UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: September 30, 2007

Commission File Number: 0-18059

 

PARAMETRIC TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

140 Kendrick Street, Needham, MA 02494

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant

to Section 12(g) of the Act:

None

(Title of Class)

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES x  NO o

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES o  NO x

 

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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  x Accelerated Filer  o Non-accelerated Filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o  NO x

 

The aggregate market value of our voting stock held by non-affiliates was approximately $2,145,330,897 on March 31, 2007 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on that day. There were 114,798,585 shares of our common stock outstanding on that day and 115,928,680 shares of our common stock outstanding on November 23, 2007.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement in connection with the 2008 Annual Meeting of Stockholders (2008 Proxy Statement) are incorporated by reference into Part III.

 

 

EXPLANATORY NOTE

 

In this Annual Report on Form 10-K for fiscal 2007, we are restating our consolidated financial statements (and related disclosures) as of September 30, 2006 and for the years ended September 30, 2006 and 2005, which are included in “Financial Statements and Supplementary Data” in Item 8. This Form 10-K also (i) reflects the restatement of “Selected Financial Data” in Item 6 as of and for each of the years ended September 30, 2003 through 2006 and for each of the quarterly periods in fiscal 2007 and 2006 and (ii) amends “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 as it relates to fiscal 2006 and 2005.

 

We also intend to amend our Quarterly Reports on Form 10-Q for the quarters ended December 30, 2006, March 31, 2007 and June 30, 2007 as originally filed with the Securities and Exchange Commission in 2007 to restate our unaudited financial statements and related financial information for those periods and the comparative 2006 periods for the effects of the restatement. We do not intend to file any other amended Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement. For this reason, the Consolidated Financial Statements and related financial information contained in any of our previously filed financial reports should no longer be relied upon.

 

Background of the Restatement

 

As a result of an independent investigation led by the Audit Committee of our Board of Directors, the Audit Committee concluded on October 29, 2007 that we would need to restate our previously issued financial statements for the effect of certain transactions involving Toshiba Corporation of Japan (“Toshiba”), for which we recorded revenue of approximately $41 million during fiscal 2001 through 2006. Based on its investigation, the Audit Committee concluded that the understanding of the arrangement was not fully reflected in the order paperwork for these transactions because there were additional circumstances known or knowable by one or more of our personnel in Japan. That condition required us to change our conclusion that the transactions met the revenue recognition criteria of Statement of Position 97-2, Software Revenue Recognition.

 

The results of the investigation indicate that during the period 2001 to 2006, an employee of Toshiba Corporation initiated purchases of both software and services from our subsidiary in Japan, PTC Japan K.K. (“PTC Japan”). Many of these purchases were completed through a third party trading company that procured the software and services on Toshiba’s behalf. The transactions were supported by orders that were signed by employees of Toshiba and the third party trading company. PTC Japan delivered the items for which revenue was recorded and was paid for the orders in question. The Toshiba employee also allegedly entered into a series of financing agreements with third party leasing companies, including GE Capital Leasing Corporation of Japan (“GECL”), in the name of Toshiba to fund various purchases. As part of those transactions, the leasing companies allegedly entered into transactions with various third party trading companies to procure the purchased items on behalf of Toshiba. We were not a party to those financing agreements. Toshiba has disclaimed responsibility for repayment of these financed amounts and has alleged that the Toshiba employee who entered into the financing agreements was not authorized to do so and that Toshiba did not receive delivery of the items so financed.

 

Recently, the Toshiba employee involved in the transactions was arrested and charged with defrauding certain of the leasing companies. Among the allegations against him are that he forged contracts in the name of Toshiba. In addition, three individuals—each employed by a different trading company involved in the transactions—have been arrested for alleged involvement in a scheme to defraud the leasing companies. According to published news reports, the Toshiba employee and these other individuals are suspected of diverting some of the proceeds of the financings to a bank account controlled by one or more of them. Following these arrests, it was reported on October 23, 2007 that two former employees of PTC Japan were arrested on suspicion of demanding “hush money” from one of the participants in the fraudulent scheme. The press accounts indicate that the former PTC Japan employees—who left employment with PTC Japan in 2003 and 2004, respectively—were no longer working at PTC Japan at the time of the alleged demands. According to the press accounts, these individuals have not been charged with participating in the alleged underlying fraud.

 

To effect the restatement of revenue associated with the transactions placed by the Toshiba employee, we reduced previously recorded revenue by approximately $8 million in fiscal 2006, $15 million in fiscal 2005, $9 million in fiscal 2004, $2 million in fiscal 2003 and $7 million in prior years, and recorded related income tax effects. We did not make any adjustments to the costs incurred in connection with these transactions due to the uncertainty regarding our ultimate ability to retain the advances received for these transactions and our belief that all such costs are unrecoverable. Upon restatement, the revenue reversed from those prior periods was deferred and classified as Customer Advances in our consolidated balance sheets. That liability (which totaled $40.3 million and $39.5 million at September 30, 2007 and 2006, respectively, after the effects of foreign currency movements) will remain recorded until the rights and obligations of the several companies connected with the Toshiba transactions are resolved. To the extent that matters are resolved in our favor, we will reduce Customer Advances and record revenue or other income at that time.

Our restatement of prior period financial statements also includes adjustments for other previously identified errors that we had corrected in the periods they became known to us rather than in the periods in which they originated because we believed that the amounts of such errors, individually and in the aggregate, were not material to our financial statements for the affected periods. In this restatement, we have now recorded those corrections in the periods in which each error originated. Such adjustments, which have been tax effected, primarily relate to (i) recording rent expense on a straight-line basis for one of our office facilities, (ii) recording stock-based compensation expense due to the timing of approvals for certain stock options we granted, (iii) deferring or reversing revenue for certain customer orders in the Asia-Pacific region, and (iv) reversing an income tax reserve that was unwarranted when established. Our restatement also includes an adjustment to correct our third quarter 2007 financial statements for a $10.4 million overstatement of reported net income, which resulted from tax errors detected in the fourth quarter of 2007 relating primarily to our release in the third quarter of a substantial portion of the valuation allowance for our U.S. net deferred tax assets.

 

Summary of the Restatement Effects

 

A summary of the cumulative revenue and net income effects of the restatement on our consolidated financial statements is as follows:

 

 

The adjustments made as a result of the restatement are more fully described in Note B to our consolidated financial statements included in “Financial Statements and Supplementary Data” in Item 8 of this Form 10-K.

 

All amounts in this Form 10-K referenced to September 30, 2006 and 2005 reflect the balances and amounts on a restated basis. Also, comparisons of 2006 and 2005 to any other years in discussions contained in this Form 10-K have been revised from those included in our Annual Report on Form 10-K for 2006 as necessary to reflect the restated information.

PARAMETRIC TECHNOLOGY CORPORATION

 

ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2007

 

Table of Contents

 

Forward-Looking Statements

 

Statements in this Annual Report 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 factors that may cause our actual results to differ materially from these statements is discussed in Item 1A. “Risk Factors,” and generally throughout this report.

 

Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.

 

PART I

 

 

Overview

 

Parametric Technology Corporation (PTC) develops, markets and supports product lifecycle management (PLM) software solutions and related services that help companies improve their processes for developing physical and information products. Our software solutions help customers decrease time to market, improve product quality, increase innovation and reduce product development cost.

 

The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management (PDM) solutions market, as well as many previously isolated markets that address various phases of a product’s lifecycle. These include:

 

 

Our software solutions include:

 

 

These software solutions enable companies to:

 

 

Our PLM solutions suite addresses significant challenges that companies, and in particular manufacturing companies, face in their product and documentation development processes. These include:

 

 

 

Our PLM software solutions suite provides our customers with a product development system that permits individuals—regardless of their roles in the commercialization of a product, the computer-based tools they use, or their location geographically or in the supply chain—to participate in the product development process. We have devoted significant resources to developing our enterprise solutions and integrating them with our design software. We continue to integrate our products more tightly and make them easier to deploy. We believe this will create significant added value for our customers.

 

An extension of our PLM solutions, our publishing solutions enable our customers to address significant inefficiencies in cross-functional or complex documentation development processes. Today, most companies use traditional desktop publishing tools that involve a significant amount of manual work to maintain accurate documentation. This causes considerable additional work where multiple authors contribute to the development of content, content changes frequently, multiple organizations within a company have specialized requirements but use similar content, or regulatory compliance requires standardization across all information outputs. Our publishing solutions allow customers to create compound documents from reusable content components, manage the content and processes to enable teams to work together, and configure and publish the information for a variety of uses and audiences in multiple formats.

 

Our solutions are complemented by our experienced services and technical support organizations, as well as resellers and other strategic partners. Our services and technical support organizations provide training, consulting, implementation and support services to customers worldwide. Our resellers supplement our direct sales force to provide greater geographic and small account coverage, primarily for our desktop solutions. Our strategic partners provide complementary product and/or service offerings.

 

Acquisitions

 

A key element of our growth strategy is to acquire businesses that complement our product development system.

 

We have completed a number of strategic acquisitions over the past year. Additionally, we recently announced that we have entered into an agreement to purchase all of the outstanding shares of CoCreate Software GmbH, a provider of PLM and CAD modeling solutions, for approximately $250 million, net of cash acquired and excluding transaction fees. CoCreate is a privately held company based in Sindelfingen, Germany with revenue of approximately $75 million over the last twelve months and 280 employees. Completion of the acquisition is subject to customary conditions. The acquisition of CoCreate is expected to close during the first quarter of 2008. Below is a summary of the strategic transactions we have completed in the past year.

 

 

In the first quarter of 2008, PTC acquired Logistics Business Systems (LBS), a provider of integrated logistics support solutions for the aerospace and defense and civil aviation industries, for approximately $16 million in cash. LBS was a privately held company based in Preston, UK, with approximately $5 million in annual revenue and approximately 45 employees. This acquisition strengthens PTC’s publishing solutions because LBS solutions for provisioning, training and e-learning, and logistics support analysis help customers deliver product support information that is compliant with industry standards S1000D, S2000M and SCORM. The combination of PTC and LBS will facilitate the reuse of both product design and configuration data such as CAD files, bills of material, change management information and logistics information.

 

Our acquisition of NC Graphics enables us to provide a more comprehensive suite of computer-aided manufacturing solutions for design and machining of molds, dies, prototypes, and other high-speed precision machining applications. We now market and sell the NC Graphics technology as Pro/TOOLMAKER^tm, offered either stand-alone, or as an optional module of our Pro/ENGINEER^® software. NC Graphics had approximately 15 employees, primarily in the UK, and approximately $3 million in annual revenue.

 

Our acquisition of ITEDO Software GmbH and ITEDO Software LLC (together, ITEDO), enables us to provide software solutions for creating and maintaining technical illustrations to customers in multiple manufacturing markets such as automotive, aerospace and defense, and industrial equipment. The ITEDO solutions are now an integral part of our product development system and branded as part of the Arbortext^® product family. They help us complete our solution for creating, managing and publishing text and graphical content for technical publications. ITEDO had approximately 30 employees, primarily in Germany, and generated revenue of approximately $5 million for the twelve months ended July 31, 2006.

Our Principal Products and Services

 

Our product strategy is to use a common architecture to align our desktop solutions and our enterprise solutions. We capitalize on product synergies to offer integral product development solutions.

 

Our comprehensive product development system enables our customers to improve their product development processes. These processes involve the entire enterprise and extend to supplier, partner and customer participants. Our solutions work together in a cohesive system, reducing complexity for our customers. Our product development system enables our customers to create digital product information, collaborate internally and externally, control content and automate processes, manage product configurations and communicate product information to people and systems across the extended enterprise and design chain. These capabilities are enabled by a system architecture that is built to address the needs of the distributed product development environment. Our product development system architecture is:

 

 

These same principles apply to our dynamic publishing system, allowing us to deliver the benefits of a system-based approach to all of our customers. We describe our integral portfolio of Desktop Solutions and Enterprise Solutions in more detail below.

 

DESKTOP SOLUTIONS

 

Our Desktop Solutions include our integrated CAD/CAM/CAE software as well as document authoring tools. Our principal Desktop Solutions are described below.

 

Pro/ENGINEER^® is a family of three-dimensional product design solution based on a parametric, feature-based solid modeler that enables changes made during the design process to be associatively updated throughout the design. Designers can use Pro/ENGINEER for detailed design (CAD), manufacturing/production (CAM), and simulation/analysis (CAE), as well as for exchanging CAD data with a multitude of sources and in varied standard formats, allowing them to create more innovative, differentiated and functional products quickly and easily. Pro/ENGINEER can improve product quality and reduce time to market by enabling end users to evaluate multiple design alternatives and to share data with bi-directional associativity.

 

Mathcad^® is an engineering calculation software solution that combines a computational engine, accessed through conventional math notation, with a full-featured word processor and graphing tools. Mathcad allows our customers to determine their Pro/ENGINEER designs and predict the behavior of a Pro/ENGINEER model, which can then be validated using our Pro/ENGINEER CAE solutions. This approach can help our customers speed time to market by significantly reducing the number of iterations necessary to complete a design. In addition, when combined with our Windchill solutions, the valuable intellectual property captured in Mathcad can be managed and shared securely with others for reuse and regulatory compliance.

 

Arbortext^® desktop offerings Arbortext Editor^tm and Arbortext IsoDraw^® are designed to help customers speed time to market, improve documentation accuracy and lower publishing costs:

 

 

ENTERPRISE SOLUTIONS

 

Our suite of Windchill, Arbortext and ProductView solutions is designed to help companies manage the process of developing products and documentation across an extended enterprise. The products in our enterprise solutions category help customers leverage product development content not only for the engineering processes, but also for use in other processes, such as

manufacturing, procurement, technical publications and after market services. With our enterprise solutions, our customers can improve time to market, increase the number of new products they introduce, improve product quality, reduce product cost, reduce development cost, and improve content reuse.

 

Our Enterprise Solutions include:

 

Windchill^® is a family of sophisticated, Internet-based content and process management solutions for managing complex data and relationships, processes and publications, including:

 

 

Arbortext^® enterprise offerings enable our customers to manage complex information assets and to streamline their document and publishing processes. Optimized for managing XML documents, authored using Arbortext these solutions support collaboration of geographically dispersed teams, and manage critical processes such as configuration management and release of publications. The solutions consist of a Windchill-based content and configuration management system that assembles Arbortext-authored XML and SGML content components and automatically publishes audience-specific content in both print and electronic forms, with high-quality layout and formatting.

 

ProductView^tm solutions enable enterprise-wide visualization, verification, annotation and automated comparison of a wide variety of product development data formats including MCAD (2D and 3D), ECAD, and documents. This solution provides internal and external participants in the process with lightweight access to product designs and related data without requiring the original authoring tool.

 

SERVICES

 

Maintenance Services

 

We offer maintenance support plans for our software products. Participating customers receive periodic software updates and new releases. Active maintenance plan customers also have direct access to our global technical support team of certified engineers for issue resolution. We also provide self-service support tools that allow our customers access to an extensive amount of technical support information.

 

Consulting and Training Services

 

We offer consulting, implementation and training services through our services organization, as well as through third-party resellers and other strategic partners. These services enable our customers to adopt and use our solutions more effectively.

 

Geographic and Segment Information

 

Financial information about our international and domestic operations, including by segment and principal products, may be found in Note N of “Notes to Consolidated Financial Statements” which information is incorporated herein by reference.

Product Development

 

To remain competitive, we must provide our customers with new and innovative software solutions. Accordingly, we continue to invest in research and development, and we look for opportunities to acquire new technologies suited to our customers’ needs. We must also efficiently manage our development resources to ensure the appropriate balance among product lines, based on both product development plans and customer demand.

 

The modular structure of our software code helps us to rapidly develop new design products. This structure enables functional capabilities of existing products to be used in new software applications or modules, thereby reducing the amount of new code required to develop additional products. Much of our Enterprise Solutions technology is Internet-centric, Java-based, object-oriented software and our products depend on these evolving technologies. We also license certain technologies from third parties to augment the functionality of our products. We generally pay these third parties either periodic royalties or fixed fees for the use of their technologies and rely on them for development and other support. We continually review the associated costs, development resource savings, support levels, and, if applicable, experience with the third party to determine whether the use of such technologies is beneficial.

 

Over the past few years, we have focused much of our research and development on integrating our products into a unified product development system. This strategy is supported by changes we have made to both our product planning and product testing processes to ensure that the products work together in a cohesive system across specific customer business processes.

 

We also work closely with our customers to define improvements and enhancements to our products. Customers become involved early in the software design process to help validate feasibility and to provide feedback on functionality. In addition, we maintain software and hardware partner programs designed to provide partners with access to our products and with the mechanisms and environment to facilitate the integration of complementary products with our product lines. By using our software development toolkits, partners can build tightly integrated solutions that satisfy the various requirements of our customers.

 

Our research and development expenses were $162.4 million in 2007, $147.0 million in 2006 and $118.3 million in 2005. Additional information about our research and development expenditures may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Costs and Expenses—Research and Development.”

 

Sales and Marketing

 

We derive most of our revenue from products and services distributed directly by our sales force to our end-user customers. We also offer products through third-party distributors. Our direct sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market.

 

Within our direct sales force, we have both strategic accounts and general business accounts units. The strategic accounts unit is further divided into vertical groups, such as aerospace and defense, automotive, consumer products, electronics and high technology, industrial products and life sciences. This vertical orientation is mirrored in our services delivery organization and, increasingly, in the products we deliver to strategic accounts. The general business account unit is organized geographically. In addition, we continue to broaden our indirect distribution channel through alliances with third-party resellers and other strategic partners who provide products and/or services that complement our offerings. Our resellers distribute our desktop solutions, including Pro/ENGINEER, and provide related services throughout North America, Europe and parts of Asia-Pacific; our other strategic partners complement our product development system with ancillary offerings. We also authorize select resellers to distribute our Windchill solutions to the small- and medium-size business market.

 

Competition

 

We compete primarily in the PLM market, including the CAD/CAM/CAE market. We compete with a number of companies that offer solutions that address specific functional areas covered by our solutions, including: Dassault Systemes SA and Siemens AG (as a result of its acquisition of UGS Corp in 2007) for traditional desktop solutions, PDM solutions, manufacturing planning solutions and visualization and digital mock-up solutions; and Oracle Corporation (as a result of its acquisition of Agile Software Corporation in 2007) for PDM solutions. In addition, we compete with SAP AG, which has entered the PLM market and offers a solution that controls product data within the larger framework of its Enterprise Resource Planning solution. We believe our PLM solutions are more specifically targeted toward the product development processes within manufacturing companies and offer broader and deeper functionality in those processes.

 

We compete with design products such as Autodesk, Inc.’s Inventor, Siemens AG’s Solid Edge and Dassault Systemes’ SolidWorks for sales to smaller manufacturing customers. We also compete with EMC Documentum, IBM’s FileNet, OpenText, Adobe Framemaker, and the Microsoft Office suite.

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.

 

Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion, which is incorporated into this section by reference.

 

PTC, the PTC Logo, Parametric Technology Corporation, The Product Development Company, Create Collaborate Control Configure Communicate, Pro/ENGINEER, Wildfire, Pro/INTRALINK, Windchill, Windchill PDMLink, Windchill ProjectLink, Windchill PartsLink, Windchill MPMLink, ProductView, Arbortext, Arbortext IsoDraw, Arbortext IsoView, Mathcad and all product names in the PTC product family are trademarks or registered trademarks of PTC or our subsidiaries in the United States and/or other countries.

 

Backlog

 

We generally ship our products within 30 days after acceptance of a customer order. A high percentage of our license revenue historically has been generated in the third month of each fiscal quarter, and this revenue tends to be concentrated in the later part of that month. Accordingly, orders may exist at the end of a quarter that have not been shipped and not been recognized as revenue. We do not believe that our backlog at any particular point in time is indicative of future sales levels.

 

Employees

 

As of September 30, 2007, we had 4,449 employees, including 1,166 in sales and marketing; 1,271 in customer support, training and consulting; 465 in general and administration; and 1,547 in product development. Of these employees, 1,859 were located in the United States and 2,590 were located outside the United States.

 

Website Access to Reports and Code of Business Conduct and Ethics

 

We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Report on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this document by reference.

 

Our Code of Business Conduct and Ethics also is available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.

 

Executive Officers of the Registrant

 

Information about our executive officers is incorporated by reference from Part III, Item 10 of this Annual Report.

 

Other Information

 

PTC was incorporated in Massachusetts in 1985 and is headquartered in Needham, Massachusetts.