e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the Quarterly Period Ended August 31, 2006
OR
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o |
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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)
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MASSACHUSETTS
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04-2746201 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of November 22, 2006, there were 41,207,000 shares of the registrants common stock, $.01 par
value per share, outstanding.
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED AUGUST 31, 2006
INDEX
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
(In thousands)
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August 31, |
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November 30, |
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2006 |
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2005 |
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Assets |
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Current assets: |
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Cash and equivalents |
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$ |
49,556 |
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$ |
40,398 |
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Short-term investments |
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187,560 |
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226,022 |
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Total cash and short-term investments |
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237,116 |
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266,420 |
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Accounts receivable, net |
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67,248 |
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66,592 |
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Other current assets |
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17,930 |
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11,813 |
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Deferred income taxes |
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20,272 |
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16,379 |
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Total current assets |
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342,566 |
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361,204 |
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Property and equipment, net |
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49,620 |
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42,816 |
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Acquired intangible assets, net |
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75,265 |
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47,213 |
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Goodwill |
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153,547 |
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84,974 |
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Deferred income taxes |
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13,419 |
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20,442 |
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Other assets |
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4,785 |
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5,066 |
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Total |
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$ |
639,202 |
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$ |
561,715 |
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Liabilities and Shareholders Equity
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Current liabilities: |
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Current portion, long-term debt |
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$ |
276 |
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$ |
262 |
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Accounts payable |
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10,702 |
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11,654 |
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Accrued compensation and related taxes |
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35,226 |
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41,653 |
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Income taxes payable |
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9,953 |
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1,122 |
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Other accrued liabilities |
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22,888 |
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22,737 |
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Short-term deferred revenue |
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117,450 |
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99,697 |
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Total current liabilities |
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196,495 |
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177,125 |
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Long-term debt, less current portion |
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1,730 |
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1,938 |
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Long-term deferred revenue |
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5,615 |
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5,068 |
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Deferred income taxes |
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3,946 |
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3,580 |
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Commitments and contingencies
Shareholders equity: |
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Common stock and additional paid-in capital; authorized, 100,000
shares; issued and outstanding, 41,218 shares in 2006
and 40,436 shares in 2005 |
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192,537 |
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160,911 |
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Deferred compensation |
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(5,706 |
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Retained earnings, including accumulated other
comprehensive gain (loss) of $72 in 2006 and ($2,182) in 2005 |
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238,879 |
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218,799 |
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Total shareholders equity |
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431,416 |
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374,004 |
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Total |
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$ |
639,202 |
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$ |
561,715 |
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See notes to unaudited condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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August 31, |
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August 31, |
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August 31, |
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August 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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(as restated, |
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(as restated, |
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see Note 2) |
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see Note 2) |
Revenue: |
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Software licenses |
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$ |
42,296 |
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$ |
37,986 |
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$ |
126,433 |
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$ |
112,762 |
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Maintenance and services |
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69,066 |
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61,502 |
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198,436 |
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184,657 |
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Total revenue |
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111,362 |
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99,488 |
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324,869 |
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297,419 |
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Costs of revenue: |
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Cost of software licenses |
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2,034 |
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1,848 |
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6,061 |
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5,665 |
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Cost of maintenance and services |
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15,044 |
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13,633 |
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44,400 |
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41,704 |
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Amortization of acquired intangibles for
purchased
technology |
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2,255 |
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1,367 |
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5,772 |
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3,772 |
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Total costs of revenue |
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19,333 |
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16,848 |
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56,233 |
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51,141 |
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Gross profit |
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92,029 |
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82,640 |
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268,636 |
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246,278 |
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Operating expenses: |
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Sales and marketing |
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44,609 |
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38,306 |
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132,236 |
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114,952 |
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Product development |
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19,288 |
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16,246 |
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57,561 |
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48,545 |
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General and administrative |
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13,981 |
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10,543 |
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40,213 |
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32,761 |
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Amortization of other acquired intangibles |
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1,961 |
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1,201 |
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5,328 |
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3,089 |
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Compensation expense from repurchase of
subsidiary stock options |
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2,803 |
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2,803 |
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Acquisition-related expenses |
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3 |
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1,776 |
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1,834 |
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2,750 |
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Total operating expenses |
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79,842 |
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70,875 |
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237,172 |
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204,900 |
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Income from operations |
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12,187 |
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11,765 |
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31,464 |
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41,378 |
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Other income (expense): |
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Interest income and other |
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1,931 |
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1,620 |
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5,437 |
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3,670 |
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Foreign currency loss |
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(263 |
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(317 |
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(2,554 |
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(2,128 |
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Total other income, net |
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1,668 |
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1,303 |
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2,883 |
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1,542 |
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Income before provision for income taxes |
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13,855 |
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13,068 |
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34,347 |
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42,920 |
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Provision for income taxes |
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4,985 |
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473 |
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11,850 |
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10,221 |
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Net income |
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$ |
8,870 |
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$ |
12,595 |
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$ |
22,497 |
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$ |
32,699 |
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Earnings per share: |
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Basic |
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$ |
0.22 |
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$ |
0.32 |
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$ |
0.55 |
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$ |
0.87 |
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Diluted |
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$ |
0.21 |
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$ |
0.30 |
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$ |
0.52 |
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$ |
0.80 |
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Weighted average shares outstanding: |
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Basic |
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41,137 |
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38,947 |
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40,899 |
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37,651 |
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Diluted |
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42,901 |
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42,357 |
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43,144 |
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40,911 |
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See notes to unaudited condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
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Nine Months Ended August 31, |
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2006 |
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2005 |
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(as restated, |
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see Note 2) |
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Cash flows from operating activities: |
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Net income |
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$ |
22,497 |
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$ |
32,699 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization of property and equipment |
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6,593 |
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6,357 |
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Amortization of capitalized software costs |
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131 |
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199 |
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Amortization of acquired intangible assets |
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11,100 |
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6,860 |
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Stock-based compensation |
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16,874 |
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2,027 |
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Deferred income taxes |
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(3,811 |
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(11,961 |
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Tax benefit from stock options |
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1,137 |
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17,833 |
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In-process research and development |
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900 |
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Changes in operating assets and liabilities, net of effects
from acquisitions: |
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Accounts receivable, net |
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7,840 |
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10,383 |
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Other current assets |
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(3,374 |
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39 |
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Accounts payable and accrued expenses |
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(24,868 |
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257 |
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Income taxes payable |
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8,771 |
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(946 |
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Deferred revenue |
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4,517 |
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103 |
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Net cash provided by operating activities |
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48,307 |
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63,850 |
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Cash flows from investing activities: |
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Purchases of investments available for sale |
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(258,040 |
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(288,403 |
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Sales and maturities of investments available for sale |
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296,501 |
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212,322 |
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Purchases of property and equipment |
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(12,305 |
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(5,860 |
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Acquisitions, net of cash acquired |
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(72,066 |
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(32,161 |
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Decrease in other non-current assets |
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125 |
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324 |
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Net cash used for investing activities |
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(45,785 |
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(113,778 |
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Cash flows from financing activities: |
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Issuance of
common stock from stock plans |
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12,961 |
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46,084 |
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Repurchase
of stock in subsidiary, net of issuances |
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(467 |
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Excess tax benefit from stock options |
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875 |
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Payment of long-term debt |
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(193 |
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(151 |
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Repurchase of common stock |
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(12,679 |
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(9,275 |
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Net cash provided by financing activities |
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964 |
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36,191 |
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Effect of exchange rate changes on cash |
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5,671 |
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(824 |
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Net increase (decrease) in cash and equivalents |
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9,157 |
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(14,561 |
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Cash and equivalents, beginning of period |
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40,399 |
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58,439 |
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Cash and equivalents, end of period |
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$ |
49,556 |
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$ |
43,878 |
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See notes to unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim
financial reporting. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statements and should be read in conjunction with the
restated audited financial statements
included in our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2005.
In the opinion of management, we have prepared the accompanying unaudited condensed consolidated
financial statements on the same basis as the restated audited financial statements, and these financial
statements 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: Restatement of Previously Issued Consolidated Financial Statements
On November 28, 2006, our Board of Directors concluded that our consolidated
financial statements
for the three months ended February 28, 2006 and each of the
years during the three year period ended November 30, 2005
(including all interim periods) should be restated to record additional non-cash stock-based
compensation expense, and related tax effects, resulting from stock options granted during fiscal years 1996 to
2005 that were incorrectly accounted for under accounting principles
generally accepted in the United States of America (GAAP). This decision was based on the
determination that the actual measurement dates for determining the accounting
treatment of certain stock option grants differed from the measurement dates we used
in preparing our consolidated financial statements.
We determined the actual grant or measurement date for options by determining when
the last step in the process necessary to complete a grant took place. We considered
receipt of an executed unanimous written consent from each member of the Compensation
Committee as the last required step. After comparing the grant or measurement dates
that we historically used during fiscal years 1996 through 2005 to the actual grant
dates identified by determining when the last step in the process necessary to
complete a grant took place, we determined that certain options were granted at an
exercise price below the fair market value of our common stock on the actual grant
date.
In our accompanying fiscal 2005 interim financial statements, we recorded additional stock-based
compensation expense of $0.6 million and $2.0 million for the three month and nine month periods ended
August 31, 2005, respectively. As a result of the errors in determining measurement dates, we also
recorded payroll withholding tax-related adjustments for the exercise of certain options formerly classified
as Incentive Stock Option (ISO) grants under Internal Revenue Service regulations. These options were
determined to have been granted with an exercise price below the fair market value of our common stock
on the actual grant date, and thus did not qualify for ISO tax treatment. Because these options did not
qualify for ISO tax treatment, we should have withheld additional taxes on exercise of those options. We
recorded estimated payroll withholding tax liabilities of $0.5 million and $1.2 million for the three month
and nine month periods ended August 31, 2005, respectively, in connection with the disqualification of such
ISO tax treatment. We have included in the estimated payroll withholding liabilities an estimate of a gross-up
in income for any payments to be made on behalf of employees. The stock-based compensation
expenses, including the aforementioned withholding tax adjustments and income tax expense adjustments,
decreased net income by $0.8 million and $2.2 million for the three month and nine month
periods ended August 31, 2005, respectively.
6
Related Proceedings
On June 23, 2006, we received written notice that the Boston, Massachusetts office of the
Securities and Exchange Commission is conducting an informal inquiry into our option-granting
practices during the period December 1, 1995 through November 30, 2002. The informal inquiry has
been expanded to cover periods through the present. The SEC has requested testimony from certain
of our officers and documents relating to our stock option practices for the period under
investigation. We have produced responsive documents and are in the process of producing
additional documents. We are unable to predict accurately what consequences may arise from the SEC inquiry. We have
already incurred, and expect to continue to incur, significant legal and accounting expenses
arising from the inquiry. The inquiry could also divert the attention of our management and harm
our business. If the SEC institutes legal action, we could face significant fines and penalties
and be required to take remedial actions determined by the SEC or a court. Although we have filed
certain restated financial statements that we believe correct the accounting errors arising from
our past option-granting practices, the filing of those financial statements will not resolve the
pending SEC inquiry. The SEC has not reviewed our restated financial statements, and any future
review could lead to further restatements or other modifications of our financial statements.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement
System, Derivatively on Behalf of Progress Software Corporation, v. Joseph Alsop et
al. was filed in the United States District Court for the District of Massachusetts
by a party identifying itself as one of our shareholders purporting to act on our
behalf against our directors and certain of our present and former officers. We are
also named as a nominal defendant. The complaint alleges violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty,
aiding and abetting breaches of fiduciary duty and unjust enrichment arising from an
alleged option backdating scheme. The complaint seeks monetary damages, restitution,
disgorgement, rescission of stock options, punitive damages and other relief. A
motion to dismiss the derivative complaint has been filed and is pending. We have
also received derivative demands relating to substantially the same allegations from
three purported shareholders, including the plaintiff that filed the derivative
complaint. On November 30, 2006, the plaintiff filed an amended complaint. The ultimate outcome of these complaints could have a material adverse effect on our results of operations.
We expect
to incur additional legal expenses arising from the derivative action, including the
advancement of legal expenses to our directors and officers in connection with the
derivative action. We have indemnification obligations to our directors and officers,
and the outcome of the derivative or any other litigation may require that we
indemnify some or all of our directors and officers for expenses they may incur in
defending the litigation and other losses.
NASDAQ Delisting Notice
On July 19, 2006, we received a staff determination letter from the Nasdaq Stock Market stating that our failure to timely file our quarterly report on Form 10-Q for the fiscal quarter ended May 31, 2006 was a violation of Nasdaq rules and that our securities would be delisted unless we requested a hearing. We requested a hearing, and this request stayed the delisting pending the outcome of the hearing. On October 13, 2006, we
received a similar staff determination letter with respect to our failure to timely file our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2006. The outcome of the hearing resulted in our delisting being deferred until November 30, 2006 based on our ability to meet certain conditions, including the filing of our delayed and restated financial statements by that date and providing Nasdaq with information regarding the results of our internal investigation.
We have provided the Nasdaq Hearing Department with certain requested
information. On November 29, 2006, we requested an extension of time
until December 15, 2006 to file our delayed and restated financial
statements. On December 15, 2006, we requested another such
extension until December 18, 2006. The Nasdaq Listing Qualifications Panel has not granted us a formal written extension of the above conditions. If Nasdaq does not grant our requested extension, or if we do not meet any extended deadline for those filings or if Nasdaq is not satisfied with the result of our
internal investigation, our common stock may be delisted.
7
Statement of Operations Adjustments
The following is a summary of the adjustments to our previously issued statements of operations for
the three and nine months ended August 31, 2005.
(In thousands, except per share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
ended |
|
|
|
|
|
|
|
|
|
ended |
|
|
Three Months Ended, |
|
|
|
|
|
Aug. 31, 2005 |
|
|
|
|
|
|
|
|
|
Aug. 31, 2005 |
|
|
|
|
|
(as reported) |
|
(adjustments) |
|
(as restated) |
|
(as reported) |
|
(adjustments) |
|
(as restated) |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
37,986 |
|
|
|
|
|
|
$ |
37,986 |
|
|
$ |
112,762 |
|
|
|
|
|
|
$ |
112,762 |
|
Maintenance and services |
|
|
61,502 |
|
|
|
|
|
|
|
61,502 |
|
|
|
184,657 |
|
|
|
|
|
|
|
184,657 |
|
|
|
|
|
|
Total revenue |
|
|
99,488 |
|
|
|
|
|
|
|
99,488 |
|
|
|
297,419 |
|
|
|
|
|
|
|
297,419 |
|
|
|
|
|
|
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
|
1,843 |
|
|
|
5 |
|
|
|
1,848 |
|
|
|
5,649 |
|
|
|
16 |
|
|
|
5,665 |
|
Cost of maintenance and services |
|
|
13,492 |
|
|
|
141 |
|
|
|
13,633 |
|
|
|
41,328 |
|
|
|
376 |
|
|
|
41,704 |
|
Amortization of acquired intangibles
for purchased technology |
|
|
1,367 |
|
|
|
|
|
|
|
1,367 |
|
|
|
3,772 |
|
|
|
|
|
|
|
3,772 |
|
|
|
|
|
|
Total costs of revenue |
|
|
16,702 |
|
|
|
146 |
|
|
|
16,848 |
|
|
|
50,749 |
|
|
|
392 |
|
|
|
51,141 |
|
|
|
|
|
|
Gross profit |
|
|
82,786 |
|
|
|
(146 |
) |
|
|
82,640 |
|
|
|
246,670 |
|
|
|
(392 |
) |
|
|
246,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
37,910 |
|
|
|
396 |
|
|
|
38,306 |
|
|
|
113,799 |
|
|
|
1,153 |
|
|
|
114,952 |
|
Product development |
|
|
15,957 |
|
|
|
289 |
|
|
|
16,246 |
|
|
|
47,749 |
|
|
|
796 |
|
|
|
48,545 |
|
General and administrative |
|
|
10,284 |
|
|
|
259 |
|
|
|
10,543 |
|
|
|
31,948 |
|
|
|
813 |
|
|
|
32,761 |
|
Amortization of other acquired
intangibles |
|
|
1,201 |
|
|
|
|
|
|
|
1,201 |
|
|
|
3,089 |
|
|
|
|
|
|
|
3,089 |
|
Compensation expense from repurchase
of subsidiary stock options |
|
|
2,803 |
|
|
|
|
|
|
|
2,803 |
|
|
|
2,803 |
|
|
|
|
|
|
|
2,803 |
|
Acquisition-related expenses, net |
|
|
1,776 |
|
|
|
|
|
|
|
1,776 |
|
|
|
2,750 |
|
|
|
|
|
|
|
2,750 |
|
|
|
|
|
|
Total operating expenses |
|
|
69,931 |
|
|
|
944 |
|
|
|
70,875 |
|
|
|
202,138 |
|
|
|
2,762 |
|
|
|
204,900 |
|
|
|
|
|
|
Income from operations |
|
|
12,855 |
|
|
|
(1,090 |
) |
|
|
11,765 |
|
|
|
44,532 |
|
|
|
(3,154 |
) |
|
|
41,378 |
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other |
|
|
1,620 |
|
|
|
|
|
|
|
1,620 |
|
|
|
3,670 |
|
|
|
|
|
|
|
3,670 |
|
Foreign currency loss |
|
|
(317 |
) |
|
|
|
|
|
|
(317 |
) |
|
|
(2,128 |
) |
|
|
|
|
|
|
(2,128 |
) |
|
|
|
|
|
Total other income, net |
|
|
1,303 |
|
|
|
|
|
|
|
1,303 |
|
|
|
1,542 |
|
|
|
|
|
|
|
1,542 |
|
|
|
|
|
|
Income before provision for income taxes |
|
|
14,158 |
|
|
|
(1,090 |
) |
|
|
13,068 |
|
|
|
46,074 |
|
|
|
(3,154 |
) |
|
|
42,920 |
|
Provision for income taxes |
|
|
801 |
|
|
|
(328 |
) |
|
|
473 |
|
|
|
11,174 |
|
|
|
(953 |
) |
|
|
10,221 |
|
|
|
|
|
|
Net income |
|
$ |
13,357 |
|
|
$ |
(762 |
) |
|
$ |
12,595 |
|
|
$ |
34,900 |
|
|
$ |
(2,201 |
) |
|
$ |
32,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.02 |
) |
|
$ |
0.32 |
|
|
$ |
0.93 |
|
|
$ |
(0.06 |
) |
|
$ |
0.87 |
|
Diluted |
|
$ |
0.31 |
|
|
$ |
(0.01 |
) |
|
$ |
0.30 |
|
|
$ |
0.85 |
|
|
$ |
(0.05 |
) |
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
38,947 |
|
|
|
|
|
|
|
38,947 |
|
|
|
37,651 |
|
|
|
|
|
|
|
37,651 |
|
Diluted |
|
|
42,501 |
|
|
|
(144 |
) |
|
|
42,357 |
|
|
|
41,067 |
|
|
|
(156 |
) |
|
|
40,911 |
|
|
|
|
|
|
8
Note 3: Stock-based Compensation
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based
Payment (SFAS 123R). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), and supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and its related implementation guidance. SFAS 123R
requires a company to measure the grant date fair value of equity awards given to employees in
exchange for services and recognize that cost over the period that such services are performed. We
adopted SFAS 123R on December 1, 2005 using the modified prospective transition method.
Prior to adopting SFAS 123R, we accounted for stock-based compensation under APB 25, as permitted
by SFAS 123. Under APB 25, we recorded stock-based compensation expense associated with
below-market grants of stock options but generally did not otherwise record any stock-based
compensation. We have applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior
to adoption have not been restated to conform to SFAS 123R and are not directly comparable to periods after adoption. Under
the modified prospective method, compensation cost recognized in the nine months ended August 31,
2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of December 1, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, less estimated forfeitures, and (b) compensation cost for all
share-based payments granted and vested subsequent to December 1, 2005, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R, less estimated forfeitures.
Prior to the adoption of SFAS 123R, we presented all excess tax benefits related to
stock compensation as cash flows from operating activities in the statement of cash flows. SFAS
123R requires the cash flows resulting from these tax benefits to be classified as cash flows from
financing activities. In the first nine months of fiscal 2006, the excess tax benefit from the
exercise of stock options was $0.9 million and was classified as cash flows from financing
activities.
Had we
used the fair value method prescribed by SFAS 123R to measure
compensation related to stock options and awards to employees in
prior periods, pro forma net income and pro forma earnings per share
would have been as follows:
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31, |
|
Nine Months Ended Aug. 31, |
|
|
2005 |
|
|
2005 |
|
|
Net income,
currently reported |
|
$ |
12,595 |
|
|
$ |
32,699 |
|
Add: stock-based compensation expense included in reported
net income, net of tax |
|
|
427 |
|
|
|
1,401 |
|
Less: stock-based compensation expense determined under
fair value
method for all awards, net of tax |
|
|
(2,703 |
) |
|
|
(9,612 |
) |
|
Pro forma net income |
|
$ |
10,319 |
|
|
$ |
24,488 |
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.32 |
|
|
$ |
0.87 |
|
Pro forma |
|
$ |
0.26 |
|
|
$ |
0.65 |
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.30 |
|
|
$ |
0.80 |
|
Pro forma |
|
$ |
0.24 |
|
|
$ |
0.60 |
|
|
9
The stock-based employee compensation expense that is reflected in the Statement of Operations in
the third quarter of fiscal 2006 was approximately $5.1 million. The stock-based employee
compensation expense that is reflected in the Statement of Operations in the first nine months of
fiscal 2006 was approximately $16.9 million. The total income tax benefit recognized in the
Statement of Operations for the third quarter of fiscal 2006 for share-based payments was
approximately $1.5 million and was approximately $4.8 million for the first nine months of fiscal
2006.
We have three shareholder-approved stock option plans: the 1992 Incentive and Nonqualified Stock
Option Plan (1992 Plan), the 1994 Stock Incentive Plan (1994 Plan) and the 1997 Stock Incentive
Plan (1997 Plan). These plans permit the granting of stock awards to officers, members of the
Board of Directors, employees and consultants. Awards under the 1992, 1994 and 1997 Plans may
include stock options (both incentive and nonqualified), grants of restricted stock, unrestricted
grants of stock, grants of stock contingent upon the attainment of performance goals and stock
appreciation rights. Prior to fiscal 2005, no awards other than incentive and nonqualified stock
options had been granted under the foregoing plans. The options granted prior to fiscal 2005
generally vest over five years and had terms of ten years. Subsequent option grants generally vest
over five years and have terms of seven years. A total of 21,540,000 shares are issuable under
these plans, of which 2,000,000 shares were available for grant at August 31, 2006.
We have an employee stock purchase plan which permits eligible employees to purchase shares of our common stock at 85% of the lesser of the market value of such shares at the beginning of a 27-month offering period or the end of each three-month segment within such offering period. A total of 3,200,000 shares are issuable under the employee stock purchase plan, of which 263,000 shares were available at August 31, 2006.
In 2002, the Board of Directors approved and adopted the 2002 Nonqualified Stock Plan (2002 Plan),
for which the approval of shareholders was not required. Executive officers and members of the
Board of Directors are not eligible for awards under the 2002 Plan. Awards under the 2002 Plan may
include nonqualified stock options, grants of restricted stock, unrestricted grants of stock,
grants of stock contingent upon the attainment of performance goals and stock appreciation rights.
Prior to fiscal 2005, no awards other than nonqualified stock options had been granted under the
2002 Plan. The options granted prior to fiscal 2005 generally vest over five years and had terms
of ten years. Subsequent option grants generally vest over five years and have terms of seven
years. A total of 6,500,000 shares are issuable under the 2002 Plan, of which 72,100 shares were
available for grant at August 31, 2006.
In 2004, the Board of Directors approved and adopted the 2004 Inducement Stock Plan (2004 Plan),
for which approval of shareholders was not required. We intend that the 2004 Plan be reserved for
persons to whom we may issue securities as an inducement to become employed by us pursuant to the
rules and regulations of the Nasdaq
10
Stock Market. Awards under the 2004 Plan may include nonqualified stock options, grants of
restricted stock, unrestricted grants of stock, grants of stock contingent upon the attainment of
performance goals and stock appreciation rights. No awards other than nonqualified stock options
have been granted under the 2004 Plan. The options granted prior to fiscal 2005 generally vest
over five years and have terms of ten years. Subsequent option grants generally vest over five
years and have terms of seven years. A total of 700,000 shares are issuable under the 2004 Plan,
of which 197,000 shares were available for grant at August 31, 2006.
During the fourth quarter of fiscal 2005, we issued 190,000 shares of restricted stock under the
1997 Plan and the 2002 Plan. The restricted stock generally vests over two years. Approximately
22,000 shares were forfeited and approximately 49,000 shares were
vested as of August 31, 2006.
A summary of stock option activity under all plans is as follows:
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number |
|
|
Exercise Price |
|
|
|
of Shares |
|
|
Per Share |
|
Options outstanding, December 1, 2005 |
|
|
9,459 |
|
|
$ |
17.75 |
|
Granted |
|
|
1,153 |
|
|
|
24.74 |
|
Exercised |
|
|
(508 |
) |
|
|
14.78 |
|
Canceled |
|
|
(324 |
) |
|
|
23.73 |
|
|
Options outstanding, August 31, 2006 |
|
|
9,780 |
|
|
$ |
18.54 |
|
|
Options exercisable, August 31, 2006 |
|
|
6,046 |
|
|
$ |
16.10 |
|
|
The weighted average remaining contractual term and the aggregate intrinsic value for options
outstanding at August 31, 2006 were 5.9 years and $72.6 million, respectively. The weighted
average remaining contractual term and the aggregate intrinsic value for options exercisable at
August 31, 2006 were 5.3 years and $57.3 million, respectively.
A summary of the status of our restricted stock awards as of August 31, 2006 is as follows:
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number |
|
|
Grant date |
|
|
|
of Shares |
|
|
Fair value |
|
Restricted stock awards nonvested, December 1, 2005 |
|
|
188 |
|
|
$ |
30.81 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(47 |
) |
|
|
30.81 |
|
Forfeited |
|
|
(22 |
) |
|
|
30.81 |
|
|
Restricted stock awards nonvested, August 31, 2006 |
|
|
119 |
|
|
$ |
30.81 |
|
|
We estimate the fair value of each option award issued under the Plans on the date of grant using a
Black-Scholes based option-pricing model that uses the assumptions noted in the following table.
Expected volatilities are based on historical volatility of our common stock. We base the expected
term of the options on our historical option exercise data taking into consideration the exercise
patterns of the option holder during the options life. We base the risk-free interest rate on the
U.S. Treasury yield curve in effect at the time of the grant for a term equivalent to the expected
life of the options.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, |
|
Nine Months Ended August 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Stock Purchase Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
27.2 |
% |
|
|
27.6 |
% |
|
|
27.2 |
% |
|
|
34.5 |
% |
Risk-free interest rate |
|
|
3.3 |
% |
|
|
2.5 |
% |
|
|
3.1 |
% |
|
|
2.1 |
% |
Expected life in years |
|
|
1.5 |
|
|
|
0.9 |
|
|
|
1.4 |
|
|
|
1.7 |
|
Expected dividend yield |
|
None |
|
None |
|
None |
|
None |
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
28.4 |
% |
|
|
34.6 |
% |
|
|
29.7 |
% |
|
|
37.5 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
|
|
3.7 |
% |
|
|
4.8 |
% |
|
|
3.9 |
% |
Expected life in years |
|
|
4.4 |
|
|
|
5.0 |
|
|
|
4.7 |
|
|
|
4.7 |
|
Expected dividend yield |
|
None |
|
None |
|
None |
|
None |
|
Based on the above assumptions, the weighted average estimated fair value of options granted in the
third quarter of fiscal years 2006 and 2005 was $6.97 and $12.36 per share, respectively. The
weighted average estimated fair value of options granted in the first nine months of fiscal years
2006 and 2005 was $8.39 and $11.50 per share, respectively. We estimate forfeitures related to
option grants at an annual rate of 7% per year. The weighted average estimated fair value for
shares issued under the ESPP in the third quarter of fiscal years 2006 and 2005 was $6.98 and $5.69
per share, respectively. The weighted average estimated fair value for shares issued under the
ESPP in the first nine months of fiscal years 2006 and 2005 was $6.70 and $5.92 per share,
respectively.
Other reasonable assumptions about these factors could provide different estimates of fair value.
Future changes in stock price volatility, life of options, interest rates, forfeitures and dividend
practices, if any, may require changes in our assumptions, which could materially affect the
calculation of fair value.
Total gross unrecognized stock-based compensation expense related to unvested stock options and
unvested restricted stock awards amounted to $40.8 million at August 31, 2006. The shares
associated with this unrecognized expense have a weighted average remaining vest period of 2.8
years.
Note 4: Earnings Per Share
We calculate basic earnings per share using the weighted average number of common shares
outstanding. We compute diluted earnings per share 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 provides the calculation of basic and diluted earnings per share on an
interim basis:
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, |
|
|
Nine Months Ended August 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
8,870 |
|
|
$ |
12,595 |
|
|
$ |
22,497 |
|
|
$ |
32,699 |
|
|
Weighted average shares outstanding |
|
|
41,137 |
|
|
|
38,947 |
|
|
|
40,899 |
|
|
|
37,651 |
|
Dilutive impact from outstanding stock
options |
|
|
1,764 |
|
|
|
3,410 |
|
|
|
2,245 |
|
|
|
3,260 |
|
|
Diluted weighted average shares
outstanding |
|
|
42,901 |
|
|
|
42,357 |
|
|
|
43,144 |
|
|
|
40,911 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
|
$ |
0.32 |
|
|
$ |
0.55 |
|
|
$ |
0.87 |
|
Diluted |
|
$ |
0.21 |
|
|
$ |
0.30 |
|
|
$ |
0.52 |
|
|
$ |
0.80 |
|
|
12
Note 5: Income Taxes
We provide for income taxes during interim periods based on the estimated effective tax rate for
the full fiscal year. We record cumulative adjustments to the tax provision in an interim period in
which a change in the estimated annual effective rate is determined.
Note 6: Comprehensive Income
The components of comprehensive income include net income, foreign currency translation
adjustments, unrealized gains and losses on foreign exchange hedging contracts and unrealized gains
and losses on investments. The following table provides the calculation of comprehensive income on
an interim basis:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, |
|
|
Nine Months Ended August 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
8,870 |
|
|
$ |
12,595 |
|
|
$ |
22,497 |
|
|
$ |
32,699 |
|
Foreign currency translation adjustments,
net of tax |
|
|
436 |
|
|
|
132 |
|
|
|
2,139 |
|
|
|
(528 |
) |
Unrealized gains on foreign exchange
hedging contracts, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622 |
|
Unrealized gains (losses) on investments,
net of tax |
|
|
66 |
|
|
|
19 |
|
|
|
115 |
|
|
|
(78 |
) |
|
Total comprehensive income |
|
$ |
9,372 |
|
|
$ |
12,746 |
|
|
$ |
24,751 |
|
|
$ |
32,715 |
|
|
Note 7: Segment Information
Based upon the aggregation criteria for segment reporting, we have two reportable segments:
Application Development and Deployment, which primarily includes the OpenEdge Division and
DataDirect Technologies, and Enterprise SOA Infrastructure, which includes Sonic Software and Real
Time. We aggregated our segment data based on similar utilization characteristics, such as
deployment and integration, of the primary products in each operating unit. We do not manage our
assets, capital expenditures, interest income or provision for income taxes by segment. We manage
such items on a company basis.
At the end of fiscal 2005, we changed the composition of our reporting segments from previous
disclosures. We restated the fiscal 2005 segment disclosure to conform to the current
presentation.
The following table provides revenue and income from operations from our reportable segments on an
interim basis:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, |
|
|
Nine Months Ended August 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Development and
Deployment |
|
$ |
98,164 |
|
|
$ |
86,599 |
|
|
$ |
286,992 |
|
|
$ |
261,570 |
|
Enterprise SOA Infrastructure |
|
|
16,211 |
|
|
|
14,483 |
|
|
|
44,372 |
|
|
|
38,998 |
|
Reconciling items |
|
|
(3,013 |
) |
|
|
(1,594 |
) |
|
|
(6,495 |
) |
|
|
(3,149 |
) |
|
Total |
|
$ |
111,362 |
|
|
$ |
99,488 |
|
|
$ |
324,869 |
|
|
$ |
297,419 |
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Development and
Deployment |
|
$ |
31,164 |
|
|
$ |
27,488 |
|
|
$ |
92,990 |
|
|
$ |
83,624 |
|
Enterprise SOA Infrastructure |
|
|
(5,004 |
) |
|
|
(6,803 |
) |
|
|
(20,125 |
) |
|
|
(21,136 |
) |
Reconciling items |
|
|
(13,973 |
) |
|
|
(8,920 |
) |
|
|
(41,401 |
) |
|
|
(21,110 |
) |
|
Total |
|
$ |
12,187 |
|
|
$ |
11,765 |
|
|
$ |
31,464 |
|
|
$ |
41,378 |
|
|
13
Amounts included under reconciling items represent inter-segment sales, which are accounted for as
if sold under an equivalent arms-length basis arrangement, amortization of acquired intangibles,
stock-based compensation, acquisition-related expenses and certain unallocated administrative
expenses.
Total revenue by significant product line, regardless of which segment generated the revenue, is as
follows:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, |
|
|
Nine Months Ended August 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
DataDirect |
|
$ |
15,949 |
|
|
$ |
7,887 |
|
|
$ |
42,134 |
|
|
$ |
25,696 |
|
Sonic and Real Time |
|
|
18,098 |
|
|
|
16,015 |
|
|
|
50,300 |
|
|
|
42,921 |
|
Progress OpenEdge and other |
|
|
77,315 |
|
|
|
75,586 |
|
|
|
232,435 |
|
|
|
228,802 |
|
|
Total revenue |
|
$ |
111,362 |
|
|
$ |
99,488 |
|
|
$ |
324,869 |
|
|
$ |
297,419 |
|
|
Note 8: Acquisitions of NEON, Actional and Pantero
On January 20, 2006, we acquired for a combination of cash and stock, through a wholly-owned
subsidiary, the stock of Actional Corporation (Actional) for an aggregate purchase price of
approximately $29 million, net of cash acquired. Actional is a leading provider of Web services
management software for visibility and run-time governance of distributed IT systems in a
service-oriented architecture. The purpose of the acquisition was to broaden the Sonic product
line. Upon the closing of the transaction, Actional became part of our Sonic operating unit. We
accounted for the acquisition as a purchase, and accordingly, we included the results of operations
of Actional in our operating results from the date of acquisition. Transaction costs related to
this acquisition totaled $0.4 million of direct acquisition costs. We paid the cash portion of the
purchase price from available funds. After the closing, approximately $18.1 million of the
purchase price remained to be paid, a portion of which was satisfied through the issuance of
460,011 shares of our common stock in the second quarter of fiscal 2006. The remaining cash
balance was paid in the second quarter of fiscal 2006.
On January 30, 2006, we acquired, through a wholly-owned subsidiary, approximately 91% of the
outstanding shares of common stock of NEON Systems, Inc. (NEON), and we acquired the remaining
outstanding shares of common stock of NEON on February 2, 2006. The aggregate purchase price of the
acquisition was approximately $51 million, net of cash acquired. The purchase price also included
the value of in-the-money stock options and warrants. NEON is a provider of mainframe integration
products and services. The purpose of the acquisition was to broaden the product offerings of
DataDirect. Upon the closing of the transaction, NEON became part of our DataDirect operating
unit. We accounted for the acquisition as a purchase, and accordingly, we included the results of
operations of NEON in our operating results from January 30, 2006, the date of acquisition.
Transaction costs related to this acquisition included $0.7 million of expenses related to a
facilities closure and $0.8 million of direct acquisition costs. We paid the purchase price in
cash from available funds.
On
June 19, 2006, we acquired, through a wholly-owned subsidiary,
the stock of Pantero
Corporation for an aggregate purchase price of approximately $6 million, net of cash acquired. Pantero is a
provider of technology for validating business data in integration projects. Upon the closing of
the transaction, Pantero became part of our Real Time operating unit. We accounted for the
acquisition as a purchase, and accordingly, we included the results of operations of Pantero in our
operating results from June 19, 2006, the date of acquisition. Transaction costs related to this
acquisition included $0.1 million of direct acquisition costs. We paid the purchase price in cash
from available funds.
Included
in acquisition-related expenses is $0.9
million of in-process research and development from the acquisition of NEON, which was expensed
when the acquisition was consummated because the technological feasibility of several products
under development at the time of the acquisition had not been achieved and no alternate future uses
had been established. Research and development costs to bring the acquired products to
technological feasibility are not expected to have a material impact on our future results of
operations or
14
cash flows. The value of in-process research and development was determined based on an appraisal
from an independent third party.
For all acquisitions we obtained valuations from independent appraisers for the amounts assigned to
intangible assets. The preliminary allocation of the purchase prices as of August 31, 2006 was as
follows:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Life (in years) |
|
Assets and liabilities, including cash |
|
$ |
3,527 |
|
|
|
|
|
Acquired intangible assets |
|
|
38,009 |
|
|
1 to 10 years |
Goodwill (not deductible for tax purposes) |
|
|
68,393 |
|
|
|
|
|
In-process research and development |
|
|
900 |
|
|
|
|
|
Deferred tax liability |
|
|
(5,862 |
) |
|
|
|
|
|
Total purchase price |
|
|
104,967 |
|
|
|
|
|
Less: cash acquired |
|
|
(19,390 |
) |
|
|
|
|
Less: stock issuance |
|
|
(13,511 |
) |
|
|
|
|
|
Net cash paid |
|
$ |
72,066 |
|
|
|
|
|
|
Pro forma financial information has not been presented, as the historical operations of NEON,
Actional and Pantero are not significant to our consolidated financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions
regarding forward-looking statements. This Form 10-Q, and other information provided by us or
statements made by our directors, officers or employees from time to time, may contain
forward-looking statements and information, which involve risks and uncertainties. Actual future
results may differ materially. Statements indicating that we expect, estimate, believe, are
planning or plan 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 that could cause actual results or events to differ materially from those anticipated by
the forward-looking statements. Such factors include those described in Part II, Item 1A of this
Form 10-Q under the heading Risk Factors. Although we have sought to identify the most
significant risks to our business, we cannot predict whether, or to what extent, any of such risks
may be realized. We also cannot assure you that we have identified all possible issues which we
might face. We undertake no obligation to update any forward-looking statements that we make.
Restatement of Consolidated Financial Statements
On August 29, 2006, the Audit Committee of our Board of Directors concluded that the
actual measurement dates for determining the accounting treatment of certain stock
option grants differed from the measurement dates we used in preparing our
consolidated financial statements, and that our annual and interim consolidated financial statements,
including the reports of our independent registered public accounting firm thereon,
and our earnings releases and similar communications for the year ended November 30,
1996 and subsequent periods, should no longer be relied upon.
On November 28, 2006, our Board of Directors
concluded that our consolidated financial statements for the three months ended February 28, 2006 and each of the
years during the three year period ended November 30, 2005
(including all interim periods) should be
restated to record additional non-cash stock-based compensation expense, and related
tax effects, resulting from stock options granted during fiscal years 1996 to 2005
that were incorrectly accounted for under GAAP. This decision was based on the
determination that the actual measurement dates for determining the accounting
treatment of certain stock option grants differed from the measurement dates we used
in preparing our consolidated financial statements.
Our decision to restate our financial statements was based on the facts obtained by
an internal investigation into our stock option accounting. This investigation was
initiated voluntarily by our Board of Directors in May 2006 as a result of media and
analysts reports regarding stock option grant practices of numerous companies,
including Progress Software, as well as investor inquiries. The investigation was
conducted initially under the direction of the Audit Committee of the Board of
Directors, which included an independent director who also served on the Compensation
Committee of our Board of Directors. In September 2006, our Board of Directors
created the Special Committee of the Board of Directors, consisting only of
independent directors who had never served on the Compensation Committee of our Board
of Directors, to continue the investigation. The investigation was jointly conducted
by our outside legal counsel and by special legal counsel retained by the Special
Committee, which counsel had no prior relationship with us or our management.
15
Our option grants were made by means of unanimous written consents executed by the
Compensation Committee. During fiscal years 1996 through 2005, we used as the
measurement date for our option grants the dates which appeared on the unanimous
written consents. However, during the period from December 1995 through July 2005,
the Compensation Committee generally did not execute those written consents on the
dates appearing on those consents. Instead, the consents were generally executed by
the Compensation Committee after the dates stated on the consents. During fiscal
years 1996 through 2002, we generally selected the dates used as the grant dates
retrospectively. Particularly for our annual grants, which represented the largest
number of options granted each year, we chose as the grant date a date on which the
closing price of our common stock was at or near the lowest price for the quarter in
which the annual grant was made.
For our large annual grants made between December 2002 and November 2004, we used as
the measurement date the date reported by our Section 16 officers as the grant date
on their Forms 4. Generally, however, as of the reported grant date, we had not made
a final determination of the number of options to be granted to individual recipients
other than our Section 16 officers. In addition, we generally selected the reported
grant date by choosing the date when our common stock price was the lowest between
the second business day before the filing date of the Forms 4 and the filing date.
We determined the actual grant or measurement date for options by determining when
the last step in the process necessary to complete a grant took place. We considered
receipt of an executed unanimous written consent from each member of the Compensation
Committee as the last required step. After comparing the grant or measurement dates
that we historically used during fiscal years 1996 through 2005 to the actual grant
dates identified by determining when the last step in the process necessary to
complete a grant took place, we determined that certain options were granted at an
exercise price below the fair market value of our common stock on the actual grant
date.
In our accompanying fiscal 2005 interim financial statements, we recorded additional stock-based
compensation expense of $0.6 million and $2.0 million for the three month and nine month periods ended
August 31, 2005, respectively. As a result of the errors in determining measurement dates, we also
recorded payroll withholding tax-related adjustments for the exercise of certain options formerly classified
as Incentive Stock Option (ISO) grants under Internal Revenue Service regulations. These options were
determined to have been granted with an exercise price below the fair market value of our common stock
on the actual grant date, and thus did not qualify for ISO tax treatment. Because these options did not
qualify for ISO tax treatment, we should have withheld additional taxes on exercise of those options. We
recorded estimated payroll withholding tax liabilities of $0.5 million and $1.2 million for the three month
and nine month periods ended August 31, 2005, respectively, in connection with the disqualification of such
ISO tax treatment. We have included in the estimated payroll withholding liabilities an estimate of a gross-up in income for any payments to be made on behalf of employees. The stock-based compensation
expenses, including the aforementioned withholding tax adjustments and income tax expense adjustments,
decreased net income by $0.8 million and $2.2 million for the three month and nine month
periods ended August 31, 2005, respectively.
On November 28, 2006, our Board of Directors
authorized us to mitigate the unfavorable personal tax consequences under Section 409A of the Internal
Revenue Code. Options determined to have been granted with an exercise price below the fair market value
of our common stock on the actual grant date and vesting subsequent to December 2004 result in
nonqualified deferred compensation for purposes of Section 409A, and holders are subject to an excise tax
on the value of the options in the year in which they vest. We have determined that options to purchase
approximately 3.1 million shares of our common stock held by current and former employees may be
subject to adverse tax consequences under Section 409A.
In order to mitigate the unfavorable personal
tax consequences under Section 409A, we intend to offer holders of these options the opportunity to amend
their affected options. Specifically, we expect to conduct a tender offer pursuant to which we will offer to
amend the affected options to increase the exercise price to the fair market value of our common stock on
the revised grant date, and to give the option holders (excluding certain executive officers and employees) a
cash payment for the increase in the exercise price.
We expect to provide to option holders who are
eligible for the tender offer, and to file with the Securities and Exchange Commission, a formal Offer to
Amend, a related Letter of Transmittal and other documents describing the tender offer in detail. Eligible
option holders should read these tender offer documents carefully when they are available because they will
contain important information about the tender offer. Eligible option holders can obtain the tender offer
documents, when available, and other related documents filed with the Commission for free at the
Commissions web site (www.sec.gov) or at no cost from us.
We also intend to enter into option amendment
agreements containing similar terms with a limited number of individuals for whom the deadline for such
an amendment is December 31, 2006. We will account for the impact of the tender offer and these option
amendment agreements as a stock option modification under SFAS 123R and recognize additional stock-based
compensation expense, with a corresponding offset to additional paid-in capital, over the vesting
period of the modified options. We will record a liability for the present value of the expected cash
payments, with a corresponding reduction in additional paid-in capital, and recognize interest expense
through the period up to each payment date.
We also plan to compensate holders of
exercised options for the consequences of Section 409A and plan to take steps to compensate holders for
the loss of value arising from the cancellation of vested, in-the-money options from May 2006 to the filing
of our restated consolidated financial statements, including any consequences arising under Section 409A.
We estimate that we will incur additional compensation expense of $0.7 million in the fourth quarter of
fiscal 2006 in connection with these actions.
The accompanying discussion in Results of Operations below reflects the effects of
the restatement described above.
Related Proceedings
On June 23, 2006, we received written notice that the Boston, Massachusetts office of the
Securities and Exchange Commission is conducting an informal inquiry into our option-granting
practices during the period December 1, 1995 through November 30, 2002. The informal inquiry has
been expanded to cover periods through the present. The SEC has requested testimony from certain
of our officers and documents relating to our stock option practices for the period under
investigation. We have produced responsive documents and are in the process of producing
additional documents. We are unable to predict accurately what consequences may arise from the SEC inquiry. We have
already incurred, and expect to continue to incur, significant legal and accounting expenses
arising from the inquiry. The inquiry could also divert the attention of our management and harm
our business. If the SEC institutes legal action, we could face significant fines and penalties
and be required to take remedial actions determined by the SEC or a court. Although we have filed
certain restated financial statements that we believe correct the accounting errors arising from
our past option-granting practices, the filing of those financial statements will not resolve the
pending SEC inquiry. The SEC has not reviewed our restated financial statements, and any future
review could lead to further restatements or other modifications of our financial statements.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement
System, Derivatively on Behalf of Progress Software Corporation, v. Joseph Alsop et
al. was filed in the United States District Court for the District of Massachusetts
by a party identifying itself as one of our shareholders purporting to act on our
behalf against our directors and certain of our present and former officers. We are
also named as a nominal defendant. The complaint alleges violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty,
aiding and abetting breaches of fiduciary duty and unjust enrichment arising from an
alleged option backdating scheme. The complaint seeks monetary damages, restitution,
disgorgement, rescission of stock options, punitive damages and other relief. A
motion to dismiss the derivative complaint has been filed and is pending. We have
also received derivative demands relating to substantially the same allegations from
three purported shareholders, including the plaintiff that filed the derivative
complaint. On November 30, 2006, the plaintiff filed an amended complaint. The ultimate outcome of these complaints could have a material adverse effect on our results of operations.
We expect
to incur additional legal expenses arising from the derivative action, including the
advancement of legal expenses to our directors and officers in connection with the
derivative action. We have indemnification obligations to our directors and officers,
and the outcome of the derivative or any other litigation may require that we
indemnify some or all of our directors and officers for expenses they may incur in
defending the litigation and other losses.
16
NASDAQ
Delisting Notice
On July 19, 2006, we received a staff determination letter from the
Nasdaq Stock Market stating that our failure to timely file our
quarterly report on Form 10-Q for the fiscal quarter ended May 31,
2006 was a violation of Nasdaq rules and that our securities would
be delisted unless we requested a hearing. We requested a hearing,
and this request stayed the delisting pending the outcome of the
hearing. On October 13, 2006, we received a similar staff
determination letter with respect to our failure to timely file our
quarterly report on Form 10-Q for the fiscal quarter ended August
31, 2006. The outcome of the hearing resulted in our delisting being
deferred until November 30, 2006 based on our ability to meet certain
conditions, including the filing of our delayed and restated
financial statements by that date and providing Nasdaq with
information regarding the results of our internal investigation. We
have provided the Nasdaq Hearing Department with certain requested
information. On November 29, 2006, we requested an extension of time
until December 15, 2006 to file our delayed and restated financial
statements. On December 15, 2006, we requested another such
extension until December 18, 2006. The Nasdaq Listing Qualifications Panel has not granted
us a formal written extension of the above conditions. If Nasdaq does
not grant our requested extension, or if we do not meet any extended
deadline for those filings or if Nasdaq is not satisfied with the
result of our internal investigation, our common stock may be
delisted.
Overview
We develop, market and distribute software to simplify and accelerate the development, deployment,
integration and management of business applications. Our mission is to deliver software products
and services that empower partners and customers to improve their development, deployment,
integration and management of quality applications worldwide. Our products include development
tools, databases, application servers, messaging servers, application management tools, data
connectivity products and integration products that enable the highly distributed deployment of
responsive applications across internal networks, the Internet and occasionally-connected users.
Through our various operating units, we market our products globally to a broad range of
organizations in manufacturing, distribution, finance, retail, healthcare, telecommunications,
government and many other fields.
We derive
a significant portion of our revenue from international operations.
In the second half of fiscal 2005 and the first half of fiscal 2006, the strengthening of the U.S. dollar against most major currencies,
primarily the euro and the British pound, negatively affected the
translation of our results into U.S. dollars. In the third quarter of
fiscal 2006, the weakening of the U.S. dollar against most major currencies, primarily the euro and
the British pound, positively affected the translation of our results
into U.S. dollars. In the first two quarters of fiscal 2005 as
well as in fiscal years 2002 through 2004, the weakening of the U.S. dollar against most major
currencies, primarily the euro and the British pound, positively
affected the translation of our results into U.S. dollars.
Adoption of SFAS 123R
Effective December 1, 2005, we adopted SFAS No. 123(R), Share-Based Payment (SFAS 123R). SFAS
123R requires us to measure the grant date fair value of equity awards given to employees in
exchange for services and recognize that cost over the period that such services are performed.
Prior to adopting SFAS 123R, we accounted for stock-based compensation under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), as permitted by SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123).
In transitioning from APB 25 to SFAS 123R, we have applied the modified prospective method.
Accordingly, periods prior to adoption have not been restated to
conform to SFAS 123R and are not directly comparable to
periods after adoption. Under the modified prospective method, compensation cost recognized in
periods after adoption includes (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of December 1, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, less estimated forfeitures, and (b)
compensation cost for all share-based payments granted subsequent to December 1, 2005, based on the
grant date fair value estimated in accordance with the provisions of SFAS 123R, less estimated
forfeitures.
Total stock-based employee compensation cost of $5.1 million is reflected in net income in the
third quarter of fiscal 2006 and approximately $16.9 million is reflected in net income in the
first nine months of fiscal 2006. The total income tax benefit recognized in our statement of
operations for the third quarter of fiscal 2006 for share-based payments was approximately $1.5
million. The total income tax benefit recognized in our statement of operations for the first nine
months of fiscal 2006 for share-based payments was approximately $4.8 million. Total gross
unrecognized stock-based compensation expense related to unvested stock options and unvested
restricted stock awards amounted to $40.8 million at August 31, 2006. The shares associated with
this unrecognized expense have a weighted average remaining vest period of 2.8 years. For fiscal
2006, total stock-based compensation expense, including amounts from the issuance of restricted
shares and amounts from stock options using the fair value provisions of SFAS 123R, is estimated to
be approximately $23 million.
Prior to the adoption of SFAS 123R, we presented all excess tax benefits related to stock
compensation as cash flows from operating activities in our statement of cash flows. SFAS 123R
requires the cash flows resulting from these excess tax benefits to be classified as cash flows from
financing activities when realized. In the first nine months of fiscal 2006, the tax benefit from the exercise of
stock options was $0.9 million, which was classified as cash flows from financing activities.
17
For more information about stock-based compensation, including valuation methodology, see Note 3 of
Notes to our Consolidated Financial Statements included in Item 1 of this Form 10-Q and Critical
Accounting Policies Stock-Based Compensation below.
Critical Accounting Policies
Our managements discussion and analysis of financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. We make estimates and assumptions
in the preparation of our consolidated financial statements that affect the reported amounts of
assets and liabilities, revenue and expenses and related disclosures of contingent assets and
liabilities. We base our estimates on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. However, actual results may differ from these
estimates.
We have identified the following critical accounting policies that require the use of significant
judgments and estimates in the preparation of our consolidated financial statements. This listing
is not a comprehensive list of all of our accounting policies. For further information regarding
the application of these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements in Item 8 of our Annual Report on Form 10-K/A, as well as the notes to our
Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Revenue Recognition Our revenue recognition policy is significant because revenue is a key
component affecting results of operations. In determining when to recognize revenue from a
customer arrangement, we are often required to exercise judgment regarding the application of our
accounting policies to a particular arrangement. For example, judgment is required in determining
whether a customer arrangement has multiple elements. When such a situation exists, judgment is
also involved in determining whether vendor-specific objective evidence (VSOE) of fair value for
the undelivered elements exists. While we follow specific and detailed rules and guidelines
related to revenue recognition, we make and use significant management judgments and estimates in
connection with the revenue recognized in any reporting period, particularly in the areas described
above, as well as collectibility. If management made different estimates or judgments, material
differences in the timing of the recognition of revenue could occur.
Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. We establish this
allowance using estimates that we make based on factors such as the composition of the accounts
receivable aging, historical bad debts, changes in payment patterns, changes to customer
creditworthiness and current economic trends. If we used different estimates, or if the financial
condition of customers were to deteriorate, resulting in an impairment of their ability to make
payments, we would require additional provisions for doubtful accounts that would increase bad debt
expense.
Goodwill and Intangible Assets We have goodwill and net intangible assets of $228.8 million at
August 31, 2006. We assess the impairment of goodwill and identifiable intangible assets on an
annual basis and whenever events or changes in circumstances indicate that the carrying value of
the asset may not be recoverable. We would record an impairment charge if such an assessment were
to indicate that the fair value of such assets was less than the carrying value. Judgment is
required in determining whether an event has occurred that may impair the value of goodwill or
identifiable intangible assets. Factors that could indicate that an impairment may exist include
significant underperformance relative to plan or long-term projections, changes in business
strategy, significant negative industry or economic trends or a significant decline in our stock
price or in the value of one of our reporting units for a sustained period of time. We utilize
cash flow models to determine the fair value of our reporting units. We must make assumptions
about future cash flows, future operating plans, discount rates and other factors in our models, as
do the third parties that provide valuation reports to us. Different assumptions and judgment
determinations could yield different conclusions that would result in an impairment charge to
income in the period that such change or determination was made.
Income Tax Accounting We have a net deferred tax asset of $29.7 million at August 31, 2006. We
record valuation allowances to reduce deferred tax assets to the amount that is more likely than
not to be realized. We consider scheduled reversals of temporary differences, projected future
taxable income, ongoing tax planning
18
strategies and other matters in assessing the need for and the amount of a valuation allowance. If
we were to change our assumptions or otherwise determine that we were unable to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period that such change or determination was made.
Stock-Based
Compensation We account for stock-based compensation expense in accordance with SFAS
123R. Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based
awards measured at the grant date, is recognized over the relevant service period, and is adjusted
each period for anticipated forfeitures. We estimate the fair value of each stock-based award on
the date of grant using the Black-Scholes option valuation model. The Black-Scholes option
valuation model incorporates assumptions as to stock price volatility, the expected life of
options, a risk-free interest rate and dividend yield. Many of these assumptions are highly
subjective and require the exercise of management judgment. Our management must also apply
judgment in developing an estimate of awards that may be forfeited. If our actual experience
differs significantly from our estimates and we choose to employ different assumptions in the
future, the stock-based compensation expense that we record in future periods may differ materially
from that recorded in the current period.
19
Results of Operations
The following table provides certain income and expense items as a percentage of total revenue, and
the percentage change in dollar amounts of such items compared with the corresponding period in the
previous fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Revenue |
|
Period-to-Period Change |
|
|
Three Months Ended |
|
Nine Months Ended |
|
Three |
|
Nine |
|
|
August 31, |
|
August 31, |
|
August 31, |
|
August 31, |
|
Month |
|
Month |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Period |
|
Period |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
|
38 |
% |
|
|
38 |
% |
|
|
39 |
% |
|
|
38 |
% |
|
|
11 |
% |
|
|
12 |
% |
Maintenance and services |
|
|
62 |
|
|
|
62 |
|
|
|
61 |
|
|
|
62 |
|
|
|
12 |
|
|
|
7 |
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
12 |
|
|
|
9 |
|
|
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
10 |
|
|
|
7 |
|
Cost of maintenance and services |
|
|
13 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
10 |
|
|
|
6 |
|
Amortization of acquired
intangibles for
purchased technology |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
65 |
|
|
|
53 |
|
|
Total costs of revenue |
|
|
17 |
|
|
|
17 |
|
|
|
17 |
|
|
|
17 |
|
|
|
15 |
|
|
|
10 |
|
|
Gross Profit |
|
|
83 |
|
|
|
83 |
|
|
|
83 |
|
|
|
83 |
|
|
|
11 |
|
|
|
9 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
40 |
|
|
|
38 |
|
|
|
41 |
|
|
|
39 |
|
|
|
16 |
|
|
|
15 |
|
Product development |
|
|
17 |
|
|
|
16 |
|
|
|
18 |
|
|
|
16 |
|
|
|
19 |
|
|
|
19 |
|
General and administrative |
|
|
13 |
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
33 |
|
|
|
23 |
|
Amortization of other acquired
intangibles |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
63 |
|
|
|
72 |
|
Compensation expenses from
repurchase of subsidiary stock
options |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
Acquisition-related expenses, net |
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
|
* |
|
|
|
(33 |
) |
|
Total operating expenses |
|
|
72 |
|
|
|
71 |
|
|
|
73 |
|
|
|
69 |
|
|
|
13 |
|
|
|
16 |
|
|
Income from operations |
|
|
11 |
|
|
|
12 |
|
|
|
10 |
|
|
|
14 |
|
|
|
4 |
|
|
|
(24 |
) |
Other income |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
28 |
|
|
|
87 |
|
|
Income before provision for taxes |
|
|
12 |
|
|
|
13 |
|
|
|
11 |
|
|
|
14 |
|
|
|
6 |
|
|
|
(20 |
) |
Provision for income taxes |
|
|
4 |
|
|
|
0 |
|
|
|
4 |
|
|
|
3 |
|
|
|
954 |
|
|
|
16 |
|
|
Net income |
|
|
8 |
% |
|
|
13 |
% |
|
|
7 |
% |
|
|
11 |
% |
|
|
(30 |
)% |
|
|
(31 |
)% |
|
Revenue. Our total revenue increased 12% from $99.5 million in the third quarter of fiscal 2005 to
$111.4 million in the third quarter of fiscal 2006. Total revenue would have increased by 10% if
exchange rates had been constant in the third quarter of fiscal 2006 as compared to exchange rates
in effect in the third quarter of fiscal 2005. Total revenue increased 9% from $297.4 million in
the first nine months of fiscal 2005 to $324.9 million in the first nine months of fiscal 2006.
Total revenue would have increased by 11% if exchange rates had been constant in the first nine
months of fiscal 2006 as compared to exchange rates in effect in the first nine months of fiscal
2005. Our revenue increased primarily due to the incremental revenue from the acquisitions of NEON
and Actional and to increased volume of software license and maintenance sales from all of our
major product lines, partially offset by the year-over-year impact of exchange rates.
Revenue from our Progress OpenEdge product line increased from $75.6 million in the third quarter
of fiscal 2005 to $77.3 million in the third quarter of fiscal 2006 and increased from $228.8
million in the first nine months of fiscal 2005 to $232.4 million in the first nine months of
fiscal 2006. Revenue derived from our Sonic and Real Time product lines increased 13% from $16.0
million in the third quarter of fiscal 2005 to $18.1 million in the third quarter of fiscal 2006
and increased 17% from $42.9 million in the first nine months of fiscal 2005 to $50.3 million in
the first nine months of fiscal 2006. Revenue from our DataDirect product line increased 102% from
$7.9 million in the third quarter of fiscal 2005 to $15.9 million in the third quarter of fiscal
2006 and increased 64% from $25.7 million in the first nine months of fiscal 2005 to $42.1 million
in the first nine months of fiscal 2006.
20
Software license revenue increased 11% from $38.0 million in the third quarter of fiscal 2005 to
$42.3 million in the third quarter of fiscal 2006. Software license revenue would have increased
by 10% if exchange rates had been constant in the third quarter of fiscal 2006 as compared to
exchange rates in effect in the third quarter of fiscal 2005. Software license revenue increased
12% from $112.8 million in the first nine months of fiscal 2005 to $126.4 million in the first nine
months of fiscal 2006. Software license revenue would have increased by 14% if exchange rates had
been constant in the first nine months of fiscal 2006 as compared to exchange rates in effect in
the first nine months of fiscal 2005. The increase in software license revenue in the nine month
period was primarily due to growth from the DataDirect product line, including the impact of products acquired
in the NEON acquisition, and the Sonic and Real Time product lines. These product lines accounted
for 47% of software license revenue in the third quarter of fiscal 2006 as compared to 36% in the
third quarter of fiscal 2005. Software license revenue from indirect channels, including
application partners and OEMs, increased 6% in the first nine months of fiscal 2006 as compared to
the first nine months of fiscal 2005.
Maintenance and services revenue increased 12% from $61.5 million in the third quarter of fiscal
2005 to $69.1 million in the third quarter of fiscal 2006. Maintenance and services revenue would
have increased by 10% if exchange rates had been constant in the third quarter of fiscal 2006 as
compared to exchange rates in effect in the third quarter of fiscal 2005. Maintenance and services
revenue increased 7% from $184.7 million in the first nine months of fiscal 2005 to $198.4 million
in the first nine months of fiscal 2006. Maintenance and services revenue would have increased by
9% if exchange rates had been constant in the first nine months of fiscal 2006 as compared to
exchange rates in effect in the first nine months of fiscal 2005.
Excluding the impact of changes in exchange rates, the increase in maintenance and
services revenue was primarily the result of growth in our installed customer base, renewal of
maintenance agreements and an increase in professional services
revenue.
Total revenue generated in markets outside North America increased 8% from $55.4 million in the
third quarter of fiscal 2005 to $59.9 million in the third quarter of fiscal 2006 and represented
56% of total revenue in the third quarter of fiscal 2005 and 54% of total revenue in the third
quarter of fiscal 2006. Revenue from the three major regions outside North America, consisting of
EMEA, Latin America and Asia Pacific, increased in EMEA and Latin America in fiscal 2006 as
compared to fiscal 2005 partially offset by a decrease in Asia Pacific. Total revenue generated in
markets outside North America would have represented 53% of total revenue if exchange rates had
been constant in the third quarter of fiscal 2006 as compared to the exchange rates in effect in
the third quarter of fiscal 2005.
Total revenue generated in markets outside North America increased 5% from $168.4 million in the
first nine months of fiscal 2005 to $177.0 million in the first nine months of fiscal 2006 and
represented 57% of total revenue in the first nine months of fiscal 2005 and 54% of total revenue
in the first nine months of fiscal 2006. Revenue in EMEA and Latin America increased in fiscal
2006 as compared to fiscal 2005 and was partially offset by a decrease in Asia Pacific. Total
revenue generated in markets outside North America would have represented 55% of total revenue if
exchange rates had been constant in the first nine months of fiscal 2006 as compared to the
exchange rates in effect in the first nine months of fiscal 2005.
Cost of Software Licenses. Cost of software licenses consists primarily of costs of product
media, documentation, duplication, packaging, electronic software distribution, royalties and
amortization of capitalized software costs. Cost of software licenses increased 10% from $1.8
million in the third quarter of fiscal 2005 to $2.0 million in the third quarter of fiscal 2006,
and remained the same as a percentage of software license revenue at 5%. Cost of
21
software licenses increased 7% from $5.7 million in the first nine months of fiscal 2005 to
$6.1 million in the first nine months of fiscal 2006, and remained the same as a percentage of
software license revenue at 5%. Cost of software licenses as a percentage of software license
revenue may vary from period to period depending upon the relative product mix. However, we expect
the cost of software licenses to range from 5% to 8% of the related software license revenue in a
given period.
Cost of Maintenance and Services. Cost of maintenance and services consists primarily of costs of
providing customer technical support, education and consulting. Cost of maintenance and services
increased 10% from $13.6 million in the third quarter of fiscal 2005 to $15.0 million in the third
quarter of fiscal 2006, and remained the same as a percentage of maintenance and services revenue
at 22%. Cost of maintenance and services increased 6% from $41.7 million in the first nine months
of fiscal 2005 to $44.4 million in the first nine months of fiscal 2006, and decreased as a
percentage of maintenance and services revenue from 23% to 22%. The total dollar amount in the
third quarter of fiscal 2006 and in the first nine months of fiscal 2006 increased primarily due to
increased usage of third party contractors for professional services engagements and the adoption
of SFAS 123R. Cost of maintenance and services included $0.1 million of stock-based compensation
in the third quarter of fiscal 2005 as compared to $0.4 million of stock-based compensation in the
third quarter of fiscal 2006. Cost of maintenance and services included $0.2 million of
stock-based compensation in the first nine months of fiscal 2005 as compared to $1.3 million of
stock-based compensation in the first nine months of fiscal 2006. Our technical support, education
and consulting headcount decreased by 4% from the end of the third quarter of fiscal 2005 to the
end of the third quarter of fiscal 2006.
Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired
intangibles for purchased technology primarily represents the amortization of the value assigned to
technology-related intangible assets obtained in business combinations. Amortization of acquired
intangibles for purchased technology increased from $1.4 million in the third quarter of fiscal
2005 to $2.3 million in the third quarter of fiscal 2006. Amortization of acquired intangibles for
purchased technology increased from $3.8 million in the first nine months of fiscal 2005 to $5.8
million in the first nine months of fiscal 2006. The increase was due to amortization expense
associated with the acquisitions of NEON and Actional in the first quarter of fiscal 2006.
Gross Profit. Our gross profit increased 11% from $82.6 million in the third quarter of fiscal
2005 to $92.0 million in the third quarter of fiscal 2006. The gross profit percentage of total
revenue remained the same at 83% in the third quarter of fiscal 2005 as compared to the third
quarter of fiscal 2006. Our gross profit increased 9% from $246.3 million in the first nine months
of fiscal 2005 to $268.6 million in the first nine months of fiscal 2006. The gross profit
percentage remained the same at 83% of total revenue in the first nine months of fiscal 2006 as
compared to the first nine months of fiscal 2005.
Sales and Marketing. Sales and marketing expenses increased 16% from $38.3 million in the third
quarter of fiscal 2005 to $44.6 million in the third quarter of fiscal 2006, and increased as a
percentage of total revenue from 38% to 40%. Sales and marketing expenses increased 15% from
$115.0 million in the first nine months of fiscal 2005 to $132.2 million in the first nine months
of fiscal 2006, and increased as a percentage of total revenue from 39% to 41%. The increase in
sales and marketing expenses was due to the addition of sales and marketing personnel and related
expenses resulting from acquisitions and to the adoption of SFAS 123R. Sales and marketing
expenses included $0.2 million of stock-based compensation in the third quarter of fiscal 2005 as
compared to $1.9 million of stock-based compensation in the third quarter of fiscal 2006. Sales
and marketing expenses included $0.8 million of stock-based compensation in the first nine months
of fiscal 2005 and $6.3 million of stock-based compensation in the first nine months of fiscal
2006. Our sales support and marketing headcount increased by 3% from the end of the third quarter
of fiscal 2005 to the end of the third quarter of fiscal 2006.
Product Development. Product development expenses increased 19% from $16.2 million in the third
quarter of fiscal 2005 to $19.3 million in the third quarter of fiscal 2006, and increased as a
percentage of revenue from 16% to 17%. Product development expenses increased 19% from $48.5
million in the first nine months of fiscal 2005 to $57.6 million in the first nine months of fiscal
2006, and increased as a percentage of revenue from 16% to 18%. The dollar increase was primarily
due to headcount-related expenses from the development teams associated with the recently acquired NEON and
Actional products and the adoption of SFAS 123R. Product development expenses included $0.1
million of stock-based compensation in the third quarter of fiscal 2005 as compared to $1.2 million
of stock-based compensation in the third quarter of fiscal 2006. Product development expenses
included $0.4 million of stock-
22
based compensation in the first nine months of fiscal 2005 as compared to $3.9 million of
stock-based compensation in the first nine months of fiscal 2006. Our product development
headcount increased 17% from the end of the third quarter of fiscal 2005 to the end of the third
quarter of fiscal 2006.
General and Administrative. General and administrative expenses include the costs of our finance,
human resources, legal, information systems and administrative departments. General and
administrative expenses increased 33% from $10.5 million in the third quarter of fiscal 2005 to
$14.0 million in the third quarter of fiscal 2006, and increased as a percentage of revenue from
11% to 13%. General and administrative expenses increased 23% from $32.8 million in the first nine
months of fiscal 2005 to $40.2 million in the first nine months of fiscal 2006, and increased as a
percentage of revenue from 11% to 12%. General and administrative expenses for the first nine
months of fiscal 2006 include $1.1 million of costs related to the stock option review. The dollar
increase was also due to headcount-related costs, transition and integration costs associated with
acquisitions, and the adoption of SFAS 123R. General and administrative expenses included $0.2
million of stock-based compensation in the third quarter of fiscal 2005 as compared to $1.6 million
of stock-based compensation in the third quarter of fiscal 2006. General and administrative
expenses included $0.7 million of stock-based compensation in the first nine months of fiscal 2005
as compared to $5.4 million of stock-based compensation in the first nine months of fiscal 2006.
Our administrative headcount increased 8% from the end of the third quarter of fiscal 2005 to the
end of the third quarter of fiscal 2006.
Amortization of Other Acquired Intangibles. Amortization of other acquired intangibles primarily
represents the amortization of value assigned to non-technology-related intangible assets obtained
in business combinations. Amortization of other acquired intangibles increased from $1.2 million
in the third quarter of fiscal 2005 to $2.0 million in the third quarter of fiscal 2006.
Amortization of other acquired intangibles increased from $3.1 million in the first nine months of
fiscal 2005 to $5.3 million in the first nine months of fiscal 2006. The increase was due to
amortization expense associated with the acquisitions of NEON and Actional in the first quarter of
fiscal 2006.
Acquisition-Related Expenses. Acquisition-related expenses for the first nine months of fiscal
2006 include $0.9 million of expenses for retention bonuses to Apama and EasyAsk employees who
joined us in fiscal 2005 and $0.9 million of in-process research and development from the
acquisition of NEON, which was expensed when the acquisition was consummated because the
technological feasibility of several products under development at the time of the acquisition had
not been achieved and no alternate future uses had been established. Research and development
costs to bring the acquired products to technological feasibility are not expected to have a
material impact on our future results of operations or cash flows. The value of in-process
research and development was determined based on an appraisal from an independent third party.
Compensation expense from repurchase of subsidiary stock options. Compensation expense from
repurchase of subsidiary stock options for the third quarter of fiscal 2005 represented expenses of
$2.8 million related to the settlement and pay-out to Sonic employees who held vested, in-the-money
options to purchase Sonic common stock.
Income From Operations. Income from operations increased 4% from $11.8 million in the third
quarter of fiscal 2005 to $12.2 million in the third quarter of fiscal 2006 and decreased as a
percentage of total revenue from 12% in the third quarter of fiscal 2005 to 11% in the third
quarter of fiscal 2006. Income from operations decreased 24% from $41.4 million in the first nine
months of fiscal 2005 to $31.5 million in the first nine months of fiscal 2006 and decreased as a
percentage of total revenue from 14% in the first nine months of fiscal 2005 to 10% in the first
nine months of fiscal 2006. The decrease was primarily due to the adoption of SFAS 123R and the
increase in amortization of acquired intangibles and other acquisition-related expenses.
Income from operations increased from $27.5 million in the third quarter of fiscal 2005 to
$31.2 million in the third quarter of fiscal 2006 in our Application Development & Deployment
segment, which primarily includes OED and DataDirect Technologies. Income from operations in the
same segment increased from $83.6 million in the first nine months of fiscal 2005 to $93.0 million
in the first nine months of fiscal 2006. Losses from operations decreased from $6.8 million in the
third quarter of fiscal 2005 to $5.0 million in the third quarter of fiscal 2006 in our Enterprise
SOA Infrastructure segment, which includes Sonic and Real Time. Losses from operations in the same
segment decreased from $21.1 million in the first nine months of fiscal 2005 to $20.1 million in
the first nine
23
months of fiscal 2006. See Note 7 to the accompanying condensed consolidated financial
statements for a reconciliation of income from operations for each segment to consolidated income
from operations.
Other Income. Other income increased 28% from $1.3 million in the third quarter of fiscal 2005 to
$1.7 million in the third quarter of fiscal 2006. The increase was primarily due to an increase in
interest income resulting from slightly higher interest rates, and to lower foreign exchange losses
in the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005. Other income
increased 87% from $1.5 million in the first nine months of fiscal 2005 to $2.9 million in the
first nine months of fiscal 2006. The increase was primarily due to an increase in interest income
resulting from slightly higher interest rates, higher average cash and short-term investment
balances, partially offset by higher foreign exchange losses.
Provision for Income Taxes. Our effective tax rate was 4% in the third quarter of fiscal 2005 as
compared to 36% in the third quarter of fiscal 2006. Our effective tax rate was 24% in the first
nine months of fiscal 2005 as compared to 35% in the first nine months of fiscal 2006. We provide
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. During the third
quarter of fiscal 2005, the IRS completed an examination of our United States income tax returns
for fiscal years through 2002. The provision for income taxes in the third quarter of fiscal 2005
included a tax benefit of $3.8 million resulting from the reversal of previously established income
tax liabilities that were no longer required. The increase in the effective tax rate from the
third quarter and first nine months of fiscal 2005 as compared to the same periods in fiscal 2006
was primarily due to this benefit.
Liquidity and Capital Resources
At the end of the third quarter of fiscal 2006, our cash and short-term investments totaled $237.1
million. The decrease of $29.3 million since the end of fiscal 2005 resulted primarily from cash
paid for the acquisitions of NEON, Actional and Pantero.
We generated $48.3 million in cash from operations in the first nine months of fiscal 2006 as
compared to $63.9 million in the first nine months of fiscal 2005. The decrease in cash generated
from operations in the third quarter of fiscal 2006 over the third quarter of fiscal 2005 was
primarily due to an increase in acquisition related payments as compared to amounts from the
previous period.
Accounts receivable increased by $0.7 million from the end of fiscal 2005. Accounts receivable
days sales outstanding, or DSO, decreased by 2 days to 54 days at the end of the third quarter of
fiscal 2006 as compared to 56 days at the end of fiscal 2005 and increased by 7 days from 47 days
at the end of the third quarter of fiscal 2005. Our DSO tends to be
lowest at the end of the third quarter of each fiscal year and
highest at the end of the first quarter due to the concentration of
maintenance renewal billings in the first quarter. We target a DSO range of 60 to 80 days.
We purchased property and equipment totaling $12.3 million in the first nine months of fiscal 2006
as compared to $5.9 million in the first nine months of fiscal 2005. The purchases consisted
primarily of computer software, equipment and building and leasehold improvements. The increase
primarily related to costs associated with our ongoing ERP implementation.
In September 2005, the Board of Directors authorized, for the period from October 1, 2005 through
September 30, 2006, the purchase of up to 10,000,000 shares of our common stock, at such times that
we deem such purchases to be an effective use of cash. We purchased and retired approximately
470,000 shares of our common stock for $12.7 million in the first nine months of fiscal 2006 as
compared to approximately 379,000 shares of our common stock for $9.3 million in the first nine
months of fiscal 2005.
We received $13.0 million in the first nine months of fiscal 2006 from the exercise of stock
options and the issuance of ESPP shares as compared to $46.1 million in the first nine months of
fiscal 2005.
In the first nine months of fiscal year 2006, we used cash and stock to complete three
acquisitions. All of these acquisitions were accounted for as purchases, and accordingly, the
results of operations of the acquired companies
24
are included in our operating results from their respective dates of acquisition. The details of
the acquisitions are as follows:
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On January 20, 2006, we acquired for a combination of cash and stock, through a
wholly-owned subsidiary, the stock of Actional Corporation for an aggregate purchase price
of approximately $29 million, net of cash. At February 28, 2006, approximately $18.1
million of the purchase price remained to be paid, a portion of which has since been
satisfied through the issuance of 460,011 shares of our common stock. The remaining cash
balance was paid in the second quarter of fiscal 2006. |
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On January 30, 2006, we acquired, through a wholly-owned subsidiary, approximately 91%
of the outstanding shares of common stock of NEON Systems, Inc., and we acquired the
remaining outstanding shares of common stock of NEON on February 2, 2006. The aggregate
purchase price of the acquisition was approximately $51 million, net of cash acquired. |
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On June 19, 2006, we acquired, through a wholly-owned
subsidiary, the stock of Pantero
Corporation for an aggregate purchase price of $6 million, net of cash acquired. |
We include standard intellectual property indemnification provisions in our licensing agreements in
the ordinary course of business. Pursuant to our product license agreements, we will indemnify,
hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to our
products. Other agreements with our customers provide indemnification for claims relating to
property damage or personal injury resulting from the performance of services by us or our
subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such
indemnity agreements have been insignificant. Accordingly, the estimated fair value of these
indemnification provisions is immaterial.
We are 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 our consolidated financial position or results of operations.
We believe that existing cash balances together with funds generated from operations will be
sufficient to finance our operations and meet our foreseeable cash requirements (including planned
capital expenditures, lease commitments, debt payments, potential cash acquisitions and other
long-term obligations) through at least the next twelve months.
Off-Balance Sheet Arrangements
Our only significant off-balance sheet commitments relate to operating lease obligations. We have
no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K. Future
annual minimum rental lease payments are detailed in Note 10 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K/A for the year ended November 30, 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including changes in interest rates affecting the
return on our investments and foreign currency fluctuations. We have established policies and
procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange
rates.
Exposure to market risk for changes in interest rates relates to our investment portfolio. We have
not used derivative financial instruments in our investment portfolio. We seek to place our
investments with high-quality issuers and have policies limiting, among other things, the amount of
credit exposure to any one issuer. We seek to limit default risk by purchasing only
investment-grade securities. Our investments have an average remaining maturity of less than two
years and are primarily fixed-rate instruments. In addition, we have
classified all of our debt
securities as available for sale. This classification reduces the income statement exposure to
interest rate risk if
25
such investments are held until their maturity date. Based on a hypothetical 10% adverse movement
in interest rates, the potential losses in future earnings, fair value of risk-sensitive
instruments and cash flows are immaterial.
We enter 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. We have not entered into foreign exchange option and forward contracts for speculative or
trading purposes. We base our accounting policies for these contracts on the designation of the
contracts as hedging instruments. The criteria we use for designating a contract as a hedge
include the contracts effectiveness in risk reduction and matching of derivative instruments to
the underlying transactions. We generally recognize market value increases and decreases on the
foreign exchange option and forward contracts in income in the same period as gains and losses on
the underlying transactions. We operate in certain countries where there are limited forward
currency exchange markets and thus we have unhedged transaction exposures in these currencies. The
notional principal amount of outstanding foreign exchange option contracts at August 31, 2006 was
$100.2 million. There were no unrealized market value gains on such contracts at August 31, 2006.
We also hedge net intercompany balances. We generally do not hedge the net assets of our
international subsidiaries. The foreign exchange exposure from a 10% movement of currency exchange
rates on our financial position is not significant. Based on a hypothetical 10% adverse movement
in all foreign currency exchange rates, our revenue would be adversely affected by approximately 6%
and our net income would be adversely affected by approximately 20% (excluding any offsetting
positive impact from our ongoing hedging programs), although the actual effects may differ
materially from the hypothetical analysis.
The table below details outstanding forward contracts, which mature in ninety days or less, at
August 31, 2006 where the notional amount is determined using contract exchange rates:
(In thousands, except exchange rate data)
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Exchange |
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Exchange |
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Notional |
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Foreign Currency |
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U.S. Dollars |
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Weighted |
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for U.S. Dollars |
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for Foreign Currency |
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Average |
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Functional Currency: |
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(Notional Amount) |
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(Notional Amount) |
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Exchange Rate* |
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Australian dollar |
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$ |
2,870 |
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|
1.31 |
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Brazilian real |
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$ |
1,066 |
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2.16 |
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Euro |
|
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|
|
|
34,607 |
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|
0.78 |
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Japanese yen |
|
|
4,197 |
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|
|
|
|
116.75 |
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South African rand |
|
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745 |
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7.12 |
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U.K. pound |
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17,192 |
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0.52 |
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$ |
6,008 |
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$ |
54,669 |
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* expressed as local currency unit per U.S. dollar |
Item 4. Controls and Procedures
Background of Restatement
On August 29, 2006, the Audit Committee of our Board of Directors concluded that the
actual measurement dates for determining the accounting treatment of certain stock
option grants differed from the measurement dates we used in preparing our
consolidated financial statements, and that our annual and interim consolidated financial statements,
including the reports of our independent registered public accounting firm thereon,
and our earnings releases and similar communications for the year ended November 30,
1996 and subsequent periods, should no longer be relied upon.
On November 28, 2006, our Board of Directors concluded that our consolidated
financial statements
for the three months ended February 28, 2006 and each of the
years during the three year period ended November 30, 2005
(including all interim periods) should be restated to record additional non-cash stock-based
compensation expense, and related tax effects, resulting from stock options granted
during fiscal years 1996 to 2005 that were incorrectly accounted for
under GAAP. This decision was based on the determination that the
actual measurement dates for determining the accounting treatment of
certain stock option grants differed from the measurement dates
we used in preparing our consolidated financial statements.
Our decision to restate our financial statements was based on the facts obtained by
an internal investigation into our stock option accounting, conducted initially by
the Audit Committee of our Board of Directors, and subsequently by a Special
Committee of our Board consisting entirely of non-employee directors who had not
served on the Compensation Committee of our Board. The Special Committee, advised by
our outside legal counsel and special legal counsel, in consultation with management,
concluded that nearly all option grants from December 1995 through July 2005 were
accounted for improperly, and concluded that stock-based compensation associated with
nearly all grants was misstated in fiscal years 1996 through 2005 and in the first
quarter of fiscal 2006. The Special Committee identified several practices, including
the retrospective selection of grant dates and the completion subsequent to the grant
date of the allocation of individual awards, which caused errors related to stock
option grant measurement dates and stock-based compensation. The Special Committee
concluded, based on its review of the facts and circumstances surrounding our option
grant practices, that management knew that relevant accounting rules required us to
record stock-based compensation charges when we made below fair market value option
grants, but did not apply those rules correctly or assure that they were being
applied correctly and therefore failed to record necessary accounting charges. The
Special Committee further concluded that there was no evidence to indicate that the
practices that caused errors related to stock option grant measurement dates and
stock-based compensation resulted from willful misconduct.
26
During the second half of fiscal 2005, prior to the commencement of the investigation
by the Audit Committee and the Special Committee, we revised our stock option grant
practices. The revised grant process includes, among other things, fixed grant dates
during the year, review by the Compensation Committee of a preliminary grant list in
advance of the fixed grant date and a final approval by the Compensation Committee of
the final list of grant recipients on the fixed grant date.
Evaluation of Disclosure Controls and Procedures
Our management, including the chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d- 15(e) under the Securities and Exchange Act of
1934, as amended)
as of the end of the period covered by this report. Based on this
evaluation, our chief executive officer and chief financial officer concluded that
our disclosure controls and procedures were not effective as of August 31, 2006.
Specifically, our management determined that we had a material weakness resulting from the failure
to design and implement controls necessary to provide reasonable assurance that historical
measurement dates for stock option grants to employees were appropriately determined; accordingly,
the measurement dates used for certain option grants were not appropriate, and the Companys
accounting for those grants was not in accordance with Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees and, beginning December 1, 2005, Financial Accounting
Standard No. 123(R), Share-based Payments. This material weakness resulted in the restatement
described in Note 2 to the restated consolidated financial statements included in this Form 10-Q.
Our management determined that this control deficiency was a material weakness, based upon the
actual misstatements identified, the potential for additional material misstatements to have
occurred as a result of the deficiency, and the lack of other mitigating controls.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the
quarter ended August 31, 2006 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
We believe
that subsequent to August 31, 2006, we completed
our remediation of the aforementioned
material weakness in our internal control over financial reporting. During the second half of fiscal 2005, prior to the commencement
of the investigation by the Audit Committee and the Special Committee, we revised our
stock option grant practices. The revised grant process includes, among other things,
fixed grant dates during the year, review by the Compensation Committee of a
preliminary grant list in advance of the fixed grant date and a final approval by the
Compensation Committee of the final list of grant recipients on the fixed grant date.
Additionally, our management has corrected its understanding of the accounting principles included
in APB 25 and as a result, our previous accounting for stock-based compensation has
been corrected in the restated consolidated financial statements appearing in Item 1
of this Form 10-Q.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 23, 2006, we received written notice that the Boston, Massachusetts office of
the Securities and Exchange Commission is conducting an informal inquiry into our
option-granting practices during the period December 1, 1995 through November 30,
2002. The informal inquiry has been expanded to cover periods through the present.
The SEC has requested testimony from certain of our officers and documents relating
to our stock option practices for the period under investigation. We have produced
responsive documents and are in the process of producing additional
documents. We are unable to predict accurately what consequences may arise from the SEC inquiry. We have
already incurred, and expect to continue to incur, significant legal and accounting expenses
arising from the inquiry. The inquiry could also divert the attention of our management and harm
our business. If the SEC institutes legal action, we could face significant fines and penalties
and be required to take remedial actions determined by the SEC or a court. Although we have filed
certain restated financial statements that we believe correct the accounting errors arising from
our past option-granting practices, the filing of those financial statements will not resolve the
pending SEC inquiry. The SEC has not reviewed our restated financial statements, and any future
review could lead to further restatements or other modifications of our financial statements.
On July 19, 2006, we received a staff determination letter from the Nasdaq Stock
Market stating that our failure to timely file our quarterly report on Form 10-Q for
the fiscal quarter ended May 31, 2006 was a violation of Nasdaq rules and that our
securities would be delisted unless we requested a hearing. We requested a hearing,
and this request stayed the delisting pending the outcome of the hearing. On October
13, 2006, we received a similar staff determination letter with respect to our
failure to timely file our quarterly report on Form 10-Q for the fiscal quarter ended
August 31, 2006. The outcome of the hearing resulted in our delisting being deferred
until November 30, 2006 based on our ability to meet certain conditions, including
the filing of our delayed and restated financial statements by that date and
providing Nasdaq with information regarding the results of our internal
investigation. We have provided the Nasdaq Hearing Department with certain requested
information. On November 29, 2006, we requested an extension of time until December
15, 2006 to file our delayed and restated financial statements. On
December 15, 2006, we requested another such extension until December 18, 2006. The Nasdaq Listing
Qualifications Panel has not granted us a formal written extension of the above
conditions. If Nasdaq does not grant our requested extension, or if we do not meet
any extended deadline for those filings or if Nasdaq is not satisfied with the result
of our internal investigation, our common stock may be delisted.
On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System,
Derivatively on Behalf of Progress Software Corporation, v. Joseph Alsop et al. was
filed in the United States District Court for the District of Massachusetts by a
party identifying itself as one of our shareholders purporting to act on our behalf
against our directors and certain of our present and former officers. We are also
named as a nominal defendant. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty,
aiding and abetting breaches of fiduciary duty and unjust enrichment arising from an
alleged option backdating scheme. The complaint seeks monetary damages, restitution,
disgorgement, rescission of stock options, punitive
damages and other relief. A motion to dismiss the derivative complaint has been
filed and is pending. We have also received derivative demands relating to
substantially the same allegations from three purported shareholders, including the
plaintiff that filed the derivative complaint. On November 30, 2006, the plaintiff
filed an amended complaint. The ultimate outcome of these complaints
could have a material adverse effect on our results of operations.
We expect to incur additional legal expenses arising from
the derivative action, including the advancement of legal expenses to our directors
and officers in connection with the derivative action. We have indemnification
obligations to our directors and officers, and the outcome of the derivative or any
other litigation may require that we indemnify some or all of our directors and
officers for expenses they may incur in defending the litigation and other losses.
We are
subject to various other legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these other claims cannot be predicted with certainty, management does not believe that the
outcome of any of these other legal matters will have a material adverse effect on our
consolidated financial position or results of operations.
27
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves certain risks and uncertainties, some of
which are beyond our control. The following discussion highlights some of these risks.
We face risks related to the restatement of our financial statements and the pending SEC inquiry
regarding our past practices with respect to stock options. On June 23, 2006, we received written
notice that the Boston, Massachusetts office of the Securities and Exchange Commission is
conducting an informal inquiry into our option-granting practices during the period December 1,
1995 through November 30, 2002. The informal inquiry has been expanded to cover periods through the
present. The SEC has requested testimony from certain of our officers and documents relating to
our stock option practices for the period under investigation. We have produced responsive
documents and are in the process of producing additional documents. We are unable to predict
accurately what consequences may arise from the SEC inquiry. We have already incurred, and expect
to continue to incur, significant legal and accounting expenses arising from the inquiry. The
inquiry could also divert the attention of our management and harm our business. If the SEC
institutes legal action, we could face significant fines and penalties and be required to take
remedial actions determined by the SEC or a court. Although we have filed certain restated
financial statements that we believe correct the accounting errors arising from our past
option-granting practices, the filing of those financial statements will not resolve the pending
SEC inquiry. The SEC has not reviewed our restated financial statements, and any future review
could lead to further restatements or other modifications of our financial statements.
Our
common stock may be delisted from Nasdaq. On July 19, 2006, we received a staff determination letter from the Nasdaq Stock Market stating
that our failure to timely file our quarterly report on Form 10-Q for the fiscal quarter ended May 31, 2006 was a violation of Nasdaq rules and that
our securities would be delisted unless we requested a hearing. We requested a hearing, and this request stayed the delisting pending the outcome of the hearing.
On October 13, 2006, we
received a similar staff determination letter with respect to our failure to timely file our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2006.
The outcome of the hearing resulted in our delisting being deferred until November 30, 2006 based on our ability to meet certain conditions, including the filing of our
delayed and restated financial statements by that date and providing Nasdaq with information regarding the results of our internal investigation.
We have provided the Nasdaq Hearing Department with certain requested information. On November 29, 2006, we requested an extension of time until December 15, 2006 to
file our delayed and restated financial statements. On December 15, 2006, we requested another such extension until December 18, 2006.
The Nasdaq Listing Qualifications Panel has not granted us a formal written extension of the above conditions.
If Nasdaq does not grant our requested extension, or if we do not meet any extended deadline for those filings or if Nasdaq is not satisfied with the result of our
internal investigation, our common stock may be delisted. The delisting of our common stock
would likely make the market for trading of our common stock less liquid, which could adversely
affect the trading price of our common stock.
We face litigation risks relating to our past practices with respect to stock options that could
have a material adverse effect our business. On August 17, 2006, a derivative complaint was filed in the United States District Court for the District of Massachusetts by a party identifying itself as one of our shareholders purporting to act on our behalf against our directors and certain of our present and former officers. We are also named as a nominal defendant. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, breaches
of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from an alleged option backdating scheme. The complaint seeks monetary damages, restitution, disgorgement, rescission of stock options, punitive damages and other relief. A motion to dismiss the derivative complaint has been filed and is pending. We have also received derivative demands relating to substantially the same allegations from three purported shareholders, including the plaintiff that
filed the derivative complaint. On November 30, 2006, the plaintiff
filed an amended complaint. Additional lawsuits, including purported class
actions and additional derivative actions, may be filed in state or federal court based upon
allegations substantially similar to those described in this
complaint or otherwise relating to our option grant practices. We expect to incur additional legal expenses arising from the
derivative action, including the advancement of legal expenses to our directors and officers in
connection with the derivative action. This and any other litigation may divert the attention of
our management, which could impair our ability to operate our business. We have indemnification
obligations to our directors and officers, and the outcome of the derivative or any other
litigation may require that we indemnify some or all of our directors and officers for expenses
they may incur in defending the litigation and other losses.
We have recently amended our annual report on Form 10-K for the year ended November 30, 2005 and
included in that filing, among other things, restated financial statements for the years ended
November 30, 2005, 2004 and 2003 and restated selected financial data for the years ended November
30, 2002, 2001, 2000 1999 and 1998. We
28
similarly amended our quarterly report on Form 10-Q for the three months ended February 28, 2006 to
restate the financial statements in that filing. These restatements may lead to new litigation,
may strengthen and expand the claims in the pending litigation, and may increase the cost of
defending or resolving the current litigation.
Our revenue and quarterly results may fluctuate, which could adversely affect our stock price. We
have experienced, and may in the future experience, significant fluctuations in our quarterly
operating results that may be caused by many factors. These factors include:
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changes in demand for our products; |
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introduction, enhancement or announcement of products by us or our competitors; |
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market acceptance of our new products; |
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the growth rates of certain market segments in which we compete; |
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size and timing of significant orders; |
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budgeting cycles of customers; |
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mix of distribution channels; |
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mix of products and services sold; |
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mix of international and North American revenues; |
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fluctuations in currency exchange rates; |
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changes in the level of operating expenses; |
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the amount of our stock-based compensation; |
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changes in our sales incentive plans; |
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completion or announcement of acquisitions by us or competitors; |
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customer order deferrals in anticipation of new products announced by us or our competitors; and |
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general economic conditions in regions in which we conduct business. |
Revenue forecasting is uncertain, in large part, because we generally ship our products shortly
after receipt of orders. Most of our expenses are relatively fixed, including costs of personnel
and facilities, and are not easily reduced. Thus, an unexpected reduction in our revenue, or
failure to achieve the anticipated rate of growth, would have a material adverse effect on our
profitability. If our operating results do not meet our publicly stated guidance, if any, or the
expectations of investors, our stock price may decline.
Our international operations expose us to additional risks, and changes in global economic and
political conditions could adversely affect our international operations, our revenue and our net
income. We typically generate between 55% and 60% of our total revenue from sales outside North
America. Political instability, oil price shocks and armed conflict in various regions of the world
can lead to economic uncertainty and may adversely influence our business. If customers buying
patterns, such as decision-making processes, timing of expected deliveries and timing of new
projects, unfavorably change due to economic or political conditions, there will be a material
adverse effect on our business, financial condition and operating results. Other potential risks
inherent in our international business include:
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longer payment cycles; |
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greater difficulties in accounts receivable collection; |
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unexpected changes in regulatory requirements; |
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export restrictions, tariffs and other trade barriers; |
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difficulties in staffing and managing foreign operations; |
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political instability; |
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reduced protection for intellectual property rights in some countries; |
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seasonal reductions in business activity during the summer months in Europe and certain
other parts of the world; |
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economic instability in emerging markets; and |
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potentially adverse tax consequences. |
Any one or more of these factors could have a material adverse effect on our international
operations, and, consequently, on our business, financial condition and operating results.
29
Fluctuations in foreign currency exchange rates could continue to have an adverse impact on our
financial condition and results of operations. Because a majority of our total revenue is derived
from international operations that are primarily conducted in foreign currencies, changes in the
value of these foreign currencies relative to the U.S. dollar may adversely affect our results of
operations and financial position. We seek to reduce our exposure to fluctuations in foreign
currency exchange rates by entering into foreign exchange option and forward contracts to hedge
certain transactions of selected foreign currencies (mainly in Europe and Asia Pacific). Our
currency hedging transactions may not be effective in reducing any adverse impact of fluctuations
in foreign currency exchange rates. Further, if for any reason exchange or price controls or other
restrictions on the conversion of foreign currencies were imposed, our business could be adversely
affected.
Technology and customer requirements evolve rapidly in our industry, and if we do not continue to
develop new products and enhance our existing products in response to these changes, our business
could be harmed. Ongoing enhancements to our product sets will be required to enable us to
maintain our competitive position. We may not be successful in developing and marketing
enhancements to our products on a timely basis, and any enhancements we develop may not adequately
address the changing needs of the marketplace. Overlaying the risks associated with our existing
products and enhancements are ongoing technological developments and rapid changes in customer
requirements. Our future success will depend upon our ability to develop and introduce in a timely
manner new products that take advantage of technological advances and respond to new customer
requirements. The development of new products is increasingly complex and uncertain, which
increases the risk of delays. We may not be successful in developing new products incorporating
new technology on a timely basis, and any new products may not adequately address the changing
needs of the marketplace. Failure to develop new products and product enhancements that meet market
needs in a timely manner could have a material adverse effect on our business, financial condition
and operating results.
We are substantially dependent on our core product, Progress OpenEdge. We derive a significant
portion of our revenue from software license and maintenance revenue attributable to our core
product line, Progress OpenEdge, and other products that complement OpenEdge and are generally
licensed only in conjunction with OpenEdge. Accordingly, our future results depend on continued
market acceptance of OpenEdge, and any factor adversely affecting the market for OpenEdge could
have a material adverse effect on our business, financial condition and operating results.
Higher costs associated with some of our newer products could adversely affect our operating
margins. Some of our newer products, such as the Sonic and Real Time product sets, require a higher
level of development, distribution and support expenditures, on a percentage of revenue basis, than
the OpenEdge or DataDirect product lines. If revenue generated from these products grows as a
percentage of our total revenue and if the expenses associated with these products do not decrease
on a percentage of revenue basis, then our operating margins will be adversely affected.
We may make acquisitions or investments in new businesses, products or technologies that involve
additional risks, which could disrupt our business or harm our financial condition or results of
operations. As part of our business strategy, we have made, and expect to continue to make,
acquisitions of businesses or investments in companies that offer complementary products, services
and technologies, such as the acquisitions of DataDirect and Persistence in fiscal 2004, Apama and
EasyAsk in fiscal 2005 and our recently completed acquisitions of Actional, NEON, Pantero and Open
Access in fiscal 2006. These acquisitions or investments involve a number of risks, including the
risks of assimilating the operations and personnel of acquired companies, realizing the value of
the acquired assets relative to the price paid, distraction of management from our ongoing
businesses and potential product disruptions associated with the sale of the acquired companys
products. These factors could have a material adverse effect on our business, financial condition
and operating results. As in the Actional acquisition, consideration paid for any future
acquisitions could include our stock. As a result, future acquisitions could cause dilution to
existing shareholders and to earnings per share.
We recognize a substantial portion of our revenue from sales made through third parties, including
our application partners and original equipment manufacturers (OEMs), and adverse developments in
the businesses of these third parties or in our relationships with them could harm our revenues and
results of operations. Our future results depend upon our continued successful distribution of our
products through our application partner and
30
OEM channels. Application partners utilize our technology to create their applications and resell
our products along with their own applications. OEMs embed our products within their software
products or technology devices. The activities of these third parties are not within our direct
control. Our failure to manage our relationships with these third parties effectively could impair
the effectiveness of our sales, marketing and support activities. A reduction in the sales efforts,
technical capabilities or financial viability of these parties, a misalignment of interest between
us and them, or a termination of our relationship with a major application partner or OEM could
have a negative effect on our sales and financial results. Any adverse effect on the application
partners or OEMs businesses related to competition, pricing and other factors could also have a
material adverse effect on our business, financial condition and operating results.
The market for enterprise integration and messaging products and services in which our Sonic
Software subsidiary participates is rapidly evolving and highly competitive, and failure of our
Sonic ESB and other enterprise infrastructure products to achieve and maintain market acceptance
could harm our business. We are currently developing and enhancing the Sonic product set and other
related new products and services. The market for enterprise application integration, Web
services, messaging products and other Internet business-to-business products is highly
competitive. Many potential customers have made significant investments in proprietary or
internally developed systems and would incur significant costs in switching to the Sonic product
set or other third-party products. Global e-commerce and online exchange of information on the
Internet and other similar open wide area networks continue to evolve. If our Sonic products are
not successful in penetrating these evolving markets, our results of operations will be adversely
affected.
The software industry in which we participate is intensely competitive, and our inability to
compete effectively would harm our business. We experience significant competition from a variety
of sources with respect to the marketing and distribution of our products. Many of our competitors
have greater financial, marketing or technical resources than we do 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 we can. Increased competition could
make it more difficult for us to maintain our market presence or lead to downward pricing pressure.
The marketplace for 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.
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 better address the needs of our prospective customers. Current and
potential competitors also may be more successful than we are in having their products or
technologies widely accepted. We may be unable to compete successfully against current and future
competitors, and our failure to do so could have a material adverse effect on our business,
prospects, financial condition and operating results.
We rely on the experience and expertise of our skilled employees, and must continue to attract and
retain qualified technical, marketing and managerial personnel in order to succeed. Our future
success will depend in a large part upon our ability to attract and retain highly skilled
technical, managerial and marketing personnel. There is significant competition for such personnel
in the software industry. We may not continue to be successful in attracting and retaining the
personnel we require to develop new and enhanced products and to continue to grow and operate
profitably.
Our success is dependent upon our proprietary software technology, and our inability to protect it
would harm our business. We rely principally on a combination of contract provisions and
copyright, trademark, patent and trade secret laws to protect our proprietary technology. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult. The steps we take to protect our proprietary rights may be
inadequate to prevent misappropriation of our technology; moreover, others could independently
develop similar technology.
We could be subject to claims that we infringe intellectual property rights of others, or incur
substantial cost in protecting our own technology, either of which could harm our business,
financial condition or results of operations. Litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade
31
secrets, to determine the validity and scope of the proprietary rights of others, or to defend
against claims of infringement. Although we believe that our products and technology do not
infringe on any existing proprietary rights of others, third parties could assert infringement
claims in the future, and such claims might be successful. Such litigation could result in
substantial costs and diversion of resources, whether or not we ultimately prevail on the merits.
Such litigation could also lead to our being prohibited from selling one or more of our products,
cause reluctance by potential customers to purchase our products, or result in liability to our
customers and could have a material adverse effect on our business, financial condition and
operating results.
The loss of technology licensed from third parties could adversely affect our ability to deliver
our products. We utilize certain technology that we license from third parties, including software
that is integrated with internally developed software and used in our products to perform key
functions. This technology, or functionally similar technology, may not continue to be available
on commercially reasonable terms in the future, or at all. The loss of any significant third-party
technology license could cause delays in our ability to deliver our products or services until
equivalent technology is developed internally or equivalent third-party technology, if available,
is identified, licensed and integrated.
Our common stock price may continue to be volatile, which could result in losses for investors.
The market price of our 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 us or our competitors, changes in
financial estimates by securities analysts or other events or factors. Our stock price may also be
affected by broader market trends unrelated to our performance. As a result, purchasers of our
common stock may be unable at any given time to sell their shares at or above the price they paid
for them.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.
(c) Stock Repurchases
(in thousands, except per share data)
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Total Number of |
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Maximum Number of |
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Shares Purchased |
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Shares That May |
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Total Number |
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Average |
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As Part of Publicly |
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Yet Be Purchased |
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Of Shares |
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Price Paid |
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Announced Plans |
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Under the Plans or |
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Period: |
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Purchased (1) |
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Per Share |
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Or Programs |
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Programs (2) |
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June 1, 2006 June 30, 2006 |
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9,449 |
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July 1, 2006 July 31, 2006 |
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9,449 |
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August 1, 2006 August 31,
2006 |
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9,449 |
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Total |
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9,449 |
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(1) |
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All shares were purchased in open market transactions. |
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(2) |
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Our board authorized repurchase programe which existed at
August 31, 2006 expired on September 30, 2006. In September 2006, the Board of Directors authorized, for the period from October 1, 2006
through September 30, 2007, the purchase of up to 10,000,000 shares of our common stock. |
Item 6. Exhibits
The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:
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Exhibit No. |
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Description |
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31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Joseph W. Alsop |
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31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Norman R. Robertson |
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32.1
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act |
32
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)
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Dated: December 18, 2006
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/s/ Joseph W. Alsop |
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Joseph W. Alsop
Chief Executive Officer
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(Principal Executive Officer) |
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Dated: December 18, 2006
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/s/ Norman R. Robertson
Norman R. Robertson
Senior Vice President, Finance and
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Administration and Chief Financial
Officer (Principal Financial Officer) |
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Dated: December 18, 2006
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/s/ David H. Benton, Jr.
David H. Benton, Jr.
Vice President and Corporate Controller
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(Principal Accounting Officer) |
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33
exv31w1
Exhibit 31.1
CERTIFICATION
I, Joseph W. Alsop, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Software Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure control and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date:
December 18, 2006
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/s/ JOSEPH W. ALSOP
Joseph W. Alsop
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Chief Executive Officer |
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(Principal Executive Officer) |
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exv31w2
Exhibit 31.2
CERTIFICATION
I, Norman R. Robertson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Software Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure control and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date:
December 18, 2006
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/s/ NORMAN R. ROBERTSON
Norman R. Robertson
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Senior Vice President, Finance and |
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Administration and Chief Financial Officer |
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(Principal Financial Officer) |
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exv32w1
Exhibit 32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K/A of Progress Software Corporation (the Company)
for the year ended November 30, 2005, as filed with the Securities and Exchange Commission on the
date hereof (the Report), each of the undersigned, Joseph W. Alsop, Chief Executive Officer, and
Norman R. Robertson, Senior Vice President, Finance and Administration and Chief Financial Officer,
of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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1. |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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2. |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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/s/ JOSEPH W. ALSOP
Chief Executive Officer
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/s/ NORMAN R. ROBERTSON
Senior Vice President, Finance and
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Administration and Chief Financial |
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Officer |
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Date:
December 18, 2006
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Date:
December 18, 2006
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