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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 May 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
------- -------
As of July 9, 2000, there were 35,638,000 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 MAY 31, 2000
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
May 31, 2000 and November 30, 1999 3
Condensed Consolidated Statements of Income for
the three and six months ended May 31, 2000 and
May 31, 1999 4
Condensed Consolidated Statements of Cash Flows
for the six months ended May 31, 2000 and
May 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 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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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>
May 31, 2000 November 30, 1999
------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $101,276 $ 81,651
Short-term investments 67,332 77,014
Accounts receivable (less allowances of $7,269 in
2000 and $7,259 in 1999) 49,636 47,952
Other current assets 14,297 9,406
Deferred income taxes 10,782 9,836
-------- --------
Total current assets 243,323 225,859
-------- --------
Property and equipment-net 21,417 20,594
Capitalized software costs-net 2,828 3,155
Other assets 9,558 6,946
-------- --------
Total $277,126 $256,554
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,295 $ 14,041
Accrued compensation and related taxes 15,802 24,344
Income taxes payable 11,746 8,723
Other current liabilities 10,524 8,962
Deferred revenue 70,465 58,173
-------- --------
Total current liabilities 119,832 114,243
-------- --------
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
35,648 in 2000 and 35,553 shares in 1999 41,616 40,491
Retained earnings 118,982 103,904
Accumulated other comprehensive loss (3,304) (2,084)
-------- --------
Total shareholders' equity 157,294 142,311
-------- --------
Total $277,126 $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 May 31, Six Months Ended May 31,
-------------------------- ---------------------------
2000 1999 2000 1999
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software licenses $26,135 $ 32,124 $ 59,372 $ 65,253
Maintenance and services 41,265 38,626 80,159 72,642
------- -------- --------- ---------
Total revenue 67,400 70,750 139,531 137,895
------- -------- --------- ---------
Costs and expenses:
Cost of software licenses 2,279 3,140 5,040 6,246
Cost of maintenance and services 13,659 13,198 27,650 25,711
Sales and marketing 23,880 27,131 49,918 52,914
Product development 9,446 9,895 19,805 19,189
General and administrative 7,079 7,001 14,415 13,795
------- -------- --------- ---------
Total costs and expenses 56,343 60,365 116,828 117,855
------- -------- --------- ---------
Income from operations 11,057 10,385 22,703 20,040
------- -------- --------- ---------
Other income (expense):
Interest income 2,038 1,199 3,848 2,406
Foreign currency gain (loss) 998 (43) 893 (549)
Minority interest -- 35 -- 94
Other income (expense) 11 (46) (5) (25)
------- -------- --------- ---------
Total other income 3,047 1,145 4,736 1,926
------- -------- --------- ---------
Income before provision for income taxes 14,104 11,530 27,439 21,966
Provision for income taxes 4,513 3,690 8,780 7,029
------- -------- --------- ---------
Net income $ 9,591 $ 7,840 $ 18,659 $ 14,937
======= ======== ========= =========
Basic earnings per share $ 0.27 $ 0.23 $ 0.52 $ 0.43
======= ======== ========= =========
Weighted average shares (basic) 35,736 34,436 35,703 34,540
======= ======== ========= =========
Diluted earnings per share $ 0.24 $ 0.20 $ 0.46 $ 0.38
======= ======== ========= =========
Weighted average shares (diluted) 40,039 38,858 40,353 39,502
======= ======== ========= =========
</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>
Six Months Ended May 31,
------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,659 $ 14,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 4,775 5,379
Amortization of capitalized software costs 852 1,081
Amortization of intangible assets 360 329
Deferred income taxes (966) (361)
Minority interest -- (94)
Other noncash charges 285 30
Changes in operating assets and liabilities:
Accounts receivable (3,560) (5,157)
Other current assets (5,002) (909)
Accounts payable and accrued expenses (8,766) (4,986)
Income taxes payable 4,737 995
Deferred revenue 14,327 8,539
--------- --------
Total adjustments 7,042 4,846
--------- --------
Net cash provided by operating activities 25,701 19,783
--------- --------
Cash flows from investing activities:
Purchases of investments available for sale (28,417) (32,857)
Maturities of investments available for sale 37,794 24,069
Purchases of property and equipment (5,914) (4,588)
Capitalized software costs (525) (181)
Acquisition of distributor (2,100) --
Increase in other noncurrent assets (1,570) (1,606)
--------- --------
Net cash used for investing activities (732) (15,163)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,122 8,108
Repurchase of common stock (8,128) (22,408)
--------- --------
Net cash used for financing activities (4,006) (14,300)
--------- --------
Effect of exchange rate changes on cash (1,338) 309
--------- --------
Net increase (decrease) in cash and equivalents 19,625 (9,371)
Cash and equivalents, beginning of period 81,651 50,155
--------- --------
Cash and equivalents, end of period $ 101,276 $ 40,784
========= ========
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock options $ 1,473 $ 3,774
========= ========
</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 stockholders' equity. The following
tables set forth the calculation of comprehensive income on an interim
basis:
Three Months Ended May 31,
--------------------------
2000 1999
------- -------
Net income $ 9,591 $ 7,840
Foreign currency translation adjustments (695) 1,213
Unrealized holding losses on investments (130) (288)
------- -------
Total comprehensive income $ 8,766 $ 8,765
======= =======
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Six Months Ended May 31,
------------------------
2000 1999
------- -------
Net income $18,659 $14,937
Foreign currency translation adjustments (914) (552)
Unrealized holding losses on investments (306) (339)
------- -------
Total comprehensive income $17,439 $14,046
======= =======
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 is effective for fiscal years beginning after June
15, 2000. The Company will adopt SFAS 133 in the first quarter of
fiscal 2001. The Company is currently evaluating this statement, but
does not expect the adoption of SFAS 133 to have a material effect on
the Company's consolidated financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information 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 Six Months Ended -----------------------
------------------ ---------------- Three Six
May 31, May 31, May 31, May 31, Month Month
2000 1999 2000 1999 Period Period
---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses 39% 45% 43% 47% (19)% (9)%
Maintenance and services 61 55 57 53 7 10
--- --- --- ---
Total revenue 100 100 100 100 (5) 1
--- --- --- ---
Costs and expenses:
Cost of software licenses 3 4 4 4 (27) (19)
Cost of maintenance and services 20 19 21 19 3 8
Sales and marketing 36 38 36 38 (12) (6)
Product development 14 14 14 14 (5) 3
General and administrative 11 10 10 10 1 4
--- --- --- ---
Total costs and expenses 84 85 85 84 (7) (1)
--- --- --- ---
Income from operations 16 15 15 15 6 13
--- --- --- ---
Other income 5 1 4 1 166 146
--- --- --- ---
Income before provision for income taxes 21 16 20 16 22 25
Provision for income taxes 7 5 7 5 22 25
--- --- --- ---
Net income 14% 11% 13% 11% 22% 25%
=== === === ===
</TABLE>
The Company's total revenue decreased 5% from $70.8 million in the second
quarter of fiscal 1999 to $67.4 million in the second quarter of fiscal 2000.
The Company's total revenue increased 1% from $137.9 million in the first six
months of fiscal 1999 to $139.5 million in the first six months of fiscal 2000.
Software license revenue decreased 19% from $32.1 million in the second quarter
of fiscal 1999 to
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$26.1 million in the second quarter of fiscal 2000. Software license revenue
decreased 9% from $65.3 million in the first six months of fiscal 1999 to $59.4
million in the first six months of fiscal 2000.
The decrease in software license revenue in the second quarter and in the first
six 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 six 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 softness in these product groups were
new Internet-focused products, primarily Progress WebSpeed and to a lesser
extent Progress SonicMQ, which significantly increased year over year. However,
these products currently represent a small percentage of total software license
revenue.
Maintenance and services revenue increased 7% from $38.6 million in the second
quarter of fiscal 1999 to $41.3 million in the second quarter of fiscal 2000.
Maintenance and services revenue increased 10% from $72.6 million in the first
six months of fiscal 1999 to $80.2 million in the first six months of fiscal
2000. The increase in maintenance and services revenue was primarily the result
of growth in the Company's installed customer base, renewal of maintenance
contracts and increased consulting revenue. The Company is dedicating more
resources to its service businesses in order to take advantage of the market
opportunities associated with companies buying packaged applications and
engaging service providers to Web-enable, customize or integrate such packages
with other applications.
Total revenue generated in markets outside North America decreased 1% from $41.5
million in the second quarter of fiscal 1999 to $41.4 million in the second
quarter of fiscal 2000. Such revenue represented 61% of total revenue in the
second quarter of fiscal 2000 as compared to 59% of total revenue in the second
quarter of fiscal 1999. Total revenue generated in markets outside North America
would have represented 63% of total revenue in the second quarter of fiscal 2000
if exchange rates had been constant as compared to the exchange rates in effect
in the second quarter of fiscal 1999. On a constant currency basis, total
revenue in the second quarter of fiscal 2000 would have been the same as in the
second quarter of fiscal 1999 versus the 5% decrease reported.
Total revenue generated in markets outside North America increased 5% from $83.1
million in the first six months of fiscal 1999 to $86.9 million in the first six
months of fiscal 2000. Such revenue represented 62% of total revenue in the
first six months of fiscal 2000 as compared to 60% in the first six months of
fiscal 1999. Total revenue generated in markets outside North America would have
represented 64% of total revenue in the first six months of fiscal 2000 if
exchange rates had been constant as compared to the exchange rates in effect in
the first six months of fiscal 1999. On a constant currency basis, total revenue
would have increased by 7% versus the 1% reported in the first six 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 27% from $3.1 million in the
second quarter of fiscal 1999 to $2.3 million in the second quarter of fiscal
2000 and decreased as a percentage of software license revenue from 10% to 9%.
Cost of software licenses decreased 19% from $6.2 million in the first six
months of fiscal 1999 to $5.0 million in the first six months of fiscal 2000 and
decreased as a percentage of software license revenue from 10% to 8%. 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 increased 3% from $13.2 million in the second quarter of fiscal 1999 to
$13.7 million in the second quarter of fiscal 2000, but decreased as a
percentage of maintenance and services revenue from 34% to 33%. Cost of
maintenance and services increased 8% from $25.7 million in the first six months
of fiscal 1999 to $27.7 million in the first six months of 2000, but
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decreased as a percentage of maintenance and services revenue from 35% to 34%.
The slight margin percentage improvement was primarily due to maintenance
revenue increasing at a faster rate than the related support costs in fiscal
2000 as compared to fiscal 1999. The dollar increase was due primarily to an
increase in the technical support, consulting and education staff in the first
half of fiscal 2000 as compared to the first half of fiscal 1999. The Company
expects its headcount for technical support, consulting and education to
continue to increase through the remainder of fiscal 2000 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 decreased 12% from $27.1 million in the second
quarter of fiscal 1999 to $23.9 million in the second quarter of fiscal 2000 and
decreased as a percentage of total revenue from 38% to 36%. Sales and marketing
expenses decreased 6% from $52.9 million in the first six months of fiscal 1999
to $49.9 million in the first six months of fiscal 2000 and decreased as a
percentage of total revenue from 38% to 36%. The percentage decrease was due to
the Company's efforts to manage sales and marketing expenses at a rate of growth
below the rate of revenue growth. Excluding the impact of expenses associated
with its two upcoming user conferences, the Company is planning to increase
sales and marketing expenses at a slower rate of growth than revenue during the
remainder of fiscal 2000. The dollar decrease in the second quarter and first
half of fiscal 2000 as compared to the corresponding periods of fiscal 1999 was
also due to the timing of the Company's user conference event in fiscal 1999 and
a decrease 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. An increase in personnel and related expenses from slightly
higher headcount partially offset these decreases in the first six months of
fiscal 2000 as compared to the first six months of fiscal 1999.
Product development expenses decreased 5% from $9.9 million in the second
quarter of fiscal 1999 to $9.4 million in the second quarter of fiscal 2000, but
remained the same percentage of total revenue in each period. Product
development expenses increased 3% from $19.2 million in the first six months of
fiscal 1999 to $19.8 million in the first six months of fiscal 2000 and remained
the same percentage of total revenue in each period. The decrease in expenses in
the second quarter was primarily due to lower headcount and the use of fewer
outside contractors. Major product development efforts in the first half of
fiscal 2000 primarily related to the development of the next versions of the
Company's various product lines, including Progress Version 9.1 and Progress
SonicMQ. Capitalized software costs represented approximately 1% of total
product development spending in the second quarter of fiscal 2000 and fiscal
1999. Capitalized software costs represented 3% of total product development
spending in the first half of fiscal 2000 versus 1% in the first half of fiscal
1999. The increase in the percentage of capitalized software costs was 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 increased 1% from $7.0 million in
the second quarter of fiscal 1999 to $7.1 million in the second quarter of
fiscal 2000 and increased as a percentage of total revenue from 10% to 11%.
General and administrative expenses increased 4% from $13.8 million in the first
six months of fiscal 1999 to $14.4 million in the first six months of fiscal
2000, but remained the same percentage of total revenue in each period. The
dollar 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 166% from $1.1 million in the second quarter of fiscal
1999 to $3.0 million in the second quarter of fiscal 2000. Other income
increased 146% from $1.9 million in the first six months of fiscal 1999 to $4.7
million in the first six 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.
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LIQUIDITY AND CAPITAL RESOURCES
At the end of the second quarter of fiscal 2000, the Company's cash and
short-term investments totaled $168.6 million. The increase in the balance of
$9.9 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 $25.7 million in cash from operations in the first six
months of fiscal 2000 as compared to $19.8 million in the first six months of
fiscal 1999. The increase was primarily due to higher net income and an increase
in deferred revenue, primarily from maintenance, partially offset by an increase
in other current assets, primarily from prepaid user conference expenses and
prepaid royalties. The Company's accounts receivable days sales outstanding
(DSO) was 66 days at the end of the second quarter of fiscal 2000 as compared to
63 days at the end of the first 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 increase in
DSO was attributable to the mix and timing of revenue during the quarter.
The Company purchased $5.9 million of property and equipment in the first six
months of fiscal 2000 and $4.6 million in the first six 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.
The Company purchased and retired 412,600 shares of its common stock for $8.1
million in the first six months of fiscal 2000 as compared to 1,852,000 shares
for $22.4 million in the first six months of fiscal 1999. The Company financed
these purchases primarily from cash generated from operations.
In September 1999, the Board of Directors authorized, for the period October 1,
1999 through September 30, 2000, 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. At May 31, 2000, approximately 9,600,000 shares of common
stock remained available for repurchase under this authorization.
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 is effective for fiscal years beginning after
June 15, 2000. The Company will adopt SFAS 133 in the first quarter of fiscal
2001. The Company is currently evaluating this statement, but does not expect
the adoption of SFAS 133 to have a material effect on the Company's consolidated
financial position or results of operations.
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 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.
International sales through subsidiaries totaled approximately 59% of the
Company's total revenue in the first half of fiscal 2000 as compared to 57% in
the first half of fiscal 1999. 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.
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
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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 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
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on April 20, 2000, the
shareholders voted on the items described below:
- To fix the numbers of directors at seven:
Affirmative Negative Votes
Votes Cast Votes Cast Abstaining
----------- -------------- ----------
29,381,302 943,131 522,223
- To elect the following seven directors: Joseph W. Alsop, Larry R. Harris,
Roger J. Heinen, Jr., Michael L. Mark, Arthur J. Marks, Scott A. McGregor
and Amram Rasiel:
Nominee For Withhold Authority
------------------- ---------- ------------------
Joseph W. Alsop 30,199,299 647,357
Larry R. Harris 30,199,841 646,815
Roger J. Heinen, Jr. 30,199,841 646,815
Michael L. Mark 30,200,947 645,709
Arthur J. Marks 30,200,947 645,709
Scott A. McGregor 30,199,747 646,909
Amram Rasiel 30,199,785 646,871
- To act upon a proposal to amend the Company's Restated Articles of
Organization to increase the authorized Common Stock, $.01 par value per
share, of the Company from 75,000,000 shares to 100,000,000 shares.
Affirmative Negative Votes
Votes Cast Votes Cast Abstaining
----------- -------------- ----------
28,427,333 2,387,829 31,494
- To act upon a proposal to amend the Company's 1997 Stock Incentive Plan to
increase the maximum number of shares that may be issued under such plan
from 5,040,000 shares to 7,540,000 shares:
Affirmative Negative Votes Broker
Votes Cast Votes Cast Abstaining Non-votes
----------- -------------- ---------- ---------
12,031,628 11,289,013 54,533 7,471,482
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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 May 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: July 13, 2000 /s/ Joseph W. Alsop
----------------------------------
Joseph W. Alsop
President
(Principal Executive Officer)
Dated: July 13, 2000 /s/ Norman R. Robertson
----------------------------------
Norman R. Robertson
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
Dated: July 13, 2000 /s/ David H. Benton, Jr.
----------------------------------
David H. Benton, Jr.
Vice President and Corporate Controller
(Principal Accounting Officer)
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