<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------
FORM 10-Q
----------------------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period Ended August 31, 1996
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2746201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (617) 280-4000
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of September 30, 1996, there were 12,674,949 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
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1
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PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED AUGUST 31, 1996
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 1996 and November 30, 1995 3
Condensed Consolidated Statements of Income for
the three and nine months ended August 31, 1996 and
August 31, 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended August 31, 1996 and
August 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<CAPTION>
August 31, 1996 November 30, 1995
--------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 30,878 $ 33,465
Short-term investments 65,251 58,873
Accounts receivable (less allowance for doubtful
accounts of $5,089 in 1996 and $4,611 in 1995) 30,037 41,652
Inventories 1,630 2,090
Other current assets 4,738 4,804
Deferred income taxes 3,485 3,227
-------- --------
Total current assets 136,019 144,111
-------- --------
Property and equipment-net 25,164 24,318
Capitalized software costs-net 5,288 4,668
Other assets 2,959 2,639
-------- --------
Total $169,430 $175,736
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 49 $ 89
Accounts payable 6,668 9,536
Accrued compensation and related taxes 9,883 14,829
Income taxes payable 2,273 2,231
Other accrued liabilities 5,122 4,350
Advanced payments from customers 1,038 812
Deferred revenue 27,390 26,993
-------- --------
Total current liabilities 52,423 58,840
-------- --------
Deferred income taxes 3,013 2,706
Long-term debt 68 73
Minority interest in subsidiary 285 636
Commitments and contingency
Shareholders' equity:
Preferred stock, $.01 par value; authorized,
1,000,000 shares; issued, none
Common stock, $.01 par value; authorized, 20,000,000
shares; issued and outstanding, 12,668,899 shares
in 1996 and 12,905,998 shares in 1995 127 129
Additional paid-in capital 42,005 46,467
Retained earnings 71,575 66,783
Unrealized gain on short-term investments 20 133
Cumulative translation adjustments (86) (31)
-------- --------
Total shareholders' equity 113,641 113,481
-------- --------
Total $169,430 $175,736
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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PROGRESS SOFTWARE CORPORATION
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
----------------------------- ----------------------------
1996 1995 1996 1995
------------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software licenses $19,658 $25,789 $ 69,381 $ 77,134
Maintenance and support services 21,753 19,172 62,074 50,003
------- ------- -------- --------
Total revenue 41,411 44,961 131,455 127,137
------- ------- -------- --------
Costs and expenses:
Cost of software licenses 2,011 1,717 6,592 4,537
Cost of maintenance and support services 7,689 6,628 21,699 17,306
Sales and marketing 20,942 20,254 64,949 57,175
Product development 6,096 6,099 17,987 17,586
Purchase of in-process software development -- -- -- 2,373
General and administrative 5,449 4,560 15,938 13,287
------- ------- -------- --------
Total costs and expenses 42,187 39,258 127,165 112,264
------- ------- -------- --------
Income (loss) from operations (776) 5,703 4,290 14,873
------- ------- -------- --------
Other income (expense):
Interest income 943 922 2,884 2,541
Interest expense (1) (5) (7) (11)
Foreign currency gain (loss) 20 (209) (283) (650)
Minority interest 95 133 351 329
Other income (expense) 49 (3) 26 8
------- ------- -------- --------
Total other income 1,106 838 2,971 2,217
------- ------- -------- --------
Income before provision for income taxes 330 6,541 7,261 17,090
Provision for income taxes 112 2,223 2,469 6,617
------- ------- -------- --------
Net income $ 218 $ 4,318 $ 4,792 $ 10,473
======= ======= ======== ========
Income per common share $ 0.02 $ 0.31 $ 0.36 $ 0.77
======= ======= ======== ========
Weighted average number of common and
common equivalent shares outstanding 12,915 13,752 13,268 13,536
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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PROGRESS SOFTWARE CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended August 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,792 $ 10,473
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 7,058 3,904
Charge for purchase of in-process software development -- 2,373
Amortization of capitalized software costs 1,224 774
Amortization of intangible assets 268 215
Deferred income taxes 51 34
Minority interest in subsidiary (351) (329)
Noncash compensation 2 2
Changes in operating assets and liabilities:
Accounts receivable 11,566 (1,516)
Inventories 464 (225)
Other current assets (107) (994)
Accounts payable and accrued expenses (6,601) (4,994)
Income taxes payable 215 2,477
Deferred revenue 399 5,458
-------- --------
Total adjustments 14,188 7,179
-------- --------
Net cash provided by operating activities 18,980 17,652
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale (59,302) (71,900)
Maturities of investments available for sale 20,600 47,414
Sales of investments available for sale 32,211 8,758
Purchase of property and equipment (7,943) (8,859)
Capitalized software costs (1,844) (1,822)
Acquisition of CSI, net of cash acquired -- (1,894)
Increase in other noncurrent assets (452) (1,094)
-------- --------
Net cash used for investing activities (16,730) (29,397)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,642 4,492
Repurchase of common stock (6,276) --
Contributions from minority interest -- 1,039
Payment of obligations under capital leases (49) (61)
-------- --------
Net cash provided by (used for) financing activities (4,683) 5,470
-------- --------
Effect of exchange rate changes on cash (154) 420
-------- --------
Net decrease in cash and equivalents (2,587) (5,855)
Cash and equivalents, beginning of period 33,465 24,533
-------- --------
Cash and equivalents, end of period $ 30,878 $ 18,678
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PROGRESS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by Progress Software Corporation (the Company) pursuant
to 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 and should be read
in conjunction with the audited financial statements included in the
Company's Annual Report and Form 10-K for the fiscal year ended November
30, 1995.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited financial statements, and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results of the interim periods presented. The operating results for
the interim periods presented are not necessarily indicative of the
results expected for the full fiscal year.
2. Income Per Common Share
Income per common share is computed on a fully-diluted basis using the
weighted average number of common and common equivalent shares outstanding
during each period presented.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and are comprised of product media, documentation, and packaging.
4. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year.
Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rate is
determined.
5. Contingency
The Company's 401(k) Plan has approximately $900,000 in Guaranteed
Investment Contracts (GICs) issued by Mutual Benefit Life Insurance
Company (MBLI). On July 16, 1991, the Insurance Commissioner of the State
of New Jersey took possession and control of MBLI's assets. In April 1994,
a rehabilitation plan was approved by the Superior Court of New Jersey.
Pursuant to the plan, the GICs are supported by a group of life insurance
companies and are paid
6
<PAGE> 7
out from the assets of MBL Life Assurance Corporation, the successor to
MBLI. The Company is not presently able to determine whether the 401(k)
Plan or its participants will incur any losses as a result of this action
or whether, if such losses are incurred, the Company might be subject to
any liability (either directly as a Plan fiduciary or as an indemnitor of
officers and directors of the Company who serve as trustees of the Plan).
6. Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The Company will adopt SFAS 123 in fiscal 1997.
As permitted by SFAS 123, the Company intends to continue to apply
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" and will make the proforma disclosures required by
SFAS 123. Adoption will not have a material effect on the Company's
financial position or results of operations.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's total revenue and net income for the third quarter of fiscal
1996 decreased 8% and 95%, respectively, from the total revenue and net income
for the third quarter of fiscal 1995. The Company's total revenue for the first
nine months of 1996 increased 3% from the first nine months of 1995. The
Company's net income for the first nine months of 1996 decreased 63% from the
first nine months of 1995 before the non-recurring charge. In the first quarter
of fiscal 1995, the Company recorded a non-recurring charge of $2,373,000 for
purchase of in-process software development costs related to the acquisition of
Crescent Software, Inc. (CSI). The acquisition was accounted for as a purchase.
<TABLE>
The following table sets forth certain income and expense items as a
percentage of total revenue, and the percentage change in dollar amounts of such
items compared with the corresponding period in the previous fiscal year.
<CAPTION>
Percentage of Total Revenue Period-to-Period Change
------------------------------------- -----------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
August 31, August 31, Three Months Nine Months
-------------- ------------- 1996 Compared 1996 Compared
1996 1995 1996 1995 to 1995 to 1995
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses 47% 57% 53% 61% (24)% (10)%
Maintenance and support services 53 43 47 39 13 24
--- --- --- ---
Total revenue 100 100 100 100 (8) 3
--- --- --- ---
Cost and expenses:
Cost of software licenses 5 4 5 3 17 45
Cost of maintenance and
support services 19 15 17 14 16 25
Sales and marketing 50 45 49 45 3 14
Product development 15 13 14 14 0 2
Purchase of in-process software
development - - - 2 - -
General and administrative 13 10 12 10 19 20
--- --- --- ---
Total costs and expenses 102 87 97 88 7 13
--- --- --- ---
Income (loss) from operations (2) 13 3 12 (114) (71)
--- --- --- ---
Other income 2 2 3 1 32 34
--- --- --- ---
Income before provision for
income taxes 1 15 6 13 (95) (58)
Provision for income taxes 0 5 2 5 (95) (63)
--- --- --- ---
Net income 1% 10% 4% 8% (95)% (54)%
=== === === ===
</TABLE>
- ----------
The Company's total revenue decreased 8% from $44,961,000 in the third
quarter of fiscal 1995 to $41,411,000 in the third quarter of fiscal 1996. The
Company's total revenue increased 3% from $127,137,000 in the first nine months
of fiscal 1995 to $131,455,000 in the first nine months of fiscal 1996. Software
license revenue decreased 24% from $25,789,000 in the third quarter of fiscal
1995 to $19,658,000 in the third quarter of fiscal 1996. Software license
revenue decreased 10% from $77,134,000 in the first nine months of fiscal 1995
to $69,381,000 in the first nine months of fiscal 1996. The software license
revenue decrease is attributable to increased competition, a slowdown in
8
<PAGE> 9
the rate of growth for application development tools, the transition some of the
Company's Application Partners face in the marketplace as they move their
applications to PROGRESS Version 8 and the new user-based pricing structure
implemented in the fourth quarter of fiscal 1995. The new pricing structure
appears to have resulted in smaller initial purchases since customers have
reduced the number of user counts purchased. During the first nine months of
fiscal 1996, the Company entered into approximately 219 new Application Partner
agreements worldwide (92 in North America and 127 outside North America).
Maintenance and support services revenue increased 13% from $19,172,000 in the
third quarter of fiscal 1995 to $21,753,000 in the third quarter of fiscal 1996.
Maintenance and support services revenue increased 24% from $50,003,000 in the
first nine months of fiscal 1995 to $62,074,000 in the first nine months of
fiscal 1996. The maintenance and support services revenue increase is primarily
a result of growth in the Company's installed customer base, renewal of
maintenance contracts and greater demand for consulting services. Total revenue
generated in markets outside North America increased from $69,688,000 in the
first nine months of fiscal 1995 to $76,144,000 in the first nine months of
fiscal 1996 and increased from 55% to 58% of total revenue in each period. Total
revenue generated outside North America would not have been significantly
different in the first nine months of fiscal 1996 if exchange rates had been
constant as compared to the first nine months of fiscal 1995.
Cost of software licenses consists primarily of cost of product media,
documentation, duplication, packaging, royalties, and amortization of
capitalized software costs. Cost of software licenses increased 17% from
$1,717,000 in the third quarter of fiscal 1995 to $2,011,000 in the third
quarter of fiscal 1996 and increased as a percentage of software license revenue
from 7% to 10%. Cost of software licenses increased 45% from $4,537,000 in the
first nine months of fiscal 1995 to $6,592,000 in the first nine months of
fiscal 1996 and increased as a percentage of software license revenue from 6% to
10%. The percentage and dollar increase is due to an increase in amortization of
capitalized software costs, higher documentation costs associated with PROGRESS
Version 7 and Version 8 as compared to Version 6, higher royalty expense and an
increase in the number of software license update shipments. Cost of software
licenses as a percentage of software license revenue can vary depending upon the
relative product mix in the related period.
Cost of maintenance and support services consists primarily of costs of
providing customer technical support, education, and consulting. Cost of
maintenance and support services increased 16% from $6,628,000 in the third
quarter of fiscal 1995 to $7,689,000 in the third quarter of fiscal 1996 but
remained approximately 35% of maintenance and support services revenue in each
period. Cost of maintenance and support services increased 25% from $17,306,000
in the first nine months of fiscal 1995 to $21,699,000 in the first nine months
of fiscal 1996, but remained approximately 35% of maintenance and support
services revenue in each period. The dollar increase was due primarily to the
growth in the Company's technical support, education, and consulting staff and
related costs required to support the growth in the Company's installed customer
base. The Company increased its technical support, education, and consulting
staff from 209 to 214 (111 in North America and 98 outside North America at
August 31, 1995 to 121 in North America and 93 outside North America at August
31, 1996).
Sales and marketing expenses increased 3% from $20,254,000 in the third
quarter of fiscal 1995 to $20,942,000 in the third quarter of fiscal 1996 and
increased as a percentage of total revenue from 45% to 50%. Sales and marketing
expenses increased 14% from $57,175,000 in the first nine months of fiscal 1995
to $64,949,000 in the first nine months of fiscal 1996, and increased as a
percentage of total revenue from 45% to 49%. The percentage and dollar increase
in sales and marketing expenses was primarily due to expansion of the sales,
sales support and marketing staff, the establishment of a subsidiary in
Argentina and, to a lesser extent, expansion of marketing activities associated
with
9
<PAGE> 10
PROGRESS Version 8 and the Crescent Division product line. The Company increased
its sales, sales support and marketing staff from 445 to 494 (250 in North
America and 195 outside North America at August 31, 1995 to 260 in North America
and 234 outside North America at August 31, 1996).
Product development expenses remained approximately the same, decreasing
slightly from $6,099,000 in the third quarter of fiscal 1995 to $6,096,000 in
the third quarter of fiscal 1996, but increased as a percentage of total revenue
from 13% to 15%. Product development expenses increased 2% from $17,586,000 in
the first nine months of fiscal 1995 to $17,987,000 in the first nine months of
fiscal 1996, but remained approximately 14% of total revenue. The dollar
increase was due primarily to higher average personnel costs and other related
costs to support continued new product development efforts for WebSpeed and the
PROGRESS Version 8 product set in the Enterprise Division and Visual Basic
add-on tools and components within the Crescent Division. The product
development staff decreased from 244 at August 31, 1995 to 200 at August 31,
1996. However, the average headcount of the product development staff has
decreased by less than 5% in the first nine months of fiscal 1996 as compared
to the first nine months of fiscal 1995.
The Company capitalized $842,000 of software development costs in the third
quarter of fiscal 1995 and $627,000 in the third quarter of fiscal 1996, which
represented 12% and 9%, respectively, of total product development expenses in
each period. The Company capitalized $1,822,000 in the first nine months of
fiscal 1995 and $1,844,000 in the first nine months of fiscal 1996, which
represented 9% of total product development expenses in both periods. A
substantial portion of the amount capitalized related to work on the next
release of PROGRESS Version 8. Capitalized software costs are amortized over the
estimated life of the product (two to four years) and amounts amortized are
included in cost of software licenses for the period.
General and administrative expenses include the costs of the finance, human
resources, legal, information systems, and administrative departments of the
Company. General and administrative expenses increased 19% from $4,560,000 in
the third quarter of fiscal 1995 to $5,449,000 in the third quarter of fiscal
1996, and increased as a percentage of total revenue from 10% to 13%. General
and administrative expenses increased 20% from $13,287,000 in the first nine
months of fiscal 1995 to $15,938,000 in the first nine months of fiscal 1996,
and increased as a percentage of total revenue from 10% to 12%. The dollar
increase resulted primarily from the addition of personnel and related costs to
support the growth of the Company's operations. The Company increased its
administrative staff from 174 to 180 (92 in North America and 82 outside North
America at August 31, 1995 to 102 in North America and 78 outside North America
at August 31, 1996).
Other income increased approximately $268,000 from $838,000 in the third
quarter of fiscal 1995 to $1,106,000 in the third quarter of fiscal 1996 due
primarily to a foreign currency gain of $20,000 in the third quarter of fiscal
1996 as compared to a foreign currency loss of $209,000 in the third quarter of
fiscal 1995. Other income increased approximately $754,000 from $2,217,000 in
the first nine months of fiscal 1995 to $2,971,000 in the first nine months of
fiscal 1996 due primarily to higher interest income, lower foreign currency
losses and the minority interest in the Company's joint venture in Japan. All
revenue, costs and expenses attributable to the Company's joint venture are
included in the Company's revenue, costs and expenses. To account for the fact
that the Company owns only a 51% interest in the joint venture, other income
(expense) reflects that portion of the joint venture's income or loss which is
attributable to the 49% minority interest in the joint venture. The joint
venture generated a net loss in each period presented and the Company recorded
as "other income - minority interest" an amount equal to 49% of the joint
venture's net loss. The increase in interest income was due to higher average
cash balances. Foreign currency gains and losses relate primarily to the
translation and settlement of short-term intercompany receivables.
10
<PAGE> 11
The Company's effective tax rate was 34.0% in the third quarter of fiscal
1996 and in the first nine months of fiscal 1996 as compared to 34.0% in the
third quarter of fiscal 1995 and 38.7% in the first nine months of fiscal 1995.
The decrease in the first nine months of 1996 from the first nine months of
fiscal 1995 was due to nondeductible expenses related to the acquisition of CSI
in January 1995 included in fiscal 1995. Excluding these nondeductible expenses,
the Company's effective tax rate for fiscal 1995 was 34.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $96,129,000 in cash and short-term investments at
August 31, 1996. The increase of $3,791,000 from $92,338,000 at November 30,
1995 was due primarily to cash generated from operations.
The Company purchased $8,859,000 of property and equipment in the first
nine months of fiscal 1995 and $7,943,000 in the first nine months of fiscal
1996, which consisted of computer equipment and software, furniture and
fixtures, and leasehold improvements. The level of property and equipment
purchases resulted from continued growth in the business. The Company financed
these purchases from cash generated from operations.
The Company purchased 396,500 shares of its common stock for $6,276,000 in
the first nine months of fiscal 1996 under the Board of Directors' previously
announced authorization to purchase up to 3,000,000 shares of common stock
through September 30, 1996. In September 1996, the Board of Directors
authorized, during the period from October 1, 1996 through September 30, 1997,
the purchase of up to 3,000,000 shares of the Company's common stock at such
times when the Company deems such purchases to be an effective use of cash. The
Company financed these purchases from cash generated from operations.
Total current liabilities decreased approximately $6,417,000 from
November 30, 1995. This was primarily due to a decrease in accrued compensation
and related taxes of $4,946,000 resulting from the payment of fiscal 1995
bonuses and profit sharing.
The Company's 401(k) Plan has approximately $900,000 in Guaranteed
Investment Contracts (GICs) issued by Mutual Benefit Life Insurance Company
(MBLI). On July 16, 1991, the Insurance Commissioner of the State of New Jersey
took possession and control of MBLI's assets. In April 1994, a rehabilitation
plan was approved by the Superior Court of New Jersey. Pursuant to the plan,
the GICs are supported by a group of life insurance companies and are paid out
from the assets of MBL Life Assurance Corporation, the successor to MBLI. The
Company is not presently able to determine whether the 401(k) Plan or its
participants will incur any losses as a result of this action or whether, if
such losses are incurred, the Company might be subject to any liability (either
directly as a Plan fiduciary or as an indemnitor of officers and directors of
the Company who serve as trustees of the Plan).
The Company believes that existing cash balances together with its funds
generated from operations will be sufficient to finance the Company's operations
and meet its foreseeable cash requirements (including planned capital
expenditures, lease commitments, and other long-term obligations) at least
through the next twelve months.
11
<PAGE> 12
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. The
following discussion highlights some of these risks.
The Company's future operating results may vary from quarter-to-quarter, and,
as such, one quarter's results should not be relied upon as an indication of
future performance. Revenue forecasting is uncertain, in large part, because the
Company generally ships its products upon receipt of orders. This uncertainty is
compounded because each quarter's revenue is derived disproportionately from
orders booked and shipped during the third month, and disproportionately in the
latter half of that month. In contrast, most of the company's expenses are
relatively fixed, including costs of personnel and facilities, and are not
easily reduced rapidly. Thus, an unexpected reduction in the Company's revenue,
or in the rate of growth of such revenue, would have a material adverse effect
on the profitability of the Company.
Approximately 50% of the Company's total revenue for the first nine months of
fiscal 1996 was attributable to international sales made through international
subsidiaries. Because a substantial portion of the Company's total revenue is
derived from such international operations which are conducted in foreign
currencies, changes in the value of these foreign currencies relative to the
United States dollar may affect the Company's results of operations and
financial position. The Company engages in certain currency-hedging transactions
intended to reduce the effect of fluctuations in foreign currency exchange rates
on the Company's results of operations. However, there can be no assurance that
such hedging transactions will materially reduce the effect of fluctuation in
foreign currency exchange rates on such results. If for any reason exchange or
price controls or other restrictions on the conversion of foreign currencies
were imposed, the Company's business could be adversely affected. Other
potential risks inherent in the Company's international business generally
include longer payment cycles, greater difficulties in accounts receivable
collection and the burdens of complying with a wide variety of foreign laws and
regulations.
The Company's operations are currently organized around the Enterprise
Division and the Crescent Division. The Enterprise Division develops and markets
the Company's core product line, the PROGRESS Application Development
Environment, the PROGRESS RDBMS, and the PROGRESS Dataserver Architecture
(collectively, "PROGRESS"). In November 1995, the Company began commercially
shipping the latest major enhancement to the PROGRESS product line, PROGRESS
Version 8. In September 1996, the Company announced the availability of
WebSpeed, an open development and deployment environment that enables
organizations to build transaction processing applications on the Internet and
corporate intranets. The Company's Crescent Division develops and markets a
collection of advanced tools and components to Visual Basic development teams.
The Crescent Division began offering these products commercially in January 1995
and has since released major enhancements to its existing line of products as
well as many new products.
Although the Company believes that PROGRESS, WebSpeed and the Crescent line
of products have features and functionality which enable the Company to compete
effectively with other vendors of application development products, ongoing
enhancements to PROGRESS, WebSpeed and the Crescent line of products will be
required to enable the Company to maintain its competitive position. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to its products on a timely basis, or that the enhancements will
adequately address the changing needs of the marketplace. Delays in the release
of enhancements may negatively affect results.
12
<PAGE> 13
The Company has derived most of its revenue from PROGRESS and other products
which complement PROGRESS and are generally licensed only in conjunction with
PROGRESS. Accordingly, the Company's future results depend on continued market
acceptance of PROGRESS and any factor adversely affecting the market for
PROGRESS could have a material adverse effect on the Company's business and its
financial results. Future results may also depend upon the Company's continued
successful distribution of PROGRESS through its Application Partner channel and
may be impacted by downward pressure on pricing, which may not be offset by
increases in volume. Application Partners resell PROGRESS along with their own
applications and any adverse effect on their business related to competition,
pricing and other factors could have a material adverse effect on the Company.
The Company experiences significant competition from a variety of sources
with respect to the marketing and distribution of PROGRESS. Some of these
competitors have greater financial, marketing or technical resources than the
Company and may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than can the Company.
The Company hopes that the Crescent Division and other new products, such as
WebSpeed, will contribute positively to the Company's future results. The market
for the Crescent product line is extremely competitive and may be affected by
changes in Microsoft's strategy with respect to Visual Basic and the add-on
product market for Visual Basic, and market acceptance of products competitive
with Visual Basic. The market for internet transaction processing products, such
as WebSpeed, is highly competitive and will depend on the commercial acceptance
of the Internet as a medium for all types of commerce.
Overlaying the risks associated with the Company's existing products and
enhancements are ongoing technological developments and rapid changes in
customer requirements. The Company's future success will depend upon its ability
to develop and introduce in a timely manner new products that take advantage of
technological advances and respond to new customer requirements. The Company's
Enterprise and Crescent Divisions are currently developing new products intended
to help organizations meet the future needs of application developers.
The development of new products is increasingly complex and uncertain, which
increases the risk of delays. There can be no assurance that the Company will be
successful in developing new products incorporating new technology on a timely
basis, or that its new products will adequately address the changing needs of
the marketplace. The marketplace for these new products is intensely competitive
and characterized by low barriers to entry. As a result, new competitors
possessing technological, marketing or other competitive advantages may emerge
and rapidly acquire market share.
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the software industry is intense. There can be
no assurance that the Company will continue to be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably.
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies principally on a combination of contract
provisions and copyright, trademark and trade secret laws to protect its
proprietary technology. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology
13
<PAGE> 14
or independent development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, the use of patents to protect software has
increased, and there can be no assurance that third parties will not assert
infringement claims in the future.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
11.1 - Statement regarding computation of per share earnings
27.1 - Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1996.
14
<PAGE> 15
SIGNATURES
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 thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
(Registrant)
Dated: October 10, 1996 /s/ Joseph W. Alsop
-------------------------------
Joseph W. Alsop
President and Treasurer
(Principal Executive Officer)
Dated: October 10, 1996 /s/ Norman R. Robertson
------------------------------
Norman R. Robertson
Vice President, Finance
(Principal Financial Officer)
Dated: October 10, 1996 /s/ Mary B. Miller
------------------------------
Mary B. Miller
Director,
Finance and Administration
(Principal Accounting Officer)
15
<PAGE> 16
PROGRESS SOFTWARE CORPORATION
Exhibit Index
Page
----
11.1 - Statement regarding computation of per share earnings 17
27.1 - Financial Data Schedule 18
16
<PAGE> 1
EXHIBIT 11.1
<TABLE>
<CAPTION>
(In thousands, except per share data)
PRIMARY
- -------
Three Months Ended Nine Months Ended
August 31, August 31,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
Weighted average number of common
and common equivalent shares
outstanding:
Common stock 12,769 12,752 12,878 12,606
Common equivalent shares resulting
from stock options (treasury
stock method) 102 866 375 772
------- ------- ------- -------
Total 12,871 13,618 13,253 13,378
======= ======= ======= =======
Net income $ 218 $ 4,318 $ 4,792 $10,473
======= ======= ======= =======
Net income per common share $ 0.02 $ 0.32 $ 0.36 $ 0.78
======= ======= ======= =======
<CAPTION>
FULLY-DILUTED
- -------------
Three Months Ended Nine Months Ended
August 31, August 31,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
Weighted average number of common
and common equivalent shares
outstanding:
Common stock 12,769 12,752 12,878 12,606
Common equivalent shares resulting
from stock options (treasury
stock method) 146 1,000 390 930
------- ------- ------- -------
Total 12,915 13,752 13,268 13,536
======= ======= ======= =======
Net income $ 218 $ 4,318 $ 4,792 $10,473
======= ======= ======= =======
Net income per common share $ 0.02 $ 0.31 $ 0.36 $ 0.77
======= ======= ======= =======
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDING AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 30,878
<SECURITIES> 65,251
<RECEIVABLES> 35,126
<ALLOWANCES> 5,089
<INVENTORY> 1,630
<CURRENT-ASSETS> 136,019
<PP&E> 53,026
<DEPRECIATION> 27,862
<TOTAL-ASSETS> 169,430
<CURRENT-LIABILITIES> 52,423
<BONDS> 0
<COMMON> 127
0
0
<OTHER-SE> 113,514
<TOTAL-LIABILITY-AND-EQUITY> 169,430
<SALES> 69,381
<TOTAL-REVENUES> 131,455
<CGS> 6,592
<TOTAL-COSTS> 127,165
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 7,261
<INCOME-TAX> 2,469
<INCOME-CONTINUING> 4,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,792
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
