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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 February 28, 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
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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
----- -----
As of March 31, 1998, there were 11,515,704 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 THREE MONTHS ENDED FEBRUARY 28, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
February 28, 1998 and November 30, 1997 3
Condensed Consolidated Statements of Income for
the three months ended February 28, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended February 28, 1998 and 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 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
February 28, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 30,044 $ 37,088
Short-term investments 57,616 56,397
Accounts receivable (less allowance for doubtful accounts
of $6,742 in 1998 and $4,928 in 1997) 33,298 35,651
Inventories 1,124 1,394
Other current assets 7,248 6,081
Deferred income taxes 5,346 5,166
-------- --------
Total current assets 134,676 141,777
-------- --------
Property and equipment-net 22,673 23,183
Capitalized software costs-net 4,123 4,545
Other assets 6,506 2,228
-------- --------
Total $167,978 $171,733
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,292 $ 10,712
Accrued compensation and related taxes 13,615 17,088
Income taxes payable 7,195 6,450
Other current liabilities 8,044 8,033
Deferred revenue 37,658 31,734
-------- --------
Total current liabilities 75,804 74,017
-------- --------
Deferred income taxes 1,042 1,009
Minority interest in subsidiary 215 268
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, 11,384,322 shares in 1998 and 11,812,023 shares in 1997 114 118
Additional paid-in capital 16,755 25,901
Retained earnings 74,220 70,673
Unrealized gain on short-term investments 363 245
Cumulative translation adjustments (535) (498)
-------- --------
Total shareholders' equity 90,917 96,439
-------- --------
Total $167,978 $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)
Three Months Ended February 28,
-------------------------------
1998 1997
------- -------
Revenue:
Software licenses $27,646 $24,641
Maintenance and services 26,500 20,703
------- -------
Total revenue 54,146 45,344
------- -------
Costs and expenses:
Cost of software licenses 2,835 2,349
Cost of maintenance and services 9,638 6,958
Sales and marketing 22,552 21,558
Product development 7,114 6,405
General and administrative 7,139 5,878
------- -------
Total costs and expenses 49,278 43,148
------- -------
Income from operations 4,868 2,196
------- -------
Other income (expense):
Interest income 902 875
Foreign currency loss (479) (188)
Minority interest 53 114
Other expense (49) (1)
------- -------
Total other income 427 800
------- -------
Income before provision for income taxes 5,295 2,996
Provision for income taxes 1,748 1,018
------- -------
Net income $ 3,547 $ 1,978
======= =======
Basic earnings per share $ 0.31 $ 0.16
======= =======
Weighted average shares outstanding (basic) 11,524 12,633
======= =======
Diluted earnings per share $ 0.29 $ 0.15
======= =======
Weighted average shares outstanding (diluted) 12,304 12,890
======= =======
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>
Three Months Ended February 28,
-------------------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,547 $ 1,978
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 2,571 2,745
Amortization of capitalized software costs 542 523
Amortization of intangible assets 459 74
Deferred income taxes (161) (24)
Minority interest in subsidiary (53) (114)
Changes in operating assets and liabilities:
Accounts receivable 1,808 3,264
Inventories 270 (182)
Other current assets (1,225) (2,010)
Accounts payable and accrued expenses (4,334) 129
Income taxes payable 861 435
Deferred revenue 6,135 4,810
-------- -------
Total adjustments 6,873 9,650
-------- -------
Net cash provided by operating activities 10,420 11,628
-------- -------
Cash flows from investing activities:
Purchases of investments available for sale (4,079) (8,022)
Maturities of investments available for sale 2,912 7,295
Sales of investments available for sale - 1,045
Purchase of property and equipment (2,177) (3,124)
Acquisition of distributor (5,000) -
Capitalized software costs (120) (624)
Decrease in other noncurrent assets 186 146
-------- -------
Net cash used for investing activities (8,278) (3,284)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 888 1,714
Repurchase of common stock (10,129) (5,972)
Contribution from minority interest - 603
Payment of obligations under capital leases - (7)
-------- -------
Net cash used for financing activities (9,241) (3,662)
-------- -------
Effect of exchange rate changes on cash 55 (337)
-------- -------
Net increase (decrease) in cash and equivalents (7,044) 4,345
Cash and equivalents, beginning of period 37,088 30,872
-------- -------
Cash and equivalents, end of period $ 30,044 $35,217
======== =======
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 91 $ 94
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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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.
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 affect 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 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
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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 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.
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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
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, for
the three months ended February 28, 1998 and 1997.
<TABLE>
<CAPTION>
Percentage of Total Revenue
---------------------------- Period-to-Period Change
Three Months Ended -----------------------
---------------------------- Three Months
February 28, February 28, 1998 Compared
1998 1997 to 1997
------------ ------------ -----------------------
<S> <C> <C> <C>
Revenue:
Software licenses 51% 54% 12%
Maintenance and services 49 46 28
--- ---
Total revenue 100 100 19
--- ---
Costs and expenses:
Cost of software licenses 5 5 21
Cost of maintenance and services 18 15 39
Sales and marketing 42 48 5
Product development 13 14 11
General and administrative 13 13 21
--- ---
Total costs and expenses 91 95 14
--- ---
Income from operations 9 5 122
Total other income 1 2 (47)
--- ---
Income before provision for income taxes 10 7 77
Provision for income taxes 3 3 72
--- ---
Net income 7% 4% 79%
=== ===
</TABLE>
The Company's total revenue increased 19% from $45,344,000 in the first quarter
of fiscal 1997 to $54,146,000 in the first quarter of fiscal 1998. The increase
in total revenue was due to an increase in software license revenue of 12% and
an increase in maintenance and services revenue of 28%. Software license revenue
increased from $24,641,000 in the first quarter of fiscal 1997 to $27,646,000 in
the first quarter of fiscal 1998. The increase in software license revenue is
attributable to greater acceptance of the Company's products including PROGRESS
Version 8.2 and, to a lesser extent,
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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 databases, dataservers and reporting tools products.
Maintenance and services revenue increased 28% from $20,703,000 in the first
quarter of fiscal 1997 to $26,500,000 in the first quarter of fiscal 1998. The
increase in maintenance and services revenue was primarily a result of growth in
the Company's installed customer base, renewal of maintenance contracts and
increased consulting revenue. The Company is dedicating more resources to its
service business 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 16% from
$26,169,000 in the first quarter of fiscal 1997 to $30,338,000 in the first
quarter of fiscal 1998, but decreased as a percentage of total revenue from 58%
in the first quarter of fiscal 1997 to 56% in the first quarter of fiscal 1998.
Total revenue generated in markets outside North America would have represented
58% of total revenue in the first quarter of fiscal 1998 if exchange rates had
been constant as compared to the first quarter 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 21% from $2,349,000 in
the first quarter of fiscal 1997 to $2,835,000 in the first quarter of fiscal
1998, but remained approximately the same percentage of software license revenue
in each period. The dollar increase was due primarily to 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 39% from $6,958,000 in the first quarter of fiscal 1997 to
$9,638,000 in the first quarter of fiscal 1998 and increased as a percentage of
maintenance and services revenue from 34% to 36%. 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 for such revenue. The
dollar increase was due primarily to an increase in the technical support,
consulting and education staff in the first quarter of fiscal 1998 as compared
to the first quarter 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 209 at the end of the first
quarter of fiscal 1997 to 263 at the end of the first quarter of fiscal 1998.
The Company expects its headcount for technical support, consulting and
education to 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 5% from $21,558,000 in the first quarter
of fiscal 1997 to $22,552,000 in the first quarter of fiscal 1998 but decreased
as a percentage of total revenue from 48% to 42%. The dollar increase in sales
and marketing expenses was primarily due to higher average compensation costs
for the sales, sales support and marketing staff and, to a lesser extent, a
slight increase in the level of discretionary marketing spending. The amount of
discretionary marketing expenses can vary from period to period depending on the
timing of significant trade shows, advertising campaigns and direct mail
solicitations. The Company decreased its sales, sales support and marketing
staff from 480 at the end of the first quarter of fiscal 1997 to 463 at the end
of the first quarter of fiscal 1998. The Company expects the level of the sales,
sales support and marketing staff to stay within the range which has prevailed
over the past few quarters.
Product development expenses increased 11% from $6,405,000 in the first quarter
of fiscal 1997 to $7,114,000 in the first quarter of fiscal 1998, but decreased
as a percentage of total revenue from 14% to 13%. The dollar increase was
primarily due to a lower rate of capitalization of software costs. Total product
development spending increased by 3% from $7,029,000 in the first quarter of
fiscal 1997 to $7,234,000 in the first quarter of fiscal 1998. The increase was
primarily due to slightly higher average personnel costs to support continued
new product development efforts. The major product development efforts in the
first quarter of fiscal 1998 related to the development of the next versions of
the
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Company's various product lines. The product development staff decreased from
206 at the end of the first quarter of fiscal 1997 to 198 at the end of the
first quarter of fiscal 1998.
The Company capitalized $624,000 of software development costs in the first
quarter of fiscal 1997 and $120,000 in the first quarter 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 quarter of fiscal 1997 and 2% in the first quarter of fiscal
1998. 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 21% from $5,878,000 in
the first quarter of fiscal 1997 to $7,139,000 in the first quarter of fiscal
1998 but remained approximately the same percentage of total revenue in each
period. 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 179 at the end of the first quarter of fiscal 1997 to
185 at the end of the first quarter of fiscal 1998.
Other income decreased $373,000 from $800,000 in the first quarter of fiscal
1997 to $427,000 in the first quarter of fiscal 1998 due primarily to foreign
currency losses and a lower amount for minority interest. All revenue, costs
and expenses attributable to the Company's joint venture in Japan are included
in the Company's revenue, costs and expenses. To account for the fact that the
Company owns only a 51% interest in the joint venture, other income (expense)
reflects that portion of the joint venture's income or loss which is
attributable to the 49% minority interest in the joint venture. The joint
venture generated a net loss in each period presented and the Company recorded
as "other income - minority interest" an amount equal to 49% of the joint
venture's net loss. Foreign currency losses relate primarily to the translation
and settlement of short-term intercompany receivables.
The Company's effective tax rate was 34% in the first quarter of fiscal 1997
and 33% in the first quarter of 1998 and was based upon the estimated effective
tax rate for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $87,660,000 in cash and short-term investments at February 28,
1998. The decrease of $5,825,000 in cash and short-term investments from
$93,485,000 at November 30, 1997 was primarily due to common stock repurchases,
the acquisition of the Company's distributor in Brazil and the purchase of
property and equipment, partially offset by cash generated from operations.
The Company purchased 496,615 shares of its common stock for $10,129,000 in the
first quarter of fiscal 1998. 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. At February 28,
1998, there remained approximately 2,500,000 shares of common stock available
for repurchase under this authorization.
The Company purchased $2,177,000 of property and equipment in the first quarter
of fiscal 1998 and $3,124,000 in the first quarter 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
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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 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 2.0 in January 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.
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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. 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.
12
<PAGE> 13
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 assurances 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 51% of the Company's total revenue in fiscal 1997 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 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.
13
<PAGE> 14
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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
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 February 28, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
-----------------------------
(Registrant)
Dated: April 14, 1998 /s/Joseph W. Alsop
------------------------------------------
Joseph W. Alsop
President and Treasurer
(Principal Executive Officer)
Dated: April 14, 1998 /s/Norman R. Robertson
------------------------------------------
Norman R. Robertson
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
Dated: April 14, 1998 /s/David H. Benton, Jr.
------------------------------------------
David H. Benton, Jr.
Corporate Controller
(Principal Accounting Officer)
15
<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 FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 30,044
<SECURITIES> 57,616
<RECEIVABLES> 40,040
<ALLOWANCES> 6,742
<INVENTORY> 1,124
<CURRENT-ASSETS> 134,676
<PP&E> 55,523
<DEPRECIATION> 32,850
<TOTAL-ASSETS> 167,978
<CURRENT-LIABILITIES> 75,804
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 90,803
<TOTAL-LIABILITY-AND-EQUITY> 167,978
<SALES> 27,646
<TOTAL-REVENUES> 54,146
<CGS> 2,835
<TOTAL-COSTS> 49,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,295
<INCOME-TAX> 1,748
<INCOME-CONTINUING> 3,547
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<NET-INCOME> 3,547
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.29
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