e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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| þ |
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Quarterly report pursuant to Section 13 or 15(d) of
the Securities
Exchange Act of 1934 |
For the Quarterly Period Ended May 31, 2007
OR
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| o |
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Transition report pursuant to Section 13 or 15(d) of
the Securities
Exchange Act of 1934 |
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
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04-2746201
(I.R.S. Employer
Identification No.) |
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number: (781) 280-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of June 29, 2007, there were 41,654,000 shares of the registrant’s common stock, $.01 par value
per share, outstanding.
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MAY 31, 2007
INDEX
2
PART 1. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
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| (In thousands) |
|
|
|
|
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|
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May 31, |
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November 30, |
|
| |
|
2007 |
|
|
2006 |
|
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|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
48,407 |
|
|
$ |
46,449 |
|
Short-term investments |
|
|
222,370 |
|
|
|
194,866 |
|
| |
Total cash and short-term investments |
|
|
270,777 |
|
|
|
241,315 |
|
Accounts receivable, net |
|
|
84,415 |
|
|
|
82,762 |
|
Other current assets |
|
|
20,107 |
|
|
|
17,943 |
|
Deferred income taxes |
|
|
19,780 |
|
|
|
18,119 |
|
| |
Total current assets |
|
|
395,079 |
|
|
|
360,139 |
|
| |
Property and equipment, net |
|
|
60,239 |
|
|
|
57,585 |
|
Acquired intangible assets, net |
|
|
66,230 |
|
|
|
75,069 |
|
Goodwill |
|
|
157,632 |
|
|
|
157,858 |
|
Deferred income taxes |
|
|
13,509 |
|
|
|
14,153 |
|
Other assets |
|
|
5,056 |
|
|
|
5,435 |
|
| |
Total |
|
$ |
697,745 |
|
|
$ |
670,239 |
|
| |
|
|
|
|
|
|
|
|
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Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
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Current liabilities: |
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|
|
|
|
|
|
|
Current portion, long-term debt |
|
$ |
292 |
|
|
$ |
281 |
|
Accounts payable |
|
|
12,332 |
|
|
|
15,034 |
|
Accrued compensation and related taxes |
|
|
37,277 |
|
|
|
48,398 |
|
Income taxes payable |
|
|
7,467 |
|
|
|
6,316 |
|
Other accrued liabilities |
|
|
22,229 |
|
|
|
23,166 |
|
Short-term deferred revenue |
|
|
133,237 |
|
|
|
120,974 |
|
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Total current liabilities |
|
|
212,834 |
|
|
|
214,169 |
|
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Long-term debt, less current portion |
|
|
1,508 |
|
|
|
1,657 |
|
| |
Long-term deferred revenue |
|
|
8,565 |
|
|
|
6,355 |
|
| |
Other non-current liabilities |
|
|
3,714 |
|
|
|
3,494 |
|
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Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital; authorized, 100,000
shares; issued and outstanding, 41,479 shares in 2007
and 41,177 shares in 2006 |
|
|
213,631 |
|
|
|
197,748 |
|
Retained earnings, including accumulated other
comprehensive gains of $2,290 in 2007 and $1,106 in 2006 |
|
|
257,493 |
|
|
|
246,816 |
|
| |
Total shareholders’ equity |
|
|
471,124 |
|
|
|
444,564 |
|
| |
Total |
|
$ |
697,745 |
|
|
$ |
670,239 |
|
| |
See notes to unaudited condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations (unaudited)
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|
|
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|
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|
|
|
|
|
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| (In thousands, except per share data) |
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
May 31,
2007 |
|
|
May 31,
2006 |
|
|
May 31,
2007 |
|
|
May 31,
2006 |
|
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|
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Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Software licenses |
|
$ |
44,555 |
|
|
$ |
41,357 |
|
|
$ |
89,284 |
|
|
$ |
84,137 |
|
Maintenance and services |
|
|
75,087 |
|
|
|
68,229 |
|
|
|
145,587 |
|
|
|
129,370 |
|
| |
Total revenue |
|
|
119,642 |
|
|
|
109,586 |
|
|
|
234,871 |
|
|
|
213,507 |
|
| |
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of software licenses |
|
|
1,880 |
|
|
|
1,817 |
|
|
|
3,552 |
|
|
|
4,027 |
|
Cost of maintenance and services |
|
|
16,871 |
|
|
|
15,125 |
|
|
|
33,133 |
|
|
|
29,356 |
|
Amortization of acquired intangibles for
purchased technology |
|
|
2,493 |
|
|
|
1,993 |
|
|
|
4,984 |
|
|
|
3,517 |
|
| |
Total costs of revenue |
|
|
21,244 |
|
|
|
18,935 |
|
|
|
41,669 |
|
|
|
36,900 |
|
| |
Gross profit |
|
|
98,398 |
|
|
|
90,651 |
|
|
|
193,202 |
|
|
|
176,607 |
|
| |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
45,745 |
|
|
|
44,983 |
|
|
|
90,390 |
|
|
|
87,627 |
|
Product development |
|
|
20,389 |
|
|
|
19,346 |
|
|
|
41,184 |
|
|
|
38,273 |
|
General and administrative |
|
|
19,029 |
|
|
|
13,034 |
|
|
|
34,060 |
|
|
|
26,232 |
|
Amortization of other acquired intangibles |
|
|
1,946 |
|
|
|
1,984 |
|
|
|
3,926 |
|
|
|
3,367 |
|
Acquisition-related expenses |
|
|
— |
|
|
|
297 |
|
|
|
— |
|
|
|
1,831 |
|
| |
Total operating expenses |
|
|
87,109 |
|
|
|
79,644 |
|
|
|
169,560 |
|
|
|
157,330 |
|
| |
Income from operations |
|
|
11,289 |
|
|
|
11,007 |
|
|
|
23,642 |
|
|
|
19,277 |
|
| |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other |
|
|
2,331 |
|
|
|
1,711 |
|
|
|
4,249 |
|
|
|
3,506 |
|
Foreign currency loss |
|
|
(710 |
) |
|
|
(1,193 |
) |
|
|
(1,538 |
) |
|
|
(2,291 |
) |
| |
Total other income, net |
|
|
1,621 |
|
|
|
518 |
|
|
|
2,711 |
|
|
|
1,215 |
|
| |
Income before provision for income taxes |
|
|
12,910 |
|
|
|
11,525 |
|
|
|
26,353 |
|
|
|
20,492 |
|
Provision for income taxes |
|
|
4,519 |
|
|
|
3,807 |
|
|
|
9,224 |
|
|
|
6,865 |
|
| |
Net income |
|
$ |
8,391 |
|
|
$ |
7,718 |
|
|
$ |
17,129 |
|
|
$ |
13,627 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
0.42 |
|
|
$ |
0.33 |
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.39 |
|
|
$ |
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,178 |
|
|
|
41,062 |
|
|
|
41,123 |
|
|
|
40,781 |
|
Diluted |
|
|
43,636 |
|
|
|
43,473 |
|
|
|
43,537 |
|
|
|
43,265 |
|
| |
See notes to unaudited condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows (unaudited)
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
| |
|
Six Months Ended May 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,129 |
|
|
$ |
13,627 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
|
4,849 |
|
|
|
4,313 |
|
Write-down for asset impairment |
|
|
2,388 |
|
|
|
— |
|
Amortization of capitalized software costs |
|
|
87 |
|
|
|
87 |
|
Amortization of acquired intangible assets |
|
|
8,910 |
|
|
|
6,884 |
|
Stock-based compensation |
|
|
12,408 |
|
|
|
11,767 |
|
Deferred income taxes |
|
|
(1,477 |
) |
|
|
(2,239 |
) |
Tax benefit from stock options |
|
|
230 |
|
|
|
974 |
|
In-process research and development |
|
|
— |
|
|
|
900 |
|
Changes in operating assets and liabilities, net of effects
from acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(925 |
) |
|
|
3,139 |
|
Other current assets |
|
|
(879 |
) |
|
|
(2,538 |
) |
Accounts payable and accrued expenses |
|
|
(17,927 |
) |
|
|
(22,400 |
) |
Income taxes payable |
|
|
1,178 |
|
|
|
4,549 |
|
Deferred revenue |
|
|
13,047 |
|
|
|
13,523 |
|
| |
Net cash provided by operating activities |
|
|
39,018 |
|
|
|
32,586 |
|
| |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of investments available for sale |
|
|
(108,061 |
) |
|
|
(172,463 |
) |
Sales and maturities of investments available for sale |
|
|
80,557 |
|
|
|
220,429 |
|
Purchases of property and equipment |
|
|
(9,622 |
) |
|
|
(9,161 |
) |
Acquisitions, net of cash acquired |
|
|
— |
|
|
|
(66,438 |
) |
Decrease (increase) in other non-current assets |
|
|
(827 |
) |
|
|
205 |
|
| |
Net cash used for investing activities |
|
|
(37,953 |
) |
|
|
(27,428 |
) |
| |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
17,359 |
|
|
|
10,158 |
|
Excess tax benefit from stock options |
|
|
1,039 |
|
|
|
843 |
|
Payment of long-term debt |
|
|
(138 |
) |
|
|
(127 |
) |
Repurchase of common stock |
|
|
(19,529 |
) |
|
|
(12,678 |
) |
| |
Net cash used for financing activities |
|
|
(1,269 |
) |
|
|
(1,804 |
) |
| |
Effect of exchange rate changes on cash |
|
|
2,162 |
|
|
|
4,857 |
|
| |
Net increase in cash and equivalents |
|
|
1,958 |
|
|
|
8,211 |
|
Cash and equivalents, beginning of period |
|
|
46,449 |
|
|
|
40,398 |
|
| |
Cash and equivalents, end of period |
|
$ |
48,407 |
|
|
$ |
48,609 |
|
| |
See notes to unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim
financial reporting. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statements and these unaudited financial statements should be read in conjunction with
the audited financial statements included in our Annual Report on Form 10-K for the fiscal year
ended November 30, 2006.
In the opinion of management, we have prepared the accompanying unaudited condensed consolidated
financial statements on the same basis as the audited financial statements, and these financial
statements include all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of the interim periods presented. The operating results for the
interim periods presented are not necessarily indicative of the results expected for the full
fiscal year.
Note 2: Revenue Recognition
We recognize revenue when earned. We recognize software license revenue upon shipment of the
product or, if delivered electronically, when the customer has the right to access the software,
provided that the license fee is fixed or determinable, persuasive evidence of an arrangement
exists and collection is probable. We do not consider software license arrangements with payment
terms greater than ninety days beyond our standard payment terms to be fixed and determinable and
therefore such software license fees are recognized upon due date. We do not license our software
with a right of return and generally do not license our software with conditions of acceptance. If
an arrangement does contain conditions of acceptance, we defer recognition of the revenue until the
acceptance criteria are met or the period of acceptance has passed. We generally recognize revenue
for products distributed through application partners and distributors when sold through to the
end-user.
We generally sell our software licenses with maintenance services and, in some cases, also with
consulting services. For the undelivered elements, we determine vendor-specific objective evidence
(VSOE) of fair value to be the price charged when the undelivered element is sold separately. We
determine VSOE for maintenance sold in connection with a software license based on the amount that
will be separately charged for the maintenance renewal period. We determine VSOE for consulting
services by reference to the amount charged for similar engagements when a software license sale is
not involved.
We generally recognize revenue from software licenses sold together with maintenance and/or
consulting services upon shipment using the residual method, provided that the above criteria have
been met. If VSOE of fair value for the undelivered elements cannot be established, we defer all
revenue from the arrangement until the earlier of the point at which such sufficient VSOE does
exist or all elements of the arrangement have been delivered, or if the only undelivered element is
maintenance, then we recognize the entire fee ratably. If payment of the software license fees is
dependent upon the performance of consulting services or the consulting services are essential to
the functionality of the licensed software, then we recognize both the software license and
consulting fees using the percentage of completion method.
We recognize maintenance revenue ratably over the term of the applicable agreement. We generally
recognize revenue from services, primarily consulting and customer education, as the related
services are performed.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with Statement 109 and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
6
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early
adoption permitted. We will adopt FIN 48 on December 1, 2007. We are currently evaluating the
impact that the adoption of FIN 48 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating whether adoption of SFAS 157 will
have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides a “Fair Value Option” under which a company
may irrevocably elect fair value as the initial and subsequent measurement attribute for certain
financial assets and liabilities. This Fair Value Option will be available on a
contract-by-contract basis with changes in fair value recognized in earnings as those changes
occur. The effective date for SFAS 159 is the beginning of each reporting entity’s first fiscal
year end that begins after November 15, 2007. SFAS 159 also allows an entity to early adopt the
statement as of the beginning of an entity’s fiscal year that begins after the issuance of SFAS
159, provided that the entity also adopts the requirement of SFAS No. 157. We are currently
evaluating whether adoption of SFAS 159 will have an impact on our consolidated financial
statements.
Note 3: Earnings Per Share
We calculate basic earnings per share using the weighted average number of common shares
outstanding. We compute diluted earnings per share on the basis of the weighted average number of
common shares outstanding plus the effects of outstanding stock options using the treasury stock
method. The following table provides the calculation of basic and diluted earnings per share on an
interim basis:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
| |
|
Three Months Ended May 31, |
|
Six Months Ended May 31, |
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,391 |
|
|
$ |
7,718 |
|
|
$ |
17,129 |
|
|
$ |
13,627 |
|
| |
Weighted average shares outstanding |
|
|
41,178 |
|
|
|
41,062 |
|
|
|
41,123 |
|
|
|
40,781 |
|
Dilutive impact from outstanding stock
Options |
|
|
2,458 |
|
|
|
2,411 |
|
|
|
2,414 |
|
|
|
2,484 |
|
| |
Diluted weighted average shares outstanding |
|
|
43,636 |
|
|
|
43,473 |
|
|
|
43,537 |
|
|
|
43,265 |
|
| |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
0.42 |
|
|
$ |
0.33 |
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.39 |
|
|
$ |
0.31 |
|
| |
Stock options to purchase approximately 2,156,000 shares and 1,997,000 shares of common stock were
excluded from the calculation of diluted earnings per share in the second quarter of fiscal years
2007 and 2006, respectively, because these options were anti-dilutive. Stock options to purchase
approximately 2,561,000 shares and 1,833,000 shares of common stock were excluded from the
calculation of diluted earnings per share in the first six months of fiscal years 2007 and 2006,
respectively, because these options were anti-dilutive.
Note 4: Stock-based Compensation
We account for stock-based compensation expense in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R,
stock-based compensation expense reflects the fair value of stock-based awards measured at the
grant date, is recognized over the relevant service period, and is adjusted each period for
anticipated forfeitures. We estimate the fair value of each stock-based award on the date of grant
using the Black-Scholes option valuation model. The Black-Scholes option valuation model
incorporates assumptions as to stock price volatility, the expected life of options, a risk-free
interest rate and dividend yield.
7
SFAS 123R requires the cash flows resulting from excess tax benefits related to stock compensation
to be classified as cash flows from financing activities when realized. In the first six months of
fiscal 2007, the excess tax benefit from the exercise of stock options was $1.0 million, which was
classified as cash flows from financing activities compared to $0.8 million in the first six months
of fiscal 2006.
The following table provides the classification of stock-based compensation as reflected in our
consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
|
Three Months Ended May 31, |
|
Six Months Ended May 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
| |
Cost of software licenses |
|
$ |
44 |
|
|
$ |
37 |
|
|
$ |
74 |
|
|
$ |
77 |
|
Cost of maintenance and services |
|
|
515 |
|
|
|
427 |
|
|
|
862 |
|
|
|
877 |
|
Sales and marketing |
|
|
2,702 |
|
|
|
2,161 |
|
|
|
4,498 |
|
|
|
4,385 |
|
Product development |
|
|
1,731 |
|
|
|
1,335 |
|
|
|
2,850 |
|
|
|
2,689 |
|
General and administrative |
|
|
2,539 |
|
|
|
1,864 |
|
|
|
4,124 |
|
|
|
3,739 |
|
| |
Total stock-based
compensation expense |
|
$ |
7,531 |
|
|
$ |
5,824 |
|
|
$ |
12,408 |
|
|
$ |
11,767 |
|
| |
On April 12, 2007, we completed a tender offer to amend stock options issued in previous years for
which it was determined that the exercise price was less than the fair value on the revised date of
grant, in order to mitigate the unfavorable personal tax consequences under Section 409A. The
impact of the amendment of such options resulted in a stock option modification under SFAS 123R.
The terms of such offer require us to make cash payments to option holders in an amount equal to
the difference between the exercise price of the original option and the amended price of the new
option. We recorded a liability of approximately $2.5 million in the second quarter for the
present value of the fully vested cash payments to be paid in January 2008, of which $0.5 million
was recorded as stock-based compensation expense and $2.0 million was recorded as a reduction in
additional paid in capital. The stock-based compensation expense amount represents the
incremental fair value of the new options, and was recognized in the second quarter due to the fact
that the future cash payments were fully vested as of the conclusion of the tender offer. Also, as
a result of the modification and subsequent remeasurement of the options included in the tender
offer, we accelerated the recognition of $0.4 million of unamortized stock-based compensation
associated with the partial settlement of the unvested portion of the original award.
We also entered into option amendment agreements with a limited number of individuals for whom the
deadline for such an amendment was December 31, 2006. These agreements contained similar terms to
the tender offer except that the cash payment associated with unvested shares as of the date of the
agreements require the individuals to be employed by us on the payment dates. In the first quarter
of fiscal year 2007, we accounted for the impact of these option amendment agreements as a stock
option modification under SFAS 123R. We recorded a liability of approximately $0.7 million in the
first quarter for the present value of the expected cash payments, which will be paid in up to five
payments depending on the vest schedules of each individual through October 2009. Approximately
$0.2 million of this liability represents the incremental fair value of the new options, and will
be recorded as stock-based compensation expense over the remaining vest period and $0.5 million was
recorded as a reduction in additional paid in capital.
Note 5: Income Taxes
We provide for income taxes during interim periods based on the estimated effective tax rate for
the full fiscal year. We record cumulative adjustments to the tax provision in an interim period in
which a change in the estimated annual effective rate is determined. We record valuation
allowances to reduce deferred tax assets to the amount that is more likely than not to be realized.
We have not provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries,
as these earnings have been permanently reinvested or would be principally offset by foreign tax
credits.
8
Note 6: Comprehensive Income
The components of comprehensive income include net income, foreign currency translation adjustments
and unrealized gains and losses on investments. The following table provides the composition of
comprehensive income on an interim basis:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
|
Three Months Ended May 31, |
|
Six Months Ended May 31, |
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
8,391 |
|
|
$ |
7,718 |
|
|
$ |
17,129 |
|
|
$ |
13,627 |
|
Foreign currency
translation adjustments,
net of tax |
|
|
1,386 |
|
|
|
1,343 |
|
|
|
1,218 |
|
|
|
1,703 |
|
Unrealized gains (losses)
on investments, net of tax |
|
|
(17 |
) |
|
|
22 |
|
|
|
(34 |
) |
|
|
49 |
|
| |
Total comprehensive income |
|
$ |
9,760 |
|
|
$ |
9,083 |
|
|
$ |
18,313 |
|
|
$ |
15,379 |
|
| |
Note 7: Shareholders’ Equity
Common Stock Repurchases
In September 2006, the Board of Directors authorized, for the period from October 1, 2006 through
September 30, 2007, the purchase of up to 10,000,000 shares of our common stock, at such times that
management deems such purchases to be an effective use of cash. Approximately 9.3 million shares
were available for repurchase under this repurchase authorization. We purchased and retired
approximately 705,000 shares of our common stock for $19.5 million in the first six months of
fiscal 2007 as compared to approximately 470,000 shares of our common stock for $12.7 million in
the first six months of fiscal 2006.
Note 8: Goodwill
Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeded
the fair value of net identifiable assets on the date of purchase. For purposes of the annual
impairment test, we assigned goodwill of $11.7 million to the operating divisions comprising the
OpenEdge operating segment, $56.9 million to the operating divisions comprising the Enterprise
Infrastructure reporting segment and $89.0 million to the reporting unit comprising the DataDirect
reporting segment.
During the first quarter of fiscal 2007, we completed our annual testing for impairment of goodwill
and, based on those tests, concluded that no impairment of goodwill existed as of December 15,
2006, the goodwill impairment measurement date for fiscal 2007. The decrease in goodwill from the
end of fiscal 2006 was primarily related to changes to the preliminary allocation of the purchase
price from previous acquisitions.
Note 9: Segment Information
At the end of fiscal 2006, we reorganized our business into five operating units. Our principal
operating unit conducts business as the OpenEdge Division. The OpenEdge Division (OED) provides the
Progress® OpenEdge platform, a set of development and deployment technologies, including the
OpenEdge RDBMS, one of the leading embedded databases, for building business applications. Another
significant operating unit, the Enterprise Infrastructure Division (EID), is responsible for the
development, marketing and sales of our Sonic, Actional, DataXtend and ObjectStore product lines.
The third significant operating unit, DataDirect Technologies, provides standards-based data
connectivity software. Our other two operating units are the Apama Division and the EasyAsk
Division.
Segment information is presented in accordance with SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information.” This standard is based on a management approach, which
requires segmentation based upon our internal organization and disclosure of revenue and operating
income based upon internal accounting methods. Our chief decision maker is our Chief Executive
Officer.
Based upon the aggregation criteria for segment reporting, we have three reportable segments: the
OpenEdge segment, which includes the OED and EasyAsk Division, the Enterprise Infrastructure
segment, which includes the
9
EID and Apama Division, and the DataDirect segment. We do not manage our assets, capital
expenditures, interest income or provision for income taxes by segment. We manage such items on a
company basis.
At the end of fiscal 2006, we changed the composition of our reporting segments from previous
disclosures. We have restated our fiscal 2006 segment disclosure to conform to the current
presentation.
The following table provides revenue and income from operations from our reportable segments on an
interim basis:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
|
Three Months Ended May 31, |
|
Six Months Ended May 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpenEdge segment |
|
$ |
89,851 |
|
|
$ |
82,653 |
|
|
$ |
177,105 |
|
|
$ |
162,642 |
|
Enterprise Infrastructure
segment |
|
|
14,895 |
|
|
|
14,313 |
|
|
|
28,430 |
|
|
|
28,160 |
|
DataDirect segment |
|
|
16,892 |
|
|
|
14,280 |
|
|
|
33,197 |
|
|
|
26,185 |
|
Reconciling items |
|
|
(1,996 |
) |
|
|
(1,660 |
) |
|
|
(3,861 |
) |
|
|
(3,480 |
) |
| |
Total |
|
$ |
119,642 |
|
|
$ |
109,586 |
|
|
$ |
234,871 |
|
|
$ |
213,507 |
|
| |
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpenEdge segment |
|
$ |
32,725 |
|
|
$ |
30,515 |
|
|
$ |
63,970 |
|
|
$ |
58,210 |
|
Enterprise Infrastructure
segment |
|
|
(6,026 |
) |
|
|
(8,326 |
) |
|
|
(12,654 |
) |
|
|
(15,131 |
) |
DataDirect segment |
|
|
2,084 |
|
|
|
(899 |
) |
|
|
3,539 |
|
|
|
(116 |
) |
Reconciling items |
|
|
(17,494 |
) |
|
|
(10,283 |
) |
|
|
(31,214 |
) |
|
|
(23,686 |
) |
| |
Total |
|
$ |
11,289 |
|
|
$ |
11,007 |
|
|
$ |
23,641 |
|
|
$ |
19,277 |
|
| |
The reconciling items within revenue primarily represent intersegment sales, which are accounted
for as if sold under an equivalent arms-length basis arrangement. Amounts included under
reconciling items within income from operations represent expenses which are not charged to
segments for internal reporting and include amortization of acquired intangibles, stock-based
compensation, acquisition-related expenses and certain unallocated administrative expenses.
Total revenue by significant product line, regardless of which segment generated the revenue, is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
|
Three Months Ended May 31, |
|
Six Months Ended May 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DataDirect |
|
$ |
16,892 |
|
|
$ |
14,280 |
|
|
$ |
33,197 |
|
|
$ |
26,185 |
|
Enterprise Infrastructure |
|
|
20,894 |
|
|
|
16,146 |
|
|
|
38,016 |
|
|
|
32,202 |
|
Progress OpenEdge and other |
|
|
81,856 |
|
|
|
79,160 |
|
|
|
163,658 |
|
|
|
155,120 |
|
| |
Total revenue |
|
$ |
119,642 |
|
|
$ |
109,586 |
|
|
$ |
234,871 |
|
|
$ |
213,507 |
|
| |
Note 10: Contingencies
On June 23, 2006, we received written notice that the Enforcement Staff in the Boston,
Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices
during the period December 1, 1995 through November 30, 2002. On December 19, 2006, the SEC
informed us that it had issued a formal order of investigation into our option-granting practices
during the period December 1, 1995 through the present. We are unable to predict with certainty
what consequences may arise from the SEC investigation. We have already incurred, and expect to
continue to incur, significant legal expenses arising from the investigation. The investigation
could also divert the attention of our management and harm our business. If the SEC institutes
legal action, we could face significant fines and penalties and be required to take remedial
actions determined by the SEC or a court. Although we have filed certain restated financial
statements that we believe correct the accounting errors arising from our past option-granting
practices, the filing of those financial statements did not resolve the pending SEC inquiry. The
SEC has not
10
indicated to us whether it has reviewed our restated financial statements, and any SEC review could
lead to further restatements or other modifications of our financial statements.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively
on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL
was filed in the United States District Court for the District of Massachusetts by a party
identifying itself as one of our shareholders purporting to act on our behalf against our directors
and certain of our present and former officers. We are also named as a nominal defendant. The
complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust
enrichment arising from the allegedly improper backdating of certain stock option grants. The
complaint seeks monetary damages, restitution, disgorgement, rescission of stock options, punitive
damages and other relief. On January 23, 2007, we moved to dismiss the Arkansas Teacher Retirement
System complaint on the grounds that the Plaintiff failed to make a proper pre-filing demand upon
our Board of Directors. This motion is pending.
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges breaches of fiduciary duty, aiding
and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper
backdating of certain stock option grants. The complaint seeks monetary damages and disgorgement,
among other forms of relief. A Special Litigation Committee formed by our board of directors to
investigate and determine the Company’s response to the complaint.
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to incur legal expenses arising from these matters, which
may be significant, including the advancement of legal expenses to our directors and officers. We
have certain indemnification obligations to our directors and officers, and the outcome of
derivative or any other litigation may require that we indemnify some or all of our directors and
officers for expenses they may incur in defending the litigation and other losses.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these other claims cannot be
predicted with certainty, management does not believe that the outcome of any of these other legal
matters will have a material adverse effect on our consolidated financial position or results of
operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions
regarding forward-looking statements. This Form 10-Q, and other information provided by us or
statements made by our directors, officers or employees from time to time, may contain
“forward-looking” statements and information, which involve risks and uncertainties. Actual future
results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are
planning” or “plan 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 that could cause actual results or events to differ materially from those anticipated by
the forward-looking statements. Such factors include those described in Part II, Item 1A of this
Form 10-Q under the heading “Risk Factors.” Although we have sought to identify the most
significant risks to our business, we cannot predict whether,
11
or to what extent, any of such risks may be realized. We also cannot assure you that we have
identified all possible issues which we might face. We undertake no obligation to update any
forward-looking statements that we make.
Overview
We develop, market and distribute software to simplify and accelerate the development, deployment,
integration and management of business applications. Our mission is to deliver software products
and services that empower partners and customers to improve their development, deployment,
integration and management of quality applications worldwide. Our products include development
tools, databases, application servers, messaging servers, application management tools, data
connectivity products and integration products that enable the highly distributed deployment of
responsive applications across internal networks, the Internet and occasionally-connected users.
Through our various operating units, we market our products globally to a broad range of
organizations in manufacturing, distribution, finance, retail, healthcare, telecommunications,
government and many other fields.
We derive a significant portion of our revenue from international operations. In the first half of
fiscal 2006, the strengthening of the U.S. dollar against most major currencies, primarily the euro
and the British pound, negatively affected the translation of our results into U.S. dollars. In
the second half of fiscal 2006 and the first half of fiscal 2007, the weakening of the U.S. dollar
against most major currencies, primarily the euro and the British pound, positively affected the
translation of our results into U.S. dollars.
Critical Accounting Policies
Our management’s discussion and analysis of financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. We make estimates and assumptions
in the preparation of our consolidated financial statements that affect the reported amounts of
assets and liabilities, revenue and expenses and related disclosures of contingent assets and
liabilities. We base our estimates on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. However, actual results may differ from these
estimates.
We have identified the following critical accounting policies that require the use of significant
judgments and estimates in the preparation of our consolidated financial statements. This listing
is not a comprehensive list of all of our accounting policies. For further information regarding
the application of these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements in Item 8 of our Annual Report on Form 10-K for the year ended November 30,
2006, as well as the notes to our Consolidated Financial Statements included in Item 1 of this Form
10-Q.
Revenue Recognition — Our revenue recognition policy is significant because revenue is a key
component affecting results of operations. In determining when to recognize revenue from a
customer arrangement, we are often required to exercise judgment regarding the application of our
accounting policies to a particular arrangement. For example, judgment is required in determining
whether a customer arrangement has multiple elements. When such a situation exists, judgment is
also involved in determining whether vendor-specific objective evidence (VSOE) of fair value for
the undelivered elements exists. While we follow specific and detailed rules and guidelines
related to revenue recognition, we make and use significant management judgments and estimates in
connection with the revenue recognized in any reporting period, particularly in the areas described
above, as well as collectibility. If management made different estimates or judgments, material
differences in the timing of the recognition of revenue could occur.
Allowance for Doubtful Accounts — We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. We establish this
allowance using estimates that we make based on factors such as the composition of the accounts
receivable aging, historical bad debts, changes in payment patterns, changes to customer
creditworthiness and current economic trends. If we used different estimates, or if the financial
condition of customers were to deteriorate, resulting in an impairment of their ability to make
payments, we would require additional provisions for doubtful accounts that would increase bad debt
expense.
12
Goodwill and Intangible Assets — We had goodwill and net intangible assets of approximately $224
million at May 31, 2007. We assess the impairment of goodwill and identifiable intangible assets
on an annual basis and whenever events or changes in circumstances indicate that the carrying value
of the asset may not be recoverable. We would record an impairment charge if such an assessment
were to indicate that the fair value of such assets was less than the carrying value. Judgment is
required in determining whether an event has occurred that may impair the value of goodwill or
identifiable intangible assets. Factors that could indicate that an impairment may exist include
significant underperformance relative to plan or long-term projections, changes in business
strategy, significant negative industry or economic trends or a significant decline in our stock
price or in the value of one of our reporting units for a sustained period of time. We utilize
cash flow models to determine the fair value of our reporting units. We must make assumptions
about future cash flows, future operating plans, discount rates and other factors in our models.
Different assumptions and judgment determinations could yield different conclusions that would
result in an impairment charge to income in the period that such change or determination was made.
Income Tax Accounting — We had a net deferred tax asset of approximately $30 million at May 31,
2007. We record valuation allowances to reduce deferred tax assets to the amount that is more
likely than not to be realized. We consider scheduled reversals of temporary differences,
projected future taxable income, ongoing tax planning strategies and other matters in assessing the
need for and the amount of a valuation allowance. If we were to change our assumptions or otherwise
determine that we were unable to realize all or part of our net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to income in the period that such change
or determination was made. On a quarterly basis we provide for income taxes based on the estimated
effective tax rate for the full fiscal year.
Stock-Based Compensation — We account for stock-based compensation expense in accordance with SFAS
123R. Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based
awards measured at the grant date, is recognized over the relevant service period, and is adjusted
each period for anticipated forfeitures. We estimate the fair value of each stock-based award on
the date of grant using the Black-Scholes option valuation model. The Black-Scholes option
valuation model incorporates assumptions as to stock price volatility, the expected life of
options, a risk-free interest rate and dividend yield. Many of these assumptions are highly
subjective and require the exercise of management judgment. Our management must also apply
judgment in developing an estimate of awards that may be forfeited. If our actual experience
differs significantly from our estimates and we choose to employ different assumptions in the
future, the stock-based compensation expense that we record in future periods may differ materially
from that recorded in the current period.
13
Results of Operations
The following table provides 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of Total Revenue |
Period-to-Period Change |
| |
|
Three Months Ended |
Six Months Ended |
|
Three |
|
Six |
| |
|
May 31, |
|
May 31, |
|
May 31, |
|
May 31, |
|
Month |
|
Month |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Period |
|
Period |
| |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
|
37 |
% |
|
|
38 |
% |
|
|
38 |
% |
|
|
39 |
% |
|
|
8 |
% |
|
|
6 |
% |
Maintenance and services |
|
|
63 |
|
|
|
62 |
|
|
|
62 |
|
|
|
61 |
|
|
|
10 |
|
|
|
13 |
|
| |
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
9 |
|
|
|
10 |
|
| |
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
(12 |
) |
Cost of maintenance and services |
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
12 |
|
|
|
13 |
|
Amortization of acquired
intangibles for purchased
technology |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
25 |
|
|
|
42 |
|
| |
Total costs of revenue |
|
|
18 |
|
|
|
17 |
|
|
|
18 |
|
|
|
17 |
|
|
|
12 |
|
|
|
13 |
|
| |
Gross profit |
|
|
82 |
|
|
|
83 |
|
|
|
82 |
|
|
|
83 |
|
|
|
9 |
|
|
|
9 |
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
38 |
|
|
|
41 |
|
|
|
38 |
|
|
|
41 |
|
|
|
2 |
|
|
|
3 |
|
Product development |
|
|
17 |
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
5 |
|
|
|
8 |
|
General and administrative |
|
|
16 |
|
|
|
12 |
|
|
|
14 |
|
|
|
12 |
|
|
|
46 |
|
|
|
30 |
|
Amortization of other acquired
intangibles |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
17 |
|
Acquisition-related expenses, net |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
|
|
(100 |
) |
|
|
(100 |
) |
| |
Total operating expenses |
|
|
73 |
|
|
|
73 |
|
|
|
72 |
|
|
|
74 |
|
|
|
9 |
|
|
|
8 |
|
| |
Income from operations |
|
|
9 |
|
|
|
10 |
|
|
|
10 |
|
|
|
9 |
|
|
|
3 |
|
|
|
23 |
|
Other income |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
213 |
|
|
|
123 |
|
| |
Income before provision for taxes |
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
10 |
|
|
|
12 |
|
|
|
29 |
|
Provision for income taxes |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
19 |
|
|
|
34 |
|
| |
Net income |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
9 |
% |
|
|
26 |
% |
| |
Revenue. Our total revenue increased 9% from $109.6 million in the second quarter of fiscal 2006
to $119.6 million in the second quarter of fiscal 2007. Total revenue would have increased by 5%
if exchange rates had been constant in the second quarter of fiscal 2007 as compared to exchange
rates in effect in the second quarter of fiscal 2006. Total revenue increased 10% from $213.5
million in the first six months of fiscal 2006 to $234.9 million in the first six months of fiscal
2007. Total revenue would have increased by 5% if exchange rates had been constant in the first
six months of fiscal 2007 as compared to exchange rates in effect in the first six months of fiscal
2007. In addition to the positive effect of changes in exchange rates, each of our major product
lines experienced growth in the first six months of fiscal 2007.
Revenue from our Progress OpenEdge product line increased from $79.2 million in the second quarter
of fiscal 2006 to $81.9 million in the second quarter of fiscal 2007 and increased from $155.1
million in the first six months of fiscal 2006 to $163.7 million in the first six months of fiscal
2007. Revenue derived from our Enterprise Infrastructure product lines increased 29% from $16.1
million in the second quarter of fiscal 2006 to $20.9 million in the second quarter of fiscal 2007
and increased 18% from $32.2 million in the first six months of fiscal 2006 to $38.0 million in the
first six months of fiscal 2007. Revenue from our DataDirect product line increased 18% from $14.3
million in the second quarter of fiscal 2006 to $16.9 million in the second quarter of fiscal 2007
and increased 27% from $26.2 million in the first six months of fiscal 2006 to $33.2 million in the
first six months of fiscal 2007.
14
Software license revenue increased 8% from $41.4 million in the second quarter of fiscal 2006 to
$44.6 million in the second quarter of fiscal 2007. Software license revenue would have increased
by 4% if exchange rates had been constant in the second quarter of fiscal 2007 as compared to
exchange rates in effect in the second quarter of fiscal 2006. Software license revenue increased
6% from $84.1 million in the first six months of fiscal 2006 to $89.3 million in the first six
months of fiscal 2007. Software license revenue would have increased by 2% if exchange rates had
been constant in the first six months of fiscal 2007 as compared to exchange rates in effect in the
first six months of fiscal 2006. The increase in software license revenue in the six month period
was primarily due to growth from the DataDirect and the Enterprise Infrastructure product lines.
These product lines accounted for 46% of software license revenue in the second quarter of fiscal
2007 as compared to 39% in fiscal 2006. Software license revenue from the Progress OpenEdge
product set increased year over year, primarily within the development products.
Maintenance and services revenue increased 10% from $68.2 million in the second quarter of fiscal
2006 to $75.1 million in the second quarter of fiscal 2007. Maintenance and services revenue would
have increased by 5% if exchange rates had been constant in the second quarter of fiscal 2007 as
compared to exchange rates in effect in the second quarter of fiscal 2006. Maintenance and
services revenue increased 13% from $129.4 million in the first six months of fiscal 2006 to $145.6
million in the first six months of fiscal 2007. Maintenance and services revenue would have
increased by 7% if exchange rates had been constant in the first six months of fiscal 2007 as
compared to exchange rates in effect in the first six months of fiscal 2006. Excluding the impact
of changes in exchange rates, the increase in maintenance and services revenue was primarily the
result of an increase in professional services revenue, growth in our installed customer base and
renewal of maintenance agreements.
Total revenue generated in markets outside North America increased 14% from $59.6 million in the
second quarter of fiscal 2006 to $68.0 million in the second quarter of fiscal 2007 and represented
54% of total revenue in the second quarter of fiscal 2006 and 57% of total revenue in the second
quarter of fiscal 2007. Revenue from the three major regions outside North America, consisting of
EMEA, Latin America and Asia Pacific, each increased in the second quarter of fiscal 2007 as
compared to the second quarter of fiscal 2006. Total revenue generated in markets outside North
America would have represented 55% of total revenue if exchange rates had been constant in the
second quarter of fiscal 2007 as compared to the exchange rates in effect in the second quarter of
fiscal 2006.
Total revenue generated in markets outside North America increased 14% from $117.1 million in the
first six months of fiscal 2006 to $133.1 million in the first six months of fiscal 2007 and
represented 55% of total revenue in the first six months of fiscal 2006 and 57% of total revenue in
the first six months of fiscal 2007. Revenue from the three major regions outside North America,
consisting of EMEA, Latin America and Asia Pacific, each increased in fiscal 2007 as compared to
fiscal 2006. Total revenue generated in markets outside North America would have represented 55%
of total revenue if exchange rates had been constant in the first six months of fiscal 2007 as
compared to the exchange rates in effect in the first six months of fiscal 2006.
Cost of Software Licenses. Cost of software licenses consists primarily of costs of product
media, documentation, duplication, packaging, electronic software distribution, royalties and
amortization of capitalized software costs. Cost of software licenses increased 3% from $1.8
million in the second quarter of fiscal 2006 to $1.9 million in the second quarter of fiscal 2007,
and remained the same as a percentage of software license revenue at 4%. The dollar increase for
the second quarter was primarily due to a slight increase in royalty expense for products and
technologies licensed or resold from third parties. Cost of software licenses decreased 12% from
$4.0 million in the first six months of fiscal 2006 to $3.6 million in the first six months of
fiscal 2007, and decreased as a percentage of software licenses revenue from 5% in the first six
months of fiscal 2006 to 4% in the first six months of fiscal 2007. The dollar decrease in the
first six months of fiscal 2007 compared to the first six months of fiscal 2006 was primarily due
to a decrease in royalty expense for products and technologies licensed or resold from third
parties. Cost of software licenses as a percentage of software license revenue may vary from period
to period depending upon the relative product mix.
Cost of Maintenance and Services. Cost of maintenance and services consists primarily of costs of
providing customer technical support, education and consulting. Cost of maintenance and services
increased 12% from $15.1 million in the second quarter of fiscal 2006 to $16.9 million in the
second quarter of fiscal 2007, and remained the same as a percentage of maintenance and services
revenue at 22%. Cost of maintenance and services increased 13% from $29.4 million in the first six
months of fiscal 2006 to $33.1 million in the first six months of fiscal 2007, and
15
remained the same as a percentage of maintenance and services revenue at 23%. The total dollar
amount in the second quarter of fiscal 2007 and in the first six months of fiscal 2007 increased
primarily due to higher usage of third-party contractors for service engagements. Our technical
support, education and consulting headcount decreased by 3% from the end of the second quarter of
fiscal 2006 to the end of the second quarter of fiscal 2007.
Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired
intangibles for purchased technology primarily represents the amortization of the value assigned to
technology-related intangible assets obtained in business combinations. Amortization of acquired
intangibles for purchased technology increased from $2.0 million in the second quarter of fiscal
2006 to $2.5 million in the second quarter of fiscal 2007. Amortization of acquired intangibles
for purchased technology increased from $3.5 million in the first six months of fiscal 2006 to $5.0
million in the first six months of fiscal 2007. The increase was due to a full six months of
amortization expense associated with the acquisitions of NEON, Actional, Pantero and OpenAccess in
fiscal 2006.
Gross Profit. Our gross profit increased 9% from $90.7 million in the second quarter of fiscal
2006 to $98.4 million in the second quarter of fiscal 2007. Our gross profit percentage of total
revenue decreased from 83% in the second quarter of fiscal 2006 to 82% in the second quarter of
fiscal 2007. Our gross profit increased 9% from $176.6 million in the first six months of fiscal
2006 to $193.2 million in the first six months of fiscal 2007. Our gross profit percentage of
total revenue decreased from 83% in the first six months of fiscal 2006 to 82% in the first six
months of fiscal 2007. The slight decrease in our gross profit percentage was due to professional
services, the lowest margin revenue component, growing at the highest rate of our revenue
components.
Sales and Marketing. Sales and marketing expenses increased 2% from $45.0 million in the second
quarter of fiscal 2006 to $45.7 million in the second quarter of fiscal 2007, and decreased as a
percentage of total revenue from 41% to 38%. Sales and marketing expenses increased 3% from $87.6
million in the first six months of fiscal 2006 to $90.4 million in the first six months of fiscal
2007, and decreased as a percentage of total revenue from 41% to 38%. The increase in sales and
marketing expenses was due to higher average selling costs, partially offset by a decrease in
marketing program expenses. Our sales support and marketing headcount remained relatively flat
from the end of the second quarter of fiscal 2006 to the end of the second quarter of fiscal 2007.
Product Development. Product development expenses increased 5% from $19.3 million in the second
quarter of fiscal 2006 to $20.4 million in the second quarter of fiscal 2007, and decreased as a
percentage of revenue from 18% to 17%. Product development expenses increased 8% from $38.3
million in the first six months of fiscal 2006 to $41.2 million in the first six months of fiscal
2007, and remained the same as a percentage of revenue at 18%. The dollar increase in the first
six months of fiscal 2007 as compared to the first six months of fiscal 2006 was primarily due to
expenses related to the development teams associated with the acquisitions of NEON and Actional,
which occurred at the end of the first quarter of fiscal 2006. Our product development headcount
increased 2% from the end of the second quarter of fiscal 2006 to the end of the second quarter of
fiscal 2007.
General and Administrative. General and administrative expenses include the costs of our finance,
human resources, legal, information systems and administrative departments. General and
administrative expenses increased 46% from $13.0 million in the second quarter of fiscal 2006 to
$19.0 million in the second quarter of fiscal 2007, and increased as a percentage of revenue from
12% to 16%. General and administrative expenses increased 30% from $26.2 million in the first six
months of fiscal 2006 to $34.1 million in the first six months of fiscal 2007, and increased as a
percentage of revenue from 12% to 14%. The dollar increase was primarily due to a write-down
associated with a portion of the implementation of a new ERP system of $2.4 million in the second
quarter of fiscal 2007, payments made to compensation committee members for cancelled options of
$1.3 million, and professional services fees associated with the investigation and shareholder
derivative lawsuits related to our historical stock option grant practices of $0.8 million in the
second quarter of fiscal 2007 and $2.4 million in the first six months of fiscal 2007. The
write-down was necessitated by the conclusion that it was not advisable to proceed further with the
implementation of the third-party application. Our administrative headcount decreased 6% from the
end of the second quarter of fiscal 2006 to the end of the second quarter of fiscal 2007.
Amortization of Other Acquired Intangibles. Amortization of other acquired intangibles primarily
represents the amortization of value assigned to non-technology-related intangible assets obtained
in business combinations. Amortization of other acquired intangibles decreased slightly from $2.0
million in the second quarter of fiscal 2006
16
to $1.9 million in the second quarter of fiscal 2007. Amortization of other acquired intangibles
increased from $3.4 million in the first six months of fiscal 2006 to $3.9 million in the first six
months of fiscal 2007. The increase was due to amortization expense associated with the
acquisitions of NEON and Actional in the first quarter of fiscal 2006.
Acquisition-Related Expenses. Acquisition-related expenses for the second quarter of fiscal 2006
include $0.3 million of expenses for retention bonuses to Apama and EasyAsk employees who joined us
in fiscal 2005. Acquisition-related expenses for the first six months of fiscal 2006 totaled $1.8
million and include $0.9 million of expenses for retention bonuses to Apama and EasyAsk employees
who joined us in fiscal 2005 and $0.9 million of in-process research and development from the
acquisition of NEON, which was expensed when the acquisition was consummated because the
technological feasibility of several products under development at the time of the acquisition had
not been achieved and no alternate future uses had been established. Research and development
costs to bring the acquired products to technological feasibility are not expected to have a
material impact on our future results of operations or cash flows. The value of in-process
research and development was determined based on an appraisal from an independent third party.
Income From Operations. Income from operations increased 3% from $11.0 million in the second
quarter of fiscal 2006 to $11.3 million in the second quarter of fiscal 2007 and decreased as a
percentage of total revenue from 10% in the second quarter of fiscal 2006 to 9% in the second
quarter of fiscal 2007. Income from operations increased 23% from $19.3 million in the first six
months of fiscal 2006 to $23.6 million in the first six months of fiscal 2007 and increased as a
percentage of total revenue from 9% in the first six months of fiscal 2006 to 10% in the first six
months of fiscal 2007.
Income from operations increased from $30.5 million in the second quarter of fiscal 2006 to
$32.7 million in the second quarter of fiscal 2007 in our OpenEdge segment, which primarily
includes OED and the EasyAsk Division. Income from operations in the same segment increased from
$58.2 million in the first six months of fiscal 2006 to $64.0 million in the first six months of
fiscal 2007. Losses from operations decreased from $8.3 million in the second quarter of fiscal
2006 to $6.0 million in the second quarter of fiscal 2007 in our Enterprise Infrastructure segment.
Losses from operations in the same segment decreased from $15.1 million in the first six months of
fiscal 2006 to $12.7 million in the first six months of fiscal 2007. Income from operations
increased from a loss of $0.9 million in the second quarter of fiscal 2006 to income of $2.1
million in the second quarter of fiscal 2007 in our DataDirect segment. Income from operations in
the same segment increased from a loss of $0.1 million in the first six months of fiscal 2006 to
income of $3.5 million in the first six months of fiscal 2007. See Note 9 to the accompanying
condensed consolidated financial statements for a reconciliation of income from operations for each
segment to consolidated income from operations.
Other Income. Other income increased 213% from $0.5 million in the second quarter of fiscal 2006
to $1.6 million in the second quarter of fiscal 2007. Other income increased 123% from $1.2
million in the first six months of fiscal 2006 to $2.7 million in the first six months of fiscal
2007. The increase in each period was primarily due to an increase in interest income, resulting
from slightly higher interest rates and higher average cash and short-term investment balances, and
lower foreign exchange losses.
Provision for Income Taxes. Our effective tax rate was 35% in the first six months of fiscal 2007
as compared to 34% in the first six months of fiscal 2006. The increase in our effective tax rate
was due to the loss of the ETI benefit, which was phased out as of December 31, 2006 (approximately
3%), partially offset by research and development credits. We estimate that our effective tax rate
will be approximately 35% for all of fiscal 2007.
Liquidity and Capital Resources
At the end of the second quarter of fiscal 2007, our cash and short-term investments totaled $270.8
million. The increase of $29.5 million since the end of fiscal 2006 resulted primarily from cash
generated from operations, partially offset by capital expenditures.
We generated $39.0 million in cash from operations in the first six months of fiscal 2007 as
compared to $32.6 million in the first six months of fiscal 2006. The increase in cash generated
from operations in the second quarter
17
of fiscal 2007 over the second quarter of fiscal 2006 was primarily due to increased profitability
and a lower reduction from working capital uses.
A summary of our cash flows from operations for the first six months of fiscal years 2007 and 2006
is as follows:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
Six Months Ended May 31, |
| |
|
2007 |
|
2006 |
| |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,129 |
|
|
$ |
13,627 |
|
Depreciation, amortization and other noncash charges |
|
|
28,642 |
|
|
|
23,951 |
|
Tax benefit from stock plans |
|
|
230 |
|
|
|
974 |
|
Changes in operating assets and liabilities |
|
|
(6,983 |
) |
|
|
(5,966 |
) |
| |
Total |
|
$ |
39,018 |
|
|
$ |
32,586 |
|
| |
Accounts receivable increased by $1.7 million from the end of fiscal 2006. Accounts receivable
days sales outstanding, or DSO, increased by 3 days to 64 days at the end of the second quarter of
fiscal 2007 as compared to 61 days at the end of fiscal 2006 and increased by 5 days from 59 days
at the end of the second quarter of fiscal 2006. We target a DSO range of 60 to 80 days.
We purchased property and equipment totaling $9.6 million in the first six months of fiscal 2007 as
compared to $9.2 million in the first six months of fiscal 2006. The purchases consisted primarily
of computer equipment and software and building and leasehold improvements. The increase primarily
related to costs associated with our ongoing ERP implementation.
In September 2006, our Board of Directors authorized, for the period from October 1, 2006 through
September 30, 2007, the purchase of up to 10,000,000 shares of our common stock, at such times that
we deem such purchases to be an effective use of cash. We purchased and retired approximately
705,000 shares of our common stock for $19.5 million in the first six months of fiscal 2007 as
compared to approximately 470,000 shares of our common stock for $12.7 million in the first six
months of fiscal 2006.
We received $17.4 million in the first six months of fiscal 2007 from the exercise of stock options
and the issuance of shares under our Employee Stock Purchase Plan as compared to $10.2 million in
the first six months of fiscal 2006.
We believe that existing cash balances together with funds generated from operations will be
sufficient to finance our operations and meet our foreseeable cash requirements (including planned
capital expenditures, lease commitments, debt payments, potential cash acquisitions and other
long-term obligations) through at least the next twelve months.
Revenue Backlog — Our aggregate revenue backlog at May 31, 2007 was approximately $167 million of
which $142 million was included on our balance sheet as deferred revenue, primarily related to
unexpired maintenance and support contracts. At May 31, 2007, the remaining amount of backlog of
approximately $25 million was composed of multi-year licensing arrangements of approximately $21
million and open software license orders received but not shipped of approximately $4 million. Our
backlog of orders not included on the balance sheet is not subject to our normal accounting
controls for information that is either reported in or derived from our basic financial statements.
Our aggregate revenue backlog at May 31, 2006 was approximately $154 million of which $131
million was included on our balance sheet as deferred revenue, primarily related to unexpired
maintenance and support contracts. At May 31, 2006, the remaining amount of backlog of
approximately $23 million was composed of multi-year licensing arrangements of approximately $17
million and open software license orders received but not shipped of approximately $6 million.
We typically fulfill most of our software license orders within 30 days of acceptance of a purchase
order. Assuming all other revenue recognition criteria have been met, we recognize software
license revenue upon shipment of the product, or if delivered electronically, when the customer has
the right to access the software. Because there are many elements governing when revenue is
recognized, including when orders are shipped, credit approval,
18
completion of internal control processes over revenue recognition and other factors, management has
some control in determining the period in which certain revenue is recognized. We frequently have
open software license orders at the end of the quarter which have not shipped or have otherwise not
met all the required criteria for revenue recognition. Although the amount of open software license
orders may vary at any time, we generally do not believe that the amount, if any, of such software
license orders at the end of a particular quarter is a reliable indicator of future performance.
In addition, there is no industry standard for the definition of backlog and there may be an
element of estimation in determining the amount. As such, direct comparisons with other companies
may be difficult or potentially misleading.
Guarantees and Indemnification Obligations
We include standard intellectual property indemnification provisions in our licensing agreements in
the ordinary course of business. Pursuant to our product license agreements, we will indemnify,
hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to our
products. Other agreements with our customers provide indemnification for claims relating to
property damage or personal injury resulting from the performance of services by us or our
subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such
indemnity agreements have been insignificant. Accordingly, the estimated fair value of these
indemnification provisions is immaterial.
Legal and Other Regulatory Matters
On June 23, 2006, we received written notice that the Enforcement Staff in the Boston,
Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices
during the period December 1, 1995 through November 30, 2002. On December 19, 2006, the SEC
informed us that it had issued a formal order of investigation into our option-granting practices
during the period December 1, 1995 through the present. We are unable to predict with certainty
what consequences may arise from the SEC investigation. We have already incurred, and expect to
continue to incur, significant legal expenses arising from the investigation. The investigation
could also divert the attention of our management and harm our business. If the SEC institutes
legal action, we could face significant fines and penalties and be required to take remedial
actions determined by the SEC or a court. Although we have filed certain restated financial
statements that we believe correct the accounting errors arising from our past option-granting
practices, the filing of those financial statements did not resolve the pending SEC inquiry. The
SEC has not indicated to us whether it has reviewed our restated financial statements, and any SEC
review could lead to further restatements or other modifications of our financial statements.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively
on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL
was filed in the United States District Court for the District of Massachusetts by a party
identifying itself as one of our shareholders purporting to act on our behalf against our directors
and certain of our present and former officers. We are also named as a nominal defendant. The
complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust
enrichment arising from the allegedly improper backdating of certain stock option grants. The
complaint seeks monetary damages, restitution, disgorgement, rescission of stock options, punitive
damages and other relief. On January 23, 2007, we moved to dismiss the Arkansas Teacher Retirement
System complaint on the grounds that the Plaintiff failed to make a proper pre-filing demand upon
our Board of Directors. This motion is pending.
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges breaches of fiduciary duty, aiding
and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper
backdating of certain stock option grants. The complaint seeks monetary damages and disgorgement,
among other forms of relief. A Special Litigation Committee formed by our board of directors to
investigate and determine the Company’s response to the complaint.
19
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to incur legal expenses arising from these matters, which
may be significant, including the advancement of legal expenses to our directors and officers. We
have certain indemnification obligations to our directors and officers, and the outcome of
derivative or any other litigation may require that we indemnify some or all of our directors and
officers for expenses they may incur in defending the litigation and other losses.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these other claims cannot be
predicted with certainty, management does not believe that the outcome of any of these other legal
matters will have a material adverse effect on our consolidated financial position or results of
operations.
Off-Balance Sheet Arrangements
Our only significant off-balance sheet commitments relate to operating lease obligations. We have
no “off-balance sheet arrangements” within the meaning of Item 303(a)(4) of Regulation S-K. Future
annual minimum rental lease payments are detailed in Note 10 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended November 30, 2006.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with Statement 109 and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption
permitted. We will adopt FIN 48 on December 1, 2007. We are currently evaluating the impact that
the adoption of FIN 48 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating whether adoption of SFAS 157 will
have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides a “Fair Value Option” under which a company
may irrevocably elect fair value as the initial and subsequent measurement attribute for certain
financial assets and liabilities. This Fair Value Option will be available on a
contract-by-contract basis with changes in fair value recognized in earnings as those changes
occur. The effective date for SFAS 159 is the beginning of each reporting entity’s first fiscal
year end that begins after November 15, 2007. SFAS 159 also allows an entity to early adopt the
statement as of the beginning of an entity’s fiscal year that begins after the issuance of SFAS
159, provided that the entity also adopts the requirement of SFAS No. 157. We are currently
evaluating whether adoption of SFAS 159 will have an impact on our consolidated financial
statements.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including changes in interest rates affecting the
return on our investments and foreign currency fluctuations. We have established policies and
procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange
rates.
Exposure to market risk for changes in interest rates relates to our investment portfolio. We have
not used derivative financial instruments in our investment portfolio. We seek to place our
investments with high-quality issuers and have policies limiting, among other things, the amount of
credit exposure to any one issuer. We seek to limit default risk by purchasing only
investment-grade securities. Our investments have an average remaining maturity of less than two
years and are primarily fixed-rate instruments. In addition, we have classified all of our debt
securities as available for sale. This classification reduces the income statement exposure to
interest rate risk if such investments are held until their maturity date. Based on a hypothetical
10% adverse movement in interest rates, the potential losses in future earnings, fair value of
risk-sensitive instruments and cash flows are immaterial.
We enter 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. We have not entered into foreign exchange option and forward contracts for speculative or
trading purposes. We recognize market value increases and decreases on the foreign exchange option
and forward contracts in income each period. We operate in certain countries where there are
limited forward currency exchange markets and thus we have unhedged transaction exposures in these
currencies. There were approximately $111.1 million of outstanding foreign exchange option
contracts at May 31, 2007. Major U.S. multinational banks are counterparties to the option
contracts. We also hedge net intercompany balances. We generally do not hedge the net assets of
our international subsidiaries. The foreign exchange exposure from a 10% movement of currency
exchange rates would have a material impact on our revenue and net income. Based on a hypothetical
10% adverse movement in all foreign currency exchange rates, our revenue would be adversely
affected by approximately 6% and our net income would be adversely affected by approximately 20%
(excluding any offsetting positive impact from our ongoing hedging programs), although the actual
effects may differ materially from the hypothetical analysis.
The table below details outstanding forward contracts, which mature in ninety days or less, at May
31, 2007 where the notional amount is determined using contract exchange rates:
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Exchange |
|
|
Exchange |
|
|
Notional |
|
| |
|
Foreign Currency |
|
|
U.S. Dollars |
|
|
Weighted |
|
| |
|
For U.S. Dollars |
|
|
For Foreign Currency |
|
|
Average |
|
| Functional Currency: |
|
(Notional Amount) |
|
|
(Notional Amount) |
|
|
Exchange Rate* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar |
|
|
— |
|
|
$ |
3,558 |
|
|
|
1.22 |
|
Brazilian real |
|
$ |
1, 022 |
|
|
|
— |
|
|
|
1.96 |
|
Euro |
|
|
— |
|
|
|
37,053 |
|
|
|
0.74 |
|
Japanese yen |
|
|
3,718 |
|
|
|
— |
|
|
|
121.04 |
|
South African rand |
|
|
432 |
|
|
|
— |
|
|
|
7.18 |
|
U.K. pound |
|
|
— |
|
|
|
27,708 |
|
|
|
0.51 |
|
| |
|
|
$ |
5,172 |
|
|
$ |
68,319 |
|
|
|
|
|
| |
|
|
|
| * |
|
expressed as local currency unit per U.S. dollar |
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our management, including the chief
executive officer and the chief financial officer, carried out an evaluation of the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report.
Based on this evaluation, our chief executive officer and chief financial officer concluded that
our disclosure controls and procedures were effective to provide a reasonable level of assurance
that the information required to be disclosed in the reports filed or submitted by us under the
Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the
requisite time periods.
21
(b) Changes in internal control over financial reporting. No changes in our internal control over
financial reporting occurred during the quarter ended May 31, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 23, 2006, we received written notice that the Enforcement Staff in the Boston,
Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices
during the period December 1, 1995 through November 30, 2002. On December 19, 2006, the SEC
informed us that it had issued a formal order of investigation into our option-granting practices
during the period December 1, 1995 through the present. We are unable to predict with certainty
what consequences may arise from the SEC investigation. We have already incurred, and expect to
continue to incur, significant legal expenses arising from the investigation. The investigation
could also divert the attention of our management and harm our business. If the SEC institutes
legal action, we could face significant fines and penalties and be required to take remedial
actions determined by the SEC or a court. Although we have filed certain restated financial
statements that we believe correct the accounting errors arising from our past option-granting
practices, the filing of those financial statements did not resolve the pending SEC inquiry. The
SEC has not indicated to us whether it has reviewed our restated financial statements, and any SEC
review could lead to further restatements or other modifications of our financial statements.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively
on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL
was filed in the United States District Court for the District of Massachusetts by a party
identifying itself as one of our shareholders purporting to act on our behalf against our directors
and certain of our present and former officers. We are also named as a nominal defendant. The
complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust
enrichment arising from the allegedly improper backdating of certain stock option grants. The
complaint seeks monetary damages, restitution, disgorgement, rescission of stock options, punitive
damages and other relief. On January 23, 2007, we moved to dismiss the Arkansas Teacher Retirement
System complaint on the grounds that the Plaintiff failed to make a proper pre-filing demand upon
our Board of Directors. This motion is pending.
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges breaches of fiduciary duty, aiding
and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper
backdating of certain stock option grants. The complaint seeks monetary damages and disgorgement,
among other forms of relief. A Special Litigation Committee formed by our board of directors to
investigate and determine the Company’s response to the complaint.
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to incur legal expenses arising from these matters, which
may be significant, including the advancement of legal expenses to our directors and officers. We
have certain indemnification obligations to our directors and officers, and the outcome of
derivative or any other litigation may require that we indemnify some or all of our directors and
officers for expenses they may incur in defending the litigation and other losses.
22
We are subject to various other legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these other claims cannot be
predicted with certainty, management does not believe that the outcome of any of these other legal
matters will have a material adverse effect on our consolidated financial position or results of
operations.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves certain risks and uncertainties, some of
which are beyond our control. You should carefully review and consider the information regarding
certain factors that could materially affect our business, financial condition or future results
set forth under Part II, Item 1A (Risk Factors) in our Quarterly Report on Form 10Q for the period
ending February 28, 2007. No material changes have occurred during the three months ended May 31,
2007 to the risk factors previously presented, although we may disclose changes to such factors or
disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.
(c) Stock Repurchases
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
| |
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Shares That May |
|
| |
|
Total Number |
|
|
Average |
|
|
As Part of Publicly |
|
|
Yet Be Purchased |
|
| |
|
Of Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Under the Plans or |
|
| Period: |
|
Purchased (1) |
|
|
Per Share |
|
|
Or Programs |
|
|
Programs (2) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 1, 2007 – Mar. 31, 2007 |
|
|
10 |
|
|
$ |
27.82 |
|
|
|
10 |
|
|
|
9,295 |
|
Apr. 1, 2007 – Apr. 30, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,295 |
|
May 1, 2007 – May 31, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,295 |
|
| |
|
|
Total |
|
|
10 |
|
|
$ |
27.82 |
|
|
|
10 |
|
|
|
9,295 |
|
| |
|
|
|
| (1) |
|
All shares were purchased in open market transactions. |
| |
| (2) |
|
In September 2006, the Board of Directors authorized, for the period from October 1, 2006
through September 30, 2007, the purchase of up to 10,000,000 shares of our common stock. |
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of our shareholders held on April 26, 2007, the shareholders voted on
the items described below:
| • |
|
To fix the number of directors constituting the full board at six: |
| |
|
|
|
|
|
|
|
|
| For |
|
Against |
|
|
Abstain |
|
|
|
|
|
|
|
|
|
|
36,939,090 |
|
|
298,670 |
|
|
|
153,506 |
|
| • |
|
To elect the following six directors: Joseph W. Alsop, Barry N. Bycoff, Roger J. Heinen,
Jr., Charles F. Kane, Michael L. Mark, and Scott A. McGregor: |
| |
|
|
|
|
|
|
|
|
| Nominee |
|
For |
|
|
Withhold Authority |
|
|
|
|
|
|
|
|
|
|
Joseph W. Alsop |
|
|
33,011,789 |
|
|
|
4,379,477 |
|
Barry N. Bycoff |
|
|
36,681,671 |
|
|
|
709,595 |
|
Roger J. Heinen, Jr. |
|
|
31,258,289 |
|
|
|
6,132,977 |
|
23
| |
|
|
|
|
|
|
|
|
| Nominee |
|
For |
|
|
Withhold Authority |
|
|
|
|
|
|
|
|
|
|
Charles F. Kane |
|
|
34,745,236 |
|
|
|
2,646,030 |
|
Michael L. Mark |
|
|
32,785,368 |
|
|
|
4,605,898 |
|
Scott A. McGregor |
|
|
31,500,966 |
|
|
|
5,890,300 |
|
| • |
|
To act upon a proposal to amend the Company’s 1991 Employee Stock Purchase Plan, to
increase the maximum number of shares that may be issued under such plan from 3,200,000 shares
to 4,000,000 shares: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For |
|
Against |
|
|
Abstain |
|
|
Broker Non-Vote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,868,592 |
|
|
1,826,882 |
|
|
|
39,010 |
|
|
|
4,656,782 |
|
| • |
|
To act upon a proposal to amend and restate the Company’s 1997 Stock Incentive Plan: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For |
|
Against |
|
|
Abstain |
|
|
Broker Non-Vote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,337,120 |
|
|
3,354,272 |
|
|
|
43,092 |
|
|
|
4,656,782 |
|
| • |
|
To act upon a shareholder proposal related to the Company’s executive compensation plan: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For |
|
Against |
|
|
Abstain |
|
|
Broker Non-Vote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,686,920 |
|
|
17,975,685 |
|
|
|
71,879 |
|
|
|
4,656,782 |
|
24
Item 6. Exhibits
The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
10.1
|
|
Progress Software Corporation 1991 Employee Stock Purchase Plan, as amended and
restated (incorporated by reference to Annex A to our Proxy Statement filed with the SEC on
March 27, 2007) |
|
|
|
10.2
|
|
Progress Software Corporation 1997 Stock Incentive Plan, as amended and restated
(incorporated by reference to Annex B to our Proxy Statement filed with the SEC on March 27,
2007) |
|
|
|
10.3
|
|
Employee Retention and Motivation Agreement, dated April 27, 2007, with Gordon Van Huizen |
|
|
|
10.4
|
|
Progress Software Corporation Corporate Executive Bonus Plan |
|
|
|
10.5
|
|
Progress Software Corporation 2007 Fiscal Year Director Compensation Program |
|
|
|
10.6
|
|
Form of Deferred Stock Unit Agreement under the Progress Software Corporation 1997 Stock
Incentive Plan |
|
|
|
10.7
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the
Progress Software Corporation 1997 Stock Incentive Plan (Initial Grant) |
|
|
|
10.8
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the
Progress Software Corporation 1997 Stock Incentive Plan (Annual Grant) |
|
|
|
10.9
|
|
Letter Agreement, dated March 29, 2007, executed by Roger J. Heinen, Jr. regarding
Cancellation of Stock Options |
|
|
|
10.10
|
|
Letter Agreement, dated March 23, 2007, executed by Scott A. McGregor regarding
Cancellation of Stock Options |
|
|
|
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – Joseph W. Alsop |
|
|
|
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – Norman R. Robertson |
|
|
|
32.1
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROGRESS SOFTWARE CORPORATION
(Registrant)
| |
|
|
|
|
| |
|
|
| Dated: July 10, 2007 |
/s/ Joseph W. Alsop
|
|
| |
Joseph W. Alsop |
|
| |
Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| Dated: July 10, 2007 |
/s/ Norman R. Robertson
|
|
| |
Norman R. Robertson |
|
| |
Senior Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial
Officer) |
|
| |
| |
|
|
| Dated: July 10, 2007 |
/s/ David H. Benton, Jr.
|
|
| |
David H. Benton, Jr. |
|
| |
Vice President and Corporate
Controller
(Principal Accounting Officer) |
|
| |
26