<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
--------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period Ended May 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2746201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of July 9, 1998, there were 11,562,778 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
May 31, 1998 and November 30, 1997 3
Condensed Consolidated Statements of Income for
the three and six months ended May 31, 1998 and
May 31, 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended May 31, 1998 and
May 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
May 31, 1998 November 30, 1997
------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 27,373 $ 39,451
Short-term investments 68,890 54,034
Accounts receivable (less allowance for doubtful accounts
of $7,321 in 1998 and $4,928 in 1997) 36,682 35,651
Inventories 1,177 1,394
Other current assets 8,122 6,081
Deferred income taxes 5,505 5,166
--------- ---------
Total current assets 147,749 141,777
--------- ---------
Property and equipment-net 21,922 23,183
Capitalized software costs-net 3,826 4,545
Other assets 6,258 2,228
--------- ---------
Total $ 179,755 $ 171,733
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 9,635 $ 10,712
Accrued compensation and related taxes 17,069 17,088
Income taxes payable 6,426 6,450
Other current liabilities 8,026 6,924
Deferred revenue 45,125 32,843
--------- ---------
Total current liabilities 86,281 74,017
--------- ---------
Deferred income taxes 1,069 1,009
Minority interest in subsidiary 213 268
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value; authorized, 1,000,000 shares; issued, none
Common stock, $.01 par value; authorized, 50,000,000 shares; issued and
outstanding, 11,401,275 shares in 1998 and 11,812,023 shares in 1997 114 118
Additional paid-in capital 15,089 25,901
Retained earnings 77,426 70,673
Unrealized gain on short-term investments 252 245
Cumulative translation adjustments (689) (498)
--------- ---------
Total shareholders' equity 92,192 96,439
--------- ---------
Total $ 179,755 $ 171,733
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended May 31, Six Months Ended May 31,
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 27,686 $ 22,975 $ 55,332 $47,616
Maintenance and services 29,420 21,856 55,920 42,559
-------- -------- --------- -------
Total revenue 57,106 44,831 111,252 90,175
-------- -------- --------- -------
Costs and expenses:
Cost of software licenses 2,438 2,388 5,273 4,737
Cost of maintenance and services 11,833 7,222 21,471 14,180
Sales and marketing 22,036 21,364 44,588 42,922
Product development 8,133 6,776 15,247 13,181
General and administrative 6,727 5,698 13,866 11,576
-------- -------- --------- -------
Total costs and expenses 51,167 43,448 100,445 86,596
-------- -------- --------- -------
Income from operations 5,939 1,383 10,807 3,579
-------- -------- --------- -------
Other income (expense):
Interest income 996 1,043 1,898 1,918
Foreign currency gain (loss) 42 471 (437) 283
Minority interest 2 182 55 296
Other income (expense) (5) 16 (54) 15
-------- -------- --------- -------
Total other income 1,035 1,712 1,462 2,512
-------- -------- --------- -------
Income before provision for income taxes 6,974 3,095 12,269 6,091
Provision for income taxes 2,301 1,053 4,049 2,071
-------- -------- --------- -------
Net income $ 4,673 $ 2,042 $ 8,220 $ 4,020
======== ======== ========= =======
Basic earnings per share $ 0.41 $ 0.17 $ 0.71 $ 0.32
======== ======== ========= =======
Weighted average shares outstanding (basic) 11,526 12,267 11,525 12,450
======== ======== ========= =======
Diluted earnings per share $ 0.36 $ 0.16 $ 0.65 $ 0.31
======== ======== ========= =======
Weighted average shares outstanding (diluted) 12,994 13,002 12,649 12,946
======== ======== ========= =======
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended May 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,220 $ 4,020
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 5,942 5,379
Amortization of capitalized software costs 892 1,069
Amortization of intangible assets 653 138
Deferred income taxes (295) (183)
Minority interest in subsidiary (55) (296)
Noncash compensation -- 16
Changes in operating assets and liabilities:
Accounts receivable (1,505) 2,076
Inventories 217 (109)
Other current assets (2,083) (3,849)
Accounts payable and accrued expenses 2,573 1,623
Income taxes payable 1,044 (622)
Deferred revenue 10,492 7,145
-------- --------
Total adjustments 17,875 12,387
-------- --------
Net cash provided by operating activities 26,095 16,407
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale (19,901) (15,475)
Maturities of investments available for sale 4,861 1,075
Sales of investments available for sale 100 9,839
Purchase of property and equipment (4,831) (4,646)
Capitalized software costs (173) (1,257)
Acquisition of distributor (5,000) --
Decrease in other noncurrent assets 128 131
-------- --------
Net cash used for investing activities (24,816) (10,333)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,244 2,455
Repurchase of common stock (18,561) (14,396)
Contributions from minority interest -- 603
Payment of obligations under capital leases -- (116)
-------- --------
Net cash used for financing activities (13,317) (11,454)
-------- --------
Effect of exchange rate changes on cash (40) (406)
-------- --------
Net decrease in cash and equivalents (12,078) (5,786)
Cash and equivalents, beginning of period 39,451 30,872
-------- --------
Cash and equivalents, end of period $ 27,373 $ 25,086
======== ========
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 1,033 $ 302
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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PROGRESS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by Progress Software Corporation (the Company)
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and
should be read in conjunction with the audited financial statements
included in the Company's Annual Report and Form 10-K for the fiscal
year ended November 30, 1997.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis
as the audited financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full fiscal year.
Certain amounts for 1997 have been reclassified to conform to the 1998
presentation.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and are comprised of product media, documentation, and
packaging.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year.
Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rate is
determined.
4. Earnings Per Share
On December 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic
earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding
plus the effect of outstanding stock options using the treasury stock
method. Earnings per share for all prior periods presented herein have
been restated to conform to SFAS 128.
5. Revenue Recognition
On December 1, 1997, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition." Adoption of this pronouncement did not have a
material effect on the revenue recognition practices of the Company.
6. Litigation
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
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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.
7. Acquisition
On December 10, 1997, the Company, through a wholly-owned subsidiary,
acquired certain assets of its distributor in Brazil for $5,000,000.
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 purchase price was allocated
primarily to goodwill, which is being amortized over a seven-year
period. If this acquisition had been made at the beginning of the
earliest period presented, the effect on the consolidated financial
statements would not have been significant.
8. Subsequent Event
On June 17, 1998, the Board of Directors approved a three-for-two stock
split in the form of a 50% stock dividend, effective July 13, 1998 for
shareholders of record on June 29, 1998. Share and per share amounts
have not been restated for the stock split.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information that 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, professional consulting services and technical support, pricing
pressures and the competitive environment in the software industry, the adoption
rate of Java for business application development, consumer use of the Internet,
issues related to the year 2000 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 that it might face.
RESULTS OF OPERATIONS
The following table sets forth certain income and expense items as a percentage
of total revenue, and the percentage change in dollar amounts of such items
compared with the corresponding period in the previous fiscal year.
<TABLE>
<CAPTION>
Percentage of Total Revenue Period-to-Period Change
----------------------------------------------------- -----------------------------
Three Months Ended May 31, Six Months Ended May 31, Three Months Six Months
------------------------- ------------------------ 1998 Compared 1998 Compared
1998 1997 1998 1997 to 1997 to 1997
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses 48% 51% 50% 53% 21% 16%
Maintenance and services 52 49 50 47 35 31
--- --- --- ---
Total revenue 100 100 100 100 27 23
--- --- --- ---
Cost and expenses:
Cost of software licenses 4 5 5 5 2 11
Cost of maintenance and services 21 16 19 16 64 51
Sales and marketing 39 48 40 47 3 4
Product development 14 15 14 15 20 16
General and administrative 12 13 12 13 18 20
--- --- --- ---
Total costs and expenses 90 97 90 96 18 16
--- --- --- ---
Income from operations 10 3 10 4 329 202
Other income 2 4 2 3 (40) (42)
--- --- --- ---
Income before provision for income taxes 12 7 12 7 125 101
Provision for income taxes 4 2 4 2 119 96
--- --- --- ---
Net income 8% 5% 8% 5% 129% 104%
=== === === ===
</TABLE>
The Company's total revenue increased 27% from $44,831,000 in the second
quarter of fiscal 1997 to $57,106,000 in the second quarter of fiscal 1998. The
Company's total revenue increased 23% from $90,175,000 in the first six months
of fiscal 1997 to $111,252,000 in the first six months of fiscal 1998. Software
license revenue increased 21% from $22,975,000 in the second quarter of fiscal
1997 to $27,686,000 in the second quarter of fiscal 1998. Software license
revenue increased 16% from $47,616,000 in the first six months of fiscal 1997 to
$55,332,000 in the first six months of fiscal 1998.
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The increase in software license revenue in the second quarter and first six
months of fiscal 1998 as compared to the periods one year ago is due to greater
acceptance of the Company's flagship product family, PROGRESS, and, to a lesser
extent, new products such as WebSpeed, Apptivity and ProtoSpeed. PROGRESS
Version 8.2 is providing customers with increased capabilities through its
32-bit architecture and enhanced database features. The Company also experienced
an increase in sales to its Application Partners, value-added resellers who
resell the Company's products in conjunction with the sale of their
applications. The increase in sales to Application Partners is primarily due to
greater deployment revenue from database, dataservers and reporting tools
products.
Maintenance and services revenue increased 35% from $21,856,000 in the second
quarter of fiscal 1997 to $29,420,000 in the second quarter of fiscal 1998.
Maintenance and services revenue increased 31% from $42,559,000 in the first six
months of fiscal 1997 to $55,920,000 in the first six months of fiscal 1998. The
maintenance and services revenue increase was primarily a result of growth in
the Company's installed customer base, renewal of maintenance contracts and
increased consulting revenues. The Company is dedicating more resources to its
service businesses in order to take advantage of the market opportunities
associated with companies buying packaged applications and engaging service
providers to customize such packages to provide them with a competitive
advantage through systems that are uniquely designed for their business.
Total revenue generated in markets outside North America increased 21% from
$27,461,000 in the second quarter of fiscal 1997 to $33,267,000 in the second
quarter of fiscal 1998 and represented 58% of total revenue in the second
quarter of fiscal 1998 as compared to 61% of total revenue in the second quarter
of fiscal 1997. Total revenue generated in markets outside North America would
have represented 59% of total revenue in the second quarter of fiscal 1998 if
exchange rates had been constant as compared to the exchange rates in effect
in the second quarter of fiscal 1997.
Total revenue generated in markets outside North America increased 19% from
$53,630,000 in the first six months of fiscal 1997 to $63,605,000 in the first
six months of fiscal 1998 and represented 57% of total revenue in the first six
months of fiscal 1998 as compared to 59% in the first six months of fiscal 1997.
Total revenue generated in markets outside North America would have represented
59% of total revenue in the first six months of fiscal 1998 if exchange rates
had been constant as compared to the exchange rates in effect in the first
six months of fiscal 1997.
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 2% from $2,388,000 in the
second quarter of fiscal 1997 to $2,438,000 in the second quarter of fiscal
1998, but decreased as a percentage of software license revenue from 10% to 9%.
Cost of software licenses increased 11% from $4,737,000 in the first six months
of fiscal 1997 to $5,273,000 in the first six months of fiscal 1998, but
remained approximately the same percentage of software license revenue in each
period. The dollar increase was due to higher royalty expense for products and
technologies licensed from third parties. 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 64% from $7,222,000 in the second quarter of fiscal 1997 to
$11,833,000 in the second quarter of fiscal 1998 and increased as a percentage
of maintenance and services revenue from 33% to 40%. Cost of maintenance and
services increased 51% from $14,180,000 in the first six months of fiscal 1997
to $21,471,000 in the first six months of 1998 and increased as a percentage of
maintenance and services revenue from 33% to 38%. The percentage increase was
due primarily to a change in the mix of maintenance and service revenue as
consulting revenue increased at a greater rate than maintenance and education
revenue. Consulting revenue generally has a lower margin than either maintenance
or education due to the amount of resources required to produce such revenue.
The dollar increase was due primarily to an increase in the technical support,
consulting and education staff in the first half of fiscal 1998 as compared to
the first half of fiscal 1997 and greater usage of outside contractors to
fulfill demand for consulting services. The Company increased its technical
support, education, and consulting staff from 211 at the end of the first half
of fiscal 1997 to 265 at the end of the first half of fiscal 1998. The Company
expects its headcount for technical support, consulting and education to
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continue to increase through the remainder of fiscal 1998 primarily due to the
need to satisfy increased demand for consulting and training services. However,
there can be no assurance that the Company will be successful in recruiting and
retaining such personnel.
Sales and marketing expenses increased 3% from $21,364,000 in the second quarter
of fiscal 1997 to $22,036,000 in the second quarter of fiscal 1998, but
decreased as a percentage of total revenue from 48% to 39%. Sales and marketing
expenses increased 4% from $42,922,000 in the first six months of fiscal 1997 to
$44,588,000 in the first six months of fiscal 1998, but decreased as a
percentage of total revenue from 47% to 40%. The percentage decrease in sales
and marketing expenses was primarily due to improved productivity as revenue
increased at a greater rate than sales and marketing expenses during each period
of fiscal 1998 as compared to fiscal 1997. The dollar increase in sales and
marketing expenses was primarily due to higher average compensation costs,
including commissions, for the sales, sales support and marketing staff.
Product development expenses increased 20% from $6,776,000 in the second quarter
of fiscal 1997 to $8,133,000 in the second quarter of fiscal 1998, but decreased
as a percentage of total revenue from 15% to 14%. Product development expenses
increased 16% from $13,181,000 in the first six months of fiscal 1997 to
$15,247,000 in the first six months of fiscal 1998, but decreased as a
percentage of total revenue from 15% to 14%. The dollar increase was primarily
due to a lower rate of capitalization of software costs and increased personnel
costs. The increase in personnel costs was primarily due to slightly higher
average compensation costs and increased headcount to support continued new
product development efforts. The major product development efforts in the first
half of fiscal 1998 related to the development of the next versions of the
Company's various product lines, including the release of Apptivity Version 2.1.
The product development staff increased from 201 at the end of the first half of
fiscal 1997 to 210 at the end of the first half of fiscal 1998.
The Company capitalized $1,257,000 of software development costs in the first
six months of fiscal 1997 and $173,000 in the first six months of fiscal 1998 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." The amounts capitalized represented 9% of total product development
costs in the first six months of fiscal 1997 and 1% in the first six months of
fiscal 1998. The decrease in the percentage of capitalized software costs in the
first six months of fiscal 1998 as compared to the first six months of fiscal
1997 was due to the timing of when significant development projects qualify for
capitalization under the Company's software capitalization policy. Capitalized
software costs are amortized over the estimated life of the product (four years)
and amounts amortized are included in cost of software licenses for the period.
General and administrative expenses include the costs of the finance, human
resources, legal, information systems and administrative departments of the
Company. General and administrative expenses increased 18% from $5,698,000 in
the second quarter of fiscal 1997 to $6,727,000 in the second quarter of fiscal
1998, but decreased as a percentage of total revenue from 13% to 12%. General
and administrative expenses increased 20% from $11,576,000 in the first six
months of fiscal 1997 to $13,866,000 in the first six months of fiscal 1998, but
decreased as a percentage of total revenue from 13% to 12%. The dollar increase
in general and administrative expenses was primarily due to higher staff levels
and average personnel costs and increased goodwill charges resulting from recent
acquisitions. The Company increased its administrative staff from 180 at the end
of the first half of fiscal 1997 to 185 at the end of the first half of fiscal
1998.
Other income decreased $677,000 from $1,712,000 in the second quarter of fiscal
1997 to $1,035,000 in the second quarter of fiscal 1998. Other income decreased
$1,050,000 from $2,512,000 in the first six months of fiscal 1997 to $1,462,000
in the first six months of fiscal 1998. The decreases in each period were due
primarily to foreign currency gains in fiscal 1997 and lower amounts for "other
income-minority interest" in fiscal 1998. All revenue, costs and expenses
attributable to the Company's joint venture in Japan are included in the
Company's revenue, costs and expenses. To account for the fact that the Company
owns only a 51% interest in the joint venture, other income (expense) reflects
that portion of the joint venture's income or loss which is attributable to the
49% minority interest in the joint venture. The joint venture generated a net
loss in each period presented and the Company recorded as "other income -
minority interest" an amount equal to 49% of the joint venture's net loss. The
foreign
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currency gain in each period of fiscal 1997 relates primarily to unrealized
market gains on foreign currency option contracts related to the Company's
hedging programs.
The Company's effective tax rate was 34% in the each period of fiscal 1997 and
33% in each period of 1998 and was based upon the estimated effective tax rate
for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $96,263,000 in cash and short-term investments at May 31, 1998.
The increase of $2,778,000 in cash and short-term investments from $93,485,000
at November 30, 1997 was primarily due to cash generated from operations, offset
by common stock repurchases, the acquisition of the Company's distributor in
Brazil and the purchase of property and equipment.
In September 1997, the Board of Directors authorized, through September 30,
1998, the purchase of up to 3,000,000 shares of the Company's common stock, at
such times as the Company deems such purchases to be an effective use of cash,
for various purposes including the issuance of shares pursuant to the Company's
stock option plans. The Company purchased 760,957 shares of its common stock for
$18,561,000 in the first six months of fiscal 1998. At May 31, 1998, there
remained approximately 2,200,000 shares of common stock available for repurchase
under this authorization.
The Company purchased $4,831,000 of property and equipment in the first six
months of fiscal 1998 and $4,646,000 in the first six months of fiscal 1997. The
purchases consisted primarily of computer equipment and software, furniture and
fixtures, and leasehold improvements. The property and equipment purchases were
primarily for replacement of older equipment and renovations to various
locations.
On December 10, 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for $5,000,000. 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
purchase price was allocated primarily to goodwill, which will be amortized over
a seven-year period. If this acquisition had been made at the beginning of the
earliest period presented, the effect on the consolidated financial statements
would not have been significant.
The Company is party to one significant legal proceeding. Such proceeding is
detailed in Item 1 - Legal Proceedings in Part II of this report on Form 10-Q.
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 and
lease commitments) through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. The
following discussion highlights some of these risks.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including changes in
demand for the Company's products, introduction, enhancement or announcement of
products by the Company and its competitors, market acceptance of new products,
size and timing of significant orders, budgeting cycles of customers, mix of
distribution channels, mix of products and services sold, mix of international
and North American revenues, 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
11
<PAGE> 12
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. The Company began shipments of WebSpeed Version 2.0 in July 1997. The
Company's Crescent Division develops and markets a collection of advanced tools
and components to Visual Basic and Visual J++ development teams. 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.
The Apptivity product line consists of Apptivity Developer and Apptivity Server.
The Company began commercial shipments of Apptivity Version 2.1 in May 1998.
The Company believes that PROGRESS, WebSpeed, Apptivity, ProtoSpeed and the
Crescent line of products have features and functionality that 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.
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 that 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 effect 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.
12
<PAGE> 13
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 application tools, such as
Apptivity, 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.
With the exception of the Crescent product line as discussed below, the Company
believes that all of its products are fully year 2000 compliant. The Company's
products use four digit years for all internal manipulations and
representations. In addition, for customers who require the storage and
manipulation of two digit years, the Company's current products provide the
ability to specify a range of years for comparison and calculation. Therefore,
the Company does not believe that the Company's products will be adversely
affected by date changes in the year 2000. However, there can be no assurance
that the Company's products contain and will contain all features and
functionality considered necessary by customers, including Application Partners,
end users and distributors, to be year 2000 compliant. In addition, there can be
no assurances that the Company's current products do not contain undetected
errors or defects associated with year 2000 date functions that may result in
material costs to the Company.
While the Company believes that the PROGRESS product line is fully year 2000
compliant, improper programming techniques used in creating a PROGRESS-based
application could result in such application not being year 2000 compliant. The
Company does not believe that it would be liable in such an event. However, due
to the unprecedented nature of potential litigation related to year 2000
compliance as discussed in the industry and popular press, it is uncertain
whether or to what extent the Company may be affected by it.
The Company is currently evaluating the Crescent product line for year 2000
compliance. During the course of these evaluations, the Company will provide
customers with information regarding testing procedures and results for each
tested product. Following the evaluations, to the extent that any tested
Crescent products are found not to be year 2000 compliant, the Company will
provide information concerning its plans to upgrade or modify such products. The
Company does not believe that the cost of the evaluations or any potential
upgrades or modifications will have a material adverse effect on the Company's
business, financial condition and operating results.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurance that the Company will not experience unanticipated negative
consequences or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are based primarily on the
Company's own software products with respect to software and which also include
third party software and hardware technology. The Company has not assessed fully
the impact of year 2000 compliance issues on the entities with which the Company
interacts. However, the Company does not anticipate that these issues will have
a material adverse effect on the Company's business, financial condition and
operating results.
Approximately 53% of the Company's total revenue in the first six months of
fiscal 1998 was attributable to international sales made through its
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
13
<PAGE> 14
position. The Company engages in certain currency-hedging transactions intended
to reduce the effect of fluctuations in foreign currency exchange rates on the
Company's results of operations. However, there can be no assurance that such
hedging transactions will materially reduce the effect of fluctuation in foreign
currency exchange rates on such results. If for any reason exchange or price
controls or other restrictions on the conversion of foreign currencies were
imposed, the Company's business could be adversely affected. Other potential
risks inherent in the Company's international business generally include longer
payment cycles, greater difficulties in accounts receivable collection,
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
political instability, reduced protection for intellectual property rights in
some countries, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, and potentially adverse
tax consequences, any of which could adversely impact the success of the
Company's international operations. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's future
international operations, and, consequently, on the Company's business,
financial condition, and operating results.
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the software industry is intense. There can be
no assurance that the Company will continue to be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably.
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies principally on a combination of contract
provisions and copyright, trademark and trade secret laws to protect its
proprietary technology. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement. 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. 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
At the Annual Meeting of Shareholders of the Company held on April 24, 1998, the
shareholders voted on the items described below:
* To fix the numbers of directors at eight:
Affirmative Negative Votes
Votes Cast Votes Cast Abstaining
---------- ---------- ----------
9,853,052 24,446 183,657
* To elect the following eight directors: Joseph W. Alsop, Larry R. Harris,
Robert J. Lepkowski, Michael L. Mark, Arthur J. Marks, Scott A. McGregor, Amram
Rasiel and James W. Storey:
Nominee For Withhold Authority
------- --------- ------------------
Joseph W. Alsop 9,926,392 134,763
Larry R. Harris 9,926,504 134,651
Robert J. Lepkowski 9,926,504 134,651
Michael L. Mark 9,926,504 134,651
Arthur J. Marks 9,926,504 134,651
Scott A. McGregor 9,926,304 134,851
Amram Rasiel 9,926,504 134,651
James W. Storey 9,926,504 134,651
* To act upon a proposal to amend the Company's 1991 Employee Stock Purchase
Plan to increase the maximum number of shares that may be issued under such plan
from 300,000 shares to 500,000 shares:
Affirmative Negative Votes
Votes Cast Votes Cast Abstaining
---------- ---------- ----------
9,745,128 216,514 99,513
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.8 - 1991 Employee Stock Purchase Plan, as amended
27.1 - Financial Data Schedule (EDGAR Version Only)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 1998.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
(Registrant)
Dated: July 10, 1998 /s/ Joseph W. Alsop
------------------------------------
Joseph W. Alsop
President and Treasurer
(Principal Executive Officer)
Dated: July 10, 1998 /s/ Norman R. Robertson
------------------------------------
Norman R. Robertson
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
Dated: July 10, 1998 /s/ David H. Benton, Jr.
------------------------------------
David H. Benton, Jr.
Corporate Controller
(Principal Accounting Officer)
17
<PAGE> 1
EXHIBIT 10.8
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Page 1
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PROGRESS SOFTWARE CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of March 10, 1998)
1. PURPOSE
The Progress Software Corporation Employee Stock Purchase Plan (the "Plan")
is intended to provide a method whereby employees of Progress Software
Corporation (the "Company") will have an opportunity to acquire an
ownership interest (or increase an existing ownership interest) in the
Company through the purchase of shares of the Common Stock of the Company.
It is the intention of the Company that the Plan qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a
manner consistent with the requirements of that section of the Code.
2. DEFINITIONS
(a) "Eligible Compensation" for purposes of the Plan means: (i) with
respect to individuals who are hourly employees, base salary plus
payments for overtime and bonuses or (ii) with respect to individuals
who are salaried employees, base salary plus sales commissions and
bonuses. Eligible Compensation shall not include any deferred
compensation other than contributions by an individual through a
salary reduction agreement to a cash or deferred plan pursuant to
Section 401(k) of the Code or to a cafeteria plan pursuant to Section
125 of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the Compensation Committee of the Board.
(d) "Common Stock" means the common stock, $.01 par value per share, of
the Company.
(e) "Company" shall also include any subsidiary of Progress Software
Corporation designated as a participant in the Plan by the Board,
unless the context otherwise requires.
(f) "Employee" means any person who is customarily employed at least 20
<PAGE> 2
hours per week and more than five months in a calendar year by (i) the
Company or (ii) any subsidiary corporation.
(g) "Subsidiary Corporation" shall mean any present or future corporation
which is or would constitute a "subsidiary corporation" as that term
is defined in Section
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424(f) of the Code.
3. ELIGIBILITY
(a) Participation in the Plan is completely voluntary. Participation
during any one or more of the Offering Periods, as hereafter defined,
under the Plan shall neither limit, nor require, participation during
any other Offering Period.
(b) Each Employee of the Company and its Subsidiary Corporations shall be
eligible to participate in the Plan on any Offering Period
commencement date, as hereafter identified, following the completion
of three months of continuous service with the Company and/or its
Subsidiary Corporations; provided, however, that no Employee shall be
granted an option under the Plan:
(i) if, immediately after the grant, such Employee would own stock,
and/or hold outstanding options to purchase stock, possessing 5%
or more of the total combined voting power or value of all
classes of stock of the Company or any Subsidiary Corporation;
for purposes of this Paragraph the rules of Section 424(d) of the
Code shall apply in determining stock ownership of any employee;
or
(ii) which permits his/her rights to purchase stock under all Section
423 employee stock purchase plans of the Company and its
Subsidiary Corporations to exceed US $25,000 of the fair market
value of the stock (determined at the time such option is
granted) for each calendar year in which such option is
outstanding; for purposes of this Paragraph, the rules of Section
423 (b)(8) of the Code shall apply.
4. OFFERING PERIOD / EXERCISE PERIOD
The right to purchase stock hereunder shall be made available by a series
of "Exercise Periods" during an "Offering Period" to employees eligible in
accordance with Paragraph 3 hereof.
<PAGE> 3
Offering Period. Each participant in the Plan will be enrolled in an
Offering Period. An Offering Period has a duration of 27 consecutive months
unless a participant: withdraws from the Plan, ceases to be an eligible
employee, or is automatically transferred to a new Offering Period.
Offering Periods commence on each of the following dates: January 1, April
1, July 1, or October 1.
Exercise Period. Each 27-month Offering Period consists of nine consecutive
Exercise Periods lasting three months each. Exercise Periods start on
January 1, April 1, July 1, and October 1.
Exercise Date. During each 27-month Offering Period there will be nine
Exercise Dates. An Exercise Date is the last date of each Exercise Period.
Therefore, Exercise
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Dates will be as follows: March 31, June 30, September 30, and December 31.
5. PARTICIPATION
Any eligible employee may become a participant by completing a payroll
deduction authorization form provided by the Company and filing it with
their payroll department and the Plan administrator 20 days prior to an
Offering Period commencement date.
A participant may be enrolled in only one Offering Period at a time. A
participant will be re-enrolled automatically as a participant in future
Offering Periods when an Offering Period in which such participant is
currently enrolled ends, unless such participant withdraws from
participation, is terminated or terminates employment, becomes ineligible
to participate for any reason, or the Plan terminates.
6. PAYROLL DEDUCTIONS
(a) At the time a participant files his/her authorization for a payroll
deduction, he/she shall specify a percentage of his/her Eligible
Compensation to be deducted from his/her pay on each payday during any
Offering Period in which he/she is a participant in the Plan. Such
percentage shall be in increments of one percent (1%) up to a maximum
percentage to be established for each Offering Period by the
Committee.
<PAGE> 4
(b) Payroll deductions for participants shall commence on the Offering
Period commencement date following the effective date of his/her
authorization for such payroll deductions.
(c) A participant may, at any time, reduce the percentage (but not below
1%) of his/her Eligible Compensation to be deducted on each payday
that he/she participates in the Plan. A reduction in payroll
deductions will be effective on the seventh business day following
receipt of notice by the Company and will apply to the first full pay
period commencing after such date.
(d) A participant may, at any time, increase the percentage (but not above
the maximum established by the Committee) of his/her Eligible
Compensation to be deducted on each payday that the he/she
participates in the Plan. An increase in payroll deductions will be
effective on the seventh business day following receipt of notice by
the Company and will apply to the first full Exercise Period
commencing after such date.
(e) All payroll deductions made for a participant shall be credited to
his/her account under the Plan. A participant may not make any
separate cash payment into such account.
7. GRANTING OF OPTION / EXERCISE PRICE
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(a) On the commencement date of each Offering Period, a participant in
such Offering Period shall be deemed to have been granted an option to
purchase on each Exercise Date during such Offering Period (at the per
share exercise price) up to a number of shares of the Company's Common
Stock determined by dividing such participant's payroll deductions
accumulated during the applicable Exercise Period by eighty-five (85%)
of the market value per share of the Company's Common Stock on the
Offering Period commencement date or on the Exercise Date, whichever
is lower, provided that the number of shares subject to the option
shall not exceed 200% of the number of shares determined by dividing
10% of the participant's Eligible Compensation over the Offering
Period (determined as of the Offering Period commencement date) by 85%
of the market value per share of the Company's Common Stock on the
Offering Period commencement date, subject to the limitations set
forth in Section 3 (b) and 12 hereof. The Market value per share of
the Company's Common Stock shall be determined as provided in Section
<PAGE> 5
7(b) herein.
(b) The exercise price per share to be paid for Common Stock purchased
under the Plan shall be equal to the lower of 85% of the market value
per share of the Common Stock on the first day of the Offering Period
in which the Exercise Date falls, or 85% of the market value per share
of the Common Stock on the Exercise Date. Market value per share of
the Common Stock on a particular date is the closing price (or closing
bid, if no sales were reported) of the Common Stock on the National
Association of Securities Dealers Automated Quotation System, Inc.
("NASDAQ"), or, in the event the Common Stock is listed on a stock
exchange, the market value per share shall be the closing price on
such exchange, for that date, as reported in the Wall Street Journal.
If a closing price is not available for a particular date, then the
market value per share to be used for that date will be the closing
stock price as of the last preceding trading day on the NASDAQ or a
stock exchange for which a closing price is available. If the Common
Stock is not listed on the NASDAQ or a stock exchange then the market
value per share will be determined by the Committee.
For purpose of calculating the number of shares of Common Stock to be
purchased with payroll deductions from participants outside of the
United States, the Company will use the exchange rate published in the
Wall Street Journal on the Exercise Date.
8. EXERCISE OF OPTION
Unless a participant withdraws from the Plan or is terminated from
participating in the Plan pursuant to paragraph 10 hereof, his/her option
for the purchase of Common Stock will be deemed to have been exercised
automatically on each Exercise Date for the purchase of the number of full
shares of Common Stock which the accumulated payroll deductions in his/her
account at that time will purchase at the price of the Common Stock as
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determined in Paragraph 7 (b). Fractional shares will not be issued under
the Plan and any excess funds in a participant's account representing any
fractional shares after Common Stock purchases made on each Exercise Date
will be automatically carried forward to the next Exercise Period unless
the participant elects, by written notice to their payroll department, to
have the excess returned to him/her.
<PAGE> 6
9. NEW OFFERING PERIOD
If the market value of the Common Stock is lower on an Exercise Date than
it was on the first day of the Offering Period, then all participants in
such Offering Period will be automatically withdrawn from that Offering
Period immediately after the participants' exercise of the option on such
Exercise Date, and such participants will be automatically re-enrolled in a
new Offering Period commencing immediately after that Exercise Date. The
old Offering Period terminates upon such automatic re-enrollment.
10. WITHDRAWAL AND TERMINATION
(a) Prior to the Exercise Date for each Exercise Period, any participant
may withdraw all but not less than all of his/her payroll deductions
under the Plan for such Exercise Period by giving written notice to
his/her payroll department. All of the participant's payroll
deductions credited to such account will be paid to him/her after
receipt of notice of withdrawal, without interest, and no future
payroll deductions will be made. Withdrawal from an Exercise Period
will be deemed to be a withdrawal from the Offering Period which
includes such Exercise Period. The Company will treat any attempt to
borrow by a participant on the security of accumulated payroll
deductions as an election to withdraw such deductions.
(b) A participant may elect not to exercise an option by giving written
notice to their payroll department no less than seven (7) business
days prior to the applicable Exercise Date. Any such election will be
treated as a withdrawal pursuant to section (a) above.
(c) A participant's election not to participate in, or withdrawal from,
any Offering Period or Exercise Period within such Offering Period
will not have any effect upon his/her eligibility to participate in
any succeeding Offering Period or in any similar plan which may
hereafter be adopted by the Company.
(d) Upon termination of the participant's employment for any reason,
including retirement but excluding death, all of his/her payroll
deductions accrued during the relevant Exercise Period will be
returned to the participant.
(e) Upon termination of the participant's employment because of death, the
participant's beneficiary (as defined in Paragraph 14) shall have the
right to elect, by written notice given to the participant's former
payroll department prior to the expiration of a period of 90 days
commencing with the date of the death of the participant but in no
event later than the applicable Offering Period, either
<PAGE> 7
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Page 6
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(i) to withdraw all of the payroll deductions credited to the
participant's account under the Plan; or
(ii) to exercise the participant's option for the purchase of stock on
the Exercise Date next following the date of the participant's
death for the purchase of the number of full shares which the
participant's accumulated payroll deductions, at the date of the
participant's death, will purchase at the applicable price, and
any excess deductions will be returned to said beneficiary. In
the event that no such written notice of election shall be duly
received by the appropriate payroll department of the Company,
the beneficiary shall automatically be deemed to have elected to
withdraw the payroll deductions credited to the participant at
the date of the participant's death and the same will be paid
promptly to said beneficiary.
11. INTEREST
No interest will be paid or allowed on any money paid into the Plan or
credited to any participant.
12. STOCK
(a) The maximum number of shares of Common Stock available for issuance
and purchase by participants under the Plan, subject to adjustment
upon changes in capitalization of the Company as provided in Paragraph
17, shall be 500,000 shares of Common Stock, par value $.01 per share,
of the Company. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number of
shares then available, the Company shall make a pro rata allocation of
the shares available for delivery and distribution in an equitable
manner, with the balances of payroll deductions credited to each
participant under the Plan carried forward to the next Exercise Period
in the applicable Offering Period or returned to the participant if
the participant so chooses, by giving written notice to their payroll
department to this effect.
(b) The participant will have no interest in stock underlying his/her
option until such option has been exercised.
(c) The Committee, in its sole discretion, may establish a minimum holding
period, if any, for shares of stock acquired pursuant hereto by any
participant or his beneficiary pursuant to Paragraph 14 hereof.
Certificates representing said shares of stock issued pursuant to this
<PAGE> 8
Plan may bear legends to that effect.
13. ADMINISTRATION
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The Plan shall be administered by the Committee. The interpretation and
construction of any provision of the Plan and adoption of rules and
regulations for administering the Plan shall be made by the Committee.
Determinations made by the Committee with respect to any matter or
provision contained in the Plan shall be final, conclusive and binding upon
the Company and upon all participants, their heirs or legal
representatives. Any rule or regulation adopted by the Committee shall
remain in full force and effect unless and until altered, amended, or
repealed by the Committee.
14. DESIGNATION OF BENEFICIARY
A participant shall file with their payroll department a written
designation of a beneficiary who is to receive any Common Stock and/or cash
under the Plan. Such designation of beneficiary may be changed by the
participant at any time by written notice. Upon the death of a participant
and upon receipt by the Company of proof of the identity and existence at
the participant's death of a beneficiary validly designated by him under
the Plan, the Company shall deliver such Common Stock and/or cash to such
beneficiary validly designated under the Plan who is living at the time of
such participant's death, the Company shall deliver such Common Stock
and/or cash to the executor or administrator of the estate of the
participant. No beneficiary shall prior to the death of the participant by
whom he has been designated, acquire any interest in the Common Stock
and/or cash credited to the participant under the Plan.
15. TRANSFERABILITY
Neither payroll deductions credited to a participant nor any rights with
regard to the exercise of an option or to receive Common Stock under the
Plan may be assigned, transferred, pledged, or otherwise disposed of in any
way by the participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds in accordance with Paragraph 10(a).
16. USE OF FUNDS
All payroll deductions received or held by the Company under this Plan may
<PAGE> 9
be used by the Company for any corporate purpose, and the Company shall not
be obligated to segregate such payroll deductions.
17. EFFECT OF CHANGES OF COMMON STOCK
If the Company shall subdivide or reclassify the Common Stock which has
been or may be optioned under this Plan, or shall declare thereon any
dividend payable in shares of such Common Stock, or shall take any other
action of a similar nature affecting such Common Stock, then the number and
class of shares of Common Stock which may thereafter be optioned (in the
aggregate and to any participant) shall be adjusted accordingly and in the
case of each option outstanding at the time of any such action, the number
and class of
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Page 8
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shares which may thereafter be purchased pursuant to such option and the
option price per share shall be adjusted to such extent as may be
determined by the Committee, with the approval of independent public
accountants and counsel, to be necessary to preserve the rights of the
holder of such option.
18. AMENDMENT OR TERMINATION
The Board may at any time terminate or amend the Plan. No such termination
shall affect options previously granted, nor may an amendment make any
change in any option theretofore granted which would adversely affect the
rights of any participant holding options under the Plan.
19. NOTICES
All notices or other communications by a participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received by the participant's payroll department.
20. MERGER OR CONSOLIDATION
If the Company shall at any time merge into or consolidate with another
corporation, the holder of each option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such
option for each share as to which such option shall be exercised, the
securities or property which a holder of one share of the Common Stock was
<PAGE> 10
entitled to upon and at the time of such merger or consolidation. In
accordance with this Paragraph and Paragraph 17, the Committee shall
determine the kind and amount of such securities or property which such
holder of an option shall be entitled to receive. A sale of all or
substantially all of the assets of the Company shall be deemed a merger or
consolidation for the foregoing purposes.
21. APPROVAL OF STOCKHOLDERS
The Plan is subject to the approval of the stockholders of the Company at
their next annual meeting or at any special meeting of the stockholders for
which one of the purposes of such a special meeting shall be to act upon
the Plan.
22. GOVERNMENTAL AND OTHER REGULATIONS
The Plan, and the grant and exercise of the rights to purchase shares
hereunder, and the Company's obligation to sell and deliver shares upon the
exercise of rights to purchase shares, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such
approvals by any regulatory or governmental agency as may, in the opinion
of counsel for the Company, be required. The Plan shall be governed by, and
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Page 9
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construed and enforced in accordance with, the provisions of Sections 421,
423 and 424 of the Code and the substantive laws of the Commonwealth of
Massachusetts. In the event of any inconsistency between such provisions of
the Code and any such laws, said provisions of the Code shall govern to the
extent necessary to preserve favorable federal income tax treatment
afforded employee stock purchase plans under Section 423 of the Code.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDING MAY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 27,373
<SECURITIES> 68,890
<RECEIVABLES> 44,003
<ALLOWANCES> 7,321
<INVENTORY> 1,177
<CURRENT-ASSETS> 147,749
<PP&E> 57,077
<DEPRECIATION> 35,155
<TOTAL-ASSETS> 179,755
<CURRENT-LIABILITIES> 86,281
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 92,078
<TOTAL-LIABILITY-AND-EQUITY> 179,755
<SALES> 55,332
<TOTAL-REVENUES> 111,252
<CGS> 5,273
<TOTAL-COSTS> 100,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,269
<INCOME-TAX> 4,049
<INCOME-CONTINUING> 8,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,220
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.65
</TABLE>
