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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal Year Ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For The Transaction Period From To
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2746201
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
14 OAK PARK
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices)
TELEPHONE NUMBER: (781) 280-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
--------------------------------
Title of each class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and, (2) has been subject to such
filing requirements for the past 90 days:
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 22, 1999, there were 17,265,281 shares outstanding of the
registrant's common stock, $.01 par value. As of that date, the aggregate market
value of voting stock held by non-affiliates of the registrant was approximately
$429,570,000.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
November 30, 1998 are incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1999 are incorporated by reference into
Part III.
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PART I
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involves risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, some of which are described in greater detail in the 1998 Annual
Report to Shareholders under the heading "Factors That May Affect Future
Results," include, but are not limited to, the effect of Year 2000 issues, 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 and technical support, pricing pressures and the competitive
environment in the software industry, business and consumer use of the Internet,
and the Company's ability to penetrate international markets and manage its
international operations. Although the Company has sought to identify the most
significant risks to its business, the Company cannot predict whether, or to
what extent, any of such risks may be realized, nor can there be any assurance
that the Company has identified all possible issues which the Company might
face.
ITEM 1. BUSINESS
Progress Software Corporation ("PSC" or the "Company") is a supplier of
application development, deployment and management technology, network
management solutions and support services to business, industry and government
worldwide. The Company's product lines encompass application servers, relational
database management systems, application development tools and network, system
and application management tools. The Company's products simplify and accelerate
the development, deployment and management of software across distributed
Internet/Web, client/server and host/terminal computing environments.
The Company's principal product line, Progress(R), is an integrated,
component-based visual development environment for building and deploying
multi-tier, enterprise-class business applications. The Progress(R)
Apptivity(TM) product line enables the development and deployment of
distributed, multi-tier Java(TM) business applications. The Internet Software
Quality ("ISQ") product line enhances information system availability and
performance by monitoring, measuring and managing Internet devices, networks,
systems and applications. In order to provide businesses with a total solution,
the Company also offers professional services from its worldwide consulting,
education and technical support organizations.
The Company sells its products and services throughout North America, Latin
America, Europe, Middle East, Africa ("EMEA") and the Asia/Pacific region to
organizations that develop and deploy mission-critical enterprise business
applications. More than half of the Company's revenue is derived from over 2,000
Independent Software Vendors ("ISVs") who market applications that utilize the
Company's technology. The balance of the Company's business comes from serving
the needs of Information Technology ("IT") organizations of businesses and
governments.
In order to better serve the Company's installed customer base and
facilitate marketing to new customers, the Company is organized into three
product units. These product units consist of integrated teams of product
development, product management and product marketing groups that utilize the
resources of the functional organizations of worldwide sales and professional
services, corporate marketing, technical support and finance and administration.
The Company's three product units are Core Products, which includes the Progress
product line, the Apptivity product unit and the ISQ product unit.
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BUSINESS STRATEGY
The Company was founded in 1981 to develop and market application
development and deployment software. Its business strategy has been developed in
response to user needs for application development tools that enable the rapid
development and deployment of business-critical applications regardless of the
computing environment. The Company's mission today is to deliver superior
software products and services that empower its partners and customers to
dramatically improve their development and deployment of quality applications
worldwide. This mission encompasses the following strategic points:
- Rapid Application Development. The Company's development tools and
technologies are designed to be easy-to-use, intuitive, highly visual
and component-based. This allows the Company's products and services
to improve the productivity of developers in creating and maintaining
complex applications.
- Application Deployment Flexibility. The Company's products allow
deployment across all major computing configurations: Internet/Web,
client/server and host/terminal. The Progress(R) Open AppServer(TM)
and the Progress Apptivity Application Server provide "n-tier"
computing support in order to improve application performance. The
Company designs its products to operate across a broad range of
midrange systems, workstations and PCs. The Company believes that
application developers need the flexibility to deploy their
applications across hardware, operating system platforms, databases
and user interfaces that may be different from those on which their
applications are originally developed. In addition, end-users need the
flexibility to continue to use applications with minimal
re-programming, even as they modify or upgrade their computing
environments.
- Future Proof Business Applications. A major focus for the Company is
protecting the business application investments of its customers,
making their applications "Future Proof(TM)." The Company's latest
product releases offer a standards-based path for building and
deploying functionally rich, distributed multi-tier applications.
- Balanced Distribution. PSC chose at an early stage to implement both
direct and indirect channels of distribution to broaden its geographic
reach, accelerate its sales expansion and leverage its sales force.
The Company sells to ISVs and IT departments of corporations and
government agencies. ISVs develop end-user applications for resale,
and both IT customers and ISVs generally license additional deployment
copies of the Company's products to run applications. To minimize
channel conflict, PSC neither develops application software for
distribution nor plans to do so in the future.
- Recurring Revenue. The Company's distribution and pricing strategies
are intended to generate recurring revenue. The sale of a development
system can lead to follow-on sales as ISVs license additional copies
of the Company's development and deployment products upon successful
distribution of their applications, or as end-users deploy such
applications within their organizations or upgrade their systems.
- Worldwide Market. PSC has emphasized international sales through its
subsidiaries and a network of independent distributors. Approximately
57% of the Company's revenue was derived from customers outside of
North America in fiscal 1998.
- Customer Service. PSC has made a strategic commitment to customer
service. The Company believes that rapid changes in technology require
not only continuous product enhancement but also a strong customer
service effort to encourage product usage and maintain customer
satisfaction. The Company provides a variety of technical support and
service options under its annual maintenance programs, including an
option for 24 hour, 7 day a week service. The Company also offers an
extensive selection of training courses and on-site consulting
services.
- "Buy, Build, Both". A major challenge for the software industry is to
unite the economical price, reliability and immediate benefit of
packaged software applications with the tailored fit of custom
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solutions. Purchasing a packaged application provides standard
functionality that can be used quickly and economically with little or
no development time. Building an in-house application results in a
solution that offers a competitive business advantage, but typically
involves long development cycles. By combining both packaged and
customized solutions, IT departments can deliver flexible,
business-driven applications more quickly and productively. The
Company's products and services, in conjunction with solutions from its
ISVs, are designed to give IT departments that flexibility and
competitive advantage.
PROGRESS PRODUCT LINE
The Company's core product line consists of Progress(R) ProVision Plus(TM),
Progress(R) WebSpeed(R), Progress(R) RDBMS, Progress Open AppServer and
Progress(R) DataServers. Applications developed in Progress are reconfigurable
between character-based and graphical interfaces, as well as between
client/server and host-based computing systems. The Progress product line
provides a high degree of portability across a wide range of computing
environments while affording developers the flexibility to build applications on
a range of database management products.
In December 1998, the Company began shipping Progress Version 9.0, the
latest major release of the Company's flagship product line of application
development and deployment products. This release allows users to build Future
Proof enterprise applications by leveraging investments in existing applications
and integrating new technologies. Progress Version 9 provides scalability
enhancements to support thousands of concurrent users; open, standards-based
support for numerous user interfaces (clients) and a wide range of databases;
component-based modularity for greater application efficiency, resource
utilization, performance and reliability; server-based performance and
maintainability for application components stored on application servers; and a
single development environment for building 4GL and HTML applications.
PROGRESS PROVISION PLUS
Progress ProVision Plus is a programming environment that provides
developers with a "visual road map" for developing and deploying complex
enterprise applications. Progress ProVision Plus contains a set of integrated,
graphical development tools that support a range of development approaches,
including structured, procedural, event-driven and object approaches. Progress
ProVision Plus is an Integrated Application Environment for developing and
managing enterprise applications, whether they are host-based, web-based,
client/server or distributed. Progress ProVision Plus lets developers share
common business logic among a variety of clients, simplifying the creation and
management of enterprise applications.
Developers can create all the required components for mission-critical,
enterprise applications using Progress ProVision Plus. The product's tight
integration with the Progress RDBMS allows developers to build a single, central
repository that not only describes the database definitions but the application
defaults and business rules as well. The Progress 4GL allows developers to build
application business logic quickly and efficiently. Progress ProVision Plus also
includes Progress(R)SmartObjects(TM), which makes creating attractive and
effective graphical user interfaces fast and easy.
Progress ProVision Plus is also tightly integrated with the Progress Open
AppServer to facilitate the development and deployment of distributed enterprise
applications. Shared business logic can be made available to virtually any
client application, including those built with Java, ActiveX(TM) and Visual
Basic(TM), using the Open Client Toolkit. By embracing industry standards,
Progress ProVision Plus opens enterprise applications to numerous third-party
products.
Progress ProVision Plus delivers one of most comprehensive 4GL development
and deployment toolsets in the industry. Based on the combined technologies of
Progress(R) ProVision(TM) and Progress(R) WebSpeed(R) Workshop, Progress
ProVision Plus ensures that development efforts can be reused for greater
efficiency. The
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Company also offers Progress ProVision and Progress WebSpeed Workshop as
standalone products. Progress ProVision Plus provides common tools for
client/server and web-based development, including:
- AppBuilder--a productivity-enhancing suite of tools for client/server,
web, and character development.
- Roundtable Lite--an integrated source code management and team
collaboration system that provides version control, secure
check-in/out, task management, impact analysis, change auditing, cross
referencing and incremental compiling.
- Open Client Toolkit--provides Open Client access to Progress Open
AppServer functionality.
- AppServer Partition Deployment ProTool--defines the location of
business logic at runtime, facilitating ease of development and
deployment of distributed applications.
- Progress ProVision Plus Development Server--includes a development
database, AppServer and WebSpeed Transaction Server for quickly and
easily testing distributed applications.
- WebTools--a set of browser-based tools used for building and testing
web applications.
- Progress Explorer--defines and manages the Progress database, Progress
Open AppServer, and Progress WebSpeed Transaction Server.
- Progress Data Dictionary--a central repository that describes the
database definitions, application defaults and business rules.
- SmartObjects--component technology that offers code inheritance,
encapsulation and other object-oriented development features that
allows the creation, customization, and automatic assembly of
components.
- Progress 4GL--a high-level application development language that
reduces development complexity by addressing all development needs
within a single language.
- Wizards--tools that speed development through the creation of reusable
SmartObjects or Web Objects.
- Integration with ActiveX components for greater user interface
flexibility and OLE automation for application interoperability.
- Integrated reporting tools including Report Builder, a graphical
report writing tool for business analysts and application developers,
and Results, an interactive data access and reporting tool that allows
non-technical end-users to create ad-hoc queries and reports.
PROGRESS RDBMS
The Progress RDBMS products are high-performance relational databases that
can scale from a single-user Windows(R) 95 system to massive symmetric
multiprocessing ("SMP") and cache coherent non-uniform memory access ("ccNUMA")
systems, supporting thousands of concurrent users. In addition to offering one
of the lowest total costs of ownership and scalability, the Progress RDBMS
products offer high availability, reliability, performance, and platform
portability. With full support for ANSI SQL-92 Entry Level specification,
Progress RDBMS products integrate with enterprise applications, tools, and
numerous third-party data management systems.
The three Progress RDBMS products--the Progress Enterprise RDBMS, the
Progress Workgroup RDBMS, and the Progress Personal RDBMS--allow users to select
a solution that satisfies their business objectives. The benefit to customers is
that they pay for what is needed today, and, as their requirements grow, they
can upgrade to a more robust solution without changing program code.
The Progress Enterprise RDBMS is designed for large user environments and
the transaction processing throughput of high volume SQL-based and Progress
4GL-based on-line transaction processing ("OLTP") applications. The Progress
Enterprise RDBMS was developed with a flexible, multithreaded, multiserver
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architecture. The Progress Enterprise RDBMS is a powerful, open and large-scale
enterprise database that can run across multiple hardware platforms and
networks.
The Progress Enterprise RDBMS includes the functionality needed to meet
demanding OLTP requirements. These capabilities include row-level locking,
roll-back and roll-forward recovery, point-in-time recovery, distributed
database management with two-phase commit, a complete suite of on-line utilities
and full support for ANSI-standard SQL-92. Sophisticated self-tuning
capabilities and simple graphical interfaces for system administration make the
Progress Enterprise RDBMS easy to install, tune and manage. With low
administration costs, low initial cost of licenses, minimum upgrade fees and
limited software implementation costs, the Progress Enterprise RDBMS provides a
significant cost-of-ownership advantage over competing database products.
The Progress Workgroup RDBMS, which offers many of the same powerful
capabilities as the Progress Enterprise RDBMS, is optimized for workgroups of
two to thirty simultaneous users. This cost-effective, department-level solution
provides high performance, multi-user support, and cross-platform
interoperability. The Progress Workgroup RDBMS meets the needs of workgroup
applications by running on a wide variety of hardware and operating system
platforms. Because the flexible database architecture provides optimal
throughput on all supported platforms, a database developed on one machine can
serve applications on other systems and network configurations.
The Progress Personal RDBMS is bundled with Progress development tools,
including Progress ProVision Plus, and is suitable for deploying single-user
SQL-based and 4GL-based applications and for developing, prototyping and testing
applications.
PROGRESS OPEN APPSERVER
Progress Open AppServer supports distributed enterprise applications that
leverage existing investments, support new technologies, and communicate with
other applications as needed. An integrated application server for both Progress
Version 9 4GL-based applications and Progress WebSpeed Version 3.0 Web-based
applications, Progress Open AppServer forms a middle tier between an
application's user interface and its back-end data. Progress Open AppServer
allows interoperability with various clients and various data sources and
improves the performance and scalability of business applications. Progress Open
AppServer uses a component-based model for partitioning an application for
efficient deployment. Progress 4GL procedures can be encapsulated into
components that represent an application's business logic. Components can then
be placed on client systems or onto faster server machines distributed
throughout the enterprise or the Web. When distributed, the business logic
components are reusable across multiple applications. A new component called the
SmartDataObject gives developers the ability to create these components.
Progress Open AppServer components can run on a single Windows NT(R) or
UNIX(R) workstation for faster processing or on multiple machines for failover
capabilities. Additionally, all business logic and components can be accessed by
multiple user interfaces for broad client support. The AppServer Partitioning
Tool, part of Progress Version 9, makes it possible to code applications using
distributed components or "partitions" that can be run either remotely on a
Progress Open AppServer or locally on the client. Furthermore, the decision on
whether to run remotely or locally can be made at runtime without recompiling
the client application. A developer can create and compile an application once
and deploy it in many different Progress Open AppServer configurations. Progress
Open AppServers can connect across the network to other Progress Open AppServers
in complex multi-tier configurations, allowing more effective enterprise
business solutions that maximize available computing resources.
PROGRESS DATASERVERS
The Company provides developers with a transparent interface to a wide
range of database management systems through Progress DataServers. These
products offer full read, write, update and delete capabilities to diverse data
management systems and enable developers to write applications once and deploy
them across a broad spectrum of data sources. Progress DataServers also enable
existing Progress 4GL and web-based
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applications to access non-Progress data sources and allow the integration of
new and legacy applications with diverse databases.
Progress DataServer products include the Progress Oracle(R) DataServer, the
Progress ODBC DataServer, which is available in Enterprise and Personal
editions, and the Progress/400 DataServer. These products provide an environment
for developing and deploying Progress 4GL and web-based applications designed
for heterogeneous, distributed computing environments.
PROGRESS WEBSPEED
Progress WebSpeed is a comprehensive environment for web-enabling existing
applications and building new Internet Transaction Processing ("ITP")
applications that deliver a high level of database connectivity and transaction
management. Progress WebSpeed consists of two components: Progress WebSpeed
Workshop and Progress WebSpeed Transaction Server. Progress WebSpeed Workshop is
an integrated suite of development tools for building ITP applications that
deliver powerful database connectivity and state management. Progress WebSpeed
Transaction Server provides a robust platform for ITP applications that require
high scalability and rapid response rates.
Progress WebSpeed Workshop supports a component development paradigm that
allows developers to create and share business logic across web and
client/server applications. Developers can define and reuse SmartObjects in web
and client/server applications, offering code inheritance, encapsulation and
other object-oriented development features.
Progress WebSpeed Transaction Server provides high throughput, dynamic load
balancing, and scalability to handle thousands of simultaneous users. Progress
WebSpeed Transaction Server includes record locking, transaction rollback, and
two-phase commit capabilities that safeguard application and data integrity,
even if transactions are interrupted, and ensure the integrity of transactions
that span multiple databases.
PROGRESS APPTIVITY PRODUCT LINE
Progress Apptivity provides the capabilities to let developers create
applications that dynamically integrate and manage data from diverse business
systems, including databases, enterprise and custom applications, and legacy
systems. The Company released Progress Apptivity Version 3.0 in October 1998. In
a single, integrated environment, Progress Apptivity Version 3 provides the
enterprise application server and rapid application development tools that
developers need to quickly develop and deploy business applications on the Web.
Progress Apptivity is a complete development and deployment environment that
tightly integrates an open, standards-based, highly scalable application server,
a productive component-based, visual development environment and a component
framework for building distributed business applications.
PROGRESS APPTIVITY DEVELOPER
Progress Apptivity Developer is an integrated development environment
designed to simplify and accelerate the development of distributed, Web-deployed
business applications that leverage the capabilities of the Progress Apptivity
Application Server. The product provides a comprehensive toolset and component
framework for developing both the client and server portions of the application.
Progress Apptivity Developer provides a single integrated environment for
building data-centric HTML pages, interactive Java forms and reusable Enterprise
JavaBeans(TM) server components. The toolset includes a customizable
environment, a color-coded editor, an integrated Java debugger and other
productivity tools. Progress Apptivity Developer supports team-based development
and speeds the development process with its SmartComponent framework and
comprehensive set of wizards that perform many functions including page layout,
creating client and server business logic and working with CORBA objects.
PROGRESS APPTIVITY APPLICATION SERVER
The Progress Apptivity Application Server is an open, standards-based and
highly scalable application server that simplifies the process of web-enabling
legacy business applications and data. The product includes
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numerous features such as an extensible CORBA-based server architecture that
supports Enterprise JavaBeans and SmartAdapters(TM) that allow applications to
access an external data source through a standard data interface model. Since
Progress Apptivity Application Server maintains business logic on a central
server, applications can be deployed faster and with lower maintenance costs.
Progress Apptivity's SmartConnect capabilities, which include native support for
JDBC-and ODBC-compliant databases, allow developers to build content-rich
applications that dynamically aggregate and manage data from diverse business
processes and data sources.
Progress Apptivity Application Server has multi-threaded server
architecture that provides a secure and scalable foundation for business
applications. Progress Apptivity Application Server includes comprehensive
security, load balancing and automatic failover that ensures no single point of
failure and provides a high level of application reliability and scalability.
The product has an Object Request Broker ("ORB")-neutral, CORBA-based
architecture and includes IONA Technologies Plc's OrbixWeb, a leading business
ORB. Progress Apptivity Application Server also includes Apptivity Explorer, an
application monitoring and management tool.
INTERNET SOFTWARE QUALITY PRODUCT LINE
The ISQ product line is the Company's newest and includes a set of products
designed to provide a full line of solutions geared toward the management of
applications and networks by determining their availability, performance and
recoverability. The ISQ product line currently includes Progress(R) IPQoS(TM),
Progress(R) IPAccounting(TM), Progress(R) Lighthouse(TM), Progress(R)
ProtoSpeed(TM) and the Crescent Division product set.
PROGRESS IPQOS
Progress IPQoS enables developers to introduce a new element into network
management capabilities -- the ability to monitor service levels for specific
network resources throughout the entire network. Progress IPQoS integrates with
standard SNMP management platforms including SPECTRUM(R), OpenView, Tivoli(R)
and others to add socket-level TCP/IP and IPX/SPX resource monitoring. Progress
IPQoS allows users to detect and identify resource and application failures in
the network, create detailed reports of enterprise resources, visualize the
performance of a particular resource using standard graphing capabilities and
make decisions to route network traffic more efficiently based on historical
trends.
PROGRESS IPACCOUNTING
Progress IPAccounting allows users to monitor and capture layer-3/layer-4
traffic. This includes email, e-commerce, voice over IP and video conferencing.
Progress IPAccounting provides the functionality to filter network traffic by
application protocol, IP address and port, log all or part of protocol
transactions to a central database using filters, catalog requests and replies
and log a total byte count for each protocol transaction, and associate the IP
address of a protocol transaction with an authenticated user.
PROGRESS LIGHTHOUSE
Progress LightHouse delivers four essential services (persistence,
installation, configuration and visualization) that allow for a sophisticated
level of network device management and control. The persistence service is built
on top of the extensible Progress Repository, which includes information about
network devices, their properties, functions and relationships, and includes a
browser interface for viewing, editing and navigating the data in this
repository. Installation services use information from this repository to assign
IP addresses to network devices. Configuration services allow users to edit
settings and forward these settings to the device located on the network.
Visualization services enable users to visualize network devices during
operation and monitor performance levels.
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PROGRESS PROTOSPEED
Progress ProtoSpeed is an Internet protocol debugger. Progress ProtoSpeed
goes beyond traditional debugging capabilities by providing the ability to
examine distributed objects from any location on the network. This simplifies
distributed debugging by enabling developers to debug multiple objects: local
and remote, running in the browser, outside the browser, or on the server.
Progress ProtoSpeed also provides Internet protocol debugging capabilities,
giving developers the ability to set breakpoints and modify and record multiple
protocol streams in real-time.
CRESCENT DIVISION PRODUCTS
The Crescent Division of the Company provides advanced client/server tools
and components to Visual Basic and Visual J++ development teams. The Crescent
Division's strategy in the workgroup/departmental tools market complements
Visual Basic and Visual J++ by offering an integrated suite of add-on tools and
components that enable professional developers to make client/server business
application development easy and intuitive. The products offered by the Crescent
Division include Crescent Internet ToolPak(TM), QuickPak(R) VB/J++ and
PDQComm(R).
PRODUCT DEVELOPMENT
To date, most of the Company's products have been developed by its internal
product development staff. Although the Company believes that the features and
performance of its products are competitive with those of other available
application development and deployment tools and that none of its current
product versions is approaching obsolescence, the Company believes that
continuing enhancements of its products will be required to enable the Company
to maintain its competitive position.
The Company intends to focus its principal future product development
efforts on developing new products and updating existing products in order to
realize the Company's vision of the expected direction of application
development technology -- which the Company describes as Universal Application
Architecture ("UAA"). UAA is an approach to application development and
deployment technology that relies on server-centric performance and
maintainability, component-based modularity and standards-based interoperability
and integration.
In the server-centric UAA model, the business logic of an application
resides primarily on the server, accessed by users with thin clients or Web
browsers. Application code that is more suitable for client side execution, such
as user interface logic, data entry validation, and the like, is distributed as
needed to the client but managed by the server. Component-based modularity is an
application development technique derived from object-oriented programming in
which applications are built as encapsulated blocks of logic. This enables
client/server applications to be rewritten into other languages, such as Java,
in incremental steps, easing the transition to next-generation architectures.
Standards-based interoperability facilitates communication between business
application logic and a variety of clients and a variety of data sources.
Business applications developed within this framework will include the messaging
standards of CORBA, a standard that enables software programs written in any
programming language to communicate with each other and execute on any platform.
The Company's product development staff consisted of 225 employees as of
November 30, 1998. Product development is primarily conducted at the Company's
offices in Bedford, Massachusetts, Newark, California and Nashua, New Hampshire.
Limited work related to product localization may also be performed at the
Company's international subsidiaries. In fiscal years 1998, 1997 and 1996, the
Company spent $32.2 million, $28.9 million and $26.4 million, respectively, on
product development, of which $2.0 million, $1.9 million and $2.5 million,
respectively, were capitalized in those years. The Company believes that the
experience and depth of its product development staff are important factors in
the Company's success.
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CUSTOMERS
The Company markets its products worldwide to ISVs and IT departments of
corporations and government agencies. No single customer has accounted for more
than 10% of the Company's total revenue in any of its last three fiscal years.
Independent Software Vendors. The Company's ISVs provide the Company with
broad market coverage, offer an extensive library of commercial applications and
are a source of follow-on revenue. PSC publishes Application Catalogs and
includes ISVs in trade shows and other marketing programs. PSC also has kept
entry costs for ISVs low to encourage a wide variety of ISVs to build
applications. An ISV typically takes 6 to 18 months to develop an application.
Although many of the Company's ISVs have developed successful applications and
have large installed customer bases, others are engaged in earlier stages of
product development and marketing and may not contribute follow-on revenue to
PSC for some time, if at all. However, if an ISV succeeds in marketing its
applications, the Company obtains follow-on revenue as the ISV licenses copies
of the Company's deployment products to permit its application to be installed
and used by customers.
IT Departments. PSC licenses its products to IT departments of
corporations, government agencies and other organizations to build complex
applications. Large IT departments that purchase ISV applications often also
purchase the Company's development tools to supplement their internal
application development. Like ISVs, IT customers may also license deployment
products to install applications at additional user sites.
Apptivity Resellers. In October 1997, the Company initiated the Apptivity
Partner Program, a new reseller program designed to promote sales of its
Apptivity line of Java business application development tools. While the Company
has a long-standing ISV Program for its core products, the Apptivity Partner
Program represents the first time that PSC has marketed its products through the
pure reseller channel. The Apptivity Partner Program offers various levels of
participation, with graded levels of competitive discounts. Resellers will
purchase directly from PSC in order to eliminate potential channel conflicts.
The Company provides technical and marketing assistance and is seeking to
partner with a limited number of resellers in each major market.
SALES AND MARKETING
The Company sells its products through its direct sales force in the United
States and in over 20 other countries and through independent distributors in
over 50 countries outside North America. The sales, marketing and service groups
are organized by region into North America, EMEA, Asia Pacific, Latin America,
and Japan. The Company believes that this structure allows it to maintain direct
contact with and better support its customers and to control its international
distribution. The Company's international subsidiaries provide focused local
marketing efforts and are better able to directly respond to changes in local
conditions. Financial information relating to business segment and international
operations is detailed in Note 10 of Notes to Consolidated Financial Statements
on page 43 in the 1998 Annual Report to Shareholders and is incorporated herein
by reference.
Sales personnel are responsible for developing new ISV and IT accounts,
assisting ISVs in closing major accounts and servicing existing customers. The
Company actively seeks to avoid conflict between the sales efforts of its ISVs
and the Company's own sales efforts.
PSC uses its telephone sales and sales administration groups to enhance its
direct sales efforts and to generate new business and follow-on business from
existing customers. These groups may provide evaluation copies to ISVs or IT
organizations to help qualify them as prospective customers, and also sell
additional development and deployment products to existing customers.
The Company's marketing department conducts extensive marketing programs
designed to ensure a stream of market-ready products, raise general awareness of
PSC, generate leads for the PSC sales organization and promote the Company's
various product lines. These programs include public relations, direct mail,
participation in trade shows, advertising and production of collateral
literature. The Company utilizes the "Powered by Progress" branding program in
order to raise awareness of its products and their
10
<PAGE> 11
capabilities in the enterprise application development market. The Company
sponsored three regional user conferences in the United States, the United
Kingdom and Australia in fiscal 1998. The Company is planning to hold a single
worldwide user conference in the United States in 1999.
CUSTOMER SUPPORT
The Company's technical support staff provides telephone support to
application developers and end-users using a computerized call tracking and
problem reporting system. PSC also provides custom software development,
consulting services and training throughout the world. The Company's software
licenses generally are perpetual licenses. Customers may also purchase an annual
maintenance service entitling them to software updates, technical support and
technical bulletins. The annual fee for maintenance is generally 15% to 20% of
the current list price of the product to be maintained; first year maintenance
is not included with the Company's products and is purchased separately. The
Company provides technical support to customers primarily through its technical
support centers in Bedford, Massachusetts; Rotterdam, The Netherlands; and
Melbourne, Australia. Some local support is also provided by international
subsidiaries in their own countries.
The Company's professional services organization delivers a total business
solution for customers through a combination of products, consulting and
education. The Company's worldwide consulting organization offers project
management, custom development, programming, application implementation,
Internet services, Y2K support, migration services and other services. The
Company's consulting organization also provides services to Web-enable existing
applications or take advantage of the capabilities of new product releases.
Consulting and training services for customers outside North America are
provided by personnel at the Company's international subsidiaries and
distributors. Revenue from maintenance and services was 53%, 49% and 47% of
total revenue for fiscal years 1998, 1997 and 1996, respectively.
COMPETITION
The computer software industry is intensely competitive. The Company
experiences significant competition from a variety of sources with respect to
all its products. The Company believes that the breadth and integration of its
product offerings have become increasingly important competitive advantages.
Other factors affecting competition in the markets served by the Company include
product performance in complex applications, application portability, vendor
experience, ease of integration, price, training and support. The Company
believes that it competes favorably with respect to these factors.
The Company competes with a number of entities, principally application
development tools vendors, such as Forte Software Inc., Inprise Corporation,
Powersoft Corporation, a subsidiary of Sybase, Inc., and Uniface, a division of
Compuware Corporation, and relational database vendors offering tools in
conjunction with their database systems, such as CA Ingres, a subsidiary of
Computer Associates International, Inc., Informix Corporation, Microsoft
Corporation, Oracle Corporation and Sybase, Inc. The Company believes that the
database market is currently dominated by Oracle and Microsoft, and that there
is no dominant application development tools vendor. Some of these competitors
have greater financial, marketing or technical resources than the Company and
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than can the Company. Increased competition could make it more
difficult for the Company to maintain its market presence.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
In accordance with industry practice, the Company relies upon a combination
of contractual provisions and copyright, trademark and trade secret laws to
protect its proprietary rights in its products. The Company distributes its
products under software license agreements which grant customers a perpetual
non-exclusive license to use the Company's products and contain terms and
conditions prohibiting the unauthorized reproduction or transfer of the
Company's products. In addition, the Company attempts to protect its trade
11
<PAGE> 12
secrets and other proprietary information through agreements with employees and
consultants. Although the Company intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
The Company seeks to protect the source code of its products as a trade
secret and as an unpublished copyrighted work. The Company has also made patent
applications for some of its various product technologies. Where possible, the
Company seeks to obtain protection of its product names through trademark
registration and other similar procedures.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a leadership position within
the industry than are the various legal protections of its technology. In
addition, the Company believes that the nature of its customers, the importance
of the Company's products to them and their need for continuing product support
reduce the risk of unauthorized reproduction.
BACKLOG
The Company generally ships its products within 30 days after acceptance of
a customer purchase order and execution of a license agreement. Accordingly, the
Company does not believe that its backlog at any particular point in time is
indicative of future sales levels.
EMPLOYEES
As of November 30, 1998, the Company had 1,201 employees worldwide,
including 476 in sales and marketing, 309 in customer support and services
(including manufacturing and distribution), 225 in product development and 191
in administration. The competition in recruiting skilled technical personnel in
the computer software industry is intense. The Company believes that its ability
to attract and retain qualified employees is an important factor in its growth
and development, and that its future success will depend, in large measure, on
its ability to continue to attract and retain qualified employees. To date, the
Company has been successful in recruiting and retaining sufficient numbers of
qualified personnel to effectively conduct its business. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relations with employees are good.
The Company has adopted policies with regard to issuance of stock options
and payment of cash bonuses and contributions to retirement plans in years in
which the Company has met or exceeded its financial plan. These policies are
designed to minimize employee turnover, although there can be no assurance that
such policies will be successful.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph W. Alsop.............................. 53 President, Treasurer and Director
Jennifer J. Bergantino....................... 39 Vice President, Marketing and Strategic Planning
David G. Ireland............................. 52 Vice President and General Manager, Core Products
and Services
Richard D. Reidy............................. 39 Vice President, Product Development
Norman R. Robertson.......................... 50 Vice President, Finance and Administration and
Chief Financial Officer
David P. Vesty............................... 46 Vice President, Worldwide Sales
</TABLE>
Mr. Alsop, a founder of the Company, has been a director and President of
the Company since its inception in 1981.
Ms. Bergantino joined the Company in January 1994 as Manager, Technology
Marketing. In January 1995, she was appointed Director, Crescent Business
Operations, was elected Vice President, Product
12
<PAGE> 13
Marketing and Planning in February 1996 and was elected Vice President,
Marketing and Strategic Planning in July 1996. From 1991 to 1993, she was
employed by Component Software Corporation, a computer software company, as Vice
President, Marketing.
Mr. Ireland joined the Company in September 1997 as Vice President, Core
Products and Services and was elected Vice President and General Manager, Core
Products and Services in March 1998. From 1994 to 1997, Mr. Ireland was employed
by Marcam Corporation, a computer software company, as a Vice President and
General Manager. From 1992 to 1994, Mr. Ireland was employed by Cognos Inc., a
computer software company, as Senior Vice President, Powerhouse Products.
Mr. Reidy was elected Vice President, Development Tools in July 1996 and
was elected Vice President, Product Development in July 1997. From 1994 to 1996,
Mr. Reidy held various management positions within the product development
organization of the Company. Mr. Reidy joined the Company in June 1985.
Mr. Robertson joined the Company in May 1996 as Vice President, Finance and
Chief Financial Officer and was elected Vice President, Finance and
Administration and Chief Financial Officer in December 1997. From 1993 to 1996
he was employed by M/A-COM, Inc., a telecommunications company, as Director of
Finance and Administration.
Mr. Vesty was elected Vice President, International Operations in June 1989
and was elected Vice President, Worldwide Sales in December 1996. Mr. Vesty
joined the Company in June 1986.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, support, marketing and
product development facility is located in a single leased building of
approximately 165,000 square feet in Bedford, Massachusetts. The Company leases
approximately 58,000 square feet in Wilmington, Massachusetts and maintains its
manufacturing and distribution operations at this location. In addition, the
Company maintains offices in 18 other locations in North America and 31
locations outside North America. The Bedford lease expires in August 2002. The
terms of all other leases generally range from one to seven years. The Company
believes that its present and proposed facilities are adequate for its current
needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
Naf Naf S.A. commenced an expert proceeding in the Paris Trade Court,
Paris, France, against Progress Software S.A., Timeless S.A. and Digital
Equipment France in May 1996. Progress Software Corporation was added as a party
to the expert proceeding in June 1997. The basis of the proceeding against
Progress Software was alleged late availability of Progress Software products
and alleged product deficiencies after delivery by Timeless to Naf Naf of such
products. On November 20, 1998 all the parties to the expert proceeding entered
into a settlement agreement which became binding on the parties on December 4,
1998. The settlement did not have a material effect on the Company's
consolidated financial position or results of operations.
The Company is also subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended November 30, 1998.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information appearing under the caption "Market for Registrant's Common
Equity and Related Shareholder Matters" on page 45 of the 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Selected Consolidated
Financial Data" on page 22 of the 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 23 to 31 of
the 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 23 to 31 of
the 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, related notes and independent
auditors' report appearing on pages 32 to 44 of the 1998 Annual Report to
Shareholders and the information appearing under the caption "Selected Quarterly
Financial Data" on page 45 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any matter of
accounting principles, financial statement disclosure, or auditing scope or
procedures required to be reported under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers set forth under the caption
"Executive Officers of the Registrant" in Item 1 of this Annual Report is
incorporated herein by reference.
The information regarding directors set forth under the caption "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 23, 1999, which will be filed
with the Securities and Exchange Commission not later than 120 days after
November 30, 1998, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1999, which will be filed with the
Securities and Exchange Commission not later than 120 days after November 30,
1998, is incorporated herein by reference.
14
<PAGE> 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Holders and Management" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 23, 1999, which will
be filed with the Securities and Exchange Commission not later than 120 days
after November 30, 1998, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 23, 1999, which will be
filed with the Securities and Exchange Commission not later than 120 days after
November 30, 1998, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following financial statements are included in the Company's 1998
Annual Report to Shareholders and are incorporated herein by reference:
Consolidated Balance Sheets as of November 30, 1998 and 1997
Consolidated Statements of Operations for the years ended November 30,
1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity for the years ended
November 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended November 30,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplemental Financial Data not covered by the Independent Auditors'
Report:
Selected Quarterly Financial Data
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended November 30, 1998.
(c) EXHIBITS
Documents listed below, except for documents identified by parenthetical
numbers, are being filed as exhibits herewith. Documents identified by
parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32
of the General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Act"), reference is made to such documents
as previously filed as exhibits with the Commission. The Company's file number
under the Act is 0-19417.
<TABLE>
<S> <C>
3.1 Restated Articles of Organization of the Company(1)
3.1.1 Articles of Amendment to Restated Articles of Organization
of the Company(2)
3.1.2 Articles of Amendment to Restated Articles of Organization
of the Company(3)
3.2 By-Laws of the Company, as amended and restated(4)
4.1 Specimen certificate for the Common Stock of the Company(5)
10.1 1984 Incentive Stock Option Plan, with amendments(6)
10.2 Amended and Restated 1984 Incentive Stock Option Plan(7)
10.3 1991 Employee Stock Purchase Plan, as amended(8)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.4 Progress Software Corporation 401(k) Plan with Fidelity Institutional Retirement Services Company(9)
10.5 1992 Incentive and Nonqualified Stock Option Plan(10)
10.6 First Amended and Restated Lease dated August 11, 1994 between the Company and the Equitable Life
Assurance Company of the United States(11)
10.7 1994 Stock Incentive Plan(12)
10.8 1993 Directors' Stock Option Plan(13)
10.9 1997 Stock Incentive Plan(14)
10.10 Employee Retention and Motivation Agreement executed by each of the Executive Officers
13.1 1998 Annual Report to Shareholders (which is not deemed to be "filed" except to the extent that portions
thereof are expressly incorporated by reference in this Annual Report on Form 10-K)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1997.
(2) Incorporated by reference to Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1994.
(3) Incorporated by reference to Exhibit 3.1.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1997.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 31, 1991.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(6) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(7) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(8) Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 1998.
(9) Incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1991.
(10) Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1992.
(11) Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(12) Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(13) Incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(14) Incorporated by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1997
(D) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown on the financial statements or notes thereto.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Bedford, Commonwealth of Massachusetts on the 24th day of February, 1999.
PROGRESS SOFTWARE CORPORATION
BY: /s/ JOSEPH W. ALSOP
-------------------------------------
Joseph W. Alsop
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH W. ALSOP President, Treasurer, and Director February 24, 1999
- --------------------------------------------------- (Principal Executive Officer)
Joseph W. Alsop
/s/ NORMAN R. ROBERTSON Vice President, Finance and February 24, 1999
- --------------------------------------------------- Administration and Chief Financial
Norman R. Robertson Officer (Principal Financial Officer)
/s/ DAVID H. BENTON, JR. Corporate Controller (Principal February 24, 1999
- --------------------------------------------------- Accounting Officer)
David H. Benton, Jr.
/s/ LARRY R. HARRIS Director February 24, 1999
- ---------------------------------------------------
Larry R. Harris
/s/ ROBERT J. LEPKOWSKI Director February 24, 1999
- ---------------------------------------------------
Robert J. Lepkowski
/s/ MICHAEL L. MARK Director February 24, 1999
- ---------------------------------------------------
Michael L. Mark
/s/ ARTHUR J. MARKS Director February 24, 1999
- ---------------------------------------------------
Arthur J. Marks
/s/ SCOTT A. MCGREGOR Director February 24, 1999
- ---------------------------------------------------
Scott A. McGregor
/s/ AMRAM RASIEL Director February 24, 1999
- ---------------------------------------------------
Amram Rasiel
/s/ JAMES W. STOREY Director February 24, 1999
- ---------------------------------------------------
James W. Storey
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Articles of Organization of the Company(1)
3.1.1 Articles of Amendment to Restated Articles of Organization
of the Company(2)
3.1.2 Articles of Amendment to Restated Articles of Organization
of the Company(3)
3.2 By-Laws of the Company, as amended and restated(4)
4.1 Specimen certificate for the Common Stock of the Company(5)
10.1 1984 Incentive Stock Option Plan, with amendments(6)
10.2 Amended and Restated 1984 Incentive Stock Option Plan(7)
10.3 1991 Employee Stock Purchase Plan, as amended(8)
10.4 Progress Software Corporation 401(k) Plan with Fidelity
Institutional Retirement Services Company(9)
10.5 1992 Incentive and Nonqualified Stock Option Plan(10)
10.6 First Amended and Restated Lease dated August 11, 1994
between the Company and the Equitable Life Assurance Company
of the United States(11)
10.7 1994 Stock Incentive Plan(12)
10.8 1993 Directors' Stock Option Plan(13)
10.9 1997 Stock Incentive Plan(14)
10.10 Employee Retention and Motivation Agreement executed by each
of the Executive Officers
13.1 1998 Annual Report to Shareholders (which is not deemed to
be "filed" except to the extent that portions thereof are
expressly incorporated by reference in this Annual Report on
Form 10-K)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1997.
(2) Incorporated by reference to Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1994.
(3) Incorporated by reference to Exhibit 3.1.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1997.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 31, 1991.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(6) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(7) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(8) Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 1998.
(9) Incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1991.
(10) Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1992.
<PAGE> 19
(11) Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(12) Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(13) Incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(14) Incorporated by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1997
<PAGE> 1
EXHIBIT 10.10
Note: This agreement was individually executed by each executive officer of
the Company during fiscal 1998.
EMPLOYEE RETENTION AND MOTIVATION AGREEMENT
This Agreement (the "Agreement") is effective as of _________________,
(the "Agreement Date") by and between ________________ (the "Employee") and
Progress Software Corporation, a Massachusetts corporation (the "Company").
R E C I T A L S
A. The Employee presently serves at the pleasure of the Board of
Directors of the Company (the "Board") in a role that is important to the
continued conduct of the Company's business and operations.
B. The Board has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued dedication and objectivity of the Employee, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company.
C. The Board believes that it is imperative to provide the
Employee with certain benefits following a Change of Control and certain
severance benefits upon the Employee's termination of employment following a
Change of Control.
D. In order to accomplish the foregoing objectives, the Board has
directed the Company, upon execution of this Agreement by the Employee, to
commit to the terms provided herein.
E. Certain capitalized terms used in this Agreement are defined
in Section 4 below.
In consideration of the mutual covenants herein contained; and in
consideration of Employee's execution of the Employee Proprietary Information
and Confidentiality Agreement, attached hereto as Exhibit A; and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. TERM OF EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is at will, as defined under applicable law,
except as may otherwise be provided under the terms of any written employment
agreement between the Company and Employee, that is signed on behalf of the
Company and now or hereafter in effect. If the Employee's employment terminates
for any reason, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation (collectively, "recompense" other than the
maximum recompense as provided by one of the following: (i) this Agreement, or
(ii) any written employment agreement then in effect between Employee and the
Company, or (iii) the Company's existing severance guidelines and benefits plans
which are in effect at the time of termination, or (iv) applicable statutory
<PAGE> 2
provisions. The provisions of this Agreement shall terminate upon the earlier of
(i) the date that all obligations of the parties hereunder have been satisfied,
or (ii) five years after the Agreement Date; provided, however, that the term of
the provisions of this Agreement may be extended by written resolutions adopted
by the Board. A termination of the provisions of this Agreement pursuant to the
preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the provisions of this Agreement.
2. BENEFITS IMMEDIATELY FOLLOWING CHANGE OF CONTROL.
(a) ACCELERATED VESTING OF A PORTION OF OUTSTANDING
OPTION. Upon a Change of Control, the vesting of each outstanding stock option
held by the Employee under the Company's stock option plans on the date of the
Change of Control, shall automatically accelerate as to the last six (6) months
of the unvested portion of each such option.
(b) PAYMENT OF MANAGEMENT BONUS. Effective immediately
upon a Change of Control, the Employee's annual management bonus shall be fixed
at the Employee's target bonus level as in effect immediately prior to the
Change of Control and the Employee shall be paid a pro-rated portion of such
bonus, as of the date of the Change of Control. In addition, the Employee shall
be paid the balance of the fixed bonus at the end of the Company's fiscal year
provided that the Employee remains employed as of the applicable date or upon
the Employee's Involuntary Termination (as defined in Section 4(b) below),
whichever event occurs earlier. Any payment to which the Employee is entitled
pursuant to this section shall be paid in a lump sum within thirty (30) days of
the event requiring such payment.
3. SEVERANCE BENEFITS.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the
Employee's employment terminates after a Change of Control, then, subject to
Section 5 below, the Employee shall be entitled to receive severance benefits as
follows:
(i) INVOLUNTARY TERMINATION. If the Employee's
employment is terminated within six (6) months following a Change of Control as
a result of Involuntary Termination other than for Cause, then the Employee
shall be entitled to receive a lump sum severance payment in an amount equal to
nine (9) months of the Employee's annual Target Compensation; and in addition,
for a period of nine (9) months after such termination, the Company shall be
obligated to provide the Employee with benefits that are substantially
equivalent to the Employee's benefits that were in effect immediately prior to
the Change of Control. If the Employee's employment is terminated after six (6)
months and prior to twelve (12) months following a Change of Control as a result
of Involuntary Termination other than for Cause, then the Employee shall be
entitled to receive a lump sum severance payment in an amount equal to six (6)
months of the
-2-
<PAGE> 3
Employee's annual Target Compensation; and in addition, for a period of six (6)
months after such termination, the Company shall be obligated to provide the
Employee with benefits that are substantially equivalent to the Employee's
benefits that were in effect immediately prior to the Change of Control. Any
severance payments to which the Employee is entitled pursuant to this section
shall be paid in a lump sum within thirty (30) days of the effective date of the
Employee's termination. For purposes of this Paragraph 3(a)(i), the term "Target
Compensation" shall mean the highest level of Target Compensation applicable to
the Employee from the period of time immediately prior to the Change of Control
through the effective date of the Employee's termination. With respect to any
taxable income that the Employee is deemed to have received for federal income
tax purposes by virtue of the Company providing continued employee benefits to
the Employee, the Company shall make a cash payment to the Employee such that
the net economic result to the Employee will be as if such benefits were
provided on a tax-free basis to the same extent as would have been applicable
had the Employee's employment not been terminated.
If the Employee's employment is terminated
at any time following a Change of Control as a result of Involuntary Termination
other than for Cause, then the vesting of each outstanding stock option which
had been granted prior to the date of the Change of Control, held by the
Employee under the Company's stock option plans, shall accelerate as to the last
twelve (12) months of the unvested portion of each such option on the effective
date of the Involuntary Termination, after taking into account accelerated
vesting in accordance with Section 2(a) above.
(ii) VOLUNTARY RESIGNATION. If the Employee's
employment terminates by reason of the Employee's voluntary resignation (and is
not an Involuntary Termination or a termination for Cause), then the Employee
shall not be entitled to receive any severance payments or other benefits except
for such benefits (if any) as may then be established under the Company's then
existing severance guidelines and benefits plans at the time of such
termination.
(iii) DISABILITY; DEATH. If the Company terminates
the Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive any severance payments or other
benefits except for those (if any) as may then be established under the
Company's then existing severance guidelines and benefits plans at the time of
such Disability of death.
(iv) TERMINATION FOR CAUSE. If the Employee is
terminated for Cause, then the Employee shall not be entitled to receive any
severance payments or other benefits following the date of such termination, and
the Company shall have no obligation to provide for the continuation of any
health and medical benefit or life insurance plans existing on the date of such
termination, other than as required by law.
-3-
<PAGE> 4
(b) TERMINATION OTHER THAN FROM CHANGE OF CONTROL. If the
Employee's employment is terminated for any reason either prior to the
occurrence of a Change of Control or after the twelve (12) month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance guidelines and benefit plans at the time of such
termination.
4. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities, whether by tender offer, or otherwise; or
(ii) A change in the composition of the Board, as
a result of which fewer than a majority of the directors are Incumbent
Directors. "Incumbent Directors" shall mean directors who either (A) are
directors of the Company as of the Agreement Date, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the directors of the Company as of the Agreement Date, at the time
of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company); or
(iii) The consummation of a merger or
consolidation of the Company with any other entity, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (B) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto representing less than fifty percent (50%)
of the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; but the Company is clearly the acquiror considering the totality
of the circumstances, including such factors as whether the president of the
Company will continue as president of the Company or the surviving entity, the
majority of the directors of the Company or the surviving entity will be
Incumbent Directors, substantially all of the executive officers of the Company
will be retained, etc., all as
-4-
<PAGE> 5
determined immediately prior to the consummation of the merger or consolidation
by the Incumbent Directors.
(iv) The liquidation of the Company; or the sale
or disposition by the Company of all or substantially all of the Company's
assets.
(b) INVOLUNTARY TERMINATION. "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the assignment to
the Employee of any duties or the significant reduction of the Employee's
duties, either of which is materially inconsistent with the Employee's position
with the Company and responsibilities in effect immediately prior to such
assignment, or the removal of the Employee from such position and
responsibilities, which is not effected for Disability or for Cause; (ii) a
material reduction by the Company in the base salary and/or bonus of the
Employee as in effect immediately prior to such reduction; (iii) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced; (iv) the
relocation of the Employee to a facility or a location more than 50 miles from
the Employee's then present location, without the Employee's express written
consent; (v) any purported termination of the Employee by the Company which is
not effected for death or Disability or for Cause, or any purported termination
for Cause for which the grounds relied upon are not valid; or (vi) the failure
of the Company to obtain, on or before the Change of Control, the assumption of
the terms of this Agreement by any successors contemplated in Section 7 below.
An Involuntary Termination shall be effective upon written notice by the
Employee.
(c) CAUSE. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his or her responsibilities
as an employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, and
(iv) continued violations by the Employee of the Employee's obligations as an
employee of the Company which are demonstrably willful and deliberate on the
Employee's part after there has been delivered to the Employee a written demand
for performance from the Company which describes the basis for the Company's
belief that the Employee has not substantially performed his or her duties.
(d) DISABILITY. "Disability" shall mean that the Employee
has been unable to perform his or her duties as an employee of the Company as
the result of incapacity due to physical or mental illness, and such inability,
at least 26 weeks after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and acceptable
to the Employee or the Employee's legal representative (such agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 day's written notice by the
Company of its intention to terminate the Employee's employment. In the event
that the Employee resumes the performance of substantially all of his or her
duties
-5-
<PAGE> 6
as an employee of the Company before the termination of his or her employment
becomes effective, the notice of intent to terminate shall automatically be
deemed to have been revoked.
(e) TARGET COMPENSATION. "Target Compensation" shall mean
the total of all fixed and variable compensation due an Employee based upon 100%
attainment of performance levels.
5. LIMITATION ON PAYMENTS. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code (the "Excise Tax"), then the Employee's severance benefits under
Section 3(a)(i) shall be either
(i) delivered in full, or
(ii) delivered as to such lesser extent which would result
in no portion of such severance benefits subject to
the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by the
Employee on an after-tax basis, of the greatest amount of severance payments and
benefits, notwithstanding that all or some portion of such severance payments
and benefits may be taxable under Section 4999 of the Code. Unless the Company
and the Employee otherwise agree in writing, any determination required under
this Section 5 shall be made in writing in good faith by the accounting firm
serving as the Company's independent public accountants immediately prior to the
Change of Control (the "Accountants"), in good faith consultation with the
Employee. In the event of a reduction in benefits hereunder, the Employee shall
be given the choice of which benefits to reduce. For purposes of making the
calculations required by this Section 5, the Accountants may make reasonable
assumptions and approximations concerning the application taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 5.
6. REMEDY. If Employee's benefits are reduced to avoid the Excise
Tax pursuant to Section 5 hereof and notwithstanding such reduction, the IRS
determines that Employee is liable for the Excise Tax as a result of the receipt
of severance benefits from the Company, then Employee shall be obligated to pay
to the Company (the "Repayment Obligation") an amount of money equal to the
"Repayment Amount." The Repayment Amount shall be the smallest such amount, if
any, as shall be required to be paid to the Company so that Employee's net
proceeds with respect to his or her severance benefits hereunder (after taking
into account the payment of the Excise Tax imposed on such
-6-
<PAGE> 7
benefits) shall be maximized. Notwithstanding the foregoing, the Repayment
Amount shall be zero if a Repayment Amount of more than zero would not eliminate
the Excise Tax. If the Excise Tax is not eliminated through the performance of
the Repayment Obligation, Employee shall pay the Excise Tax. The Repayment
Obligation shall be discharged within 30 days of either (i) Employee entering
into a binding agreement with the IRS as to the amount of Excise Tax liability,
or (ii) a final determination by the IRS or a court decision requiring Employee
to pay the Excise Tax from which no appeal is available or is timely taken.
7. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) or to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) which becomes bound by the terms of this
Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement
and all rights of the Employees hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributes, devisees and legatees.
8. NOTICE.
(a) GENERAL. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him or her at the home address
which he or she most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its General
Counsel.
(b) NOTICE OF TERMINATION BY THE COMPANY. Any termination
by the Company of the Employee's employment with the Company at any time
following a Change of Control shall be communicated by notice of termination to
the Employee at least five (5) days prior to the date of such termination, given
in accordance with Section 8(a) of this Agreement. Such notice shall specify the
termination date and whether the termination is considered by the Company to be
for Cause as defined in Section 4(c) in which case the Company shall identify
the specific subsection(s) of Section 4(c) asserted
-7-
<PAGE> 8
by the Company as the basis for the termination and shall set forth in
reasonable detail the facts and circumstances relied upon by the Company in
categorizing the termination as for Cause.
(c) NOTICE BY EMPLOYEE OF INVOLUNTARY TERMINATION BY THE
COMPANY. In the event the Employee determines that an Involuntary Termination
has occurred at any time following a Change of Control, the Employee shall give
written notice that such Involuntary Termination has occurred as set forth in
this Section 8(c). Such notice shall be delivered by the Employee to the Company
in accordance with Section 8(a) of this Agreement within ninety (90) days
following the date on which such Involuntary Termination occurred (or, if such
Involuntary Termination occurred as a result of more than one event set forth in
Section 4(b), within ninety (90) days following the earliest of such events),
shall indicate the specific provision or provisions in this Agreement upon which
the Employee relied to make such determination and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
determination. The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his or her rights hereunder.
9. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement
(whether by seeking new employment or in any other manner), nor shall any such
payment be reduced by any earnings that the Employee may receive from any other
source.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision of the
same condition or provision at another time.
(c) ENTIRE AGREEMENT. Except with respect to the terms of
any written employment agreement, if any, by and between the Company and
Employee that is signed on behalf of the Company, no agreements, representations
or understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the Commonwealth of Massachusetts.
-8-
<PAGE> 9
(e) SEVERABILITY. The invalidity or unenforceability of
any provisions or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) ARBITRATION. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by final and
binding arbitration in Massachusetts, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. In the event Employee
prevails in an action or proceeding brought to enforce the terms of this
Agreement or to enforce and collect on any non-de minimis judgment entered
pursuant to this Agreement, Employee shall be entitled to recover all costs and
reasonable attorney's fees.
(g) NO ASSIGNMENT OF BENEFITS. The rights of any person
to payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (g) shall be
void.
(h) EMPLOYMENT TAXES. Subject to Section 5, all payments
made pursuant to this Agreement will be subject to withholding of applicable
income and employment taxes.
(i) ASSIGNMENT BY COMPANY. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that no assignment shall be made if the net worth of
the assignee is less than the net worth of the Company at the time of the
assignment. In the case of any such assignment, the term "Company" when used in
a section of the Agreement shall mean the corporation that actually employs the
Employee.
(j) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the Agreement
Date.
Progress Software Corporation
By:
-----------------------------------
Authorized Officer
By:
-----------------------------------
Employee
-9-
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software licenses $ 113,312 $ 95,579 $ 93,178 $ 110,785 $ 88,426
Maintenance and services 126,578 92,735 83,512 69,350 50,811
--------- --------- -------- --------- --------
Total revenue 239,890 188,314 176,690 180,135 139,237
--------- --------- -------- --------- --------
Costs and expenses:
Cost of revenue 56,038 41,238 38,539 31,896 21,634
Sales and marketing 96,832 87,570 87,830 79,546 62,477
Product development 30,154 26,991 23,951 24,175 20,203
General and administrative 26,839 23,202 21,909 18,813 15,092
Non-recurring charges -- 11,537 -- 2,373 --
Total costs and expenses 209,863 190,538 172,229 156,803 119,406
--------- --------- -------- --------- --------
Income (loss) from operations 30,027 (2,224)* 4,461 23,332** 19,831
--------- --------- -------- --------- --------
Other income, net 3,941 5,356 3,869 3,169 2,136
--------- --------- -------- --------- --------
Income before provision for income taxes 33,968 3,132* 8,330 26,501** 21,967
Provision for income taxes 11,210 4,739 2,833 9,817 7,579
--------- --------- -------- --------- --------
Net income (loss) $ 22,758 $ (1,607)* $ 5,497 $ 16,684** $ 14,388
========= ========= ======== ========= ========
Basic earnings (loss) per share $ 1.32 $ (0.09)* $ 0.29 $ 0.88** $ 0.78
========= ========= ======== ========= ========
Weighted average shares outstanding (basic) 17,229 18,168 19,234 19,011 18,456
========= ========= ======== ========= ========
Diluted earnings (loss) per share $ 1.18 $ (0.09)* $ 0.28 $ 0.82** $ 0.74
========= ========= ======== ========= ========
Weighted average shares outstanding (diluted) 19,280 18,168 19,833 20,257 19,317
========= ========= ======== ========= ========
Balance Sheet Data:
Cash and short-term investments $ 113,999 $ 93,485 $ 97,323 $ 92,338 $ 74,286
Working capital 69,188 67,760 84,207 85,271 66,868
Total assets 206,708 171,733 173,188 175,736 134,554
Long-term debt, including current portion -- -- 122 162 210
Shareholders' equity 102,693 96,439 113,793 113,481 88,517
</TABLE>
* Includes non-recurring charges related to the acquisition of Apptivity
Corporation of $11.5 million or $0.62 per diluted share. Excluding these
non-recurring items, net income would have been $9.7 million or $0.53 per
diluted share. See Note 2 of Notes to Consolidated Financial Statements.
** Includes a non-recurring charge for purchase of in-process software
development of $2.4 million or $0.12 per diluted share. Excluding this
non-recurring item, net income would have been $19.1 million or $0.94 per
diluted share.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking statements. From time to
time, information provided by the Company or statements made by its directors,
officers or employees may contain "forward-looking" information which involves
risks and uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, some of which are described in greater detail below under the
heading "Factors That May Affect Future Results," include, but are not limited
to, the effect of Year 2000 issues, 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 and technical
support, pricing pressures and the competitive environment in the software
industry, business and consumer use of the Internet, and the Company's ability
to penetrate international markets and manage its international operations.
Although the Company has sought to identify the most significant risks to its
business, the Company cannot predict whether, or to what extent, any of such
risks may be realized, nor can there be any assurance that the Company has
identified all possible issues which the Company might face.
RESULTS OF OPERATIONS The Company's total revenue in fiscal 1998 increased 27%
from its total revenue in fiscal 1997. The Company's net income increased 135%
from $9.7 million, excluding non-recurring, acquisition-related charges, in
fiscal 1997 to $22.8 million in fiscal 1998. After including the effect of the
non-recurring charges of $11.5 million related to the acquisition of Apptivity
Corporation (Apptivity), the Company recorded a net loss of $1.6 million in
fiscal 1997.
In fiscal 1997, the Company acquired all of the outstanding stock of Apptivity,
a developer of Java-based application development tools, for approximately $11.2
million, consisting of $3.8 million in cash, $1.4 million in assumed and other
liabilities, the issuance of 593,485 shares of common stock valued at $5.5
million and the assumption of stock options valued at $0.5 million. The
acquisition has been accounted for as a purchase, and accordingly, the results
of operations have been included in the Company's operating results from the
date of acquisition. The allocation of the purchase price included $10.8 million
to in-process software development which was charged to operations as part of
the non-recurring charges in the third quarter of fiscal 1997. Additionally, the
Company recorded a non-recurring charge of $0.7 million for the writedown of
certain capitalized software costs and other intangible assets to fair value
after evaluating the impact of the acquisition upon the Company's future
operating plans.
The Company's total revenue in fiscal 1997 increased 7% from its total revenue
in fiscal 1996. The Company's net income (before non-recurring charges)
increased 76% from $5.5 million in fiscal 1996 to $9.7 million in fiscal 1997.
The following table sets forth certain income and expense items as a percentage
of total revenue, and the percentage change in dollar amounts of such items
compared with the corresponding period in the previous fiscal year.
2
<PAGE> 3
<TABLE>
<CAPTION>
Percentage of Total Revenue Period-to-Period Change
--------------------------- -----------------------
Year Ended November 30, 1998 1997
------------------------ Compared Compared
1998 1997 1996 to 1997 to 1996
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses 47% 51% 53% 19% 3%
Maintenance and services 53 49 47 36 11
--- --- ---
Total revenue 100 100 100 27 7
--- --- ---
Costs and expenses:
Cost of software licenses 4 5 5 1 13
Cost of maintenance and services 19 17 17 47 5
Sales and marketing 41 47 50 11 0
Product development 13 14 13 12 13
General and administrative 11 12 12 16 6
Non-recurring charges -- 6 -- -- --
--- --- ---
Total costs and expenses 88 101 97 10 11
--- --- ---
Income (loss) from operations 12 (1) 3 * (150)
Other income, net 2 3 2 (26) 38
--- --- ---
Income before provision for income taxes 14 2 5 985 (62)
Provision for income taxes 5 3 2 137 67
--- --- ---
Net income (loss) 9% (1)% 3% * (129)
=== === ===
</TABLE>
- ------------------------------------------------
* Not meaningful
FISCAL 1998 COMPARED TO FISCAL 1997 The Company's total revenue increased 27%
from $188.3 million in fiscal 1997 to $239.9 million in fiscal 1998. Total
revenue would have increased by 30% in fiscal 1998 from fiscal 1997 if exchange
rates had been constant as compared to the exchange rates in effect in fiscal
1997.
Software license revenue increased 19% from $95.6 million in fiscal 1997 to
$113.3 million in fiscal 1998. The increase in software license revenue in
fiscal 1998 as compared to fiscal 1997 was due to greater acceptance of the
Company's flagship product family, Progress, and, to a lesser extent, new
products such as Progress WebSpeed and Progress Apptivity. Progress Version 8.3
provided customers with increased capabilities through its 32-bit architecture
and enhanced database and reporting tools features. 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 was primarily due to greater
deployment revenue from database, dataservers and reporting tools products.
Maintenance and services revenue increased 36% from $92.7 million in fiscal 1997
to $126.6 million in fiscal 1998. The maintenance and services revenue increase
was primarily a result of growth in the Company's installed customer base,
greater demand for consulting services and renewal of maintenance contracts. The
Company is dedicating more resources to its service businesses in order to take
advantage of the market opportunities associated with companies buying packaged
applications and engaging service providers to customize such packages. This
combination provides companies with a competitive advantage through systems that
are uniquely designed for their business.
Total revenue generated in markets outside North America increased 23% from
$111.5 million in fiscal 1997 to $137.0 million in fiscal 1998 and represented
57% of total revenue in fiscal 1998 as compared to 58% in fiscal 1997. Total
revenue generated in markets outside North America would have represented 58% of
total revenue in fiscal 1998 if exchange rates had been constant as compared to
the exchange rates in effect in 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 1% from $10.0 million in
fiscal 1997 to $10.1 million in fiscal 1998, but decreased as a percentage of
software license revenue from 10% to 9%. The percentage decrease was due to
lower documentation costs and lower amortization expense from capitalized
software costs. Cost of software licenses as a percentage of software license
revenue can vary depending upon the relative product mix in a given period.
3
<PAGE> 4
Cost of maintenance and services consists primarily of costs of providing
customer technical support, education and consulting. Cost of maintenance and
services increased 47% from $31.2 million in fiscal 1997 to $46.0 million in
fiscal 1998 and increased as a percentage of maintenance and services revenue
from 34% to 36%. The percentage increases were due primarily to a change in the
mix of maintenance and service revenue as consulting revenue increased at a
greater rate than maintenance revenue and education revenue. Consulting revenue
generally has a lower margin than either maintenance or education due to the
amount of resources required to produce such revenue. The dollar increase was
due primarily to an increase in the technical support, consulting and education
staff in fiscal 1998 as compared to fiscal 1997 and greater usage of third-party
contractors to fulfill demand for consulting services. The Company increased its
technical support, education, and consulting staff from 230 at the end of fiscal
1997 to 282 at the end of fiscal 1998.
Sales and marketing expenses increased 11% from $87.6 million in fiscal 1997 to
$96.8 million in fiscal 1998, but decreased as a percentage of total revenue
from 47% to 41%. The percentage decrease in sales and marketing expenses was
primarily due to improved productivity as revenue increased at a greater rate
than sales and marketing expenses during fiscal 1998 as compared to fiscal 1997.
The dollar increase in sales and marketing expenses was primarily due to
increased headcount and higher average compensation costs, including
commissions, for the sales, sales support and marketing staff. Worldwide sales
and marketing headcount increased from 454 at the end of fiscal 1997 to 476 at
the end of fiscal 1998.
Product development expenses increased 12% from $27.0 million in fiscal 1997 to
$30.2 million in fiscal 1998, but decreased as a percentage of total revenue
from 14% to 13%. The dollar increase was primarily due to increased personnel
costs. The increase in personnel costs was primarily due to higher average
compensation costs and increased headcount to support continued new product
development efforts. The major product development efforts in fiscal 1998
related to the development of the next versions of the Company's various product
lines, including Progress Version 9.0, Progress Apptivity Versions 2 and 3 and
various new products for the Internet Software Quality (ISQ) product line. The
product development staff increased from 199 at the end of fiscal 1997 to 225 at
the end of fiscal 1998.
The Company capitalized $1.9 million of software development costs in fiscal
1997 and $2.0 million in 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" (SFAS 86). The amounts
capitalized represented 6% of total product development costs in each year.
Capitalized software costs are amortized over the estimated life of the product
(generally four years) and amounts amortized are included in cost of software
licenses.
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 16% from $23.2 million in
fiscal 1997 to $26.8 million in fiscal 1998, but decreased as a percentage of
total revenue from 12% to 11%. The dollar increase in general and administrative
expenses was primarily due to higher staff levels and average personnel costs
and increased goodwill charges resulting from recent acquisitions. The Company
increased its administrative staff from 180 at the end of fiscal 1997 to 191 at
the end of fiscal 1998.
Income from operations increased as a percentage of total revenue from (1)% in
fiscal 1997 (including non-recurring charges of $11.5 million related to the
acquisition of Apptivity) to 12% in fiscal 1998. Excluding the non-recurring
charges, income from operations in fiscal 1997 was 5% of total revenue.
Excluding the non-recurring charges, income from operations attributable to
North America increased from 6% of North American revenue in fiscal 1997 to 18%
in fiscal 1998. Income from operations attributable to Europe as a percentage of
European revenue was 5% in fiscal 1997 and 12% in fiscal 1998. The increase in
income from operations in North America and Europe was due to higher revenue and
continued expense control in fiscal 1998 as compared to fiscal 1997. The
operating loss in fiscal 1998 in regions outside of North America and Europe
related primarily to losses in Latin America as the Company invested in
expanding its presence in the region. Operating margins from international
operations in the future will depend significantly on the extent and timing of
the Company's expansion into new markets, and its ability to achieve economies
of scale in established international markets. See Note 10 of Notes to
Consolidated Financial Statements.
Other income decreased 26% from $5.4 million in fiscal 1997 to $3.9 million in
fiscal 1998. The decrease was due primarily to foreign currency gains in fiscal
1997 versus foreign currency losses in fiscal 1998 and lower amounts for "other
income-minority interest" in fiscal 1998, offset to some extent by higher
interest income. The foreign currency gain in fiscal
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<PAGE> 5
1997 related primarily to gains from the Company's foreign currency hedging
programs. All revenue, costs and expenses attributable to the Company's joint
venture in Japan are included in the Company's revenue, costs and expenses. To
account for the fact that the Company owns only a 51% interest in the joint
venture, other income (expense) reflects that portion of the joint venture's
income or loss which is attributable to the 49% minority interest in the joint
venture. The joint venture generated a net loss in each period presented and the
Company recorded as "other income - minority interest" an amount equal to 49% of
the joint venture's net loss. The increase in interest income was due to higher
average cash balances in fiscal 1998 as compared to fiscal 1997.
The Company's effective tax rate was 33% in fiscal 1998 compared to 151% in
fiscal 1997. The decrease in the effective tax rate in fiscal 1998 from fiscal
1997 was due to nondeductible expenses related to the acquisition of Apptivity
in fiscal 1997. Excluding these nondeductible expenses, the Company's effective
tax rate for fiscal 1997 was 34%. See Note 7 of Notes to Consolidated Financial
Statements. The Company expects its effective tax rate to be approximately 32%
in fiscal 1999.
FISCAL 1997 COMPARED TO FISCAL 1996 The Company's total revenue increased 7%
from $176.7 million in fiscal 1996 to $188.3 million in fiscal 1997. Total
revenue would have increased by 11% in fiscal 1997 from fiscal 1996 if exchange
rates had been constant as compared to the exchange rates in effect in fiscal
1996. Software license revenue increased 3% from $93.2 million in fiscal 1996 to
$95.6 million in fiscal 1997. The software license revenue increase was
attributable to greater sales of the Company's flagship products, Progress
Versions 7 and 8, a slowdown in the rate of decline of Progress Version 6 and
increased acceptance of new products such as Progress WebSpeed. Maintenance and
services revenue increased 11% from $83.5 million in fiscal 1996 to $92.7
million in fiscal 1997. The maintenance and services revenue increase was
primarily a result of growth in the Company's installed customer base, renewal
of maintenance contracts and greater demand for consulting services.
Total revenue generated in markets outside North America increased from $104.6
million in fiscal 1996 to $111.5 million in fiscal 1997 and represented 58% of
total revenue in fiscal 1997 as compared to 59% in fiscal 1996. Total revenue
generated in markets outside North America would have represented 61% of total
revenue in fiscal 1997 if exchange rates had been constant as compared to the
exchange rates in effect in fiscal 1996.
Cost of software licenses increased 13% from $8.8 million in fiscal 1996 to
$10.0 million in fiscal 1997 and increased as a percentage of software license
revenue from 9% to 10%. The percentage and dollar increases were due to an
increase in amortization of capitalized software costs and higher royalty
expense.
Cost of maintenance and services increased 5% from $29.7 million in fiscal 1996
to $31.2 million in fiscal 1997, but decreased as a percentage of maintenance
and services revenue from 36% to 34%. The percentage decrease was due primarily
to improved margins in the North America consulting business. The dollar
increase was due primarily to the growth in the Company's technical support,
education and consulting staff and related costs. Additionally, the Company
increased its usage of third-party contractors in fiscal 1997 as compared to
fiscal 1996 in order to satisfy demand for increased consulting and training
services. The Company increased its technical support, education and consulting
staff from 218 at the end of fiscal 1996 to 230 at the end of fiscal 1997.
Sales and marketing expenses decreased slightly from $87.8 million in fiscal
1996 to $87.6 million in fiscal 1997 and decreased as a percentage of total
revenue from 50% to 47%. Worldwide sales and marketing headcount decreased from
485 at the end of fiscal 1996 to 454 at the end of fiscal 1997. The reduction in
headcount resulted in lower compensation expense. This decrease was offset by
increased discretionary marketing program expenses such as advertising, trade
shows and direct mail. The decrease in sales and marketing expenses as a
percentage of total revenue was primarily due to improved productivity as
revenue increased at a greater rate than sales and marketing expenses during
fiscal 1997 as compared to fiscal 1996.
Product development expenses increased 13% from $24.0 million in fiscal 1996 to
$27.0 million in fiscal 1997 and increased as a percentage of total revenue from
13% to 14%. The dollar and percentage increases were primarily due to increased
headcount levels in fiscal 1997 as compared to fiscal 1996 and higher average
compensation costs per person. The major product development efforts in fiscal
1997 related to the development of the Progress Apptivity and Progress WebSpeed
product lines, as well as a major new release of Progress Version 8. The Company
also devoted significant resources to developing the Progress ProtoSpeed product
and enhancements to products in the Crescent Division. The
5
<PAGE> 6
product development staff increased from 196 at November 30, 1996 to 199 at
November 30, 1997. The Company capitalized $2.5 million of software development
costs in fiscal 1996 and $1.9 million in fiscal 1997 in accordance with SFAS 86.
The amounts capitalized represented 9% of total product development costs in
fiscal 1996 and 6% of total product development costs in fiscal 1997. The
decrease in the capitalization rate in fiscal 1997 resulted from fewer projects
qualifying for capitalization under the Company's software capitalization
policies.
General and administrative expenses increased 6% from $21.9 million in fiscal
1996 to $23.2 million in fiscal 1997 and remained approximately the same
percentage of total revenue in each year. The dollar increase in general and
administrative expenses was primarily due to higher average personnel costs,
including higher incentive compensation costs in fiscal 1997 as compared to
fiscal 1996. The Company's administrative headcount was essentially the same at
the end of fiscal 1997 as compared to the end of fiscal 1996.
Income from operations decreased as a percentage of total revenue from 3% in
fiscal 1996 to (1)% in fiscal 1997 (including non-recurring charges of $11.5
million related to the acquisition of Apptivity). Excluding the non-recurring
charges, income from operations in fiscal 1997 was 5% of total revenue.
Excluding the non-recurring charges, income from operations attributable to
North America remained approximately 6% of North American revenue in each year.
Income from operations attributable to Europe as a percentage of European
revenue was 1% in fiscal 1996 and 5% in fiscal 1997. The increase in income from
operations in Europe was due to higher revenue and improved expense control in
fiscal 1997 as compared to fiscal 1996. The lower operating margin in fiscal
1997 from other operations as compared to operating margins in North America and
Europe primarily related to continued losses at the Company's joint venture in
Japan. See Note 10 of Notes to Consolidated Financial Statements.
Other income increased $1.5 million from $3.9 million in fiscal 1996 to $5.4
million in fiscal 1997 due primarily to a foreign currency gain of $1.1 million
in fiscal 1997 as compared to a foreign currency loss in fiscal 1996. The
foreign currency gain in fiscal 1997 related to gains from the Company's foreign
currency hedging programs, as well as foreign currency gains and losses related
primarily to the translation and settlement of short-term intercompany
receivables. During fiscal 1997, the U.S. dollar strengthened considerably
against most international currencies. This resulted in lower reported revenue
and operating income primarily from the Company's European operations, which was
offset to some extent by the Company's foreign exchange hedging program. The
increase in other income was also due to an increase in other income-minority
interest, offset by slightly lower interest income.
The Company's effective tax rate was 151% in fiscal 1997 compared to 34% in
fiscal 1996. The increase in the effective tax rate in fiscal 1997 from fiscal
1996 was due to nondeductible expenses related to the acquisition of Apptivity
in fiscal 1997. Excluding these nondeductible expenses, the Company's effective
tax rate for fiscal 1997 was 34%. See Note 7 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES The Company had $114.0 million in cash and
short-term investments at November 30, 1998. The increase of $20.5 million in
cash and short-term investments from $93.5 million at November 30, 1997 was
primarily due to cash generated from operations and stock option exercises,
offset by common stock repurchases, property and equipment purchases and the
acquisition of certain assets from its distributor in Brazil. The increase in
cash generated from operations from the prior year in both fiscal 1998 and
fiscal 1997 was primarily due to improved profitability, before non-cash,
non-recurring charges, and stronger cash collections.
In fiscal years 1998, 1997 and 1996, the Company purchased $10.0 million, $10.0
million and $9.5 million, respectively, of property and equipment, which
consisted primarily of computer equipment and software, furniture and fixtures
and leasehold improvements. The level of property and equipment purchases
resulted primarily from continued growth of the business and replacement of
older equipment. The Company financed these purchases primarily from cash
generated from operations. See Note 4 of Notes to Consolidated Financial
Statements.
In fiscal years 1998, 1997 and 1996, the Company purchased 1,750,485 shares,
2,351,400 shares and 686,250 shares, respectively, of its common stock for $33.2
million, $26.6 million and $7.2 million, respectively. The Company financed
these purchases primarily from cash generated from operations.
6
<PAGE> 7
In September 1998, the Board of Directors authorized, for the period October 1,
1998 through September 30, 1999, the purchase of up to 5,000,000 shares of the
Company's common stock, at such times when the Company deems such purchases to
be an effective use of cash. Shares that are repurchased may be used for various
purposes including the issuance of shares pursuant to the Company's stock option
plans. At November 30, 1998, approximately 4,800,000 shares of common stock
remained available for repurchase under this authorization.
On December 10, 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for $5.0 million. The acquisition
was accounted for as a purchase, and accordingly, the results of operations are
included in the Company's operating results from the date of acquisition. The
purchase price was allocated primarily to goodwill, which is being amortized
over a seven-year period. If this acquisition had been made at the beginning of
the earliest period presented, the effect on the consolidated financial
statements would not have been significant.
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. Progress Software Corporation was added as a party to the
expert proceeding in June 1997. The basis of the proceeding against Progress
Software was alleged late availability of Progress Software products and alleged
product deficiencies after delivery by Timeless to Naf Naf of such products. On
November 20, 1998 all the parties to the expert proceeding entered into a
settlement agreement which became binding on the parties on December 4, 1998.
The settlement did not have a material effect on the Company's consolidated
financial position or results of operations.
The Company is also subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
The Company believes that existing cash balances together with funds generated
from operations will be sufficient to finance the Company's operations and meet
its foreseeable cash requirements (including planned capital expenditures, lease
commitments and other long-term obligations) through the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130)
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 130 requires the presentation of an additional
primary financial statement in the format prescribed by the standard. SFAS 131
requires disclosure about the Company's operations on a disaggregated basis
consistent with management's internal reporting structure. The Company will
adopt these standards in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes standards for
derivative instruments and for hedging activities. It 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 is
effective for fiscal years beginning after June 15, 1999. The Company is
currently evaluating the requirements and impact of SFAS 133.
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. Information about
the Company's investment policies and portfolio is in Notes 1 and 3 of Notes to
Consolidated Financial Statements.
The Company has entered into foreign exchange option 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
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<PAGE> 8
exchange option 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 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 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. Information about the
Company's foreign currency option contracts is set forth in Note 1 of Notes to
Consolidated Financial Statements.
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.
With the exception of the products discussed below, the Company believes that
the most current versions of its products are Year 2000 ready. The Company's
Progress products fully support four-digit years. The Progress products
internally store 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
Company's Progress products provide 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 Progress products that will be retired as of January 1, 2000. The
Company is encouraging customers who are using such products to either upgrade
to a more current version 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. Although assessment and testing are ongoing, the
Company believes that all material 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. 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 has not assessed fully the Year 2000 readiness of material third
parties, such as public utilities and key suppliers, who provide external
services to the Company. The Company expects to complete these assessments and
testing, as well as the testing of its internal systems, by the Fall of 1999 and
does not anticipate that any of these potential issues will have a material
adverse effect on the Company's business, financial condition and operating
results. All costs related to Year 2000 issues are being expensed as incurred
and the Company does not expect the total costs of evaluation and testing to be
material. The Company has not yet developed detailed contingency plans, but
intends to evaluate the necessity of such plans based on the outcome of its
assessment and testing of the Year 2000 readiness of material third parties.
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<PAGE> 9
Resolving Year 2000 readiness issues impacts almost every customer 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, 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
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 ProVision, Progress RDBMS, Progress WebSpeed, Progress Open
AppServer and Progress DataServers. In December 1998, the Company began shipping
the latest major enhancement to the Progress product line, Progress Version 9.0.
The Company acquired Apptivity Corporation, a developer of multi-tier,
Java-based business application tools, in July 1997. 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 IPQoS, the latest
ISQ product, began shipping in December 1998.
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 and its financial
results.
The Company has derived most of its revenue from its core product line,
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 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.
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<PAGE> 10
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 Progress Apptivity, the ISQ product set and other new
products will contribute positively to the Company's future results. The market
for Internet transaction processing products is highly competitive and will
depend in large part on the commercial acceptance of the Internet as a medium
for all types of commerce. Global commerce and online exchange of information on
the Internet and other similar open wide area networks are 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 fully develop. 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
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 53% of the Company's total revenue in 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 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, 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
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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.
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) November 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 50,155 $ 39,451
Short-term investments 63,844 54,034
Accounts receivable (less allowances of
$7,147 in 1998 and $4,928 in 1997) 40,779 35,651
Other current assets 9,855 7,475
Deferred income taxes 8,415 5,166
--------- ---------
Total current assets 173,048 141,777
--------- ---------
Property and equipment, net 22,458 23,183
Capitalized software costs, net 4,742 4,545
Other assets 6,460 2,228
--------- ---------
Total $ 206,708 $ 171,733
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,461 $ 10,712
Accrued compensation and related taxes 23,041 17,088
Income taxes payable 10,276 6,450
Other accrued liabilities 8,140 6,924
Deferred revenue 49,942 32,843
--------- ---------
Total current liabilities 103,860 74,017
--------- ---------
Deferred income taxes -- 1,009
Minority interest in subsidiary 155 268
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value; authorized, 1,000,000 shares;
issued, none
Common stock, $.01 par value; authorized, 50,000,000 shares;
issued and outstanding, 17,090,291 shares in 1998 and
17,718,034 shares in 1997 171 118
Additional paid-in capital 18,795 25,901
Retained earnings 84,115 70,673
Unrealized gains on short-term investments 503 245
Cumulative translation adjustments (891) (498)
--------- ---------
Total shareholders' equity 102,693 96,439
--------- ---------
Total $ 206,708 $ 171,733
========= =========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Year Ended November 30,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Revenue:
Software licenses $ 113,312 $ 95,579 $ 93,178
Maintenance and services 126,578 92,735 83,512
--------- --------- ---------
Total revenue 239,890 188,314 176,690
--------- --------- ---------
Costs and expenses:
Cost of software licenses 10,085 10,000 8,838
Cost of maintenance and services 45,953 31,238 29,701
Sales and marketing 96,832 87,570 87,830
Product development 30,154 26,991 23,951
General and administrative 26,839 23,202 21,909
Non-recurring charges -- 11,537 --
--------- --------- ---------
Total costs and expenses 209,863 190,538 172,229
--------- --------- ---------
Income (loss) from operations 30,027 (2,224) 4,461
--------- --------- ---------
Other income (expense):
Interest income 4,529 3,756 3,885
Foreign currency gain (loss) (632) 1,135 (453)
Minority interest 113 556 415
Other income (expense) (69) (91) 22
--------- --------- ---------
Total other income, net 3,941 5,356 3,869
--------- --------- ---------
Income before provision for income taxes 33,968 3,132 8,330
Provision for income taxes 11,210 4,739 2,833
--------- --------- ---------
Net income (loss) $ 22,758 $ (1,607) $ 5,497
========= ========= =========
Basic earnings (loss) per share $ 1.32 $ (0.09) $ 0.29
========= ========= =========
Weighted average shares outstanding (basic) 17,229 18,168 19,234
========= ========= =========
Diluted earnings (loss) per share $ 1.18 $ (0.09) $ 0.28
========= ========= =========
Weighted average shares outstanding (diluted) 19,280 18,168 19,833
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized Total
Additional Gains on Cumulative Share-
Common Paid-in Retained Short-Term Translation holders'
Stock Capital Earnings Investments Adjustments Equity
------ ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1995 $ 129 $ 46,467 $ 66,783 $ 133 $ (31) $ 113,481
Exercise of stock options (205,055 shares) 1 1,108 1,109
Issuance of stock under employee stock
purchase plan (71,143 shares) 736 736
Purchase and retirement of treasury
stock (686,250 shares) (4) (7,201) (7,205)
Stock option compensation 2 2
Tax benefit arising from employees'
exercise of stock options 197 197
Unrealized gains on short-term investments 108 108
Net income 5,497 5,497
Translation adjustment (132) (132)
----- -------- -------- ----- ------- ---------
Balance, November 30, 1996 126 41,309 72,280 241 (163) 113,793
Exercise of stock options (470,785 shares) 3 4,160 4,163
Issuance of stock under employee stock
purchase plan (56,218 shares) 511 511
Purchase and retirement of treasury
stock (2,351,400 shares) (15) (26,538) (26,553)
Stock option compensation 16 16
Tax benefit arising from employees'
exercise of stock options 488 488
Issuance of stock in connection with
Apptivity acquisition (593,485 shares) 4 5,433 5,437
Stock options assumed in connection with
Apptivity acquisition 522 522
Unrealized gains on short-term investments 4 4
Net loss (1,607) (1,607)
Translation adjustment (335) (335)
----- -------- -------- ----- ------- ---------
Balance, November 30, 1997 118 25,901 70,673 245 (498) 96,439
Stock split 59 (59)
Exercise of stock options (1,062,536 shares) 11 11,148 11,159
Issuance of stock under employee stock
purchase plan (60,206 shares) 1 918 919
Purchase and retirement of treasury
stock (1,750,485 shares) (18) (23,883) (9,316) (33,217)
Tax benefit arising from employees'
exercise of stock options 4,770 4,770
Unrealized gains on short-term investments 258 258
Net income 22,758 22,758
Translation adjustment (393) (393)
----- -------- -------- ----- ------- ---------
Balance, November 30, 1998 $ 171 $ 18,795 $ 84,115 $ 503 $ (891) $ 102,693
===== ======== ======== ===== ====== =========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended November 30,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22,758 $ (1,607) $ 5,497
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation and amortization of property and equipment 10,750 10,596 9,514
Non-recurring charges -- 11,537 --
Allowances for accounts receivable 3,617 1,807 1,818
Amortization of capitalized software costs 1,771 2,072 1,702
Amortization of intangible assets 1,032 241 331
Deferred income taxes (4,834) (2,950) (695)
Minority interest in subsidiary (113) (556) (415)
Non-cash compensation -- 16 2
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (8,702) (4,905) 5,235
Other current assets (2,326) (2,120) 1,243
Accounts payable and accrued expenses 8,854 9,252 (2,664)
Income taxes payable 8,609 3,908 1,008
Deferred revenue 17,062 6,359 284
-------- -------- --------
Total adjustments 35,720 35,257 17,363
-------- -------- --------
Net cash provided by operating activities 58,478 33,650 22,860
-------- -------- --------
Cash flows from investing activities:
Purchases of investments available for sale (57,025) (33,809) (76,550)
Maturities of investments available for sale 47,033 31,238 48,380
Sales of investments available for sale 440 15,068 20,700
Purchase of property and equipment (10,038) (10,048) (9,545)
Capitalized software costs (1,968) (1,864) (2,462)
Acquisitions, net of cash acquired (5,000) (3,847) --
Decrease (increase) in other non-current assets (24) 59 (310)
-------- -------- --------
Net cash used for investing activities (26,582) (3,203) (19,787)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,078 4,674 1,845
Repurchase of common stock (33,217) (26,553) (7,205)
Contributions from minority interest -- 603 --
Proceeds from capital lease obligations -- -- 85
Payment of obligations under capital leases -- (116) (130)
-------- --------
Net cash used for financing activities (21,139) (21,392) (5,405)
-------- -------- --------
Effect of exchange rate changes on cash (53) (476) (261)
-------- -------- --------
Net increase (decrease) in cash and equivalents 10,704 8,579 (2,593)
Cash and equivalents, beginning of year 39,451 30,872 33,465
-------- -------- --------
Cash and equivalents, end of year $ 50,155 $ 39,451 $ 30,872
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 7,203 $ 3,760 $ 2,569
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 4,770 $ 488 $ 197
Stock issued and options assumed in acquisition of Apptivity $ -- $ 5,959 $ --
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY Progress Software Corporation (the Company) develops, markets and
supports application development, deployment and management software for
professional information service organizations in business, government and
industry worldwide. The Progress product line is an integrated, component-based
visual development environment for building and deploying multi-tier,
enterprise-class business applications. The Progress Apptivity product line
enables organizations to build and deploy distributed, multi-tier, Java-based
business applications. The Internet Software Quality product line consists of
products that manage system and application quality and recoverability of
enterprise networks.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
BASIS OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION For foreign operations with the local currency as
the functional currency, assets and liabilities are translated into U.S. dollars
at the exchange rate on the balance sheet date. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are accumulated in a separate component of shareholders'
equity.
For foreign operations with the U.S. dollar as the functional currency, monetary
assets and liabilities are translated into U.S. dollars at the exchange rate on
the balance sheet date. Nonmonetary assets and liabilities are remeasured into
U.S. dollars at historical exchange rates. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are recognized currently as a component of foreign
currency gain or loss.
The Company enters into foreign exchange option contracts which are designated
as effective hedges on certain transactions in selected foreign currencies. The
purpose of the Company's foreign exposure management policies and practices is
to attempt to minimize the impact of exchange rate fluctuations on the Company's
results of operations. The option contracts are structured such that the cost to
the Company cannot exceed the premium paid for such contracts. Premiums are
recognized ratably over the contract period as a component of foreign currency
gain or loss. Increases and decreases in market value gains on such contracts
are recognized currently as a component of foreign currency gain or loss. The
notional principal amount of outstanding foreign exchange option contracts at
November 30, 1998 was $54.8 million. Unrealized market value gains on such
contracts were immaterial at November 30, 1998. Major U.S. multinational banks
are counterparties to the option contracts.
MINORITY INTEREST IN SUBSIDIARY Minority interest in subsidiary represents the
joint venture partners' proportionate share of the equity in Progress Software
K.K. (PSKK), a Japanese joint stock corporation established in January 1995 to
market and support the Company's products in Japan. At November 30, 1998, the
Company owned 51% of the capital stock of PSKK.
REVENUE RECOGNITION Software license revenue is recognized upon shipment of the
product provided that the license fee is fixed and determinable and collection
is probable. Maintenance revenue is deferred and recognized ratably over the
term of the agreement. Revenue from services, primarily consulting and customer
education, is recognized as the related services are performed. On December 1,
1997, the Company adopted the American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition." Adoption of this
pronouncement did not have a material effect on the revenue recognition
practices of the Company.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include short-term,
highly liquid investments purchased with remaining maturities of three months or
less. Short-term investments, which consist primarily of municipal and U.S.
Treasury obligations and corporate debt securities purchased with remaining
maturities of more than three months, are classified as investments available
for sale and stated at fair value. Aggregate unrealized holding gains and losses
are included as a separate component of shareholders' equity.
16
<PAGE> 17
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of cash, short-term
investments and trade receivables. The Company has cash investment policies
which, among other things, limit investments to investment-grade securities. The
Company performs ongoing credit evaluations of its customers and the risk with
respect to trade receivables is further mitigated by the diversity, both by
geography and by industry, of its customer base.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts
receivable and accounts payable approximates fair value due to the short-term
nature of these instruments. The fair value of investments available for sale is
based on current market value (Note 3).
PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation
and amortization is provided on the straight-line method over the estimated
useful lives (three to ten years) of the related assets or the remaining terms
of leases, whichever is shorter.
CAPITALIZATION OF SOFTWARE COSTS The Company capitalizes certain internally
generated software development costs after technological feasibility of the
product has been established. Capitalized software costs also include amounts
paid for purchased software which has reached technological feasibility. Such
costs are amortized over the estimated life of the product (generally four
years). The Company continually compares the unamortized costs of capitalized
software to the expected future revenues for the products. If the unamortized
costs exceed the expected future net realizable value, the excess amount is
written off. Accumulated amortization was approximately $6.9 million and $5.1
million at November 30, 1998 and 1997, respectively.
INTANGIBLE ASSETS Intangible assets, included in other assets, primarily
represent goodwill, noncompete agreements and organization costs and are
recorded at cost. Such costs are amortized over periods ranging from three to
seven years. Accumulated amortization was approximately $1.2 million and $.5
million at November 30, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION PLANS The Company accounts for its stock option plans
and its employee stock purchase plan in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
the Company provides additional pro forma disclosures (Note 5).
INCOME TAXES The Company provides for deferred income taxes resulting from
temporary differences between financial and taxable income. Such differences
arise primarily from the use of accelerated tax depreciation, accruals,
capitalized software costs, and provisions for doubtful accounts. No provision
for U.S. income taxes has been made for the undistributed earnings of non-U.S.
subsidiaries, as these earnings have been permanently reinvested or would be
principally offset by foreign tax credits. Cumulative undistributed foreign
earnings were approximately $13.6 million at November 30, 1998.
EARNINGS PER SHARE Effective 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 years presented herein have been restated to conform to SFAS 128
and the stock split (Note 5).
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform
to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130)
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 130 requires the presentation of an additional
primary financial statement in the format prescribed by the standard. SFAS 131
requires disclosure about the Company's operations on a disaggregated basis
consistent with management's internal reporting structure. The Company will
adopt these standards in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes standards for
derivative instruments and for hedging activities. It requires an entity to
recognize all
17
<PAGE> 18
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The Company is currently evaluating
the requirements and impact of SFAS 133.
NOTE 2: BUSINESS COMBINATIONS AND NON-RECURRING CHARGES
On December 10, 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for $5.0 million. The acquisition
was accounted for as a purchase, and accordingly, the results of operations are
included in the Company's operating results from the date of acquisition. The
purchase price was allocated primarily to goodwill, which is being amortized
over a seven-year period. If this acquisition had been made at the beginning of
the earliest year presented, the effect on the consolidated financial statements
would not have been significant.
On July 15, 1997, the Company acquired all of the outstanding stock of Apptivity
Corporation (Apptivity), a developer of Java-based application development
tools, for approximately $11.2 million, consisting of $3.8 million in cash, $1.4
million in assumed and other liabilities, the issuance of 593,485 shares of
common stock valued at $5.5 million and the assumption of stock options valued
at $0.5 million. The acquisition has been accounted for as a purchase, and
accordingly, the results of operations have been included in the Company's
operating results from the date of acquisition. The allocation of the purchase
price included $10.8 million to in-process software development which was
charged to operations as part of the non-recurring charges in the third quarter
of fiscal 1997. Additionally, the Company recorded a non-recurring charge of
$0.7 million for the writedown of certain capitalized software costs and other
intangible assets to fair value after evaluating the impact of the acquisition
upon the Company's future operating plans. If this acquisition had been made at
the beginning of the earliest year presented, the effect on the consolidated
financial statements would not have been significant.
NOTE 3: CASH AND SHORT-TERM INVESTMENTS
A summary of the Company's investments available for sale by major security type
at November 30, 1998 was as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type Cost Gains Losses Value
- ------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate debt securities $ 22,864 $ 22,864
Obligations of states and political subdivisions 57,212 $ 341 $ (28) 57,525
U.S. government obligations 6,323 190 -- 6,513
-------- ----- ----- -------
Total $ 86,399 $ 531 $ (28) $ 86,902
======== ===== ===== ========
</TABLE>
The fair value of debt securities at November 30, 1998, by contractual maturity,
was as follows:
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Due in one year or less (including $23,058 classified as cash equivalents) $ 50,443
Due after one year 36,459
--------
Total $ 86,902
========
</TABLE>
A summary of the Company's investments available for sale by major security type
(including $14.3 million classified as cash equivalents) at November 30, 1997
was as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type Cost Gains Losses Value
- ------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate debt securities $ 13,700 $ 13,700
Obligations of states and political subdivisions 48,836 $ 214 $ (4) 49,046
U.S. government obligations 5,553 35 5,588
-------- ----- ---- --------
Total $ 68,089 $ 249 $ (4) $ 68,334
======== ===== ==== ========
</TABLE>
18
<PAGE> 19
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) November 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Equipment and software $ 46,989 $ 40,696
Furniture and fixtures 5,919 5,304
Leasehold improvements 9,082 7,682
-------- --------
Total 61,990 53,682
Less accumulated depreciation and amortization 39,532 30,499
-------- --------
Property and equipment, net $ 22,458 $ 23,183
======== ========
</TABLE>
NOTE 5: SHAREHOLDERS' EQUITY
PREFERRED STOCK The Board of Directors is authorized to establish one or more
series of preferred stock and to fix and determine the number and conditions of
preferred shares, including dividend rates, redemption and/or conversion
provisions, if any, preference and voting rights. At November 30, 1998, the
Board of Directors has not authorized any series of preferred stock.
COMMON STOCK On June 17, 1998, the Board of Directors approved a three-for-two
common stock split in the form of a stock dividend. Shareholders received one
additional share for every two shares held. Such distribution was made on July
14, 1998 to shareholders of record at the close of business on June 29, 1998.
All share and per share amounts for all years presented have been restated to
reflect the split.
In fiscal years 1998, 1997 and 1996, the Company purchased 1,750,485 shares,
2,351,400 shares and 686,250 shares, respectively, of its common stock for $33.2
million, $26.6 million and $7.2 million, respectively.
In September 1998, the Board of Directors authorized, for the period October 1,
1998 through September 30, 1999, the purchase of up to 5,000,000 shares of the
Company's common stock, at such times when the Company deems such purchases to
be an effective use of cash. Shares that are repurchased may be used for various
purposes including the issuance of shares pursuant to the Company's stock option
plans. At November 30, 1998, approximately 4,800,000 shares of common stock
remained available for repurchase under this authorization.
STOCK OPTIONS In April 1992, the shareholders adopted and approved the 1992
Incentive and Nonqualified Stock Option Plan (1992 Plan) and terminated the 1984
Incentive Stock Option Plan (1984 Plan). Options granted and outstanding under
the 1984 Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the 1984 Plan. In August
1994, the shareholders of the Company adopted and approved the 1994 Stock
Incentive Plan (1994 Plan) and the 1993 Directors' Stock Option Plan (Directors'
Plan). The Directors' Plan permitted certain option grants to non-employee
directors.
In April 1997, the shareholders of the Company adopted and approved the 1997
Stock Incentive Plan (1997 Plan). Upon the approval of the 1997 Plan, the
Directors' Plan was terminated. Options granted and outstanding under the
Directors' Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the Directors' Plan. The
1994 and 1997 Plans permit the granting of stock incentive awards to officers,
members of the Board of Directors, employees and consultants. Awards under the
1994 and 1997 Plans may include stock options (both incentive and
non-qualified), grants of conditioned stock, unrestricted grants of stock,
grants of stock contingent upon the attainment of performance goals and stock
appreciation rights.
A total of 7,020,000 shares are issuable under the 1992, 1994 and 1997 Plans, of
which 769,970 shares were available for grant at November 30, 1998.
19
<PAGE> 20
A summary of stock option activity under the plans is as follows:
(In thousands, except per share
data)
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Price Number Exercise Price Number Exercise Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning options outstanding 4,539 $ 10.71 4,299 $ 10.89 3,437 $ 12.02
Granted 1,598 15.43 1,600 9.83 2,167 9.56
Exercised (1,063) 10.50 (471) 8.85 (205) 5.42
Canceled (214) 9.84 (889) 10.98 (1,100) 12.80
------ ------- ----- ------- ------ -------
Ending options outstanding 4,860 12.34 4,539 10.71 4,299 10.89
====== ======= ===== ======= ====== =======
Exercisable 1,904 $ 11.61 1,820 $ 11.33 1,691 $ 11.01
====== ======= ===== ======= ====== =======
</TABLE>
For various exercise price ranges, weighted average characteristics of
outstanding stock options at November 30, 1998 were as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- -----------------------------
Weighted Average
Range of Number of Remaining Weighted Average Number of Weighted Average
Exercise Price Shares Life (in years) Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$ 0.45-3.33 28 6.68 $ 0.78 13 $ 1.18
9.00-11.00 2,221 7.52 $ 9.87 1,050 $ 9.96
11.25-12.46 425 6.63 $ 11.64 182 $ 11.47
13.00-14.50 1,737 7.91 $ 14.33 644 $ 14.38
18.00-25.38 449 9.77 $ 18.32 15 $ 18.11
----- -----
$ 0.45-25.38 4,860 7.78 $ 12.34 1,904 $ 11.61
===== =====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN The 1991 Employee Stock Purchase Plan (ESPP), as
amended in April 1998, permits eligible employees to purchase up to a maximum of
750,000 shares of common stock of the Company at 85% of the lesser of the market
value of such shares at the beginning of a 27-month offering period or the end
of each three-month segment within such offering period. During fiscal years
1998, 1997 and 1996, 60,206 shares, 56,218 shares and 71,143 shares,
respectively, were issued with a weighted average purchase price of $15.26,
$9.09 and $10.35 per share, respectively, under the ESSP. At November 30, 1998,
464,056 shares were available and reserved for issuance under the ESSP.
PRO FORMA DISCLOSURES The pro forma disclosures are required to be determined as
if the Company had accounted for its stock-based compensation arrangements
granted subsequent to November 30, 1995 under the fair value method of SFAS 123.
The fair value of options and ESPP shares granted in fiscal years 1998, 1997 and
1996 reported below has been estimated at the date of grant using a
Black-Scholes option valuation model with the following ranges of assumptions:
<TABLE>
<CAPTION>
Stock Purchase Plan Stock Options
----------------------- -----------------------
Year Ended November 30, Year Ended November 30,
--------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected volatility 29.2-44.1% 39.1-53.1% 38.6-61.4% 43.2-45.6% 43.0-44.1% 40.4-43.2%
Risk-free interest rate 5.0-5.2% 5.1-5.3% 5.0-5.4% 4.7-5.7% 5.9-6.8% 5.6-6.7%
Expected life in years 0.6 0.5 0.5 6.5 6.6 6.0
Expected dividend yield none none none none none none
</TABLE>
For purposes of the pro forma disclosure, the estimated fair value of options is
amortized to expense over the vesting period. Had compensation costs for options
and ESPP shares been determined based on the Black-Scholes option valuation
model as prescribed by SFAS 123, pro forma net income (loss) and pro forma
diluted earnings (loss) per share would have been:
20
<PAGE> 21
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
----------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Pro forma net income (loss) $ 20,870 $ (3,040) $ 4,352
Pro forma diluted earnings (loss) per share $ 1.08 $ (0.17) $ 0.22
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not provide a reliable single measure of fair value of its
options. The weighted average estimated fair value of options granted in fiscal
years 1998, 1997 and 1996 was $8.06, $5.57 and $5.07 per share, respectively.
The weighted average estimated fair value for shares issued under the ESPP in
fiscal years 1998, 1997 and 1996 was $6.15, $4.10 and $8.73 per share,
respectively.
The effect on pro forma net income (loss) and pro forma diluted earnings (loss)
per share in fiscal years 1998, 1997 and 1996 is not necessarily indicative of
the effects on pro forma net income and pro forma diluted earnings per share in
future years.
NOTE 6: RETIREMENT PLAN
The Company maintains a retirement plan covering all U.S. employees under
Section 401(k) of the Internal Revenue Code. Company contributions to the plan
are at the discretion of the Board of Directors and totaled approximately $2.4
million, $1.8 million and $0.7 million for fiscal years 1998, 1997 and 1996,
respectively.
NOTE 7: INCOME TAXES
The components of pretax income (loss) were as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended November 30,
--------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
United States $ 29,236 $ (1,402) $ 7,711
Non-U.S 4,732 4,534 619
-------- -------- -------
Total $ 33,968 $ 3,132 $ 8,330
======== ======== =======
</TABLE>
The provisions for income taxes were comprised of the following:
<TABLE>
<CAPTION>
(In thousands) Year Ended November 30,
----------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 11,419 $ 5,226 $ 1,564
State 2,015 467 205
Foreign 2,610 1,996 1,759
-------- ------- -------
Total current 16,044 7,689 3,528
-------- ------- -------
Deferred:
Federal (3,448) (2,316) (361)
State (684) (454)
(73)
Foreign (702) (180) (261)
-------- ------- -------
Total deferred (4,834) (2,950) (695)
-------- ------- -------
Total $ 11,210 $ 4,739 $ 2,833
======== ======= =======
</TABLE>
21
<PAGE> 22
The tax effects of significant items comprising the Company's deferred taxes
were as follows:
<TABLE>
<CAPTION>
(In thousands) November 30,
---------------------
1998 1997
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Capitalized software costs $ (1,112) $ (934)
Depreciation and amortization -- (75)
-------- -------
Total deferred tax liabilities (1,112) (1,009)
-------- -------
Deferred tax assets:
Accounts receivable 2,826 1,451
Depreciation and amortization 1,688 --
Inventories 720 764
Accrued compensation 70 684
Deferred revenue 2,784 --
Other accruals 1,869 2,192
Tax loss carryforwards 1,461 1,409
-------- -------
Total deferred tax assets 11,418 6,500
Valuation allowance (1,315) (1,334)
-------- -------
Total $ 8,991 $ 4,157
======== =======
</TABLE>
The valuation allowance applies to deferred tax assets, primarily net operating
loss carryforwards, in the U.S. and in certain foreign jurisdictions where
realization is not assured. The change in the valuation allowance of $0.4
million and $0.6 million in fiscal years 1997 and 1996, respectively, primarily
related to tax loss carryforwards. Noncurrent deferred taxes of $0.6 million
were included in other assets at November 30, 1998.
The Company has net operating loss carryforwards of $3.1 million expiring on
various dates through 2012 and $1.0 million which can be carried forward
indefinitely.
A reconciliation of the U.S. federal statutory rate to the effective tax rate
was as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
Non-U.S 2.9 14.8 5.5
Unutilized foreign losses 1.4 1.4 7.0
Foreign sales corporation (4.5) (3.5) (8.2)
Research credits (2.9) (4.8) (2.0)
State income taxes, net 2.5 8.5 3.0
Tax-exempt interest (2.0) (23.3) (9.4)
Nondeductible in-process software development -- 117.3 --
Other 0.6 5.9 3.1
---- ----- ----
Total 33.0% 151.3% 34.0%
==== ===== ====
</TABLE>
NOTE 8: OPERATING LEASES
The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Future minimum rental payments at November 30,
1998 under these leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999 $ 7,931
2000 5,174
2001 4,189
2002 3,812
2003 3,069
Thereafter 8,056
--------
Total $ 32,231
========
</TABLE>
22
<PAGE> 23
Total rent expense under all operating leases was approximately $7.0 million,
$6.2 million and $5.8 million for fiscal years 1998, 1997 and 1996,
respectively.
NOTE 9: 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. Progress Software Corporation was added as a party to the
expert proceeding in June 1997. The basis of the proceeding against Progress
Software was alleged late availability of Progress Software products and alleged
product deficiencies after delivery by Timeless to Naf Naf of such products. On
November 20, 1998 all the parties to the expert proceeding entered into a
settlement agreement which became binding on the parties on December 4, 1998.
The settlement did not have a material 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.
23
<PAGE> 24
NOTE 10: BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
The Company operates in one industry segment consisting of the development,
marketing and support of application development, deployment and management
software. Intercompany revenue principally represents royalties based on
software license and maintenance revenue generated by non-U.S. operations from
their unaffiliated customers.
Summarized information relating to international operations is as follows:
(In thousands)
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America $ 102,893 $ 76,847 $ 72,122
Europe 93,599 73,363 72,533
Other 32,414 22,404 18,775
Export sales from United States 10,984 15,700 13,260
--------- --------- ---------
Total sales to unaffiliated customers $ 239,890 $ 188,314 $ 176,690
========= ========= =========
Intercompany revenue: $ 42,535 $ 33,225 $ 29,793
========= ========= =========
Operating income (loss):
North America $ 20,453 $ (6,028) $ 4,882
Europe 10,916 3,700 504
Other (1,278) 197 (870)
Eliminations (64) (93) (55)
--------- --------- ---------
Total operating income (loss) $ 30,027 $ (2,224) $ 4,461
========= ========= =========
Identifiable assets:
North America $ 164,603 $ 138,153 $ 143,890
Europe 45,108 36,922 35,466
Other 26,325 16,593 13,086
Eliminations (29,328) (19,935) (19,254)
--------- --------- ---------
Total identifiable assets $ 206,708 $ 171,733 $ 173,188
========= ========= =========
</TABLE>
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Progress Software Corporation:
We have audited the accompanying consolidated balance sheets of Progress
Software Corporation and its subsidiaries as of November 30, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended November 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Progress Software Corporation and
its subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Boston, Massachusetts
December 18, 1998
25
<PAGE> 26
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenue $ 54,146 $ 57,106 $ 59,482 $ 69,156
Income from operations 4,868 5,939 7,968 11,252
Net income 3,547 4,673 6,161 8,377
Diluted earnings per share 0.19 0.24 0.31 0.43
1997
Revenue $ 45,344 $ 44,831 $ 45,880 $ 52,259
Income (loss) from operations 2,196 1,383 (10,216)* 4,413
Net income (loss) 1,978 2,042 (9,369)* 3,742
Diluted earnings (loss) per share 0.10 0.10 (0.53)* 0.20
</TABLE>
* Includes non-recurring charges related to the acquisition of Apptivity of
$11.5 million or $0.64 per diluted share. Excluding these non-recurring items,
net income would have been $1.9 million or $0.11 per diluted share.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of high and
low bid prices for the Company's common stock as reported by the Nasdaq Stock
Market. The Company's common stock is traded on the market under the Nasdaq
symbol "PRGS."
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------------------------------------
1998 1997
------------------------ ------------------------
High Low High Low
------- ------- ------- ------
<S> <C> <C> <C> <C>
First Quarter $ 18.67 $ 12.58 $ 15.33 $ 8.42
Second Quarter 23.08 16.92 12.71 8.92
Third Quarter 28.00 18.00 12.42 10.50
Fourth Quarter 27.17 17.25 17.00 11.83
------------------------ ------------------------
</TABLE>
The Company has not declared or paid cash dividends on its common stock and does
not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of December 31, 1998, the Company's common stock was held by
approximately 4,000 shareholders of record or through nominee or street name
accounts with brokers.
26
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PROGRESS SOFTWARE CORPORATION
North America
Barbados Progress Software International Sales
Corporation
Canada Progress Software Corporation of
Canada Ltd.
Connecticut Crescent Software, Inc.
Delaware Progress Software International
Corporation
Massachusetts Apptivity Corporation
Massachusetts Progress Security Corporation
Europe
European Headquarters -
Netherlands Progress Software Europe B.V.
Austria Progress Software GesmbH
Belgium Progress Software NV
Czech Republic Progress Software spol. s.r.o.
Denmark Progress Software A/S
Finland Progress Software Oy
France Progress Software S.A.
Germany Progress Software GmbH
Italy Progress Software Italy S.r.l.
Netherlands Progress Software B.V.
Norway Progress Software A/S
Poland Progress Software sp. z.o o.
Spain Progress Spain S.A.
Sweden Progress Software Svenska AB
Switzerland Progress Software A.G.
United Kingdom Progress Software Ltd.
Other
Argentina Progress Software de Argentina S.A.
Australia Progress Software Pty. Ltd.
Brazil Progress Software do Brasil Ltda.
Hong Kong Progress Software Corporation Limited
Japan Progress Software K.K.
Mexico Progress Software, S.A. de C.V.
Singapore Progress Software Pte. Ltd.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-41752, 33-43045, 33-50654, 33-58892, 33-96320, 333-41393, 333-41401 and
333-41403 of Progress Software Corporation and its subsidiaries on Form S-8 of
our report dated December 18, 1998, appearing in and incorporated by reference
in this Annual Report on Form 10-K of Progress Software Corporation and its
subsidiaries for the year ended November 30, 1998.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Boston, Massachusetts
February 24, 1999
<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-K
FOR THE YEAR ENDING NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 50,155
<SECURITIES> 63,844
<RECEIVABLES> 47,926
<ALLOWANCES> 7,147
<INVENTORY> 0
<CURRENT-ASSETS> 173,048
<PP&E> 61,990
<DEPRECIATION> 39,532
<TOTAL-ASSETS> 206,708
<CURRENT-LIABILITIES> 103,860
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 102,522
<TOTAL-LIABILITY-AND-EQUITY> 206,708
<SALES> 113,312
<TOTAL-REVENUES> 239,890
<CGS> 10,085
<TOTAL-COSTS> 209,863
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,968
<INCOME-TAX> 11,210
<INCOME-CONTINUING> 22,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,758
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.18
</TABLE>
