SEC Filing | Progress Software Corporation

1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q - -------------------------------------------------------------------------------- (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period Ended February 29, 2000 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number: 0-19417 PROGRESS SOFTWARE CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2746201 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 Oak Park Bedford, Massachusetts 01730 (Address of principal executive offices) Telephone Number: (781) 280-4000 -------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] As of April 10, 2000, there were 35,729,000 shares of the Registrant's Common Stock, $.01 par value per share, outstanding. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------

2 PROGRESS SOFTWARE CORPORATION FORM 10-Q FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of February 29, 2000 and November 30, 1999 3 Condensed Consolidated Statements of Income for the three months ended February 29, 2000 and February 28, 1999 4 Condensed Consolidated Statements of Cash Flows for the three months ended February 29, 2000 and February 28, 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 15 Signatures 16 2 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------

3 PART 1. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PROGRESS SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) February 29, November 30, 2000 1999 ------------ ------------ ASSETS Current assets: Cash and equivalents $ 81,913 $ 81,651 Short-term investments 84,234 77,014 Accounts receivable (less allowances of $7,321 in 2000 and $7,259 in 1999) 50,789 47,952 Other current assets 11,198 9,406 Deferred income taxes 10,707 9,836 --------- --------- Total current assets 238,841 225,859 --------- --------- Property and equipment-net 20,387 20,594 Capitalized software costs-net 3,142 3,155 Other assets 8,286 6,946 --------- --------- Total $ 270,656 $ 256,554 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,207 $ 14,041 Accrued compensation and related taxes 15,870 24,344 Income taxes payable 10,936 8,723 Other current liabilities 10,832 8,962 Deferred revenue 69,784 58,173 --------- --------- Total current liabilities 119,629 114,243 --------- --------- Commitments and contingent liabilities Shareholders' equity: Preferred stock, $.01 par value, authorized, 1,000 shares; Issued, none Common stock and additional paid in capital, $.01 par value, authorized, 75,000 shares, issued 35,689 shares in 2000 and 35,553 shares in 1999 42,030 40,491 Retained earnings 111,476 103,904 Accumulated other comprehensive loss (2,479) (2,084) --------- --------- Total shareholders' equity 151,027 142,311 --------- --------- Total $ 270,656 $ 256,554 ========= ========= See notes to condensed consolidated financial statements 3

4 PROGRESS SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ended ------------------------------- February 29, February 28, 2000 1999 ---------- ------------ Revenue: Software licenses $ 33,237 $ 33,129 Maintenance and services 38,894 34,016 ---------- --------- Total revenue 72,131 67,145 ---------- --------- Costs and expenses: Cost of software licenses 2,761 3,106 Cost of maintenance and services 13,991 12,513 Sales and marketing 26,038 25,783 Product development 10,359 9,294 General and administrative 7,336 6,794 ---------- --------- Total costs and expenses 60,485 57,490 ---------- --------- Income from operations 11,646 9,655 ---------- --------- Other income (expense): Interest income 1,810 1,206 Foreign currency loss (105) (507) Other income (expense) (16) 82 ---------- --------- Total other income 1,689 781 ---------- --------- Income before provision for income taxes 13,335 10,436 Provision for income taxes 4,267 3,339 ---------- --------- Net income $ 9,068 $ 7,097 ========== ========= Basic earnings per share $0.25 $0.20 ========== ========= Weighted average shares outstanding (basic) 35,670 34,644 ========== ========= Diluted earnings per share $0.22 $0.18 ========== ========= Weighted average shares outstanding (diluted) 40,666 40,146 ========== ========= See notes to condensed consolidated financial statements. 4

5 PROGRESS SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended ------------------------------ February 29, February 28, 2000 1999 ------------ ------------ Cash flows from operating activities: Net income $ 9,068 $ 7,097 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 2,478 2,780 Amortization of capitalized software costs 413 559 Amortization of intangible assets 121 199 Deferred income taxes (615) (249) Minority interest -- (59) Other noncash charges 405 15 Changes in operating assets and liabilities: Accounts receivable (3,083) (2,171) Other current assets (1,985) (1,408) Accounts payable and accrued liabilities (7,991) (9,180) Income taxes payable 3,187 (795) Deferred revenue 11,817 7,121 -------- -------- Total adjustments 4,747 (3,188) -------- -------- Net cash provided by operating activities 13,815 3,909 -------- -------- Cash flows from investing activities: Purchases of investments available for sale (26,570) (27,266) Maturities of investments available for sale 19,173 13,983 Purchases of property and equipment (2,381) (1,965) Capitalized software costs (400) (75) Acquisition of distributor (2,100) -- Decrease (increase) in other noncurrent assets 232 (30) -------- -------- Net cash used for investing activities (12,046) (15,353) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 2,043 4,706 Repurchase of common stock (2,870) (6,125) -------- -------- Net cash used for financing activities (827) (1,419) -------- -------- Effect of exchange rate changes on cash (680) (341) -------- -------- Net increase (decrease) in cash and equivalents 262 (13,204) Cash and equivalents, beginning of period 81,651 50,155 -------- -------- Cash and equivalents, end of period $ 81,913 $ 36,951 ======== ======== Supplemental disclosure of noncash financing activities: Income tax benefit from employees' exercise of stock options $ 827 $ 2,129 ======== ======== See notes to condensed consolidated financial statements. 5

6 PROGRESS SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared by Progress Software Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report and Form 10-K for the fiscal year ended November 30, 1999. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year. All share and per share information reflects the impact of the two-for-one stock split which was effective on January 21, 2000. The Company operates in a single segment consisting of the development, marketing and support of application development, deployment and management software. 2. Income Taxes The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. 3. Earnings Per Share Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options using the treasury stock method. 4. Comprehensive Income Comprehensive income includes foreign currency translation gains and losses and unrealized gains and losses on equity securities that have been previously excluded from net income and reflected instead in stockholders' equity. The following table sets forth the calculation of comprehensive income on an interim basis: Three Months Ended ------------------------------ February 29, February 28, 2000 1999 ------------ ------------ Net income $9,068 $7,097 Foreign currency translation adjustments (219) (1,765) Unrealized holding losses on investments (176) (51) ------ ------ Total comprehensive income $8,673 $5,281 ====== ====== 6

7 5. Acquisition In January 2000, the Company, through a wholly-owned subsidiary, acquired certain assets of its distributor in South Africa for $2.1 million. The acquisition was accounted for as a purchase, and accordingly, the results of operations are included in the Company's operating results from the date of acquisition. The purchase price was allocated primarily to goodwill, which will be amortized over a seven-year period. If this acquisition had been made at the beginning of the earliest period presented, the effect on the consolidated financial statements would not have been material. 6. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which establishes standards for derivative instruments and hedging activities. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 in the first quarter of fiscal 2001. The Company is currently evaluating this statement, but does not expect the adoption of SFAS 133 to have a material effect on the Company's consolidated financial position or results of operations. 7

8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward- looking statements. From time to time, information provided by the Company or statements made by its directors, officers or employees may contain "forward-looking" information which involves risks and uncertainties. Actual future results may differ materially. Statements indicating that the Company "expects," "estimates," "believes," "is planning" or "plans to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors which could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors are described in greater detail below under the heading "Factors That May Affect Future Results" and include, but are not limited to, the receipt and shipment of new orders, the timely release of enhancements to the Company's products, the growth rates of certain market segments, the positioning of the Company's products in those market segments, market acceptance of the application service provider distribution model, variations in the demand for customer service and technical support, pricing pressures and the competitive environment in the software industry, business and consumer use of the Internet, and the Company's ability to penetrate international markets and manage its international operations. Although the Company has sought to identify the most significant risks to its business, the Company cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that the Company has identified all possible issues which the Company might face. RESULTS OF OPERATIONS The following table sets forth certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items, for the three months ended February 29, 2000 and February 28, 1999. Percentage of Total Revenue --------------------------------- Period-to-period Change Three Months Ended ----------------------- --------------------------------- Three Months February 29, February 28, 2000 Compared 2000 1999 to 1999 ------------ ------------ ----------------------- Revenue: Software licenses 46% 49% 0% Maintenance and services 54 51 14 --- --- Total revenue 100 100 7 --- --- Costs and expenses: Cost of software licenses 4 5 (11) Cost of maintenance and services 20 19 12 Sales and marketing 36 38 1 Product development 14 14 11 General and administrative 10 10 8 --- --- Total costs and expenses 84 86 5 --- --- Income from operations 16 14 21 --- --- Other income, net 2 2 116 --- --- Income before provision for income taxes 18 16 28 Provision for income taxes 6 5 28 --- --- Net income 12% 11% 28% === === The Company's total revenue increased 7% from $67.1 million in the first quarter of fiscal 1999 to $72.1 million in the first quarter of fiscal 2000. The increase in total revenue was due to an increase in maintenance and services revenue of 14%, while software license revenue was approximately the same as in the corresponding period from the prior year. 8

9 Total revenue in the first quarter of fiscal 2000 would have increased by 13% over the first quarter of fiscal 1999 if exchange rates had remained constant as compared to the rates in effect in the corresponding period from the prior year. Software license revenue would have increased by 6% and maintenance and services revenue would have increased by 20% on a constant currency basis. Software license revenue remained approximately the same as in the corresponding period from the prior year at $33 million. The Company believes that the lack of growth in software license revenue was attributable to the impact of a strong dollar, especially relative to the Euro, and a shift in the buying patterns of customers due to a purchasing slowdown around the millenium changeover. Software license revenue from development products, such as Progress ProVision, decreased year over year. Software license revenue from most deployment products was flat. Partially offsetting these product groups were new Internet-focused products, primarily Progress WebSpeed and to a lesser extent Progress SonicMQ, which significantly increased year over year. However, these products currently represent a small percentage of total software license revenue. Maintenance and services revenue increased 14% from $34.0 million in the first quarter of fiscal 1999 to $38.9 million in the first quarter of fiscal 2000. The increase in maintenance and services revenue was primarily a result of year over year growth in the Company's installed customer base, renewal of maintenance contracts and increased consulting revenue, especially overseas. The Company is dedicating more resources to its service businesses in order to take advantage of the market opportunities associated with companies buying packaged applications and engaging service providers to customize or integrate such packages with other applications. Total revenue generated in markets outside North America increased 9% from $41.6 million in the first quarter of fiscal 1999 to $45.5 million in the first quarter of fiscal 2000. Such revenue increased as a percentage of total revenue from 62% in the first quarter of fiscal 1999 to 63% in the first quarter of fiscal 2000. Revenue growth in the Asia Pacific and Latin American regions exceeded the overall growth rate for the Company in the first quarter of fiscal 2000. On a constant currency basis, total revenue generated in markets outside North America would have represented 65% of total revenue in the first quarter of fiscal 2000. Cost of software licenses consists primarily of cost of product media, documentation, duplication, packaging, royalties and amortization of capitalized software costs. Cost of software licenses decreased 11% from $3.1 million in the first quarter of fiscal 1999 to $2.8 million in the first quarter of fiscal 2000 and decreased as a percentage of software license revenue from 9% to 8%. The dollar and percentage decrease was due primarily to lower documentation and media costs. Cost of maintenance and services consists primarily of costs of providing customer technical support, consulting and education. Cost of maintenance and services increased 12% from $12.5 million in the first quarter of fiscal 1999 to $14.0 million in the first quarter of fiscal 2000, but decreased as a percentage of maintenance and services revenue from 37% to 36%. The margin percentage improvement was due primarily to slightly better margins in the Company's consulting and education business in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. The dollar increase was due primarily to an increase in the technical support, consulting and education staff in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 and greater usage of outside contractors to fulfill demand for consulting services. The Company expects its headcount for technical support, consulting and education to continue to increase through the remainder of fiscal 2000 primarily due to the need to satisfy increased demand for consulting and education services. However, there can be no assurance that the Company will be successful in recruiting and retaining such personnel. Sales and marketing expenses increased 1% from $25.8 million in the first quarter of fiscal 1999 to $26.0 million in the first quarter of fiscal 2000 but decreased as a percentage of total revenue from 38% to 36%. The percentage decrease was due to the Company's efforts to manage sales and marketing expenses at a rate of growth below the rate of revenue growth. The Company is planning to increase sales and marketing expenses at a slower rate of growth than revenue during the remainder of fiscal 2000. The dollar increase 9

10 in sales and marketing expenses was primarily due to an increase in headcount in the sales, sales support and marketing staff, partially offset by a slight decrease in the level of discretionary marketing spending. The amount of discretionary marketing expenses can vary from period to period depending on the timing of significant trade shows, advertising campaigns and direct mail solicitations. The headcount increase was primarily to support international growth. Product development expenses increased 11% from $9.3 million in the first quarter of fiscal 1999 to $10.4 million in the first quarter of fiscal 2000 and remained the same percentage of total revenue at 14%. Total product development spending increased by 15% from $9.4 million in the first quarter of fiscal 1999 to $10.8 million in the first quarter of fiscal 2000. The increase was primarily due to an increase in headcount-related expenses required to support continued new product development efforts. The major product development efforts in the first quarter of fiscal 2000 primarily related to the development of the next versions of the Company's various product lines, including Progress Version 9.1 and Progress SonicMQ. Capitalized software costs represented 4% of total product development spending in the first quarter of fiscal 2000 versus 1% in the first quarter of fiscal 1999. The increase in the percentage of capitalized software costs was due to the timing and stage of development of significant projects that qualify for capitalization under the Company's software capitalization policy. General and administrative expenses include the costs of the finance, human resources, legal, information systems and administrative departments of the Company. General and administrative expenses increased 8% from $6.8 million in the first quarter of fiscal 1999 to $7.3 million in the first quarter of fiscal 2000 and remained the same percentage of total revenue at 10%. The dollar increase in general and administrative expenses was primarily due to an increase in headcount due to growth in the Company's overseas operations. Other income increased 116% from $0.8 million in the first quarter of fiscal 1999 to $1.7 million in the first quarter of fiscal 2000. The increase was primarily due to greater interest income from higher average cash balances and lower foreign exchange losses. Foreign currency losses in each period primarily relate to the translation and settlement of short-term intercompany receivables. The Company's effective tax rate was 32% in each of the first quarters of fiscal 1999 and 2000 and was based upon the estimated effective tax rate for the full fiscal year. LIQUIDITY AND CAPITAL RESOURCES At the end of the first quarter of fiscal 2000, the Company's cash and short-term investments totaled $166.1 million. The increase in the balance of $7.5 million since the end of fiscal 1999 resulted from cash generated from operations and proceeds from stock issuances under the stock purchase plan and exercise of stock options, partially offset by common stock repurchases and capital expenditures. The Company generated $13.8 million in cash from operations in the first three months of fiscal 2000 as compared to $3.9 million in the first three months of fiscal 1999. The increase was primarily due to higher net income and an increase in deferred revenue. Accounts receivable increased in each period primarily due to revenue growth. The Company's accounts receivable days sales outstanding (DSO) were 63 days at the end of the first quarter of fiscal 2000 as compared to 55 days at the end of the first quarter of fiscal 1999 and at the end of fiscal 1999. The Company targets a DSO range of 55 to 75 days. The increase in DSO was attributable to the mix of revenue during the quarter. The Company purchased $2.4 million of property and equipment in the first three months of fiscal 2000 and $2.0 million in the first three months of fiscal 1999. The purchases consisted primarily of computer equipment and software, furniture and fixtures and leasehold improvements. The level of property and equipment purchases resulted primarily from continued growth of the business and replacement of older equipment. The Company financed these purchases primarily from cash generated from operations. 10

11 The Company purchased and retired 124,500 shares of its common stock for $2.9 million in the first three months of fiscal 2000 as compared to 436,000 shares for $6.1 million in the first three months of fiscal 1999. The Company financed these purchases primarily from cash generated from operations. In September 1999, the Board of Directors authorized, for the period October 1, 1999 through September 30, 2000, the purchase of up to 10,000,000 shares of the Company's common stock, at such times when the Company deems such purchases to be an effective use of cash. Shares that are repurchased may be used for various purposes including the issuance of shares pursuant to the Company's stock option plans. At February 29, 2000, approximately 9,850,000 shares of common stock remain available for repurchase under this authorization. In January 2000, the Company, through a wholly-owned subsidiary, acquired certain assets of its distributor in South Africa for $2.1 million. The acquisition was accounted for as a purchase, and accordingly, the results of operations are included in the Company's operating results from the date of acquisition. The purchase price was allocated primarily to goodwill, which will be amortized over a seven-year period. If this acquisition had been made at the beginning of the earliest period presented, the effect on the consolidated financial statements would not have been material. The Company financed this acquisition primarily from cash generated from operations. The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's consolidated financial position or results of operations. The Company believes that existing cash balances together with funds generated from operations will be sufficient to finance the Company's operations and meet its foreseeable cash requirements (including planned capital expenditures, lease commitments and other long-term obligations) through the next twelve months. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which establishes standards for derivative instruments and hedging activities. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 in the first quarter of fiscal 2001. The Company is currently evaluating this statement, but does not expect the adoption of SFAS 133 to have a material effect on the Company's consolidated financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including changes in interest rates affecting the return on its investments and foreign currency fluctuations. The Company has established policies and procedures to manage its exposure to fluctuations in interest rates and foreign currency exchange. The Company's exposure to market rate risk for changes in interest rates relates to the Company's investment portfolio. The Company has not used derivative financial instruments in its investment portfolio. The Company places its investments with high quality issuers and has policies limiting, among other things, the amount of credit exposure to any one issuer. The Company limits default risk by purchasing only investment-grade securities. The Company's investments are all fixed rate instruments. In addition, the Company has classified all its debt securities as available for sale. This classification reduces the income statement exposure to interest rate risk. 11

12 The Company has entered into foreign exchange option and forward contracts to hedge certain transactions of selected foreign currencies (mainly in Europe and Asia Pacific) against fluctuations in exchange rates. The Company has not entered into foreign exchange option and forward contracts for speculative or trading purposes. The Company's accounting policies for these contracts are based on the Company's designation of the contracts as hedging transactions. The criteria the Company uses for designating a contract as a hedge include the contract's effectiveness in risk reduction and matching of derivative instruments to the underlying transactions. Market value increases and decreases on the foreign exchange option and forward contracts are recognized in income in the same period as gains and losses on the underlying transactions. The Company operates in certain countries where there are limited forward currency exchange markets and thus the Company has unhedged transaction exposures in these currencies. The Company generally does not hedge the net assets of its international subsidiaries. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond the Company's control. The following discussion highlights some of these risks. The Company may experience significant fluctuations in future quarterly operating results that may be caused by many factors. Some of these factors include changes in demand for the Company's products, introduction, enhancement or announcement of products by the Company and its competitors, market acceptance of new products, size and timing of significant orders, budgeting cycles of customers, mix of distribution channels, mix of products and services sold, mix of international and North American revenues, fluctuations in currency exchange rates, changes in the level of operating expenses, changes in the Company's sales incentive plans, customer order deferrals in anticipation of new products announced by the Company or its competitors and general economic conditions. Revenue forecasting is uncertain, in large part, because the Company generally ships its products shortly after receipt of orders. Most of the Company's expenses are relatively fixed, including costs of personnel and facilities, and are not easily reduced. Thus, an unexpected reduction in the Company's revenue, or a decrease in the rate of growth of such revenue, would have a material adverse effect on the profitability of the Company. The Company develops, markets and supports application development, deployment and management software. Its core product line, Progress, is composed primarily of Progress ProVision, Progress RDBMS, Progress WebSpeed, Progress Open AppServer and Progress DataServers. In March 2000, the Company began shipping the latest major enhancement to the Progress product line, Progress Version 9.1. The Progress Apptivity product line consists of Apptivity Developer and Apptivity Server. The Company began commercial shipments of Progress Apptivity Version 3.2 in October 1999. The Company began commercial shipments of Progress SonicMQ, an Internet messaging server, in December 1999. The Company believes that the Progress product set, Progress SonicMQ and Progress Apptivity have features and functionality that enable the Company to compete effectively with other vendors of application development products. Ongoing enhancements to these product lines will be required to enable the Company to maintain its competitive position. There can be no assurance that the Company will be successful in developing and marketing enhancements to its products on a timely basis, or that the enhancements will adequately address the changing needs of the marketplace. Delays in the release of enhancements could have a material adverse effect on the Company's business, financial condition and operating results. The Company has derived most of its revenue from its core product line, Progress, and other products that complement Progress and are generally licensed only in conjunction with Progress. Accordingly, the Company's future results depend on continued market acceptance of Progress and any factor adversely affecting the market for Progress could have a material adverse effect on the Company's business and its financial results. Future results also depend upon the Company's continued successful distribution of its products through its Independent Software Vendor (ISV) channel and may be impacted by downward pressure on pricing, which may not be offset by increases in volume. ISVs utilize technology from the Company to create their 12

13 applications and resell the Company's products along with their own applications. Any adverse effect on their business related to competition, pricing and other factors could have a material adverse effect on the Company's business, financial condition and operating results. The Company experiences significant competition from a variety of sources with respect to the marketing and distribution of its products. Many of these competitors have greater financial, marketing or technical resources than the Company and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than can the Company. Increased competition could make it more difficult for the Company to maintain its market presence. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to deliver products that address the needs of the Company's prospective customers. Current and potential competitors also may be more successful than the Company in having their products or technologies widely accepted. There can be no assurance that the Company will be able to compete successfully against current and future competitors and its failure to do so could have a material adverse effect upon the Company's business, prospects, financial condition and operating results. The Company expects to devote significant resources enabling its ISVs to move their applications to the Application Service Provider (ASP) distribution model by providing a combination of technology, professional services and partnerships. The ASP distribution model enables ISVs to rent their business applications to end-user organizations over the Internet or through other thin-client technologies. The ASP market is new and evolving. There can be no assurance that the ASP model will become a viable market for business applications or that the Company will be successful in penetrating this new market. The Company hopes that Progress SonicMQ, Progress Apptivity and other new products and services will contribute positively to the Company's future results. The market for Internet transaction processing products and other Internet business-to-business products is highly competitive. Global e-commerce and online exchange of information on the Internet and other similar open wide area networks continue to evolve. There can be no assurance that the Company's products will be successful in penetrating these new and evolving markets. Overlaying the risks associated with the Company's existing products and enhancements are ongoing technological developments and rapid changes in customer requirements. The Company's future success will depend upon its ability to develop and introduce in a timely manner new products that take advantage of technological advances and respond to new customer requirements. The Company is currently developing new products intended to help organizations meet the future needs of application developers. The development of new products is increasingly complex and uncertain, which increases the risk of delays. There can be no assurance that the Company will be successful in developing new products incorporating new technology on a timely basis, or that its new products will adequately address the changing needs of the marketplace. The marketplace for these new products is intensely competitive and characterized by low barriers to entry. As a result, new competitors possessing technological, marketing or other competitive advantages may emerge and rapidly acquire market share. Approximately 60% of the Company's total revenue in the first quarter of fiscal 2000, as compared to 58% in the first quarter of fiscal 1999, was attributable to international sales made through its subsidiaries. Because a substantial portion of the Company's total revenue is derived from such international operations which are primarily conducted in foreign currencies, changes in the value of these foreign currencies relative to the United States dollar may affect the Company's results of operations and financial position. The Company engages in certain currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on the Company's results of operations. However, there can be no assurance that such hedging transactions will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. If for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, the Company's business could be adversely affected. 13

14 Other potential risks inherent in the Company's international business generally include longer payment cycles, greater difficulties in accounts receivable collection, unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political instability, reduced protection for intellectual property rights in some countries, seasonal reductions in business activity during the summer months in Europe and certain other parts of the world and potentially adverse tax consequences. Any one of these factors could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's future international operations, and, consequently, on the Company's business, financial condition and operating results. The Company's future success will depend in large part upon its ability to attract and retain highly skilled technical, managerial and marketing personnel. Competition for such personnel in the software industry is intense. There can be no assurance that the Company will continue to be successful in attracting and retaining the personnel it requires to successfully develop new and enhanced products and to continue to grow and operate profitably. The Company's success is heavily dependent upon its proprietary software technology. The Company relies principally on a combination of contract provisions and copyright, trademark, patent and trade secret laws to protect its proprietary technology. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or independent development by others of similar technology. In addition, litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. Although the Company believes that its products and technology do not infringe on any existing proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and operating results. The Company also utilizes certain technology which it licenses from third parties, including software which is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that functionally similar technology will continue to be available on commercially reasonable terms in the future. The market price of the Company's common stock, like that of other technology companies, is highly volatile and is subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts or other events or factors. The Company's stock price may also be affected by broader market trends unrelated to the Company's performance. 14

15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 27.1 - Financial Data Schedule (EDGAR Version Only) b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended February 29, 2000. 15

16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS SOFTWARE CORPORATION (Registrant) Dated: April 13, 2000 /s/ Joseph W. Alsop ---------------------------------- Joseph W. Alsop President (Principal Executive Officer) Dated: April 13, 2000 /s/ Norman R. Robertson ---------------------------------- Norman R. Robertson Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer) Dated: April 13, 2000 /s/ David H. Benton, Jr. ---------------------------------- David H. Benton, Jr. Vice President and Corporate Controller (Principal Accounting Officer) 16

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDING FEBRUARY 29, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS NOV-30-2000 DEC-01-1999 FEB-29-2000 81,913 84,234 58,110 7,321 0 238,841 70,105 49,718 270,656 119,629 0 0 0 42,030 108,997 270,656 33,237 72,131 2,761 60,485 0 0 0 13,335 4,267 9,068 0 0 0 9,068 0.25 0.22