PTC Inc.
PARAMETRIC TECHNOLOGY CORP (Form: 10-Q, Received: 05/14/2009 16:18:38)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 4, 2009

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

(Registrant’s 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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

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. (Check one):

 

Large accelerated filer   þ    Accelerated filer   ¨    Non-accelerated filer   ¨    Smaller reporting company   ¨
      (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   ¨     No   þ

There were 115,874,521 shares of our common stock outstanding on May 8, 2009.

 

 

 


Table of Contents

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended April 4, 2009

 

     Page
Number

Part I— FINANCIAL INFORMATION

  

Item 1. Unaudited Condensed Consolidated Financial Statements:

  

Balance Sheets as of April 4, 2009 and September 30, 2008

   3

Statements of Operations for the three and six months ended April 4, 2009 and March 29, 2008

   4

Statements of Cash Flows for the six months ended April 4, 2009 and March 29, 2008

   5

Statements of Comprehensive Income for the three and six months ended April 4, 2009 and March 29, 2008

   6

Notes to Financial Statements

   7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   37

Item 4. Controls and Procedures

   37

Part II—OTHER INFORMATION

  

Item 1. Legal Proceedings

   38

Item 1A. Risk Factors

   38

Item 4. Submission of Matters to a Vote of Security Holders

   39

Item 6. Exhibits

   40

Signature

   41

 

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PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

    April 4,
2009
    September 30,
2008
 
ASSETS    

Current assets:

   

Cash and cash equivalents

  $ 267,718     $ 256,941  

Accounts receivable, net of allowance for doubtful accounts of $5,486 and $5,151 at April 4, 2009 and September 30, 2008, respectively

    131,886       201,509  

Prepaid expenses

    31,587       28,474  

Other current assets

    81,143       82,136  

Deferred tax assets and tax-related deferred charges

    28,590       28,434  
               

Total current assets

    540,924       597,494  

Property and equipment, net

    57,853       55,253  

Goodwill

    399,712       405,195  

Acquired intangible assets, net

    166,042       182,342  

Deferred tax assets and tax-related deferred charges

    77,625       71,175  

Other assets

    24,706       38,114  
               

Total assets

  $ 1,266,862     $ 1,349,573  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY    

Current liabilities:

   

Revolving credit facility

  $ 53,348     $ 88,505  

Accounts payable

    13,515       16,710  

Accrued expenses and other current liabilities

    50,672       58,701  

Accrued compensation and benefits

    62,348       83,432  

Accrued income taxes

    —         24,122  

Deferred tax liabilities

    247       244  

Customer advances

    46,456       43,801  

Deferred revenue

    262,573       250,838  
               

Total current liabilities

    489,159       566,353  

Deferred tax liabilities

    26,025       30,768  

Deferred revenue

    4,459       7,457  

Other liabilities

    37,701       42,470  
               

Total liabilities

    557,344       647,048  
               

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; 115,864 and 115,726 shares issued and outstanding at April 4, 2009 and September 30, 2008, respectively

    1,159       1,157  

Additional paid-in capital

    1,783,761       1,778,694  

Accumulated deficit

    (1,048,216 )     (1,060,050 )

Accumulated other comprehensive loss

    (27,186 )     (17,276 )
               

Total stockholders’ equity

    709,518       702,525  
               

Total liabilities and stockholders’ equity

  $ 1,266,862     $ 1,349,573  
               

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

 

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PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three months ended     Six months ended
     April 4,
2009
    March 29,
2008
    April 4,
2009
    March 29,
2008

Revenue:

        

License

   $ 42,070     $ 77,862     $ 92,572     $ 148,837

Service

     183,222       179,931       373,111       350,198
                              

Total revenue

     225,292       257,793       465,683       499,035
                              

Costs and expenses:

        

Cost of license revenue

     6,976       6,778       14,560       11,583

Cost of service revenue

     72,302       73,875       148,043       144,855

Sales and marketing

     71,387       73,359       151,249       144,387

Research and development

     44,752       45,734       93,113       87,282

General and administrative

     17,693       20,808       39,130       44,359

Amortization of acquired intangible assets

     3,815       4,315       7,683       7,208

In-process research and development

     —         —         —         1,887

Restructuring charges

     9,788       1,892       9,788       11,577
                              

Total costs and expenses

     226,713       226,761       463,566       453,138
                              

Operating income (loss)

     (1,421 )     31,032       2,117       45,897

Interest and other income (expense), net

     (250 )     (355 )     (1,321 )     1,251
                              

Income (loss) before income taxes

     (1,671 )     30,677       796       47,148

Provision for (benefit from) income taxes

     (8,846 )     11,829       (11,038 )     18,420
                              

Net income

   $ 7,175     $ 18,848     $ 11,834     $ 28,728
                              

Earnings per share—Basic

   $ 0.06     $ 0.17     $ 0.10     $ 0.25

Earnings per share—Diluted

   $ 0.06     $ 0.16     $ 0.10     $ 0.24

Weighted average shares outstanding—Basic

     114,793       113,811       114,672       113,746

Weighted average shares outstanding—Diluted

     115,656       117,247       116,503       117,667

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

 

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PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    Six months ended  
    April 4,
2009
    March 29,
2008
 

Cash flows from operating activities:

   

Net income

  $ 11,834     $ 28,728  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Amortization of acquired intangible assets

    17,062       14,865  

Depreciation and other amortization

    12,895       11,983  

Stock-based compensation

    17,261       21,532  

Other non-cash costs, net

    586       827  

In-process research and development

    —         1,887  

Changes in operating assets and liabilities, net of effects of acquisitions:

   

Accounts receivable

    77,015       69,551  

Accounts payable and accrued expenses

    (12,595 )     (9,826 )

Accrued compensation and benefits

    (18,354 )     (20,370 )

Deferred revenue

    6,859       21,716  

Accrued income taxes

    (34,787 )     2,513  

Other current assets and prepaid expenses

    (1,726 )     (11,791 )

Other noncurrent assets and liabilities

    12,600       (3,811 )
               

Net cash provided by operating activities

    88,650       127,804  
               

Cash flows from investing activities:

   

Additions to property and equipment

    (15,266 )     (10,707 )

Acquisitions of businesses, net of cash acquired

    (8,475 )     (261,592 )
               

Net cash used by investing activities

    (23,741 )     (272,299 )
               

Cash flows from financing activities:

   

Borrowings under revolving credit facility

    —         220,000  

Repayment of borrowings under revolving credit facility

    (31,951 )     (67,358 )

Repurchases of common stock

    (9,581 )     (22,009 )

Proceeds from issuance of common stock

    2,116       3,649  

Payments of withholding taxes in connection with vesting of restricted stock units and restricted stock

    (4,341 )     (10,691 )

Payments of capital lease obligations and other

    (185 )     (200 )
               

Net cash (used) provided by financing activities

    (43,942 )     123,391  
               

Effect of exchange rate changes on cash and cash equivalents

    (10,190 )     16,779  
               

Net increase (decrease) in cash and cash equivalents

    10,777       (4,325 )

Cash and cash equivalents, beginning of period

    256,941       263,271  
               

Cash and cash equivalents, end of period

  $ 267,718     $ 258,946  
               

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

 

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PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three months ended    Six months ended
     April 4,
2009
    March 29,
2008
   April 4,
2009
    March 29,
2008

Net income

   $ 7,175     $ 18,848    $ 11,834     $ 28,728
                             

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustment

     (2,490 )     14,005      (9,891 )     13,672

Minimum pension liability adjustment

     (11 )     15      (19 )     1
                             

Other comprehensive income (loss)

     (2,501 )     14,020      (9,910 )     13,673
                             

Comprehensive income

   $ 4,674     $ 32,868    $ 1,924     $ 42,401
                             

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

 

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PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed 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 condensed quarterly financial statements should be read in conjunction with our 2008 annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. 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 mean our fiscal year, which ends on September 30. The September 30, 2008 year-end consolidated balance sheet is derived from our audited financial statements.

In the first quarter of 2009, we began classifying revenue from sales of our computer-based training products as license and maintenance revenue to better align with how these training products are sold to customers. Prior to that, computer-based training product revenue, and maintenance thereon, was classified as consulting and training service revenue and included in total service revenue. We have made certain reclassifications to the consolidated statements of operations for the three and six months ended March 29, 2008 to conform to classifications for the current periods. For the three and six months ended March 29, 2008, computer-based training revenue totaling $4.9 million and $8.7 million, respectively, has been reclassified from service revenue to license revenue, and related costs of $0.1 million and $0.2 million, respectively, have been reclassified from cost of service to cost of license, in the accompanying consolidated statement of operations. This reclassification had no impact on total revenue, operating income or net income.

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 April 4, 2009 and September 30, 2008 were $77.7 million and $76.8 million, respectively.

The results of operations for the three and six months ended April 4, 2009 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2. Restructuring Charges

In the second quarter of 2009, we recorded restructuring charges of $9.8 million. The restructuring charges included $9.7 million for severance and related costs associated with 204 employees notified of termination during the second quarter of 2009 and $0.1 million of charges related to excess facilities.

In the second quarter of 2008 and first six months of 2008, we recorded restructuring charges of $1.9 million and $11.6 million, respectively. These restructuring charges included $0.6 million and $3.9 million for severance and related costs associated with 19 and 81 employees notified of termination during the second quarter and first six months of 2008, respectively, and $0.7 million and $7.1 million of charges for the second quarter and first six months of 2008, respectively, primarily related to gross lease commitments in excess of estimated sublease income for excess facilities in the U.S. and the U.K. In addition, in the second quarter of 2008, we recorded $0.6 million for costs incurred in connection with our integration of CoCreate, which we acquired in the first quarter of 2008.

 

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The following table summarizes restructuring accrual activity for the six months ended April 4, 2009:

 

     Employee
Severance
and Related
Benefits
    Facility
Closures
and Other
Costs
    Total  
     (in thousands)  

Balance, September 30, 2008

   $ 5,505     $ 12,179     $ 17,684  

Charges to operations

     9,666       122       9,788  

Cash disbursements

     (6,585 )     (4,342 )     (10,927 )

Foreign exchange impact

     (81 )     (396 )     (477 )
                        

Balance, April 4, 2009

   $ 8,505     $ 7,563     $ 16,068  
                        

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 April 4, 2009, of the $16.1 million remaining in accrued restructuring charges, $14.8 million was included in current liabilities and $1.3 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 $7.2 million as of April 4, 2009 related to excess facilities (compared to $11.7 million at September 30, 2008), representing gross lease commitments with agreements expiring at various dates through 2013 of approximately $17.0 million, net of committed and estimated sublease income of approximately $9.6 million and a present value factor of $0.2 million. We have entered into signed sublease arrangements for approximately $9.5 million, with the remaining $0.1 million based on future estimated sublease arrangements.

3. Stock-based Compensation

We measure the cost of employee services received in exchange for stock-based awards based on the grant-date fair value of the award using an option pricing model for stock options or the fair value of our stock on the date of grant for restricted stock and restricted stock units. 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 (SFAS) 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, 2008.

We made the following restricted stock and restricted stock unit grants in the first six months of 2009 and 2008:

 

     Restricted Stock     Restricted Stock Units  

Grant Period

   Performance-based     Time-based     Performance-based     Time-based  
     (Number of Shares)     (Number of Units)  

First six months of 2009

   —       —       565,456 (1)   6,666  

First six months of 2008

   477,830 (2)   425,464 (3)   88,215 (4)   2,772,345 (5)

 

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(1) These performance-based restricted stock units were granted to our executive officers and certain employees and will vest in November 2009 to the extent earned. We expect that 322,809 of these units will be forfeited as we do not expect that the performance criteria originally approved in November 2008 will be met. The performance criteria for the remaining 242,647 units issued to non-executive employees were modified in March 2009 and we expect approximately half of these units will be earned based on the revised performance criteria. We have not recognized compensation expense on the units that we expect will not be earned and, in the second quarter of 2009, we reversed approximately $0.6 million of compensation expense recorded in the first quarter of 2009 related to such units.
(2) These restricted shares were granted to our executive officers. Of the shares granted, 462,056 were earned and 15,774 were forfeited as the performance criteria were not achieved in full. Of the earned shares, the restrictions on 233,824 shares lapsed in November 2008, and the restrictions on the remaining shares will lapse in two substantially equal amounts in November 2009 and November 2010.
(3) These restricted shares include 354,038 granted to our executive officers in the first quarter of 2008, the restrictions on 118,014 of which lapsed in November 2008. The restrictions on the remaining 236,024 shares will lapse in two substantially equal installments in November 2009 and 2010. The remaining 71,426 shares were granted to members of our Board of Directors in the second quarter of 2008, the restrictions on which lapsed on March 5, 2009.
(4) These restricted stock units were granted to employees in connection with our employee management incentive plans for the 2008 fiscal year and vested in November 2008 as the performance criteria were fully met.
(5) These restricted stock units were granted to employees. Of these units, 449,946 vest in three substantially equal installments, the first of which vested in March 2009 and the remaining installments of which will vest in March 2010 and 2011, and 760,277 vest in three substantially equal installments, the first of which vested in November 2008 and the remaining installments of which will vest in November 2009 and 2010. The remaining 1,562,122 were granted as a special retention grant, two-thirds of which will vest in November 2009 and the remainder of which will vest in November 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 PTC.

The following table shows restricted stock activity for the six months ended April 4, 2009:

 

     Shares     Weighted
Average
Grant Date
Fair Value
     (in thousands)      

Balance of outstanding restricted stock September 30, 2008

   1,660     $ 17.98

Granted

   —         —  

Vested

   (928 )   $ 17.48

Forfeited or not earned

   (20 )   $ 18.61
        

Balance of outstanding restricted stock April 4, 2009

   712     $ 18.62
        

The following table shows restricted stock unit activity for the six months ended April 4, 2009:

 

     Shares     Weighted
Average
Grant Date
Fair Value
     (in thousands)      

Balance of outstanding restricted stock units September 30, 2008

   3,821     $ 17.73

Granted

   572     $ 9.42

Vested

   (1,142 )   $ 17.06

Forfeited or not earned

   (97 )   $ 17.84
        

Balance of outstanding restricted stock units April 4, 2009

   3,154     $ 16.46
        

 

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The weighted average fair value per share of restricted shares and restricted stock units granted in the first six months of 2009 and 2008 was $9.42 and $17.94, 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    Six months ended
     April 4,
2009
   March 29,
2008
   April 4,
2009
   March 29,
2008
     (in thousands)

Cost of license revenue

   $ 3    $ 14    $ 17    $ 14

Cost of service revenue

     1,291      2,222      3,546      4,569

Sales and marketing

     2,193      2,936      5,101      5,803

Research and development

     1,566      2,337      3,824      4,607

General and administrative

     1,677      3,420      4,773      6,539
                           

Total stock-based compensation expense

   $ 6,730    $ 10,929    $ 17,261    $ 21,532
                           

To date in the third quarter of 2009, we have granted the restricted stock and the restricted stock units shown in the table below.

 

     MIP
RSUs
   Performance-
Based RSUs
   Second Half
Executive Incentive
Plan RSUs
   Time-Based RSUs    Time-based restricted
shares granted to
Board of Directors

Number Granted

     6,579      887,470      379,401      2,447,208      83,039

Intrinsic Value

   $ 72,040    $ 9,256,312    $ 3,957,152    $ 25,533,028    $ 868,864

The MIP RSUs were issued to an employee and are earned based on performance conditions established by the Compensation Committee. These MIP RSUs will vest on the later of November 15, 2009 and the date the Compensation Committee determines the extent to which the performance criteria have been achieved. Based on year-to-date results, we expect that only half of these MIP RSUs will be earned.

The performance-based RSUs are earned based on performance conditions established by the Compensation Committee in November 2008 and are subject to subsequent time-based restrictions. The earned units will vest in three substantially equal installments on (1) the later of November 15, 2009 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, (2) November 15, 2010 and (3) November 15, 2011. The granting of these awards was delayed from November 2008 because we had insufficient shares available under the 2000 Equity Incentive Plan at that time. Based on year-to-date results, it is unlikely that these performance-based RSUs and the 322,809 2009 Executive Incentive Plan RSUs (EIP RSUs) granted in the first half of 2009 will be earned, and they will likely be forfeited in full.

In March 2009, the Compensation Committee established an executive incentive plan for the second half of the year based on performance criteria established at that time in connection with our revised financial plan for the year. The second-half executive incentive plan RSUs will vest on the later of November 15, 2009 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved. None of these RSUs will be earned if any of the EIP RSUs are earned.

The time-based RSUs were issued to executive and non-executive employees. Substantially all of these RSUs will vest in three equal installments in November 2009, 2010 and 2011.

The time-based restricted shares were issued to our non-employee directors as part of their annual compensation. The restrictions on these shares will lapse in March 2010.

 

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4. Earnings Per Share (EPS) and Common Stock

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 EPS. 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    Six months ended
     April 4,
2009
   March 29,
2008
   April 4,
2009
   March 29,
2008
     (in thousands, except per share data)

Net income

   $ 7,175    $ 18,848    $ 11,834    $ 28,728
                           

Weighted average shares outstanding—Basic

     114,793      113,811      114,672      113,746

Dilutive effect of employee stock options, restricted shares and restricted stock units

     863      3,436      1,831      3,921
                           

Weighted average shares outstanding—Diluted

     115,656      117,247      116,503      117,667
                           

Earnings per share—Basic

   $ 0.06    $ 0.17    $ 0.10    $ 0.25

Earnings per share—Diluted

   $ 0.06    $ 0.16    $ 0.10    $ 0.24

Stock options to purchase 5.4 million and 5.1 million shares for the second quarter and first six months of 2009, respectively, and 3.2 million shares for each of the second quarter and first six months of 2008 were outstanding 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. In addition, restricted shares and restricted stock units equivalent to 0.9 million shares for the second quarter of 2009 were outstanding but were not included in the calculation of diluted net income per share because the effect of the assumed proceeds related to the tax benefits and unamortized compensation relating thereto was in excess of such shares outstanding. These shares were excluded from the computation of diluted EPS as their effect would have been anti-dilutive.

Common Stock Repurchases

Prior to May 14, 2008, our Board of Directors had authorized the repurchase of up to 16.0 million shares of our common stock. On May 14, 2008, our Board of Directors revoked the prior repurchase authorization and authorized us to use up to $50 million of cash from operations to repurchase shares of our common stock in the form of open market purchases. The current authorization was increased to $100 million on November 20, 2008 and will expire on May 31, 2010 unless earlier revoked. In the first quarter of 2009, we repurchased 0.9 million shares at a cost of $9.6 million, and none in the second quarter. In the first six months of 2008, we repurchased 1.4 million shares at a cost of $22.0 million. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

5. Goodwill, Intangible Assets and Acquisitions

Our acquisitions are described more fully in Note E to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

 

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Goodwill

The change in the carrying amount of goodwill from September 30, 2008 to April 4, 2009 includes the allocation of goodwill for the acquisition of the assets of Synapsis ($2.1 million), offset by foreign currency translation adjustments related to goodwill balances that are recorded in non-U.S. currencies.

Amortization of intangible assets

The aggregate amortization expense for intangible assets with finite lives recorded for the second quarters and first six months of 2009 and 2008 was classified in our consolidated statements of operations as follows:

 

     Three months ended    Six months ended
     April 4,
2009
   March 29,
2008
   April 4,
2009
   March 29,
2008
     (in thousands)

Amortization of acquired intangible assets

   $ 3,815    $ 4,315    $ 7,683    $ 7,208

Cost of license revenue

     4,703      4,623      9,371      7,623

Cost of service revenue

     —        17      8      34
                           

Total amortization expense

   $ 8,518    $ 8,955    $ 17,062    $ 14,865
                           

CoCreate Acquisition

In the first quarter of 2008, we acquired all of the outstanding common stock of CoCreate Software GmbH, a provider of CAD and PLM solutions, for $247.5 million (net of cash acquired). CoCreate was a privately-held company based in Sindelfingen, Germany. CoCreate’s results of operations have been included in our consolidated financial statements beginning December 1, 2007.

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 the first quarter of 2008. 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 the first quarter of 2008. The pro forma financial information is based on PTC’s results of operations for the first six months of 2008, including CoCreate’s results beginning December 1, 2007, combined with CoCreate’s stand-alone 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.

 

     Six months ended
March 29,
2008
     (in millions, except
per share data)

Revenue

   $ 512.4

Operating income

     49.4

Net income

     29.2

Earnings per share—Basic

   $ 0.26

Earnings per share—Diluted

   $ 0.25

6. Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to accounting pronouncements that require or permit fair value measurements. Accordingly,

 

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this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, in January 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-2 permits entities to elect to defer the effective date of SFAS 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We elected to defer the adoption of SFAS 157 with respect to those assets and liabilities permitted by FSP 157-2. We are currently evaluating the impact, if any, that the adoption of FSP 157-2 will have on our consolidated financial statements. On October 1, 2008, we adopted SFAS 157 and certain related FASB staff positions for our financial assets and liabilities. The adoption of SFAS 157 and related positions did not have a material impact on our consolidated financial statements.

SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS 157 establishes three levels of inputs that may be used to measure fair value:

 

   

Level 1: quoted prices in active markets for identical assets or liabilities;

 

   

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

   

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our significant financial assets and liabilities measured at fair value on a recurring basis were all measured using input type Level 1 and consisted of the following as of April 4, 2009:

 

     April 4,
2009
     (in thousands)

Financial assets

  

Cash equivalents (1)

   $ 41,540
      

Financial liabilities

  

Forward contracts

   $ 1,525
      

 

(1) Represent money market funds.

7. Derivative Financial Instruments

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 , (SFAS 161). This statement improves transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities , (SFAS 133). We adopted this new standard effective January 4, 2009.

 

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Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the value of transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables. The contracts primarily are denominated in European currencies, and have maturities of less than three months.

Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other expense, net. As of April 4, 2009, we had outstanding forward contracts with notional amounts equivalent to $114.5 million comprised of the following:

 

Currency Hedged    April 4,
2009
     (in thousands)

Euro/U.S. Dollar

   $ 55,690

British Pound/Euro

     20,970

Indian Rupee/U.S. Dollar

     19,106

Japanese Yen/U.S. Dollar

     4,685

All other

     14,095
      

Total

   $ 114,546
      

As of April 4, 2009 a net payable of $1.5 million related to the fair value of our forward contracts was included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet.

Net realized and unrealized gains and losses on forward contracts included in other income (expense), net, excluding the underlying foreign currency exposure being hedged, were net losses of $0.4 million and net gains of $3.0 million for the second quarter and first six months of 2009, respectively.

Net gains and losses on foreign currency exposures, including realized and unrealized gains and losses on forward contracts, included in other income (expense), net, were net losses of $0.5 million and $2.0 million for the second quarter and first six months of 2009, respectively.

8. Recent Accounting Pronouncements

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-6-1). EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions in EITF 03-6-1. We will be subject to EITF 03-6-1 beginning in fiscal 2010, which begins on October 1, 2009. We have not yet determined the impact, if any, of EITF 03-6-1 on our consolidated financial statements.

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)) and SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements , an

 

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amendment of ARB No. 51 (SFAS 160). These statements will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) requires companies to: (i) recognize, with certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity; (ii) measure acquirer shares issued in consideration for a business combination at fair value on the acquisition date; (iii) recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings; (iv) with certain exceptions, recognize preacquisition loss and gain contingencies at their acquisition-date fair values; (v) capitalize in-process research and development assets acquired; (vi) expense, as incurred, acquisition-related transaction costs; and (vii) capitalize acquisition-related restructuring costs only if the criteria in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities , are met as of the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of acquisition.

SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will be subject to SFAS 141(R) beginning in fiscal 2010, which begins on October 1, 2009. Early adoption of these statements is prohibited. We believe the adoption of these statements will have a material effect on the financial accounting for any significant acquisitions completed after October 1, 2009.

Determination of the Useful Lives of Intangible Assets

In April 2008, the FASB issued FASB Staff Position No.142-3, Determination of Useful Lives of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets (SFAS 142). FSP 142-3 is intended to improve consistency between the useful life of an intangible asset determined under SFAS 142 and the expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently evaluating the impact, if any, that the adoption of FSP 142-3 in our fiscal 2010 will have on our consolidated financial position, results of operations and cash flows.

9. Segment Information

We operate within a single industry segment—computer software and related services. Operating segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , are 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 operating and reportable segments: (1) Software Products, which includes license and related maintenance revenue (including new releases and technical support) for all our products except training-related products; and (2) Services, which includes consulting, implementation, training, computer-based training products, including maintenance thereon, and other support revenue. In our consolidated statements of operations, maintenance revenue is included in service revenue. We do not allocate sales, marketing or administrative expenses to our operating segments, as these activities are managed on a consolidated basis.

 

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The revenue and operating income attributable to our operating segments are summarized as follows:

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    April 4,
2009
    March 29,
2008
 
     (in thousands)  

Revenue:

        

Total Software Products segment revenue

   $ 159,451     $ 194,007     $ 338,029     $ 375,075  

Total Service segment revenue

     65,841       63,786       127,654       123,960  
                                

Total revenue

   $ 225,292     $ 257,793     $ 465,683     $ 499,035  
                                

Operating income (loss): (1)(2)

        

Software Products segment

   $ 88,566     $ 120,190     $ 192,570     $ 232,956  

Services segment

     5,797       6,276       6,630       9,531  

Sales and marketing expenses

     (76,245 )     (73,892 )     (156,107 )     (150,362 )

General and administrative expenses

     (19,539 )     (21,542 )     (40,976 )     (46,228 )
                                

Total operating income (loss)

   $ (1,421 )   $ 31,032     $ 2,117     $ 45,897  
                                

 

(1) The operating income reported for each operating segment does not represent the total operating results as it does not contain an allocation of sales, marketing, corporate and general and administrative expenses incurred in support of the operating segments.
(2) For the second quarter and first six months of 2009, we recorded restructuring charges of $9.8 million. Of this amount, $1.4 million was included in the Software Products segment, $1.7 million was included in the Services segment, $4.9 million was included in sales and marketing expenses and $1.8 million was included in general and administrative expenses. For the second quarter and first six months of 2008, we recorded combined charges for restructuring and in-process research and development of $1.9 million and $13.5 million, respectively. Of the combined charges, for the second quarter and first six months of 2008, $0.1 million and $3.0 million, respectively, was included in the Software Products segment, $0.5 million and $2.6 million, respectively, was included in the Services segment, $0.5 million and $6.0 million, respectively, was included in sales and marketing expenses, and $0.8 million and $1.9 million, respectively, was included in general and administrative expenses.

Data for the geographic regions in which we operate is presented below.

 

     Three months ended    Six months ended
     April 4,
2009
   March 29,
2008
   April 4,
2009
   March 29,
2008
     (in thousands)

Revenue:

           

North America (1)

   $ 79,476    $ 88,167    $ 163,001    $ 172,689

Europe (2)(3)

     89,869      106,182      189,241      207,823

Asia-Pacific (4)

     55,947      63,444      113,441      118,523
                           

Total revenue

   $ 225,292    $ 257,793    $ 465,683    $ 499,035
                           

 

(1) Includes revenue in the United States totaling $76.6 million and $84.0 million for the three months ended April 4, 2009 and March 29, 2008, respectively, and $155.8 million and $164.9 million for the six months ended April 4, 2009 and March 29, 2008, respectively.
(2) Includes revenue in Germany totaling $28.0 million and $37.0 million for the three months ended April 4, 2009 and March 29, 2008, respectively, and $61.3 million and $64.7 million for the six months ended April 4, 2009 and March 29, 2008, respectively.

 

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(3) Includes revenue in France totaling $23.1 million and $22.5 million for the three months ended April 4, 2009 and March 29, 2008, respectively, and $45.7 million and $45.3 million for the six months ended April 4, 2009 and March 29, 2008, respectively.
(4) Includes revenue in Japan totaling $30.5 million and $29.9 million for the three months ended April 4, 2009 and March 29, 2008, respectively, and $56.3 million and $55.1 million for the six months ended April 4, 2009 and March 29, 2008, respectively.

10. Income Taxes

In the second quarter of 2009, our effective tax rate was a benefit of 529% on a pre-tax loss of $1.7 million, compared to a provision of 39% in the second quarter of 2008 on pre-tax income of $30.7 million. In the first six months of 2009, our effective tax rate was a benefit of 1,387% on pre-tax income of $0.8 million, compared to a provision of 39% in the first six months of 2008 on pre-tax income of $47.1 million. Our unusual effective tax rates for the 2009 periods reflect the disproportionate impact of discrete items on the near break-even profit (loss) before income taxes. In the second quarter and first six months of 2009, our effective tax rate differed from the 35% statutory federal income tax rate due primarily to a $7.6 million one-time benefit recorded in the second quarter of 2009 in connection with litigation in a foreign jurisdiction, foreign taxes at a net effective tax rate lower than the U.S. rate and a $1.8 million tax benefit related to research and development (R&D) tax credits triggered by a retroactive extension of the R&D tax credit enacted during the first quarter of 2009. In the second quarter and first six months of 2008, our effective tax rate was higher than the statutory federal income tax rate due primarily to the impact of losses in a foreign jurisdiction for which we did not record a tax benefit due to the uncertainty of whether we would be able to realize the benefit of such losses.

As of April 4, 2009 and September 30, 2008, we had unrecognized tax benefits of $28.8 million ($24.3 million net of tax benefits from non-U.S. jurisdictions) and $26.3 million ($21.9 million net of tax benefits from non-U.S. jurisdictions), respectively. In the six months ended April 4, 2009, we recorded a net increase of $2.5 million to our unrecognized tax benefits. If all of our unrecognized tax benefits as of April 4, 2009 were to become recognizable, we would record a $21.3 million benefit to the income tax provision.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In both of the second quarters of 2009 and 2008, we included $0.1 million of interest expense and no tax penalty expense in our income tax provision. As of April 4, 2009 and September 30, 2008, we had accrued $0.9 million and $0.8 million, respectively, of estimated interest expense. We had no accrued tax penalties as of either April 4, 2009 or September 30, 2008. Changes in our unrecognized tax benefits in the six months ended April 4, 2009 were as follows:

 

     (in thousands)

Balance as of October 1, 2008

   $ 26,320

Tax positions related to current year

     1,420

Tax positions related to prior years

     1,023
      

Balance as of April 4, 2009

   $ 28,763
      

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We anticipate the settlement of certain tax audits may be finalized within the next twelve months and could result in a decrease in our unrecognized tax benefits of up to $11 million.

 

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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. As of April 4, 2009, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

 

Major Tax Jurisdiction

  

Open Years

United States    2003, and 2005 through 2008
Germany    2004 through 2008
France    2004 through 2008
Japan    2005 through 2008
Ireland    2003 through 2008

In November 2008, we completed a realignment of our European business which resulted in a one-time taxable gain in the U.S. We expect this realignment will result in the utilization of the majority of our U.S. federal net operating loss carryforwards in 2009. We do not expect this realignment to negatively impact our 2009 effective tax rate, in part because it enables us to recognize current year and previously reserved tax credits and because, pursuant to SFAS No. 109, Accounting for Income Taxes , the resulting tax impact must be deferred over the useful life of the property being transferred. As of April 4, 2009, the accompanying consolidated balance sheet included $7 million in current deferred tax assets and tax-related deferred charges and $35 million in long-term deferred tax assets and tax-related deferred charges related to this deferral. This realignment had no impact on our consolidated income before income taxes and had an immaterial impact on our consolidated provision for income taxes for the six months ended April 4, 2009.

11. Commitments and Contingencies

Revolving Credit Agreement

On February 21, 2006, we entered into a multi-currency bank revolving credit facility. The credit facility consists of a $230 million revolving credit facility, which may be increased by up to an additional $150 million if the existing or additional lenders are willing to make increased commitments. The credit facility expires on February 20, 2011, when all amounts will be due and payable in full. Any obligations under the credit facility are guaranteed by PTC’s material domestic subsidiaries and are collateralized by a pledge of 65% of the capital stock of PTC’s material first-tier non-U.S. subsidiaries. Subject to the terms of the credit facility agreement, we may borrow funds up to $230 million, repay the same in whole or in part and re-borrow at any time through February 20, 2011.

Interest rates under the credit facility range from 0.75% to 1.50% above the Eurodollar rate for Eurodollar-based borrowings or the defined base rate for base rate borrowings, in each case based upon our leverage ratio. In addition, we may borrow certain foreign currencies at the London interbank-offered interest rates for those currencies, with the same range above such rates based on our leverage ratio. We are required to pay a quarterly commitment fee based on the undrawn portion of the credit facility, ranging from 0.125% to 0.30% per year, depending upon our leverage ratio.

On November 28, 2007, in connection with our acquisition of CoCreate, we borrowed $220 million under the credit facility in two tranches: $36 million that accrued interest at the Eurodollar-based borrowing rate, and an alternate currency loan of 124.6 million Euros, equivalent to $184 million at the borrowing date, that accrued interest at approximately 5.6% per year. The $36 million loan was repaid in full in the first six months of 2008. In addition, to date we have repaid 85.0 million Euros of the alternate currency loan, including 23.3 million Euros in the first six months of 2009. As of April 4, 2009, we had 39.6 million Euros outstanding under the revolving credit facility, which was equivalent to $53.3 million on that date. The current loan accrues interest at 2.6% per year and matures on May 27, 2009. Upon the due date, and subsequent due dates, we may either repay the amount outstanding or roll over the amount outstanding with new short term loans at the then current interest rates described above.

 

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The credit facility limits our and our subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, we and our material domestic subsidiaries may not invest cash or property in, or loan cash to, our foreign subsidiaries in aggregate amounts exceeding $25 million for any purpose and an additional $50 million for acquisitions of businesses. In addition, under the credit facility, PTC must maintain a defined leverage ratio not to exceed 2.50 to 1.00 and a defined fixed-charge ratio of not less than 1.25 to 1.00. Any failure to comply with the financial or operating covenants of the credit facility would not only prevent us from being able to borrow additional funds, but would also constitute a default, resulting in, among other things, the amounts outstanding, including all accrued interest and unpaid fees, becoming immediately due and payable. A change in control of PTC (as defined in the credit facility) also constitutes an event of default, permitting the lenders to accelerate the required payments of all amounts due and to terminate the credit facility. We were in compliance with all financial and operating covenants of the credit facility as of April 4, 2009.

Legal Proceedings

On August 2, 2007, GE Capital Leasing Corporation (now GE Financial Services Corporation, “GECL”) filed a lawsuit against us in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that GECL was fraudulently induced to provide over $60 million in financing to Toshiba Corporation for purchases of third party products, predominantly PTC products, during the period from 2003 to 2006. GECL claims that PTC participated in the alleged scheme or, alternatively, should have been aware of the scheme and made negligent misrepresentations that enabled the scheme to continue undetected. All of the alleged transactions occurred in Japan. GECL’s complaint claims damages of $47 million and seeks three times that amount plus attorneys’ fees. On October 2, 2008, the United States District Court for the District of Massachusetts entered an order granting PTC’s motion to dismiss GECL’s complaint subject to certain conditions, including PTC’s agreement to provide certain discovery to GECL and to assent to personal jurisdiction in Japan. On November 17, 2008, GECL filed a motion to vacate the court’s October 2 nd order and to seek to continue the case in the U.S. We have opposed GECL’s motion.

On January 7, 2009, GECL also filed an action in Tokyo District Court in Japan against PTC’s Japanese subsidiary, PTC Japan K.K. The lawsuit arises from the same underlying transactions as the Massachusetts lawsuit and seeks damages of 5,808,384,889 Yen (approximately $58 million as of April 4, 2009) plus interest of 5% per year on such amount since April 27, 2007 and costs of the lawsuit. GECL has asked the court to consolidate this newly filed action with its pending action against Toshiba and other parties to the transactions filed in Tokyo District Court in August 2007.

We dispute GECL’s claims and intend to contest them vigorously. As of April 4, 2009 and September 30, 2008, revenue of 4,658,162,417 Yen ($46.5 million and $43.8 million, respectively), that was previously recorded for the transactions at issue has been deferred and recorded as customer advances in our consolidated balance sheets. That liability will remain recorded until the rights and obligations of the several companies connected with the Toshiba transactions are resolved. The change in customer advances at April 4, 2009 from September 30, 2008 is due to foreign currency translation adjustments. To the extent that matters are resolved in our favor, we will reduce customer advances and record revenue or other income at that time. We have not accrued any other liability for this matter as of April 4, 2009.

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.

 

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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 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 warrant 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 generally 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.

 

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ITEM 2. MANAGEMENT’S 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 profitability, the development of our products and markets, and adoption of our solutions are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from those projected include the following: our customers may continue to decrease, delay or forego investments in our solutions in this weakened global economic climate; customers may delay, or become unable to pay, payments due to us in this weakened global economic climate; our efforts to reduce our operating costs may not become effective as quickly as we expect, thereby impacting our profitability, and such reductions could harm our business by decreasing our investments in necessary or strategic initiatives; our cost reduction initiatives may delay our ability to take advantage of business opportunities when the economy recovers; we may be unable to increase revenues or successfully execute strategic and other business initiatives while containing expenses; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by changes in the competitive landscape that have increased both the size and number of companies with which we compete, some of which have larger operating budgets on an absolute and relative basis; as well as other risks and uncertainties referenced in Part II, Item 1A. “Risk Factors” of this report.

Our Business

We develop, market and support product lifecycle management (PLM) software solutions and related services that help companies develop physical and information products. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management solutions market, as well as many previously isolated markets that address various other phases of a product’s lifecycle.

Our PLM software solutions provide our customers with a product development system that enables them to create digital product content, collaborate internally and externally, control content and automate processes, configure products and content, and communicate product information to people and systems across the extended enterprise and design chain. We have devoted significant resources to developing our PLM offerings into an integrated product development system.

Executive Overview

The most significant challenge we faced in the first six months of 2009 was the current global economic environment, which has weakened considerably since 2008. We expect this economic environment to continue at least for the near term and that our customers (including those of our resellers) may continue delaying purchase decisions or reducing the size of their purchases. Our other significant challenge was the decline in the value of certain non-U.S. currencies in which we transact business, particularly the Euro, relative to the U.S. dollar, which adversely affected, and may continue to adversely affect, our reported results as amounts earned in these currencies are translated into dollars for reporting purposes.

We recorded $225 million and $466 million of total revenue in the second quarter and first six months of 2009, respectively, compared to $258 million and $499 million in the year-ago periods. This reflects a decrease in license revenue of 46%, or $36 million, and 38%, or $56 million, in the second quarter and first six months of 2009, respectively. This decrease was partially offset by CoCreate revenue which was higher by $12 million in the first six months of 2009, primarily because the first six months of 2008 only included four months of results for CoCreate, which we acquired on November 30, 2007.

 

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We view the decline in license revenue as particularly significant and, accordingly, have reduced our revenue expectations for the year. We expect license revenues for the remainder of 2009 will continue to be below 2008 levels and that the declines in license sales could negatively impact consulting and training services sales and maintenance sales in 2009 and beyond.

Primarily as a result of revenue declines, our operating income declined by $32 million and $44 million in the second quarter and first six months of 2009, respectively. Net income declined by $12 million and $17 million in the second quarter and first six months of 2009, respectively, primarily due to lower operating income, partially offset by a decrease in our income tax provision of $21 million and $29 million over the same periods.

As a result of our lowered revenue expectations for 2009, we took actions in the second quarter of 2009 that reduced or contained our operating costs, including:

 

   

implementing a hiring freeze other than for selected positions that support our key strategic initiatives;

 

   

eliminating annual merit increases for our employees;

 

   

reducing travel and marketing related expenses; and

 

   

reducing our workforce.

We recorded a $10 million restructuring charge in the second quarter of 2009 primarily related to headcount reductions of 4% of our workforce. We expect that additional workforce reductions, and potential associated facility consolidations, will result in total combined restructuring charges during the remainder of 2009 of approximately $3 million.

While we remain focused on reducing costs to increase our profitability, we intend to continue to make strategic investments we believe are critical to gaining market share and improving operating profitability over the longer term. Such investments include:

 

   

improving the breadth and competitiveness of our product portfolio through both internal development and strategic acquisitions;

 

   

expanding our reseller channel and developing a network of enterprise reseller partners; and

 

   

expanding our services ecosystem with the addition of strategic services partners.

Continued macroeconomic pressure or additional declines in revenue beyond that which we expect could cause us to reduce or delay these strategic investments and/or take further actions to reduce our operating costs.

Results of Operations

Explanatory Note about a Change in Our Revenue Reporting

In the first quarter of 2009, we began classifying revenue from sales of our computer-based training products as license and maintenance revenue to better align our reporting with how these training products are sold to customers. Prior to that, computer-based training product revenue, and maintenance thereon, was classified as consulting and training service revenue and included in total service revenue. Revenue for the first six months of 2008 has been reclassified to conform to the current classification and the discussion below gives effect to this change.

Impact of Foreign Currency Exchange on Results of Operations

Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Because we report our results of operations in U.S. dollars, currency translation affects our reported results. On a year-over-year comparative basis, our revenues for the second quarter and first six months of 2009

 

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were unfavorably impacted as a result of changes in currency exchange rates, primarily the Euro. Conversely, our expenses were lower as a result of changes in these rates. If actual reported results for the second quarter and first six months of 2009 had been converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates, revenue would have been higher by approximately $8.8 million and $16.6 million, respectively, and expenses would have been higher by approximately $11.3 million and $19.0 million, respectively. The net impact on year-over-year results for the second quarter and first six months of 2009 would have been a decrease in operating income of $2.5 million and $2.4 million, respectively. The results of operations, revenue by category, and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes year over year on a constant currency basis.

Total Operating Results

Total revenue, costs and expenses, operating income and net income for the second quarters and first six months of 2009 and 2008 were as follows:

 

     Three months ended     Percent Change     Six months ended    Percent Change  
     April 4,
2009
    March 29,
2008
    Actual     Constant
Currency
    April 4,
2009
    March 29,
2008
   Actual     Constant
Currency
 
     (Dollar amounts in millions)  

Total revenue

   $ 225.3     $ 257.8     (13 )%   (9 )%   $ 465.7     $ 499.0    (7 )%   (3 )%

Total costs and expenses

     226.7       226.8     —   %   5 %     463.6       453.1    2 %   6 %
                                       

Operating income (loss)

     (1.4 )     31.0     (105 )%   (113 )%     2.1       45.9    (95 )%   (100 )%

Other income (expense), net

     (0.2 )     (0.3 )         (1.3 )     1.2     
                                       

Income (loss) before income taxes

     (1.6 )     30.7           0.8       47.1     

Provision for (benefit from) income taxes

     (8.8 )     11.8           (11.0 )     18.4     
                                       

Net income

   $ 7.2     $ 18.9         $ 11.8     $ 28.7     
                                       

Revenue in the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008 decreased primarily due to:

 

   

a decrease in license revenue; and

 

   

the unfavorable impact of foreign currency exchange rate movements described above.

These decreases were partially offset by:

 

   

an additional $12.2 million of revenue from the CoCreate business, which we acquired on November 30, 2007, for the first six months of 2009, compared to the first six months of 2008 (which included only four months of CoCreate revenue);

 

   

consulting and training service revenue which, excluding CoCreate, was higher by $3.0 million and $5.8 million in the second quarter and first six months of 2009; and

 

   

maintenance revenue, which, excluding CoCreate, was relatively flat in the second quarter of 2009 and higher by $4.2 million in the first six months of 2009.

Costs and expenses in the second quarter and first six months of 2009 were lower due to:

 

   

actions taken in the second quarter described above in “Executive Overview”; and

 

   

the favorable impact of foreign currency exchange rate movements described above.

 

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These decreases were partially offset by:

 

   

two additional months of costs from the CoCreate business for the first six months of 2009; and

 

   

restructuring charges of $9.8 million.

Details of Results of Operations

We discuss our results of operations for the second quarters and first six months of 2009 and 2008 in detail below, beginning with a table showing certain consolidated financial data as a percentage of total revenue, followed by a discussion of revenue and costs and expenses. Our results of operations include the results of operations of companies we acquired beginning on their respective acquisition dates.

 

     Percentage of Total Revenue  
     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    April 4,
2009
    March 29,
2008
 

Revenue:

        

License

   19 %   30 %   20 %   30 %

Service

   81     70     80     70  
                        

Total revenue

   100     100     100     100  
                        

Costs and expenses:

        

Cost of license revenue

   3     2     3     2  

Cost of service revenue

   32     29     32     29  

Sales and marketing

   32     28     33     29  

Research and development

   20     18     20     18  

General and administrative

   8     8     8     9  

Amortization of acquired intangible assets

   2     2     2     2  

In-process research and development

   —       —       —       —    

Restructuring charges

   4     1     2     2  
                        

Total costs and expenses

   101     88     100     91  
                        

Operating income (loss)

   (1 )   12     —       9  

Interest and other income (expense), net

   —       —       —       —    
                        

Income (loss) before income taxes

   (1 )   12     —       9  

Provision for (benefit from) income taxes

   (4 )   5     (2 )   4  
                        

Net income

   3 %   7 %   2 %   5 %
                        

Revenue

Total Revenue

Our revenue consists of software license revenue and service revenue, which includes software maintenance revenue (consisting of providing our customers software updates and technical support) as well as consulting and training revenue (including implementation services).

In connection with our reclassification of computer-based training product revenue in 2009, for the second quarter and first six months of 2008, we reclassified $4.9 million and $8.7 million, respectively, to license revenue and $0.9 million and $1.8 million, respectively, to maintenance revenue from consulting and training service revenue, to conform to the current classification. The table and discussion below gives effect to this reclassification. The amount of computer-based training product revenue varies from quarter to quarter and, for the second quarter and first half of 2009, was below such revenue recorded in the second quarter and first half of 2008.

 

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The following table shows our revenue by category for the periods indicated.

 

     Three months ended    Percent Change     Six months ended    Percent Change  
     April 4,
2009
   March 29,
2008
   Actual     Constant
Currency
    April 4,
2009
   March 29,
2008
   Actual     Constant
Currency
 
     (Dollar amounts in millions)  

License Revenue

   $ 42.1    $ 77.9    (46 )%   (44 )%   $ 92.6    $ 148.8    (38 )%   (35 )%

Service revenue:

                    

Maintenance revenue

     122.6      122.0    1 %   4 %     253.4      236.7    7 %   10 %

Consulting and training service revenue

     60.6      57.9    5 %   11 %     119.7      113.5    6 %   11 %
                                    

Total service revenue

     183.2      179.9    2 %   6 %     373.1      350.2    7 %   10 %
                                    

Total revenue

   $ 225.3    $ 257.8    (13 )%   (9 )%   $ 465.7    $ 499.0    (7 )%   (3 )%
                                    

Revenue results for the second quarter and first six months of 2009 reflect weak license sales. We believe this was primarily attributable to the adverse macroeconomic environment in which customers reduced the amount of their purchases and delayed purchasing decisions. Additionally, revenue in the first six months of 2009, compared to the year-ago period, was negatively impacted by unfavorable foreign currency exchange rates in most currencies in which we do business. Our maintenance and services businesses, however, performed well in the second quarter and first six months of 2009. Revenue for the first six months of 2009 also included $12.2 million more revenue from the sale of CoCreate products, primarily because the first six months of 2008 included only four months of CoCreate revenue. CoCreate revenues are primarily concentrated in Europe and Japan.

License Revenue

License revenue in the second quarter and first six months of 2009 decreased year over year in every region and across most of our major product families. License revenue was also unfavorably impacted in the second quarter and first six months of 2009 by approximately $1.3 million and $3.5 million, respectively, due to unfavorable foreign currency exchange rate movements.

Maintenance Revenue

Maintenance revenue represented 54% of total revenue in the second quarter and first six months of 2009 and 47% of total revenue in the second quarter and first six months of 2008. Increases in maintenance revenue in the second quarter and first six months of 2009 were partially offset by unfavorable foreign currency exchange rate movements of approximately $3.9 million and $6.4 million, respectively. Maintenance revenue in the first six months of 2009 continued to benefit from CoCreate’s maintenance base, which contributed $12.5 million more maintenance revenue in the first six months of 2009 than the first six months of 2008, primarily because the first six months of 2009 included two additional months of revenue. Excluding the CoCreate business, compared to the prior year periods, maintenance revenue declined 1% and increased 2% in the second quarter and first six months of 2009, respectively.

While the total number of active maintenance-paying seats has increased compared to the prior year, we experienced a modest sequential decline in active maintenance paying seats in the second quarter of 2009 compared to the first quarter of 2009. This sequential seat decline is partially attributable to fewer licenses sold over the two preceding quarters, resulting in a reduced number of new maintenance paying seats, as well as a decline or delay in maintenance seat renewals. The declines are primarily in Europe and North America, where the macroeconomic environment has been most challenging. Further declines in license seats sold would likely have an adverse effect on future maintenance revenue.

 

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Consulting and Training Service Revenue

Consulting and training service revenue, which has a lower gross profit margin than license and maintenance revenues, accounted for 27% and 26% of total revenue in the second quarter and first six months of 2009, respectively, and 23% of total revenue in the second quarter and first six months of 2008.

The increase in consulting and training service revenue in the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008 was primarily the result of growth in consulting services. Year over year, consulting services revenue was up 6% for both the second quarter and first six months of 2009. The second quarter increase reflects a 23% increase in Europe, offset by an 8% decrease in Asia-Pacific. The increase for the first six months of 2009 reflects growth in all major geographic regions. Year over year, training revenue, which typically represents about 15% of our total consulting and training services revenue, declined 5% in the second quarter and increased 1% for the first six months of 2009.

Although we have pending service engagements that we expect to perform, continued declines in new licenses sold, particularly Windchill licenses, will likely have an adverse effect on future services revenue.

Revenue by Geographic Region

 

     Three months ended    Percent Change     Six months ended    Percent Change  
     April 4,
2009
   March 29,
2008
   Actual     Constant
Currency
    April 4,
2009
   March 29,
2008
   Actual     Constant
Currency
 
     (Dollar amounts in millions)  

Revenue by region:

                    

North America

   $ 79.5    $ 88.2    (10 )%   (10 )%   $ 163.0    $ 172.7    (6 )%   (6 )%

Europe

   $ 89.9    $ 106.2    (15 )%   (3 )%   $ 189.2    $ 207.8    (9 )%   3 %

Asia-Pacific

   $ 55.9    $ 63.4    (12 )%   (19 )%   $ 113.4    $ 118.5    (4 )%   (11 )%

Revenue by region as a % of total revenue:

                    

North America

     35%      34%          35%      35%     

Europe

     40%      41%          41%      41%     

Asia-Pacific

     25%      25%          24%      24%     

North America. The decrease in revenue in North America in the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008 was primarily due to decreases in license revenue of $9.4 million and $14.9 million, respectively, partially offset by increases in maintenance revenue of $0.9 million and $4.4 million, respectively.

Europe. European revenue in the second quarter and first six months of 2009 was unfavorably impacted by foreign currency exchange rate movements, particularly the Euro. At foreign currency exchange rates consistent with the comparable year-ago periods, revenue in the second quarter and first six months of 2009 would have been higher by $13.4 million and $24.0 million, respectively. Excluding the impact of currency movements, revenue in the second quarter of 2009 reflects a $14.6 million decline in license revenue, partially offset by an $8.4 million increase in consulting and training services revenue, and a $3.3 million increase in maintenance revenue. Sales of CoCreate products in Europe were higher by $5.5 million for the first six months of 2009 compared to the first six months of 2008. Revenue in Europe in the first six months of 2009 reflects a $24.6 million decline in license revenue, partially offset by an increase of $3.6 million in consulting and training services revenue and a $2.5 million increase in maintenance revenue. European revenue in the first six months of both 2009 and 2008 included significant consulting service revenue from a single customer. Revenue from that customer in the second quarters and first six months of 2009 and 2008 ranged from 10-14% of total European revenue and was less than 6% of total worldwide revenue for all periods.

 

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Asia-Pacific. Revenue in Asia-Pacific for the second quarter of 2009 reflects a decline of 24% year over year in the Pacific Rim, and 2% growth in Japan. The growth in Japan, which comprised 54% of total Asia-Pacific revenue in the second quarter of 2009, was primarily due to changes in the Yen exchange rate relative to the U.S. dollar which favorably impacted revenue by $4.7 million, offset by a $3.8 million decrease in license revenue. The decline in revenue in the Pacific Rim was primarily due to a decrease in license revenue of $6.7 million. Revenue in Asia-Pacific for the first six months of 2009 reflects a decline of 10% year over year in the Pacific Rim and 2% growth in Japan. The growth in Japan, which comprised 50% of total Asia-Pacific revenue in the first six months of 2009, was primarily due to changes in the Yen exchange rate relative to the U.S. dollar and an increase in revenue from CoCreate products of $4.3 million, partially offset by an $8.0 million decrease in license revenue. The favorable foreign exchange impact in Japan in the first six months of 2009 was $7.7 million. The decrease in revenue in the Pacific Rim in the first six months of 2009 was primarily attributable to an $8.6 million decrease in license revenue.

Revenue from Individual Customers

We enter into customer contracts that may result in revenue being recognized over multiple reporting periods. Accordingly, revenue recognized in a current quarter may be attributable to contracts entered into during the current period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in the second quarters of 2009 and 2008 was $24.7 million (attributable to nine customers) and $37.6 million (attributable to sixteen customers), respectively; for the first six months of 2009 and 2008, such revenue was $48.9 million and $69.6 million, respectively. The declines in revenue with respect to these customers were primarily declines in license revenue. We attribute the decline in the number of such large transactions and the decline in license revenue to the unfavorable macroeconomic environment.

The current adverse global economic conditions have resulted in longer sales lead times and smaller deal sizes, which we expect to continue at least for the near term. While we expect fluctuations and uncertainty in the level of customer spending for at least the next year, over the longer term we believe our historically strong performance in large accounts will continue as we believe that customers will continue to invest in PLM solutions relative to other IT spending initiatives and that customers will continue to invest in our PLM solutions due to the strength and breadth of our solutions.

Channel Revenue

We have been building and diversifying our reseller channel to provide the resources necessary for more effective distribution of our products. 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 and allows our direct sales force to focus on larger sales opportunities. Revenue from our reseller channel was 25% and 26% for the second quarter of 2009 and 2008, respectively, and 26% and 25% for the first six months of 2009 and 2008, respectively. Revenue from our reseller channel declined 16% in the second quarter of 2009 to $56.8 million from $67.5 million in the second quarter of 2008, and declined 4% in the first six months of 2009 to $121.5 million from $126.1 million in the first six months of 2008. The decline in the second quarter reflects decreases in all major geographic regions except for Japan. The first six months of 2009 includes two additional months of CoCreate revenue compared to the year-ago period. Excluding CoCreate revenue, our channel revenue was down 10% year over year, including declines in all major geographic regions. We believe our reseller channel continues to help us improve our profitability and increase our reach to small and medium-sized businesses around the world. We expect our channel revenue to comprise a growing percentage of our total revenue as we continue to focus on expanding our use of resellers.

 

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Costs and Expenses

While we intend to continue to invest in the strategic initiatives described in the “Executive Overview” of this section of this report, we remain focused on profitability. During the second quarter of 2009, we took the following steps to reduce or contain our operating expenses in response to reduced revenue expectations for 2009:

 

   

implemented a hiring freeze other than for selected positions that support our key strategic initiatives;

 

   

eliminated annual merit increases for our employees;

 

   

reduced travel and marketing related expenses; and

 

   

reduced our workforce by approximately 4%.

As a result of the workforce reductions, we incurred restructuring charges of $9.8 million in the second quarter of 2009. We expect to incur additional restructuring charges of approximately $3.0 million during the remainder of 2009.

Further, based on year-to-date results, our employee cash and stock performance-based incentive plans are anticipated to be earned at 50% of original 2009 amounts and amounts under our executive incentive plans established in November 2008 are not expected to be earned. Accordingly, our second quarter of 2009 expenses reflect an adjustment to bring the year-to-date bonus charges to the expected achievement levels. Comparatively, in the first six months of 2008, the performance-based incentive plans were anticipated to be earned in full. As a result, total stock-based compensation and bonus expenses were lower by $7.7 million and $7.8 million for the second quarter and first six months of 2009, respectively, compared to the year-ago periods.

In March 2009, we established an executive incentive plan for the second half of 2009 based on performance criteria established at the time in accordance with our revised financial plan. Restricted stock units for this plan were granted in May 2009, along with other annual incentive stock-based compensation granted to our directors, executive officers and employees. We expect that an additional annual employee grant will be made in May 2009. These grants were delayed from November 2008 and March 2009 due to the fact that we had insufficient shares available under our equity incentive plans.

Accordingly, we expect stock-based compensation expense will be higher in the remaining quarters of 2009 than the second quarter of 2009 and will be somewhat higher than the comparable quarters of 2008.

The following table shows our costs and expenses by expense category for the periods stated.

 

     Three months ended     Six months ended  
     April 4,
2009
   March 29,
2008
   Percent
Change
    April 4,
2009
   March 29,
2008
   Percent
Change
 
     (Dollar amounts in millions)  

Costs and expenses:

                

Cost of license revenue

   $ 7.0    $ 6.8    3 %   $ 14.6    $ 11.6    26 %

Cost of service revenue

     72.3      73.9    (2 )%     148.0      144.8    2 %

Sales and marketing

     71.4      73.4    (3 )%     151.3      144.4    5 %

Research and development

     44.7      45.7    (2 )%     93.1      87.3    7 %

General and administrative

     17.7      20.8    (15 )%     39.1      44.3    (12 )%

Amortization of acquired intangible assets

     3.8      4.3    (12 )%     7.7      7.2    7 %

In-process research and development

     —        —          —        1.9   

Restructuring charges

     9.8      1.9    417 %     9.8      11.6    (15 )%
                                

Total costs and expenses

   $ 226.7    $ 226.8    —   %(1)   $ 463.6    $ 453.1    2 %(1)
                                

 

(1) On a consistent foreign currency basis, compared to the year-ago period, total costs and expenses for the second quarter and first six months of 2009 increased 5% and 6%, respectively.

 

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The costs and expenses in the second quarter and first six months of 2009 compared to the prior year periods reflect the following:

 

   

acquisitions completed in 2008, particularly CoCreate in the first quarter of 2008, that added operating costs and increased headcount by an aggregate of more than 250 employees;

 

   

spending to support planned revenue growth, including increasing our services delivery capacity and investments in sales headcount;

 

   

investments in research and development to improve the breadth and competitiveness of our product portfolio; and

 

   

amortization expense, primarily associated with acquired intangible assets, which totaled $17.1 million in the first six months of 2009 compared to $14.9 million in the first six months of 2008.

These cost increases were offset by the cost reductions described above as well as the favorable impact of foreign currency exchange rate movements. If actual reported results for the second quarter and first six months of 2009 had been converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates, expenses would have been higher by approximately $11.3 million and $19.0 million, respectively.

Additionally, the first six months of 2008 included approximately $3.2 million of professional fees included in general and administrative expenses incurred primarily in connection with an Audit Committee investigation and restatement of prior period financial statements completed in the first quarter of 2008.

Changes in headcount were primarily a result of investments in product development resources, offset by workforce reductions. Headcount was 5,159 at April 4, 2009 compared to 5,264 at January 4, 2009 (the end of the first quarter of 2009) and 4,725 at March 29, 2008.

Cost of License Revenue

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    Percent
Change
    April 4,
2009
    March 29,
2008
    Percent
Change
 
     (Dollar amounts in millions)  

Cost of license revenue

   $ 7.0     $ 6.8     3 %   $ 14.6     $ 11.6     26 %

% of total revenue

     3 %     2 %       3 %     2 %  

% of total license revenue

     17 %     9 %       16 %     8 %  

Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation as well as royalties paid to third parties for technology embedded in or licensed with our software products and amortization costs associated with acquired products. Year over year, cost of license revenue as a percentage of license revenue was higher in the second quarter and first six months of 2009 due primarily to fixed costs that did not decrease with license revenue declines in 2009 compared to 2008. The increase in cost of license revenue in the first six months of 2009 compared to the first six months of 2008 was due primarily to amortization of acquired purchased software and capitalized software, which was higher by approximately $1.7 million. 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 and the level of amortization of acquired software intangible assets.

Cost of Service Revenue

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    Percent
Change
    April 4,
2009
    March 29,
2008
    Percent
Change
 
     (Dollar amounts in millions)  

Cost of service revenue

   $ 72.3     $ 73.9     (2 )%   $ 148.0     $ 144.8     2 %

% of total revenue

     32 %     29 %       32 %     29 %  

% of total service revenue

     39 %     41 %       40 %     41 %  

Service headcount at end of period

     1,422       1,338     6 %     1,422       1,338     6 %

 

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Our cost of service revenue includes costs associated with instructor-led training, customer support and consulting personnel, such as salaries and related costs; third-party subcontractor fees; costs associated with the release of maintenance updates (including related royalty costs); and facility costs. Service margins can vary based on the product mix sold in the period. Total salaries, commissions, benefits and travel costs were 2% or $0.9 million higher in the second quarter of 2009 compared to the second quarter of 2008 and 5% or $4.4 million higher in the first six months of 2009 compared to the first six months of 2008. The net increases reflect an increase in salaries and benefits, partially offset by a decrease in stock-based compensation of $0.9 million and $1.0 million in the second quarter and first six months of 2009. These costs increased at a lower rate than the related headcount primarily because of globalization initiatives that have resulted in increased headcount in lower cost geographic regions, particularly China and India. The cost of third-party consulting services was $3.2 million higher in the first six months of 2009 compared to the first six months of 2008 due to the use of such services in support of increases in consulting and training service revenue.

Sales and Marketing

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    Percent
Change
    April 4,
2009
    March 29,
2008
    Percent
Change
 
     (Dollar amounts in millions)  

Sales and marketing

   $ 71.4     $ 73.4     (3 )%   $ 151.3     $ 144.4     5 %

% of total revenue

     32 %     28 %       33 %     29 %  

Sales and marketing headcount at end of period

     1,342       1,266     6 %     1,342       1,266     6 %

Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Our salaries and benefit costs and travel expenses were lower by an aggregate of $4.5 million and $0.4 million in the second quarter and first six months of 2009, respectively, compared to the second quarter and first six months of 2008, primarily due to lower commissions as a result of lower comparable revenue,. These employee related decreases reflect lower commission expense of $4.8 million and $6.5 million in the second quarter and first six months of 2009, respectively, partially offset by higher salaries of $1.6 million and $5.6 million in the second quarter and first six months of 2009, respectively. Salary costs have increased at a lower rate than the related headcount primarily because of globalization initiatives that have resulted in increased sales headcount in lower cost geographic regions, particularly China, and the favorable impact of changes in the Euro relative to the U.S. Dollar.

Research and Development

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    Percent
Change
    April 4,
2009
    March 29,
2008
    Percent
Change
 
     (Dollar amounts in millions)  

Research and development

   $ 44.7     $ 45.7     (2 )%   $ 93.1     $ 87.3     7 %

% of total revenue

     20 %     18 %       20 %     18 %  

Research and development headcount at end of period

     1,880       1,621     16 %     1,880       1,621     16 %

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. Total salaries, benefits and travel costs were lower in the second quarter of 2009 by $2.6 million and higher by $1.3 million in the first six months of 2009 compared to 2008 periods. The second quarter of 2009 reflects a $1.8 million decrease in performance-based cash incentive plan expense and a $0.8 million reduction in stock-based compensation.

 

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General and Administrative

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    Percent
Change
    April 4,
2009
    March 29,
2008
    Percent
Change
 
     (Dollar amounts in millions)  

General and administrative

   $ 17.7     $ 20.8     (15 )%   $ 39.1     $ 44.3     (12 )%

% of total revenue

     8 %     8 %       8 %     9 %  

General and administrative headcount at end of period

     503       485     4 %     503       485     4 %

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as bad debt expense. Total salaries, benefits and travel costs were lower in the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008 by an aggregate of $2.9 million and $2.0 million, respectively. The second quarter and first six months of 2009 reflect a decrease in performance-based cash incentive plan expense of $0.7 million and $0.8 million, respectively, and lower stock-based compensation of $1.7 million and $1.8 million, respectively. General and administrative expenses also include costs associated with outside professional services, including accounting and legal fees. These costs were $2.4 million lower in the first six months of 2009 primarily because the first six months of 2008 included approximately $3.2 million of costs for outside professional services incurred primarily in connection with an Audit Committee investigation and restatement of prior period financial statements completed in the first quarter of 2008.

Amortization of Acquired Intangible Assets

The aggregate amortization expense for intangible assets with finite lives recorded for the second quarters and first six months of 2009 and 2008 was classified in our consolidated statements of operations as follows:

 

     Three months ended    Six months ended
     April 4,
2009
   March 29,
2008
   April 4,
2009
   March 29,
2008
     (in thousands)

Amortization of acquired intangible assets

   $ 3,815    $ 4,315    $ 7,683    $ 7,208

Cost of license revenue

     4,703      4,623      9,371      7,623

Cost of service revenue

     —        17      8      34
                           

Total amortization expense

   $ 8,518    $ 8,955    $ 17,062    $ 14,865
                           

The increase in expense in the first six months of 2009 compared to the first six months of 2008 was due primarily to amortization of intangible assets resulting from the CoCreate and LBS acquisitions completed in the first quarter of 2008. Those acquisitions resulted in an increase in acquired intangible assets of $141.7 million. Acquired intangible assets consisted of $76.1 million of customer relationship intangibles, $62.1 million of purchased software, $2.3 million of trademarks, and $1.2 million of non-compete agreements and other, which are being amortized over estimated useful lives of 8-11 years, 8 years, 9 years and 1.5-5 years, respectively.

In-process Research and Development

In the first six months of 2008, we recorded $1.9 million of in-process research and development costs associated with our acquisitions of CoCreate and Digital Human Inc. completed in the first quarter of 2008. These costs are related to research and development projects in process for which technological feasibility had not yet been established at the respective acquisition date and for which there was no alternative future use.

 

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Restructuring Charges

Given the challenging macroeconomic environment and lower than planned revenue, we implemented workforce reductions and facility consolidations during the second quarter of 2009. These actions resulted in a $9.8 million restructuring charge in the second quarter of 2009, which included $9.7 million for severance and related costs associated with 204 employees notified of termination during the quarter and $0.1 million of charges related to excess facilities. We expect to incur additional restructuring charges of approximately $3 million during the remainder of 2009 related to these initiatives.

As part of our continuing efforts to increase profitability, we relocated certain business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. Primarily as a result of this initiative, we recorded restructuring charges in the second quarter and first six months of 2008 of $1.9 million and $11.6 million, respectively. The restructuring charges included $0.6 million and $3.9 million for severance and related costs associated with 19 and 81 employees notified of termination during the second quarter and first six months of 2008, respectively, and $0.7 million and $7.1 million of charges for the second quarter and first six months of 2008, respectively, primarily related to gross lease commitments in excess of estimated sublease income for excess facilities in the U.S. and the U.K. In addition, in the second quarter of 2008, we recorded $0.6 million for costs incurred in connection with our integration of CoCreate.

Interest and Other Income (Expense), net

 

     Three months ended     Six months ended  
     April 4,
2009
    March 29,
2008
    April 4,
2009
    March 29,
2008
 
     (in millions)  

Interest income

   $ 1.2     $ 2.5     $ 2.8     $ 5.1  

Interest expense

     (0.7 )     (2.8 )     (1.9 )     (3.9 )

Other income (expense), net

     (0.8 )     (0.1 )     (2.2 )     —    
                                

Total interest and other income (expense), net

   $ (0.3 )   $ (0.4 )   $ (1.3 )   $ 1.2  
                                

Interest and other income (expense), net includes interest income, interest expense, costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses 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 revenue and expenses is 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, primarily in the Euro, the British Pound and the Japanese Yen. The decrease in interest expense in the second quarter and first six months of 2009 is due to lower borrowings outstanding under our revolving credit facility as well as lower interest rates. Other income (expense), net in the second quarter and first six months of 2008 includes a one-time benefit of $1.3 million related to a legal settlement.

Income Taxes

In the second quarter of 2009, our effective tax rate was a benefit of 529% on a pre-tax loss of $1.7 million, compared to a provision of 39% in the second quarter of 2008 on pre-tax income of $30.7 million. In the first six months of 2009, our effective tax rate was a benefit of 1,387% on pre-tax income of 0.8 million, compared to a provision of 39% in the first six months of 2008 on pre-tax income of $47.1 million. Our unusual effective tax rates for the 2009 periods reflect the disproportionate impact of discrete items on the near break-even profit (loss) before income taxes. In the second quarter and first six months of 2009, our effective tax rate differed from the 35% statutory federal income tax rate due primarily to a $7.6 million one-time benefit recorded in the second quarter of 2009 in connection with litigation in a foreign jurisdiction, foreign taxes at a net effective tax rate lower than the U.S. rate and a $1.8 million tax benefit related to research and development (R&D) tax credits

 

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triggered by a retroactive extension of the R&D tax credit enacted during the first quarter of 2009. In the second quarter and first six months of 2008, our effective tax rate was higher than the statutory federal income tax rate due primarily to the impact of losses in a foreign jurisdiction for which we did not record a tax benefit due to the uncertainty of whether we would be able to realize the benefit of such losses.

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, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties, and acquisitions of companies.

Liquidity and Capital Resources

 

     April 4,
2009
    March 29,
2008
 
     (in thousands)  

Cash and cash equivalents

   $ 267,718     $ 258,946  
                

Amounts below are for the six months ended:

    

Cash provided by operating activities

   $ 88,650     $ 127,804  

Cash used by investing activities

     (23,741 )     (272,299 )

Cash (used) provided by financing activities

     (43,942 )     123,391  

Cash provided by operating activities included the following:

    

Cash disbursements for restructuring charges

     (10,927 )     (16,584 )

Cash used by investing activities included the following:

    

Cash paid to acquire businesses, net of cash acquired

     (8,475 )     (261,592 )

Cash (used) provided by financing activities included the following:

    

Net (repayments) borrowings under revolving credit facility

     (31,951 )     152,642  

Repurchases of common stock

     (9,581 )     (22,009 )

Cash and cash equivalents

We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At April 4, 2009, cash and cash equivalents totaled $267.7 million, up from $256.9 million at September 30, 2008. The increase in cash and cash equivalents in the first six months of 2009 was due primarily to $88.7 million of cash provided by operations partially offset by uses of cash for: repayments of $32.0 million of amounts outstanding under our revolving credit facility; $9.6 million to repurchase our common stock; $8.5 million paid for acquisitions; and $15.3 million for additions to property and equipment, as well as a $10.2 million unfavorable effect of exchange rate changes on cash and cash equivalents.

Cash provided by operating activities

Cash provided by operating activities was $88.7 million and $127.8 million in the first six months of 2009 and 2008, respectively. This change was due primarily to lower earnings and higher income tax payments, partially offset by higher receivables collections in the first six months of 2009 compared to the first six months of 2008. Days sales outstanding was 53 days as of the end of the second quarter of 2009 compared to 61 days as of September 30, 2008 and 64 days at the end of the second quarter of 2008.

 

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Cash used by investing activities

Cash used by investing activities was $23.7 million and $272.3 million in the first six months of 2009 and 2008, respectively. The decrease in cash used by investing activities was primarily due to lower amounts paid for acquisitions, $8.5 million in the first six months of 2009 compared to $261.6 million in the first six months of 2008. During the first six months of 2009, we paid approximately $7.4 million for the acquisition of the Synapsis assets. During the first six months of 2008, we paid approximately $247.5 million, $13.1 million and $1.0 million for the CoCreate, LBS and DHI acquisitions, respectively, net of cash acquired. In addition, cash used for additions to property and equipment was $15.3 million in the first six months of 2009 compared to $10.7 million in the first six months of 2008. Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.

Cash (used) provided by financing activities

Cash (used) provided by financing activities was $(43.9) million and $123.4 million in the first six months of 2009 and 2008, respectively. The increase in cash used for financing activities in the first six months of 2009 was primarily due to $32.0 million of repayments of amounts outstanding under our revolving credit facility compared to net borrowings of $152.6 million in the first six months of 2008, partially offset by lower share repurchases in the first six months of 2009 and lower cash payments for withholding taxes on stock-based awards. We used $9.6 million to repurchase our common stock in the first six months of 2009 compared to $22.0 million in the first six months of 2008. Cash used to pay employee withholding taxes related to restricted stock and restricted stock units that vested during the periods was $4.3 million in the first six months of 2009, compared to $10.7 million in the first six months of 2008.

Credit Facility

Subject to the terms of the credit facility agreement, we may borrow funds up to $230 million, repay the same in whole or in part and re-borrow at any time through February 20, 2011 when all amounts outstanding will be due and payable in full.

On November 28, 2007, in connection with our acquisition of CoCreate, we borrowed $220 million under the credit facility in two tranches: $36 million that accrued interest at the Eurodollar-based borrowing rate, and an alternate currency loan of 124.6 million Euros, equivalent to $184 million at the borrowing date. The $36 million loan was repaid in full in the first six months of 2008. In addition, to date we have repaid 85.0 million Euros of the alternate currency loan, including 23.3 million Euros in the first six months of 2009. As of April 4, 2009, we had 39.6 million Euros outstanding under the revolving credit facility, which was equivalent to $53.3 million on that date. The current loan accrues interest at 2.6% per year and matures on May 27, 2009. Upon the due date, and subsequent due dates, we may either repay the amount outstanding or roll over the amount outstanding with new short term loans at the then current interest rates described above.

For a description of the terms and conditions of the credit facility, including limitations on our ability to undertake certain actions, see “Note 11. Commitments and Contingencies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

Share Repurchases

Prior to May 14, 2008, our Board of Directors had authorized the repurchase of up to 16.0 million shares of our common stock. On May 14, 2008, our Board of Directors revoked the prior repurchase authorization and authorized us to use up to $50 million of cash from operations to repurchase shares of our common stock in the form of open market purchases. The current authorization was increased to $100 million on November 20, 2008 and will expire on May 31, 2010 unless earlier revoked. In the first six months of 2009, we repurchased 0.9 million shares at a cost of $9.6 million. We have $85 million remaining under our current authorization and we intend to continue our share repurchases in the third quarter of 2009. In the first six months of 2008, we repurchased 1.4 million shares at a cost of $22.0 million.

 

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Expectations for Fiscal 2009

We believe that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements through at least the next twelve months. During 2009, we expect to use cash to repurchase our shares and we expect to continue to pay down the remaining amount outstanding under our credit facility.

In the remainder of 2009, capital expenditures are currently anticipated to be approximately $11 million and we expect to make cash disbursements estimated at $12 million for restructuring charges incurred in the second quarter of 2009 and prior periods. Additionally, we expect to incur total restructuring charges of approximately $3 million during the remainder of 2009. We expect that substantially all of the associated cash disbursements will be paid out in fiscal 2009.

We have evaluated, and expect to continue to evaluate, possible strategic acquisitions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic acquisitions. Our cash position could be reduced and we may incur additional debt obligations to the extent we complete any significant acquisitions.

As discussed above, current economic conditions and the global decline in business activity are having an adverse effect on our business. This may materially reduce the cash we are able to generate from operations, which may cause us to reduce the amounts we are able or willing to use for the purposes described above.

Critical Accounting Policies and Estimates

The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2008 Annual Report on Form 10-K. However, you should be aware that, if the continuing worldwide economic troubles continue to have a negative effect on our business, actual circumstances in future periods may vary materially from those we previously estimated.

The accounting estimates most likely to be impacted materially if the economic situation deteriorates significantly are our estimates regarding the valuation of goodwill and intangible assets, accounting for pensions, and the allowance for doubtful accounts, as follows.

Valuation of Goodwill and Acquired Intangible Assets

Our goodwill and net acquired intangible assets totaled $565.8 million and $587.5 million as of April 4, 2009 and September 30, 2008, respectively. We assess the impairment of goodwill 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 (on an overall company basis and reportable segment basis, as applicable) that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in our use of the acquired assets or a significant change in the strategy for our business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, or a significant reduction of our market capitalization relative to net book value. 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 June 28, 2008 and concluded that no impairment charge was required as of that date.

During the first six months of 2009, our revenue, operating income and net income declined as compared to the first six months of 2008, and were below our expectations. While we expect the uncertain economic environment to continue at least for the near-term, we concluded that we have not had a triggering event that

 

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indicates that the carrying value of our goodwill and net acquired intangible assets may not be recoverable, and we have concluded that we do not need to prepare an updated impairment analysis. Our conclusion is based in part on our market capitalization, which exceeded our net book value as of April 4, 2009. However, further significant negative industry or economic trends that adversely affect our future revenues and profits, or a further material reduction of our market capitalization relative to net book value, among other factors, may change our assessment and lead us to conclude that a portion of the carrying value of such assets may not be recoverable. That would require us to complete an updated valuation of our long-lived assets and to record an impairment charge relative to the differences between their carrying value and their estimated fair value.

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. If the financial condition of our customers were to deteriorate, additional allowances might be required that are not included in our current allowance for doubtful accounts, resulting in future operating expenses.

Accounting for Pensions

In the U.S., we sponsor a frozen pension plan covering mostly inactive participants. Certain of our foreign subsidiaries also sponsor pension plans. We make several assumptions that are used in calculating the expense and liability of these plans. These key assumptions include the expected long-term rate of return on plan assets and the discount rate. In selecting the expected long-term rate of return on assets, we consider the average future rate of earnings expected on the funds invested or to be invested to provide for the benefits under the pension plan. The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions or longer or shorter life spans of the participants. Our actual results could differ materially from those we estimated, which could require us to record a greater amount of pension expense in future years.

In 2008 and 2007, our actual return on plan assets for our pension plans was a loss of $13.2 million and a gain of $6.3 million, respectively. Recent distress in the financial markets has caused extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuation of others. Subsequent to year end (from October 1, 2008 through March 31, 2009), the fair value of our pension assets have declined and returns are significantly below our expected rates of return. If actual returns continue to be below our expected rates of return, it will adversely impact the amount and timing of future contributions and expense for these plans.

Recent Accounting Pronouncements

Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations (SFAS 141(R)) and SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements , an amendment of ARB No. 51 (SFAS 160). These statements will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) requires companies to: (i) recognize, with certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity; (ii) measure acquirer shares issued in consideration for a business

 

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combination at fair value on the acquisition date; (iii) recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings; (iv) with certain exceptions, recognize preacquisition loss and gain contingencies at their acquisition-date fair values; (v) capitalize in-process research and development assets acquired; (vi) expense, as incurred, acquisition-related transaction costs; and (vii) capitalize acquisition-related restructuring costs only if the criteria in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities , are met as of the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of acquisition.

SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will be subject to SFAS 141(R) beginning in fiscal 2010, which begins on October 1, 2009. Early adoption of these statements is prohibited. We believe the adoption of these statements will have a material effect on the financial accounting for any significant acquisitions completed after October 1, 2009.

For a description of other recent accounting pronouncements, see “Note 8. Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements of this Form 10-Q.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk exposure as described in Item 7A: Quantitative and Qualitative Disclosures About Market Risk of our 2008 Annual Report on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures 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 our disclosure controls and procedures were effective at the reasonable assurance level as of April 4, 2009.

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) that occurred during the quarter ended April 4, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The discussion of legal proceedings in “Note 11. Commitments and Contingencies” in the Notes to Consolidated Financial Statements of this Form 10-Q is hereby incorporated by reference.

 

ITEM 1A. RISK FACTORS

In addition to the below and other information set forth in this report, you should carefully consider the factors described in Part I. Item 1A. “Risk Factors” in our 2008 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described below and in our 2008 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The effects of the global economic crisis have adversely affected, and are expected to continue to adversely affect, our business and operating results.

The recent global economic crisis has created great uncertainty among businesses and has caused them to seek to reduce spending and investment. Our customers have been decreasing the size of, or foregoing, new investments in our solutions and delaying purchasing decisions. Accordingly, our license revenue for our first six months of 2009 was below our license revenue for the first six months of 2008 and we expect license revenue for the remainder of 2009 will be below license revenue for 2008. Declines in license sales could cause future declines in maintenance and consulting and training services sales. In addition, although we are taking steps to reduce our operating expenses, our operating expenses will still constitute a higher percentage of revenue than in recent years, which will reduce our operating margins. If our customers further reduce or delay, or decide to forego, investments in our solutions, our revenue will likely decline further. If the amount of any decline exceeds that which we anticipate, our operating margins could be further reduced and we may need to implement additional cost reduction initiatives. Cost reductions could harm our business if we terminate persons necessary for future growth or delay investments in our solutions and our business.

Changes in the relative values of currencies in which we conduct business against the U.S. dollar affect our reported results.

Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Because we report our results of operations in U.S. dollars, currency translation affects our reported results. Accordingly, declines in the value of those currencies relative to the U.S. dollar could adversely affect our reported revenue results and improve our reported expense results. For example, if the value of the Euro relative to the U.S. dollar had remained constant from the first six months of 2008 to the first six months of 2009, rather than declining in relative value, reported revenue and expenses would have been higher. Conversely, increases in the value of those currencies relative to the U.S. dollar can improve our reported revenue results and adversely affect our reported expense results.

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting of Stockholders held on March 4, 2009, the stockholders:

 

   

elected Donald K. Grierson, James E. Heppelmann and Oscar B. Marx, III as Class I directors of the Company to hold office until the 2012 Annual Meeting (subject to the election and qualification of their successors and to their earlier resignation, removal or death):

 

Name

   Votes For    Votes Withheld

Donald K. Grierson

   100,899,110    7,214,799

James E. Heppelmann

   100,320,619    7,793,290

Oscar B. Marx, III

   100,968,508    7,145,401

 

   

approved an increase in the number of shares available for issuance under our 2000 Equity Incentive Plan to 22,300,000:

 

Votes For

  Votes Against   Votes Abstaining   Broker Non-Votes
77,502,643   18,866,784   26,888   11,717,594

 

   

confirmed the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2009:

 

Votes For

 

Votes Against

 

Votes Abstaining

   
104,766,292   3,317,951   29,665  

 

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Table of Contents
ITEM 6. EXHIBITS

 

  3.1(a)   Restated Articles of Organization of Parametric Technology Corporation adopted February 4, 1993 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996 (File No. 0-18059) and incorporated herein by reference).
  3.1(b)   Articles of Amendment to Restated Articles of Organization adopted February 9, 1996 (filed as Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-01297) and incorporated herein by reference).
  3.1(c)   Articles of Amendment to Restated Articles of Organization adopted February 13, 1997 (filed as Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-22169) and incorporated herein by reference).
  3.1(d)   Articles of Amendment to Restated Articles of Organization adopted February 10, 2000 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000 (File No. 0-18059) and incorporated herein by reference).
  3.1(e)   Certificate of Vote of Directors establishing Series A Junior Participating Preferred Stock (filed as Exhibit 3.1(e) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 0-18059) and incorporated herein by reference).
  3.1(f)   Articles of Amendment to Restated Articles of Organization adopted February 28, 2006 (filed as Exhibit 3.1(f) to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2006 (File No. 0-18059) and incorporated herein by reference).
  3.2   By-Laws, as amended and restated, of Parametric Technology Corporation.
  4.1   Rights Agreement effective as of January 5, 2001 between Parametric Technology Corporation and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 0-18059) and incorporated herein by reference).
10.1*   2000 Equity Incentive Plan (filed as Exhibit 10 to our Current Report on Form 8-K dated March 4, 2009 (File No. 0-18059) and incorporated herein by reference).
10.2*   Form of Restricted Stock Agreement (Non-Employee Directors).
10.3*   Ancillary Executive Incentive Plan (described under Item 5.02 of our Current Report on Form 8-K dated March 3, 2009 (File No. 0-18059) and incorporated herein by reference).
10.4*   Compensatory Arrangements with Directors.
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.

 

* Identifies 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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Table of Contents

SIGNATURE

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: May 14, 2009

 

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Exhibit 3.2

BY-LAWS

OF

PARAMETRIC TECHNOLOGY CORPORATION

ARTICLE 1—Stockholders

1.1     Place of Meetings; Participation by Remote Communications . Meetings of stockholders shall be held at the principal office of the corporation or such different place as is fixed by the Board of Directors or the Chief Executive Officer and stated in the notice of the meeting. The corporation may permit stockholders and proxyholders not physically present at a meeting of stockholders to participate in and be deemed present in person and vote at the meeting by means of remote communications, provided that (a) the corporation shall have implemented reasonable measures (i) to provide such stockholders and proxyholders a reasonable opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings and (ii) to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder and (b) the corporation shall maintain a record of each vote cast or other action taken at the meeting by means of remote communication.

1.2     Annual Meeting . The annual meeting of stockholders shall be held on the date (which shall not be a legal holiday in the place where the meeting is to be held) and at the time fixed by the Board of Directors or the Chief Executive Officer and stated in the notice of the meeting. The annual meeting shall be held for the purpose of electing directors and such other purposes as are specified in the notice of meeting. To the extent a stockholder is entitled as a matter of law independent of these By-Laws to propose nominations or other business to be considered at an annual meeting, such stockholder may do so only in compliance with these By-Laws and any other applicable requirements. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-Laws to the annual meeting of stockholders shall be deemed to refer to such special meeting.

1.3     Special Meetings . Special meetings of stockholders may be called by the Chief Executive Officer or by the Board of Directors. Upon written application, in accordance with these By-Laws and any other applicable requirements, of one or more stockholders who are entitled to vote and who hold at least 10% (or 40% in the event the corporation has a class of voting stock registered under the Securities Exchange Act of 1934, as amended) of the capital stock entitled to vote at the meeting, special meetings shall be called by the Secretary, or in the case of the death, absence, incapacity or refusal of the Secretary, by any other officer.

1.4     Notice of Meetings; Waiver . A written notice of each meeting of stockholders, stating the place, date and hour thereof, and the purposes for which the meeting is to be held, shall be given by the Secretary, Assistant Secretary or other person calling the meeting at least seven, and no more than sixty, days before the meeting to each stockholder entitled to vote at the meeting and to each stockholder who by law, by the Articles of Organization or by these By-Laws is entitled to such notice, by leaving such notice with him or at his residence or usual place of business, by mailing it postage prepaid and addressed to him at his address as it appears in the records of the corporation, or by electronic transmission. Whenever any notice is required to be given to a stockholder by law, by the Articles of Organization or by these By-Laws, no such notice need be given if a written (including electronically transmitted) waiver of notice, executed before or after the meeting by the stockholder or his authorized attorney, is filed with the records of the meeting. A stockholder’s attendance at a meeting (i) waives objection to lack of notice or defective notice of the meeting, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the stockholder objects to considering the matter when it is presented.

1.5     Quorum . Unless the Articles of Organization otherwise provide, the holders of a majority of the shares of stock issued, outstanding and entitled to vote on any matter shall constitute a quorum with respect to that matter, except that if two or more voting groups are entitled to vote separately then, in the case of each such voting group, a quorum shall consist of the holders of a majority of the votes entitled to be cast on the matter by the voting group. Shares owned directly or indirectly by the corporation shall not be counted in determining the total number of shares outstanding for this purpose. Shares once represented for any purpose at a


meeting are deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless (i) the stockholder attends solely to object to lack of notice, defective notice or the conduct of the meeting on other grounds and does not vote the shares or otherwise consent that such shares are to be deemed present, or (ii) in the case of an adjournment, a new record date is or shall be set for that adjourned meeting.

1.6     Postponements; Adjournments . Any meeting of stockholders may, before it is called to order, be postponed for any reason by the Board of Directors or Chief Executive Officer to any other date, time and place at which a meeting of stockholders may be held under these By-Laws. Any meeting of stockholders may be adjourned to any other date, time and place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting, although less than a quorum, or by any officer entitled to preside or to act as clerk of such meeting, if no stockholder is present. It shall not be necessary to notify any stockholder of any adjournment. Any business that could have been transacted at any meeting of the stockholders as originally called may be transacted at any postponement or adjournment of the meeting.

1.7     Voting and Proxies . Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by the Articles of Organization. Stockholders may vote either in person or by written proxy dated not more than eleven months before the meeting named in the proxy. Proxies shall be filed with the clerk of the meeting, or of any adjourned meeting, before being voted. Except as otherwise limited by their terms, a proxy shall entitle the persons named in the proxy to vote at any adjournment of such meeting. A stockholder may give a proxy by electronic transmission under procedures approved by the Board of Directors or the Chief Executive Officer designed to permit determination that such transmission was authorized by the stockholder. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them, unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purported to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise.

1.8     Action at Meeting . When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more voting groups entitled to vote separately, then, in the case of each such voting group, the holders of a majority of the votes present or represented and voting on a matter), shall decide any matter to be voted on by the stockholders, except when a larger vote is required by law, the Articles of Organization or these By-Laws. Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election. No ballot shall be necessary for such election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election or required by the chairman of the meeting. The corporation shall not directly or indirectly vote any share of its own stock.

1.9     Action without Meeting . Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Each such consent shall be treated for all purposes as a vote at a meeting.

1.10     Advance Notice of Business at Meetings of Stockholders .

(a)    To the extent a stockholder is entitled as a matter of law or another provision of these By-Laws to propose a matter to be considered at any meeting of the stockholders (other than the nomination of directors, which is addressed in Section 2.3), such matter may be proposed only by a person who is a stockholder of record of the corporation at the time of giving the notice provided for in this Section 1.10, who is entitled to vote at the applicable meeting, and who (in addition to complying with any other applicable requirements) has given timely written notice thereof in accordance with this Section 1.10 to the Secretary at the principal executive offices of the corporation.

(b)    To be timely with respect to an annual meeting, a stockholder’s notice must be received by the Secretary not less than ninety (90) days nor more than one hundred twenty (120) days before the anniversary of the date on which the corporation first transmitted to stockholders its proxy materials for the immediately preceding annual meeting of stockholders; provided that, if the annual meeting is not held within thirty (30) days

 

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before or after the anniversary of such preceding annual meeting, such stockholder’s notice to be timely must be so received not later than the close of business on the later of (i) the one hundred twentieth (120th) day before the date of such annual meeting or (ii) the tenth (10th) day after the day on which notice of the date of the annual meeting was transmitted to stockholders or other public disclosure of the date of the annual meeting was made, whichever occurs first. Notwithstanding the foregoing, the postponement or adjournment of any annual meeting for which notice has been provided to stockholders shall not commence a new time period for giving the stockholder’s notice.

(c)    To be timely with respect to a special meeting, a stockholder’s notice must be received by the Secretary not less than ninety (90) days nor more than one hundred twenty (120) days before the date of the special meeting; provided that, if the first day on which notice of the special meeting is transmitted to stockholders or on which public disclosure of the date of the special meeting is made is less than one hundred (100) days before the date of the special meeting, such stockholder’s notice to be timely must be so received not later than the close of business on the tenth (10th) day after the day on which notice of the date of the special meeting was transmitted to stockholders or other public disclosure of the date of the special meeting was made, whichever occurs first. Notwithstanding the foregoing, the postponement or adjournment of any special meeting for which notice has been transmitted to stockholders shall not commence a new time period for giving the stockholder’s notice.

(d)    A stockholder’s notice shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of the stockholder proposing such business and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) details of all the following that are held and/or beneficially owned, directly or indirectly, including through any entity, by such stockholder and by such beneficial owner, if any: (A) the class and number of shares of the corporation, (B) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part form the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the corporation or otherwise (a “Derivative Instrument”) and any other direct or indirect opportunity of any such person to profit or share in any profit derived from any increase or decrease in the value of shares of the corporation, (C) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder or such other beneficial owner, if any, has a right to vote any shares of any security of the corporation, (D) any short interest in any security of the corporation (for purposes of this By-Law a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (E) any rights to dividends on the shares of the corporation that are separated or separable from the underlying shares of the corporation, and (F) any performance-related fees (other than an asset-based fee) that such stockholder or such beneficial owner, if any, is entitled to based on any increase or decrease in the value of shares of the corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interest held by members of such stockholder’s immediate family sharing the same household (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date), (iv) a description of any material interest of the stockholder and of such beneficial owner, if any, in such business, (v) a description of any agreement, arrangement or understanding such stockholder or such beneficial owner, if any, has with any other person(s) relating to the subject matter of such business, and (vi) the basis upon which the stockholder is entitled to make the proposal.

(e)    Notwithstanding anything in these By-Laws to the contrary, no business proposed by a stockholder shall be conducted at any meeting of stockholders except in accordance with the procedures set forth in this Section, whether or not the stockholder (if otherwise permitted by applicable law) seeks inclusion of such proposal in the corporation’s proxy statement for the meeting; provided that any stockholder proposal that complies with Rule 14a-8 (or any successor provision) of the proxy rules promulgated under the Securities Exchange Act of 1934, as amended, and is included in the corporation’s proxy statement for the applicable stockholders meeting shall be deemed to comply with the requirements for the timing and content of notices hereunder.

(f)    The chairman of the respective stockholders meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the

 

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provisions of this Section 1.10, and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

ARTICLE 2—Directors

2.1     Powers . The business of the corporation shall be managed by a Board of Directors, who may exercise all the powers of the corporation except as otherwise provided by law, by the Articles of Organization or by these By-Laws. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled.

2.2     Number, Election and Qualification . The number of Directors which shall constitute the whole Board of Directors shall be determined by vote of the stockholders or the Board of Directors, but shall consist of not less than three Directors (except that whenever there shall be only two stockholders the number of Directors shall be not less than two and whenever there shall be only one stockholder, there shall be at least one Director). The number of Directors may be decreased at any time and from time to time either by the stockholders or by a majority of the Directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more Directors. Directors need not be stockholders of the corporation. Notwithstanding the foregoing provisions, if the corporation is a “public corporation” within the meaning of Section 8.06 of the Massachusetts Business Corporation Act and has not elected, pursuant to paragraph (c) of such Section 8.06, to be exempt from the provisions of paragraph (b) of such Section 8.06, then:

(i)    In accordance with paragraph (e), clause (4) of such Section 8.06, the number of directors shall be fixed only by vote of the Board of Directors.

(ii)    In accordance with paragraph (b) of such Section 8.06, the Directors of the corporation shall be classified with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible; the term of office of those of the first class (“Class I Directors”) to continue until the first annual meeting following the date the corporation becomes subject to such paragraph (a) and until their successors are duly elected and qualified; the term of office of those of the second class (“Class II Directors”) to continue until the second annual meeting following the date the corporation becomes subject to such paragraph (a) and until their successors are duly elected and qualified; and the term of office of those of the third class ( “Class III Directors”) to continue until the third annual meeting following the date the corporation becomes subject to such paragraph (a) and until their successors are duly elected and qualified. At each annual meeting of the corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified.

2.3     Nomination of Directors .

(a)    Only persons who are nominated in accordance with this Section 2.3 shall be eligible for election as directors at any annual or special meeting of stockholders. Nominations of persons for election as directors may be made only (i) by or at the direction of the Board of Directors or (ii) by any person who is a stockholder of record of the corporation at the time of giving the notice provided for in this Section 2.3, who is entitled to vote for the election of directors at the applicable meeting, and who (in addition to any other applicable requirements) has given timely written notice thereof in accordance with this Section 2.3 to the Secretary at the principal executive offices of the corporation.

(b)    To be timely with respect to an annual meeting, a stockholder’s notice must be received by the Secretary not less than ninety (90) days nor more than one hundred twenty (120) days before the anniversary of the date on which the corporation first transmitted to stockholders its proxy materials for the immediately preceding annual meeting of stockholders; provided that, if the annual meeting is not held within thirty (30) days before or after the anniversary of such preceding annual meeting, such stockholder’s notice to be timely must be so received not later than the close of business on the later of (i) the one hundred twentieth (120th) day before the date of such annual meeting or (ii) the tenth (10th) day after the day on which notice of the date of the annual meeting was transmitted to stockholders or other public disclosure of the date of the annual meeting was made, whichever

 

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occurs first. Notwithstanding the foregoing, the postponement or adjournment of any annual meeting for which notice has been provided to stockholders shall not commence a new time period for giving the stockholder’s notice.

(c)    To be timely with respect to a special meeting, a stockholder’s notice must be received by the Secretary not less than ninety (90) days nor more than one hundred twenty (120) days before the date of the special meeting; provided that, if the first day on which notice of the special meeting is transmitted to stockholders or on which public disclosure of the date of the special meeting is made is less than one hundred (100) days before the date of the special meeting, such stockholder’s notice to be timely must be so received not later than the close of business on the tenth (10th) day after the day on which notice of the date of the special meeting was transmitted to stockholders or other public disclosure of the date of the special meeting was made, whichever occurs first. Notwithstanding the foregoing, the postponement or adjournment of any special meeting for which notice has been provided to stockholders shall not commence a new time period for giving the stockholder’s notice.

(d)    Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation that are beneficially owned by the person, (iv) whether or not the person is currently “independent” from the corporation under the independence standards of the principal national securities exchange on which the corporation’s shares are then traded and all facts that currently prevent the person from being independent under such standards, if applicable, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; (b) as to the stockholder giving the notice: (i) the name and record address of such stockholder and the name and address of the beneficial owner, if any, on whose behalf the proposal is made and (ii) the information described in Section 1.10(d)(iii); and (c) a description of all familial, compensatory, financial and/or other relationships, arrangements and transactions, existing at any time within the preceding three years or currently proposed, between the person proposed to be nominated as a director and such stockholder or such beneficial owner, if any, or any of their respective affiliates and associates. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the proposed nominee’s eligibility, or lack thereof, to serve as an independent director of the corporation.

(e)    The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with this Section 2.3, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

2.4     Enlargement of the Board . Subject to Section 2.2 above, the number of Directors may be increased at any time and from time to time by the stockholders or by a majority of the Directors then in office.

2.5     Tenure . Subject to Section 2.2 above, each Director shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified or until his earlier death, resignation or removal.

2.6     Vacancies .

(a)    Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the Directors present at any meeting of Directors at which a quorum is present. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is chosen and qualified or until his earlier death, resignation or removal.

(b)    Notwithstanding the foregoing provisions, if the corporation is a “public corporation” within the meaning of Section 8.06 of the Massachusetts Business Corporation Act and has not elected, pursuant to paragraph (c) of such Section 8.06, to be exempt from the provisions of paragraph (b) of such Section 8.06, then (i) vacancies and newly created directorships, whether resulting from an increase in the size of the Board of Directors, from the death, resignation, disqualification or removal of a director or otherwise, shall be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors, and (ii) any Director elected in accordance with clause (i) shall hold office for the remainder of the full

 

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term of the class of Directors in which the vacancy occurred or the new directorship was created and until such Director’s successor shall have been elected and qualified or until his earlier death, resignation or removal.

2.7     Resignation . Any Director may resign by delivering his written resignation to the corporation at its principal office or to the Chairman of the Board, the Chief Executive Officer or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

2.8     Removal .

(a)    A Director may be removed from office with or without cause by vote of the holders of a majority of the shares entitled to vote in the election of Directors. However, the Directors elected by the holders of a particular class or series of stock may be removed from office with or without cause only by vote of the holders of a majority of the outstanding shares of such class or series. In addition, a Director may be removed from office for cause by vote of a majority of the Directors then in office. A Director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him.

(b)    Notwithstanding the foregoing provisions, if the corporation is a “public corporation” within the meaning of Section 8.06 of the Massachusetts Business Corporation Act and has not elected, pursuant to paragraph (c) of such Section 8.06, to be exempt from the provisions of paragraph (b) of such Section 8.06, then stockholders may effect, by the affirmative vote of a majority of the shares outstanding and entitled to vote in the election of Directors, the removal of any Director or Directors or the entire Board of Directors only for cause, as defined in paragraph (f) of such Section 8.06.

2.9     Regular Meetings . Regular meetings of the Directors may be held without call or notice at such places, within or without Massachusetts, and at such times as the Directors may from time to time determine, provided that any Director who is absent when such determination is made shall be given notice of the determination. A regular meeting of the Directors may be held without a call or notice immediately after and at the same place as the annual meeting of stockholders.

2.10     Special Meetings . Special meetings of the Directors may be held at any time and place, within or without Massachusetts, designated in a call by the Chairman of the Board, Chief Executive Officer, Treasurer, two or more Directors or by one Director in the event that there is only a single Director in office.

2.11     Meetings by Telephone Conference Calls or Other Electronic Communication . Directors or members of any committee designated by the Directors may participate in a meeting of the Directors or such committee by means of a conference telephone or other electronic communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.

2.12     Notice of Special Meetings . Notice of any special meeting of the Directors shall be given to each Director by the Secretary or by the officer or one of the Directors calling the meeting. Notice shall be duly given to each Director (i) by notice given to such Director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending an electronic communication, or by delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior to the meeting or at its commencement the lack of notice to him. A notice or waiver of notice of a Directors’ meeting need not specify the purposes of the meeting. If notice is given in person or by telephone, an affidavit of the Secretary, officer or Director who gives such notice that the notice has been duly given shall, in the absence of fraud, be conclusive evidence that such notice was duly given.

 

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2.13     Quorum . At any meeting of the Board of Directors, a majority of the Directors then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time without further notice.

2.14     Action at Meeting . At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, by the Articles of Organization or by these By-Laws.

2.15     Action by Consent . Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all the Directors consent to the action in writing, signed by each director or delivered to the corporation by electronic transmission, and the written consents are filed with the records of the Directors’ meetings. Each such consent shall be treated for all purposes as a vote at a meeting.

2.16     Committees . The Board of Directors may, by vote of a majority of the Directors then in office, elect from their number an executive committee or other committees and may by like vote delegate to committees so elected some or all of their powers to the extent permitted by law. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided by these By-Laws for the Directors. The Board of Directors shall have the power at any time to fill vacancies in any such committee, to change its membership or to discharge the committee.

2.17     Chairman of the Board and Vice-Chairman of the Board . The Board of Directors may appoint a Chairman of the Board. If the Board of Directors appoints a Chairman of the Board, he shall preside at meetings of the Directors and the stockholders and shall perform such other duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors.

2.18     Compensation of Directors . Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor.

ARTICLE 3—Officers

3.1     Enumeration . The officers of the corporation shall consist of a Chief Executive Officer, a President, a Treasurer, a Secretary and such other officers with such other titles as the Board of Directors or the Chief Executive Officer may determine, including, but not limited to one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries.

3.2     Election . The Chief Executive Officer, President, Treasurer and Secretary shall be elected annually by the Board of Directors at their first meeting following the annual meeting of stockholders. Other officers may be chosen or appointed by or under the authority of the Board of Directors.

3.3     Qualification . No officer need be a director or stockholder. Any two or more offices may be held by the same person. Any officer may be required by the Directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the Directors may determine. The premiums for such bonds may be paid by the corporation.

3.4     Tenure . Except as otherwise provided by law, by the Articles of Organization or by these By-Laws, the Chief Executive Officer, President, Treasurer and Secretary shall hold office until the first meeting of the Directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, or until their earlier death, resignation or removal; and all other officers shall serve at the pleasure of the Directors.

 

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3.5     Resignation and Removal .

(a)    Any officer may resign by delivering his written resignation to the corporation at its principal office or to the Chief Executive Officer or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

(b)    An officer may be removed at any time, with or without cause, by or under the authority of the Board of Directors.

(c)    Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation.

3.6     Vacancies . Any vacancy occurring in any office for any reason may be filled by or under the authority of the Board of Directors, which may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is chosen and qualified, or until he sooner dies, resigns or is removed.

3.7     Chief Executive Officer . The Chief Executive Officer shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless a separate Chairman of the Board has been appointed, or except as otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a Director, at all meetings of the Board of Directors.

3.8     President . The President shall, subject to the direction of the Chief Executive Officer, have general charge and supervision of the business of the corporation and shall perform such other duties and shall possess such other powers as the Chief Executive Officer may from time to time prescribe. If no other Chief Executive Officer has been appointed, or in the event of the absence, inability or refusal to act of the Chief Executive Officer, the President shall perform the duties of the Chief Executive Officer and when so performing shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer.

3.9     Vice Presidents . Any Vice President shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the President may from time to time prescribe. The Board of Directors or the Chief Executive Officer may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title.

3.10     Treasurer and Assistant Treasurers .

(a)    The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the Chief Executive Officer. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-Laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation.

(b)    The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer.

 

8


3.11     Secretary and Assistant Secretaries .

(a)    The Secretary shall perform such duties and shall possess such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the clerk, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents.

(b)    Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary.

(c)    In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or Directors, the person presiding at meeting shall designate a temporary Secretary to keep a record of the meeting.

3.12     Salaries . Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.

ARTICLE 4—Capital Stock

4.1     Issue of Capital Stock . Unless otherwise voted by the stockholders, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of the capital stock of the corporation held in its treasury may be issued or disposed of by vote of the Board of Directors, in such manner, for such consideration and on such terms as the Directors may determine.

4.2     Certificate of Stock; Uncertificated Shares .

(a)    Shares of the corporation’s capital stock may be represented by certificates or may be uncertificated as prescribed from time to time by or under the authority of the Directors. Certificates for shares shall be signed by the Chief Executive Officer, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, but when a certificate is countersigned by a transfer agent or a registrar, other than a Director, officer or employee of the corporation, such signature may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue.

(b)    Every certificate for shares of stock which are subject to any restriction on transfer pursuant to the Articles of Organization, the By-Laws, applicable securities laws or any agreement to which the corporation is a party, shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restrictions and a statement that the corporation will furnish a copy of the restrictions to the holder of such certificate upon written request and without charge. Every certificate issued when the corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series authorized to be issued or a statement of the existence of such preferences, powers, qualifications and rights and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Holders of uncertificated shares shall be provided with a statement of the information set forth above as applicable and as required by the Massachusetts Business Corporation Act.

4.3     Transfers . Subject to the restrictions, if any, stated or noted on the stock certificates or provided to the holder of uncertificated shares, shares of stock may be transferred on the books of the corporation by (a) the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed

 

9


or accompanied by a written assignment or power of attorney properly executed or (b) proper transfer instructions from the registered owner of uncertificated shares, in each case with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Articles of Organization or by these By-Laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-Laws. It shall be the duty of each stockholder to notify the corporation of his post office address and of his taxpayer identification number.

4.4     Record Date .

(a)    The Board of Directors may fix in advance a time not more than 70 days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date. Without fixing such record date the Directors may for any of such purposes close the transfer books for all or any part of such period.

(b)    If no record date is fixed and the transfer books are not closed, the record date for determining the stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, and the record date for determining the stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect to such purpose.

(c)    A determination of stockholders entitled to notice of or to vote at a meeting of stockholders is effective for any postponement or adjournment of the meeting unless the meeting is postponed or adjourned to a date more than one hundred twenty days after the date fixed for the original meeting, in which case the Board of Directors shall fix a new record date.

4.5     Replacement of Certificates . In case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate or uncertificated shares may be issued in place of the lost, destroyed or mutilated certificate, upon such terms as the Directors may prescribe, including the presentation of reasonable evidence of such loss, destruction or mutilation and the giving of such indemnity as the Directors may require for the protection of the corporation or any transfer agent or registrar.

ARTICLE 5—Miscellaneous Provisions

5.1     Fiscal Year . Except as otherwise set forth in the Articles of Organization or as otherwise determined from time to time by the Board of Directors, the fiscal year of the corporation shall in each year end on September 30.

5.2     Seal . The seal of the corporation shall, subject to alteration by the Directors, bear its name, the word “Massachusetts” and the year of its incorporation.

5.3     Voting of Securities . The Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer, the Secretary or any other person the Board of Directors may designate may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of or other action by stockholders, shareholders or members of any other corporation or organization, the securities of which may be held by this corporation.

5.4     Corporate Records . The corporation shall keep, in Massachusetts at the principal office of the corporation, or at an office of its transfer agent or of the Secretary, such records as are required by the

 

10


Massachusetts Business Corporation Act. These copies and records need not all be kept in the same office. They shall be available for inspection by stockholders for any proper purpose and in conformity with said Act.

5.5     Evidence of Authority . A certificate by the Secretary or an Assistant or temporary Secretary as to any action taken by the stockholders, Directors, any committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action.

5.6     Articles of Organization . All references in these By-Laws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the corporation, as amended and in effect from time to time.

5.7     Severability . Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws.

5.8     Pronouns . All pronouns used in these By-Laws shall be deemed refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

ARTICLE 6—Amendments

These By-Laws may be amended by vote of the holders of a majority of the shares of each class of the capital stock at the time outstanding and entitled to vote at any annual or special meeting of stockholders, if notice of the substance of the proposed amendment is stated in the notice of such meeting. If authorized by the Articles of Organization, the Directors, by a majority of their number then in office, may also make, amend or repeal these By-Laws, in whole or in part, except with respect to (a) the provisions of these By-Laws governing (i) the removal of directors and (ii) the amendment of these By-Laws and (b) any provision of these By-Laws which by law, the Articles of Organization or these By-Laws requires action by the stockholders.

Not later than the time of giving notice of the meeting of stockholders next following the making, amending or repealing by the Directors of any By-Law, notice stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-Laws.

Any By-Law adopted by the Directors may be amended or repealed by the stockholders entitled to vote on amending the By-Laws.

As amended through March 4, 2009.

 

11

Exhibit 10.2

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 Company’s 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 Director’s rights


PARAMETRIC TECHNOLOGY CORPORATION

Restricted Stock Agreement – Page 2

 

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.

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 the right to vote such Restricted Stock, provided, however, that no dividends shall be paid on or accrued with respect to 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 Grantee’s 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 Committee’s 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 Grantee’s 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 Company’s 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 Company’s 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.


PARAMETRIC TECHNOLOGY CORPORATION

Restricted Stock Agreement – Page 3

 

9.     Change in Control . In order to preserve Grantee’s 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 Grantee’s 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

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.

 

PARAMETRIC TECHNOLOGY CORPORATION
By    
 

Name:

Title:

GRANTEE
 
Name:
Address:    
 
 
 

Exhibit 10.4

Compensatory Arrangements with Directors

The amount of the annual cash retainer, committee chair cash retainers and restricted stock grants for our non-employee directors for the current year are set forth in the table below.

 

Name    Position/Chair      Annual Retainer      Committee
Chair Retainer
     Annual Equity
Grant(1)

Noel Posternak

  

Lead Independent Director,

 

Nominating & Corporate Governance Committee

     $125,000           28,961 shares

Robert Goldman

   Compensation Committee      $  35,000      $10,000      19,307 shares

Michael Porter

   Corporate Development Committee      $  35,000      $  5,000      15,464 shares

Donald Grierson

   Audit Committee Chair      $  35,000      $10,000      19,307 shares

 

(1) The restrictions on the shares will lapse on the earlier of the date of the 2010 Annual Meeting of Stockholders or March 15, 2010, provided the person remains a director on that date and pursuant to our 2000 Equity Incentive Plan.

EXHIBIT 31.1

CERTIFICATIONS

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 registrant’s 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s 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

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

 

Date: May 14, 2009

  

/s/    C. R ICHARD H ARRISON        

   C. Richard Harrison
   Chief Executive Officer

EXHIBIT 31.2

CERTIFICATIONS

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 registrant’s 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s 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

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

 

Date: May 14, 2009

  

/s/    C ORNELIUS F. M OSES , III        

   Cornelius F. Moses, III
   Executive Vice President and Chief Financial Officer

EXHIBIT 32

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 April 4, 2009 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: May 14, 2009

  

/s/    C. R ICHARD H ARRISON        

   C. Richard Harrison
   Chief Executive Officer

Date: May 14, 2009

  

/s/    C ORNELIUS F. M OSES , III        

   Cornelius F. Moses, III
   Executive Vice President and Chief Financial Officer