PTC Inc.
PARAMETRIC TECHNOLOGY CORP (Form: 10-Q, Received: 05/13/2010 14:47:15)
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 3, 2010

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 116,084,081 shares of our common stock outstanding on May 7, 2010.

 

 

 


Table of Contents

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended April 3, 2010

 

     Page
Number

Part I—FINANCIAL INFORMATION

  

Item 1. Unaudited Condensed Financial Statements:

  

Consolidated Balance Sheets as of April 3, 2010 and September 30, 2009

   1

Consolidated Statements of Operations for the three and six months ended April 3, 2010 and April  4, 2009

   2

Consolidated Statements of Cash Flows for the six months ended April 3, 2010 and
April 4, 2009

   3

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended April  3, 2010 and April 4, 2009

   4

Notes to Condensed Consolidated Financial Statements

   5

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

   16

Item 3. Quantitative and Qualitative Disclosures about Market Risk

   33

Item 4. Controls and Procedures

   33

Part II—OTHER INFORMATION

  

Item 1. Legal Proceedings

   34

Item 1A. Risk Factors

   34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   34

Item 5. Other Information

   35

Item 6. Exhibits

   39

Signature

   40


Table of Contents

PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

 

     April 3,
2010
    September 30,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 222,692      $ 235,122   

Accounts receivable, net of allowance for doubtful accounts of $4,653 and $5,329 at April 3, 2010 and September 30, 2009, respectively

     151,117        166,591   

Prepaid expenses

     28,773        24,166   

Other current assets

     105,454        77,856   

Deferred tax assets

     42,665        42,731   
                

Total current assets

     550,701        546,466   

Property and equipment, net

     61,935        58,105   

Goodwill

     415,887        428,268   

Acquired intangible assets, net

     143,552        168,249   

Deferred tax assets

     106,699        110,193   

Other assets

     33,051        38,931   
                

Total assets

   $ 1,311,825      $ 1,350,212   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Revolving credit facility

   $ 33,528      $ 57,880   

Accounts payable

     11,589        13,292   

Accrued expenses and other current liabilities

     47,418        44,052   

Accrued compensation and benefits

     69,379        85,984   

Accrued income taxes

     —          9,223   

Deferred tax liabilities

     —          216   

Customer advances

     49,260        51,892   

Deferred revenue

     262,597        228,892   
                

Total current liabilities

     473,771        491,431   

Deferred tax liabilities

     24,970        29,164   

Deferred revenue

     6,302        5,378   

Other liabilities

     65,023        62,658   
                

Total liabilities

     570,066        588,631   
                

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued

     —          —     

Common stock, $0.01 par value; 500,000 shares authorized; 115,974 and 115,950 shares issued and outstanding at April 3, 2010 and September 30, 2009, respectively

     1,160        1,160   

Additional paid-in capital

     1,789,401        1,822,544   

Accumulated deficit

     (1,001,664     (1,028,528

Accumulated other comprehensive loss

     (47,138     (33,595
                

Total stockholders’ equity

     741,759        761,581   
                

Total liabilities and stockholders’ equity

   $ 1,311,825      $ 1,350,212   
                

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 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

Revenue:

        

License

   $ 64,644      $ 42,070      $ 139,460      $ 92,572   

Service

     175,912        183,222        359,525        373,111   
                                

Total revenue

     240,556        225,292        498,985        465,683   
                                

Costs and expenses:

        

Cost of license revenue

     8,232        6,976        16,379        14,560   

Cost of service revenue

     68,934        72,302        139,458        148,043   

Sales and marketing

     75,137        71,387        153,735        151,249   

Research and development

     49,960        44,752        100,650        93,113   

General and administrative

     22,807        17,693        46,878        39,130   

Amortization of acquired intangible assets

     3,975        3,815        8,033        7,683   

Restructuring charges

     —          9,788        —          9,788   
                                

Total costs and expenses

     229,045        226,713        465,133        463,566   
                                

Operating income (loss)

     11,511        (1,421     33,852        2,117   

Interest and other income (expense), net

     (605     (250     (1,129     (1,321
                                

Income (loss) before income taxes

     10,906        (1,671     32,723        796   

Provision for (benefit from) income taxes

     1,904        (8,846     5,858        (11,038
                                

Net income

   $ 9,002      $ 7,175      $ 26,865      $ 11,834   
                                

Earnings per share—Basic

   $ 0.08      $ 0.06      $ 0.23      $ 0.10   

Earnings per share—Diluted

   $ 0.08      $ 0.06      $ 0.22      $ 0.10   

Weighted average shares outstanding—Basic

     115,951        114,793        116,104        114,672   

Weighted average shares outstanding—Diluted

     119,856        115,656        120,487        116,503   

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 3,
2010
    April 4,
2009
 

Cash flows from operating activities:

    

Net income

   $ 26,865      $ 11,834   

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

    

Amortization of acquired intangible assets

     17,859        17,062   

Depreciation and other amortization

     14,040        12,895   

Stock-based compensation

     26,147        17,261   

Other non-cash costs, net

     570        586   

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

    

Accounts receivable

     8,761        77,015   

Accounts payable and accrued expenses

     2,388        (12,595

Accrued compensation and benefits

     (15,121     (18,354

Deferred revenue

     16,453        6,859   

Accrued income taxes

     (6,498     (34,787

Other current assets and prepaid expenses

     (3,217     (1,726

Other noncurrent assets and liabilities

     2,461        12,600   
                

Net cash provided by operating activities

     90,708        88,650   
                

Cash flows from investing activities:

    

Additions to property and equipment

     (17,102     (15,266

Acquisitions of businesses, net of cash acquired

     (2,087     (8,475
                

Net cash used by investing activities

     (19,189     (23,741
                

Cash flows from financing activities:

    

Repayment of borrowings under revolving credit facility

     (19,720     (31,951

Repurchases of common stock

     (45,072     (9,581

Proceeds from issuance of common stock

     7,045        2,116   

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

     (20,168     (4,341

Other

     222        (185
                

Net cash used by financing activities

     (77,693     (43,942
                

Effect of exchange rate changes on cash and cash equivalents

     (6,256     (10,190
                

Net (decrease) increase in cash and cash equivalents

     (12,430     10,777   

Cash and cash equivalents, beginning of period

     235,122        256,941   
                

Cash and cash equivalents, end of period

   $ 222,692      $ 267,718   
                

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 (LOSS)

(in thousands)

(unaudited)

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

Net income

   $ 9,002      $ 7,175      $ 26,865      $ 11,834   
                                

Other comprehensive loss, net of tax:

        

Foreign currency translation adjustment

     (10,103     (2,490     (13,494     (9,891

Minimum pension liability adjustment

     (53     (11     (49     (19
                                

Other comprehensive loss

     (10,156     (2,501     (13,543     (9,910
                                

Comprehensive income (loss)

   $ (1,154   $ 4,674      $ 13,322      $ 1,924   
                                

 

 

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 in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. 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, 2009 consolidated balance sheet included herein is derived from our audited consolidated financial statements.

Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected maintenance-related amounts included in other current assets at April 3, 2010 and September 30, 2009 were $92.8 million and $66.0 million, respectively.

As of April 3, 2010, approximately 10% of the total net trade accounts receivable was due from a customer in Europe. No individual customer comprised more than 10% of our net trade accounts receivable as of September 30, 2009.

The results of operations for the three and six months ended April 3, 2010 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2. Restructuring Charges

The following table summarizes restructuring accrual activity for the six months ended April 3, 2010:

 

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

Balance, September 30, 2009

   $ 11,796      $ 3,979      $ 15,775   

Cash disbursements

     (11,182     (2,265     (13,447

Foreign exchange impact

     (71     (13     (84
                        

Balance, April 3, 2010

   $ 543      $ 1,701      $ 2,244   
                        

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 3, 2010, of the $2.2 million remaining in accrued restructuring charges, $1.1 million was included in current liabilities and $1.1 million was included in other long-term liabilities, principally for facility costs to be paid out through 2013.

 

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Each quarter we review the adequacy of our facility accrual based on known real estate market conditions and the credit-worthiness of subtenants, which may result in revisions to established facility reserves. We had accrued $1.7 million as of April 3, 2010 related to excess facilities (compared to $4.0 million at September 30, 2009), representing gross lease commitments with agreements expiring at various dates through 2013 of $5.7 million, net of committed sublease income of $4.0 million.

3. Stock-based Compensation

We measure the cost of employee services received in exchange for restricted stock and restricted stock unit awards based on the fair value of our common stock on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plans provide for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock and restricted stock units (RSUs) as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of 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, 2009.

 

Restricted Stock Activity for the six months ended April 3, 2010    Shares     Weighted
Average
Grant Date
Fair Value
(Per Share)
     (in thousands)      

Balance of outstanding restricted stock September 30, 2009

   834      $ 17.57

Granted

   90      $ 17.18

Vested

   (582   $ 17.26

Forfeited or not earned

   (4   $ 18.73
        

Balance of outstanding restricted stock April 3, 2010

   338      $ 17.98
        

 

Restricted Stock Unit Activity for the six months ended April 3, 2010    Shares     Weighted
Average
Grant Date
Fair Value
(Per Share)
     (in thousands)      

Balance of outstanding restricted stock units September 30, 2009

   7,827      $ 12.76

Granted

   3,060      $ 15.96

Vested

   (3,231   $ 14.15

Forfeited or not earned

   (1,549   $ 10.58
        

Balance of outstanding restricted stock units April 3, 2010

   6,107      $ 14.18
        

The weighted average fair value per share of restricted stock and restricted stock units granted in the first six months of 2010 and 2009 was $15.99 and $9.42, respectively.

 

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We made the following restricted stock and restricted stock unit grants in the first six months of 2010:

 

     Restricted Stock (1)    Restricted Stock Units (2)

Grant Period

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

First six months of 2010

   —      90    640    2,420

 

(1) The time-based shares of restricted stock were issued to our non-employee directors as part of their annual compensation. The restrictions on these shares generally lapse in one or two equal amounts approximately one year from the date of grant.
(2) The performance-based RSUs were issued to our executive officers and are earned based on performance criteria established by the Compensation Committee of our Board of Directors on the grant date and are also subject to service conditions. Of these RSUs, 490 thousand will vest in three installments on the later of November 15, 2010 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, November 15, 2011 and November 15, 2012, and 150 thousand will vest on the later of November 15, 2012 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved. The time-based RSUs were issued to employees, including our executive officers, and will vest in three substantially equal annual installments from the date of grant.

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 3,
2010
   April 4,
2009
   April 3,
2010
   April 4,
2009
     (in thousands)

Cost of license revenue

   $ 2    $ 3    $ 19    $ 17

Cost of service revenue

     2,241      1,291      4,821      3,546

Sales and marketing

     3,520      2,193      6,594      5,101

Research and development

     2,383      1,566      5,042      3,824

General and administrative

     4,146      1,677      9,671      4,773
                           

Total stock-based compensation expense

   $ 12,292    $ 6,730    $ 26,147    $ 17,261
                           

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 stock, although legally issued and outstanding, is 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.

 

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

 

     Three months ended    Six months ended
     April 3,
2010
   April 4,
2009
   April 3,
2010
   April 4,
2009
     (in thousands, except per share data)

Net income

   $ 9,002    $ 7,175    $ 26,865    $ 11,834
                           

Weighted average shares outstanding—Basic

     115,951      114,793      116,104      114,672

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

     3,905      863      4,383      1,831
                           

Weighted average shares outstanding—Diluted

     119,856      115,656      120,487      116,503
                           

Earnings per share—Basic

   $ 0.08    $ 0.06    $ 0.23    $ 0.10

Earnings per share—Diluted

   $ 0.08    $ 0.06    $ 0.22    $ 0.10

Stock options to purchase 2.0 million shares for both the second quarter and first six months of 2010, and 5.4 million and 5.1 million shares for the second quarter and first six months of 2009, respectively, were outstanding but were not included in the calculation of diluted EPS because the exercise prices per share were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.

Common Stock Repurchases

Our Board of Directors has authorized us to use up to $100 million of cash from operations to repurchase shares of our common stock in open market purchases. This authorization will expire on May 31, 2011 unless earlier revoked or extended. In the second quarter and first six months of 2010, we repurchased 2.4 million shares at a cost of $40.0 million and 2.7 million shares at a cost of $45.1 million, respectively. As of April 3, 2010, $35.5 million remained under our current authorization. In the third quarter of 2010, through May 13, 2010, we have repurchased an additional 0.8 million shares at a cost of $15.0 million. In the first six months of 2009, we repurchased 0.9 million shares at a cost of $9.6 million. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

5. Goodwill and Intangible Assets

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, 2009.

Goodwill

Changes in goodwill, presented by reportable segment, are as follows:

 

     Software
Products
Segment
    Services
Segment
    Total  
Six months ended April 3, 2010    (in thousands)  

Balance, September 30, 2009

   $ 410,585      $ 17,683      $ 428,268   

Acquisitions

     1,751        —          1,751   

Foreign currency translation adjustments

     (13,972     (160     (14,132
                        

Balance, April 3, 2010

   $ 398,364      $ 17,523      $ 415,887   
                        

 

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Amortization of intangible assets

The aggregate amortization expense for intangible assets with finite lives recorded for the second quarters and first six months of 2010 and 2009 was classified in our consolidated statements of operations as follows:

 

     Three months ended    Six months ended
     April 3,
2010
   April 4,
2009
   April 3,
2010
   April 4,
2009
     (in thousands)

Amortization of acquired intangible assets

   $ 3,975    $ 3,815    $ 8,033    $ 7,683

Cost of license revenue

     4,928      4,703      9,826      9,371

Cost of service revenue

     —        —        —        8
                           

Total amortization expense

   $ 8,903    $ 8,518    $ 17,859    $ 17,062
                           

6. Fair Value Measurements

Fair value is defined 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. Generally accepted accounting principles prescribe 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. Three levels of inputs that may be used to measure fair value:

 

   

Level 1: quoted prices (unadjusted) 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 3, 2010:

 

     April 3,
2010
 
     (in thousands)  

Financial assets:

  

Cash equivalents (1)

   $ 33,598   
        

Financial liabilities:

  

Forward contracts

   $ (560
        

 

(1) Money market funds.

7. Derivative Financial Instruments

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 with maturities of less than three months, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables.

 

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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 income (expense), net. As of April 3, 2010, we had outstanding forward contracts with notional amounts equivalent to $117.5 million comprised of the following:

 

 

Currency Hedged

   April 3,
2010
     (in thousands)

Euro/U.S. Dollar

   $ 55,475

British Pound/Euro

     21,057

Indian Rupee/U.S. Dollar

     20,490

Japanese Yen/U.S. Dollar

     4,355

Chinese Renminbi/U.S. Dollar

     3,642

All other

     12,489
      

Total

   $ 117,508
      

The accompanying consolidated balance sheet as of April 3, 2010 includes a net liability of $0.6 million related to the fair value of our forward contracts.

Net gains and losses on foreign currency exposures are recorded in other income (expense), net and include realized and unrealized gains and losses on forward contracts. Net gains and losses on foreign currency exposures for the second quarters and first six months ended April 3, 2010 and April 4, 2009 were as follows:

 

     Three months ended    Six months ended  
     April 3,
2010
    April 4,
2009
   April 3,
2010
    April 4,
2009
 
     (in thousands)  

Net losses on foreign currency exposures

   $ 863      $ 485    $ 1,688      $ 2,000   
                               

Net realized and unrealized (gain) loss on forward contracts (excluding the underlying foreign currency exposure being hedged)

   $ (2,429   $ 419    $ (1,985   $ (2,951
                               

8. Recent Accounting Pronouncements

Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued authoritative guidance that requires additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. The disclosures about plan assets are required to be provided for fiscal years ending after December 15, 2009 (our fiscal 2010).

9. Segment Information

We operate within a single industry segment—computer software and related services. Operating segments as defined under GAAP 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 consists of our Chief Executive Officer and our President and Chief Operating Officer. We have two operating and reportable segments: (1) Software Products, which includes license and related maintenance revenue (including new

 

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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.

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

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 
     (in thousands)  

Revenue:

        

Total Software Products segment revenue

   $ 182,363      $ 159,451      $ 378,410      $ 338,029   

Total Service segment revenue

     58,193        65,841        120,575        127,654   
                                

Total revenue

   $ 240,556      $ 225,292      $ 498,985      $ 465,683   
                                

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

        

Software Products segment

   $ 106,003      $ 88,566      $ 224,574      $ 192,570   

Services segment

     3,452        5,797        9,891        6,630   

Sales and marketing expenses

     (75,137     (76,245     (153,735     (156,107

General and administrative expenses

     (22,807     (19,539     (46,878     (40,976
                                

Total operating income (loss)

   $ 11,511      $ (1,421   $ 33,852      $ 2,117   
                                

 

(1) The operating income reported for each operating segment does not represent the total operating results as it does not include an allocation of sales, marketing, 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.

In the first quarter of 2010, we began reporting revenue by product groupings, Desktop and Enterprise. Desktop revenue includes our CAx Solutions: Pro/ENGINEER ® , CoCreate ® CAD products, Mathcad ® and Arbortext ® authoring products. Enterprise revenue includes our PLM solutions: Windchill ® , Arbortext enterprise products, ProductView TM , CoCreate data management products and InSight TM . These definitions of Desktop and Enterprise are not the same as those we used when we last reported these revenue categories in our SEC filings for the period ended September 30, 2007, or periods before that.

Data for the three months and six months ended April 4, 2009 below includes immaterial reclassifications between Desktop and Enterprise revenue and between geographic regions made to conform to the current classification.

 

     Three months ended    Six months ended
     April 3,
2010
   April 4,
2009
   April 3,
2010
   April 4,
2009
     (in thousands)

Revenue:

           

Desktop

   $ 134,417    $ 132,848    $ 270,009    $ 277,135

Enterprise

     106,139      92,444      228,976      188,548
                           

Total revenue

   $ 240,556    $ 225,292    $ 498,985    $ 465,683
                           

 

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

 

     Three months ended    Six months ended
     April 3,
2010
   April 4,
2009
   April 3,
2010
   April 4,
2009
     (in thousands)

Revenue:

           

Americas (1)

   $ 83,930    $ 79,589    $ 191,096    $ 163,175

Europe (2)(3)

     93,504      89,675      192,700      188,919

Pacific Rim

     33,414      25,553      62,317      57,301

Japan

     29,708      30,475      52,872      56,288
                           

Total revenue

   $ 240,556    $ 225,292    $ 498,985    $ 465,683
                           

 

(1) Includes revenue in the United States totaling $80.7 million and $76.6 million for the three months ended April 3, 2010 and April 4, 2009, respectively, and $184.9 million and $155.6 million for the six months ended April 3, 2010 and April 4, 2009, respectively.
(2) Includes revenue in Germany totaling $32.1 million and $27.7 million for the three months ended April 3, 2010 and April 4, 2009, respectively, and $65.3 million and $60.8 million for the six months ended April 3, 2010 and April 4, 2009, respectively.
(3) Includes revenue in France totaling $16.8 million and $23.0 million for the three months ended April 3, 2010 and April 4, 2009, respectively, and $37.3 million and $45.5 million for the six months ended April 3, 2010 and April 4, 2009, respectively.

10. Income Taxes

In the second quarter of 2010, our effective tax rate was a provision of 17% on pre-tax income of $10.9 million, compared to a benefit of 529% on a pre-tax loss of $1.7 million in the second quarter of 2009. In the first six months of 2010, our effective tax rate was a provision of 18% on pre-tax income of $32.7 million, compared to a benefit of 1,387% on pre-tax income of $0.8 million in the first six months of 2009. In the second quarter and first six months of 2010, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to foreign taxes at a net effective tax rate lower than the U.S. rate (including a net benefit of $0.4 million and $1.3 million in the second quarter and first six months, respectively, related to research and development (R&D) cost sharing pre-payments by a foreign subsidiary to the U.S.). 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 R&D tax credits triggered by a retroactive extension of the R&D tax credit enacted during the first quarter of 2009.

In November 2008, we completed a realignment of our European business which, in part, resulted in a one-time taxable gain in the U.S. This taxable gain enabled us to recognize tax credits generated in 2009 and previously unrecognized tax credits. The resulting tax impact of this one-time gain was deferred over the useful life of the property being transferred and as of April 3, 2010 and September 30, 2009, the accompanying consolidated balance sheet included deferred charges of $16.8 million ($3.6 million in other current assets and $13.2 million in other assets) and $18.6 million ($3.6 million in other current assets and $15.0 million in other assets), respectively. We expect this realignment to favorably impact our effective tax rate in future periods.

As of April 3, 2010 and September 30, 2009, we had unrecognized tax benefits of $17.6 million ($16.0 million net of tax benefits from non-U.S. jurisdictions) and $16.9 million ($15.6 million net of tax benefits from non-U.S. jurisdictions), respectively. If all of our unrecognized tax benefits as of April 3, 2010 were to become recognizable in the future, we would record a $16.0 million benefit to the income tax provision.

 

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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 the first six months of both 2010 and 2009, we included $0.7 million and $0.2 million of interest expense, respectively, and no tax penalty expense in our income tax provision. As of April 3, 2010 and September 30, 2009, we had accrued $1.5 million and $0.8 million, respectively, of estimated interest expense. We had no accrued tax penalties as of either April 3, 2010 or September 30, 2009. Changes in our unrecognized tax benefits in the six months ended April 3, 2010 were as follows:

 

     (in millions)

Balance as of October 1, 2009

   $ 16.9

Tax positions related to current year

     0.7

Tax positions related to prior years

     —  
      

Balance as of April 3, 2010

   $ 17.6
      

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 to our unrecognized tax benefits of up to $4 million.

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 3, 2010, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

 

Major Tax Jurisdiction

  

Open Years

United States    2003, 2008 and 2009
Germany    2004 through 2009
France    2004 through 2009
Japan    2005 through 2009
Ireland    2004 through 2009

11. Commitments and Contingencies

Revolving Credit Agreement

On February 21, 2006, we entered into a multi-currency bank revolving credit facility with a syndicate of seven banks. We use the credit facility for general corporate purposes, including acquisitions of businesses. 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 outstanding 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.

Interest rates for amounts borrowed under the credit facility range from 0.75% to 1.50% above the Eurodollar rate for Eurodollar-based borrowings or at 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. A quarterly commitment fee based on the undrawn portion of the credit facility is required to be paid by us, ranging from 0.125% to 0.30% per year, depending upon our leverage ratio.

As of April 3, 2010, the amount outstanding under the revolving credit facility was 24.9 million Euros, which was equivalent to $33.5 million on that date. The current loan matures on May 25, 2010 and accrues interest at 1.4% per annum. 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. As of April 3, 2010, our leverage ratio was 0.21 to 1.00 and our fixed-charge ratio was 2.09 to 1.00. We were in compliance with all financial and operating covenants of the credit facility as of April 3, 2010.

Legal Proceedings

On August 2, 2007, GE Capital Leasing Corporation (now GE Japan, “GE Japan”) filed a lawsuit against us in the U.S. District Court for the District of Massachusetts. The lawsuit alleged that GE Japan 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. GE Japan claimed 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. GE Japan’s complaint claimed damages of $47 million and sought 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 GE Japan’s complaint on the basis that GE Japan had commenced the action in the improper forum. The court issued this order subject to certain conditions, including PTC’s agreement to assent to personal jurisdiction in Japan. On November 17, 2008, GE Japan filed a motion to vacate the court’s October 2nd order and to seek to continue the case in the U.S. We have opposed GE Japan’s motion.

On January 7, 2009, GE Japan 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 $61 million as of April 3, 2010) plus interest of 5% per year on such amount since April 27, 2007 and costs of the lawsuit. Subsequently, the Tokyo District Court consolidated this action with GE Japan’s pending action against Toshiba and other parties to the transactions, which was filed in the Tokyo District Court in August 2007. In the consolidated Japanese action, GE Japan alleges that employees of PTC Japan committed wrongful acts in cooperation with employees of other companies involved in the transactions, including an employee of Toshiba who was criminally convicted for obtaining fraudulent loans. GE Japan claims that the wrongful acts allegedly committed by PTC Japan employees caused GE Japan’s damages and that PTC Japan, as an employer, is jointly and severally liable for all of GE Japan’s losses along with the other defendants.

The trial process in the Japanese action is nearing completion and we expect that the Tokyo District Court will render its judgment as early as late summer or fall of calendar 2010.

As of April 3, 2010 and September 30, 2009, revenue of 4,658,162,417 Yen ($49.3 million and $51.9 million, respectively) that was previously recorded for the transactions at issue has been deferred and recorded as customer advances in our consolidated balance sheets. The change in customer advances at April 3, 2010 from September 30, 2009 is due to foreign currency translation adjustments. We have not accrued any other liability for this matter as of April 3, 2010 or September 30, 2009 as a different amount potentially payable is not estimable. It is possible that the financial impact of this matter could differ materially from the amount reserved as customer advances. If this matter is resolved in an amount less than the recorded customer

 

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advances liability, we would reduce customer advances at that time and record the portion retained to revenue or other income. If this matter is resolved in an amount in excess of the recorded customer advances liability, we would record expense at that time for the amount due in excess of our recorded liability. In either event, a finding of liability would impact our cash position.

We also are subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these other matters will not have a material adverse impact on our financial condition or results of operations.

Guarantees and Indemnification Obligations

We enter into standard indemnification agreements in the ordinary course of our 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. 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 not 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 future financial and growth expectations, the development of our products and markets, adoption of our solutions, and the expected impact of our strategic investments on our business 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 projected results include the following: our customers may not purchase our solutions when or at the rates we expect; customers may delay, or become unable to pay, payments due to us in this challenging global economic climate; our strategic investments may not have the effects we expect; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by the relatively larger size and greater resources of several of the companies with which we compete; as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. “Risk Factors” of this report.

Our Business

Parametric Technology Corporation (PTC) develops, markets and supports product development software solutions and related services that help companies design products, manage product information and improve their product development processes. Our software solutions help customers increase innovation, improve product quality, decrease time to market, and reduce product development costs.

We offer solutions in the product development market, which encompasses the product lifecycle management, or PLM, market (product data management, collaboration and related solutions) and the CAx market (computer-aided design, manufacturing and engineering (CAD, CAM and CAE) solutions).

Our software solutions provide our customers with an integral 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 generate revenue through the sale of:

 

   

software licenses,

 

   

maintenance contracts, under which we provide technical support and software upgrades and enhancements to our software, and

 

   

consulting and training services, which include implementation services for our software.

The PLM and the CAx markets we serve present different growth opportunities for us. We believe that the markets for our PLM solutions and CAx solutions to small- and medium-size businesses provide an opportunity for future growth while the market for our CAx solutions to large businesses is a mature market with limited growth opportunities. We believe the PLM market for large businesses presents the greatest opportunity for revenue growth for us and believe revenue from this market will constitute an increasingly greater proportion of our revenue over time.

Executive Overview

We recorded $241 million and $499 million of total revenue in the second quarter and first six months of 2010, respectively, compared to $225 million and $466 million in the second quarter and first six months of

 

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2009, respectively, an increase of 7% for both periods. The increases reflect a 54% ($23 million) and 51% ($47 million) increase in license revenue in the second quarter and first six months of 2010, respectively, primarily driven by sales of our primary PLM product - Windchill - to large customers. Our increases in license revenue were partially offset by a 12% and 9% decrease in consulting and training service revenue in the second quarter and first six months of 2010, respectively. Maintenance revenue was relatively flat in the second quarter of 2010 compared to the second quarter of 2009 and declined 1% on a year-to-date basis compared to the first half of 2009. Maintenance and consulting and training service revenue were both negatively impacted by our soft license revenue in 2009. While we believe spending among our small- and medium-size customers continues to be impacted by the adverse global economic climate, we believe our year-to-date results suggest signs of improvement in customer spending by our large customers.

We provide non-GAAP operating income, operating margin and diluted earnings per share for each period below, in addition to GAAP operating income, operating margin and diluted earnings per share. The non-GAAP measures exclude stock-based compensation expense, amortization of acquired intangible assets expense and restructuring charges that we incurred during the respective period, and include income tax adjustments reflecting the exclusion of those items. Our reasons for providing this non-GAAP information and reconciliations to the corresponding GAAP information are provided in “Uses of Non-GAAP Financial Measures and Reconciliations to GAAP Results” on page 29 below. Non-GAAP information should not be construed as an alternative to GAAP information because amounts excluded from non-GAAP measures can have a material effect on our GAAP results and may be considered part of ongoing operations. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.

Our GAAP operating income increased to $12 million and $34 million in the second quarter and first six months of 2010, respectively, compared to an operating loss of $1 million and income of $2 million in the second quarter and first six months of 2009, respectively. Our GAAP operating margin increased to approximately 5% and 7% in the second quarter and first six months of 2010, respectively, compared to (1)% and 0% in the second quarter and first six months of 2009, respectively. Our non-GAAP operating income increased to $33 million and $78 million in the second quarter and first six months of 2010, respectively, compared to $24 million and $46 million in the second quarter and first six months of 2009, respectively. Our non-GAAP operating margin increased to approximately 14% and 16% in the second quarter and first six months of 2010, respectively, compared to 11% and 10% in the second quarter and first six months of 2009, respectively. Both our GAAP and non-GAAP operating income are up primarily because of increases in license revenue. GAAP diluted earnings per share increased to $0.08 and $0.22 in the second quarter and first six months of 2010, respectively, from $0.06 and $0.10 in the second quarter and first six months of 2009, respectively, reflecting higher operating income partially offset by higher income tax provisions in the second quarter and first six months of 2010 compared to the prior year periods. The second quarter of 2009 GAAP earnings per share included a one-time tax benefit of $7.6 million (an effect on GAAP diluted earnings per share of $0.06 for both the second quarter and first six months of 2009) in connection with litigation in a foreign jurisdiction which benefit has been excluded from the non-GAAP earnings per share. Our non-GAAP diluted earnings per share increased to $0.20 and $0.47 in the second quarter and first six months of 2010, respectively, from $0.15 and $0.30 in the second quarter and first six months of 2009, respectively.

Fluctuations in foreign currency exchange rates continue to impact our business. At foreign currency exchange rates consistent with the comparable periods of 2009, reported revenue in the second quarter and first six months of 2010 would have been lower by approximately $9 million and $21 million, respectively, (and reported revenue growth rates would have been reduced from 7% to 3% for both periods) and reported expenses would have been lower by approximately $6 million and $14 million, respectively, a net decrease in operating income of approximately $3 million and $7 million, respectively.

Our balance sheet remained strong with $223 million of cash and an additional $196 million available under our revolving credit facility as of April 3, 2010. Our cash flow from operations was $91 million in the first six months of 2010, up $2 million from the first six months of 2009.

 

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Acquisitions

We will continue to review potential acquisitions for opportunities to enhance our product portfolio. In the second quarter of 2010, we acquired technology that enables organizations to model and analyze carbon emissions and energy use. While this technology will not contribute significantly to revenue or earnings in 2010, it provides an important expansion of our InSight product analytics solutions.

Fiscal Year 2010 Expectations, Strategies and Risks

We continue to be impacted by the adverse global economic conditions and we expect fluctuations and continued uncertainty in the level of customer spending. However, we are encouraged by our financial results in the first six months of 2010.

We expect that the global economy will continue to improve in fiscal 2010, led by North America, with sales to large direct customers recovering before sales to the small- and medium-size customer market. Accordingly, we expect 35%-40% license revenue growth in 2010. However, the steep license revenue decline we saw in 2009 has adversely impacted and may continue to adversely impact our maintenance and services businesses in 2010. As a result, we expect maintenance and services revenue in 2010 to be down modestly from 2009. Our revenue and operating results will also continue to be impacted by currency fluctuations.

If economic growth in North America does not continue to improve, or if the economies of countries in Europe or Asia-Pacific are slower to recover than we expect, customers may continue to delay, reduce or forego technology purchases. This could adversely impact sales of our products, result in longer sales cycles, slow adoption of new technologies and increase price competition.

Balancing an improving but still challenging economic situation with the longer-term opportunity for the business, we are modestly increasing investments in our business that we believe are critical to delivering value to our customers and will help us gain market share, drive faster top line growth and improve operating profitability over the longer term. These investments include:

 

   

hiring direct sales resources and continuing to invest in our reseller channel;

 

   

investing in research and development to further enhance our products; and

 

   

investing in our services business and ecosystem in support of our Windchill license growth opportunity.

Continued macroeconomic pressure or revenue below that which we expect could cause us to reduce or delay these strategic investments and/or take actions to reduce our operating costs. In addition, these investments may not deliver the results we expect.

We are also subject to additional risks associated with our operations, including income taxes and pending litigation. See our discussions in “Costs and Expenses – Income Taxes” and in “Note 11. Commitments and Contingencies” and “Liquidity and Capital Resources – Expectations for the Rest of Fiscal 2010” for more information.

Results of Operations

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 2010 were favorably impacted as a result of changes in currency exchange rates, primarily the Euro to U.S. Dollar exchange rate. Conversely, our expenses were higher as a result of changes in these rates. If actual reported results for the second quarter and first six months of 2010 had been converted into U.S. dollars based on the foreign currency exchange rates in effect for the second quarter and first six months of 2009, revenue would have

 

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been lower by $8.6 million and $20.6 million, respectively, and expenses would have been lower by $6.5 million and $14.1 million, respectively. The net impact on year-over-year results would have been a decrease in operating income of $2.1 million and $6.5 million, respectively. The results of operations, revenue by line of business, 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, calculated by multiplying the actual results for 2010 by the exchange rates in effect for 2009.

Total Operating Results

 

     Three months
ended
    Percent Change     Six months ended     Percent Change  
     April 3,
2010
    April 4,
2009
    Actual     Constant
Currency
    April 3,
2010
    April 4,
2009
    Actual     Constant
Currency
 
     (Dollar amounts in millions)  

Total revenue

   $ 240.6      $ 225.3      7   3   $ 499.0      $ 465.7      7   3

Total costs and expenses

     229.1        226.7      1   (2 )%      465.1        463.6      —     (3 )% 
                                        

Operating income (loss)

     11.5        (1.4   910   770     33.9        2.1      1,499   1,205

Other income (expense), net

     (0.6     (0.3         (1.1     (1.3    
                                        

Income (loss) before income taxes

     10.9        (1.7         32.8        0.8       

Provision for (benefit from) income taxes

     1.9        (8.9         5.9        (11.0    
                                        

Net income

   $ 9.0      $ 7.2          $ 26.9      $ 11.8       
                                        

For the second quarter of 2010, compared to the second quarter of 2009, revenue increased due to a 54% increase in license revenue, partially offset by a 12% decrease in consulting and training service revenue. Total revenue for the second quarter of 2010 was favorably impacted by approximately $8.6 million due to changes in foreign currency exchange rates, primarily the Euro to U.S. Dollar rate.

For the first six months of 2010, compared to the first six months of 2009, revenue increased due to a 51% increase in license revenue, partially offset by a 9% decrease in consulting and training service revenue and a 1% decrease in maintenance revenue. Total revenue for the first six months of 2010 was favorably impacted by approximately $20.6 million due to changes in foreign currency exchange rates, primarily the Euro to U.S. Dollar rate.

For the second quarter of 2010, compared to the second quarter of 2009, costs and expenses increased slightly and were relatively flat for the first six months of 2010 compared to the first six months of 2009. Year-to-date costs and expenses reflect the impact of headcount reductions made in the third and fourth quarters of 2009, offset by the unfavorable impact of foreign currency exchange rate movements of approximately $6.5 million and $14.1 million in the second quarter and first six months of 2010, respectively, costs associated with investments in product development and higher incentive-based compensation. Additionally, higher license revenue for the first six months of 2010, compared to the first six months of 2009, resulted in higher commissions, offset by lower cost of service revenue due to lower consulting and training service revenue.

Net income in the second quarter and first six months of 2010 increased from the second quarter and first six months of 2009 due primarily to higher operating income as a result of the changes in revenue and costs and expenses described above, partially offset by a higher tax provision in the second quarter and first six months of 2010 compared to the comparable periods in 2009 as the second quarter of 2009 included a one-time tax benefit of $7.6 million in connection with litigation in a foreign jurisdiction.

Revenue

Our revenue consists of software license revenue and service revenue, which includes software maintenance revenue as well as consulting and training revenue.

 

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Table of Contents

Explanatory Note about a Change in Our Revenue Reporting

In the first quarter of 2010, we began reporting revenue by product groupings—Desktop and Enterprise—and by distribution channel—Direct and Indirect.

Desktop revenue includes our CAx Solutions: Pro/ENGINEER ® , CoCreate ® CAD products, Mathcad ® and Arbortext ® authoring products. Enterprise revenue includes our PLM solutions: Windchill ® , Arbortext enterprise products, ProductView TM , CoCreate data management products and InSight. These definitions of Desktop and Enterprise are not the same as those we used when we last reported these revenue categories in our SEC filings for the period ended September 30, 2007, or previous periods to that date.

Direct revenue includes sales made primarily by our direct sales force to large businesses. Indirect revenue includes sales from our reseller channel, primarily to small- and medium-size businesses, as well as revenue from other accounts that we have classified as indirect.

Revenue for the first six months and second quarter of 2009 has been reclassified to conform to the classifications above and the discussion below gives effect to these changes. Additionally, certain immaterial reclassifications between Direct and Indirect revenue and Desktop and Enterprise revenue from amounts previously reported for the first quarters of 2010 and 2009 have been made to conform to the current classification.

 

     Desktop
Three Months Ended
    Enterprise
Three Months Ended
    Total Revenue
Three Months Ended
 
     April 3,
2010
   April 4,
2009
   Percent
Change
    April 3,
2010
   April 4,
2009
   Percent
Change
    April 3,
2010
   April 4,
2009
   Percent
Change
 
Direct    (Dollar amounts in millions)  

License revenue

   $ 19.7    $ 16.3    20   $ 25.8    $ 10.9    137   $ 45.5    $ 27.2    67

Service revenue:

                        

Consulting and training service revenue

     7.8      10.5    -25     42.9      47.3    -9     50.7      57.8    -12

Maintenance revenue

     48.0      49.5    -3     25.8      23.7    9     73.8      73.2    1
                                                

Total service revenue

     55.8      60.0    -7     68.7      71.0    -3     124.5      131.0    -5
                                                

Total revenue

   $ 75.5    $ 76.3    -1   $ 94.5    $ 81.9    15   $ 170.0    $ 158.2    7
                                                

Indirect

                        

License revenue

   $ 15.1    $ 11.3    35   $ 4.1    $ 3.6    14   $ 19.2    $ 14.9    30

Service revenue:

                        

Consulting and training service revenue

     1.3      2.1    -36     1.1      0.7    29     2.4      2.8    -17

Maintenance revenue

     42.5      43.2    -2     6.5      6.2    5     49.0      49.4    -1
                                                

Total service revenue

     43.8      45.3    -3     7.6      6.9    8     51.4      52.2    -2
                                                

Total revenue

   $ 58.9    $ 56.6    4   $ 11.7    $ 10.5    10   $ 70.6    $ 67.1    5
                                                

Total Revenue

                        

License revenue

   $ 34.8    $ 27.6    26   $ 29.9    $ 14.5    107   $ 64.7    $ 42.1    54

Service revenue:

                        

Consulting and training service revenue

     9.1      12.6    -27     44.0      48.0    -9     53.1      60.6    -12

Maintenance revenue

     90.5      92.7    -2     32.3      29.9    8     122.8      122.6    0
                                                

Total service revenue

     99.6      105.3    -5     76.3      77.9    -2     175.9      183.2    -4
                                                

Total revenue

   $ 134.4    $ 132.9    1   $ 106.2    $ 92.4    15   $ 240.6    $ 225.3    7
                                                

 

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Table of Contents
     Desktop
Six Months Ended
    Enterprise
Six Months Ended
    Total Revenue
Six Months Ended
 
     April 3,
2010
   April 4,
2009
   Percent
Change
    April 3,
2010
   April 4,
2009
   Percent
Change
    April 3,
2010
   April 4,
2009
   Percent
Change
 
Direct    (Dollar amounts in millions)  

License revenue

   $ 35.3    $ 33.8    4   $ 66.8    $ 24.8    169   $ 102.1    $ 58.6    74

Service revenue:

                        

Consulting and training service revenue

     16.8      21.1    -20     87.7      92.7    -5     104.5      113.8    -8

Maintenance revenue

     98.7      101.7    -3     51.3      48.3    6     150.0      150.0    0
                                                

Total service revenue

     115.5      122.8    -6     139.0      141.0    -1     254.5      263.8    3
                                                

Total revenue

   $ 150.8    $ 156.6    -4   $ 205.8    $ 165.8    24   $ 356.6    $ 322.4    11
                                                

Indirect

                        

License revenue

   $ 29.6    $ 25.9    15   $ 7.8    $ 8.1    -4   $ 37.4    $ 34.0    10

Service revenue:

                        

Consulting and training service revenue

     2.7      4.2    -35     1.8      1.7    0     4.5      5.9    -24

Maintenance revenue

     86.9      90.5    -4     13.6      12.9    5     100.5      103.4    -3
                                                

Total service revenue

     89.6      94.7    -5     15.4      14.6    4     105.0      109.3    -4
                                                

Total revenue

   $ 119.2    $ 120.6    -1   $ 23.2    $ 22.7    1   $ 142.4    $ 143.3    -1
                                                

Total Revenue

                        

License revenue

   $ 64.9    $ 59.7    9   $ 74.6    $ 32.9    127   $ 139.5    $ 92.6    51

Service revenue:

                        

Consulting and training service revenue

     19.5      25.3    -23     89.5      94.4    -5     109.0      119.7    -9

Maintenance revenue

     185.6      192.2    -3     64.9      61.2    6     250.5      253.4    -1
                                                

Total service revenue

     205.1      217.5    -6     154.4      155.6    -1     359.5      373.1    -4
                                                

Total revenue

   $ 270.0    $ 277.2    -3   $ 229.0    $ 188.5    21   $ 499.0    $ 465.7    7
                                                

Revenue results for the second quarter and first six months of 2010 reflect license revenue growth, particularly with respect to sales to customers in our direct enterprise market, relatively flat to modest declines in maintenance revenue, and declines in consulting and training services revenue. Both maintenance and consulting and training services revenue continued to be impacted by soft license sales in 2009. We have seen some recent signs of improvement in sales of Desktop products and in license sales to indirect accounts. While the market for Desktop products, particularly with respect to our large direct accounts, is a mature market with limited growth opportunities, Desktop license sales to direct customers in the second quarter of 2010 grew on both a sequential basis compared to the first quarter of 2010 and year over year. Total indirect revenue for the second quarter of 2010 was down slightly on a sequential basis compared to the first quarter of 2010 and year over year, driven by declines in consulting and training services revenue. However, in the second quarter of 2010, license revenue sales to indirect customers increased sequentially and year over year. Total revenue in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 was positively impacted by $8.6 million and $20.6 million, respectively, due to favorable foreign currency exchange rates in most currencies in which we do business.

 

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Revenue by Line of Business

 

Revenue as a Percentage of Total Revenue    Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

License revenue

   27   19   28   20

Maintenance revenue

   51      54      50      54   

Consulting and training service revenue

   22      27      22      26   
                        
   100   100   100   100
                        

 

Year Over Year Percentage Changes in Revenue    Three months ended
April 3, 2010
compared to three
months ended
April 4, 2009
    Six months ended
April 3, 2010
compared to six
months ended
April 4, 2009
 
     As
Reported
    Constant
Currency
    As
Reported
    Constant
Currency
 

License revenue

   54   48   51   46

Maintenance revenue

   —     (3 )%    (1 )%    (5 )% 

Consulting and training service revenue

   (12 )%    (16 )%    (9 )%    (13 )% 

Total revenue

   7   3   7   3

License Revenue

The growth in license revenue in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 reflects increases of 107% ($15.4 million) and 127% ($41.7 million), respectively, in Enterprise license revenue and increases of 26% ($7.2 million) and 9% ($5.2 million), respectively, in Desktop license revenue. The growth in Enterprise license revenue in the first six months of 2010 was driven by sales of Windchill, which were $12.4 million and $32.3 million higher in the second quarter and first six months of 2010, respectively, than in the second quarter and first six months of 2009. The increase in Desktop license revenue in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 was due to increases of $7.4 million and $5.3 million, respectively, in sales of new Pro/ENGINEER licenses.

License revenue in the second quarter and first six months of 2010 was favorably impacted by $2.2 million and $4.7 million, respectively, as a result of foreign currency exchange rate movements.

Maintenance Revenue

Maintenance revenue is comprised of contracts to maintain previously purchased software and sales of maintenance services on new software. Our maintenance revenue in the second quarter and first six months of 2010 was flat and down 1%, respectively, compared to the second quarter and first six months of 2009. Maintenance revenue in the second quarter and first six months of 2010 was favorably impacted by $4.4 million and $10.5 million, respectively, as a result of foreign currency exchange rate movements. Our maintenance revenue continues to be adversely impacted by the global economic climate and soft license revenue in 2009. Desktop maintenance revenue decreased 2% and 3%, in the second quarter and first six months of 2010, respectively, reflecting a slight decline in Pro/ENGINEER seats under maintenance at the end of the second quarter of 2010 compared to the end of the second quarter of 2009. Enterprise maintenance revenue increased 8% and 6% in the second quarter and first six months of 2010, respectively, reflecting a 24% increase in Windchill seats under maintenance at the end of the second quarter of 2010 compared to the end of the second quarter of 2009.

 

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Table of Contents

Consulting and Training Service Revenue

Consulting and training services engagements typically result from sales of new licenses, particularly of our Enterprise solutions. As a result, significantly reduced year-over-year license revenue in 2009 had an adverse impact on services revenue in the second quarter and first six months of 2010. Although we have pending service engagements that we expect to perform, declines in new licenses sold during 2009 have had, and may continue to have, an adverse effect on future services revenue. Total consulting revenue, which is primarily related to Windchill implementations, was down 11% and 7% in the second quarter and first six months of 2010, respectively. Total training revenue, which typically represents about 15% of our total consulting and training services revenue, was down 18% and 17% in the second quarter and first six months of 2010, respectively. Direct Enterprise consulting and training service revenue, which comprised over 75% of our total consulting and training service revenue in the second quarters and first six months of both 2010 and 2009, was down 9% and 5% in the second quarter and first six months of 2010, respectively.

Consulting and training services revenue in the second quarter and first six months of 2010 was favorably impacted by $2.1 million and $5.4 million, respectively, as a result of foreign currency exchange rate movements.

One of our strategic initiatives is to continue to expand our services ecosystem by adding strategic services partners to focus on smaller engagements, enabling us to focus on larger engagements. This strategy has resulted in a concentration of our services engagements among a smaller number of customers. Our revenue includes a large consulting and training service engagement with a European customer that has benefited all periods presented.

Revenue by Distribution Model

Direct

Direct revenue is comprised primarily of sales by our direct sales force to large businesses. Our direct revenue was 71% and 70% of our total revenue in the second quarters of 2010 and 2009, respectively, and 71% and 69% of our total revenue in first six months of 2010 and 2009, respectively. The increases in direct revenue in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 were driven by 15% and 24% growth in direct Enterprise revenue in the second quarter and first six months of 2010, respectively. These increases were partially offset by decreases of 1% and 4% in direct Desktop revenue in the second quarter and first six months of 2010, respectively, over the comparable 2009 periods. The direct Desktop large business market is a mature market, which, while important due to the strong base of maintenance-paying customers, has limited long-term growth opportunity.

Indirect

Indirect revenue is comprised of revenue from our reseller channel and from customers we have designated as indirect. We have over 420 geographically dispersed resellers that focus on sales to small- and medium-size businesses. This enables our direct sales force to focus on larger sales opportunities and ensures greater coverage of all customer segments. Historically, our resellers have focused primarily on selling our Desktop products. In 2009, we began developing a network of resellers to sell our Enterprise products and we are continuing these efforts in 2010.

Our indirect revenue was 29% and 30% of our total revenue in the second quarter of 2010 and 2009, respectively, and 29% and 31% of our total revenue in the first six months of 2010 and 2009, respectively. Indirect revenue was up 5% and down 1% in the second quarter and first six months of 2010, respectively, compared to the second quarter and first six months of 2009. We believe that this performance reflects challenging but improving macroeconomic conditions.

 

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Table of Contents

We believe that the markets for Desktop and Enterprise solutions served by our indirect channel continue to offer long-term growth potential. However, while we have achieved sequential indirect license revenue growth in both the first and second quarters of 2010, and growth in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009, these markets continue to be impacted by ongoing uncertain macroeconomic conditions and we expect them to recover at a slower pace than our direct business.

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 period 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 from contracts entered into during the current period and/or prior periods was $39.4 million (attributable to 18 customers) and $24.7 million (attributable to nine customers) in the second quarter of 2010 and 2009, respectively. For the first six months of 2010 and 2009, such revenue was $89.3 million and $48.9 million, respectively. This revenue represented 16% and 11% of total revenue, respectively, and 33% and 24% of total license and consulting and training service revenue, respectively, in the second quarters of 2010 and 2009. This revenue represented 18% and 11% of total revenue, respectively, and 36% and 23% of total license and consulting and training service revenue, respectively, in the first six months of 2010 and 2009. The increase in the first six months of 2010 was due primarily to the sale of Enterprise products to large direct customers.

The amount of revenue, particularly license revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on current macroeconomic conditions.

Revenue by Geographic Region

 

     Three months ended     Percent Change     Six months ended     Percent Change  
     April 3,
2010
    April 4,
2009
    Actual     Constant
Currency
    April 3,
2010
    April 4,
2009
    Actual     Constant
Currency
 
     (Dollar amounts in millions)  

Revenue by region:

                

Americas

   $ 83.9      $ 79.6      5   5   $ 191.1      $ 163.2      17   17

Europe

   $ 93.5      $ 89.7      4   (4 )%    $ 192.7      $ 188.9      2   (7 )% 

Pacific Rim

   $ 33.4      $ 25.5      31   27   $ 62.3      $ 57.3      9   6

Japan

   $ 29.7      $ 30.5      (3 )%    (4 )%    $ 52.9      $ 56.3      (6 )%    (11 )% 

Revenue by region as a % of total revenue:

                

Americas

     35     35         38     35    

Europe

     39     40         39     41    

Pacific Rim

     14     11         12     12    

Japan

     12     14         11     12    

Americas

The increase in revenue in the Americas in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 was primarily due to increases of 27% ($3.8 million) and 99% ($29.4 million), respectively, in license revenue. The increases in license revenue were driven by sales of Enterprise products to direct customers.

Europe

Revenue in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 reflects an increase of 59% ($8.1 million) and 23% ($7.7 million), respectively, in license revenue and an increase of 3% ($1.3 million) and 1% ($1.2 million), respectively, in maintenance revenue, offset

 

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Table of Contents

by decreases of 21% ($5.5 million) and 10% ($5.0 million), respectively, in consulting and training service revenue. Foreign currency exchange rate movements, particularly the Euro, favorably impacted revenue in Europe by $7.1 million and $16.1 million in the second quarter and first six months of 2010, respectively, compared to the second quarter and first six months of 2009.

Pacific Rim

The increase in revenue in the Pacific Rim in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 was primarily due to increases of 102% ($8.7 million) and 41% ($8.5 million), respectively, in license revenue, partially offset by decreases of 13% ($1.2 million) and 19% ($3.8 million), respectively, in consulting and training service revenue. Revenue from customers in China, which represents a significant portion of our Pacific Rim revenue, increased 46% and 24%, respectively, compared to the second quarter and first six months of 2009. Revenue in the Pacific Rim in the second quarter and first six months of 2010 was favorably impacted by $1.0 million and $1.5 million, respectively, due to the impact of changes in foreign currency exchange rate movements.

Japan

The decrease in revenue in Japan in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 was primarily due to decreases of 10% ($2.0 million) and 7% ($2.5 million), respectively, in maintenance revenue and decreases of 16% ($0.8 million) and 22% ($2.3 million), respectively, in consulting and training service revenue, partially offset by increases of 34% ($2.1 million) and 15% ($1.3 million), respectively, in license revenue. Revenue in Japan in the second quarter and first six months of 2010 was favorably impacted by $0.5 million and $3.0 million, respectively, due to the impact of changes in the Yen to U.S. dollar exchange rate.

Costs and Expenses

 

     Three months ended     Six months ended  
     April 3,
2010
   April 4,
2009
   Percent
Change
    April 3,
2010
   April 4,
2009
   Percent
Change
 
     (Dollar amounts in millions)  

Costs and expenses:

                

Cost of license revenue

   $ 8.2    $ 7.0    18   $ 16.4    $ 14.6    12

Cost of service revenue

     68.9      72.3    (5 )%      139.4      148.0    (6 )% 

Sales and marketing

     75.2      71.4    5     153.7      151.3    2

Research and development

     50.0      44.7    12     100.7      93.1    8

General and administrative

     22.8      17.7    29     46.9      39.1    20

Amortization of acquired intangible assets

     4.0      3.8    4     8.0      7.7    5

Restructuring charges

     —        9.8        —        9.8   
                                

Total costs and expenses

   $ 229.1    $ 226.7    1 % (1)     $ 465.1    $ 463.6    —   % (1)  
                                

Total headcount at end of period

     5,205      5,159           

 

(1) On a constant foreign currency basis, compared to the year-ago period, total costs and expenses for the second quarter and first six months of 2010 decreased 2% and 3%, respectively.

Costs and expenses in the second quarter and first six months of 2010 compared to the prior year periods reflect the following:

Lower costs due to:

 

   

headcount reductions as part of the executed 2009 restructuring plan made in the third and fourth quarters of 2009; and

 

   

lower cost of service revenue due to the decrease in consulting and training service revenue.

 

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Table of Contents

Higher costs due to:

 

   

higher commission expense due to an increase in license revenue;

 

   

investments in research and development; and

 

   

higher accrued incentive-based compensation, primarily in general and administrative expense.

Cost of License Revenue

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    Percent
Change
    April 3,
2010
    April 4,
2009
    Percent
Change
 
     (Dollar amounts in millions)  

Cost of license revenue

   $ 8.2      $ 7.0      18   $ 16.4      $ 14.6      12

% of total revenue

     3     3       3     3  

% of total license revenue

     13     17       12     16  

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 of intangible assets associated with acquired products. Cost of license revenue as a percentage of total license revenue was lower in the second quarter and first six months of 2010 than the second quarter and first six months of 2009 due to higher license revenue in the first six months of 2010. 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 3,
2010
    April 4,
2009
    Percent
Change
    April 3,
2010
    April 4,
2009
    Percent
Change
 
     (Dollar amounts in millions)  

Cost of service revenue

   $ 68.9      $ 72.3      (5 )%    $ 139.4      $ 148.0      (6 )% 

% of total revenue

     29     32       28     32  

% of total service revenue

     39     39       39     40  

Service headcount at end of period

     1,466        1,422      3      

Our cost of service revenue includes costs such as salaries, benefits and computer equipment and facilities for our training, customer support and consulting personnel; third-party subcontractor fees; and costs associated with the release of maintenance updates (including related royalty costs). Service margins can vary based on the product mix sold in the period. Total compensation, benefit costs and travel expenses were 1% ($0.4 million) and 2% ($1.5 million) higher in the second quarter and first six months of 2010, respectively, compared to the second quarter and first six months of 2009. The cost of third-party consulting services was $1.7 million and $6.6 million lower in the second quarter and first six months of 2010, respectively, compared to the second quarter and first six months of 2009 due to decreases in consulting and training service revenue in the first six months of 2010.

Sales and Marketing

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    Percent
Change
    April 3,
2010
    April 4,
2009
    Percent
Change
 
     (Dollar amounts in millions)  

Sales and marketing

   $ 75.2      $ 71.4      5   $ 153.7      $ 151.3      2

% of total revenue

     31     32       31     32  

Sales and marketing headcount at end of period

     1,266        1,342      (6 )%       

 

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Table of Contents

Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Our compensation, benefit costs and travel expenses were higher by an aggregate of $2.9 million and 4.3 million in the second quarter and first six months of 2010, respectively, compared to the second quarter and first six months of 2009. These costs increased due to commissions, which were higher by $3.2 million and $7.1 million, respectively, due to more license sales in 2010 than in 2009 offset by lower salaries due to headcount reductions made in the third and fourth quarters of 2009.

Research and Development

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    Percent
Change
    April 3,
2010
    April 4,
2009
    Percent
Change
 
     (Dollar amounts in millions)  

Research and development

   $ 50.0      $ 44.7      12   $ 100.7      $ 93.1      8

% of total revenue

     21     20       20     20  

Research and development headcount at end of period

     1,933        1,880      3      

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 enhance functionality. We have increased headcount to support additional development of our core products. As a result of an increase in headcount, total compensation, benefit costs and travel expenses were higher in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009, respectively, by an aggregate of $5.2 million and $7.2 million, respectively.

General and Administrative

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    Percent
Change
    April 3,
2010
    April 4,
2009
    Percent
Change
 
     (Dollar amounts in millions)  

General and administrative

   $ 22.8      $ 17.7      29   $ 46.9      $ 39.1      20

% of total revenue

     9     8       9     8  

General and administrative headcount at end of period

     527        503      5      

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 and outside professional services, including accounting and legal fees. Total compensation, benefit costs and travel costs were higher in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 by an aggregate of $4.7 million and $8.0 million, respectively, due primarily to a $4.1 million and $7.4 million increase, respectively, in accrued incentive-based compensation expense. The increases were due primarily to grants of fiscal 2010 stock-based awards being made in November 2009, our usual timing, while the 2009 stock-based awards were not made until the third quarter of 2009 because we had insufficient shares available under the 2000 Equity Incentive Plan earlier in the year.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets reflects the amortization of acquired non-product related intangible assets, primarily customer and trademark-related intangible assets, recorded in connection with completed acquisitions.

 

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Restructuring Charges

In the second quarter of 2009, we implemented workforce reductions and facility consolidations. 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.

Interest and Other Income (Expense), net

 

     Three months ended     Six months ended  
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 
     (in millions)  

Interest income

   $ 0.7      $ 1.2      $ 1.5      $ 2.8   

Interest expense

     (0.3     (0.7     (0.8     (1.9

Other income (expense), net

     (1.0     (0.8     (1.8     (2.2
                                

Total interest and other income (expense), net

   $ (0.6   $ (0.3   $ (1.1   $ (1.3
                                

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 and the British Pound. The decrease in interest income and interest expense in the first six months of 2010 compared to the first six months of 2009 is due to lower interest rates, resulting in less interest earned on cash balances and less interest accrued on borrowings outstanding under our revolving credit facility.

Income Taxes

In the second quarter of 2010, our effective tax rate was a provision of 17% on a pre-tax income of $10.9 million, compared to a benefit of 529% in the second quarter of 2009 on a pre-tax loss of $1.7 million. In the first six months of 2010, our effective tax rate was a provision of 18% on pre-tax income of $32.7 million, compared to a benefit of 1,387% in the first six months of 2009 on pre-tax income of $0.8 million. In the second quarter and first six months of 2010, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to foreign taxes at a net effective tax rate lower than the U.S. rate (including a net benefit of $0.4 million and $1.3 million in the second quarter and first six months, respectively, related to research and development (R&D) cost sharing pre-payments by a foreign subsidiary to the U.S.). 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 R&D tax credits triggered by a retroactive extension of the R&D tax credit enacted during the first quarter of 2009.

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. Our tax rate may also 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 other companies.

 

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We have net deferred tax assets ($123.5 million as of September 30, 2009) primarily relating to our U.S. operations. We have concluded, based on the weight of available evidence, that our net deferred tax assets are more likely than not to be realized in the future. In arriving at this conclusion, we evaluated all available evidence, including our pre-tax results for the last three years (adjusted for permanent differences), the circumstances of a pre-tax loss generated in the U.S. for the 2009 fiscal year and our expected future profitability. We reassess our valuation allowance requirements each financial reporting period. Our results for the first half of 2010 continued to be a loss in the U.S. If our results for the remainder of 2010 do not improve, and if our projections for 2011 indicate continued losses in our U.S. operations, our assessment may indicate that a valuation allowance is required.

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. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several foreign jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.

Uses of Non-GAAP Financial Measures and Reconciliations to GAAP Results

We evaluate our consolidated financial performance using a variety of measures, including certain non-GAAP measures. The non-GAAP measures we use exclude amounts that are normally included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures included in this Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measure prepared in accordance with GAAP.

As used by us,

 

   

non-GAAP operating income (loss)  is GAAP operating income (loss) excluding stock-based compensation, amortization of acquired intangible assets, restructuring charges, and unusual charges, if any, that we incurred during the respective period,

 

   

non-GAAP net income (loss) is GAAP net income (loss) excluding the expenses excluded from non-GAAP operating income (loss), the related tax effects of excluding those expenses, and other unusual tax provisions or benefits recorded in a period, and

 

   

non-GAAP operating margin is GAAP operating margin excluding stock-based compensation, amortization of acquired intangible assets, restructuring charges, and unusual charges, if any, that we incurred during the respective period.

We exclude stock-based compensation expense and amortization of acquired intangible assets expense because these are non-cash expenses and, with respect to amortization of acquired intangible assets expense, the expense is affected by the timing and magnitude of our acquisitions. We exclude restructuring charges because we incur these charges only when we are engaged in restructuring activities and not as part of our normal operations.

We use these non-GAAP measures to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We believe that providing non-GAAP measures affords investors a view of our operating results that may be more easily compared to the results of peer companies.

 

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In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. However, non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on our financial results and such items often recur. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.

 

     Three Months
Ended
    Six Months
Ended
 
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 
     (in millions except per share data)  

GAAP operating income (loss)

   $ 11.5      $ (1.4   $ 33.9      $ 2.1   

Stock-based compensation (1)

     12.3        6.7        26.1        17.2   

Amortization of acquired intangible assets

     8.9        8.5        17.9        17.1   

Restructuring charges

     —          9.8        —          9.8   
                                

Non-GAAP operating income

   $ 32.7      $ 23.6      $ 77.9      $ 46.2   
                                

GAAP net income

   $ 9.0      $ 7.2      $ 26.9      $ 11.8   

Stock-based compensation (1)

     12.3        6.7        26.1        17.2   

Amortization of acquired intangible assets

     8.9        8.5        17.9        17.1   

Restructuring charges

     —          9.8        —          9.8   

Income tax adjustments (2)

     (6.7     (14.7     (14.1     (20.9
                                

Non-GAAP net income

   $ 23.5      $ 17.5      $ 56.8      $ 35.0   
                                

GAAP diluted earnings per share

   $ 0.08      $ 0.06      $ 0.22      $ 0.10   

Stock-based compensation (3)

     0.10        0.06        0.22        0.15   

All other items identified above (3)

     0.02        0.03        0.03        0.05   
                                

Non-GAAP diluted earnings per share

   $ 0.20      $ 0.15      $ 0.47      $ 0.30   
                                

Diluted weighted average shares outstanding

     120        116        120        117   
                                

Operating margin impact of non-GAAP adjustments:

 

     Three Months
Ended
    Six Months
Ended
 
     April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

GAAP operating margin

   4.8   (0.6 )%    6.8   0.4

Stock-based compensation

   5.1   3.0   5.2   3.7

Amortization of acquired intangible assets

   3.7   3.8   3.6   3.7

Restructuring charges

   —     4.3   —     2.1
                        

Non-GAAP operating margin

   13.6   10.5   15.6   9.9
                        

 

(1) The increases in stock-based compensation in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 were due primarily to grants of fiscal 2010 stock-based awards being made in November 2009, our usual timing, while the fiscal 2009 stock-based awards were not made until the third quarter of 2009 because we had insufficient shares available under the 2000 Equity Incentive Plan earlier in the year.
(2) Income tax adjustments reflect the tax effects of non-GAAP adjustments for the second quarter and first six months of 2010 and 2009, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above, as well as the effect of a $7.6 million one-time tax benefit recorded in the second quarter of 2009 due to the recognition of deferred tax assets in a foreign jurisdiction.
(3) EPS impact of non-GAAP adjustments is calculated by dividing the dollar amount of the non-GAAP adjustment by the GAAP diluted earnings per share outstanding for the respective period.

 

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Liquidity and Capital Resources

 

     April 3,
2010
    April 4
2009
 
     (in thousands)  

Cash and cash equivalents

   $ 222,692      $ 267,718   
                

Amounts below are for the six months ended:

    

Cash provided by operating activities

   $ 90,708      $ 88,650   

Cash used by investing activities

     (19,189     (23,741

Cash used by financing activities

     (77,693     (43,942

Cash provided by operating activities included the following:

    

Cash disbursements for restructuring charges

     (13,447     (10,927

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 3, 2010, cash and cash equivalents totaled $222.7 million, down from $235.1 million at September 30, 2009. The decrease in cash and cash equivalents in the first six months of 2010 was due primarily to uses of cash for: $45.1 million to repurchase our common stock; $20.2 million to pay employee withholding taxes related to restricted stock and restricted stock units that vested during the period; $19.7 million used to repay borrowings under our revolving credit facility and $17.1 million for additions to property and equipment, partially offset by $90.7 million of cash provided by operations.

Cash provided by operating activities

Cash provided by operating activities was $90.7 million and $88.7 million in the first six months of 2010 and 2009, respectively. This change was primarily due to higher income (net income was higher by $15.0 million in the first six months of 2010 compared to the first six months of 2009), lower payments related to year-end compensation accruals, and lower income tax payments, partially offset by lower cash collections from accounts receivable as accounts receivable at September 30, 2009 was $166.6 million compared to $201.5 million at September 30, 2008. Cash collections on accounts receivable remained strong with days sales outstanding of 57 days as of the end of the second quarter of 2010 compared to 62 days as of September 30, 2009 and 53 days at the end of the second quarter of 2009.

As of April 3, 2010, approximately 10% of our total net trade accounts receivable was due from a customer in Europe.

Cash used by investing activities

 

     Six months ended  
     April 3,
2010
    April 4,
2009
 

Cash used by investing activities included the following:

    

Acquisitions of businesses, net of cash acquired

   $ (2,087   $ (8,475

Additions to property and equipment

     (17,102     (15,266
                
   $ (19,189   $ (23,741
                

Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.

 

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Cash used by financing activities

 

     Six months ended  
     April 3,
2010
    April 4,
2009
 

Cash used by financing activities included the following:

    

Net repayments under revolving credit facility

   $ (19,720   $ (31,951

Repurchases of common stock

     (45,072     (9,581

Payments of withholding taxes in connection with vesting of stock-based awards

     (20,168     (4,341

Proceeds from issuance of common stock

     7,045        2,116   

Other

     222        (185
                
   $ (77,693   $ (43,942
                

Credit Facility

We have a revolving credit facility with a bank syndicate under which 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.

As of April 3, 2010, the amount outstanding under the revolving credit facility was 24.9 million Euros, which was equivalent to $33.5 million on that date. The current loan matures on May 25, 2010 and accrues interest at 1.4% per annum. 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. We currently plan to repay the remaining balance outstanding under the credit facility by the end of 2010.

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

Our Board of Directors has authorized us to use up to $100 million of cash from operations to repurchase shares of our common stock in open market purchases. This authorization will expire on May 31, 2011 unless earlier revoked or extended. In the first six months of 2010, we repurchased 2.7 million shares at a cost of $45.1 million and we have repurchased an additional 0.8 million shares at a cost of $15 million in the third quarter of 2010. In the first six months of 2009, we repurchased 0.9 million shares at a cost of $9.6 million. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued. As of April 3, 2010, $35.5 million remained under our current authorization.

Expectations for the Rest of Fiscal 2010

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.

In the second half of 2010, we expect to use $35 million of cash to repay amounts outstanding under our revolving credit facility and/or to repurchase shares of our common stock ( including $15 million of share repurchases made to date in the third quarter of 2010) and $11 million for capital expenditures.

We have evaluated, and expect to continue to evaluate, possible strategic transactions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic transactions.

 

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Our expected uses of cash could change, our cash position could be reduced and we may incur additional debt obligations to the extent we complete any significant acquisitions and/or pay any amounts, settlements or judgments related to the pending legal matter discussed in “Note 11. Commitments and Contingencies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

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 2009 Annual Report on Form 10-K. We did not make any changes to these policies or to these estimates during the quarter ended April 3, 2010.

Recent Accounting Pronouncements

For a description of 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 2009 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 3, 2010.

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 3, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

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 other information set forth in this report, you should carefully consider the factors described in Part I. Item 1A. “Risk Factors” in our 2009 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2009 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below shows the shares of our common stock we repurchased in the second quarter of 2010.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period (1)

  Total Number of Shares
(or Units) Purchased
    Average Price Paid
per Share (or
Unit)
  Total Number of
Shares (or Units)
Purchased as Part of
Publicly  Announced
Plans or Programs
  Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
 

January 3 – January 30, 2010

  —          —     —     $ 75,482,500 (2) 

January 31 – February 27, 2010

  2,445,248 (3)    $ 16.61   2,408,922   $ 35,482,518 (2) 

February 28 – April 3, 2010

  —          —     —     $ 35,482,518 (2) 
                   

Total

  2,445,248 (3)    $ 16.61   2,408,922   $ 35,482,518 (2) 
                   

 

(1) Periods are our fiscal months within the fiscal quarter.
(2) On May 20, 2008, we announced our share repurchase program in the amount of $50 million, and on November 26, 2008, we announced that the repurchase program had been increased to $100 million. On March 3, 2010, our Board of Directors extended the share repurchase authorization through May 31, 2011. The current program will expire on that date unless earlier revoked or extended.
(3) Includes 36,326 shares tendered to PTC to satisfy tax withholding obligations incurred in connection with the vesting of certain of our executives’ restricted stock awards on February 15, 2010. The shares were repurchased from the executives at a price of $16.62 which was the closing price per share of our common stock on the Nasdaq Global Select Market on that date.

 

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ITEM 5. OTHER INFORMATION

On May 10, 2010, we announced that James E. Heppelmann, our President and Chief Operating Officer, will succeed C. Richard Harrison as our Chief Executive Officer, effective October 1, 2010, at which time Mr. Harrison will become our Executive Chairman. In connection with this transition, we made the changes described below in the compensatory arrangements for Messrs. Harrison and Heppelmann. We also amended the existing Executive Agreements with our other executive officers as described below.

Agreement with C. Richard Harrison

On May 7, 2010, we entered into a new Executive Agreement with Mr. Harrison (the “2010 Harrison Agreement”). In connection therewith, we amended the Amended and Restated Executive Agreement dated June 26, 2008 between us and Mr. Harrison (the “2008 Harrison Agreement”) only to extend its term through September 30, 2010. As of October 1, 2010, the 2010 Harrison Agreement will supersede the 2008 Harrison Agreement, which will thereupon be terminated and of no further force and effect.

The 2010 Harrison Agreement provides that Mr. Harrison will cease serving as Chief Executive Officer and will become our Executive Chairman on October 1, 2010 and sets forth his compensation arrangements in that position. Mr. Harrison’s employment as Executive Chairman will extend through November 30, 2012 (the “Term”) unless earlier terminated. Mr. Harrison will be required to be available on a part-time basis for consultation and the performance of duties requested by the Chief Executive Officer, including without limitation enhancing relationships with our key customers, partners and investors and other activities focused on improving the business climate for us around the world. Mr. Harrison will also continue to serve on our board of directors.

Under the 2010 Harrison Agreement, we will pay Mr. Harrison an annual salary of $500,000 for our 2011 fiscal year, and an aggregate salary of $500,000 for the period from October 1, 2011 through November 30, 2012. He will remain entitled to participate on the same terms as employees generally in certain of our employee benefit plans. In lieu of other benefits for which he ceases to be eligible upon assuming part-time employment status, he will receive a one-time lump sum payment of $110,000. In addition, effective October 1, 2010, he will receive a grant of restricted stock units with a value equal to approximately $3,000,000, which will vest in two equal installments on September 30, 2011 and September 30, 2012 if the 2010 Harrison Agreement is then in effect.

If, before October 1, 2010, a Change in Control (as defined in the 2008 and 2010 Harrison Agreements) occurs or Mr. Harrison’s employment is terminated, any obligations we have to Mr. Harrison will be as set forth in the 2008 Harrison Agreement, and the 2010 Harrison Agreement will not take effect. During the Term, Mr. Harrison’s employment may be terminated by him for convenience or Good Reason or by us for convenience, for Cause or because of his Disability (as each such term is defined in the 2010 Harrison Agreement). In addition, Mr. Harrison’s employment would automatically terminate upon a Change in Control. The 2010 Harrison Agreement provides for the following consequences of termination in the respective circumstances:

Termination by Mr. Harrison for Good Reason, by Us for Convenience, or Due to a Change in Control. If Mr. Harrison’s employment is terminated by Mr. Harrison for Good Reason, by us for convenience, or due to a Change in Control, the vesting of all outstanding equity awards he holds and the payment of all cash compensation required under the agreement would be accelerated and each outstanding vested stock option he holds would remain exercisable until the close of business on the earlier of the end of the original term of the option and November 30, 2012.

Termination by Mr. Harrison for Convenience or by Us for Non-Performance. If Mr. Harrison’s employment is terminated by Mr. Harrison for convenience or by us for non-performance of his new employment

 

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responsibilities, the agreement provides for forfeiture of his unearned salary and any unvested equity granted pursuant to the agreement; however, vesting would continue on any equity granted other than under the agreement so long as Mr. Harrison continues to serve on our board of directors. In addition, as long as he remains a director, the period during which he may exercise any vested stock options will be extended to the earlier of the original termination date of the option and February 28, 2013.

Termination for Cause (other than Non-Performance). If Mr. Harrison’s employment is terminated by us for reasons constituting Cause (other than non-performance described above), he would forfeit all of his unearned salary and unvested equity awards.

Death or Disability. If Mr. Harrison’s employment is terminated due to his death or Disability, all outstanding equity awards that he holds would immediately become vested and exercisable in full.

In the event that any payments and benefits provided for under the 2010 Harrison Agreement or otherwise payable to Mr. Harrison would constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code and be subject to the related excise tax, Mr. Harrison would be entitled to receive either the full payment of such payments and benefits or only such lesser amount that would result in no portion of the benefits being subject to the excise tax, whichever results in the greatest amount of after-tax benefits to him. This replaces the excess parachute payment tax “gross-up payment” provision contained in the 2008 Harrison Agreement.

Agreement with James E. Heppelmann

On May 7, 2010, our board of directors appointed Mr. Heppelmann as President and Chief Executive Officer, effective October 1, 2010. Mr. Heppelmann, 45, has been our President and Chief Operating Officer since March 2009 and before that was Executive Vice President and Chief Product Officer since 2003. He has also been a member of our board of directors since 2008.

On May 7, 2010, we amended the Amended and Restated Executive Agreement dated June 26, 2008 between us and Mr. Heppelmann (the “Original Heppelmann Agreement”) only to extend its term through September 30, 2010. On May 7, 2010, we also entered into an Amended and Restated Executive Agreement with Mr. Heppelmann (the “Amended Heppelmann Agreement”), which amends and restates the Original Heppelmann Agreement, primarily for the purpose of establishing Mr. Heppelmann’s new compensation arrangements. The amendment and restatement will take effect October 1, 2010 and the provisions of the Amended Heppelmann Agreement will supersede those of the Original Heppelmann Agreement.

The Amended Heppelmann Agreement sets forth Mr. Heppelmann’s compensation arrangements beginning October 1, 2010. It provides that, for the fiscal year beginning October 1, 2010, Mr. Heppelmann’s annual base salary will be $750,000 and his target annual bonus will be $1,000,000. Effective October 1, 2010, he will receive a one-time grant of restricted stock units with a value equal to approximately $7,000,000, which will be subject to five-year performance and time-based vesting criteria as set forth in the agreement, subject to Mr. Heppelmann’s continuing employment. We also agreed that, during our 2011 fiscal year, we will grant Mr. Heppelmann long-term incentive compensation consisting of restricted stock units with a value equal to approximately $3,450,000 that will be subject to performance and time-based vesting as set forth in the agreement.

The Amended Heppelmann Agreement makes the following principal changes to the payments and benefits that may be received by Mr. Heppelmann upon a Change in Control or termination of his employment and to certain other terms of the Original Heppelmann Agreement.

 

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Elimination of Change in Control Bonus Payment. Mr. Heppelmann will no longer be entitled to payment of an amount equal to his target annual bonus upon a Change in Control, as the Original Heppelmann Agreement provides.

Amendment of “Good Reason” Definition. The definition of “Good Reason” for termination of employment is supplemented to include (i) the failure to install Mr. Heppelmann in the position of Chief Executive Officer on October 1, 2010 or to maintain him in that position thereafter and (ii) any material reduction in the aggregate benefits for which he is eligible under our employee benefit plans, other than any such reduction that is consistent with similar actions taken with respect to our employees generally.

Termination without Cause. The period over which Mr. Heppelmann’s salary and benefits will be continued if Mr. Heppelmann is terminated by us without Cause, other than a termination constituting a Change in Control Termination or a termination due to his Disability (as such terms are defined in the Amended Heppelmann Agreement), has been increased from one year to two years, and payment of an aggregate amount equal to two times the average of the annual bonuses paid to him with respect to the two fiscal years immediately preceding the fiscal year in which the termination occurs has been added.

Termination Upon Change in Control. The cash severance payable effective upon a Change in Control Termination has been increased from one times to two times his annual salary and target bonus, his participation in our benefit plans has been extended from one to two years, and, in addition to the vesting of equity awards currently provided for, each of Mr. Heppelmann’s vested stock options will now remain exercisable until the earlier of the end of the original maximum term of such option or two years following the date of termination.

Sunset of “Gross-Up” Payment. The Amended Heppelmann Agreement terminates the excess parachute payment tax “gross-up payment” called for by the Original Heppelmann Agreement, effective after December 31, 2013. Instead, in the event that any payments and benefits provided for under the Amended Heppelmann Agreement or otherwise payable to Mr. Heppelmann would constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code and be subject to the related excise tax, Mr. Heppelmann would be entitled to receive either the full payment of such payments and benefits or only such lesser amount that would result in no portion of the benefits being subject to the excise tax, whichever results in the greatest amount of after-tax benefits to him.

In connection with execution of the Amended Heppelmann Agreement, we required Mr. Heppelmann to enter into a new non-competition agreement with us that extends the term of his post-employment non-competition period to two-years.

We provide the following required disclosure of related party transactions with respect to Mr. Heppelmann. Mr. Heppelmann’s brother, Howard Heppelmann, is our Vice President, General Manager of PTC’s InSight group. For fiscal 2010, Howard Heppelmann’s annual salary is $185,000, his target annual bonus is $125,000, $31,250 of which was paid for the first half of fiscal 2010 performance, and his automobile allowance is $300 per month. Howard Heppelmann is also eligible to participate in our standard employee benefits packages and has received a matching contribution of $3,606 to date for 2010 under our 401(k) Savings Plan. We have recorded stock-based compensation expense of $59,498 to date in fiscal 2010 for equity awards made to Howard Heppelmann under our equity incentive plans. Information with respect to Howard Heppelmann’s fiscal 2009 compensation is incorporated herein by reference to the “Transactions with Related Persons” section of our proxy statement filed with the Securities and Exchange Commission on January 20, 2010.

Other Executives’ Agreements

We have also entered into Amended and Restated Executive Agreements (the “Amended Executive Agreements”) with our other executive officers, Cornelius F. Moses, Executive Vice President, Chief Financial Officer, Barry F. Cohen, Executive Vice President, Strategic Services and Partners, Paul J. Cunningham,

 

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Executive Vice President, Worldwide Sales, Anthony DiBona, Executive Vice President, Global Maintenance Support, Robert C. Gremley, Executive Vice President, Corporate Marketing, Brian A. Shepard, Executive Vice President, Product Development, and Aaron C. von Staats, Corporate Vice President, General Counsel and Secretary, as of May 7, 2010.

In connection with the execution of the Amended Executive Agreements, the Amended and Restated Executive Agreement entered into with each of those officers on June 26, 2008 or subsequently (the “Original Executive Agreements”) was amended without other change to extend its term through September 30, 2010. As of October 1, 2010, the amendment and restatement of each agreement will take effect and the provisions of the Amended Executive Agreements will supersede those of the Original Executive Agreements, making the following principal changes:

Elimination of Change in Control Bonus Payment. The officer will no longer be entitled to payment of an amount equal to his target annual bonus upon a Change in Control, as is currently provided in the Original Executive Agreements.

Amendment of ” Good Reason” Definition. The definition of “Good Reason” for termination of employment is supplemented to include any material reduction in the aggregate benefits for which the officer is eligible under our employee benefit plans, other than any such reduction that is consistent with similar actions taken with respect to our employees generally.

Sunset of “Gross-Up” Payment. The Amended Executive Agreements terminate the “gross-up payment” provision contained in the Original Executive Agreements, effective after December 31, 2013, and replace it with the same provision for reducing the payments and benefits to the executive in order to achieve the best after-tax benefits as described above in connection with the Amended Heppelmann Agreement.

The foregoing descriptions are qualified in their entirety by the full text of the 2010 Harrison Agreement, the Amended Heppelmann Agreement, and the form of Amended Executive Agreement, as set forth in the exhibits filed herewith and incorporated herein by reference.

 

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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 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2009 (File No. 0-18059) and incorporated herein by reference).
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   Executive Agreement dated as of May 7, 2010 by and between C. Richard Harrison and Parametric Technology Corporation.
10.2   Amended and Restated Executive Agreement dated as of May 7, 2010 by and between James E. Heppelmann and Parametric Technology Corporation.
10.3   Form of Amended and Restated Executive Agreement entered into by and between Parametric Technology Corporation and each of Barry Cohen, Paul Cunningham, Anthony DiBona, Cornelius Moses, III, Robert Gremley, Brian Shepherd and Aaron von Staats.
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.

 

* Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

 

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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 13, 2010

 

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Exhibit 10.1

EXECUTIVE AGREEMENT

This Executive Agreement dated as of May 7, 2010 is by and between Parametric Technology Corporation, a Massachusetts corporation (the “Company”), and C. Richard Harrison (the “Executive”).

 

1. Definitions.

For the purposes of this Agreement:

(a) “ Cause ” means:

(i) the Executive’s willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), provided that the Company has delivered a written demand for performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties and the Executive does not cure such failure within thirty (30) days after such demand;

(ii) willful conduct by the Executive which is demonstrably and materially injurious to the Company;

(iii) the Executive’s conviction of, or pleading of guilty or nolo contendere to, a felony;

(iv) the Executive’s entry in his personal capacity into a consent decree relating to the business of the Company with any government body; or

(v) the Executive’s willful material violation of any material provision of his Non-Disclosure, Non-Competition and Invention Agreement with the Company; provided that, if such violation is able to be cured, the Executive has not, within thirty (30) days after written demand by the Company, cured such violation.

For purposes of this definition, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.

(b) “ Change in Control ” means the occurrence of any of the following events:

(i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company);

(ii) individuals who, as of the date hereof, constitute the board of directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the board of directors, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board;

(iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other entity (each a “Business Combination”), other than (x) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another


entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (y) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or

(iv) the stockholders of the Company approve (x) a plan of complete liquidation of the Company; or (y) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion.

(c) “Code” means the U.S. Internal Revenue Code of 1986, as amended.

(d) “ Disability ” means such physical or mental incapacity as to make the Executive unable to perform the essential functions of his employment duties for a period of at least sixty (60) consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of his employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive.

(e) “ Good Reason ” means the occurrence, without the Executive’s consent and without Cause, of any of the following events (provided that the Executive shall have given the Company written notice describing such event within ninety (90) days of its initial existence and the matter shall not have been fully remedied by the Company within thirty (30) days after receipt of such notice):

(i) the Executive’s ceasing to be a member of the Company’s board of directors by reason of the failure of the Company to re-nominate the Executive for election or failure of the Executive to be elected by the stockholders of the Company;

(ii) any breach by the Company of its material obligations under this Agreement; or

(iii) any requirement that the Executive relocate to a primary work site that would increase the Executive’s one-way commute distance by more than fifty (50) miles from the Executive’s then principal residence.

 

2. Services to be Performed by the Executive.

(a) Position and Services . Effective October 1, 2010 (the “Commencement Date”), the Executive shall cease serving as Chief Executive Officer of the Company and shall become the Company’s Executive Chairman, an executive officer of the Company. As of the Commencement Date, the Executive will perform certain employment duties, reporting to the President and Chief Executive Officer. The Executive’s employment duties will include enhancing relationships with the Company’s key customers, partners and investors and other activities focused on improving the business climate for the Company around the world, and such other duties consistent with his position as may be reasonably assigned to him by the Company’s Chief Executive Officer (“Employment Duties”).

(b) Obligations . During the Term (as defined in Section 2(c)), the Executive will be available on a part-time time basis for consultation and the performance of the Employment Duties as requested by the Chief Executive Officer. The Executive will use good faith efforts to discharge his obligations under this Agreement to the best of his ability and in accordance with the Company’s Code of Business Conduct and Ethics. During the

 

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Term, the Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Company’s Chief Executive Officer (which approval will not be unreasonably withheld); provided, however, that the Executive may, without the approval of the Chief Executive Officer, serve in any capacity with any civic, educational, or charitable organization, provided such services do not interfere with the Executive’s obligations to the Company.

(c) Term . The Executive’s employment shall continue in effect until 11:59 p.m. on November 30, 2012 unless earlier terminated in accordance with Section 4 hereof (the period from the Commencement Date until the earlier of such date and the date of termination of the Executive’s employment being the “Term”). Except as otherwise expressly set forth in this Agreement, upon the termination of the Executive’s employment, the respective rights and obligations of the parties hereunder shall survive to the extent necessary to carry out the intentions of the parties as embodied herein.

 

3. Compensation & Benefits.

(a) Salary . During the Term, for the period from October 1, 2010 through September 30, 2011, the Company will pay the Executive an annual salary of $500,000 and for the period from October 1, 2011 through November 30, 2012, the Company will pay the executive an aggregate salary of $500,000, such salary to be paid periodically in accordance with the Company’s normal payroll practices.

(b) Benefits . As a part time employee, during the Term, the Executive shall be entitled to participate on the same terms as employees generally in the Company’s employee benefit plans, such as the Company’s 401(k) plan and PTO policy, to the extent he is eligible under the applicable plans. In lieu of other benefits for which the Executive ceases to be eligible upon commencing part-time employment status, which may include but not be limited to health, dental, vision, life and long term disability insurance, the Executive will be paid a one time, lump sum payment of $110,000 within 30 days following the Commencement Date. If permitted by the terms of the respective plan or by law, the Executive shall have the option to continue discontinued benefits, at his expense, under COBRA or the applicable policy conversion options.

(c) Equity . Effective as of October 1, 2010, the Executive will be granted restricted stock units with a value equal to approximately $3,000,000. The actual number of restricted stock units to be granted shall be based on the closing price of the Company’s common stock on October 1, 2010. The restricted stock units will be granted under the Company’s 2000 Equity Incentive Plan and shall vest in two substantially equal installments on each of September 30, 2011 and September 30, 2012 if this Agreement is then in effect.

 

4. Termination.

If, before the Commencement Date, the Executive’s employment with the Company is terminated for any reason, or a Change In Control occurs, this Agreement shall thereupon automatically terminate. During the Term, the Executive’s employment may be terminated by the Executive or the Company as follows and with the respective effects set forth in Section 5.

(a) By the Executive . During the Term, the Executive’s employment may be terminated by the Executive at any time upon not less than thirty (30) days’ written notice to the Company for convenience or for Good Reason.

(b) By the Company . During the Term, the Executive’s employment may be terminated at any time by the Company for convenience, for Cause or because of the Executive’s Disability.

(c) Upon a Change in Control . During the Term, the Executive’s employment will automatically terminate upon a Change in Control.

 

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5. Effect of Certain Termination Events.

The provisions of this Section 5 shall apply to termination of the Executive’s employment during the Term in the respective circumstances set forth below.

(a) By the Executive for Convenience or by the Company for Nonperformance . If the Executive terminates his employment for convenience or if the Company terminates the Executive’s employment for Cause solely pursuant to Section 1(a)(i):

(i) to the extent not then vested, the restricted stock units granted pursuant to Section 3(c) and any other shares of restricted stock, restricted stock units, stock options, stock appreciation rights or other equity awards granted to the Executive by the Company during the Term, including any extension thereof, shall thereupon be terminated and forfeited without compensation;

(ii) if and for so long as the Executive remains a member of the Company’s board of directors, all shares of restricted stock, restricted stock units, stock options, stock appreciation rights and other equity awards granted to the Executive by the Company before the Commencement Date shall continue to vest as though the Executive remained employed by the Company;

(iii) if the Executive remains a member of the Company’s board of directors, the period during which the Executive may exercise any stock options then currently vested shall be extended until the earliest of (x) the expiration of the term of the applicable option, (y) the expiration of the post-termination exercise period for the applicable option (for which purpose, termination of board service shall be substituted for termination of employment) and (z) February 28, 2013;

(iv) upon the later of the termination of the Executive’s employment and the termination of his membership on the Company’s board of directors, all remaining unvested shares of restricted stock, restricted stock units, stock options, stock appreciation rights and other equity awards granted to the Executive by the Company shall be terminated and forfeited without compensation; and

(v) no further salary or other amounts, other than accrued and unpaid amounts, shall be payable to the Executive.

(b) By the Company for Cause . If the Company terminates the Executive’s employment for Cause, other than solely pursuant to Section 1(a)(i):

(i) all unvested shares of restricted stock, restricted stock units, stock options, stock appreciation rights and other equity awards granted to the Executive by the Company shall thereupon be terminated and forfeited without compensation as of the termination date and

(ii) no further salary or other amounts, other than accrued and unpaid amounts, shall be payable to the Executive.

(c) Death or Disability . Effective upon termination of the Executive’s employment due to his death or by the Company due to his Disability:

(i) all restrictions applicable to restricted stock issued by the Company and held by the Executive shall immediately lapse and

(ii) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued by the Company shall immediately become vested and exercisable in full.

 

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(d) Other Terminations . If during the Term the Executive’s employment is terminated (x) by the Executive for Good Reason, (y) by the Company for convenience or (z) upon a Change in Control, the following shall occur, effective upon such termination:

(i) Effect on Outstanding Equity . With respect to all equity awards issued by the Company and held by the Executive, whether issued during the Term or prior thereto:

(A) all restrictions applicable to restricted stock issued by the Company and held by the Executive, other than any restriction the lapse of which is based upon achievement of performance goals, shall immediately lapse;

(B) all vesting conditions applicable to all stock options, stock appreciation rights, restricted stock units, and other equity awards granted to the Executive by the Company, other than any vesting conditions based upon achievement of performance goals, shall thereupon be deemed satisfied and, except to the extent of any such performance-based conditions, such awards shall become exercisable or distributable in full; and

(C) each outstanding stock option granted to the Executive by the Company shall, to the extent vested after giving effect to clause (B), remain exercisable following the termination of the Executive’s employment until the close of business on the earlier of (1) the end of the original maximum term of such option and (2) November 30, 2012.

(ii) Payment of Contract Amounts . The Executive shall be entitled to a lump sum payment in an amount equal to the amounts payable under Sections 3(a) and 3(b) less all amounts paid pursuant to those subsections during the Term to the date of such termination, payable within forty-five (45) days after the termination date.

 

6. Taxes.

(a) Withholding . All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes. In addition, the Company may withhold from any payments hereunder any amounts attributable to withholding taxes applicable to the vesting of or lapse of restrictions on any restricted stock or restricted stock units held by the Executive or the exercise of any nonqualified stock options held by the Executive, including, in its discretion withholding from any shares deliverable to the Executive such number of shares as the Company determines is necessary to satisfy such tax obligations, valued at their fair market value (determined pursuant to the respective Company equity compensation plan) as of the date of such vesting or lapse of restrictions.

(b) Limitations on Payments .

(i) If it is determined that any payment, benefit or distribution provided for in this Agreement or otherwise (each, a “Payment” and collectively, the “Payments”) from the Company to or for the benefit of the Executive to which the Executive first becomes entitled as a result of an event occurring on or after October 1, 2010 (x) constitutes a “parachute payment” within the meaning of Section 280G of the Code and (y) but for this subsection (b), would be subject to excise tax imposed by Section 4999 of the Code (the “Excise Tax”), such Payments shall be either

(A) delivered in full, or

(B) delivered to such lesser extent that would result in no portion of the Payments being subject to the Excise Tax,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after tax basis, of the greatest amount of Payments, notwithstanding that all or some portion of the Payments may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6(b)(i) shall be made in writing in good faith by an independent accounting firm selected by the Company, whose determinations shall be binding upon the Company and the Executive (the “Accountants”), in good faith consultation with the Executive.

 

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(ii) In the event a reduction in the Payments is required hereunder, the Company shall promptly give the Executive notice to that effect and the Executive may then determine, in his sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments are subject to the Excise Tax), and shall advise the Company in writing of his election within ten (10) days of his receipt of the Company’s notice. If no such election is made by the Executive within such period, the Company may determine which and how much of the Payments shall be eliminated or reduced (as long as, after such determination, none of the Payments are subject to the Excise Tax) and shall notify the Executive promptly of such determination.

(iii) For purposes of making the calculations required by this Section 6(b), the Accountants may make reasonable assumptions and approximations concerning the application taxes and may rely on reasonable good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonable request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6(b).

(iv) If the Payments are reduced to avoid the Excise Tax pursuant to Section 6(b)(i) hereof and notwithstanding such reduction, the IRS determines that the Executive is liable for the Excise Tax as a result of the receipt of Payments from the Company, then the Executive shall be obligated to pay to the Company (the “Repayment Obligation”) an amount of money equal to the “Repayment Amount.” The Repayment Amount shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Executive’s net proceeds with respect to the Payments (after taking into account the payment of the Excise Tax imposed on such benefits) shall be maximized. Notwithstanding the foregoing, the Repayment Amount shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax in accordance with the principles of Section 6(b)(i). If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the Executive shall pay the Excise Tax. The Repayment Obligation shall be discharged within 30 days of either (A) the Executive’s entering into a binding agreement with the IRS as to the amount of Excise Tax liability, or (B) a final determination by the IRS or a court decision requiring the Executive to pay the Excise Tax from which no appeal is available or is timely taken.

 

7. Certain Payments to Specified Employees.

Notwithstanding anything to the contrary in this Agreement, if the Executive is a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i) at the time of the Executive’s separation from service with the Company, no payment or benefit payable or provided to the Executive pursuant to this Agreement that constitutes an item of deferred compensation under Code Section 409A and becomes payable by reason of the Executive’s termination of employment with the Company will be paid or provided to the Executive prior to the earlier of (i) the expiration of the six (6) month period following the date of the Executive’s “separation from service” (as such term is defined by Code Section 409A and the regulations promulgated thereunder), or (ii) the date of the Executive’s death, but only to the extent such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). The payments and benefits to which the Executive would otherwise be entitled during the first six (6) months following his separation from service shall be accumulated and paid or provided, as applicable, in a lump sum, on the date that is six (6) months and one day following the Executive’s separation from service (or if such date does not fall on a business day of the Company, the next following business day) and any remaining payments or benefits will be paid in accordance with the normal payment dates specified for them herein.

 

8. Successors and Assigns.

(a) This Agreement is personal to the Executive and is not assignable by the Executive, other than by will or the laws of descent and distribution, without the prior written consent of the Company.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and acquirers and assigns.

 

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9. Conditions to Payment of Severance.

Notwithstanding any other provision of this Agreement, the Executive’s entitlement to receive any of the payments and other benefits contemplated by Section 5 hereof shall be contingent upon:

(a) execution by the Executive prior to the forty-fifth (45 th )  day following the termination of his employment of a release in substantially the form of Appendix A hereto (the “Release”), which has not subsequently been revoked, and the Executive hereby acknowledges and agrees that the Company’s entering into this Agreement and agreement to make such payments are and shall be good and sufficient consideration for such Release; and

(b) the Executive’s continued compliance with the material terms of this Agreement, as applicable, and those of his Non-Disclosure, Non-Competition and Invention Agreement with the Company.

 

10. Miscellaneous.

(a) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except any such laws that would render such choice of law ineffective.

(b) Compliance with Section 409A . This Agreement is intended, to the extent applicable, to constitute good faith compliance with the requirements of Section 409A of the Code. The Company and the Executive agree that they shall cooperate in good faith to amend any provision hereof to the extent required to maintain compliance with the provisions of Section 409A of the Code as they may be modified hereafter (including by subsequent regulations or other guidance of the Internal Revenue Service).

(c) Amendment . This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(d) Effect on Earlier Agreements . This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the compensation payable to the Executive in the circumstances described herein, superseding all prior understandings and agreements, whether oral or written relating to the subject matter of this Agreement. If a Change In Control or termination of the Executive’s employment occurs prior to the Commencement Date, any obligations of the Company to the Executive shall be as set forth in the Amended and Restated Executive Agreement dated as of June 26, 2008 by and between the Company and the Executive (the “Prior Agreement”). As of the Commencement Date, this Agreement shall supersede the Prior Agreement, which shall thereupon be terminated and of no further force and effect. For the purposes of clarity, with respect to a Change In Control or termination of the Executive’s employment on or after the date hereof and before the Commencement Date, payments and benefits under the Prior Agreement shall be exclusive and no payments or benefits shall be provided under this Agreement, and with respect to a Change in Control or termination of the Executive’s Employment occurring on or after the Commencement Date, payments and benefits shall be available only under this Agreement. The agreements evidencing any equity awards granted by the Company to the Executive are hereby and will be deemed amended to give effect to the provisions of Section 5 of this Agreement.

The Executive acknowledges and agrees that the change in his position from Chief Executive Officer to Executive Chairman, the related changes in compensation provided for in this Agreement and the naming of another person as Chief Executive Officer of the Company effective as of October 1, 2010 shall not constitute “Good Reason” or other grounds for resignation by the Executive under the Prior Agreement and that the Executive shall have no right to receive compensation or any other benefits under the Prior Agreement by reason of such events.

(e) Partial Invalidity . If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way.

(f) Expenses . The Company agrees to pay as incurred and within 20 days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability

 

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of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement) with respect to which the Executive is successful on the merits, plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. The Company’s payment of any eligible expenses must be made no later than December 31 of the year after the year in which the expense was incurred.

(g) Notices . All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid. Notice to the Executive shall be addressed to him at the last address contained in the Company’s records and notice to the Company shall be addressed to:

Parametric Technology Corporation

140 Kendrick Street

Needham, MA 02494

Attention: General Counsel

Notice shall be provided to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail.

EXECUTED as of the date first written above.

 

PARAMETRIC TECHNOLOGY CORPORATION     C. RICHARD HARRISON
By:  

/s/James E. Heppelmann

   

/s/ C. Richard Harrison

  James E. Heppelmann    
  President and Chief Operating Officer    

 

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Exhibit 10.2

AMENDED AND RESTATED EXECUTIVE AGREEMENT

This Amended and Restated Executive Agreement dated as of May 7, 2010 by and between Parametric Technology Corporation, a Massachusetts corporation (the “Company”), and James Heppelmann (the “Executive”) further amends and, as so amended restates, the Amended and Restated Executive Agreement dated as of June 26, 2008 by and between the Company and the Executive (the “Current Agreement”), effective as of October 1, 2010 (the “Commencement Date”).

WHEREAS, the Executive is the President and Chief Operating Officer of the Company;

WHEREAS, the Executive has been appointed President and Chief Executive Officer of the Company commencing on the Commencement Date;

WHEREAS, the Company and the Executive desire to provide for the Executive’s compensation during his employment beginning on the Commencement Date and make changes to the payments and benefits to be provided to the Executive if his employment with the Company is terminated without cause or if certain other events occur on or after the Commencement Date, as described herein;

NOW, THEREFORE, the Company and the Executive hereby agree as follows:

 

1. Definitions .

For the purposes of this Agreement:

(a) “Board” means the Company’s board of directors.

(b) “Code” means the U.S. Internal Revenue Code of 1986, as amended.

(c) “Cause” means

(i) the Executive’s willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), provided that the Company has delivered a written demand for performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties and the Executive does not cure such failure within thirty (30) days after such demand;

(ii) willful conduct by the Executive which is demonstrably and materially injurious to the Company;

(iii) the Executive’s conviction of, or pleading of guilty or nolo contendere to, a felony;

(iv) the Executive’s entry in his personal capacity into a consent decree relating to the business of the Company with any government body; or

(v) the Executive’s willful violation of any material provision of his Non-Disclosure, Non-Competition and Invention Agreement with the Company; provided that, if such violation is able to be cured, the Executive has not, within thirty (30) days after written demand by the Company, cured such violation.

For purposes of this definition, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.


(d) “Change in Control” means the occurrence of any of the following events:

(i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company);

(ii) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board;

(iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other entity (each a “Business Combination”), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or

(iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion.

(e) “Change in Control Termination” means any of the following terminations of the Executive’s employment:

(i) termination of the Executive’s employment by the Company during the period from the date of a Change in Control through the second anniversary thereof, other than for Cause or as a result of the Executive’s Disability;

(ii) resignation by the Executive for Good Reason during the period from the date of a Change in Control through the second anniversary thereof; or

(iii) termination of the Executive’s employment by the Company within one hundred eighty (180) days prior to a Change in Control, other than for Cause or as a result of the Executive’s Disability, if it is reasonably demonstrated by the Executive that such termination of employment (A) was at the request of a third party that has taken steps reasonably calculated to effect the Change in Control or (B) was otherwise related to or in anticipation of the Change in Control. A Change in Control Termination under this Section 1(e)(iii) shall be deemed to have occurred if and when the Change in Control occurs.

(f) “Disability” means such physical or mental incapacity as to make the Executive unable to perform the essential functions of his employment duties for a period of at least sixty (60) consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of his employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to

 

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continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive.

(g) “Good Reason” means the occurrence, without the Executive’s consent and without Cause, of any of the following events after or in connection with a Change in Control (provided that the Executive shall have given the Company written notice describing such event within ninety (90) days of its initial existence and the matter shall not have been fully remedied by the Company within thirty (30) days after receipt of such notice):

(i) any reduction of the Executive’s annual base salary or target bonus from the respective amount (x) in effect at the date of the Change in Control or (y) otherwise required by this Agreement; provided that any such reduction (not exceeding fifteen percent (15%) of either (A) such base salary or (B) the sum of such base salary and such target bonus) that is consistent with similar actions taken with respect to the base salaries and/or target bonuses of the other senior executives of the Company shall not constitute Good Reason;

(ii) any material reduction in the aggregate benefits for which the Executive is eligible under the Company’s benefit plans, including medical, dental, vision, basic life insurance, retirement, paid time off, long-term disability and short-term disability plans; provided that any such reduction or other action that is consistent with similar actions taken with respect to comparable benefits of the Company employees generally shall not constitute Good Reason;

(iii) the failure to (A) install the Executive in the position of Chief Executive Officer of the Company on the Commencement Date or (B) maintain the Executive in the position of Chief Executive Officer of the Company from and after the Commencement Date;

(iv) a material diminution of the Executive’s authority or responsibilities; provided that no diminution of authority or responsibilities resulting from a sale or spin-off of a product line, business unit or line of business of the Company that does not constitute a Change in Control under Section 1(d)(iv) shall constitute Good Reason;

(v) any breach by the Company of its material obligations under this Agreement;

(vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or

(vii) any requirement that the Executive relocate to a primary work site that would increase the Executive’s one-way commute distance by more than fifty (50) miles from the Executive’s then principal residence.

(h) “Stock Plan” means any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 1997 Incentive Stock Option Plan, the 1997 Nonqualified Stock Option Plan, and the 2000 Equity Incentive Plan.

 

2. Compensation .

(a) Commencing October 1, 2010, for the fiscal year ending September 30, 2011, the Executive’s annual base salary during his employment shall be seven hundred fifty thousand dollars ($750,000) and his target annual bonus shall be one million dollars ($1,000,000). The Board or the Compensation Committee thereof shall retain sole and absolute discretion to increase or decrease these amounts for all periods beginning after September 30, 2011. The performance criteria applicable to the target bonus for fiscal 2011 and thereafter shall be as determined by the Board or the Compensation Committee in their sole and absolute discretion.

(b) In connection with the Executive’s appointment as Chief Executive Officer, the Company will, effective as of October 1, 2010, make a one-time grant to the Executive of restricted stock units with a value equal to approximately seven million dollars ($7,000,000). The actual number of restricted stock units to be granted shall be

 

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based on the closing sale price of the Company’s common stock on October 1, 2010. The restricted stock units will be granted under the Company’s 2000 Equity Incentive Plan and shall be subject to the five-year performance and vesting criteria set forth on Appendix A to this Agreement.

(c) During the Company’s 2011 fiscal year, pursuant to the Company’s long-term equity incentive award program, the Company will make a grant to the Executive of restricted stock units under the Company’s 2000 Equity Incentive Plan with a value equal to approximately three million, four hundred fifty thousand dollars ($3,450,000), based on the closing sale price of the Company’s common stock on the grant date. One half of such restricted stock units shall be subject to performance criteria determined by the Board or the Compensation Committee in their discretion, and all of such restricted stock units shall be subject to time-based vesting in substantially equal installments in November 2011, 2012 and 2013.

(d) In addition, Executive will also be eligible to receive long-term equity incentive awards from time to time as determined by the Board or the Compensation Committee in their sole and absolute discretion.

 

3. Termination of Employment without Cause .

If the Company terminates the Executive’s employment without Cause, other than a termination constituting a Change in Control Termination or a termination due to his Disability, the Executive shall be entitled to the following:

(a) payment of (i) his base salary, paid bi-weekly, for a two-year period commencing on the termination date, such salary to be paid at a rate equal, on an annualized basis, to the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the termination date, and (ii) an aggregate amount equal to two times the average of the annual bonuses paid to the Executive with respect to the two fiscal years immediately preceding the fiscal year in which the termination occurs (valued as set forth in Section 3(c)), paid in equal bi-weekly installments for a two-year period commencing on the termination date, the first payment of which shall (x) be made within forty-five (45) days following the termination date and (y) include all amounts then due under this clause (a) that have not yet been paid; and

(b) continued participation in the Company’s medical, dental, vision and basic life insurance benefit plans (the “Benefit Plans”), subject to the terms and conditions of the respective plans and applicable law, for a period of two years following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.

(c) For purposes of clause (ii) of Section 3(a), if the Executive’s bonus for either of the two preceding fiscal years was funded in the form of an equity award, the amount of the bonus for such year shall be a dollar amount equal to the percentage of the target bonus amount established by the Board or Compensation Committee for such fiscal year that was actually earned by the Executive.

 

4. Change in Control .

(a) Equity Awards . Effective upon a Change in Control that occurs during the Executive’s employment, except as expressly provided in the applicable award agreement excluding such award from the effects of this section 4, the following shall occur:

(i) any performance criteria applicable to any stock options, stock appreciation rights, restricted stock units, restricted stock or other equity awards issued under any Stock Plan and held by the Executive shall be deemed to have been met in full;

 

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(ii) any of the restrictions on any shares of restricted stock issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 4(a)) to lapse after the second anniversary of the Change in Control shall lapse immediately so that the portion of such shares formerly subject to such restrictions shall become unrestricted (and any such restrictions that are scheduled by their terms to lapse on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i));

(iii) any other equity awards (including without limitation any stock options, stock appreciation rights and restricted stock units) issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 4(a)) to vest after the second anniversary of the Change in Control shall vest immediately and become exercisable or distributable (and any such awards that are scheduled by their terms to vest on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i) of this Section 4(a)); provided that if any such stock option, stock appreciation right, restricted stock unit or other equity award is not assumed or a cash payment of equivalent value is not substituted therefor (in either case with vesting terms no more restrictive than those of the assumed or substituted award) by any acquirer of or successor to the Company, then such stock option, stock appreciation right, restricted stock unit or other equity award shall become vested and exercisable in full upon such Change in Control; and

(iv) each outstanding equity award held by the Executive shall be deemed amended automatically to provide that, notwithstanding any provision of any Stock Plan, no outstanding share of restricted stock, stock option, stock appreciation right, restricted stock unit or other equity award held by the Executive may be terminated or forfeited without the Executive’s written consent (provided that this shall not prevent termination of (A) any unvested portion thereof that is terminated or forfeited upon termination of the Executive’s employment as provided in any agreement or certificate executed in connection with any such equity award, (B) a stock option the termination of which is covered by Section 8(i) of the Company’s 2000 Equity Incentive Plan, or (C) upon payment of a cash payment equivalent to the value of such terminated award).

The foregoing notwithstanding, this Section 4(a) shall not apply to any shares of restricted stock, restricted stock units or other equity awards granted to the Executive as an incentive bonus under any of the Company’s short-term incentive programs which are subject to performance criteria with a performance period of one year or less and time-based vesting with an original vesting term of less than fifteen (15) months (collectively, “Bonus Equity”), which shall be treated as provided in Section 4(b)(ii).

(b) Bonus . Effective upon (x) a Change in Control that occurs during the Executive’s employment or (y) a Change in Control Termination under Section 1(e)(iii):

(i) the Executive shall be entitled to payment of a pro-rata portion of any annual cash incentive award for which the Executive is eligible for the fiscal year in which the Change in Control occurs, based on the Executive’s target cash bonus for such year and the percentage of the year completed through the date of the Change in Control, for the purposes of which any performance criteria applicable to such award shall be deemed to have been met in full, which payment shall be made in one lump sum within forty-five (45) days of the date of the Change in Control; and

(ii) the vesting schedule applicable to any Bonus Equity held by the Executive shall be amended automatically so that a pro-rata portion of any such Bonus Equity equal to the percentage of the respective fiscal year completed through the date of the Change in Control shall thereupon be vested and subject to no further restrictions, exercisable or distributable, as the case may be, and the portion not so vested shall thereupon automatically be cancelled and forfeited to the Company.

(c) Change in Control Termination Benefits .

(i) Equity Awards . Effective upon a Change in Control Termination:

(A) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately become vested and exercisable or distributable in full; and

 

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(B) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately lapse; and

(C) each outstanding stock option issued by the Company and held by the Executive shall remain exercisable, following the termination of the Executive’s employment, until the close of business on the earlier of (x) the end of the original maximum term of such option, or (y) two years following the date of termination of the Executive’s employment.

(ii) Make-Up Payment . Effective upon a Change in Control Termination under Section 1(e)(iii), the Company shall pay the Executive in a lump sum the amount equal to the sum of:

(x) the excess, if any, of (A) the product of (1) the number of additional shares of the Company’s Common Stock that either were subject to options, stock appreciation rights, or other awards that would have become vested and exercisable and/or were restricted stock or restricted stock units as to which the restrictions would have lapsed, in each case solely as a result of Section 4(c)(i), and for which the Executive would have been entitled to receive consideration in the Change in Control (on the same basis as other holders of Common Stock), had the Executive remained employed on the date of the Change in Control and was deemed to have exercised all the stock options that would then have become exercisable under Section 4(c)(i)(A) times (2) the amount per share of the Company’s Common Stock (if any) received by the Company’s stockholders generally pursuant to the Change in Control (the “Shareholder Price”) over (B) the aggregate exercise price of all such additional stock options that the Executive would then have become able to exercise upon the Change in Control as a result of Section 4(c)(i)(A) (whereupon all such stock options, stock appreciation rights, and other awards shall terminate and shall no longer be exercisable); and

(y) the excess, if any, of (A) the product of (1) the number of shares of the Company’s Common Stock that the Executive (a) held on the date of termination of his employment or acquired upon exercise of stock options held on such date and (b) sold before the consummation of the Change in Control (the “Pre-Sold Shares”) times (2) the Shareholder Price over (B) the aggregate amount received by the Executive in the sale(s) of the Pre-Sold Shares.

The Company shall pay this lump sum payment within forty-five (45) days following the Executive’s termination date.

(iii) Salary, Bonus and Benefits . Effective upon a Change in Control Termination, the Executive shall be entitled to the following:

(A) a lump sum payment in an amount equal to two times his base salary plus his target bonus, such salary to be the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the Executive’s termination or required to take effect at any time within six months following such termination and such target bonus to be the highest target bonus in effect or required by this Agreement to take effect with respect to the Executive for (1) the fiscal year in which the Change in Control occurs, (2) the fiscal year following the year in which the Change in Control occurs, or (3) the fiscal year in which the Change in Control Termination occurs, whichever is highest, payable within forty-five (45) days after the termination date; and

(B) continued participation in the Benefit Plans, subject to the terms and conditions of the respective plans and applicable law, for a period of two years following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided, further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance

 

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benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.

(iv) Payments and benefits under this Section 4(c) shall be in lieu and without duplication of any amounts or benefits under Section 3, and the Executive shall be entitled to any such payments and benefits for no more than two years even if both such sections apply. If, in the event of a Change in Control Termination under Section 1(e)(iii), the Executive becomes entitled to payments under this Section 4(c) after he has begun to receive payments under Section 3, he shall be entitled to a make-up payment to ensure that he receives the higher amount payable hereunder, with such make-up payment being made within forty-five (45) days following the Change in Control Termination.

(d) Deemed Amendment of Equity Awards . The Company and the Executive hereby agree that the agreements evidencing any equity awards to the Executive are hereby and will be deemed amended to give effect to the provisions of Sections 4 and 5 of this Agreement.

 

5. Death or Disability .

Effective upon termination of the Executive’s employment due to his death or by the Company due to his Disability, the following shall occur:

(a) all performance criteria applicable to any stock options, stock appreciation rights, restricted stock units, restricted stock or other equity awards issued under any Stock Plan and held by the Executive shall be deemed to have been met in full;

(b) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued under any Stock Plan shall immediately become vested and exercisable or distributable in full; and

(c) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive shall immediately lapse;

(d) provided that this Section 5 shall not apply to any Bonus Equity.

 

6. Taxes .

(a) Withholding . All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes. In addition, the Company may withhold from any payments hereunder any amounts attributable to withholding taxes applicable to the vesting of or lapse of restrictions on restricted stock or restricted stock units held by the Executive or the exercise of any nonqualified stock options held by the Executive, including, in its discretion withholding from any shares deliverable to the Executive such number of shares as the Company determines is necessary to satisfy such tax obligations, valued at their fair market value (determined pursuant to the respective Company equity compensation plan) as of the date of such vesting or lapse of restrictions.

(b) Excess Parachute Payment Tax .

(i) If it is determined that any payment, benefit or distribution provided for in this Agreement or otherwise (for the purposes of this Section 6(b) and Section 6(c), each, a “Payment” and collectively, the “Payments”) from the Company to or for the benefit of the Executive to which the Executive first becomes entitled as a result of an event occurring on or before December 31, 2013 would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains

 

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an amount of the Gross-Up Payment equal to the Excise Tax; provided, however, that if a reduction in the amount of the Payments (other than the Gross-Up Payment) to the Executive would cause the Payments not to be subject to the Excise Tax and the amount of such reduction does not exceed fifteen percent (15%) of the Payments (other than the Gross-Up Payment) that would be subject to the Excise Tax (the “Parachute Payments”), then the amount of Payments from the Company to the Executive shall be reduced by the minimum amount necessary so that the remaining Payments to the Executive will not be subject to the Excise Tax and the Executive will not be entitled to the Gross-Up Payment. In the event that the Payments to the Executive are to be reduced, the Company shall promptly give the Executive notice to that effect and the Executive may then elect, in his sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments to the Executive are subject to the Excise Tax), and shall advise the Company in writing of his election within ten (10) days of his receipt of the Company’s notice. If no such election is made by the Executive within such period, the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments to the Executive are subject to the Excise Tax) and shall notify the Executive promptly of such election. Notwithstanding the foregoing, the Company shall be entitled to exhaust its remedies under Sections 6(b)(ii) and (iii) below prior to the payment of any Gross-Up Payment and the Executive shall not be entitled to any Gross-Up Payment if the Executive has not complied with Section 6(b)(ii) or (iii), as the case may be.

(ii) Subject to the provisions of Section 6(b)(iii), all determinations required to be made under this Section 6(b), including whether and when a Gross-Up Payment is required, the amount of any such Gross-Up Payment, the amount of any reduction of the Payments to the Executive and the assumptions to be used in arriving at such determination, shall be made by an independent accounting firm selected by the Company, whose determinations shall be binding upon the Company and the Executive (the “Accountants”). Notwithstanding any determination by the Accountants, if it is later determined that:

(A) the amount of the Executive’s Excise Tax liability is greater than the amount of the initial Gross-Up Payment, if any, the Company shall pay to the Executive an additional amount with respect to such additional Excise Tax such that the aggregate Gross-Up Payment is equal to the amount contemplated by Section 6(b)(i) above; provided, however, that if a reduction in the aggregate amount of the Payments (other than the Gross-Up Payment) to the Executive would cause the Payments not to be subject to the Excise Tax and the amount of such reduction would not exceed fifteen percent (15%) of the Parachute Payments the Executive was originally entitled to receive (other than the Gross-Up Payment), then the Executive shall return a portion of the Payments the Executive received equal to the minimum amount necessary so that the Payments retained by the Executive will not be subject to the Excise Tax, reduced by the amount of any relevant taxes already paid by the Executive and not refundable;

(B) the amount of the Executive’s Excise Tax liability is less than the Excise Tax liability with respect to which the initial Gross-Up Payment was made, the Executive shall, as soon as practical after the determination is made, pay to the Company the amount of the overpayment by the Company, reduced by the amount of any relevant taxes already paid by the Executive and not refundable; provided, however, that if, as a result of the reduced Excise Tax liability, a reduction in the amount of the Payments (other than the Gross-Up Payment) to the Executive would cause the Payments not to be subject to the Excise Tax and the amount of such reduction would not exceed fifteen percent (15%) of the Parachute Payments the Executive was originally entitled to receive (other than the Gross-Up Payment), then the Executive shall return to Company the Gross-Up Payment and a portion of the Payments the Executive received equal to the minimum amount necessary so that the Payments retained by the Executive will not be subject to the Excise Tax, reduced by the amount of any relevant taxes already paid by the Executive and not refundable;

(C) the amount of the Executive’s Excise Tax liability is greater than the amount originally determined and the Payments to the Executive were previously reduced, the Company shall pay to the Executive the amount of the reduced Payments and a Gross-Up Payment equal to the amount contemplated by Section 6(b)(i) above; provided, however, that if a further reduction in the amount of the Payments (other than the Gross-Up Payment) to the Executive would cause the Payments not to be subject to the Excise Tax and the amount of the aggregate reduction would not exceed fifteen percent (15%) of the Parachute Payments the Executive was originally entitled to receive (other than the Gross-Up Payment), then the Executive shall return a portion of the Payments the Executive received equal to the minimum amount necessary so that the Payments retained by the Executive will not be subject to the Excise Tax, reduced by the amount of any relevant taxes already paid by the Executive and not refundable; or

 

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(D) the amount of the Executive’s Excise Tax liability is less than the amount originally determined and the Payments to the Executive were previously reduced, the Company shall pay to the Executive the amount by which the Payments were reduced, or a portion thereof, to the extent necessary so that the aggregate Payments paid to the Executive will not be subject to the Excise Tax.

Upon request of the Company, the Executive agrees to make available to the Company and the Accountants the Executive’s tax returns and such other financial information that the Company may reasonably request to verify the amount payable by the Company or the Executive pursuant to clause (A), (B), (C) or (D) above, as applicable.

(iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than thirty (30) days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (A) provide the Company with any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith in order effectively to contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim. Subject to the other provisions of this Section 6(b)(iii), the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(b), the Company shall control all proceedings taken in connection with such contest, and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine.

(iv) Notwithstanding anything to the contrary in this Section 6, the Gross-Up Payment shall in all events be paid by the Company to the Executive not later than the last day of the calendar year next following the calendar year in which the Executive remits the related taxes, in accordance with the requirements set forth in Treas. Reg. §1.409A-3(i)(1)(v).

(c) Limitations on Payments .

(i) The provisions of this Section 6(c) and not those of Section 6(b) shall apply to any Payments to which the Executive first becomes entitled as a result of an event occurring on or after January 1, 2014. In the event that any such Payments (x) constitute “parachute payments” within the meaning of Section 280G of the Code and (y) but for this subsection (b), would be subject to the Excise Tax, such Payments shall be either

(A) delivered in full, or

(B) delivered to such lesser extent that would result in no portion of the Payments being subject to the Excise Tax,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after tax basis, of the greatest amount of Payments,

 

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notwithstanding that all or some portion of the Payments may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6(c)(i) shall be made in writing in good faith by the Accountants in good faith consultation with the Executive.

(ii) In the event a reduction in the Payments is required hereunder, the Company shall promptly give the Executive notice to that effect and the Executive may then determine, in his sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments are subject to the Excise Tax), and shall advise the Company in writing of his election within ten (10) days of his receipt of the Company’s notice. If no such election is made by the Executive within such period, the Company may determine which and how much of the Payments shall be eliminated or reduced (as long as, after such determination, none of the Payments are subject to the Excise Tax) and shall notify the Executive promptly of such determination.

(iii) For purposes of making the calculations required by this Section 6(c), the Accountants may make reasonable assumptions and approximations concerning the application taxes and may rely on reasonable good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonable request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6(c).

(iv) If the Payments are reduced to avoid the Excise Tax pursuant to Section 6(c)(i) hereof and notwithstanding such reduction, the IRS determines that the Executive is liable for the Excise Tax as a result of the receipt of Payments from the Company, then the Executive shall be obligated to pay to the Company (the “Repayment Obligation”) an amount of money equal to the “Repayment Amount.” The Repayment Amount shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Executive’s net proceeds with respect to the Payments (after taking into account the payment of the Excise Tax imposed on such benefits) shall be maximized. Notwithstanding the foregoing, the Repayment Amount shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax in accordance with the principles of Section 6(c)(i). If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the Executive shall pay the Excise Tax. The Repayment Obligation shall be discharged within 30 days of either (A) the Executive’s entering into a binding agreement with the IRS as to the amount of Excise Tax liability, or (B) a final determination by the IRS or a court decision requiring the Executive to pay the Excise Tax from which no appeal is available or is timely taken.

 

7. Certain Payments to Specified Employees.

Notwithstanding anything to the contrary in this Agreement, if the Executive is a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i) at the time of the Executive’s separation from service with the Company (in connection with a Change in Control Termination or otherwise), no payment or benefit payable or provided to the Executive pursuant to this Agreement that constitutes an item of deferred compensation under Code Section 409A and becomes payable by reason of the Executive’s termination of employment with the Company will be paid or provided to the Executive prior to the earlier of (i) the expiration of the six (6) month period following the date of the Executive’s “separation from service” (as such term is defined by Code Section 409A and the regulations promulgated thereunder), or (ii) the date of the Executive’s death, but only to the extent such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). The payments and benefits to which the Executive would otherwise be entitled during the first six (6) months following his separation from service shall be accumulated and paid or provided, as applicable, in a lump sum, on the date that is six (6) months and one day following the Executive’s separation from service (or if such date does not fall on a business day of the Company, the next following business day) and any remaining payments or benefits will be paid in accordance with the normal payment dates specified for them herein.

 

8. Term.

Unless the Executive’s employment is earlier terminated, this Agreement shall continue in effect until 11:59 p.m. on September 30, 2011 and shall automatically renew thereafter on an annual basis for additional twelve-month terms unless either party provides written notice to the other party of non-renewal at least ninety (90) days

 

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prior to the expiration of the then current term. If a Change in Control occurs on or after the Commencement Date while this Agreement is in effect, the term of this Agreement shall automatically be extended to the second anniversary of the Change in Control on the terms as amended and restated hereby. Upon the termination of this Agreement, the respective rights and obligations of the parties shall survive to the extent necessary to carry out the intentions of the parties as embodied herein.

 

9. Successors and Assigns.

(a) This Agreement is personal to the Executive and is not assignable by the Executive, other than by will or the laws of descent and distribution, without the prior written consent of the Company.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor or acquirer (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to or acquirer of its business and/or assets that assumes and agrees to perform this Agreement.

 

10. No Duty to Mitigate.

In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as contemplated by Sections 3(b) and 4(c)(iii)(B) hereof, any benefits payable to the Executive hereunder shall not be subject to reduction for any compensation received from other employment.

 

11. Conditions to Payment of Severance.

Notwithstanding any other provision of this Agreement, the Executive’s entitlement to receive any of the payments and other benefits contemplated by Sections 3, 4 or 5 (with respect to Disability) hereof shall be contingent upon:

(a) execution by the Executive within forty-five (45) days of the termination of a general release in substantially the form of Appendix B hereto (the “Release”), which has not subsequently been revoked, and the Executive hereby acknowledges and agrees that the Company’s entering into this Agreement and agreement to make such payments are and shall be good and sufficient consideration for such Release; and

(b) the Executive’s continued compliance with the material terms of this Agreement, as applicable, and those of his Non-Disclosure, Non-Competition and Invention Agreement with the Company.

 

12. Miscellaneous.

(a) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except any such laws that would render such choice of law ineffective.

(b) Compliance with Section 409A . This Agreement is intended, to the extent applicable, to constitute good faith compliance with the requirements of Section 409A of the Code. The Company and the Executive agree that they shall cooperate in good faith to amend any provision hereof to the extent required to maintain compliance with the provisions of Section 409A of the Code as they may be modified hereafter (including by subsequent regulations or other guidance of the Internal Revenue Service).

(c) Amendment . This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

 

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(d) Partial Invalidity . If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way.

(e) Entire Agreement; Effect of Current Agreement . This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the compensation and benefits payable to the Executive in the respective circumstances described herein, superseding all prior understandings and agreements, whether oral or written. The amendment and restatement effected hereby shall take effect on the Commencement Date, so that (i) if either a Change in Control or a termination of the Executive’s employment occurs before the Commencement Date (including a Change in Control Termination where either (x) the Executive’s employment is terminated before the Commencement Date and the Change in Control occurs on or after the Commencement Date or (y) the Change in Control occurs before the Commencement Date and the Executive’s employment is terminated on or after the Commencement Date), all payments and benefits to which the Executive is entitled shall be as determined under the Current Agreement and this amendment and restatement shall not take effect, and (ii) if a Change in Control or a termination of the Executive’s employment (other than a Change in Control Termination described in clause (i)) occurs on or after the Commencement Date, payments and benefits shall be provided under this Agreement as amended and restated hereby.

(f) Expenses . The Company agrees to pay as incurred and within twenty (20) days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement) with respect to which the Executive is successful on the merits, plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. The Company’s payment of any eligible expenses must be made no later than December 31 of the year after the year in which the expense was incurred.

(g) Notices . All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid. Notice to the Executive shall be addressed to the Executive at his last address contained in the records of the Company, and notice to the Company shall be addressed to:

Parametric Technology Corporation

140 Kendrick Street

Needham, MA 02494

Attention: General Counsel

Notice shall be addressed to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail.

EXECUTED as of the date first written above.

 

PARAMETRIC TECHNOLOGY CORPORATION       JAMES HEPPELMANN
By:  

/s/ C. Richard Harrison

     

/s/ James E. Heppelmann

  Chairman of the Board and Chief Executive Officer       President and Chief Operating Officer

 

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Appendix A

Performance and Vesting Criteria for One-Time Grant

 

Metric and Measurement Period   

Non-GAAP EPS Compounded Annual Growth Rate (CAGR) measured over 3, 4 and 5-year periods compared to base year ending September 30, 2010;

 

•    3-year Non-GAAP EPS CAGR: up to one-third of award vests

 

•    4-year Non-GAAP EPS CAGR: up to two-thirds of award (less any amounts previously vested) vests

 

•    5-year Non-GAAP EPS CAGR: up to 100% of award (less any amounts previously vested) vests

Vesting Schedule   

Threshold performance is 16% non-GAAP EPS CAGR. For performance at threshold or higher, vesting shall be determined as follows:

 

Evaluate Non-GAAP EPS CAGR as of each of September 30, 2013, 2014 and 2015. Base year is September 30, 2010. Vesting of earned amounts shall occur on the later of November 15 of the year in which the amounts are earned and the date the Compensation Committee determines the extent to which the performance criterion has been achieved for the relevant year.

 

For each year, the portion of the award eligible to be earned in that year shall vest on a linear basis between threshold and target performance in accordance with the schedule below:

 

•    20% Non-GAAP EPS CAGR: 100% vests

 

•    19% Non-GAAP EPS CAGR: 80% vests

 

•    18% Non-GAAP EPS CAGR: 60% vests

 

•    17% Non-GAAP EPS CAGR: 40% vests

 

•    16% Non-GAAP EPS CAGR: 20% vests

 

Example:

 

For an initial share award of 360,000 shares,

 

•    up to 120,000 shares can be earned for 2013,

 

•    up to 240,000 shares less the number of shares earned for 2013 can be earned for 2014, and

 

•    up to 360,000 shares less the number of shares earned for 2013 and 2014 can be earned for 2015.

 

If the Non-GAAP EPS CAGR is 20% for each year:

 

•    120,000 shares will be earned for 2013 and vested,

 

•    120,000 shares will be earned for 2014 and vested, and

 

•    120,000 shares will be earned for 2015 and vested.


Appendix A

 

Catch-Up Provision   

Any unearned shares for 2013 or 2014 may be earned in 2014 and/or 2015 based on performance.

 

The following is an illustration of the catch-up feature.

 

Assumptions:

 

•    360,000 initial share award

 

•    Actual 3-year Non-GAAP EPS CAGR = 14%

 

•    Actual 4-year Non-GAAP EPS CAGR = 18%

 

•    Actual 5-year Non-GAAP EPS CAGR = 20%

 

Resulting Attainment:

 

•    Year 3: No portion of the award earned (< 16% 3-year CAGR)

 

•    Year 4: 144,000 shares earned ((year 3 + year 4) x 60%)

 

•    Year 5: 216,000 shares earned (360,000 – 144,000)

Change in Control Treatment   

In the event of a Change In Control (as defined in the Executive Agreement between the Executive and the Company) that occurs before October 1, 2013, vesting of the award shall be as follows:

 

(a)    In the event a Change In Control occurring on or before September 30, 2011, 50% of the award shall vest and 50% shall be forfeited;

 

(b)    In the event of a Change In Control occurring on or after October 1, 2011 and on or before September 30, 2012, 75% of the award shall vest and 25% shall be forfeited;

 

(c)    In the event of a Change In Control occurring on or after October 1, 2012 and on or before September 30, 2013, 100% of the award shall vest.

 

In the event of a Change In Control occurring on or after October 1, 2013, shares that were first eligible to be earned and vested prior to such Change In Control but which were not in fact earned and vested shall be forfeited. Vesting on any remaining shares shall be accelerated in full and such shares shall fully vest.

 

For example, using the assumptions above in the “Catch-Up Provision”:

 

•    For a change in control that occurs on or before September 30, 2013, 50% of the award (180,000 shares) is deemed earned and vesting for such 180,000 shares is accelerated, with the remaining shares forfeited;

 

•    For a change in control that occurs in March 2014, the 120,000 shares not earned for 2013 are forfeited and vesting of 180,000 shares (75% of remaining shares) is accelerated;

 

•    For a change in control that occurs in March 2015, the 96,000 shares not earned for 2013 and 2014 are forfeited and vesting of 120,000 shares is accelerated (100% of remaining shares).


Appendix A

 

Non-GAAP Definition   

Definitions and Exclusions

 

(1)    “Non-GAAP Earnings per Share” is “Non-GAAP Net Income” divided by fully-diluted weighted average shares outstanding at the end of the applicable fiscal year.

 

(2)    “Non-GAAP Net Income” is GAAP Net Income excluding the effect of purchase accounting on the fair value of any acquired deferred revenue, stock-based compensation expense, amortization or impairment charge of acquired intangible assets and acquired in-process research and development expenses, restructuring expenses, operating benefit or charge associated with the resolution of the matter underlying the Customer Advances liability shown on PTC’s consolidated balance sheet, any one-time charges associated with termination of a pension plan, and expenses incurred by the Board of Directors or any committee thereof in connection with any non-recurring matter directed by the Board or any such committee (all such items, “Non-GAAP Adjustments”), the tax effect of the exclusion of the Non-GAAP Adjustments and one-time tax items consistent with PTC’s methodology for reporting of non-GAAP measures (such as valuation allowances).

 

The Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, the award in recognition of unusual or nonrecurring events (as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or other business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee’s assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (i) would cause the award to fail to qualify as “performance-based compensation” under Code Section 162(m) and regulations thereunder, or (ii) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to the award.

Exhibit 10.3

AMENDED AND RESTATED EXECUTIVE AGREEMENT

This Amended and Restated Executive Agreement dated as of May     , 2010 by and between Parametric Technology Corporation, a Massachusetts corporation (the “Company”), and [executive] (the “Executive”) further amends and, as so amended restates, the Amended and Restated Executive Agreement dated as of June 26, 2008 by and between the Company and the Executive (the “Current Agreement”) effective as of October 1, 2010.

WHEREAS, the Executive is the [title] of the Company; and

WHEREAS, the Company and the Executive desire to make changes to the payments and benefits to be provided to the Executive if his employment with the Company is terminated without cause or if certain other events occur on or after October 1, 2010, as described herein;

NOW, THEREFORE, the Company and the Executive hereby agree as follows:

 

1. Definitions.

For the purposes of this Agreement:

(a) “Board” means the Company’s board of directors.

(b) “Code” means the U.S. Internal Revenue Code of 1986, as amended.

(c) “Cause” means

(i) the Executive’s willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), provided that the Company has delivered a written demand for performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties and the Executive does not cure such failure within thirty (30) days after such demand;

(ii) willful conduct by the Executive which is demonstrably and materially injurious to the Company;

(iii) the Executive’s conviction of, or pleading of guilty or nolo contendere to, a felony;

(iv) the Executive’s entry in his personal capacity into a consent decree relating to the business of the Company with any government body; or

(v) the Executive’s willful violation of any material provision of his Non-Disclosure, Non-Competition and Invention Agreement with the Company; provided that, if such violation is able to be cured, the Executive has not, within thirty (30) days after written demand by the Company, cured such violation.

For purposes of this definition, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.

(d) “Change in Control” means the occurrence of any of the following events:

(i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the


stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company);

(ii) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board;

(iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other entity (each a “Business Combination”), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or

(iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion.

(e) “Change in Control Termination” means any of the following terminations of the Executive’s employment:

(i) termination of the Executive’s employment by the Company during the period from the date of a Change in Control through the second anniversary thereof, other than for Cause or as a result of the Executive’s Disability;

(ii) resignation by the Executive for Good Reason during the period from the date of a Change in Control through the second anniversary thereof; or

(iii) termination of the Executive’s employment by the Company within one hundred eighty (180) days prior to a Change in Control, other than for Cause or as a result of the Executive’s Disability, if it is reasonably demonstrated by the Executive that such termination of employment (A) was at the request of a third party that has taken steps reasonably calculated to effect the Change in Control or (B) was otherwise related to or in anticipation of the Change in Control. A Change in Control Termination under this Section 1(e)(iii) shall be deemed to have occurred if and when the Change in Control occurs.

(f) “Disability” means such physical or mental incapacity as to make the Executive unable to perform the essential functions of his employment duties for a period of at least sixty (60) consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of his employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has

 

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no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive.

(g) “Good Reason” means the occurrence, without the Executive’s consent and without Cause, of any of the following events after or in connection with a Change in Control (provided that the Executive shall have given the Company written notice describing such event within ninety (90) days of its initial existence and the matter shall not have been fully remedied by the Company within thirty (30) days after receipt of such notice):

(i) any reduction of the Executive’s annual base salary or target bonus as in effect at the date of the Change in Control; provided that any such reduction (not exceeding fifteen percent (15%) of either (A) such base salary or (B) the sum of such base salary and such target bonus) that is consistent with similar actions taken with respect to the base salaries and/or target bonuses of the other senior executives of the Company shall not constitute Good Reason;

(ii) any material reduction in the aggregate benefits for which the Executive is eligible under the Company’s benefit plans, including medical, dental, vision, basic life insurance, retirement, paid time off, long-term disability and short-term disability plans; provided that any such reduction or other action that is consistent with similar actions taken with respect to comparable benefits of the Company employees generally shall not constitute Good Reason;

(iii) a material diminution in the substantive responsibilities or the scope of the Executive’s position, taking into consideration, without limitation, the dollar amount of the budget and the number of employees for which the Executive has responsibility (and a reduction of more than ten percent (10%) in such dollar amount or such number from that which was applicable at the date of the Change in Control shall be deemed a “material diminution” unless it is comparable to similar reductions then applicable to the Company’s executive officers generally);

(iv) any breach by the Company of its material obligations under this Agreement;

(v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or

(vi) any requirement that the Executive relocate to a primary work site that would increase the Executive’s one-way commute distance by more than fifty (50) miles from the Executive’s then principal residence.

(h) “Stock Plan” means any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 1997 Incentive Stock Option Plan, the 1997 Nonqualified Stock Option Plan, and the 2000 Equity Incentive Plan.

 

2. Termination of Employment without Cause.

If the Company terminates the Executive’s employment without Cause, other than a termination constituting a Change in Control Termination or a termination due to his Disability, the Executive shall be entitled to the following:

(a) a lump sum payment in an amount equal to one times the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the termination date, payable within forty-five (45) days after the termination date; and

 

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(b) continued participation in the Company’s medical, dental, vision and basic life insurance benefit plans (the “Benefit Plans”), subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.

 

3. Change in Control.

(a) Equity Awards . Effective upon a Change in Control that occurs during the Executive’s employment, except as provided in Section 3(b), the following shall occur:

(i) any performance criteria applicable to any stock options, stock appreciation rights, restricted stock units, restricted stock or other equity awards issued under any Stock Plan and held by the Executive shall be deemed to have been met in full;

(ii) any of the restrictions on any shares of restricted stock issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 3(a)) to lapse after the second anniversary of the Change in Control shall lapse immediately so that the portion of such shares formerly subject to such restrictions shall become unrestricted (and any such restrictions that are scheduled by their terms to lapse on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i));

(iii) any other equity awards (including without limitation any stock options, stock appreciation rights and restricted stock units) issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 3(a)) to vest after the second anniversary of the Change in Control shall vest immediately and become exercisable or distributable (and any such awards that are scheduled by their terms to vest on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i) of this Section 3(a)); provided that if any such stock option, stock appreciation right, restricted stock unit or other equity award is not assumed or a cash payment of equivalent value is not substituted therefor (in either case with vesting terms no more restrictive than those of the assumed or substituted award) by any acquirer of or successor to the Company, then such stock option, stock appreciation right, restricted stock unit or other equity award shall become vested and exercisable in full upon such Change in Control; and

(iv) each outstanding equity award held by the Executive shall be deemed amended automatically to provide that, notwithstanding any provision of any Stock Plan, no outstanding share of restricted stock, stock option, stock appreciation right, restricted stock unit or other equity award held by the Executive may be terminated or forfeited without the Executive’s written consent (provided that this shall not prevent termination of (A) any unvested portion thereof that is terminated or forfeited upon termination of the Executive’s employment as provided in any agreement or certificate executed in connection with any such equity award, (B) a stock option the termination of which is covered by Section 8(i) of the Company’s 2000 Equity Incentive Plan, or (C) upon payment of a cash payment equivalent to the value of such terminated award).

The foregoing notwithstanding, this Section 3(a) shall not apply to any shares of restricted stock, restricted stock units or other equity awards granted to the Executive as an incentive bonus under any of the Company’s short-term incentive programs which are subject to performance criteria with a performance period of one year or less and time-based vesting with an original vesting term of less than fifteen (15) months (collectively, “Bonus Equity”), which shall be treated as provided in Section 3(b)(ii).

 

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(b) Bonus . Effective upon (x) a Change in Control that occurs during the Executive’s employment or (y) a Change in Control Termination under Section 1(e)(iii):

(i) the Executive shall be entitled to payment of a pro-rata portion of any annual cash incentive award for which the Executive is eligible for the fiscal year in which the Change in Control occurs, based on the Executive’s target cash bonus for such year and the percentage of the year completed through the date of the Change in Control, for the purposes of which any performance criteria applicable to such award shall be deemed to have been met in full, which payment shall be made in one lump sum within forty-five (45) days of the date of the Change in Control; and

(ii) the vesting schedule applicable to any Bonus Equity held by the Executive shall be amended automatically so that a pro-rata portion of any such Bonus Equity equal to the percentage of the respective fiscal year completed through the date of the Change in Control shall thereupon be vested and subject to no further restrictions, exercisable or distributable, as the case may be, and the portion not so vested shall thereupon automatically be cancelled and forfeited to the Company.

(c) Change in Control Termination Benefits .

(i) Equity Awards . Effective upon a Change in Control Termination, the following shall occur:

(A) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately become vested and exercisable or distributable in full; and

(B) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately lapse.

(ii) Make-Up Payment . Effective upon a Change in Control Termination under Section 1(e)(iii), the Company shall pay the Executive in a lump sum the amount equal to the sum of:

(x) the excess, if any, of (A) the product of (1) the number of additional shares of the Company’s Common Stock that either were subject to options, stock appreciation rights or other awards that would have become vested and exercisable and/or were restricted stock or restricted stock units as to which the restrictions would have lapsed, in each case solely as a result of Section 3(c)(i), and for which the Executive would have been entitled to receive consideration in the Change in Control (on the same basis as other holders of Common Stock), had the Executive remained employed on the date of the Change in Control and was deemed to have exercised all the stock options that would then have become exercisable under Section 3(c)(i)(A) times (2) the amount per share of the Company’s Common Stock (if any) received by the Company’s stockholders generally pursuant to the Change in Control (the “Shareholder Price”) over (B) the aggregate exercise price of all such additional stock options that the Executive would then have become able to exercise upon the Change in Control as a result of Section 3(c)(i)(A) (whereupon all such stock options, stock appreciation rights, and other awards shall terminate and shall no longer be exercisable); and

(y) the excess, if any, of (A) the product of (1) the number of shares of the Company’s Common Stock that the Executive (a) held on the date of termination of his employment or acquired upon exercise of stock options held on such date and (b) sold before the consummation of the Change in Control (the “Pre-Sold Shares”) times (2) the Shareholder Price over (B) the aggregate amount received by the Executive in the sale(s) of the Pre-Sold Shares.

 

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The Company shall pay this lump sum payment within forty-five (45) days following the Executive’s termination date.

(iii) Salary, Bonus and Benefits . Effective upon a Change in Control Termination, the Executive shall be entitled to the following:

(A) a lump sum payment in an amount equal to one times his base salary plus his target bonus, such salary to be the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the Executive’s termination and such target bonus to be the highest target bonus in effect with respect to the Executive for (1) the fiscal year in which the Change in Control occurs, (2) the fiscal year following the year in which the Change in Control occurs, or (3) the fiscal year in which the Change in Control Termination occurs, whichever is highest, payable within forty-five (45) days after the termination date; and

(B) continued participation in the Benefit Plans, subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided, further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.

(iv) Payments and benefits under this Section 3(c) shall be in lieu and without duplication of any amounts or benefits under Section 2, and the Executive shall be entitled to any such payments and benefits for no more than one year even if both such sections apply. If, in the event of a Change in Control Termination under Section 1(c)(iii), the Executive becomes entitled to payments under this Section 3(c) after he has begun to receive payments under Section 2, he shall be entitled to a make-up payment to ensure that he receives the higher amount payable hereunder, with such make-up payment being made within forty-five (45) days following the Change in Control Termination.

(d) Deemed Amendment of Equity Awards . The Company and the Executive hereby agree that the agreements evidencing any equity awards to the Executive are hereby and will be deemed amended to give effect to the provisions of Sections 3 and 4 of this Agreement.