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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the Quarterly Period Ended August 31, 1999
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 October 8, 1999, there were 17,465,000 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 AUGUST 31, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 1999 and November 30, 1998 3
Condensed Consolidated Statements of Income for
the three and nine months ended August 31, 1999 and
August 31, 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended August 31, 1999 and
August 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
AUGUST 31, 1999 NOVEMBER 30, 1998
--------------- -----------------
ASSETS
Current assets:
Cash and equivalents $ 69,246 $ 50,155
Short-term investments 61,112 63,844
Accounts receivable 38,880 40,779
Other current assets 10,026 9,855
Deferred income taxes 8,610 8,415
-------- --------
Total current assets 187,874 173,048
-------- --------
Property and equipment-net 20,347 22,458
Capitalized software costs-net 3,410 4,742
Other assets 6,200 6,460
-------- --------
Total $217,831 $206,708
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,556 $ 12,461
Accrued compensation and related taxes 17,691 23,041
Income taxes payable 8,209 10,276
Other current liabilities 9,484 8,140
Deferred revenue 53,853 49,942
-------- --------
Total current liabilities 100,793 103,860
-------- --------
Minority interest in subsidiary 25 155
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, authorized, 1,000 shares;
issued, none
Common stock, authorized, 75,000 shares in
1999 and 50,000 in 1998; issued, 17,043
shares in 1999 and 17,090 shares in 1998 170 171
Additional paid-in capital 26,250 18,795
Retained earnings 92,479 84,115
Other comprehensive income (1,886) (388)
-------- --------
Total shareholders' equity 117,013 102,693
-------- --------
Total $217,831 $206,708
======== ========
See notes to condensed consolidated financial statements.
3
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
----------------------------- ----------------------------
1999 1998 1999 1998
------- ------- -------- --------
Revenue:
<S> <C> <C> <C> <C>
Software licenses $31,219 $27,171 $ 96,472 $ 82,503
Maintenance and services 38,940 32,311 111,582 88,231
------- ------- -------- --------
Total revenue 70,159 59,482 208,054 170,734
------- ------- -------- --------
Costs and expenses:
Cost of software licenses 3,583 2,442 9,829 7,715
Cost of maintenance and services 14,704 11,571 40,415 33,042
Sales and marketing 24,330 23,422 77,244 68,010
Product development 9,596 7,276 28,785 22,523
General and administrative 7,330 6,803 21,125 20,669
------- ------- -------- --------
Total costs and expenses 59,543 51,514 177,398 151,959
------- ------- -------- --------
Income from operations 10,616 7,968 30,656 18,775
------- ------- -------- --------
Other income (expense):
Interest income 1,170 1,221 3,574 3,119
Foreign currency gain (loss) 338 (32) (211) (469)
Minority interest 36 18 130 73
Other income (expense) 13 20 (10) (34)
------- ------- -------- --------
Total other income 1,557 1,227 3,483 2,689
------- ------- -------- --------
Income before provision for income taxes 12,173 9,195 34,139 21,464
Provision for income taxes 3,896 3,034 10,925 7,083
------- ------- -------- --------
Net income $ 8,277 $ 6,161 $ 23,214 $ 14,381
======= ======= ======== ========
Basic earnings per share $ 0.49 $ 0.36 $ 1.35 $ 0.83
======= ======= ======== ========
Weighted average shares outstanding (basic) 16,964 17,227 17,168 17,267
======= ======= ======== ========
Diluted earnings per share $ 0.43 $ 0.31 $ 1.19 $ 0.75
======= ======= ======== ========
Weighted average shares outstanding (diluted) 19,168 19,633 19,557 19,193
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
----------------------------
1999 1998
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income $23,214 $14,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 8,094 8,837
Amortization of capitalized software costs 1,613 1,327
Amortization of intangible assets 443 844
Deferred income taxes (480) (373)
Minority interest in subsidiary (130) (73)
Noncash compensation 45 --
Changes in operating assets and liabilities:
Accounts receivable (472) (894)
Other current assets (456) (721)
Accounts payable and accrued expenses (3,923) 2,330
Income taxes payable 3,322 3,047
Deferred revenue 6,370 15,617
------- -------
Total adjustments 14,426 29,941
------- -------
Net cash provided by operating activities 37,640 44,322
------- -------
Cash flows from investing activities:
Purchases of investments available for sale (40,304) (44,278)
Maturities of investments available for sale 42,335 23,455
Sales of investments available for sale -- 400
Purchase of property and equipment (6,423) (8,012)
Capitalized software costs (281) (1,069)
Acquisition of distributor -- (5,000)
Decrease (increase) in other noncurrent assets (1,621) 35
------- -------
Net cash used for investing activities (6,294) (34,469)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 11,195 8,542
Repurchase of common stock (23,843) (24,639)
------- -------
Net cash used for financing activities (12,648) (16,097)
------- -------
Effect of exchange rate changes on cash 393 (111)
------- -------
Net increase (decrease) in cash and equivalents 19,091 (6,355)
Cash and equivalents, beginning of period 50,155 39,451
------- -------
Cash and equivalents, end of period $69,246 $33,096
======= =======
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 5,195 $ 1,933
======= =======
</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, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis
as the audited financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full fiscal year.
2. Income 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.
3. Earnings Per Share
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.
4. Comprehensive Income
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires presentation of the components of comprehensive income,
including unrealized gains and losses on investments and foreign
currency translation adjustments. Comprehensive income was as follows
(in thousands):
THREE MONTHS ENDED AUGUST 31,
-----------------------------
1999 1998
------ ------
Net income $8,277 $6,161
Foreign currency translation adjustments (246) (43)
Unrealized holding gains (losses) on investments (361) 159
------ ------
Total comprehensive income $7,670 $6,277
====== ======
NINE MONTHS ENDED AUGUST 31,
----------------------------
1999 1998
------- -------
Net income $23,214 $14,381
Foreign currency translation adjustments (797) (234)
Unrealized holding gains (losses) on investments (701) 166
------- -------
Total comprehensive income $21,716 $14,313
======= =======
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5. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) which establishes standards for derivative
instruments and hedging activities. SFAS 133 requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met and that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 is effective for fiscal years beginning after June
15, 2000. The Company will adopt SFAS 133 in the first quarter of
fiscal 2001. The Company is currently evaluating this statement, but
does not expect the adoption of SFAS 133 to have a material effect on
the Company's consolidated financial position or results of operations.
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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, 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 Nine Months ----------------------------
Ended August 31, Ended August 31, Three Months Nine Months
---------------- ---------------- 1999 Compared 1999 Compared
1999 1998 1999 1998 To 1998 To 1998
---- ---- ---- ---- ------- -------
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Software licenses 44% 46% 46% 48% 15% 17%
Maintenance and services 56 54 54 52 21 26
--- --- --- ---
Total revenue 100 100 100 100 18 22
--- --- --- ---
Costs and expenses:
Cost of software licenses 5 4 5 5 47 27
Cost of maintenance and services 21 20 19 19 27 22
Sales and marketing 35 39 37 40 4 14
Product development 14 12 14 13 32 28
General and administrative 10 12 10 12 8 2
--- --- --- ---
Total costs and expenses 85 87 85 89 16 17
--- --- --- ---
Income from operations 15 13 15 11 33 63
Other income, net 2 2 1 2 27 30
--- --- --- ---
Income before provision for income taxes 17 15 16 13 32 59
Provision for income taxes 5 5 5 5 28 54
--- --- --- ---
Net income 12% 10% 11% 8% 34 61
=== === === ===
</TABLE>
The Company's total revenue increased 18% from $59.5 million in the third
quarter of fiscal 1998 to $70.2 million in the third quarter of fiscal 1999. The
Company's total revenue increased 22% from $170.7 million in the first nine
months of fiscal 1998 to $208.1 million in the first nine months of fiscal 1999.
Software license revenue increased 15% from $27.2 million in the third quarter
of fiscal 1998 to $31.2 million in the third quarter of fiscal 1999. Software
license revenue increased 17% from $82.5 million in the first nine months of
fiscal 1998 to $96.5 million in the first nine months of fiscal 1999.
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<PAGE> 9
The increase in software license revenue is attributable to greater acceptance
of the Company's products, including Progress(R) Version 8 and Progress(R)
Version 9, the latest versions of the Company's flagship development and
deployment product set, and, to a lesser extent, new Internet-focused products
such as Progress(R) WebSpeed(R) and Progress(R) Apptivity(TM). Progress Version
9 was released in December 1998. The Company also experienced an increase in
sales to Independent Software Vendors (ISVs), value-added resellers who resell
the Company's products in conjunction with the sale of their applications. The
increase in sales to ISVs is primarily due to greater deployment revenue from
database, application server, dataservers and reporting tools products.
Maintenance and services revenue increased 21% from $32.3 million in the third
quarter of fiscal 1998 to $38.9 million in the third quarter of fiscal 1999.
Maintenance and services revenue increased 26% from $88.2 million in the first
nine months of fiscal 1998 to $111.6 million in the first nine months of fiscal
1999. The increase in maintenance and services revenue was primarily the 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 businesses in order to take advantage of the market
opportunities associated with companies Web-enabling their business applications
and buying packaged applications and engaging service providers to customize
such packages.
Total revenue generated in markets outside North America increased 24% from
$33.1 million in the third quarter of fiscal 1998 to $41.2 million in the third
quarter of fiscal 1999. Such revenue represented 59% of total revenue in the
third quarter of fiscal 1999 as compared to 56% of total revenue in the third
quarter of fiscal 1998. Total revenue generated in markets outside North America
would have represented 60% of total revenue in the third quarter of fiscal 1999
if exchange rates had been constant as compared to the exchange rates in effect
in the third quarter of fiscal 1998. On a constant currency basis, total revenue
would have increased by 22% versus the 18% reported in the third quarter of
fiscal 1999.
Total revenue generated in markets outside North America increased 29% from
$96.7 million in the first nine months of fiscal 1998 to $124.3 million in the
first nine months of fiscal 1999. Such revenue represented 60% of total revenue
in the first nine months of fiscal 1999 as compared to 57% in the first nine
months of fiscal 1998. Total revenue generated in markets outside North America
would have also represented 60% of total revenue in the first nine months of
fiscal 1999 if exchange rates had been constant as compared to the exchange
rates in effect in the first nine months of fiscal 1998. On a constant currency
basis, total revenue would have increased by 24% versus the 22% reported in the
first nine months of fiscal 1999.
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 47% from $2.4 million in the
third quarter of fiscal 1998 to $3.6 million in the third quarter of fiscal 1999
and increased as a percentage of software license revenue from 9% to 11%. Cost
of software licenses increased 27% from $7.7 million in the first nine months of
fiscal 1998 to $9.8 million in the first nine months of fiscal 1999 and
increased as a percentage of software license revenue from 9% to 10%. The dollar
and percentage increases were due to an increase in documentation costs and
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 27% from $11.6 million in the third quarter of fiscal 1998 to
$14.7 million in the third quarter of fiscal 1999 and increased as a percentage
of maintenance and services revenue from 36% to 38%. The margin decrease for the
three months ended August 31, 1999 was primarily attributable to lower than
expected education revenues across a relatively fixed base of expenses. Cost of
maintenance and services increased 22% from $33.0 million in the first nine
months of fiscal 1998 to $40.4 million in the first nine months of 1999, but
decreased as a percentage of maintenance and services revenue from 37% to 36%.
The margin improvement for the nine months ended August 31, 1999 was due to
improved consulting margins and higher technical support margins. The dollar
increase in each period was due primarily to greater usage of outside
contractors to fulfill demand for consulting services and an increase in the
technical support, consulting and education staff in the first nine months of
fiscal 1999 as compared to the first nine months of fiscal 1998. The Company
increased its technical support, education, and consulting staff from 280 at the
end of the first nine months
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of fiscal 1998 to 356 at the end of the first nine months of fiscal 1999. The
Company expects its headcount for technical support, consulting and education to
continue to increase through the remainder of fiscal 1999 primarily due to the
need to satisfy increased demand for consulting services. However, there can be
no assurance that the Company will be successful in recruiting and retaining
such personnel.
Sales and marketing expenses increased 4% from $23.4 million in the third
quarter of fiscal 1998 to $24.3 million in the third quarter of fiscal 1999, but
decreased as a percentage of total revenue from 39% to 35%. Sales and marketing
expenses increased 14% from $68.0 million in the first nine months of fiscal
1998 to $77.2 million in the first nine months of fiscal 1999, but decreased as
a percentage of total revenue from 40% to 37%. The percentage decrease was due
to increased productivity from the Company's sales and marketing efforts. If the
Company is able to achieve its planned revenue, sales and marketing expenses are
expected to continue to increase at a slower rate of growth than revenue during
the remainder of fiscal 1999. The dollar increase in sales and marketing
expenses was due to an increase in headcount in the sales, sales support and
marketing staff and an 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, direct mail solicitations and other events. The headcount increase
was primarily to support international growth and new product lines. The Company
increased its sales, sales support and marketing staff from 477 at the end of
the first nine months of fiscal 1998 to 529 at the end of the first nine months
of fiscal 1999.
Product development expenses increased 32% from $7.3 million in the third
quarter of fiscal 1998 to $9.6 million in the third quarter of fiscal 1999 and
increased as a percentage of total revenue from 12% to 14%. Product development
expenses increased 28% from $22.5 million in the first nine months of fiscal
1998 to $28.8 million in the first nine months of fiscal 1999 and increased as a
percentage of total revenue from 13% to 14%. The dollar increase was primarily
due to an increase in average compensation costs as well as increased headcount
to support continued new product development efforts. The major product
development efforts in the first nine months of fiscal 1999 primarily related to
the development of the next versions of the Company's various product lines.
Capitalized software costs were not significant in either the three or nine
month periods ended August 31, 1999. Capitalized software costs represented 11%
and 5% of total product development spending in the three and nine months ended
August 31, 1998, respectively. The decrease in the percentage capitalized in
fiscal 1999 is due to the stages of the Company's various development projects.
The product development staff increased from 229 at the end of the first nine
months of fiscal 1998 to 234 at the end of the first nine months of fiscal 1999.
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 8% from $6.8 million in
the third quarter of fiscal 1998 to $7.3 million in the third quarter of fiscal
1999, but decreased as a percentage of total revenue from 12% to 10%. General
and administrative expenses increased 2% from $20.7 million in the first nine
months of fiscal 1998 to $21.1 million in the first nine months of fiscal 1999,
but decreased as a percentage of total revenue from 12% to 10%. The dollar
increase in the third quarter of fiscal 1999 was due to increased headcount. The
dollar increase in the first nine months of fiscal 1999 was primarily due to
increased headcount, offset by lower goodwill amortization charges in fiscal
1999 and start-up expenses associated with the Company's subsidiary in Brazil in
the first quarter of fiscal 1998. The Company increased its administrative staff
from 192 at the end of the first nine months of fiscal 1998 to 209 at the end of
the first nine months of fiscal 1999.
Other income increased 27% from $1.2 million in the third quarter of fiscal 1998
to $1.6 million in the third quarter of fiscal 1999. The increase in the third
quarter of fiscal 1999 as compared to fiscal 1998 was primarily due to foreign
currency gains resulting from the Company's ongoing foreign exchange hedging
programs. Other income increased 30% from $2.7 million in the first nine months
of fiscal 1998 to $3.5 million in the first nine months of fiscal 1999. The
increase in the first nine months of fiscal 1999 as compared to fiscal 1998 was
primarily due to an increase in interest income from higher average cash
balances. Other income also includes foreign currency gains and losses and the
minority interest in the Company's joint venture in Japan.
The Company's effective tax rate was 33% in each period of fiscal 1998 and 32%
in each period of fiscal 1999 and was based upon the estimated effective tax
rate for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
10
<PAGE> 11
At the end of the third quarter of fiscal 1999, the Company's cash and
short-term investments totaled $130.4 million. The increase in the balance from
year-end resulted from cash generated from operations and proceeds from stock
issuances in the first nine months of fiscal 1999, partially offset by common
stock repurchases and capital expenditures.
The Company generated $37.6 million in cash from operations in the first nine
months of fiscal 1999 as compared to $44.3 million in the first nine months of
fiscal 1998. The decrease was primarily due to the timing of payments related to
accounts payable and other accrued liabilities and a smaller increase in the
deferred revenue balance, partially offset by higher net income.
The Company purchased 988,236 shares of its common stock for $23.8 million in
the first nine months of fiscal 1999 as compared to 1,402,435 shares for $24.6
million in the first nine months of fiscal 1998. In September 1999, the Board of
Directors authorized, from October 1, 1999 through September 30, 2000, the
purchase of up to 5,000,000 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 $6.4 million of property and equipment in the first nine
months of fiscal 1999 and $8.0 million in the first nine months of fiscal 1998.
The purchases consisted primarily of computer equipment and software, furniture
and fixtures, and leasehold improvements. The property and equipment purchases
were for supporting the continued growth in the business, replacement of older
equipment and renovations to various locations.
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.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)
which establishes standards for derivative instruments and hedging activities.
SFAS 133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met and that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. The Company will adopt
SFAS 133 in the first quarter of fiscal 2001. The Company is currently
evaluating this statement, but does not expect the adoption of SFAS 133 to have
a material effect on the Company's consolidated financial position or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and foreign currency fluctuations.
The Company has established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency exchange.
The Company's exposure to market rate risk for changes in interest rates relates
to the Company's investment portfolio. The Company has not used derivative
financial instruments in its investment portfolio. The Company places its
investments with high quality issuers and has policies limiting, among other
things, the amount of credit exposure to any one issuer. The Company limits
default risk by purchasing only investment-grade securities. The Company's
investments are all fixed rate instruments. In addition, the Company has
classified all its debt securities as available for sale. This classification
reduces the income statement exposure to interest rate risk.
The Company has entered into foreign exchange option and forward contracts to
hedge certain transactions of selected foreign currencies (mainly in Europe and
Asia Pacific) against fluctuations in exchange rates. The Company has not
entered into foreign exchange option and forward contracts for speculative or
trading purposes. The Company's accounting policies for these contracts are
based on the Company's designation of the contracts as
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<PAGE> 12
hedging transactions. The criteria the Company uses for designating a contract
as a hedge include the contract's effectiveness in risk reduction and matching
of derivative instruments to the underlying transactions. Market value increases
and decreases on the foreign exchange option and forward contracts are
recognized in income in the same period as gains and losses on the underlying
transactions. The Company operates in certain countries where there are limited
forward currency exchange markets and thus the Company has unhedged transaction
exposures in these currencies. The Company generally does not hedge the net
assets of its international subsidiaries.
YEAR 2000
The Year 2000 presents potential concerns and issues for the Company as well as
other companies in the information technology industry. In general, Year 2000
readiness issues typically arise in computer software and hardware systems that
use two digit date formats, instead of four digits, to represent a particular
year. Users must test their unique combination of hardware, system software
(operating systems, transaction processors and database systems) and application
software in order for Year 2000 readiness to be achieved.
The Company has established a global project team to coordinate the Company's
Year 2000 readiness efforts and address the impact of the Year 2000 date
transition on its operations. The project team meets regularly and reports to an
executive steering committee composed of the Chief Financial Officer, the
General Counsel and the General Manager for Core Products and Services.
With the exception of the products discussed below, the Company believes that
the most current versions of its products are Year 2000 ready. For example, the
Company's Progress product set fully supports four-digit years. The Progress
product set internally stores dates as integers representing the number of days
from a base date. For customers who require the entry and display of two digit
years, the Progress product set provides the ability to specify a range of years
for comparison and calculation. Therefore, the Company does not believe that the
most current versions of its products, except those discussed below, will be
adversely affected by date changes in the Year 2000.
The Company does not intend to test products that will be retired on or before
January 1, 2000. The Company is encouraging customers who are using such
products to either upgrade to a more current version (if available) or conduct
their own testing to determine if the continued use of such products allows them
to meet their own Year 2000 readiness objectives. There can be no assurance that
the Company's products contain and will contain all features and functionality
considered necessary by customers, including ISVs, end users and distributors,
to be Year 2000 ready. In addition, there can be no assurances that the
Company's 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 most current versions of its products are
Year 2000 ready, other factors may result in an application created using the
Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used in creating the application or
non-compliance of the underlying hardware or operating system on which the
software runs. The Company does not believe that it would be liable in such
events. However, due to the unprecedented nature of potential litigation related
to Year 2000 readiness as discussed in the industry and popular press, the most
likely worst case scenario is that the Company would be subject to litigation.
It is uncertain whether or to what extent the Company may be affected by such
litigation.
The Company has tested the current versions of its three Crescent products and
determined that two products were not Year 2000 ready. Free patches that fix the
Year 2000 issues for these products are available on the Company's website. The
Company does not intend to test earlier versions of those Crescent products or
retired Crescent products. The Company cautions users of such products to
conduct their own testing to determine if the continued use of such products
allows them to meet their own Year 2000 readiness objectives.
The Company is not aware of any material operational issues or costs associated
with preparing its internal systems, both information technology (IT) and non-IT
systems, for the Year 2000. These systems are based primarily on the Company's
own software products with respect to applications and also include third-party
software and hardware technology. The Company's Year 2000 readiness plans
encompass four phases. The first phase is an inventory and assessment of the
Company's internal systems. The second phase is testing such systems for Year
2000 readiness.
12
<PAGE> 13
The third phase is remediation, representing the repair or replacement of any
hardware or software, and the fourth phase is contingency planning and
preparation.
The Company has substantially completed the first three phases and, although
testing is ongoing, the Company believes that all mission-critical internal
systems are Year 2000 ready. However, 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.
The Company has substantially completed its assessment of the Year 2000
readiness of material third parties, such as telecommunication service
providers, public utilities and key suppliers, who provide external services to
the Company. It is not currently anticipated that any potential third party
issues will have a material adverse effect on the Company's business, financial
condition and operating results. The Company has substantially completed its
Year 2000 readiness efforts of material internal systems and will continue
extensive testing of secondary systems and evaluating material third parties
throughout 1999.
The Company is continuing to develop and update its contingency plans. The
Company's contingency plans will address such areas as alternative third party
suppliers for critical services and products, alternative manual processes for
potential software or hardware failures and staffing requirements for internal
systems and customer support readiness. The Company expects to substantially
complete its contingency planning by the middle of November 1999.
All costs related to Year 2000 issues are being expensed as incurred. To date,
costs for addressing Year 2000 readiness issues have not been material. Most of
these expenses have been, and are expected to continue to be, time spent by
employees. The Company also is continually upgrading and improving its
facilities and IT systems. Such costs are integrated into the operating budgets
of each product unit or function and are not separately maintained.
Resolving Year 2000 readiness issues impacts almost every customer of the
Company and may potentially absorb significant portions of their budgets and
time in the near term. As the Year 2000 approaches, customers may delay software
purchases as they devote more time to preparing and testing their existing
systems and applications for Year 2000 readiness. It is uncertain whether or to
what extent the Company's revenue may be impacted by such actions.
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. In addition, risks and
uncertainties related to Year 2000 issues are described above under the heading
"Year 2000."
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors. Some of these factors
include 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 shortly after receipt of orders. 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 application development, deployment
and management software. Its core product line, Progress, is composed primarily
of Progress(R) ProVision(TM), Progress(R) RDBMS(TM), Progress WebSpeed,
Progress(R) Open AppServer(TM) and Progress(R) DataServers(TM). In December
1998, the Company began shipping the latest major enhancement to the Progress
product line, Progress Version 9.0. The Progress Apptivity product line consists
of Apptivity Developer and Apptivity Server. The Company began commercial
shipments of Progress Apptivity Version 3.0 in October 1998. The ISQ product
line is a set of software products that measure, monitor and manage the
availability, performance and recoverability of enterprise networks and ensure
overall system and application quality. Progress(R) IPQoS(TM) Version 2.0, the
latest ISQ product, began shipping in March
13
<PAGE> 14
1999.
The Company believes that the Progress product set, Progress Apptivity, and the
ISQ product set 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, financial condition,
and operating results.
The Company has derived most of its revenue from its core product line,
Progress, and other products that 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 also depend upon
the Company's continued successful distribution of its products through its ISV
channel and may be impacted by downward pressure on pricing, which may not be
offset by increases in volume. ISVs resell the Company's products 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 recently announced the formation of its Application Service Provider
(ASP) business unit that will provide a combination of technology, professional
services and partnerships to ISVs who want to move their applications to the ASP
distribution model. The ASP distribution model enables ISVs to rent their
business applications to end-user organizations over the Internet or through
other thin-client technologies. The ASP market is new and evolving. There can be
no assurance that the ASP model will become a viable market for business
applications or that the Company will be successful in penetrating this new
market.
The Company hopes that Progress Apptivity, the ISQ product set and other new
products and services will contribute positively to the Company's future
results. The market for Internet transaction processing products is highly
competitive. Global commerce and online exchange of information on the Internet
and other similar open wide area networks continue to evolve. There can be no
assurance that the Company's products will be successful in penetrating these
new and evolving markets. The market for Java-based business application
development and deployment tools, such as Progress 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
14
<PAGE> 15
adequately address the changing needs of the marketplace. The marketplace for
these new products is intensely competitive and characterized by low barriers to
entry. As a result, new competitors possessing technological, marketing or other
competitive advantages may emerge and rapidly acquire market share.
Approximately 56% of the Company's total revenue in the first nine months of
fiscal 1999, as compared to 52% in the first nine 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 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 one of
these factors 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, patent 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.
PART II. OTHER INFORMATION
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 - Financial Data Schedule (EDGAR Version Only)
10.10.1 - First amendment to Employee Retention and Motivation Agreement
executed by each of the Executive Officers
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1999.
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: October 12, 1999 /s/ Joseph W. Alsop
----------------------------------
Joseph W. Alsop
President
(Principal Executive Officer)
Dated: October 12, 1999 /s/ Norman R. Robertson
----------------------------------
Norman R. Robertson
Vice President, Finance and
Administration and Chief Financial
Officer
(Principal Financial Officer)
Dated: October 12, 1999 /s/ David H. Benton, Jr.
----------------------------------
David H. Benton, Jr.
Vice President and Corporate
Controller
(Principal Accounting Officer)
17
<PAGE> 1
EXHIBIT 10.10.1
FIRST AMENDMENT TO
EMPLOYEE RETENTION AND MOTIVATION AGREEMENT
WHEREAS, Progress Software Corporation (the "Company") and (the
"Employee") entered into an Employee Retention and Motivation Agreement (the
"Agreement"), effective ; and,
WHEREAS, upon a Change of Control, as defined in the Agreement, the
Employee is entitled to accelerated vesting of a portion of the Employee's
unvested stock options; and,
WHEREAS, the Company's Board of Directors has determined that it is in
the best interests of the Company and its stockholders to increase the portion
of the Employee's options that are subject to accelerated vesting upon a Change
of Control;
NOW THEREFORE, in consideration of the mutual covenants herein
contained; and in consideration of Employee's prior execution of an Employee
Proprietary Information and Confidentiality Agreement, the parties hereby agree
as follows:
Section 2(a) is amended by deleting the word and number, "six
(6)", as they appear in line number four and substituting
therefor the word and number, "twelve (12)".
This Amendment shall both supplement and amend and shall constitute a
part of the Agreement made between the Company and Employee. Except to the
extent expressly altered by this Amendment, all provisions of the Agreement
shall remain in full force and effect.
This Amendment shall be effective as of the date the Company signs
below.
PROGRESS SOFTWARE CORPORATION EMPLOYEE
________________________________ ________________________________
Date: __________________________ Date: __________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q
FOR THE PERIOD ENDING AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 69,246
<SECURITIES> 61,112
<RECEIVABLES> 46,359
<ALLOWANCES> 7,479
<INVENTORY> 0
<CURRENT-ASSETS> 187,874
<PP&E> 67,148
<DEPRECIATION> 46,801
<TOTAL-ASSETS> 217,831
<CURRENT-LIABILITIES> 100,793
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 116,843
<TOTAL-LIABILITY-AND-EQUITY> 217,831
<SALES> 96,472
<TOTAL-REVENUES> 208,054
<CGS> 9,829
<TOTAL-COSTS> 177,398
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 34,139
<INCOME-TAX> 10,925
<INCOME-CONTINUING> 23,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,214
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.19
</TABLE>
