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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal year ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transaction Period From To
Commission file number 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
MASSACHUSETTS 04-2746201
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
14 OAK PARK
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices)
TELEPHONE NUMBER: (781)280-4000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
TITLE OF EACH CLASS
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 6, 1998, there were 11,427,480 shares outstanding of the
registrant's common stock, $.01 par value. As of that date, the aggregate market
value of voting stock held by non-affiliates of the registrant was approximately
$174,742,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
November 30, 1997 are incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 1998 are incorporated by reference into
Part III.
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PART I
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 greater detail in the 1997 Annual
Report to Shareholders 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.
ITEM 1. BUSINESS
Progress Software Corporation ("PSC" or the "Company") is a supplier of
application development and deployment technology and support services to
business, industry and government worldwide. Application development is the
creation, deployment and ongoing enhancement of computer software to support
business strategy and operations. The Company's products and services are
designed to improve application quality and development productivity by
simplifying and accelerating the creation, deployment and enhancement of
applications. The Company's principal product line, marketed as PROGRESS!!REG
MARK!!, consists of the PROGRESS Application Development Environment ("ADE"),
PROGRESS AppServer, PROGRESS DataServers and the PROGRESS Relational Database
Management System ("RDBMS"). PROGRESS is an integrated, component-based visual
development environment for building and deploying multi-tier, enterprise-class
business applications. Additionally, PSC supplies Apptivity(TM), for developing
distributed, multi-tier Java-based business applications; ProtoSpeed(TM), an
error detecting and debugging tool; and WebSpeed(TM), a product for creating
Internet Transaction Processing ("ITP") applications. The Company also develops
and markets add-on application development tools for Microsoft's Visual Basic
and Visual J++ through its Crescent Division. The Company's products provide
capabilities for accelerating the development of high-functionality business
applications that are portable, scalable and reconfigurable across a range of
Internet, intranet, client/server and host-terminal computing environments.
In order to better serve the Company's installed customer base and
facilitate marketing to new customers, the Company has created three product
units. These product units will consist of integrated teams of development,
product management and product marketing groups and will utilize the resources
of the functional organizations of worldwide sales, corporate marketing,
professional services, technical support and finance and administration. The
Core Products unit includes the PROGRESS and Webspeed product lines. The
Apptivity Product Unit is focused on the development of Java-based business
applications and includes the Apptivity product line. The Internet Software
Quality Products ("ISQP") unit includes the ProtoSpeed product line and the
Crescent Division.
BUSINESS STRATEGY
The Company was founded in 1981 to develop and market application
development software. Its business strategy has been developed in response to
user needs for application development tools that enable the rapid development
and deployment of business-critical applications regardless of the computing
environment. The
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Company's mission today is to deliver superior software products and services
that empower its partners and customers to dramatically improve their
development and deployment of quality applications worldwide. This mission
encompasses the following strategic points:
- Rapid Application Development. The Company's development tools and
technologies are designed to be easy-to-use, intuitive, highly visual
and component-based. This allows the Company's products and services
to improve the productivity of developers in creating and maintaining
complex applications.
- Portability for Developers and End-Users. The Company designs its
products to operate across a broad range of midrange systems,
workstations and PCs. The Company believes that application developers
need the flexibility to deploy their applications across hardware,
operating system platforms, databases and user interfaces that may be
different from those on which their applications are originally
developed. In addition, end-users need the flexibility to continue to
use applications with minimal re-programming, even as they modify or
upgrade their computing environments.
- Application Deployment Flexibility. As business requirements evolve,
the Company is planning its future product development direction in
order that customers can take advantage of emerging technologies and
standards. This means that customers can migrate their existing
applications and adapt to new trends in business computing, such as
ITP and Java. The Company's products allow deployment across all major
computing configurations: host-terminal, client/server and Internet.
The PROGRESS AppServer and Apptivity provide "n-tier" computing
support in order to improve application performance. The Company's
products operate across heterogeneous networks using a variety of
communication protocols, and PROGRESS-based applications can access
data stored in both PROGRESS and non-PROGRESS databases.
- Balanced Distribution. PSC chose at an early stage to implement both
direct and indirect channels of distribution to broaden its geographic
reach, accelerate its sales expansion and leverage its sales force.
The Company sells to value-added resellers (which the Company refers
to as Application Partners) and to the Information Technology ("IT")
departments of corporations and government agencies. Application
Partners develop end-user applications for resale, and both IT
customers and Application Partners generally license additional
deployment copies of the Company's products to run applications. In
addition, the Company launched the Apptivity Partner Program in
October 1997 in order to promote sales of its Apptivity line of
Java-based business application development tools. The Apptivity
Partner Program represents the first time that PSC has created a
program to market its products through the pure reseller channel. To
minimize channel conflict, PSC neither develops application software
for distribution nor plans to do so in the future.
- Recurring Revenue. The Company's distribution and pricing strategies
are intended to generate recurring revenue. The sale of a development
system can lead to follow-on sales as Application Partners license
additional copies of the Company's development and deployment products
upon successful distribution of their applications, or as end-users
deploy such applications or upgrade their systems.
- Worldwide Market. PSC has emphasized international sales through its
subsidiaries and a network of independent distributors. Approximately
59% of the Company's revenue was derived from customers outside of
North America in fiscal 1997.
- Customer Service. PSC has made a strategic commitment to customer
service. The Company believes that rapid changes in technology require
not only continuous product enhancement but also a strong customer
service effort to encourage product usage and maintain customer
satisfaction. The Company provides a variety of technical support and
service options under its annual maintenance agreements, including an
option for 24 hour, 7 day a week service. The Company also offers an
extensive selection of training courses and on-site consulting
services.
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- "Buy, Build, Both". A major challenge for the software industry is to
unite the economical price, reliability and immediate benefit of
packaged software applications with the tailored fit of custom
solutions. Purchasing a packaged application provides standard
functionality that can be used quickly and economically with little or
no development time. Building an in-house application results in a
solution that offers a competitive business advantage, but typically
involves long development cycles. By combining both packaged and
customized solutions, IT departments can deliver flexible,
business-driven applications more quickly and productively. The
Company's products and services, in conjunction with solutions from
its Application Partners, are designed to give IT departments that
flexibility and competitive advantage.
PROGRESS PRODUCT LINE
The Company's core product line consists of the PROGRESS ADE, the PROGRESS
RDBMS, the PROGRESS AppServer and the PROGRESS DataServer Architecture.
Applications developed in PROGRESS are reconfigurable between character-based
and graphical interfaces, as well as between client/server and host-based
computing systems. PROGRESS provides a high degree of portability across a wide
range of computing environments while affording developers the flexibility to
build applications on a range of database management products.
In June, 1997 the Company began shipping PROGRESS Version 8.2, the latest
release of the Company's flagship application development and deployment
environment. Version 8.2 is designed to let developers build and deploy highly
scalable transaction processing applications cost-effectively, by enabling them
to exploit the full range and power of the 32-bit Windows platform for
additional deployment options and faster compile times; to leverage a wide range
of ActiveX controls, greatly increasing user-interface flexibility; to integrate
with other ActiveX-based applications using Object Linking and Embedding ("OLE")
Automation for application interoperability and; to take advantage of enhanced
PROGRESS database functionality for added performance and maintainability.
Customers may license bundled packages or stand-alone products. The
Company's pricing structure is generally based on the number of concurrent
users, regardless of the platform and operating system. Prices for the Company's
principal ADE package, which is marketed as ProVision, range from $2,600 to
$3,600 per user depending on the total number of users. Prices for similar user
counts for the PROGRESS RDBMS and for DataServers enabling access to
non-PROGRESS data managers range from $155 to $1,200 per user.
PROGRESS ADE
The PROGRESS ADE is a programming environment that provides developers with
a "visual road map" for developing and deploying complex enterprise applications
that are scalable, portable and re-configurable across heterogeneous
client/server and host-based environments. Within the PROGRESS ADE is a set of
integrated, graphical development tools that support a range of development
approaches, including structured, procedural, event-driven and object
approaches. High-performance applications can be visually assembled using
reusable application components known as PROGRESS SmartObjects. The principal
components of the PROGRESS ADE are as follows:
PROGRESS SmartObjects are a collection of reusable business components that
enable developers to fabricate and assemble application components into fully
functional applications. Working within a graphical programming environment,
developers can build scalable and portable enterprise-class applications by
using the PROGRESS SmartObjects templates included in the PROGRESS starter set
and/or by customizing their own reusable code. The PROGRESS starter set includes
the SmartView, SmartBrowse, SmartQuery, SmartFrame, SmartWindow, SmartPanel,
SmartDialog and SmartFolder templates, representing the most common visual,
interactive and data management functions of complex transaction-based
client/server applications.
The PROGRESS ADE is based on the PROGRESS 4GL and an extensive Data
Dictionary, which enables developers to address mission-critical application
requirements. In addition, the PROGRESS ADE gives developers the flexibility to
control application interfaces, processing logic and data management
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components required to complete mission-critical systems. The principal
components of the PROGRESS ADE are as follows:
- User Interface Builder--The PROGRESS User Interface Builder ("UIB") is
the central tool for rapidly creating and maintaining complex
applications. The UIB provides point-and-click functionality, a fully
customizable object palette, automatic linking of components, and
complete control of application interaction with end users. Within the
PROGRESS UIB, developers are able to create and customize their own
SmartObjects.
- PROGRESS 4GL--The PROGRESS 4GL is a high-level application development
language that runs throughout the entire toolset in the PROGRESS ADE.
It is an efficient and robust development language for prototyping,
developing and modifying solutions.
- Data Dictionary--The PROGRESS Data Dictionary is a central repository
for all information (regardless of where it is stored) that describes
the application data, including database definitions, application
defaults and business rules. When building, updating and distributing
new application components, the Data Dictionary defaults and
definition inheritances are automatically and transparently applied.
- Integration of Third-party Development Tools--The PROGRESS ADE
promotes the integration of value-added solutions from third-party
tool providers who offer capabilities that complement, enhance and
extend PROGRESS as part of an overall application development
strategy. Products from these tool vendors range from application
design, analysis, modeling, repository and testing systems to
prototyping, methodology, process management and project management.
- On-Line Help--The PROGRESS On-Line Help system allows developers to
build their own Help interface using popular word processors or
desktop publishing systems to document their system, and run it
without modification across all PROGRESS-supported environments.
- Procedure Editor--The Procedure Editor is a full-function code editing
tool that allows developers to write, edit, compile and run PROGRESS
4GL application components. The Procedure Editor provides a full range
of editing features including cut-and-paste and search-and-replace,
which allow developers to make large-scale changes to several
different programs.
- Application Debugger--The Application Debugger is an interactive
utility that allows developers to control and monitor the execution of
PROGRESS procedures. The Debugger enables developers to find and fix
data and logic errors, modify any procedure code, and display or
update information about the procedure running without having to
modify procedure code.
- Translation Manager--Translation Manager is a GUI tool set for
creating and delivering multilingual versions of a PROGRESS
application without having to modify the original source code. This
tool enables a project manager to define and provide consistent
business context translations of the application interface into
multiple languages. The tool provides the translator with a visual
context for translating the user-interface components of the
application.
PROGRESS RDBMS
PROGRESS RDBMS is a fully-featured relational SQL-compliant database
management system that runs on most UNIX, PC and PC LAN operating systems. The
PROGRESS RDBMS offers the advantage of scalability through the use of a
multi-threaded, multiple server architecture that runs efficiently on small and
large single-processor computers, multiple-processor computers and distributed
networks of server and client computers. The PROGRESS RDBMS permits
simultaneous, distributed multi-user access by providing flexible record-level
locking control, query optimization strategies, two-phase database commits,
on-line backup, automatic crash recovery and other features intended to protect
data integrity. These features make the PROGRESS RDBMS well-suited for
high-volume transaction processing applications. The PROGRESS RDBMS is designed
to be easy to install, maintain and administer. The PROGRESS database products
include Personal Database for stand alone users, Workgroup Database Server for
workgroups or departments
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of up to 49 concurrent users, and Enterprise Database Server for large numbers
of users and symmetric multi-processing (SMP) environments.
PROGRESS APPSERVER
The PROGRESS AppServer delivers application partitioning or "n-tier"
computing support to provide improved application performance in networked
environments. In traditional client/server applications, the user interface and
business logic execute on the client machine. As business logic is executed,
database records are accessed on the server and individually sent over the
network back to the client for processing. The network can quickly become a
bottleneck when processing complex queries involving the transmission of large
record sets, or as networked users are added. The PROGRESS AppServer is intended
to deliver a range of benefits in the deployment of distributed applications.
Such applications execute significantly faster with the PROGRESS AppServer, as
the business logic is typically deployed and executed on a UNIX, OpenVMS or
Windows NT server. Network traffic between client and server is reduced as only
result sets from server-based processing are returned to the client. PROGRESS
AppServers can be re-used unmodified across any number of servers and can
connect other PROGRESS AppServers in a peer-to-peer relationship. PROGRESS
AppServers also introduce a level of separation between users and the database
for enhanced security and data integrity.
PROGRESS DATASERVERS
PROGRESS-based applications have access to a wide range of data sources
through the PROGRESS DataServer Architecture. The DataServer Architecture
consists of a set of data integration services and interfaces that allow
developers to use the PROGRESS ADE tools to write database-independent
applications. The architecture is designed to make any supported database appear
to be completely integrated into the PROGRESS ADE. This allows PROGRESS
applications to efficiently read from and write to a variety of databases and
file systems, including the PROGRESS RDBMS. Whether the data manager is
relational, indexed flat-file or object-oriented, the DataServer generates
native calls to the data manager.
PROGRESS DataServers provide for database independence, data integration
and data migration. The Company currently offers DataServers for the following
database and file managers: Oracle, RMS, Microsoft SQL Server, C-ISAM, DB2/400
and ODBC.
PROGRESS/400
PROGRESS/400 is a version of the Company's application development
environment for the IBM AS/400 product line. PROGRESS/400 is an integrated
client/server solution for commercial transaction processing applications on the
AS/400. PROGRESS/400 also permits developers to program and test code
independent of an AS/400. The PROGRESS/400 DataServer supports native access to
the DB2/400 database and optimized communication to local and remote clients.
The PROGRESS/400 DataServer allows PROGRESS-based applications to access and
update any DB2/400-based data, while coexisting with non-PROGRESS applications.
WEBSPEED PRODUCT LINE
WebSpeed is a comprehensive environment for developing and deploying
database-independent, high-volume transaction processing applications over the
Internet, extranets and corporate intranets. WebSpeed enables companies to
create a direct link between customers and suppliers, resulting in more
efficient and timely access to corporate databases for transaction-intensive
applications like order entry, customer service, claims processing and inventory
control. The current products in the WebSpeed product line are WebSpeed Workshop
and WebSpeed Transaction Server.
WEBSPEED WORKSHOP
WebSpeed Workshop delivers a powerful toolset for building WebSpeed's
scalable, transaction-based applications. Featuring an open architecture, it
supports most popular Web authoring tools (HTML 3.2, Java
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and JavaScript) for building an application's user interface. The Workshop's 4GL
is then used to create the business logic and data access portions of the
application. WebSpeed Workshop includes easy-to-use Web-centric development
tools that let developers write code, check syntax, compile and run applications
through an intuitive browser interface. WebSpeed Workshop includes SpeedScript,
a high-level, server-side scripting language that enables developers to
prototype, develop and maintain re-usable application business logic. Scripting
Lab enables developers to test code fragments before adding them to the
application.
WEBSPEED TRANSACTION SERVER
The WebSpeed Transaction Server delivers a robust transaction-processing
environment over the Internet and on corporate intranets. The Transaction Server
supports access to and updating of multiple databases and also protects the data
integrity of transactions - even if Internet connections are interrupted. The
WebSpeed Transaction Server lets developers integrate leading Web servers,
security solutions and databases. The WebSpeed Transaction Server is compatible
with any ISAPI, NSAPI or CGI-compliant Web server. The Transaction Server
includes a Transaction Broker component that manages a pool of Transaction
Agents and maintains status information for efficient dispatch of Web requests.
It eliminates the overhead of starting a new agent for each user request and
increases the agent pool size as required. The Transaction Agent executes Web
objects, performs database transactions and dynamically merges data into HTML
format to deliver real-time data access over the Web. Transaction Agents provide
full support for multi-page Web transactions by executing stateless, state-aware
and state-persistent Web objects.
APPTIVITY PRODUCT LINE
Apptivity visual tools include a component-based form designer, multiple
productivity Wizards and a distributed debugger to concurrently build both the
client and server tiers of a distributed Java database application. The
Apptivity architecture is designed to facilitate deploying and maintaining
multi-tier applications. Load balancing is supported across multi-threaded,
scalable Apptivity Servers - enabling the high availability of middle-tier
resources to handle large numbers of users. Business logic is partitioned
between client and server such that it can be updated centrally. Apptivity
generates 100% Java code. Apptivity's standards-based architecture enables
developers to deliver interactive applications to virtually any user connected
to a Web platform (Internet, intranet, extranet). Apptivity features a class
library that provides extensive functionality and flexibility and ensures a
uniform look and feel regardless of the platform or browser on which the
application is running. The initial products in the Apptivity product line are
as follows:
APPTIVITY DEVELOPER
Apptivity Developer provides tools needed to develop, test and maintain
Java-based business applications. Apptivity Developer is comprised of visual,
component-based tools that generate 100% Java business logic. Apptivity
Developer includes Common Object Request Broker Architecture ("CORBA")
productivity tools to allow integration of CORBA-compliant components in a
distributed Apptivity application. Flexible deployment options allow
applications to run stand-alone or from a Web browser supporting both 1.02 and
1.1 versions of the Java development kit. The visual SQL query editor eliminates
the need to know SQL to build queries against a database.
APPTIVITY SERVER
Apptivity Server manages sessions, executes Java application logic and
handles database access to leading corporate databases from Oracle, Sybase,
Informix, IBM, Microsoft as well as PSC. The load balancing option of Apptivity
Server manages connections across multiple servers, increasing application
scalability. Apptivity Server includes Apptivity Manager which provides a visual
environment to specify runtime settings related to load balancing, license
management and concurrent usage as well as to monitor real-time information as
applications are running.
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PROTOSPEED
ProtoSpeed is an Internet protocol debugger. ProtoSpeed goes beyond
traditional debugging capabilities by providing the ability to examine
distributed objects from any location on the network. This simplifies
distributed debugging by enabling developers to debug multiple objects: local
and remote, running in the browser, outside the browser, or on the server.
ProtoSpeed also provides Internet protocol debugging capabilities, giving
developers the ability to set breakpoints and modify and record multiple
protocol streams in real-time.
ProtoSpeed offers developers the flexibility to keep pace with changing
Internet technology. Using a standard publish/subscribe mechanism, ProtoSpeed's
network event manager allows developers to build customized features such as
providing event triggers for specific conditions or allowing other applications
to access the data stream. ProtoSpeed gives developers control over the
application by offering either passive or active debugging modes. Passive mode
allows streaming and capturing data over a port, while active mode offers
setting watch, breakpoint and filtering.
CRESCENT DIVISION PRODUCTS
The Crescent Division of the Company provides advanced client/server tools
and components to Visual Basic and Visual J++ development teams. The Crescent
Division's strategy in the workgroup/departmental tools market complements
Visual Basic and Visual J++ by offering an integrated suite of add-on tools and
components that enable professional developers to make client/server business
application development easy and intuitive. The major products offered by the
Crescent Division are as follows:
CRESCENT INTERNET TOOLPAK
Internet ToolPak provides event-driven, Internet-enabled tools to meet the
needs of Visual Basic developers building applications in both 16- and 32-bit
environments. The Crescent Internet ToolPak suite, including a set of sixteen
ActiveX controls, a Telnet form and an Internet mail "Wizard", manages Visual
Basic developers' Internet protocol needs and enables them to create
sophisticated Internet-enabled applications with a minimum of coding.
QUICKPAK VB/J++
QuickPak VB/J++ utilizes the power of the latest advances in ActiveX
component techniques to improve user productivity. QuickPak VB/J++ consists of
libraries of ActiveX components designed to simplify some of the most demanding
programming tasks. These libraries contain hundreds of commonly used functions,
including string and array handling, keyboard routines and system configuration.
QuickPak VB/J++ also includes routines developed specifically for the Internet,
such as Internet Information Server and Internet Core Messaging Protocol.
PDQCOMM
PDQComm provides tools to develop robust serial communications applications
in the Visual Basic environment. PDQComm provides simplified file transfers and
advanced terminal emulation as well as support for TAPI.
PRODUCT DEVELOPMENT
To date, most of the Company's products have been developed by its internal
product development staff. Although the Company believes that the features and
performance of its products are generally competitive with those of other
available application development tools, and that none of its current product
versions is approaching obsolescence, the Company believes that continuing
enhancements of its products will be required to enable the Company to maintain
its competitive position.
The Company intends to focus its principal future product development
efforts on developing new products and updating existing products in order to
realize the Company's vision of the expected direction of application
development technology - which the Company describes as Universal Application
Architecture
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("UAA"). UAA is a standards-based approach to application development and
deployment technology that relies on server-centric performance and
maintainability, component-based modularity and standards-based interoperability
and integration.
In the server-centric UAA model, the business logic of an application
resides primarily on the server, accessed by users with thin clients or Web
browsers. Application code that is more suitable for client side execution, such
as user interface logic, data entry validation, and the like, is distributed as
needed to the client but managed by the server. Component-based modularity is an
application development technique derived from object-oriented programming in
which applications are built as encapsulated blocks of logic. This enables
client/server applications to be rewritten into other languages, such as Java,
in incremental steps, easing the transition to next-generation architectures.
Standards-based interoperability facilitates communication between business
application logic and a variety of clients and a variety of data sources.
Business applications developed within this framework will include the messaging
standards of CORBA, a standard that enables software programs written in any
programming language to communicate with each other and execute on any platform.
The Company is planning on releasing the next generation of its core
application development and deployment products (PROGRESS and WebSpeed) with an
application server engine to be called Open AppServer. This product is evolving
from the PROGRESS AppServer and WebSpeed Transaction Server and will provide a
Universal External Interface that allows 4GL application logic executing within
the Open AppServer to operate with any client and with any data source.
Subsequent releases of Open AppServer are expected to fully support CORBA. The
Company plans for the next release of the PROGRESS RDBMS to support the latest
SQL, ODBC and JDBC standards, Java stored procedures and Java triggers.
The Company plans for the next release of Apptivity to support UAA by
providing a complete CORBA-based AppServer for integrating with any client,
application or service, and any data source accessible within a CORBA messaging
infrastructure. The Company plans to enhance its Apptivity development tools to
include HTML capabilities and compatibility with Open AppServer.
The ISQP unit plans to focus future enhancements and new products on
database or data source error detection and performance. The Company is also
seeking to strengthen its product mix through strategic alliances with other
application development tools vendors and similar companies.
The Company's product development staff consisted of 199 employees as of
November 30, 1997. Product development is primarily conducted at the Company's
offices in Bedford, Massachusetts, Newark, California and Nashua, New Hampshire.
Limited work related to product localization may also be performed at the
Company's international subsidiaries.
In fiscal years 1997, 1996 and 1995, the Company spent $28,855,000,
$26,413,000 and $26,872,000, respectively, on product development, of which
$1,864,000, $2,462,000 and $2,697,000, respectively, were capitalized in those
years. The Company believes that the experience and depth of its product
development staff are important factors in the Company's success.
CUSTOMERS
The Company markets its products worldwide to Application Partners and IT
departments of corporations and government agencies. No single customer has
accounted for more than 10% of the Company's total revenue in any of its last
three fiscal years.
Application Partners. PSC's Application Partners provide the Company with
broad market coverage, offer an extensive library of commercial applications and
are a source of follow-on revenue. PSC publishes Application Catalogs and
includes Application Partners in trade shows and other marketing programs. PSC
also has kept entry costs for Application Partners low to encourage a wide
variety of Application Partners to build applications. An Application Partner
typically takes 6 to 24 months to develop an application. Although many of the
Company's Application Partners have developed successful applications and have
large installed customer bases, others are engaged in earlier stages of product
development and marketing and may not contribute follow-on revenue to PSC for
some time, if at all. However, if an Application Partner succeeds in
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marketing its applications, the Company obtains follow-on revenue as the
Application Partner licenses copies of the Company's deployment products to
permit its application to be installed and used by customers.
IT Departments. PSC licenses its products to IT departments of
corporations, government agencies and other organizations to build complex
applications. Large IT departments that purchase Application Partner
applications typically also purchase the Company's development tools to
supplement their internal application development. Like Application Partners, IT
customers may also license deployment products to install applications at
additional user sites.
Apptivity Resellers. In October 1997, the Company initiated the Apptivity
Partner Program, a new reseller program designed to promote sales of its
Apptivity line of Java business application development tools. While the Company
has a long-standing Application Partner Program for its core products, the
Apptivity Partner Program represents the first time that PSC has marketed its
products through the pure reseller channel. The Apptivity Partner Program offers
various levels of participation, with graded levels of competitive discounts.
Resellers will purchase directly from PSC in order to eliminate potential
channel conflicts. The Company provides technical and marketing assistance and
is seeking to partner with a limited number of resellers in each major market.
SALES AND MARKETING
The Company sells PROGRESS, WebSpeed and related products through its
direct sales force in the United States and in over 20 other countries and
through independent distributors in over 30 countries outside North America. The
sales organization is organized into the following regions: North America;
Europe, Middle East and Africa ("EMEA"); Asia Pacific; Latin America; and Japan.
The Company believes that its network of subsidiaries allows it to maintain
direct contact with and better support its customers and to control its
international distribution. The Company's international subsidiaries provide
focused local marketing efforts and are better able to directly respond to
changes in local conditions. Financial information relating to business segment
and international operations is detailed in Note 10 of Notes to Consolidated
Financial Statements on page 41 in the 1997 Annual Report to Shareholders and is
incorporated herein by reference.
Sales personnel are responsible for developing new Application Partner and
IT accounts, assisting Application Partners in closing major accounts and
servicing existing customers. The Company actively seeks to avoid conflict
between the sales efforts of its Application Partners and the Company's own
sales efforts. In addition, the Company has dedicated sales personnel focused on
developing the Apptivity Partner Program.
PSC uses its telephone sales and sales administration groups to enhance its
direct sales efforts and to generate new business and follow-on business from
existing customers. These groups may provide evaluation copies to Application
Partners or IT organizations to help qualify them as prospective customers, and
may also sell additional development and deployment products to existing
customers.
The Company's marketing department conducts extensive marketing programs
designed to ensure a stream of market-ready products, raise general awareness of
PSC, generate leads for the PSC sales organization and promote the Company's
various product lines. These programs include public relations, direct mail,
participation in trade shows, advertising and production of collateral
literature. The Company utilizes the "Powered by Progress" branding program in
order to raise awareness of its products and their capabilities in the
enterprise application development market. The Company sponsored a single
worldwide user conference in the United States in 1997 and is planning to hold
user conferences in the United States, Europe and Australia in 1998.
CUSTOMER SUPPORT
The Company's technical support staff provides telephone support to
application developers and end-users using a computerized call tracking and
problem reporting system. PSC also provides custom software development,
consulting services and training throughout the world. The Company's software
licenses generally are perpetual licenses. Customers may also purchase an annual
maintenance service entitling them to software updates, technical support and
technical bulletins. The annual fee for maintenance is generally 15% to 20% of
the current list price of the product to be maintained; first year maintenance
is not included
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<PAGE> 11
with the Company's products and is purchased separately. The Company provides
technical support to customers primarily through its technical support centers
in Bedford, Massachusetts, Rotterdam, The Netherlands and Melbourne, Australia.
Some local support is also provided by international subsidiaries in their own
countries.
The Company's professional services organization (education and consulting)
deliver a total business solution for customers through a combination of
products, consulting and education. The Company's worldwide consulting
organization is well-positioned to meet customers' needs by helping to implement
PROGRESS-, WebSpeed- or Apptivity-based applications. The Company's consulting
organization also provides services to Web-enable existing applications or take
advantage of the capabilities of new product releases. The Company's consulting
organization also provides assistance with project management, custom
development, programming, application implementation, Internet services,
migration services and other services.
Consulting and training services for customers outside North America are
provided by personnel at the Company's international subsidiaries and
distributors. Revenue from maintenance and services was 49%, 47% and 38% of
total revenue for fiscal years 1997, 1996 and 1995, respectively.
COMPETITION
The computer software industry is intensely competitive. The Company
experiences significant competition from a variety of sources with respect to
all its products. The Company believes that the breadth and integration of its
product offerings have become increasingly important competitive advantages.
Other factors affecting competition in the markets served by the Company include
product performance in complex applications, application portability, vendor
experience, ease of integration, price, training and support. The Company
believes that it competes favorably with respect to these factors.
The Company competes with a number of entities, principally application
development tools vendors such as Borland International Inc., Forte Software
Inc., Powersoft Corporation, a subsidiary of Sybase, Inc., and Uniface, a
division of Compuware Corporation, and relational database vendors offering
tools in conjunction with their database systems such as CA Ingres, a subsidiary
of Computer Associates International, Inc., Informix Corporation, Microsoft
Corporation, Oracle Corporation and Sybase, Inc. The Company believes that the
database market is currently dominated by Oracle, Informix and Sybase, and that
there is no dominant application development tools vendor. 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.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
In accordance with industry practice, the Company relies upon a combination
of contractual provisions and copyright, trademark and trade secret laws to
protect its proprietary rights in its products. The Company distributes its
products under software license agreements which grant customers a perpetual
non-exclusive license to use the Company's products and contain terms and
conditions prohibiting the unauthorized reproduction or transfer of the
Company's products. In addition, the Company attempts to protect its trade
secrets and other proprietary information through agreements with employees and
consultants. Although the Company intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
The Company seeks to protect the source code of its products as a trade
secret and as an unpublished copyrighted work. The Company does not believe that
patent laws are a significant source of protection for the Company's products.
Where possible, the Company seeks to obtain protection of the names "PROGRESS",
"WebSpeed", "Apptivity" and "ProtoSpeed" through trademark registration and
other similar procedures.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a
11
<PAGE> 12
leadership position within the industry than are the various legal protections
of its technology. In addition, the Company believes that the nature of its
customers, the importance of the Company's products to them and their need for
continuing product support reduce the risk of unauthorized reproduction.
BACKLOG
The Company generally ships its products within 30 days after acceptance of
a customer purchase order and execution of a license agreement. Accordingly, the
Company does not believe that its backlog at any particular point in time is
indicative of future sales levels.
EMPLOYEES
As of November 30, 1997, the Company had 1,090 employees worldwide,
including 454 in sales and marketing, 257 in customer support (including
manufacturing and distribution), 199 in product development and 180 in
administration. The competition in recruiting skilled technical personnel in the
computer software industry is intense. The Company believes that its ability to
attract and retain qualified employees is an important factor in its growth and
development, and that its future success will depend, in large measure, on its
ability to continue to attract and retain qualified employees. To date, the
Company has been successful in recruiting and retaining sufficient numbers of
qualified personnel to effectively conduct its business. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relations with employees are good.
The Company has adopted policies with regard to issuance of stock options
and payment of cash bonuses and contributions to retirement plans in years in
which the Company has met or exceeded its financial plan. These policies are
designed to minimize employee turnover, although there can be no assurance that
such policies will be successful.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
NAME AGE POSITION
- ---- --- --------
Joseph W. Alsop............... 52 President, Treasurer and Director
Jennifer J. Bergantino........ 38 Vice President, Marketing and Strategic
Planning
David G. Ireland.............. 51 Vice President, Core Products and Services
Richard D. Reidy.............. 38 Vice President, Product Development
Norman R. Robertson........... 49 Vice President, Finance and Administration
and Chief Financial Officer
David P. Vesty................ 45 Vice President, Worldwide Sales
Mr. Alsop, a founder of the Company, has been a director and President of
the Company since its inception in 1981.
Ms. Bergantino joined the Company in January 1994 as Manager, Technology
Marketing. In January 1995, she was appointed Director, Crescent Business
Operations, was elected Vice President, Product Marketing and Planning in
February 1996 and was elected Vice President, Marketing and Strategic Planning
in July 1996. From 1991 to 1993, she was employed by Component Software
Corporation, a computer software company, as Vice President, Marketing.
Mr. Ireland joined the Company in September 1997 as Vice President, Core
Products and Services. From 1994 to 1997, Mr. Ireland was employed by Marcam
Corporation, a computer software company, as a Vice President and General
Manager. From 1992 to 1994, Mr. Ireland was employed by Cognos Inc., a computer
software company, as Senior Vice President, Powerhouse Products.
Mr. Reidy was elected Vice President, Development Tools in July 1996 and
was elected Vice President, Product Development in July 1997. From 1993 to 1996,
Mr. Reidy held various management positions within the product development
organization of the Company. Mr. Reidy joined the Company in June 1985.
12
<PAGE> 13
Mr. Robertson joined the Company in May 1996 as Vice President, Finance and
Chief Financial Officer and was elected Vice President, Finance and
Administration and Chief Financial Officer in December 1997. From 1993 to 1996
he was employed by M/A-COM, Inc., a telecommunications company, as Director of
Finance and Administration. From 1990 to 1993 he was employed by Progressive
Technologies, Inc., a semiconductor company, as Chief Financial Officer.
Mr. Vesty was elected Vice President, International Operations in June 1989
and was elected Vice President, Worldwide Sales in December 1996. Mr. Vesty
joined the Company in June 1986.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, support, marketing and
product development facility is located in a single leased building of
approximately 165,000 square feet in Bedford, Massachusetts. The Company leases
approximately 58,000 square feet in Wilmington, Massachusetts and maintains its
manufacturing and distribution operations at this location. The Company leases
approximately 33,000 square feet in Nashua, New Hampshire and maintains a
product development facility at this location. In addition, the Company
maintains offices in 16 other locations in North America and 29 offices outside
North America. The Bedford lease expires in August 1999 and has a three-year
renewal option. The terms of all other leases generally range from one to seven
years. The Company believes that its present and proposed facilities are
adequate for its current needs and that suitable additional space will be
available as needed.
ITEM 3. LEGAL PROCEEDINGS
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 products from Progress Software 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 Paris Trade 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 other 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended November 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information appearing under the caption "Market for Registrant's Common
Equity and Related Shareholder Matters" on page 43 of the 1997 Annual Report to
Shareholders is incorporated herein by reference.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Selected Consolidated
Financial Data" on page 22 of the 1997 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 23 to 29 of
the 1997 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, related notes and independent
auditors' report appearing on pages 30 to 42 of the 1997 Annual Report to
Shareholders and the information appearing under the caption "Selected Quarterly
Financial Data" on page 43 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any matter of
accounting principles, financial statement disclosure, or auditing scope or
procedures required to be reported under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers set forth under the caption
"Executive Officers of the Registrant" in Item 1 of this Annual Report is
incorporated herein by reference.
The information regarding directors set forth under the caption "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 24, 1998, which will be filed
with the Securities and Exchange Commission not later than 120 days after
November 30, 1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 1998, which will be filed with the
Securities and Exchange Commission not later than 120 days after November 30,
1997, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Holders and Management" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 24, 1998, which will
be filed with the Securities and Exchange Commission not later than 120 days
after November 30, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 24, 1998, which will be
filed with the Securities and Exchange Commission not later than 120 days after
November 30, 1997, is incorporated herein by reference.
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<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following financial statements are included in the Company's 1997
Annual Report to Shareholders and are incorporated herein by reference:
Consolidated Balance Sheets as of November 30, 1997 and 1996
Consolidated Statements of Operations for the years ended November 30,
1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity for the years ended
November 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended November 30,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplemental Financial Data not covered by the Independent Auditors'
Report:
Selected Quarterly Financial Data
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended November 30, 1997.
(c) EXHIBITS
Documents listed below, except for documents identified by parenthetical
numbers, are being filed as exhibits herewith. Documents identified by
parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32
of the General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Act"), reference is made to such documents
as previously filed as exhibits with the Commission. The Company's file number
under the Act is 0-19417.
<TABLE>
<S> <C>
3.1 Restated Articles of Organization of the Company
3.1.1 Articles of Amendment to Restated Articles of Organization of the Company(1)
3.1.2 Articles of Amendment to Restated Articles of Organization of the Company
3.2 By-Laws of the Company, as amended and restated(2)
4.1 Specimen certificate for the Common Stock of the Company(3)
10.2 Form of User Agreement, as amended(4)
10.3 Form of Application Partner Agreement(5)
10.4 Form of End User Product License Agreement(6)
10.5 Form of Authorized International Distributor Agreement(7)
10.6 1984 Incentive Stock Option Plan, with amendments(8)
10.7 Amended and Restated 1984 Incentive Stock Option Plan(9)
10.8 1991 Employee Stock Purchase Plan, as amended(10)
10.9 Progress Software Corporation 401(k) Plan and Trust(11)
10.11 Progress Software Corporation 401(k) Plan with Fidelity Institutional Retirement
Services Company(12)
10.12 1992 Incentive and Nonqualified Stock Option Plan(13)
</TABLE>
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<PAGE> 16
10.15 First Amended and Restated Lease dated August 11, 1994 between the
Company and the Equitable Life Assurance Company of the United
States(14)
10.16 1994 Stock Incentive Plan(15)
10.17 1993 Directors' Stock Option Plan(16)
10.18 1997 Stock Incentive Plan(17)
11.1 Statement re computation of per share earnings
13.1 1997 Annual Report to Shareholders (which is not deemed to be "filed"
except to the extent that portions thereof are expressly incorporated
by reference in this Annual Report on Form 10-K)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (EDGAR version only)
- ---------------
(1) Incorporated by reference to Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1994.
(2) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 31, 1991.
(3) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(4) Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(5) Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(6) Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(7) Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(8) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(9) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(10) Incorporated by reference to Exhibit 28.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1991.
(11) Incorporated by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(12) Incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1991.
(13) Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1992.
(14) Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(15) Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
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<PAGE> 17
(16) Incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(17) Incorporated by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1997
(D) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown on the financial statements or notes thereto.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of
Bedford, Commonwealth of Massachusetts on the 19th day of February, 1998.
PROGRESS SOFTWARE CORPORATION
By: /s/ JOSEPH W. ALSOP
------------------------------------
Joseph W. Alsop,
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ JOSEPH W. ALSOP President, Treasurer and February 19, 1998
- ------------------------------------------ Director (Principal
Joseph W. Alsop Executive Officer)
/s/ NORMAN R. ROBERTSON Vice President, Finance and February 19, 1998
- ------------------------------------------ Administration and Chief
Norman R. Robertson Financial Officer (Principal
Financial Officer)
/s/ DAVID H. BENTON, JR. Corporate Controller February 19, 1998
- ------------------------------------------ (Principal Accounting
David H. Benton, Jr. Officer)
/s/ LARRY R. HARRIS Director February 19, 1998
- ------------------------------------------
Larry R. Harris
/s/ ROBERT J. LEPKOWSKI Director February 19, 1998
- ------------------------------------------
Robert J. Lepkowski
/s/ MICHAEL L. MARK Director February 19, 1998
- ------------------------------------------
Michael L. Mark
/s/ ARTHUR J. MARKS Director February 19, 1998
- ------------------------------------------
Arthur J. Marks
/s/ AMRAM RASIEL Director February 19, 1998
- ------------------------------------------
Amram Rasiel
/s/ JAMES W. STOREY Director February 19, 1998
- ------------------------------------------
James W. Storey
</TABLE>
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<PAGE> 19
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of
Progress Software Corporation:
We have audited the consolidated financial statements of Progress Software
Corporation and its subsidiaries as of November 30, 1997 and 1996, and for each
of the three years in the period ended November 30, 1997, and have issued our
report thereon dated December 19, 1997; such consolidated financial statements
and report are included in your 1997 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Progress Software Corporation and its subsidiaries, listed
in the Index accompanying Item 14(d). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 19, 1997
19
<PAGE> 20
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
DESCRIPTION OF PERIOD EXPENSES RESERVES PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reserves deducted from assets to which
they apply--for doubtful accounts receivable:
1997....................................... $5,112 $1,807 $(1,991) $4,928
====== ====== ======= ======
1996....................................... $4,611 $1,818 $(1,317) $5,112
====== ====== ======= ======
1995....................................... $4,268 $1,936 $(1,593) $4,611
====== ====== ======= ======
</TABLE>
20
<PAGE> 1
EXHIBIT 3.1
The Commonwealth of Massachusetts
MICHAEL JOSEPH CONNOLLY
Secretary of State FEDERAL IDENTIFICATION
ONE ASHBURTON PLACE, BOSTON, MASS. 02108 NO.04-2746201
RESTATED ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B SECTION 74
This certificate must be submitted to the Secretary of the Commonwealth
within sixty days after the date of the vote of stockholders adopting the
restated articles of organization. The fee for filing this certificate is
prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the
Commonwealth of Massachusetts
We, Joseph W. Alsop President and
Robert L. Birnbaum Assistant Clerk
Progress Software Corporation
- --------------------------------------------------------------------------------
(Name of Corporation)
located at 5 Oak Park, Bedford, Massachusetts 01730 do
------------------------------------------------------------------
hereby certify that the following restatement of the articles of organization of
the corporation was duly adopted at a meeting held on July 1, 1991 by vote of
1,754,838 shares of COMMON STOCK out of 1,905,060 shares outstanding.
719,875 shares of SERIES A CONVERTIBLE PREFERRED STOCK out of 755,500 shares
outstanding, and
520,000 shares of SERIES B CONVERTIBLE PREFERRED STOCK out of 520,000 shares
outstanding,
being at least two-thirds of each class of stock outstanding and entitled to
vote and of each class of series of stock adversely affected thereby:
1. The name by which the corporation shall be know is:
Progress Software Corporation
2. The purposes for which the corporation is formed are as follows:
See Attachment 2A
<PAGE> 2
3. The total number of shares and the par value, if any, of each class of
stock which the corporation is authorized to issue is as follows:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE WITH PAR VALUE
CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE
- -------------- ---------------- ---------------- ---------
<S> <C> <C>
Preferred 1,000,000 $.01
Common 8,500,000 $.01
</TABLE>
4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established:
See Attachment 4A attached hereto and incorporated herein by
reference.
5. The restrictions, if any, imposed by the articles of organization upon the
transfer of shares of stock of any class are as follows:
None.
6. Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining, or regulating the powers of the corporation, or of
its directors or stockholders, or of any class of stockholders:
See Attachments 6A-6G.
<PAGE> 3
2A. PURPOSES
To build, construct, design, develop, purchase, lease, or otherwise
acquire, and to hold, use, lease, manage, operate, equip, maintain, sell,
mortgage, pledge, deal in or with any and all kinds of properties, real,
personal, or mixed, tangible or intangible, and generally to engage in a
manufacturing and merchandising, designing, developing and evaluating business
in the field of computer information systems, computer systems and programming
services.
To acquire, and pay for in cash, stock or bonds of the corporation, or
otherwise, the good will, rights, assets and properties and to undertake,
guarantee or assume the whole or any part of the obligations or liabilities, of
any person, firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in respect of,
mortgage or otherwise dispose of letters patent of the United States or any
foreign country, patent rights, licenses and privileges, formulae, inventions,
improvements and processes, trade secrets, trade-marks, and trade names relating
to or useful in connection with any business of the Corporation.
To incur liabilities and borrow money and to insure notes, bonds or other
evidences of indebtedness and to secure the same by mortgage or pledge of any
part or all of the properties of any and every kind of the Corporation.
To purchase, subscribe for or otherwise acquire, register, hold, sell,
assign, transfer, pledge or otherwise dispose of shares of stock, bonds, notes
and other securities and evidences of interest in or indebtedness of any
government or political subdivisions thereof and of any person, firm or
corporation of this or any other state or country, and while the owner or holder
thereof to exercise all the rights, powers and privileges of ownership, in the
same manner than an individual might do.
To purchase, hold, sell and transfer the shares of its own capital stock or
any other securities issued by it; provided (1) it shall not use its funds or
property for the purchase of its own shares of capital stock when such use would
cause any impairment of its capital, unless otherwise permitted by law, (2) such
purchase, sale or transfer is not otherwise prohibited by law, and (3) shares of
its own capital stock belonging to it shall not be voted on directly or
indirectly.
To have one or more offices and to carry on any or all of its operations
and business in any of the states, districts, territories or colonies of the
United States, in the Provinces of Canada, and in any and all foreign countries,
subject to the laws of such state, district, territory, colony, province or
country.
To carry on business incidental to and in connection with the foregoing and
to have and exercise all the powers conferred by the laws of Massachusetts upon
corporations formed under the General Laws of Massachusetts and to do any or all
of the things hereinbefore set forth to the same extent as natural persons might
or could do.
The purposes specified in the foregoing clauses, shall except where
otherwise expressed, be in nowise limited or restricted by reference to, or
inference from, the terms of any other clause, but the objects and powers
specified in each of the foregoing clauses of this article shall be regarded as
independent purposes.
To carry on any business or other activity which may be lawfully carried on
by a corporation organized under the Business Corporation Law of The
Commonwealth of Massachusetts, whether or not related to those preferred to in
the foregoing paragraphs.
<PAGE> 4
4A. PREFERRED STOCK
A. DESIGNATION OF CLASSES.
The authorized classes of capital stock of the Corporation shall be
designated, respectively, the Common Stock and the Preferred Stock.
Any and all shares of stock issued, and for which the full consideration
has been paid or delivered, shall be deemed fully paid stock; and the holder of
such shares shall not be liable for any further call or assessment of any other
payment thereon.
B. COMMON STOCK.
Each holder of Common Stock shall at every meeting of stockholders be
entitled to one vote in person or by proxy for each share of Common Stock held
by him. The holders of the Common Stock shall be entitled to such dividends as
may from time to time be declared by the Board of Directors out of any funds
legally available for the declaration of dividends, subject to any provisions of
these Articles of Organization, as amended from time to time, and subject to the
relative rights and preferences of any shares of Preferred Stock authorized and
issued hereunder. No share of Common Stock shall entitle its holder to have any
preemptive right in or preemptive right to subscribe to any additional shares of
Common Stock or any shares of any other class of stock which may at any time be
authorized or issued, or any bonds, debentures or other securities convertible
into shares of stock of any class of the Corporation, or options or warrants
carrying rights to purchase such shares or securities. Subject to the relative
rights and preferences of any shares of Preferred Stock authorized and issued
hereunder, upon the dissolution or liquidation of the Corporation, whether
voluntary or involuntary the holders of shares of Common Stock shall be entitled
to receive all assets of the Corporation available for distribution to its
stockholders.
C. PREFERRED STOCK.
1. The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article 4, to
provide for the issuance of the shares of Preferred Stock, with
or without series, and, by filing a certificate pursuant to the
applicable law of The Commonwealth of Massachusetts (the
"Certificate of Designation"), to establish from time to time
the number of shares to be included in each such series and to
fix the designation, preferences, voting powers, qualifications
and special or relative rights or privileges of the shares of
each such series. In the event that at any time the Board of
Directors shall have established and designated one or more
series of Preferred Stock consisting of a number of shares less
than all of the authorized number of shares of Preferred Stock,
the remaining authorized shares of Preferred Stock shall be
deemed to be shares of an undesignated series of Preferred Stock
until designated by the Board of Directors as being a part of a
series previously established or a new series then being
established by the Board of Directors. Notwithstanding the
fixing of the number of shares constituting a particular series,
the Board of Directors may at any time thereafter authorize the
issuance of additional shares of the same series except as set
forth in the Certificate of Designation.
2. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to,
determination of the following:
(i) the number of shares constituting that series, which
number may be increased or decreased (but not below the
number of shares of such series then outstanding) from
time to time by the Board of Directors, and the
distinctive designation of that series;
(ii) whether any dividends shall be paid on shares of that
series, and, if so, the dividend rate on the shares of
that series; whether dividends shall be
<PAGE> 5
cumulative and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of
dividends on shares of that series;
(iii) whether shares of that series shall have voting rights
in addition to the voting rights provided by law and, if
so, the terms of such voting rights;
(iv) whether shares of that series shall be convertible into
shares of Common Stock or another security and, if so,
the terms and conditions of such conversion, including
provisions for adjustment of the conversion rate in such
events as the Board of Directors shall determine;
(v) whether or not the shares of that series shall be
redeemable and, if so, the terms and conditions of such
redemption, including the date or dates upon or after
which they shall be redeemable and the amount per share
payable in case of redemption, which amount may vary
under different conditions and at different redemption
dates; and whether that series shall have a sinking fund
for the redemption or purchase of shares of that series
and, if so, the terms and amount of such sinking fund;
(vi) whether, in the event of purchase or redemption of the
shares of that series, any shares of that series shall
be restored to the status of authorized but unissued
shares or shall have such other status as shall be set
forth in the Certificate of Designation;
(vii) the rights of the shares of that series in the event of
the sale, conveyance, exchange or transfer of all or
substantially all of the property and assets of the
Corporation, or the merger or consolidation of the
Corporation into or with any other corporation, or the
merger of any other corporation into it, or the
voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights
of priority, if any, of shares of that series to payment
in any such event;
(viii) whether the shares of that series shall carry any
preemptive right in or preemptive right to subscribe to
any additional shares of Preferred Stock or any shares
of any other class of stock which may at any time be
authorized or issued, or any bonds, debentures or other
securities convertible into shares of stock of any class
of the Corporation, or options or warrants carrying
rights to purchase such shares or securities; and
(ix) any other designation, preferences, voting powers,
qualifications, and special or relative rights or
privileges of the shares of that series.
<PAGE> 6
6A. CERTAIN BUSINESS COMBINATIONS
(a) VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
(1) HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to
any affirmative vote required by law or these Articles of Organization, and
except as otherwise expressly provided in paragraph (b) of this Article 6A:
(i) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested
Stockholder (as hereinafter defined) or (b) any other
corporation (whether or not itself an Interested Stockholder)
which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested Stockholder;
or
(ii) any sale, lease, license, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate Fair Market
Value (as hereinafter defined) equal to or greater than ten
percent (10%) of the combined assets of the Corporation and its
Subsidiaries; or
(iii) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of
any securities of the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property
(or a combination thereof) having an aggregate Fair Market Value
equal to or greater than ten percent (10%) of the combined
assets of the Corporation and its Subsidiaries, except pursuant
to an employee benefit plan of the Corporation or any Subsidiary
thereof; or
(iv) any reclassification of securities of the Corporation
(including any reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the Corporation
with any of its Subsidiaries or any other transaction (whether
or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of
any class of equity or convertible securities of the Corporation
or any Subsidiary which are directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
(v) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on behalf of
any Interested Stockholder or any Affiliate of any Interested
Stockholder shall require the affirmative vote of the holders of
at least eighty percent (80%) of the voting power of the then
outstanding shares of capital stock of the Corporation entitled
to vote in the election of directors (the "Voting Stock"),
voting together as a single class it being understood that for
purposes of this Article 6A, each share of the Voting Stock
shall have the number of votes granted to it pursuant to Article
4 of these Articles of Organization). Such affirmative vote
shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified by law or
by any other provisions of these Articles of Organization or any
Certificate of Designation (as defined in Article 4 of these
Articles of Organization), or in any agreement with any national
securities exchange or otherwise.
(2) DEFINITION OF "BUSINESS COMBINATION". The term "Business
Combination" as used in this Article 6A shall mean any transaction which is
referred to in any one or more of clauses (i ) through (v) of subparagraph (1)
of this paragraph (a).
<PAGE> 7
(b) WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of paragraph (a) of
this Article 6A shall not be applicable to any particular Business Combination,
and such Business Combination shall require only such affirmative vote as is
required by law and any other provisions of these Articles of Organization, if,
in the case of any Business Combination that does not involve any cash or other
consideration being received by the stockholders of the Corporation solely in
their capacity as stockholders of the Corporation, the condition specified in
the following subparagraph (b) (1) is met, or, in the case of any other Business
Combination, all of the conditions specified in the following subparagraphs (b)
(1) and (b) (2) are met:
(1) APPROVAL BY DISINTERESTED DIRECTORS. The Business Combination
shall have been approved by a majority of the members of the Board of Directors
(the "Board") who are Disinterested Directors (as hereinafter defined), it being
understood that this condition shall not be capable of satisfaction unless there
is at least one Disinterested Director.
(2) PRICE AND PROCEDURAL REQUIREMENTS. All of the following
conditions shall have been met:
(i) The aggregate amount of the cash, and the Fair Market
Value as of the date of the consummation of the Business Combination of
consideration other than cash, to be received per share by the holders of Common
Stock of the Corporation in such Business Combination shall be at least equal to
the higher of the following:
(A) (if applicable) the highest per share price
(including any brokerage commissions, transfer
taxes and soliciting dealers fees) paid by the
Interested Stockholder or any of its Affiliates
for any shares of Common Stock of the
Corporation acquired by it (1) within the
two-year period immediately prior to the first
public announcement of the proposal of the
Business Combination (the "Announcement Date")
or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher; or
(B) the Fair Market Value per share of Common Stock
of the Corporation on the Announcement Date or
on the date on which the Interested Stockholder
became an Interested Stockholder (the
"Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of shares of
any class of outstanding Voting Stock other than Common Stock shall be at least
equal to the highest of the following (it being intended that the requirements
of this subparagraph (b)(2)(ii) shall be required to be met with respect to
every class of outstanding Voting Stock, whether or not the Interested
Stockholder has previously acquired any shares of a particular class of Voting
Stock):
(A) (if applicable) the highest per share price
(including any brokerage commissions, transfer
taxes and soliciting dealer fees) paid by the
Interested Stockholder or any of its Affiliates
for any shares of such class of Voting Stock
acquired or beneficially owned by it that were
acquired (1) within the two-year period
immediately prior to the Announcement Date or
(2) in the transaction in which it became an
Interested Stockholder, whichever is higher; or
(B) (if applicable) the highest preferential amount
per share to which the holders of shares of such
class of Voting Stock are entitled in the event
of any voluntary liquidation, dissolution or
winding up of the Corporation; or
(C) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
<PAGE> 8
(iii) The price determined in accordance with subparagraphs
(i) and (ii) of this subparagraph (b) (2) shall be subject to appropriate
adjustment in the event of any stock dividend, stock split, combination of
shares or similar event.
(iv) The holders of all outstanding shares of Voting Stock
not beneficially owned by the Interested Stockholder immediately prior to the
consummation of any Business Combination shall be entitled to receive in such
Business Combination cash or other consideration for their shares meeting all of
the terms and conditions of this paragraph (2) provided, however, that the
failure of any stockholders who are exercising their statutory rights to dissent
from such Business Combination and receive payment of the fair value of their
shares to exchange their shares in such Business Combination shall not be deemed
to have prevented the condition set forth in this subparagraph (2) (iv) from
being satisfied.
(v) The consideration to be received by holders of any
particular class of outstanding Voting Stock (including Common Stock) shall be
in cash or in the same form as the Interested Stockholder has previously paid
for shares of such class of Voting Stock. If the Interested Stockholder has paid
for shares of any class of Voting Stock with varying forms of consideration, the
form of consideration to be received per share by holders of such class of
Voting Stock shall be either cash or the form used to acquire the largest number
of shares of such class of Voting Stock previously acquired by the Interested
Stockholder.
(vi) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of such Business
Combination: (A) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at the regular
date therefor any full quarterly dividends (whether or not cumulative) on any
outstanding Preferred Stock of the Corporation; (B) there shall have been (I) no
reduction in the annual rate of dividends paid on the Common Stock of the
Corporation (except as necessary to reflect any subdivision of the Common
Stock), except as approved by a majority of the Disinterested Directors, and
(II) an increase in such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Disinterested
Directors and (C) neither such Interested Stockholder nor any of its Affiliates
shall have become the beneficial owner of any additional shares of Voting Stock
except as part of the transaction which results in such Interested Stockholder
becoming an Interested Stockholder.
(vii) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder), of
any loans, advances, guarantees, pledges or other financial assistance or any
tax credits or other tax advantages provided by the Corporation, whether in
anticipation of or in connection with such Business Combination or otherwise.
(viii) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (or any subsequent provisions replacing the Exchange Act
or such rules or regulations) shall be mailed to stockholders of the Corporation
at least thirty (30) days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be mailed
pursuant to the Exchange Act or subsequent provisions). Such proxy or
information statement shall contain, if a majority of the Disinterested
Directors so requests, an opinion of a reputable investment banking firm which
shall be selected by a majority of the Disinterested Directors, furnished with
all information such investment banking firm reasonably requests and paid a
reasonable fee for its services by the Corporation upon the Corporation's
receipt of such opinion, as to the fairness (or lack of fairness) of the terms
of the proposed Business Combination from the point of view of the holders of
shares of Voting Stock (other than the Interested Stockholder).
(c) CERTAIN DEFINITIONS. For the purposes of this Article 6A:
<PAGE> 9
(1) A "person" shall include any individual, group acting in
concert, corporation, partnership, association, joint venture, pool, joint stock
company, trust, unincorporated organization or similar company, syndicate, or
any group formed for the purpose of acquiring, holding or disposing of
securities.
(2) "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of more
than fifteen percent (15%) of the voting power of the then
outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in
question was the beneficial owner, directly or indirectly, of
fifteen percent (15%) or more of the voting power of the then
outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the
two-year period immediately prior to the date in question
beneficially owned by any Interested Stockholder, if such
assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public
offering within the meaning of the 1933 Act.
(3) A person shall be a "beneficial owner" of any shares of Voting
Stock:
(i) which such person or any of its Affiliates or Associates
(as hereinafter defined) beneficially owns, directly or
indirectly, within the meaning of Rule 13d-3 of the Exchange
Act, as in effect on June 30, 1991; or
(ii) which such person or any of its Affiliates or Associates
has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to an
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise; provided, however, that a person shall not be deemed
the beneficial owner of securities tendered pursuant to a tender
or exchange offer made by or on behalf of such person or any of
such person's Affiliates or Associates until such tendered
securities are accepted for purchase; or (B) the right to vote
pursuant to any agreement, arrangement, understanding or
otherwise; provided, however, that a person shall not be deemed
the beneficial owner of any security if the agreement,
arrangement or understanding to vote such security (I) arises
solely from a revocable proxy or consent solicitation made
pursuant to, and in accordance with, the Exchange Act and (II)
is not also then reportable on Schedule 13D under the Exchange
Act (or a comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly
within the meaning of Rule 13d-3 under the Exchange Act, as in
effect on June 30, 1991, by any other person with which such
person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting (except to the extent permitted by the provision
of subparagraph (c) (3) (ii) (B) above) or disposing of any
shares of Voting Stock;
provided, however, that in the case of any employee stock ownership or similar
plan of the Corporation or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by such plan, no such
plan nor any trustee with respect thereto (nor any Affiliate of such trustee,
solely by reason of such capacity of such trustee, shall be deemed, for any
purpose hereof, to beneficially own any shares of Voting Stock held under any
such plan.
(4) For the purposes of determining whether a person is an
Interested Stockholder pursuant to subparagraph (c) (2), the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of subparagraph (c) (3), but shall not include any other shares of
<PAGE> 10
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
(5) "Affiliate" and "Associate" shall have the meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act, as in effect on June 30, 1991.
(6) "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation.
(7) "Disinterested Director" means any Director of the Corporation
who is not an Affiliate or Associate of the Interested Stockholder and was a
member of the Board prior to the time that the Interested Stockholder became an
Interested Stockholder, and any Director who is thereafter chosen to fill any
vacancy on the Board or who is elected and who, in either event, is not an
Affiliate or Associate of the Interested Stockholder and in connection with his
or her initial assumption of office is recommended for appointment or election
by a majority of Disinterested Directors then serving on the Board.
(8) "Fair Market Value" means: (i ) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding and
including the date in question of a share of such stock on the Composite Tape
for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on
the Composite Tape, on the New York Exchange, or, if such stock is not listed on
such Exchange, on the principal United States securities exchange registered
;under the Exchange Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation with respect to a
share of such stock during the 30-day period preceding and including the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined in good faith by a majority of the Disinterested Directors;
and (ii) in the case of property other than cash or stock, the fair market value
of such property on the date in question as determined in good faith by a
majority of the Disinterested Directors.
(9) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in subparagraphs (b) (2) (i ) and (ii) of this Article 6A shall include
the shares of Common Stock of the Corporation and/or the shares of any other
class of outstanding Voting Stock retained by the holders of such shares.
(10) For the purposes of determining the "Announcement Date," in the
event that the first public announcement of the proposal of the Business
Combination is made after the close on such date of any securities exchange
registered under the Exchange Act on which any shares of the Voting Stock of the
Corporation are traded, or of the National Association of Securities Dealers,
Inc. Automated Quotations System or any other system on which any shares of the
Voting Stock of the Corporation are listed, then the Announcement Date shall be
deemed to be the next day on which such exchange or quotations system is open.
(d) POWERS OF THE BOARD OF DIRECTORS. A majority of the Board shall have the
power and duty to determine for the purposes of this Article 6A, on the basis of
information known to them after reasonable inquiry, whether a person is an
Interested Stockholder, which determination shall be conclusive. Once the Board
has made a determination, pursuant to the preceding sentence, that a person is
an Interested Stockholder, then a majority of Disinterested Directors, shall
have the power and duty to determine for the purposes of this Article 6A, on the
basis of information known to them after reasonable inquiry, (i ) the number of
shares of Voting Stock beneficially owned by any person, (ii) whether a person
is an Affiliate of Associate of another, (iii) whether the assets which may be
the subject of any Business Combination have, or the consideration which may be
received for the issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has, an aggregate Fair Market Value equal
to or greater than ten percent (10%) of the combined assets of the Corporation
and its Subsidiaries and (iv) whether all of the applicable conditions set forth
in subsection (b) (2) shall have been met with respect to any Business
Combination, any of which determinations by a majority of the Disinterested
Directors shall be conclusive. A majority of the Disinterested Directors shall
<PAGE> 11
have the further power to interpret all of the terms and provisions of this
Article 6A, which interpretation shall be conclusive.
(e) NO EFFECT ON FIDUCIARY OBLIGATION OF INTERESTED STOCKHOLDERS. Nothing
contained in this Article 6A shall be construed to relieve any Interested
Stockholder of any fiduciary obligation imposed by law.
(f) AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these
Articles of Organization or the By-Laws of the Corporation (and notwithstanding
the fact that a lesser percentage or no vote may be specified by law, these
Articles of Organization or the By-Laws of the Corporation), and in addition to
any affirmative vote of the holders of Preferred Stock or any other class of
capital stock of the Corporation or any series of the foregoing then outstanding
which is required by law or by or pursuant to these Articles of Organization,
the affirmative vote of the holders of eighty percent (80%) or more of the
outstanding Voting Stock, voting together as a single class, shall be required
to amend or repeal, or adopt any provisions inconsistent with, this Article 6A.
<PAGE> 12
6B. CERTAIN TRANSACTIONS APPROVED BY THE BOARD OF DIRECTORS
Except as provided in Article 6A of, or as otherwise provided in, these
Articles of Organization, the Corporation may authorize, by a vote of a majority
of the shares of each class of stock outstanding and entitled to vote thereon,
(a) the sale, lease or exchange of all or substantially all of its property and
assets, including its goodwill, upon such terms and conditions as it deems
expedient, and (b) the merger or consolidation of the Corporation or any
Subsidiary (as defined in Section (c) (6) of Article 6A of these Articles of
Organization) into any other corporation, provided, however, that such sale,
lease, exchange, merger or consolidation shall have been approved by a majority
of the members of the Board of Directors.
<PAGE> 13
6C. LIMITATION OF LIABILITY OF DIRECTORS
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that this Article shall not eliminate or limit any liability
of a director (i ) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 61 and 62 of the Massachusetts Business Corporation Law, or (iv) with
respect to any transaction from which the director derived an improper personal
benefit.
The provisions of this Article shall not eliminate or limit the
liability of a director of this Corporation for any act or omission occurring
prior to the date on which this Article became effective, provided, however,
that neither any provision of this Article nor the adoption of this Article
shall affect the effectiveness of any predecessor provision of these Articles of
Organization pertaining to the elimination or limitation of the liability of a
director of this Corporation for any act or omission occurring prior to the date
on which this Article became effective. No amendment or repeal of this Article
shall adversely affect the rights and protection afforded to a director of this
Corporation under this Article for acts or omissions occurring prior to such
amendment or repeal.
If the Massachusetts Business Corporation Law is subsequently amended
to further eliminate or limit the personal liability of directors or to
authorize corporate action to further eliminate or limit such liability, then
the liability of the directors of this Corporation shall, without any further
action of the Board of Directors or the stockholders of this Corporation, be
eliminated or limited to the fullest extent permitted by the Massachusetts
Business Corporation Law as so amended.
<PAGE> 14
6D. MAKING AND AMENDING BY-LAWS
The directors of the Corporation shall have power to make, alter, amend
and repeal the By-Laws of the Corporation in whole or in part, except with
respect to any provision thereof which by law or these Articles of Organization
or such By-Laws requires action by the stockholders, who shall also have power
to make, alter, amend and repeal the By-Laws of the Corporation. Any By-Laws
made by the directors under the powers conferred hereby may be altered, amended,
or repealed by the directors or the stockholders. Notwithstanding the foregoing
and anything contained in these Articles of Organization to the contrary,
Articles III, IV, VII and X of the By-Laws, and this Article 6D, shall not be
altered, amended or repealed by the stockholders, and no provision inconsistent
therewith or herewith shall be adopted by the stockholders, without the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of all shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class. In addition,
notwithstanding the foregoing and anything contained in these Articles of
Organization to the contrary, Article VI of the By-Laws may not be altered,
amended or repealed, in whole or in part, and no provision inconsistent
therewith shall be adopted, by the Board of Directors unless approved by the
affirmative vote of at least three-fourths (3/4) of the directors then serving.
<PAGE> 15
6E. PLACES OF MEETINGS OF STOCKHOLDERS
Meetings of the stockholders may be held anywhere in the United States.
<PAGE> 16
6F. PARTNERSHIP IN ANY BUSINESS ENTERPRISE
The Corporation may be a partner in any business enterprise it would
have power to conduct by itself.
<PAGE> 17
6G. TRANSACTION WITH AFFILIATED PERSONS
The Corporation may enter into contracts or transact business with one
or more of its directors, officers or stockholders or with any corporation,
organization or other concern in which one or more of its directors, officers or
stockholders are directors, officers, stockholders or are otherwise interested
and may enter into other contracts or transactions in which one or more of its
directors, officers or stockholders are in any way interested. In the absence of
fraud no such contract or transaction shall be invalidated or in any way
affected by the fact that such one or more of the directors, officers or
stockholders of the Corporation have or may have any interest which is or might
be adverse to the interest of the Corporation even though the vote or action of
directors, officers of stockholder having such adverse interest may have been
necessary to obligate the Corporation upon such contract or transaction.
At any meeting of the Board of Directors of the Corporation (or of any
duly authorized committee thereof) at which any such contract or transaction
shall be authorized or ratified, any such directors or directors may vote or act
thereat with like force and effect as if he had not such interest, provided in
such case that the nature of such interest (though not necessarily the extent or
details thereof) shall be disclosed or shall have been known to the directors. A
general notice that a director or officer is interested in any corporation or
other concern of any kind referred to above shall be a sufficient disclosure as
to the interest of such director or officer with respect to all contracts and
transactions with such corporation or other concern. No director shall be
disqualified from holding office as a director or an officer of the Corporation
by reason of any such adverse interest, unless the Board of Directors shall
determine that such adverse interest is detrimental to the Corporation. In the
absence of fraud, no director, officer or stockholder having such adverse
interest shall be liable on account of such adverse interest to the Corporation
or to any stockholder or creditor thereof or to any other person for any loss
incurred by it under or by reason of such contract or transaction, nor shall any
such director, officer or stockholder be accountable on such ground for any
gains or profits realized thereon.
<PAGE> 18
BRIEF DESCRIPTION OF AMENDMENTS
Article 3: Article 3 has been amended by deleting from the Corporation's
authorized capital stock the shares of Series A Convertible
Preferred Stock, par value $.01 per share, and Series B
Convertible Preferred Stock, par value $.01 per share.
Article 4: Article 4 has been amended to eliminate the description of, and
references to, the Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock.
<PAGE> 19
*We further certify that the foregoing restated articles of organization
effect no amendments to the articles of organization of the corporation as
heretofore amended, except amendments to the following articles:
Article 3 and Article 4
- --------------------------------------------------------------------------------
Briefly describe amendments in space below:
See page 20 attached hereto.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names
16th day of August in the year 1991
/s/ JOSEPH W. ALSOP
-----------------------------------
JOSEPH W. ALSOP
President
/s/ ROBERT L. BIRNBAUM
-----------------------------------
ROBERT L. BIRNBAUM
Assistant Clerk
<PAGE> 20
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
I hereby approve the within restated
articles of organization and the
filing fee in the amount of $400.00
having been paid, said articles are
deemed to have been filed with me this
23rd day of August, 1991.
MICHAEL JOSEPH CONNOLLY
Secretary of State
TO BE FILLED IN BY CORPORATION
PHOTO COPY OF RESTATED ARTICLES OF
ORGANIZATION TO BE SENT TO:
Robert L. Birnbaum, Esquire
-----------------------------------------------
Foley, Hoag & Eliot
-----------------------------------------------
One Post Office Sq., Boston, MA 02109
-----------------------------------------------
Telephone (617) 482-1390
--------------------------------------
COPY MAILED
<PAGE> 1
Exhibit 3.1.2
FEDERAL IDENTIFICATION
NO. 04-2746201
-------------------
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
We, Joseph W. Alsop , President
---------------------------------------------------------------
and James D. Freedman , Assistant Clerk
---------------------------------------------------------
of Progress Software Corporation
----------------------------------------------------------------------------,
(Exact name of corporation)
located at 14 Oak Park, Bedford, Massachusetts 01730 .
--------------------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
- --------------------------------------------------------------------------------
(Number those articles 1 ,2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on April 25,
1997, by vote of:
9,091,013 shares of Common Stock of 12,397,249 shares outstanding,
- --------- -------------------------- ----------
(type, class & series if any)
shares of of shares outstanding, and
- --------- -------------------------- ----------
shares of of shares outstanding,
- --------- -------------------------- ----------
(type, class & series if any)
1** being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
<PAGE> 2
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common: Common: 20,000,000 $.01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- --------------------------------------------------------------------------------
Change the total authorized to:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common: Common: 50,000,000 $.01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- --------------------------------------------------------------------------------
<PAGE> 3
The foregoing amendments(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: _______________
SIGNED UNDER THE PENALTIES OF PERJURY, this 17th day of November, 1997,
/s/ JOSEPH W. ALSOP
----------------------------------
Joseph W. Alsop
President
/s/ JAMES D. FREEDMAN
----------------------------------
James D. Freedman
Assistant Clerk
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended November 30,
----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
PRIMARY
- -------
Weighted average number of common and
common equivalent shares outstanding:
Common stock 12,112 12,823 12,674
Common equivalent shares resulting from
stock options (treasury stock method) -- 399 831
------- ------- -------
Total 12,112 13,222 13,505
======= ======= =======
Net income (loss) $(1,607) $ 5,497 $16,684
======= ======= =======
Income (loss) per common share $ (0.13) $ 0.42 $ 1.24
======= ======= =======
FULLY-DILUTED
- -------------
Weighted average number of common and
common equivalent shares outstanding:
Common stock 12,112 12,823 12,674
Common equivalent shares resulting from
stock options (treasury stock method) -- 445 954
------- ------- -------
Total 12,112 13,268 13,628
======= ======= =======
Net income (loss) $(1,607) $ 5,497 $16,684
======= ======= =======
Income (loss) per common share $ (0.13) $ 0.41 $ 1.22
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software licenses $ 95,579 $ 93,178 $110,785 $ 88,426 $ 73,582
Maintenance and services 92,735 83,512 69,350 50,811 38,058
-------- -------- -------- -------- --------
Total revenue 188,314 176,690 180,135 139,237 111,640
-------- -------- -------- -------- --------
Costs and expenses:
Cost of revenue 41,238 38,539 31,896 21,634 16,546
Sales and marketing 87,570 87,830 79,546 62,477 49,803
Product development 26,991 23,951 24,175 20,203 15,296
General and administrative 23,202 21,909 18,813 15,092 12,528
Non-recurring charges 11,537 -- 2,373 -- --
-------- -------- -------- -------- --------
Total costs and expenses 190,538 172,229 156,803 119,406 94,173
-------- -------- -------- -------- --------
Income (loss) from operations (2,224)* 4,461 23,332** 19,831 17,467
-------- -------- -------- -------- --------
Other income, net 5,356 3,869 3,169 2,136 2,369
-------- -------- -------- -------- --------
Income before provision for income taxes 3,132* 8,330 26,501** 21,967 19,836
Provision for income taxes 4,739 2,833 9,817 7,579 6,943
-------- -------- -------- -------- --------
Net income (loss) $ (1,607)* $ 5,497 $ 16,684** $ 14,388 $ 12,893
======== ======== ======== ======== ========
Income (loss) per common share $ (0.13)* $ 0.41 $ 1.22** $ 1.12 $ 1.00
======== ======== ======== ======== ========
Weighted average number of common and
equivalent shares outstanding 12,112 13,268 13,628 12,878 12,922
======== ======== ======== ======== ========
Balance Sheet Data:
Cash and short-term investments $ 93,485 $ 97,323 $ 92,338 $ 74,286 $ 61,300
Working capital 67,760 84,207 85,271 66,868 53,381
Total assets 171,733 173,188 175,736 134,554 107,786
Long-term debt, including current portion -- 122 162 210 412
Shareholders' equity 96,439 113,793 113,481 88,517 69,876
</TABLE>
* Includes non-recurring charges related to the acquisition of Apptivity
Corporation of $11,537 or $0.93 per share. Excluding these non-recurring
items, net income would have been $9,682 or $0.80 per share. See Note 2 of
Notes to Consolidated Financial Statements.
** Includes a non-recurring charge for purchase of in-process software
development of $2,373 or $0.18 per share. Excluding this non-recurring
item, net income would have been $19,057 or $1.40 per share. See Note 2 of
Notes to Consolidated Financial Statements.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT 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 greater 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 approximately $11,179,000,
consisting of $3,847,000 in cash, $1,373,000 in assumed and other liabilities,
the issuance of 395,657 shares of common stock valued at $5,437,000 and the
assumption of stock options valued at $522,000. 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 non-recurring charges
in the third quarter of fiscal 1997. Additionally, the Company recorded a
non-recurring 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.
The Company's total revenue in fiscal 1997 increased 7% from its total revenue
in fiscal 1996. The Company's net income (before non-recurring charges)
increased 76% from $5,497,000 in fiscal 1996 to $9,682,000 in fiscal 1997. After
including the effect of the non-recurring charges of $11,537,000 related to the
acquisition of Apptivity, the Company recorded a net loss of $1,607,000 in
fiscal 1997.
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
-------------------------------- -------------------------
Year Ended November 30, 1997 1996
-------------------------------- Compared Compared
1997 1996 1995 to 1996 to 1995
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses 51% 53% 62% 3% (16)%
Maintenance and services 49 47 38 11 20
--- --- ---
Total revenue 100 100 100 7 (2)
--- --- ---
Costs and expenses:
Cost of software licenses 5 5 4 13 27
Cost of maintenance and services 17 17 14 5 19
Sales and marketing 47 50 44 0 10
Product development 14 13 14 13 (1)
General and administrative 12 12 10 6 16
Non-recurring charges 6 -- 1 -- --
--- --- ---
Total costs and expenses 101 97 87 11 10
--- --- ---
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C> <C>
Income (loss) from operations (1) 3 13 (150) (81)
Other income, net 3 2 2 38 22
--- --- ---
Income before provision for income
taxes 2 5 15 (62) (69)
Provision for income taxes 3 2 6 67 (71)
--- --- ---
Net income (loss) (1)% 3% 9% (129) (67)
=== === ===
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996 The Company's total revenue increased 7%
from $176,690,000 in fiscal 1996 to $188,314,000 in fiscal 1997. Software
license revenue increased 3% from $93,178,000 in fiscal 1996 to $95,579,000 in
fiscal 1997. The software license revenue increase was attributable to greater
sales of the Company's flagship products, PROGRESS Versions 7 and 8, a slowdown
in the rate of decline of PROGRESS Version 6 and increased acceptance of new
products such as WebSpeed.
Maintenance and services revenue increased 11% from $83,512,000 in fiscal 1996
to $92,735,000 in fiscal 1997. The maintenance and services revenue increase was
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
$104,568,000 in fiscal 1996 to $111,467,000 in fiscal 1997 and remained
approximately 59% of total revenue. Total revenue generated in markets outside
North America would have represented 61% of total revenue in fiscal 1997 if
exchange rates had been constant as compared to the exchange rates in effect in
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 13% from $8,838,000 in
fiscal 1996 to $10,000,000 in fiscal 1997 and increased as a percentage of
software license revenue from 9% to 10%. The percentage and 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 services consists primarily of costs of providing
customer technical support, education and consulting. Cost of maintenance and
services increased 5% from $29,701,000 in fiscal 1996 to $31,238,000 in fiscal
1997, but decreased as a percentage of maintenance and services revenue from 36%
to 34%. The percentage decrease was due primarily to improved margins in the
North America consulting business. The dollar increase was due primarily to the
growth in the Company's technical support, education and consulting staff and
related costs. Additionally, the Company increased its usage of third party
contractors in fiscal 1997 as compared to fiscal 1996 in order to satisfy demand
for increased consulting and training services. The Company increased its
technical support, education and consulting staff from 218 at the end of fiscal
1996 to 230 at the end of fiscal 1997.
Sales and marketing expenses decreased slightly from $87,830,000 in fiscal 1996
to $87,570,000 in fiscal 1997 and decreased as a percentage of total revenue
from 50% to 47%. Worldwide sales and marketing headcount decreased from 485 at
the end of fiscal 1996 to 454 at the end of fiscal 1997. The reduction in
headcount resulted in lower compensation expense. This decrease was offset by
increased discretionary marketing program expenses such as advertising, trade
shows and direct mail. The percentage decrease in sales and marketing expenses
as a percentage of total revenue was primarily due to improved productivity as
revenue increased at a greater rate than sales and marketing expenses during
fiscal 1997 as compared to fiscal 1996.
Product development expenses increased 13% from $23,951,000 in fiscal 1996 to
$26,991,000 in fiscal 1997 and increased as a percentage of total revenue from
13% to 14%. The dollar and percentage increases were primarily due to increased
headcount levels in fiscal 1997 as compared to fiscal 1996 and higher average
compensation costs per person. The major product development efforts in fiscal
1997 related to the development of the Apptivity and WebSpeed product lines, as
well as a major new release of PROGRESS Version 8. The Company also devoted
significant resources to
3
<PAGE> 4
developing the ProtoSpeed product and enhancements to products in the Crescent
Division. The product development staff increased from 196 at November 30, 1996
to 199 at November 30, 1997.
The Company capitalized $2,462,000 of software development costs in fiscal 1996
and $1,864,000 in fiscal 1997 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" (SFAS 86). The amounts
capitalized represented 9% of total product development costs in fiscal 1996 and
6% of total product development costs in fiscal 1997. The decrease in the
capitalization rate in fiscal 1997 resulted from fewer projects qualifying for
capitalization under the Company's software capitalization policies. 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 6% from $21,909,000 in
fiscal 1996 to $23,202,000 in fiscal 1997 and remained approximately the same
percentage of total revenue in each year. The dollar increase in general and
administrative expenses was primarily due to higher average personnel costs,
including higher incentive compensation costs in fiscal 1997 as compared to
fiscal 1996. The Company's administrative headcount was essentially the same at
the end of fiscal 1997 as compared to the end of fiscal 1996.
Income from operations decreased as a percentage of total revenue from 3% in
fiscal 1996 to (1)% in fiscal 1997 (including non-recurring charges of
$11,537,000 related to the acquisition of Apptivity). Excluding the
non-recurring charges, income from operations in fiscal 1997 was 5% of total
revenue.
Excluding the non-recurring charges, income from operations attributable to
North America remained approximately 6% of North American revenue in each year.
Income from operations attributable to Europe as a percentage of European
revenue was 1% in fiscal 1996 and 5% in fiscal 1997. The increase in income from
operations in Europe was due to higher revenue and improved expense control in
fiscal 1997 as compared to fiscal 1996. The lower operating margin in fiscal
1997 from other operations as compared to operating margins in North America and
Europe related primarily to continued losses at the Company's joint venture in
Japan. Operating margins from international operations in the future will depend
significantly on the extent and timing of the Company's expansion into new
markets, and its ability to achieve economies of scale in established
international markets. See Note 10 of Notes to Consolidated Financial
Statements.
Other income increased $1,487,000 from $3,869,000 in fiscal 1996 to $5,356,000
in fiscal 1997 due primarily to a foreign currency gain of $1,135,000 in fiscal
1997 as compared to a foreign currency loss in fiscal 1996. The foreign currency
gain in fiscal 1997 relates to gains from the Company's foreign currency hedging
programs, as well as foreign currency gains and losses related primarily to the
translation and settlement of short-term intercompany receivables. During fiscal
1997, the U.S. dollar strengthened considerably against most international
currencies. This resulted in lower reported revenue and operating income
primarily from the Company's European operations, which was offset to some
extent by the Company's foreign exchange hedging program. The increase in other
income was also due to an increase in other income-minority interest, offset by
slightly lower interest income. 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 Company's effective tax rate was 151% in fiscal 1997 compared to 34% in
fiscal 1996. The increase in the effective tax rate in fiscal 1997 from fiscal
1996 was due to nondeductible expenses related to the acquisition of Apptivity
in fiscal 1997. Excluding these nondeductible expenses, the Company's effective
tax rate for fiscal 1997 was 34%. See Note 7 of Notes to Consolidated Financial
Statements. The Company expects its effective tax rate to be around 34% in
fiscal 1998.
FISCAL 1996 COMPARED TO FISCAL 1995 The Company's total revenue decreased 2%
from $180,135,000 in fiscal 1995 to $176,690,000 in fiscal 1996. The reduction
in total revenue was primarily due to a decrease in software license revenue,
4
<PAGE> 5
offset by an increase in maintenance and services revenue. Software license
revenue decreased 16% from $110,785,000 in fiscal 1995 to $93,178,000 in fiscal
1996. The software license revenue decrease was attributable to increased
competition, a slowdown in the rate of growth for application development tools,
the transition some of the Company's Application Partners faced in the
marketplace as they moved their applications to PROGRESS Versions 7 and 8 and,
to a lesser extent, the new user-based pricing structure implemented in the
fourth quarter of fiscal 1995.
Maintenance and services revenue increased 20% from $69,350,000 in fiscal 1995
to $83,512,000 in fiscal 1996. The maintenance and services revenue increase was
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 decreased slightly from
$104,680,000 in fiscal 1995 to $104,568,000 in fiscal 1996 but increased as a
percentage of total revenue from 58% in fiscal 1995 to 59% in fiscal 1996. Total
revenue generated in markets outside North America would have represented 60% of
total revenue in fiscal 1996 if exchange rates had been constant as compared to
fiscal 1995.
Cost of software licenses increased 27% from $6,965,000 in fiscal 1995 to
$8,838,000 in fiscal 1996 and increased as a percentage of software license
revenue from 6% to 9%. The percentage and dollar increase was 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 and
higher royalty expense.
Cost of maintenance and services increased 19% from $24,931,000 in fiscal 1995
to $29,701,000 in fiscal 1996, but remained approximately the same percentage of
maintenance and services revenue. 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. Additionally, the Company increased its usage of third party contractors
in fiscal 1996 as compared to fiscal 1995 in order to satisfy demand for
increased consulting and training services. The Company increased its technical
support, education and consulting staff from 199 at November 30, 1995 to 218 at
November 30, 1996.
Sales and marketing expenses increased 10% from $79,546,000 in fiscal 1995 to
$87,830,000 in fiscal 1996 and increased as a percentage of total revenue from
44% to 50%. The dollar and percentage 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 the launch of WebSpeed,
PROGRESS Version 8 and the Crescent product line. The Company increased its
sales, sales support and marketing staff from 457 at November 30, 1995 to 485 at
November 30, 1996.
Product development expenses decreased 1% from $24,175,000 in fiscal 1995 to
$23,951,000 in fiscal 1996, but remained approximately the same percentage of
total revenue in both years. The dollar decrease was due primarily to reduced
headcount levels in fiscal 1996 as compared to fiscal 1995. However, the
decrease in expenses was not proportionate to the decrease in period end
headcount due to higher average personnel expenses and other related costs in
fiscal 1996 as compared to fiscal 1995. The major product development efforts in
fiscal 1996 related to the development of the WebSpeed product line, major new
releases of PROGRESS, including Version 8.0B and Version 8.1, and Visual Basic
and Visual J++ add-on tools and components in the Crescent Division. The product
development staff decreased from 242 at November 30, 1995 to 196 at November 30,
1996. The Company capitalized $2,697,000 of software development costs in fiscal
1995 and $2,462,000 in fiscal 1996 in accordance with SFAS 86. The amounts
capitalized represented 10% in fiscal 1995 and 9% in fiscal 1996 of total
product development costs.
General and administrative expenses increased 16% from $18,813,000 in fiscal
1995 to $21,909,000 in fiscal 1996, and increased as a percentage of total
revenue from 10% to 12%. The dollar increase in general and administrative
expenses was primarily due to higher expenses in information systems as the
Company improved its system infrastructure and increased personnel costs
reflecting the full impact of the fiscal 1995 staff increase. The Company's
administrative headcount remained essentially the same at the end of fiscal 1996
as compared to fiscal 1995.
Income from operations decreased as a percentage of total revenue from 13% in
fiscal 1995 (including the non-recurring charge of $2,373,000 for in-process
software development costs related to the acquisition of Crescent) to 3% in
fiscal
5
<PAGE> 6
1996. The decrease was due to a reduction in total revenue of 2% together with
an increase in total cost and expenses of 10%. Excluding the non-recurring
charge, income from operations in fiscal 1995 was 14% of total revenue.
Excluding the non-recurring charge, income from operations attributable to North
America decreased as a percentage of North American revenue from 22% in fiscal
1995 to 6% in fiscal 1996. Income from operations attributable to Europe as a
percentage of European revenue was 7% in fiscal 1995 and 1% in fiscal 1996. The
decrease in income from operations in Europe and North America was due to a
slowdown in revenue growth in most markets and increased costs and expenses in
fiscal 1996. The operating loss from operations attributable to other regions
outside North America and Europe related primarily to the inability to achieve
profitable operations at the Company's joint venture in Japan. See Note 10 of
Notes to Consolidated Financial Statements.
Other income increased approximately $700,000 from $3,169,000 in fiscal 1995 to
$3,869,000 in fiscal 1996 due primarily to higher interest income and lower
foreign currency losses. The increase in interest income was due to higher
average cash balances in fiscal 1996 as compared to fiscal 1995. The joint
venture in Japan generated a net loss in each period and the Company recorded as
"other income - minority interest" an amount equal to 49% of the joint venture's
net loss. Foreign currency gains and losses relate primarily to the translation
and settlement of short-term intercompany receivables. The net foreign currency
loss in fiscal 1995 also includes the effect of the devaluation of the Mexican
peso during the first quarter of fiscal 1995 on peso-denominated intercompany
receivables.
The Company's effective tax rate was 34% in fiscal 1996 compared to 37% in
fiscal 1995. The decrease in the effective tax rate in fiscal 1996 from fiscal
1995 was due to nondeductible expenses related to the acquisition of Crescent in
fiscal 1995. Excluding these nondeductible expenses, the Company's effective tax
rate for fiscal 1995 was 34%. See Note 7 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES The Company had $93,485,000 in cash and
short-term investments at November 30, 1997. The decrease of $3,838,000 in cash
and short-term investments 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.
In fiscal years 1995, 1996 and 1997, the Company purchased $13,376,000,
$9,545,000 and $10,048,000, respectively, of property and equipment, which
consisted primarily of computer equipment and software, furniture and fixtures
and leasehold improvements. The level of property and equipment purchases
resulted primarily from continued growth of the business and replacement of
older equipment. The Company financed these purchases primarily from cash
generated from operations. See Note 4 of Notes to Consolidated Financial
Statements.
In fiscal 1997, the Company purchased 1,567,600 shares of its common stock for
$26,553,000. In fiscal 1996, the Company purchased 457,500 shares of its common
stock for $7,205,000. The Company financed these purchases primarily from cash
generated from operations.
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. Shares that are repurchased may be used for various
purposes including the issuance of shares pursuant to the Company's stock option
plans. At November 30, 1997, no shares of common stock had been repurchased
under this authorization.
On December 10, 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for approximately $5,000,000. The
acquisition will be accounted for as a purchase, and accordingly, the results of
operations will be included in the Company's operating results from the date of
acquisition. The allocation of the purchase price is expected to be primarily
attributed to goodwill, which will be amortized over a seven-year period.
The Company's 401(k) Plan has approximately $900,000 in Guaranteed Investment
Contracts (GICs) issued by Mutual Benefit Life Insurance Company (MBLI). In July
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
6
<PAGE> 7
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. In May 1997, the Company and the
401(k) Plan entered into an agreement pursuant to which the Company agreed to
purchase the GICs from the 401(k) Plan for the accumulated book value of the
GICs, subject to the receipt of certain regulatory approvals. In December 1997,
the Company obtained all such approvals and purchased the GICs from the 401(k)
Plan enabling participants to choose other investment vehicles prior to the end
of the rehabilitation plan. The transaction did not have a material effect on
the Company's consolidated financial position or results of operations.
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
products from Progress Software 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 Paris Trade
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 other 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.
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 (FASB) issued SFAS No. 128 (SFAS 128), "Earnings per Share."
SFAS 128 establishes a different method of computing income per common share
than is currently required under the provisions of Accounting Principles Board
Opinion No. 15. Under SFAS 128, the Company will be required to present both
basic income per common share and diluted income per common share. Basic income
(loss) per common share for the fiscal years ended November 30, 1997 and
November 30, 1996 would have been $(0.13) and $0.43 per share, respectively.
Diluted income (loss) per common share under SFAS 128 for the fiscal years ended
November 30, 1997 and November 30, 1996 would have been $(0.13) and $0.42 per
share, respectively. The Company plans to adopt SFAS 128 in its first quarter of
fiscal 1998 and at that time all historical income per common share data
presented will be restated to conform to the provisions of SFAS 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
(SFAS 130) and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 requires the presentation of an
additional primary financial statement in the format prescribed by the standard.
SFAS 131 requires disclosure about the Company's operations on a disaggregated
basis consistent with management's internal reporting structure. The Company
will adopt these standards in the first quarter of fiscal 1999.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company
intends to adopt this pronouncement in the first quarter of fiscal 1998, which
is one year earlier than the date of adoption required by the SOP, and does not
expect it to have a material affect on the revenue recognition practices of the
Company.
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.
7
<PAGE> 8
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, fluctuations in currency exchange rates, 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.
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 began commercial shipments of ProtoSpeed, an
internally developed distributed debugging tool, in September 1997. The Company
acquired Apptivity Corporation, a developer of multi-tier, Java-based business
application tools, in July 1997. Apptivity currently offers Apptivity Developer
Version 1.0 and Apptivity Server Version 1.0.
The Company believes that PROGRESS, WebSpeed, Apptivity, ProtoSpeed 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 these product lines 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 could
have a material adverse effect on the Company's business and its financial
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.
8
<PAGE> 9
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,
prospects, 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, such as WebSpeed, 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 be developed. The market for Java-based
business applications is in the early stages of commercial adoption. There can
be no assurance that Java will emerge as a viable programming language for
large-scale business application deployment environments.
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 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 51% of the Company's total revenue in 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
9
<PAGE> 10
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 continue to 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 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.
10
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) November 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 39,451 $ 30,872
Short-term investments 54,034 66,451
Accounts receivable (less allowance for doubtful accounts of
$4,928 in 1997 and $5,112 in 1996) 35,651 34,452
Inventories 1,394 1,257
Other current assets 6,081 4,367
Deferred income taxes 5,166 3,552
-------- --------
Total current assets 141,777 140,951
-------- --------
Property and equipment-net 23,183 24,230
Capitalized software costs-net 4,545 5,428
Other assets 2,228 2,579
-------- --------
Total $171,733 $173,188
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ -- $ 37
Accounts payable 10,712 7,989
Accrued compensation and related taxes 17,088 12,385
Income taxes payable 6,450 3,004
Other accrued liabilities 8,033 5,964
Deferred revenue 31,734 27,365
-------- --------
Total current liabilities 74,017 56,744
-------- --------
Deferred income taxes 1,009 2,345
Long-term debt -- 85
Minority interest in subsidiary 268 221
Commitments and contingencies
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 shares in 1996; issued and outstanding,
11,812,023 shares in 1997 and 12,632,630 shares in 1996 118 126
Additional paid-in capital 25,901 41,309
Retained earnings 70,673 72,280
Unrealized gains on short-term investments 245 241
Cumulative translation adjustments (498) (163)
-------- --------
Total shareholders' equity 96,439 113,793
-------- --------
Total $171,733 $173,188
======== ========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 12
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Software licenses $ 95,579 $ 93,178 $110,785
Maintenance and services 92,735 83,512 69,350
-------- -------- --------
Total revenue 188,314 176,690 180,135
-------- -------- --------
Costs and expenses:
Cost of software licenses 10,000 8,838 6,965
Cost of maintenance and services 31,238 29,701 24,931
Sales and marketing 87,570 87,830 79,546
Product development 26,991 23,951 24,175
General and administrative 23,202 21,909 18,813
Non-recurring charges 11,537 -- 2,373
-------- -------- --------
Total costs and expenses 190,538 172,229 156,803
-------- -------- --------
Income (loss) from operations (2,224) 4,461 23,332
-------- -------- --------
Other income (expense):
Interest income 3,756 3,885 3,585
Interest expense (13) (11) (15)
Foreign currency gain (loss) 1,135 (453) (847)
Minority interest 556 415 403
Other income (expense) (78) 33 43
-------- -------- --------
Total other income, net 5,356 3,869 3,169
-------- -------- --------
Income before provision for income taxes 3,132 8,330 26,501
Provision for income taxes 4,739 2,833 9,817
-------- -------- --------
Net income (loss) $ (1,607) $ 5,497 $ 16,684
======== ======== ========
Income (loss) per common share $ (0.13) $ 0.41 $ 1.22
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 12,112 13,268 13,628
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data)
Unrealized Total
Additional Gains on Cumulative Share-
Common Paid-in Retained Short-term Translation holders'
Stock Capital Earnings Investments Adjustments Equity
------ ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1994 $ 62 $ 38,480 $ 50,099 $(124) $ 88,517
Stock split 62 (62) 0
Exercise of stock options (525,688 shares) 5 4,991 4,996
Issuance of stock under employee stock
purchase plan (25,118 shares) 460 460
Stock option compensation 2 2
Tax benefit arising from employees'
exercise of stock options 2,596 2,596
Unrealized gains on short-term investments $133 133
Net income 16,684 16,684
Translation adjustment 93 93
---- -------- -------- ---- ----- --------
Balance, November 30, 1995 129 46,467 66,783 133 (31) 113,481
Exercise of stock options (136,703 shares) 1 1,108 1,109
Issuance of stock under employee stock
purchase plan (47,429 shares) 736 736
Purchase and retirement of treasury
stock (457,500 shares) (4) (7,201) (7,205)
Stock option compensation 2 2
Tax benefit arising from employees'
exercise of stock options 197 197
Unrealized gains on short-term investments 108 108
Net income 5,497 5,497
Translation adjustment (132) (132)
---- -------- -------- ---- ----- --------
Balance, November 30, 1996 126 41,309 72,280 241 (163) 113,793
Exercise of stock options (313,857 shares) 3 4,160 4,163
Issuance of stock under employee stock
purchase plan (37,479 shares) 511 511
Purchase and retirement of treasury
stock (1,567,600 shares) (15) (26,538) (26,553)
Stock option compensation 16 16
Tax benefit arising from employees'
exercise of stock options 488 488
Issuance of stock in connection with
Apptivity acquisition (395,657 shares) 4 5,433 5,437
Stock options assumed in connection with
Apptivity acquisition 522 522
Unrealized gains on short-term investments 4 4
Net loss (1,607) (1,607)
Translation adjustment (335) (335)
---- -------- -------- ---- ----- --------
Balance, November 30, 1997 $118 $ 25,901 $ 70,673 $245 $(498) $ 96,439
==== ======== ======== ==== ===== ========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended November 30,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,607) $ 5,497 $ 16,684
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 10,596 9,514 7,616
Non-recurring charges 11,537 -- 2,373
Amortization of capitalized software costs 2,072 1,702 1,076
Amortization of intangible assets 241 331 301
Deferred income taxes (2,950) (695) 234
Minority interest in subsidiary (556) (415) (403)
Non-cash compensation 16 2 2
Changes in operating assets and liabilities:
Accounts receivable (3,098) 7,053 (12,777)
Inventories (140) 837 395
Other current assets (1,980) 406 (838)
Accounts payable and accrued expenses 9,252 (2,664) 3,936
Income taxes payable 3,908 1,008 3,432
Deferred revenue 6,359 284 7,913
-------- -------- --------
Total adjustments 35,257 17,363 13,260
-------- -------- --------
Net cash provided by operating activities 33,650 22,860 29,944
-------- -------- --------
Cash flows from investing activities:
Purchases of investments available for sale (33,809) (76,550) (78,693)
Maturities of investments available for sale 31,238 48,380 59,106
Sales of investments available for sale 15,068 20,700 10,598
Purchase of property and equipment (10,048) (9,545) (13,376)
Capitalized software costs (1,864) (2,462) (2,697)
Acquisitions, net of cash acquired (3,847) -- (1,894)
Decrease (increase) in other non-current assets 59 (310) (1,045)
-------- -------- --------
Net cash used for investing activities (3,203) (19,787) (28,001)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,674 1,845 5,456
Repurchase of common stock (26,553) (7,205) --
Contributions from minority interest 603 -- 1,039
Proceeds from capital lease obligations -- 85 39
Payment of long-term debt and obligations under capital leases (116) (130) (81)
-------- -------- --------
Net cash provided by (used for) financing activities (21,392) (5,405) 6,453
-------- -------- --------
Effect of exchange rate changes on cash (476) (261) 536
-------- -------- --------
Net increase (decrease) in cash and equivalents 8,579 (2,593) 8,932
Cash and equivalents, beginning of year 30,872 33,465 24,533
-------- -------- --------
Cash and equivalents, end of year $ 39,451 $ 30,872 $ 33,465
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 3,760 $ 2,569 $ 6,109
Interest paid $ 13 $ 13 $ 21
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 488 $ 197 $ 2,596
Stock issued and options assumed in acquisition of Apptivity $ 5,959 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY Progress Software Corporation (the Company) develops, markets and
supports application development and deployment software for professional
information service organizations in business, government and industry
worldwide. The PROGRESS product line is an integrated, component-based visual
development environment for building and deploying multi-tier, enterprise-class
business applications. The WebSpeed product line enables organizations to build
and deploy Internet transaction processing applications. The Apptivity product
line enables developers to build and deploy scalable, multi-tier, Java-based
business applications. ProtoSpeed is a debugging tool for testing distributed
objects across the Internet. The Crescent Division supplies tools and add-on
components to developers using Microsoft's Visual Basic and Visual J++
application development environment.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
BASIS OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION For foreign operations with the local currency as
the functional currency, assets and liabilities are translated into U.S. dollars
at the exchange rate on the balance sheet date. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are accumulated in a separate component of shareholders'
equity.
For foreign operations with the U.S. dollar as the functional currency, monetary
assets and liabilities are translated into U.S. dollars at the exchange rate on
the balance sheet date. Nonmonetary assets and liabilities are remeasured into
U.S. dollars at historical exchange rates. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are recognized currently as a component of foreign
currency gain or loss.
The Company enters into foreign exchange option contracts which are designated
as effective hedges on certain transactions and receivables in selected foreign
currencies. The purpose of the Company's foreign exposure management policies
and practices is to attempt to minimize the impact of exchange rate fluctuations
on the Company's results of operations. The option contracts are structured such
that the cost to the Company cannot exceed the premium paid for such contracts.
Premiums are recognized ratably over the contract period as a component of
foreign currency gain or loss. Increases and decreases in market value gains on
such contracts are recognized currently as a component of foreign currency gain
or loss. The notional principal amount of outstanding foreign exchange option
contracts at November 30, 1997 was $39.0 million. Unrealized market value gains
on such contracts were immaterial at November 30, 1997. Major U.S. multinational
banks are counterparties to the option contracts.
MINORITY INTEREST IN SUBSIDIARY Minority interest in subsidiary represents the
joint venture partners' proportionate share of the equity in Progress Software
K.K. (PSKK), a Japanese joint stock corporation established in January 1995 to
market and support the Company's products in Japan. At November 30, 1997, the
Company owned 51% of the capital stock of PSKK.
REVENUE RECOGNITION Software license revenue is recognized upon the later of
shipment of product or completion of significant obligations to customers.
Maintenance revenue is deferred and recognized ratably over the term of the
agreement. Revenue from services, primarily consulting and customer education,
is recognized as the related services are performed.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company
intends to adopt this pronouncement in the first quarter of fiscal 1998,
15
<PAGE> 16
which is one year earlier than the date of adoption required by the SOP, and
does not expect it to have a material affect on the revenue recognition
practices of the Company.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include short-term,
highly liquid investments purchased with remaining maturities of three months or
less. Short-term investments, which consist primarily of municipal and U.S.
Treasury obligations and corporate debt securities purchased with remaining
maturities of more than three months, are classified as investments available
for sale and stated at fair value. Aggregate unrealized holding gains and losses
are included as a separate component of shareholders' equity.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of cash, short-term
investments and trade receivables. The Company has cash investment policies
which, among other things, limit investments to investment-grade securities. The
Company performs ongoing credit evaluations of its customers and the risk with
respect to trade receivables is further mitigated by the diversity, both by
geography and by industry, of its customer base.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts
receivable and accounts payable approximates fair value due to the short-term
nature of these instruments. The fair value of investments available for sale is
based on current market value (Note 3).
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or
market and are comprised principally of magnetic media and documentation.
PROPERTY AND EQUIPMENT Purchased property and equipment is recorded at cost.
Leased equipment is recorded at the present value of the minimum lease payments
required during the lease period. Depreciation and amortization is provided on
the straight-line method over the estimated useful lives (three to ten years) of
the related assets or the remaining terms of leases, whichever is shorter.
CAPITALIZATION OF SOFTWARE COSTS The Company capitalizes certain internally
generated software development costs after technological feasibility of the
product has been established. Capitalized software costs also include amounts
paid for purchased software which has reached technological feasibility. Such
costs are amortized over the estimated life of the product (two to four years).
The Company continually compares the unamortized costs of capitalized software
to the expected future revenues for the products. If the unamortized costs
exceed the expected future net realizable value, the excess amount is written
off (Note 2). Accumulated amortization was approximately $5,121,000 and
$4,306,000 at November 30, 1997 and 1996, respectively.
INTANGIBLE ASSETS Intangible assets, included in other assets, primarily
represent goodwill, noncompete agreements and organization costs and are
recorded at cost. Such costs are amortized over periods ranging from three to
five years. Accumulated amortization was approximately $540,000 and $679,000 at
November 30, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION PLANS The Company accounts for its stock option plans
and its employee stock purchase plan in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
the Company provides additional pro forma disclosures (Note 5).
INCOME TAXES The Company provides for deferred income taxes resulting from
temporary differences between financial and taxable income. Such differences
arise primarily from the use of accelerated tax depreciation, accruals,
capitalized software costs, and provisions for doubtful accounts. No provision
for U.S. income taxes has been made for the undistributed earnings of non-U.S.
subsidiaries, as these earnings have been permanently reinvested or would be
principally offset by foreign tax credits. Cumulative undistributed foreign
earnings were approximately $11,724,000 at November 30, 1997.
16
<PAGE> 17
INCOME PER COMMON SHARE Income per common share is computed using the weighted
average number of common and common equivalent shares outstanding during each
period presented. Common stock equivalents consist of stock options. Income per
common share is computed by dividing net income by the weighted average number
of common and common equivalent shares outstanding (under the treasury stock
method). The weighted average number of common and common equivalent shares
excludes the impact of common stock equivalents in fiscal 1997 as the impact
would be antidilutive.
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 (SFAS 128), "Earnings per Share." SFAS 128 establishes a different
method of computing income per common share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS 128, the
Company will be required to present both basic income per common share and
diluted income per common share. Basic income (loss) per common share for the
fiscal years ended November 30, 1997 and November 30, 1996 would have been
$(0.13) and $0.43 per share, respectively. Diluted income (loss) per common
share under SFAS 128 for the fiscal years ended November 30, 1997 and November
30, 1996 would have been $(0.13) and $0.42 per share, respectively. The Company
plans to adopt SFAS 128 in its first quarter of fiscal 1998 and at that time all
historical income per common share data presented will be restated to conform to
the provisions of SFAS 128.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 requires
the presentation of an additional primary financial statement in the format
prescribed by the standard. SFAS 131 requires disclosure about the Company's
operations on a disaggregated basis consistent with management's internal
reporting structure. The Company will adopt these standards in the first quarter
of fiscal 1999.
NOTE 2: BUSINESS COMBINATIONS AND NON-RECURRING CHARGES
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 approximately $11,179,000, consisting of $3,847,000 in cash,
$1,373,000 in assumed and other liabilities, the issuance of 395,657 shares of
common stock valued at $5,437,000 and the assumption of stock options valued at
$522,000. 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 non-recurring charges in the third quarter of fiscal 1997.
Additionally, the Company recorded a non-recurring 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. If this acquisition had been made at the beginning of
the earliest year presented, the effect on the consolidated financial statements
would not have been significant.
On January 6, 1995, the Company acquired all of the outstanding stock of
Crescent Software, Inc. (Crescent) for approximately $3,000,000, consisting of
$2,150,000 in cash and $850,000 in assumed and other liabilities. Crescent is a
supplier of add-on software to users of Microsoft's Visual Basic application
development environment. The assets acquired consisted primarily of existing
software and software in the development stage. The acquisition was accounted
for as a purchase, and accordingly, the results of operations are included in
the Company's operating results from the date of acquisition. The allocation of
the purchase price included $2,373,000 to in-process software development which
was charged to operations in the first quarter of fiscal 1995 and $230,000 to
capitalized software costs which were amortized over a two-year period.
17
<PAGE> 18
NOTE 3: CASH AND SHORT-TERM INVESTMENTS
A summary of the Company's investments available for sale by major security type
at November 30, 1997 was as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type Cost Gains Losses Value
- ------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate debt securities $13,700 $13,700
Obligations of states and political subdivisions 48,836 $214 $(4) 49,046
U.S. government obligations 5,553 35 5,588
------- ---- --- -------
Total $68,089 $249 $(4) $68,334
======= ==== === =======
The fair value of debt securities at November 30, 1997, by contractual maturity,
was as follows:
(In thousands)
Due in one year or less (including $14,300 classified as cash equivalents) $37,197
Due after one year 31,137
-------
Total $68,334
=======
A summary of the Company's investments available for sale by major security type
at November 30, 1996 was as follows:
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type Cost Gains Losses Value
- ------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate debt securities $11,871 $11,871
Obligations of states and political subdivisions 65,373 $294 $(52) 65,615
U.S. government obligations 7,612 (1) 7,611
------- ---- ---- -------
Total $84,856 $294 $(53) $85,097
======= ==== ==== =======
</TABLE>
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) November 30,
---------------------------
1997 1996
------- -------
<S> <C> <C>
Equipment and software $40,696 $42,470
Equipment held under capital leases -- 952
Furniture and fixtures 5,304 5,046
Leasehold improvements 7,682 6,331
------- -------
Total 53,682 54,799
Less accumulated depreciation and amortization 30,499 30,569
------- -------
Property and equipment-net $23,183 $24,230
======= =======
</TABLE>
Accumulated amortization related to equipment held under capital leases was
approximately $822,000 at November 30, 1996.
NOTE 5: SHAREHOLDERS' EQUITY
COMMON STOCK On September 25, 1995, the Board of Directors approved a
two-for-one common stock split in the form of a stock dividend. Shareholders
received one additional share for each share held. Such distribution was made on
November 27, 1995 to shareholders of record at the close of business on October
27, 1995.
In 1997, the Company purchased 1,567,600 shares of its common stock for
$26,553,000. In 1996, the Company purchased 457,500 shares of its common stock
for $7,205,000. All shares purchased in 1997 were acquired under a Board of
Directors' authorization which expired on September 30, 1997.
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. Shares that are repurchased may be used for various
purposes including the
18
<PAGE> 19
issuance of shares pursuant to the Company's stock option and employee stock
purchase plans. At November 30, 1997, no shares of common stock had been
repurchased under this authorization.
STOCK OPTIONS In April 1992, the shareholders adopted and approved the 1992
Incentive and Nonqualified Stock Option Plan (1992 Plan) and terminated the 1984
Incentive Stock Option Plan (1984 Plan). Options granted and outstanding under
the 1984 Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the 1984 Plan.
In August 1994, the shareholders of the Company adopted and approved the 1994
Stock Incentive Plan (1994 Plan) and the 1993 Directors' Stock Option Plan
(Directors' Plan). The Directors' Plan permitted certain option grants to
non-employee directors.
In April 1997, the shareholders of the Company adopted and approved the 1997
Stock Incentive Plan (1997 Plan). Upon the approval of the 1997 Plan, the
Directors' Plan was terminated. Options granted and outstanding under the
Directors' Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the Directors' Plan. The
1994 and 1997 Plans permit the granting of stock incentive awards to officers,
members of the Board of Directors, employees and consultants. Awards under the
1994 and 1997 Plans may include stock options (both incentive and
non-qualified), grants of conditioned stock, unrestricted grants of stock,
grants of stock contingent upon the attainment of performance goals and stock
appreciation rights.
A total of 4,680,000 shares are issuable under the 1992, 1994 and 1997 Plans, of
which 1,462,962 shares were available for grant at November 30, 1997.
A summary of stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended November 30,
-----------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ---------------------------- --------------------------
Weighted Average Weighted Average Weighted Average
Number Exercise Price Number Exercise Price Number Exercise Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Beginning options outstanding 2,866 $16.34 2,292 $18.02 2,150 $14.46
Granted 1,067 14.74 1,444 14.33 853 21.88
Exercised (314) 13.27 (137) 8.14 (526) 9.49
Canceled (593) 16.47 (733) 19.20 (185) 18.60
----- ----- -----
Ending options outstanding 3,026 16.07 2,866 16.34 2,292 18.02
===== ===== =====
Exercisable 1,213 $16.99 1,127 $16.52 802 $14.96
===== ===== =====
</TABLE>
For various exercise price ranges, weighted average characteristics of
outstanding stock options at November 30, 1997 were as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------- -----------------------------------
Weighted Average
Range of Number of Remaining Weighted Average Number of Weighted Average
Exercise Price Shares Life (in years) Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------- ------------- ---------------------
<C> <C> <C> <C> <C> <C>
$ 0.67- 5.00 77 5.39 $ 2.72 47 $ 4.00
13.50-16.50 1,955 8.45 $14.74 587 $15.19
16.88-18.25 412 6.85 $17.22 203 $16.93
18.69-21.63 582 6.74 $21.46 376 $21.47
----- ----
$ 0.67-21.63 3,026 7.82 $16.07 1213 $16.99
===== ====
</TABLE>
19
<PAGE> 20
EMPLOYEE STOCK PURCHASE PLAN The 1991 Employee Stock Purchase Plan (ESPP)
permits eligible employees to purchase up to a maximum of 300,000 shares of
common stock of the Company at 85% of market value. During 1997, 1996 and 1995,
37,479 shares, 47,429 shares and 25,118 shares, respectively, were issued under
the ESSP. At November 30, 1997, 149,508 shares were available and reserved for
issuance under the ESSP.
PRO FORMA DISCLOSURES The pro forma disclosures are required to be determined as
if the Company had accounted for its stock-based compensation arrangements
granted subsequent to November 30, 1995 under the fair value method of SFAS 123.
The fair value of options and ESPP shares granted in fiscal years 1997 and 1996
reported below have been estimated at the date of grant using a Black-Scholes
option valuation model with the following ranges of assumptions:
<TABLE>
<CAPTION>
Stock Purchase Plan Stock Options
-------------------------- ------------------------
Year Ended November 30, Year Ended November 30,
-------------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Expected volatility 39.1-53.1% 38.6-61.4% 43.0-44.1% 40.4-43.2%
Risk-free interest rate 5.1- 5.3% 5.0- 5.4% 5.9- 6.8% 5.6- 6.7%
Expected life in years 0.50 0.50 6.6 6.0
Expected dividend yield none none none none
</TABLE>
For purposes of the pro forma disclosure, the estimated fair value of options is
amortized to expense over the vesting period. Had compensation costs for options
and ESPP shares been determined based on the Black-Scholes option valuation
model as prescribed by SFAS 123, pro forma net income (loss) and pro forma
income (loss) per common share would have been:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
----------------------
1997 1996
-------- ------
<S> <C> <C>
Pro forma net income (loss) $(3,040) $4,352
Pro forma income (loss) per common share $ (0.25) $ 0.33
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not provide a reliable single measure of fair value of its
options. The weighted average estimated fair value of options granted in fiscal
1997 and fiscal 1996 was $8.36 and $7.60 per share, respectively. The weighted
average estimated fair value for shares issued under the ESPP in fiscal 1997 and
fiscal 1996 was $6.16 and $13.10 per share, respectively.
The effect on pro forma net income (loss) and pro forma income (loss) per common
share in fiscal years 1997 and 1996 is not necessarily indicative of the effects
on pro forma net income and pro forma income per common share in future years.
NOTE 6: RETIREMENT PLAN
The Company maintains a retirement plan covering all U.S. employees under
Section 401(k) of the Internal Revenue Code (Note 9). Company contributions to
the plan are at the discretion of the Board of Directors and totaled
approximately $1,800,000, $700,000 and $900,000 for fiscal years 1997, 1996 and
1995, respectively.
20
<PAGE> 21
NOTE 7: INCOME TAXES
The components of pretax income (loss) were as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended November 30,
-----------------------------------
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
United States $(1,402) $7,711 $18,938
Non-U.S. 4,534 619 7,563
------- ------ -------
Total $ 3,132 $8,330 $26,501
======= ====== =======
<CAPTION>
The provisions for income taxes were comprised of the following:
(In thousands) Year Ended November 30,
--------------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current:
Federal $5,226 $1,564 $6,160
State 467 205 513
Foreign 1,996 1,759 2,910
------- ------ ------
Total current 7,689 3,528 9,583
------- ------ ------
Deferred:
Federal (2,316) (361) 509
State (454) (73) 93
Foreign (180) (261) (368)
------- ------ ------
Total deferred (2,950) (695) 234
------- ------ ------
Total $ 4,739 $2,833 $9,817
======= ====== ======
</TABLE>
The tax effects of significant items comprising the Company's deferred taxes
were as follows:
<TABLE>
<CAPTION>
(In thousands) November 30,
-------------------
1997 1996
-------------------
<S> <C> <C>
Deferred Tax Liabilities:
Capitalized software costs $( 934) $(2,129)
Depreciation and amortization (75) (216)
------- ------
Total deferred tax liabilities (1,009) (2,345)
------- ------
Deferred Tax Assets:
Accounts receivable 1,451 1,512
Inventories 764 412
Accrued compensation 684 268
Other accruals 2,192 1,140
Tax loss carryforwards 1,409 1,202
------ ------
Total deferred tax assets 6,500 4,534
Valuation allowance (1,334) (982)
------ ------
Total $4,157 $1,207
====== ======
</TABLE>
The valuation allowance applies to deferred tax assets, primarily net operating
loss carryforwards, in the U.S. and in certain foreign jurisdictions where
realization is not assured. The increase in the valuation allowance of $352,000,
$595,000 and $136,000 in 1997, 1996 and 1995, respectively, primarily related to
tax loss carryforwards.
The Company has net operating loss carryforwards of $1,921,000 expiring on
various dates through 2012 and $2,279,000 which can be carried forward
indefinitely.
21
<PAGE> 22
A reconciliation of the U.S. federal statutory rate to the effective tax rate
was as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
Non-U.S 16.2 5.5 0.1
Unutilized foreign losses -- 7.0 --
Foreign sales corporation (3.5) (8.2) (1.2)
Research credits (4.8) (2.0) (0.9)
State income taxes, net 8.5 3.0 2.6
Tax-exempt interest (23.3) (9.4) (2.4)
Nondeductible software development costs 117.3 -- 3.0
Other 5.9 3.1 0.8
----- ---- ----
Total 151.3% 34.0% 37.0%
===== ==== ====
<CAPTION>
NOTE 8: OPERATING LEASES
The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Future minimum rental payments at November 30,
1997 under these leases are as follows:
(In thousands)
<C> <C>
1998 $ 7,621
1999 6,076
2000 3,426
2001 2,756
2002 2,184
Thereafter 4,140
-------
Total $26,203
=======
</TABLE>
Total rent expense under all operating leases was approximately $6,181,000,
$5,815,000 and $5,753,000 for fiscal years 1997, 1996 and 1995, respectively.
NOTE 9: 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). In July
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. In May 1997,
the Company and the 401(k) Plan entered into an agreement pursuant to which the
Company agreed to purchase the GICs from the 401(k) Plan for the accumulated
book value of the GICs, subject to the receipt of certain regulatory approvals.
In December 1997, the Company obtained all such approvals and purchased the GICs
from the 401(k) Plan enabling participants to choose other investment vehicles
prior to the end of the rehabilitation plan. The transaction did not have a
material effect on the Company's consolidated financial position or results of
operations.
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
products from Progress Software 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 Paris Trade
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 other 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
22
<PAGE> 23
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.
NOTE 10: BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
The Company operates in one industry segment consisting of the development,
marketing and support of application development and database software.
Intercompany revenue principally represents royalties based on software license
and maintenance revenue generated by non-U.S. operations from their unaffiliated
customers.
Summarized information relating to international operations is as follows:
(In thousands)
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America $ 76,847 $ 72,122 $ 75,455
Europe 73,363 72,533 79,489
Other 22,404 18,775 14,898
Export Sales from United States 15,700 13,260 10,293
-------- -------- --------
Total sales to unaffiliated customers $188,314 $176,690 $180,135
======== ======== ========
Intercompany revenue: $ 33,225 $ 29,793 $ 35,520
======== ======== ========
Operating income (loss):
North America $ (6,028) $ 4,882 $ 16,517
Europe 3,700 504 5,836
Other 197 (870) 646
Eliminations (93) (55) 333
-------- -------- --------
Total operating income (loss) $ (2,224) $ 4,461 $ 23,332
======== ======== ========
Identifiable assets:
North America $138,153 $143,890 $142,833
Europe 36,922 35,466 41,489
Other 16,593 13,086 10,550
Eliminations (19,935) (19,254) (19,136)
-------- -------- --------
Total identifiable assets. $171,733 $173,188 $175,736
======== ======== ========
</TABLE>
NOTE 11: SUBSEQUENT EVENT
On December 10, 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for approximately $5,000,000. The
acquisition will be accounted for as a purchase, and accordingly, the results of
operations will be included in the Company's operating results from the date of
acquisition. The allocation of the purchase price is expected to be primarily
attributed to goodwill, which will be amortized over a seven-year period.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Progress Software Corporation:
We have audited the accompanying consolidated balance sheets of Progress
Software Corporation and its subsidiaries as of November 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended November 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Progress Software Corporation and
its subsidiaries as of November 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1997, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Boston, Massachusetts
December 19, 1997
24
<PAGE> 25
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenue $45,344 $44,831 $ 45,880 $52,259
Income (loss) from operations 2,196 1,383 (10,216)* 4,413
Net income (loss) 1,978 2,042 (9,369)* 3,742
Income (loss) per common share 0.15 0.16 (0.80)* 0.30
1996
Revenue $48,382 $41,662 $ 41,411 $45,235
Income (loss) from operations 5,855 (789) (776) 171
Net income 4,419 155 218 705
Income per common share 0.32 0.01 0.02 0.05
</TABLE>
* Includes non-recurring charges related to the acquisition of Apptivity of
$11,537 or $0.96 per share. Excluding these non-recurring items, net income
would have been $1,919 or $0.16 per share.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of high and
low bid prices for the Company's common stock as reported by the Nasdaq Stock
Market. The Company's common stock is traded on the market under the Nasdaq
symbol "PRGS."
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------
1997 1996
----------------------- ----------------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter $23.00 $12.63 $37.75 $19.50
Second Quarter 19.06 13.38 23.25 14.62
Third Quarter 18.63 15.75 17.63 12.13
Fourth Quarter 25.50 17.75 20.63 14.00
----------------------- ----------------------
</TABLE>
The Company has not declared or paid cash dividends on its common stock and does
not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of December 31, 1997, the Company's common stock was held by
approximately 5,000 shareholders of record or through nominee or street name
accounts with brokers.
25
<PAGE> 1
Exhibit 21.1
Subsidiaries of Progress Software Corporation
North America
Barbados Progress Software International Sales Corporation
Canada Progress Software Corporation of Canada Ltd.
Connecticut Crescent Software, Inc.
Delaware Progress Software International Corporation
Massachusetts Apptivity Corporation
Massachusetts Progress Security Corporation
Europe
European Headquarters -
Netherlands Progress Software Europe B.V.
Austria Progress Software GesmbH
Belgium Progress Software NV
Czech Republic Progress Software spol. s.r.o.
Denmark Progress Software A/S
Finland Progress Software Oy
France Progress Software S.A.
Germany Progress Software GmbH
Netherlands Progress Software B.V.
Norway Progress Software A/S
Spain Progress Spain S.A.
Sweden Progress Software Svenska AB
Switzerland Progress Software A.G.
United Kingdom Progress Software Ltd.
Other
Argentina Progress Software de Argentina S.A.
Australia Progress Software Pty. Ltd.
Brazil Progress Software do Brasil Ltda.
Hong Kong Progress Software Corporation Limited
Japan Progress Software K.K.
Mexico Progress Software, S.A. de C.V.
Singapore Progress Software Pte. Ltd.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-41752, 33-43045, 33-50654, 33-58892, 33-96320, 333-41393, 333-41401 and
333-41403 of Progress Software Corporation and its subsidiaries on Form S-8 of
our reports dated December 19, 1997, appearing in and incorporated by reference
in this Annual Report on Form 10-K of Progress Software Corporation and its
subsidiaries for the year ended November 30, 1997.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------------
Boston, Massachusetts
February 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE
YEAR ENDED NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
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0
0
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</TABLE>
