500 Outlets - 30 2,700 Switches - 14 1,120 New Lights - 4 640 Relocate Lights - 20 1,000 ----- $35,760 Floor 2 - ------- HVAC 1,000 Demo - 100' 1,000 Dumpster 1,200 New Part - 160' 8,000 Doors - 9 5,850 Ceiling Work 1,000 Outlets - 12 1,080 Switches 960 Lights Reconnect - 12 600 New Lights - 3 480 Vinyl 2,000 Sprinkler 2,000 Louver Drapes 500 --- $25,670
EX-10.20 3 EMPLOYMENT AGREEMENT WITH MICHAEL E. MCGUINNESS EXHIBIT 10.20 CONFIDENTIAL AGREEMENT AND GENERAL RELEASE ------------------------------------------ This Confidential Agreement and General Release ("Agreement") is entered into by and between Parametric Technology Corporation (the "Company"), a Massachusetts corporation with its principal place of business at 128 Technology Drive, Waltham, Massachusetts, 02154, and Michael E. McGuinness (the "Employee"), residing at 32 Sears Road, Southboro, MA 01772. PLEASE READ THIS AGREEMENT AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT. YOU SHOULD CONSULT AN ATTORNEY OF YOUR CHOICE ABOUT THIS AGREEMENT BEFORE YOU SIGN THIS AGREEMENT. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. RECITALS WHEREAS, the Employee has resigned his position as Executive Vice President of Research and Development and Product Marketing of the Company, effective as of the close of business on November 12,1997; and WHEREAS, the Company desires to continue to employ the Employee in the position of Senior Sales Consultant, under the terms and conditions set forth below, effective immediately following the Employee's resignation as Executive Vice President of Research and Development and Product Marketing of the Company. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee hereby agree as follows: ARTICLE I EMPLOYMENT The Company hereby agrees to continue to employ the Employee to serve the Company in the position of Senior Sales Consultant and to perform such specific duties as may reasonably be assigned to the Employee from time to time by the President and Chief Operating Officer of the Company for the period commencing immediately following the Employee's resignation as Executive Vice President of Research and Development and Product Marketing of the Company and terminating on November 30, 1998, unless earlier terminated as provided herein (the "Employment Period"). The Employee hereby accepts such continued employment for the Employment Period. The Employee agrees to relinquish and hereby does relinquish any and all rights to re-instatement as Executive Vice President of Research and Development and Product Marketing, involvement in any customer accounts with respect to which the Employee was heretofore involved, re-assignment to any other position within the Company, and employment beyond November 30, 1998. ARTICLE II COMPENSATION For services to be rendered by the Employee to the Company pursuant to this Agreement and provided this Agreement is signed by the Employee and returned to the Company, during the Employment Period the Company shall pay to the Employee the compensation and provide to the Employee the benefits set forth below: (i) Salary: The Company shall pay to the Employee through November ------ 30, 1998 a bi-weekly salary of four thousand six hundred fifteen dollars and thirty-eight cents ($4,615.38). (ii) Expenses: The Company agrees to reimburse the Employee for -------- ordinary and necessary business expenses incurred by the Employee on or before November 12, 1998, in the performance of his duties as Executive Vice President of Research and Development and Product Marketing of the Company, provided that the Employee submits receipts therefor and otherwise properly accounts for such expenses in accordance with the Company's policy and practice. (iii) Employee Benefits: In addition to the foregoing payments, ----------------- (A) the Company shall provide to the Employee benefits under the Company's standard benefit plans pursuant to the same terms and conditions under which the Company makes such benefits available to employees generally, including health insurance, dental insurance, life insurance, and short-term and long-term disability coverage, and (B) the Employee shall remain eligible to participate in the Company's 401(k) Savings Plan, 1991 Employee Stock Purchase Plan and the 1987 Incentive Stock Option Plan, 1997 Incentive Stock Option Plan and 1997 Nonstatutory Stock Option Plan (collectively, the "Option Plans") subject to the terms and conditions of the respective plans. ARTICLE III TERMINATION 3.1 For Cause. The Employee may be terminated from his employment by --------- the Company only for "Cause." "Cause" shall mean, for purposes of this Agreement, (i) willful conduct or gross negligence by the Employee which is demonstrably and materially injurious to the Company, (ii) the Employee's violation of Articles V and VI hereof, (iii) the Employee's commencement of full-time employment with another company, (iv) commission of any act of dishonesty, fraud, misrepresentation or other act of moral turpitude, (v) commission of any act tending to, or which is reasonably likely to, reflect negatively on the image or reputation of the Company, its subsidiaries or affiliates, and/or (vi) violation of any of the Company's policies. The Employee and the Company hereby agree that the provisions of this Section 3.1 shall supersede and preempt Section I and Section 4(a) of that certain agreement dated May 15, 1997, by and between the Company and the Employee (the "May, 1997 Agreement"). 3.2 Without Cause. The Employee may terminate his employment by the ------------- Company without cause by providing to the Company fourteen days' prior written notice of such termination. 3.3 Death. In the event of the death of the Employee during the term ----- hereof, the Employee's employment shall automatically terminate as of the date of his death. ARTICLE IV EFFECT OF TERMINATION 4.1 For Cause. Upon termination of the Employee's employment for Cause, --------- the Employee's salary and benefits specified in Article II shall cease at the time of such termination, provided that the Company shall pay to the Employee, within fifteen (15) days after the date of such termination, all amounts accrued under clause (i) of Article II as of the date of such termination. Each vested stock option under the Option Plans that is held by the Employee on the date of termination of the Employee's employment, to the extent not previously exercised at the date of such termination, shall expire to the extent not exercised within ten (10) days after the date of such termination. All non-vested stock options shall terminate on the date of such termination. The Employee and the Company hereby agree that the provisions of this Section 4.1 shall supersede and preempt Section 2 of the May, 1997 Agreement. 4.2 Without Cause. In the event that the Employee terminates his ------------- employment with the Company without Cause, the Employee's salary and benefits specified in Article II shall cease on the date of termination of Employee's employment, provided that the Company shall pay to the Employee, within fifteen (15) days after the date of such termination, all amounts accrued under clause (i) of Article II as of the date of such termination. Each vested stock option under the Option Plans that is held by the Employee on the date of termination of the Employee's employment, to the extent not previously exercised at the date of such termination, shall expire to the extent not exercised within ten (10) days after the date of such termination. All non-vested stock options shall terminate on the date of such termination. 4.3 Death. Upon termination of the Employee's employment due to the ----- Employee's death, the Employee's salary and benefits specified in Article II shall cease at the time of such termination, provided that the Company shall pay to the Employee's estate, within fifteen (15) days after the date of such termination, all amounts then accrued under Article II, clause (i) hereof. Each vested stock option under the Option Plans then held by the Employee, to the extent not previously exercised at the date of such termination, may be exercised at any time within one year after that date (unless terminated earlier by its terms) by the Employee's estate or by the person(s) to whom the Employee's option rights pass by will or by the applicable laws of descent and distribution. All non-vested stock options shall terminate on the date of such termination. 4.4 Expiration of Employment Period. Upon expiration of the Employment ------------------------------- Period on November 30, 1998, the Employee's salary and benefits specified in Article II shall cease, provided that the Company shall pay to the Employee, within fifteen (15) days after the date of such expiration, all amounts accrued under clause (i) of Article II as of the date of such expiration. Each vested stock option under the Option Plans that is held by the Employee on the date of expiration of the Employment Period, to the extent not previously exercised as of the date of expiration of the Employment Period, shall expire to the extent not exercised within ten (10) days after the date of expiration of the Employment Period. All non-vested stock options shall terminate on the date of expiration of the Employment Period. ARTICLE V NONCOMPETITION AND COMPLIANCE WITH EXISTING AGREEMENT The Employee agrees to be bound by all of the terms and conditions contained in that certain Agreement signed by Employee on or about September 28, 1987, by and between the Company and the Employee (the "1987 Agreement"), which is attached hereto as Exhibit A and incorporated herein by reference. In addition, in consideration for the payments and other compensation set forth in Article II of this Agreement, the Employee agrees that he shall be bound by the obligations of paragraph 6 of the 1987 Agreement until the later of November 30, 1999 or one year following the termination of his employment with the Company. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Confidentiality; No Disparagement. During the Employment Period and --------------------------------- thereafter, the Employee agrees (i) unless otherwise required by law, to keep the terms and conditions of this Agreement and any matters arising out of or relating to the Employee's resignation as Executive Vice President of Research and Development and Product Marketing of the Company and subsequent termination of employment from the Company strictly confidential and (ii) to refrain from making any disparaging remarks about the Company, its officers, employees, customers, business partners or products. The provisions of this Section 6.1 shall survive the termination or expiration of this Agreement. 6.2 Return of Company Property. The Employee will return to the Company -------------------------- any computer equipment and computer programs or other tangible embodiment of any Company information and any other property of the Company (i.e. credit cards, etc.) upon demand. The Employee assures that he has either not made any copies of such information or has destroyed all copies previously made and that he will not in the future make copies. ARTICLE VII SUCCESSORS AND ASSIGNS 7.1 Assignment. This Agreement is personal to the Employee and shall ---------- not be assignable by the Employee. 7.2 Binding Effect. This Agreement shall inure to the benefit of and -------------- be binding upon the Company and its successors and assigns. ARTICLE VIII RELEASE AND WAIVER As a material inducement to the Company to enter into this Agreement, except for the performance by the Company of this Agreement and except for any rights the Employee may have through status as a shareholder of the Company or any right that the Employee has to benefits under any company employee benefit plan in accordance with the Employee Retirement Income Security Act, the Employee does hereby, for himself and his heirs, successors, assigns and relatives by blood or marriage, forever release the Company and each of the past and present officers, directors, employees, agents, representatives, attorneys, insurers, related entities, assigns, successors and predecessors of the Company, and all persons acting by, through, under or in concert with any of them [collectively the "RELEASEES"], from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including back wages, attorney's fees and costs actually incurred) of any nature whatsoever, known or unknown, suspected or unsuspected, including but not limited to, rights arising out of alleged violations of any contract, express or implied (including but not limited to any contract of employment, partnership, independent contractor, fiduciary, special or confidential relationship); any covenant of good faith and fair dealing (express or implied); any tort including fraud and deceit, negligent misrepresentation, promise without intent to perform, conversion, breach of fiduciary duty, defamation, libel, slander, invasion of privacy, negligence, intentional or negligent infliction of emotional distress, malicious prosecution, abuse of process, intentional or negligent interference with prospective economic advantage, and conspiracy; any "wrongful discharge" and "constructive discharge" claims; any claims relating to any breach of public policy; any legal restrictions on the Company's right to terminate employees; or any federal, state or other governmental statute, regulation or ordinance, including without limitation: (1) the National Labor Relations Act, 29 U.S.C. (S) 151, et seq.; (2) the Fair Labor Standards Act, 29 ------- U.S.C. (S)201, et seq.; (3) the Employee Retirement Income Security Act of 1974, ------- 29 U.S.C. (S) 1001 et seq.; (4) the Civil Rights Act of 1964, 42 U.S.C. (S)2000e ------- et seq.; (5) the Civil Rights Act of 1866, 42 U.S.C. (S) 1981 et seq.; (6) the - ------- ------- Rehabilitation Act of 1973, 29 U.S.C. (S) 701 et seq.; (7) the Equal Pay Act of ------- 1963, 29 U.S.C. (S)206(d); (8) the Civil Rights Act of 1991, Pub. L. No. 102-166; (9) the Americans With Disabilities Act, 42 U.S.C. (S) 12 101 et seq.; ------- (10) the Age Discrimination in Employment Act of 1967, 29 U.S.C. (S)621, et -- seq.; (11) the Occupational Safety and Health Act of 1970, 29 U.S.C. (S)651 et - ---- -- seq.; (12) the Consolidated Omnibus Budget Reconciliation Act of 1985, I.R.C. - ---- (S)4980B; (13) the Family and Medical Leave Act of 1993, 29 U.S.C. (S)2601 et -- seq.; (14) the Massachusetts Wage and Hour Laws, G.L. c.151; (15) the - ---- Massachusetts Law Against Discrimination, G.L. c.151B; (16) the Massachusetts Civil Rights Act, G.L. c.93; (17) the Massachusetts Privacy Statute, G.L. c.214, (S) 1B; (18) the Massachusetts Wage Payment Statute, G.L. c.149, (S) 148 et -- seq.; (19) G.L.c. 214, (S) 1C, which Employee may now have, own, or hold, or - ---- claims to have, own or hold, or which Employee at any time heretofore had, owned, or held, or claimed to have, own or hold, or which Employee at any time hereinafter may have, own or hold, or claim to have, own or hold against each of any of the Company and other RELEASEES, including without limitation claims, demands, and causes of action relating to or arising from the Employee's employment after the date hereof and the termination of such employment [collectively "CLAIM" or "CLAIMS"]. Notwithstanding the foregoing, however, nothing in this Release and Waiver shall prohibit Employee from filing any charge of discrimination with the Equal Employment Opportunity Commission ("EEOC") or from cooperating with the EEOC in any lawful investigation by the EEOC. In the event any such complaint is filed with the EEOC, Employee shall not obtain or accept any recovery or relief therefrom. ARTICLE IX KNOWING AND VOLUNTARY WAIVER The Employee understands and agrees that there is a risk that each and every injury which Employee may have allegedly suffered by reason of the Company's relationship with the Employee might not now be known, and there is a further risk that said injuries, whether known or unknown at the date of this Agreement, might possibly become progressively worse and that as a result thereof further damages may be sustained by Employee; nevertheless, Employee desires to forever and fully release and discharge the Company and other RELEASEES and understands that by the execution of this Agreement no further claims for any such injuries may ever be asserted by the Employee. The Employee warrants that he is not aware of any such circumstances now. Thus for the purpose of implementing a full and complete release and discharge of the Company and other RELEASEES, Employee expressly acknowledges that, except as to the performance of this Agreement, this Agreement is intended to include in its effect, without limitation, all claims which the Employee does not know or suspect to exist in his favor against the Company and other RELEASEES, or any of them, and that this Agreement contemplates the extinguishment of any such CLAIM or CLAIMS. ARTICLE X FULL SETTLEMENT The Employee agrees that the payment of the sums and benefits set forth in Article II hereof is in final and full settlement of alleged acts, omissions or other matters between the Employee and the Company and other RELEASEES, including but not limited to, all claims for wages, stock, stock options, other compensation, damages of any nature whatsoever, attorneys' fees and costs. ARTICLE XI MISCELLANEOUS 11.1 Non-Admission of Liability. This Agreement shall not in any way be --------------------------- construed as an admission by the Company or by the Employee that they have acted wrongfully with respect to each other or any other person, or that they have any rights whatsoever against each other. The Company specifically disclaims any liability to or wrongful acts against the Employee or any other person, on the part of themselves, their agents or their employees, past and present. The Employee specifically disclaims any liability to or wrongful acts against the Company or any other person. 11.2 No Representations. The Employee represents and acknowledges that ------------------- in executing this Agreement the Employee does not rely and has not relied upon any representation or statement not set forth herein made by the Company or any of the other RELEASEES or by the Company's or any of the other RELEASEES agents, representatives, or attorneys with regard to the subject matter, basis or effect of the Agreement or otherwise. The Company represents and acknowledges that in executing this Agreement it did not rely and has not relied upon any representation or statement made bv the Employee with regard to the subject matter, basis or effect of this Agreement. 11.3 No Assignment of Claims. The Employee represents and warrants that ------------------------ the Employee has not heretofore assigned or otherwise transferred or subrogated or purported to assign, transfer or subrogate, to any person or entity, any CLAIM or portion thereof, or interest therein the Employee may have against the Company, and the other RELEASEES, or any of them, and the Employee agrees to indemnify, defend and hold the Company and the other RELEASEES harmless from and against any and all liability, loss, damages, claims, costs, expenses or attorney's fees incurred by the Company and the other RELEASEES as the result of any person or entity asserting any such right, assignment, transfer or subrogation. 11.4 Governing Law. This Agreement and any and all litigation that may -------------- arise as a result of, based upon, or in connection with this Agreement shall be brought before a court in Boston, Massachusetts and be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, without reference to principles of conflict of laws. 11.5 Review of Agreement. The Employee agrees and acknowledges that he -------------------- has had the opportunity to consult with legal counsel of his own choice in order to negotiate this Agreement, and that the Employee has signed it of his own free will. To the extent any part of this Agreement is deemed to be ambiguous, it shall not be interpreted against either party. 11.6 Amendment. This Agreement may not be amended or modified ---------- otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11.7 Counterparts. This Agreement may be executed in one or more ------------- counterparts, any one of which shall be deemed to be the original even if the others are not produced. 11.8 Further Acts. The Employee and the Company, without further ------------- consideration, shall execute and deliver such other documents and take such other action as may be necessary to achieve the objective of this Agreement. 11.9 Notices. All notices hereunder shall be in writing and shall be -------- delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid, to the parties at their respective addresses set forth above or at such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice shall be deemed to be delivered upon the date of hand delivery, one day following delivery to such overnight courier service, or three days following mailing by registered or certified mail. 11.10 Captions. Captions herein have been inserted solely for --------- convenience of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement. 11.11 Severability. In case any provision hereof shall, for any ------------- reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not effect any other provision hereof, and the parties agree to substitute for such invalid or unenforceable provision a valid and enforceable provision which most clearly approximates the interest and economic effect of such invalid or unenforceable provision. 11.12 Entire Agreement. This Agreement, together with the 1987 ----------------- Agreement and the May, 1997 Agreement (as amended herein), constitutes the entire understanding and agreement between the parties hereto with regard to the subject matter hereof, and fully supersedes all prior understandings and agreements, whether oral or written. [The remainder of this page is left intentionally blank.] IN WITNESS WHEREOF, this Agreement has been signed as of the date set forth below. PARAMETRIC TECHNOLOGY CORPORATION By: /S/ Carl F. Ockerbloom ---------------------------------- Name: Carl F. Ockerbloom ---------------------------------- Title: VP HUMAN RESOURCES ---------------------------------- Dale: 11/19/97 ---------------------------------- THE EMPLOYEE /S/ Michael E. McGuinness ---------------------------------- Michael E. McGuinness Date: 11/17/97 ---------------------------------- EXHIBIT A In consideration of my employment by Parametric Technology Corporation (hereinafter referred to as "EMPLOYER"), I hereby agree as follows: 1. I understand that my employment relationship with EMPLOYER is one whereby I will be exposed to confidential information and data, trade secrets, both tangible and intangible, confidential customer information and customer- related materials, know-how and related materials, all of which are unique, owned by and valuable to EMPLOYER. 2. I will not disclose at any time during my employment or thereafter directly or indirectly, to any third party or parties any information or knowledge which I may acquire with respect to inventions, designs, methods, systems, improvements, trade secrets or other private or confidential matters of EMPLOYER without prior written approval of EMPLOYER, provided, however, that none of the foregoing shall prevent me from using or disclosing information of knowledge which is then generally known to and available within the industry automation business. 3. I agree that all data, including drawings, prints, specifications, designs, notes, records, documents, reproductions and other information either furnished by EMPLOYER to me or prepared by me in connection with my employment are the sole property of EMPLOYER and I will turn over same to EMPLOYER upon request and in any event upon my termination of employment with EMPLOYER. 4. I agree that all inventions and improvements or discoveries made by or conceived by me alone or in conjunction with others during the term of my employment relating to products or services or EMPLOYER shall belong to EMPLOYER, and I will promptly communicate and disclose to EMPLOYER all such inventions, improvements or discoveries. 5. I will execute all papers and documents as requested by EMPLOYER to apply for UNITED STATES and foreign patents and copyrights relating to any such inventions, improvements, or discoveries in my name or EMPLOYER'S name, as the case may be, and to vest title to such patents of copyrights in EMPLOYER, or its nominee, at EMPLOYER'S expense. I also agree, if requested by EMPLOYER, to give testimony in the event of contested proceedings involving patent application or patents maturing therefrom upon reasonable reimbursement for time so expended. 6. I agree that the obligations imposed herein upon me shall survive the termination of my employment, and further agree that for a period of one (1) year after I leave the employment of EMPLOYER, I shall not either directly or indirectly: (i) Make known to any person, firm or corporation the names and addresses of any of the customers of EMPLOYER or any other information pertaining to them. (ii) Take away any of the customers of EMPLOYER on whom I called, or with whom I dealt or became acquainted during my employment with EMPLOYER, either for myself or for any other person, firm or corporation. (iii) Accept a position with, or otherwise become affiliated with any other person, firm or corporation for the purpose of competing with EMPLOYER'S business. I understand that this provision not to work for any of EMPLOYER'S competitors is necessary to protect its trade secrets, proprietary information, confidential information, and know-how by my avoiding such employment situations which would inherently create a risk of fraud with the potentiality of intentional and unintentional revelations of the above-mentioned information belonging to the EMPLOYER. (iv) Interfere with the business of EMPLOYER in any manner including recruiting or hiring of employee of EMPLOYER or ex-employee whose employment with EMPLOYER was terminated less than one (1) year prior to the date of such interference. 7. It is understood that either party may terminate the employment relationship at any time upon not less than fourteen (14) days notice unless the termination is for cause, in which event only three (3) days notice shall be required. 8. This Agreement shall be binding upon the parties, their heirs, executors, administrators, legal representatives, successors and assigns. 9. It is agreed that this Agreement shall have the effect of a sealed instrument and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. 10. I recognize that any violation by me of the provisions of the Agreement would cause EMPLOYER irreparable damage for which other remedies would be inadequate, and I therefore agree that EMPLOYER shall have the right to obtain, in addition to all other remedies, such injunctive and other equitable relief from a court of competent jurisdiction as may be necessary or appropriate to prevent any violation of this Agreement. 11. All headings and subdivision of this Agreement are for reference only and shall not affect its interpretation. In the event that any provision of this Agreement should be held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force without being impaired or invalidated in any way. IN WITNESS WHEREOF, the parties have hereunto affixed their hands and seals this 28th day of September, 1987. /s/ Michael E. McGuinness ---------------------------------- Employee Signature Parametric Technology Corporation /s/ Steven C. Walske ---------------------------------- By: EX-13.1 4 ANNUAL REPORT EXHIBIT 13.1 PARAMETRIC TECH - -------------------------------------------------------------------------------- Management's Discussion and Analysis - ------------------------------------ of Financial Condition and Results of Operations Parametric Technology Corporation is the leading supplier of software tools used to automate the mechanical development of a product from its conceptual design through production. Any forward-looking statements, including projections about growth and the Company's business, are based on certain assumptions made by management. Important information about the basis for those assumptions and factors that may cause actual results to differ materially from those projected is contained in "Proposed Acquisition" and "Important Factors Regarding Future Results." Proposed Acquisition On November 4, 1997, the Company announced that it had entered into an agreement to acquire Computervision Corporation ("Computervision") in a stock-for-stock transaction. Under the terms of the proposed transaction, each share of Computervision common stock will be exchanged for .0866 shares of the Company's common stock and Computervision will become a wholly-owned subsidiary of the Company. The transaction is intended to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. Subject to several conditions, including approval of Computervision's shareholders, the transaction is expected to close in the second quarter of fiscal 1998. The discussion and analysis below, except where otherwise noted, do not reflect the effects of the transaction. As a pooling of interests, upon completion of the transaction, the historic results of Computervision will be combined with those of the Company. In addition, the Company expects to recognize a non-recurring charge of approximately $75,000,000 to $95,000,000 related to certain merger- related, debt prepayment, consolidation and integration expenses during the quarter in which the transaction closes. Also, the Company will assume approximately $240,000,000 in debt from Computervision, and expects to use cash and short-term investment balances to repay a substantial portion of such debt. Results of Operations For the fiscal year ended September 30, 1997, the Company's revenue and net income increased 35% and 38%, respectively, over the previous fiscal year, excluding a non-recurring acquisition related charge in fiscal 1996. For the fiscal year ended September 30, 1996, revenue and net income excluding non- recurring acquisition related charges increased 52% and 61%, respectively, over fiscal year 1995. For the fiscal year ended September 30, 1997, net income as a percentage of revenue was 27% as compared to 26% and 25%, excluding the non- recurring acquisition related charges, in fiscal 1996 and 1995, respectively. Operating income as a percentage of revenue was 40% in fiscal 1997 compared to 39% and 38%, excluding the non-recurring acquisition related charges, in fiscal 1996 and 1995, respectively. Net income for fiscal year 1996 excludes a non- recurring acquisition related charge of $32,119,000 related to the acquisition of Reflex technology ("Reflex"). Net income for fiscal year 1995 excludes the non-recurring acquisition related charges of $10,438,000 related to the merger of Rasna Corporation ("Rasna") into the Company and $19,000,000 related to the acquisition of the Conceptual Design and Rendering System ("CDRS") software business. Including the non-recurring acquisition related charges, the Company's net income as a percentage of revenue was 27%, 23% and 20% in fiscal 1997, 1996 and 1995, respectively. The following table sets forth certain consolidated financial data as a percentage of revenue for the fiscal years ended September 30, 1997, 1996 and 1995. PARAMETRIC TECHNOLOGY CORPORATION 21 Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended September 30, - ------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------ Revenue: License 73.2% 74.8% 73.1% Service 26.8 25.2 26.9 - ------------------------------------------------------------------------ Total revenue 100.0 100.0 100.0 - ------------------------------------------------------------------------ Cost of revenue: License 1.0 0.8 0.8 Service 8.4 8.6 8.4 - ------------------------------------------------------------------------ Total cost of revenue 9.4 9.4 9.2 - ------------------------------------------------------------------------ Gross profit 90.6 90.6 90.8 Operating expenses: Sales and marketing 38.8 39.8 41.6 Research and development 6.6 6.6 6.5 General and administrative 4.8 4.8 5.2 Non-recurring acquisition and related costs - 5.3 7.4 - ------------------------------------------------------------------------ Total operating expenses 50.2 56.5 60.7 - ------------------------------------------------------------------------ Operating income 40.4 34.1 30.1 Other income, net 1.3 1.9 2.3 - ------------------------------------------------------------------------ Income before income taxes 41.7 36.0 32.4 Provision for income taxes 14.6 13.0 12.8 - ------------------------------------------------------------------------ Net income 27.1% 23.0% 19.6% ======================================================================== Excluding acquisition and related costs: Operating income 40.4% 39.5% 37.6% Net income 27.1% 26.4% 25.0% ========================================================================
Revenue The Company derives its revenue from the sale and support of software used in the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing and engineering) industry. In fiscal 1997, the Company licensed 93% of its products directly to end-user customers and 7% via third-party distributors as compared with 91% directly to end-user customers and 9% via third party distributors in both fiscal 1996 and 1995. The overall revenue growth in fiscal 1997 and 1996 reflects the continued worldwide acceptance of the Company's products and services and the Company's ongoing investment in expanding its worldwide direct sales force. License and service revenue for fiscal years 1997, 1996 and 1995 were:
- -------------------------------------------------------------------------- (dollars in thousands) 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------- License $591,849 32% $448,699 56% $288,349 Percentage 73% 75% 73% of total revenue Service $216,947 43% $151,423 43% $105,961 Percentage 27% 25% 27% of total revenue Total revenue $808,796 35% $600,122 52% $394,310
The increase in license revenue results from an increase in the number of seats of software licensed and from a higher price realized per seat. A seat of software generally consists of various software products configured to serve the needs of a single end-user. The Company licensed approximately 29,950 seats of software in fiscal 1997, an increase of 30% from fiscal 1996's 23,000 seats, which was 45% higher than fiscal 1995's 15,900 seats. The increase in the number of seats licensed was achieved as a result of continued market penetration of the Company's products, with strong growth in fiscal 1997 in North America. The decrease in license revenue growth from 56% to 32% is due in part to the lower rate of growth of international license revenue. The average price per seat during fiscal 1997 was approximately $19,800, compared with an average price of approximately $19,500 in 1996 and $18,100 in 1995. The average price per seat has increased as a result of customers purchasing configurations of software seats containing more modules. Service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. This revenue increased during both fiscal 1997 and 1996 as a result of the growth in the Company's installed customer base and, to a lesser extent, increased training and consulting services performed for these customers. 22 Sales by geographic region for fiscal years 1997, 1996 and 1995 were:
- -------------------------------------------------------------------------- (dollars in thousands) 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------- North America $370,676 40% $264,880 34% $197,839 Percentage 46% 44% 50% of total revenue Europe $272,125 31% $207,811 55% $133,873 Percentage 34% 35% 34% of total revenue Asia/Pacific $165,995 30% $127,431 104% $ 62,598 Percentage 20% 21% 16% of total revenue
The Company derived 54%, 56% and 50% of its revenues from sales to international customers in fiscal 1997, 1996 and 1995, respectively. Direct export sales were $127,715,000, $84,537,000 and $45,147,000 in fiscal 1997, 1996 and 1995, respectively. The decrease in the percentage of revenue derived from international sales from fiscal 1996 to fiscal 1997 is attributable primarily to the strengthening of the dollar in relation to the yen and the major European currencies and to weaker revenues in Japan due to internal execution issues. The Company has taken measures to strengthen its sales and support infrastructure in Japan and to rebuild capacity in order to re-accelerate revenue growth in this region, but does not expect Japan's year-over-year revenue growth to contribute to overall revenue growth until at least the second quarter of fiscal 1998. The Company expects that total revenue will increase in fiscal 1998 from continued penetration in the mechanical CAD/CAM/CAE industry. However, the rate of continued revenue growth in fiscal 1998 depends upon the Company's ability to implement recent measures taken to strengthen results in Japan, adequately manage exposure to foreign currency fluctuations, continue to penetrate the mechanical segment of the CAD/CAM/CAE industry, attract and retain skilled personnel, and deliver timely product enhancements. In addition, there can be no assurance that quarterly revenue growth rates or growth rates for particular geographic areas will be comparable to those in fiscal 1997. Fiscal 1998 performance could also be affected by the efforts to integrate Computervision's operations with those of the Company and the success of those integration efforts. Cost of Revenue
- ------------------------------------------------------------------------ (dollars in thousands) 1997 Change 1996 Change 1995 - ------------------------------------------------------------------------ Cost of license $ 8,233 77% $ 4,642 39% $ 3,348 Percentage 1% 1% 1% of license revenue Cost of service $68,259 32% $51,812 57% $32,970 Percentage 31% 34% 31% of service revenue
Cost of license revenue consists of the amortization of capitalized computer software costs, costs associated with reproducing and distributing software and documentation, and royalties. The absolute increase in cost of license revenue is a result of the increase in the number of seats licensed and the variable costs associated with software media, documentation and royalties during each of the last three fiscal years. 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. Absolute increases in cost of service revenue resulted primarily from growth in the staffing necessary to generate and support increased worldwide service revenue and provide ongoing quality customer support to its increasing installed base. As a percentage of revenue, total cost of revenue has remained constant at 9% over the past three fiscal years. Operating Expenses
- -------------------------------------------------------------------------- (dollars in thousands) 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------- Sales and marketing $313,785 31% $238,860 46% $163,918 Percentage 39% 40% 42% of total revenue Research and development $ 53,236 35% $ 39,476 54% $ 25,591 Percentage 7% 7% 6% of total revenue General and administrative $ 38,699 36% $ 28,557 40% $ 20,414 Percentage 5% 5% 5% of total revenue Non-recurring acquisition and related costs - $ 32,119 $ 29,438
PARAMETRIC TECHNOLOGY CORPORATION 23 Management's Discussion and Analysis - ------------------------------------ of Financial Condition and Results of Operations Sales and Marketing Sales and marketing expenses primarily include salaries, sales commissions, travel and facility costs. These expenses also include programs aimed at increasing revenues, such as advertising, trade shows, and various sales and promotional seminar programs. While sales and marketing expenses as a percentage of revenue have declined slightly over the three most recent fiscal years, the absolute increases in these expenses were due principally to worldwide expansion of the sales force and sales commissions associated with higher revenue. Total sales and marketing headcount increased to 2,093 in fiscal 1997 from 1,645 in fiscal 1996 and 1,098 in fiscal 1995. International sales and marketing expenses represented 60% of total sales and marketing expenses in fiscal 1997, compared with 58% in 1996 and 52% in 1995. The Company expects to continue the growth of its worldwide sales and marketing organization during fiscal 1998, reflecting the Company's commitment to focus its resources on expanding worldwide acceptance for its products. The Company's ability to meet this expectation depends primarily upon its ability to attract and retain highly skilled technical, managerial and sales personnel. Research and Development The Company continued to make investments in research and development, consisting principally of salaries and benefits, expenses associated with product translations, costs of computer equipment used in software development and facility expenses. The Company believes that research and development expenditures are essential to maintaining its competitive position in the CAD/CAM/CAE industry and expects the expenditure levels to increase in absolute dollars in fiscal 1998. Research and development expenses as a percentage of revenues remained consistent at 6.6% in fiscal 1997 as compared with 6.6% and 6.5% in fiscal 1996 and 1995, respectively. General and Administrative General and administrative expenses include the costs of the corporate, finance, information technology, human resources and administrative functions of the Company. The absolute increases in these expenses were principally due to the hiring of additional employees necessary to support the Company's worldwide growth, and in the information technology area as the Company upgraded its internal management information systems. As a percentage of revenue, general and administrative expenses were 4.8% in fiscal 1997 as compared with 4.8% and 5.2% in fiscal 1996 and 1995, respectively. Non-recurring Acquisition and Related Costs The Company recorded a non-recurring acquisition related charge of $32,119,000 related to the write-off of purchased research and development in process in conjunction with the Reflex acquisition in the fourth quarter of fiscal 1996. In the fourth quarter of fiscal 1995, the Company recorded a non-recurring acquisition related charge of $10,438,000 in conjunction with the Rasna merger consisting primarily of transaction fees and costs associated with integrating the businesses. In conjunction with the CDRS acquisition in the third quarter of fiscal 1995, the Company recorded a non-recurring charge of $19,000,000 related to the write-off of purchased research and development in process. Other Income
- ------------------------------------------------------------------------ (dollars in thousands) 1997 Change 1996 Change 1995 - ------------------------------------------------------------------------ Other income, net $10,625 (8)% $11,501 27% $9,029
Other income, net, primarily includes interest income, foreign currency gains and losses, and the costs associated with managing the Company's foreign exchange exposure. Interest income increased to $17,096,000 in fiscal 1997 from $13,914,000 in fiscal 1996 and $10,159,000 in fiscal 1995 due primarily to higher average cash and investment balances partially offset by lower average annual returns. As the international portion of its business continues to expand, a growing percentage of the Company's revenue and expenses is transacted in foreign currencies. In order to reduce its exposure to fluctuations in foreign exchange rates, the Company from time to time engages in hedging transactions involving the use of forward foreign exchange contracts and foreign exchange option contracts in the primary European and Asian currencies. 24 Income Taxes and Net Income
- ------------------------------------------------------------------------- (dollars in thousands) 1997 Change 1996 Change 1995 - ------------------------------------------------------------------------- Provision for income taxes $118,024 51% $ 78,247 56% $50,298 Effective 35% 36% 39% income tax rate Net income $219,185 59% $137,910 78% $77,362
The difference between the effective and statutory federal tax rate was due primarily to the benefits of tax exempt interest income and the income from foreign sales corporation, offset by the impact of state income taxes and, in fiscal 1995, the non-deductible acquisition costs associated with the Rasna merger. The effective tax rate decreased to 35% in fiscal 1997 from 36% in fiscal 1996 primarily due to tax credits. Liquidity and Capital Resources
- ----------------------------------------------------------------------------- (dollars in thousands) 1997 Change 1996 Change 1995 - ----------------------------------------------------------------------------- Cash, cash equivalents and investments $ 554,324 22% $ 456,112 48% $ 308,248 Working capital $ 503,983 21% $ 416,058 31% $ 317,702 Net cash provided by operating activities $ 266,335 16% $ 229,724 93% $ 119,017 Net cash used by investing activities $(188,285) (30)% $(144,511) (2)% $(141,270) Net cash provided (used) by financing activities $(119,379) (360)% $ (25,926) (202)% $ 25,354
Net cash generated by operating activities and proceeds from issuance of the Company's stock under stock plans provided sufficient resources to fund the Company's headcount growth, capital assets needs, stock repurchases and acquisitions in all periods presented. The increase in fiscal 1997 and 1996 in cash and cash equivalents provided by operations was primarily due to higher net income before depreciation and amortization, and increases in accounts payable and accrued expenses, accrued compensation, income taxes and deferred revenue, offset by increases in accounts receivable and other current assets. Excluding the investment of excess cash, investing activities for the periods presented used cash primarily to purchase property and equipment and to acquire technology and businesses. In fiscal 1997, 1996 and 1995, the Company acquired $28,809,000, $29,650,000 and $12,868,000, respectively, of capital equipment consisting principally of computer equipment, computer software and office equipment. In fiscal 1998, the Company expects to spend at least as much as was spent in fiscal 1997, but the level of spending will be dependent on various factors, including the growth of the business and general economic conditions. Net cash was used by financing activities in fiscal 1997 and 1996 primarily to repurchase $184,780,000 and $66,563,000, respectively, of the Company's stock, offset by proceeds of $65,514,000 and $40,763,000 from the issuance of the Company's common stock under stock plans. In fiscal 1995, net cash was provided by financing activities primarily from issuance of the Company's common stock under stock plans. On May 12, 1994, the Company announced that its Board of Directors had authorized a plan that allowed the Company to repurchase up to 6,000,000 shares of its common stock. During fiscal 1997, the Company repurchased 3,720,000 shares at a cost of $184,780,000, of which 524,000 remained in treasury at September 30, 1997, to partially offset the dilution caused by the exercise of stock options under the Company's option plans and the purchase of shares under the employee stock purchase plan. Since the inception of the plan, the Company has repurchased 5,813,000 shares. The repurchases have been funded through the use of available cash, cash generated from operations and cash received from stock option exercises and stock purchase plan purchases. On September 11, 1997, the Company announced that its Board of Directors had authorized an increase in the number of shares of common stock that the Company may repurchase under the repurchase program from 6,000,000 to 12,000,000 shares. In anticipation of the Computervision acquisition, the Company has suspended repurchases and the Board of Directors has rescinded authorization of the repurchase program. PARAMETRIC TECHNOLOGY CORPORATION 25 Management's Discussion and Analysis of Financial Condition and Results of Operations On July 10, 1996, the Company acquired project modeling and management software (Reflex) technology for $32,119,000, which included the issuance of 113,000 shares of the Company's common stock with a fair value of $5,000,000 at the time of the acquisition. Payments of $5,000,000 in fiscal 1997 and $22,119,000 in fiscal 1996 were from the Company's existing cash balances. The acquisition has been accounted for as a purchase. The purchase price was allocated to purchased research and development in process, as no other tangible or intangible assets were identified. The purchased research and development in process had not reached technological feasibility, had no alternative future use and was valued using expected future cash flows, discounted for risks and uncertainties related to the target markets and the completion of the products. As a result, at the date of acquisition, the $32,119,000 allocated to purchased research and development in process was recorded as a non-recurring charge. The Company believes that existing cash and short-term investment balances together with cash generated from operations and the issuance of the Company's common stock under stock plans will be sufficient to meet the Company's working capital, financing and capital expenditure requirements through at least fiscal 1998. Following completion of the Computervision acquisition, the Company expects to use its existing cash and short-term investment balances to repay a substantial portion of Computervision's $240,000,000 of debt and the $75,000,000 to $95,000,000 of merger-related, debt prepayment, consolidation and integration expenses that will be recorded as a non-recurring charge. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. The Company plans to adopt SFAS No. 128 in its first quarter of fiscal 1998 and at that time all historical net income per share data presented will be restated as follows to conform to the provisions of SFAS No. 128:
- --------------------------------------------------- 1997 1996 1995 - --------------------------------------------------- Basic net income per share $1.72 $1.09 $0.63 Diluted net income per share $1.64 $1.04 $0.60
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Management has not yet evaluated the effects of this change on its reporting of income. The Company will adopt SFAS No. 130 for its fiscal year ending September 30, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. Management is currently evaluating the effects of this change on its reporting of segment information. The Company will adopt SFAS No. 131 for its fiscal year ending September 30, 1999. 26 In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and supersedes SOP 91-1, "Software Revenue Recognition." The Company will adopt SOP 97-2 for its fiscal year ending September 30, 1999 and does not expect any material impact on its revenue recognition policies. Financial Risk Management In January 1997, the U.S. Securities and Exchange Commission issued Financial Reporting Release No. 48 which expands disclosure requirements for certain derivative and other financial instruments. The Company adopted the sensitivity analysis approach effective in the fourth quarter of fiscal 1997. The sensitivity approach presents the hypothetical change in fair value resulting from hypothetical changes in market rates. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. Historically, the Company's primary exposures have been related to local currency revenue in Japan and Europe and local currency operating expenses in Europe, Japan and Asia/Pacific. Historically, the Company has hedged currency exposures associated with certain accounts receivable denominated in local currencies and certain anticipated foreign currency revenue transactions. The hedging activity undertaken by the Company is intended to offset the impact of currency fluctuations on certain local currency accounts receivable and certain anticipated foreign currency revenue transactions. 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, the Company could experience unanticipated currency gains or losses. Outstanding forward foreign exchange contracts at September 30, 1997 mature within one month, and therefore movement in the exchange rates is not expected to have a material impact on the Company's financial results. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturities of these instruments. The fair values represent estimates of possible value that may not be realized in the future. The Company maintains 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 value with unrealized gains or losses reported as a separate component of stockholders' equity. Given the short maturities and investment grade quality of the portfolio holdings at September 30, 1997, a sharp rise in interest rates should not have a material adverse impact on the fair value of the Company's investment portfolio. As a result, the Company does not currently hedge these interest rate exposures. The following table presents hypothetical changes in fair values in the financial instruments held by the Company at September 30, 1997 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. The modeling technique used measures the change in fair values arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical shifts in the yield curve of plus or minus 50 basis points ("BP"), and 100 BP. Fair values represent the market principal plus accrued interest, dividends and certain interest rate- sensitive securities considered cash, cash equivalents and investments for financial reporting purposes at September 30, 1997. PARAMETRIC TECHNOLOGY CORPORATION 27 PARAMETRIC TECH MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations
Valuation of securities No change Valuation of securities given an interest rate in interest given an interest rate Type of security decrease of X basis points rates increase of X basis points - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) (100 BP) (50 BP) 50 BP 100 BP - ------------------------------------------------------------------------------------------------------------------------------------ Municipal debt securities $360,908 $359,168 $357,440 $355,687 $353,947 Mutual funds 9,911 9,860 9,812 9,763 9,714 Auction rate preferred stock 37,239 37,056 36,873 36,689 36,505 Corporate debt securities 11,195 11,141 11,086 11,032 10,977 ==================================================================================================================================== Total $419,253 $417,225 $415,211 $413,171 $411,143 ====================================================================================================================================
A 50-BP move in the Federal Funds Rate has occurred in 8 of the last 40 quarters; a 100-BP move in the Federal Funds Rate has not occurred in any of the last 40 quarters. Important Factors Regarding Future Results Information provided by the Company, including information contained in this Annual Report, or by its spokespersons from time to time may contain forward- looking statements concerning projected financial performance, market and industry segment growth, product development and commercialization or other aspects of future operations. Such statements, made pursuant to the safe harbor established by recent securities legislation, will be based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors, including, but not limited to the following, may cause the Company's future results to differ materially from those projected in any forward-looking statement. Fluctuations in Operating Results While the Company's sales cycle varies substantially from customer to customer, a high percentage of the Company's revenues are expected to be realized in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. The Company's orders early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter. In addition, the Company's operating expenses are based on expected future revenue and are relatively fixed for the short term. Accordingly, the Company's quarterly results may be difficult to predict until the end of the quarter and a shortfall in shipments or contract orders at the end of any particular quarter may cause the results for that quarter to fall short of anticipated levels. In turn, this could adversely impact the market price of the Company's stock. Stock Market Volatility Market prices for securities of software companies have generally been volatile. In particular, the market price of the Company's common stock has been and may continue to be subject to significant fluctuations as a result of factors affecting the computer industry or the securities markets in general. These factors include, but are not limited to, quarterly variations, announcements of technological innovations by the Company or competitors, changes in prices by the Company or competitors, changes in product mix and changes in revenue or revenue growth rates for geographic areas or products. In addition, a large percentage of the Company's common stock traditionally has been held by institutional investors. Consequently, actions with respect to the Company's common stock by certain of these institutional investors could have a significant impact on the market price for the stock. For more information, please see the Company's proxy statement with respect to its most recent annual meeting of stockholders and Schedules 13D and 13G filed with the U.S. Securities and Exchange Commission with respect to the Company's common stock. Market Growth Any Company projections of revenue growth are based on the assumptions that the Company will be able to continue to penetrate the relevant markets, execute management initiatives, and that the mechanical CAD/CAM/CAE industry will continue to grow at a predicted annual rate. Failure of these assumptions to materialize could adversely impact the Company's operating results. 28 Rapid Technological and Market Changes The mechanical CAD/CAM/CAE industry is highly competitive, and is characterized by rapid technological advances. Accordingly, the Company's ability to realize its expectations will depend on its success at enhancing its current offerings, licensing technology from third parties, developing new products and services that keep pace with developments in technology and meeting evolving customer requirements, and delivering those products through appropriate distribution channels. This will require, among other things, correctly anticipating customer needs, hiring and retaining personnel with the necessary skills and creativity, providing adequate funding for the development efforts and managing distribution channels effectively. In addition, the Company's software has historically been available on a variety of platforms. However, the Company is aware of efforts by competitors to focus on single platform applications. There can be no assurance that multiple platform applications will provide the Company with any competitive advantage. The Company has continued to enhance its existing products through updated product releases. The Company has recently announced that those product releases will be less frequent in order to permit customers to more effectively absorb upgrades. The Company's competitive position and operating results could be adversely affected by failure to anticipate or respond adequately to customer requirements or to technological developments, particularly those of our competitors; or by significant delays in the development, production, testing, marketing or availability of new or enhanced products or services; or by the failure of customers to accept such products or services. Possibility of New Product Delays As is common in the computer software industry, the Company may from time to time experience delays in its product development and "debugging" efforts. Significant delays in developing, completing or shipping new or enhanced products could adversely affect the Company's financial performance. Among other things, such delays could cause the Company to incorrectly predict the fiscal quarter in which revenue from the shipment of the new or enhanced product will be realized and give the Company's competitors a greater opportunity to market competing products. Management of Growth Through Acquisitions The Company's product range and customer base have increased in the recent past due in part to acquisitions. The Company may acquire additional businesses or product lines in the future. In particular, the Company has announced that it has entered into an agreement to acquire Computervision, subject to several factors including approval of Computervision's shareholders. The probability of success of any acquisition may be dependent upon the Company's ability to integrate the acquired business or products successfully and to retain key personnel and customers associated with the acquisition. Failure to do so, or a material increase in the cost of integration, could cause actual results to differ from those projected in management's forward-looking statements. Competition The Company believes that the principal bases for competition in its markets are product functionality, price/performance characteristics, product portability, ease of product use, sales and marketing strength, support services and corporate reputation. In particular, the Company believes that the current success of its Pro/ENGINEER product line is due in part to the mechanical and functional superiority of such products over competitive offerings. The Company is aware of a number of efforts to develop technically equivalent competitive products and to market these products at lower prices. Should a competitor successfully bring such a product to market and be able to sell it at a lower price in the future, the Company's operating results could be adversely affected. In addition, the Company is aware of ongoing efforts by competitors, some of whom have greater resources than the Company, to emulate the performance and functionality of the Company's products, and competitors may develop PARAMETRIC TECHNOLOGY CORPORATION 29 Managements's Discussion and Analysis of Financial Condition and Results of Operations equivalent or superior technology. The Company's future success will depend in a large part on its ability to license additional products and services to its existing customer base as well as to the installed customer bases of traditional mechanical CAD/CAM/CAE suppliers. Dependence on Key Personnel The Company's success depends upon its ability to attract and retain highly skilled technical, managerial and sales personnel. While the Company has not to date experienced any significant difficulty in hiring or retaining qualified personnel, competition for such personnel in the computer industry in general, and the mechanical CAD/CAM/CAE industry in particular, is intense. Management's projections necessarily assume that the Company will continue to attract and retain such personnel and the failure to do so could have a material adverse effect on the Company's ability to develop and market competitive products and its ability to achieve projected operating results. Risks Associated with International Business A significant and growing portion of the Company's business comes from outside the United States. A consequence of increased international business is that a growing percentage of the Company's revenue and expenses are denominated in foreign currencies, which subjects the Company's results of operations to foreign exchange fluctuations. Although the Company may enter into forward foreign exchange contracts and foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may materially and adversely affect its results. Additional risks associated with international business include, but are not limited to, unexpected changes in regulatory practices and tariffs, staffing and managing foreign operations, longer collection cycles in certain areas, potential changes in tax laws, greater difficulty in protecting intellectual property rights and general economic and political conditions. Protection of Intellectual Property and Other Proprietary Rights The Company regards its software products as proprietary and attempts to protect its intellectual property rights by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability in its agreements with other parties. Although the Company intends to protect its intellectual property rights, there can be no assurance that the laws of all jurisdictions in which the Company's products are or may be developed, manufactured or sold will afford the same protections to its products and intellectual property, or will be enforced or enforceable by the Company, to the same extent as under the laws of the United States. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. While the Company has not, to date, had any significant claims of such nature asserted against it, there can be no assurance that third parties will not assert such claims against the Company with respect to existing or future products or that, if asserted, such claims would be resolved in a satisfactory manner. In the event of litigation to determine the validity of any third party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. 30 Consolidated Balance Sheet
September 30, - ------------------------------------------------------------------------------ (amounts in thousands) 1997 1996 - ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $154,228 $201,614 Short-term investments 354,516 232,602 Accounts receivable, net of allowance for doubtful accounts of $2,749 and $2,910 154,777 117,273 Other current assets 27,620 10,561 - ------------------------------------------------------------------------------ Total current assets 691,141 562,050 Marketable investments 45,580 21,896 Property and equipment, net 47,504 36,517 Other assets 48,198 38,754 - ------------------------------------------------------------------------------ Total assets $832,423 $659,217 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 36,417 $ 39,416 Accrued compensation 39,085 32,186 Deferred revenue 81,287 56,420 Income taxes 30,369 17,970 - ------------------------------------------------------------------------------ Total current liabilities 187,158 145,992 Other liabilities 470 793 Commitments and contingencies - ------------------------------------------------------------------------------ Stockholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized; none issued - - Common stock, $.01 par value; 350,000 shares authorized; 128,149 and 127,452 shares issued 1,281 1,275 Additional paid-in capital 253,201 207,039 Retained earnings 419,285 306,638 Treasury stock, at cost, 524 and 23 shares (24,169) (1,164) Other equity (4,803) (1,356) - ------------------------------------------------------------------------------ Total stockholders' equity 644,795 512,432 - ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $832,423 $659,217 ==============================================================================
The accompanying notes are an integral part of the consolidated financial statements. Parametric Technology Corporation 31 Consolidated Statement of Income
Year ended September 30, - ------------------------------------------------------------------------------ (amounts in thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------ Revenue: License $591,849 $448,699 $288,349 Service 216,947 151,423 105,961 - ------------------------------------------------------------------------------ Total revenue 808,796 600,122 394,310 - ------------------------------------------------------------------------------ Cost of revenue: License 8,233 4,642 3,348 Service 68,259 51,812 32,970 - ------------------------------------------------------------------------------ Total cost of revenue 76,492 56,454 36,318 - ------------------------------------------------------------------------------ Gross profit 732,304 543,668 357,992 - ------------------------------------------------------------------------------ Operating expenses: Sales and marketing 313,785 238,860 163,918 Research and development 53,236 39,476 25,591 General and administrative 38,699 28,557 20,414 Non-recurring acquisition and related costs - 32,119 29,438 - ------------------------------------------------------------------------------ Total operating expenses 405,720 339,012 239,361 - ------------------------------------------------------------------------------ Operating income 326,584 204,656 118,631 Interest income 17,096 13,914 10,159 Other expense, net (6,471) (2,413) (1,130) - ------------------------------------------------------------------------------ Income before income taxes 337,209 216,157 127,660 Provision for income taxes 118,024 78,247 50,298 - ------------------------------------------------------------------------------ Net income $219,185 $137,910 $ 77,362 ============================================================================== Net income per share $1.64 $1.04 $0.60 ============================================================================== Weighted average number of common and dilutive common equivalent shares outstanding 133,558 133,211 129,046 ==============================================================================
The accompanying notes are an integral part of the consolidated financial statements. 32 Consolidated Statement of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------ Foreign Unrealized Total Common stock Additional currency Treasury stock gain/(loss) stock- ---------------- paid-in translation Retained ------------------ on invest- holders' (amounts in thousands) Shares Amount capital adjustment earnings Shares Cost ments equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1994 120,649 $ 1,206 $113,373 $1,086 $ 135,513 - $ - $ - $251,178 - ------------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock for services 35 - 46 46 Issuance of common stock under stock plans 4,517 46 26,127 26,173 Income tax benefit related to incentive stock option plan 16,040 16,040 Foreign currency translation adjustment 578 578 Net income 77,362 77,362 Elimination of Rasna's net activity for the three months ended December 31, 1994 (72) (1) (89) 46 (404) (448) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1995 125,129 1,251 155,497 1,710 212,471 - - - 370,929 - ------------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock under stock plans 2,210 23 19,084 19,107 Issuance of common stock for acquisition 113 1 4,999 5,000 Income tax benefit related to incentive stock option plan 27,459 27,459 Purchase of common stock for treasury (1,779) (66,563) (66,563) Issuance of treasury stock under stock plans (43,743) 1,756 65,399 21,656 Foreign currency translation adjustment (3,026) (3,026) Unrealized loss on investments (40) (40) Net income 137,910 137,910 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1996 127,452 1,275 207,039 (1,316) 306,638 (23) (1,164) (40) 512,432 - ------------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock under stock plans 697 6 10,268 10,274 Income tax benefit related to incentive stock option plan 35,894 35,894 Purchase of common stock for treasury (3,720) (184,780) (184,780) Issuance of treasury stock under stock plans (106,538) 3,219 161,775 55,237 Foreign currency translation adjustment (3,534) (3,534) Unrealized gain on investments 87 87 Net income 219,185 219,185 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1997 128,149 $1,281 $253,201 $(4,850) $419,285 (524) $(24,169) $ 47 $644,795 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Parametric Technology Corporation 33 Consolidated Statement of Cash Flows
Year ended September 30, - --------------------------------------------------------------------------------- (amounts in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 219,185 $ 137,910 $ 77,362 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,377 16,800 9,466 Deferred income taxes 2,195 (6,420) (10,599) Charge for purchased research and development in process - 32,119 19,000 Changes in assets and liabilities net of effects from acquisitions: Increase in accounts receivable (52,139) (39,040) (13,129) (Increase) decrease in other current assets (14,646) 88 (2,334) (Increase) decrease in other assets (4,223) 205 (4,378) Increase in accounts payable and accrued expenses 9,358 15,377 5,660 Increase in accrued compensation 8,439 12,687 3,131 Increase in deferred revenue 27,174 19,420 16,436 Increase in income taxes 48,615 40,578 18,402 - --------------------------------------------------------------------------------- Net cash provided by operating activities 266,335 229,724 119,017 - --------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment, net (28,809) (29,650) (12,868) Payments for acquisitions (5,000) (22,119) (33,507) Additions to capitalized computer software costs (965) (815) (1,132) Proceeds from maturities of investments 423,988 244,645 171,163 Purchases of investments (577,499) (336,572) (264,926) - --------------------------------------------------------------------------------- Net cash used by investing activities (188,285) (144,511) (141,270) - --------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term obligations (113) (126) (175) Short-term borrowings, net - - (600) Proceeds from issuance of common stock 65,514 40,763 26,129 Purchases of treasury stock (184,780) (66,563) - - --------------------------------------------------------------------------------- Net cash provided (used) by financing activities (119,379) (25,926) 25,354 - --------------------------------------------------------------------------------- Elimination of Rasna's net cash activity for the three months ended December 31, 1994 - - (112) Effects of exchange rate changes on cash (6,057) (3,311) 447 - --------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (47,386) 55,976 3,436 Cash and cash equivalents at beginning of year 201,614 145,638 142,202 - --------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 154,228 $ 201,614 $ 145,638 =================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 34 Notes to Consolidated Financial Statements A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the financial statements. Certain reclassifications have been made for consistent presentation. On August 1, 1995, the Company completed its merger with Rasna Corporation ("Rasna"), a developer and marketer of software products for mechanical computer-aided engineering. The merger was accounted for as a pooling of interests. Accordingly, the accompanying consolidated financial statements have been retroactively combined to reflect this transaction. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation Foreign currency financial statements of international subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at period end for assets and liabilities and at average rates during the period for results of operations. The resulting foreign currency translation adjustments are reflected as a separate component of stockholders' equity. For international subsidiaries where the U.S. dollar is the functional currency, monetary assets and liabilities are translated using exchange rates in effect at period end, nonmonetary assets and liabilities are translated at historical rates and results of operations are translated at average rates for the period. The resulting foreign currency translation adjustments are included in income. Any gains or losses from foreign exchange transactions are included in income and are immaterial for all periods presented. Revenue Recognition 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 shipment, unless collection is not reasonably assured. Revenue from software maintenance contracts is recognized ratably over the contract period and other service revenue is recognized upon performance. Financial Instruments The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturities of these instruments. Cash Equivalents and Investments The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Short-term investments are those with maturities in excess of three months but less than one year. Marketable investments are those with maturities in excess of one year but less than two years. All cash equivalents and short-term and marketable investments have been classified as available for sale and are reported at fair value with unrealized gains and losses included in stockholders' equity. The Company invests its non-operating cash in debt instruments of financial institutions, government entities, corporations and mutual funds. The Company has established guidelines relative to credit ratings, diversification and maturities that maintain safety and liquidity. The Company has not experienced any losses on its investments. Concentration of Credit Risk The Company places its cash, cash equivalents and investments with financial institutions with high credit standing. The Company's 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. Parametric Technology Corporation 35 Notes to Consolidated Financial Statements Derivatives The Company enters into forward foreign exchange contracts to hedge specific foreign currency denominated receivables, which require the Company to exchange foreign currencies for U.S. dollars at maturity at rates agreed to at inception of the contracts. Exchange gains or losses arising from such transactions are included in other expense. All forward foreign exchange contracts are designated as effective hedges and are highly inversely correlated to the hedged item as required by generally accepted accounting principles. As of September 30, 1997 and 1996, the Company had approximately $50,170,000 and $11,766,000, respectively, of foreign exchange contracts outstanding. All contracts mature within one year. At September 30, 1997 and for all fiscal years presented, unrealized and realized gains and losses associated with exchange rate fluctuations on forward foreign exchange contracts are immaterial. Cash flows from the forward foreign exchange contracts are classified with the related receivables. The Company purchases foreign exchange option contracts from time to time to limit potential losses from adverse exchange rate movements on certain anticipated revenue transactions. The contracts are primarily in European currencies and Japanese yen and have maturities of less than one year. All foreign exchange option contracts are designated as hedges, the purpose of which is to protect against the potential appreciation of the U.S. dollar for certain anticipated revenue transactions. Premiums to purchase foreign exchange option contracts are capitalized to other current assets and amortized to other expense over the life of the contract. Gains on option contracts, if any, are included in license and service revenues in the period in which the related local currency revenue is reported. For 1997 these transactions were immaterial. There were no outstanding option contracts at September 30, 1997. Property and Equipment Property and equipment are stated at cost and depreciated using the straight- line method over the estimated useful lives, typically three years. Leasehold improvements are amortized over the shorter of the 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 the estimated useful lives. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Capitalized Computer Software Costs and Intangible Assets The Company incurs 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 are amortized over the economic lives of the related products, typically three years, beginning at their initial shipment date. Capitalized computer software costs of $1,687,000 and $3,174,000, included in other assets, are net of accumulated amortization of $8,002,000 and $5,672,000 at September 30, 1997 and 1996, respectively. Amortization charged to expense was $2,329,000, $2,021,000 and $1,334,000 for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. In fiscal 1995, purchased software of $3,400,000 and intangible assets of $11,083,000 (including goodwill of $7,703,000) were capitalized and were attributable to the acquisition of the Conceptual Design and Rendering System ("CDRS") software business operated by the Design Software Division of Evans & Sutherland Computer Corporation. These assets, included in other assets, are amortized on a straight-line basis, over three and seven years, respectively. Amortization charges related to intangible assets, the majority of which were reflected in general and administrative expenses, totaled $1,570,000, $1,580,000 and $725,000 for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. The Company evaluates the net realizable value of capitalized computer software costs and intangible assets on an ongoing basis relying on a number of factors including operating results, business plans, budgets and economic projections. 36 Income Per Common Share Income per common share is computed based upon the weighted average number of common and dilutive common equivalent shares outstanding during the year. Fully diluted and primary earnings per common share are the same amounts for each of the years presented. Dilutive common equivalent shares consist of stock options and are calculated using the treasury stock method. B. ACQUISITIONS On July 10, 1996, the Company acquired project modeling and management software ("Reflex") technology from Greenshire License Co. for $32,119,000, which included the issuance of 113,000 shares of the Company's common stock with a fair value of $5,000,000 at the time of the acquisition. Payments of $5,000,000 in fiscal 1997 and $22,119,000 in fiscal 1996 were from the Company's existing cash balances. The acquisition has been accounted for as a purchase. The purchase price was allocated to purchased research and development in process as no other tangible or intangible assets were identified. The purchased research and development in process had not reached technological feasibility, had no alternative future use and was valued using expected future cash flows, discounted for risks and uncertainties related to the target markets and the completion of the products. As a result, at the date of acquisition, the $32,119,000 allocated to purchased research and development in process was recorded as a non-recurring charge. The operating results of Reflex have not been material in relation to those of the Company and are included in the Company's consolidated results of operations from the date of acquisition. On August 1, 1995, the Company acquired Rasna by merging it into the Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995. Based on the number of shares of Rasna common stock outstanding, the Company issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its common stock for outstanding Rasna stock options assumed. The merger was accounted for as a pooling of interests. In conjunction with the Rasna merger, the Company recorded a non-recurring charge of $10,438,000, which included approximately $6,028,000 for transaction fees, $1,722,000 for severance related expenses, and $2,688,000 related to integration costs and lease and distributor termination costs. The following information shows revenue and net income of the separate companies during the period preceding the combination. Adjustments recorded to conform the accounting policies of the companies were not material to the consolidated financial statements.
- -------------------------------------------------------------------------------- Nine months ended (in thousands) July 1, 1995 - -------------------------------------------------------------------------------- Revenue: Parametric $252,566 Rasna 22,500 - -------------------------------------------------------------------------------- $275,066 ================================================================================ Net income: Parametric $ 54,809 Rasna 2,267 - -------------------------------------------------------------------------------- $57,076 ================================================================================
On April 12, 1995, the Company acquired substantially all of the assets and specified liabilities of CDRS for $33,507,000 in cash, which was paid by the Company from its existing cash balances. The acquisition was accounted for as a purchase. The purchase price has been allocated to the assets acquired, including certain intangible assets, such as purchased computer software and research and development in process, based on their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill ($7,703,000), which is being amortized on a straight-line basis over seven years. In conjunction with the acquisition, the Company recorded a non-recurring charge of $19,000,000 related to the write-off of purchased research and development in process. CDRS's results of operations have been included in the consolidated results of operations since the date of acquisition. Parametric Technology Corporation 37 Notes to Consolidated Financial Statements C. INVESTMENTS The following is a summary of investments held as available-for-sale:
September 30, 1997 - ----------------------------------------------------------------------------------------------- Gross Gross Estimated unrealized unrealized fair (in thousands) Cost gains losses value - ----------------------------------------------------------------------------------------------- Municipal debt securities $357,372 $233 $ (165) $357,440 Mutual funds 9,812 - - 9,812 Auction rate Corporate debt securities 11,106 3 (23) 11,086 - ----------------------------------------------------------------------------------------------- Total investments $415,164 $237 $ (190) $415,211 =============================================================================================== Amounts included in cash and cash equivalents $ 15,115 $ - $ - $ 15,115 Amounts included in short-term investments 354,567 133 (184) 354,516 Amounts included in marketable investments 45,482 104 (6) 45,580 - ----------------------------------------------------------------------------------------------- Total investments $415,164 $237 $ (190) $415,211 =============================================================================================== September 30, 1996 - ----------------------------------------------------------------------------------------------- Gross Gross Estimated unrealized unrealized fair (in thousands) Cost gains losses value - ----------------------------------------------------------------------------------------------- Municipal debt securities $269,728 $240 $ (270) $269,698 Mutual funds 20,422 - - 20,422 Auction rate preferred stock 40,287 10 (10) 40,287 U.S. Government debt securities 13,233 10 (20) 13,223 - ----------------------------------------------------------------------------------------------- Total investments $343,670 $260 $ (300) $343,630 =============================================================================================== Amounts included in cash and cash equivalents $ 89,132 $ 10 $ (10) $ 89,132 Amounts included in short-term investments 232,522 250 (170) 232,602 Amounts included in marketable investments 22,016 - (120) 21,896 - ----------------------------------------------------------------------------------------------- Total investments $343,670 $260 $ (300) $343,630 ===============================================================================================
Fair values have been determined through information obtained from market sources and management estimates. Realized gains and losses on the sale of each type of security for the years ended September 30, 1997, 1996 and 1995 were immaterial. For the purpose of determining gross realized gains and losses, the cost of securities sold is based upon specific identification. D. PROPERTY AND EQUIPMENT Property and equipment consists of:
September 30, - ------------------------------------------------------------------------------ (in thousands) 1997 1996 - ------------------------------------------------------------------------------ Computer hardware and software $ 76,098 $ 55,825 Furniture and fixtures 9,549 6,530 Leasehold improvements 8,503 4,501 - ------------------------------------------------------------------------------ 94,150 66,856 ============================================================================== Less: accumulated depreciation and amortization (46,646) (30,339) - ------------------------------------------------------------------------------ Total $ 47,504 $ 36,517 ==============================================================================
Depreciation expense totaled $18,993,000, $13,171,000 and $7,663,000 for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. At September 30, 1997 and 1996, property and equipment (principally computer hardware) includes assets under capital leases of $175,000 and $312,000, less accumulated amortization of $140,000 and $167,000, respectively. E. INCOME TAXES 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 this difference is reported as deferred income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences, utilizing current tax rates, of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Deferred tax expense represents the change in the deferred tax asset or liability balances. 38 The provision for income taxes consists of the following:
Year ended September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- FEDERAL INCOME TAXES: Current $ 82,201 $57,880 $30,257 Deferred 3,677 (7,730) 7,068 - -------------------------------------------------------------------------------- 85,878 50,150 37,325 - -------------------------------------------------------------------------------- STATE INCOME TAXES: Current 18,280 10,719 6,113 Deferred 119 529 1,997 - -------------------------------------------------------------------------------- 18,399 11,248 8,110 - -------------------------------------------------------------------------------- FOREIGN INCOME TAXES: Current 13,582 16,068 3,329 Deferred 165 781 1,534 - -------------------------------------------------------------------------------- 13,747 16,849 4,863 - -------------------------------------------------------------------------------- Total $118,024 $78,247 $50,298 ================================================================================
The differences between statutory federal income taxes and the provision for income taxes are as follows:
Year ended September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Statutory federal income taxes $118,024 $75,655 $44,681 State income taxes, net of federal tax benefit 11,959 7,311 5,386 Tax exempt interest income (4,496) (3,600) (2,744) Tax benefit of foreign sales corporation (8,058) (6,308) (3,357) Other, net 595 5,189 4,006 - -------------------------------------------------------------------------------- Subtotal 118,024 78,247 47,972 Non-deductible acquisition costs - - 2,326 - -------------------------------------------------------------------------------- Total $118,024 $78,247 $50,298 ================================================================================
The components of the net deferred tax asset are as follows:
September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Reserves not currently deductible $ 2,117 $ 2,901 Depreciation 854 278 Net operating loss carryforwards 730 1,882 Amortization of intangible assets 14,979 18,565 Other 2,390 1,149 - -------------------------------------------------------------------------------- Total deferred tax assets 21,070 24,775 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Capitalized software (299) (563) Other (1,163) (643) - -------------------------------------------------------------------------------- Total deferred tax liabilities (1,462) (1,206) - -------------------------------------------------------------------------------- Valuation allowance (662) (662) - -------------------------------------------------------------------------------- Net deferred tax asset $ 18,946 $22,907 ================================================================================
The net operating loss carryforwards of $2,186,000 at September 30, 1997 will expire in fiscal 2000. Ownership changes, as defined in the Internal Revenue Code of 1986, as amended, limit the amount of the net operating loss carryforwards that can be utilized annually. The Company has recorded a valuation allowance for the tax benefit of certain foreign net operating loss carryforwards since realization of these future benefits is not sufficiently assured at September 30, 1997. F. COMMON STOCK On February 13, 1997, the stockholders approved an amendment to the Company's Articles of Organization to increase the number of authorized shares of the Company's common stock from 215,000,000 to 350,000,000. On February 8, 1996, the Company's Board of Directors declared a one- for-one stock dividend on all shares of common stock, which became effective on February 29, 1996 to all stockholders of record on February 22, 1996. These financial statements and related notes have been retroactively adjusted, as appropriate, to reflect this one-for-one stock dividend. On May 12, 1994, the Company announced that its Board of Directors had authorized a plan that allowed the Company to repurchase up to 6,000,000 shares of its common stock. During fiscal 1997, the Company repurchased 3,720,000 shares at a cost of $184,780,000, of which 524,000 remained in treasury at September 30, 1997, to partially offset the dilution caused by the exercise of stock options under the Company's option plans and the purchase of shares under the employee stock purchase plan. During fiscal 1996, the Company repurchased 1,779,000 shares at a cost of $66,563,000. Since the inception of the plan, the Company has repurchased 5,813,000 shares. On September 11, 1997, the Company announced that its Board of Directors had authorized an increase in the number of shares of common stock that the Company may repurchase under the repurchase program from 6,000,000 to 12,000,000 shares. In anticipation of the Computervision acquisition (see Note K), the Company has suspended repurchases and the Board of Directors has rescinded authorization of the repurchase program. Parametric Technology Corporation 39 Notes to Consolidated Financial Statements G. STOCK PLANS Stock Options Under the 1987 Incentive Stock Option Plan (the "Stock Option Plan"), the Board of Directors may grant options to key employees to purchase shares at an option exercise price equal to the fair market value on the date of grant. The options are exercisable at such times, in installments or otherwise, as the Board of Directors may determine. Generally, these options vest ratably over a period of four years and expire ten years from the date of grant. The Stock Option Plan limits the number of options that may be granted to any eligible employee in any fiscal year to 1,000,000 options. In fiscal 1996, the stockholders approved an increase in the number of shares issuable under this plan from 42,792,000 to 48,792,000 and a change to the designation of persons eligible to receive options under the Stock Option Plan to include consultants. On February 13, 1997, the stockholders approved the 1997 Incentive Stock Option Plan (the "1997 Stock Option Plan") for which 6,000,000 shares of common stock have been reserved, and the Board of Directors also approved the 1997 Non- Qualified Stock Option Plan (the "1997 Non-Qualified Plan") for which 3,100,000 shares of common stock have been reserved. The 1997 Stock Option Plan and the 1997 Non-Qualified Plan (collectively the "1997 Plans") replace and essentially have the same terms and conditions as the Stock Option Plan. No additional options will be granted under the Stock Option Plan, but the rights and privileges of holders of outstanding options under the Stock Option Plan will continue under the terms of that plan. Under the 1997 Plans, the Board of Directors may grant options to employees and consultants to purchase shares at a price equal to the fair market value on the date of grant. Persons subject to Section 16 of the Exchange Act of 1934, as amended, are not eligible to receive options under the 1997 Non-Qualified Plan. The options are exercisable at such time, in installments or otherwise, as the Board of Directors may determine. Generally, these options vest ratably over a period of four years and expire ten years from the date of grant. Under the 1992 Director Stock Option Plan (the "1992 Director Plan"), 640,000 shares of common stock have been reserved. The purpose of the 1992 Director Plan is to attract and retain qualified persons who are not also officers or employees of the Company (the "Eligible Directors") to serve as Directors of the Company and to encourage stock ownership in the Company by such Directors. Options granted under the 1992 Director Plan, at an option price equal to the fair market value on the date of grant, shall become exercisable in four equal annual installments following the date of grant if, and only if, the optionee is a Director of the Company on such anniversary date. The options expire ten years from the date of grant. Options to purchase 80,000 shares of common stock were granted in fiscal 1995 to Eligible Directors of the Company. In fiscal 1996, the stockholders approved the 1996 Director Stock Option Plan (the "1996 Director Plan") for which 180,000 shares of common stock have been reserved. The 1996 Director Plan replaces the 1992 Director Plan. The terms of the 1996 Director Plan are essentially the same as the 1992 Director Plan, except that each Eligible Director is automatically granted options to purchase 20,000 shares of common stock at the time of initial election to the Board of Directors, and immediately following the meeting of stockholders every year, each Eligible Director continuing in office after such meeting will automatically be granted options to purchase 5,000 shares of common stock. No additional options will be granted under the 1992 Director Plan, but the rights and privileges of holders of outstanding options under the 1992 Director Plan are not adversely affected by the 1996 Director Plan. In conjunction with the Rasna merger, the Company assumed 1,045,000 outstanding options on August 1, 1995. These assumed options were granted at prices equal to the fair market value at the date of grant, become exercisable in installments (generally ratably over four years) and expire ten years from the date of grant. The Company does not intend to issue any additional options under the Rasna stock option plan. At September 30, 1997, options remaining under the assumed plan were approximately 173,000. 40 The following table summarizes stock option transactions under all plans:
- -------------------------------------------------------------------------------- Weighted average Shares exercise price - -------------------------------------------------------------------------------- Outstanding at September 30, 1994 14,851,258 $10.32 - -------------------------------------------------------------------------------- Granted and assumed 6,418,626 24.41 Canceled (883,518) 15.00 Exercised (4,324,704) 6.89 - -------------------------------------------------------------------------------- Outstanding at September 30, 1995 16,061,662 16.72 - -------------------------------------------------------------------------------- Granted 5,139,750 38.82 Canceled (1,381,180) 21.93 Exercised (3,842,020) 10.38 - -------------------------------------------------------------------------------- Outstanding at September 30, 1996 15,978,212 24.99 - -------------------------------------------------------------------------------- Granted 7,914,500 49.07 Canceled (1,614,834) 36.17 Exercised (3,737,492) 16.19 - -------------------------------------------------------------------------------- Outstanding at September 30, 1997 18,540,386 $36.18 ================================================================================
Options available for grant at September 30, 1997 were 3,949,000. Options exercisable at September 30, 1997 were 4,635,000 as compared with 4,554,000 and 2,354,000 for fiscal 1996 and 1995, respectively. The average exercise price for options exercisable at September 30, 1997 was $22.57 as compared with $14.35 and $8.19 for fiscal 1996 and 1995, respectively. Certain employees have disposed of stock acquired through the exercise of incentive stock options earlier than the mandatory holding period required for such options. The tax benefits allowed to the Company because of these dispositions, together with the tax benefits realized from the exercise of nonqualified stock options, have been recorded as increases to additional paid-in capital. For various price ranges, weighted average information for options outstanding at September 30, 1997 were as follows:
OUTSTANDING OPTIONS - -------------------------------------------------------------------------------- Weighted average Range of per share remaining life Weighted average exercise prices Shares (in years) exercise price - -------------------------------------------------------------------------------- $ 0.01 - 11.31 887,295 3.67 $5.55 $11.32 - 21.81 4,282,215 7.06 18.55 $21.82 - 35.00 3,871,949 8.12 32.37 $35.01 - 45.25 3,812,702 9.35 43.93 $45.26 - 50.88 3,678,275 9.49 48.40 $50.89 - 60.56 2,007,950 9.15 54.93
EXERCISABLE OPTIONS - -------------------------------------------------------------------------------- Range of per share Weighted average exercise prices Shares exercise price - -------------------------------------------------------------------------------- $ 0.01 - 11.31 843,526 $ 5.55 $11.32 - 21.81 2,079,290 17.90 $21.82 - 35.00 1,217,990 31.60 $35.01 - 45.25 446,572 44.13 $45.26 - 50.88 47,241 48.51 $50.89 - 60.56 - - - --------------------------------------------------------------------------------
These options will expire if not exercised at specific dates ranging from January 1998 to September 2007. A total of 22,489,136 shares of the Company's common stock have been reserved for future issuance under stock option plans. Stock Purchase Plan The 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") enables eligible employees to purchase the Company's common stock at 85% of the fair market value of the stock on the date an offering commences or on the date an offering terminates, whichever value is lower. The 1991 Purchase Plan covers substantially all employees, subject to certain limitations. Each employee may elect to have up to 10% of his or her base pay withheld and applied toward the purchase of shares in such offering (provided that the aggregate amount of his or her base pay withheld may not exceed $10,000 in any fiscal year). The 1991 Purchase Plan covers an aggregate of up to 2,000,000 shares of common stock to be issued and sold to participating employees of the Company through a series of six-month offerings, beginning April 1, 1991. Purchases under the 1991 Purchase Plan for fiscal 1997, 1996 and 1995 were 176,705, 169,425 and 154,722 shares, generating proceeds to the Company of $6,488,000, $4,906,000 and $2,459,000, respectively. In fiscal 1997, the average purchase price was $36.82. At September 30, 1997, approximately 933,000 shares of common stock were reserved for purchases under the 1991 Purchase Plan. Stock Plans Valuation The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock-Based Compensation," issued in October 1995. In accordance with SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its option plans, and Parametric Technology Corporation 41 Notes to Consolidated Financial Statements accordingly does not record compensation costs. Pro forma information regarding net income and net income per share is required to be determined as if the Company had accounted for its stock options (including shares issued under the 1991 Purchase Plan, collectively called "options") under the fair value method of SFAS No. 123. The fair value of the options granted has been estimated at the date of grant using a Black-Scholes option pricing model assuming an expected life of five years (.5 years for 1991 Purchase Plan shares), no dividends, volatility of .40, and risk-free interest rates of 6.2%, 6.0% and 6.5% in 1997, 1996 and 1995, respectively. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for options been determined based on the Black-Scholes option pricing model at the grant date as prescribed by SFAS No. 123, pro forma information would have been:
- -------------------------------------------------------------------------------- (in thousands except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------- Net income - as reported $219,185 $137,910 $77,362 Net income - pro forma 168,250 105,060 59,844 Net income per share - as reported 1.64 1.04 0.60 Net income per share - pro forma 1.31 0.82 0.48
The pro forma disclosures above include the amortization of the fair value of all options vested during 1997, 1996 and 1995. If only options granted during 1997 and 1996 were valued, as prescribed by SFAS No. 123, pro forma net income would have been $185,696,000 and $126,820,000, and pro forma net income per share would have been $1.44 and $0.97 for 1997 and 1996, respectively. 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 the Company's 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 its options. The weighted average estimated fair value of employee stock options granted during fiscal years 1997, 1996 and 1995 was $22.33, $17.35 and $11.06 per share, respectively. The weighted average estimated fair value of shares granted under the 1991 Purchase Plan during fiscal years 1997, 1996 and 1995 was $12.26, $9.25 and $5.04 per share, respectively. 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. H. EMPLOYEE BENEFIT PLAN The Board of Directors in 1989 adopted the Parametric Technology Corporation 401(k) Savings Plan (the "Plan"), which is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers substantially all employees. Each employee may elect to contribute to the Plan, through payroll deductions, up to 15% of his or her salary, subject to certain limitations. The Company makes matching contributions on behalf of each participating employee in an amount equal to 50% of the amount contributed by the employee up to a maximum 10% employee contribution. The employee's entitlement to such Company contributions vests at a rate of 25% per year of service. For the fiscal years ended September 30, 1997, 1996 and 1995, the Company made matching contributions to the Plan which totaled $2,293,000, $1,867,000 and $1,034,000, respectively. 42 I. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes in fiscal 1997, 1996 and 1995 was $55,037,000, $38,853,000 and $40,281,000, respectively. During fiscal 1997, the Company did not acquire any fixed assets under capital leases. J. COMMITMENTS AND CONTINGENCIES Leasing Arrangements The Company leases its office facilities and certain equipment under operating leases expiring at various dates through fiscal 2003. The Company also leases computer equipment under capital leases that expire through fiscal 1999. At September 30, 1997, future minimum lease payments under capital and operating leases with initial or remaining terms of one or more years are as follows:
- -------------------------------------------------------------------------------- Capital Operating (in thousands) Leases Leases - -------------------------------------------------------------------------------- 1998 $37 $34,214 1999 2 23,080 2000 - 13,047 2001 - 6,091 2002 - 3,134 Subsequent to 2002 - 2,236 - -------------------------------------------------------------------------------- Total minimum lease payments 39 $81,802 ======================= Less amounts representing interest (2) - ------------------------------------------------------ Present value of net minimum lease payments $37 ======================================================
Rental expense under operating leases was $30,460,000, $21,520,000 and $15,186,000 for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. Legal Proceedings The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Management currently believes that resolving these matters will not have a material adverse impact on the Company's financial position or its results of operations. K. SUBSEQUENT EVENT On November 4, 1997, the Company announced that it had entered into an agreement to acquire Computervision Corporation ("Computervision") in a stock-for-stock transaction. Based on the November 3, 1997 closing price of the Company's stock, the aggregate equity value of the transaction is approximately $260,000,000. The Company will also assume approximately $240,000,000 in debt from Computervision. Under the terms of the proposed transaction, each share of Computervision common stock will be exchanged for .0866 shares of the Company's common stock and Computervision will become a wholly-owned subsidiary of the Company. The transaction is intended to be accounted for as a pooling of interests and to qualify as a tax-free reorganization. Subject to several conditions, including approval of Computervision's shareholders, the transaction is expected to close in the second quarter of fiscal 1998. The Company expects to recognize a non- recurring charge of approximately $75,000,000 to $95,000,000 related to certain merger-related, debt prepayment, consolidation and integration expenses during the quarter in which the transaction closes. L. SEGMENT AND GEOGRAPHIC INFORMATION The Company is engaged in one industry segment: the development, marketing and support of software products for the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing and engineering) industry. The Company licenses products to customers on a worldwide basis. Sales and marketing operations outside the United States are conducted principally through the Company's foreign sales subsidiaries throughout Europe and Asia/Pacific. Intercompany sales and transfers between geographic areas are accounted for at prices which are designed to be representative of unaffiliated party transactions. Parametric Technology Corporation 43 Notes to Consolidated Financial Statements
North America Europe Asia/Pacific Corporate Eliminations Total - ------------------------------------------------------------------------------------------------------------------------------------ (amounts in thousands) Year ended September 30, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue from unaffiliated customers: License $255,695 $146,164 $ 79,207 $481,066 Service 114,981 59,884 25,150 200,015 Revenue from unaffiliated export: Europe 66,077 66,077 Asia/Pacific 61,638 61,638 Intercompany revenue 277,428 46,604 34,302 $(358,334) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 775,819 252,652 138,659 (358,334) 808,796 - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 313,373 5,926 7,285 326,584 Other income (expense) (2,999) (567) 354 $ 13,837 10,625 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 310,374 5,359 7,639 13,837 337,209 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 666,334 75,019 46,060 399,769 (354,759) 832,423 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ (amounts in thousands) Year ended September 30, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue from unaffiliated customers: License $182,494 $115,424 $ 75,970 $373,888 Service 82,386 43,804 15,507 141,697 Revenue from unaffiliated export: Europe 48,583 48,583 Asia/Pacific 35,954 35,954 Intercompany revenue 167,800 29,006 18,835 $(215,641) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 517,217 188,234 110,312 (215,641) 600,122 - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 182,656 12,048 9,952 204,656 Other income (expense) 1,177 (418) (17) $ 10,759 11,501 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 183,833 11,630 9,935 10,759 216,157 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 564,107 65,612 37,282 328,037 (335,821) 659,217 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ (amounts in thousands) Year ended September 30, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue from unaffiliated customers: License $134,412 $ 76,871 $ 36,739 $248,022 Service 63,427 28,484 9,230 101,141 Revenue from unaffiliated export: Europe 28,518 28,518 Asia/Pacific 16,629 16,629 Intercompany revenue 92,339 19,422 7,306 $(119,067) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 335,325 124,777 53,275 (119,067) 394,310 - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 112,620 2,547 3,464 118,631 Other income (expense) 1,794 (790) (226) $ 8,251 9,029 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 114,414 1,757 3,238 8,251 127,660 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 403,247 46,224 19,263 242,568 (257,575) 453,727 ====================================================================================================================================
44 Report of Independent Accountants TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF PARAMETRIC TECHNOLOGY CORPORATION: We have audited the accompanying consolidated balance sheets of Parametric Technology Corporation as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. 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. The financial statements of Parametric Technology Corporation for the year ended September 30, 1995, were audited by other auditors whose report dated October 19, 1995, except as to Notes F and G which are as of November 17, 1995, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1997 and 1996 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Parametric Technology Corporation as of September 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts October 15, 1997, except for Note K, as to which the date is November 4, 1997 Parametric Technology Corporation 45 Selected Financial Data/(1)/
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEAR ENDED SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Revenue $808,796 $600,122 $394,310 $266,974 $179,311 Operating income 326,584 204,656 118,631 103,362 66,502 Net income 219,185 137,910 77,362 68,089 43,470 Net income per share/(2)/ 1.64 1.04 0.60 0.54 0.36 Weighted average number of common and dilutive common equivalent shares outstanding/(2)/ 133,558 133,211 129,046 125,051 122,424 Total assets 832,423 659,217 453,727 305,125 190,975 Working capital 503,983 416,058 317,702 229,878 137,581 Stockholders' equity 644,795 512,432 370,929 251,178 154,655 Excluding acquisition and related costs:/(3)/ Net income 219,185 158,402 98,500 68,089 43,470 Net income per share/(2)/ 1.64 1.19 0.76 0.54 0.36 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) FISCAL QUARTER ENDED - ------------------------------------------------------------------------------------------------------------- September 30, June 28, March 29, December 28, (in thousands, except per share data) 1997 1997 1997 1996 - ------------------------------------------------------------------------------------------------------------- Revenue $220,169 $207,114 $198,012 $183,501 Gross profit 199,295 187,605 179,451 165,953 Operating income 90,398 83,556 79,177 73,453 Net income 60,488 56,188 53,058 49,451 Net income per share/(2)/ 0.46 0.42 0.39 0.37 Common stock prices:/(4)/ High 53.50 48.88 62.50 56.38 Low 41.25 39.31 46.50 48.25 FISCAL QUARTER ENDED - ------------------------------------------------------------------------------------------------------------- September 30, June 29, March 30, December 30, (in thousands, except per share data) 1996 1996 1996 1995 - ------------------------------------------------------------------------------------------------------------- Revenue $177,128 $157,104 $140,493 $125,397 Gross profit 160,607 143,014 127,104 112,943 Operating income 38,664 62,173 55,086 48,733 Net income 26,433 41,620 36,837 33,020 Net income per share/(2)/ 0.20 0.31 0.28 0.25 Excluding acquisition and related costs:/(3)/ Net income 46,925 41,620 36,837 33,020 Net income per share/(2)/ 0.35 0.31 0.28 0.25 Common stock prices:/(4)/ High 51.63 48.75 39.13 35.63 Low 37.38 34.38 27.13 27.38
(1) All financial information presented here has been retroactively restated to reflect the fiscal 1995 Rasna merger that has been accounted for as a pooling of interests. See Note A of Notes to Consolidated Financial Statements for additional information. (2) Per-share data and weighted average number of common and dilutive common equivalent shares outstanding have been retroactively adjusted to reflect the one-for-one stock dividends on all shares of capital stock declared by the Company's Board of Directors on February 4, 1993 and February 8, 1996, effective February 25, 1993 and February 29, 1996, respectively. (3) The acquisition and related costs consist of $32,119 in the fourth quarter of fiscal 1996 related to the acquisition of Reflex technology, $10,438 related to the merger of Rasna Corporation into the Company in the fourth quarter of fiscal 1995 and $19,000 in the third quarter of fiscal 1995 related to its acquisition of the Conceptual Design and Rendering System software business. See Note B of Notes to Consolidated Financial Statements for additional information. (4) The common stock of the Company is traded on the Nasdaq National Market under the symbol "PMTC". The common stock prices shown are based on the Nasdaq daily closing stock price. 46 Supplemental Financial Information The Company has not paid cash dividends on its common stock and has historically retained earnings for use in its business. The Company intends to review its 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. On September 30, 1997, the number of stockholders of record of the Company's common stock was 4,489. Investor Information Requests for information about the Company should be directed to: John Hudson, Vice President of Investor Relations Parametric Technology Corporation 128 Technology Drive, Waltham, MA 02154 Telephone: (781) 398-5000 Report on Form 10-K Stockholders may obtain additional financial information about Parametric Technology from the Company's Report on Form 10-K filed with the Securities and Exchange Commission. Copies are available from the Company without charge upon written request. Annual Meeting The Annual Meeting of Stockholders will be held on February 12, 1998 at 9:00 A.M. at: Parametric Technology Corporation, 128 Technology Drive, Waltham, MA 02154. Stock Listing Nasdaq National Market Symbol: PMTC Internet Access http://www.ptc.com General Counsel Palmer & Dodge LLP, Boston, MA Independent Accountants Coopers & Lybrand L.L.P., Boston, MA Transfer Agent and Registrar American Stock Transfer & Trust Company Directors Steven C. Walske Chairman and Chief Executive Officer Parametric Technology Corporation C. Richard Harrison President and Chief Operating Officer Parametric Technology Corporation Robert N. Goldman Chief Executive Officer and President Object Design Inc., a software developer Donald K. Grierson Chief Executive Officer and President ABB Vetco Gray, Inc., an oil services business Oscar B. Marx, III Chief Executive Officer and President TMW Enterprises, an autoparts business Michael E. Porter Professor Harvard Business School, an educational institution Noel G. Posternak Senior Partner Posternak, Blankstein & Lund L.L.P., a law firm Corporate Officers Steven C. Walske Chairman of the Board of Directors and Chief Executive Officer C. Richard Harrison President and Chief Operating Officer Edwin J. Gillis Executive Vice President of Finance and Administration Chief Financial Officer and Treasurer John D. McMahon Executive Vice President of Worldwide Sales James F. Kelliher Senior Vice President of Finance Martha L. Durcan Vice President, Corporate Counsel and Clerk John G. Mokas Director of Treasury and Finance and Assistant Treasurer Parametric Technology Corporation, Pro/ENGINEER and Pro/MECHANICA are registered trademarks of Parametric Technology Corporation in the United States and other countries. Parametric Technology, PTC, the PTC logo, and all product names in the PTC product family are trademarks of Parametric Technology Corporation in the United States and other countries. All other companies and products referenced herein have trademarks or registered trademarks of their respective holders. (C) Copyright 1997, Parametric Technology Corporation Parametric Technology Corporation EX-21.1 5 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 Subsidiaries of the Company ---------------------------
Name Place of Incorporation ---- ---------------------- Parametric Holdings Inc. Delaware Parametric International, Inc. Delaware Parametric Technology International Inc. Delaware Parametric Securities Corporation Massachusetts PTC International, Inc. Massachusetts PTC Acquisition Corporation Massachusetts Parametric Technology Australia Pty Limited Australia Parametric Technology Gesellschaft m.b.H. Austria Parametric Foreign Sales Corporation Barbados Parametric Technology (Belgium) b.v.b.a. Belgium Parametric Technology Brasil Ltda. Brazil Parametric Technology (Canada) Ltd. Canada Parametric Technology (C.R.) s.r.o. Czech Republic Parametric Technology (Denmark) A/S Denmark Parametric Technology (Finland) Oy Finland Parametric Technology S.A. France Parametric Technology GmbH Germany Parametric Technology (Hong Kong) Limited Hong Kong Parametric Technology (India) Private Limited India Parametric Technology (Republic of Ireland) Limited Ireland Parametric Technology Israel Ltd. Israel Parametric Technology Italia S.r.l. Italy Nihon Parametric Technology K.K. Japan Parametric Korea Co., Ltd. Korea Parametric Technology Europe B.V. The Netherlands Parametric Technology Nederland B.V. The Netherlands Parametric Technology New Zealand Limited New Zealand Parametric Technology (Norway) AS Norway Parametric Technology Poland Sp. z o.o Poland Parametric Technology Portugal-Computadores, Lda Portugal Parametric Technology Singapore Pte Ltd Singapore Parametric Technology (Slovakia) s.r.o. Slovakia Parametric Technology South Africa Pty. Limited South Africa Parametric Technology Espana, S.A. Spain PTC Sweden AB Sweden Parametric Technology (Schweiz) AG Switzerland Parametric Technology Taiwan Ltd. Taiwan Parametric Technology (UK) Limited United Kingdom
EX-23.1 6 REPORT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.1 Report of Independent Accountants ---------------------------------- To the Stockholders and Board of Directors of Parametric Technology Corporation: Our report on the consolidated financial statements of Parametric Technology Corporation has been incorporated by reference in this Form 10-K from page 45 of the 1997 Annual Report to Stockholders of Parametric Technology Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in item 14(a)(2) on page 8 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /S/COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts October 15, 1997, except for Note K, as to which the date is November 4, 1997 EX-23.2 7 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.2 Consent of Independent Accountants ---------------------------------- We consent to the incorporation by reference in the registration statements of Parametric Technology Corporation on Form S-8 (File Nos. 333-01297, 333-01299, 33-52044, 33-89528, 33-61485, 333-38629, 333-28495, and 333-22169) and Form S-4 (File No. 333-39959) of our reports dated October 15, 1997, except for Note K, as to which the date is November 4, 1997, on our audits of the consolidated financial statements and financial statement schedule of Parametric Technology Corporation as of September 30, 1997 and 1996 and for the years then ended, which reports are included or incorporated by reference in this 1997 Annual Report on Form 10-K. /S/COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts December 29, 1997 EX-23.3 8 REPORT OF PRICE WATERHOUSE LLP EXHIBIT 23.3 Report of Independent Accountants --------------------------------- To the Stockholders and Board of Directors of Parametric Technology Corporation: In our opinion, the consolidated statements of income, of changes in stockholders' equity and of cash flows for the year ended September 30, 1995 (appearing on pages 32 through 34 of the Parametric Technology Corporation 1997 Annual Report to Stockholders which has been incorporated by reference in this Annual Report on Form 10-K) present fairly, in all material respects, the results of operations and cash flows of Parametric Technology Corporation and its subsidiaries for the year ended September 30, 1995, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with the generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Parametric Technology Corporation for any period subsequent to September 30, 1995. /S/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Boston, Massachusetts October 19, 1995, except as to Notes F and G which are as of November 17, 1995 EX-23.4 9 RPT. OF PRICE WATERHOUSE LLP FIN. STATMNT. SCH. EXHIBIT 23.4 Report of Independent Accountants on Financial Statement Schedule ----------------------------------------------------------------- To the Stockholders and Board of Directors of Parametric Technology Corporation: Our audit of the consolidated financial statements referred to in our report dated October 19, 1995, except as to Notes F and G which are as of November 17, 1995 (which report appears as Exhibit 23.3 in this Form 10-K and which consolidated financial statements are incorporated by reference in this Form 10- K) also included an audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K for the year ended September 30, 1995. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. We have not audited the consolidated financial statements of Parametric Technology Corporation for any period subsequent to September 30, 1995. /S/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Boston, Massachusetts October 19, 1995, except as to Notes F and G which are as of November 17, 1995 EX-23.5 10 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.5 Consent of Independent Accountants ---------------------------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-4 (File No. 333-39959) and the Registration Statements on Form S-8 (File Nos. 333-01297, 333-01299, 33- 52044, 33-89528, 33-61485, 333-38629, 333-28495, and 333-22169) of Parametric Technology Corporation and its subsidiaries of our report dated October 19, 1995, except as to Notes F and G which are dated November 17, 1995, which appears as Exhibit 23.3 in this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears as Exhibit 23.4 in this Form 10-K. /S/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Boston, Massachusetts December 23, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 154,228 354,516 157,526 2,749 0 691,141 94,150 46,646 832,423 187,158 0 0 0 1,281 643,514 832,423 591,849 808,796 8,233 76,492 405,720 0 0 337,209 118,024 219,185 0 0 0 219,185 1.64 1.64
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