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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period Ended February 28, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2746201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of April 8, 1999, there were 17,515,111 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
February 28, 1999 and November 30, 1998 3
Condensed Consolidated Statements of Income for
the three months ended February 28, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended February 28, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
February 28, November 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 36,951 $ 50,155
Short-term investments 77,076 63,844
Accounts receivable 41,210 40,779
Other current assets 11,049 9,855
Deferred income taxes 8,359 8,415
--------- ---------
Total current assets 174,645 173,048
--------- ---------
Property and equipment-net 21,251 22,458
Capitalized software costs-net 4,258 4,742
Other assets 4,699 6,460
--------- ---------
Total $ 204,853 $ 206,708
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,665 $ 12,461
Accrued compensation and related taxes 13,531 23,041
Income taxes payable 7,219 10,276
Other current liabilities 8,587 8,140
Deferred revenue 55,057 49,942
--------- ---------
Total current liabilities 96,059 103,860
--------- ---------
Minority interest in subsidiary 96 155
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, authorized, 1,000 shares; issued, none
Common stock, authorized, 50,000 shares; issued, 17,269
shares in 1999 and 17,090 shares in 1998 173 171
Additional paid-in capital 21,954 18,795
Retained earnings 88,775 84,115
Unrealized holding gains on short-term investments 452 503
Cumulative translation adjustments (2,656) (891)
--------- ---------
Total shareholders' equity 108,698 102,693
--------- ---------
Total $ 204,853 $ 206,708
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------
1999 1998
---- ----
Revenue:
Software licenses $ 33,129 $ 27,646
Maintenance and services 34,016 26,500
-------- --------
Total revenue 67,145 54,146
-------- --------
Costs and expenses:
Cost of software licenses 3,106 2,835
Cost of maintenance and services 12,513 9,638
Sales and marketing 25,783 22,552
Product development 9,294 7,114
General and administrative 6,794 7,139
-------- --------
Total costs and expenses 57,490 49,278
-------- --------
Income from operations 9,655 4,868
-------- --------
Other income (expense):
Interest income 1,206 902
Foreign currency losses (507) (479)
Minority interest 59 53
Other income (expense) 23 (49)
-------- --------
Total other income 781 427
-------- --------
Income before provision for income taxes 10,436 5,295
Provision for income taxes 3,339 1,748
-------- --------
Net income $ 7,097 $ 3,547
======== ========
Basic earnings per share $ 0.41 $ 0.21
======== ========
Weighted average shares outstanding (basic) 17,322 17,286
======== ========
Diluted earnings per share $ 0.35 $ 0.19
======== ========
Weighted average shares outstanding (diluted) 20,073 18,456
======== ========
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,097 $ 3,547
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 2,780 2,571
Amortization of capitalized software costs 559 542
Amortization of intangible assets 199 459
Deferred income taxes (249) (161)
Minority interest (59) (53)
Noncash compensation 15 -
Changes in operating assets and liabilities:
Accounts receivable (2,171) 1,808
Other current assets (1,408) (955)
Accounts payable and accrued liabilities (9,180) (4,334)
Income taxes payable (795) 861
Deferred revenue 7,121 6,135
-------- --------
Total adjustments (3,188) 6,873
-------- --------
Net cash provided by operating activities 3,909 10,420
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale (27,266) (6,443)
Maturities of investments available for sale 13,983 2,912
Purchases of property and equipment (1,965) (2,177)
Capitalized software costs (75) (120)
Acquisition of distributor - (5,000)
Decrease (increase) in other noncurrent assets (30) 186
-------- --------
Net cash used for investing activities (15,353) (10,642)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,706 888
Repurchase of common stock (6,125) (10,129)
-------- --------
Net cash used for financing activities (1,419) (9,241)
-------- --------
Effect of exchange rate changes on cash (341) 55
-------- --------
Net decrease in cash and equivalents (13,204) (9,408)
Cash and equivalents, beginning of period 50,155 39,451
-------- --------
Cash and equivalents, end of period $ 36,951 $ 30,043
======== ========
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 2,129 $ 91
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Progress Software Corporation (the Company) pursuant to
the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the audited financial statements included in the Company's
Annual Report and Form 10-K for the fiscal year ended November 30, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited financial statements, and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results of the interim periods presented. The operating results for the
interim periods presented are not necessarily indicative of the results
expected for the full fiscal year.
2. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year.
Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rate is
determined.
3. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the treasury stock method.
4. Comprehensive Income
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires presentation of the components of comprehensive income,
including unrealized gains and losses on investments and foreign currency
translation adjustments. Comprehensive income was as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $7,097 $3,547
Foreign currency translation adjustments (1,765) (37)
Unrealized holding gains (losses) on investments (51) 118
------ ------
Total comprehensive income $5,281 $3,628
====== ======
</TABLE>
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5. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)
which establishes standards for derivative instruments and 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. It requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met and that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 1999 and the Company will adopt SFAS 133 in the first
quarter of fiscal 2000. The Company is currently evaluating this statement,
but does not expect that it will have a material effect on the Company's
consolidated financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information 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 following table sets forth certain income and expense items as a percentage
of total revenue, and the percentage change in dollar amounts of such items, for
the three months ended February 28, 1999 and 1998.
<TABLE>
<CAPTION>
Percentage of Total Revenue Period-to-Period Change
--------------------------- -----------------------
Three Months Ended Three Months
---------------------------
February 28, February 28, 1999 Compared
1999 1998 to 1998
------------ ------------ -------------
<S> <C> <C> <C>
Revenue:
Software licenses 49% 51% 20%
Maintenance and services 51 49 28
---
Total revenue 100 100 24
--- ---
Costs and expenses:
Cost of software licenses 5 5 10
Cost of maintenance and services 19 18 30
Sales and marketing 38 42 14
Product development 14 13 31
General and administrative 10 13 (5)
--- ---
Total costs and expenses 86 91 17
--- ---
Income from operations 14 9 98
--- ---
Other income, net 2 1 83
--- ---
Income before provision for income taxes 16 10 97
Provision for income taxes 5 3 91
--- ---
Net income 11% 7% 100%
=== ===
</TABLE>
The Company's total revenue increased 24% from $54.1 million in the first
quarter of fiscal 1998 to $67.1 million in the first quarter of fiscal 1999. The
increase in total revenue was due to an increase in software license revenue of
20% and an increase in maintenance and services revenue of 28%. Software license
revenue increased from $27.6 million in the first quarter of fiscal 1998 to
$33.1 million in the first quarter of fiscal 1999. The increase in software
license revenue is attributable to greater acceptance of
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the Company's products, including Progress(R) Version 8 and Progress(R) Version
9, the most current versions of the Company's flagship development and
deployment product set, and, to a lesser extent, new Internet-focused products
such as Progress(R) WebSpeed(R) Version 3 and Progress(R) Apptivity(TM) Version
3. Progress Version 9 was released in December 1998. The Company also
experienced an increase in sales to Independent Software Vendors (ISVs),
value-added resellers who resell the Company's products in conjunction with the
sale of their applications. The increase in sales to ISVs is primarily due to
greater deployment revenue from database, dataservers and reporting tools
products.
Maintenance and services revenue increased 28% from $26.5 million in the first
quarter of fiscal 1998 to $34.0 million in the first quarter of fiscal 1999. The
increase in maintenance and services revenue was primarily a result of growth in
the Company's installed customer base, renewal of maintenance contracts and
increased consulting revenue. The Company is dedicating more resources to its
service businesses in order to take advantage of the market opportunities
associated with companies buying packaged applications and engaging service
providers to customize such packages.
Total revenue generated in markets outside North America increased 37% from
$30.3 million in the first quarter of fiscal 1998 to $41.6 million in the first
quarter of fiscal 1999. Such revenue increased as a percentage of total revenue
from 56% in the first quarter of fiscal 1998 to 62% in the first quarter of
fiscal 1999. Changes in foreign exchange rates from the first quarter of fiscal
1998 to the first quarter of fiscal 1999 did not have a significant impact on
total revenue. On a constant currency basis, total revenue would have increased
by 23% versus the 24% reported.
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 10% from $2.8 million in the
first quarter of fiscal 1998 to $3.1 million in the first quarter of fiscal
1999, but decreased as a percentage of software license revenue from 10% to 9%.
The dollar increase was due primarily to higher royalty expense. The percentage
decrease was primarily due to fixed production costs increasing at a slower rate
of growth than license revenue.
Cost of maintenance and services consists primarily of costs of providing
customer technical support, consulting and education. Cost of maintenance and
services increased 30% from $9.6 million in the first quarter of fiscal 1998 to
$12.5 million in the first quarter of fiscal 1999 and increased as a percentage
of maintenance and services revenue from 36% to 37%. The percentage increase was
due primarily to slightly lower margins in the Company's service business in the
first quarter of fiscal 1999 as compared to the first quarter of fiscal 1998.
Consulting revenue and education revenue generally have a lower margin than
maintenance revenue due to the amount of resources required to generate such
revenue. The dollar increase was due primarily to an increase in the technical
support, consulting and education staff in the first quarter of fiscal 1999 as
compared to the first quarter of fiscal 1998 and greater usage of outside
contractors to fulfill demand for consulting services. The Company increased its
technical support, education, and consulting staff from 263 at the end of the
first quarter of fiscal 1998 to 304 at the end of the first quarter of fiscal
1999. The Company expects its headcount for technical support, consulting and
education to continue to increase through the remainder of fiscal 1999 primarily
due to the need to satisfy increased demand for consulting and education
services. However, there can be no assurance that the Company will be successful
in recruiting and retaining such personnel.
Sales and marketing expenses increased 14% from $22.6 million in the first
quarter of fiscal 1998 to $25.8 million in the first quarter of fiscal 1999 but
decreased as a percentage of total revenue from 42% to 38%. The percentage
decrease was due to increased productivity from the Company's sales and
marketing efforts. If the Company is able to achieve its planned revenue, sales
and marketing expenses are expected to continue to increase at a slower rate of
growth than revenue during the remainder of fiscal 1999. The dollar increase in
sales and marketing expenses was primarily due to an increase in headcount in
the sales, sales support and marketing staff and, to a lesser extent, a slight
increase in the level of discretionary marketing spending. The amount of
discretionary marketing expenses can vary from period to period depending on the
timing of significant trade shows, advertising campaigns and direct mail
solicitations. The headcount increase was primarily to support international
growth and new product lines. The
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Company increased its sales, sales support and marketing staff from 463 at the
end of the first quarter of fiscal 1998 to 502 at the end of the first quarter
of fiscal 1999.
Product development expenses increased 31% from $7.1 million in the first
quarter of fiscal 1998 to $9.3 million in the first quarter of fiscal 1999 and
increased as a percentage of total revenue from 13% to 14%. Total product
development spending increased by 30% from $7.2 million in the first quarter of
fiscal 1998 to $9.4 million in the first quarter of fiscal 1999. The increase
was primarily due to an increase in headcount required to support continued new
product development efforts. The major product development efforts in the first
quarter of fiscal 1999 primarily related to the development of the next versions
of the Company's various product lines. Capitalized software costs weren't
significant in the first quarter of each fiscal year due to the stage of the
Company's various development projects. The product development staff increased
from 198 at the end of the first quarter of fiscal 1998 to 241 at the end of the
first quarter of fiscal 1999.
General and administrative expenses include the costs of the finance, human
resources, legal, information systems and administrative departments of the
Company. General and administrative expenses decreased 5% from $7.1 million in
the first quarter of fiscal 1998 to $6.8 million in the first quarter of fiscal
1999 and decreased as a percentage of total revenue from 13% to 10%. The dollar
decrease in general and administrative expenses was primarily due to lower
goodwill amortization charges in the first quarter of fiscal 1999 and initial
start-up expenses associated with the Company's subsidiary in Brazil in the
first quarter of fiscal 1998, partially offset by increased headcount. The
Company increased its administrative staff from 185 at the end of the first
quarter of fiscal 1998 to 197 at the end of the first quarter of fiscal 1999.
Other income increased 83% from $0.4 million in the first quarter of fiscal 1998
to $0.8 million in the first quarter of fiscal 1999 primarily due to an increase
in interest income from higher average cash balances. Other income also includes
foreign currency gains and losses and the minority interest in the Company's
joint venture in Japan. Foreign currency losses in each period primarily relate
to the translation and settlement of short-term intercompany receivables.
The Company's effective tax rate was 33% in the first quarter of fiscal 1998 and
32% in the first quarter of 1999 and was based upon the estimated effective tax
rate for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At the end of the first quarter of fiscal 1999, the Company's cash and
short-term investments totaled $114.0 million. The balance remained
approximately the same as at year-end as cash generated from operations and
proceeds from stock issuances in the first quarter of fiscal 1999 were offset by
common stock repurchases and capital expenditures.
The Company generated $3.9 million in cash from operations in the first quarter
of fiscal 1999 as compared to $10.4 million in the first quarter of fiscal 1998.
The decrease was primarily due to the timing of payments as accounts payable and
other accrued liabilities decreased by $9.2 million in the first quarter of
fiscal 1999 as compared to a decrease of $4.3 million in the first quarter of
fiscal 1998.
The Company purchased 218,000 shares of its common stock for $6.1 million in the
first quarter of fiscal 1999 as compared to 745,000 shares for $10.1 million in
the first quarter of fiscal 1998. In September 1998, the Board of Directors
authorized, through September 30, 1999, the purchase of up to 5,000,000 shares
of the Company's common stock, at such times as the Company deems such purchases
to be an effective use of cash, for various purposes including the issuance of
shares pursuant to the Company's stock option plans. At February 28, 1999, there
remained approximately 4,500,000 shares of common stock available for repurchase
under this authorization.
The Company purchased $2.0 million of property and equipment in the first
quarter of fiscal 1999 and $2.2 million in the first quarter of fiscal 1998. The
purchases consisted primarily of computer equipment and software, furniture and
fixtures, and leasehold improvements. The property and equipment purchases were
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for supporting the continued growth in the business, replacement of older
equipment and renovations to various locations.
The Company believes that existing cash balances together with funds generated
from operations will be sufficient to finance the Company's operations and meet
its foreseeable cash requirements (including planned capital expenditures and
lease commitments) through the next twelve months.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which
establishes standards for derivative instruments and 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. It requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and that
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999 and the Company will adopt SFAS 133 in the
first quarter of fiscal 2000. The Company is currently evaluating this
statement, but does not expect that it will have a material effect on the
Company's financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and foreign currency fluctuations.
The Company has established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency exchange.
The Company's exposure to market rate risk for changes in interest rates relates
to the Company's investment portfolio. The Company has not used derivative
financial instruments in its investment portfolio. The Company places its
investments with high quality issuers and has policies limiting, among other
things, the amount of credit exposure to any one issuer. The Company limits
default risk by purchasing only investment-grade securities. The Company's
investments are all fixed rate instruments. In addition, the Company has
classified all its debt securities as available for sale. This classification
reduces the income statement exposure to interest rate risk.
The Company has entered into foreign exchange option contracts to hedge certain
transactions of selected foreign currencies (mainly in Europe and Asia Pacific)
against fluctuations in exchange rates. The Company has not entered into foreign
exchange option 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.
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.
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With the exception of the products discussed below, the Company believes that
the most current versions of its products are Year 2000 ready. For example, the
Company's Progress product set fully supports four-digit years. The Progress
product set internally stores dates as integers representing the number of days
from a base date. For customers who require the entry and display of two digit
years, the Progress product set provides the ability to specify a range of years
for comparison and calculation. Therefore, the Company does not believe that the
most current versions of its products, except those discussed below, will be
adversely affected by date changes in the Year 2000.
The Company does not intend to test 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 begun to develop contingency plans and will continue
to evaluate the scope of such plans based on the outcome of its assessment and
testing of the Year 2000 readiness of material third parties.
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
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The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. The
following discussion highlights some of these risks. In addition, risks and
uncertainties related to Year 2000 issues are described above under the heading
"Year 2000."
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors. Some of these factors
include changes in demand for the Company's products, introduction, enhancement
or announcement of products by the Company and its competitors, market
acceptance of new products, size and timing of significant orders, budgeting
cycles of customers, mix of distribution channels, mix of products and services
sold, mix of international and North American revenues, fluctuations in currency
exchange rates, changes in the level of operating expenses, changes in the
Company's sales incentive plans, customer order deferrals in anticipation of new
products announced by the Company or its competitors and general economic
conditions. Revenue forecasting is uncertain, in large part, because the Company
generally ships its products shortly after receipt of orders. Most of the
Company's expenses are relatively fixed, including costs of personnel and
facilities, and are not easily reduced. Thus, an unexpected reduction in the
Company's revenue, or a decrease in the rate of growth of such revenue, would
have a material adverse effect on the profitability of the Company.
The Company develops, markets and supports application development, deployment
and management software. Its core product line, Progress, is composed primarily
of Progress(R) ProVision(TM), Progress(R) RDBMS(TM), Progress WebSpeed,
Progress(R) Open AppServer(TM) and Progress(R) DataServers(TM). In December
1998, the Company began shipping the latest major enhancement to the Progress
product line, Progress Version 9.0. The Progress Apptivity product line consists
of Apptivity Developer and Apptivity Server. The Company began commercial
shipments of Progress Apptivity Version 3.0 in October 1998. The ISQ product
line is a set of software products that measure, monitor and manage the
availability, performance and recoverability of enterprise networks and ensure
overall system and application quality. Progress(R) IPQoS(TM) Version 2.0, the
latest ISQ product, began shipping in March 1999.
The Company believes that the Progress product set, Progress Apptivity, and the
ISQ product set have features and functionality that enable the Company to
compete effectively with other vendors of application development products.
Ongoing enhancements to these product lines will be required to enable the
Company to maintain its competitive position. There can be no assurance that the
Company will be successful in developing and marketing enhancements to its
products on a timely basis, or that the enhancements will adequately address the
changing needs of the marketplace. Delays in the release of enhancements could
have a material adverse effect on the Company's business, financial condition,
and operating results.
The Company has derived most of its revenue from its core product line,
Progress, and other products that complement Progress and are generally licensed
only in conjunction with Progress. Accordingly, the Company's future results
depend on continued market acceptance of Progress and any factor adversely
affecting the market for Progress could have a material adverse effect on the
Company's business and its financial results. Future results also depend upon
the Company's continued successful distribution of its products through its ISV
channel and may be impacted by downward pressure on pricing, which may not be
offset by increases in volume. ISVs resell the Company's products along with
their own applications, and any adverse effect on their business related to
competition, pricing and other factors could have a material adverse effect on
the Company's business, financial condition, and operating results.
The Company experiences significant competition from a variety of sources with
respect to the marketing and distribution of its products. Some of these
competitors have greater financial, marketing or technical resources than the
Company and may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than can the Company. Increased competition
could make it more difficult for the Company to maintain its market presence.
13
<PAGE> 14
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. Global
commerce and online exchange of information on the Internet and other similar
open wide area networks continue to evolve. There can be no assurance that the
Company's products will be successful in penetrating these new and evolving
markets. The market for Java-based business application development and
deployment tools, such as Progress Apptivity, is in the early stages of
commercial adoption. There can be no assurance that Java will emerge as a viable
programming language for large-scale business application deployment
environments.
Overlaying the risks associated with the Company's existing products and
enhancements are ongoing technological developments and rapid changes in
customer requirements. The Company's future success will depend upon its ability
to develop and introduce in a timely manner new products that take advantage of
technological advances and respond to new customer requirements. The Company is
currently developing new products intended to help organizations meet the future
needs of application developers. The development of new products is increasingly
complex and uncertain, which increases the risk of delays. There can be no
assurance that the Company will be successful in developing new products
incorporating new technology on a timely basis, or that its new products will
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 58% of the Company's total revenue in the first quarter of fiscal
1999, as compared to 53% in the first quarter of fiscal 1998, was attributable
to international sales made through its subsidiaries. Because a substantial
portion of the Company's total revenue is derived from such international
operations which are conducted in foreign currencies, changes in the value of
these foreign currencies relative to the United States dollar may affect the
Company's results of operations and financial position. The Company engages in
certain currency-hedging transactions intended to reduce the effect of
fluctuations in foreign currency exchange rates on the Company's results of
operations. However, there can be no assurance that such hedging transactions
will materially reduce the effect of fluctuation in foreign currency exchange
rates on such results. If for any reason exchange or price controls or other
restrictions on the conversion of foreign currencies were imposed, the Company's
business could be adversely affected. Other potential risks inherent in the
Company's international business generally include longer payment cycles,
greater difficulties in accounts receivable collection, unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
reduced protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences. Any one of
these factors could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will not
have a material adverse effect on the Company's future international operations,
and, consequently, on the Company's business, financial condition, and operating
results.
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the software industry is intense. There can be
no assurance that the Company will continue to be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably.
14
<PAGE> 15
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies principally on a combination of contract
provisions and copyright, trademark, patent and trade secret laws to protect its
proprietary technology. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement. Although the Company believes that its
products and technology do not infringe on any existing proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims in the future. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company also utilizes certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that functionally similar technology will continue to be
available on commercially reasonable terms in the future.
The market price of the Company's common stock, like that of other technology
companies, is highly volatile and is subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts or other events or factors. The
Company's stock price may also be affected by broader market trends unrelated to
the Company's performance.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 - Financial Data Schedule (EDGAR Version Only)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended February 28,
1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
-----------------------------
(Registrant)
Dated: April 13, 1999 /s/ Joseph W. Alsop
---------------------------------------
Joseph W. Alsop
President
(Principal Executive Officer)
Dated: April 13, 1999 /s/ Norman R. Robertson
---------------------------------------
Norman R. Robertson
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
Dated: April 13, 1999 /s/ David H. Benton, Jr.
---------------------------------------
David H. Benton, Jr.
Corporate Controller
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q
FOR THE PERIOD ENDING FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 36,951
<SECURITIES> 77,076
<RECEIVABLES> 48,377
<ALLOWANCES> 7,167
<INVENTORY> 0
<CURRENT-ASSETS> 174,645
<PP&E> 63,889
<DEPRECIATION> 42,638
<TOTAL-ASSETS> 204,853
<CURRENT-LIABILITIES> 96,059
<BONDS> 0
0
0
<COMMON> 173
<OTHER-SE> 108,525
<TOTAL-LIABILITY-AND-EQUITY> 204,853
<SALES> 33,129
<TOTAL-REVENUES> 67,145
<CGS> 3,106
<TOTAL-COSTS> 57,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,436
<INCOME-TAX> 3,339
<INCOME-CONTINUING> 7,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,097
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.35
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