UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 August 31, 2003 |
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
| 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes x No o
As of October 3, 2003, there were 34,878,000 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, 2003
INDEX
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Consolidated Financial Statements | 3 | ||
Condensed Consolidated Balance Sheets as of August 31, 2003 and November 30,
2002
|
3 | |||
Condensed Consolidated Statements of Operations for the three months and nine
months ended August 31, 2003 and
2002
|
4 | |||
Condensed Consolidated Statements of Cash Flows for the nine months ended August 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 6. | Exhibits and Reports on Form 8-K | 22 | ||
| Signatures | 23 |
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
(In thousands)
| August 31, | November 30, | ||||||||||
| 2003 | 2002 | ||||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash and equivalents |
$ | 125,530 | $ | 117,425 | |||||||
Short-term investments |
77,673 | 59,768 | |||||||||
Accounts receivable, net |
42,205 | 48,676 | |||||||||
Other current assets |
10,999 | 10,102 | |||||||||
Deferred income taxes |
8,773 | 8,857 | |||||||||
Total current assets |
265,180 | 244,828 | |||||||||
Property and equipment, net |
34,570 | 34,045 | |||||||||
Intangible assets, net |
7,800 | 887 | |||||||||
Goodwill |
14,676 | 4,013 | |||||||||
Other assets |
16,680 | 6,393 | |||||||||
Total |
$ | 338,906 | $ | 290,166 | |||||||
Liabilities and Shareholders’ Equity |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 8,448 | $ | 9,717 | |||||||
Accrued compensation and related taxes |
24,341 | 21,788 | |||||||||
Income taxes payable |
3,030 | 6,785 | |||||||||
Other accrued liabilities |
20,126 | 12,509 | |||||||||
Deferred revenue |
79,050 | 66,404 | |||||||||
Total current liabilities |
134,995 | 117,203 | |||||||||
Commitments and contingent liabilities |
|||||||||||
Shareholders’ equity: |
|||||||||||
Common stock and additional paid-in capital;
authorized, 100,000 shares; issued and outstanding,
34,601 shares in 2003 and 33,401 shares in 2002 |
43,794 | 27,743 | |||||||||
Retained earnings, including accumulated other
comprehensive loss of $1,991 in 2003 and $2,256 in 2002 |
160,117 | 145,220 | |||||||||
Total shareholders’ equity |
203,911 | 172,963 | |||||||||
Total |
$ | 338,906 | $ | 290,166 | |||||||
See notes to condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
| Three Months Ended Aug. 31, | Nine Months Ended Aug. 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenue: |
||||||||||||||||||
Software licenses |
$ | 27,191 | $ | 22,842 | $ | 79,719 | $ | 68,342 | ||||||||||
Maintenance and services |
50,504 | 46,141 | 147,348 | 132,678 | ||||||||||||||
Total revenue |
77,695 | 68,983 | 227,067 | 201,020 | ||||||||||||||
Costs and expenses: |
||||||||||||||||||
Cost of software licenses |
2,098 | 2,505 | 6,858 | 7,973 | ||||||||||||||
Cost of maintenance and services |
13,088 | 14,146 | 38,995 | 42,774 | ||||||||||||||
Sales and marketing |
30,806 | 27,146 | 92,088 | 77,581 | ||||||||||||||
Product development |
13,010 | 10,459 | 38,299 | 31,740 | ||||||||||||||
General and administrative |
8,630 | 7,405 | 26,137 | 21,945 | ||||||||||||||
In-process research and development |
— | — | 200 | — | ||||||||||||||
Total costs and expenses |
67,632 | 61,661 | 202,577 | 182,013 | ||||||||||||||
Income from operations |
10,063 | 7,322 | 24,490 | 19,007 | ||||||||||||||
Other income (expense): |
||||||||||||||||||
Interest income and other |
811 | 1,147 | 2,557 | 3,386 | ||||||||||||||
Investment impairment charge |
— | — | — | (1,000 | ) | |||||||||||||
Foreign currency losses |
(404 | ) | (632 | ) | (966 | ) | (1,809 | ) | ||||||||||
Total other income, net |
407 | 515 | 1,591 | 577 | ||||||||||||||
Income before provision for income
taxes |
10,470 | 7,837 | 26,081 | 19,584 | ||||||||||||||
Provision for income taxes |
3,141 | 2,351 | 7,824 | 5,875 | ||||||||||||||
Net income |
$ | 7,329 | $ | 5,486 | $ | 18,257 | $ | 13,709 | ||||||||||
Earnings per share: |
||||||||||||||||||
Basic |
$ | 0.21 | $ | 0.15 | $ | 0.54 | $ | 0.38 | ||||||||||
Diluted |
$ | 0.19 | $ | 0.14 | $ | 0.49 | $ | 0.35 | ||||||||||
Weighted average shares outstanding: |
||||||||||||||||||
Basic |
34,604 | 35,962 | 33,953 | 35,809 | ||||||||||||||
Diluted |
38,182 | 38,251 | 37,196 | 38,923 | ||||||||||||||
See notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
| Nine Months Ended August 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 18,257 | $ | 13,709 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
8,280 | 8,455 | ||||||||||
Investment impairment charge |
— | 1,000 | ||||||||||
In-process research and development |
200 | — | ||||||||||
Deferred income taxes and other |
290 | 69 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
13,920 | 13,216 | ||||||||||
Other current assets |
2,038 | 1,564 | ||||||||||
Accounts payable and accrued expenses |
(1,812 | ) | (4,460 | ) | ||||||||
Income taxes payable |
657 | 1,430 | ||||||||||
Deferred revenue |
4,692 | 852 | ||||||||||
Net cash provided by operating activities |
46,522 | 35,835 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of investments available for sale |
(35,733 | ) | (23,481 | ) | ||||||||
Maturities of investments available for sale |
17,453 | 23,254 | ||||||||||
Purchases of property and equipment |
(4,445 | ) | (5,654 | ) | ||||||||
Acquisitions, net of cash acquired |
(24,040 | ) | — | |||||||||
Decrease (increase) in other non-current assets |
(396 | ) | 88 | |||||||||
Net cash used for investing activities |
(47,161 | ) | (5,793 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock |
19,624 | 8,345 | ||||||||||
Repurchase of common stock |
(11,703 | ) | (17,724 | ) | ||||||||
Net cash provided by (used for) financing activities |
7,921 | (9,379 | ) | |||||||||
Effect of exchange rate changes on cash |
823 | 1,304 | ||||||||||
Net increase in cash and equivalents |
8,105 | 21,967 | ||||||||||
Cash and equivalents, beginning of period |
117,425 | 108,337 | ||||||||||
Cash and equivalents, end of period |
$ | 125,530 | $ | 130,304 | ||||||||
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, 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 (FASB) 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 August 31, | 2003 | 2002 | |||||||
Net income, as reported |
$ | 7,329 | $ | 5,486 | |||||
Less: stock-based compensation expense determined under fair value
method for all awards, net of tax |
(2,144 | ) | (1,872 | ) | |||||
Pro forma net income |
$ | 5,185 | $ | 3,614 | |||||
Earnings per share: |
|||||||||
Basic, as reported |
$ | 0.21 | $ | 0.15 | |||||
Basic, pro forma |
$ | 0.15 | $ | 0.10 | |||||
Diluted, as reported |
$ | 0.19 | $ | 0.14 | |||||
Diluted, pro forma |
$ | 0.14 | $ | 0.09 | |||||
6
(In thousands, except per share data)
| Nine Months Ended August 31, | 2003 | 2002 | |||||||
Net income, as reported |
$ | 18,257 | $ | 13,709 | |||||
Less: stock based compensation expense determined under fair value
method for all awards, net of tax |
(6,181 | ) | (5,411 | ) | |||||
Pro forma net income |
$ | 12,076 | $ | 8,298 | |||||
Earnings per share: |
|||||||||
Basic, as reported |
$ | 0.54 | $ | 0.38 | |||||
Basic, pro forma |
$ | 0.36 | $ | 0.23 | |||||
Diluted, as reported |
$ | 0.49 | $ | 0.35 | |||||
Diluted, pro forma |
$ | 0.32 | $ | 0.21 | |||||
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.
7
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, | 2003 | 2002 | ||||||
Net income |
$ | 7,329 | $ | 5,486 | ||||
Weighted average shares outstanding |
34,604 | 35,962 | ||||||
Dilutive impact from outstanding stock options |
3,578 | 2,289 | ||||||
Diluted weighted average shares outstanding |
38,182 | 38,251 | ||||||
Basic earnings per share |
$ | 0.21 | $ | 0.15 | ||||
Diluted earnings per share |
$ | 0.19 | $ | 0.14 | ||||
(In thousands, except per share data)
| Nine Months Ended August 31, | 2003 | 2002 | ||||||