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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal Year Ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For The Transaction Period From To
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2746201
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
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14 OAK PARK
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices)
TELEPHONE NUMBER: (781) 280-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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Title of each class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and, (2) has been subject to such
filing requirements for the past 90 days:
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 14, 2000, there were 35,693,816 shares outstanding of the
registrant's common stock, $.01 par value. As of that date, the aggregate market
value of voting stock held by non-affiliates of the registrant was approximately
$615,694,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
November 30, 1999 are incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 20, 2000 are incorporated by reference into
Part III.
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PART I
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involves risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors are described in greater detail in the 1999 Annual Report to
Shareholders 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.
ITEM 1. BUSINESS
Progress Software Corporation ("PSC" or the "Company") is a global supplier
of application development, deployment and management technology, Internet and
intranet enabling technologies and support services to business, industry and
government. To compete in a volatile, global, technology-driven economy,
businesses need applications built and deployed within an architecture that is
as flexible as fast-changing markets demand. The Company's software products and
services address these challenges by increasing developer productivity, by
delivering applications with a low total cost of ownership and by enhancing
performance and availability. The Company's products include application
servers, databases, development tools and application management products for
Internet/Web, extranet and intranet applications as well as for client/server
and host/terminal applications.
PSC offers several product lines. The Progress product line is an
integrated, component-based visual development environment for building and
deploying multi-tier, enterprise-class business applications. The Company's
other product lines enable the development and deployment of distributed,
multi-tier Java Internet business applications, and make it easy to measure,
monitor and manage Internet, intranet and extranet solutions. To provide
customers with the benefits of a total solution, PSC offers professional
services from its worldwide consulting, education and technical support
organizations.
PSC sells software products and services worldwide to organizations that
develop and use mission-critical enterprise business applications. More than
half of the Company's worldwide revenue is realized in partnership with
Independent Software Vendors ("ISVs") who market applications that utilize the
Company's technology. These ISVs sell Internet and networked business
applications across diverse markets such as manufacturing, distribution, retail
and health care. PSC also sells software products and services to the
Information Technology ("IT") organizations of businesses and governments. The
Company operates throughout North America, Latin America, Europe, Middle East,
Africa ("EMEA") and the Asia/Pacific region through a network of subsidiaries
and independent distributors.
Progress and WebSpeed are registered trademarks of PSC. Apptivity,
ProVision, ProVision Plus, Open AppServer, SmartObjects, AppBuilder, SonicMQ,
SmartAdapters, "Future Proof", IPQoS, IPAccounting and ASPEN are trademarks of
PSC. All other trademarks or trade names appearing in this Form 10-K are the
property of their respective owners.
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BUSINESS STRATEGY
The Company was founded in 1981 to develop and market application
development and deployment software. Its business strategy has been developed in
response to user needs for application development tools that enable the rapid
development and deployment of business-critical applications regardless of the
computing environment. The Company's mission today is to deliver superior
software products and services that empower its partners and customers to
dramatically improve their development and deployment of quality applications
worldwide. This mission encompasses the following strategic points:
- Rapid Application Development The Company's development tools and
technologies are designed to be easy-to-use, intuitive, highly visual and
component-based. This allows the Company's products and services to
improve the productivity of developers in creating and maintaining
complex applications.
- Application Deployment Flexibility The Company's products allow
deployment across all major computing and networked environments:
Internet/Web, client/server and host/terminal. The Progress Open
AppServer and the Progress Apptivity Application Server provide "n-tier"
computing support in order to improve application performance. The
Company designs its products to operate across a broad range of midrange
systems, workstations and PCs. The Company believes that application
developers need the flexibility to deploy their applications across
hardware, operating system platforms, databases and user interfaces that
may be different from those on which their applications are originally
developed. In addition, end-users need the flexibility to continue to use
applications with minimal re-programming, even as they modify or upgrade
their computing environments.
- Future Proof Business Applications A major focus for the Company is
protecting the business application investments of its customers, making
their applications "Future Proof." The Company's latest product releases
offer a standards-based path for building and deploying functionally
rich, distributed multi-tier applications.
- "Buy, Build, Subscribe" The Company enables sophisticated business
applications to be bought, built or acquired as a service. As a result,
complex application functionality is available to a broader group of
businesses, including those that have not traditionally been able to cost
justify large-scale IT investments. This strategy means that an
organization can take advantage of three options in accessing business
applications. When packaged functionality does not already exist, or when
a company seeks to out-distance the competition with unique capabilities
that go beyond the offerings of any commercial software package,
organizations can use PSC technologies to quickly and efficiently build
or customize application functionality that is easy to deploy, maintain
and enhance for a competitive edge. Organizations can also buy
commercially available applications from an ISV, thus gaining standard or
customizable functionality for immediate business benefit. A third option
is also emerging: businesses can now access complex applications as a
service from Application Service Providers ("ASPs"), and thus subscribe
to applications over the Internet or other wide-area networks, rather
than licensing software.
- Balanced Distribution The Company chose at an early stage to implement
both direct and indirect channels of distribution to broaden its
geographic reach, accelerate its sales expansion and leverage its sales
force. The Company sells to both ISVs and to IT departments of
corporations and government agencies. ISVs develop end-user applications
for resale, and both IT customers and ISVs generally license additional
deployment copies of the Company's products to run applications. To
minimize channel conflict, PSC neither develops application software for
distribution nor plans to do so in the future.
- Recurring Revenue The Company's distribution and pricing strategies are
intended to generate recurring revenue. The sale of a development system
can lead to follow-on sales as ISVs license additional copies of the
Company's development and deployment products upon successful
distribution of their applications, or as end-users deploy such
applications within their organizations or upgrade their systems.
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- Worldwide Market The Company has emphasized international sales through
its subsidiaries and a network of independent distributors. Approximately
61% of the Company's revenue was derived from customers outside of North
America in fiscal 1999.
- Customer Service The Company has made a strategic commitment to customer
service. The Company believes that rapid changes in technology require
not only continuous product enhancement but also a strong customer
service effort to encourage product usage and maintain customer
satisfaction. The Company provides a variety of technical support and
service options under its annual maintenance programs, including an
option for 24 hour, 7 day a week service. The Company also offers an
extensive selection of training courses and on-site consulting services.
PROGRESS SOFTWARE PRODUCTS
The Company continues to deliver on its traditional strengths with
intuitive development tools that empower developers to deliver high-quality
applications -- faster and more productively. The Company delivers reliable,
high-performance deployment products -- such as application servers, databases
and Internet messaging servers -- that are essential to successful use of the
application, result in low total cost of ownership and extend application
lifecycles. The Company also has products that ensure overall network and
application quality through measuring, monitoring and management. All Progress
product lines are designed to continually integrate open standards while
delivering high levels of performance.
The Company's core product line consists of Progress ProVision Plus,
Progress WebSpeed, Progress RDBMS, Progress Open AppServer and Progress
DataServers. The Progress product line provides a high degree of portability
across a wide range of computing and networked environments while affording
developers the flexibility to build applications on a range of database
management products. The Company began shipping Progress Version 9, the latest
major release of the Company's flagship product line of application development
and deployment products, in December 1998.
DEVELOPMENT TECHNOLOGIES
PROGRESS PROVISION PLUS
Progress ProVision Plus is a programming environment that provides
developers with a "visual road map" for developing and deploying complex
enterprise applications. Progress ProVision Plus contains a set of integrated,
graphical development tools that support a range of development approaches,
including structured, procedural, event-driven and object approaches. Progress
ProVision Plus is an Integrated Development Environment for developing and
managing enterprise applications, whether they are web-based, client/server or
distributed. Progress ProVision Plus lets developers share common business logic
among a variety of clients, simplifying the creation and management of
enterprise applications.
Developers can create all the required components for mission-critical,
enterprise applications using Progress ProVision Plus. The product's tight
integration with the Progress RDBMS allows developers to build a single, central
repository that not only describes the database definitions but the application
defaults and business rules as well. The Progress 4GL allows developers to build
application business logic quickly and efficiently. Progress ProVision Plus also
includes Progress SmartObjects, which makes creating attractive and effective
graphical user interfaces fast and easy.
Progress ProVision Plus delivers one of the most comprehensive 4GL
development and deployment toolsets in the industry. Based on the combined
technologies of Progress ProVision and Progress WebSpeed Workshop, Progress
ProVision Plus ensures that development efforts can be reused for greater
efficiency. The Company also offers Progress ProVision and Progress WebSpeed
Workshop as standalone products. Progress WebSpeed Workshop supports a component
development paradigm that allows developers to create and share business logic
across web and client/server applications. Developers can define and reuse
SmartObjects in web and client/server applications, offering code inheritance,
encapsulation and other object-oriented development
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features. Progress ProVision Plus provides common tools for web-based and
client/server development, including:
- AppBuilder -- a productivity-enhancing suite of tools for client/server,
web and character development.
- Roundtable Lite -- an integrated source code management and team
collaboration system that provides version control, secure check-in/out,
task management, impact analysis, change auditing, cross referencing and
incremental compiling.
- Open Client Toolkit -- provides Open Client access to Progress Open
AppServer functionality.
- AppServer Partition Deployment ProTool -- defines the location of
business logic at runtime, increasing ease of development and deployment
of distributed applications.
- Progress ProVision Plus Development Server -- includes a development
database, AppServer and WebSpeed Transaction Server for quickly and
easily testing distributed applications.
- WebTools -- a set of browser-based tools used for building and testing
web applications.
- Progress Explorer -- defines and manages the Progress database, Progress
Open AppServer and Progress WebSpeed Transaction Server.
- Progress Data Dictionary -- a central repository that describes the
database definitions, application defaults and business rules.
- SmartObjects -- component technology that offers code inheritance,
encapsulation and other object-oriented development features that allow
the creation, customization and automatic assembly of components.
- Progress 4GL -- a high-level application development language that
reduces development complexity by addressing all development needs within
a single language.
- Wizards -- tools that speed development through the creation of reusable
SmartObjects or Web Objects.
- Integration with ActiveX components for greater user interface
flexibility and OLE automation for application interoperability.
- Integrated reporting tools including Report Builder, a graphical report
writing tool for business analysts and application developers, and
Results, an interactive data access and reporting tool that allows non-
technical end-users to create ad-hoc queries and reports.
PROGRESS APPTIVITY DEVELOPER
Progress Apptivity Developer is an integrated application environment
designed to simplify and accelerate the development of distributed, Web-deployed
business applications that leverage the capabilities of the Progress Apptivity
Application Server. The product provides a comprehensive toolset and component
framework for developing both the client and server portions of the application.
Progress Apptivity Developer provides a single integrated environment for
building data-centric HTML pages, interactive Java forms and reusable Enterprise
JavaBeans server components. The toolset includes a customizable environment, a
color-coded editor, an integrated Java debugger and other productivity tools.
Progress Apptivity Developer supports team-based development and speeds the
development process with its SmartComponent framework and comprehensive set of
wizards that perform many functions including page layout, creating client and
server business logic and working with CORBA objects.
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DEPLOYMENT TECHNOLOGIES: APPLICATION AND MESSAGING SERVERS
PROGRESS OPEN APPSERVER
Progress Open AppServer supports distributed enterprise applications that
leverage existing investments, support new technologies, and communicate with
other applications as needed. An integrated application server for both Progress
Version 9 4GL-based applications and Progress WebSpeed Version 3 web-based
applications, Progress Open AppServer forms a middle tier between an
application's user interface and its back-end data. Progress Open AppServer
allows interoperability with various clients and various data sources and
improves the performance and scalability of business applications. Progress Open
AppServer uses a component-based model for partitioning an application for
efficient deployment. Progress 4GL procedures can be encapsulated into
components that represent an application's business logic. These components can
then be placed on client systems or onto faster server machines distributed
throughout the enterprise or the web. When distributed, the business logic
components are reusable across multiple applications. A new feature called the
SmartDataObject gives developers the ability to create these components.
Progress Open AppServer components can run on a single Windows NT or UNIX
workstation for faster processing or on multiple machines for failover
capabilities. Additionally, all business logic and components can be accessed by
multiple user interfaces for broad client support. The AppServer Partitioning
Tool, part of Progress Version 9, makes it possible to code applications using
distributed components or "partitions" that can be run either remotely on a
Progress Open AppServer or locally on the client. Furthermore, the decision on
whether to run remotely or locally can be made at runtime without recompiling
the client application. A developer can create and compile an application once
and deploy it in many different Progress Open AppServer configurations. Progress
Open AppServers can connect across the network to other Progress Open AppServers
in complex multi-tier configurations, allowing more effective enterprise
business solutions that maximize available computing resources.
PROGRESS SONICMQ
Progress SonicMQ is a fast, flexible, scalable Internet messaging server
designed to simplify the development and integration of today's highly
distributed enterprise applications and Internet-based business solutions.
Progress SonicMQ is one of the only standards-based Internet messaging servers
that fully complies with Sun Microsystems' Java Messaging Server ("JMS") and the
World Wide Web Consortium's XML specifications. Progress SonicMQ is designed to
meet the most demanding performance requirements of business-to-business ("B2B")
e-commerce.
Messaging allows distributed applications to exchange data and business
logic with each other asynchronously. At its core stands an Internet messaging
server, which manages the constant flow of business events between applications.
The messaging server is like a postmaster who will deliver reliably, even if the
message must be preserved until a disconnected receiver returns online. Messages
marked for guaranteed delivery will arrive once, and only once, at the
subscriber's address. Progress SonicMQ allows developers to quickly establish
and maintain an efficient high-performance messaging structure that can handle
the most complex business logic flow requirements without compromising
application functionality.
Progress SonicMQ provides high-speed messaging capabilities for a large
number of connections. Progress SonicMQ's feature set, including guaranteed
delivery, durable subscriptions and persistent messaging, supports both data and
message integrity. Progress SonicMQ supports both point-to-point and publish-
and-subscribe communication models. The product's administration tools simplify
the creation and maintenance of an efficient messaging system, which can be
configured and managed remotely.
PROGRESS WEBSPEED TRANSACTION SERVER
Progress WebSpeed is a comprehensive environment for web-enabling existing
applications and building new applications that deliver a high level of database
connectivity and transaction management. Progress WebSpeed Transaction Server is
one of two components within the Progress WebSpeed product line. Progress
WebSpeed Transaction Server provides a robust platform for Internet Transaction
Processing ("ITP")
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applications that require high scalability and rapid response rates. Progress
WebSpeed Transaction Server provides high throughput, dynamic load balancing and
scalability to handle thousands of simultaneous users. Progress WebSpeed
Transaction Server includes record locking, transaction rollback and two-phase
commit capabilities that safeguard application and data integrity, even if
transactions are interrupted, and ensures the integrity of transactions that
span multiple databases.
PROGRESS APPTIVITY APPLICATION SERVER
The Progress Apptivity Application Server is an open, standards-based and
highly scalable application server that simplifies the process of web-enabling
legacy business applications and data. The product includes numerous features
such as SmartAdapters that allow applications to access an external data source
through a standard data interface model. Since Progress Apptivity Application
Server maintains business logic on a central server, applications can be
deployed faster and with lower maintenance costs. Progress Apptivity's
SmartConnect capabilities, which include native support for JDBC- and
ODBC-compliant databases, allow developers to build content-rich applications
that dynamically aggregate and manage data from diverse business processes and
data sources. Progress Apptivity Application Server has multi-threaded server
architecture that provides a secure and scalable foundation for business
applications. Progress Apptivity Application Server includes comprehensive
security, load balancing and automatic failover that ensures no single point of
failure and provides a high level of application reliability and scalability.
DEPLOYMENT TECHNOLOGIES: DATABASES
PROGRESS RDBMS
The Progress RDBMS products are high-performance relational databases that
can scale from a single-user Windows 95 system to massive symmetric
multiprocessing ("SMP") and cache coherent non-uniform memory access ("ccNUMA")
systems, supporting thousands of concurrent users. In addition to offering one
of the lowest total costs of ownership and scalability, the Progress RDBMS
products offer high availability, reliability, performance, and platform
portability. With full support for ANSI SQL-92 Entry Level specification,
Progress RDBMS products integrate with enterprise applications, tools and
numerous third-party data management systems.
The three Progress RDBMS products -- the Progress Enterprise RDBMS, the
Progress Workgroup RDBMS, and the Progress Personal RDBMS -- allow users to
select a solution that satisfies their business objectives. The benefit to
customers is that they pay for what is needed today and, as their requirements
grow, they can upgrade to a more robust solution without changing program code.
The Progress Enterprise RDBMS is designed for large user environments and
the transaction processing throughput of high volume SQL-based and Progress
4GL-based on-line transaction processing ("OLTP") applications. The Progress
Enterprise RDBMS was developed with a flexible, multithreaded, multiserver
architecture. The Progress Enterprise RDBMS is a powerful, open and large-scale
enterprise database that can run across multiple hardware platforms and
networks.
The Progress Enterprise RDBMS includes the functionality needed to meet
demanding OLTP requirements. These capabilities include row-level locking,
roll-back and roll-forward recovery, point-in-time recovery, distributed
database management with two-phase commit, a complete suite of on-line utilities
and full support for ANSI-standard SQL-92. Sophisticated self-tuning
capabilities and simple graphical interfaces for system administration make the
Progress Enterprise RDBMS easy to install, tune and manage. With low
administration costs, low initial cost of licenses and upgrade fees and limited
software implementation costs, the Progress Enterprise RDBMS provides a
significant cost-of-ownership advantage over competing database products.
The Progress Workgroup RDBMS, which offers many of the same powerful
capabilities as the Progress Enterprise RDBMS, is optimized for workgroups of
two to thirty simultaneous users. This cost-effective, department-level solution
provides high performance, multi-user support and cross-platform
interoperability. The Progress Workgroup RDBMS meets the needs of workgroup
applications by running on a wide variety of
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hardware and operating system platforms. Because the flexible database
architecture provides optimal throughput on all supported platforms, a database
developed on one machine can serve applications on other systems and network
configurations.
The Progress Personal RDBMS is bundled with Progress development tools,
including Progress ProVision Plus, and is suitable for deploying single-user
SQL-based and 4GL-based applications and for developing, prototyping and testing
applications.
DEPLOYMENT TECHNOLOGIES: DATASERVERS
PROGRESS DATASERVERS
The Company provides developers with a transparent interface to a wide
range of database management systems through Progress DataServers. These
products offer full read, write, update and delete capabilities to diverse data
management systems and enable developers to write applications once and deploy
them across a broad spectrum of data sources. Progress DataServers also enable
existing Progress 4GL and web-based applications to access non-Progress data
sources and allow the integration of new and legacy applications with diverse
databases.
Progress DataServer products include the Progress Oracle DataServer, the
Progress ODBC DataServer, which is available in Enterprise and Personal
editions, and the Progress/400 DataServer. These products provide an environment
for developing and deploying Progress 4GL and web-based applications designed
for heterogeneous, distributed computing environments.
APPLICATION MANAGEMENT PRODUCTS
The Internet Software Quality ("ISQ") product line includes a set of
products designed to provide solutions geared toward the management of
applications and networks by monitoring their availability, performance and
recoverability. The ISQ product line consists primarily of Progress IPQoS and
Progress IPAccounting Framework.
PROGRESS IPQOS
Progress IPQoS enables developers to introduce a new element into network
management capabilities -- the ability to monitor service levels for specific
network resources throughout the entire network. Progress IPQoS measures and
monitors the overall availability and performance of applications, file systems
and services over distributed networks. Progress IPQoS is designed to deliver a
comprehensive application and resource monitoring and measuring system that
provides reporting, notification and recoverability features.
PROGRESS IPACCOUNTING FRAMEWORK
Progress IPAccounting Framework provides developers with an environment for
the rapid development of custom business solutions that require the inspection,
analysis and logging of IP network traffic. Progress IPAccounting Framework
allows developers to create applications to capture and analyze full messages
and session content from any type of TCP/IP or UDP/IP application.
PRODUCT DEVELOPMENT
To date, most of the Company's products have been developed by its internal
product development staff. The Company believes that the features and
performance of its products are competitive with those of other available
application development and deployment tools and that none of the current
versions of its products is approaching obsolescence. However, the Company
believes that significant investments in new product development and continuing
enhancements of its current products will be required to enable the Company to
maintain its competitive position.
The Company intends to focus its principal future product development
efforts on developing new products and updating existing products in order to
realize the Company's vision of the expected direction of
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application development technology -- which the Company describes as Universal
Application Architecture ("UAA"). UAA is an approach to application development
and deployment technology that relies on server-centric performance and
maintainability, component-based modularity and standards-based interoperability
and integration.
In the server-centric UAA model, the business logic of an application
resides primarily on the server, accessed by users with Web browsers or thin
clients. Application code that is more suitable for client side execution, such
as user interface logic, data entry validation, and the like, is distributed as
needed to the client but managed by the server. Component-based modularity is an
application development technique derived from object-oriented programming in
which applications are built as encapsulated blocks of logic. The product
direction of future releases is to offer ISVs standards-based paths for building
and deploying functionally rich, distributed, integrated multi-tier
applications. This will enable them to take advantage of the emerging ASP and
Internet B2B market opportunities.
The Company's product development staff consisted of 242 employees as of
November 30, 1999. Product development is primarily conducted at the Company's
offices in Bedford, Massachusetts, Newark, California and Nashua, New Hampshire.
Limited work related to product localization may also be performed at the
Company's international subsidiaries. In fiscal years 1999, 1998 and 1997, the
Company spent $38.8 million, $32.2 million and $28.9 million, respectively, on
product development, of which $0.5 million, $2.0 million and $1.9 million,
respectively, were capitalized in those years. The Company believes that the
experience and depth of its product development staff are important factors in
the Company's success.
CUSTOMERS
The Company markets its products worldwide to ISVs and IT departments of
corporations and government agencies. No single customer has accounted for more
than 10% of the Company's total revenue in any of its last three fiscal years.
Independent Software Vendors The Company's ISVs provide the Company with
broad market coverage, offer an extensive library of commercial applications and
are a source of follow-on revenue. PSC publishes Application Catalogs and
includes ISVs in trade shows and other marketing programs. PSC also has kept
entry costs for ISVs low to encourage a wide variety of ISVs to build
applications. An ISV typically takes 6 to 12 months to develop an application.
Although many of the Company's ISVs have developed successful applications and
have large installed customer bases, others are engaged in earlier stages of
product development and marketing and may not contribute follow-on revenue to
PSC for some time, if at all. However, if an ISV succeeds in marketing its
applications, the Company obtains follow-on revenue as the ISV licenses copies
of the Company's deployment products to permit its application to be installed
and used by customers.
IT Departments PSC licenses its products to IT departments of
corporations, government agencies and other organizations to build complex
applications. Many IT departments that purchase ISV applications often also
purchase the Company's development tools to supplement their internal
application development. Like ISVs, IT customers may also license deployment
products to install applications at additional user sites.
SALES AND MARKETING
The Company sells its products through its direct sales force in the United
States and in over 20 other countries and through independent distributors in
over 50 countries outside North America. The sales, marketing and service groups
are organized by region into North America, EMEA, Asia/Pacific, Latin America
and Japan. The Company believes that this structure allows it to maintain direct
contact with and better support its customers and to control its international
distribution. The Company's international operations provide focused local
marketing efforts and are better able to directly respond to changes in local
conditions. Financial information relating to business segment and international
operations is detailed in Note 10 of Notes to Consolidated Financial Statements
on page 51 in the 1999 Annual Report to Shareholders and is incorporated herein
by reference. Risks and uncertainties related to the Company's
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international operations are detailed under the heading "Factors That May Affect
Future Results" on pages 31 to 35 in the 1999 Annual Report to Shareholders and
are incorporated herein by reference.
Sales personnel are responsible for developing new ISV and IT accounts,
assisting ISVs in closing major accounts and servicing existing customers. The
Company actively seeks to avoid conflict between the sales efforts of its ISVs
and the Company's own sales efforts.
PSC uses its telephone sales and sales administration groups to enhance its
direct sales efforts and to generate new business and follow-on business from
existing customers. These groups may provide evaluation copies to ISVs or IT
organizations to help qualify them as prospective customers, and also sell
additional development and deployment products to existing customers.
The Company is investing significant resources in its ASPEN (ASP
ENablement) program. The ASP business model has the potential to revolutionize
the way software is delivered. With the Company's ASPEN program, ISVs get the
support they need to gain a foothold in this new marketplace. PSC's ASPEN
program offers business planning assistance, industry recognition, technology,
services and partnerships to help ISVs transform their Progress-based
applications into ASP-enabled applications. These new applications, available on
a subscription basis and accessed over the Internet rather than purchased, allow
small and mid-tier organizations to more quickly and economically gain access to
application functionality previously unavailable to them. ASP-enabled
applications reduce traditional IT infrastructure costs because they are
developed and maintained by service providers rather than an internal IT staff.
The Company's marketing department conducts extensive marketing programs
designed to ensure a stream of market-ready products, raise general awareness of
PSC, generate leads for the PSC sales organization and promote the Company's
various product lines. These programs include public relations, direct mail,
participation in trade shows, advertising and production of collateral
literature. The Company sponsored a single worldwide user conference in the
United States in fiscal 1999. The Company is planning to hold regional user
conferences in the United States and Spain in fiscal 2000.
CUSTOMER SUPPORT AND PROFESSIONAL SERVICES
The Company's technical support staff provides telephone support to
application developers and end-users using a computerized call tracking and
problem reporting system. PSC also provides custom software development,
consulting services and training throughout the world. The Company's software
licenses generally are perpetual licenses. Customers may also purchase an annual
maintenance service entitling them to software updates, technical support and
technical bulletins. The annual fee for maintenance is generally 15% to 20% of
the current list price of the product to be maintained; first year maintenance
is not included with the Company's products and is purchased separately. The
Company provides technical support to customers primarily through its technical
support centers in Bedford, Massachusetts, Rotterdam, The Netherlands and
Melbourne, Australia. Additional localized support may also be provided by
international subsidiaries in their own countries.
The Company's professional services organization delivers a total business
solution for customers through a combination of products, consulting and
education. The Company's worldwide consulting organization offers project
management, custom development, programming, application implementation and
Internet, migration and other services. The Company's consulting organization
also provides services to Web-enable existing applications or take advantage of
the capabilities of new product releases.
Consulting and training services for customers outside North America are
provided by personnel at the Company's international subsidiaries and
distributors. Revenue from maintenance and services was 54%, 53% and 49% of
total revenue for fiscal years 1999, 1998 and 1997, respectively.
COMPETITION
The computer software industry is intensely competitive. The Company
experiences significant competition from a variety of sources with respect to
all its products. The Company believes that the breadth and integration of its
product offerings have become increasingly important competitive advantages.
Other factors
10
<PAGE> 11
affecting competition in the markets served by the Company include product
performance in complex applications, application portability, vendor experience,
ease of integration, price, training and support. The Company believes that it
competes favorably with respect to these factors.
The Company competes in various markets with a number of entities including
database vendors offering development tools in conjunction with their database
systems, such as Informix Corporation, Microsoft Corporation, Oracle Corporation
and Sybase, Inc., as well as numerous application server vendors and application
development tools vendors. The Company believes that the database market is
currently dominated by Oracle and Microsoft, and that there is no dominant
application development tools or application server vendor. Some of these
competitors have greater financial, marketing or technical resources than the
Company and may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than can the Company. Increased competition
could make it more difficult for the Company to maintain its market presence.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
In accordance with industry practice, the Company relies upon a combination
of contractual provisions and copyright, patent, trademark and trade secret laws
to protect its proprietary rights in its products. The Company distributes its
products under software license agreements that grant customers a perpetual non-
exclusive license to use the Company's products and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of the Company's products.
In addition, the Company attempts to protect its trade secrets and other
proprietary information through agreements with employees and consultants.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful.
The Company seeks to protect the source code of its products as a trade
secret and as an unpublished copyrighted work. The Company holds a patent on
SmartObjects and has also made patent applications for some of its various other
product technologies. Where possible, the Company seeks to obtain protection of
its product names through trademark registration and other similar procedures.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are as equally important in establishing and maintaining a leadership position
within the industry as are the various legal protections of its technology. In
addition, the Company believes that the nature of its customers, the importance
of the Company's products to them and their need for continuing product support
reduce the risk of unauthorized reproduction.
BACKLOG
The Company generally ships its products within 30 days after acceptance of
a customer purchase order and execution of a license agreement. Accordingly, the
Company does not believe that its backlog at any particular point in time is
indicative of future sales levels.
EMPLOYEES
As of November 30, 1999, the Company had 1,363 employees worldwide,
including 519 in sales and marketing, 397 in customer support and services
(including manufacturing and distribution), 242 in product development and 205
in administration. The competition in recruiting skilled technical personnel in
the computer software industry is intense. The Company believes that its ability
to attract and retain qualified employees is an important factor in its growth
and development, and that its future success will depend, in large measure, on
its ability to continue to attract and retain qualified employees. To date, the
Company has been successful in recruiting and retaining sufficient numbers of
qualified personnel to effectively conduct its business. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relations with employees are good.
11
<PAGE> 12
The Company has various equity incentive plans which permit the granting of
options to eligible employees and the purchase of shares by eligible employees.
The payment of cash bonuses and contributions to retirement plans is at the
discretion of the compensation committee of the Board of Directors and the
amounts depend on the level of attainment relative to the Company's financial
plan. These programs are designed to minimize employee turnover, although there
can be no assurance that such programs will be successful.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph W. Alsop........................... 54 President and Director
David G. Ireland.......................... 53 Vice President and General Manager, Worldwide
Field Operations
Richard D. Reidy.......................... 40 Vice President, Products
Norman R. Robertson....................... 51 Vice President, Finance and Administration and
Chief Financial Officer
</TABLE>
Mr. Alsop, a founder of the Company, has been a director and President of
the Company since its inception in 1981.
Mr. Ireland joined the Company in September 1997 as Vice President, Core
Products and Services and was elected Vice President and General Manager, Core
Products and Services in March 1998 and Vice President and General Manager,
Worldwide Field Operations in December 1999. From 1994 to 1997, Mr. Ireland was
employed by Marcam Corporation, a computer software company, as a Vice President
and General Manager.
Mr. Reidy was elected Vice President, Development Tools in July 1996 and
was elected Vice President, Product Development in July 1997 and Vice President,
Products in December 1999. From 1995 to 1996, Mr. Reidy held various management
positions within the product development organization of the Company. Mr. Reidy
joined the Company in June 1985.
Mr. Robertson joined the Company in May 1996 as Vice President, Finance and
Chief Financial Officer and was elected Vice President, Finance and
Administration and Chief Financial Officer in December 1997. From 1993 to 1996
he was employed by M/A-COM, Inc., a telecommunications company, as Director of
Finance and Administration.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, support, marketing and
product development facility is located in a single leased building of
approximately 165,000 square feet in Bedford, Massachusetts. The Company leases
approximately 58,000 square feet in Wilmington, Massachusetts and maintains its
manufacturing and distribution operations at this location. In addition, the
Company maintains offices in 15 other locations in North America and 35
locations outside North America. The Bedford lease expires in August 2002. The
terms of all other leases generally range from one to seven years. The Company
believes that its present and proposed facilities are adequate for its current
needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
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.
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended November 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information appearing under the caption "Market for Registrant's Common
Equity and Related Shareholder Matters" on page 53 of the 1999 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Selected Consolidated
Financial Data" on page 20 of the 1999 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 21 to 35 of
the 1999 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under the caption "Quantitative and Qualitative
Disclosures About Market Risk" on pages 29 and 30 of the 1999 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, related notes and independent
auditors' report appearing on pages 36 to 52 of the 1999 Annual Report to
Shareholders and the information appearing under the caption "Selected Quarterly
Financial Data" on page 53 of the 1999 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers set forth under the caption
"Executive Officers of the Registrant" in Item 1 of this Annual Report is
incorporated herein by reference.
The information regarding directors set forth under the caption "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 20, 2000, which will be filed
with the Securities and Exchange Commission not later than 120 days after
November 30, 1999, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 20, 2000, which will be
13
<PAGE> 14
filed with the Securities and Exchange Commission not later than 120 days after
November 30, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Holders and Management" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 20, 2000, which will
be filed with the Securities and Exchange Commission not later than 120 days
after November 30, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 20, 2000, which will be
filed with the Securities and Exchange Commission not later than 120 days after
November 30, 1999, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following financial statements are included in the Company's 1999
Annual Report to Shareholders and are incorporated herein by reference:
Consolidated Balance Sheets as of November 30, 1999 and 1998
Consolidated Statements of Operations for the years ended November 30, 1999,
1998, and 1997
Consolidated Statements of Shareholders' Equity for the years ended November
30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended November 30, 1999,
1998, and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplemental Financial Data not covered by the Independent Auditors'
Report:
Selected Quarterly Financial Data
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended November 30, 1999.
14
<PAGE> 15
(c) EXHIBITS
Documents listed below, except for documents identified by parenthetical
numbers, are being filed as exhibits herewith. Documents identified by
parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32
of the General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Act"), reference is made to such documents
as previously filed as exhibits with the Commission. The Company's file number
under the Act is 0-19417.
<TABLE>
<S> <C>
3.1 Restated Articles of Organization of the Company(1)
3.1.1 Articles of Amendment to Restated Articles of Organization
filed on January 19, 1995(2)
3.1.2 Articles of Amendment to Restated Articles of Organization
filed on November 17, 1997(3)
3.1.3 Articles of Amendment to Restated Articles of Organization
filed on May 6, 1999
3.2 By-Laws of the Company, as amended and restated(4)
4.1 Specimen certificate for the Common Stock of the Company(5)
10.1 1984 Incentive Stock Option Plan, with amendments(6)
10.2 Amended and Restated 1984 Incentive Stock Option Plan(7)
10.3 1991 Employee Stock Purchase Plan, as amended(8)
10.4 Progress Software Corporation 401(k) Plan with Fidelity
Institutional Retirement Services Company(9)
10.5 1992 Incentive and Nonqualified Stock Option Plan(10)
10.6 First Amended and Restated Lease dated August 11, 1994
between the Company and the Equitable Life Assurance Company
of the United States(11)
10.7 1994 Stock Incentive Plan(12)
10.8 1993 Directors' Stock Option Plan(13)
10.9 1997 Stock Incentive Plan, as amended(14)
10.10 Employee Retention and Motivation Agreement executed by each
of the Executive Officers(15)
10.10.1 First amendment to Employee Retention and Motivation
Agreement executed by each of the Executive Officers(16)
13.1 1999 Annual Report to Shareholders (which is not deemed to
be "filed" except to the extent that portions thereof are
expressly incorporated by reference in this Annual Report on
Form 10-K)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1997.
(2) Incorporated by reference to Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1994.
(3) Incorporated by reference to Exhibit 3.1.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1997.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 31, 1991.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(6) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
15
<PAGE> 16
(7) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(8) Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 1998.
(9) Incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1991.
(10) Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1992.
(11) Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(12) Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(13) Incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(14) Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 1999.
(15) Incorporated by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1998.
(16) Incorporated by reference to Exhibit 10.10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1999.
(d) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown on the financial statements or notes thereto.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
February, 2000.
PROGRESS SOFTWARE CORPORATION
By: /s/ JOSEPH W. ALSOP
------------------------------------
Joseph W. Alsop
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH W. ALSOP President and Director February 25, 2000
- --------------------------------------------------- (Principal Executive Officer)
Joseph W. Alsop
/s/ NORMAN R. ROBERTSON Vice President, Finance and February 25, 2000
- --------------------------------------------------- Administration and Chief
Norman R. Robertson Financial Officer (Principal
Financial Officer)
/s/ DAVID H. BENTON, JR. Vice President and Corporate February 25, 2000
- --------------------------------------------------- Controller (Principal
David H. Benton, Jr. Accounting Officer)
/s/ LARRY R. HARRIS Director February 25, 2000
- ---------------------------------------------------
Larry R. Harris
/s/ ROGER J. HEINEN, JR. Director February 25, 2000
- ---------------------------------------------------
Roger J. Heinen, Jr.
/s/ MICHAEL L. MARK Director February 25, 2000
- ---------------------------------------------------
Michael L. Mark
/s/ ARTHUR J. MARKS Director February 25, 2000
- ---------------------------------------------------
Arthur J. Marks
/s/ SCOTT A. MCGREGOR Director February 25, 2000
- ---------------------------------------------------
Scott A. McGregor
/s/ AMRAM RASIEL Director February 25, 2000
- ---------------------------------------------------
Amram Rasiel
</TABLE>
17
<PAGE> 1
EXHIBIT 3.1.3
FEDERAL IDENTIFICATION
NO. 04-2746201
----------------------
THE COMMONWEALTH OF MASSACHUSETTS
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Joseph W. Alsop , President
-----------------
and James D. Freedman , Clerk
-------------------
of Progress Software Corporation
-----------------------------,
(Exact name of corporation)
located at 14 Oak Park, Bedford, Massachusetts 01730 .
------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
- --------------------------------------------------------------------------------
(Number those articles 1 ,2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on April 23,
1999, by vote of:
11,725,870 shares of Common Stock of 17,269,526 shares outstanding,
- ---------- ------------ ----------
(type, class & series if any)
shares of of shares outstanding, and
- ---------- ------------------------ --------
shares of of shares outstanding,
- ---------- ------------------------ --------
(type, class & series if any)
1** being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
<PAGE> 2
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 50,000,000 $.01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- --------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 75,000,000 $.01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
The foregoing amendments(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: -----------------
SIGNED UNDER THE PENALTIES OF PERJURY, this 5th day of May, 1999,
/s/ JOSEPH W. ALSOP
----------------------------------
Joseph W. Alsop
President
/s/ JAMES D. FREEDMAN
----------------------------------
James D. Freedman
Clerk
<PAGE> 4
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within restated Articles of Amendment,
and the filing fee in the amount of $25,000.00 having been
paid, said article is deemed to have been filed with me this
6th day of May, 1999.
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of the document to be sent to:
James W. Romeo, Esquire
----------------------------------------
Progress Software Corporation
----------------------------------------
14 Oak Park
----------------------------------------
Bedford, MA 01730
----------------------------------------
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software licenses $131,499 $113,312 $ 95,579 $ 93,178 $110,785
Maintenance and services 154,648 126,578 92,735 83,512 69,350
-------- -------- --------- -------- --------
Total revenue 286,147 239,890 188,314 176,690 180,135
-------- -------- --------- -------- --------
Costs and expenses:
Cost of revenue 68,133 56,038 41,238 38,539 31,896
Sales and marketing 104,809 96,832 87,570 87,830 79,546
Product development 38,339 30,154 26,991 23,951 24,175
General and administrative 28,162 26,839 23,202 21,909 18,813
Non-recurring charges -- -- 11,537 -- 2,373
-------- -------- --------- -------- --------
Total costs and expenses 239,443 209,863 190,538 172,229 156,803
-------- -------- --------- -------- --------
Income (loss) from operations 46,704 30,027 (2,224)* 4,461 23,332**
-------- -------- --------- -------- --------
Other income, net 4,739 3,941 5,356 3,869 3,169
-------- -------- --------- -------- --------
Income before provision for income taxes 51,443 33,968 3,132* 8,330 26,501**
Provision for income taxes 16,452 11,210 4,739 2,833 9,817
-------- -------- --------- -------- --------
Net income (loss) $ 34,991 $ 22,758 $ (1,607)* $ 5,497 $ 16,684**
======== ======== ========= ======== ========
Basic earnings (loss) per share $ 1.01 $ 0.66 $ (0.04)* $ 0.14 $ 0.44**
======== ======== ========= ======== ========
Weighted average shares outstanding (basic) 34,488 34,458 36,336 38,468 38,022
======== ======== ========= ======== ========
Diluted earnings (loss) per share $ 0.89 $ 0.59 $ (0.04)* $ 0.14 $ 0.41**
======== ======== ========= ======== ========
Weighted average shares outstanding (diluted) 39,212 38,560 36,336 39,666 40,514
======== ======== ========= ======== ========
Balance Sheet Data:
Cash and short-term investments $158,665 $113,999 $ 93,485 $ 97,323 $ 92,338
Working capital 111,616 69,188 67,760 84,207 85,271
Total assets 256,554 206,708 171,733 173,188 175,736
Long-term debt, including current portion -- -- -- 122 162
Shareholders' equity 142,311 102,693 96,439 113,793 113,481
</TABLE>
- ----------
Note: All share and per share amounts have been restated to reflect the
two-for-one stock split on January 21, 2000.
* Includes non-recurring charges related to the acquisition of Apptivity
Corporation of $11.5 million or $0.31 per diluted share. Excluding these
non-recurring items, net income would have been $9.7 million or $0.27 per
diluted share. See Note 2 of Notes to Consolidated Financial Statements.
** Includes a non-recurring charge for purchase of in-process software
development of $2.4 million or $0.06 per diluted share. Excluding this
non-recurring item, net income would have been $19.1 million or $0.47 per
diluted share.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking statements. From time to
time, information provided by the Company or statements made by its directors,
officers or employees may contain "forward-looking" information which involves
risks and uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors 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 Company's total revenue in fiscal 1999 increased 19%
from its total revenue in fiscal 1998. The Company's net income increased 54%
from $22.8 million in fiscal 1998 to $35.0 million in fiscal 1999. The Company's
total revenue in fiscal 1998 increased 27% from its total revenue in fiscal
1997. The Company's net income increased 135% from $9.7 million, excluding
non-recurring, acquisition-related charges, in fiscal 1997 to $22.8 million in
fiscal 1998. After including the effect of the non-recurring charges of $11.5
million related to the acquisition of Apptivity Corporation (Apptivity), the
Company recorded a net loss of $1.6 million in fiscal 1997.
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
Year Ended -------------------
November 30, 1999 1998
------------------- Compared Compared
1999 1998 1997 to 1998 to 1997
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses 46% 47% 51% 16% 19%
Maintenance and services 54 53 49 22 36
--- --- ---
Total revenue 100 100 100 19 27
--- --- ---
Costs and expenses:
Cost of software licenses 5 4 5 31 1
Cost of maintenance and services 19 19 17 20 47
Sales and marketing 37 41 47 8 11
Product development 13 13 14 27 12
General and administrative 10 11 12 5 16
Non-recurring charges -- -- 6 -- --
--- --- ---
Total costs and expenses 84 88 101 14 10
--- --- ---
Income (loss) from operations 16 12 (1) 56 *
Other income, net 2 2 3 20 (26)
--- --- ---
Income before provision for income taxes 18 14 2 51 985
Provision for income taxes 6 5 3 47 137
--- --- ---
Net income (loss) 12% 9% (1)% 54 *
=== === ===
</TABLE>
- ----------
* Not meaningful
FISCAL 1999 COMPARED TO FISCAL 1998 The Company's total revenue increased 19%
from $239.9 million in fiscal 1998 to $286.1 million in fiscal 1999. Total
revenue would have increased by 23% in fiscal 1999 from fiscal 1998 if exchange
rates had been constant as compared to the exchange rates in effect in fiscal
1998.
2
<PAGE> 3
Software license revenue increased 16% from $113.3 million in fiscal 1998 to
$131.5 million in fiscal 1999. The increase in software license revenue is
attributable to greater acceptance of the Company's products, including Progress
Version 8 and Progress Version 9, the latest versions of the Company's flagship
development and deployment product set, and, to a lesser extent, new Internet -
focused products such as Progress WebSpeed and Progress Apptivity. Progress
Version 9 was released in December 1998. The Company also experienced an
increase in sales to Independent Software Vendors (ISVs), value-added resellers
who resell the Company's products in conjunction with the sale of their
applications. The increase in sales to ISVs is primarily due to greater
deployment revenue from database, application server, dataservers and reporting
tools products.
Maintenance and services revenue increased 22% from $126.6 million in fiscal
1998 to $154.6 million in fiscal 1999. The increase in maintenance and services
revenue was primarily the result of growth in the Company's installed customer
base, renewal of maintenance contracts and increased consulting revenue. The
Company is dedicating more resources to its service business in order to take
advantage of the market opportunities associated with companies Web-enabling
their business applications and buying packaged applications and engaging
service providers to customize such packages.
Total revenue generated in markets outside North America increased 28% from
$137.0 million in fiscal 1998 to $175.0 million in fiscal 1999 and represented
61% of total revenue in fiscal 1999 as compared to 57% in fiscal 1998. Revenue
growth was strong in all regions outside of North America in fiscal 1999 with
growth rates of 27% in Europe, Middle East and Africa (EMEA), 28% in Latin
America and 30% in Asia Pacific. Revenue in North America increased 8% in fiscal
1999 as compared to fiscal 1998. The decrease in the growth rate in North
America from fiscal 1998 was primarily due to a slowdown in revenue from certain
ISVs, especially in the enterprise resource planning (ERP) sector, and a
slowdown in consulting. Total revenue generated in markets outside North America
would have represented 62% of total revenue in fiscal 1999 if exchange rates had
been constant as compared to the exchange rates in effect in fiscal 1998.
Cost of software licenses consists primarily of cost of product media,
documentation, duplication, packaging, royalties and amortization of capitalized
software costs. Cost of software licenses increased 31% from $10.1 million in
fiscal 1998 to $13.2 million in fiscal 1999 and increased as a percentage of
software license revenue from 9% to 10%. The dollar and percentage increases
were due to an increase in documentation costs and higher royalty expense for
products and technologies licensed from third parties. Cost of software licenses
as a percentage of software license revenue can vary depending upon the relative
product mix in a given period.
Cost of maintenance and services consists primarily of costs of providing
customer technical support, education and consulting. Cost of maintenance and
services increased 20% from $46.0 million in fiscal 1998 to $54.9 million in
fiscal 1999, but remained the same percentage of maintenance and services
revenue in each year at 36%. The dollar increase was due primarily to an
increase in the technical support, consulting and education staff and related
expenses and greater usage of third-party contractors to fulfill demand for
consulting services in fiscal 1999 as compared to fiscal 1998. The Company
increased its technical support, education, and consulting staff from 282 at the
end of fiscal 1998 to 373 at the end of fiscal 1999. The Company expects its
headcount for technical support, consulting and education to continue to
increase in fiscal 2000 primarily due to the need to satisfy increased demand
for consulting services. However, there can be no assurance that the Company
will be successful in recruiting and retaining such personnel.
Sales and marketing expenses increased 8% from $96.8 million in fiscal 1998 to
$104.8 million in fiscal 1999, but decreased as a percentage of total revenue
from 41% to 37%. The percentage decrease was due to increased productivity from
the Company's sales and marketing efforts. The dollar increase in sales and
marketing expenses was due to an increase in headcount in the sales, sales
support and marketing staff and an increase in the level of discretionary
marketing spending for trade shows, advertising campaigns, direct mail
solicitations and other events. The headcount increase was primarily to support
international growth and new products. Worldwide sales and marketing headcount
increased from 476 at the end of fiscal 1998 to 519 at the end of fiscal 1999.
Product development expenses increased 27% from $30.2 million in fiscal 1998 to
$38.3 million in fiscal 1999 and remained approximately the same percentage of
total revenue at 13%. The dollar increase was primarily due to an increase in
average compensation costs as well as increased headcount to support continued
new product development efforts. The major product development efforts in fiscal
1999 primarily related to the development of new products such as Progress
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SonicMQ and the next versions of the Company's various product lines, including,
Progress Version 9.1 and Progress Apptivity. The product development staff
increased from 225 at the end of fiscal 1998 to 242 at the end of fiscal 1999.
The Company capitalized $2.0 million of software development costs in fiscal
1998 and $0.5 million in fiscal 1999 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" (SFAS 86). The amounts
capitalized represented 6% of total product development costs in fiscal 1998 and
1% in fiscal 1999. The decrease in the percentage capitalized in fiscal 1999 was
due to the stages of completion of the Company's various development projects.
Capitalized software costs are amortized over the estimated life of the product
(generally four years) in an amount equal to the greater of the amount computed
using the ratio of current revenue to total expected revenue in the product's
life or straight line and amounts amortized are included in cost of software
licenses.
General and administrative expenses include the costs of the finance, human
resources, legal, information systems and administrative departments of the
Company and amortization of goodwill. General and administrative expenses
increased 5% from $26.8 million in fiscal 1998 to $28.2 million in fiscal 1999,
but decreased as a percentage of total revenue from 11% to 10% due to expense
control. The dollar increase in general and administrative expenses was
primarily due to higher staff levels and average personnel costs, partially
offset by lower amounts for bad debt expense and amortization of goodwill. The
Company increased its administrative staff from 191 at the end of fiscal 1998 to
205 at the end of fiscal 1999.
Income from operations increased as a percentage of total revenue from 12% in
fiscal 1998 to 16% in fiscal 1999. The increase in operating income as a
percentage of revenue was due to continued expense control over selling,
marketing and administrative expenses and improved sales productivity,
especially overseas. International operations contributed 53% of the total
operating income in fiscal 1999 versus 32% in fiscal 1998.
Other income increased 20% from $3.9 million in fiscal 1998 to $4.7 million in
fiscal 1999. The increase in fiscal 1999 as compared to fiscal 1998 was
primarily due to an increase in interest income from higher average cash
balances and a smaller foreign currency exchange loss.
The Company's effective tax rate was 32% in fiscal 1999 compared to 33% in
fiscal 1998. The decrease in the effective tax rate in fiscal 1999 from fiscal
1998 was primarily due to a decrease in taxes on foreign sourced income in
excess of the US federal tax rate. See Note 7 of Notes to Consolidated Financial
Statements. The Company expects its effective tax rate to remain at
approximately 32% in fiscal 2000.
FISCAL 1998 COMPARED TO FISCAL 1997 The Company's total revenue increased 27%
from $188.3 million in fiscal 1997 to $239.9 million in fiscal 1998. Total
revenue would have increased by 30% in fiscal 1998 from fiscal 1997 if exchange
rates had been constant as compared to the exchange rates in effect in fiscal
1997.
Software license revenue increased 19% from $95.6 million in fiscal 1997 to
$113.3 million in fiscal 1998. The increase in software license revenue in
fiscal 1998 as compared to fiscal 1997 was due to greater acceptance of the
Progress Version 8 product family, and, to a lesser extent, new Internet-focused
products such as Progress WebSpeed and Progress Apptivity. Progress Version 8.3,
released in May 1998, provided customers with increased capabilities through its
32-bit architecture and enhanced database and reporting tools features. The
Company also experienced an increase in sales to ISVs. The increase in sales to
ISVs was primarily due to greater deployment revenue from database, dataservers
and reporting tools products.
Maintenance and services revenue increased 36% from $92.7 million in fiscal 1997
to $126.6 million in fiscal 1998. The maintenance and services revenue increase
was primarily a result of growth in the Company's installed customer base,
greater demand for consulting services and renewal of maintenance contracts. The
Company dedicated more resources to its service businesses in order to take
advantage of the market opportunities associated with companies buying packaged
applications and engaging service providers to customize such packages.
Total revenue generated in markets outside North America increased 23% from
$111.5 million in fiscal 1997 to $137.0 million in fiscal 1998 and represented
57% of total revenue in fiscal 1998 as compared to 58% in fiscal 1997. Total
revenue generated in markets outside North America would have represented 58% of
total revenue in fiscal 1998 if exchange rates had been constant as compared to
the exchange rates in effect in fiscal 1997.
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Cost of software licenses increased 1% from $10.0 million in fiscal 1997 to
$10.1 million in fiscal 1998, but decreased as a percentage of software license
revenue from 10% to 9%. The percentage decrease was due to lower documentation
costs and lower amortization expense from capitalized software costs.
Cost of maintenance and services increased 47% from $31.2 million in fiscal 1997
to $46.0 million in fiscal 1998 and increased as a percentage of maintenance and
services revenue from 34% to 36%. The percentage increase was due primarily to a
change in the mix of maintenance and service revenue as consulting revenue
increased at a greater rate than maintenance revenue and education revenue.
Consulting revenue generally has a lower margin than either maintenance or
education revenue due to the amount of resources required to produce such
revenue. The dollar increase was due primarily to an increase in the technical
support, consulting and education staff in fiscal 1998 as compared to fiscal
1997 and greater usage of third-party contractors to fulfill demand for
consulting services. The Company increased its technical support, education, and
consulting staff from 230 at the end of fiscal 1997 to 282 at the end of fiscal
1998.
Sales and marketing expenses increased 11% from $87.6 million in fiscal 1997 to
$96.8 million in fiscal 1998, but decreased as a percentage of total revenue
from 47% to 41%. The percentage decrease in sales and marketing expenses was
primarily due to improved productivity as revenue increased at a greater rate
than sales and marketing expenses during fiscal 1998 as compared to fiscal 1997.
The dollar increase in sales and marketing expenses was primarily due to
increased headcount and higher average compensation costs, including
commissions, for the sales, sales support and marketing staff. Worldwide sales
and marketing headcount increased from 454 at the end of fiscal 1997 to 476 at
the end of fiscal 1998.
Product development expenses increased 12% from $27.0 million in fiscal 1997 to
$30.2 million in fiscal 1998, but decreased as a percentage of total revenue
from 14% to 13%. The dollar increase was primarily due to increased personnel
costs. The increase in personnel costs was primarily due to higher average
compensation costs and increased headcount to support continued new product
development efforts. The major product development efforts in fiscal 1998
related to the development of the next versions of the Company's various product
lines, including Progress Version 9.0, Progress Apptivity Versions 2 and 3 and
various new products for the Internet Software Quality (ISQ) product line. The
Company capitalized $1.9 million of software development costs in fiscal 1997
and $2.0 million in fiscal 1998. The product development staff increased from
199 at the end of fiscal 1997 to 225 at the end of fiscal 1998.
General and administrative expenses increased 16% from $23.2 million in fiscal
1997 to $26.8 million in fiscal 1998, but decreased as a percentage of total
revenue from 12% to 11%. The dollar increase in general and administrative
expenses was primarily due to higher staff levels and average personnel costs
and increased goodwill charges resulting from recent acquisitions. The Company
increased its administrative staff from 180 at the end of fiscal 1997 to 191 at
the end of fiscal 1998.
Income from operations increased as a percentage of total revenue from (1)% in
fiscal 1997 (including non-recurring charges of $11.5 million related to the
acquisition of Apptivity) to 12% in fiscal 1998. Excluding the non-recurring
charges, income from operations in fiscal 1997 was 5% of total revenue.
In fiscal 1997, the Company acquired all of the outstanding stock of Apptivity,
a developer of Java-based application development tools, for approximately $11.2
million, consisting of $3.8 million in cash, $1.4 million in assumed and other
liabilities, the issuance of 1,186,970 shares of common stock valued at $5.5
million and the assumption of stock options valued at $0.5 million. The
acquisition has been accounted for as a purchase, and accordingly, the results
of operations have been included in the Company's operating results from the
date of acquisition. The allocation of the purchase price included $10.8 million
to in-process software development which was charged to operations as part of
the non-recurring charges in the third quarter of fiscal 1997. Additionally, the
Company recorded a non-recurring charge of $0.7 million for the writedown of
certain capitalized software costs and other intangible assets to fair value
after evaluating the impact of the acquisition upon the Company's future
operating plans.
Excluding the non-recurring charges, income from operations increased due to
continued sales productivity improvement and expense control, especially in
North America and EMEA. These increases in fiscal 1998 were partially offset by
operating losses in regions outside of North America and EMEA, primarily in
Latin America, as the Company invested in expanding its presence in the region.
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Other income decreased 26% from $5.4 million in fiscal 1997 to $3.9 million in
fiscal 1998. The decrease was primarily due to foreign currency gains in fiscal
1997 versus foreign currency losses in fiscal 1998 and lower amounts from the
minority interest in fiscal 1998, offset to some extent by higher interest
income. The foreign currency gain in fiscal 1997 related primarily to gains from
the Company's foreign currency hedging programs. Minority interest included as a
component of other income (expense) reflects the portion of the income or loss
in the Company's joint venture in Japan which is attributable to the 49%
minority interest. The increase in interest income was due to higher average
cash balances in fiscal 1998 as compared to fiscal 1997.
The Company's effective tax rate was 33% in fiscal 1998 compared to 151% in
fiscal 1997. The decrease in the effective tax rate in fiscal 1998 from fiscal
1997 was due to nondeductible expenses related to the acquisition of Apptivity
in fiscal 1997. Excluding these nondeductible expenses, the Company's effective
tax rate for fiscal 1997 was 34%.
LIQUIDITY AND CAPITAL RESOURCES At the end of fiscal 1999, the Company's cash
and short-term investments totaled $158.7 million. The increase in the balance
of $44.7 million since the end of fiscal 1998 resulted from cash generated from
operations and proceeds from stock issuances under the stock purchase plan and
exercise of options, partially offset by common stock repurchases and capital
expenditures.
In fiscal years 1999, 1998 and 1997, the Company generated $61.1 million, $58.5
million and $33.7 million, respectively, in cash from operations. The increase
in each year was primarily due to higher net income, partially offset by the
timing of payments related to accounts payable and other accrued liabilities,
smaller increases in the deferred revenue balance and changes in the accounts
receivable balance. Accounts receivable increased each year primarily due to
revenue growth. The Company's accounts receivable days sales outstanding were 55
days, 53 days and 61 days at the end of fiscal years 1999, 1998 and 1997,
respectively. The improvement from fiscal 1997 was due to more effective
collection efforts in fiscal 1999 and fiscal 1998.
In fiscal years 1999, 1998 and 1997, the Company purchased and retired $9.3
million, $10.0 million and $10.0 million, respectively, of property and
equipment, which consisted primarily of computer equipment and software,
furniture and fixtures and leasehold improvements. The level of property and
equipment purchases resulted primarily from continued growth of the business and
replacement of older equipment. The Company financed these purchases primarily
from cash generated from operations. See Note 4 of Notes to Consolidated
Financial Statements.
In fiscal years 1999, 1998 and 1997, the Company purchased and retired 2,042,238
shares, 3,500,970 shares and 4,702,800 shares, respectively, of its common stock
for $24.8 million, $33.2 million and $26.6 million, respectively. 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
plans. At November 30, 1999, approximately 9,975,000 shares of common stock
remained available for repurchase under this authorization.
In December 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for $5.0 million. The acquisition
was accounted for as a purchase, and accordingly, the results of operations are
included in the Company's operating results from the date of acquisition. The
purchase price was allocated primarily to goodwill, which is being amortized
over a seven-year period. If this acquisition had been made at the beginning of
the earliest period presented, the effect on the consolidated financial
statements would not have been significant.
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 the next twelve months.
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NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133) which establishes standards for derivative
instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met and that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years beginning after
June 15, 2000. The Company will adopt SFAS 133 in the first quarter of fiscal
2001. The Company is currently evaluating this statement, but does not expect
the adoption of SFAS 133 to have a material effect on the Company's consolidated
financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is
exposed to a variety of risks, including changes in interest rates affecting the
return on its investments and foreign currency fluctuations. The Company has
established policies and procedures to manage its exposure to fluctuations in
interest rates and foreign currency exchange.
The Company's exposure to market rate risk for changes in interest rates relates
to the Company's investment portfolio. The Company has not used derivative
financial instruments in its investment portfolio. The Company places its
investments with high quality issuers and has policies limiting, among other
things, the amount of credit exposure to any one issuer. The Company limits
default risk by purchasing only investment-grade securities. The Company's
investments are all fixed rate instruments. In addition, the Company has
classified all its debt securities as available for sale. This classification
reduces the income statement exposure to interest rate risk. Information about
the Company's investment policies and portfolio is in Notes 1 and 3 of Notes to
Consolidated Financial Statements.
The Company has entered into foreign exchange option 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. Information about the Company's foreign currency
option contracts is set forth in Note 1 of Notes to Consolidated Financial
Statements.
YEAR 2000 The Year 2000 presented potential concerns and issues for the Company
as well as other companies in the information technology industry. In general,
Year 2000 readiness issues in computer software and hardware systems relate to
the use two digit date formats, instead of four digits, to represent a
particular year.
The Company established a global project team to coordinate the Company's Year
2000 readiness efforts and address the impact of the Year 2000 date transition
on its operations. The project team met regularly and reported to an executive
steering committee composed of the Chief Financial Officer, the General Counsel
and the General Manager for Worldwide Field Operations. The Company's initial
Year 2000 readiness plans encompassed four phases. The first phase was an
inventory and assessment of the Company's internal systems. The second phase was
testing such systems for Year 2000 readiness. The third phase was remediation,
representing the repair or replacement of any non-compliant hardware or
software, and the fourth phase was contingency planning and preparation. The
Company completed all phases and has not experienced any disruptions in its
internal operations or systems, both information technology (IT) and non-IT
systems, related to the Year 2000. These systems are based primarily on the
Company's own software products with respect to applications and also include
third-party software and hardware technology.
The Company believes that the most current versions of its products, including
available patches, have not been adversely affected by the Year 2000 date
change. The Company did not test products that were retired on or before January
1, 2000. The Company encouraged customers who are using such products to either
upgrade to a more current version or conduct their own testing to determine if
continued use of such products allows them to meet their own Year 2000 readiness
objectives.
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The Company has not experienced an increase in technical support calls since the
new year related to Year 2000 readiness issues. However, there can be no
assurance that the Company will not experience unanticipated negative
consequences or material costs caused by undetected errors or defects in its
products. While the Company believes that the most current versions of its
products are Year 2000 ready, other factors may result in an application created
using the Company's products not being Year 2000 ready. Some of these factors
include improper programming techniques used in creating the application or
non-compliance of the underlying hardware or operating system on which the
software runs. The Company does not believe that it would be liable in such
events. However, due to the unprecedented nature of potential litigation related
to Year 2000 readiness as discussed in the industry and popular press, the most
likely worst case scenario is that the Company would be subject to litigation.
It is uncertain whether or to what extent the Company may be affected by such
litigation.
All costs related to Year 2000 issues were expensed as incurred. Costs for
addressing Year 2000 readiness issues were not material. Most of these expenses
represented time spent by employees. The Company also continually upgrades and
improves its facilities and IT systems. Such costs are integrated into the
operating budgets of each geographic area or function and are not separately
maintained as Year 2000-related expenses.
FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a rapidly
changing environment that involves certain risks and uncertainties, some of
which are beyond the Company's control. The following discussion highlights some
of these risks. In addition, risks and uncertainties related to Year 2000 issues
are described above under the heading "Year 2000."
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors. Some of these factors
include changes in demand for the Company's products, introduction, enhancement
or announcement of products by the Company and its competitors, market
acceptance of new products, size and timing of significant orders, budgeting
cycles of customers, mix of distribution channels, mix of products and services
sold, mix of international and North American revenues, fluctuations in currency
exchange rates, changes in the level of operating expenses, changes in the
Company's sales incentive plans, customer order deferrals in anticipation of new
products announced by the Company or its competitors and general economic
conditions. Revenue forecasting is uncertain, in large part, because the Company
generally ships its products shortly after receipt of orders. Most of the
Company's expenses are relatively fixed, including costs of personnel and
facilities, and are not easily reduced. Thus, an unexpected reduction in the
Company's revenue, or a decrease in the rate of growth of such revenue, would
have a material adverse effect on the profitability of the Company.
The Company develops, markets and supports application development, deployment
and management software. Its core product line, Progress, is composed primarily
of Progress ProVision, Progress RDBMS, Progress WebSpeed, Progress Open
AppServer and Progress DataServers. In December 1998, the Company began shipping
the latest major enhancement to the Progress product line, Progress Version 9.0.
The Progress Apptivity product line consists of Apptivity Developer and
Apptivity Server. The Company began commercial shipments of Progress Apptivity
Version 3.2 in October 1999. The Company began commercial shipments of Progress
SonicMQ, an Internet messaging server, in December 1999. The ISQ product line is
a set of software products that measure, monitor and manage the availability,
performance and recoverability of enterprise networks and ensure overall system
and application quality. Progress IPQoS Version 2.0 began shipping in March
1999. The Company believes that the Progress product set, Progress SonicMQ,
Progress Apptivity and the ISQ product set have features and functionality that
enable the Company to compete effectively with other vendors of application
development products. Ongoing enhancements to these product lines will be
required to enable the Company to maintain its competitive position. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to its products on a timely basis, or that the enhancements will
adequately address the changing needs of the marketplace. Delays in the release
of enhancements could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company has derived most of its revenue from its core product line,
Progress, and other products that complement Progress and are generally licensed
only in conjunction with Progress. Accordingly, the Company's future results
depend on continued market acceptance of Progress and any factor adversely
affecting the market for Progress could have a material adverse effect on the
Company's business and its financial results.
Future results also depend upon the Company's continued successful distribution
of its products through its ISV channel and may be impacted by downward pressure
on pricing, which may not be offset by increases in volume. ISVs utilize
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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.
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 is devoting significant resources to enabling 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, Progress Apptivity, the ISQ product set
and other new products and services will contribute positively to the Company's
future results. The market for Internet transaction processing products 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.
Approximately 58% of the Company's total revenue in fiscal 1999, as compared to
53% in fiscal 1998, was attributable to international sales made through its
subsidiaries. Because a substantial portion of the Company's total revenue is
derived from such international operations which are 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 world
and potentially adverse tax consequences. Any one of these factors could
adversely
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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.
10
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) November 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 81,651 $ 50,155
Short-term investments 77,014 63,844
Accounts receivable (less allowances of
$7,259 in 1999 and $7,147 in 1998) 47,952 40,779
Other current assets 9,406 9,855
Deferred income taxes 9,836 8,415
--------- ---------
Total current assets 225,859 173,048
--------- ---------
Property and equipment, net 20,594 22,458
Capitalized software costs, net 3,155 4,742
Other assets 6,946 6,460
--------- ---------
Total $ 256,554 $ 206,708
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 14,041 $ 12,461
Accrued compensation and related taxes 24,344 23,041
Income taxes payable 8,723 10,276
Other accrued liabilities 8,962 8,140
Deferred revenue 58,173 49,942
--------- ---------
Total current liabilities 114,243 103,860
--------- ---------
Minority interest in subsidiary -- 155
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value; authorized, 1,000,000 shares;
issued, none
Common stock, $.01 par value, and additional paid-in capital; authorized,
75,000,000 shares in 1999 and 50,000,0000 shares in 1998; issued and
outstanding, 35,552,862 shares in
1999 and 34,180,582 shares in 1998 40,491 18,966
Retained earnings 103,904 84,115
Accumulated other comprehensive loss (2,084) (388)
--------- ---------
Total shareholders' equity 142,311 102,693
--------- ---------
Total $ 256,554 $ 206,708
========= =========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 12
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Year Ended November 30,
-----------------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Software licenses $ 131,499 $ 113,312 $ 95,579
Maintenance and services 154,648 126,578 92,735
--------- --------- ---------
Total revenue 286,147 239,890 188,314
--------- --------- ---------
Costs and expenses:
Cost of software licenses 13,188 10,085 10,000
Cost of maintenance and services 54,945 45,953 31,238
Sales and marketing 104,809 96,832 87,570
Product development 38,339 30,154 26,991
General and administrative 28,162 26,839 23,202
Non-recurring charges -- -- 11,537
--------- --------- ---------
Total costs and expenses 239,443 209,863 190,538
--------- --------- ---------
Income (loss) from operations 46,704 30,027 (2,224)
--------- --------- ---------
Other income (expense):
Interest income 5,054 4,529 3,756
Foreign currency gain (loss) (374) (632) 1,135
Minority interest 155 113 556
Other expense (96) (69) (91)
--------- --------- ---------
Total other income, net 4,739 3,941 5,356
--------- --------- ---------
Income before provision for income taxes 51,443 33,968 3,132
Provision for income taxes 16,452 11,210 4,739
--------- --------- ---------
Net income (loss) $ 34,991 $ 22,758 $ (1,607)
========= ========= =========
Basic earnings (loss) per share $ 1.01 $ 0.66 $ (0.04)
========= ========= =========
Weighted average shares outstanding (basic) 34,488 34,458 36,336
========= ========= =========
Diluted earnings (loss) per share $ 0.89 $ 0.59 $ (0.04)
========= ========= =========
Weighted average shares outstanding (diluted) 39,212 38,560 36,336
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock and
Additional Paid-in Capital Accumulated Total
---------------------------- Other Share-
Comprehensive Number of Retained Comprehensive holders'
Income (Loss) Shares Amount Earnings Income (Loss) Equity
------------- --------- --------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1996 37,898 $ 41,435 $ 72,280 $ 78 $ 113,793
Exercise of employee stock options 942 4,163 4,163
Issuance of stock under ESPP 112 511 511
Repurchase of common stock (4,703) (26,553) (26,553)
Stock option compensation 16 16
Tax benefits from stock plans 488 488
Issuance of stock in connection with
Apptivity acquisition 1,187 5,437 5,437
Stock options assumed in connection
with Apptivity acquisition 522 522
Unrealized gains on investments $ 4 4 4
Translation adjustments (335) (335) (335)
Net loss (1,607) (1,607) (1,607)
---------
Comprehensive loss $ (1,938)
========= ------ --------- --------- --------- ---------
Balance, November 30, 1997 35,436 26,019 70,673 (253) 96,439
Exercise of employee stock options 2,126 11,159 11,159
Issuance of stock under ESPP 120 919 919
Repurchase of common stock (3,501) (23,901) (9,316) (33,217)
Tax benefits from stock plans 4,770 4,770
Unrealized gains on investments $ 258 258 258
Translation adjustments (393) (393) (393)
Net income 22,758 22,758 22,758
---------
Comprehensive income $ 22,623
========= ------ --------- --------- --------- ---------
Balance, November 30, 1998 34,181 18,966 84,115 (388) 102,693
Exercise of employee stock options 3,197 18,541 18,541
Issuance of stock under ESPP 217 2,070 2,070
Repurchase of common stock (2,042) (9,626) (15,202) (24,828)
Stock option compensation 81 81
Tax benefits from stock plans 10,459 10,459
Unrealized losses on investments $ (699) (699) (699)
Translation adjustments (997) (997) (997)
Net income 34,991 34,991 34,991
---------
Comprehensive income $ 33,295 ------ --------- --------- --------- ---------
Balance, November 30, 1999 ========= 35,553 $ 40,491 $ 103,904 $ (2,084) $ 142,311
====== ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended November 30,
---------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 34,991 $ 22,758 $ (1,607)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 10,641 10,750 10,596
Non-recurring charges -- -- 11,537
Allowances for accounts receivable 2,098 3,617 1,807
Amortization of capitalized software costs 2,101 1,771 2,072
Amortization of intangible assets 586 1,032 241
Deferred income taxes (2,013) (4,834) (2,950)
Minority interest in subsidiary (155) (113) (556)
Non-cash compensation 81 -- 16
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (12,458) (8,702) (4,905)
Other current assets (311) (2,326) (2,120)
Accounts payable and accrued expenses 5,258 8,854 9,252
Income taxes payable 8,905 8,609 3,908
Deferred revenue 11,331 17,062 6,359
-------- -------- --------
Total adjustments 26,064 35,720 35,257
-------- -------- --------
Net cash provided by operating activities 61,055 58,478 33,650
-------- -------- --------
Cash flows from investing activities:
Purchases of investments available for sale (59,606) (57,025) (33,809)
Maturities of investments available for sale 45,631 47,033 31,238
Sales of investments available for sale -- 440 15,068
Purchase of property and equipment (9,331) (10,038) (10,048)
Capitalized software costs (514) (1,968) (1,864)
Acquisitions, net of cash acquired -- (5,000) (3,847)
Decrease (increase) in other non-current assets (578) (24) 59
-------- -------- --------
Net cash used for investing activities (24,398) (26,582) (3,203)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 20,611 12,078 4,674
Repurchase of common stock (24,828) (33,217) (26,553)
Contributions from minority interest -- -- 603
Payment of obligations under capital leases -- -- (116)
-------- -------- --------
Net cash used for financing activities (4,217) (21,139) (21,392)
-------- -------- --------
Effect of exchange rate changes on cash (944) (53) (476)
-------- -------- --------
Net increase in cash and equivalents 31,496 10,704 8,579
Cash and equivalents, beginning of year 50,155 39,451 30,872
-------- -------- --------
Cash and equivalents, end of year $ 81,651 $ 50,155 $ 39,451
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY Progress Software Corporation (the Company) develops, markets and
distributes application development, deployment and management technology and
Internet and intranet enabling technologies to business, industry and government
worldwide. The Company also provides consulting, education and support to its
customers through its worldwide professional services organization.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
BASIS OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION For foreign operations with the local currency as
the functional currency, assets and liabilities are translated into U.S. dollars
at the exchange rate on the balance sheet date. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are accumulated in a separate component of shareholders'
equity.
For foreign operations with the U.S. dollar as the functional currency, monetary
assets and liabilities are translated into U.S. dollars at the exchange rate on
the balance sheet date. Nonmonetary assets and liabilities are remeasured into
U.S. dollars at historical exchange rates. Income and expense items are
translated at average rates of exchange prevailing during each period.
Translation adjustments are recognized currently as a component of foreign
currency gain or loss.
The Company enters into foreign exchange option contracts which are designated
as effective hedges on certain transactions in selected foreign currencies. The
purpose of the Company's foreign exposure management policies and practices is
to attempt to minimize the impact of exchange rate fluctuations on the Company's
results of operations. The option contracts are structured such that the cost to
the Company cannot exceed the premium paid for such contracts. Premiums are
recognized ratably over the contract period as a component of foreign currency
gain or loss. Increases and decreases in market value gains on such contracts
are recognized currently as a component of foreign currency gain or loss. The
notional principal amount of outstanding foreign exchange option contracts at
November 30, 1999 was $71.8 million. Unrealized market value gains on such
contracts were immaterial at November 30, 1999. Major U.S. multinational banks
are counterparties to the option contracts.
MINORITY INTEREST IN SUBSIDIARY Minority interest in subsidiary represents the
joint venture partners' proportionate share of the equity in Progress Software
K.K. (PSKK), a Japanese joint stock corporation established in January 1995 to
market and support the Company's products in Japan. At November 30, 1999, the
Company owned 51% of the capital stock of PSKK.
REVENUE RECOGNITION Software license revenue is recognized upon shipment of the
product provided that the license fee is fixed and determinable, persuasive
evidence of an arrangement exists and collection is probable. Maintenance
revenue is deferred and recognized ratably over the term of the agreement.
Revenue from services, primarily consulting and customer education, is
recognized as the related services are performed. The Company follows the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" and its amendments. The application of this
statement at the beginning of fiscal 1998 did not have a material effect on the
revenue recognition practices of the Company.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include short-term,
highly liquid investments purchased with remaining maturities of three months or
less. Short-term investments, which consist primarily of municipal and U.S.
Treasury obligations and corporate debt securities purchased with remaining
maturities of more than three months, are classified as investments available
for sale and stated at fair value. Aggregate unrealized holding gains and losses
are included as a component of accumulated other comprehensive income (loss) in
shareholders' equity.
15
<PAGE> 16
SUPPLEMENTAL CASH FLOW INFORMATION In fiscal years 1999, 1998 and 1997, the
Company paid $9.5 million, $7.2 million and $3.8 million in income taxes,
respectively. The Company had the following noncash financing activities: income
tax benefit from employees' exercise of stock options of $10.5 million, $4.8
million and $0.5 million in fiscal years 1999, 1998 and 1997, respectively, and
stock issued and options assumed in the acquisition of Apptivity of $6.0 million
in fiscal 1997.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of cash, short-term
investments and trade receivables. The Company has cash investment policies
which, among other things, limit investments to investment-grade securities. The
Company performs ongoing credit evaluations of its customers and the risk with
respect to trade receivables is further mitigated by the diversity, both by
geography and by industry, of its customer base.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts
receivable and accounts payable approximates fair value due to the short-term
nature of these instruments. The fair value of investments available for sale is
based on current market value (Note 3).
PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation
and amortization is provided on the straight-line method over the estimated
useful lives (three to ten years) of the related assets or the remaining terms
of leases, whichever is shorter.
CAPITALIZATION OF SOFTWARE COSTS The Company capitalizes certain internally
generated software development costs after technological feasibility of the
product has been established. Capitalized software costs also include amounts
paid for purchased software which has reached technological feasibility. Such
costs are amortized over the estimated life of the product (generally four
years) in an amount equal to the greater of the amount computed using the ratio
of current revenue to total expected revenue in the product's life or straight
line. The Company continually compares the unamortized costs of capitalized
software to the expected future revenues for the products. If the unamortized
costs exceed the expected future net realizable value, the excess amount is
written off. Accumulated amortization was approximately $9.0 million and $6.9
million at November 30, 1999 and 1998, respectively.
INTANGIBLE ASSETS Intangible assets, included in other assets, primarily
represent goodwill and are recorded at cost. Such costs are amortized over
periods ranging from three to seven years. Accumulated amortization was
approximately $1.1 million and $1.2 million at November 30, 1999 and 1998,
respectively.
INVESTMENT IN RELATED PARTY The Company has a 7% ownership stake, on a
fully-diluted basis, in EasyAsk, Inc., a privately-held software company whose
president is on the board of directors of the Company. The investment in
EasyAsk, Inc., accounted for using the cost method, approximated $0.8 million
and $0.6 million at November 30, 1999 and 1998, respectively, and is included in
other assets.
STOCK-BASED COMPENSATION PLANS The Company accounts for its stock option plans
and its employee stock purchase plan in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
the Company provides additional pro forma disclosures (Note 5).
INCOME TAXES The Company provides for deferred income taxes resulting from
temporary differences between financial and taxable income. Such differences
arise primarily from depreciation, accruals, deferred revenue, capitalized
software costs, tax loss carryforwards and allowances for accounts receivable.
No provision for U.S. income taxes has been made for the undistributed earnings
of non-U.S. subsidiaries, as these earnings have been permanently reinvested or
would be principally offset by foreign tax credits. Cumulative undistributed
foreign earnings were approximately $20.1 million at November 30, 1999.
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. Earnings per share for all years presented herein have been
restated to reflect the stock split (Note 5).
COMPREHENSIVE INCOME Effective December 1, 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which requires presentation of the components of comprehensive
16
<PAGE> 17
income, including unrealized gains and losses on investments and foreign
currency translation adjustments. Accumulated foreign currency translation
losses, net of taxes, were approximately $1.9 million and $0.9 million at
November 30, 1999 and 1998, respectively. Accumulated unrealized gains (losses)
on short-term investments, net of taxes, were approximately $(0.2) million and
$0.5 million at November 30, 1999 and 1998, respectively.
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.
NOTE 2: BUSINESS COMBINATIONS AND NON-RECURRING CHARGES
In December 1997, the Company, through a wholly-owned subsidiary, acquired
certain assets of its distributor in Brazil for $5.0 million. The acquisition
was accounted for as a purchase, and accordingly, the results of operations are
included in the Company's operating results from the date of acquisition. The
purchase price was allocated primarily to goodwill, which is being amortized
over a seven-year period. If this acquisition had been made at the beginning of
the earliest year presented, the effect on the consolidated financial statements
would not have been significant.
In July 1997, the Company acquired all of the outstanding stock of Apptivity
Corporation (Apptivity), a developer of Java-based application development
tools, for approximately $11.2 million, consisting of $3.8 million in cash, $1.4
million in assumed and other liabilities, the issuance of 1,186,970 shares of
common stock valued at $5.5 million and the assumption of stock options valued
at $0.5 million. The acquisition has been accounted for as a purchase, and
accordingly, the results of operations have been included in the Company's
operating results from the date of acquisition. The allocation of the purchase
price included $10.8 million to in-process software development which was
charged to operations as part of the non-recurring charges in the third quarter
of fiscal 1997. Additionally, the Company recorded a non-recurring charge of
$0.7 million for the writedown of certain capitalized software costs and other
intangible assets to fair value after evaluating the impact of the acquisition
upon the Company's future operating plans. If this acquisition had been made at
the beginning of fiscal 1997, the effect on the consolidated financial
statements would not have been significant.
NOTE 3: CASH AND SHORT-TERM INVESTMENTS
A summary of the Company's investments available for sale by major security type
at November 30, 1999 was as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type: Cost Gains Losses Value
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate debt securities $ 56,460 -- -- $ 56,460
Obligations of states and political subdivisions 59,841 $ 55 $ (326) 59,570
U.S. government obligations 7,051 5 (36) 7,020
-------- -------- -------- --------
Total $123,352 $ 60 $ (362) $123,050
======== ======== ======== ========
</TABLE>
The fair value of debt securities at November 30, 1999, by contractual maturity,
was as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Due in one year or less (including $46,036 classified as cash equivalents) $ 83,621
Due after one year 39,429
--------
Total $123,050
========
</TABLE>
17
<PAGE> 18
A summary of the Company's investments available for sale by major security type
(including $23.1 million classified as cash equivalents) at November 30, 1998
was as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Security Type: Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Corporate debt securities $22,864 -- -- $22,864
Obligations of states and political subdivisions 57,212 $ 341 $ (28) 57,525
U.S. government obligations 6,323 190 -- 6,513
------- ------- ------- -------
Total $86,399 $ 531 $ (28) $86,902
======= ======= ======= =======
</TABLE>
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) November 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
Equipment and software $52,686 $46,989
Furniture and fixtures 6,295 5,919
Leasehold improvements 9,891 9,082
------- -------
Total 68,872 61,990
Less accumulated depreciation and amortization 48,278 39,532
------- -------
Property and equipment, net $20,594 $22,458
======= =======
</TABLE>
NOTE 5: SHAREHOLDERS' EQUITY
PREFERRED STOCK The Board of Directors is authorized to establish one or more
series of preferred stock and to fix and determine the number and conditions of
preferred shares, including dividend rates, redemption and/or conversion
provisions, if any, preference and voting rights. At November 30, 1999, the
Board of Directors has not authorized any series of preferred stock.
COMMON STOCK On December 17, 1999, the Board of Directors approved a two-for-one
common stock split in the form of a stock dividend. Shareholders received one
additional share for each share held. Such distribution was made on January 21,
2000 to shareholders of record at the close of business on January 7, 2000. All
share and per share amounts for all years presented have been restated to
reflect the split.
In fiscal years 1999, 1998 and 1997, the Company purchased and retired 2,042,238
shares, 3,500,970 shares and 4,702,800 shares, respectively, of its common stock
for $24.8 million, $33.2 million and $26.6 million, respectively.
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
plans. At November 30, 1999, approximately 9,975,000 shares of common stock
remained available for repurchase under this authorization.
STOCK OPTIONS In April 1992, the shareholders adopted and approved the 1992
Incentive and Nonqualified Stock Option Plan (1992 Plan) and terminated the 1984
Incentive Stock Option Plan (1984 Plan). Options granted and outstanding under
the 1984 Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the 1984 Plan. In August
1994, the shareholders of the Company adopted and approved the 1994 Stock
Incentive Plan (1994 Plan) and the 1993 Directors' Stock Option Plan (Directors'
Plan). The Directors' Plan permitted certain option grants to non-employee
directors.
18
<PAGE> 19
In April 1997, the shareholders of the Company adopted and approved the 1997
Stock Incentive Plan (1997 Plan). Upon the approval of the 1997 Plan, the
Directors' Plan was terminated. Options granted and outstanding under the
Directors' Plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the Directors' Plan. The
1994 and 1997 Plans permit the granting of stock incentive awards to officers,
members of the Board of Directors, employees and consultants. Awards under the
1994 and 1997 Plans may include stock options (both incentive and
non-qualified), grants of conditioned stock, unrestricted grants of stock,
grants of stock contingent upon the attainment of performance goals and stock
appreciation rights. However, no awards other than incentive and non-qualified
stock options have been granted under either the 1994 or 1997 Plans in fiscal
years 1999, 1998 and 1997.
In April 1999, the shareholders of the Company adopted and approved an increase
of 3,000,000 shares of Common Stock authorized for issuance under the 1997 Plan.
A total of 17,040,000 shares are issuable under the 1992, 1994 and 1997 Plans,
of which approximately 3,118,000 shares were available for grant at November 30,
1999.
A summary of stock option activity under the plans is as follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Price
of Shares Per Share
--------- --------------
<S> <C> <C>
Options outstanding, December 1, 1996 8,598 $ 5.45
Granted 3,200 4.92
Exercised (942) 4.43
Canceled (1,778) 5.49
------
Options outstanding, November 30, 1997 9,078 5.36
Granted 3,196 7.72
Exercised (2,126) 5.25
Canceled (428) 4.92
------
Options outstanding, November 30, 1998 9,720 6.17
Granted 2,560 12.43
Exercised (3,197) 5.80
Canceled (1,175) 7.24
------
Options outstanding, November 30, 1999 7,908 8.19
======
</TABLE>
At the end of fiscal years 1999, 1998 and 1997, the Company had 2,854,000
shares, 3,808,000 shares and 3,640,000 shares of exercisable options,
respectively, with weighted average exercise prices of $6.66, $5.81 and $5.67
per share, respectively.
19
<PAGE> 20
For various exercise price ranges, characteristics of outstanding stock options
at November 30, 1999 were as follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------
Weighted Average
Range of Number of Remaining Weighted Average
Exercise Price: Shares Life (in years) Exercise Price
----------------- --------------------- ----------------------
<S> <C> <C> <C>
$ 0.22 - 1.67 12 4.00 $ 0.67
4.50 - 6.23 2,690 6.20 5.17
6.54 - 7.23 2,240 7.04 7.20
9.00-12.19 1,168 9.08 9.79
12.69-16.69 1,798 9.24 12.95
-----
$ 0.22-16.69 7,908 7.55 $ 8.19
=====
</TABLE>
(In thousands, except per share data)
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------
Range of Number of Weighted Average
Exercise Price: Shares Exercise Price
--------- ----------------
<S> <C> <C>
$ 0.22- 1.67 8 $ 0.83
4.50- 6.23 1,524 5.21
6.54- 7.23 956 7.20
9.00-12.19 178 9.81
12.69-16.69 188 12.93
-----
$ 0.22-16.69 2,854 $ 6.66
=====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN The 1991 Employee Stock Purchase Plan (ESPP), as
amended in April 1998, permits eligible employees to purchase up to a maximum of
1,500,000 shares of common stock of the Company at 85% of the lesser of the
market value of such shares at the beginning of a 27-month offering period or
the end of each three-month segment within such offering period. During fiscal
years 1999, 1998 and 1997, 217,002 shares, 120,412 shares and 112,436 shares,
respectively, were issued with a weighted average purchase price of $9.54, $7.63
and $4.55 per share, respectively, under the ESPP. At November 30, 1999,
approximately 711,000 shares were available and reserved for issuance under the
ESPP.
20
<PAGE> 21
PRO FORMA DISCLOSURES The pro forma disclosures are required to be determined as
if the Company had accounted for its stock-based compensation arrangements
granted subsequent to November 30, 1995 under the fair value method of SFAS 123.
The fair value of options and ESPP shares granted in fiscal years 1999, 1998 and
1997 reported below has been estimated at the date of grant using a
Black-Scholes option valuation model with the following ranges of assumptions:
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------------
Stock Purchase Plan: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility 35.1-65.0% 29.2-44.1% 39.1-53.1%
Risk-free interest rate 4.1-5.4% 5.0-5.2% 5.1-5.3%
Expected life in years 1.1 0.6 0.5
Expected dividend yield None None None
</TABLE>
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------
Stock Options: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility 46.5-47.5% 43.2-45.6% 43.0-44.1%
Risk-free interest rate 4.5-6.2% 4.7-5.7% 5.9-6.8%
Expected life in years 6.0 6.5 6.6
Expected dividend yield None None None
</TABLE>
For purposes of the pro forma disclosure, the estimated fair value of options is
amortized to expense over the vesting period. Had compensation costs for options
and ESPP shares been determined based on the Black-Scholes option valuation
model as prescribed by SFAS 123, pro forma net income (loss) and pro forma
diluted earnings (loss) per share would have been:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended November 30,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $31,072 $20,870 $(3,040)
Pro forma diluted earnings (loss) per share $0.79 $0.54 $(0.08)
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Based on the above assumptions, the weighted
average estimated fair value of options granted in fiscal years 1999, 1998 and
1997 was $6.59, $4.03 and $2.79 per share, respectively. The weighted average
estimated fair value for shares issued under the ESPP in fiscal years 1999, 1998
and 1997 was $4.43, $3.08 and $2.05 per share, respectively.
The effect on pro forma net income (loss) and pro forma diluted earnings (loss)
per share in fiscal years 1999, 1998 and 1997 is not necessarily indicative of
the effects on pro forma net income and pro forma diluted earnings per share in
future years.
NOTE 6: RETIREMENT PLAN
The Company maintains a retirement plan covering all U.S. employees under
Section 401(k) of the Internal Revenue Code. Company contributions to the plan
are at the discretion of the Board of Directors and totaled approximately $2.5
million, $2.4 million and $1.8 million for fiscal years 1999, 1998 and 1997,
respectively.
21
<PAGE> 22
NOTE 7: INCOME TAXES
The components of pretax income (loss) were as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended November 30,
----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States $37,527 $29,236 $(1,402)
Non-U.S 13,916 4,732 4,534
------- ------- -------
Total $51,443 $33,968 $ 3,132
======= ======= =======
</TABLE>
The provisions for income taxes were comprised of the following:
<TABLE>
<CAPTION>
(In thousands) Year Ended November 30,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $11,571 $11,419 $ 5,226
State 2,109 2,015 467
Foreign 4,785 2,610 1,996
------- ------- -------
Total current 18,465 16,044 7,689
------- ------- -------
Deferred:
Federal (1,902) (3,448) (2,316)
State (378) (684) (454)
Foreign 267 (702) (180)
-------- -------- --------
Total deferred (2,013) (4,834) (2,950)
-------- -------- --------
Total $ 16,452 $ 11,210 $ 4,739
======== ======== ========
</TABLE>
The tax effects of significant items comprising the Company's deferred taxes
were as follows:
<TABLE>
<CAPTION>
(In thousands) November 30,
-----------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Capitalized software costs $ (589) $ (1,112)
-------- --------
Total deferred tax liabilities (589) (1,112)
-------- --------
Deferred tax assets:
Accounts receivable 2,713 2,826
Depreciation and amortization 2,559 1,688
Other current assets 1,044 720
Accrued compensation 699 70
Deferred revenue 2,657 2,784
Tax loss carryforwards 1,982 1,461
Accrued liabilities and other 2,272 1,869
-------- --------
Total deferred tax assets 13,926 11,418
Valuation allowance (1,211) (1,315)
-------- --------
Total $ 12,126 $ 8,991
======== ========
</TABLE>
The valuation allowance applies to deferred tax assets, primarily net operating
loss carryforwards, in the U.S. and in certain foreign jurisdictions where
realization is not assured. The change in the valuation allowance of $0.1
million, $0.0 million and $0.4 million in fiscal years 1999, 1998 and 1997,
respectively, primarily related to tax loss carryforwards. Noncurrent deferred
taxes of $2.3 million and $0.6 million were included in other assets at November
30, 1999 and 1998, respectively.
The Company has net operating loss carryforwards of $3.4 million expiring on
various dates through 2012 and $1.9 million which can be carried forward
indefinitely.
22
<PAGE> 23
A reconciliation of the U.S. federal statutory rate to the effective tax rate
was as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
Non-U.S 1.7 4.3 16.2
Foreign sales corporation (4.5) (4.5) (3.5)
Research credits (1.2) (2.9) (4.8)
State income taxes, net 2.2 2.5 8.5
Tax-exempt interest (1.6) (2.0) (23.3)
Nondeductible in-process software development -- -- 117.3
Other 0.4 0.6 5.9
---- ---- -----
Total 32.0% 33.0% 151.3%
==== ==== =====
</TABLE>
NOTE 8: OPERATING LEASES
The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Future minimum rental payments at November 30,
1999 under these leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $ 8,454
2001 7,165
2002 5,331
2003 2,540
2004 1,884
Thereafter 5,306
-------
Total $30,680
=======
</TABLE>
Total rent expense under all operating leases was approximately $7.4 million,
$7.0 million and $6.2 million for fiscal years 1999, 1998 and 1997,
respectively.
NOTE 9: LITIGATION
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.
23
<PAGE> 24
NOTE 10: BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 requires public companies to report financial and descriptive
information about their reportable operating segments, and also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Generally, financial information is required to be reported
on the basis used internally by the chief operating decision-maker to evaluate
segment performance and determine resource allocation. The Company operates in a
single segment consisting of the development, marketing and support of
application development, deployment and management software.
The Company's revenues are derived from licensing its products, and from related
services, which consist of maintenance and consulting and education. Information
relating to product and service revenue from external customers is as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended November 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
Licenses $131,499 $113,312 $ 95,579
Maintenance 104,230 83,613 66,064
Consulting and education 50,418 42,965 26,671
-------- -------- --------
Total $286,147 $239,890 $188,314
======== ======== ========
</TABLE>
Revenue attributed to North America includes shipments to customers in the
United States and Canada and licensing to certain multinational organizations.
Revenue from Europe, Middle East and Africa (EMEA), Latin America and Asia
Pacific includes shipments to customers in each region, not including certain
multinational organizations, plus export shipments into each region that are
billed from the United States. Information relating to revenue from external
customers from different geographical areas is as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended November 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
North America $111,081 $102,893 $ 76,847
EMEA 128,012 100,507 80,501
Latin America 28,577 22,269 16,415
Asia Pacific 18,477 14,221 14,551
-------- -------- --------
Total $286,147 $239,890 $188,314
======== ======== ========
</TABLE>
Revenue from the United Kingdom totaled $34.0 million, $24.0 million and $15.9
million for fiscal years 1999, 1998 and 1997, respectively. No other country
outside of the United States exceeded 10% of the Company's consolidated total
revenue in any year presented. Long-lived assets totaled $18.1 million, $20.6
million and $21.5 million in the United States and $7.2 million, $7.7 million
and $7.3 million outside of the United States for fiscal years 1999, 1998 and
1997, respectively. No individual country exceeded 10% of the Company's
consolidated long-lived assets.
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Progress Software Corporation:
We have audited the accompanying consolidated balance sheets of Progress
Software Corporation and its subsidiaries as of November 30, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended November 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Progress Software Corporation and
its subsidiaries as of November 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1999, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 17, 1999 (January 21, 2000 as to the effects of the stock split in Note
5)
25
<PAGE> 26
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
Revenue $67,145 $70,750 $70,159 $78,093
Income from operations 9,655 10,385 10,616 16,048
Net income 7,097 7,840 8,277 11,777
Diluted earnings per share 0.18 0.20 0.22 0.30
1998
Revenue $54,146 $57,106 $59,482 $69,156
Income from operations 4,868 5,939 7,968 11,252
Net income 3,547 4,673 6,161 8,377
Diluted earnings per share 0.10 0.12 0.16 0.21
</TABLE>
Note: All per share amounts have been restated to reflect the two-for-one stock
split on January 21, 2000.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of high and
low trade prices for the Company's common stock as reported by the Nasdaq Stock
Market. The Company's common stock is traded on the market under the Nasdaq
symbol "PRGS."
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------------
1999 1998
----------------------- ------------------------
High Low High Low
------ ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter $19.19 $12.38 $ 9.34 $6.29
Second Quarter 17.63 9.94 11.54 8.46
Third Quarter 16.88 12.10 14.00 9.00
Fourth Quarter 21.25 13.94 13.59 8.63
------ ------ ------ -----
</TABLE>
Note: All share prices have been restated to reflect the two-for-one stock split
on January 21, 2000.
The Company has not declared or paid cash dividends on its common stock and does
not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of December 31, 1999, the Company's common stock was held by
approximately 5,500 shareholders of record or through nominee or street name
accounts with brokers.
26
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PROGRESS SOFTWARE CORPORATION
North America
Barbados Progress Software International Sales Corporation
Canada Progress Software Corporation of Canada Ltd.
Connecticut Crescent Software, Inc.
Delaware Progress Software International Corporation
Delaware Progress Software Corporation
Massachusetts Apptivity Corporation
Massachusetts Progress Security Corporation
Europe
Austria Progress Software GesmbH
Belgium Progress Software NV
Czech Republic Progress Software spol. s.r.o.
Denmark Progress Software A/S
Finland Progress Software Oy
France Progress Software S.A.
Germany Progress Software GmbH
Italy Progress Software Italy S.r.l.
Netherlands Progress Software B.V.
Netherlands Progress Software Europe B.V.
Norway Progress Software A/S
Poland Progress Software sp. z.o o.
Spain Progress Spain S.A.
Sweden Progress Software Svenska AB
Switzerland Progress Software A.G.
United Kingdom Progress Software Ltd.
Other
Argentina Progress Software de Argentina S.A.
Australia Progress Software Pty. Ltd.
Brazil Progress Software do Brasil Ltda.
Colombia Progress Software de Colombia S.A.
Hong Kong Progress Software Corporation Limited
Japan Progress Software K.K.
Mexico Progress Software, S.A. de C.V.
Singapore Progress Software Pte. Ltd.
South Africa Tresso Trading 10 (Pty.) Limited
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-41752, 33-43045, 33-50654, 33-58892, 33-96320, 333-41393, 333-41401,
333-41403, 333-80571 and 333-80559 of Progress Software Corporation and its
subsidiaries on Form S-8 of our report dated December 17, 1999 (January 21, 2000
as to the effects of the stock split in Note 5), incorporated by reference in
this Annual Report on Form 10-K of Progress Software Corporation and its
subsidiaries for the year ended November 30, 1999.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE
YEAR ENDING NOVEMBER 30, 1999 AND IS QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 81,651
<SECURITIES> 77,014
<RECEIVABLES> 55,211
<ALLOWANCES> 7,259
<INVENTORY> 0
<CURRENT-ASSETS> 225,859
<PP&E> 68,872
<DEPRECIATION> 48,278
<TOTAL-ASSETS> 256,554
<CURRENT-LIABILITIES> 114,243
<BONDS> 0
0
0
<COMMON> 40,491
<OTHER-SE> 101,820
<TOTAL-LIABILITY-AND-EQUITY> 256,554
<SALES> 131,499
<TOTAL-REVENUES> 286,147
<CGS> 13,188
<TOTAL-COSTS> 239,443
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 51,443
<INCOME-TAX> 16,452
<INCOME-CONTINUING> 34,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,991
<EPS-BASIC> 1.01
<EPS-DILUTED> 0.89
</TABLE>
