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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period Ended August 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2746201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of October 10, 2000, there were 35,499,000 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 2000 and November 30, 1999 3
Condensed Consolidated Statements of Income for
the three and nine months ended August 31, 2000 and
August 31, 1999 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended August 31, 2000 and
August 31, 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 93,257 $ 81,651
Short-term investments 79,670 77,014
Accounts receivable (less allowances of $7,040 in
2000 and $7,259 in 1999) 43,967 47,952
Other current assets 14,291 9,406
Deferred income taxes 10,787 9,836
--------- ---------
Total current assets 241,972 225,859
--------- ---------
Property and equipment-net 22,492 20,594
Capitalized software costs-net 2,406 3,155
Other assets 9,477 6,946
--------- ---------
Total $ 276,347 $ 256,554
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,537 $ 14,041
Accrued compensation and related taxes 17,011 24,344
Income taxes payable 11,525 8,723
Other current liabilities 9,556 8,962
Deferred revenue 63,679 58,173
--------- ---------
Total current liabilities 110,308 114,243
--------- ---------
Commitments and contingent liabilities Shareholders' equity:
Preferred stock, $.01 par value; authorized, 1,000 shares; -- --
issued, none
Common stock and additional paid in capital, $.01 par value; authorized,
100,000 shares in 2000 and 75,000 in 1999;
issued 35,796 in 2000 and 35,553 shares in 1999 43,107 40,491
Retained earnings 125,694 103,904
Accumulated other comprehensive loss (2,762) (2,084)
--------- ---------
Total shareholders' equity 166,039 142,311
--------- ---------
Total $ 276,347 $ 256,554
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
----------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 23,466 $ 31,219 $ 82,838 $ 96,472
Maintenance and services 41,943 38,940 122,102 111,582
--------- --------- --------- ---------
Total revenue 65,409 70,159 204,940 208,054
--------- --------- --------- ---------
Costs and expenses:
Cost of software licenses 2,453 3,583 7,493 9,829
Cost of maintenance and services 12,998 14,704 40,648 40,415
Sales and marketing 25,534 24,330 75,452 77,244
Product development 9,979 9,596 29,784 28,785
General and administrative 7,341 7,330 21,756 21,125
--------- --------- --------- ---------
Total costs and expenses 58,305 59,543 175,133 177,398
--------- --------- --------- ---------
Income from operations 7,104 10,616 29,807 30,656
--------- --------- --------- ---------
Other income (expense):
Interest income 2,114 1,170 5,962 3,574
Foreign currency gain (loss) 1,035 338 1,928 (211)
Minority interest -- 36 -- 130
Other income (expense) (58) 13 (63) (10)
--------- --------- --------- ---------
Total other income 3,091 1,557 7,827 3,483
--------- --------- --------- ---------
Income before provision for income taxes 10,195 12,173 37,634 34,139
Provision for income taxes 3,263 3,896 12,043 10,925
--------- --------- --------- ---------
Net income $ 6,932 $ 8,277 $ 25,591 $ 23,214
========= ========= ========= =========
Basic earnings per share $ 0.19 $ 0.24 $ 0.72 $ 0.68
========= ========= ========= =========
Weighted average shares (basic) 35,725 33,928 35,711 34,336
========= ========= ========= =========
Diluted earnings per share $ 0.18 $ 0.22 $ 0.64 $ 0.59
========= ========= ========= =========
Weighted average shares (diluted) 38,885 38,336 39,863 39,114
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,591 $ 23,214
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 7,306 8,094
Amortization of capitalized software costs 1,274 1,613
Amortization of intangible assets 555 443
Deferred income taxes (1,032) (480)
Minority interest -- (130)
Other noncash charges 285 45
Changes in operating assets and liabilities:
Accounts receivable 1,261 (472)
Other current assets (5,562) (456)
Accounts payable and accrued expenses (10,893) (3,923)
Income taxes payable 4,973 3,322
Deferred revenue 8,491 6,370
-------- --------
Total adjustments 6,658 14,426
-------- --------
Net cash provided by operating activities 32,249 37,640
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale (52,850) (40,304)
Maturities of investments available for sale 50,268 42,335
Purchases of property and equipment (9,686) (6,423)
Capitalized software costs (525) (281)
Acquisition of distributor (2,100) --
Increase in other noncurrent assets (1,257) (1,621)
-------- --------
Net cash used for investing activities (16,150) (6,294)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,719 11,195
Repurchase of common stock (8,787) (23,843)
-------- --------
Net cash used for financing activities (3,068) (12,648)
-------- --------
Effect of exchange rate changes on cash (1,425) 393
-------- --------
Net increase in cash and equivalents 11,606 19,091
Cash and equivalents, beginning of period 81,651 50,155
-------- --------
Cash and equivalents, end of period $ 93,257 $ 69,246
======== ========
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 1,806 $ 5,195
======== ========
</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, 1999.
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.
All share and per share information reflects the impact of the two-for-one
stock split which was effective on January 21, 2000.
The Company operates in a single segment consisting of the development,
marketing and support of application development, deployment and management
software.
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
Comprehensive income includes foreign currency translation gains and
losses, net of tax, and unrealized gains and losses on equity securities,
net of tax, that have been previously excluded from net income and
reflected instead in shareholders' equity. The following tables set forth
the calculation of comprehensive income on an interim basis:
<TABLE>
<CAPTION>
Three Months Ended August 31,
-----------------------------
2000 1999
------ ------
<S> <C> <C>
Net income $6,932 $8,277
Foreign currency translation adjustments 162 (246)
Unrealized holding gains (losses) on investments 380 (361)
------ ------
Total comprehensive income $7,474 $7,670
====== ======
</TABLE>
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<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
2000 1999
------- -------
<S> <C> <C>
Net income $25,591 $23,214
Foreign currency translation adjustments (752) (797)
Unrealized holding gains (losses) on investments 74 (701)
------- -------
Total comprehensive income $24,913 $21,716
======= =======
</TABLE>
5. Acquisition
In January 2000, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in South Africa for $2.1 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 will be amortized over a seven-year period. If this acquisition had
been made at the beginning of the earliest period presented, the effect on
the consolidated financial statements would not have been material.
6. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133) which establishes standards for derivative instruments and
hedging activities. SFAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met and that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 in the first quarter of fiscal 2001. The Company does not
expect the adoption of SFAS 133 to have a material effect on the Company's
consolidated financial position or results of operations.
7. Subsequent Event
On October 12, 2000, the Company purchased its principal administrative,
sales, support, marketing and product development facility in Bedford,
Massachusetts for $15.7 million in cash.
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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 are described in greater detail below under the heading "Factors That
May Affect Future Results" and include, but are not limited to, the receipt and
shipment of new orders, the timely release of enhancements to the Company's
products, the growth rates of certain market segments, the positioning of the
Company's products in those market segments, market acceptance of the
application service provider distribution model, 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
compared with the corresponding period in the previous fiscal year.
<TABLE>
<CAPTION>
Percentage of Total Revenue
----------------------------------------------- Period-to-Period Change
Three Months Ended Nine Months Ended -------------------------
------------------- ------------------- Three Nine
Aug 31, Aug 31, Aug 31, Aug 31, Month Month
2000 1999 2000 1999 Period Period
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses 36% 44% 40% 46% (25)% (14)%
Maintenance and services 64 56 60 54 8 9
---- ---- ---- ----
Total revenue 100 100 100 100 (7) (1)
---- ---- ---- ----
Costs and expenses:
Cost of software licenses 4 5 4 5 (32) (24)
Cost of maintenance and services 20 21 20 19 (12) 1
Sales and marketing 39 35 37 37 5 (2)
Product development 15 14 14 14 4 3
General and administrative 11 10 11 10 0 3
---- ---- ---- ----
Total costs and expenses 89 85 86 85 (2) (1)
---- ---- ---- ----
Income from operations 11 15 14 15 (33) (3)
Other income 5 2 4 1 99 125
---- ---- ---- ----
Income before provision for income taxes 16 17 18 16 (16) 10
Provision for income taxes 5 5 6 5 (16) 10
---- ---- ---- ----
Net income 11% 12% 12% 11% (16)% 10%
==== ==== ==== ====
</TABLE>
The Company's total revenue decreased 7% from $70.2 million in the third quarter
of fiscal 1999 to $65.4 million in the third quarter of fiscal 2000. The
Company's total revenue decreased 1% from $208.1 million in the first nine
months of fiscal 1999 to $204.9 million in the first nine months of fiscal 2000.
Software license revenue decreased 25% from $31.2 million in the third quarter
of fiscal 1999 to
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$23.5 million in the third quarter of fiscal 2000. Software license revenue
decreased 14% from $96.5 million in the first nine months of fiscal 1999 to
$82.8 million in the first nine months of fiscal 2000.
The decrease in software license revenue in the third quarter and in the first
nine months of fiscal 2000 was due to a slowdown in revenue from Independent
Software Vendors (ISVs), especially those in the enterprise resource planning or
ERP sector. In addition, the Company's license revenue was adversely affected by
the strong dollar, especially relative to the Euro. The decrease in license
revenue for the first nine months was also affected by a shift in the buying
patterns of customers due to a purchasing slowdown around the millenium
changeover. Software license revenue from development products, such as Progress
ProVision, and most deployment products, including Progress RDBMS, decreased
year over year. Partially offsetting the decline in license revenue from these
product groups were significantly increased license revenue from
Internet-focused products, primarily Progress WebSpeed and to a lesser extent
Progress SonicMQ. However, these products currently represent a small percentage
of total software license revenue.
Maintenance and services revenue increased 8% from $38.9 million in the third
quarter of fiscal 1999 to $41.9 million in the third quarter of fiscal 2000.
Maintenance and services revenue increased 9% from $111.6 million in the first
nine months of fiscal 1999 to $122.1 million in the first nine months of fiscal
2000. The increase in maintenance and services revenue in the third quarter was
primarily due to growth in the Company's installed customer base and renewal of
maintenance contracts. The increase in maintenance and services revenue in the
first nine months of fiscal 2000 as compared to fiscal 1999 was primarily the
result of growth in the Company's installed customer base, renewal of
maintenance contracts and increased consulting revenue.
Total revenue generated in markets outside North America decreased 8% from
$41.2 million in the third quarter of fiscal 1999 to $38.0 million in the third
quarter of fiscal 2000. Such revenue represented 58% of total revenue in the
third quarter of fiscal 2000 as compared to 59% of total revenue in the third
quarter of fiscal 1999. Total revenue generated in markets outside North America
would have represented 60% of total revenue in the third quarter of fiscal 2000
if exchange rates had been constant as compared to the exchange rates in effect
in the third quarter of fiscal 1999. On a constant currency basis, total revenue
in the third quarter of fiscal 2000 would have decreased by 3% as compared to
the third quarter of fiscal 1999, versus the 7% decrease reported.
Total revenue generated in markets outside North America increased 1% from
$124.3 million in the first nine months of fiscal 1999 to $124.9 million in the
first nine months of fiscal 2000. Such revenue represented 60% of total revenue
in the first nine months of fiscal 2000 and in the first nine months of fiscal
1999. Total revenue generated in markets outside North America would have
represented 63% of total revenue in the first nine months of fiscal 2000 if
exchange rates had been constant as compared to the exchange rates in effect in
the first nine months of fiscal 1999. On a constant currency basis, total
revenue would have increased by 3% versus the 1% decrease reported in the first
nine months of fiscal 2000.
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 decreased 32% from $3.6 million in the
third quarter of fiscal 1999 to $2.5 million in the third quarter of fiscal 2000
and decreased as a percentage of software license revenue from 11% to 10%. Cost
of software licenses decreased 24% from $9.8 million in the first nine months of
fiscal 1999 to $7.5 million in the first nine months of fiscal 2000 and
decreased as a percentage of software license revenue from 10% to 9%. The dollar
and percentage decreases were primarily due to lower documentation and media
costs and, to a lesser extent, lower amortization expense from previously
capitalized software costs.
Cost of maintenance and services consists primarily of costs of providing
customer technical support, education and consulting. Cost of maintenance and
services decreased 12% from $14.7 million in the third quarter of fiscal 1999 to
$13.0 million in the third quarter of fiscal 2000 and decreased as a percentage
of maintenance and services revenue from 38% to 31%. Cost of maintenance and
services increased 1% from $40.4 million in the first nine months of fiscal 1999
to $40.6 million in the first nine months of 2000, but
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decreased as a percentage of maintenance and services revenue from 36% to 33%.
The margin percentage improvement in fiscal 2000 as compared to fiscal 1999 was
primarily due to maintenance revenue increasing at a faster rate than the
related support costs, which are relatively fixed in the short-term, and, to a
lesser extent, a slight improvement in service margins. The dollar decrease in
the third quarter of fiscal 2000 was due to lower consulting expenses from
outside contractors proportionate with decreased revenue associated with such
resources. The dollar increase in the first nine months of fiscal 2000 as
compared to the first nine months of fiscal 1999 was primarily due to slightly
higher headcount, partially offset by lower usage of third party consulting
contractors.
Sales and marketing expenses increased 5% from $24.3 million in the third
quarter of fiscal 1999 to $25.5 million in the third quarter of fiscal 2000 and
increased as a percentage of total revenue from 35% to 39%. Sales and marketing
expenses decreased 2% from $77.2 million in the first nine months of fiscal 1999
to $75.5 million in the first nine months of fiscal 2000, but remained the same
percentage of total revenue in each period. The dollar and percentage increase
in the third quarter of fiscal 2000 as compared to the third quarter of fiscal
1999 was primarily due to marketing and show expenses associated with the
Company's user conference in June 2000. The user conference in fiscal 1999 was
held in the second quarter. The dollar decrease in the first nine months of
fiscal 2000 was due to a reduction in marketing programs as compared to the
level in the first nine months of fiscal 1999. 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. An
increase in personnel and related expenses from slightly higher headcount
partially offset the marketing program decreases in the first nine months of
fiscal 2000 as compared to the first nine months of fiscal 1999.
Product development expenses increased 4% from $9.6 million in the third
quarter of fiscal 1999 to $10.0 million in the third quarter of fiscal 2000 and
increased as a percentage of total revenue from 14% to 15%. Product development
expenses increased 3% from $28.8 million in the first nine months of fiscal 1999
to $29.8 million in the first nine months of fiscal 2000 and remained the same
percentage of total revenue in each period. The increase in expenses in the
third quarter and first nine months was primarily due to slightly higher
headcount. Major product development efforts in the first nine months of fiscal
2000 primarily related to the development of the next versions of the Company's
various product lines, including Progress Version 9 and Progress SonicMQ.
Capitalized software costs were 0% of total product development spending in the
third quarter of fiscal 2000 versus 1% in the third quarter of fiscal 1999.
Capitalized software costs represented 2% of total product development spending
in the first nine months of fiscal 2000 versus 1% in the first nine months of
fiscal 1999. The variation in the percentage of capitalized software costs is
due to the timing and stage of development of significant projects that qualify
for capitalization under the Company's software capitalization policy.
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 were approximately the same in the
third quarter of fiscal 1999 and in the third quarter of fiscal 2000, but
increased as a percentage of total revenue from 10% to 11%. General and
administrative expenses increased 3% from $21.1 million in the first nine months
of fiscal 1999 to $21.8 million in the first nine months of fiscal 2000 and
increased as a percentage of total revenue from 10% to 11%. The increase in
general and administrative expenses was primarily due to an increase in
headcount due to growth in the Company's overseas operations.
Other income increased 99% from $1.6 million in the third quarter of fiscal 1999
to $3.1 million in the third quarter of fiscal 2000 and increased 125% from $3.5
million in the first nine months of fiscal 1999 to $7.8 million in the first
nine months of fiscal 2000. The increase in each period was primarily due to an
increase in interest income from higher average cash balances and from higher
interest rates and foreign exchange gains under the Company's hedging programs.
The Company's effective tax rate was 32% in each period of fiscal 1999 and
fiscal 2000 and was based upon the estimated effective tax rate for the full
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
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At the end of the third quarter of fiscal 2000, the Company's cash and
short-term investments totaled $172.9 million. The increase in the balance of
$14.3 million since the end of fiscal 1999 resulted from cash generated from
operations and proceeds from stock issuances under the Company's stock purchase
plan and exercise of stock options, partially offset by common stock repurchases
and capital expenditures.
The Company generated $32.2 million in cash from operations in the first nine
months of fiscal 2000 as compared to $37.6 million in the first nine months of
fiscal 1999. The decrease was primarily due to the timing of payments and
accrued expenses and an increase in other current assets, primarily from prepaid
user conference expenses and prepaid royalties, partially offset by higher net
income and increases in deferred revenue. The Company's accounts receivable days
sales outstanding (DSO) was 60 days at the end of the third quarter of fiscal
2000 as compared to 66 days at the end of the second quarter of fiscal 2000 and
55 days at the end of fiscal 1999. The Company targets a DSO range of 55 to 75
days.
The Company purchased $9.7 million of property and equipment in the first nine
months of fiscal 2000 and $6.4 million in the first nine months of fiscal 1999.
The purchases 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.
On October 12, 2000, the Company purchased its principal administrative, sales,
support, marketing and product development facility in Bedford, Massachusetts
for $15.7 million in cash. The Company financed this purchase from cash
generated from operations.
The Company purchased and retired 454,100 shares of its common stock for $8.8
million in the first nine months of fiscal 2000 as compared to 1,976,472 shares
for $23.8 million in the first nine months of fiscal 1999. The Company financed
these purchases primarily from cash generated from operations.
In September 2000, the Board of Directors authorized, for the period October 1,
2000 through September 30, 2001, the purchase of up to 10,000,000 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
and purchase plans.
In January 2000, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in South Africa for $2.1 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 will
be amortized over a seven-year period. If this acquisition had been made at the
beginning of the earliest period presented, the effect on the consolidated
financial statements would not have been material. The Company financed this
acquisition primarily from cash generated from operations.
The Company is subject to various 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 at least the next twelve
months.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)
which establishes standards for derivative
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instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met and that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133, as amended, is effective for fiscal years
beginning after June 15, 2000. The Company will adopt SFAS 133 in the first
quarter of fiscal 2001. The Company does not expect the adoption of SFAS 133 to
have a material effect on the Company's consolidated financial position or
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. The
following discussion highlights some of these risks.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors. 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 ProVision, Progress RDBMS, Progress WebSpeed, Progress Open
AppServer and Progress DataServers. In March 2000, the Company began shipping
the latest major enhancement to the Progress product line, Progress Version 9.1.
The Company began commercial shipments of Progress SonicMQ, an Internet
messaging server, in December 1999. The Company believes that the Progress
product set and Progress SonicMQ have features and functionality that enable the
Company to compete effectively with other vendors of application development
products, but 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 Independent Software Vendor (ISV) channel and may be
impacted by downward pressure on pricing, which may not be offset by increases
in volume. ISVs utilize technology from the Company to create their applications
and resell the Company's products along with their own applications. Any adverse
effect on their business related to competition, pricing and other factors could
have a material adverse effect on the Company's business, financial condition
and operating results.
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The Company experiences significant competition from a variety of sources with
respect to the marketing and distribution of its products. Many of these
competitors have greater financial, marketing or technical resources than the
Company and may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than can the Company. Increased competition
could make it more difficult for the Company to maintain its market presence.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to deliver products that address the needs of
the Company's prospective customers. Current and potential competitors also may
be more successful than the Company in having their products or technologies
widely accepted. There can be no assurance that the Company will be able to
compete successfully against current and future competitors and its failure to
do so could have a material adverse effect upon the Company's business,
prospects, financial condition and operating results.
The Company expects to devote significant resources to enable its ISVs to move
their applications to the Internet and the Application Service Provider (ASP)
distribution model by providing a combination of technology, professional
services and partnerships. The ASP distribution model enables ISVs to rent their
business applications to end-user organizations over the Internet or through
other thin-client technologies. The ASP market is new and evolving. There can be
no assurance that the ASP model will become a viable market for business
applications or that the Company will be successful in penetrating this new
market.
The Company hopes that Progress SonicMQ and other new products and services will
contribute positively to the Company's future results. The market for Internet
transaction processing products and other Internet business-to-business products
is highly competitive. Global e-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.
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.
In June 2000, the Company announced the formation of NuSphere, a company focused
on the open source database market. NuSphere intends to create a set of products
and services for the MySQL open source database. There can be no assurance that
NuSphere will be successful in building a sustainable business model or that
MySQL will attain sufficient market acceptance to support such a business.
International sales through subsidiaries represented over 50% of the Company's
total revenue in the first nine months of fiscal 2000. Because a substantial
portion of the Company's total revenue is derived from such international
operations which are primarily 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.
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Other potential risks inherent in the Company's international business generally
include longer payment cycles, greater difficulties in accounts receivable
collection, unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, reduced protection for intellectual property
rights in some countries, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world and potentially
adverse tax consequences. Any one of these factors could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of such factors will not have a material adverse effect on the
Company's future international operations, and, consequently, on the Company's
business, financial condition and operating results.
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the software industry is intense. There can be
no assurance that the Company will continue to be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably.
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies principally on a combination of contract
provisions and copyright, trademark, patent and trade secret laws to protect its
proprietary technology. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology.
In addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement. Although the Company believes that its
products and technology do not infringe on any existing proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims in the future. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company also utilizes certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that functionally similar technology will continue to be
available on commercially reasonable terms in the future.
The market price of the Company's common stock, like that of other technology
companies, is highly volatile and is subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts or other events or factors. The
Company's stock price may also be affected by broader market trends unrelated to
the Company's performance.
ITEM 3. 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
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addition, the Company has classified all its debt securities as available for
sale. This classification reduces the income statement exposure to interest rate
risk.
The Company has entered into foreign exchange option and forward contracts to
hedge certain transactions of selected foreign currencies (mainly in Europe and
Asia Pacific) against fluctuations in exchange rates. The Company has not
entered into foreign exchange option and forward contracts for speculative or
trading purposes. The Company's accounting policies for these contracts are
based on the Company's designation of the contracts as hedging transactions. The
criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and matching of derivative
instruments to the underlying transactions. Market value increases and decreases
on the foreign exchange option and forward contracts are recognized in income in
the same period as gains and losses on the underlying transactions. The Company
operates in certain countries where there are limited forward currency exchange
markets and thus the Company has unhedged transaction exposures in these
currencies. The Company generally does not hedge the net assets of its
international subsidiaries.
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 August 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
(Registrant)
Dated:October 12, 2000 /s/ Joseph W. Alsop
----------------------------------
Joseph W. Alsop
President
(Principal Executive Officer)
Dated:October 12, 2000 /s/ Norman R. Robertson
----------------------------------
Norman R. Robertson
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
Dated:October 12, 2000 /s/ David H. Benton, Jr.
----------------------------------
David H. Benton, Jr.
Vice President and Corporate Controller
(Principal Accounting Officer)
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