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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal Year Ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For The Transaction Period From To
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2746201
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
14 OAK PARK
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices)
TELEPHONE NUMBER: (617) 280-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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TITLE OF EACH CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 14, 1997, there were 12,438,536 shares outstanding of the
registrant's common stock, $.01 par value. As of that date, the aggregate market
value of voting stock held by non-affiliates of the registrant was approximately
$131,652,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 1997 are incorporated by reference into
Part III (Items 10, 11, 12 and 13).
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PART I
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involve risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, some of which are described in greater detail in Item 7 under the
heading "Factors That May Affect Future Results," include, but are not limited
to, the receipt and shipment of new orders, the timely release of enhancements
to the Company's products, which could be subject to software release delays,
the growth rates of certain market segments, the positioning of the Company's
products in those market segments, variations in the demand for customer service
and technical support, pricing pressures and the competitive environment in the
software industry, consumer use of the Internet, and the Company's ability to
penetrate international markets and manage its international operations.
Although the Company has sought to identify the most significant risks to its
business, the Company cannot predict whether, or to what extent, any of such
risks may be realized nor can there be any assurance that the Company has
identified all possible issues which the Company might face.
ITEM 1. BUSINESS
Progress Software Corporation ("PSC" or the "Company") provides products
and services that enable organizations throughout the world to rapidly and
cost-effectively develop, deploy and maintain computer software applications.
The Company develops, markets and supports cross-platform, database-independent
application development tools and a database management system. The Company's
principal product line, marketed as PROGRESS, consists of a fourth generation
language ("4GL")-based visual development environment, a transaction-oriented
Structured Query Language ("SQL") relational data base management system
("RDBMS") and capabilities that enable the deployment of applications across
hardware platforms, operating systems, networks and other database management
systems. The Company's WebSpeed product line enables developers to build and
deploy Internet Transaction Processing ("ITP") applications. The Company also
markets add-on application development tools for Microsoft's Visual Basic and
Visual J++ through its Crescent Division.
BUSINESS STRATEGY
The Company was founded in 1981 to develop and market application
development software. Its business strategy has been developed in response to
user needs for application development tools that enable the rapid development
and deployment of business-critical applications regardless of the computing
environment. In combination with WebSpeed, which was released in October 1996,
PROGRESS application development tools and database technology enable customers
to build and deploy applications across all three major computing
configurations: host-terminal, client/server and the Internet. The Company's
mission today is to deliver superior software products and services that empower
its partners and customers to dramatically improve their development and
deployment of quality applications worldwide. This mission encompasses the
following strategic points:
- Improved Developer Productivity. The Company's principal focus is
to offer products and support services which improve the
productivity of developers in creating and maintaining complex
applications.
- Portability for Developers and End-Users. The Company designs its
products to operate across a broad range of midrange systems,
workstations and PCs. The Company believes that application
developers need the flexibility to deploy their applications across
hardware, operating system
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platforms, databases and user interfaces different from those on
which their applications are originally developed. In addition,
end-users need the flexibility to continue to use applications with
minimal re-programming, even as they modify or upgrade their
computing environments.
- Application Deployment Flexibility. The Company's objective is to
assist developers in exploiting the continuing trend towards
Internet/intranet client/server computing paradigms. The Company's
products allow deployment across all three major computing
configurations: host-terminal, client/server and Internet. The
PROGRESS AppServer provides application partitioning or "n-tier"
computing support in order to improve application performance. The
Company's products operate across heterogeneous networks using a
variety of communication protocols, and PROGRESS applications can
access data stored in both PROGRESS and non-PROGRESS databases.
- Balanced Distribution. PSC chose at an early stage to implement
both direct and indirect channels of distribution to broaden its
geographic reach, accelerate its sales expansion and leverage its
sales force. The Company sells to value-added resellers (which the
Company refers to as Application Partners) and to the Information
Systems ("IS") departments of corporations and government agencies.
Application Partners develop end-user applications, and both IS
customers and Application Partners generally license additional
deployment copies of the Company's products to run applications. To
minimize channel conflict, PSC neither develops applications
software for distribution nor plans to do so in the future.
- Recurring Revenue. The Company's distribution and pricing
strategies are intended to generate recurring revenue. The sale of a
development system can lead to follow-on sales as customers license
additional copies of PROGRESS or copies of WebSpeed to distribute
successful applications, or as end-users deploy such applications or
upgrade their systems.
- Worldwide Market. PSC has emphasized international sales through
its subsidiaries and a network of independent distributors.
Financial information relating to business segment and international
operations is detailed in Note 10 of Notes to Consolidated Financial
Statements in Item 8 of this Annual Report.
- Customer Service. PSC has made a strategic commitment to customer
service. The Company believes that rapid changes in technology
require not only continuous product enhancement but also a strong
customer service effort to encourage product usage and maintain
customer satisfaction. The Company provides a variety of technical
support and service options under its annual maintenance agreements,
including an option for 24 hour, 7 day a week service. The Company
also offers an extensive listing of training courses and on-site
consulting services.
- "Buy, Build, Both". A major challenge for the software industry is
to unite the economical price, reliability and immediate benefit of
packaged software applications with the tailored fit of custom
solutions. Purchasing a packaged application provides standard
functionality that can be used quickly and economically with little
or no development time. Building an in-house application results in
a solution that offers a competitive business advantage, but
typically involves long development cycles. By combining both
packaged and customized solutions, IS departments can deliver
flexible, business-driven applications more quickly and
productively. The Company's products, in conjunction with solutions
from its Application Partners, are designed to give IS departments
that flexibility and competitive advantage.
PROGRESS PRODUCT LINE
The Company's core product line consists of the PROGRESS Application
Development Environment ("ADE"), the PROGRESS RDBMS, the PROGRESS AppServer and
the PROGRESS DataServer Architecture. Applications developed in PROGRESS are
reconfigurable between character-based and graphical interfaces, as well as
between client/server and host-based computing systems. PROGRESS
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provides a high degree of portability across a wide range of computing
environments while affording developers the flexibility to build applications on
a range of database management products.
Customers license bundled packages or stand-alone products. The Company's
pricing structure is generally based on the number of concurrent users,
regardless of the platform and operating system. Prices for ProVISION, the
Company's principal ADE package, range from $2,600 to $3,600 per user depending
on the total number of users. Prices for similar user counts for the PROGRESS
RDBMS and for DataServers enabling access to non-PROGRESS data managers range
from $155 to $1,200 per user.
PROGRESS ADE
The PROGRESS ADE is a programming environment that provides developers with
a "visual road map" for developing and deploying complex enterprise applications
that are scaleable, portable and re-configurable across heterogeneous
client/server and host-based environments. Within the PROGRESS ADE is a set of
integrated, graphical development tools that support a range of development
approaches, including: structured, procedural, event-driven and object
approaches. High-performance applications can be visually assembled using
reusable application components known as PROGRESS SmartObjects.
PROGRESS SmartObjects are a collection of reusable business components that
enable developers to fabricate and assemble application components into fully
functional applications. Working within a graphical programming environment,
developers can build scaleable and portable enterprise-class applications by
using the PROGRESS SmartObjects templates included in the PROGRESS starter set
and/or by customizing their own reusable code. The PROGRESS starter set includes
the SmartView, SmartBrowse, SmartQuery, SmartFrame, Smart Window, SmartPanel,
Smart Dialog and SmartFolder templates representing the most common visual,
interactive and data management functions of complex transaction-based
client/server applications.
The PROGRESS ADE is based on the PROGRESS 4GL and an extensive Data
Dictionary, which enables developers to address mission-critical application
requirements. In addition, the PROGRESS ADE gives developers the flexibility to
control application interfaces, processing logic and data management components
required to complete mission-critical systems.
- User Interface Builder -- The PROGRESS User Interface Builder ("UIB") is
the central tool for rapidly creating and maintaining complex
applications. The UIB provides point-and-click functionality, a fully
customizable object palette, automatic linking of components, and
complete control of application interaction with end users. Within the
PROGRESS UIB, developers are able to create and customize their own
SmartObjects.
- PROGRESS 4GL -- The PROGRESS 4GL is a high-level application development
language that runs throughout the entire toolset in the PROGRESS ADE. It
is an efficient and robust development language for prototyping,
developing and modifying solutions.
- Data Dictionary -- The PROGRESS Data Dictionary is a central repository
for all information (regardless of where it is stored) that describes the
application data, including database definitions, application defaults
and business rules. When building, updating and distributing new
application components, the Data Dictionary defaults and definition
inheritances are automatically and transparently applied.
- Integration of third-party development tools -- The PROGRESS ADE promotes
the integration of value-added solutions from third-party tool providers
who offer capabilities that complement, enhance and extend PROGRESS as
part of an overall application development strategy. Products from these
tool vendors range from application design, analysis, modeling,
repository and testing systems to prototyping, methodology, process
management and project management.
- On-Line Help -- The PROGRESS On-Line Help system allows developers to
build their own Help interface using popular word processors or desktop
publishing systems to document their system, and run it without
modification across all PROGRESS-supported environments.
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- Procedure Editor -- The Procedure Editor is a full-function code editing
tool that allows developers to write, edit, compile and run PROGRESS 4GL
application components. The Procedure Editor provides a full range of
editing features including cut-and-paste and search-and-replace, which
allow developers to make large-scale changes to several different
programs.
- Application Debugger -- The Application Debugger is an interactive
utility that allows developers to control and monitor the execution of
PROGRESS procedures. The Debugger enables developers to find and fix data
and logic errors, modify any procedure code, and display or update
information about the procedure running without having to modify
procedure code.
- Roundtable Total Software Management System -- Roundtable, licensed from
StarBase Corporation, is a software configuration management tool that
promotes team development for large development projects. Roundtable
offers automated repository features, version control, check in/out,
impact analysis, schema versioning and project security. Roundtable is
suitable for reducing large-scale development costs associated with
engineering and maintaining GUI or character applications in a team
environment.
- ReportBuilder -- ReportBuilder is a visual report-writing tool for
business analysts and application developers. ReportBuilder gives
developers the flexibility to create report formats that emphasize the
importance of the data and enhance the visual appeal of the report.
- Translation Manager -- Translation Manager is a GUI tool set for creating
and delivering multilingual versions of a PROGRESS application without
having to modify the original source code. This tool enables a project
manager to define and provide consistent business context translations of
the application interface into multiple languages. The visual translator
provides the translator with a visual context for translating the
user-interface components of the application.
PROGRESS RDBMS
PROGRESS RDBMS is a fully-featured relational SQL-compliant database
management system that runs on most UNIX, PC and PC LAN operating systems. The
PROGRESS RDBMS offers the advantage of scalability (the ability to efficiently
utilize additional computing resources) through the use of a multi-threaded,
multiple server architecture that runs efficiently on small and large
single-processor computers, multiple-processor computers and distributed
networks of server and client computers. The PROGRESS RDBMS permits
simultaneous, distributed multi-user access by providing flexible record-level
locking control, query optimization strategies, two-phase database commits,
on-line backup, automatic crash recovery and other features intended to protect
data integrity. These features make the PROGRESS RDBMS well-suited for
high-volume transaction processing applications. The PROGRESS RDBMS is designed
to be easy to install, maintain and administer. The PROGRESS database products
include Personal Database for stand alone users, the Workgroup Database Server
for workgroups or departments of up to 49 concurrent users, and the Enterprise
DatabaseServer for large numbers of users and symmetric multi-processing (SMP)
environments.
PROGRESS APPSERVER
The PROGRESS AppServer, which became available in November 1996, delivers
application partitioning or "n-tier" computing support to provide improved
application performance in networked environments. In traditional client/server
applications, the user interface and business logic execute on the client
machine. As business logic is executed, database records are accessed on the
server and individually sent over the network back to the client for processing.
The network can quickly become a bottleneck when processing complex queries
involving the transmission of large record sets, or as networked users are
added. The PROGRESS AppServer is intended to deliver a range of benefits in the
deployment of distributed applications. Such applications execute faster with
the PROGRESS AppServer, as this logic is typically deployed and executed on a
higher powered UNIX or Windows NT server. Network traffic between client and
server is reduced as only result sets from server-based processing are returned
to the client. PROGRESS AppServers can be re-used unmodified across any number
of servers and can connect other PROGRESS AppServers in a peer-to-
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peer relationship. PROGRESS AppServers introduce a level of separation between
users and the database for enhanced security and data integrity.
PROGRESS DATASERVERS
PROGRESS-based applications have access to a wide range of data sources
through the PROGRESS DataServer Architecture. The DataServer Architecture
consists of a set of data integration services and interfaces that allow
developers to use the PROGRESS ADE tools to write database-independent
applications. The architecture is designed to make any supported database appear
to be completely integrated into the PROGRESS ADE. This allows PROGRESS
applications to efficiently read from and write to a variety of databases and
file systems, including the PROGRESS RDBMS. Whether the data manager is
relational, indexed flat-file system or object-oriented, the DataServer
generates native calls to the data manager.
PROGRESS DataServers provide for database independence, data integration
and data migration. The Company currently offers DataServers for the following
database and file managers: Oracle, RMS, Microsoft SQL Server, C-ISAM, DB2/400
and ODBC.
PROGRESS/400
PROGRESS/400 is a version of the Company's application development
environment for the IBM AS/400 product line. PROGRESS/400 is an integrated
client/server solution for commercial transaction processing applications on the
AS/400. The PROGRESS/400 DataServer supports native access to the DB2/400
database and optimized communication to local and remote clients using LAN
FastPath, a communications protocol jointly developed by the Company and IBM
that is designed specifically for client/ server computing on the AS/400.
WEBSPEED PRODUCT LINE
In October 1996, the Company introduced WebSpeed, a comprehensive
environment for developing and deploying database-independent, high-volume
transaction processing applications over the Internet and corporate intranets.
WebSpeed is an open development and deployment environment that enables
organizations to build transaction processing applications for their
environments. WebSpeed enables companies to create a direct link between
customers and suppliers, resulting in more efficient and timely access to
corporate databases via transaction-intensive applications like order entry,
customer service, claims processing and inventory control. The initial products
under the WebSpeed product line are WebSpeed Workshop and WebSpeed Transaction
Server.
WEBSPEED WORKSHOP
WebSpeed Workshop delivers a powerful toolset for building WebSpeed's
scalable transaction-based applications. Featuring an open architecture, it
supports most popular Web authoring tools for building an application's user
interface, including HoTMetaLPro, Microsoft FrontPage and Java. The Workshop's
4GL is then used to create the business logic and data access portions of the
application. WebSpeed Workshop tools include:
- WorkBench: WorkBench is WebSpeed's visual tool for binding data and
building application logic. WorkBench is used to create logic-based Web
objects that process input from and output to data-driven Web pages.
- 4GL Scripting Language: 4GL Scripting language allows developers to
prototype, develop and maintain application logic with this high-level
language.
- TagExtract: TagExtract provides a utility that accelerates
HTML-to-WebSpeed data mapping. TagExtract also allows developers to
quickly adopt new HTML specifications.
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WEBSPEED TRANSACTION SERVER
The WebSpeed Transaction Server delivers a robust, transaction-processing
environment over the Internet and on corporate intranets. The Transaction Server
supports access to and updating of multiple databases, while also protecting the
data integrity of transactions -- even if Internet connections are interrupted.
The WebSpeed Transaction Server lets developers integrate leading Web servers,
security solutions, and databases. The WebSpeed Transaction Server includes:
- Messenger: Messenger is compatible with any CGI-compliant Web server.
The Messenger speeds up transaction processing by transferring data
directly between the Web server and a Transaction Agent during a Web
transaction. This maximizes data throughput and overall performance.
- Transaction Broker: Transaction Broker is the component that manages a
pool of Transaction Agents. The Transaction Broker maintains status
information for efficient dispatch of Web requests. It eliminates the
overhead of starting a new agent for each user request and increases the
agent pool size as required.
- Transaction Agent: The Transaction Agent executes Web objects, performs
database transactions, and dynamically merges data into HTML format to
deliver real-time data access over the Web. Transaction Agents provide
full support for multipage Web transactions by executing stateless,
state-aware and state-persistent Web objects.
CRESCENT DIVISION PRODUCTS
The Crescent Division of the Company provides advanced client/server tools
and components to Visual Basic and Visual J++ development teams. The Crescent
Division's strategy in the workgroup/departmental tools market complements
Visual Basic and Visual J++ by offering an integrated suite of add-on tools and
components that enable professional developers to make database, client/server
business application development easy and intuitive. The Crescent Division
offers the following major products.
QUICKPAK PROFESSIONAL
QuickPak Professional is a comprehensive toolset of custom controls,
subroutines, utilities and sample code for developing Visual Basic applications.
QUICKPAK VISUAL BASIC/J++
QuickPak Visual Basic/J++ utilizes the power of the latest advances in
ActiveX component techniques to improve user productivity. QuickPak Visual
Basic/J++ consists of libraries of ActiveX components designed to take the work
out of the most frequently demanded programming tasks. These libraries contain
hundreds of commonly used functions, including string and array handling,
keyboard routines and system configuration. QuickPak Visual Basic/J++ also
includes new routines developed specifically for the Internet, such as Internet
Information Server and Internet Core Messaging Protocol.
POWERPAK PROFESSIONAL EDITION
PowerPak Professional Edition combines various Visual Basic tools including
QuickPak Professional and tools licensed from third parties. PowerPak
Professional Edition also includes technical support.
CRESCENT INTERNET TOOLPAK
Internet ToolPak 3.0 provides event-driven, Internet-enabled tools to meet
the needs of Visual Basic developers building applications in both 16 and 32-bit
environments. The Crescent Internet ToolPak suite, including a set of sixteen
ActiveX controls, a Telnet form and an Internet mail "Wizard," manages Visual
Basic developers' Internet protocol needs and enables them to create
sophisticated Internet-enabled applications with a minimum of coding.
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PRODUCT DEVELOPMENT
To date, most of the Company's products have been developed by its internal
product development staff. Although the Company believes that the features and
performance of its products are generally competitive with those of other
available application development tools, and that none of its current product
versions is approaching obsolescence, the Company believes that continuing
enhancements of its products will be required to enable the Company to maintain
its competitive position. The primary focus of the Company's current product
development efforts is to enhance its core products, including WebSpeed, the
PROGRESS ADE and the PROGRESS RDBMS, with new functionality, improved
performance and greater ease of use, including additional component-based
capabilities. The Company's Crescent Division is also in the process of
developing additional application development tools, add-on products and product
suites for the Visual Basic and Visual J++ market.
The Company is currently working on a number of product enhancements that
are intended to help organizations meet the future of application development.
Future PROGRESS products will allow the integration of PROGRESS and non-PROGRESS
components, further enhancing the application component environment and
fostering an organization's ability to select and assemble best-of-breed
components. In the client/server area, the Company plans to continue to deliver
greater productivity gains for developers, including electronic software
distribution that permits version changes to be automatically distributed to
multiple users.
The Company's product development staff is planning to develop enhancements
to WebSpeed and other potential Internet products with features that will
provide greater ease of use, improved performance, additional database support
and enhanced security integration. The Company is also seeking to strengthen its
product mix through strategic alliances with other application development tools
vendors and similar companies.
The Company's product development staff consisted of 196 employees as of
November 30, 1996. Product development is primarily conducted at the Company's
offices in Bedford, Massachusetts and Nashua, New Hampshire. Limited work
related to product localization may also be performed at the Company's
international subsidiaries.
In fiscal years 1996, 1995 and 1994, the Company spent $26,413,000,
$26,872,000 and $22,185,000, respectively, on product development, of which
$2,462,000, $2,697,000 and $1,982,000, respectively, were capitalized in those
years. The Company believes that the experience and depth of its product
development staff are important factors in the Company's success.
CUSTOMERS
The Company markets its products worldwide to Application Partners and IS
departments of corporations and government agencies. No single customer has
accounted for more than 10% of the Company's total revenue in any of its last
three fiscal years.
Application Partners. PSC's Application Partners provide the Company with
broad market coverage, offer an extensive library of commercial applications and
are a source of follow-on revenue. PSC publishes Application Catalogs and
includes Application Partners in trade shows and other marketing programs. PSC
also has kept entry costs for Application Partners low (typically $3,000 to
$5,000) to encourage a wide variety of Application Partners to build
applications using PROGRESS or WebSpeed. An Application Partner typically takes
6 to 24 months to develop an application. Although many of the Company's
Application Partners have developed successful applications and have large
installed customer bases, others are engaged in earlier stages of product
development and marketing and may not contribute follow-on revenue to PSC for
some time, if at all.
However, if an Application Partner succeeds in marketing its applications,
the Company obtains follow-on revenue as the Application Partner licenses copies
of the Company's deployment products to permit its application to be installed
and used by customers.
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IS Departments. PSC licenses its products to IS departments of
corporations, government agencies and other organizations to build complex
applications. Large IS departments that purchase Application Partner
applications typically also purchase PROGRESS or WebSpeed development licenses
to supplement their internal application development. Like Application Partners,
IS customers may also license deployment products to install applications at
additional user sites.
SALES AND MARKETING
The Company sells PROGRESS, WebSpeed and related products through its
direct sales force in the United States, Canada and 20 other countries and
through independent distributors in over 30 countries outside North America. The
sales organization is organized into the following regions: North America;
Europe, Middle East and Africa ("EMEA'); Asia Pacific; Latin America; and Japan.
At November 30, 1996, the Company employed 133 field sales personnel in 45 sales
offices throughout the world. The Company believes that its network of
subsidiaries allows it to maintain direct contact with and better support its
customers and to control its international distribution. The Company's
international subsidiaries provide focused local marketing efforts and are able
to directly respond to changes in local conditions. The Crescent Division sells
its products through a telephone salesforce and Visual Basic catalogs.
Additionally, the Crescent Division provides an on-line catalog, with purchasing
and download capabilities, on the Company's Website utilizing the Internet.
Sales personnel are responsible for developing new Application Partner and
IS accounts, assisting Application Partners in closing major accounts and
servicing existing customers. The Company actively seeks to avoid conflict
between the sales efforts of its Application Partners and the Company's own
sales efforts.
PSC uses its telephone sales and sales administration groups to enhance its
direct sales efforts and to generate new business and follow-on business from
existing customers. These groups may provide evaluation copies to Application
Partners or IS organizations to help qualify them as prospective customers, and
may also sell additional development and deployment products to existing
customers.
The Company's marketing department conducts extensive marketing programs
designed to ensure a stream of market-ready products, raise general awareness of
PSC, generate leads for the PSC sales organization and promote the PROGRESS and
WebSpeed application development environments. These programs include public
relations, direct mail, participation in trade shows, advertising and production
of collateral literature. The Company introduced the Powered by PROGRESS
branding program in 1995 in order to raise awareness of the product and its
capability in the enterprise client/server environment. The Company sponsored
user conferences in the United States, Europe and Australia in 1996 and is
planning to hold a single worldwide user conference in the United States in
1997.
CUSTOMER SUPPORT
The Company's technical support staff provides telephone support to
application developers and end-users using a computerized call tracking and
problem reporting system. PSC also provides custom software development,
consulting services and training throughout the world. The Company's software
licenses generally are perpetual licenses. Customers may also purchase an annual
maintenance service entitling them to software updates, technical support and
technical bulletins. The annual fee for maintenance is generally 15% of the
current list price of the product to be maintained; first year maintenance is
not included with the Company's products and is purchased separately. The
Company provides technical support to customers primarily through its technical
support centers in Bedford, Massachusetts, Rotterdam, The Netherlands, and
Melbourne, Australia. Some local support is also provided by international
subsidiaries in their own countries. Consulting and training services for
customers outside North America are provided by personnel at the Company's
international subsidiaries and distributors. Revenue from maintenance and
support services was 47%, 38% and 36% of total revenue for fiscal years 1996,
1995 and 1994, respectively.
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COMPETITION
The computer software industry is intensely competitive. The Company
experiences significant competition from a variety of sources with respect to
all its products. The Company believes that the breadth and integration of its
product offerings have become increasingly important competitive advantages.
Other factors affecting competition in the markets served by the Company include
product performance in complex applications, application portability, vendor
experience, ease of integration, price, training and support. The Company
believes that it competes favorably with respect to these factors.
The Company competes with a number of entities, principally application
development tools vendors such as Centura Software Corporation, Dynasty
Technologies, Inc., Forte Software Inc., Powersoft Corporation, a subsidiary of
Sybase, Inc., and Uniface, a division of Compuware Corporation, and relational
database vendors offering tools in conjunction with their database systems such
as CA Ingres, a subsidiary of Computer Associates International, Inc., Informix
Corporation, Oracle Corporation and Sybase, Inc. The Company believes that the
database market is currently dominated by Oracle, Informix and Sybase, and that
there is no dominant application development tools vendor.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
In accordance with industry practice, the Company relies upon a combination
of contractual provisions and copyright, trademark and trade secret laws to
protect its proprietary rights in its products. The Company distributes its
products under software license agreements which grant customers a perpetual
non-exclusive license to use the Company's products and contain terms and
conditions prohibiting the unauthorized reproduction or transfer of the
Company's products. In addition, the Company attempts to protect its trade
secrets and other proprietary information through agreements with employees and
consultants. Although the Company intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
The Company seeks to protect the source code of its products as a trade
secret and as an unpublished copyrighted work. The Company does not believe that
patent laws are a significant source of protection for the Company's products.
Where possible, the Company seeks to obtain protection of the names "PROGRESS"
and "WebSpeed' through trademark registration and other similar procedures.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a leadership position within
the industry than are the various legal protections of its technology. In
addition, the Company believes that the nature of its customers, the importance
of the Company's products to them and their need for continuing product support
reduce the risk of unauthorized reproduction.
BACKLOG
The Company generally ships its products within 30 days after acceptance of
a customer purchase order and execution of a license agreement. Accordingly, the
Company does not believe that its backlog at any particular point in time is
indicative of future sales levels.
EMPLOYEES
As of November 30, 1996, the Company had 1,108 employees worldwide,
including 485 in sales and marketing, 249 in customer support (including
manufacturing and distribution), 196 in product development and 178 in
administration. 708 of the Company's employees were located in North America and
400 were located in other countries. The competition in recruiting skilled
technical personnel in the computer software industry is intense. The Company
believes that its ability to attract and retain qualified employees is an
important factor in its growth and development, and that its future success will
depend, in large measure, on its ability to continue to attract and retain
qualified employees. To date, the Company has been successful in recruiting and
retaining sufficient numbers of qualified personnel to effectively conduct its
business. None of
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the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes its relations with employees are
good.
The Company has adopted policies with regard to issuance of stock options
and payment of cash bonuses and contributions to retirement plans in years in
which the Company has met or exceeded its financial plan. These policies are
designed to minimize employee turnover, although there can be no assurance that
such policies will be successful.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------------------
Joseph W. Alsop.......................... 51 President, Treasurer and Director
Joseph A. Andrews........................ 40 Vice President, Human Resources
Jennifer J. Bergantino................... 37 Vice President, Marketing and Strategic Planning
Chadwick H. Carpenter, Jr................ 46 Senior Vice President, Corporate Development
James D. Freedman........................ 48 Vice President and General Counsel
Eric D. Frey............................. 49 Vice President, Product Development
Norman R. Robertson...................... 48 Vice President, Finance and Chief Financial Officer
David P. Vesty........................... 44 Vice President, Worldwide Sales
Charles A. Ziering....................... 46 Vice President, Development
Mr. Alsop, a founder of the Company, has been a director and President of
the Company since its inception in 1981.
Mr. Andrews joined the Company in February 1997 as Vice President, Human
Resources. In 1996, he was employed at NEC Technologies as Vice President, Human
Resources. From 1993 to 1996, he was employed as Vice President, Human Resources
at Polaroid Medical and Graphics Imaging Systems units. From 1981 to 1993 he
held management positions in Human Resources at Digital Equipment Corporation.
Ms. Bergantino joined the Company in January 1994 as Manager, Technology
Marketing. In January 1995, she was appointed Director, Crescent Business
Operations, was elected Vice President, Product Marketing and Planning in
February 1996 and was elected Vice President, Marketing and Strategic Planning
in July 1996. From 1991 to 1993, she was employed by Component Software
Corporation, a computer software company, as Vice President, Marketing.
Mr. Carpenter joined the Company in December 1983 as Vice President,
Product Services. He was elected Vice President, Sales and Services in December
1986, was elected Senior Vice President, Sales and Services in June 1987, and
was elected Senior Vice President, Corporate Development in June 1993.
Mr. Freedman joined the Company in January 1992 as General Counsel and was
elected Vice President and General Counsel in May 1994. From 1986 to 1991 he was
employed by Praxis International Incorporated (previously Computer Corporation
of America), most recently as General Counsel.
Mr. Frey joined the Company in February 1988 as Vice President, Technology
and was elected Vice President, Product Development in February 1996.
Mr. Robertson joined the Company in May 1996 as Vice President, Finance and
Chief Financial Officer. From 1993 to 1996 he was employed by M/A-COM, Inc., a
telecommunications company, as Director of Finance and Administration. From 1990
to 1993 he was employed by Progressive Technologies, Inc., a semiconductor
company, as Chief Financial Officer.
Mr. Vesty joined the Company in June 1986 as Manager, Major Accounts, was
appointed Regional Sales Manager in March 1987, was elected Director,
International Sales in June 1988, was elected Vice President, International
Operations in June 1989 and was elected Vice President, Worldwide Sales in
December 1996.
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Mr. Ziering, a founder of the Company, has been a Vice President of the
Company since its inception in 1981.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, support, marketing and
product development facility is located in a single, leased building of
approximately 165,000 square feet in Bedford, Massachusetts. The Company leases
approximately 58,000 square feet in Wilmington, Massachusetts and maintains its
manufacturing and distribution operations at this location. The Company leases
approximately 33,000 square feet in Nashua, New Hampshire and maintains a
product development facility at this location. In addition, the Company
maintains offices in 15 locations in North America. The Company also maintains
29 offices outside North America. The Bedford lease, which was renegotiated in
August 1994, expires in August 1999 and has a three-year renewal option. The
terms of all other leases generally range from one to five years. The Company
believes that its present and proposed facilities are adequate for its current
needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation, and is not aware of
any pending or threatened litigation that would have a material adverse effect
on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended November 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of
high and low bid prices for the Company's common stock as reported by the Nasdaq
Stock Market. The Company's common stock is traded on the market under the
Nasdaq symbol "PRGS."
YEAR ENDED NOVEMBER 30,
---------------------------------------
1996 1995
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter................................... $37.75 $19.50 $27.88 $17.75
Second Quarter.................................. 23.25 14.62 29.75 19.53
Third Quarter................................... 17.63 12.13 29.75 24.38
Fourth Quarter.................................. 20.63 14.00 35.25 28.25
The Company has not declared or paid cash dividends on its common stock and
does not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of February 14, 1997, the Company's common stock was held by
approximately 5,000 shareholders of record or through nominee or street name
accounts with brokers.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes:
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Revenue:
Software licenses.................. $ 93,178 $110,785 $ 88,426 $ 73,582 $57,894
Maintenance and support services... 83,512 69,350 50,811 38,058 27,156
-------- -------- -------- -------- -------
Total revenue.............. 176,690 180,135 139,237 111,640 85,050
Costs and expenses:
Cost of revenue.................... 38,539 31,896 21,634 16,546 12,846
Sales and marketing................ 87,830 79,546 62,477 49,803 36,661
Product development................ 23,951 24,175 20,203 15,296 13,103
Purchase of in-process software
development..................... -- 2,373 -- -- --
General and administrative......... 21,909 18,813 15,092 12,528 9,335
-------- -------- -------- -------- -------
Total costs and expenses... 172,229 156,803 119,406 94,173 71,945
-------- -------- -------- -------- -------
Income from operations............... 4,461 23,332* 19,831 17,467 13,105
-------- -------- -------- -------- -------
Other income, net.................... 3,869 3,169 2,136 2,369 1,915
-------- -------- -------- -------- -------
Income before provision for income
taxes.............................. 8,330 26,501* 21,967 19,836 15,020
Provision for income taxes........... 2,833 9,817 7,579 6,943 5,407
-------- -------- -------- -------- -------
Net income........................... $ 5,497 $ 16,684* $ 14,388 $ 12,893 $ 9,613
======== ======== ======== ======== =======
Income per common share.............. $ 0.41 $ 1.22* $ 1.12 $ 1.00 $ 0.75
======== ======== ======== ======== =======
Weighted average number of common and
equivalent shares outstanding...... 13,268 13,628 12,878 12,922 12,808
======== ======== ======== ======== =======
Balance Sheet Data:
Working capital.................... $ 84,207 $ 85,271 $ 66,868 $ 53,381 $43,993
Total assets....................... 173,188 175,736 134,554 107,786 81,415
Long-term debt, including current
portion......................... 122 162 210 412 426
Shareholders' equity............... 113,793 113,481 88,517 69,876 53,234
- ---------------
* Includes a non-recurring charge for purchase of in-process software
development of $2,373 or $0.18 per share. Excluding this non-recurring item,
net income would have been $19,057 and $1.40 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's total revenue for fiscal 1996 decreased 2% as compared to
fiscal 1995. The Company's net income for fiscal 1996 decreased 67% from fiscal
1995. In the first quarter of fiscal 1995, the Company recorded a non-recurring
charge of $2,373,000 for purchase of in-process software development costs
related to the acquisition of Crescent Software, Inc. (Crescent). The
acquisition was accounted for as a purchase. Without taking into account the
non-recurring charge during fiscal 1995, the Company's net income decreased 71%
from fiscal 1995.
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The following table sets forth certain income and expense items as a
percentage of total revenue, and the percentage change in dollar amounts of such
items, for the years ended November 30, 1996, 1995 and 1994.
PERCENTAGE OF TOTAL PERIOD-TO-PERIOD
REVENUE CHANGE
------------------------- ---------------------
YEAR ENDED NOVEMBER 30, 1996 1995
------------------------- COMPARED COMPARED
1996 1995 1994 TO 1995 TO 1994
----- ----- ----- -------- --------
Revenue:
Software licenses............................. 53% 62% 64% (16)% 25%
Maintenance and support services.............. 47 38 36 20 36
--- --- ---
Total revenue......................... 100 100 100 (2) 29
--- --- ---
Costs and expenses:
Cost of software licenses..................... 5 4 3 27 71
Cost of maintenance and support services...... 17 14 13 19 42
Sales and marketing........................... 50 44 45 10 27
Product development........................... 13 14 14 (1) 20
Purchase of in-process software development... -- 1 -- --- --
General and administrative.................... 12 10 11 16 25
--- --- ---
Total costs and expenses.............. 97 87 86 10 31
--- --- ---
Income from operations.......................... 3 13 14 (81) 18
--- --- ---
Other income (expense).......................... 2 2 2 22 48
--- --- ---
Income before provision for income taxes........ 5 15 16 (69) 21
Provision for income taxes...................... 2 6 6 (71) 30
--- --- ---
Net income...................................... 3% 9% 10% (67) 16
=== === ===
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's total revenue decreased 2% from $180,135,000 in fiscal 1995
to $176,690,000 in fiscal 1996. The reduction in total revenue was primarily due
to a decrease in software license revenue offset by an increase in maintenance
and support services revenue. Software license revenue decreased 16% from
$110,785,000 in fiscal 1995 to $93,178,000 in fiscal 1996. The software license
revenue decrease was attributable to increased competition, a slowdown in the
rate of growth for application development tools, the transition some of the
Company's Application Partners faced in the marketplace as they moved their
applications to PROGRESS Versions 7 and 8 and, to a lesser extent, the new
user-based pricing structure implemented in the fourth quarter of fiscal 1995.
During fiscal 1996, the Company entered into 281 new Application Partner
agreements worldwide (116 in North America and 165 outside North America).
Revenue generated in markets outside North America decreased slightly from
$104,680,000 in fiscal 1995 to $104,568,000 in fiscal 1996 but increased as a
percentage of total revenue from 58% in fiscal 1995 to 59% in fiscal 1996.
Revenue generated in markets outside North America would have represented 60% of
total revenue in fiscal 1996 if exchange rates had been constant as compared to
fiscal 1995. Maintenance and support services revenue increased 20% from
$69,350,000 in fiscal 1995 to $83,512,000 in fiscal 1996. The maintenance and
support services revenue increase was primarily a result of growth in the
Company's installed customer base, renewal of maintenance contracts and greater
demand for consulting services.
Cost of software licenses consists primarily of cost of product media,
documentation, duplication, packaging, royalties and amortization of capitalized
software costs. Cost of software licenses increased 27% from $6,965,000 in
fiscal 1995 to $8,838,000 in fiscal 1996 and increased as a percentage of
software license revenue from 6% to 9%. The percentage and dollar increase was
due to an increase in amortization of capitalized software costs, higher
documentation costs associated with PROGRESS Version 7 and Version 8 as compared
to Version 6 and higher royalty expense. Cost of software licenses as a
percentage of software license revenue can vary depending upon the relative
product mix in the related period.
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15
Cost of maintenance and support services consists primarily of costs of
providing customer technical support, education and consulting. Cost of
maintenance and support services increased 19% from $24,931,000 in fiscal 1995
to $29,701,000 in fiscal 1996, but remained approximately the same percentage of
maintenance and support services revenue. The dollar increase was due primarily
to the growth in the Company's technical support, education, and consulting
staff and related costs required to support the growth in the Company's
installed customer base. Additionally, the Company increased its usage of third
party contractors in fiscal 1996 as compared to fiscal 1995 in order to satisfy
demand for increased consulting and training services. The Company increased its
technical support, education, and consulting staff from 199 to 218 (109 in North
America and 90 outside North America at November 30, 1995 to 124 in North
America and 94 outside North America at November 30, 1996).
Sales and marketing expenses increased 10% from $79,546,000 in fiscal 1995
to $87,830,000 in fiscal 1996 and increased as a percentage of total revenue
from 44% to 50%. The dollar and percentage increase in sales and marketing
expenses was primarily due to expansion of the sales, sales support and
marketing staff, the establishment of a subsidiary in Argentina and, to a lesser
extent, expansion of marketing activities associated with the launch of
WebSpeed, PROGRESS Version 8 and the Crescent product line. The Company
increased its sales, sales support and marketing staff from 457 to 485 (259 in
North America and 198 outside North America at November 30, 1995 to 253 in North
America and 232 outside North America at November 30, 1996).
Product development expenses decreased 1% from $24,175,000 in fiscal 1995
to $23,951,000 in fiscal 1996, but remained approximately the same percentage of
total revenue in both years. The dollar decrease was due primarily to reduced
headcount levels in fiscal 1996 as compared to fiscal 1995. However, the
decrease in expenses was not proportionate to the decrease in period end
headcount due to higher average personnel expenses and other related costs in
fiscal 1996 as compared to fiscal 1995. The major product development efforts in
fiscal 1996 related to the development of the WebSpeed product line, major new
releases of PROGRESS, including Version 8.0B and Version 8.1, and Visual Basic
and Visual J++ add-on tools and components in the Crescent Division. The product
development staff decreased from 242 at November 30, 1995 to 196 at November 30,
1996. The Company expects the product development staff to increase in fiscal
1997 from fiscal 1996, but there can be no assurance that the Company will be
successful in recruiting new employees or retaining current employees.
The Company capitalized $2,697,000 of software development costs in fiscal
1995 and $2,462,000 in fiscal 1996 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." The amounts capitalized
represented 10% in fiscal 1995 and 9% in fiscal 1996 of total product
development costs. Capitalized software costs are amortized over the estimated
life of the product (two to four years) and amounts amortized are included in
cost of software licenses for the period.
General and administrative expenses include the costs of the finance, human
resources, legal, information systems and administrative departments of the
Company. General and administrative expenses increased 16% from $18,813,000 in
fiscal 1995 to $21,909,000 in fiscal 1996, and increased as a percentage of
total revenue from 10% to 12%. The dollar increase in general and administrative
expenses was primarily due to higher expenses in information systems as the
Company improved its system infrastructure and increased personnel costs
reflecting the full impact of the fiscal 1995 staff increase. The Company
decreased its administrative staff from 179 to 178 (96 in North America and 83
outside North America at November 30, 1995 to 104 in North America and 74
outside North America at November 30, 1996).
Income from operations decreased as a percentage of total revenue from 13%
in fiscal 1995 (including the non-recurring charge of $2,373,000 for in-process
software development costs related to the acquisition of Crescent) to 3% in
fiscal 1996 due to a reduction in total revenue of 2% together with an increase
in total cost and expenses of 10%. Excluding the non-recurring charge, income
from operations in fiscal 1995 was 14% of total revenue.
Excluding the non-recurring charge, income from operations attributable to
North America decreased as a percentage of North American revenue from 22% in
fiscal 1995 to 6% in fiscal 1996. Income from operations
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16
attributable to Europe as a percentage of European revenue was 7% in fiscal 1995
and 1% in fiscal 1996. The decrease in income from operations in Europe and
North America was due to a slowdown in revenue growth in most markets in fiscal
1996. The operating loss from operations attributable to other regions outside
North America and Europe related primarily to the continued inability to achieve
profitable operations at the Company's joint venture in Japan. Operating margins
from international operations in the future will depend significantly on the
extent and timing of the Company's expansion into new markets, and its ability
to achieve economies of scale in established international markets. See Note 10
of Notes to Consolidated Financial Statements.
Other income increased approximately $700,000 from $3,169,000 in fiscal
1995 to $3,869,000 in fiscal 1996 due primarily to higher interest income and
lower foreign currency losses. The increase in interest income was due to higher
average cash balances in fiscal 1996 as compared to fiscal 1995. All revenue,
costs and expenses attributable to the Company's joint venture are included in
the Company's revenue, costs and expenses. To account for the fact that the
Company owns only a 51% interest in the joint venture, other income (expense)
reflects that portion of the joint venture's income or loss which is
attributable to the 49% minority interest in the joint venture. The joint
venture generated a net loss in each period presented and the Company recorded
as "other income -- minority interest" an amount equal to 49% of the joint
venture's net loss. Foreign currency gains and losses relate primarily to the
translation and settlement of short-term intercompany receivables. The net
foreign currency loss in fiscal 1995 also includes the effect of the devaluation
of the Mexican peso during the first quarter of fiscal 1995 on peso-denominated
intercompany receivables.
The Company's effective tax rate was 34% in fiscal 1996 compared to 37% in
fiscal 1995. The decrease in the effective tax rate in fiscal 1996 from fiscal
1995 was due to nondeductible expenses related to the acquisition of Crescent in
fiscal 1995. Excluding these nondeductible expenses, the Company's effective tax
rate for fiscal 1995 was 34%. See Note 7 of Notes to Consolidated Financial
Statements. The Company expects its effective tax rate to remain at
approximately 34% in fiscal 1997.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's total revenue increased 29% from $139,237,000 in fiscal 1994
to $180,135,000 in fiscal 1995. The growth in revenue was primarily due to an
increase in software license revenue and, to a lesser extent, to an increase in
maintenance and support services revenue. Software license revenue increased 25%
from $88,426,000 in fiscal 1994 to $110,785,000 in fiscal 1995, primarily due to
the continued acceptance of the Company's products, successful sales and
marketing efforts and, to a lesser extent, the acquisition of Crescent and
geographic expansion, including a new subsidiary in the Czech Republic and a
joint venture in Japan. During fiscal 1995, the Company entered into 352 new
Application Partner agreements worldwide (148 in North America and 204 outside
North America). In November 1995, the Company adopted a new pricing structure
for the PROGRESS product line based on the number of concurrent users,
regardless of platform or operating system. This pricing change did not have a
material impact on total revenue in fiscal 1995 as compared to fiscal 1994.
Revenue generated in markets outside North America increased from $76,826,000 in
fiscal 1994 to $104,680,000 in fiscal 1995 and increased as a percentage of
total revenue from 55% in fiscal 1994 to 58% in fiscal 1995. Revenue generated
in markets outside North America would have represented 56% of total revenue if
exchange rates in fiscal 1995 had remained constant from fiscal 1994.
Maintenance and support services revenue increased 36% from $50,811,000 in
fiscal 1994 to $69,350,000 in fiscal 1995 and increased as a percentage of total
revenue from 36% to 38%, primarily as a result of growth in the Company's
installed customer base, renewal of maintenance contracts and growth in
consulting services provided to customers.
Cost of software licenses increased 71% from $4,069,000 in fiscal 1994 to
$6,965,000 in fiscal 1995 and increased as a percentage of software license
revenue from 5% to 6%. The dollar and percentage increase was primarily due to
Crescent Division product sales which have a lower margin than Enterprise
Division product sales, an increase in amortization of capitalized software
costs and an inventory writedown for documentation costs related to certain
earlier versions of PROGRESS after the release of Version 8. The dollar increase
was also due to increased sales volume.
16
17
Cost of maintenance and support services increased 42% from $17,565,000 in
fiscal 1994 to $24,931,000 in fiscal 1995, and increased as a percentage of
maintenance and support services revenue from 35% to 36%. The dollar increase
was primarily due to the growth of the technical support, education, and
consulting staff required to support the growth in the Company's installed
customer base, the establishment of the Europe, Middle East, and Africa
Technical Support Center in Rotterdam, and greater use of outside contractors to
meet the increased demand for consulting services. The Company increased its
technical support, education, and consulting staff from 91 in North America and
81 outside North America at November 30, 1994 to 109 in North America and 90
outside North America at November 30, 1995.
Sales and marketing expenses increased 27% from $62,477,000 in fiscal 1994
to $79,546,000 in fiscal 1995 but decreased as a percentage of total revenue
from 45% to 44%. The increase in sales and marketing expenses was primarily due
to expansion of the sales, sales support and marketing staff, the establishment
of a new subsidiary in the Czech Republic and a joint venture in Japan, the
opening of one new sales office in North America, and expansion of marketing
activities, such as advertising for the Powered by PROGRESS(TM) program. The
Company increased its sales, sales support and marketing staff from 226 in North
America and 173 outside North America at November 30, 1994 to 259 in North
America and 198 outside North America at November 30, 1995.
Product development expenses increased 20% from $20,203,000 in fiscal 1994
to $24,175,000 in fiscal 1995, and remained approximately the same percentage of
total revenue in both years. The dollar increase resulted primarily from growth
of the product development staff and related costs to support continued new
product development efforts for the PROGRESS Version 7 and Version 8 product
sets in the Enterprise Division and add-on tools for Visual Basic in the
Crescent Division. The product development staff increased from 213 at November
30, 1994 to 242 at November 30, 1995. The Company capitalized $1,982,000 and
$2,697,000 of software development costs in fiscal 1994 and fiscal 1995,
respectively. The amount capitalized represented 9% in fiscal 1994 and 10% in
fiscal 1995 of total product development costs.
In January 1995, the Company acquired all the outstanding stock of Crescent
for approximately $3,000,000, consisting of $2,150,000 in cash and $850,000 in
assumed and other liabilities. The assets acquired consisted primarily of
existing software and software in the development stage. The acquisition has
been accounted for as a purchase and, accordingly, the results of operations
have been included in the Company's operating results from the date of
acquisition. The purchase price included a non-recurring charge of $2,373,000
for in-process software development costs which was included in the Company's
results of operations in the first quarter of fiscal 1995.
General and administrative expenses increased 25% from $15,092,000 in
fiscal 1994 to $18,813,000 in fiscal 1995, but decreased as a percentage of
total revenue from 11% to 10%. The dollar increase resulted primarily from the
addition of personnel and related costs to support the growth of the Company's
operations. The Company increased its administrative staff from 78 in North
America and 73 outside North America at November 30, 1994 to 96 in North America
and 83 outside North America at November 30, 1995.
Income from operations decreased as a percentage of total revenue from 14%
in fiscal 1994 to 13% in fiscal 1995 due to the inclusion of a non-recurring
charge of $2,373,000 for in-process software development costs related to the
acquisition of Crescent. Excluding this non-recurring charge, income from
operations remained 14% of total revenue in fiscal 1995. Excluding the
non-recurring charge, income from operations attributable to North America
decreased as a percentage of North American revenue from 25% in fiscal 1994 to
22% in fiscal 1995. Income from operations attributable to Europe as a
percentage of European revenue was 3% in fiscal 1994 and 7% in fiscal 1995. The
increase in income from operations in Europe was due to improved productivity
and revenue growth in most European markets in fiscal 1995. Income from
operations attributable to other regions outside North America and Europe
remained 4% of the related revenue in both years. See Note 10 of Notes to
Consolidated Financial Statements.
Other income increased approximately $1,033,000 from $2,136,000 in fiscal
1994 to $3,169,000 in fiscal 1995. The increase was primarily due to higher
interest income and an adjustment for the minority interest in the Company's
joint venture in Japan, offset by a net foreign currency loss. The increase in
interest income was due to higher average cash balances and higher interest
earned on such balances. Foreign currency losses
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18
relate primarily to the translation and settlement of short-term intercompany
receivables. The net foreign currency loss in fiscal 1995 also includes the
effect of the devaluation of the Mexican peso during the first quarter of fiscal
1995 on peso-denominated intercompany receivables.
The Company's effective tax rate was 37% in fiscal 1995 compared to 34.5%
in fiscal 1994. The increase from the fiscal 1994 effective tax rate was due to
nondeductible expenses related to the acquisition of Crescent in January 1995.
Excluding these nondeductible expenses, the effective tax rate was 34% in 1995.
See Note 7 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $97,323,000 in cash and short-term investments at November
30, 1996. The cash and short-term investments increase of $4,985,000 from
$92,338,000 at November 30, 1995 was primarily due to cash generated from
operations, offset by common stock repurchases and property and equipment
purchases.
In fiscal years 1994, 1995, and 1996, the Company purchased $8,025,000,
$13,376,000, and $9,545,000, respectively, of property and equipment which
consisted primarily of computer equipment and software, furniture and fixtures,
and leasehold improvements. The level of property and equipment purchases
resulted primarily from continued growth of the business and replacement of
older equipment. The Company financed these purchases primarily from cash
generated from operations. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.
In fiscal 1996, the Company purchased 457,500 shares of its common stock
for $7,205,000. Of the total shares purchased in fiscal 1996, 396,500 shares
were purchased under the Board of Directors' previous authorization which
expired on September 30, 1996. The Company financed these purchases primarily
from cash generated from operations.
In September 1996, the Board of Directors authorized, through September 30,
1997, the purchase of up to 3,000,000 shares of the Company's common stock, at
such times when the Company deems such purchases to be an effective use of cash
for various purposes including the issuance of shares pursuant to the Company's
stock option plans. At November 30, 1996, there were 2,939,000 shares of common
stock authorized for repurchase.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company will
adopt this standard in the first quarter of fiscal 1997. As permitted by SFAS
123, the Company intends to continue to apply Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and will prepare the
pro forma disclosures required by SFAS 123. Adoption is not expected to have a
material effect on the Company's financial position or results of operations.
The Company's 401(k) Plan has approximately $900,000 invested in Guaranteed
Investment Contracts (GICs) issued by Mutual Benefit Life Insurance Company
(MBLI). On July 16, 1991, the Insurance Commissioner of the State of New Jersey
took possession and control of MBLI's assets. In April 1994, a rehabilitation
plan was approved by the Superior Court of New Jersey. Pursuant to the plan, the
GICs are supported by a group of life insurance companies and are to be paid out
from the assets of MBL Life Assurance Corporation, the successor to MBLI. The
Company is not presently able to determine whether the 401(k) Plan or its
participants will incur any losses or whether, if such losses are incurred, the
Company might be subject to any liability (either directly as a Plan fiduciary
or as an indemnitor of officers and directors of the Company who serve as
trustees of the Plan).
The Company believes that existing cash balances together with funds
generated from operations will be sufficient to finance the Company's operations
and meet its foreseeable cash requirements (including planned capital
expenditures, lease commitments, and other long-term obligations) through the
next twelve months.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves
certain risks and uncertainties, some of which are beyond the Company's control.
The following discussion highlights some of these risks.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including changes in
demand for the Company's products, introduction, enhancement or announcement of
products by the Company and its competitors, market acceptance of new products,
size and timing of significant orders, budgeting cycles of customers, mix of
distribution channels, mix of products and services sold, mix of international
and North American revenues, changes in the level of operating expenses, changes
in the Company's sales incentive plans, customer order deferrals in anticipation
of new products announced by the Company or its competitors and general economic
conditions. Revenue forecasting is uncertain, in large part, because the Company
generally ships its products upon receipt of orders. This uncertainty is
compounded because each quarter's revenue is derived disproportionately from
orders booked and shipped during the third month, and disproportionately in the
latter half of that month. In contrast, most of the Company's expenses are
relatively fixed, including costs of personnel and facilities, and are not
easily reduced. Thus, an unexpected reduction in the Company's revenue, or a
decrease in the rate of growth of such revenue, would have a material adverse
effect on the profitability of the Company.
The Company develops, markets and supports its core product line, the
PROGRESS Application Development Environment, the PROGRESS RDBMS and the
PROGRESS Dataserver Architecture (collectively, "PROGRESS"). In November 1996,
the Company began shipping the latest major enhancement to the PROGRESS product
line, PROGRESS Version 8.1. In October 1996, the Company began shipments of
WebSpeed, an open development and deployment environment that enables
organizations to build transaction processing applications on the Internet and
corporate intranets. The Company's Crescent Division develops and markets a
collection of advanced tools and components to Visual Basic and Visual J++
development teams. The Crescent Division began offering these products
commercially in January 1995 and has since released major enhancements to its
existing line of products as well as many new products.
Although the Company believes that PROGRESS, WebSpeed and the Crescent line
of products have features and functionality which enable the Company to compete
effectively with other vendors of application development products, ongoing
enhancements to PROGRESS, WebSpeed and the Crescent line of products will be
required to enable the Company to maintain its competitive position. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to its products on a timely basis, or that the enhancements will
adequately address the changing needs of the marketplace. Delays in the release
of enhancements may negatively affect results.
The Company has derived most of its revenue from PROGRESS and other
products which complement PROGRESS and are generally licensed only in
conjunction with PROGRESS. Accordingly, the Company's future results depend on
continued market acceptance of PROGRESS and any factor adversely affecting the
market for PROGRESS could have a material adverse effect on the Company's
business and its financial results. Future results may also depend upon the
Company's continued successful distribution of PROGRESS through its Application
Partner channel and may be impacted by downward pressure on pricing, which may
not be offset by increases in volume. Application Partners resell PROGRESS along
with their own applications and any adverse effect on their business related to
competition, pricing and other factors could have a material adverse effect on
the Company.
The Company experiences significant competition from a variety of sources
with respect to the marketing and distribution of its products. Some of these
competitors have greater financial, marketing or technical resources than the
Company and may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than can the Company. Increased competition
could make it more difficult for the Company to maintain its market presence.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing their ability to deliver products which
19
20
address the needs of the Company's prospective customers. Current and potential
competitors also may be more successful than the Company in having their
products or technologies widely accepted. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors and their failure so to do could have a material adverse affect upon
the Company's business, prospects, financial condition and results of
operations.
The Company hopes that the Crescent Division and other new products, such
as WebSpeed, will contribute positively to the Company's future results. The
market for the Crescent product line is extremely competitive and may be
affected by changes in Microsoft's strategy with respect to Visual Basic and
Visual J++ and the add-on product market for such products, and market
acceptance of products competitive with Visual Basic and Visual J++. The market
for internet transaction processing products, such as WebSpeed, is highly
competitive and will depend in large part on the commercial acceptance of the
Internet as a medium for all types of commerce. Because global commerce and
online exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance
that the infrastructure or complementary products necessary to make the Internet
a viable medium for all types of commerce will be developed.
Overlaying the risks associated with the Company's existing products and
enhancements are ongoing technological developments and rapid changes in
customer requirements. The Company's future success will depend upon its ability
to develop and introduce in a timely manner new products that take advantage of
technological advances and respond to new customer requirements. The Company is
currently developing new products intended to help organizations meet the future
needs of application developers. The development of new products is increasingly
complex and uncertain, which increases the risk of delays. There can be no
assurance that the Company will be successful in developing new products
incorporating new technology on a timely basis, or that its new products will
adequately address the changing needs of the marketplace. The marketplace for
these new products is intensely competitive and characterized by low barriers to
entry. As a result, new competitors possessing technological, marketing or other
competitive advantages may emerge and rapidly acquire market share.
Approximately 52% of the Company's total revenue in fiscal 1996 was
attributable to international sales made through international subsidiaries.
Because a substantial portion of the Company's total revenue is derived from
such international operations which are conducted in foreign currencies, changes
in the value of these foreign currencies relative to the United States dollar
may affect the Company's results of operations and financial position. The
Company engages in certain currency-hedging transactions intended to reduce the
effect of fluctuations in foreign currency exchange rates on the Company's
results of operations. However, there can be no assurance that such hedging
transactions will materially reduce the effect of fluctuation in foreign
currency exchange rates on such results. If for any reason exchange or price
controls or other restrictions on the conversion of foreign currencies were
imposed, the Company's business could be adversely affected. Other potential
risks inherent in the Company's international business generally include longer
payment cycles, greater difficulties in accounts receivable collection,
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax consequences, any of which
could adversely impact the success of the Company's international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations, if
any, and, consequently, on the Company's business, financial condition, and
operating results.
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the software industry is intense. There can be
no assurance that the Company will continue to be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably.
20
21
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies principally on a combination of contract
provisions and copyright, trademark and trade secret laws to protect its
proprietary technology. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claim of infringement or invalidity. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results or financial condition.
The Company also utilizes certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that functionally similar technology will be available on
commercially reasonable terms in the future.
The market price of the Company's Common Stock, like that of other
technology companies, is highly volatile and is subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
changes in financial estimates by securities analysts, or other events or
factors. The Company's stock price may also be affected by broader market trends
unrelated to the Company's performance.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
-----------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
ASSETS
Current assets:
Cash and equivalents............................................... $ 30,872 $ 33,465
Short-term investments............................................. 66,451 58,873
Accounts receivable (less allowance for doubtful accounts of
$5,112 in 1996 and $4,611 in 1995).............................. 34,452 41,652
Inventories........................................................ 1,257 2,090
Other current assets............................................... 4,367 4,804
Deferred income taxes.............................................. 3,552 3,227
-------- --------
Total current assets....................................... 140,951 144,111
-------- --------
Property and equipment-net........................................... 24,230 24,318
Capitalized software costs-net....................................... 5,428 4,668
Other assets......................................................... 2,579 2,639
-------- --------
Total...................................................... $173,188 $175,736
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.................................. $ 37 $ 89
Accounts payable................................................... 7,989 9,536
Accrued compensation and related taxes............................. 12,385 14,829
Income taxes payable............................................... 3,004 2,231
Other accrued liabilities.......................................... 5,122 4,350
Advanced payments from customers................................... 842 812
Deferred revenue................................................... 27,365 26,993
-------- --------
Total current liabilities.................................. 56,744 58,840
-------- --------
Deferred income taxes................................................ 2,345 2,706
Long-term debt....................................................... 85 73
Minority interest in subsidiary...................................... 221 636
Commitments and contingency
Shareholders' equity
Preferred stock, $.01 par value; authorized, 1,000,000 shares;
issued, none
Common stock, $.01 par value; authorized, 20,000,000 shares, issued
and outstanding, 12,632,630 shares in 1996 and 12,905,998 shares
in 1995......................................................... 126 129
Additional paid-in capital......................................... 41,309 46,467
Retained earnings.................................................. 72,280 66,783
Unrealized gains on short-term investments......................... 241 133
Cumulative translation adjustments................................. (163) (31)
-------- --------
Total shareholders' equity................................. 113,793 113,481
-------- --------
Total...................................................... $173,188 $175,736
======== ========
See notes to consolidated financial statements
22
23
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED NOVEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenue:
Software licenses........................................ $ 93,178 $110,785 $ 88,426
Maintenance and support services......................... 83,512 69,350 50,811
-------- -------- --------
Total revenue.................................... 176,690 180,135 139,237
Cost and expenses:
Cost of software licenses................................ 8,838 6,965 4,069
Cost of maintenance and support services................. 29,701 24,931 17,565
Sales and marketing...................................... 87,830 79,546 62,477
Product development...................................... 23,951 24,175 20,203
Purchase of in-process software development.............. -- 2,373 --
General and administrative............................... 21,909 18,813 15,092
-------- -------- --------
Total costs and expenses......................... 172,229 156,803 119,406
-------- -------- --------
Income from operations..................................... 4,461 23,332 19,831
-------- -------- --------
Other income (expense):
Interest income.......................................... 3,885 3,585 2,286
Interest expense......................................... (11) (15) (27)
Foreign currency loss.................................... (453) (847) (168)
Minority interest........................................ 415 403 --
Other income............................................. 33 43 45
-------- -------- --------
Total other income, net.......................... 3,869 3,169 2,136
-------- -------- --------
Income before provision for income taxes................... 8,330 26,501 21,967
Provision for income taxes................................. 2,833 9,817 7,579
-------- -------- --------
Net income................................................. $ 5,497 $ 16,684 $ 14,388
======== ======== ========
Income per common share.................................... $ 0.41 $ 1.22 $ 1.12
======== ======== ========
Weighted average number of common and common equivalent
shares outstanding....................................... 13,268 13,628 12,878
======== ======== ========
See notes to consolidated financial statements
23
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
ADDITIONAL GAINS ON CUMULATIVE TOTAL
COMMON PAID-IN RETAINED SHORT-TERM TRANSLATION SHAREHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENTS ADJUSTMENTS EQUITY
------ ---------- -------- ----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 1, 1993................... $ 61 $34,399 $35,711 $(295) $ 69,876
Exercise of stock options (103,760
shares)................................ 1 783 784
Issuance of stock under employee stock
purchase plan (19,120 shares).......... 293 293
Stock option compensation................. 2 2
Tax benefit arising from employees'
exercise of stock options.............. 3,003 3,003
Net income................................ 14,388 14,388
Translation adjustment.................... 171 171
---- ------- ------- ---- ----- --------
Balance, November 30, 1994.................. 62 38,480 50,099 (124) 88,517
Stock split............................... 62 (62) 0
Exercise of stock options (525,688
shares)................................ 5 4,991 4,996
Issuance of stock under employee stock
purchase plan (25,118 shares).......... 460 460
Stock option compensation................. 2 2
Tax benefit arising from employees'
exercise of stock options.............. 2,596 2,596
Unrealized gains on short-term
investments............................ $133 133
Net income................................ 16,684 16,684
Translation adjustment.................... 93 93
---- ------- ------- ---- ----- --------
Balance, November 30, 1995.................. 129 46,467 66,783 133 (31) 113,481
Exercise of stock options (136,703
shares)................................ 1 1,108 1,109
Issuance of stock under employee stock
purchase plan (47,429 shares).......... 736 736
Purchase and retirement of treasury stock
(457,500 shares)....................... (4) (7,201) (7,205)
Stock options compensation................ 2 2
Tax benefit arising from employees'
exercise of stock options.............. 197 197
Unrealized gains on short-term
investments............................ 108 108
Net income................................ 5,497 5,497
Translation adjustment.................... (132) (132)
---- ------- ------- ---- ----- --------
Balance November 30, 1996................... $126 $41,309 $72,280 $241 $(163) $113,793
==== ======= ======= ==== ===== ========
See notes to consolidated financial statements
24
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................... $ 5,497 $ 16,684 $ 14,388
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment........................................... 9,514 7,616 5,642
Charge for purchase of in-process software
development......................................... -- 2,373 --
Amortization of capitalized software costs............ 1,702 1,076 590
Amortization of intangible assets..................... 331 301 45
Deferred income taxes................................. (695) 234 (298)
Minority interest in subsidiary....................... (415) (403) --
Noncash compensation.................................. 2 2 2
Changes in operating assets and liabilities:
Accounts receivable................................. 7,053 (12,777) (4,079)
Inventories......................................... 837 395 (844)
Other current assets................................ 406 (838) (1,417)
Accounts payable and accrued expenses............... (2,664) 3,936 4,412
Income taxes payable................................ 1,008 3,432 1,325
Deferred revenue.................................... 284 7,913 3,546
-------- -------- --------
Total adjustments................................ 17,363 13,260 8,924
-------- -------- --------
Net cash provided by operating activities........ 22,860 29,944 23,312
-------- -------- --------
Cash flows from investing activities:
Purchases of investments available for sale.............. (76,550) (78,693) --
Maturities of investments available for sale............. 48,380 59,106 --
Sales of investments available for sale.................. 20,700 10,598 --
Increase in short-term investments....................... -- -- (9,056)
Purchase of property and equipment....................... (9,545) (13,376) (8,025)
Capitalized software costs............................... (2,462) (2,697) (1,982)
Acquisition, net of cash acquired........................ -- (1,894) --
Increase in other noncurrent assets...................... (310) (1,045) (1,146)
-------- -------- --------
Net cash used for investing activities........... (19,787) (28,001) (20,209)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 1,845 5,456 1,077
Repurchase of common stock............................... (7,205) -- --
Contributions from minority interest..................... -- 1,039 --
Proceeds from capital lease obligations.................. 85 39 33
Payment of obligations under capital leases.............. (130) (81) (249)
-------- -------- --------
Net cash provided by (used for) financing
activities..................................... (5,405) 6,453 861
-------- -------- --------
Effect of exchange rate changes on cash.................... (261) 536 (34)
-------- -------- --------
Net increase (decrease) in cash and equivalents............ (2,593) 8,932 3,930
Cash and equivalents, beginning of year.................... 33,465 24,533 20,603
-------- -------- --------
Cash and equivalents, end of year.......................... $ 30,872 $ 33,465 $ 24,533
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid........................................ $ 2,569 $ 6,109 $ 6,514
Interest paid............................................ $ 13 $ 21 $ 40
Supplemental disclosure of noncash financing activities:
Income tax benefit from employees' exercise of stock
options............................................... $ 197 $ 2,596 $ 3,003
See notes to consolidated financial statements.
25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Progress Software Corporation (the Company) develops, markets and supports
application development and deployment software for professional information
service organizations in business, government and industry worldwide. The
PROGRESS product line enables developers to build and deploy enterprise-class
client/server applications. The WebSpeed product line enables organizations to
build and deploy Internet transaction processing applications. The Crescent
Division supplies tools and add-on components to developers using Microsoft's
Visual Basic and Visual J++ application development environments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated into U.S. dollars at the exchange rate on
the balance sheet date. Income and expense items are translated at average rates
of exchange prevailing during each period. Translation adjustments are
accumulated in a separate component of shareholders' equity.
For foreign operations with the U.S. dollar as the functional currency,
monetary assets and liabilities are translated into U.S. dollars at the exchange
rate on the balance sheet date. Nonmonetary assets and liabilities are
remeasured into U.S. dollars at historical exchange rates. Income and expense
items are translated at average rates of exchange prevailing during each period.
Translation adjustments are recognized currently as a component of foreign
currency gain or loss.
The Company enters into foreign exchange option contracts which are
designated as effective hedges on certain transactions and receivables in
selected foreign currencies. The purpose of the Company's foreign exposure
management policies and practices is to attempt to minimize the impact of
exchange rate fluctuations on the Company's results of operations. The option
contracts are structured such that the cost to the Company cannot exceed the
premium paid for such contracts. Premiums are recognized ratably over the
contract period as a component of foreign currency gain or loss. Increases and
decreases in market value gains on such contracts are recognized currently as a
component of foreign currency gain or loss. The notional principal amount of
outstanding foreign exchange option contracts at November 30, 1996 was $38.1
million. Unrealized market value gains on such contracts were immaterial at
November 30, 1996. Major U.S. multinational banks are counterparties to the
option contracts.
MINORITY INTEREST IN SUBSIDIARY
Minority interest in subsidiary represents the joint venture partners'
proportionate share of the equity in Progress Software K.K. (PSKK), a Japanese
joint stock corporation established in January 1995 to market and support the
Company's products in Japan. At November 30, 1996, the Company owned 51% of the
capital stock of PSKK.
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Software license revenue is recognized upon the later of shipment of
product or completion of significant obligations to customers. Maintenance
revenue is deferred and recognized ratably over the term of the agreement.
Revenue from support services is recognized as the related services are
performed.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents include short-term highly liquid investments purchased
with remaining maturities of three months or less. Short-term investments, which
consist primarily of municipal and U.S. Treasury obligations and corporate debt
securities purchased with remaining maturities of more than three months, are
classified as investments available for sale and stated at fair value. Aggregate
unrealized holding gains and losses are included as a separate component of
shareholders' equity.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash investments and trade
receivables. The Company has cash investment policies which limit investments to
investment grade securities. The Company performs ongoing credit evaluations of
its customers and the risk with respect to trade receivables is further
mitigated by the diversity, both by geography and by industry, of its customer
base.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1996, the Company adopted SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments" (SFAS 107). The provisions of SFAS 107 require disclosure
of the fair value of financial instruments.
The carrying amount of cash, accounts receivable and accounts payable
approximates fair value due to the short-term nature of these instruments. The
fair value of investments available for sale is based on current market value.
The carrying amount of long-term debt, including the current portion,
approximate fair value as the Company believes these financial instruments carry
terms which are comparable to similar instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised principally of magnetic media and documentation.
PROPERTY AND EQUIPMENT
Purchased property and equipment is recorded at cost. Leased equipment is
recorded at the present value of the minimum lease payments required during the
lease period. Depreciation and amortization is provided on the straight-line
method over the estimated useful lives (three to ten years) of the related
assets or the remaining terms of leases, whichever is shorter.
CAPITALIZATION OF SOFTWARE COSTS
The Company capitalizes certain internally generated software development
costs after technological feasibility of the product has been established.
Capitalized software costs also include amounts paid for purchased software
which has reached technological feasibility. Such costs are amortized over the
estimated life of the product (two to four years). The Company continually
compares the unamortized costs of capitalized software costs to the expected
future revenues for the products. If the unamortized costs exceed the expected
future net realizable value, the excess amount is written off. Accumulated
amortization was approximately $4,306,000 and $2,604,000 at November 30, 1996
and 1995, respectively.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, included in other assets, primarily represent noncompete
agreements and organization costs and are recorded at the lower of amortized
cost or fair value. Such costs are amortized over periods ranging from three to
five years. Accumulated amortization was approximately $679,000 and $385,000 at
November 30, 1996 and 1995, respectively.
INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between financial and taxable income. Such differences arise
primarily from the use of accelerated tax depreciation, accruals, capitalized
software costs, and provisions for doubtful accounts. No provision for U.S.
income taxes has been made for the undistributed earnings of non-U.S.
subsidiaries, as these earnings have been permanently reinvested or would be
principally offset by foreign tax credits. Cumulative undistributed foreign
earnings were approximately $9,711,000 at November 30, 1996.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted average number of
common and common equivalent shares outstanding during each period presented.
Common stock equivalents consist of stock options. Income per common share, on a
fully-diluted basis, is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding based on the higher of
the ending or average market price of the Company's common stock (under the
treasury stock method).
NOTE 2: CASH AND SHORT-TERM INVESTMENTS
A summary of the Company's investments available for sale by major security
type at November 30, 1996 was as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITY TYPE COST GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- -------
(IN THOUSANDS)
Corporate debt securities........................ $11,871 $11,871
Obligations of states and political
subdivisions................................... 65,373 $294 $(52) 65,615
U.S. government obligations...................... 7,612 (1) 7,611
------- ---- ---- -------
Total.................................. $84,856 $294 $(53) $85,097
======= ==== ==== =======
The fair value of debt securities at November 30, 1996, by contractual
maturity, was as follows:
Due in one year or less (including $18,646 classified as cash
equivalents)..................................................... $50,060
Due after one year................................................. 35,037
-------
Total.................................................... $85,097
=======
A summary of the Company's investments available for sale by major security
type at November 30, 1995 was as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITY TYPE COST GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- -------
(IN THOUSANDS)
Corporate debt securities........................ $ 7,350 $ 7,350
Obligations of states and political
subdivisions................................... 53,452 $ 81 53,533
U.S. government obligation....................... 9,361 52 9,413
------- ---- ---- -------
Total.................................. $70,163 $133 $ -- $70,296
======= ==== ==== =======
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29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
NOVEMBER 30,
---------------------
1996 1995
------- -------
(IN THOUSANDS)
Equipment and purchased software............................... $42,470 $35,654
Equipment held under capital leases............................ 952 1,049
Furniture and fixtures......................................... 5,046 4,467
Leasehold improvements......................................... 6,331 5,093
------- -------
Total................................................ 54,799 46,263
Less accumulated depreciation and amortization................. 30,569 21,945
------- -------
Property and equipment -- net.................................. $24,230 $24,318
======= =======
Accumulated amortization related to equipment held under capital leases was
approximately $822,000 and $845,000 at November 30, 1996 and 1995, respectively.
NOTE 4: LONG-TERM DEBT
Long-term debt consisted of the following:
NOVEMBER 30,
-----------------
1996 1995
---- ----
(IN THOUSANDS)
Obligations under noncancelable capital leases at rates of 8.0%
to 11.25%....................................................... $122 $162
Less current portion.............................................. 37 89
---- ----
Long-term debt.................................................... $ 85 $ 73
==== ====
At November 30, 1996, future remaining minimum lease payments under capital
lease obligations were as follows:
(IN THOUSANDS)
1997................................................................... $ 47
1998................................................................... 35
1999................................................................... 21
2000................................................................... 43
----
Total minimum lease payments........................................... 146
Less amount representing interest...................................... 24
----
Present value of minimum lease payments................................ 122
Less portion due in one year........................................... 37
----
Long-term portion of minimum lease payments............................ $ 85
====
NOTE 5: SHAREHOLDERS' EQUITY
COMMON STOCK
On September 25, 1995, the Board of Directors approved a two-for-one common
stock split in the form of a stock dividend. Shareholders received one
additional share for each share held. Such distribution was made on November 27,
1995 to shareholders of record at the close of business on October 27, 1995. All
share and per share amounts for fiscal 1994 have been restated to reflect the
split.
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company purchased 457,500 shares of its common stock for
$7,205,000. Of the total shares purchased in 1996, 396,500 shares were purchased
under the Board of Directors' previous authorization which expired on September
30, 1996.
In September 1996, the Board of Directors authorized, through September 30,
1997 the purchase of up to 3,000,000 shares of the Company's common stock at
such times when the Company deems such purchases to be an effective use of cash
for various purposes including the issuance of shares pursuant to the Company's
stock option plans. At November 30, 1996, there were 2,939,000 shares of common
stock authorized for repurchase.
STOCK OPTIONS
In August 1994, the shareholders of the Company adopted and approved the
1994 Stock Incentive Plan (1994 Plan) and the 1993 Directors' Stock Option Plan
(Directors' Plan). In April 1992, the shareholders adopted and approved the 1992
Incentive and Nonqualified Stock Option Plan (1992 Plan) and terminated the 1984
Incentive Stock Option Plan (1984 Plan). Options granted and outstanding under
the 1984 plan remain outstanding and are exercisable in accordance with their
terms, but no further options will be granted under the 1984 Plan.
The 1994 Plan permits the granting of stock incentive awards to officers,
employees and consultants. Awards under the 1994 Plan may include stock options
(both incentive and nonqualified), grants of conditioned stock, unrestricted
grants of stock, grants of stock contingent upon the attainment of performance
goals and stock appreciation rights.
Under the Directors' Plan, each non-employee director is granted an option
to purchase 20,000 shares of common stock on the date such person first becomes
a director. All non-employee directors who were serving as of December 31, 1993
received a one time automatic grant of an option to purchase 20,000 shares. The
Directors' Plan also provides that each non-employee director will be granted an
additional option to purchase 20,000 shares of common stock upon re-election to
the Board of Directors when all previously granted options under the Directors'
Plan are fully vested. The exercise price of all options equals the fair market
value of the shares on the date of grant. All options vest ratably over a
six-year period from the date of grant.
A total of 2,000,000 shares are issuable under each of the 1992 and 1994
Plans, of which 1,226,716 shares were available for grant at November 30, 1996.
A total of 300,000 shares are issuable under the Directors' Plan, of which
180,000 shares were available for grant at November 30, 1996.
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under the plans is as follows:
INCENTIVE NONQUALIFIED
---------------------------- ----------------------------
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE
--------- -------------- --------- --------------
Outstanding at December 1, 1993......... 1,110,858 $ .45-22.31 379,748 $ 1.00-19.83
Granted............................... 470,270 16.00-21.56 472,968 16.00-21.56
Exercised............................. (103,760) .45-16.88
Canceled.............................. (108,474) 2.50-22.31 (72,100) 16.50-21.56
--------- ------------ --------- ------------
Outstanding at November 30, 1994........ 1,368,894 $ .45-22.31 780,616 $ 1.00-21.56
Granted............................... 469,872 18.25-34.00 383,000 21.63-28.13
Exercised............................. (497,810) .75-25.69 (27,878) 1.00-21.63
Canceled.............................. (148,360) 2.50-21.63 (36,684) 16.50-21.63
--------- ------------ --------- ------------
Outstanding at November 30, 1995........ 1,192,596 $ .45-34.00 1,099,054 $ 1.00-28.13
Granted............................... 958,713 13.50-21.63 485,750 13.50-16.12
Exercised............................. (119,701) .45-21.63 (17,002) 1.00-21.63
Canceled.............................. (362,636) 2.50-34.00 (370,476) 15.50-28.13
--------- ------------ --------- ------------
Outstanding at November 30, 1996........ 1,668,972 $ .75-22.31 1,197,326 $ 1.00-21.63
========= ============ ========= ============
Exercisable at November 30, 1996........ 587,758 $ .75-22.31 539,260 $ 1.00-21.63
========= ============ ========= ============
In connection with all stock option plans, 4,273,014 shares of common stock
were reserved for issuance at November 30, 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company will
adopt this standard in the first quarter of fiscal 1997. As permitted by SFAS
123, the Company intends to continue to apply Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and will prepare the
pro forma disclosures required by SFAS 123. Adoption is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
EMPLOYEE STOCK PURCHASE PLAN
The 1991 Employee Stock Purchase Plan permits eligible employees to
purchase up to a maximum of 300,000 shares of common stock of the Company at 85%
of market value. During 1996, 1995 and 1994, 47,429 shares, 25,118 shares and
19,120 shares, respectively, were issued under this plan. At November 30, 1996,
186,987 shares were available and reserved for issuance under this plan.
NOTE 6: RETIREMENT PLAN
The Company maintains a retirement plan covering all U.S. employees under
Section 401(k) of the Internal Revenue Code (Note 9). Company contributions to
the plan are at the discretion of the Board of Directors and totaled
approximately $700,000, $900,000 and $800,000 during 1996, 1995 and 1994,
respectively.
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: INCOME TAXES
The components of pretax income were as follows:
YEAR ENDED NOVEMBER 30,
------------------------------
1996 1995 1994
------ ------- -------
(IN THOUSANDS)
United States.......................................... $7,711 $18,938 $18,542
Non U.S................................................ 619 7,563 3,425
------ ------- -------
Total............................................. $8,330 $26,501 $21,967
====== ======= =======
The provisions for income taxes were comprised of the following:
YEAR ENDED NOVEMBER 30,
------------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Current:
Federal.............................................. $1,564 $6,160 $5,694
State................................................ 205 513 823
Foreign.............................................. 1,759 2,910 1,360
------ ------ ------
Total current..................................... 3,528 9,583 7,877
------ ------ ------
Deferred:
Federal.............................................. (361) 509 (139)
State................................................ (73) 93 (25)
Foreign.............................................. (261) (368) (134)
------ ------ ------
Total deferred.................................... (695) 234 (298)
------ ------ ------
Total........................................ $2,833 $9,817 $7,579
====== ====== ======
The tax effects of significant items comprising the Company's deferred
taxes were as follows:
NOVEMBER 30,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
Deferred Tax Liabilities:
Capitalized software costs..................................... $(2,129) $(1,767)
Depreciation and amortization.................................. (216) (939)
------- -------
Total deferred tax liabilities......................... (2,345) (2,706)
------- -------
Deferred Tax Assets:
Accounts receivable............................................ 1,512 1,299
Inventories.................................................... 412 288
Accrued compensation........................................... 268 345
Other accruals................................................. 1,140 1,371
Foreign tax loss carryforwards................................. 1,202 311
------- -------
Total deferred tax assets...................................... 4,534 3,614
Valuation allowance............................................ (982) (387)
------- -------
Total.................................................. $ 1,207 $ 521
======= =======
The valuation allowance applies to deferred tax assets in certain foreign
jurisdictions where realization is not assured. The increase in the valuation
allowance in 1996, 1995 and 1994 primarily related to foreign tax loss
carryforwards.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has foreign net operating loss carryforwards of $206,000
expiring on various dates through 2002 and $2,703,000 which can be carried
forward indefinitely.
A reconciliation of the U.S. federal statutory rate to the effective tax
rate was as follows:
YEAR ENDED NOVEMBER 30,
----------------------
1996 1995 1994
---- ---- ----
Tax at U.S. federal statutory rate............................. 35.0% 35.0% 35.0%
Non-U.S........................................................ 5.5 0.1 1.4
Unutilized foreign losses...................................... 7.0 -- --
Foreign sales corporation...................................... (8.2) (1.2) (0.7)
Research credits............................................... (2.0) (0.9) (1.7)
State income taxes, net........................................ 3.0 2.6 2.6
Tax-exempt interest............................................ (9.4) (2.4) (2.5)
Nondeductible software development costs....................... -- 3.0 --
Other.......................................................... 3.1 0.8 0.4
---- ---- ----
Total................................................ 34.0% 37.0% 34.5%
==== ==== ====
NOTE 8: OPERATING LEASES
The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Future minimum rental payments at November 30,
1996 under these leases are as follows:
(IN THOUSANDS)
1997................................................... $ 6,990
1998................................................... 4,593
1999................................................... 3,015
2000................................................... 882
2001................................................... 569
Thereafter............................................. 1,486
-------
Total........................................ $17,535
=======
Total rent expense under all operating leases was approximately $5,815,000,
$5,753,000 and $4,797,000 during 1996, 1995 and 1994, respectively.
NOTE 9: CONTINGENCY AND LITIGATION
The Company's 401(k) Plan has approximately $900,000 invested in Guaranteed
Investment Contracts (GICs) issued by Mutual Benefit Life Insurance Company
(MBLI). On July 16, 1991, the Insurance Commissioner of the State of New Jersey
took possession and control of MBLI's assets. In April 1994, a rehabilitation
plan was approved by the Superior Court of New Jersey. Pursuant to the plan, the
GICs are supported by a group of life insurance companies and are to be paid out
from the assets of MBL Life Assurance Corporation, the successor to MBLI. The
Company is not presently able to determine whether the 401(k) Plan or its
participants will incur any losses or whether, if such losses are incurred, the
Company might be subject to any liability (either directly as a Plan fiduciary
or as an indemnitor of officers and directors of the Company who serve as
trustees of the Plan).
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
The Company operates in one industry segment consisting of the development,
marketing and support of application development and database software.
Intercompany revenues principally represent royalties based on software license
and maintenance revenue generated by non-U.S. operations from their unaffiliated
customers.
Summarized information relating to international operations is as follows:
YEAR ENDED NOVEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Sales to unaffiliated customers:
North America............................................ $ 72,122 $ 75,455 $ 62,411
Europe................................................... 72,533 79,489 57,266
Other.................................................... 18,775 14,898 11,213
Export Sales from United States.......................... 13,260 10,293 8,347
-------- -------- --------
Total sales to unaffiliated customers...................... $176,690 $180,135 $139,237
======== ======== ========
Intercompany revenues:..................................... $ 29,793 $ 35,520 $ 25,470
======== ======== ========
Operating income:
North America............................................ $ 4,882 $ 16,517 $ 17,933
Europe................................................... 504 5,836 1,542
Other.................................................... (870) 646 453
Eliminations............................................. (55) 333 (97)
-------- -------- --------
Total operating income..................................... $ 4,461 $ 23,332 $ 19,831
======== ======== ========
Identifiable assets:
North America............................................ $143,890 $142,833 $113,226
Europe................................................... 35,466 41,489 26,219
Other.................................................... 13,086 10,550 7,052
Eliminations............................................. (19,254) (19,136) (11,943)
-------- -------- --------
Total identifiable assets.................................. $173,188 $175,736 $134,554
======== ======== ========
NOTE 11: BUSINESS ACQUISITION
On January 6, 1995, the Company acquired all of the outstanding stock of
Crescent Software, Inc. (Crescent) for approximately $3,000,000, consisting of
$2,150,000 in cash and $850,000 in assumed and other liabilities. Crescent is a
supplier of add-on software to users of Microsoft's Visual Basic application
development environment. The assets acquired consist primarily of existing
software and software in the development stage. The acquisition was accounted
for as a purchase, and accordingly, the results of operations are included in
the Company's operating results from the date of acquisition. The purchase price
included $2,373,000 of in-process software development costs which was charged
to operations in the first quarter of fiscal 1995 and $230,000 of capitalized
software costs which will be amortized over a two-year period. Pro forma results
of this acquisition, assuming it had been made at the beginning of each year
presented, would not be materially different than the results reported.
34
35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Progress Software Corporation:
We have audited the accompanying consolidated balance sheets of Progress
Software Corporation and its subsidiaries as of November 30, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended November 30, 1996. Our
audits also included the financial statement schedule listed in the Index in
Item 14. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Progress Software Corporation
and its subsidiaries as of November 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 20, 1996
35
36
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Revenue........................................... $48,382 $41,662 $41,411 $45,235
Income (loss) from operations..................... 5,855 (789) (776) 171
Net income........................................ 4,419 155 218 705
Income per common share........................... 0.32 0.01 0.02 0.05
1995
Revenue........................................... $39,418 $42,758 $44,961 $52,998
Income from operations............................ 3,206* 5,964 5,703 8,459
Net income........................................ 1,590* 4,565 4,318 6,211
Income per common share........................... 0.12* 0.34 0.31 0.45
- ---------------
* Includes a non-recurring charge for purchase of in-process software
development of $2,373 or $0.18 per share. Excluding this non-recurring item,
net income would have been $3,963 or $0.30 per share.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END
DESCRIPTION OF PERIOD EXPENSES RESERVES OF PERIOD
- ----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Reserves deducted from assets to which they
apply -- for doubtful accounts receivable:
1996.......................................... $4,611 $1,818 $(1,317) $5,112
====== ====== ======= ======
1995.......................................... $4,268 $1,936 $(1,593) $4,611
====== ====== ======= ======
1994.......................................... $2,867 $2,097 $ (696) $4,268
====== ====== ======= ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any matter of
accounting principles, financial statement disclosure, or auditing scope or
procedures required to be reported under this item.
36
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers set forth under the caption
"Executive Officers of the Registrant" in Item 1 of this Annual Report is
incorporated herein by reference.
The information regarding directors set forth under the caption "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 25, 1997, which will be filed
with the Securities and Exchange Commission not later than 120 days after
November 30, 1996, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 1997, which will be filed with the
Securities and Exchange Commission not later than 120 days after November 30,
1996, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Holders and Management" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 25, 1997, which will
be filed with the Securities and Exchange Commission not later than 120 days
after November 30, 1996, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 25, 1997, which will be
filed with the Securities and Exchange Commission not later than 120 days after
November 30, 1996, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report:
Consolidated Balance Sheets as of November 30, 1996 and 1995
Consolidated Statements of Income for the years ended November 30, 1996,
1995, and 1994
Consolidated Statements of Shareholders' Equity for the years ended
November 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended November 30,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplemental Financial Data not covered by the Independent Auditors'
Report:
Selected Quarterly Financial Data
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown on the financial statements or notes thereto.
37
38
(3) EXHIBITS
Documents listed below, except for documents identified by parenthetical
numbers, are being filed as exhibits herewith. Documents identified by
parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32
of the General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Act"), reference is made to such documents
as previously filed as exhibits with the Commission. The Company's file number
under the Act is 0-19417.
3.1 Restated Articles of Organization of the Company(1)
3.1.1 Articles of Amendment to Restated Articles of Organization of the Company(2)
3.2 By-Laws of the Company, as amended and restated(3)
4.1 Specimen certificate for the Common Stock of the Company(4)
10.2 Form of User Agreement, as amended(5)
10.3 Form of Application Partner Agreement(6)
10.4 Form of End User Product License Agreement(7)
10.5 Form of Authorized International Distributor Agreement(8)
10.6 1984 Incentive Stock Option Plan, with amendments(9)
10.7 Amended and Restated 1984 Incentive Stock Option Plan(10)
10.8 1991 Employee Stock Purchase Plan, as amended(11)
10.9 Progress Software Corporation 401(k) Plan and Trust(12)
10.10 Lease dated June 28, 1991 between the Company and The Equitable Life Assurance
Company of the United States(13)
10.11 Progress Software Corporation 401(k) Plan with Fidelity Institutional Retirement
Services Company(14)
10.12 1992 Incentive and Nonqualified Stock Option Plan(15)
10.13 Amendments dated April 27, 1992 and November 13, 1992 to lease dated June 28, 1991
between the Company and The Equitable Life Assurance Company of the United States(16)
10.14 Amendment dated March 16, 1993 to lease dated June 28, 1991 between the Company and
the Equitable Life Assurance Company of the United States(17)
10.15 First Amended and Restated Lease dated August 11, 1994 between the Company and the
Equitable Life Assurance Company of the United States(18)
10.16 1994 Stock Incentive Plan(19)
10.17 1993 Directors' Stock Option Plan(20)
11.1 Statement re computation of per share earnings
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (EDGAR version only)
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(2) Incorporated by reference to Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1994.
(3) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1991.
(4) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(5) Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(6) Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(7) Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
38
39
(8) Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
(9) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(10) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(11) Incorporated by reference to Exhibit 28.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1991.
(12) Incorporated by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(13) Incorporated by reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1, File No. 33-41223, as amended.
(14) Incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1991.
(15) Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1992.
(16) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1992.
(17) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1993.
(18) Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(19) Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(20) Incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
(4) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended November 30, 1996.
39
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Bedford, Commonwealth of Massachusetts on the 19th day of February, 1997.
PROGRESS SOFTWARE CORPORATION
By: /s/ JOSEPH W. ALSOP
------------------------------------
Joseph W. Alsop
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------ ------------------
/s/ JOSEPH W. ALSOP President, Treasurer, and Director February 19, 1997
- ------------------------------------- (Principal Executive Officer)
Joseph W. Alsop
/s/ NORMAN R. ROBERTSON Vice President, Finance and Chief February 19, 1997
- ------------------------------------- Financial Officer (Principal
Norman R. Robertson Financial Officer)
/s/ DAVID H. BENTON, JR. Corporate Controller (Principal February 19, 1997
- ------------------------------------- Accounting Officer)
David H. Benton, Jr.
/s/ LARRY R. HARRIS Director February 19, 1997
- -------------------------------------
Larry R. Harris
/s/ ROBERT J. LEPKOWSKI Director February 19, 1997
- -------------------------------------
Robert J. Lepkowski
/s/ MICHAEL L. MARK Director February 19, 1997
- -------------------------------------
Michael L. Mark
/s/ ARTHUR J. MARKS Director February 19, 1997
- -------------------------------------
Arthur J. Marks
/s/ AMRAM RASIEL Director February 19, 1997
- -------------------------------------
Amram Rasiel
/s/ JAMES W. STOREY Director February 19, 1997
- -------------------------------------
James W. Storey
40