UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
| For the Quarterly Period Ended August 31, 2002 |
OR
| o | 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 October 7, 2002, there were 34,125,000 shares of the Registrant’s Common Stock, $.01 par value per share, outstanding.
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED AUGUST 31, 2002
INDEX
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Consolidated Financial Statements | 3 | ||
| Condensed Consolidated Balance Sheets as of August 31, 2002 and November 30, 2001. | 3 | |||
| Condensed Consolidated Statements of Operations for the three month and nine month periods ended August 31, 2002 and 2001 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the nine months ended August 31, 2002 and 2001 | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 20 | ||
| Item 4. | Controls and Procedures | 21 | ||
| PART II | OTHER INFORMATION | |||
| Item 5. | Other Information | 21 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 21 | ||
| Signatures | 22 | |||
| Certifications | 23 |
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
| August 31, | November 30, | ||||||||||
| (In thousands, except share data) | 2002 | 2001 | |||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash and equivalents |
$ | 130,304 | $ | 108,337 | |||||||
Short-term investments |
66,438 | 66,179 | |||||||||
Accounts receivable (less allowances of $7,830 in 2002
and $6,333 in 2001) |
42,951 | 54,230 | |||||||||
Other current assets |
9,555 | 11,067 | |||||||||
Deferred income taxes |
9,500 | 9,632 | |||||||||
Total current assets |
258,748 | 249,445 | |||||||||
Property and equipment, net |
35,145 | 36,990 | |||||||||
Other assets |
10,919 | 12,945 | |||||||||
Total |
$ | 304,812 | $ | 299,380 | |||||||
Liabilities and Shareholders’ Equity |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 7,783 | $ | 10,386 | |||||||
Accrued compensation and related taxes |
19,390 | 20,146 | |||||||||
Income taxes payable |
8,033 | 8,886 | |||||||||
Other accrued liabilities |
9,665 | 10,323 | |||||||||
Deferred revenue |
67,547 | 64,463 | |||||||||
Total current liabilities |
112,418 | 114,204 | |||||||||
Commitments and contingent liabilities |
|||||||||||
Shareholders’ equity: |
|||||||||||
Common stock, $.01 par value, and additional paid-in capital;
authorized, 100,000,000 shares; issued and outstanding,
35,478,516 in 2002 and 35,621,071 shares in 2001 |
40,880 | 42,382 | |||||||||
Retained earnings, including accumulated other
comprehensive loss of $2,273 in 2002 and $2,720 in 2001 |
151,514 | 142,794 | |||||||||
Total shareholders’ equity |
192,394 | 185,176 | |||||||||
Total |
$ | 304,812 | $ | 299,380 | |||||||
See notes to condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations (unaudited)
| Three Months Ended Aug 31, | Nine months Ended Aug 31, | |||||||||||||||||
| (In thousands, except per share data) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Revenue: |
||||||||||||||||||
Software licenses |
$ | 22,842 | $ | 23,560 | $ | 68,342 | $ | 69,660 | ||||||||||
Maintenance and services |
46,141 | 43,531 | 132,678 | 124,241 | ||||||||||||||
Total revenue |
68,983 | 67,091 | 201,020 | 193,901 | ||||||||||||||
Costs and expenses: |
||||||||||||||||||
Cost of software licenses |
2,505 | 2,767 | 7,973 | 7,914 | ||||||||||||||
Cost of maintenance and services |
14,146 | 14,670 | 42,774 | 41,908 | ||||||||||||||
Sales and marketing |
27,146 | 25,723 | 77,581 | 76,419 | ||||||||||||||
Product development |
10,459 | 10,390 | 31,740 | 31,106 | ||||||||||||||
General and administrative |
7,405 | 7,441 | 21,945 | 21,842 | ||||||||||||||
Total costs and expenses |
61,661 | 60,991 | 182,013 | 179,189 | ||||||||||||||
Income from operations |
7,322 | 6,100 | 19,007 | 14,712 | ||||||||||||||
Other income (expense): |
||||||||||||||||||
Interest income |
1,131 | 1,534 | 3,345 | 5,286 | ||||||||||||||
Investment impairment charge |
— | — | (1,000 | ) | — | |||||||||||||
Foreign currency losses |
(632 | ) | (554 | ) | (1,809 | ) | (1,763 | ) | ||||||||||
Other |
16 | 12 | 41 | (58 | ) | |||||||||||||
Total other income (expense), net |
515 | 992 | 577 | 3,465 | ||||||||||||||
Income before provision for income taxes |
7,837 | 7,092 | 19,584 | 18,177 | ||||||||||||||
Provision for income taxes |
2,351 | 2,198 | 5,875 | 5,634 | ||||||||||||||
Net income |
$ | 5,486 | $ | 4,894 | $ | 13,709 | $ | 12,543 | ||||||||||
Earnings per share: |
||||||||||||||||||
Basic |
$ | 0.15 | $ | 0.14 | $ | 0.38 | $ | 0.35 | ||||||||||
Diluted |
$ | 0.14 | $ | 0.13 | $ | 0.35 | $ | 0.33 | ||||||||||
Weighted average shares outstanding: |
||||||||||||||||||
Basic |
35,962 | 35,396 | 35,809 | 35,401 | ||||||||||||||
Diluted |
38,251 | 38,724 | 38,923 | 38,420 | ||||||||||||||
See notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows (unaudited)
| Nine months Ended August 31, | ||||||||||||
| (In thousands) | 2002 | 2001 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 13,709 | $ | 12,543 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
8,455 | 9,084 | ||||||||||
Investment impairment charge |
1,000 | — | ||||||||||
Deferred income taxes and other |
69 | 369 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
13,216 | 1,593 | ||||||||||
Other current assets |
1,564 | 2,865 | ||||||||||
Accounts payable and accrued expenses |
(4,460 | ) | (5,270 | ) | ||||||||
Income taxes payable |
1,430 | (2,086 | ) | |||||||||
Deferred revenue |
852 | 5,473 | ||||||||||
Net cash provided by operating activities |
35,835 | 24,571 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of investments available for sale |
(23,481 | ) | (29,410 | ) | ||||||||
Maturities of investments available for sale |
23,254 | 28,398 | ||||||||||
Purchases of property and equipment |
(5,654 | ) | (6,001 | ) | ||||||||
Capitalized software costs |
— | (392 | ) | |||||||||
Acquisitions |
— | (2,188 | ) | |||||||||
Increase in other non-current assets |
88 | (277 | ) | |||||||||
Net cash used for investing activities |
(5,793 | ) | (9,870 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock |
8,345 | 7,964 | ||||||||||
Repurchase of common stock |
(17,724 | ) | (8,802 | ) | ||||||||
Net cash used for financing activities |
(9,379 | ) | (838 | ) | ||||||||
Effect of exchange rate changes on cash |
1,304 | (107 | ) | |||||||||
Net increase in cash and equivalents |
21,967 | 13,756 | ||||||||||
Cash and equivalents, beginning of period |
108,337 | 90,722 | ||||||||||
Cash and equivalents, end of period |
$ | 130,304 | $ | 104,478 | ||||||||
See notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 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 on Form 10-K for the fiscal year ended November 30, 2001.
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.
Note 2: Revenue Recognition
Revenue is recognized when earned. Software license revenue is recognized upon shipment of the product provided that the license fee is fixed and determinable, persuasive evidence of an arrangement exists and collection is probable. The Company does not license its software with a right of return and generally does not license its software with conditions of acceptance. If an arrangement does contain conditions of acceptance, recognition of the revenue is deferred until the acceptance criteria are met or the period of acceptance has passed. The Company generally recognizes revenue for products distributed through indirect channels, including independent software vendors, original equipment manufacturers and distributors, when sold through to the end user.
Software licenses sold together with maintenance and/or consulting services are generally recognized upon shipment using the residual method, provided that the above criteria have been met. If payment of the software license fees is dependent upon the performance of consulting services or the consulting services are essential to the functionality of the licensed software, then both the software license and consulting fees are recognized under the percentage-of-completion method of contract accounting.
Maintenance revenue is deferred and recognized ratably over the term of the applicable agreement. Revenue from services, primarily consulting and customer education, is generally recognized as the related services are performed.
Note 3: 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.
Note 4: Investment in Related Party
The Company holds a minority interest in EasyAsk, Inc., a privately-held software company whose chairman is on the board of directors of the Company. The Company regularly monitors the carrying value of its investment in EasyAsk. The investment was valued at $0.3 million at August 31, 2002 and is included in other assets. In the second quarter of fiscal 2002, the Company recorded an impairment charge of $1.0 million related to this investment.
6
Note 5: 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. The following table sets forth the calculation of basic and diluted earnings per share on an interim basis:
| (In thousands, except per share data) | ||||||||
| Three Months Ended August 31, | 2002 | 2001 | ||||||
Net income |
$ | 5,486 | $ | 4,894 | ||||
Weighted average shares outstanding |
35,962 | 35,396 | ||||||
Dilutive impact from outstanding stock options |
2,289 | 3,328 | ||||||
Diluted weighted average shares outstanding |
38,251 | 38,724 | ||||||
Basic earnings per share |
$ | 0.15 | $ | 0.14 | ||||
Diluted earnings per share |
$ | 0.14 | $ | 0.13 | ||||
| (In thousands, except per share data) | ||||||||
| Nine Months Ended August 31, | 2002 | 2001 | ||||||
Net income |
$ | 13,709 | $ | 12,543 | ||||
Weighted average shares outstanding |
35,809 | 35,401 | ||||||
Dilutive impact from outstanding stock options |
3,114 | 3,019 | ||||||
Diluted weighted average shares outstanding |
38,923 | 38,420 | ||||||
Basic earnings per share |
$ | 0.38 | $ | 0.35 | ||||
Diluted earnings per share |
$ | 0.35 | $ | 0.33 | ||||
Approximately 857,000 and 855,000 outstanding stock options were excluded from the calculation of diluted earnings per share in the three months ended August 31, 2002 and 2001, respectively, because these options were anti-dilutive. However, these options could be dilutive in the future.
Note 6: Comprehensive Income
Comprehensive income includes foreign currency translation gains and losses, net of tax, and unrealized gains and losses on investments and hedging contracts, net of tax, that have been previously excluded from net income and reflected instead in shareholders’ equity. The following table sets forth the calculation of comprehensive income on an interim basis:
| (In thousands) | |||||||||
| Three Months Ended August 31, | 2002 | 2001 | |||||||
Net income |
$ | 5,486 | $ | 4,894 | |||||
Foreign currency translation adjustments |
212 | 127 | |||||||
Unrealized gains on foreign exchange hedging contracts |
106 | — | |||||||
Unrealized holding gains on investments |
180 | 190 | |||||||
Total comprehensive income |
$ | 5,984 | $ | 5,211 | |||||
7
| (In thousands) | |||||||||
| Nine Months Ended August 31, | 2002 | 2001 | |||||||
Net income |
$ | 13,709 | $ | 12,543 | |||||
Foreign currency translation adjustments |
|||||||||