<PAGE> 1
================================================================================
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, 1997
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: (781) 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, 1997, there were 11,759,226 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
================================================================================
<PAGE> 2
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED AUGUST 31, 1997
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 1997 and November 30, 1996 3
Condensed Consolidated Statements of Income for
the three and nine months ended August 31, 1997 and
August 31, 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended August 31, 1997 and
August 31, 1996 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 1. Legal Proceedings 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
August 31, 1997 November 30, 1996
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ......................................................... $ 26,897 $ 30,872
Short-term investments ....................................................... 55,682 66,451
Accounts receivable (less allowance for doubtful accounts
of $5,085 in 1997 and $5,112 in 1996) ...................................... 29,072 34,452
Inventories .................................................................. 1,622 1,257
Other current assets ......................................................... 8,415 4,367
Deferred income taxes ........................................................ 3,775 3,552
-------- --------
Total current assets ................................................. 125,463 140,951
-------- --------
Property and equipment-net ..................................................... 21,863 24,230
Capitalized software costs-net ................................................. 4,939 5,428
Other assets ................................................................... 2,252 2,579
-------- --------
Total ................................................................ $154,517 $173,188
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Current portion of long-term debt ............................................ $ - $ 37
Accounts payable ............................................................. 7,099 7,989
Accrued compensation and related taxes ....................................... 13,479 12,385
Income taxes payable ......................................................... 1,318 3,004
Other accrued liabilities .................................................... 8,252 5,964
Deferred revenue ............................................................. 30,530 27,365
-------- --------
Total current liabilities ............................................ 60,678 56,744
-------- --------
Deferred income taxes .......................................................... 2,387 2,345
Long-term debt ................................................................. - 85
Minority interest in subsidiary ................................................ 356 221
Commitments and contingency
Shareholders' equity:
Preferred stock, $.01 par value; authorized, 1,000,000 shares; issued, none
Common stock, $.01 par value; authorized, 50,000,000 shares in 1997 and
20,000,000 in 1996; issued and outstanding, 11,718,982 shares in
1997 and 12,632,630 shares in 1996 ......................................... 117 126
Additional paid-in capital ................................................... 24,425 41,309
Retained earnings ............................................................ 66,931 72,280
Unrealized gain on short-term investments .................................... 184 241
Cumulative translation adjustments ........................................... (561) (163)
-------- --------
Total shareholders' equity ........................................... 91,096 113,793
-------- --------
Total ................................................................ $154,517 $173,188
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
----------------------------- ----------------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software licenses .................................... $ 22,371 $19,658 $ 69,987 $ 69,381
Maintenance and support services ..................... 23,509 21,753 66,068 62,074
-------- ------- -------- --------
Total revenue ................................ 45,880 41,411 136,055 131,455
-------- ------- -------- --------
Costs and expenses:
Cost of software licenses ............................ 2,232 2,011 6,969 6,592
Cost of maintenance and support services ............. 7,879 7,689 22,059 21,699
Sales and marketing .................................. 21,963 20,942 64,885 64,949
Product development .................................. 6,667 6,096 19,848 17,987
General and administrative ........................... 5,818 5,449 17,394 15,938
Nonrecurring charges ................................. 11,537 - 11,537 -
-------- ------- -------- --------
Total costs and expenses ..................... 56,096 42,187 142,692 127,165
-------- ------- -------- --------
Income (loss) from operations .......................... (10,216) (776) (6,637) 4,290
-------- ------- -------- --------
Other income (expense):
Interest income ...................................... 977 943 2,895 2,884
Interest expense ..................................... - (1) (7) (7)
Foreign currency gain (loss) ........................ 443 20 726 (283)
Minority interest .................................... 172 95 468 351
Other income (expense) .............................. (5) 49 17 26
-------- ------- -------- --------
Total other income ........................... 1,587 1,106 4,099 2,971
-------- ------- -------- --------
Income (loss) before provision for income taxes ........ (8,629) 330 (2,538) 7,261
Provision for income taxes ............................. 740 112 2,811 2,469
-------- ------- -------- --------
Net income (loss) ...................................... $ (9,369) $ 218 $ (5,349) $ 4,792
======== ======= ======== ========
Income (loss) per common share ......................... $ (0.80) $ 0.02 $ (0.44) $ 0.36
======== ======= ======== ========
Weighted average number of common and
common equivalent shares outstanding ................. 11,769 12,915 12,223 13,268
======== ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................... $ (5,349) $ 4,792
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment .................. 8,002 7,058
Nonrecurring charges ..................................................... 11,537 -
Amortization of capitalized software costs ............................... 1,592 1,224
Amortization of intangible assets ........................................ 201 268
Deferred income taxes .................................................... (260) 51
Minority interest in subsidiary .......................................... (468) (351)
Noncash compensation ..................................................... 16 2
Changes in operating assets and liabilities:
Accounts receivable ................................................... 3,182 11,566
Inventories ........................................................... (369) 464
Other current assets .................................................. (4,360) (107)
Accounts payable and accrued expenses ................................. 2,796 (6,601)
Income taxes payable .................................................. (1,222) 215
Deferred revenue ...................................................... 4,991 399
-------- --------
Total adjustments .................................................. 25,638 14,188
-------- --------
Net cash provided by operating activities .......................... 20,289 18,980
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale ................................ (25,816) (59,302)
Maturities of investments available for sale ............................... 26,000 32,211
Sales of investments available for sale .................................... 10,528 20,600
Purchase of property and equipment ......................................... (6,212) (7,943)
Capitalized software costs ................................................. (1,778) (1,844)
Acquisition of Apptivity ................................................... (3,847) -
Increase (decrease) in other noncurrent assets ............................. 102 (452)
-------- --------
Net cash used for investing activities ............................. (1,023) (16,730)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................................... 3,224 1,642
Repurchase of common stock ................................................. (26,453) (6,276)
Contributions from minority interest ....................................... 603 -
Payment of obligations under capital leases ................................ (116) (49)
-------- --------
Net cash used for financing activities ............................. (22,742) (4,683)
-------- --------
Effect of exchange rate changes on cash ...................................... (499) (154)
-------- --------
Net decrease in cash and equivalents ......................................... (3,975) (2,587)
Cash and equivalents, beginning of period .................................... 30,872 33,465
-------- --------
Cash and equivalents, end of period .......................................... $ 26,897 $ 30,878
======== ========
</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, 1996.
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. Acquisition and Nonrecurring Charges
On July 15, 1997, the Company acquired all of the outstanding stock of
Apptivity Corporation, a developer of Java based application
development tools, for $3,847,000 in cash, $1,373,000 of assumed and
other liabilities and the issuance of 395,657 shares of common stock.
The acquisition has been accounted for as a purchase, and accordingly,
the results of operations have been included in the Company's operating
results from the date of acquisition. The allocation of the purchase
price included $10,806,000 to in-process software development which was
charged to operations as part of the nonrecurring charge in the third
quarter of fiscal 1997. Additionally, the Company recorded a
nonrecurring charge of $731,000 for the writedown of certain
capitalized software costs and other intangible assets to fair value
after evaluating the impact of the acquisition upon the Company's
future operating plans.
3. Income (Loss) Per Common Share
Income (loss) 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. The weighted average
number of common and common equivalent shares excludes the impact of
common stock equivalents for each loss period as the impact would be
antidilutive.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and are comprised of product media, documentation, and
packaging.
5. 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.
6. Contingency and Litigation
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
6
<PAGE> 7
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 rehabilitation 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. On May 23, 1997, the Company initiated a process to purchase the
GICs from the 401(k) Plan to enable participants to choose other
investment vehicles prior to the end of the rehabilitation plan. The
purchase transaction requires the approval of the Department of Labor
and the Internal Revenue Service. Assuming no objection or other
impediment to the transaction, the Company expects the purchase
transaction to be completed before the end of the Company's current
fiscal year and not to have a material effect on the Company's
consolidated financial position or results of operations.
On April 4, 1997, Newstar Technologies Inc. commenced an action in the
Ontario (Canada) Court of Justice (General Division) against the
Company and its wholly owned subsidiary, Progress Software Corporation
of Canada Ltd. (NEWSTAR TECHNOLOGIES INC. V. PROGRESS SOFTWARE
CORPORATION OF CANADA LTD. AND PROGRESS SOFTWARE CORPORATION, No.
97-CU-121571). Newstar claimed that the Company entered into a contract
with it under which Newstar was entitled to purchase the Company's
software and receive product support from the Company under specific
terms which differ substantially from the Company's standard terms and
conditions. The purported contract cited by Newstar was prepared by
Newstar and executed by a lower-level Company salesperson in the name
of a Company sales executive followed by the initials of the
salesperson. The Company denied the existence of a binding contract, on
various grounds, including that the salesperson did not have the
authority to sign the sales executive's name and that Newstar knew or
should have known of that fact. On July 7, 1997 the parties
participated in voluntary non-binding mediation, during which the
parties reached a tentative settlement. Subsequent to the mediation
session, the parties finalized the settlement pursuant to which Newstar
became an Application Partner of the Company under mutually acceptable
terms and conditions reasonably consistent with arrangements entered
into with other Application Partners. As part of the above-mentioned
settlement, Newstar has released the Company and its subsidiaries and
affiliates, and their respective directors, officers, employees and
agents from any and all claims arising out of any actions or matters
occurring prior to the date of said release, including, but not limited
to, any claims arising out of, related to or in connection with any of
the matters at issue in the above-mentioned Ontario Court action.
Naf Naf S.A. commenced an expert proceeding in the Paris Trade Court,
Paris, France, against Progress Software S.A., Timeless S.A. and
Digital Equipment France in May 1996. In June 1997, Naf Naf petitioned
the court to add Progress Software Corporation as a party to the expert
proceeding, which petition has been granted. The basis of the
proceeding is alleged late availability of Progress Software products
and alleged product deficiencies after delivery by Timeless to Naf Naf
of such products. At this time, no specific damage claim has been
formally filed under French legal proceeding rules with the court. The
Company is vigorously defending itself in this proceeding and the costs
of such defense are being reimbursed to the Company by the Company's
insurer. The Company's insurer has agreed to reimburse such costs under
a reservation of rights as to coverage. While the outcome of this claim
cannot be predicted with certainty, management does not believe that
the outcome will have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company is also subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these claims cannot be predicted with
certainty, management does not believe that the outcome of any of these
legal matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
7. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share." SFAS 128 establishes a different method of
computing net income per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15 (APB 15).
Under SFAS 128, the Company will be required to present both basic
7
<PAGE> 8
net income per share and diluted net income per share. Basic net income
(loss) per share for the three-month and nine-month periods ended
August 31, 1997 would have been ($.80) and ($.44) per share,
respectively, as compared with $.02 and $.37 per share for the
corresponding periods in fiscal 1996. Diluted net income per share
under SFAS 128 for these periods is not expected to be materially
different from primary earnings per share under APB 15. The Company
plans to adopt SFAS 128 in its first quarter of fiscal 1998 and at that
time all historical net income per share data presented will be
restated to conform to the provisions of SFAS 128.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involves risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, some of which are described in great detail below under the
heading "Factors That May Affect Future Results," include, but are not limited
to, the receipt and shipment of new orders, the timely release of enhancements
to the Company's products, which could be subject to software release delays,
the growth rates of certain market segments, the positioning of the Company's
products in those market segments, variations in the demand for customer service
and technical support, pricing pressures and the competitive environment in the
software industry, consumer use of the Internet, and the Company's ability to
penetrate international markets and manage its international operations.
Although the Company has sought to identify the most significant risks to its
business, the Company cannot predict whether, or to what extent, any of such
risks may be realized nor can there be any assurance that the Company has
identified all possible issues which the Company might face.
RESULTS OF OPERATIONS
On July 15, 1997, the Company acquired all of the outstanding stock of Apptivity
Corporation (Apptivity), a developer of Java based application development
tools, for $3,847,000 in cash, $1,373,000 of assumed and other liabilities and
the issuance of 395,657 shares of common stock. The acquisition has been
accounted for as a purchase, and accordingly, the results of operations have
been included in the Company's operating results from the date of acquisition.
The allocation of the purchase price included $10,806,000 to in-process software
development which was charged to operations as part of the nonrecurring charge
in the third quarter of fiscal 1997. Additionally, the Company recorded a
nonrecurring charge of $731,000 for writedown of certain capitalized software
costs and other intangible assets to fair value after evaluating the impact of
the acquisition upon the Company's future operating plans.
The Company's total revenue for the third quarter of fiscal 1997 increased 11%
from the total revenue for the third quarter of fiscal 1996. The Company's net
income (before nonrecurring charges) increased 780% from $218,000 for the third
quarter of fiscal 1996 to $1,919,000 for the third quarter of fiscal 1997. The
Company's total revenue for the first nine months of 1997 increased 3% from the
first nine months of 1996. The Company's net income (before nonrecurring
charges) increased 24% from $4,792,000 for the first nine months of 1996 to
$5,939,000 for the first nine months of 1997. After including the effect of the
nonrecurring charges of $11,537,000 related to the acquisition of Apptivity, the
Company recorded a net loss for the three and nine months ended August 31, 1997
of ($9,369,000) and ($5,349,000), respectively.
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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.
<TABLE>
<CAPTION>
Percentage of Total Revenue Period-to-Period Change
------------------------------------------------------------ ------------------------------
Three Months Ended August 31, Nine Months Ended August 31, Three Months Nine Months
----------------------------- ---------------------------- 1997 Compared 1997 Compared
1997 1996 1997 1996 to 1996 to 1996
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses ........... 49% 47% 51% 53% 14% 1%
Maintenance and support
services ................ 51 53 49 47 8 6
--- --- --- ---
Total revenue .................. 100 100 100 100 11 3
--- --- --- ---
Cost and expenses:
Cost of software licenses ... 5 5 5 5 11 6
Cost of maintenance and
support services ......... 17 19 16 17 2 2
Sales and marketing ......... 48 50 47 49 5 -
Product development ......... 14 15 15 14 9 10
General and administrative .. 13 13 13 12 7 9
Non-recurring charges ....... 25 - 9 - - -
--- --- --- ---
Total costs and expenses ....... 122 102 105 97 33 12
--- --- --- ---
Income (loss) from operations ..... (22) (2) (5) 3 (1,216) (255)
--- --- --- ---
Other income ...................... 3 2 3 3 43 38
--- --- --- ---
Income (loss) before provision for
income taxes ................ (19) 0 (2) 6 (2,715) (135)
Provision for income taxes ........ 1 0 2 2 561 14
--- --- --- ---
Net income (loss) ................. (20)% 0% (4)% 4% (4,398)% (212)%
=== === === ===
</TABLE>
- ------------------------
The Company's total revenue increased 11% from $41,411,000 in the third quarter
of fiscal 1996 to $45,880,000 in the third quarter of fiscal 1997. The Company's
total revenue increased 3% from $131,455,000 in the first nine months of fiscal
1996 to $136,055,000 in the first nine months of fiscal 1996. Software license
revenue increased 14% from $19,658,000 in the third quarter of fiscal 1996 to
$22,371,000 in the third quarter of fiscal 1997. Software license revenue
increased 1% from $69,381,000 in the first nine months of fiscal 1996 to
$69,987,000 in the first nine months of fiscal 1997. The increase in software
license revenue in the third quarter and first nine months of fiscal 1997 as
compared to the periods one year ago is due to greater sales of the Company's
flagship products, PROGRESS Versions 7 and 8, and a slowdown in the rate of
decline of PROGRESS Version 6. In addition, sales from WebSpeed have continued
to increase since its release in the fourth quarter of fiscal 1996.
Maintenance and support services revenue increased 8% from $21,753,000 in the
third quarter of fiscal 1996 to $23,509,000 in the third quarter of fiscal 1997.
Maintenance and support services revenue increased 6% from $62,074,000 in the
first nine months of fiscal 1996 to $66,068,000 in the first nine months of
fiscal 1997. The maintenance and support services revenue increase was primarily
a result of growth in the Company's installed customer base, renewal of
maintenance contracts and increased consulting revenues.
Total revenue generated in markets outside North America increased from
$23,811,000 in the third quarter of fiscal 1996 to $26,190,000 in the third
quarter of fiscal 1997, but represented 57% of total revenue in the third
quarter of fiscal 1997 as compared to 58% of total revenue in the third quarter
of fiscal 1996. Total revenue generated in markets outside North America would
have represented 60% of total revenue in the third quarter of
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fiscal 1997 if exchange rates had been constant as compared to the exchange
rates in the effect in the third quarter of fiscal 1996. Total revenue generated
in markets outside North America increased from $76,144,000 in the first nine
months of fiscal 1996 to $79,820,000 in the first nine months of fiscal 1997 and
increased as a percentage of total revenue from 58% in the first nine months of
fiscal 1996 to 59% in the first nine months of fiscal 1997. Total revenue
generated in markets outside North America would have represented 60% of total
revenue in the first nine months of fiscal 1997 if exchange rates had been
constant as compared to the exchange rates in the effect in the first nine
months of fiscal 1996.
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 11% from $2,011,000 in the
third quarter of fiscal 1996 to $2,232,000 in the third quarter of fiscal 1997,
but remained the same percentage of software license revenue in each period.
Cost of software licenses increased 6% from $6,592,000 in the first nine months
of fiscal 1996 to $6,969,000 in the first nine months of fiscal 1997, but
remained approximately the same percentage of software license revenue in each
period. The dollar increase was due to an increase in amortization of
capitalized software costs and higher royalty expense. Cost of software licenses
as a percentage of software license revenue can vary depending upon the relative
product mix in a given 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 2% from $7,689,000 in the third
quarter of fiscal 1996 to $7,879,000 in the third quarter of fiscal 1997, but
decreased as a percentage of maintenance and support services revenue from 35%
to 34%. Cost of maintenance and support services increased 2% from $21,699,000
in the first nine months of fiscal 1996 to $22,059,000 in the first nine months
of 1997, but decreased as a percentage of maintenance and support services
revenue from 35% to 33%. The percentage decrease was due primarily to improved
margins in the North America consulting business.
Sales and marketing expenses increased 5% from $20,942,000 in the third quarter
of fiscal 1996 to $21,963,000 in the third quarter of fiscal 1997, but decreased
as a percentage of total revenue from 50% to 48%. Sales and marketing expenses
in the first nine months of fiscal 1997 remained relatively consistent as
compared to the first nine months of fiscal 1996, but decreased as a percentage
of total revenue from 49% to 47%. The percentage decrease in sales and marketing
expenses was primarily due to improved productivity as revenue increased at a
greater rate than sales and marketing expenses during each period of fiscal 1997
as compared to fiscal 1996. Personnel related costs decreased in each period of
fiscal 1997 as compared to fiscal 1996 and were offset by increased spending on
various marketing programs. The Company's sales, sales support and marketing
staff decreased from 494 at August 31, 1996 to 462 at August 31, 1997. The
Company expects the level of the sales, sales support and marketing staff for
the remainder of fiscal 1997 to be within the range which has prevailed over the
past several quarters.
Product development expenses increased 9% from $6,096,000 in the third quarter
of fiscal 1996 to $6,667,000 in the third quarter of fiscal 1997, but decreased
as a percentage of total revenue from 15% to 14% due to higher revenue. Product
development expenses increased 10% from $17,987,000 in the first nine months of
fiscal 1996 to $19,848,000 in the first nine months of fiscal 1997 and increased
as a percentage of total revenue from 14% to 15%. The dollar and percentage
increases were due primarily to higher average personnel costs and other related
costs to support continued new product development efforts. The major product
development efforts in the first nine months of fiscal 1997 related to the
development of the next versions of the WebSpeed and PROGRESS product lines. The
product development staff increased from 200 at August 31, 1996 to 207 at August
31, 1997.
The Company capitalized $627,000 of software development costs in the third
quarter of fiscal 1996 and $520,000 in the third quarter of fiscal 1997 in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86),
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." The Company capitalized $1,844,000 of software development costs in
the first nine months of fiscal 1996 and $1,778,000 in the first nine months of
fiscal 1997. The amounts capitalized represented 9% of total product development
costs in each period presented for fiscal 1996. The amounts capitalized
represented 7% and 8% in the three and nine month periods presented for fiscal
1997, respectively. The percentage decrease in capitalized software costs was
due to fewer development costs qualifying for capitalization under SFAS 86 as
the Company released major
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<PAGE> 11
product upgrades for WebSpeed in the middle of third quarter of fiscal 1997 and
PROGRESS at the end of the second quarter of fiscal 1997. Capitalized software
costs are amortized over the estimated life of the product (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 7% from $5,449,000 in the
third quarter of fiscal 1996 to $5,818,000 in the third quarter of fiscal 1997,
but remained approximately the same percentage of total revenue in each period.
General and administrative expenses increased 9% from $15,938,000 in the first
nine months of fiscal 1996 to $17,394,000 in the first nine months of fiscal
1997 and increased as a percentage of total revenue from 12% to 13%. The dollar
and percentage increases in general and administrative expenses were primarily
due to higher average personnel costs and other related costs. The Company's
general and administrative staff increased from 180 at August 31, 1996 to 185 at
August 31, 1997.
Other income increased $481,000 from $1,106,000 in the third quarter of fiscal
1996 to $1,587,000 in the third quarter of fiscal 1997. Other income increased
$1,128,000 from $2,971,000 in the first nine months of fiscal 1996 to $4,099,000
in the first nine months of fiscal 1997. The increases in each period were due
primarily to foreign currency gains and increases in other income-minority
interest. All revenue, costs and expenses attributable to the Company's joint
venture in Japan 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 foreign currency gain in each period of fiscal
1997 relates primarily to unrealized market gains on foreign currency option
contracts related to the Company's hedging programs.
The Company's effective tax rate (excluding the impact of the nondeductible
nonrecurring charge for in-process software developments) was 34% for each
period presented for fiscal 1996 and 1997 and was based upon the estimated
effective tax rate for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $82,579,000 in cash and short-term investments at August 31,
1997. The cash and short-term investments decrease of $14,744,000 from
$97,323,000 at November 30, 1996 was primarily due to common stock repurchases,
property and equipment purchases and the acquisition of Apptivity offset by cash
generated from operations.
The Company purchased $7,943,000 of property and equipment in the first nine
months of fiscal 1996 and $6,212,000 in the first nine months of fiscal 1997.
The purchases consisted primarily of computer equipment and software, furniture
and fixtures, and leasehold improvements. The Company financed these purchases
primarily from cash generated from operations.
In September 1996, the Board of Directors authorized, for the period 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, for various purposes including the issuance of
shares pursuant to the Company's stock option and employee stock purchase plans.
The Company purchased 723,400 shares of its common stock for $12,057,000 in the
third quarter of fiscal 1997. For the first nine months of fiscal 1997, the
Company has purchased 1,562,000 shares of its common stock at a cost of
$26,453,000. In September 1997, the Board of Directors authorized, for the
period October 1, 1997 through September 30, 1998, 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, for various purposes
including the issuance of shares pursuant to the Company's stock option and
employee stock purchase plans.
11
<PAGE> 12
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 rehabilitation 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. On May 23,
1997, the Company initiated a process to purchase the GICs from the 401(k) Plan
to enable participants to choose other investment vehicles prior to the end of
the rehabilitation plan. The purchase transaction requires the approval of the
Department of Labor and the Internal Revenue Service. Assuming no objection or
other impediment to the transaction, the Company expects the purchase
transaction to be completed before the end of the Company's current fiscal year
and not to have a material effect on the Company's consolidated financial
position or results of operations.
The Company is party to various legal proceedings. While the outcome of these
claims cannot be predicted with certainty, management does not believe that the
outcome of any of these legal matters will have a material adverse effect on the
Company's consolidated financial position or results of operations. See Part II,
Item 1 - Legal Proceedings for further details.
The Company believes that existing cash balances together with 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) through the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." SFAS
128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15 (APB 15). Under SFAS 128, the Company will be required to present both
basic net income per share and diluted net income per share. Basic net income
(loss) per share for the three-month and nine-month periods ended August 31,
1997 would have been ($.80) and ($.44) per share, respectively, as compared with
$.02 and $.37 per share for the corresponding periods in fiscal 1996. Diluted
net income per share under SFAS 128 for these periods is not expected to be
materially different from primary earnings per share under APB 15. The Company
plans to adopt SFAS 128 in its first quarter of fiscal 1998 and at that time all
historical net income per share data presented will be restated to conform to
the provisions of SFAS 128.
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 may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including changes in
demand for the Company's products, introduction, enhancement or announcement of
products by the Company and its competitors, market acceptance of new products,
size and timing of significant orders, budgeting cycles of customers, mix of
distribution channels, mix of products and services sold, mix of international
and North American revenues, foreign currency movements relative to the United
States dollar, changes in the level of operating expenses, changes in the
Company's sales incentive plans, customer order deferrals in anticipation of new
products announced by the Company or its competitors and general economic
conditions. 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. Thus, an unexpected reduction in the Company's revenue, or a
decrease in the rate of growth of such revenue, would have a material adverse
effect on the profitability of the Company.
12
<PAGE> 13
The Company develops, markets and supports its core product line, the PROGRESS
Application Development Environment, the PROGRESS RDBMS and the PROGRESS
Dataserver Architecture (collectively, "PROGRESS"). In May 1997, the Company
began shipping the latest major enhancement to the PROGRESS product line,
PROGRESS Version 8.2. In October 1996, the Company began shipments of WebSpeed,
an open development and deployment environment that enables organizations to
build transaction processing applications on the Internet and corporate
intranets. In July 1997, the Company began shipments of WebSpeed Version 2.0.
The Company's Crescent Division develops and markets a collection of advanced
tools and components to Visual Basic and Visual J++ 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 new products. The Company acquired Apptivity Corporation in July 1997.
Apptivity currently offers Apptivity Developer Version 1.0 and Apptivity Server
Version 1.0.
Although the Company believes that PROGRESS, WebSpeed, Apptivity 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, Apptivity 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.
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's
business, financial condition and operating results.
The Company experiences significant competition from a variety of sources with
respect to the marketing and distribution of its products. 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. Increased competition
could make it more difficult for the Company to maintain its market presence.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to deliver products which address the needs of
the Company's prospective customers. Current and potential competitors also may
be more successful than the Company in having their products or technologies
widely accepted. There can be no assurance that the Company will be able to
compete successfully against current and future competitors and its failure to
do so could have a material adverse affect upon the Company's business,
financial condition and operating results.
The Company hopes that WebSpeed, Apptivity and other new products will
contribute positively to the Company's future results. The market for Internet
transaction processing products is highly competitive and will depend in large
part on the commercial acceptance of the Internet as a medium for all types of
commerce. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance that the infrastructure or complementary
products necessary to make the Internet a viable medium for all types of
commerce will develop.
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 is
currently developing new products intended to help
13
<PAGE> 14
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.
Approximately 50% of the Company's total revenue in the first nine months of
fiscal 1997 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, unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, reduced protection for intellectual property
rights in some countries, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world, and potentially
adverse tax consequences, any of which could adversely impact the success of the
Company's international operations. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business, financial
condition and operating results.
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. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
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 or independent development by others of similar technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claim of infringement or invalidity. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and operating results.
The Company also utilizes certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that functionally similar technology will be available on
commercially reasonable terms in the future.
The market price of the Company's common stock, like that of other technology
companies, is highly volatile and is subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by
14
<PAGE> 15
securities analysts, or other events or factors. The Company's stock price may
also be affected by broader market trends unrelated to the Company's
performance.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 1997, Newstar Technologies Inc. commenced an action in the Ontario
(Canada) Court of Justice (General Division) against the Company and its wholly
owned subsidiary, Progress Software Corporation of Canada Ltd. (NEWSTAR
TECHNOLOGIES INC. V. PROGRESS SOFTWARE CORPORATION OF CANADA LTD. AND PROGRESS
SOFTWARE CORPORATION, No. 97-CU-121571). Newstar claimed that the Company
entered into a contract with it under which Newstar was entitled to purchase the
Company's software and receive product support from the Company under specific
terms which differ substantially from the Company's standard terms and
conditions. The purported contract cited by Newstar was prepared by Newstar and
executed by a lower-level Company salesperson in the name of a Company sales
executive followed by the initials of the salesperson. The Company denied the
existence of a binding contract, on various grounds, including that the
salesperson did not have the authority to sign the sales executive's name and
that Newstar knew or should have known of that fact. On July 7, 1997 the parties
participated in voluntary non-binding mediation, during which the parties
reached a tentative settlement. Subsequent to the mediation session, the parties
finalized the settlement pursuant to which Newstar became an Application Partner
of the Company under mutually acceptable terms and conditions reasonably
consistent with arrangements entered into with other Application Partners. As
part of the above-mentioned settlement, Newstar has released the Company and its
subsidiaries and affiliates, and their respective directors, officers, employees
and agents from any and all claims arising out of any actions or matters
occurring prior to the date of said release, including, but not limited to, any
claims arising out of, related to or in connection with any of the matters at
issue in the above-mentioned Ontario Court action.
Naf Naf S.A. commenced an expert proceeding in the Paris Trade Court, Paris,
France, against Progress Software S.A., Timeless S.A. and Digital Equipment
France in May 1996. In June 1997, Naf Naf petitioned the court to add Progress
Software Corporation as a party to the expert proceeding, which petition has
been granted. The basis of the proceeding is alleged late availability of
Progress Software products and alleged product deficiencies after delivery by
Timeless to Naf Naf of such products. At this time, no specific damage claim has
been formally filed under French legal proceeding rules with the court. The
Company is vigorously defending itself in this proceeding and the costs of such
defense are being reimbursed to the Company by the Company's insurer. The
Company's insurer has agreed to reimburse such costs under a reservation of
rights as to coverage. While the outcome of this claim cannot be predicted with
certainty, management does not believe that the outcome will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company is also subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
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 (EDGAR Version Only)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1997.
15
<PAGE> 16
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 13, 1997 /s/ Joseph W. Alsop
----------------------------------
Joseph W. Alsop
President and Treasurer
(Principal Executive Officer)
Dated: October 13, 1997 /s/ Norman R. Robertson
----------------------------------
Norman R. Robertson
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Dated: October 13, 1997 /s/ David H. Benton, Jr.
----------------------------------
David H. Benton, Jr.
Corporate Controller
(Principal Accounting Officer)
16
<PAGE> 1
EXHIBIT 11.1
(In thousands, except per share data)
<TABLE>
<CAPTION>
PRIMARY
- -------
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common and
common equivalent shares outstanding:
Common stock ................................... 11,769 12,769 12,223 12,878
Common equivalent shares resulting from
stock options (treasury stock method) ........ - 102 - 375
------- ------- ------- -------
Total ............................................ 11,769 12,871 12,223 13,253
======= ======= ======= =======
Net income (loss) ................................ $(9,369) $ 218 $(5,349) $ 4,792
======= ======= ======= =======
Net income per common share ...................... $ (0.80) $ 0.02 $ (0.44) $ 0.36
======= ======= ======= =======
<CAPTION>
FULLY-DILUTED
- -------------
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common and common
equivalent shares outstanding:
Common stock ................................... 11,769 12,769 12,223 12,878
Common equivalent shares resulting from
stock options (treasury stock method) ........ - 146 - 390
------- ------- ------- -------
Total ............................................ 11,769 12,915 12,223 13,268
======= ======= ======= =======
Net income (loss) ................................ $(9,369) $ 218 $(5,349) $ 4,792
======= ======= ======= =======
Net income (loss) per common share ............... $ (0.80) $ 0.02 $ (0.44) $ 0.36
======= ======= ======= =======
</TABLE>
<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 ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 26,897
<SECURITIES> 55,682
<RECEIVABLES> 34,157
<ALLOWANCES> 5,085
<INVENTORY> 1,622
<CURRENT-ASSETS> 125,463
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 154,517
<CURRENT-LIABILITIES> 60,678
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 90,979
<TOTAL-LIABILITY-AND-EQUITY> 154,517
<SALES> 69,987
<TOTAL-REVENUES> 136,055
<CGS> 6,969
<TOTAL-COSTS> 142,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (2,538)
<INCOME-TAX> 2,811
<INCOME-CONTINUING> (5,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,349)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
