UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: July 2, 2005
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 incorporation or organization) |
(I.R.S. Employer Identification Number) |
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES x NO ¨
There were 272,312,542 shares of our common stock outstanding on August 8, 2005 and 272,071,148 shares of our common stock outstanding on July 2, 2005.
PARAMETRIC TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended July 2, 2005
Page
Number |
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Item 1. |
Unaudited Financial Statements: |
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Consolidated Balance Sheets as of July 2, 2005 and September 30, 2004 |
1 | |||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
Item 3. |
43 | |||
Item 4. |
43 | |||
Item 1. |
44 | |||
Item 2. |
44 | |||
Item 6. |
45 | |||
46 |
PARAMETRIC TECHNOLOGY CORPORATION
(in thousands, except per share data)
(unaudited)
July 2, 2005 |
September 30,
2004 |
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ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 403,008 | $ | 294,887 | ||||
Accounts receivable, net of allowance for doubtful accounts of $5,802 and $6,340 at July 2, 2005 and September 30, 2004, respectively |
129,402 | 130,393 | ||||||
Prepaid expenses |
24,752 | 21,675 | ||||||
Other current assets (Note 1) |
48,206 | 36,262 | ||||||
Income taxes receivable (Note 7) |
| 39,523 | ||||||
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Total current assets |
605,368 | 522,740 | ||||||
Property and equipment, net |
53,057 | 55,780 | ||||||
Goodwill |
49,471 | 45,221 | ||||||
Other intangible assets, net |
14,080 | 11,322 | ||||||
Other assets |
32,834 | 31,319 | ||||||
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Total assets |
$ | 754,810 | $ | 666,382 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
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Accounts payable |
$ | 22,253 | $ | 19,067 | ||||
Accrued expenses and other current liabilities |
39,935 | 39,420 | ||||||
Accrued compensation and benefits |
50,404 | 58,086 | ||||||
Accrued income taxes |
39,044 | 39,428 | ||||||
Deferred revenue |
202,229 | 176,664 | ||||||
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Total current liabilities |
353,865 | 332,665 | ||||||
Other liabilities |
84,092 | 91,766 | ||||||
Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 5,000 shares authorized; none issued |
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Common stock, $0.01 par value; 500,000 shares authorized; 272,071 and 269,509 shares issued and outstanding at July 2, 2005 and September 30, 2004, respectively |
2,721 | 2,695 | ||||||
Additional paid-in capital |
1,671,305 | 1,662,421 | ||||||
Accumulated deficit |
(1,320,833 | ) | (1,387,150 | ) | ||||
Accumulated other comprehensive loss |
(36,340 | ) | (36,015 | ) | ||||
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Total stockholders equity |
316,853 | 241,951 | ||||||
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Total liabilities and stockholders equity |
$ | 754,810 | $ | 666,382 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
1
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
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Revenue: |
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License |
$ | 49,228 | $ | 52,405 | $ | 148,855 | $ | 146,893 | ||||||
Service |
131,106 | 115,972 | 376,772 | 343,002 | ||||||||||
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Total revenue |
180,334 | 168,377 | 525,627 | 489,895 | ||||||||||
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Costs and expenses: |
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Cost of license revenue |
1,692 | 2,260 | 4,945 | 6,301 | ||||||||||
Cost of service revenue |
50,434 | 43,764 | 144,411 | 132,440 | ||||||||||
Sales and marketing |
59,533 | 55,237 | 174,652 | 170,554 | ||||||||||
Research and development |
28,061 | 26,250 | 82,875 | 82,609 | ||||||||||
General and administrative |
13,874 | 13,369 | 43,856 | 42,693 | ||||||||||
Amortization of intangible assets (Note 5) |
226 | 1,227 | 670 | 3,972 | ||||||||||
Restructuring and other charges (Note 2) |
| 3,548 | | 41,848 | ||||||||||
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Total costs and expenses |
153,820 | 145,655 | 451,409 | 480,417 | ||||||||||
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Operating income |
26,514 | 22,722 | 74,218 | 9,478 | ||||||||||
Other income (expense), net |
2,476 | (300 | ) | 4,226 | (613 | ) | ||||||||
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Income before income taxes |
28,990 | 22,422 | 78,444 | 8,865 | ||||||||||
Provision for income taxes |
2,336 | 6,287 | 12,127 | 16,096 | ||||||||||
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Net income (loss) |
$ | 26,654 | $ | 16,135 | $ | 66,317 | $ | (7,231 | ) | |||||
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Earnings (loss) per share Basic and Diluted |
$ | 0.10 | $ | 0.06 | $ | 0.24 | $ | (0.03 | ) | |||||
Weighted average shares outstandingBasic |
271,791 | 268,104 | 271,018 | 267,292 | ||||||||||
Weighted average shares outstandingDiluted |
280,091 | 274,983 | 279,720 | 267,292 |
The accompanying notes are an integral part of the consolidated financial statements.
2
PARAMETRIC TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
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July 2,
2005 |
July 3,
2004 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | 66,317 | $ | (7,231 | ) | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
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Depreciation and amortization |
18,565 | 27,517 | ||||||
Other non-cash costs and expenses, net |
(1,022 | ) | 4,076 | |||||
Changes in operating assets and liabilities that provided (used) cash, net of acquisitions: |
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Accounts receivable |
402 | 2,795 | ||||||
Accounts payable and accrued expenses |
(5,611 | ) | (7,781 | ) | ||||
Accrued compensation and benefits |
(7,765 | ) | (3,458 | ) | ||||
Deferred revenue |
15,290 | 24,936 | ||||||
Income taxes receivable, net of accrued income taxes |
39,441 | 10,620 | ||||||
Other current assets and prepaid expenses |
746 | 10,123 | ||||||
Other noncurrent assets and liabilities |
(6,918 | ) | 119 | |||||
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Net cash provided by operating activities |
119,445 | 61,716 | ||||||
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Cash flows from investing activities: |
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Additions to property and equipment |
(11,561 | ) | (6,086 | ) | ||||
Additions to other intangible assets |
(1,173 | ) | (1,523 | ) | ||||
Acquisition of businesses, net of cash acquired |
(6,810 | ) | (9,822 | ) | ||||
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Net cash used by investing activities |
(19,544 | ) | (17,431 | ) | ||||
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
8,943 | 5,217 | ||||||
Purchases of treasury stock |
(291 | ) | | |||||
Payments of capital lease obligations |
(177 | ) | | |||||
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Net cash provided by financing activities |
8,475 | 5,217 | ||||||
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Effect of exchange rate changes on cash and cash equivalents |
(255 | ) | 2,927 | |||||
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Net increase in cash and cash equivalents |
108,121 | 52,429 | ||||||
Cash and cash equivalents, beginning of period |
294,887 | 205,312 | ||||||
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Cash and cash equivalents, end of period |
$ | 403,008 | $ | 257,741 | ||||
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Supplemental disclosures of cash flow information: |
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Property and equipment acquired under capital leases |
$ | 1,488 | $ | |
The accompanying notes are an integral part of the consolidated financial statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
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Net income (loss) |
$ | 26,654 | $ | 16,135 | $ | 66,317 | $ | (7,231 | ) | |||||||
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustment, net of tax of $0 for all periods |
(4,414 | ) | (855 | ) | (1,175 | ) | 1,190 | |||||||||
Net unrealized gain (loss) on securities, net of tax of $0 for all periods |
359 | (221 | ) | 849 | 257 | |||||||||||
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Other comprehensive income (loss) |
(4,055 | ) | (1,076 | ) | (326 | ) | 1,447 | |||||||||
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Comprehensive income (loss) |
$ | 22,599 | $ | 15,059 | $ | 65,991 | $ | (5,784 | ) | |||||||
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The accompanying notes are an integral part of the consolidated financial statements.
4
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America. Unless otherwise indicated, all references to a year reflect our fiscal year, which ends on September 30. The year-end consolidated balance sheet is derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. We have made a reclassification within cash flows from operating activities on the Consolidated Statement of Cash Flows for the nine months ended July 3, 2004 to conform to the 2005 presentation. While we believe that the disclosures presented are adequate to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Total maintenance-related customer receivables included in other current assets at July 2, 2005 and September 30, 2004 were $46.2 million and $33.3 million, respectively.
The results of operations for the three and nine months ended July 2, 2005 are not necessarily indicative of the results expected for the remainder of the fiscal year.
2. Restructuring and Other Charges
In connection with our operating cost reduction initiative commenced in 2003, in the third quarter and first nine months of 2004, we recorded total restructuring and other charges of $3.5 million and $41.8 million, respectively. Those charges include costs for severance and termination benefits related to 459 employees terminated during the first nine months of that year, of which 49 were terminated in the third quarter, and excess facilities and other costs. The charges for excess facilities were primarily related to gross lease commitments in excess of estimated sublease income for excess facilities. Of the total restructuring and other charges recorded for the first nine months of 2004, $1.6 million was non-cash for the write-off of leasehold improvements related to the excess facilities. There were no restructuring and other charges in the first nine months of 2005.
The following table summarizes restructuring accrual activity for the three and nine months ended July 2, 2005:
Three months ended July 2, 2005
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Nine months ended July 2, 2005
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Employee
Severance and Related Benefits |
Facility
Closures and Other Costs |
Total
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Employee
Severance and Related Benefits |
Facility
Closures and Other Costs |
Total
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(in thousands) | ||||||||||||||||||||||||
Beginning balance |
$ | 163 | $ | 37,544 | $ | 37,707 | $ | 388 | $ | 42,933 | $ | 43,321 | ||||||||||||
Cash disbursements |
(104 | ) | (1,843 | ) | (1,947 | ) | (329 | ) | (7,369 | ) | (7,698 | ) | ||||||||||||
Foreign exchange impact |
| (157 | ) | (157 | ) | | (20 | ) | (20 | ) | ||||||||||||||
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Balance, July 2, 2005 |
$ | 59 | $ | 35,544 | $ | 35,603 | $ | 59 | $ | 35,544 | $ | 35,603 | ||||||||||||
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5
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The accrual for facility closures and related costs is included in current liabilities (accrued expenses and other current liabilities) and long-term liabilities (other liabilities) in the consolidated balance sheets, and the accrual for employee severance and related benefits is included in accrued compensation and benefits. As of July 2, 2005, of the $35.6 million remaining in accrued restructuring charges, $11.2 million was included in current liabilities and $24.4 million was included in other long-term liabilities, principally for facility costs to be paid out through 2014.
3. Employee Stock Plans
As described in Note 6, Recent Accounting Pronouncements , in December 2004 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We adopted SFAS No. 123R on July 3, 2005, effective with the beginning of our fourth quarter. We expect that we will incur approximately $17 million of expense related to equity-based compensation in the fourth quarter of 2005. This expected amount includes expense for past stock option grants as well as the equity awards granted in the fourth quarter of 2005 described below. The actual expense amount will be finally determined in accordance with recent interpretations of SFAS No. 123R.
On March 10, 2005, our stockholders approved amendments to our 2000 Equity Incentive Plan that (1) authorize us to exchange and cancel certain outstanding out-of-the-money non-executive employee stock options for either cash or shares of restricted stock (the Exchange), (2) authorize the grant of restricted stock units, and (3) enable us to grant a greater number of shares of restricted stock as equity awards. The amendments are designed to reduce the overall number of employee stock options outstanding and reduce potential stockholder dilution.
On July 6, 2005, we filed a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission (the SEC) outlining the terms of the Exchange. In the Exchange, we offered eligible employees the opportunity to exchange outstanding stock options with exercise prices equal to or greater than $9 per share granted under our participating incentive plans for a cash payment. The offer period commenced on July 6, 2005 and expired on August 3, 2005. Employees holding approximately 18.3 million eligible stock options elected to participate in the Exchange. The aggregate amount of the cash payments to be made to employees in exchange for their eligible options is $12.8 million and will be paid in the fourth quarter. We expect that cash payments made in connection with the Exchange will be recorded as a charge to stockholders equity in accordance with the provisions of SFAS No. 123R. Accounting for the Exchange will be reflected in our consolidated financial statements for the fourth quarter of 2005.
We have equity incentive plans for employees, directors, officers and consultants that provide for grants of nonqualified and incentive stock options, restricted stock, restricted stock units and stock appreciation rights. We historically have granted stock options. For those options, the option exercise price is typically the fair market value at the date of grant, and they generally vest over four years and expire ten years from the date of grant. Going forward, we plan to use restricted stock and restricted stock units as the principal equity incentive awards. In addition, we historically have offered an employee stock purchase plan (ESPP) for all eligible employees. SFAS No. 123R includes revised accounting rules for company-sponsored stock purchase plans. In light of these accounting changes, we have suspended offerings under the ESPP as of the date of the offering that was to have commenced on February 1, 2005. These equity incentive plans are described more fully in Note I to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
6
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In July 2005, we granted our equity incentive awards for the 2005 fiscal year, which grants had been delayed from the beginning of the fiscal year pending the Companys adoption of SFAS No. 123R. We granted to our non-employee directors an aggregate of 210,000 shares of restricted stock, the restrictions on which will lapse in three substantially equal installments on each of November 1, 2005, November 1, 2006 and November 1, 2007. We also granted primarily to our executive officers an aggregate of 1,618,000 shares of restricted stock, 809,000 of which are performance-based and may be earned in whole or in part upon achievement of performance criteria. The restrictions on the shares granted to those officers, including the performance-based shares so earned, will lapse in three substantially equal installments on each of November 1, 2005, November 1, 2006 and November 1, 2007. In addition, we granted an aggregate of 3,388,425 restricted stock units to our employees. Each restricted stock unit represents the right to receive one share of our common stock. The restricted stock units generally will vest, and the shares issuable upon such vesting will be issued, in three substantially equal installments on each of September 27, 2005, November 1, 2006 and November 1, 2007. Finally, in connection with a consulting agreement we entered into with Michael E. Porter, a non-employee director, we made a grant of 100,000 shares of restricted stock, the restrictions on which will lapse in three substantially equal annual installments, beginning on the first anniversary of the date of grant.
Through July 2, 2005, the end of our third quarter of 2005, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees , and related interpretations. Under APB No. 25, no compensation cost is recognized when the option exercise price is equal to the market price of the underlying stock on the date of grant. Under SFAS No. 123R, which we adopted on July 3, 2005, employee stock options are valued at the grant date using an option pricing model and compensation cost is recognized ratably over the vesting period.
As permitted by APB No. 25, prior to adoption of SFAS No. 123R, we generally have not recognized compensation expense in connection with stock option grants to employees, directors and officers under our plans. The following table illustrates the effect on net income (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 to all stock-based awards to employees.
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July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
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(in thousands, except per share data) | ||||||||||||||||
Net income (loss), as reported |
$ | 26,654 | $ | 16,135 | $ | 66,317 | $ | (7,231 | ) | |||||||
Stock-based employee compensation cost included in reported net income (loss), net of tax of $0 for all periods |
36 | 110 | 254 | 328 | ||||||||||||
Stock-based employee compensation expense determined under fair value based method, net of tax of $0 for all periods |
(5,505 | ) | (8,252 | ) | (19,917 | ) | (26,401 | ) | ||||||||
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Pro forma net income (loss) |
$ | 21,185 | $ | 7,993 | $ | 46,654 | $ | (33,304 | ) | |||||||
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Earnings (loss) per share: |
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Basic and dilutedas reported |
$ | 0.10 | $ | 0.06 | $ | 0.24 | $ | (0.03 | ) | |||||||
Basic and dilutedpro forma |
$ | 0.08 | $ | 0.03 | $ | 0.17 | $ | (0.12 | ) |
The illustrative disclosures above include the amortization of the fair value of all options over their vesting schedules. The pro forma net income (loss) for all periods includes an income tax valuation allowance fully offsetting any income tax benefit related to the stock-based employee compensation expense for those periods. The effects indicated above of applying SFAS No. 123 are not necessarily representative of the effects on similar illustrative disclosures in future years.
7
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There were no stock options granted during the third quarter and first nine months of 2005. The fair value of options granted during the third quarter and first nine months of 2004 was estimated at the date of grant using the Black-Scholes option-pricing model assuming the following weighted-average assumptions:
Nine months ended
July 3, 2004 |
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Expected life of options (years) |
4.0 | ||
Expected life of ESPP shares (months) |
6.0 | ||
Risk-free interest rates for options |
3.0-3.5 | % | |
Risk-free interest rates for ESPP shares |
1.2-3.3 | % | |
Volatility |
75 | % | |
Dividend yield |
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The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
4. Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options using the treasury stock method.
Stock options to purchase 40.3 million, 42.0 million and 45.0 million shares for the third quarter and first nine months of 2005 and the third quarter of 2004, respectively, had exercise prices per share that were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive. Due to the net loss generated in the first nine months of 2004, the effect of outstanding stock options for the purchase of 67.6 million shares was excluded from the computation of diluted EPS as the effect would have been anti-dilutive. Of that amount, 48.2 million shares had exercise prices per share that were greater than the average market price of our common stock for that period.
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July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
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(in thousands, except per share data) | |||||||||||||
Net income (loss) |
$ | 26,654 | $ | 16,135 | $ | 66,317 | $ | (7,231 | ) | ||||
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Weighted average shares outstanding |
271,791 | 268,104 | 271,018 | 267,292 | |||||||||
Dilutive effect of employee stock options |
8,300 | 6,879 | 8,702 | | |||||||||
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Diluted shares outstanding |
280,091 | 274,983 | 279,720 | 267,292 | |||||||||
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Basic earnings (loss) per share |
$ | 0.10 | $ | 0.06 | $ | 0.24 | $ | (0.03 | ) | ||||
Diluted earnings (loss) per share |
$ | 0.10 | $ | 0.06 | $ | 0.24 | $ | (0.03 | ) |
5. Goodwill and Other Intangible Assets
We operate within a single industry segmentcomputer software and related services. Within this single industry segment as described in Note 8, Segment Information , we have two reportable segments: (1) software
8
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
products and (2) services. All of our goodwill and other intangible assets are associated with our software products reportable segment. Goodwill and other indefinite lived intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We conduct our annual impairment test as of the end of the third quarter of each year. We completed our most recent annual impairment review as of the end of the third quarter of 2005 and concluded that, as of July 2, 2005, no impairment charge was required. Other intangible assets with finite lives are tested for impairment if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value.
The following goodwill and other intangible assets are included in the accompanying consolidated balance sheets:
July 2, 2005
|
September 30, 2004
|
|||||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Net Book
Value |
Gross
Carrying Amount |
Accumulated
Amortization |
Net Book
Value |
|||||||||||||
(in thousands) | ||||||||||||||||||
Goodwill and intangible assets with indefinite lives (not amortized): |
||||||||||||||||||
Goodwill |
$ | 154,308 | $ | 104,837 | $ | 49,471 | $ | 150,223 | $ | 105,002 | $ | 45,221 | ||||||
Trademarks |
10,214 | 6,068 | 4,146 | 10,232 | 6,078 | 4,154 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Sub-total |
164,522 | 110,905 | 53,617 | 160,455 | 111,080 | 49,375 | ||||||||||||
Intangible assets with finite lives (amortized): |
||||||||||||||||||
Purchased software |
35,223 | 29,461 | 5,762 | 30,385 | 29,060 | 1,325 | ||||||||||||
Capitalized software |
22,877 | 20,132 | 2,745 | 22,877 | 18,654 | 4,223 | ||||||||||||
Customer lists |
10,728 | 9,301 | 1,427 | 10,665 | 9,045 | 1,620 | ||||||||||||
Other |
316 | 316 | | 316 | 316 | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Sub-total |
69,144 | 59,210 | 9,934 | 64,243 | 57,075 | 7,168 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total goodwill and other intangible assets |
$ | 233,666 | $ | 170,115 | $ | 63,551 | $ | 224,698 | $ | 168,155 | $ | 56,543 | ||||||
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|
|
|
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|
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|
|
The changes in the carrying amounts of goodwill and intangible assets with indefinite lives at July 2, 2005 from September 30, 2004 are due to the impact of acquisitions completed in the third quarter of 2005 described below and foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies. During the third quarter of 2005, we acquired Polyplan Technologies Inc., a provider of manufacturing process planning technology, and Aptavis Technologies Corporation, a provider of Windchill-based solutions for the retail, footwear and apparel industry. These acquisitions resulted in a $4.3 million increase in goodwill, a $3.7 million increase in purchased software and a $0.1 million increase in customer related intangible assets, in the third quarter of 2005.
The aggregate amortization expense for intangible assets with finite lives recorded for the three and nine months ended July 2, 2005 and July 3, 2004 was reflected in our consolidated statements of operations as follows:
Three months ended
|
Nine months ended
|
|||||||||||
July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
|||||||||
(in thousands) | ||||||||||||
Amortization of intangible assets |
$ | 226 | $ | 1,227 | $ | 670 | $ | 3,972 | ||||
Cost of license revenue |
451 | 770 | 1,505 | 2,248 | ||||||||
|
|
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|
|
|
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|
|||||
Total amortization expense |
$ | 677 | $ | 1,997 | $ | 2,175 | $ | 6,220 | ||||
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|
|
|
|
|
|
9
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of July 2, 2005 is $1.0 million for the remainder of 2005, $3.6 million for 2006, $2.7 million for 2007, $1.8 million for 2008 and $0.8 million for 2009.
6. Recent Accounting Pronouncements
Employee Stock-Based Compensation
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R addresses the accounting for transactions in which a company receives employee services in exchange for (1) equity instruments of the company or (2) liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. It eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees , and generally requires that such transactions be accounted for using a fair-value-based method. SFAS No. 123R is effective for fiscal years beginning after June 15, 2005, which would be our fiscal 2006. As permitted by SFAS No. 123R, we adopted the provisions of SFAS No. 123R early, on July 3, 2005, in light of planned changes to our equity incentive plans described in Note 3. The requirement to expense stock options and other equity interests that have been or will be granted pursuant to our equity incentive program will significantly increase our total costs and expenses and result in lower earnings per share. See Note 3, Employee Stock Plans, for the illustrative effect on net income (loss) and earnings (loss) per share using the Black-Scholes option-pricing model if we had applied the fair value recognition provisions to all stock-based awards to employees.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107 provides the SEC staffs views regarding the application of SFAS No. 123R. SAB 107 gives guidance on disclosure requirements in the footnotes to financial statements for the periods presented, including changes in assumptions used in determining stock-based compensation, the expected volatility and the method used to estimate it. We will apply the requirements of SAB 107 in the fourth quarter of 2005, upon the adoption of SFAS No. 123R.
The American Jobs Creation Act
In October 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The AJCA contains a series of provisions, several of which apply to us. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. Due to the availability of net operating loss (NOL) carryforwards in the U.S., we have not and do not intend to avail ourselves of the provisions of the AJCA for any repatriations of accumulated income. While it has been our historical practice to permanently reinvest all foreign earnings into our foreign operations, in the first nine months of 2005 we repatriated approximately $48 million from our foreign subsidiaries. Repatriation of these earnings did not result in any incremental charge to our income tax provision as a result of our having maintained a full valuation allowance on U.S. deferred tax assets, which include U.S. NOL carryforwards. If we decide to repatriate any additional foreign earnings, we may be required to establish a deferred tax liability on such earnings through a charge to our income tax provision.
The AJCA also provides U.S. corporations with an income tax deduction equal to a stipulated percentage of qualified income from domestic production activities (qualified activities). The deduction, which cannot exceed 50% of annual wages paid, is phased in as follows: 3% of qualified activities in 2006 and 2007; 6% in 2008 through 2010; and 9% in 2011 and thereafter. We believe that we qualify for the deduction. The tax benefit of the deduction would generally be accounted for in the periods in which the qualifying activities occur,
10
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
generally the years in which the deductions are taken in the tax returns. This benefit would be included in our annual effective tax rate, but would not result in a remeasurement of deferred income taxes. The AJCA may have an impact on our tax rate for future years. However, we have maintained a full deferred tax valuation allowance on U.S. deferred taxes and, as a result, we do not expect the AJCA to materially affect our financial position or results of operations.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 is effective no later than fiscal years ending after December 15, 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We do not expect the adoption of FIN 47 to have a material impact on our results of operations or financial position.
Exchanges of Nonmonetary Assets
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153). SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. Pursuant to SFAS 153, exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB No. 29. APB No. 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We do not expect the adoption of SFAS No. 153 to have a material impact on our results of operations or financial position.
7. Income Taxes
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) in the United States. In fiscal 2004, the IRS concluded its examination of our income tax returns for fiscal years 1998 through 2000, which resulted in a tax refund, including interest, to us of $39.5 million (which was included in income taxes receivable on the Consolidated Balance Sheet as of September 30, 2004). Notification of the refund amount was received in the fourth quarter of 2004, and the refund was received in the first quarter of 2005.
Our income tax provision for the third quarter of 2005 reflects the impact of a one-time tax benefit of $4.4 million arising from the reduction of our tax liabilities upon the favorable resolution of a foreign jurisdiction tax audit.
8. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is our executive officers. We have two reportable segments: (1) software products, which include license and maintenance revenue (including new releases and technical support); and (2) services, which include consulting,
11
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
implementation, education and other support revenue. For external reporting purposes (as shown in our consolidated statements of operations), maintenance revenue is included in service revenue. We do not allocate certain sales, marketing or administrative expenses to our operating segments, as these activities are managed separately. Within our software products reportable segment, we have two software product categories: (1) our computer aided design, manufacturing and engineering software tools (design solutions), including our flagship Pro/ENGINEER ® design software, which provides engineering solutions to our customers, and (2) our collaboration and data management technologies (collaboration and control solutions), including our Windchill ® software suite, which provide information management solutions to our customers.
We currently offer a product development system package called Flex 3C for Create, Collaborate and Control. Because this package includes both design solutions and collaboration and control solutions, we developed a revenue allocation methodology in the second quarter of 2003 for purposes of reporting revenues by product categories. Under this methodology, revenue from sales of new Flex3C licenses is allocated 90% to our design solutions and 10% to our collaboration and control solutions, and revenue from upgrades to the Flex 3C package is allocated 50% to our design solutions and 50% to our collaboration and control solutions. As we continue to offer packages that include both design solutions products and collaboration and control solutions products, the delineation between the two product lines may become less meaningful and, accordingly, we may revise our product categories.
12
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The revenue and operating income (loss) attributable to these operating segments and product categories are summarized as follows:
Three months ended
|
Nine months ended
|
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July 2,
2005 |
July 3,
2004 |
July 2, 2005 |
July 3, 2004 |
|||||||||||||
(in thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Software Products Segment: |
||||||||||||||||
License: |
||||||||||||||||
Design solutions |
$ | 33,456 | $ | 35,912 | $ | 100,741 | $ | 103,734 | ||||||||
Collaboration and control solutions |
15,772 | 16,493 | 48,114 | 43,159 | ||||||||||||
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|
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Total software products license revenue |
49,228 | 52,405 | 148,855 | 146,893 | ||||||||||||
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|
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Maintenance: (1) |
||||||||||||||||
Design solutions |
72,360 | 69,649 | 215,660 | 205,800 | ||||||||||||
Collaboration and control solutions |
14,083 | 11,765 | 40,015 | 33,596 | ||||||||||||
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Total software products maintenance revenue |
86,443 | 81,414 | 255,675 | 239,396 | ||||||||||||
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|
|
|||||
Total software products revenue |
135,671 | 133,819 | 404,530 | 386,289 | ||||||||||||
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|
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Services Segment: |
||||||||||||||||
Design solutions |
20,178 | 16,040 | 57,402 | 48,891 | ||||||||||||
Collaboration and control solutions |
24,485 | 18,518 | 63,695 | 54,715 | ||||||||||||
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|
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Total services revenue |
44,663 | 34,558 | 121,097 | 103,606 | ||||||||||||
|
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|
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|
|
|||||
Total Revenue: |
||||||||||||||||
Design solutions |
125,994 | 121,601 | 373,803 | 358,425 | ||||||||||||
Collaboration and control solutions |
54,340 | 46,776 | 151,824 | 131,470 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenue |
$ | 180,334 | $ | 168,377 | $ | 525,627 | $ | 489,895 | ||||||||
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Operating income (loss): (2)(3) |
||||||||||||||||
Software products segment |
$ | 93,030 | $ | 91,169 | $ | 278,309 | $ | 252,806 | ||||||||
Services segment |
6,891 | 1,679 | 14,417 | (9,639 | ) | |||||||||||
Sales and marketing expenses |
(59,533 | ) | (56,417 | ) | (174,652 | ) | (186,477 | ) | ||||||||
Unallocated expenses (4) |
(13,874 | ) | (13,709 | ) | (43,856 | ) | (47,212 | ) | ||||||||
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|
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|
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Total operating income |
$ | 26,514 | $ | 22,722 | $ | 74,218 | $ | 9,478 | ||||||||
|
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|
|
|
|
|
|
(1) | Maintenance revenue is included in service revenue in the consolidated statements of operations. |
(2) | The operating income (loss) reported does not represent the total operating results for each operating segment as it does not contain an allocation of sales, marketing, corporate and general administrative expenses incurred in support of the operating segments. |
(3) | There were no restructuring and other charges in the first nine months of 2005. In the third quarter and first nine months of 2004, software products included $0.9 million and $9.4 million, services included $1.1 million and $12.0 million, sales and marketing expenses included $1.2 million and $15.9 million and unallocated expenses included $0.3 million and $4.5 million, respectively, of the $3.5 million and $41.8 million of restructuring and other charges recorded in those periods. |
(4) | Unallocated expenses represent all corporate and general and administrative expenses, including the related portion of restructuring and other charges. |
13
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Data for the geographic regions in which we operate is presented below:
Three months ended
|
Nine months ended
|
|||||||||||
July 2,
2005 |
July 3,
2004 |
July 2,
2005 |
July 3,
2004 |
|||||||||
(in thousands) | ||||||||||||
Revenue: |
||||||||||||
North America |
$ | 66,351 | $ | 59,759 | $ | 187,876 | $ | 171,511 | ||||
Europe (1) |
66,407 | 58,496 | 193,400 | 179,140 | ||||||||
Asia/Pacific (2) |
47,576 | 50,122 | 144,351 | 139,244 | ||||||||
|
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|
|
|
|
|
|
|||||
Total revenue |
$ | 180,334 | $ | 168,377 | $ | 525,627 | $ | 489,895 | ||||
|
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|
|
|
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|
|
(1) | Includes revenue in Germany totaling $21.0 million and $17.3 million for the three months ended July 2, 2005 and July 3, 2004, respectively, and $58.6 million and $55.5 million for the nine months ended July 2, 2005 and July 3, 2004, respectively. |
(2) | Includes revenue in Japan totaling $26.1 million and $29.5 million for the three months ended July 2, 2005 and July 3, 2004, respectively, and $81.6 million and $83.5 million for the nine months ended July 2, 2005 and July 3, 2004, respectively. |
Total long-lived assets by geographic region have not changed significantly from September 30, 2004.
9. Commitments and Contingencies
Legal Proceedings
On May 30, 2003, a lawsuit was filed against us in the U.S. District Court for the District of Massachusetts by Rand A Technology Corporation and Rand Technologies Limited (together, Rand). Rand historically had been our largest distributor. The complaint alleges various breaches of a revised one-year distribution agreement entered into in December 2002, as well as other agreements between Rand and us, and also asserts certain non-contract claims. The complaint, as amended, seeks equitable relief and substantial damages. On November 24, 2003, we filed our substantive response to Rands complaint and asserted counterclaims against Rand. During the second quarter of 2005, Rand quantified its claimed actual damages as being in excess of $50 million and Rand asserts that this amount should be trebled by the court. We believe Rands claims and its damages assessment associated with those claims are without merit and will continue to contest them vigorously. We also intend diligently to prosecute our counterclaims. We cannot predict the ultimate resolution of this action at this time, and there can be no assurance that this action will not have a material adverse impact on our financial condition or results of operations.
We also are subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these other matters will not have a material adverse impact on our financial condition or results of operations.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our current products, as well as claims relating to property damage or personal injury resulting from the performance of
14
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of these agreements is immaterial.
We typically warrant to our customers that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time (generally 90 to 180 days). Additionally, we typically warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have never incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these agreements is immaterial.
10. Subsequent Events
On July 19, 2005, we completed the acquisition of Arbortext, Inc., a provider of enterprise publishing software, for $190 million in cash. This acquisition will enable our customers to create, manage and dynamically publish information concurrently with the development of related products or services. The acquisition provides us with new opportunities within our existing markets and provides increased access to new markets such as pharmaceuticals, financial services, publishing and government.
As described in Note 3, during the fourth quarter of 2005, we completed an exchange of certain stock options held by employees for an aggregate cash payment of $12.8 million.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and growth, as well as about the development of our products and markets, are forward looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and important factors that may cause our actual results to differ materially from these statements is contained below and in Important Factors That May Affect Future Results beginning on page 35.
Executive Overview
We are encouraged by our performance in the first nine months of 2005. As discussed in detail below, during this period we experienced year-over-year revenue growth, particularly in service and maintenance revenue. We made measured increases to our direct sales force and increased services delivery capacity in regions with sufficient consulting and training business to support the infrastructure growth and we continued to focus on increasing revenue contribution from our indirect distribution channel. We believe our implementation of these strategic initiatives contributed to the year-over-year revenue increases in the first nine months of 2005.
Over the past few years, we focused on improving our products, our distribution model, our competitive position and our cost structure. With these initiatives now substantially complete, our focus in 2005 and beyond is to grow revenue and earnings through organic growth of our core solutions and through strategic acquisitions. We believe that the discrete market for computer-aided design solutions has begun to grow modestly and that the collaboration and control solutions market continues to present an opportunity for more meaningful growth. We also believe these markets have converged into an overall market for product lifecycle management (PLM) solutions as manufacturers look to improve their total product development processes instead of focusing on individual productivity in engineering or manufacturing. These product development processes have become increasingly complex as companies develop and manufacture products across geographic and corporate boundaries. Additionally, we believe there is a growing opportunity in the small and medium business market as these manufacturers migrate from 2D design solutions to entry-level 3D design solutions. We believe that these smaller manufacturers have a need for and will invest in collaboration and control solutions over the next several years.
Trends such as the globalization of product development have created both opportunities for our customers as well as new challenges. In order to benefit from global product development (GPD), companies need to connect teams of people and data that are geographically and functionally dispersed. Our product development system is designed to enable secure access to up-to-date information, while supporting the constant change of that information. Our development efforts over the past few years have focused on our integral architecture and ease of use. We believe this strategy has given us a competitive advantage in our core product development system and positions us to help customers solve the GPD challenge. With this core infrastructure in place, we have begun to add key capabilities through development and acquisition. We released a new version of Windchill ® in the third quarter of 2005 and are scheduled to release the next version of Pro/ENGINEER Wildfire in the spring of 2006. These products include capability and interoperability enhancements. In addition, during and after the end of the third quarter of 2005, we completed three acquisitions, which we believe will help accelerate our long-term growth. These acquisitions are described in more detail in Acquisitions on page 18. We believe these acquisitions enhance the value of our product development system by adding capabilities that appeal to our existing customers and give our product development system a broader appeal to new vertical industries. The new capabilities we are adding to our product development system are designed to address more downstream deliverables, such as manufacturing process plans, and to address complex documentation requirements, such as regulatory filings, maintenance instructions, operator manuals, and promotional materials. At the same time, these acquisitions help expand our footprint to new markets where we can provide different configurations of our product development system.
16
To achieve our long-term revenue growth objectives, while remaining focused on profitability, we plan to:
| leverage and optimize our distribution model, including, when appropriate, making measured increases to our direct sales force and reseller channel; |
| maintain and grow revenue from our traditional vertical market segments; |
| evaluate additional strategic investments in solutions for vertical market segments outside our traditional market segments as demand for our products dictate, including those serviced by newly acquired companies; |
| focus on enhancing our relationships with strategic accounts; |
| make strategic investments in the Asia-Pacific market; and |
| actively evaluate and pursue corporate development opportunities, including mergers and acquisitions and strategic partnerships. |
Our success will depend on, among other factors, our ability to:
| optimize our sales and services coverage and productivity through, among other means, effective use and management of our resellers and other strategic partners as well as our own sales force; |
| successfully penetrate strategic emerging markets; |
| differentiate our products and services from those of our competitors, including larger companies with established enterprise-wide relationships with our customers; |
| successfully integrate newly acquired businesses into our operations and effectively execute future corporate development initiatives; |
| elevate PLM expenditures over other technology spending as a budgetary priority among our customers; |
| further improve customer satisfaction and build customer references; |
| effectively manage our geographically dispersed development resources; |
| successfully execute our product strategy to provide an integrated, easy to use and rapidly deployable suite of PLM software solutions that customers can deploy to create a product development system that meets their evolving requirements; and |
| help our customers expand their product development technology infrastructure to a more robust PLM product development system. |
We discuss additional factors affecting our revenues and operating results under Important Factors That May Affect Future Results beginning on page 35.
Our Business
We develop, market and support PLM software solutions and related services that help manufacturers improve the competitiveness of their products and product development processes. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) markets as well as many previously isolated markets that address various phases of the product development and manufacturing lifecycle.
Our software solutions include:
| our design solutions, including our flagship Pro/ENGINEER ® software (a suite of mechanical computer-aided design tools); and |
| our collaboration and control solutions, including our Windchill solutions. |
17
These software solutions enable manufacturing companies to:
| create virtual computer-based products (digital products); |
| collaborate on designs within the enterprise and throughout the extended supply chain; and |
| control the digital product information throughout the product lifecycle. |
Our PLM software solutions are complemented by our experienced services and technical support organizations, as well as resellers and other strategic partners, who provide training, consulting, ancillary product offerings, implementation and support to customers worldwide.
The cornerstone of our design solutions software is Pro/ENGINEER ® , a three-dimensional product design solution based on a robust, parametric, feature-based solid modeler, enabling changes made during the design process to be associatively updated throughout the design. Pro/ENGINEER consists of capabilities for detailed design (CAD), manufacturing/production (CAM), and simulation/analysis (CAE), as well as facilities for exchanging CAD data with a multitude of sources and in varied standard formats, allowing companies to create more innovative, differentiated and functional products quickly and easily.
The cornerstone of our collaboration and control solutions software is our suite of Windchill-based products, which is currently sold in two forms based on the common Windchill infrastructure:
| Windchill Link solutions (including Windchill PDMLink and Windchill ProjectLink ), consisting of pre-configured, integral products designed to address specific business-critical manufacturing processes; and |
| configurable Windchill modules, architecture and toolsets that enable manufacturers to extend the data models and user interface to support unique business processes, such as legacy system replacement and consolidation, and integration and rationalization of diverse systems following merger or acquisition. |
With our suite of PLM software solutions, we see an opportunity to address several of the key challenges that manufacturing companies face in their product development processes: more frequent change, heterogeneity of systems, and increased communication inside and outside the manufacturing enterprise to support growing offshoring and outsourcing and increasingly transparent supply chains. Our PLM software solutions provide our customers a product development system that permits individualsregardless of their roles in the commercialization of a product, the computer-based tools they use, or their location geographically or in the supply chainto participate in and contribute to the product development process across the digital product value chain. We believe that as we continue to implement our strategy for our products to become more tightly integrated and easier to deploy, we can create significant added value for our customers.
Our software solutions are distributed primarily through our direct sales force. We also use an indirect distribution channel in tandem with our direct sales force. We have broadened our indirect distribution channel over the last several years through resellers and other strategic partners. Our resellers provide greater geographic and small-account coverage, primarily for our design solutions, while our other strategic partners help to expand the breadth of our PLM solutions by providing complementary product and/or service offerings.
Acquisitions
During and after the end of the third quarter of 2005, we completed three acquisitions, which we believe will help accelerate our long-term growth. These acquisitions, which had no material effect on our financial condition or results for the third quarter, are:
| Arbortext, Inc., a provider of enterprise publishing software, |
| Polyplan Technologies, Inc., a provider of manufacturing process planning technology, and |
| Aptavis Technologies Corporation, a provider of Windchill-based solutions for the retail, footwear and apparel industry. |
18
Our acquisition of Arbortext gives us the ability to enable customers to create, manage and dynamically publish information concurrently with the development of related products or services, improving time-to-market, quality, cost and customer satisfaction. The acquisition provides us with new opportunities within our existing markets and provides increased access to new markets such as pharmaceuticals, financial services, publishing and government. Based in Ann Arbor, Michigan, Arbortext has approximately 250 employees in offices around the world and generated revenue of approximately $40 million for the twelve months ended June 30, 2005.
Our acquisition of Polyplan Technologies will help us enable concurrent development of products and related manufacturing processes. We are focusing our extended manufacturing strategy on providing an easy-to-use and affordable solution for use by mainstream manufacturing engineers who have traditionally declined to use the complex, disconnected, specialist manufacturing process management (MPM) tools available today. We do not expect the Polyplan acquisition to contribute significant revenue in the near term as we work to integrate the technology with our solutions.
Through our prior business relationship with Aptavis Technologies Corporation, we increased our penetration of the retail, footwear and apparel market, and our solution for this market that uses the Aptavis technology
has been adopted by leading footwear and apparel manufacturers and retailers. Our acquisition of Aptavis will enable us to more fully integrate the Aptavis technology into our product offerings and to further develop the technology to address the
requirements of international customers. Although we expect this business to continue to grow, the revenue contribution from the Aptavis technology historically has not been material and we do not expect this to change in the near term as a result
Results of Operations
The following is a summary of our results of operations for the third quarter and the first nine months of 2005 and 2004. A detailed discussion of these results follows the table below.
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Total revenue |
$ | 180.3 | $ | 168.4 | 7 | % | $ | 525.6 | $ | 489.9 | 7 | % | |||||||
Total costs and expenses |
153.8 | 145.7 | 6 | % | 451.4 | 480.4 | (6 | )% | |||||||||||
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Operating income |
$ | 26.5 | $ | 22.7 | $ | 74.2 | $ | 9.5 | |||||||||||
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Net income (loss) |
$ | 26.7 | $ | 16.1 | $ | 66.3 | $ | (7.2 | ) | ||||||||||
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| Our year-over-year third quarter revenue increased 7%, reflecting a 13% increase in service revenue offset by a 6% decrease in software license revenue. Our year-over-year nine-month revenue increased 7%, reflecting a 1% increase in software license revenue and a 10% increase in service revenue. On a consistent foreign currency basis, compared to the year-ago period, total revenue for both the third quarter and first nine months of 2005 increased 4%. |
| Our year-over-year collaboration and control solutions revenue increased 16% to $54.3 million for the third quarter of 2005 from $46.8 million for the third quarter of 2004. Our year-over-year collaboration and control solutions revenue increased 15% to $151.8 million for the first nine months of 2005 from $131.5 million for the first nine months of 2004. |
| Our year-over-year design solutions revenue increased 4% to $126.0 million for the third quarter of 2005 from $121.6 million for the third quarter of 2004. Our year-over-year design solutions revenue increased 4% to $373.8 million for the first nine months of 2005 from $358.4 million for the first nine months of 2004. |
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| Total costs and expenses increased 6% to $153.8 million for the third quarter of 2005 from $145.7 million for the third quarter of 2004. Total costs and expenses decreased 6% to $451.4 million for the first nine months of 2005 from $480.4 million for the first nine months of 2004. Total costs and expenses for the first nine months of 2004 included $41.8 million of restructuring and other charges and a one-time benefit to cost of service revenue of $5 million. There were no restructuring and other charges in the first nine months of 2005. On a consistent foreign currency basis, compared to the year-ago period, total costs and expenses for the third quarter and first nine months of 2005 increased 2% and decreased 8%, respectively. |
| We generated net income of $26.7 million and $66.3 million for the third quarter and first nine months of 2005, respectively, compared to net income of $16.1 million for the third quarter of 2004 and a net loss of $7.2 million for the first nine months of 2004. The improvement in our 2005 net income is primarily attributable to higher revenue and the absence of restructuring charges. |
The following table shows certain consolidated financial data as a percentage of our total revenue for the third quarters and first nine months of 2005 and 2004:
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Revenue: |
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License |
27 | % | 31 | % | 28 | % | 30 | % | ||||
Service |
73 | 69 | 72 | 70 | ||||||||
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Total revenue |
100 | 100 | 100 | 100 | ||||||||
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Costs and expenses: |
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Cost of license revenue |
1 | 1 | 1 | 1 | ||||||||
Cost of service revenue |
28 | 26 | 28 | 27 | ||||||||
Sales and marketing |
33 | 33 | 33 | 35 | ||||||||
Research and development |
15 | 16 | 16 | 17 | ||||||||
General and administrative |
8 | 8 | 8 | 9 | ||||||||
Amortization of intangible assets |
| 1 | | 1 | ||||||||
Restructuring and other charges |
| 2 | | 8 | ||||||||
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Total costs and expenses |
85 | 87 | 86 | 98 | ||||||||
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Operating income |
15 | 13 | 14 | 2 | ||||||||
Other income (expense), net |
1 | | 1 | | ||||||||
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Income before income taxes |
16 | 13 | 15 | 2 | ||||||||
Provision for income taxes |
1 | 4 | 2 | 3 | ||||||||
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Net income (loss) |
15 | % | 9 | % | 13 | % | (1 | )% | ||||
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Revenue
Total Revenue
Our revenue consists of software license revenue and service revenue. Our service revenue consists of (1) software maintenance and (2) consulting, implementation, education and other technical support revenue. We presently report our revenue in two product categories:
1. our collaboration and data management technologies (collaboration and control solutions), including our Windchill Internet-based software, and
2. our computer-aided design, manufacturing and engineering software (design solutions), including our flagship Pro/ENGINEER design software.
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The following table illustrates trends from the third quarter and first nine months of 2004 to the third quarter and first nine months of 2005 in our software license revenue and in our service revenue, as well as in our two product categories:
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License revenue |
$ | 49.2 | $ | 52.4 | (6 | )% | $ | 148.8 | $ | 146.9 | 1 | % | ||||||
Service revenue: |
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Maintenance revenue |
86.4 | 81.4 | 6 | % | 255.7 | 239.4 | 7 | % | ||||||||||
Other service revenue |
44.7 | 34.6 | 29 | % | 121.1 | 103.6 | 17 | % | ||||||||||
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Total service revenue |
131.1 | 116.0 | 13 | % | 376.8 | 343.0 | 10 | % | ||||||||||
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Total revenue |
$ | 180.3 | $ | 168.4 | 7 | %* | $ | 525.6 | $ | 489.9 | 7 | %* | ||||||
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Revenue by product category: |
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Collaboration and control solutions revenue |
$ | 54.3 | $ | 46.8 | 16 | % | $ | 151.8 | $ | 131.5 | 15 | % | ||||||
Design solutions revenue |
$ | 126.0 | $ | 121.6 | 4 | % | $ | 373.8 | $ | 358.4 | 4 | % | ||||||
Revenue by geography: |
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North America |
$ | 66.3 | $ | 59.8 | 11 | % | $ | 187.9 | $ | 171.5 | 10 | % | ||||||
Europe |
$ | 66.4 | $ | 58.5 | 14 | % | $ | 193.4 | $ | 179.1 | 8 | % | ||||||
Asia-Pacific |
$ | 47.6 | $ | 50.1 | (5 | )% | $ | 144.3 | $ | 139.3 | 4 | % |
* | On a consistent foreign currency basis from the comparable year-ago period, in the third quarter of 2005 total revenue increased 4%, revenue in Europe increased 7%, and revenue in Asia-Pacific decreased 8%. On a consistent foreign currency basis from the comparable year-ago period, in the first nine months of 2005 total revenue increased 4%, revenue in Europe increased 1%, and revenue in Asia-Pacific increased 2%. |
In the third quarter of 2005, we had year-over-year revenue growth in both overall design solutions and collaboration and control solutions. This growth reflects increases in consulting and training services and in maintenance, as well as an increase in the number of new seats sold in both product categories for both the third quarter and first nine months of 2005 compared to the same periods in 2004. We attribute this growth to execution of our strategic initiatives described above as well as increased technology spending by our customers in North America and Europe. License revenue accounted for 27% and 31% of total revenue in the third quarter of 2005 and 2004, respectively, compared with 28% and 30% of total revenue in the first nine months of 2005 and 2004, respectively. Service revenue, which has a lower gross profit margin than license revenue, accounted for 73% and 69% of total revenue in the third quarter of 2005 and 2004, respectively, and 72% and 70% of total revenue in the first nine months of 2005 and 2004, respectively. We enter into customer contracts that may result in revenue being recognized in more than one quarter. License and/or other services revenue of $1 million or more recognized from such contracts was $17.3 million in the third quarter of 2005 and $59.9 million in the first nine months of 2005, compared to $18.4 million in the third quarter of 2004 and $53.8 million in the first nine months of 2004.
The decline in license revenue in the third quarter of 2005 compared to the third quarter of 2004 was mainly attributable to lower license revenue from large deals. Growth in our other service revenue (consulting, implementation, education and other support revenue) in the third quarter and first nine months of 2005 reflects increased sales of process consulting services and training services, including pre-packaged training products, that help customers improve their product development processes, user proficiency and adoption of our solutions. As we have increased our service revenues and expanded our service product offerings, we have also improved our service margins, an important part of our overall strategy.
We derived 63% and 65% of our total revenue from sales to customers outside of North America in the third quarter of 2005 and 2004, respectively, compared with 64% and 65% of our total revenue from such sales for the
21
first nine months of 2005 and 2004, respectively. We believe the improvements in our revenue in North America are attributable to implementation of our strategic initiatives and also indicate that the economy in that region, where the manufacturing sector and related technology spending have been weak over the past several years, is strengthening. European revenue increased 14% and 8% in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004. The increase in European revenue in the first nine months of 2005 is due primarily to improving sales and services performance in strategic accounts compared to the year-ago periods and favorable foreign currency exchange as noted above. Revenue performance in Asia-Pacific was down in the third quarter of 2005 compared to the third quarter of 2004 due to a decline in license revenue from large deals in Japan. Revenue performance in the remainder of the Pacific Rim was strong with 4% and 12% growth in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004. We believe Asia-Pacific continues to present an important growth opportunity because global manufacturing companies have continued to invest in that region and the market in that region for both our design solutions and collaboration and control solutions is unsaturated.
We have been building and diversifying our reseller channel to become less dependent on a small number of resellers and to provide the resources necessary for more effective distribution of our products. Although we typically receive lower revenue per seat for an indirect sale versus a direct sale, we believe that using diverse and geographically dispersed resellers that focus on smaller businesses provides an efficient and cost effective means to reach these customers, while allowing our direct sales force to focus on larger sales opportunities. Total sales from our reseller channel, which are primarily for design solutions, were $35.9 million (20% of total revenue) in the third quarter of 2005, $34.4 million (20% of total revenue) in the third quarter of 2004, $103.8 million (20% of total revenue) in the first nine months of 2005, and $96.8 million (20% of total revenue) in the first nine months of 2004. We attribute this performance to our efforts to expand our reseller channel and to the success of Pro/ENGINEER Wildfire among small and medium businesses, as Pro/ENGINEER Wildfire has become increasingly competitive in this market, both relative to our historic offerings as well as to competitive offerings in this market segment.
Collaboration and Control Solutions Revenue
The following table illustrates trends from the third quarter and first nine months of 2004 to the third quarter and first nine months of 2005 in our collaboration and control solutions software license revenue and service revenue:
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License revenue |
$ | 15.8 | $ | 16.5 | (4 | )% | $ | 48.1 | $ | 43.2 | 11 | % | ||||||
Service revenue: |
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Maintenance revenue |
14.0 | 11.8 | 19 | % | 40.0 | 33.6 | 19 | % | ||||||||||
Other service revenue |
24.5 | 18.5 | 32 | % | 63.7 | 54.7 | 16 | % | ||||||||||
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Total service revenue |
38.5 | 30.3 | 27 | % | 103.7 | 88.3 | 17 | % | ||||||||||
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Total revenue |
$ | 54.3 | $ | 46.8 | 16 | % | $ | 151.8 | $ | 131.5 | 15 | % | ||||||
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Total revenue from our collaboration and control solutions software and related services was 30% and 28% of our total revenue in the third quarter of 2005 and 2004, respectively, and 29% and 27% of our total revenue in the first nine months of 2005 and 2004, respectively.
The increase in collaboration and control solutions revenue in the third quarter and first nine months of 2005 compared to the year-ago periods was due to stronger sales of consulting services, a higher number of new customers and increases in both transactions and new seat orders from existing customers, reflecting our success
22
in marketing incremental adoption of our solutions. While over the first nine months of 2005, we experienced an 11% increase in license revenue for our collaboration and control solutions over the year ago period, we experienced a 4% decline in the third quarter of 2005 compared to the third quarter of 2004. We attribute the third quarter license revenue decline to lower sales of our configurable Windchill module seats, which have a higher average seat price than our Windchill Link solutions. Conversely, in the third quarter of 2005, Windchill Link solutions license revenue increased 26% over the third quarter of 2004, and, in the first nine months of 2005, Windchill Link solutions license revenue increased 27% over the first nine months of 2004. Growth in sales of our Windchill Link solutions is in line with our observation that customers are demanding PLM solutions that can be implemented in an incremental fashion with a clear return on investment. We feel that we have addressed this evolving customer demand with our Windchill Link solutions and related services packages, as well as with our product development system adoption roadmap, which provides customers with a suggested approach for purchasing and implementing our solutions in stages. As the requirements of our customers and the general market change, we plan periodically to evaluate the need for additional solutions.
Maintenance and other service revenue increases in our collaboration and control solutions are due primarily to an increase in the number of new users of our collaboration and control solutions as new customers are added and existing customers expand their implementation to additional users.
As part of our growth initiatives, we are working toward expanding the technology footprint of our PLM solutions by adding functionality through internal development and strategic acquisitions. Our acquisition of OHIO Design Automation, Inc. in April 2004 enables us to better serve the electronics and high technology industry by providing the technology necessary to enable the dynamic management of both mechanical and electrical design information. Our recent acquisitions of Arbortext, Polyplan and Aptavis will further enhance the value of our core product development system by adding capabilities that appeal to our existing customers and will give our product development system a broader appeal in new vertical industries. These acquisitions add new capabilities to our product development system that will enable our customers to create more downstream deliverables, such as manufacturing process plans and regulatory filings, and provide us increased access to new markets where we can provide different configurations of our product development system.
Another growth initiative is to improve our ability to sell collaboration and control solutions to small and medium size businesses. To achieve this, we are expanding our distribution of PLM solutions by offering qualified resellers the ability to sell our Windchill Link solutions as well as related services. In addition, we now offer an on demand version of several Windchill Link solutions, hosted by IBM ® , that helps minimize customers cost of ownership and reduces implementation time.
Design Solutions Revenue
The following table illustrates trends from the third quarter and first nine months of 2004 to the third quarter and first nine months of 2005 in our design solutions software license revenue and service revenue:
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Design solutions: |
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License revenue |
$ | 33.4 | $ | 35.9 | (7 | )% | $ | 100.7 | $ | 103.7 | (3 | )% | ||||||
Service revenue: |
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Maintenance revenue |
72.4 | 69.6 | 4 | % | 215.7 | 205.8 | 5 | % | ||||||||||
Other service revenue |
20.2 | 16.1 | 25 | % | 57.4 | 48.9 | 17 | % | ||||||||||
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Total service revenue |
92.6 | 85.7 | 8 | % | 273.1 | 254.7 | 7 | % | ||||||||||
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Total revenue |
$ | 126.0 | $ | 121.6 | 4 | % | $ | 373.8 | $ | 358.4 | 4 | % | ||||||
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Total revenue from our design solutions software and related services was 70% of our total revenue in the third quarter of 2005 and 72% of our total revenue in the third quarter of 2004, compared to 71% of our total revenue for the first nine months of 2005 and 73% of our total revenue for the first nine months of 2004.
The year-over-year decline in license revenue in the third quarter and first nine months of 2005 was due in part to lower revenue from high-end packages. Despite lower revenue from high-end packages, sales of our low-end and mid-range packages within our installed base and to new customers increased and we experienced an 11% and 15% increase, respectively, in the total number of new seats added during the third quarter and first nine months of 2005 compared to new seats added in the comparable 2004 periods. While we have seen a decline in sales of our high-end packages, we are encouraged by adoption of our core software, as such sales provide the foundation for long-term relationships and repeat business, as well as for potential sales of our overall product development system within these accounts. The increase in design solutions maintenance revenue reflects further customer adoption of Pro/ENGINEER Wildfire. The increase in design solutions other service revenue is due in large part to higher revenue from sales of consulting services and training packages, including pre-packaged training products, that help our customers improve user proficiency and engineering productivity.
To address our customers purchasing patterns as well as to enable us to better compete in the small- and medium-sized business segment of our market, we now offer Pro/ENGINEER design solutions packages that have price points, functionality and ease-of-use features that appeal to a broad spectrum of design solutions users and provide customers with the opportunity to integrate more readily traditional design solutions with collaboration and control solutions. Because our low-end and high-end offerings are based on the same platform, our solutions are scalable between different types of users, which differentiates our products from others in the marketplace. Our design solutions are now more competitive with lower-end modeling tools on the market that are known for ease of use, while maintaining the powerful functionality of Pro/ENGINEER. Further, our direct interface between Pro/ENGINEER and Windchill offers an effective solution to manufacturing companies looking for a complete product development system.
Despite recent signs of improvement, design solutions revenue continues to be adversely affected by: (1) the relative maturity and saturation of the North American and European markets, (2) the difficulty associated with displacing incumbent product design systems in the discrete market for computer-aided design solutions, and (3) increased competition and price pressure from products offering more limited functionality at lower cost. However, we believe that there are positive trends in Asia-Pacific, where the market is not saturated, the number of mechanical engineers is growing and companies are continuing to migrate from two-dimensional to three-dimensional design tools.
Costs and Expenses
Total costs and expenses increased to $153.8 million in the third quarter of 2005 compared to $145.7 million in the third quarter of 2004 (including $3.5 million in restructuring and other charges) due in part to planned investments in our services organization (particularly in Asia-Pacific), sales infrastructure and research and development. During 2005, we are making measured increases in our sales organization related to adding direct sales representatives in our strategic accounts and supporting our reseller program. We are also investing in research and development programs aimed at adding vertical functionality to our products. In our services organization, we are adding services delivery capacity to address customer demand. In the general and administrative area, we are investing in strategic corporate development initiatives and continuing our Sarbanes-Oxley compliance work. We anticipate that we will make additional measured increases to operating expenses to support our base business and to fund the revenue-generating initiatives described above and in Executive Overview beginning on page 14. The required expensing of stock options and other equity awards under SFAS No. 123R, as described in Notes 3 and 6 of Notes to Consolidated Financial Statements, will significantly increase our operating expenses beginning in the fourth quarter of 2005 due to adoption of SFAS No. 123R on July 3, 2005.
Over the past several years, we have made significant investments needed to transform our business from providing a single line of technical software with a direct distribution model to providing a family of enterprise
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solutions with an expanded channel and partner-involved distribution model. In 2003, after completing a significant portion of this transformation, we implemented a restructuring plan to reduce our cost structure. We completed the restructuring plan in the fourth quarter of 2004.
The following table illustrates trends from the third quarter and first nine months of 2004 to the third quarter and first nine months of 2005 in our costs and expenses:
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Cost of license revenue |
$ | 1.7 | $ | 2.3 | (26 | )% | $ | 4.9 | $ | 6.3 | (22 | )% | ||||||
Cost of service revenue |
50.4 | 43.8 | 15 | % | 144.4 | 132.4 | 9 | % | ||||||||||
Sales and marketing |
59.5 | 55.2 | 8 | % | 174.6 | 170.6 | 2 | % | ||||||||||
Research and development |
28.1 | 26.3 | 7 | % | 82.9 | 82.6 | 0 | % | ||||||||||
General and administrative |
13.9 | 13.4 | 4 | % | 43.9 | 42.7 | 3 | % | ||||||||||
Amortization of intangible assets |
0.2 | 1.2 | (83 | )% | 0.7 | 4.0 | (83 | )% | ||||||||||
Restructuring and other charges |
| 3.5 | (100 | )% | | 41.8 | (100 | )% | ||||||||||
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Total costs and expenses |
$ | 153.8 | $ | 145.7 | 6 | % | $ | 451.4 | $ | 480.4 | (6 | )% | ||||||
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* | On a consistent foreign currency basis from the comparable year-ago period, total costs and expenses increased 2% in the third quarter of 2005 and decreased 8% in the first nine months of 2005. |
Employees
The number of worldwide employees was 3,440 at July 2, 2005, compared to 2,984 at July 3, 2004.
Cost of License Revenue
Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation as well as royalties owed to third parties for technology embedded in or licensed with our software products. Cost of license revenue as a percentage of license revenue was 3% and 4% for the third quarters of 2005 and 2004, respectively, and 3% and 4% for the first nine months of 2005 and 2004, respectively. The decrease in cost of license revenue in the third quarter and first nine months of 2005 compared to the third quarter and first nine months of 2004 was primarily due to lower royalty costs of approximately $0.7 million and $1.4 million, respectively. Cost of license revenue as a percent of license revenue can vary depending on product mix sold and the effect of fixed and variable royalties. Royalty costs are lower due, in part, to our reduction of royalty costs (for both license and maintenance royalties) through negotiation of more favorable terms with our software vendors.
Cost of Service Revenue
Our cost of service revenue includes costs associated with training, customer support and consulting personnel, such as salaries and related costs, third-party subcontractor fees, the release of maintenance updates (including related royalty costs), and facility costs. Cost of service revenue as a percentage of service revenue was 38% in both the third quarters of 2005 and 2004, and 38% and 39% in the first nine months of 2005 and 2004, respectively. Total salaries, commissions, benefits and travel costs were $4.7 million and $3.5 million higher in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004 due to planned increases in our services delivery capacity and higher commissions due to the
25
increase in service revenue, partially offset by reductions in employee benefits. Service related employee headcount was 15% higher at the end of the third quarter of 2005 compared to the third quarter of 2004. The cost of third-party consulting services was $2.9 million and $4.8 million higher in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004, due to the use of such services in support of increases in training and professional services revenue. Royalty costs were $0.5 million lower and $4.1 million higher in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004, with the nine-month period increase primarily attributable to a one-time benefit relating to royalty obligations of $5.0 million recorded in the second quarter of 2004.
Sales and Marketing
Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Sales and marketing expenses as a percentage of total revenue were 33% for the third quarters of 2005 and 2004 and 33% and 35% in the first nine months of 2005 and 2004, respectively. Total sales and marketing employee headcount increased 8% at the end of the third quarter of 2005 compared to the end of the third quarter of 2004. As a result of planned increases in headcount and higher commissions, partially offset by reductions in employee benefits, our salaries and benefit costs, sales commissions and travel expenses were higher by an aggregate of approximately $5.3 million and $7.9 million in the third quarter and first nine months of 2005, respectively, compared to the third quarter and first nine months of 2004. Due to facility closures and consolidations, our depreciation, rent, telephone and office support costs decreased in the third quarter and first nine months of 2005 by approximately $1.5 million and $4.1 million, respectively, compared to the third quarter and first nine months of 2004. At the end of the third quarter of 2005, sales and marketing headcount was 1,011, compared to 945 at September 30, 2004 and 938 at the end of the third quarter of 2004.
Research and Development
Our research and development expenses consist principally of salaries and benefits, costs of computer equipment and facility expenses. Major research and development activities include developing new releases of our software that work together in a more integrated fashion and that include functionality enhancements desired by our customers. We released a new version of Windchill in the third quarter of 2005 and we are scheduled to release the next version of Pro/ENGINEER Wildfire in the spring of 2006. These products include integration and interoperability enhancements. Research and development expenses increased modestly in absolute dollars in the third quarter of 2005 as compared to the third quarter of 2004, which as a percentage of total revenue were 15% and 16% in the third quarters of 2005 and 2004, respectively. Research and development costs were 16% and 17% of total revenue in the first nine months of 2005 and 2004, respectively. Total research and development employee headcount increased 24% at the end of the third quarter of 2005 compared to the end of the third quarter of 2004. Total salaries and benefits have remained relatively flat despite the increase in headcount due in part to shifting certain development activities to our existing facilities in India, where overall research and development costs are lower.
General and Administrative
Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources and administrative functions as well as bad debt expense. General and administrative expenses as a percentage of total revenue were 8% in both the third quarters of 2005 and 2004, and 8% and 9% in the first nine months of 2005 and 2004, respectively. While our overall general and administrative costs have remained relatively flat for the periods presented, costs in the first nine months of 2005 compared to the first nine months of 2004 reflect a $4.2 million increase in the cost of outside professional services, primarily related to corporate development initiatives and Sarbanes-Oxley compliance, offset by a $3.0 million reduction in depreciation, rent and insurance costs and a $1.1 million decrease in bad debt expense.
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Amortization of Intangible Assets
These costs represent the amortization of acquired intangible assets. The decrease in the third quarter and first nine months of 2005 compared to the third quarter and first nine months of 2004 was due to certain intangible assets being fully amortized in 2004, partially offset by amortization of intangible assets resulting from our acquisitions in 2004 and 2005.
Restructuring and Other Charges
There were no restructuring and other charges in the first nine months of 2005. In the third quarter and first nine months of 2004, we recorded total restructuring and other charges of $3.5 million and $41.8 million, respectively. The charges include costs for severance and termination benefits related to 459 employees terminated during the first nine months of that year, of which 49 were terminated in the third quarter, and excess facilities and other costs. The charges for excess facilities were primarily related to gross lease commitments in excess of estimated sublease income for excess facilities. Of the total restructuring and other charges recorded for the first nine months of 2004, $1.6 million was non-cash for the write-off of leasehold improvements related to the excess facilities.
Cash disbursements related to restructuring and other charges totaled $7.7 million and $36.6 million in the first nine months of 2005 and 2004, respectively. Amounts accrued and not yet paid at July 2, 2005 related to all prior period restructuring initiatives totaled $35.6 million. We expect to make cash disbursements related to these accrued restructuring and other charges of approximately $11 million within the next twelve months. The remaining accruals of approximately $25 million primarily relate to excess facilities and are expected to be paid out through 2014.
Other Income (Expense), net
Other income (expense), net includes interest income, costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses, write-downs of investments, charges incurred in connection with obtaining corporate and customer contract financing and exchange gains or losses resulting from the required period-end currency remeasurement of the financial statements of our subsidiaries that use the U.S. dollar as their functional currency. A large portion of our revenues and expenses are transacted in foreign currencies. To reduce our exposure to fluctuations in foreign exchange rates, we engage in hedging transactions involving the use of foreign currency forward contracts and, from time to time, foreign currency option contracts, primarily in the Euro and Asian currencies. Other income (expense), net was $2.5 million and $(0.3) million for the third quarter of 2005 and 2004, respectively. Other income (expense), net was $4.2 million and ($0.6) million for the nine months ended 2005 and 2004, respectively. The increase in net other income is primarily due to increased interest income during 2005 compared to 2004 primarily as a result of higher cash balances. Interest income was $5.4 million and $2.1 million in the first nine months of 2005 and 2004, respectively.
Income Taxes
In the third quarter of 2005, our effective tax rate was 8% on pre-tax income of $29.0 million compared to 28% on pre-tax income of $22.4 million in the third quarter of 2004. In the first nine months of 2005, our effective tax rate was 15% on pre-tax income of $78.4 million compared to 182% on pre-tax income of $8.9 million in the first nine months of 2004. The differences between the statutory federal income tax rate of 35% and our effective tax rates were due primarily to income taxes payable in certain foreign jurisdictions as well as our use of net operating loss carryforwards and realization of other deferred tax assets in the U.S. and certain foreign jurisdictions, which reduced the valuation allowance we had recorded against those assets. In addition, in the third quarter of 2005, we recorded a tax benefit of $4.4 million arising from the reduction of our tax liabilities upon the favorable resolution of a foreign jurisdiction tax audit. In 2002, we recorded a full valuation allowance to completely offset our deferred tax assets (which consist primarily of operating loss carryforwards) due to the uncertainty of their realization. As of the end of the third quarters of 2005 and 2004, a full valuation allowance was still recorded against remaining deferred tax assets in the U.S. and certain foreign jurisdictions.
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Our future effective tax rate may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory rate, as well as the timing and extent of the realization of deferred tax assets and changes in the tax law. Further, we believe that our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to potential items arising from discrete events, including settlements of tax audits and assessments, the resolution of tax position uncertainties, acquisitions of other companies, or other similar events.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the United States. In fiscal 2004, the IRS concluded its examination of our income tax returns for fiscal years 1998 through 2000, which resulted in a tax refund, including interest, to us of $39.5 million (which was reflected as income taxes receivable on the consolidated balance sheet as of September 30, 2004). We received notice of the refund amount in the fourth quarter of 2004, and we received the refund in the first quarter of 2005. The refund resulted in a nonrecurring tax benefit of $18.9 million in the fourth quarter of 2004.
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenues, results from operations, and net income (loss), as well as on the value of certain assets and liabilities on our balance sheet. These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based on our historical experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time.
While there are a number of accounting policies, methods and estimates affecting our financial statements described in Note A of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004, the areas that are our most important critical accounting policies and estimates are described below and include:
| revenue recognition, |
| valuation of goodwill and intangible assets, |
| accounting for income taxes, |
| allowance for accounts and other receivables, and |
| restructuring charges. |
A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Critical accounting policies require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.
Accounting policies, guidelines and interpretations related to our critical accounting policies and estimates are generally subject to numerous sources of authoritative guidance and are often reexamined by accounting standards rule makers and regulators. These rule makers and/or regulators may promulgate interpretations, guidance or regulations that may result in changes to our accounting policies, which could result in a material impact on our financial position and results of operations.
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Revenue Recognition
While we apply the guidance of Statement of Position (SOP) No. 97-2, Software Revenue Recognition, and Statement of Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, both issued by the American Institute of Certified Public Accountants, as well as SEC Staff Accounting Bulletin 104, Revenue Recognition, we exercise judgment and use estimates in connection with the determination of the amounts of software license and services revenues to be recognized in each accounting period. Our primary judgments involve the following:
| determining whether collection is probable; |
| assessing whether the fee is fixed or determinable; |
| determining whether service arrangements, including modifications and customization of the underlying software, are not essential to the functionality of the licensed software and thus would qualify as service transactions under SOP 97-2, resulting in the revenue for license and service elements of an agreement to be recorded separately; and |
| determining the fair value of services and maintenance elements included in multiple-element arrangements, which is the basis for allocating and deferring revenue for such services and maintenance. |
We derive revenues from three primary sources: (1) software licenses, (2) maintenance services and (3) other services, which include consulting and education services. Revenue by type for the first quarters of 2005 and 2004 is as follows:
Three months ended
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Nine months ended
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July 2, 2005 |
July 3, 2004 |
July 2, 2005 |
July 3, 2004 |
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(in thousands) | ||||||||||||
License revenue |
$ | 49,228 | $ | 52,405 | $ | 148,855 | $ | 146,893 | ||||
Maintenance services revenue |
86,443 | 81,414 | 255,675 | 239,396 | ||||||||
Other services revenue |
44,663 | 34,558 | 121,097 | 103,606 | ||||||||
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Total revenue |
$ | 180,334 | $ | 168,377 | $ | 525,627 | $ | 489,895 | ||||
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For software license arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. Substantially all of our license revenues are recognized in this manner.
Our software is distributed primarily through our direct sales force. However, our indirect distribution channel continues to expand through alliances with resellers. Revenue arrangements with resellers are recognized on a sell-through basis; that is, when we receive persuasive evidence that the reseller has sold the products to an end-user customer. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for product returns and related allowances.
At the time of each sale transaction, we must make an assessment of the collectibility of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer credit-worthiness and historical payment experience. At that same time, we assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. If the fee is not fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction and our collection experience in similar transactions without making concessions, among other factors. Our software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.
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Our software arrangements often include implementation and consulting services that are sold separately under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to the functionality of the licensed software and qualify as service transactions under SOP 97-2, we record revenue separately for the license and service elements of these arrangements. Generally, we consider that a service is not essential to the functionality of the software based on various factors, including if the services may be provided by independent third parties experienced in providing such consulting and implementation in coordination with dedicated customer personnel. If an arrangement does not qualify for separate accounting of the license and service elements, then license revenue is recognized together with the consulting services using either the percentage-of-completion or completed-contract method of contract accounting. Contract accounting is also applied to any software arrangements that include customer-specific acceptance criteria or where the license payment is tied to the performance of consulting services. Under the percentage-of-completion method, we estimate the stage of completion of contracts with fixed or not to exceed fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, we accrue for the estimated losses immediately. The use of the percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in salaries and other costs. When adjustments in estimated contract costs are determined, such revisions may have the effect of adjusting, in the current period, the earnings applicable to performance in prior periods.
We generally use the residual method to recognize revenues from arrangements that include one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements (e.g., maintenance, consulting and education services) based on vendor-specific objective evidence (VSOE) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (i.e., software license). If evidence of the fair value of one or more of the undelivered services does not exist, all revenues are deferred and recognized when delivery of all of those services has occurred or when fair values can be established. We determine VSOE of the fair value of services revenues based upon our recent pricing for those services when sold separately. VSOE of the fair value of maintenance services may also be determined based on a substantive maintenance renewal clause, if any, within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, maintenance term and customer location. We review services revenues sold separately and maintenance renewal rates on a periodic basis and update, when appropriate, our VSOE of fair value for such services to ensure that it reflects our recent pricing experience.
Valuation of Goodwill and Other Intangible Assets
Our net goodwill and other intangible assets totaled $63.6 million as of July 2, 2005 and $56.5 million as of September 30, 2004. We assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, or a reduction of our market capitalization relative to net book value.
The goodwill impairment test prescribed by SFAS No. 142, Goodwill and Other Intangible Assets , requires us to identify reporting units and to determine estimates of the fair values of our reporting units as of the date we test for impairment. As described in Note 8 of Notes to Consolidated Financial Statements, we have two reporting units: (1) our software products reportable segment, and (2) our services reportable segment. All goodwill is attributable to our software products reportable segment. To conduct these tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting units carrying value exceeded its
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fair value, we would record an impairment loss equal to the difference between the carrying value of goodwill and its fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures and working capital for each unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data. We conduct our annual impairment test of goodwill and indefinite lived assets as of the end of the third quarter of each fiscal year. We completed our annual impairment review as of the end of the third quarter of 2005 and concluded that, as of July 2, 2005, no impairment charge was required. There can be no assurance that at the time subsequent impairment reviews are completed an impairment charge will not be recorded in light of the factors described above. If a charge were deemed necessary in the future, it would directly affect net income (loss) for the period in which the charge was taken.
For long-lived assets and identifiable intangible assets other than goodwill and indefinite-lived intangible assets, we reassess the recoverability of the asset based on projected undiscounted future cash flows over the assets remaining life if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reportable segment below its carrying value. When the carrying value of the asset exceeds its undiscounted cash flows, we record an impairment loss equal to the excess of the carrying value over the fair value of the asset, determined using projected discounted future cash flows of the asset. Determining the fair value of individual assets and goodwill includes significant judgment by management. Different judgments could yield different results.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue-sharing and cost-reimbursement arrangements among related entities and the differing tax treatment of revenue and cost items across various jurisdictions. If a foreign jurisdiction were to determine that our cost reimbursement arrangements need revision, that determination could affect our tax liability.
The income tax accounting process also involves estimating our actual current tax liability, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we must establish a valuation allowance as a charge to income tax expense. In 2002, we increased our deferred tax valuation allowance and recorded a corresponding $48.0 million charge to income tax expense and, in 2005, 2004 and 2003, we have fully reserved for additional deferred tax assets in the U.S. and certain foreign jurisdictions, primarily related to net operating loss carryforwards generated. The decision to record the valuation allowance required significant management judgment. Had we not recorded this valuation allowance, we would have reported materially different results. Significant management judgment is required to determine when the realization of our deferred tax assets in the future is considered more likely than not. If and when we conclude that realization is more likely than not, we will record a reduction to our valuation allowance that will increase net income in the period such determination is made. While we have realized operating profits over the last several quarters, we have not yet concluded that realization of all of our deferred tax assets in the future is more likely than not.
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Allowance for Accounts and Other Receivables
Management judgment is required in assessing the collectibility of customer accounts and other receivables, for which we generally do not require collateral. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, accounts receivable aging trends and changes in our customer payment terms. The following table summarizes our accounts receivable and related reserve balances as of July 2, 2005 and September 30, 2004:
July 2, 2005 |
September 30, 2004 |
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(Dollar amounts in thousands) | ||||||||
Gross accounts receivable |
$ | 135,204 | $ | 136,733 | ||||
Allowances for doubtful accounts |
(5,802 | ) | (6,340 | ) | ||||
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Net accounts receivable |
$ | 129,402 | $ | 130,393 | ||||
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Accounts receivable reserves as a percentage of gross accounts receivable |
4.3 | % | 4.6 | % |
If the financial condition of our customers were to deteriorate, additional allowances might be required, resulting in future operating expenses that are not included in the allowance for doubtful accounts. Our customer base consists of large numbers of geographically diverse customers dispersed across many industries, and no individual customer comprised more than 10% of our net trade accounts receivable for any period presented.
Restructuring Charges
We periodically record restructuring charges resulting from restructuring our operations (including consolidations and/or relocations of operations), changes to our strategic plan, or managerial responses to declines in demand, increasing costs, or other environmental factors. The determination of restructuring charges requires management judgment and may include costs related to employee benefits, such as costs of severance and termination benefits, and estimates of costs for future lease commitments on excess facilities, net of estimated future sublease income. In determining the amount of the facilities charge, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit worthiness of subtenants, and may result in revisions to established facility reserves. We have accrued $35.0 million as of July 2, 2005 (compared to $41.7 million at September 30, 2004) related to excess facilities, representing gross lease commitments with agreements expiring at various dates through 2014 of approximately $70.8 million, net of committed and estimated sublease income of approximately $34.3 million and a present value factor of $1.5 million. We have entered into signed sublease arrangements for approximately $24.9 million, with the remaining $9.4 million based on future estimated sublease arrangements, including $8.6 million for space currently available for sublease. If our sublease assumptions prove to be inaccurate, we may need to make changes in these estimates that would affect our results of operations and potentially our financial condition.
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Liquidity and Capital Resources
July 2,
2005 |
July 3,
2004 |
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(in thousands) | ||||||||
Cash and cash equivalents |
$ | 403,008 | $ | 257,741 | ||||
Investments |
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Total cash and investments |
$ | 403,008 | $ | 257,741 | ||||
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Amounts below are for the nine months ended: |
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Cash provided by operating activities |
$ | 119,445 | $ | 61,716 | ||||
Cash used by investing activities |
(19,544 | ) | (17,431 | ) | ||||
Cash provided by financing activities |
8,475 | 5,217 | ||||||
Cash provided (used) by operating activities included the following: |
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Cash disbursements for restructuring and other charges |
(7,698 | ) | (36,639 | ) | ||||
Federal income tax refunds received |
39,523 | |
Our operating activities, the proceeds from our issuance of stock under stock plans and existing cash and cash equivalents provided sufficient resources to fund our employee base, capital asset needs, acquisitions and financing needs in all periods presented. Our largest source of operating cash flows is cash collections from sales of new software licenses, sales of initial and renewal software maintenance contracts and sales of other services to our customers. Maintenance contracts typically are sold and billed one year in advance at the beginning of each contract period, although we recognize the associated revenue ratably over the annual contract period. Because the majority of our maintenance contracts are on calendar-year terms, payments from customers for maintenance generally are received in the second quarter of our fiscal year. Our primary uses of cash from operating activities are for strategic initiatives, personnel related expenditures, facilities and technology costs.
At July 2, 2005, cash and cash equivalents totaled $403.0 million, an increase of $108.1 million from $294.9 million at September 30, 2004. At July 2, 2005, we had $261.8 million of cash and cash equivalents in the United States, $77.3 million in Europe, $52.0 million in Japan and $11.9 million in other countries, principally in the Asia-Pacific region. We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. The portfolio is primarily invested in short maturity investments to minimize interest rate risk and to ensure cash is available to meet requirements as needed. The increase in cash and cash equivalents during the first nine months of 2005 consisted primarily of $119.4 million provided by operations (including a federal income tax refund of $39.5 million) and $8.5 million provided by financing activities, partially offset by $19.5 million used for investing activities.
Cash provided by operations was $119.4 million and $61.7 million in the first nine months of 2005 and 2004, respectively. The higher cash provided by operations in 2005 compared to 2004 was due primarily to (1) improved profitability in 2005 versus 2004 (net income increased $73.5 million in the first nine months of 2005 to $66.3 million from a net loss of $7.2 million in the first nine months of 2004), (2) receipt of a federal income tax refund of $39.5 million in the first quarter of 2005 and (3) lower cash disbursements for restructuring and other charges in the first nine months of 2005. Days sales outstanding in accounts receivable was 65 days at July 2, 2005 compared to 69 days at September 30, 2004 and 77 days at July 3, 2004.
Cash used by investing activities was $19.5 million in the first nine months of 2005, compared to $17.4 million in the first nine months of 2004. Cash used by investing activities for the acquisition of property and equipment and other intangible assets increased to $12.7 million in the first nine months of 2005, compared to $7.6 million in the first nine months of 2004, which increase is in line with our planned 2005 capital expenditures in order to support our strategic initiatives. Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements. In the first nine months of 2005 and 2004, we paid $6.8 million and $9.8 million, respectively, for acquisitions completed in the third quarters of each year.
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Financing activities provided cash of $8.5 million in the first nine months of 2005 and $5.2 million in the first nine months of 2004, primarily from the issuance of common stock under our employee stock purchase and stock option plans. In December 2004, the Financial Accounting Standard Board (FASB) issued SFAS No. 123R, Share-Based Payment, regarding revised accounting rules for company-sponsored stock purchase plans. In light of these accounting changes, we suspended offerings under our employee stock purchase plan (ESPP) as of the date of the offering that was to have commenced on February 1, 2005.
On March 10, 2005, our stockholders approved amendments to our 2000 Equity Incentive Plan that (1) authorize us to exchange and cancel certain outstanding out-of-the-money non-executive employee stock options for either cash or shares of restricted stock, (2) authorize the grant of restricted stock units, and (3) enable us to grant a greater number of shares of restricted stock as equity awards. The amendments are designed to reduce the overall number of employee stock options outstanding and reduce potential stockholder dilution. We completed the option exchange on August 3, 2005. We accepted 18.3 million options for exchange and cancellation and will pay $12.8 million in exchange for those options. Going forward, we anticipate that we will make more use of restricted stock and restricted stock unit grants, which require fewer shares than stock options to deliver comparable value. The use of restricted shares and restricted stock units, coupled with suspension of the ESPP, will result in lower cash proceeds to us. The ESPP and exercise of employee stock options generated cash proceeds of $8.9 million in the first nine months of 2005 and of $9.7 million in the year ended September 30, 2004.
In September 1998, our Board of Directors authorized us to repurchase up to 20.0 million shares of our common stock, and in July 2000 increased the number of shares we are authorized to repurchase to 40.0 million. Through July 2, 2005, we had repurchased a total of 31.2 million shares. We did not repurchase any shares during the first nine months of 2005 or 2004 under our repurchase program.
We lease office facilities and certain equipment under operating leases that expire at various dates through 2014, including an operating lease agreement related to our headquarters office in Needham, Massachusetts entered into in 2000, which expires in 2013, subject to certain renewal rights. These leases qualify for operating lease accounting treatment and, as such, are not included on our balance sheet. At September 30, 2004, our total contractual obligations, which include future minimum lease payments (net of sublease income) under noncancellable operating leases, pension obligations and other purchase obligations, was $227.6 million ($50.5 million due in less than one year, $59.6 million due in one to three years, $46.6 million due in three to five years, and $70.9 million due thereafter). Total contractual obligations have not changed significantly from September 30, 2004. For further information on these obligations, refer to Contractual Obligations beginning on page 23 of our Annual Report on Form 10-K for the year ended September 30, 2004.
On July 19, 2005, we completed the acquisition of Arbortext, Inc., a provider of enterprise publishing software, for $190 million in cash. We believe that existing cash and cash equivalents together with cash generated from operations will be sufficient to finance our acquisition of Arbortext, fund the stock option exchange discussed above and meet our working capital and capital expenditure requirements through at least the next twelve months. During the remainder of 2005, we expect to make cash disbursements estimated at $4 million for restructuring charges incurred in 2004 and prior periods. Capital expenditures for property and equipment for the remainder of 2005 are currently anticipated to be approximately $3 million. Our cash position could be adversely affected if we are not able to continue to generate operating profits.
We have evaluated, and expect to continue to evaluate, possible acquisition transactions and possible dispositions of certain businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. Our cash position could be reduced and we may incur debt obligations to the extent we complete any significant acquisitions.
New Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. See Note 6 of Notes to Consolidated Financial Statements .
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Important Factors That May Affect Future Results
The following are some of the factors that could affect our future results. They should be considered when evaluating forward-looking statements contained in this Quarterly Report on Form 10-Q and otherwise made by us or on our behalf, because these factors could cause actual results and conditions to differ materially from those projected in forward-looking statements.
I. Operational Considerations
Our operating results fluctuate within each quarter and from quarter to quarter making our future revenues and operating results difficult to predict.
While our sales cycle varies substantially from customer to customer, a high percentage of our revenue has historically been generated in the third month of each fiscal quarter, and this revenue tends to be concentrated in the later part of that month. Our orders early in a quarter will not generally occur at a rate which, if sustained throughout the quarter, would be sufficient to assure that we will meet our revenue targets for any particular quarter. Moreover, our transition from a one-product company to a multi-product company, our increased use of indirect distribution channels through alliances with resellers and other strategic partners and our shift in business emphasis to offering a product development system comprised of components that can be purchased in stages have resulted in more unpredictable and often longer sales cycles for products and services. Accordingly, our quarterly results may be difficult to predict prior to the end of the quarter. Any inability to obtain large orders or orders in large volumes or to make shipments or perform services in the period immediately preceding the end of any particular quarter may cause the results for that quarter to fall short of our revenue targets. In addition, our operating expenses are based on expected future revenue and are largely fixed for the short term. As a result, a revenue shortfall in any quarter could cause our earnings for that quarter to fall below expectations as well. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our stock.
Other factors that may cause quarter-to-quarter revenue and earnings fluctuations or that may affect our ability to make quarter-end shipments include the following:
| our sales incentive structure is weighted more heavily toward the end of the fiscal year, and the revenue for the first quarter historically has been lower and more difficult to predict than that for the fourth quarter of the immediately preceding fiscal year; |
| variability in the levels of professional service revenues and the mix of our license and service revenues; |
| declines in license sales may adversely affect the size of our installed base and our level of service revenue; |
| the outsourcing of our software distribution operations to third-party vendors may lessen our ability to undertake corrective measures or alternative operations in the event shipping systems or processes are interrupted or are hampered due to conditions beyond our or our vendors control at the end of any particular quarter; and |
| a significant portion of our revenue is in foreign currency and major shifts in foreign currency exchange rates could impact our reported revenue. |
In addition, the levels of quarterly or annual software or service revenue in general, or for particular geographic areas, may not be comparable to those achieved in previous periods.
General economic and political conditions may impact our results.
Our revenue growth and profitability depends on the overall demand for software and related services. Over the past several years, this demand has been adversely affected by unfavorable economic conditions, as customers have reduced, or have deferred, spending on information technology improvements, which, in turn, has affected our operating results. Although we recently have seen modest improvements in information technology spending, a return to unfavorable economic conditions has the potential to materially and adversely affect us.
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Political and social events in recent years, including concerns regarding terrorism, have the potential to put further pressure on economic conditions both domestically and internationally. The potential turmoil that may result from such events contributes to the uncertainty of the economic climate. The impact of such conditions may have a materially adverse impact on our business, operating results, and financial position.
We use third parties, such as resellers and other strategic partners, for the distribution and implementation of our software solutions, which makes it more difficult to manage the sales process.
We have entered into relationships with groups of geographically dispersed resellers and other strategic partners to promote, sell and/or implement our products, which can reduce our control over the sales process and the delivery of services to our customers. Our successful use of third parties will depend on:
| our ability to enter into agreements with appropriate third parties that can deliver our products and/or services in appropriate markets; |
| the third partys ability to learn, promote and implement our products; and |
| our ability to efficiently manage our sales channels by effectively coordinating and managing joint activities (including sales, marketing, implementation, support and customer service). |
We may be unable to implement new initiatives successfully.
Part of our recent success has resulted from our ability to implement new initiatives, including new product introductions, technology acquisitions, and organizational changes. Our future operating results will continue to depend upon:
| our successful implementation of a unified PLM product strategy, including the realignment and efficient use of our internal resources, the management of multiple development and distribution processes and effective mitigation of disruption that may result from organizational change; |
| our ability to deliver an integrated and comprehensive suite of solutions and to capitalize on existing synergies by offering a comprehensive product development system; |
| our ability to integrate acquired technologies into our integrated suite of products and successfully integrate newly acquired businesses, including potentially overlapping distribution channels, into our operations; |
| our ability to appropriately allocate and implement cost cutting measures, including transferring activities to lower cost regions, that increase profitability while maintaining adequate resources for effective and coordinated organizational performance; |
| the success of our sales coverage optimization initiatives, including: |
| the effectiveness of our organizational sales model, including the integration of distribution channels of newly acquired companies, |
| our ability to manage our internal sales organization effectively, including ensuring that we have the appropriate number of sales representatives with the skills and knowledge necessary for selling our products and educating our customers about our products, in order to create and meet demand for our products, and |
| our ability to broaden and effectively use indirect distribution channels through alliances with resellers and other strategic partners; |
| our ability to anticipate and meet evolving customer requirements for PLM solutions and successfully deliver products and services at an enterprise level; |
| our ability to identify and penetrate additional industry sectors and vertical market segments that represent growth opportunities (and in which we historically have not participated and have little experience), both through new product and sales initiatives and through acquisitions; |
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| our ability to execute customer satisfaction initiatives and programs in order to retain our customer base and to develop customer references upon which we can expand that base; and |
| our ability to effectively use our current resources, as reduced by our past cost reduction programs, to undertake one or more strategic initiatives while maintaining recurring operations at satisfactory levels. |
We are dependent on key personnel whose loss could cause delays in our product development and sales efforts.
Our success depends upon our ability to attract and retain highly skilled technical, managerial and sales personnel. Competition for such personnel in our industry is intense. This competition is even greater in offshore regions where we have shifted certain research and development resources and where concerted efforts to solicit employees are not uncommon. We assume that we will continue to be able to attract and retain such personnel. Our failure to do so, however, could have a material adverse effect on our business.
We must continually modify and enhance our products to keep pace with changing technology, and we may experience delays in developing and debugging our software.
We must continually modify and enhance our products to keep pace with changes in computer software, hardware and database technology, as well as emerging Internet standards. We must also continually expend efforts to review and fix errors (bugs) found in our current and upcoming software releases. Our ability to remain competitive will depend on our ability to:
| enhance our current offerings and develop new products and services that keep pace with technological developments and effectively undertake debugging efforts through: |
| internal research and development and quality assurance programs, |
| acquisition of technology, and |
| strategic partnerships; |
| meet evolving customer requirements, especially ease-of-use and interoperability; |
| adequately utilize our development resources in the face of a challenging economic climate; and |
| license appropriate technology from third parties for inclusion in our products. |
Also, as is common in the computer software industry, we may from time to time experience delays in our product development and debugging efforts. Our performance could be hurt by significant delays in developing, completing or shipping new or enhanced products. Moreover, if significant bugs were found in our software products, we could be adversely impacted by negative customer reaction and could experience delays in our new product development efforts, as development resources might need to be shifted toward our debugging efforts. Among other things, such delays could cause us to incorrectly predict the fiscal quarter in which we will realize revenue from the shipment of the new or enhanced products and give our competitors a greater opportunity to market competing products.
We may be unable to price our products competitively or distribute them effectively.
Our success is tied to our ability to price our products and services competitively and to deliver them efficiently, including our ability to:
| provide a range of products with functionality that our customers want at prices they can afford; |
| build appropriate direct distribution channels; and |
| build appropriate indirect distribution channels. |
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We may be adversely affected by a decline in demand for PLM solutions.
We currently derive our license and service revenues from a group of related PLM software products and services and we expect this to continue into the future. As a result, factors affecting the demand for PLM software solutions or pricing pressures on this single category could have a material adverse effect on our financial condition and results of operations.
We depend on sales within the discrete manufacturing market.
A large amount of our revenues are related to sales to customers in the discrete manufacturing sector. A decline in spending in this sector could have a material adverse effect on our financial condition and results of operations.
We depend on sales from outside the United States that could be adversely affected by changes in the international markets.
A significant portion of our business comes from outside the United States. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Asia-Pacific region. Another consequence of significant international business is that a large percentage of our revenues and expenses is denominated in foreign currencies that fluctuate in value. Although we may from time to time enter into foreign exchange forward contracts and/or foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may have a material impact on our results. Other risks associated with international business include:
| changes in regulatory practices and tariffs; |
| staffing and managing international operations, including the difficulties in providing cost-effective, incentive based compensation to attract skilled workers; |
| longer collection cycles in certain areas; |
| potential changes in tax and other laws; |
| greater difficulty in protecting intellectual property rights; and |
| general economic and political conditions. |
We may be unable to adequately protect our proprietary rights.
Our software products and our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and harm our business.
Intellectual property infringement claims could be asserted against us, which could be expensive to defend and could result in the loss of our rights.
The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. While we have not, to date, had any significant claims of this type asserted against us, such claims could be asserted against us in the future. If a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using that intellectual property or required to enter into royalty or licensing agreements, which might not be available on
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terms acceptable to us, or at all. In addition to possible claims with respect to our proprietary information, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies.
We may be unable to successfully acquire and integrate strategic businesses and any businesses we acquire may not achieve the revenue and earnings we anticipated.
The success of our long-term strategic plan depends in part on our ability to acquire strategic businesses. If we are unable to identify and acquire appropriate strategic businesses, we may not achieve our revenue targets.
In addition, business combinations involve a number of factors that affect operations, including:
| diversion of managements attention; |
| loss of key personnel; |
| entry into unfamiliar markets; |
| assumption of unanticipated legal or financial liabilities; |
| becoming significantly leveraged as a result of incurring debt to finance an acquisition; |
| unanticipated operating difficulties in connection with the acquired entities, including potential declines in revenue of the acquired entity; |
| impairment of acquired intangible assets, including goodwill; and |
| dilution to our earnings per share. |
As a result, we may fail to successfully integrate businesses that we may acquire without incurring substantial expenses, delays or other problems that could negatively impact our results of operations. If our short-term liquidity declines in connection with an acquisition, our ability to implement other strategic initiatives or make investments in our operational infrastructure could be impaired.
II. Design Solutions Related Considerations
Increasing competition in the computer aided design marketplace may reduce our revenues.
There are an increasing number of competitive design products, some of which emphasize lower price points and ease of use compared to the more robust functionality of our solutions. This increased competition makes attracting new customers more difficult. In addition, some competitive products have reached a level of functionality whereby product differentiation is less likely, in and of itself, to dislodge incumbent design systems, given the training, data conversion, and other startup costs associated with system replacement. Although Pro/ENGINEER Wildfire, which focuses on PLM interoperability and ease of use, and other initiatives are designed to address these competitive pressures, increased competition and further market acceptance of competitive products could have a negative effect on pricing and revenue for our products, which could have a material adverse affect on our results.
In addition, even though our design software is capable of performing on a variety of platforms as compared to several of our competitors whose products focus on single platform applications (particularly Windows-based platforms), there can be no assurance that we will have a competitive advantage by offering multiple platform applications.
We continue to enhance our existing product line by releasing updates as well as new products/modules. Our competitive position and operating results could suffer if:
| we fail to anticipate or to respond adequately to customer requirements or to technological developments, particularly those of our competitors; |
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| we delay the development, production, testing, marketing or availability of new or enhanced products or services; |
| customers fail to accept such new or enhanced products or services; or |
| we fail to execute our integrated product strategy initiative. |
Growth in the computer aided design solutions industry has slowed.
Growth in certain segments of the computer aided design solutions industry has slowed and, coupled with decreased functional differentiation among flexible engineering tools, may adversely affect our ability to penetrate the market for new customers and recapture our market share. Over the long term, we believe our emphasis on PLM solutions will allow us to differentiate our design solutions from the competition and stabilize sales of our design solutions products while we seek to increase sales of our collaboration and control solutions. However, the strategy may not be successful or may take longer than we plan. Our operating results in any quarter could be materially adversely affected if these assumptions are incorrect.
III. Collaboration and Control Solutions and Overall PLM Related Considerations
Our assumptions about the Product Lifecycle Management (PLM) market opportunity may be wrong.
We have identified PLM as a market opportunity for us and have devoted significant resources toward capitalizing on that opportunity. We offer a suite of PLM solutions and related services targeted at this market based on our collaboration and control solutions, together with our design solutions. This suite includes software and services that use Internet technologies to enable our customers employees, suppliers and customers to collaboratively develop, build, distribute and manage products throughout their entire lifecycle. Because the market for software products that enable companies to collaborate on product information on an enterprise-wide level is newly emerging, we cannot be sure of the size of this market, whether it will grow, or whether companies will elect to use our products or acquire them from other sources, or forego PLM initiatives altogether.
In addition, companies that have already invested substantial resources in other methods of sharing product information in the design-through-manufacture process may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or methods. We expect that we will continue to need to educate prospective customers about the uses and benefits of our products. Demand for and market acceptance of our products will be affected by the success of those efforts.
Our Windchill technology, which is central to our PLM strategy, is not yet well established in the marketplace.
The success of our PLM strategy will depend in large part on the ability of our Windchill-based solutions to meet customer expectations, especially with respect to:
| return on investment and value creation; |
| ease and rapidity of installation; |
| ease of use; |
| full capability, functionality and performance; |
| ability to support a large, diverse and geographically dispersed user base; and |
| quality and efficiency of the services performed by us and our partners relating to implementation and configuration. |
The software is still relatively new. If our customers cannot successfully deploy our solutions, or if our solutions are not well accepted within our customers organizations by their users after deployment, our operating results may be adversely affected.
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Our PLM solutions strategy is developing.
We are pursuing a strategy to provide a series of easily deployable PLM solutions that address specific business challenges that arise at points along the product lifecycle timeline (our Windchill Link solutions). These Windchill Link solutions use our Internet-based Windchill architecture as well as components of our design solutions. By offering pre-configured, fully integrated applications that can be implemented quickly, our strategy is designed both to solve customers problems relating to costly, large-scale implementation projects and to provide customers with the ability to deploy a product development system that meets their evolving requirements. If we are unable to provide these solutions or are unable to meet customer expectations, our overall revenue may be adversely affected.
Our Windchill Link solutions may crowd out service revenue and our initiatives to use select resellers to distribute these solutions may put pressure on license margins.
Our introduction of our Windchill Link solutions, which have been developed to permit quick installation and provide customers more autonomy over solving their problems, may have an adverse effect on our service revenue. Additionally, we also have begun to offer a limited number of qualified resellers the ability to offer our Windchill Link solutions. We believe that entering into these relationships will best serve to expand the coverage of our PLM software solutions, generate sufficient additional license revenue to compensate for reduced margins, and provide the necessary regional coverage for their implementation and support. If these assumptions are inaccurate or if projected additional license revenue and/or broader market coverage does not materialize, our revenues may be adversely affected.
PLM software solutions must meet our customers expectations for integration with existing systems to generate references for new accounts.
Our PLM software must integrate with our customers and their partners existing computer systems and software programs. In certain cases, we use third-party technologies to facilitate these integrations. As many of our customers will be facing these integration issues for the first time, particularly in the context of collaborating with customers, supply chain partners and other members of the extended enterprise, our customers could become dissatisfied with our products or services if systems integration proves to be difficult, costly or time consuming, and our operating results could be adversely affected. Moreover, due to the emerging nature of the industry and technology, the sales process relies in large part on customer references. Accordingly, if our customers become dissatisfied, future business and revenues may be adversely affected.
Competition is increasing, which may reduce our profits and limit or reduce our market share.
The market for our PLM software solutions is new, highly fragmented, rapidly changing and increasingly competitive. We expect competition to intensify, which could result in price reductions for our products and services, reduced gross margins and loss of market share. Our primary competition comes from:
| larger, more well-known enterprise software providers who may seek to extend the functionality of their products to encompass PLM or who may develop and/or purchase PLM technology; and |
| other vendors of engineering information management software. |
In addition, analysts expect future consolidation within the software industry, which could give rise to new competitors. To compete effectively in this evolving industry, we must:
| successfully develop solutions that are technologically superior to those of our competitors; |
| effectively demonstrate the value proposition offered by our solutions, including return on investment and value creation; and |
| overcome the perception, based on our historical roots, that we are solely a mechanical computer aided design (MCAD) company. |
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In addition, our services organization may face increasing competition for follow-on consulting, implementation and education services from other third-party consultants and service providers, including those of larger, better known consulting firms that exert considerable influence within portions of our customer base. To overcome the influence of larger enterprise software and consulting firms within our customer base, we must successfully demonstrate the superiority of our offerings as well as a high level of customer satisfaction.
If the Internet does not continue to develop or reliably support the demands placed on it by electronic commerce, we may experience a loss of sales.
Our success depends upon continued growth in the use of the Internet as a medium of secure collaboration and commerce. The use of the Internet for collaboration and commerce is still relatively new. As a result, a sufficiently broad base of companies and their supply chain may not adopt or continue to use the Internet as a medium of exchanging product information. Our PLM strategy would be seriously harmed if the infrastructure for the Internet does not efficiently support enterprises and their supply chain partners or concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of collaborating across enterprises and/or conducting commercial transactions.
IV. Other Considerations
We are required to report on, and obtain the attestation of our independent registered public accounting firm relating to, our internal control over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our fiscal 2005 Annual Report on Form 10-K our assessment, as well as an attestation from our independent registered public accounting firm, of the effectiveness of our internal control over financial reporting. While we believe our internal control over financial reporting is adequate and has been well documented, we cannot be sure that we will not receive an adverse opinion from our independent registered public accounting firm or that unforeseen circumstances will result in one or more of our controls becoming ineffective. If we are unable to implement the requirements of Section 404 in a timely manner or if we, or our independent registered public accounting firm, report material weaknesses in our internal controls, investors could lose confidence in the accuracy of our financial reports, which could cause our stock price to decline. In addition, we would potentially be subject to sanctions or investigation by regulatory authorities, including the Securities and Exchange Commission or the Nasdaq National Market.
Our stock price has been highly volatile, which may make it harder to resell your shares at a time and at a price that is favorable to you.
Market prices for securities of software companies have generally been volatile. In particular, the market price of these stocks has been and may continue to be subject to significant fluctuations unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, may not be predictable. Negative changes in the publics perception of the prospects of software companies, or of PTC or the PLM market generally, could depress our stock price regardless of our results.
We adopted SFAS No. 123R in the fourth quarter of 2005. Adoption of SFAS No. 123R will result in incremental expense on our consolidated statement of operations beginning in the fourth quarter of 2005. If the market reacts negatively to the effect of this incremental expense on our results of operations, our stock price and market capitalization could be adversely affected.
Also, traditionally, a large percentage of our common stock has been held by institutional investors. Purchases and sales of our common stock by these institutional investors could have a significant impact on the market price of the stock. For more information about those investors, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.
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We are currently defending a lawsuit seeking substantial damages in which we could be liable.
On May 30, 2003, a lawsuit was filed against us in the U.S. District Court for the District of Massachusetts by Rand A Technology Corporation and Rand Technologies Limited (together, Rand). Rand historically had been our largest distributor. The complaint alleges various breaches of a revised one-year distribution agreement entered into in December 2002, as well as other agreements between Rand and us, and also asserts certain non-contract claims. The complaint, as amended, seeks equitable relief and substantial damages. On November 24, 2003, we filed our substantive response to Rands complaint and asserted counterclaims against Rand. During the second quarter of 2005, Rand quantified its claimed actual damages as being in excess of $50 million and Rand asserts that this amount should be trebled by the court. We believe Rands claims and its damages assessment associated with those claims are without merit and will continue to contest them vigorously. We also intend diligently to prosecute our counterclaims. We cannot predict the ultimate resolution of this action at this time, and there can be no assurance that this action will not have a material adverse impact on our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Item 7A: Quantitative and Qualitative Disclosures About Market Risk to our 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures . Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.
(b) Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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On May 30, 2003, a lawsuit was filed against us in the U.S. District Court for the District of Massachusetts by Rand A Technology Corporation and Rand Technologies Limited (together, Rand). Rand historically had been our largest distributor. The complaint alleges various breaches of a revised one-year distribution agreement entered into in December 2002, as well as other agreements between Rand and us, and also asserts certain non-contract claims. The complaint, as amended, seeks equitable relief and substantial damages. On November 24, 2003, we filed our substantive response to Rands complaint and asserted counterclaims against Rand. During the second quarter of 2005, Rand quantified its claimed actual damages as being in excess of $50 million and Rand asserts that this amount should be trebled by the court. We believe Rands claims and its damages assessment associated with those claims are without merit and will continue to contest them vigorously. We also intend diligently to prosecute our counterclaims. We cannot predict the ultimate resolution of this action at this time, and there can be no assurance that this action will not have a material adverse impact on our financial condition or results of operations.
We also are subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these other matters will not have a material adverse impact on our financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
(a) Total Number of Shares Purchased |
(b) Average price paid per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number that May Yet Be Purchased Under the Plans or Programs (1) |
||||||
April 3 April 30, 2005 |
0 | n/a | 0 | 8,809,609 | ||||||
May 1 May 28, 2005 |
53,952 | (2) | $ | 5.38 | 0 | 8,809,609 | ||||
May 29 July 2, 2005 |
0 | n/a | 0 | 8,809,609 | ||||||
|
|
|
|
|
|
|||||
Total |
53,952 | $ | 5.38 | 0 | 8,809,609 | |||||
|
|
|
|
|
|
(1) | Our Board of Directors has authorized us to repurchase up to 40.0 million shares of our common stock. Through July 2, 2005, we had repurchased a total of 31.2 million shares. |
(2) | All 53,592 shares were purchased on May 5, 2005 from one of our executive officers who tendered those shares to PTC to satisfy tax withholding obligations incurred in connection with the vesting of 125,000 shares of the executives May 30, 2002 restricted stock award. The price paid per share was the closing price per share of our common stock on the Nasdaq National Market on that date. |
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2.1 | Amended and Restated Agreement and Plan of Merger dated as of July 15, 2005 by and among Parametric Technology Corporation, Arbortext, Inc., PTC Maple Corporation and a representative of the stockholders of Arbortext, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K dated July 19, 2005 and incorporated herein by reference). | |
10.1* | Form of Restricted Stock Agreement (Non-Employee Director) | |
10.2* | Form of Restricted Stock Agreement (Employee) | |
10.3 | Form of Restricted Stock Unit Certificate (U.S.) | |
10.4 | Form of Restricted Stock Unit Certificate (Non-U.S.) | |
10.5* | Form of Incentive Stock Option Certificate | |
10.6* | Form of Nonstatutory Stock Option Certificate | |
10.7* | Form of Stock Appreciation Right Certificate | |
10.8* | Information regarding director compensation (incorporated by reference from Item 1.01 in our Current Report on Form 8-K dated May 18, 2005). | |
10.9* | Amended and Restated Consulting Agreement dated as of July 28, 2005 between Parametric Technology Corporation and Michael E. Porter (filed as Exhibit 1.1 to our Current Report on Form 8-K dated July 28, 2005 and incorporated herein by reference). | |
31.1 | Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). | |
31.2 | Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). | |
32** | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. |
* | Indicates a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates. |
** | Indicates that the exhibit is being furnished with this report and is not filed as a part of it. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
P ARAMETRIC T ECHNOLOGY C ORPORATION | ||
By: |
/s/ C ORNELIUS F. M OSES , III |
|
Cornelius F. Moses, III | ||
Executive Vice President and
Chief Financial Officer (Principal Financial Officer) |
Date: August 11, 2005
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Exhibit 10.1
FORM OF RESTRICTED STOCK AGREEMENT NON-EMPLOYEE DIRECTOR
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Restricted Stock Agreement
Grantee: |
Date: |
Grant No. |
Number of Shares of Restricted Stock: |
||||
Vesting Criteria: |
As to shares on [ insert relevant milestone, e.g., date, performance goal, etc. ], | |||
as to shares on | , 20 , and | |||
as to shares on | , 20 . |
AGREEMENT dated as of the date set forth above between Parametric Technology Corporation, a Massachusetts corporation (the Company ), and the undersigned (the Grantee ), pursuant to the Companys 2000 Equity Incentive Plan (the Plan ), receipt of a copy of which is hereby acknowledged by the Grantee. Capitalized terms used and not otherwise defined in this Agreement have the meanings given to them in the Plan.
WHEREAS the Grantee is a director of the Company and the Company desires to reward such individual for his or her services rendered to the Company by affording him or her the opportunity to acquire, or increase, his or her stock ownership in the Company.
NOW, THEREFORE, in consideration of the premises, the parties hereto mutually covenant and agree as follows:
1. Grant of Restricted Stock . Pursuant to the Plan and subject to the restrictions and the terms and conditions set forth therein, which terms and conditions are incorporated herein by reference, and in this Agreement, the Company grants to the Grantee and the Grantee accepts the number of shares of Common Stock, $0.01 par value, of the Company set forth above (the Restricted Stock ). The term Restricted Stock shall include any additional shares of stock of the Company issued on account of the foregoing shares by reason of stock dividends, stock splits or recapitalizations (whether by way of mergers, consolidations, combinations or exchanges of shares or the like).
2. Restrictions on Stock.
(a) Until the termination of restrictions as provided in Section 3 hereof, the Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in this Agreement.
(b) No rights or interests of the Grantee under this Agreement or under the Plan may be assigned, encumbered or transferred other than (i) to the extent permitted and in accordance with such procedures adopted by the Committee from time to time and (ii) by will or the laws of descent and distribution. The naming of a Designated Beneficiary does not constitute a transfer.
(c) If the Grantee ceases to serve as a director of the Company for any reason (voluntary or involuntary), in the absence of any other provisions prescribed in the vote granting any Restricted Stock under the Plan or thereafter , such Restricted Stock, to the extent remaining subject to restrictions, shall immediately be forfeited to the Company subject to the Company reimbursing the consideration (if any) paid for the Restricted Stock to the Non-Employee Director or to such person(s) to whom the Non-Employee Directors rights pass by will or by the applicable laws of descent and distribution in the case the Non-Employee Director ceases to serve as a director of the Company by reason of his or her death.
PARAMETRIC TECHNOLOGY CORPORATION
Restricted Stock Agreement Page 2
3. Termination of Restrictions . The shares of Restricted Stock shall be divided into the number of separate parts set forth above under Vesting Criteria, and the restrictions set forth in Section 2 hereof shall terminate in accordance with such Vesting Criteria (with any fractional share resulting being added to the next part), so that the restrictions on all such shares shall have terminated when all Vesting Criteria have been met, if at all. The achievement of any of the Vesting Criteria (other than the passage of time) shall be determined by the Committee in its sole discretion.
4. Rights as Stockholder . Except for the restrictions and other limitations and conditions provided in this Agreement, the Grantee as owner of the Restricted Stock shall have all the rights of a stockholder, including but not limited to the right to receive all dividends paid on such Restricted Stock and the right to vote such Restricted Stock.
5. Stock Certificates . Each certificate issued for shares of Restricted Stock shall be registered in the name of the Grantee and deposited by the Grantee, together with a stock power endorsed in blank, with the Company and shall bear the following (or a similar) legend:
The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) contained in a Plan and an Agreement between the registered owner and Parametric Technology Corporation. A copy of such Plan and Agreement will be furnished to the holder of this certificate upon written request and without charge.
Upon the termination of the restrictions imposed under this Agreement as to any shares of Restricted Stock, the Company shall return to the Grantee (or to such Grantees legal representative, beneficiary or heir) certificates, without a legend, for the shares of Common Stock deposited with it pursuant to this Section 5 as to which the restrictions have terminated.
6. Tax Withholding . The Grantee shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the Restricted Stock no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Grantee. In the Committees discretion, the minimum tax obligations required by law to be withheld with respect to the Restricted Stock may be paid in whole or in part in shares of Common Stock valued at their Fair Market Value on the date of delivery.
7. Securities and Other Laws . It shall be a condition to the Grantees right to receive the shares of Restricted Stock hereunder that the Company may, in its discretion, require (a) that the shares of Restricted Stock shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933, as amended (the Act ), with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed issuance and delivery of the shares to the Grantee shall be exempt from registration under the Act and the Grantee shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Grantee, or both. The certificates representing the shares of Restricted Stock may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
8. Adjustment in Provisions . In the event that there are any changes in the outstanding Common Stock of the Company by reason of stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other such transaction affecting the Companys Common Stock, the divisions of shares of Restricted Stock into parts, the provisions for termination of restrictions on parts of Restricted Stock, and any other relevant portions of this Agreement shall be appropriately adjusted by the Committee, if necessary, to reflect equitably such change or changes.
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9. Change in Control . In order to preserve Grantees rights under this Agreement in the event of a change in control of the Company (as defined by the Committee), unless otherwise provided for in the vote granting such restricted stock, all restrictions remaining on any restricted stock (other than any restrictions the lapse of which is based on factors other than continued service) granted to Non-Employee Directors under the Plan shall lapse without regard to any vesting criteria imposed pursuant to the Plan or any restricted stock agreement. The Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any time period relating to the termination of restrictions set forth in Section 2 hereof, (ii) provide for payment to Grantee of cash or other property with a Fair Market Value equal to the amount that would have been received upon the termination of restrictions set forth in Section 2 hereof had such restrictions terminated upon the change in control, provided such amount would not otherwise have been received by Grantee because of the restrictions set forth in Section 2, (iii) adjust the terms of this Agreement in a manner determined by the Committee to reflect the change in control, (iv) cause the Agreement to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Grantee and in the best interests of the Company.
10. Notice of Election Under Section 83(b) . If the Grantee makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder, he or she will provide a copy thereof to the Company within thirty days of the filing of such election with the Internal Revenue Service.
11. Amendments . The Committee may amend, modify or terminate this Agreement, including substituting therefor another Award of the same or a different type, provided that Grantees consent to such action shall be required, unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect Grantee.
12. Directorship . The Grantee shall not be deemed to have any rights to continued service as a director of the Company by virtue of the grant of Restricted Stock. Neither the adoption, maintenance, nor operation of the Plan nor this Agreement shall confer upon the Grantee any right with respect to the continuance of his/her directorship of the Company or of any Affiliate.
13. Decisions by Committee . Any dispute or disagreement that shall arise under, or as a result of, or pursuant to this Agreement shall be resolved by the Committee in its absolute and sole discretion, and any such resolution or any other determination by the Committee under, or pursuant to, this Agreement and any interpretation by the Committee of the terms of this Agreement or the Plan shall be final, binding, and conclusive on all persons affected thereby.
14. Notices . Any notice that either party hereto shall be required or permitted to give to the other shall be in writing and may be delivered personally, by facsimile or by mail, postage prepaid, addressed as follows: to the Company at 140 Kendrick Street, Needham, Massachusetts 02494: Attention Chief Financial Officer (copy to General Counsel, Legal Department), or at such other address as the Company by notice to the Grantee may designate in writing from time to time, and to the Grantee at his or her address as shown below or at such other address as the Grantee, by notice to the General Counsel of the Company, may designate in writing from time to time.
15. Copies of the Plan. Copies of the Plan may be obtained by Grantee upon written request without charge from the General Counsel of the Company.
PARAMETRIC TECHNOLOGY CORPORATION
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Grantee has hereunto set his or her hand, all as of the day and year first above written.
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Exhibit 10.2
FORM OF RESTRICTED STOCK AGREEMENT EMPLOYEE
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Restricted Stock Agreement
Grantee: |
Date: |
Grant No. |
Number of Shares of Restricted Stock: |
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Vesting Criteria: |
As to shares on [ insert relevant milestone, e.g., date, performance goal, etc. ], | |||
as to shares on | , 20 , and | |||
as to shares on | , 20 . |
AGREEMENT dated as of the date set forth above between Parametric Technology Corporation, a Massachusetts corporation (the Company ), and the undersigned (the Grantee ), pursuant to the Companys 2000 Equity Incentive Plan (the Plan ), receipt of a copy of which is hereby acknowledged by the Grantee. Capitalized terms used and not otherwise defined in this Agreement have the meanings given to them in the Plan.
WHEREAS the Grantee is an employee or consultant of the Company or one of its Affiliates, and the Company desires to reward such individual for his or her services rendered to the Company or such Affiliate by affording him or her the opportunity to acquire, or increase, his or her stock ownership in the Company.
NOW, THEREFORE, in consideration of the premises, the parties hereto mutually covenant and agree as follows:
1. Grant of Restricted Stock . Pursuant to the Plan and subject to the restrictions and the terms and conditions set forth therein, which terms and conditions are incorporated herein by reference, and in this Agreement, the Company grants to the Grantee and the Grantee accepts the number of shares of Common Stock, $0.01 par value, of the Company set forth above (the Restricted Stock ). The term Restricted Stock shall include any additional shares of stock of the Company issued on account of the foregoing shares by reason of stock dividends, stock splits or recapitalizations (whether by way of mergers, consolidations, combinations or exchanges of shares or the like).
2. Restrictions on Stock.
(a) Until the termination of restrictions as provided in Section 3 hereof, the Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in this Agreement.
(b) No rights or interests of the Grantee under this Agreement or under the Plan may be assigned, encumbered or transferred except by will or the laws of descent and distribution.
(c) If the Grantee ceases to be an employee of the Company or an Affiliate for any reason, including disability, death and retirement, all shares of Restricted Stock that remain subject to the restrictions imposed under this Section 2 shall, except as otherwise provided in Section 3 hereof, upon such termination of employment be forfeited and returned to the Company unless the Board or the Committee in its discretion shall otherwise determine. Notwithstanding the foregoing, if the Grantee is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company (or its Affiliate) will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as
PARAMETRIC TECHNOLOGY CORPORATION
Restricted Stock Agreement Page 2
the Grantees right to reemployment or the survival of his or her service arrangement with the Company (or its Affiliate) is guaranteed either by statute or by contract; otherwise, the Grantees employment or engagement will be deemed to have terminated on the 91st day of such leave.
3. Termination of Restrictions . The shares of Restricted Stock shall be divided into the number of separate parts set forth above under Vesting Criteria, and the restrictions set forth in Section 2 hereof shall terminate in accordance with such Vesting Criteria (with any fractional share resulting being added to the next part), so that the restrictions on all such shares shall have terminated when all Vesting Criteria have been met, if at all. The achievement of any of the Vesting Criteria (other than the passage of time) shall be determined by the Committee in its sole discretion.
4. Rights as Stockholder . Except for the restrictions and other limitations and conditions provided in this Agreement, the Grantee as owner of the Restricted Stock shall have all the rights of a stockholder, including but not limited to the right to receive all dividends paid on such Restricted Stock and the right to vote such Restricted Stock.
5. Stock Certificates . Each certificate issued for shares of Restricted Stock shall be registered in the name of the Grantee and deposited by the Grantee, together with a stock power endorsed in blank, with the Company and shall bear the following (or a similar) legend:
The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) contained in a Plan and an Agreement between the registered owner and Parametric Technology Corporation. A copy of such Plan and Agreement will be furnished to the holder of this certificate upon written request and without charge.
Upon the termination of the restrictions imposed under this Agreement as to any shares of Restricted Stock, the Company shall return to the Grantee (or to such Grantees legal representative, beneficiary or heir) certificates, without a legend, for the shares of Common Stock deposited with it pursuant to this Section 5 as to which the restrictions have terminated.
6. Tax Withholding . The Grantee shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the Restricted Stock no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Grantee. In the Committees discretion, the minimum tax obligations required by law to be withheld with respect to the Restricted Stock may be paid in whole or in part in shares of Common Stock valued at their Fair Market Value on the date of delivery.
7. Securities and Other Laws . It shall be a condition to the Grantees right to receive the shares of Restricted Stock hereunder that the Company may, in its discretion, require (a) that the shares of Restricted Stock shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933, as amended (the Act ), with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed issuance and delivery of the shares to the Grantee shall be exempt from registration under the Act and the Grantee shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Grantee, or both. The certificates representing the shares of Restricted Stock may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
8. Adjustment in Provisions . In the event that there are any changes in the outstanding Common Stock of the Company by reason of stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other such transaction affecting the Companys Common Stock, the divisions of shares of Restricted Stock into parts, the provisions for termination of restrictions on parts of Restricted Stock, and any other relevant portions of this Agreement shall be appropriately adjusted by the Committee, if necessary, to reflect equitably such change or changes.
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Restricted Stock Agreement Page 3
9. Change in Control . In order to preserve Grantees rights under this Agreement in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any time period relating to the termination of restrictions set forth in Section 2 hereof, (ii) provide for payment to Grantee of cash or other property with a Fair Market Value equal to the amount that would have been received upon the termination of restrictions set forth in Section 2 hereof had such restrictions terminated upon the change in control, provided such amount would not otherwise have been received by Grantee because of the restrictions set forth in Section 2, (iii) adjust the terms of this Agreement in a manner determined by the Committee to reflect the change in control, (iv) cause the Agreement to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Grantee and in the best interests of the Company.
10. Notice of Election Under Section 83(b) . If the Grantee makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder, he or she will provide a copy thereof to the Company within thirty days of the filing of such election with the Internal Revenue Service.
11. Amendments . The Committee may amend, modify or terminate this Agreement, including substituting therefor another Award of the same or a different type, provided that Grantees consent to such action shall be required, unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect Grantee.
12. Employment . Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Grantee or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor this Agreement shall confer upon the Grantee any right with respect to the continuance of his/her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate Grantee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign Grantee from one position to another within the Company or any Affiliate, as freeley as if this Agreement had not been entered into.
13. Decisions by Committee . Any dispute or disagreement that shall arise under, or as a result of, or pursuant to this Agreement shall be resolved by the Committee in its absolute and sole discretion, and any such resolution or any other determination by the Committee under, or pursuant to, this Agreement and any interpretation by the Committee of the terms of this Agreement or the Plan shall be final, binding, and conclusive on all persons affected thereby.
14. Notices . Any notice that either party hereto shall be required or permitted to give to the other shall be in writing and may be delivered personally, by facsimile or by mail, postage prepaid, addressed as follows: to the Company at 140 Kendrick Street, Needham, Massachusetts 02494: Attention Chief Financial Officer (copy to General Counsel, Legal Department), or at such other address as the Company by notice to the Grantee may designate in writing from time to time, and to the Grantee at his or her address as shown below or at such other address as the Grantee, by notice to the General Counsel of the Company, may designate in writing from time to time.
15. Copies of the Plan. Copies of the Plan may be obtained by Grantee upon written request without charge from the General Counsel of the Company.
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Restricted Stock Agreement Page 4
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Grantee has hereunto set his or her hand, all as of the day and year first above written.
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Exhibit 10.3
FORM OF RESTRICTED STOCK UNIT CERTIFICATE (U.S.)
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Restricted Stock Unit Certificate
Grant No.
Parametric Technology Corporation (the Company), a Massachusetts corporation, hereby grants to the person named below restricted stock units (Restricted Stock Units or RSUs) representing the right to receive shares of Common Stock, $0.01 par value, of the Company (the Award) under and subject to the Companys 2000 Equity Incentive Plan (the Plan) on the terms and conditions set forth below and those attached hereto and in the Plan:
Name of Holder: |
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Employee ID No.: |
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Number of Restricted Stock Units: |
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Date of Grant: |
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Vesting Schedule: |
On | , 20 , RSUs, | ||||
on | , 20 , RSUs, and | |||||
on | , 20 , RSUs. |
The shares issuable upon vesting of this Award will not be released until all applicable withholding taxes have been collected from the Holder or otherwise provided for.
PARAMETRIC TECHNOLOGY CORPORATION | ||
By: |
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Cornelius F. Moses, III | ||
Executive Vice President and Chief Financial Officer |
HOLDERS ACCEPTANCE
[box] I have read and fully understand this Restricted Stock Unit Certificate and I accept and agree to be bound by the terms, conditions and restrictions contained in this Restricted Stock Unit Certificate and the Plan and I further intend my clicking of the box next to this statement to have the same force in all respects as a handwritten signature.
I intend to express my acceptance of this Award, including its terms, conditions and restrictions, by clicking the Award Acceptance button and I further intend my clicking of the Award Acceptance button to have the same force in all respects as a handwritten signature.
Accept Award |
PARAMETRIC TECHNOLOGY CORPORATION 2000 EQUITY INCENTIVE PLAN
Restricted Stock Unit Terms and Conditions
1. Plan Incorporated by Reference . This Award is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Legal Department of the Company.
2. Restricted Stock Units . Each Restricted Stock Unit represents the right to receive one share of Common Stock, subject to the fulfillment of the vesting conditions.
3. Vesting of Restricted Stock Units; Issuance of Common Stock . Upon each vesting of a Restricted Stock Unit in accordance with the vesting schedule set forth on the face of this certificate (each, a Vest Date), subject to Section 7 below, the Company shall issue to the Holder one share of Common Stock for each Restricted Stock Unit that vests on such Vest Date (the Shares) as soon as practicable after such Vest Date, but in no event later than March 15 of the following calendar year.
4. Award and Restricted Stock Units Not Transferable . This Award and the Restricted Stock Units are not transferable by the Holder.
5. Termination of Employment or Engagement . If the Holders status as an employee or consultant of the Company or an Affiliate is terminated for any reason (voluntary or involuntary and including disability, death or retirement), all Restricted Stock Units that remain unvested shall upon such termination of employment immediately and irrevocably terminate and unvested RSUs and the underlying Shares in respect of such RSUs shall immediately and irrevocably be forfeited. Notwithstanding the foregoing, if the Holder is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company (or its Affiliate) will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Holders right to reemployment or the survival of his or her service arrangement with the Company (or its Affiliate) is guaranteed either by statute or by contract; otherwise, the Holders employment or engagement will be deemed to have terminated on the 91st day of such leave.
6. No Right to Shares or as a Stockholder . The Holder shall not have any right in, to or with respect to any of the Shares (including voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by issuance of such Shares to the Holder.
7. Payment of Taxes . The Holder shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the Shares no later than the date of the event creating the tax liability and in any event before any Shares are delivered to the Holder. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Holder. The Company may, in its discretion, withhold from the Shares delivered to the Holder for any Vest Date such number of Shares as the Company determines is necessary to satisfy the minimum tax obligations required by law to be withheld or paid in connection with the issuance of such Shares, valued at their Fair Market Value on the date of issuance.
8. Change in Control . In order to preserve Holders rights under this Award in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any Vest Date, (ii) provide for payment to the Holder of cash or other property with a Fair Market Value equal to the amount that would have been received with respect to the Shares had the Award fully vested upon the change in control, (iii) adjust the terms of this Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to the Holder and in the best interests of the Company.
9. Securities and Other Laws . It shall be a condition to the Holders right to receive the Shares hereunder that the Company may, in its discretion, require (a) that the Shares shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the Shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed issuance and delivery of the Shares to the Holder shall be exempt from registration under that Act and the Holder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such Shares by the Company shall have been taken by the Company or the Holder, or both.
10. No Right To Employment . No person shall have any claim or right to be granted an Award. Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Holder or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor any Award thereunder shall confer upon any employee of the Company or of any Affiliate any right with respect to the continuance of his or her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign any employee from one position to another within the Company or any Affiliate.
Exhibit 10.4
FORM OF RESTRICTED STOCK UNIT CERTIFICATE (Non-U.S.)
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Restricted Stock Unit Certificate
Grant No.
Parametric Technology Corporation (the Company), a Massachusetts corporation, hereby grants to the person named below restricted stock units (Restricted Stock Units or RSUs) representing the right to receive shares of Common Stock, $0.01 par value, of the Company (the Award) under and subject to the Companys 2000 Equity Incentive Plan (the Plan) on the terms and conditions set forth below and those attached hereto and in the Plan:
Name of Holder: |
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Employee ID No.: |
Number of Restricted Stock Units: |
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Date of Grant: |
Vesting Schedule: |
On , 20 , RSUs, | |
on , 20 , RSUs, and | ||
on , 20 , RSUs. |
The shares issuable upon vesting of this Award will not be released until all applicable withholding taxes and social insurance contribution amounts have been collected from the Holder or otherwise provided for.
PARAMETRIC TECHNOLOGY CORPORATION | ||
By: | ||
Cornelius F. Moses, III |
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Executive Vice President and Chief Financial Officer |
HOLDERS ACCEPTANCE
¨ I have read and fully understand this Restricted Stock Unit Certificate and I accept and agree to be bound by the terms, conditions and restrictions contained in this Restricted Stock Unit Certificate and the Plan and I further intend my clicking of the box next to this statement to have the same force in all respects as a handwritten signature.
I intend to express my acceptance of this Award, including its terms, conditions and restrictions, by clicking the Award Acceptance button and I further intend my clicking of the Award Acceptance button to have the same force in all respects as a handwritten signature.
Accept Award
PARAMETRIC TECHNOLOGY CORPORATION 2000 EQUITY INCENTIVE PLAN
Restricted Stock Unit Terms and Conditions
1. Plan Incorporated by Reference . This Award is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Legal Department of the Company.
2. Restricted Stock Units . Each Restricted Stock Unit represents the right to receive one share of Common Stock, subject to the fulfillment of the vesting conditions.
3. Vesting of Restricted Stock Units; Issuance of Common Stock . Upon each vesting of a Restricted Stock Unit in accordance with the vesting schedule set forth on the face of this certificate (each, a Vest Date), subject to Section 7 below, the Company shall issue to the Holder one share of Common Stock for each Restricted Stock Unit that vests on such Vest Date (the Shares) as soon as practicable after such Vest Date.
4. Award and Restricted Stock Units Not Transferable . This Award and the Restricted Stock Units are not transferable by the Holder.
5. Termination of Employment or Engagement . If the Holders status as an employee or consultant of the Company or an Affiliate is terminated for any reason (voluntary or involuntary and including disability, death or retirement), all Restricted Stock Units that remain unvested shall upon such termination of employment immediately and irrevocably terminate and unvested RSUs and the underlying Shares in respect of such RSUs shall immediately and irrevocably be forfeited. Notwithstanding the foregoing, if the Holder is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company (or its Affiliate) will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Holders right to reemployment or the survival of his or her service arrangement with the Company (or its Affiliate) is guaranteed either by statute or by contract; otherwise, the Holders employment or engagement will be deemed to have terminated on the 91st day of such leave.
6. No Right to Shares or as a Stockholder . The Holder shall not have any right in, to or with respect to any of the Shares (including voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by issuance of such Shares to the Holder.
7. Payment of Taxes and Social Insurance Contributions . The Holder shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld or social insurance contribution amounts required by law to be paid with respect to the Shares no later than the date of the event creating the tax liability and in any event before any Shares are delivered to the Holder. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax or social insurance obligations from any payment of any kind due to the Holder. The Company may, in its discretion, withhold from the Shares delivered to the Holder for any Vest Date such number of Shares as the Company determines is necessary to satisfy the minimum tax and social insurance contribution obligations required by law to be withheld or paid in connection with the issuance of such Shares, valued at their Fair Market Value on the date of issuance.
8. Change in Control . In order to preserve Holders rights under this Award in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any Vest Date, (ii) provide for payment to the Holder of cash or other property with a Fair Market Value equal to the amount that would have been received with respect to the Shares had the Award fully vested upon the change in control, (iii) adjust the terms of this Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to the Holder and in the best interests of the Company.
9. Securities and Other Laws . It shall be a condition to the Holders right to receive the Shares hereunder that the Company may, in its discretion, require (a) that the Shares shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the Shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed issuance and delivery of the Shares to the Holder shall be exempt from registration under that Act and the Holder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such Shares by the Company shall have been taken by the Company or the Holder, or both.
10. Limitation on Rights; No Right to Future Grants; Extraordinary Item . The Holder understands, acknowledges and agrees that:
(a) the Plan is established voluntarily by the Company, is discretionary in nature, and may be modified, suspended or terminated by the Company at any time as provided in the Plan;
(b) the grant of the Restricted Stock Units is a one-time benefit and does not create any contractual or other right to receive future grants of Restricted Stock Units or benefits in lieu of equity awards;
(c) all determinations with respect to any such future grants, including, but not limited to, the times when awards will be granted, the number of shares subject to each award, the award price, if any, and the time or times when each award will be settled, will be at the sole discretion of the Company;
(d) participation in the Plan is voluntary;
(e) the Restricted Stock Units are an extraordinary item, are outside the scope of the Holders employment contract, if any, and are not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;
(f) the future value of the Common Stock subject to the Restricted Stock Units is unknown and cannot be predicted with certainty;
(g) neither the Plan, the Restricted Stock Units nor the issuance of the Shares confers upon the Holder any right to continue in the employ of (or any other relationship with) the Company or any Affiliate for any period or through any Vest Date, nor do they limit in any respect the right of the Company or any Affiliate to terminate the Holders employment or other relationship with the Company or any Affiliate, as the case may be, or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign the Holder from one position to another within the Company or any Affiliate, as freely as if this Award had not been made, at any time; and
(h) if the Holder is not a direct employee of Company, the grant of the Restricted Stock Units will not be interpreted to form an employment relationship with the Company; and further, the grant of the Restricted Stock Units will not be interpreted to form an employment contract with the Holders employer, the Company or any Affiliate.
11. Data Privacy . The Holder explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this Award by and among, as applicable, the Company and its Affiliates for the exclusive purpose of implementing, administering and managing his or her participation in the Plan. The Holder understands that the Company and its Affiliates hold certain personal information about him or her, including, but not limited to, his or her name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company or it Affiliates, details of all RSUs or any other entitlement to shares of stock awarded, canceled, vested, unvested or outstanding in his or her favor, for the purpose of
implementing, administering and managing the Plan (Data). The Holder understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Holders country or elsewhere, and that the recipients country may have different data privacy laws and protections than the Holders country. The Holder understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. The Holder authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party. The Holder understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Holder understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. The Holder understands, however, that refusing or withdrawing his or her consent may affect his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Holder understands that he or she may contact his or her local human resources representative.
Exhibit 10.5
FORM OF INCENTIVE STOCK OPTION CERTIFICATE
No. |
Shares |
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Incentive Stock Option Certificate
Parametric Technology Corporation (the Company), a Massachusetts corporation, hereby grants to the person named below an option to purchase shares of Common Stock, $0.01 par value, of the Company (the Option) under and subject to the Companys 2000 Equity Incentive Plan (the Plan) exercisable on the terms and conditions set forth below and those attached hereto and in the Plan:
Name of Optionholder: |
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Employee ID No. |
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Number of Shares: |
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Option Price: |
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Date of Grant: |
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Exercisability Schedule: |
On or after | , 20 , as to shares, | ||||
on or after | , 20 , as to additional shares, | |||||
on or after | , 20 , as to additional shares, and | |||||
on or after | , 20 , as to additional shares. |
Expiration Date: |
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This Option is intended to be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the Code).
By acceptance of this Option, the Optionholder agrees to the terms and conditions set forth above and those attached hereto and in the Plan.
OPTIONHOLDER |
PARAMETRIC TECHNOLOGY CORPORATION | |||||
By: |
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By: |
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Name: | ||||||
Title: |
PARAMETRIC TECHNOLOGY CORPORATION 2000 EQUITY INCENTIVE PLAN
Incentive Stock Option Terms And Conditions
1. Plan Incorporated by Reference . This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Legal Department of the Company.
2. Option Price . The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate.
3. Exercisability Schedule . This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. This Option may be terminated by the Company before the Expiration Date as permitted by the Plan.
4. Method of Exercise . To exercise this Option, the Optionholder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including, to the extent then permitted by the Committee, shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery or a payment commitment of a financial or brokerage institution, as the Committee may approve. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised.
5. No Right To Employment . No person shall have any claim or right to be granted an Option. Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Participant or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor any Option hereunder shall confer upon any employee of the Company or of any Affiliate any right with respect to the continuance of his/her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign any employee from one position to another within the Company or any Affiliate.
6. Effect of Grant. Optionholder shall not earn any Options granted hereunder until such time as all the conditions set forth herein and in the Plan which are required to be met in order to exercise the Option have been fully satisfied.
7. Change of Control . In order to preserve the Optionholders rights under the Option in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise of the Option, (ii) provide for payment to the Optionholder of cash or other property with a Fair Market Value equal to the amount that would have been received upon the exercise or payment of the Option had the Option been exercised or paid upon the change in control, (iii) adjust the terms of the Option in a manner determined by the Committee to reflect the change in control, (iv) cause the Option to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Optionholder and in the best interests of the Company.
8. Option Not Transferable . This Option is not transferable by the Optionholder other than by will or the laws of descent and distribution, and is exercisable, during the Optionholders lifetime, only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer.
9. Termination of Employment or Engagement. If the Optionholders status as an employee or consultant of (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason (voluntary or involuntary), (i) this Option shall not thereafter become exercisable as to any additional shares and (ii) if the period of exercisability for this Option following
such termination has not been specified by the Board, the vested portion of this Option shall remain exercisable (to the extent not previously exercised) for ninety (90) calendar days after the day on which the Participants employment or engagement is terminated, whereupon this Option shall terminate; except that -
(a) If the Participant is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Participants right to reemployment or the survival of his or her service arrangement with the Company is guaranteed either by statute or by contract; otherwise, the Participants employment or engagement will be deemed to have terminated on the 91st day of such leave.
(b) If the Participants employment is terminated by reason of his or her retirement from the Company at normal retirement age, each Option then held by the Participant, to the extent exercisable at retirement, may be exercised by the Participant at any time within three (3) months after such retirement unless terminated earlier by its terms.
(c) If the Participants employment or engagement is terminated by reason of his or her death, each Option then held by the Participant, to the extent exercisable at the date of death, may be exercised at any time within one year after that date (unless terminated earlier by its terms) by the person(s) to whom the Participants option rights pass by will or by the applicable laws of descent and distribution.
(d) If the Participants employment or engagement is terminated by reason of his or her becoming permanently and totally disabled, each Option then held by the Participant, to the extent exercisable upon the occurrence of permanent and total disability, may be exercised by the Participant at any time within one (1) year after such occurrence unless terminated earlier by its terms. For purposes hereof, an individual shall be deemed to be permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Any determination of permanent and total disability shall be made in good faith by the Company on the basis of a report signed by a qualified physician.
10. Compliance with Securities Laws . It shall be a condition to the Optionholders right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issuance upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
11. Payment of Taxes . The Optionholder shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the exercise of the Option no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Optionholder. In the Committees discretion, the minimum tax obligations required by law to be withheld with respect to the exercise of the Option may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of the Option, valued at their Fair Market Value on the date of retention.
12. Notice of Sale of Shares Required . The Optionholder agrees to notify the Company in writing within 30 days of the disposition of any shares purchased upon exercise of this Option if such disposition occurs within two years of the date of the grant of this Option or within one year after such purchase.
Adopted: February 10, 2000
Exhibit 10.6
FORM OF NONSTATUTORY STOCK OPTION CERTIFICATE
No. |
Shares |
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Nonstatutory Stock Option Certificate
Parametric Technology Corporation (the Company), a Massachusetts corporation, hereby grants to the person named below an option to purchase shares of Common Stock, $0.01 par value, of the Company (the Option) under and subject to the Companys 2000 Equity Incentive Plan (the Plan) exercisable on the terms and conditions set forth below and those attached hereto and in the Plan:
Name of Optionholder: |
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Employee ID No. |
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Number of Shares: |
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Option Price: |
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Date of Grant: |
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Exercisability Schedule: |
On or after | , 20 , as to shares, | ||
on or after | , 20 , as to additional shares, | |||
on or after | , 20 , as to additional shares, and | |||
on or after | , 20 , as to additional shares. |
Expiration Date: |
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This Option shall not be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the Code).
By acceptance of this Option, the Optionholder agrees to the terms and conditions set forth above and those attached hereto and in the Plan.
OPTIONHOLDER |
PARAMETRIC TECHNOLOGY CORPORATION | |||||
By: |
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By: |
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Name: | ||||||
Title: |
PARAMETRIC TECHNOLOGY CORPORATION 2000 EQUITY INCENTIVE PLAN
Nonstatutory Stock Option Terms And Conditions
1. Plan Incorporated by Reference . This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Legal Department of the Company.
2. Option Price . The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate.
3. Exercisability Schedule . This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. This Option may be terminated by the Company before the Expiration Date as permitted by the Plan.
4. Method of Exercise . To exercise this Option, the Optionholder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including, to the extent then permitted by the Committee, shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery or a payment commitment of a financial or brokerage institution, as the Committee may approve. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised.
5. No Right To Employment . No person shall have any claim or right to be granted an Option. Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Participant or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor any Option hereunder shall confer upon any employee of the Company or of any Affiliate any right with respect to the continuance of his/her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign any employee from one position to another within the Company or any Affiliate.
6. Effect of Grant. Optionholder shall not earn any Options granted hereunder until such time as all the conditions set forth herein and in the Plan which are required to be met in order to exercise the Option have been fully satisfied.
7. Change of Control . In order to preserve the Optionholders rights under the Option in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise of the Option, (ii) provide for payment to the Optionholder of cash or other property with a Fair Market Value equal to the amount that would have been received upon the exercise or payment of the Option had the Option been exercised or paid upon the change in control, (iii) adjust the terms of the Option in a manner determined by the Committee to reflect the change in control, (iv) cause the Option to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Optionholder and in the best interests of the Company.
8. Option Not Transferable . This Option is not transferable by the Optionholder other than by will or the laws of descent and distribution, and is exercisable, during the Optionholders lifetime, only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer.
9. Termination of Employment or Engagement. If the Optionholders status as an employee or consultant of (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason (voluntary or involuntary), (i) this Option
shall not thereafter become exercisable as to any additional shares and (ii) if the period of exercisability for this Option following such termination has not been specified by the Board, the vested portion of this Option shall remain exercisable (to the extent not previously exercised) for ninety (90) calendar days after the day on which the Participants employment or engagement is terminated, whereupon this Option shall terminate; except that
(a) If the Participant is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company will be treated as continuing intact if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Participants right to reemployment or the survival of his or her service arrangement with the Company is guaranteed either by statute or by contract; otherwise, the Participants employment or engagement will be deemed to have terminated on the 91st day of such leave.
(b) If the Participants employment is terminated by reason of his or her retirement from the Company at normal retirement age, each Option then held by the Participant, to the extent exercisable at retirement, may be exercised by the Participant at any time within three (3) months after such retirement unless terminated earlier by its terms.
(c) If the Participants employment or engagement is terminated by reason of his or her death, each Option then held by the Participant, to the extent exercisable at the date of death, may be exercised at any time within one year after that date (unless terminated earlier by its terms) by the person(s) to whom the Participants option rights pass by will or by the applicable laws of descent and distribution.
(d) If the Participants employment or engagement is terminated by reason of his or her becoming permanently and totally disabled, each Option then held by the Participant, to the extent exercisable upon the occurrence of permanent and total disability, may be exercised by the Participant at any time within one (1) year after such occurrence unless terminated earlier by its terms. For purposes hereof, an individual shall be deemed to be permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Any determination of permanent and total disability shall be made in good faith by the Company on the basis of a report signed by a qualified physician.
10. Compliance with Securities Laws . It shall be a condition to the Optionholders right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issuance upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Companys Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
11. Payment of Taxes . The Optionholder shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the exercise of the Option no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Optionholder. In the Committees discretion, the minimum tax obligations required by law to be withheld with respect to the exercise of the Option may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of the Option, valued at their Fair Market Value on the date of retention.
Adopted: February 10, 2000
Exhibit 10.7
FORM OF STOCK APPRECIATION RIGHT CERTIFICATE
No. |
Shares |
PARAMETRIC TECHNOLOGY CORPORATION
2000 Equity Incentive Plan
Stock Appreciation Right Certificate
Parametric Technology Corporation (the Company), a Massachusetts corporation, hereby grants to the person named below a stock appreciation right (SAR) under and subject to the Companys 2000 Equity Incentive Plan (the Plan) on the following terms and conditions set forth below and those attached hereto and in the Plan:
Name of Grantee: |
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Employee ID No. |
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Number of Shares: |
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Date of Grant: |
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Exercise Price: |
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Vesting Schedule: |
Upon [ insert milestone, e.g., date, performance goal, etc .] | , as to %, | ||
upon | , as to %, | |||
upon | , as to %, and | |||
upon | , as to %. |
Expiration Date: |
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By acceptance of this SAR, the Grantee agrees to the terms and conditions set forth above and those attached hereto and in the Plan.
GRANTEE |
PARAMETRIC TECHNOLOGY CORPORATION | |||||
By: |
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By: |
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Name: | ||||||
Title: |
PARAMETRIC TECHNOLOGY CORPORATION 2000 EQUITY INCENTIVE PLAN
Stock Appreciation Right Terms And Conditions
1. Plan Incorporated by Reference . The SAR is granted pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Legal Department of the Company.
2. Exercisability Schedule . This SAR may be exercised at any time and from time to time with respect to the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate. This SAR may not be exercised as to any shares after the Expiration Date.
3. Method of Exercise . The Grantee may exercise this SAR by delivering written notice of exercise to the Company specifying the number of shares with respect to which the SAR is being exercised. Promptly following such notice, the Company will pay to the Grantee an amount which is equal to the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Exercise Price. Such amount may be paid to the Grantee in cash, Common Stock or other securities of the Company, Awards or other property, at the election of the Company.
4. No Right To Employment . No person shall have any claim or right to be granted an SAR. Each employee of the Company or any of its Affiliates is an employee-at-will (that is to say that either the Grantee or the Company or any Affiliate may terminate the employment relationship at any time for any reason or no reason at all) unless, and only to the extent, provided in a written employment agreement for a specified term executed by the chief executive officer of the Company or his duly authorized designee or the authorized signatory of any Affiliate. Neither the adoption, maintenance, nor operation of the Plan nor any SAR hereunder shall confer upon any employee of the Company or of any Affiliate any right with respect to the continuance of his/her employment by the Company or any such Affiliate nor shall they interfere with the right of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment, including, without limitation, the right to promote, demote or otherwise re-assign any employee from one position to another within the Company or any Affiliate.
5. Effect of Grant. Participant shall not have the right to exercise this SAR with respect to any shares of Common Stock until such time as all the conditions set forth herein and in the Plan which are required to be met in order to exercise the SAR have been fully satisfied.
6. Change of Control . In order to preserve the Grantees rights under this SAR in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may at any time take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise of the SAR, (ii) provide for payment to the Grantee of cash or other property with a Fair Market Value equal to the amount that would have been received upon the exercise or payment of the SAR had the SAR been exercised or paid upon the change in control, (iii) adjust the terms of the SAR in a manner determined by the Committee to reflect the change in control, (iv) cause the SAR to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Grantee and in the best interests of the Company.
7. SAR Not Transferable . This SAR is not transferable by the Grantee otherwise than by will or the laws of descent and distribution, and is exercisable, during the Grantees lifetime, only by the Grantee. The naming of a Designated Beneficiary does not constitute a transfer.
8. Termination of Employment or Engagement . If the Grantees status as an employee or consultant of the Company or an Affiliate is terminated for any reason (voluntary or involuntary), (i) this SAR shall not thereafter become exercisable as to any additional shares and (ii) if the period of exercisability for this SAR following such termination has not been specified by the Board, the vested portion of this SAR shall remain exercisable (to the extent not previously exercised) for ninety (90) calendar days after the day on which the Participants employment or engagement is terminated, whereupon this SAR shall terminate; except that -
(a) If the Grantee is on military, sick leave or other leave of absence approved by the Company, his or her employment or engagement with the Company will be treated as continuing intact if the period of such leave does not exceed ninety
(90) days, or, if longer, so long as the Grantees right to reemployment or the survival of his or her service arrangement with the Company is guaranteed either by statute or by contract; otherwise, the Grantees employment or engagement will be deemed to have terminated on the 91st day of such leave.
(b) If the Grantees employment is terminated by reason of his or her retirement from the Company at normal retirement age, each SAR then held by the Grantee, to the extent exercisable at retirement, may be exercised by the Grantee at any time within three (3) months after such retirement unless terminated earlier by its terms.
(c) If the Grantees employment or engagement is terminated by reason of his or her death, each SAR then held by the Grantee, to the extent exercisable at the date of death, may be exercised at any time within one year after that date (unless terminated earlier by its terms) by the person(s) to whom the Grantees stock rights hereunder pass by will or by the applicable laws of descent and distribution.
(d) If the Grantees employment or engagement is terminated by reason of his or her becoming permanently and totally disabled, each SAR then held by the Grantee, to the extent exercisable upon the occurrence of permanent and total disability, may be exercised by the Grantee at any time within one (1) year after such occurrence unless terminated earlier by its terms. For purposes hereof, an individual shall be deemed to be permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Any determination of permanent and total disability shall be made in good faith by the Company on the basis of a report signed by a qualified physician.
9. Compliance with Securities Laws . It shall be a condition to the Grantees right to exercise this SAR that the Company may, in its discretion, require that such steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to such exercise shall have been taken by the Company or the Grantee, or both. The certificates representing any shares issuable upon exercise of this SAR may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
10. Payment of Taxes . The Grantee shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld with respect to the exercise of this SAR no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Grantee. In the Committees discretion, the minimum tax obligations required by law to be withheld with respect to the exercise of the SAR may be paid in whole or in part in shares of Common Stock valued at their Fair Market Value on the date of retention.
Adopted: February 10, 2000
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C. Richard Harrison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 11, 2005 |
/s/ C. R ICHARD H ARRISON |
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C. Richard Harrison | ||||
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cornelius F. Moses, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 11, 2005 |
/s/ C ORNELIUS F. M OSES , III |
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Cornelius F. Moses, III | ||||
Executive Vice President and Chief Financial Officer |
EXHIBIT 32
Parametric Technology Corporation
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Parametric Technology Corporation (the Company) certifies that, to his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended July 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 11, 2005 |
/s/ C. R ICHARD H ARRISON |
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C. Richard Harrison | ||||
Chief Executive Officer | ||||
Date: August 11, 2005 |
/s/ C ORNELIUS F. M OSES , III |
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Cornelius F. Moses, III | ||||
Executive Vice President and Chief Financial Officer |