PROGRESS SOFTWARE CORP /MA - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the Quarterly Period Ended May 31, 2003


	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 (State or other jurisdiction of incorporation or organization)		04-2746201 (I.R.S. Employer 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes X No

As of July 10, 2003, there were 34,581,000 shares of the Registrant’s Common Stock, $.01 par value per share, outstanding.

TABLE OF CONTENTS


PART 1. FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (unaudited)
	Condensed Consolidated Statements of Operations (unaudited)
	Statements of Cash Flows (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
906 Certifications

PROGRESS SOFTWARE CORPORATION

FORM 10-Q

FOR THE THREE MONTHS ENDED MAY 31, 2003

INDEX


PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of May 31, 2003 and November 30, 2002	3
	Condensed Consolidated Statements of Operations for the three months and six months ended May 31, 2003 and 2002	4
	Condensed Consolidated Statements of Cash Flows for the six months ended May 31, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22

PART II	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 6.	Exhibits and Reports on Form 8-K	23

	Signatures	24
	Certifications	25

PART 1. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Condensed Consolidated Balance Sheets (unaudited)


(In thousands)
				May 31,		November 30,
				2003		2002

Assets
Current assets:
		Cash and equivalents		$	114,718	$	117,425
		Short-term investments			75,875		59,768
		Accounts receivable, net			54,008		48,676
		Other current assets			12,249		10,102
		Deferred income taxes			8,830		8,857

			Total current assets		265,680		244,828

Property and equipment, net					34,558		34,045
Intangible assets, net					8,409		887
Goodwill					17,011		4,013
Other assets					15,566		6,393

			Total	$	341,224	$	290,166

Liabilities and Shareholders’ Equity
Current liabilities:
		Accounts payable		$	11,357	$	9,717
		Accrued compensation and related taxes			21,886		21,788
		Income taxes payable			3,371		6,785
		Other accrued liabilities			21,167		12,509
		Deferred revenue			87,124		66,404

			Total current liabilities		144,905		117,203

Commitments and contingent liabilities
Shareholders’ equity:
	Common stock and additional paid-in capital; authorized, 100,000 shares; issued and outstanding, 34,383 in 2003 and 33,401 shares in 2002				40,473		27,743
	Retained earnings, including accumulated other comprehensive loss of $1,232 in 2003 and $2,256 in 2002				155,846		145,220

			Total shareholders’ equity		196,319		172,963

			Total	$	341,224	$	290,166

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Operations (unaudited)


(In thousands, except per share data)
			Three Months Ended May 31,						Six Months Ended May 31,

			2003			2002			2003			2002

Revenue:
	Software licenses		$	27,074		$	23,023		$	52,528		$	45,500
	Maintenance and services			50,476			44,536			96,844			86,537

		Total revenue		77,550			67,559			149,372			132,037

Costs and expenses:
	Cost of software licenses			2,434			2,586			4,760			5,468
	Cost of maintenance and services			12,790			14,383			25,907			28,628
	Sales and marketing			31,992			24,456			61,282			50,435
	Product development			12,802			10,563			25,289			21,281
	General and administrative			8,367			7,153			17,507			14,540
	In-process research and development			—			—			200			—

		Total costs and expenses		68,385			59,141			134,945			120,352

Income from operations				9,165			8,418			14,427			11,685

Other income (expense):
	Interest income and other			835			1,159			1,746			2,239
	Investment impairment charge			—			(1,000	)		—			(1,000	)
	Foreign currency losses			(443	)		(346	)		(562	)		(1,177	)

		Total other income, net		392			(187	)		1,184			62

Income before provision for income taxes				9,557			8,231			15,611			11,747
Provision for income taxes				2,867			2,469			4,683			3,524

Net income			$	6,690		$	5,762		$	10,928		$	8,223

Earnings per share:
	Basic		$	0.20		$	0.16		$	0.32		$	0.23
	Diluted		$	0.18		$	0.15		$	0.30		$	0.21

Weighted average shares outstanding:
	Basic			33,844			35,749			33,628			35,733
	Diluted			37,829			39,117			36,703			39,259

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows (unaudited)


(In thousands)
					Six Months Ended May 31,

					2003			2002

Cash flows from operating activities:
	Net income				$	10,928		$	8,223
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				5,419			5,358
		Investment impairment charge				—			1,000
		In-process research and development				200			—
		Deferred income taxes and other				228			(172	)
		Changes in operating assets and liabilities:
			Accounts receivable			3,729			8,887
			Other current assets			1,080			(804	)
			Accounts payable and accrued expenses			(1,478	)		(4,961	)
			Income taxes payable			(656	)		1,060
			Deferred revenue			10,468			3,638

				Net cash provided by operating activities		29,918			22,229

Cash flows from investing activities:
	Purchases of investments available for sale					(23,545	)		(12,916	)
	Maturities of investments available for sale					7,589			12,356
	Purchases of property and equipment					(2,066	)		(3,961	)
	Acquisitions, net of cash acquired					(25,164	)		—
	Increases in other non-current assets					(521	)		(19	)

				Net cash used for investing activities		(43,707	)		(4,540	)

Cash flows from financing activities:
	Proceeds from issuance of common stock					13,451			4,838
	Repurchase of common stock					(4,865	)		(6,683	)

				Net cash provided by (used for) financing activities		8,586			(1,845	)

Effect of exchange rate changes on cash						2,496			349

Net increase (decrease) in cash and equivalents						(2,707	)		16,193
Cash and equivalents, beginning of period						117,425			108,337

Cash and equivalents, end of period					$	114,718		$	124,530

See notes to condensed consolidated financial statements.

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, 2002.

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: Stock-based Compensation

Effective March 1, 2003, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (SFAS 148). The Company accounts for stock-based compensation cost using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation cost is recognized for stock options granted to employees at fair market value.

Had the Company recognized compensation expense for its stock option and purchase plans based on the fair value for awards under those plans in accordance with SFAS No. 123, “Accounting for Stock Based Compensation,” pro forma net income and pro forma earnings per share would have been as follows:


(In thousands, except per share data)

Three Months Ended May 31,		2003			2002

Net income, as reported		$	6,690		$	5,762
Less: stock-based compensation expense determined under fair value method for all awards, net of tax			(2,148	)		(1,783	)

Pro forma net income		$	4,542		$	3,979

Earnings per share:
	Basic, as reported	$	0.20		$	0.16

	Basic, pro forma	$	0.13		$	0.11

	Diluted, as reported	$	0.18		$	0.15

	Diluted, pro forma	$	0.12		$	0.10


(In thousands, except per share data)

Six Months Ended May 31,		2003			2002

Net income, as reported		$	10,928		$	8,223
Less: stock based compensation expense determined under fair value method for all awards, net of tax			(4,037	)		(3,539	)

Pro forma net income		$	6,891		$	4,684

Earnings per share:
	Basic, as reported	$	0.32		$	0.23

	Basic, pro forma	$	0.20		$	0.13

	Diluted, as reported	$	0.30		$	0.21

	Diluted, pro forma	$	0.19		$	0.12

Note 3: 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 sold through indirect channels, including application partners, original equipment manufacturers (OEMs) and distributors, when the indirect channel partner places an order identifying the end user or reports the number of reproduced copies of the licensed software. Under certain circumstances, nonrefundable license fees from indirect channel partners, primarily OEMs, are recognized upon shipment of the product master provided that all other criteria are met.

Software licenses are generally sold with annual maintenance contracts and, in some cases, also with consulting services. For the undelivered elements, vendor-specific objective evidence (VSOE) of fair value is determined to be the price charged when the undelivered element is sold separately. VSOE for maintenance sold in connection with a software license is determined based on the amount that will be separately charged for the maintenance renewal period. VSOE for consulting services is determined by reference to amounts charged for consulting services when a software license sale is not involved.

Revenue from software licenses sold together with maintenance and/or consulting services is 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 4: 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 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 May 31,	2003		2002

Net income	$	6,690	$	5,762

Weighted average shares outstanding		33,844		35,749
Dilutive impact from outstanding stock options		3,985		3,368

Diluted weighted average shares outstanding		37,829		39,117

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