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

Commission File Number: 0-18059

Parametric Technology Corporation

Massachusetts		04-2866152
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

     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 þ     NO o

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

     Large Accelerated Filer þ     Accelerated Filer o     Non-accelerated Filer o     Smaller Reporting Company o

(Do not check if a smaller reporting company)

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

There were 115,985,169 shares of our common stock outstanding on February 1, 2008.

 

 

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended December 29, 2007

				Page
				Number
Part I—FINANCIAL INFORMATION
Item 1.		Unaudited Financial Statements:
		Consolidated Balance Sheets as of December 29, 2007 and September 30, 2007				1
		Consolidated Statements of Operations for the three months ended December 29, 2007 and December 30, 2006				2
		Condensed Consolidated Statements of Cash Flows for the three months ended December 29, 2007 and December 30, 2006				3
		Consolidated Statements of Comprehensive Income for the three months ended December 29, 2007 and December 30, 2006				4
		Notes to Consolidated Financial Statements				5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations				17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk				30
Item 4.		Controls and Procedures				30
Part II—OTHER INFORMATION
Item 1.		Legal Proceedings				32
Item 1A.		Risk Factors				32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds				32
Item 6.		Exhibits				33
Signature						34
EX-10 Information Regarding Fiscal 2008 Executive Incentive Performance Plan
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certification of CEO & CFO

PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)

		December 29,				September 30,
		2007				2007
ASSETS
Current assets:
Cash and cash equivalents		$	214,788			$	263,271
Accounts receivable, net of allowance for doubtful accounts of $3,969 and $3,869 at December 29, 2007 and September 30, 2007, respectively			193,132				217,101
Prepaid expenses			32,326				23,972
Other current assets (Note 1)			75,157				62,922
Deferred tax assets			28,022				27,365
Total current assets			543,425				594,631
Property and equipment, net			53,874				54,745
Goodwill			400,540				244,497
Acquired intangible assets, net			212,894				80,555
Deferred tax assets			69,264				69,969
Other assets			43,702				45,916
Total assets		$	1,323,699			$	1,090,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility (Note 10)		$	201,428				—
Accounts payable			18,391			$	18,715
Accrued expenses and other current liabilities			59,389				55,138
Accrued compensation and benefits			59,356				80,595
Accrued income taxes			15,960				16,857
Deferred tax liabilities			2,081				—
Customer advances (Note 10)			40,791				40,297
Deferred revenue (Note 1)			229,324				218,740
Total current liabilities			626,720				430,342
Other liabilities (Note 2)			68,489				57,040
Deferred tax liabilities			19,804				—
Deferred revenue (Note 1)			6,251				8,424
Total liabilities			721,264				495,806
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 500,000 shares authorized; 115,952 and 114,704 shares issued and outstanding at December 29, 2007 and September 30, 2007, respectively			1,160				1,147
Additional paid-in capital			1,763,231				1,759,459
Accumulated deficit			(1,128,078	)			(1,132,565	)
Accumulated other comprehensive loss			(33,878	)			(33,534	)
Total stockholders’ equity			602,435				594,507
Total liabilities and stockholders’ equity		$	1,323,699			$	1,090,313

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

		Three months ended
		December 29,				December 30,
		2007				2006
Revenue:
License		$	67,191			$	66,588
Service			174,051				155,079
Total revenue			241,242				221,667
Costs and expenses:
Cost of license revenue			4,747				3,560
Cost of service revenue			71,038				68,568
Sales and marketing			71,028				69,561
Research and development			41,548				37,984
General and administrative			23,551				18,923
Amortization of acquired intangible assets			2,893				2,088
In-process research and development (Note 5)			1,887				—
Restructuring charges (Note 2)			9,685				—
Total costs and expenses			226,377				200,684
Operating income			14,865				20,983
Other income, net			1,606				780
Income before income taxes			16,471				21,763
Provision for income taxes			6,591				6,610
Net income		$	9,880			$	15,153
Earnings per share—Basic (Note 4)		$	0.09			$	0.14
Earnings per share—Diluted (Note 4)		$	0.08			$	0.13
Weighted average shares outstanding—Basic			113,680				111,830
Weighted average shares outstanding—Diluted			118,087				117,283

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Three months ended
		December 29,				December 30,
		2007				2006
Cash flows from operating activities:
Net income		$	9,880			$	15,153
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization			11,935				9,536
Stock-based compensation			10,603				8,630
Other non-cash costs, net			1,157				69
In-process research and development			1,887				—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			38,100				(8,302	)
Accounts payable and accrued expenses			(3,880	)			(1,786	)
Accrued compensation and benefits			(26,239	)			(25,818	)
Deferred revenue			(16,417	)			(14,895	)
Accrued income taxes			(1,487	)			2,735
Other current assets and prepaid expenses			(3,292	)			639
Other noncurrent assets and liabilities			(1,691	)			(2,299	)
Net cash provided (used) by operating activities			20,555				(16,338	)
Cash flows from investing activities:
Additions to property and equipment			(4,830	)			(6,345	)
Acquisitions of businesses, net of cash acquired			(262,285	)			(17,639	)
Net cash used by investing activities			(267,115	)			(23,984	)
Cash flows from financing activities:
Borrowings under revolving credit facility			220,000				—
Repayment of borrowings under revolving credit facility			(15,000	)			—
Proceeds from issuance of common stock			2,024				7,788
Payments of withholding taxes in connection with settlement of restricted stock and restricted stock units			(8,962	)			(5,549	)
Tax benefit from stock-based awards			121				94
Payments of capital lease obligations			(129	)			(121	)
Net cash provided by financing activities			198,054				2,212
Effect of exchange rate changes on cash and cash equivalents			23				2,003
Net decrease in cash and cash equivalents			(48,483	)			(36,107	)
Cash and cash equivalents, beginning of period			263,271				183,448
Cash and cash equivalents, end of period		$	214,788			$	147,341

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

		Three months ended
		December 29,				December 30,
		2007				2006
Net income		$	9,880			$	15,153
Other comprehensive income (loss), net of tax provision:
Foreign currency translation adjustment			(330	)			2,216
Minimum pension liability adjustment, net of tax of $194 for the three months ended December 29, 2007 and $0 for the three months ended December 30, 2006			(14	)			—
Change in unrealized gain on investment securities, net of tax of $0			—				(25	)
Other comprehensive income (loss)			(344	)			2,191
Comprehensive income		$	9,536			$	17,344

The accompanying notes are an integral part of the consolidated financial statements.

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 (PTC) and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 our 2007 annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007. 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 statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated, all references to a year reflect our fiscal year, which ends on September 30. The September 30, 2007 year-end consolidated balance sheet is derived from our audited financial statements.

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. Billed but uncollected maintenance-related amounts included in other current assets at December 29, 2007 and September 30, 2007 were $70.4 million and $59.9 million, respectively.

As of December 29, 2007, approximately 14% of the total net trade accounts receivable is outstanding from a customer in Europe. No other individual customers comprised more than 10% of net trade accounts receivable as of December 29, 2007. No individual customer comprised more than 10% of our net trade accounts receivable as of September 30, 2007.

The results of operations for the three months ended December 29, 2007 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2. Restructuring Charges

In the first quarter of 2008, we recorded a restructuring charge of $9.7 million. The restructuring charge included a $3.3 million charge for severance and related costs associated with 62 employees notified of termination during the quarter and a $6.4 million charge related to excess facilities. The charge for excess facilities was primarily related to gross lease commitments in excess of estimated sublease income for excess facilities in the U.S. and the U.K. As part of our continuing efforts to increase profitability, we are relocating additional business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower.

There were no restructuring charges recorded in the first quarter of 2007.

The following table summarizes restructuring accrual activity for the three months ended December 29, 2007:

		Employee				Facility
		Severance				Closures
		and Related				and Other
		Benefits				Costs				Total
		(in thousands)
Balance, September 30, 2007		$	5,905			$	17,401			$	23,306
Charges to operations			3,285				6,400				9,685
Cash disbursements			(6,892	)			(4,357	)			(11,249	)
Non-cash utilization			—				(700	)			(700	)
Foreign exchange impact			108				(93	)			15
Balance, December 29, 2007		$	2,406			$	18,651			$	21,057

The accrual for facility closures and related costs is included in accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheet, and the accrual for employee severance and related benefits is included in accrued compensation and benefits. As of December 29, 2007, of the $21.1 million remaining in accrued restructuring charges, $11.8 million was included in current liabilities and $9.3 million was included in other long-term liabilities, principally for facility costs to be paid out through 2013.

In determining the amount of the facilities accrual, 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 had accrued $18.1 million as of December 29, 2007 related to excess facilities (compared to $16.9 million at September 30, 2007), representing gross lease commitments with agreements expiring at various dates through 2013 of approximately $37.5 million, net of committed and estimated sublease income of approximately $19.1 million and a present value factor of $0.3 million. We have entered into signed sublease arrangements for approximately $16.2 million, with the remaining $2.9 million based on future estimated sublease arrangements.

3. Stock-based Compensation

We 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 or, for restricted stock and restricted stock units, the fair value of our stock on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plans provide for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. Since July 2005, the date that we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, we have awarded restricted stock and restricted stock units as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock. Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

We made the following restricted stock and restricted stock unit grants in the first quarters of 2008 and 2007:

		Restricted Stock								Restricted Stock Units
Grant Period		Performance-based				Time-based				Performance-based				Time-based
		(Number of Shares)								(Number of Units)
First quarter of 2008			477,830				354,038				88,215				2,303,559
First quarter of 2007			495,768				—				57,380				347,827

Restricted Stock

Performance-based. In the first quarter of 2008 and 2007, we granted our executive officers performance-based shares that are earned based on achievement of certain company operating performance criteria. The criteria were specified by the Compensation Committee on or prior to the date of grant. With respect to the 2008 grant, the restrictions on up to approximately 241,805 shares will lapse on the later of November 9, 2008 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, and the restrictions on the remaining shares, up to 236,025, will lapse in substantially equal amounts on November 9, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. With respect to the 2007 grant, 425,373 of the shares were earned and 70,395 were forfeited as the performance criteria were not achieved in full. Of the earned shares, the restrictions on 215,563 lapsed on November 9, 2007 and the restrictions on the remaining shares will lapse in two substantially equal installments on November 9, 2008 and 2009, provided that the holder of the award remains employed by us at those dates.

Time-based. In the first quarter of 2008, 354,038 shares were granted to our executive officers. The restrictions on these shares will lapse in substantially equal installments on each of November 9, 2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates.

Restricted Stock Units

Performance-based. In the first quarter of 2008, 88,215 performance-based restricted stock units were granted to employees in connection with our employee management incentive plans for the 2008 fiscal year and, to the extent the performance criteria are achieved, will vest on the later of November 7, 2008 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, provided that the holder of the award remains employed by us at those dates. In the first quarter of 2007, 57,380 performance-based restricted stock units were granted to employees in connection with our employee management incentive plans for the 2007 fiscal year. Of those units, approximately 90% were earned and 10% were forfeited as the performance criteria were met in part. The units earned vested on November 9, 2007.

Time-based. In the first quarter of 2008, we granted 760,277 time-based restricted stock units to employees, which vest in three substantially equal installments on November 15, 2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. In the first quarter of 2008, we also granted 1,543,282 time-based restricted stock units to employees as a special retention grant. Two-thirds of such restricted stock units will vest on November 15, 2009 and the remaining restricted stock units will vest on November 15, 2010. The vesting of these retention units will be accelerated if the holder is terminated under certain circumstances within two years after a change in control of the company. In the first quarter of 2007, we granted 347,827 restricted stock units to employees, which vest in three substantially equal installments on November 3, 2007, 2008 and 2009, provided that the holder of the award remains employed by us at those dates.

With respect to all grants of restricted stock and restricted stock units outstanding, in the first quarters of 2008 and 2007, the restrictions on 681,859 and 635,129 restricted shares lapsed, respectively, and 759,191 and 948,019 restricted stock units vested, respectively. The fair value of restricted shares and restricted stock units granted in the first quarter of 2008 and 2007 was based on the fair market value of our stock on the date of grant. The weighted average fair value per share of restricted shares and restricted stock units granted in the first quarter of 2008 and 2007 was $18.58 and $18.61, respectively.

The following table shows the classification of compensation expense recorded for our stock-based awards as reflected in our consolidated statements of operations:

		Three months ended
		December 29,				December 30,
		2007				2006
		(in thousands)
Cost of license revenue		$	—			$	21
Cost of service revenue			2,347				1,910
Sales and marketing			2,867				1,565
Research and development			2,270				1,842
General and administrative			3,119				3,292
Total stock-based compensation expense		$	10,603			$	8,630

4. Earnings Per Share (EPS)

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense and any tax benefits as additional proceeds.

The following table presents the calculation for both basic and diluted EPS:

		Three months ended
		December 29,				December 30,
		2007				2006
		(in thousands, except
		per share data)
Net income		$	9,880			$	15,153
Weighted average shares outstanding—Basic			113,680				111,830
Dilutive effect of employee stock options, restricted shares and restricted stock units			4,407				5,453
Weighted average shares outstanding—Diluted			118,087				117,283
Earnings per share—Basic		$	0.09			$	0.14
Earnings per share—Diluted		$	0.08			$	0.13

Stock options to purchase 3.3 million shares and 3.5 million shares were outstanding for the first quarters of 2008 and 2007, respectively, but were not included in the calculation of diluted net income per share because the exercise prices per share, plus the tax benefits and unamortized compensation relating thereto, 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.

5. Acquisitions

CoCreate

In the first quarter of 2008, we acquired all of the outstanding common stock of CoCreate Software GmbH, a provider of CAD and PLM modeling solutions, for approximately $249.4 million (net of cash acquired and including $4.8 million of acquisition-related transaction costs). CoCreate was a privately held company based in Sindelfingen, Germany. CoCreate’s results of operations have been included in PTC’s consolidated financial statements beginning December 1, 2007.

The acquisition of CoCreate has been accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date (November 30, 2007). The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a preliminary valuation of certain assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change upon finalizing the valuation. The primary areas of the purchase price allocation that are not yet finalized relate to determining the fair values of leases, identifiable intangible assets, deferred support revenues, deferred taxes and integration costs, as well as the amount of resulting goodwill.

Based upon a preliminary valuation, the total preliminary purchase price allocation was as follows:

		(in thousands)
Goodwill		$	154,622
Identifiable intangible assets			131,115
Net tangible assets			2,183
Integration accrual			(1,916	)
Net deferred tax liabilities			(22,140	)
In-process research and development			811
Total preliminary purchase price allocation			264,675
Less: CoCreate cash acquired			(15,322	)
Total preliminary purchase price allocation, net of cash acquired		$	249,353

The preliminary purchase price allocation resulted in $154.6 million of goodwill none of which is deductible for income tax purposes. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential to sell our products

into CoCreate’s traditional customer base, (2) the potential to leverage our reseller channel to sell CoCreate’s products, and (3) the potential geographic expansion for CoCreate’s products, particularly in North America and Asia. Intangible assets of $131.1 million includes purchased software of $55.1 million, customer relationships of $72.6 million, trademarks of $2.3 million, and non-compete agreements of $1.1 million, which are being amortized over average useful lives of 7 years, 11 years, 5 years and 1.5 years, respectively.

Net tangible assets consist of the fair values of tangible assets less the fair values of assumed liabilities and obligations. Except for pension liabilities, leases, deferred support revenues, deferred taxes and integration accruals, net tangible assets were valued at the respective carrying amounts recorded by CoCreate as we believe that their carrying value amounts approximate their fair values at the acquisition date. We have not yet finalized our integration plans related to CoCreate. Currently, we have recorded estimated integration accruals of approximately $1.9 million for severance costs related to the termination of certain CoCreate employees.

Purchased in-process research and development of $0.8 million was written-off in the first quarter of 2008 and related to a project under development for which technological feasibility had not yet been established at the acquisition date and for which there was no alternative future use. The value of the purchased in-process research and development was determined using the excess earnings method, which discounts the projected cash flow of the intangible asset. Under this method, the projected cash flow of the intangible asset considers the contribution of other assets to the overall cash flow in order to isolate the economic benefit generated by the specific intangible asset. A risk-adjusted discount rate of 23% was used to reflect the overall risk associated with the project. The expected cost to complete the project was approximately $0.3 million at the acquisition date. This development project is expected to be completed in 2008.

Pro Forma Financial Information (unaudited)

The unaudited financial information in the table below summarizes the combined results of operations of PTC and CoCreate, on a pro forma basis, as though the companies had been combined as of the beginning of 2007. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2007. For the three months ended December 30, 2006, the pro forma financial information is based on PTC’s results of operations for its fiscal quarter ended December 30, 2006, combined with CoCreate’s results of operations for its fiscal quarter ended January 31, 2007. For the three months ended December 29, 2007, the pro forma financial information is based on PTC’s results of operations for its quarter ended December 29, 2007, which includes CoCreate’s results beginning December 1, 2007, combined with CoCreate’s results of operations for the two months ended November 30, 2007.

The pro forma financial information includes the amortization charges from acquired intangible assets, adjustments to interest income (expense) and the related tax effects.

		Three months ended
		December 29,				December 30,
		2007				2006
		(in millions,
		except per share amounts)
Revenue		$	254.6			$	240.7
Operating income			18.3				24.8
Net income			10.4				14.1
Earnings per share—Basic		$	0.09			$	0.13
Earnings per share—Diluted		$	0.09			$	0.12

LBS

In the first quarter of 2008, we acquired Logistics Business Systems Ltd. (LBS), a provider of integrated logistics support solutions for the aerospace and defense and civil aviation industries, for approximately $13.1 million in cash (net of cash acquired and including $0.2 million of acquisition-related transaction costs). An additional $1.0 million of contingent purchase price will be capitalized as goodwill, if and when earned. LBS was a privately held company based in the United Kingdom. Results of operations for LBS have been included in PTC’s consolidated statement of

operations since October 20, 2007. Our results of operations prior to this acquisition, if presented on a pro forma basis as if the companies had been combined since the beginning of fiscal 2007, would not differ materially from our reported results.

This acquisition was accounted for as a business combination. The purchase price allocation is preliminary, pending the final valuation of acquired assets and liabilities. The preliminary purchase price allocation resulted in goodwill of $4.1 million; intangible assets of $9.2 million (including purchased software of $6.7 million, customer relationships of $2.3 million, and other intangible assets of $0.2 million, which are being amortized over useful lives of 8, 8 and 5 years, respectively); and other net assets of $1.4 million.

DHI

In the first quarter of 2008 we acquired all of the outstanding common stock of Digital Human, Inc. (DHI), a privately-held company based in Canada, for $1.1 million in cash. DHI was developing ergonomic simulation technology. DHI was a development stage company and, as a result, the entire purchase price was expensed as in-process research and development in the accompanying consolidated statements of operations. An additional $1.0 million of contingent purchase price will be capitalized as purchased software, if and when earned.

NetRegulus

In the fourth quarter of 2007, we acquired substantially all of the assets of NetRegulus, Inc., headquartered in Centennial, Colorado, for approximately $2.3 million in cash. NetRegulus provided enterprise quality management solutions for the medical device industry. Results of operations for NetRegulus have been included in PTC’s consolidated statement of operations since September 11, 2007. Our results of operations prior to this acquisition, if presented on a pro forma basis as if the companies had been combined since the beginning of fiscal 2007, would not differ materially from our reported results.

This acquisition was accounted for as a business combination. The purchase price allocation resulted in purchased software of $2.5 million, which is being amortized over an estimated useful life of three years and other net liabilities of $0.2 million.

NC Graphics

In the third quarter of 2007, we acquired NC Graphics (Cambridge) Limited, headquartered in England, for $7.2 million in cash, including $0.2 million of acquisition-related transaction costs. NC Graphics provided computer-aided manufacturing solutions for design and machining of molds, dies, prototypes, and other high-speed precision machining applications. Results of operations for NC Graphics have been included in the accompanying consolidated statements of operations since May 3, 2007. Our results of operations prior to this acquisition if presented on a pro forma basis as if the companies had been combined since the beginning of fiscal 2007, would not differ materially from our reported results.

This acquisition was accounted for as a business combination. The purchase price allocation resulted in goodwill of $0.5 million; intangible assets of $5.8 million (including purchased software of $4.4 million, customer relationships of $1.3 million, and other intangible assets of $0.1 million, which are being amortized over useful lives ranging from 1 to 10 years); other net assets of $0.8 million; and deferred tax liabilities of $0.4 million. In addition, the purchase price allocation resulted in a charge of $0.5 million for in-process research and development related to a project under development for which technological feasibility had not yet been established at the acquisition date and for which there was no alternative future use. The value of the purchased in-process research and development was determined using the residual income approach, which discounts expected future cash flows from projects under development to their net present value. The estimated cost to complete the project was approximately $0.8 million at the acquisition date, and the project is expected to be completed in the second half of fiscal 2008.

6. Goodwill and Acquired Intangible Assets

We have two reportable segments: (1) software products and (2) services. As of December 29, 2007 and September 30, 2007, goodwill and acquired intangible assets in the aggregate attributable to our software products reportable

segment was $587.8 million and $299.9 million, respectively, and attributable to our services reportable segment was $25.6 million and $25.2 million, respectively. Goodwill is 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 completed our annual impairment review as of June 30, 2007 and concluded that no impairment charge was required as of that date. Since that date, there have not been any events or changes in circumstances that indicate that the carrying values of goodwill may not be recoverable.

Goodwill and acquired intangible assets consisted of the following:

		December 29, 2007												September 30, 2007
		Gross												Gross
		Carrying				Accumulated				Net Book				Carrying				Accumulated				Net Book
		Amount				Amortization				Value				Amount				Amortization				Value
		(in thousands)
Goodwill										$	400,540											$	244,497
Intangible assets with finite lives (amortized):
Purchased software		$	131,178			$	45,503				85,675			$	70,249			$	42,616				27,633