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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended November 30, 2008
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
| MASSACHUSETTS | 04-2746201 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock $.01 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
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 May 31, 2008 (the last business day of the registrant’s most recently completed second fiscal
quarter), the aggregate market value of voting stock held by non-affiliates of the registrant was
approximately $1,273,000,000.
As of January 23, 2009, there were 39,903,000 common shares outstanding.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 23, 2009 are incorporated by reference into Part III.
PROGRESS SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2008
INDEX
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CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions
regarding forward-looking statements. This Form 10-K, 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 various factors
that could cause actual results or events to differ materially from those anticipated by the
forward-looking statements. Such factors are more fully described in Item 1A of this Form 10-K
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.
Item 1. Business
Overview
Progress Software Corporation develops markets and distributes application infrastructure software
to simplify and accelerate the development, deployment, integration and management of business
applications software. Our mission is to deliver superior software products and services that
increase business effectiveness by empowering our partners and customers to dramatically improve
application development, deployment, integration and management. We seek to achieve our mission by
providing a robust portfolio of software platforms, tools and services that allows the development
of business applications, enables an event based enterprise, simplifies complex IT problems, and
integrates data and applications across internal networks, the Internet and occasionally-connected
users and facilitate the connectivity and integration of applications and data across the
enterprise and between enterprises.
More than half of our worldwide revenue is realized through relationships with indirect channel
partners, principally application partners and original equipment manufacturers (OEMs). Application
partners are independent software vendors (ISVs) that develop and market applications using our
technology and resell our products in conjunction with sales of their own products that incorporate
our technology. These application partners sell business applications in diverse markets such as
manufacturing, distribution, financial services, retail, government and health care. OEMs are
companies that embed our products into their software products or devices. We also directly sell
our software products and services to the business groups and information technology (IT)
organizations of corporations and governments. We operate in North America, Latin America, Europe,
Middle East, Africa (EMEA) and the Asia/Pacific region through local subsidiaries as well as
independent distributors.
In fiscal 2008, we completed three acquisitions, the most significant of which was IONA
Technologies PLC (IONA), which occurred in the fourth quarter. The purpose of each acquisition was
to expand the breadth or increase the number of product lines that we develop, market and support.
We acquired three product lines, Orbix®, Artix® and FUSE®, as part of the acquisition of IONA.
Our Products
We develop, market and distribute software for the development, deployment, integration and
management of business applications. With the acquisition of IONA in the fourth quarter of fiscal
2008, we have reorganized our product lines into four business units for fiscal 2009: OpenEdge,
Integration Infrastructure, Apama and Data Infrastructure. Our product lines are designed to
comply with open standards, deliver high levels of performance and scalability and provide a low
total cost of ownership. Our products are generally licensed as perpetual licenses, but certain
product lines and business activities also utilize a term or subscription-licensing model.
Our OpenEdge products empower both end-user organizations and ISVs to rapidly develop, deploy and
manage sophisticated applications utilized in an ever-changing business environment.
Our integration infrastructure products use a service oriented architecture (SOA) approach where
information systems are built from shared components called “services” which automate discrete
business functions. Our integration infrastructure products connect, mediate, control and monitor
these services and their communications to support and optimize business processes. Specialized
integration capabilities of the SOA infrastructure enable legacy systems to take part in a SOA
environment.
Our Apama products provide one of the broadest, deepest and most flexible platforms for building
event-driven applications. Apama allows both business users and IT to exploit the power of complex
event processing.
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Our data infrastructure products provide data management, data integration, replication, caching,
access, and security capabilities spanning multiple data stores, which can be multi-vendor and in
multiple locations including disconnected and mobile data. In support of a SOA, a data
infrastructure enables both database level integration as well as data services support for
distributed application services.
The following descriptions detail our significant product lines within each business unit:
OpenEdge business unit:
Progress® OpenEdge®
The Progress® OpenEdge® platform, with more than 60,000 customers worldwide, is a comprehensive
platform for the rapid development and deployment of business applications that are standards-based
and service-oriented. OpenEdge-based applications can be deployed and managed over many computer
platforms and across the Internet. OpenEdge provides a unified environment comprising development
tools, application servers, application management tools, an embedded database, and the capability
to connect and integrate with other applications and data sources. The primary products included
in this product line are OpenEdge® Studio, OpenEdge® RDBMS, OpenEdge® Application Server, OpenEdge®
DataServers, OpenEdge® Management and OpenEdge® Replication.
Progress® EasyAsk®
Progress® EasyAsk® provides product search, navigation and merchandising for web sites. EasyAsk
also provides a unique natural language query and reporting product that enables enterprises and
ISVs to reach a broader community of non-technical users.
Integration Infrastructure business unit:
Progress® Sonic™
The Progress® Sonic™ products help IT organizations achieve broad-scale interoperability of IT
systems and the flexibility to adapt these systems to rapidly changing business needs. The Sonic
products include an enterprise messaging system and one of the leading Enterprise Service Buses
(ESB). Sonic products simplify the integration and flexible reuse of diverse and often proprietary
business systems by manipulating them as modular, standards-based services, which can be rapidly
combined to serve enterprises in new ways. Sonic ESB provides reliable integration of a SOA that
incorporates multiple sites or management domains. Unique clustering technology and Continuous
Availability Architecture (CAA) ensure scalable processing that never loses messages and never goes
down. Through patent-pending CAA, Sonic products can guarantee timely and continuous delivery of
mission-critical business events. The primary products included in this product line are Sonic
ESB®, SonicMQ®, Sonic Orchestration Server and Sonic WorkBench.
Progress® Actional®
The Progress® Actional® product line offers Web Services management and SOA management providing
operation and business visibility, policy-based security and control of services and end-to-end
business processes in a heterogeneous environment. Actional continuously optimizes services
according to business requirements, ensures compliance with regulatory and security policy, and
provides root cause analysis for effective issue resolution. The primary products included in this
product line are Actional Diagnostics, Actional Application Development, and Actional Enterprise
(which comprises Actional Team Server and Actional Management Server).
Orbix®
The Orbix product line was acquired as part of our acquisition of IONA. Orbix is one of the
market-leading implementations of CORBA and is embedded in telephone switches, online brokerage
systems, multimedia news delivery, airline front desk systems, rail and road traffic control, large
scale banking systems, credit card clearance, subway management and CAD systems. Orbix exemplifies
our dedication to addressing high-end enterprise integration problems with standards-based
solutions. Orbix is the enterprise CORBA product utilized by organizations when high performance,
high availability, and security and systems management are critical. The primary products included
in this product line are Orbix and Orbacus.
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Artix®
The Artix® product line was acquired as part of our acquisition of IONA. Artix is a suite of
advanced, technology-neutral SOA infrastructure products that work together or independently and
allow customers flexibility in SOA adoption. The primary products included in this product line
are Artix ESB, Artix Mainframe and Artix Data Services.
FUSE®
FUSE® is our open source family of distributed SOA infrastructure products, acquired as part of our
acquisition of IONA, for companies seeking an open source option for system integration and SOA
implementation. Enterprises are turning to open source software to reduce license costs while still
taking advantage of innovation. The FUSE ESB is an open source product based upon popular Apache
Software Foundation (ASF) projects, ServiceMix, ActiveMQ, CXF, and Camel. The industry standard
Java Business Integration is the key feature FUSE ESB implements for extensible integration and
interoperability. FUSE Message Broker is an open source, standards-based enterprise messaging
system that is based on Apache ActiveMQ. FUSE ESB, FUSE Message Broker, FUSE Services Framework
and FUSE Mediation Router are certified releases of certain Apache projects, and are integrated,
tested and supported to combine the advantages of open source software with the security and
reliability of working with an enterprise-class commercial vendor.
Apama business unit:
Progress® Apama®
The Progress® Apama® complex event processing platform can monitor rapidly moving event streams,
detect sophisticated patterns, and take action at extremely fast speeds. Apama’s sophisticated
complex event processing functionality can act on a variety of diverse, high velocity data streams,
including financial market feeds, RFID signals, telecommunications network traffic, and satellite
telemetry data. The primary products included in this product line are Progress® Apama®
Algorithmic Trading Platform and Progress® Apama® complex event processing platform.
Data Infrastructure business unit:
DataDirect® Connect®
DataDirect® Connect® products provide data connectivity components that use industry-standard
interfaces to connect applications running on various platforms to any major database. With
components embedded in the products of over 250 software companies and in the applications of
thousands of large enterprises, DataDirect is a global leader in the data connectivity market. The
primary products included in this product line are DataDirect Connect, Stylus Studio® and
DataDirect XQuery®.
DataDirect® Shadow®
The DataDirect® Shadow® product is a multi-threaded, native runtime architecture and consolidated
development environment providing a real-time foundation architecture for standards-based mainframe
integration. The Shadow product supports Web services for SOA, real-time events for event-driven
architecture, SQL for direct data access and transactional support and automatic presentation layer
generation for extending screen-based applications to the Web. The primary products included in
this product line are Shadow, Shadow z/Direct and Shadow z/Services.
Progress® DataXtend®
The Progress® DataXtend® product family provides data integration for distributed applications,
delivering real-time transactional views of shared data in the form that applications need. The
Progress DataXtend Semantic Integrator product offers a unique approach to the data management
problems often associated with SOA, employing a common semantic data model to create sophisticated
data transformations, enabling organizations to integrate heterogeneous data sources with no
disruption to existing applications. The primary products included in this product line are
DataXtend Semantic Integrator (SI), DataXtend CE and DataXtend RE.
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Progress® ObjectStore®
The Progress® ObjectStore® object data management system enables users to store data much faster
than with a relational database management system or file-based storage system. The ObjectStore
system provides transactional and high-availability features utilized in distributed enterprises,
but with less code than traditional database technology. The ObjectStore product provides
high-performance data management with faster time to market. The primary products included in this
product line are ObjectStore® Enterprise and ObjectStore® PSE Pro™.
Segments
For fiscal 2008, we had five operating units comprised of: (1) the OpenEdge and SOA Group, which
focuses on the OpenEdge platform and SOA infrastructure products; (2) the Apama Division, which
focuses on the Apama product line and algorithmic trading for capital markets; (3) the DataXtend
Division, which focuses on the DataXtend product line; (4) DataDirect Technologies, which focuses
on the Connect and Shadow product lines and provides standards-based data connectivity software;
and (5) the EasyAsk Division. We had two operating segments which met the requirements for
separate financial statement disclosure: OpenEdge and SOA Group and DataDirect Technologies. The
other three operating segments are below the threshold for separate financial statement disclosure
and are included in the Other segment.
With the acquisition of IONA in the fourth quarter of fiscal 2008, we have reorganized into four
business units for fiscal 2009: (1) OpenEdge which includes the Progress OpenEdge and Progress
EasyAsk product lines; (2) Apama which includes the Progress Apama product lines; (3) Integration
Infrastructure which includes the Progress Sonic, Progress Actional, Orbix, Artix and FUSE product
lines; and (4) Data Infrastructure which includes the DataDirect Connect, DataDirect Shadow,
Progress DataXtend and Progress ObjectStore product lines. We expect to have three operating
segments which meet the requirements for separate financial statement disclosure in fiscal 2009:
the OpenEdge segment, the Enterprise Infrastructure segment (which includes our Integration
Infrastructure business unit and our Apama business unit), and the Data Infrastructure segment.
For financial information relating to business segments and international operations, see Note 12
of the Consolidated Financial Statements appearing in this Form 10-K.
Product Development
Most of our products have been developed by our internal product development staff or the internal
staffs of acquired companies. We believe that the features and performance of our products are
competitive with those of other available development and deployment tools and that none of the
current versions of our products are approaching obsolescence. However, we believe that significant
investments in new product development and continuing enhancements of our current products will be
required to enable us to maintain our competitive position. Our product development staff
consisted of 586 employees as of November 30, 2008. We have twelve development offices in North
America, four development offices in EMEA and one development office in India. We spent $87.8
million, $80.3 million and $77.3 million in fiscal years 2008, 2007 and 2006, respectively, on
product development.
Customers
We globally market our products directly to end-users and through application partners. Purchasers
of Progress-based applications are generally either business managers or IT managers in
corporations and government agencies. In addition, we market our DataDirect and, to a lesser
extent, our Sonic, ObjectStore and DataXtend product lines to OEMs who embed and resell these
products as part of an integrated solution. We use international distributors in certain countries
where we do not have a direct presence. No single customer has accounted for more than 10% of our
total revenue in any of our last three fiscal years.
Application Partners
Our application partners cover a broad range of markets, offer an extensive library of business
applications and are a source of follow-on revenue. We have kept entry costs, consisting of
primarily the initial purchase of development licenses, low to encourage a wide variety of
application partners to build applications. An application partner typically takes six to twelve
months to develop an application. Although many of our application partners have developed
successful applications and have large installed customer bases, others are engaged in earlier
stages of product development and marketing and may not contribute follow-on revenue to us for some
time, if at all. However, if an application partner succeeds in marketing its applications, we
obtain follow-on revenue as the application partner licenses our deployment products to allow its
application to be installed and used by customers. We offer a subscription model alternative to the
traditional perpetual license model for application partners who have chosen to enable their
business applications under a “software as a service” business model.
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Original Equipment Manufacturers (OEMs)
We enter into arrangements with OEMs whereby the OEM embeds our products into its solutions,
typically either software or technology devices. The DataDirect product lines are the primary
products sold through the OEM channel and, to a lesser extent, the products lines with our
Integration Infrastructure and Apama business units. OEMs typically license the right to embed our
products into their solutions and distribute such solutions for initial terms ranging from one to
three years. Historically, a significant portion of our OEMs have renewed their agreement upon the
expiration of the initial term, although no assurance can be made that these renewals will continue
in the future.
Direct End-users
We license our products directly to corporations, government agencies and other organizations. Many
end-users who purchase application partner applications also purchase our development tools to
supplement their internal application development or purchase additional deployment products
directly from us. Like application partners, end-user customers also license development and
deployment products for internal applications.
Sales and Marketing
We sell our products through our direct sales force and through independent distributors in certain
countries outside North America. We have sold our products to customers in over 140 countries. The
sales, marketing and service groups are organized by region and certain product lines have
specialized teams responsible for sales and marketing activities in particular markets or regions.
We operate by region in the Americas, EMEA and Asia/Pacific. We believe that this structure allows
us to maintain direct contact with our customers and support their diverse market requirements.
Our international operations provide focused local sales and marketing efforts and are able to
respond directly to changes in local conditions.
Sales personnel are responsible for developing new direct end-user accounts, recruiting new
application partners and OEM accounts, managing existing channel partner relationships and
servicing existing customers. We actively seek to avoid conflict between the sales efforts of our
application partners and our own direct sales efforts. We use our inside sales and customer service
groups to enhance our direct sales efforts and to generate new business and follow-on business from
existing customers.
Our marketing groups conduct a variety of marketing programs designed to ensure a stream of
market-ready products, raise the general awareness of our company and our business units, generate
leads for the sales organization and promote our various product lines. These programs include
public relations, digital/online promotion, direct mail, participation in trade shows, advertising
and production of collateral literature. We also hold regional user conference events in various
locations throughout the world.
Technical Support
Our technical support staff provides telephone and Web-based support to application developers and
end-users. Customers may purchase maintenance services entitling them to software updates,
technical support and technical bulletins. First year maintenance and any subsequent annual
renewals are not included with our products and are purchased separately. We provide technical
support to customers primarily through our technical support centers in Bedford, Massachusetts;
Morrisville, North Carolina; Sugarland, Texas; Rotterdam, The Netherlands; Slough, United Kingdom;
and Melbourne, Australia. Local technical support for specific products is provided in certain
other countries as well.
The Progress Software Developers Network® (PSDN) online and offline services are designed to help
developers write best-of-breed business applications using our products and technologies. PSDN
services provide access to the latest information on our technology. Through a subscription to
PSDN, developers gain priority access to a complete, continuously updated set of our development
and deployment products.
Professional Services
Our global professional services organization delivers business solutions for customers through a
combination of products, consulting and education. Our consulting organization offers project
management, custom development, programming, application implementation and other services. Our
consulting organization also provides services to Web-enable existing applications or to take
advantage of the capabilities of new product releases. Our education organization offers numerous
training options, from traditional instructor-led courses to advanced learning modules available on
CDs.
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Competition
The computer software industry is intensely competitive. We experience significant competition from
a variety of sources with respect to all our products. We believe that the breadth and integration
of our product offerings have become increasingly important competitive advantages. Other factors
affecting competition in the markets we serve include product performance in complex applications,
application portability, vendor experience, ease of integration, price, training and support.
We compete in various markets with a number of entities including database vendors offering
development tools in conjunction with their database systems, such as Microsoft Corporation, Oracle
Corporation and IBM Corporation, as well as numerous enterprise application integration vendors,
messaging vendors, event processing vendors and application development tools vendors. We believe
that Oracle, Microsoft and IBM currently dominate the database market and that IBM dominates the
messaging market. We do not believe that there is a dominant application development tools vendor,
event processing vendor or integration infrastructure vendor. Some of our competitors have greater
financial, marketing or technical resources than we have 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 revenue and market presence.
Copyrights, Trademarks, Patents and Licenses
We rely upon a combination of contractual provisions and copyright, patent, trademark and trade
secret laws to protect our proprietary rights in our products. We generally distribute our products
under software license agreements that grant customers a perpetual nonexclusive license to use our
products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of
our products. We also license our products under term or subscription arrangements. In addition,
we attempt to protect our trade secrets and other proprietary information through agreements with
employees and consultants. Although we intend to protect our rights vigorously, there can be no
assurance that these measures will be successful.
We seek to protect the source code of our products as trade secrets and as unpublished copyrighted
works. We hold 47 patents covering portions of our products. We also have 62 patent applications
for some of our other product technologies. Where possible, we seek to obtain protection of our
product names and service offerings through trademark registration and other similar procedures
throughout the world.
Actional, Apama, Artix, DataDirect, DataDirect Connect, DataDirect XQuery, DataXtend, EasyAsk,
FUSE, IONA, Progress, ObjectStore, OpenEdge, Orbix, Progress DataXtend, Progress OpenEdge, Progress
Software Developers Network, Shadow, SonicESB, SonicMQ, and Stylus Studio are registered trademarks
of Progress Software Corporation or one of our subsidiaries in the United States and/or other
countries. Progress Sonic, PSE Pro, and Sonic are trademarks of Progress Software Corporation or
one of our subsidiaries in the United States and/or other countries. Java and all Java-based marks
are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and other
countries. Any other trademarks or trade names appearing in this Form 10-K are the property of
their respective owners.
We believe that due to the rapid pace of innovation within our industry, factors such as the
technological and creative skills of our personnel are as important in establishing and maintaining
a leadership position within the industry as are the various legal protections of our technology.
In addition, we believe that the nature of our customers, the importance of our products to them
and their need for continuing product support may reduce the risk of unauthorized reproduction,
although no assurance can be made in this regard.
Employees
As of November 30, 2008, we had 1,926 employees worldwide, including 695 in sales and marketing,
362 in customer support and services, 586 in product development and 283 in administration. None of
our U.S. employees are subject to a collective bargaining agreement. Employees in certain foreign
jurisdictions are represented by local workers’ councils and/or collective bargaining agreements as
may be customary or required in those jurisdictions. We have experienced no work stoppages and
believe our relations with employees are good.
We have various equity incentive plans that permit the granting of stock awards to eligible
employees and the purchase of shares by eligible employees. The payment of cash bonuses and
contributions to retirement plans is at the discretion of the compensation committee of our Board
of Directors and the amounts primarily depend on the level of attainment relative to our financial
plan. We design these programs to reward employees for performance and reduce employee turnover,
although there can be no assurance that such programs will be successful.
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Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers.
| Name | Age | Position | ||||
Joseph W. Alsop
|
63 | Co-Founder and Chief Executive Officer and Director | ||||
Gary G. Conway
|
55 | Senior Vice President and Chief Marketing Officer | ||||
James D. Freedman
|
60 | Senior Vice President and General Counsel | ||||
John P. Goodson
|
44 | Vice President and General Manager, Data Infrastructure | ||||
David G. Ireland
|
62 | Executive Vice President | ||||
Richard D. Reidy
|
49 | Chief Operating Officer | ||||
Norman R. Robertson
|
60 | Senior Vice President, Finance and Administration and Chief Financial Officer | ||||
Jeffrey P. Stamen
|
63 | Senior Vice President, Corporate Development and Strategy | ||||
Mr. Alsop, our co-founder, has been a director and Chief Executive Officer since our inception in
1981.
Mr. Conway joined us in November 2008 as Senior Vice President and Chief Marketing Officer. Prior
to joining us, Mr. Conway was Senior Vice President, Marketing at SprintNextel, Inc., with whom he
was employed from 2004 until August 2006. Prior to that time, he was Group Vice President,
Marketing at PeopleSoft, Inc.
Mr. Freedman has been Senior Vice President and General Counsel since August 2004. Prior to that
time, he was Vice President and General Counsel. Mr. Freedman joined us in 1992.
Mr. Goodson has been Vice President and General Manager for Data Infrastructure since December
2008. Prior to that time, he was Vice President and General Manager for DataDirect Technologies, a
position he assumed in December 2007. Prior to December 2007, Mr. Goodson was Vice President,
Product Operations, for DataDirect Technologies. Mr. Goodson joined DataDirect in 1992.
Mr. Ireland has been Executive Vice President since December 2007. In that capacity, he is
responsible for our OpenEdge business unit and our global field organization. Prior to December
2007, Mr. Ireland was President, Progress OpenEdge Division. Mr. Ireland joined us in 1997.
Mr. Reidy has been Chief Operating Officer since September 2008. Prior to that time, he was
Executive Vice President, a position he assumed in December 2007. Prior to December 2007, Mr.
Reidy was President, DataDirect Technologies. Mr. Reidy joined us in 1985.
Mr. Robertson has been Senior Vice President, Finance and Administration and Chief Financial
Officer since 2000. Mr. Robertson joined us in 1996.
Mr. Stamen has been Senior Vice President, Corporate Development and Strategy since joining us in
June 2004. Prior to that time, he was Chief Executive Officer of Syncra Systems, Inc., a software
developer.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
including exhibits, and amendments to those reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our
website at www.progress.com as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission (SEC). The information posted
on our web site is not incorporated into this Annual Report.
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.
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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:
| • | changes in demand for our products; | ||
| • | introduction, enhancement or announcement of products by us or our competitors; | ||
| • | market acceptance of our new products; | ||
| • | the growth rates of certain market segments in which we compete; | ||
| • | size and timing of significant orders; | ||
| • | budgeting cycles of customers; | ||
| • | mix of distribution channels; | ||
| • | mix of products and services sold; | ||
| • | mix of international and North American revenues; | ||
| • | fluctuations in currency exchange rates; | ||
| • | changes in the level of operating expenses; | ||
| • | the amount of our stock-based compensation; | ||
| • | reorganizations of our salesforce; | ||
| • | changes in our sales incentive plans; | ||
| • | completion or announcement of acquisitions by us or competitors; | ||
| • | customer order deferrals in anticipation of new products announced by us or our competitors; and | ||
| • | general economic conditions in regions in which we conduct business. |
Revenue forecasting is uncertain, and the failure to meet our forecasts could result in a decline
in our stock price. 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.
Weakness in the U.S. and international economies may result in fewer sales of our products and may
otherwise harm our business. We are subject to the risks arising from adverse changes in global
economic conditions, especially those in the U.S., Europe and the Asia-Pacific region. Economic
growth in the United States slowed in calendar 2008 and macroeconomic conditions have deteriorated
worldwide in the second half of calendar 2008. If this economic weakness continues or worsens,
customers may delay, reduce or forego technology purchases, both directly and through our
application partners and OEMs. This could result in reductions in sales of our products, longer
sales cycles, slower adoption of new technologies and increased price competition. Further,
deteriorating economic conditions could adversely affect our customers and their ability to pay
amounts owed to us. Any of these events would likely harm our business, results of operations and
financial condition.
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. Recently, we have generated between 50% 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:
| • | longer payment cycles; | ||
| • | greater difficulties in accounts receivable collection; | ||
| • | unexpected changes in regulatory requirements; | ||
| • | export restrictions, tariffs and other trade barriers; | ||
| • | difficulties in staffing and managing foreign operations; | ||
| • | political instability; | ||
| • | reduced protection for intellectual property rights in some countries; | ||
| • | seasonal reductions in business activity during the summer months in Europe and certain other parts of the world; | ||
| • | economic instability in emerging markets; and | ||
| • | 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.
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Fluctuations in foreign currency exchange rates could have an adverse impact on our financial
condition and results of operations. We typically generate the majority of our revenue 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, South America and Asia
Pacific). Our currency hedging transactions may not be effective in reducing any adverse impact of
fluctuations in foreign currency exchange rates. Further, the imposition of exchange or price
controls or other restrictions on the conversion of foreign currencies could have a material
adverse effect on our business.
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 Progress OpenEdge product line. We derive a significant
portion of our revenue from software license and maintenance revenue attributable to our Progress
OpenEdge product line, 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 SOA Infrastructure and Apama 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 face various risks in connection with our acquisition of IONA Technologies PLC. On September 12,
2008, we completed the acquisition of IONA. We face various risks in connection with our
acquisition of IONA, including the effects of disruption from the transaction making it more
difficult to maintain relationships with employees, licensees, other business partners or
governmental entities, other business effects, including the effects of industry, economic or
political conditions outside of our or IONA’s control, transaction costs, actual or contingent
liabilities, diversion of management, uncertainties as to whether anticipated synergies will be
realized and uncertainties as to whether IONA’s business will be successfully integrated with our
business. Any one or more of these factors could have a material adverse effect on the combined
business, our results of operations and our financial condition.
We expect to 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. If we are unable to identify and complete such acquisitions, we may not
achieve our revenue or earnings targets. Any acquisitions we do complete 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 company’s products. These factors could have a material adverse effect on our business,
financial condition and operating results. The consideration we pay for any future acquisitions
could include our stock. As a result, future acquisitions could cause dilution to existing
shareholders and to earnings per share.
If our products contain software defects or security flaws, it could harm our revenues and expose
us to litigation. Our products are complex to develop and, despite extensive testing and quality
control, may contain defects or security flaws, especially when we first introduce them or when new
versions are released. We may need to issue corrective releases of our software products to fix
any defects or errors. The detection and correction of any security flaws can be time consuming and
costly. Errors in our software products could affect the ability of our products to work with other
hardware or software products, could delay the development or release of new products or new
versions of products and could adversely affect
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market acceptance of our products and could expose
us to potential litigation. If we experience errors or delays in releasing new products or new
versions of products, such errors or delays could have a material adverse effect on our revenue.
We recognize a substantial portion of our revenue from sales made through third parties, including
our application partners and 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 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 success 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 segments of the software industry in which we participate are 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. For example, an increase in market acceptance of open source software may
cause downward pricing pressures. 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.
The market for SOA infrastructure, enterprise integration and messaging products and services is
rapidly evolving and highly competitive, and failure of our SonicESB and other integration
infrastructure products to achieve and maintain market acceptance could harm our business. We are
currently developing and enhancing our Integration Infrastructure product set and other related new
products and services. The market for SOA infrastructure, 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 and/or
Actional product sets 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
SOA infrastructure products are not successful in penetrating these evolving markets, our results
of operations will be adversely affected.
The market for enterprise software products and services in which our Apama product line
participates is rapidly evolving and highly competitive, and failure of our Apama products to
achieve and maintain market acceptance could harm our business. We are currently developing and
enhancing the Apama product set and other related new products and services. The market for
complex event processing products is highly competitive, and continues to evolve rapidly. If our
Apama products are not successful in penetrating these evolving markets, our results of operations
will be adversely affected.
We face risks related to the ongoing SEC investigation regarding our past practices with respect to
stock options and the restatement of our financial statements. On June 23, 2006, we received
written notice that the Enforcement Staff in the Boston, Massachusetts office of the SEC had begun
an informal inquiry into our option-granting practices during the period December 1, 1995 through
November 30, 2002. On December 19, 2006, the SEC informed us that it had issued a formal order of
investigation into our option-granting practices during the period December 1, 1995 through the
present. We are unable to predict with certainty what consequences may arise from the SEC
investigation. We have already incurred, and expect to continue to incur, significant legal
expenses arising from the investigation. 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 did not resolve the pending SEC inquiry. The SEC has not indicated to us whether it has
reviewed our restated financial statements, and any SEC review could lead to further restatements
or other modifications of our financial statements.
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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 secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement. Third parties
could assert infringement claims in the future with respect to our products and technology, 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.
Funds associated with certain of our auction rate securities may not be accessible in the short
term, and we may be required to adjust the carrying value of these securities through an impairment
charge. As of November 30, 2008, we had approximately $62.4 million in investments related to
auction rate securities (ARS) that are classified as noncurrent. Our ARS are floating rate
securities with longer-term maturities which are marketed by financial institutions with auction
reset dates primarily at 28 or 35 day intervals to provide short-term liquidity. Beginning in
February 2008, auctions for these securities began to fail, which has resulted in higher interest
rates earned on these securities. However, the investments lack short-term liquidity. The
remaining contractual maturities of these securities range from 7 to 38 years. While we do not
currently anticipate the lack of liquidity of our ARS to adversely affect our ability to conduct
business, we will not be able to access these remaining funds until a future auction for these ARS
is successful, we sell the securities in a secondary market, or they are redeemed by the issuer, or
with respect to certain ARS, we have the opportunity to exercise a put right. In fiscal 2008, we
recorded a temporary impairment charge in accumulated other comprehensive income of $7.2 million to
reduce the value of our available-for-sale ARS investments. In addition, if the credit rating of
either the security issuer or the third-party insurer underlying the investments deteriorates, we
may be required to further adjust the carrying value of the ARS through an other than temporary
impairment charge to current period earnings.
Item 1B. Unresolved Staff Comments
As of the date of this report, we do not have any open comments or communications from the SEC
related to our financial statements or periodic filings with the SEC.
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Item 2. Properties
We own our principal administrative, sales, support, marketing, product development and
distribution facilities, which are located in three buildings totaling approximately 258,000 square
feet in Bedford, Massachusetts. In connection with the purchase of one of these buildings, we were
required to assume the existing mortgage, which has a remaining principal balance of $1.4 million
as of November 30, 2008. In addition, we maintain offices in leased facilities in approximately 26
other locations in North America and approximately 50 locations outside North America. The terms of
our leases generally range from one to seven years. We believe that our facilities are adequate for
our current needs and that suitable additional space will be available as needed.
Item 3. Legal Proceedings
On June 23, 2006, we received written notice that the Enforcement Staff in the Boston,
Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices
during the period December 1, 1995 through November 30, 2002. On December 19, 2006, the SEC
informed us that it had issued a formal order of investigation into our option-granting practices
during the period December 1, 1995 through the present. We are unable to predict with certainty
what consequences may arise from the SEC investigation. We have already incurred, and expect to
continue to incur, significant legal expenses arising from the investigation. 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 did not resolve the pending SEC
inquiry. The SEC has not indicated to us whether it has reviewed our restated financial statements,
and any SEC review could lead to further restatements or other modifications of our financial
statements.
On September 5, 2008, we and the other named defendants entered into a Stipulation of Settlement
(the “Settlement Agreement”) resolving all pending shareholder derivative lawsuits relating to our
historical stock option-granting practices. As previously reported, three parties identifying
themselves as our shareholders purporting to act on our behalf filed separate derivative complaints
(two of which were consolidated after filing) against certain of our
present and former directors and officers in state and federal courts in Massachusetts. The complaints alleged breaches of
fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from
the allegedly improper backdating of certain stock option grants. A Special Litigation Committee
was formed by our Board of Directors to investigate and determine our response to the complaints.
On December 2, 2008, following a hearing, the Massachusetts Superior Court entered an order
approving the Settlement Agreement. The time to file any appeals of that order has expired with no
appeals having been filed. No further court or other approvals of the Settlement Agreement are
required.
Under the terms of the Settlement Agreement, which we entered into on the determination of the
Special Litigation Committee of our Board of Directors, we agreed to make certain corporate
governance changes principally relating to stock option-granting procedures. The Settlement
Agreement also reflects that eight of the individual defendants, previously (i) amended any
below-market, unexercised stock options they received to increase the exercise prices to an amount
equal to the fair market value of our common stock as of the actual measurement dates of those
options for accounting and tax purposes, and (ii) with respect to restated stock options previously
exercised, paid us the amount by which the fair market value of those options exceeded the exercise
price on the measurement date for accounting and tax purposes, reduced by the amount of any federal
and state taxes already paid by those individuals in connection with such exercises. The total
amount of the above-described reimbursements is valued at approximately $7.0 million (net of tax
payments), based on the transfer of shares of our common stock, the cancellation of vested stock
options, the repricing of unexercised stock options and cash consideration. The Settlement
Agreement also provided for the payment of $1.9 million to plaintiffs’ attorneys for their fees and
expenses, which amount was paid on our behalf by our insurers. Except as described above, we and
the individual defendants in these lawsuits agreed to the terms of the Settlement Agreement without
admitting any liability, fault or wrongdoing or incurring any additional liability of any kind.
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.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter to a vote of our shareholders during the fourth quarter of the fiscal
year ended November 30, 2008.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The following table sets forth, for the periods indicated, the range of high and low sale prices
for our common stock. Our common stock trades on the NASDAQ Global Select Market under the symbol
PRGS.
| 2008 | 2007 | |||||||||||||||
| Year Ended November 30, | High | Low | High | Low | ||||||||||||
First Quarter |
$ | 34.00 | $ | 28.02 | $ | 29.34 | $ | 26.18 | ||||||||
Second Quarter |
31.23 | 27.70 | 33.13 | 26.90 | ||||||||||||
Third Quarter |
31.19 | 25.07 | 34.45 | 26.61 | ||||||||||||
Fourth Quarter |
30.05 | 17.20 | 33.55 | 28.27 | ||||||||||||
We have not declared or paid cash dividends on our common stock and we do not plan to pay cash
dividends to our shareholders in the near future. As of December 31, 2008, our common stock was
held by approximately 2,900 shareholders of record or through nominee or street name accounts with
brokers.
Information related to our repurchases of our common stock by month in the fourth quarter of fiscal
2008 is as follows:
| (in thousands, except per share data) | ||||||||||||||||
| Total Number of | Maximum Number of | |||||||||||||||
| Shares Purchased | Shares that May | |||||||||||||||
| Total Number | Average | as Part of Publicly | Yet Be Purchased | |||||||||||||
| Of Shares | Price Paid | Announced Plans | Under the Plans or | |||||||||||||
| Period: | Purchased | per Share | or Programs | Programs (1) | ||||||||||||
September 2008 |
— | — | — | 5,672 | ||||||||||||
October 2008 |
160 | $ | 19.97 | 160 | 9,840 | |||||||||||
November 2008 |
— | — | — | 9,840 | ||||||||||||
Total |
160 | $ | 19.97 | 160 | 9,840 | |||||||||||
| (1) | In September 2008, our Board of Directors authorized, for the period from October 1, 2008 through September 30, 2009, the purchase of up to 10,000,000 shares of our common stock. This authorization superseded the previous authorization that expired on September 30, 2008. |
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Stock Performance Graph and Cumulative Total Return
The graph below compares the cumulative total stockholder return on our common stock with the
cumulative total return on the NASDAQ Composite Index and the NASDAQ Computer & Data Processing
Index for each of the last five fiscal years ended November 30, 2008, assuming an investment of
$100 at the beginning of such period and the reinvestment of any dividends.
| * | $100 invested on 11/30/03 in stock or index, including reinvestment of dividends. |
| November 30, | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||
Progress Software Corporation |
100.00 | 108.10 | 147.33 | 129.10 | 150.62 | 101.33 | ||||||||||||||||||
NASDAQ Composite |
100.00 | 106.97 | 113.90 | 124.05 | 135.75 | 78.34 | ||||||||||||||||||
NASDAQ Computer & Data Processing |
100.00 | 84.31 | 110.23 | 117.98 | 136.62 | 73.40 | ||||||||||||||||||
Item 6. Selected Financial Data
The following tables set forth selected financial data for the last five fiscal years.
| (In thousands, except per share data) | ||||||||||||||||||||
| Year ended November 30, | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Revenue |
$ | 515,560 | $ | 493,500 | $ | 447,063 | $ | 405,376 | $ | 362,662 | ||||||||||
Income from operations |
64,383 | 57,216 | 40,943 | 59,950 | 42,414 | |||||||||||||||
Net income |
46,296 | 42,280 | 29,401 | 46,257 | 29,368 | |||||||||||||||
Basic earnings per share |
1.13 | 1.02 | 0.72 | 1.21 | 0.82 | |||||||||||||||
Diluted earnings per share |
1.08 | 0.96 | 0.68 | 1.12 | 0.76 | |||||||||||||||
Cash and short-term investments |
118,529 | 339,525 | 241,315 | 266,420 | 191,267 | |||||||||||||||
Total assets |
752,370 | 761,828 | 670,239 | 561,715 | 446,814 | |||||||||||||||
Long-term debt, including current portion |
1,352 | 1,657 | 1,938 | 2,200 | 2,438 | |||||||||||||||
Shareholders’ equity |
481,452 | 517,874 | 444,564 | 374,004 | 265,317 | |||||||||||||||
We have completed a number of acquisitions over the past five years which may affect year over year
comparisons of our selected financial data. See a description of recent acquisitions under the
heading “Overview” in Item 7.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 superior software
products and services that increase business effectiveness by empowering our partners and customers
to dramatically improve application development, deployment, integration and management. Our
products include development tools, databases, application servers, messaging servers, complex
event processing tools, enterprise service buses, 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. These operations are
primarily conducted in foreign currencies. As a result, changes in the value of these foreign
currencies relative to the U.S. dollar significantly impact our results of operations. In the
first half of fiscal 2006, the strengthening of the U.S. dollar against most major currencies,
primarily the euro, the British pound and the Brazilian real, negatively affected the translation
of our operating results into U.S. dollars. From the second half of fiscal 2006 to the end of the
first half of fiscal 2008, the weakening of the U.S. dollar against most major currencies
positively affected the translation of our operating results into U.S. dollars. In the second half
of fiscal 2008, the strengthening of the U.S. dollar against most major currencies negatively
affected the translation of our operating results into U.S. dollars.
For fiscal 2008, we had five operating units comprised of: (1) the OpenEdge and SOA Group, which
focuses on the OpenEdge platform and SOA infrastructure products; (2) the Apama Division, which
focuses on the Apama product line and algorithmic trading for capital markets; (3) the DataXtend
Division, which focuses on the DataXtend product line; (4) DataDirect Technologies which focuses on
the Connect and Shadow product lines; and (5) the EasyAsk Division. We had two operating units
which met the requirements for separate disclosure: the OpenEdge and SOA Group and DataDirect
Technologies. The other three operating segments are below the threshold for separate disclosure
and are included in the Other segment.
With the acquisition of IONA in the fourth quarter of fiscal 2008, we have reorganized into four
business units for fiscal 2009: (1) OpenEdge which includes the Progress OpenEdge and Progress
EasyAsk product lines; (2) Apama which includes the Progress Apama product lines; (3) Integration
Infrastructure which includes the Progress Sonic, Progress Actional, Orbix, Artix and FUSE product
lines; and (4) Data Infrastructure which includes the DataDirect Connect, DataDirect Shadow,
Progress DataXtend and Progress ObjectStore product lines. In the first quarter of fiscal 2009, we
will realign our disclosures to conform to this new business unit structure.
In fiscal 2008, we completed the acquisitions of Xcalia SA (Xcalia) in February 2008, Mindreef,
Inc. (Mindreef) in June 2008 and IONA in September 2008. We did not make any acquisitions in
fiscal 2007. In fiscal year 2006, we completed a number of acquisitions, including Actional
Corporation (Actional) in January 2006, NEON Systems, Inc. (NEON) in January 2006, Pantero
Corporation in June 2006, and OpenAccess Software Inc. in November 2006. These acquisitions were
designed to expand the size and breadth of our business and/or add complementary products and
technologies to existing product sets. During 2009, we expect to continue to pursue acquisitions
designed to expand our business and/or add complimentary products and technologies to our existing
product sets.
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 and other long-term obligations) through at
least the next twelve months. To the extent that we complete any future acquisitions, our cash
position could be reduced.
We see the most significant risks for 2009 to be the macroeconomic climate, which could cause our
customers to delay, forego or reduce the amount of their investments in our products or delay
payments of amounts due to us, and the decline in foreign currency exchange rates, primarily the
euro, the British pound and the Brazilian real, which will adversely affect our reported results as
amounts earned in other countries are translated into dollars for reporting purposes.
Critical Accounting Policies
Management’s 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
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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 are believed 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 of the Consolidated Financial
Statements appearing in this Form 10-K.
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 had goodwill and net intangible assets of $342.3 million at
November 30, 2008. We assess the impairment of goodwill and intangible assets with indefinite
lives 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, significant
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 either discounted cash flow models or other valuation 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 those models. 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 had a net deferred tax asset of $33.9 million at November 30, 2008. 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 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.
On December 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted
for in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for
Income Taxes”. Management judgment is required in evaluating whether a tax position taken or
expected to be taken in a tax return, based on the weight of available evidence, indicates that it
is more likely than not that, on an evaluation of the technical merits, the tax position will be
sustained on audit, including resolution of any related appeals or litigation processes.
Management judgment is also required in measuring the tax benefit as the largest amount that is
more than 50% likely of being realized upon ultimate settlement. If management made different
estimates or judgments, material differences in the amount accrued for uncertain tax positions
would occur.
Stock-Based Compensation — We account for stock-based compensation expense in accordance with SFAS
No. 123R, “Accounting for Stock-Based Compensation” (SFAS 123R). Under SFAS 123R, stock-based
compensation expense reflects the fair value of stock-based awards measured at the grant date and
recognized over the relevant service period. We estimate the fair value of each stock-based award
on the measurement date using the Black-Scholes option valuation model. The Black-
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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. If management made different estimates
or judgments, material differences in the amount of stock-based compensation would occur.
Investments in Debt Securities - We have
approximately $72.4 million at par value in investments related to auction rate securities (ARS),
all of which are classified as noncurrent at November 30, 2008. For each of our ARS, we evaluate the
risks related to the structure, collateral and liquidity of the investment, and forecast the probability
of issuer default, auction failure and a successful auction at par, or a redemption at par, for each future
auction period. Based on the results of this assessment, we record either a temporary impairment
charge in accumulated other comprehensive income or an other-than-temporary impairment charge in other
income in our statement of operations. Accordingly, we recorded a temporary impairment charge of $7.2 million
at November 30, 2008 to reduce the value of our ARS classified as available-for-sale securities.
For ARS acquired as part of the acquisition of IONA and classified as trading securities, we record
all changes in fair value in current period earnings. In the fourth quarter of fiscal 2008, we recorded
a charge to earnings of $1.8 million to reduce the value of our ARS classified as trading securities.
For further information regarding the ARS acquired as part of the acquisition of IONA, see Notes 2 and 6 of
the Consolidated Financial Statements appearing in this Form 10-K. If we used different assumptions and
judgment determinations or the credit rating of either the security issuer or the third-party insurer
underlying the investments deteriorates, we may be required to adjust the carrying value of our
available-for-sale ARS through an other-than-temporary impairment charge in current period earnings.
New Accounting Pronouncements
In June 2006, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
establishes a framework to improve the relevance and comparability of the information that a
reporting entity provides in its financial reports about a business combination and its effects.
SFAS 141R applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
We will apply SFAS 141R to any acquisition after the date of adoption.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157”. Collectively, the
FSPs defer the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed
at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. We adopted
SFAS 157 except for those items specifically deferred under FSP FAS 157-2. We are currently
evaluating the impact of the full adoption of SFAS 157 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51” (SFAS 160). The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial statements including the requirements
to classify noncontrolling interests as a component of consolidated shareholders’ equity, and the
elimination of “minority interest” accounting in results of operations with earnings attributable
to noncontrolling interests reported as a part of consolidated earnings. Additionally, SFAS 160
revises the accounting for both increases and decreases in a parent’s controlling ownership
interest. SFAS 160 is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of adopting SFAS 160 on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161) as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. SFAS 161 requires that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008. We are currently
evaluating the impact of adopting SFAS 161 on our consolidated financial statements.
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In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets”. FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 is effective for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. We are currently
evaluating the impact of adopting FSP FAS 142-3 on our consolidated financial statements.
Results of Operations
The following table sets forth certain income and expense items as a percentage of total revenue,
and the percentage change in dollar amounts of such items compared with the corresponding period in
the previous fiscal year.
| Percentage of Total Revenue | Period-to-Period Change | |||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||
| Compared | Compared | |||||||||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | to 2007 | to 2006 | |||||||||||||||
Revenue: |
||||||||||||||||||||
Software licenses |
37 | % | 38 | % | 39 | % | 3 | % | 6 | % | ||||||||||
Maintenance and services |
63 | 62 | 61 | 6 | 13 | |||||||||||||||
Total revenue |
100 | 100 | 100 | 4 | 10 | |||||||||||||||
Costs of revenue: |
||||||||||||||||||||
Cost of software licenses |
2 | 2 | 1 | 18 | 8 | |||||||||||||||
Cost of maintenance and services |
13 | 14 | 14 | 1 | 12 | |||||||||||||||
Amortization of acquired intangibles for
purchased technology |
3 | 2 | 2 | 29 | 24 | |||||||||||||||
Total costs of revenue |
18 | 18 | 17 | 6 | 13 | |||||||||||||||
Gross profit |
82 | 82 | 83 | 4 | 10 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
38 | 39 | 42 | 2 | 3 | |||||||||||||||
Product development |
17 | 16 | 17 | 9 | 4 | |||||||||||||||
General and administrative |
12 | 12 | 13 | (1 | ) | 10 | ||||||||||||||
Amortization of other acquired
intangibles |
1 | 1 | 2 | (12 | ) | (1 | ) | |||||||||||||
Restructuring expenses |
2 | — | — | * | * | |||||||||||||||
Impairment of goodwill |
— | 2 | — | * | * | |||||||||||||||
Acquisition-related expenses |
— | — | — | * | * | |||||||||||||||
Total operating expenses |
70 | 70 | 74 | 3 | 6 | |||||||||||||||
Income from operations |
12 | 12 | 9 | 13 | 40 | |||||||||||||||
Other income (expense), net |
2 | 1 | 1 | 23 | 69 | |||||||||||||||
Income before provision for income taxes |
14 | 13 | 10 | 14 | 43 | |||||||||||||||
Provision for income taxes |
5 | 4 | 3 | 22 | 41 | |||||||||||||||
Net income |
9 | % | 9 | % | 7 | % | 9 | % | 44 | % | ||||||||||
| * | not meaningful |
Fiscal 2008 Compared to Fiscal 2007
Revenue. Our total revenue increased 4% from $493.5 million in fiscal 2007 to $515.6 million in
fiscal 2008. Total revenue would have increased by 2% if exchange rates had been constant in fiscal
2008 as compared to exchange rates in effect in fiscal 2007. Our revenue increased principally due
to an increase in the number of software licenses sold and maintenance sales from our major
products. Changes in prices in fiscal 2008 from fiscal 2007 did not have a significant impact on
our revenue. On a product line basis, our revenue increased due to growth in the Enterprise
Infrastructure and DataDirect product lines, partially offset by a decline in the OpenEdge product
line.
Revenue from the OpenEdge product line decreased 2% from $336.6 million in fiscal 2007 to $331.4
million in fiscal 2008. Revenue from the Enterprise Infrastructure product line increased 28% from
$83.0 million in fiscal 2007 to $106.6 million in fiscal 2008. The Enterprise Infrastructure
product line included the revenue from the product lines acquired as part of the acquisition of
IONA (with such amount totaling approximately $13 million in fiscal 2008). Revenue from the
DataDirect product line increased 5% from $73.9 million in fiscal 2007 to $77.5 million in fiscal
2008.
Software license revenue increased 3% from $187.1 million in fiscal 2007 to $192.2 million in
fiscal 2008. Software license revenue would have increased by 1% if exchange rates had been
constant in fiscal 2008 as compared to exchange rates in effect in fiscal 2007. The increase in
software license revenue in fiscal 2008, excluding the impact of changes in exchange rates, was
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primarily due to increases from the DataDirect product line and the Enterprise Infrastructure
product line (including the impact of the software license revenue from the product lines acquired
as part of the acquisition of IONA from the acquisition date), partially offset by a decline in the
OpenEdge product line. The DataDirect and Enterprise Infrastructure product lines accounted for 49%
of software license revenue in fiscal 2008 as compared to 45% in fiscal 2007. Software license
revenue from sales to direct end-users increased in fiscal 2008 as compared to fiscal 2007,
partially offset by a slight decline in sales from indirect channels, including application
partners and OEMs.
Maintenance and services revenue increased 6% from $306.4 million in fiscal 2007 to $323.3 million
in fiscal 2008. Maintenance and services revenue would have increased by 4% if exchange rates had
been constant in fiscal 2008 as compared to exchange rates in effect in fiscal 2007. The increase
in maintenance and services revenue, excluding the impact of changes in exchange rates, was
primarily the result of growth in our installed customer base, renewal of maintenance agreements,
partially offset by a decrease in professional services revenue.
Total revenue generated in markets outside North America increased 6% from $281.7 million in fiscal
2007 to $299.0 million in fiscal 2008 and represented 57% of total revenue in both fiscal 2007 and
fiscal 2008. Revenue from the three major regions outside of North America, consisting of EMEA,
Latin America and Asia Pacific, each increased in fiscal 2008 as compared to fiscal 2007. Total
revenue generated in markets outside North America would have represented 55% of total revenue if
exchange rates had been constant in fiscal 2008 as compared to the exchange rates in effect in
fiscal 2007. The increase in the percentage of business derived from international operations in
fiscal 2008 is primarily the result of the positive impact of foreign exchange rates in fiscal 2008
and the success of our newer product lines.
Cost of Software Licenses. Cost of software licenses consists primarily of costs of product media,
documentation, duplication, packaging, electronic software distribution and royalties. Cost of
software licenses increased 18% from $8.1 million in fiscal 2007 to $9.5 million in fiscal 2008,
and increased as a percentage of software license revenue from 4% to 5%. The dollar increase was
primarily due to higher royalty expense associated with higher sales of third-party products. Cost
of software licenses as a percentage of software license revenue may vary from period to period
depending upon the relative product mix.
Cost of Maintenance and Services. Cost of maintenance and services consists primarily of costs of
providing technical support, education and consulting. Cost of maintenance and services increased
1% from $68.6 million in fiscal 2007 to $69.3 million in fiscal 2008, but decreased as a percentage
of maintenance and services revenue from 22% to 21%. The decrease in cost of maintenance and
services as a percentage of maintenance and services revenue was due to a decrease in professional
services revenue, which has a lower margin than maintenance revenue. The dollar increase in cost
of maintenance and services was due to higher headcount-related expenses, partially offset by lower
usage of third-party contractors. Our technical support, education and consulting headcount
increased by 21% from the end of fiscal 2007 to the end of fiscal 2008.
Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired intangibles
for purchased technology primarily represents the amortization of the value assigned to intangible
assets for technology obtained in business combinations. Amortization of acquired intangibles for
purchased technology increased 29% from $10.1 million in fiscal 2007 to $13.0 million in fiscal
2008. The increase was due to the additional amortization expense in fiscal 2008 associated with
the purchased technology acquired in the Xcalia, Mindreef, and IONA transactions.
Gross Profit. Our gross profit increased 4% from $406.7 million in fiscal 2007 to $423.7 million in
fiscal 2008. The gross profit percentage remained the same at 82% of total revenue in fiscal 2007
and fiscal 2008 principally due to the matters discussed above.
Sales and Marketing. Sales and marketing expenses increased 2% from $191.4 million in fiscal 2007
to $195.9 million in fiscal 2008, but decreased as a percentage of revenue from 39% to 38%. The
increase in sales and marketing expenses was primarily due to an increase in headcount associated
with the acquisition of IONA. Sales and marketing expenses as a percentage of total revenue
decreased in fiscal 2008 as compared to fiscal 2007 due to improved field sales productivity. Our
sales support and marketing headcount increased by 8% from the end of fiscal 2007 to the end of
fiscal 2008.
Product Development. Product development expenses increased 9% from $80.3 million in fiscal 2007 to
$87.8 million in fiscal 2008, and increased as a percentage of revenue from 16% to 17%. The dollar
increase was primarily due to headcount-related expenses for the development teams from the Xcalia,
Mindreef and IONA transactions, which occurred at various times during fiscal 2008. There were no
capitalized software development costs in either fiscal 2007 or fiscal 2008, due to the timing and
stage of development of projects that might otherwise qualify for capitalization under our software
capitalization policy. Our product development headcount increased 30% from the end of fiscal 2007
to the end of fiscal 2008.
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 decreased 1% from $62.3 million in fiscal 2007 to $62.1 million in fiscal
2008, and remained the same approximate percentage of revenue at 12%. General and
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administrative
expenses in fiscal 2008 also include $3.0 million of professional services fees related to the
investigation of our historical stock option grant practices and derivative lawsuits as compared to
$3.7 million in fiscal 2007. Our administrative headcount increased by 6% from the end of fiscal
2007 to the end of fiscal 2008.
Amortization of Other Acquired Intangibles. Amortization of other acquired intangibles primarily
represents the amortization of value assigned to intangible assets obtained in business
combinations other than assets identified as purchased technology. Amortization of other acquired
intangibles decreased 12% from $7.3 million in fiscal 2007 to $6.4 million in fiscal 2008. The
decrease in fiscal 2008 compared to fiscal 2007 was related to certain intangibles from prior
acquisitions becoming fully amortized, partially offset by amortization expense related to
intangible assets acquired in the Xcalia, Mindreef and IONA acquisitions.
Restructuring Expenses. During the fourth quarter of fiscal 2008, our management approved,
committed to and initiated plans to restructure and improve efficiencies in our operations as a
result of certain management and organizational changes and our recent acquisitions. The total
costs associated with the restructuring was $6.9 million, primarily related to employee severance,
termination costs of automobile leases for terminated employees and excess facilities costs for
unused space.
Impairment of Goodwill. In the fourth quarter of fiscal 2007, an interim impairment test was
performed as circumstances indicated that an impairment may have occurred in our EasyAsk reporting
unit. Based on the interim impairment testing, it was determined that the EasyAsk reporting unit’s
carrying value exceeded its fair value. As a result, we recorded an impairment loss of
approximately $8.2 million, which was equal to the amount by which the carrying value of goodwill
assigned to the EasyAsk reporting unit exceeded its implied fair value. No impairment of goodwill
was recorded in any of our other reporting units as the fair values of our other reporting units
exceeded their carrying values in fiscal 2007. In fiscal 2008, it was determined that that no such
impairments of goodwill existed.
Income from Operations. Income from operations increased 13% from $57.2 million in fiscal 2007 to
$64.4 million in fiscal 2008 and remained the same as a percentage of total revenue at 12%. The
increase in income from operations in fiscal 2008 as compared to fiscal 2007 was primarily due to
improved revenue increasing at a faster rate than operating expenses.
Other Income. Other income increased 23% from $7.8 million in fiscal 2007 to $9.6 million in fiscal
2008. The increase was related to lower foreign exchange losses and an increase in interest income,
primarily resulting from higher average interest rates, primarily from our ARS, and higher average
cash and investment balances.
Provision for Income Taxes. Our effective tax rate increased from 35.0% in fiscal 2007 to 37.5% in
fiscal 2008. The increase in the effective tax rate in fiscal 2008 as compared to fiscal 2007 was
primarily due to lower amounts of tax-exempt interest income and the final phase-out of the
extraterritorial income exclusion. See Note 10 of the Consolidated Financial Statements appearing
in this Form 10-K for further information.
Fiscal 2007 Compared to Fiscal 2006
Revenue. Our total revenue increased 10% from $447.1 million in fiscal 2006 to $493.5 million in
fiscal 2007. Total revenue would have increased by 5% if exchange rates had been constant in fiscal
2007 as compared to exchange rates in effect in fiscal 2006. Our revenue increased principally due
to an increase in the number of software licenses sold and maintenance sales from our major
products. Changes in prices in fiscal 2007 from fiscal 2006 did not have a significant impact on
our revenue. On a product-line basis, revenue from our major product lines, OpenEdge, Enterprise
Infrastructure and DataDirect, all increased year-over-year.
Revenue from the OpenEdge product line increased 6% from $316.5 million in fiscal 2006 to $336.6
million in fiscal 2007. Revenue from the Enterprise Infrastructure product line increased 21% from
$68.6 million in fiscal 2006 to $83.0 million in fiscal 2007. Revenue from the DataDirect product
line increased 19% from $61.9 million in fiscal 2006 to $73.9 million in fiscal 2007.
Software license revenue increased 6% from $175.8 million in fiscal 2006 to $187.1 million in
fiscal 2007. Software license revenue would have increased by 2% if exchange rates had been
constant in fiscal 2007 as compared to exchange rates in effect in fiscal 2006. The increase in
software license revenue in fiscal 2007, excluding the impact of changes in exchange rates, was
primarily due to growth from the DataDirect and Enterprise Infrastructure product lines, partially
offset by a slight decline in the OpenEdge product line. The DataDirect and Enterprise
Infrastructure product lines accounted for 45% of software license revenue in fiscal 2007 as
compared to 42% in fiscal 2006. Software license revenue from indirect channels, including
application partners and OEMs, and from sales to direct end-users, both increased in fiscal 2007 as
compared to fiscal 2006.
Maintenance and services revenue increased 13% from $271.2 million in fiscal 2006 to $306.4 million
in fiscal 2007. Maintenance and services revenue would have increased by 8% if exchange rates had
been constant in fiscal 2007 as compared
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to exchange rates in effect in fiscal 2006. The increase
in maintenance and services revenue, excluding the impact of changes in exchange rates, 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 16% from $243.8 million in
fiscal 2006 to $281.7 million in fiscal 2007 and represented 54% of total revenue in fiscal 2006
and 57% of total revenue in fiscal 2007. Revenue from the three major regions outside of North
America, consisting of EMEA, Latin America and Asia Pacific, each increased in fiscal 2007 as
compared to fiscal 2006. Total revenue generated in markets outside North America would have
represented 55% of total revenue if exchange rates had been constant in fiscal 2007 as compared to
the exchange rates in effect in fiscal 2006. The increase in the percentage of business derived
from international operations in fiscal 2007 is primarily the result of the positive impact of
foreign exchange rates in fiscal 2007 and the success of our newer product lines.
Cost of Software Licenses. Cost of software licenses increased 8% from $7.4 million in fiscal 2006
to $8.1 million in fiscal 2007, and remained the same percentage of software license revenue at 4%.
The dollar increase was primarily due to higher royalty expense associated with higher sales of
third-party products. Cost of software licenses as a percentage of software license revenue may
vary from period to period depending upon the relative product mix.
Cost of Maintenance and Services. Cost of maintenance and services increased 12% from $61.2
million in fiscal 2006 to $68.6 million in fiscal 2007, but decreased as a percentage of
maintenance and services revenue from 23% to 22%. The total dollar amount in fiscal 2007 increased
due to higher usage of third-party contractors for professional service engagements. Our technical
support, education and consulting headcount increased by 1% from the end of fiscal 2006 to the end
of fiscal 2007.
Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired intangibles
for purchased technology increased from $8.2 million in fiscal 2006 to $10.1 million in fiscal
2007. The increase was due to a full year of amortization expense in fiscal 2007 associated with
the acquisitions of NEON, Actional, Pantero and OpenAccess, as these acquisitions occurred at
various times in fiscal 2006.
Gross Profit. Our gross profit increased 10% from $370.3 million in fiscal 2006 to $406.7 million
in fiscal 2007. The gross profit percentage decreased slightly from 83% of total revenue in fiscal
2006 to 82% in fiscal 2007. The slight decrease in gross profit margin was due to consulting and
education revenue, which has the lowest margin, increasing at a faster rate of growth than both
software license revenue and maintenance revenue.
Sales and Marketing. Sales and marketing expenses increased 3% from $186.3 million in fiscal 2006
to $191.4 million in fiscal 2007, but decreased as a percentage of revenue from 42% to 39%. The
increase in sales and marketing expenses was primarily due to changes in foreign exchange rates,
partially offset by a decrease in marketing program expense. Sales and marketing expenses as a
percentage of total revenue decreased in fiscal 2007 as compared to fiscal 2006 due to improved
field sales productivity. Our sales support and marketing headcount increased by less than 1% from
the end of fiscal 2006 to the end of fiscal 2007.
Product Development. Product development expenses increased 4% from $77.3 million in fiscal 2006 to
$80.3 million in fiscal 2007, but decreased as a percentage of revenue from 17% to 16%. The dollar
increase was primarily due to a full year of expenses related to the development teams associated
with the Actional and NEON acquisitions, which occurred at the end of the first quarter of fiscal
2006. Our product development expenses also increased due to additional development activities at
our offshore development center in India. There were no capitalized software development costs in
either fiscal 2006 or fiscal 2007, due to the timing and stage of development of projects that
might otherwise qualify for capitalization under our software capitalization policy. Our product
development headcount remained flat from the end of fiscal 2006 to the end of fiscal 2007.
General and Administrative. General and administrative expenses increased 10% from $56.6 million in
fiscal 2006 to $62.3 million in fiscal 2007, but decreased as a percentage of revenue from 13% to
12%. The dollar increase was primarily due to a write-down associated with a portion of the
implementation of a new ERP system of $2.4 million, incremental stock-based compensation expense
associated with the re-grant of stock options to members of the compensation committee and the
impact of changes in foreign exchange rates. General and administrative expenses in fiscal 2007
also include $3.7 million of professional services fees related to the derivative lawsuits and
investigation of our historical stock option grant practices as compared to $3.4 million in fiscal
2006. Our administrative headcount increased by 2% from the end of fiscal 2006 to the end of
fiscal 2007.
Amortization of Other Acquired Intangibles. Amortization of other acquired intangibles decreased
slightly from $7.4 million in fiscal 2006 to $7.3 million in fiscal 2007.
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Impairment of Goodwill. In the fourth quarter of fiscal 2007, an interim impairment test was
performed as circumstances indicated that an impairment may have occurred in our EasyAsk reporting
unit. Based on the interim impairment testing, it was determined that the EasyAsk reporting unit’s
carrying value exceeded its fair value. As a result, we recorded an impairment loss of
approximately $8.2 million, which was equal to the amount by which the carrying value of goodwill
assigned to the EasyAsk reporting unit exceeded its implied fair value. No impairment of goodwill
was recorded in any of our other reporting units as the fair values of our other reporting units
exceeded their carrying values.
Acquisition-Related Expenses. Acquisition-related expenses for 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. The value of in-process research and development was determined based on an
appraisal from an independent third party. There were no such amounts in fiscal 2007.
Income from Operations. Income from operations increased 40% from $40.9 million in fiscal 2006 to
$57.2 million in fiscal 2007 and increased as a percentage of total revenue from 9% in fiscal 2006
to 12% in fiscal 2007. The increase in income from operations in fiscal 2007 as compared to fiscal
2006 was primarily due to improved profitability in each of our reportable segments.
Other Income. Other income increased 69% from $4.6 million in fiscal 2006 to $7.8 million in fiscal
2007. The increase was primarily related to an increase in interest income, resulting from higher
interest rates and higher average cash and short-term investment balances, and lower foreign
exchange losses.
Provision for Income Taxes. Our effective tax rate decreased slightly from 35.5% in fiscal 2006 to
35.0% in fiscal 2007. The decrease in the effective tax rate in fiscal 2007 as compared to fiscal
2006 was primarily due to the utilization of research and development credits in fiscal 2007.
Liquidity and Capital Resources
At the end of fiscal 2008, our cash and short-term investments totaled $118.5 million. The
decrease of $221.0 million since the end of fiscal 2007 resulted primarily from cash used for
acquisitions, purchases of our common stock, and the reclassification of ARS to noncurrent
investments (see below), partially offset by cash generated from operations.
In addition to the $118.5 million of cash and short-term investments, we had $62.4 million in
investments related to ARS that are classified as noncurrent. Our ARS are floating rate securities
with longer-term maturities that are marketed by financial institutions with auction reset dates at
primarily 28 or 35 day intervals to provide short-term liquidity. The remaining contractual
maturities of these securities range from 7 to 38 years. The underlying collateral of the ARS
consist of municipal bonds, which are insured by monoline insurance companies, and student loans,
which are supported by the federal government as part of the Federal Family Education Loan Program
(FFELP) and by the monoline insurance companies. Beginning in February 2008, auctions for these
securities began to fail, and the interest rates for these ARS reset to the maximum rate per the
applicable investment offering document. At February 29, 2008, our ARS investments totaled $109.8
million. During the last three quarters of fiscal 2008, investments totaling $55.4 million were
either redeemed at par by the issuer or sold at a successful auction. This reduction in our ARS
investments was partially offset by an additional $18.0 million par value of ARS acquired as part
of the acquisition of IONA, resulting in a net reduction of the par value of our ARS investments to
$72.4 million.
For each of the ARS remaining in our portfolio, we evaluated the risks related to the structure,
collateral and liquidity of the investment, and forecasted the probability of issuer default,
auction failure and a successful auction at par or a redemption at par for each future auction
period. The weighted average cash flow for each period was then discounted back to present value
for each security. Based on this methodology, we determined that the fair value of our ARS
investments is $62.4 million, and we recorded a temporary impairment charge in accumulated other
comprehensive income of $7.2 million to reduce the value of our available-for sale ARS investments.
In the fourth quarter of fiscal 2008, we recorded a charge to earnings of $1.8 million to reduce
the value of our ARS investments classified as trading securities, offset by a similar gain on the
put option related to the ARS rights offering discussed below.
With the exception of the ARS acquired as part of the acquisition of IONA discussed below, we will
not be able to access these remaining funds until a future auction for these ARS is successful, we
sell the securities in a secondary market, or they are redeemed by the issuer. As such, these
remaining investments currently lack short-term liquidity and are therefore classified as
noncurrent on the balance sheet at November 30, 2008. ARS were classified as current assets at
November 30, 2007. Based on our cash and short-term investments balance of $118.5 million and
expected operating cash flows, we do not anticipate the
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lack of liquidity associated with these ARS
to adversely affect our ability to conduct business and believe we have the ability to hold the
affected securities throughout the currently estimated recovery period. Therefore, the impairment
on these securities is considered only temporary in nature. If the credit rating of either the
security issuer or the third-party insurer underlying the investments deteriorates, we may be
required to adjust the carrying value of the ARS through an impairment charge.
In November 2008, we accepted a settlement offer in the form of a rights offering from UBS
Financial Services (UBS), the investment firm that brokered the original purchases of the $18.0
million par value of ARS that we acquired as part of the acquisition of IONA, which will provide us
with the option (the put option) to sell these securities at par value to UBS during a period
beginning on June 30, 2010. Since the settlement agreement is a legally enforceable firm
commitment, the put option is recognized as a financial asset at fair value in our financial
statements at November 30, 2008, and accounted for separately from the associated securities. The
fair value of the put option is based on the difference in value between the par value and the fair
value of the associated ARS. We have elected to measure the put option at its fair value pursuant
to SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115” (SFAS 159), and subsequent changes in fair value will also be
recognized in current period earnings. Since we intend to exercise the put option in June 2010,
we do not have the intent to hold the associated auction rate securities until recovery or
maturity. Therefore, we have classified these securities as trading pursuant to SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), which requires
changes in the fair value of these securities to be recorded in current period earnings, which we
believe will substantially offset changes in the fair value of the put option.
We generated cash from operations of $87.2 million in fiscal year 2008, $104.0 million in fiscal
year 2007, and $67.9 million in fiscal year 2006. The components of our cash flows from operations
for fiscal years 2008, 2007 and 2006 are as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Net income |
$ | 46,296 | $ | 42,280 | $ | 29,401 | ||||||
Depreciation, amortization and other noncash charges |
49,432 | 58,675 | 47,181 | |||||||||
Tax benefit from stock plans |
1,123 | 1,614 | 1,064 | |||||||||
Changes in operating assets and liabilities |
(9,669 | ) | 1,438 | (9,731 | ) | |||||||
Total |
$ | 87,182 | $ | 104,007 | $ | 67,915 | ||||||
The fluctuation in the change in operating assets and liabilities between fiscal 2007 and fiscal
2008 and between fiscal 2006 and fiscal 2007 was primarily the result of differences in the timing
of maintenance renewal billings. Gross accounts receivable at November 30, 2008 decreased by $0.7
million from the end of fiscal 2007. The decrease was primarily due to increased collections and
the impact of exchange rates, partially offset by the result of higher revenue. Days sales
outstanding (DSO) in accounts receivable decreased year over year by one day to 61 days at the end
of fiscal 2008 as compared to 62 days at the end of fiscal 2007 and 61 days at the end of fiscal
2006. We target a DSO range of 60 to 80 days.
We purchased $8.2 million of property and equipment in fiscal year 2008, $18.3 million in fiscal
year 2007 and $21.7 million in fiscal year 2006. The amount for fiscal 2006 included the purchase
of a building adjacent to our headquarters for $6.3 million. The decrease in fiscal 2008 as
compared to fiscal 2007 and fiscal 2006 was due to lower capital expenditures associated with our
ERP implementation as the project was substantially completed in early 2008. The remaining amounts
in each fiscal year consisted primarily of computer equipment, software and building and leasehold
improvements. We financed these purchases primarily from cash generated from operations.
We purchased and retired 3,912,000 shares of our common stock for $111.5 million in fiscal year
2008, 1,290,000 shares for $38.0 million in fiscal year 2007, and 481,000 shares for $13.0 million
in fiscal year 2006. Since beginning our stock repurchase program in 1996, we have purchased and
retired 24,402,000 shares at a cost of $365.0 million. In September 2008, our Board of Directors
authorized, for the period from October 1, 2008 through September 30, 2009, the purchase of up to
10,000,000 shares of our common stock, at such times and at such prices that we deem such purchases
to be an effective use of cash.
In fiscal year 2008, we completed three acquisitions. Each of these acquisitions was accounted for
as a purchase, and accordingly, the results of operations of the acquired companies were included
in our operating results from the date of acquisition. In each case, the cash portion of the
purchase price was paid in cash from available funds:
| • | On February 5, 2008, we acquired, through a wholly-owned subsidiary, the stock of Xcalia SA (Xcalia) for a cash payment of $4.9 million, net of cash acquired. Xcalia is a leader in providing data access and integration for service oriented architectures. The purpose of the acquisition was to expand the product offerings within the DataDirect product line. Upon the closing of the transaction, Xcalia became part of our DataDirect Technologies operating |
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| segment. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of Xcalia in our operating results from February 5, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $0.9 million. |
| • | On June 13, 2008, we acquired substantially all of the assets and assumed certain liabilities of Mindreef, Inc. (Mindreef) for a cash payment of $6.0 million, net of cash acquired. Mindreef develops and sells quality assurance and validation solutions for SOA deployments. The purpose of the acquisition was to expand the capabilities of our Actional product-line. The Mindreef assets were combined with our OpenEdge and SOA segment. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of Mindreef in our operating results from June 13, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $0.2 million. | ||
| • | On September 12, 2008, we completed the acquisition of IONA Technologies PLC (IONA) for $4.05 per share in cash, representing a cash payment of approximately $125.1 million, net of cash acquired. IONA is a provider of SOA infrastructure products and services. The purpose of the acquisition was to broaden our Enterprise Infrastructure product lines. Upon the closing of the transaction, IONA became part of our OpenEdge and SOA operating segment. We accounted for the acquisition as a purchase and accordingly, we included the results of operations of IONA in our operating results from September 12, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $3.2 million. |
In fiscal 2007, we purchased certain technology for use in our products for $1.8 million.
In fiscal year 2006, we used cash and stock to complete several acquisitions. Each of these
acquisitions was accounted for as a purchase, and accordingly, the results of operations of the
acquired companies have been included in our operating results from the date of acquisition. In
each case, the cash portion of the purchase price was paid from available funds:
| • | On January 20, 2006, we acquired for a combination of cash and stock the stock of Actional Corporation (Actional) for an aggregate purchase price of approximately $29.2 million, net of cash acquired. | ||
| • | On January 30, 2006, we acquired 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 $51.9 million, net of cash acquired. | ||
| • | On June 19, 2006, we acquired the stock of Pantero Corporation for an aggregate purchase price of $5.7 million, net of cash acquired. | ||
| • | On November 6, 2006, we acquired the stock of OpenAccess Software Inc. for an aggregate purchase price of $6.0 million, net of cash acquired. |
During 2009, we expect to continue to pursue acquisitions designed to expand our business and/or
add complementary products and technologies to our existing product sets. To the extent that we
complete any future acquisitions, our cash position could be reduced.
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 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, restructuring obligations, debt payments and other
long-term obligations) through at least the next twelve months.
Revenue Backlog — Our aggregate revenue backlog at November 30, 2008 was approximately $176
million, of which $144 million was included on our balance sheet as deferred revenue, primarily
related to unexpired maintenance and support contracts. At November 30, 2008, the remaining amount
of backlog of approximately $32 million was composed of multi-year
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licensing arrangements of
approximately $22 million and open software license orders received but not shipped of
approximately $10 million. Our backlog of orders not included on the balance sheet is not subject
to our normal accounting controls for information that is either reported in or derived from our
basic financial statements.
Our aggregate revenue backlog at November 30, 2007 was approximately $178 million, of which $147
million was included on our balance sheet as deferred revenue, primarily related to unexpired
maintenance and support contracts. At November 30, 2007, the remaining amount of backlog of
approximately $31 million was composed of multi-year licensing arrangements of approximately $21
million and open software license orders received but not shipped of approximately $10 million.
We typically fulfill most of our software license orders within 30 days of acceptance of a purchase
order. Assuming all other revenue recognition criteria have been met, we recognize software
license revenue upon shipment of the product, or if delivered electronically, when the customer has
the right to access the software. Because there are many elements governing when revenue is
recognized, including when orders are shipped, credit approval obtained, completion of internal
control processes over revenue recognition and other factors, management has some control in
determining the period in which certain revenue is recognized. We frequently have open software
license orders at the end of the quarter which have not shipped or have otherwise not met all the
required criteria for revenue recognition. Although the amount of open software license orders may
vary at any time, we generally do not believe that the amount, if any, of such software license
orders at the end of a particular quarter is a reliable indicator of future performance. In
addition, there is no industry standard for the definition of backlog and there may be an element
of estimation in determining the amount. As such, direct comparisons with other companies may be
difficult or potentially misleading.
Contractual Obligations
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. The
following table details our contractual obligations as of November 30, 2008:
| (In thousands) | ||||||||||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Less than 1 | 1-3 | 3-5 | More than 5 | |||||||||||||||||
| Contractual Obligations | Total | Year | Years | Years | Years | |||||||||||||||
Long-term debt |
$ | 1,352 | $ | 330 | $ | 746 | $ | 276 | $ | — | ||||||||||
Interest payment on long-term debt |
214 | 97 | 109 | 8 | — | |||||||||||||||
Operating leases |
49,966 | 14,001 | 22,077 | 12,036 | 1,852 | |||||||||||||||
Total |
$ | 51,532 | $ | 14,428 | $ | 22,932 | $ | 12,320 | $ | 1,852 | ||||||||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of 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 rate risk for changes in interest rates relates to our investment portfolio. We
have not used derivative financial instruments in our investment portfolio. We 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 or interest-rate resets of less than 60 days and are primarily fixed-rate instruments. In
addition, we have classified all of our debt securities as available-for-sale, except for certain
ARS which are classified as trading. The available-for-sale classification reduces the income
statement exposure to interest rate risk if such investments are held until their maturity date
because changes in fair value due to market changes in interest rates are recorded on the balance
sheet in accumulated other comprehensive income. 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 use derivative instruments to manage exposures to fluctuations in the value of foreign
currencies, which exist as part of our on-going business operations. Certain assets and forecasted
transactions are exposed to foreign currency risk. Our objective for holding derivatives is to
eliminate or reduce the impact of these exposures. We periodically monitor our foreign currency
exposures to enhance the overall effectiveness of our foreign currency hedge positions. Principal
currencies hedged include the euro, British pound, Brazilian real, Japanese yen and Australian
dollar. We do not enter into derivative instruments for speculative purposes, nor do we hold or
issue any derivative instruments for trading purposes. We enter into certain derivative
instruments that may not be designated as hedges under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging
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Activities” (SFAS 133). Although these derivatives do not qualify for hedge
accounting, we believe that such instruments are closely correlated with the underlying exposure,
thus managing the associated risk. The gains or losses from changes in the fair value of such
derivative instruments that are not accounted for as hedges are recognized in earnings.
We generally use foreign currency option contracts that are not designated as hedging instruments
under SFAS 133 to hedge a portion of forecasted international intercompany cash flows for up to one
year in the future, with major U.S. multinational banks as counterparties to the option contracts.
There were no outstanding foreign currency option contracts at November 30, 2008 compared to
outstanding foreign currency option contracts with a fair value of $0.7 million (and a notional
value of $129.6 million) at November 30, 2007. We also use forward contracts that are not
designated as hedging instruments under SFAS 133 to hedge the impact of the variability in exchange
rates on accounts receivable and collections denominated in certain foreign currencies. We
generally do not hedge the net assets of our international subsidiaries. The unrealized losses,
recorded in other income, of our outstanding foreign currency forward contracts were $(0.2) million
at November 30, 2008, and $(0.3) million at November 30, 2007.
The foreign exchange exposure from a 10% movement of currency exchange rates would have a material
impact on our revenue and net income. Based on a hypothetical 10% adverse movement in all foreign
currency exchange rates, our revenue would be adversely affected by approximately 5% 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
November 30, 2008 where the notional amount is determined using contract exchange rates:
| (In thousands) | ||||||||||||||||
| Exchange | Exchange | Notional | ||||||||||||||
| Foreign Currency | U.S. Dollars | Weighted | ||||||||||||||
| For U.S. Dollars | For Foreign Currency | Average | ||||||||||||||
| Functional Currency: | (Notional Amount) | (Notional Amount) | Exchange Rate* | Fair Value | ||||||||||||
Australian dollar |
— | $ | 5,306 | 1.54 | $ | 48 | ||||||||||
Brazilian real |
$ | 9,669 | — | 2.35 | (175 | ) | ||||||||||
Euro |
— | 36,596 | 0.78 | (145 | ) | |||||||||||
Japanese yen |
4,508 | — | 95.38 | — | ||||||||||||
South African rand |
635 | — | 10.07 | (5 | ) | |||||||||||
U.K. pound |
— | 16,066 | 0.65 | 51 | ||||||||||||
| $ | 14,812 | $ | 57,968 | $ | (226 | ) | ||||||||||
| * | expressed as local currency unit per U.S. dollar |
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Progress Software Corporation:
Bedford, MA
Progress Software Corporation:
Bedford, MA
We have audited the accompanying consolidated balance sheets of Progress Software Corporation and
subsidiaries (the “Company”) as of November 30, 2008 and 2007, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in the
period ended November 30, 2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Progress Software Corporation and subsidiaries as of November 30, 2008
and 2007, and the results of their operations and their cash flows for each of the three years in
the period ended November 30, 2008, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of November 30,
2008, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 29,
2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 29, 2009
Boston, Massachusetts
January 29, 2009
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Consolidated Financial Statements
Consolidated Balance Sheets
| (In thousands, except share data) | ||||||||
| November 30, | 2008 | 2007 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 96,485 | $ | 53,879 | ||||
Short-term investments |
22,044 | 285,646 | ||||||
Total cash and short-term investments |
118,529 | 339,525 | ||||||
Accounts receivable (less allowances of
$7,944 in 2008 and $9,458 in 2007) |
94,795 | 93,998 | ||||||
Other current assets |
18,664 | 17,891 | ||||||
Deferred income taxes |
14,264 | 13,009 | ||||||
Total current assets |
246,252 | 464,423 | ||||||
Property and equipment, net |
63,147 | 64,949 | ||||||
Intangible assets, net |
108,869 | 59,931 | ||||||
Goodwill |
233,385 | 149,057 | ||||||
Deferred income taxes |
29,618 | 17,617 | ||||||
Investments in auction rate securities |
62,364 | — | ||||||
Auction rate securities rights offering |
2,850 | — | ||||||
Other assets |
5,885 | 5,851 | ||||||
Total |
$ | 752,370 | $ | 761,828 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 330 | $ | 305 | ||||
Accounts payable |
11,592 | 12,684 | ||||||
Accrued compensation and related taxes |
46,001 | 50,092 | ||||||
Income taxes payable |
3,926 | 3,409 | ||||||
Other accrued liabilities |
43,750 | 26,493 | ||||||
Short-term deferred revenue |
135,786 | 135,487 | ||||||
Total current liabilities |
241,385 | 228,470 | ||||||
Long-term debt, less current portion |
1,022 | 1,352 | ||||||
Long-term deferred revenue |
7,957 | 11,200 | ||||||
Deferred income taxes |
10,023 | 2,817 | ||||||
Other noncurrent liabilities |
10,531 | 115 | ||||||
Commitments and contingencies (note 11) |
||||||||
Shareholders’ equity: |
||||||||
Preferred stock, $.01 par value; authorized, 1,000,000 shares;
issued, none |
||||||||
Common stock, $.01 par value, and additional paid-in capital;
authorized, 100,000,000 shares; issued and outstanding,
39,903,717 in 2008 and 42,380,338 in 2007 |
216,261 | 240,647 | ||||||
Retained earnings, including accumulated other
comprehensive income(loss) of $(14,033) in 2008 and $4,833 in 2007 |
265,191 | 277,227 | ||||||
Total shareholders’ equity |
481,452 | 517,874 | ||||||
Total |
$ | 752,370 | $ | 761,828 | ||||
See notes to consolidated financial statements.
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Consolidated Statements of Operations
| (In thousands, except per share data) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Revenue: |
||||||||||||
Software licenses |
$ | 192,217 | $ | 187,080 | $ | 175,845 | ||||||
Maintenance and services |
323,343 | 306,420 | 271,218 | |||||||||
Total revenue |
515,560 | 493,500 | 447,063 | |||||||||
Costs of revenue: |
||||||||||||
Cost of software licenses |
9,536 | 8,050 | 7,441 | |||||||||
Cost of maintenance and services |
69,321 | 68,614 | 61,196 | |||||||||
Amortization of acquired intangibles for purchased technology |
13,032 | 10,092 | 8,150 | |||||||||
Total costs of revenue |
91,889 | 86,756 | 76,787 | |||||||||
Gross profit |
423,671 | 406,744 | 370,276 | |||||||||
Operating expenses: |
||||||||||||
Sales and marketing |
195,947 | 191,436 | 186,286 | |||||||||
Product development |
87,788 | 80,345 | 77,269 | |||||||||
General and administrative |
62,084 | 62,270 | 56,571 | |||||||||
Amortization of other acquired intangibles |
6,426 | 7,303 | 7,358 | |||||||||
Restructuring expense |
6,915 | — | — | |||||||||
Impairment of goodwill |
— | 8,174 | — | |||||||||
Acquisition-related expenses |
128 | — | 1,849 | |||||||||
Total operating expenses |
359,288 | 349,528 | 329,333 | |||||||||
Income from operations |
64,383 | 57,216 | 40,943 | |||||||||
Other income (expense): |
||||||||||||
Interest income and other |
10,385 | 9,862 | 7,544 | |||||||||
Foreign currency loss |
(758 | ) | (2,031 | ) | (2,904 | ) | ||||||
Total other income, net |
9,627 | 7,831 | 4,640 | |||||||||
Income before provision for income taxes |
74,010 | 65,047 | 45,583 | |||||||||
Provision for income taxes |
27,714 | 22,767 | 16,182 | |||||||||
Net income |
$ | 46,296 | $ | 42,280 | $ | 29,401 | ||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.13 | $ | 1.02 | $ | 0.72 | ||||||
Diluted |
$ | 1.08 | $ | 0.96 | $ | 0.68 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
41,035 | 41,554 | 40,976 | |||||||||
Diluted |
42,677 | 43,943 | 43,269 | |||||||||
See notes to consolidated financial statements.
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Consolidated Statements of Shareholders’ Equity
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Common stock and additional paid-in capital: |
||||||||||||
Balance, beginning of year |
$ | 240,647 | $ | 197,748 | $ | 160,911 | ||||||
Exercise of employee stock options |
18,820 | 36,144 | 7,514 | |||||||||
Issuance of stock under the employee stock purchase plan |
6,685 | 6,248 | 5,484 | |||||||||
Repurchase of common stock |
(72,057 | ) | (22,329 | ) | (8,309 | ) | ||||||
Present value of payments for re-pricing of stock options |
— | (2,604 | ) | — | ||||||||
Stock-based compensation |
19,318 | 20,878 | 22,405 | |||||||||
Issuance of shares in connection with Actional business
combination |
— | — | 13,510 | |||||||||
Tax benefit from stock plans |
2,848 | 4,562 | 1,939 | |||||||||
Reclassification from deferred compensation |
— | — | (5,706 | ) | ||||||||
Balance, end of year |
216,261 | 240,647 | 197,748 | |||||||||
Deferred compensation: |
||||||||||||
Balance, beginning of year |
— | — | (5,706 | ) | ||||||||
Reclassification to additional paid-in capital |
— | — | 5,706 | |||||||||
Balance, end of year |
— | — | — | |||||||||
Retained earnings: |
||||||||||||
Balance, beginning of year |
277,227 | 246,816 | 218,799 | |||||||||
Net income |
46,296 | 42,280 | 29,401 | |||||||||
Other comprehensive income: |
||||||||||||
Unrealized gains (losses) on investments, net of tax |
(4,685 | ) | 158 | 148 | ||||||||
Translation adjustments, net of tax |
(14,181 | ) | 3,569 | 3,140 | ||||||||
Comprehensive income |
27,430 | 46,007 | 32,689 | |||||||||
Adoption of FIN 48 |
(12 | ) | — | — | ||||||||
Repurchase of common stock |
(39,454 | ) | (15,596 | ) | (4,672 | ) | ||||||
Balance, end of year |
265,191 | 277,227 | 246,816 | |||||||||
Total shareholders’ equity |
$ | 481,452 | $ | 517,874 | $ | 444,564 | ||||||
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 46,296 | $ | 42,280 | $ | 29,401 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
10,657 | 9,492 | 9,093 | |||||||||
Impairment of certain ERP costs |
— | 2,388 | — | |||||||||
Loss on disposal of property and equipment |
— | 173 | — | |||||||||
Amortization of capitalized software costs |
— | 175 | 175 | |||||||||
Amortization of intangible assets |
19,457 | 17,395 | 15,508 | |||||||||
Impairment of goodwill |
— | 8,174 | — | |||||||||
Stock-based compensation |
19,318 | 20,878 | 22,405 | |||||||||
In-process research and development |
— | — | 900 | |||||||||
Tax benefit from stock plans |
2,848 | 4,562 | 1,939 | |||||||||
Excess tax benefit from stock plans |
(1,725 | ) | (2,948 | ) | (875 | ) | ||||||
Allowances for accounts receivable |
(205 | ) | 968 | 1,150 | ||||||||
Deferred income taxes |
(3,956 | ) | (4,127 | ) | (7,219 | ) | ||||||
Changes in operating assets and liabilities, net of effects
from acquisitions: |
||||||||||||
Accounts receivable |
(3,828 | ) | (8,255 | ) | (7,224 | ) | ||||||
Other assets |
7,268 | 973 | (3,597 | ) | ||||||||
Accounts payable and accrued expenses |
(6,866 | ) | (2,277 | ) | (5,542 | ) | ||||||
Income taxes payable |
(5,162 | ) | 1,350 | 5,091 | ||||||||
Deferred revenue |
3,080 | 12,806 | 6,710 | |||||||||
Net cash provided by operating activities |
87,182 | 104,007 | 67,915 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of investments available-for-sale |
(143,499 | ) | (334,296 | ) | (310,539 | ) | ||||||
Sales and maturities of investments available-for-sale |
354,753 | 243,516 | 341,694 | |||||||||
Purchases of property and equipment |
(8,213 | ) | (18,482 | ) | (21,738 | ) | ||||||
Purchase of technology |
— | (1,800 | ) | — | ||||||||
Acquisitions, net of cash acquired and purchase price settlements |
(140,283 | ) | — | (79,288 | ) | |||||||
(Increase) decrease in other noncurrent assets |
(208 | ) | (547 | ) | 103 | |||||||
Net cash provided by (used for) investing activities |
62,550 | (111,609 | ) | (69,768 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Issuance of common stock |
25,505 | 42,499 | 12,998 | |||||||||
Repurchase of common stock |
(111,511 | ) | (38,031 | ) | (12,981 | ) | ||||||
Excess tax benefit from stock plans |
1,725 | 2,948 | 875 | |||||||||
Payment of long-term debt |
(305 | ) | (281 | ) | (262 | ) | ||||||
Net cash (used for) provided by financing activities |
(84,586 | ) | 7,135 | 630 | ||||||||
Effect of exchange rate changes on cash |
(22,540 | ) | 7,897 | 7,274 | ||||||||
Net increase in cash and equivalents |
42,606 | 7,430 | 6,051 | |||||||||
Cash and equivalents, beginning of year |
53,879 | 46,449 | 40,398 | |||||||||
Cash and equivalents, end of year |
$ | 96,485 | $ | 53,879 | $ | 46,449 | ||||||
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
Note 1: Nature of Business and Summary of Significant Accounting Policies
The Company
We are a global supplier of software and services for the development, deployment, integration and
management of business applications. We develop, market and distribute our products to business,
industry and governments worldwide. We also provide consulting, training and technical support
services.
Accounting Principles
We prepare our consolidated financial statements and accompanying notes in conformity with
accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Basis of Consolidation
The consolidated financial statements include our accounts and those of our subsidiaries, (all of
which are wholly-owned). We eliminate all intercompany balances and transactions.
Foreign Currency Translation
For foreign operations where the local currency is considered to be the functional currency, we
translate assets and liabilities into U.S. dollars at the exchange rate on the balance sheet date.
We translate income and expense items at average rates of exchange prevailing during each period.
We accumulate translation adjustments in other comprehensive income (loss), a component of
shareholders’ equity.
For foreign operations where the U.S. dollar is considered to be the functional currency, we
translate monetary assets and liabilities into U.S. dollars at the exchange rate on the balance
sheet date. We re-measure non-monetary assets and liabilities into U.S. dollars at historical
exchange rates. We translate income and expense items at average rates of exchange prevailing
during each period. We recognize translation adjustments currently as a component of foreign
currency gain or loss.
Revenue Recognition
We recognize software license revenue upon shipment of the product or, if delivered electronically,
when the customer has the right to access the software, provided that the license fee is fixed or
determinable, persuasive evidence of an arrangement exists and collection is probable. We do not
license our software with a right of return and generally do not license our software with
conditions of acceptance. If an arrangement does contain conditions of acceptance, we defer
recognition of the revenue until the acceptance criteria are met or the period of acceptance has
passed. If software licenses are sold on a subscription basis, we recognize the license fee ratably
over the subscription period. We generally recognize revenue for products distributed through
application partners and distributors when sold through to the end-user.
We generally sell our software licenses with maintenance services and, in some cases, also with
consulting services. For the undelivered elements, we determine vendor-specific objective evidence
(VSOE) of fair value to be the price charged when the undelivered element is sold separately. We
determine VSOE for maintenance sold in connection with a software license based on the amount that
will be separately charged for the maintenance renewal period. We determine VSOE for consulting
services by reference to the amount charged for similar engagements when a software license sale is
not involved.
We generally recognize revenue from software licenses sold together with maintenance and/or
consulting services upon shipment using the residual method, provided that the above criteria have
been met. If VSOE of fair value for the undelivered elements cannot be established, we defer all
revenue from the arrangement until the earlier of the point at which such sufficient VSOE does
exist or all elements of the arrangement have been delivered, or if the only undelivered element is
maintenance, then we recognize the entire fee ratably. If payment of the software license fees is
dependent upon the performance of consulting services or the consulting services are essential to
the functionality of the licensed software, then we recognize both the software license and
consulting fees using the percentage completion method.
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We recognize maintenance revenue ratably over the term of the applicable agreement. We generally
recognize revenue from services, primarily consulting and customer education, as the related
services are performed.
Warranty Costs
We make periodic provisions for expected warranty costs. Historically, warranty costs have been
insignificant.
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.
A summary of activity in the allowances against accounts receivable is as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Beginning balance |
$ | 9,458 | $ | 8,549 | $ | 8,639 | ||||||
Charged to (benefit to) costs and expenses |
(205 | ) | 968 | 1,150 | ||||||||
Write-offs and other |
(1,309 | ) | (59 | ) | (1,240 | ) | ||||||
Ending balance |
$ | 7,944 | $ | 9,458 | $ | 8,549 | ||||||
Cash Equivalents and Investments
Cash equivalents include short-term, highly liquid investments purchased with remaining maturities
of three months or less. We classify investments, which consist of auction rate securities, state
and municipal obligations, U.S. government securities and corporate bonds and notes, as investments
available-for-sale which are stated at fair value, except for certain student loan auction rate
securities (ARS), which are classified as trading securities. We include aggregate unrealized
holding gains and losses as a component of accumulated other comprehensive income in shareholders’
equity, except for certain ARS classified as trading, where unrealized gains and losses are
recorded in current period earnings.
Supplemental Cash Flow Information
In fiscal years 2008, 2007 and 2006, we paid $29.8 million, $21.7 million and $17.3 million in
income taxes, respectively, net of refunds received. In fiscal year 2008, we received refunds from
the Internal Revenue Service (IRS) of $1.8 million related to the filing of original tax returns
and amended tax returns from prior years. Refunds in fiscal 2007 were insignificant. In fiscal
year 2006, we received refunds from the IRS of $1.3 million.
In fiscal years 2008, 2007 and 2006, cash paid for interest on long-term debt totaled $0.1 million,
$0.1 million and $0.2 million, respectively.
In fiscal 2006, we issued 460,011 shares of our common stock in connection with the acquisition of
Actional Corporation. The total value of these shares was $13.5 million.
In fiscal 2007, we recorded a liability of
approximately $2.5 million for the present value of the fully vested cash payments to be paid in January 2008
as part of the tender offer that concluded in April 2007, of which $0.5 million was charged to stock-based
compensation expense and $2.0 million was recorded as a reduction to additional paid-in capital. We also
recorded a liability of $0.7 million for the present value of the cash payments to be paid in up to five
installments, depending on the vest schedules of each individual, through October 2009 as part of
individual option amendment agreements. Approximately $0.1 million of this liability represented the
fully vested portion of the incremental fair value of the new options and was recorded as stock-based
compensation expense and $0.6 million was recorded as a reduction in additional paid-in capital.
Concentration of Credit Risk
Our financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash, investments and trade receivables. We have cash investment policies which, among
other things, limit investments to investment-grade securities. We perform ongoing credit
evaluations of our customers, and the risk with respect to trade receivables is further mitigated
by the diversity, both by geography and by industry, of the customer base.
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Fair Value of Financial Instruments
The carrying amount of our cash and cash equivalents, accounts receivable and accounts payable
approximates fair value due to the short-term nature of these instruments. We base the fair value
of short-term investments on current market prices, and the fair value of noncurrent investments,
both available-for-sale and trading, using discounted cash flow models (Note 2). The carrying value
of the put option related to the ARS rights offering is based on the difference in value between
the par value and the fair value of the associated ARS. The carrying value of long-term debt (Note
11) approximates its fair value. We measure and record derivative financial instruments at fair
value (Note 3). As permitted under to SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115” (SFAS 159), we elect
fair value measurement for certain financial assets on a case by case basis.
Derivative Instruments
We record all derivatives, whether designated in hedging relationships or not, on the balance sheet
at fair value. We use derivative instruments to manage exposures to fluctuations in the value of
foreign currencies, which exist as part of our on-going business operations. Certain assets and
forecasted transactions are exposed to foreign currency risk. Our objective for holding derivatives
is to eliminate or reduce the impact of these exposures. We periodically monitor our foreign
currency exposures to enhance the overall effectiveness of our foreign currency hedge positions.
Principal currencies hedged include the euro, British pound, Brazilian real, Japanese yen and
Australian dollar. We do not enter into derivative instruments for speculative purposes, nor do we
hold or issue any derivative instruments for trading purposes.
We enter into certain derivative instruments that are not designated as hedges under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Although these
derivatives do not qualify for hedge accounting, we believe that such instruments are closely
correlated with the underlying exposure, thus managing the associated risk. The gains or losses
from changes in the fair value of such derivative instruments that are not accounted for as hedges
are recognized in earnings.
Property and Equipment
We record property and equipment at cost. We record property and equipment purchased in business
combinations at fair values which are then treated as the cost. We provide for depreciation and
amortization on the straight-line method over the estimated useful lives of the related assets or
the remaining initial or current terms of leases, whichever is shorter. Useful lives by major asset
class are as follows: computer equipment and software, three to seven years; buildings and
improvements, five to thirty-nine years; and furniture and fixtures, five to seven years.
Product Development Costs
We expense product development costs as incurred. We capitalize certain internally generated
software development costs after technological feasibility of the product has been established in
accordance with SFAS No. 86, “Accounting for Costs of Software for Sale or Lease.” We amortize such
costs as a component of cost of software licenses over the estimated life of the product (generally
four years) in an amount equal to the greater of the amount computed using the ratio of current
revenue to total expected revenue in the product’s life or the amount computed using the
straight-line method. There were no capitalized software costs included on our balance sheet at
the end of fiscal years 2008 and 2007. All previously capitalized amounts were fully amortized as
of the end of fiscal 2007.
Stock-based Compensation
We account for stock-based compensation expense in accordance with SFAS No. 123R, “Accounting for
Stock-Based Compensation” (SFAS 123R). Under SFAS 123R, stock-based compensation expense reflects
the fair value of stock-based awards measured at the grant date and recognized over the relevant
service period. We estimate the fair value of each stock-based award on the measurement date 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. We recognize stock-based compensation expense on a straight-line basis over the
service period of the award, which is generally five years.
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Goodwill, Other Intangible Assets and Long-lived Assets
Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeded
the fair value of net identifiable assets on the date of purchase. For purposes of the annual
impairment test, we assigned goodwill of $29.4 million to the OpenEdge and SOA operating segment,
excluding a preliminary allocation of $2.1 million of goodwill related to the Mindreef acquisition
which occurred in June 2008 and $79.3 million related to the IONA acquisition which occurred in
September 2008, $88.2 million to the DataDirect Technologies operating segment, excluding a
preliminary allocation of $4.2 million of goodwill related to the Xcalia acquisition which occurred
in February 2008, and $30.1 million to the other operating segment.
We evaluate goodwill or other intangible assets with indefinite useful lives for impairment
annually or on an interim basis when events and circumstances arise that indicate an impairment may
have occurred. To conduct these impairment tests of goodwill, we compare the fair value of a
reporting unit to its carrying value. If the reporting unit’s carrying value exceeds its fair
value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its
implied fair value. We estimate the fair values of our reporting units using discounted cash flow
models or other valuation models. During fiscal 2008 and fiscal 2007, we completed our annual
testing for impairment of goodwill and, based on those tests, concluded that no impairment of
goodwill existed. We perform our annual testing on December 15th of each year. In
addition, there were no triggering events that required an interim impairment test in fiscal 2008.
However, an interim impairment test was performed in the fourth quarter of fiscal 2007 as
circumstances indicated that an impairment may have occurred in our EasyAsk reporting unit. Based
on the interim impairment testing, it was determined that the EasyAsk reporting unit’s carrying
value exceeded its fair value. As a result, we recorded an impairment loss of approximately $8.2
million in fiscal 2007, which was equal to the amount by which the carrying value of goodwill
assigned to the EasyAsk reporting unit exceeded its implied fair value. No impairment of goodwill
was recorded in any of our other reporting units as the fair value of our other reporting units
exceeded their carrying values.
Long-lived assets primarily include property and equipment and intangible assets with finite lives
(purchased technology, capitalized software and customer-related intangibles). We periodically
review long-lived assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable or that the useful
lives of those assets are no longer appropriate. We base each impairment test on a comparison of
the undiscounted cash flows to the carrying value of the asset. If impairment is indicated, we
write down the asset to its estimated fair value based on a discounted cash flow analysis. In
fiscal 2007, we recorded a write-down of long-lived assets associated with a specific third-party
provided element of the implementation of a new ERP system of $2.4 million. The write-down was
necessitated by the conclusion that it was not advisable to proceed further with the implementation
of the third-party application.
Income Taxes
We provide for deferred income taxes resulting from temporary differences between financial and
taxable income. We record valuation allowances to reduce deferred tax assets to the amount that is
more likely than not to be realized. We have not provided for U.S. income taxes on the
undistributed earnings of non-U.S. subsidiaries, as these earnings have been permanently reinvested
or would be principally offset by foreign tax credits. Cumulative undistributed foreign earnings
were approximately $75.2 million at November 30, 2008.
On December 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48),
which contains a two-step approach to recognizing and measuring uncertain tax positions taken or
expected to be taken in a tax return, We first determine if the weight of available evidence
indicates that it is more likely than not that the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is that we
measure the tax benefit as the largest amount that is more likely than not to be realized upon
ultimate settlement. FIN 48 also required us to reclassify our uncertain tax positions from current
to noncurrent upon adoption. We recognize interest and penalties related to uncertain tax positions
in our provision for income taxes on our consolidated statements of operations. See Note 10 for
further information of the impact of adopting FIN 48.
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Comprehensive Income
The components of comprehensive income include, in addition to net income, the net of tax amounts
for unrealized gains and losses on investments and foreign currency translation adjustments.
Accumulated other comprehensive income is made up of the following components:
| (In thousands) | ||||||||
| November 30, | 2008 | 2007 | ||||||
Cumulative translation adjustment, net of tax |
$ | (9,459 | ) | $ | 4,722 | |||
Accumulated unrealized gains (losses) on investments, net of tax |
(4,574 | ) | 111 | |||||
Total accumulated comprehensive income |
$ | (14,033 | ) | $ | 4,833 | |||
The tax effect on cumulative translation adjustment in fiscal years 2008 and 2007 was $5.5 million
and $2.5 million respectively. The tax effect on accumulated unrealized gains (losses) on
investments was $2.7 million in fiscal 2008 and was insignificant in fiscal 2007.
New Accounting Pronouncements
In June 2006, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
establishes a framework to improve the relevance and comparability of the information that a
reporting entity provides in its financial reports about a business combination and its effects.
SFAS 141R applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
We will apply SFAS 141R to any acquisition after the date of adoption.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157”. Collectively, the
FSPs defer the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed
at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. We adopted
SFAS 157 in 2008 except for those items specifically deferred under FSP FAS 157-2. We are currently
evaluating the impact of the full adoption of SFAS 157 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51” (SFAS 160). The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial statements including the requirements
to classify noncontrolling interests as a component of consolidated shareholders’ equity, and the
elimination of “minority interest” accounting in results of operations with earnings attributable
to noncontrolling interests reported as a part of consolidated earnings. Additionally, SFAS 160
revises the accounting for both increases and decreases in a parent’s controlling ownership
interest. SFAS 160 is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of adopting SFAS 160 on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161) as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. SFAS 161 requires that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008. We are currently
evaluating the impact of adopting SFAS 161 on our consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets”. FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 is effective for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. We are currently
evaluating the impact of adopting FSP FAS 142-3 on our consolidated financial statements.
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Note 2: Investments
A summary of our investments by major security type at November 30, 2008 is as follows:
| (In thousands) | ||||||||||||||||
| Cost | Unrealized | Unrealized | Fair | |||||||||||||
| Security Type | Basis | Gains | Losses | Value | ||||||||||||
State and municipal bond obligations |
$ | 16,903 | $ | 107 | $ | (5 | ) | $ | 17,005 | |||||||
US government securities |
2,719 | 1 | — | 2,720 | ||||||||||||
Auction rate securities – municipal bonds |
33,891 | — | (4,420 | ) | 29,471 | |||||||||||
Auction rate securities – student loans |
20,804 | — | (2,741 | ) | 18,063 | |||||||||||
Corporate bonds and notes |
2,001 | — | (2 | ) | 1,999 | |||||||||||
Subtotal – available-for-sale securities |
76,318 | 108 | (7,168 | ) | 69,258 | |||||||||||
Auction rate securities – student loans |
18,000 | — | (2,850 | ) | 15,150 | |||||||||||
Subtotal – trading securities |
18,000 | — | (2,850 | ) | 15,150 | |||||||||||
Total |
$ | 94,318 | $ | 108 | $ | (10,018 | ) | $ | 84,408 | |||||||
Such amounts are classified on our balance sheet at November 30, 2008 as follows:
| (In thousands) | ||||||||
| Short-term | Long-term | |||||||
| Security Type | Investments | Investments | ||||||
State and municipal bond obligations |
$ | 17,005 | $ | — | ||||
US government securities |
2,720 | — | ||||||
Auction rate securities – municipal bonds |
16 | 29,455 | ||||||
Auction rate securities – student loans |
304 | 17,759 | ||||||
Corporate bonds and notes |
1,999 | — | ||||||
Subtotal – available-for-sale securities |
22,044 | 47,214 | ||||||
Auction rate securities – student loans |
— | 15,150 | ||||||
Subtotal – trading securities |
— | 15,150 | ||||||
Total |
$ | 22,044 | $ | 62,364 | ||||
For each of our ARS, we evaluated the risks related to the structure, collateral and liquidity of
the investment, and forecasted the probability of issuer default, auction failure and a successful
auction at par or a redemption at par for each future auction period. Using a trinomial discount
model, the weighted average cash flow for each period was then discounted back to present value for
each security. Based on this methodology, we determined that the fair value of our ARS investments
is $62.4 million, and we recorded a temporary impairment charge in accumulated other comprehensive
income of $7.2 million to reduce the value of our available-for-sale ARS investments. In the
fourth quarter of fiscal 2008, we recorded a charge to earnings of $1.8 million to reduce the value
of our ARS investments classified as trading securities, offset by the gain on the put option
related to the ARS rights offering. Based on our cash and short-term investments balance and
expected operating cash flows, we do not anticipate the lack of liquidity associated with our ARS
to adversely affect our ability to conduct business and believe we have the ability to hold the
remaining securities throughout the currently estimated recovery period.
In November 2008, we accepted a settlement offer in the form of a rights offering from UBS
Financial Services (UBS), the investment firm that brokered the original purchases of the $18.0
million par value of ARS that we acquired as part of the acquisition of IONA, which effectively
will provide us with a put option to sell these securities at par value to UBS during a period
beginning on June 30, 2010. Since the settlement agreement is a legally enforceable firm
commitment, the put option is recognized as a financial asset at fair value in our financial
statements at November 30, 2008, and accounted for separately from the associated securities as a
noncurrent asset. Since we intend to exercise the put option in June 2010, we do not have the
intent to hold the associated ARS until recovery or maturity. Therefore, we have classified these
securities as trading pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities” (SFAS 115). SFAS 115 requires changes in the fair value of these securities to
be recorded in current period earnings, which we believe will substantially offset changes in the
fair value of the put option.
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A summary of our investments available-for-sale by major security type at November 30, 2007 is as
follows (all were included in short-term investments on our balance sheet):
| (In thousands) | ||||||||||||||||
| Cost | Unrealized | Unrealized | Fair | |||||||||||||
| Security Type | Basis | Gains | Losses | Value | ||||||||||||
Auction rate securities – municipal bonds |
$ | 219,826 | $ | — | $ | — | $ | 219,826 | ||||||||
Auction rate securities – students loans |
20,620 | — | — | 20,620 | ||||||||||||
State and municipal bond obligations |
45,030 | 173 | (3 | ) | 45,200 | |||||||||||
Total |
$ | 285,476 | $ | 173 | $ | (3 | ) | $ | 285,646 | |||||||
The fair value of debt securities at November 30, 2008 and 2007, by contractual maturity, is as
follows:
| (In thousands) | 2008 | 2007 | ||||||
Due in one year or less (1) |
$ | 78,168 | $ | 261,287 | ||||
Due after one year |
6,240 | 24,359 | ||||||
Total |
$ | 84,408 | $ | 285,646 | ||||
| (1) | Includes ARS which are tendered for interest-rate setting purposes periodically throughout the year. Beginning in February 2008, auctions for these securities began to fail, and therefore these investments currently lack short-term liquidity. The remaining contractual maturities of these securities range from 7 to 38 years. With the exception of the trading ARS acquired as part of the acquisition of IONA which are subject to the UBS rights offering discussed above, we will not be able to access these funds until a future auction for these ARS is successful, we sell the securities in a secondary market, or they are redeemed by the issuer. |
Note 3: Derivative Instruments
We generally use foreign currency option contracts that are not designated as hedging instruments
under SFAS 133 to hedge a portion of forecasted international intercompany revenue for up to one
year in the future, with major U.S. multinational banks as counterparties to the option contracts.
There were no outstanding foreign currency option contracts at November 30, 2008 compared to
outstanding foreign currency option contracts with a fair value of $0.7 million (and a notional
value of $129.6 million) at November 30, 2007. We also use forward contracts that are not
designated as hedging instruments under SFAS 133 to hedge the impact of the variability in exchange
rates on accounts receivable and collections denominated in certain foreign currencies. The
unrealized losses, recorded in other income, of our outstanding foreign currency forward contracts
were $(0.2) million and $(0.3) million at November 30, 2008 and 2007, respectively.
The table below details outstanding forward contracts, which mature in ninety days or less, at
November 30, 2008 where the notional amount is determined using contract exchange rates:
| (In thousands) | ||||||||||||||||
| Exchange | Exchange | Notional | ||||||||||||||
| Foreign Currency | U.S. Dollars | Weighted | ||||||||||||||
| For U.S. Dollars | For Foreign Currency | Average | ||||||||||||||
| Functional Currency: | (Notional Amount) | (Notional Amount) | Exchange Rate* | Fair Value | ||||||||||||
Australian dollar |
— | $ | 5,306 | 1.54 | $ | 48 | ||||||||||
Brazilian real |
$ | 9,669 | — | 2.35 | (175 | ) | ||||||||||
Euro |
— | 36,596 | 0.78 | (145 | ) | |||||||||||
Japanese yen |
4,508 | — | 95.38 | — | ||||||||||||
South African rand |
635 | — | 10.07 | (5 | ) | |||||||||||
U.K. pound |
— | 16,066 | 0.65 | 51 | ||||||||||||
| $ | 14,812 | $ | 57,968 | $ | (226 | ) | ||||||||||
| * | expressed as local currency unit per U.S. dollar |
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The table below details outstanding forward contracts, which mature in ninety days or less, at
November 30, 2007 where the notional amount is determined using contract exchange rates:
| (In thousands) | ||||||||||||||||
| Exchange | Exchange | Notional | ||||||||||||||
| Foreign Currency | U.S. Dollars | Weighted | ||||||||||||||
| For U.S. Dollars | For Foreign Currency | Average | ||||||||||||||
| Functional Currency: | (Notional Amount) | (Notional Amount) | Exchange Rate* | Fair Value | ||||||||||||
Australian dollar |
— | $ | 6,724 | 1.14 | $ | 32 | ||||||||||
Brazilian real |
$ | 1,278 | — | 1.80 | (5 | ) | ||||||||||
Euro |
— | 41,606 | 0.68 | (347 | ) | |||||||||||
Japanese yen |
4,564 | — | 109.55 | 64 | ||||||||||||
U.K. pound |
— | 30,581 | 0.48 | (91 | ) | |||||||||||
| $ | 5,842 | $ | 78,911 | $ | (347 | ) | ||||||||||
| * | expressed as local currency unit per U.S. dollar |
Note 4: Property and Equipment
Property and equipment consists of the following:
| (In thousands) | ||||||||
| November 30, | 2008 | 2007 | ||||||
Computer equipment and software |
$ | 56,693 | $ | 53,520 | ||||
Land, buildings and leasehold improvements |
49,812 | 52,587 | ||||||
Furniture and fixtures |
9,711 | 10,218 | ||||||
Total |
116,216 | 116,325 | ||||||
Less accumulated depreciation and amortization |
53,069 | 51,376 | ||||||
Property and equipment, net |
$ | 63,147 | $ | 64,949 | ||||
In fiscal 2007, we recorded a write-down associated with a specific third-party provided element of
the implementation of a new ERP system of $2.4 million. The write-down was necessitated by the
conclusion that it was not advisable to proceed further with the implementation of the third-party
application. In fiscal 2007, we also determined that certain fully-depreciated fixed assets were
no longer in service or could not be located. The write-off of such assets totaled approximately
$22.9 million, resulting in a loss of $0.2 million on the disposal of these assets.
Note 5: Intangible Assets and Goodwill
Intangible assets are composed of the following significant classes at November 30, 2008:
| (In thousands) | ||||||||||||
| Gross | ||||||||||||
| Carrying | Accumulated | Net Book | ||||||||||
| Amount | Amortization | Value | ||||||||||
Purchased technology |
$ | 120,065 | $ | 41,984 | $ | 78,081 | ||||||
Customer-related and other |
59,466 | 28,678 | 30,788 | |||||||||
Total |
$ | 179,531 | $ | 70,662 | $ | 108,869 | ||||||
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Intangible assets are composed of the following significant classes at November 30, 2007:
| (In thousands) | ||||||||||||
| Gross | ||||||||||||
| Carrying | Accumulated | Net Book | ||||||||||
| Amount | Amortization | Value | ||||||||||
Purchased technology |
$ | 68,121 | $ | 29,969 | $ | 38,152 | ||||||
Customer-related and other |
45,282 | 23,503 | 21,779 | |||||||||
Total |
$ | 113,403 | $ | 53,472 | $ | 59,931 | ||||||
We amortize intangible assets assuming no expected residual value. The weighted average
amortization period for all intangible assets is 6.5 years, including 6.5 years for purchased
technology and 6.7 years for customer-related and other intangible assets. Amortization expense
related to these intangible assets was $19.5 million, $17.4 million and $15.5 million in fiscal
years 2008, 2007 and 2006, respectively. We estimate future amortization expense from intangible
assets held as of November 30, 2008, to be approximately $28.1 million, $25.6 million, $18.5
million, $14.9 million and $8.6 million in fiscal years 2009, 2010, 2011, 2012 and 2013,
respectively.
Changes in the carrying amount of goodwill for fiscal year 2008 by segment, as organized in fiscal
2008, is as follows:
| (In thousands) | ||||||||||||||||||||
| Acquisitions and | ||||||||||||||||||||
| Balance | Purchase | Balance | ||||||||||||||||||
| Dec. 1, | Accounting | Translation | Nov. 30, | |||||||||||||||||
| 2007 | Adjustments | Write-down | Adjustments | 2008 | ||||||||||||||||
OpenEdge and SOA |
$ | 30,269 | $ | 81,414 | $ | — | $ | (915 | ) | $ | 110,768 | |||||||||
DataDirect |
88,234 | 4,236 | — | — | 92,470 | |||||||||||||||
Other |
30,554 | — | — | (407 | ) | 30,147 | ||||||||||||||
Total |
$ | 149,057 | $ | 85,650 | $ | — | $ | (1,322 | ) | $ | 233,385 | |||||||||
Changes in the carrying amount of goodwill for fiscal year 2007 by segment, as organized in fiscal
2007, is as follows:
| (In thousands) | ||||||||||||||||||||
| Acquisitions and | ||||||||||||||||||||
| Balance | Purchase | Balance | ||||||||||||||||||
| Dec. 1, | Accounting | Translation | Nov. 30, | |||||||||||||||||
| 2006 | Adjustments | Write-down | Adjustments | 2007 | ||||||||||||||||
OpenEdge |
$ | 11,561 | $ | — | $ | (8,174 | ) | $ | 296 | $ | 3,683 | |||||||||
Enterprise Infrastructure |
57,208 | (318 | ) | — | 250 | 57,140 | ||||||||||||||
DataDirect |
89,089 | (855 | ) | — | — | 88,234 | ||||||||||||||
Total |
$ | 157,858 | $ | (1,173 | ) | $ | (8,174 | ) | $ | 546 | $ | 149,057 | ||||||||
Note 6: Fair Value Measurements
On December 1, 2007, we adopted SFAS 157. As provided by FSP FAS 157-2, we only have adopted the
provisions of SFAS 157 with respect to our financial assets and liabilities. This statement
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
42
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The following table details the fair value measurements within the fair value hierarchy of our
financial assets:
| (In thousands) | ||||||||||||||||
| Fair Value Measurements at the Reporting Date Using | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant Other | Significant | ||||||||||||||
| Nov. 30, | Using Identical | Observable Inputs | Unobservable | |||||||||||||
| Description | 2008 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Available-for-sale securities |
$ | 69,258 | $ | 22,044 | — | $ | 47,214 | |||||||||
Trading securities |
15,150 | — | — | 15,150 | ||||||||||||
Put option related to ARS
rights offering |
2,850 | — | — | 2,850 | ||||||||||||
Foreign exchange derivatives |
(226 | ) | — | $ | (226 | ) | — | |||||||||
Total |
$ | 87,032 | $ | 22,044 | $ | (226 | ) | $ | 65,214 | |||||||
The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market
approach, using prices and other relevant information generated by market transactions involving
identical or comparable assets. The valuation technique used to measure fair value for our Level 3
assets is an income approach, where the expected weighted average future cash flows were discounted
back to present value for each asset, except for the put option related to the ARS rights offering,
which is based on the difference in value between the par value and the fair value of the
associated ARS.
During fiscal 2008, we reclassified our ARS of $62.4 million to the Level 3 category. During the
first quarter of fiscal 2008, such investments were classified in the Level 2 category. We
reclassified our ARS to the Level 3 category as some of the inputs used in the trinomial discount
model include unobservable inputs. Our ARS are floating rate securities with longer-term
maturities which are marketed by financial institutions with auction reset dates at primarily 28 or
35 day intervals to provide short-term liquidity. The underlying collateral of the ARS consist
primarily of municipal bonds, which are insured by monoline insurance companies, with the remainder
consisting of student loans, which are supported by the federal government as part of the Federal
Family Education Loan Program (FFELP) and by the monoline insurance companies. Beginning in
February 2008, auctions for these securities began to fail, and the interest rates for these ARS
reset to the maximum rate per the applicable investment offering document.
As described in Note 2, we accepted a settlement offer in the form of a rights offering from UBS
which will provide us with a put option to sell these securities at par value to UBS during a
period beginning on June 30, 2010. Since the settlement agreement is a legally enforceable firm
commitment, the put option is recognized as a financial asset at its fair value of $2.8 million in
our financial statements at November 30, 2008, accounted for separately from the associated
securities. Changes in the fair value of the put option, based on the difference in value between
the par value and the fair value of the associated ARS, are recognized in current period earnings.
We have elected to measure the put option at fair value pursuant to SFAS 159, and subsequent
changes in fair value will also be recognized in current period earnings.
With the exception of the ARS acquired as part of the acquisition of IONA, we will not be able to
access these funds until a future auction for these ARS is successful, we sell the securities in a
secondary market, or they are redeemed by the issuer. As such, these remaining investments
currently lack short-term liquidity and were therefore classified as noncurrent on our balance
sheet at November 30, 2008.
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The following table reflects the activity for our financial assets measured at fair value using
Level 3 inputs:
| (in thousands) | ||||
| Level 3 | ||||
| Financial | ||||
| Assets | ||||
Balance, December 1, 2007 |
$ | — | ||
Transfers from Level 2 |
109,800 | |||
Redemptions and sales |
(55,425 | ) | ||
Unrealized losses included in accumulated other comprehensive income |
(7,161 | ) | ||
ARS acquired in the acquisition of IONA |
17,000 | |||
Put option
related to ARS rights offering acquired in the acquisition of IONA |
1,000 | |||
Unrealized
losses on ARS trading securities included in other income |
(1,850 | ) | ||
Unrealized
gains on put option related to ARS rights offering included in other income |
1,850 | |||
Balance, November 30, 2008 |
$ | 65,214 | ||
Note 7: Earnings Per Share
We compute basic earnings per share using the weighted average number of common shares outstanding.
We compute diluted earnings per share using the weighted average number of common shares
outstanding plus the effect of outstanding dilutive stock options using the treasury stock method
and outstanding deferred stock units. The following table sets forth the calculation of basic and
diluted earnings per share for each fiscal year:
| (In thousands, except per share data) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Net income |
$ | 46,296 | $ | 42,280 | $ | 29,401 | ||||||
Weighted average shares outstanding |
41,035 | 41,554 | 40,976 | |||||||||
Dilutive impact from common stock equivalents |
1,642 | 2,389 | 2,293 | |||||||||
Diluted weighted average shares outstanding |
42,677 | 43,943 | 43,269 | |||||||||
Basic earnings per share |
$ | 1.13 | $ | 1.02 | $ | 0.72 | ||||||
Diluted earnings per share |
$ | 1.08 | $ | 0.96 | $ | 0.68 | ||||||
Stock options to purchase approximately 3,440,000 shares, 2,379,000 shares and 2,468,000 shares of
common stock were excluded from the calculation of diluted earnings per share in fiscal years 2008,
2007 and 2006, respectively, because these options were anti-dilutive.
Note 8: Shareholders’ Equity
Preferred Stock
Our Board of Directors is authorized to establish one or more series of preferred stock and to fix
and determine the number and conditions of preferred shares, including dividend rates, redemption
and/or conversion provisions, if any, preferences and voting rights. At November 30, 2008, our
Board of Directors had not issued any series of preferred stock.
Common Stock
A summary of share activity is as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Beginning balance |
42,380 | 41,177 | 40,436 | |||||||||
Shares issued |
1,437 | 2,508 | 1,252 | |||||||||
Shares repurchased and retired |
(3,912 | ) | (1,290 | ) | (481 | ) | ||||||
Shares forfeited |
(1 | ) | (15 | ) | (30 | ) | ||||||
Ending balance |
39,904 | 42,380 | 41,177 | |||||||||
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Common Stock Repurchases
In fiscal years 2008, 2007 and 2006, we purchased and retired 3,912,000 shares, 1,290,000 shares
and 481,000 shares, respectively, of our common stock for
$111.5 million, $38.0 million and $13.0
million, respectively. Since beginning our stock repurchase program in 1996, we have purchased and
retired 24,402,000 shares at a cost of $365.0 million.
In September 2008, our Board of Directors authorized, for the period from October 1, 2008 through
September 30, 2009, the purchase of up to 10,000,000 shares of our common stock. There were
9,840,000 shares of common stock available for repurchase under this authorization at November 30,
2008.
Stock Options and Stock Awards
We currently have one shareholder-approved stock plan from which we can issue equity securities,
including options, deferred stock awards and restricted stock. In fiscal 2008, our board of
directors and shareholders approved the 2008 Stock Option and Incentive Plan, which replaced the
1992 Incentive and Nonqualified Stock Option Plan, the 1994 Stock Incentive Plan and the 1997 Stock
Incentive Plan (collectively, the Previous Plans). The Previous Plans solely exist to satisfy
outstanding options previously granted under these plans. The 2008 Plan permits the granting of
stock awards to officers, members of the Board of Directors, employees and consultants. Awards
under the 2008 Plan may include nonqualified stock options, incentive stock options, grants of
conditioned stock, unrestricted grants of stock, grants of stock contingent upon the attainment of
performance goals, deferred stock units and stock appreciation rights. The options granted prior to
fiscal 2005 generally vest over five years and have terms of ten years. Options granted since
fiscal 2005 generally vest over five years and have terms of seven years. A total of 25,340,000
shares are issuable under these plans, of which 2,091,000 shares were available for grant at
November 30, 2008.
We have adopted two stock plans for which the approval of shareholders was not required: the 2002
Nonqualified Stock Plan (2002 Plan) and the 2004 Inducement Stock Plan (2004 Plan). The 2002 Plan
permits the granting of stock awards to non-executive officer employees and consultants. 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 conditioned stock,
unrestricted grants of stock, grants of stock contingent upon the attainment of performance goals
and stock appreciation rights. The options granted prior to fiscal 2005 generally vest over five
years and have terms of ten years. The options granted since fiscal 2005 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 460,000 shares were available for grant at November 30, 2008.
The 2004 Plan is 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 Stock Market. Awards under the
2004 Plan may include nonqualified stock options, grants of conditioned 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. The options granted since fiscal 2005 generally vest over five years and have terms
of seven years. A total of 1,000,000 shares are issuable under the 2004 Plan, of which 355,000
shares were available for grant at November 30, 2008.
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, 2007 |
9,180 | $ | 22.47 | |||||
Granted |
2,223 | 23.76 | ||||||
Exercised |
(1,109 | ) | 16.96 | |||||
Canceled |
(525 | ) | 28.51 | |||||
Options outstanding, November 30, 2008 |
9,769 | $ | 23.07 | |||||
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For various exercise price ranges, characteristics of outstanding and exercisable stock options at
November 30, 2008 are as follows:
| (Number of shares in thousands) | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Range of | Number of | Remaining | Average | Number of | Average | |||||||||||||||
| Exercise Price: | Shares | Life (in years) | Exercise Price | Shares | Exercise Price | |||||||||||||||
$10.47-18.15 |
1,964 | 3.27 | $ | 14.94 | 1,962 | $ | 14.93 | |||||||||||||
18.75-19.78 |
2,062 | 5.99 | 19.31 | 927 | 19.10 | |||||||||||||||
20.68-24.91 |
1,991 | 4.71 | 22.20 | 1,689 | 22.09 | |||||||||||||||
25.01-30.71 |
1,787 | 5.39 | 28.18 | 682 | 27.45 | |||||||||||||||
30.81-32.40 |
1,965 | 5.02 | 31.37 | 1,030 | 31.23 | |||||||||||||||
$10.47-32.40 |
9,769 | 4.88 | $ | 23.07 | 6,290 | $ | 21.49 | |||||||||||||
The aggregate intrinsic value for options outstanding at November 30, 2008 was $16.5 million.
Options outstanding that have vested and that are expected to vest as of November 30, 2008 are as
follows:
| (In thousands, except per share data) | ||||||||||||||||
| Weighted | ||||||||||||||||
| Average | Weighted | Aggregate | ||||||||||||||
| Outstanding | Remaining | Average | Intrinsic | |||||||||||||
| Options | Life (in years) | Exercise Price | Value (1) | |||||||||||||
Vested |
6,290 | 4.32 | $ | 21.49 | $ | 14,476 | ||||||||||
Expected to vest |
3,092 | 5.89 | 25.96 | 1,774 | ||||||||||||
Total |
9,382 | 4.84 | $ | 22.97 | $ | 16,250 | ||||||||||
(1) The aggregate intrinsic value was calculated based on the difference between the closing price
of our stock on November 30, 2008 of $21.28 and the exercise prices for all in-the-money options
outstanding.
A summary of the status of our restricted stock awards at November 30, 2008 is as follows:
| (In thousands, except per share data) | ||||||||
| Weighted Average | ||||||||
| Number | Grant date | |||||||
| of Shares | Fair value | |||||||
Restricted stock awards outstanding, December 1, 2007 |
— | — | ||||||
Granted |
17 | $ | 26.05 | |||||
Vested |
— | — | ||||||
Forfeited |
(1 | ) | 26.05 | |||||
Restricted stock awards outstanding, November 30, 2008 |
16 | $ | 26.05 | |||||
The restricted stock awards vest semi-annually over a three-year period.
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Table of Contents
A summary of the status of our deferred stock units at November 30, 2008 is as follows:
| (In thousands, except per share data) | ||||||||
| Weighted Average | ||||||||
| Number | Grant date | |||||||
| of Shares | Fair value | |||||||
Deferred stock units outstanding, December 1, 2007 |
28 | $ | 31.75 | |||||
Granted |
29 | 23.72 | ||||||
Issued in the form of common shares |
(10 | ) | 31.17 | |||||
Deferred stock units outstanding, November 30, 2008 |
47 | $ | 26.86 | |||||
Each deferred stock unit (DSU) represents one share of our common stock. All DSU grants have been
made to non-employee members of our Board of Directors. The DSUs are fully vested on date of
grant, but do not have voting rights and can only be converted into common stock when the recipient
ceases being a member of the Board.
The fair value of restricted stock awards and DSUs is equal to the closing price of our common
stock on the date of grant.
The following table provides the classification of stock-based compensation expense as reflected in
our consolidated statements of operations:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Cost of software licenses |
$ | 72 | $ | 129 | $ | 144 | ||||||
Cost of maintenance and services |
1,170 | 1,518 | 1,645 | |||||||||
Sales and marketing |
6,982 | 7,979 | 8,316 | |||||||||
Product development |
4,588 | 5,083 | 5,130 | |||||||||
General and administrative |
6,506 | 8,175 | 7,170 | |||||||||
Total stock-based compensation expense |
19,318 | 22,884 | 22,405 | |||||||||
Income tax benefit included in provision for income taxes |
(4,632 | ) | (5,728 | ) | (6,554 | ) | ||||||
Total stock-based compensation expense, net of tax |
$ | 14,686 | $ | 17,156 | $ | 15,851 | ||||||
We estimated the fair value of options and employee stock purchase plan shares granted in fiscal
years 2008, 2007 and 2006 on the measurement dates using the Black-Scholes option valuation model
with the following weighted average assumptions:
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Stock Purchase Plan: |
||||||||||||
Expected volatility |
23.4 | % | 25.4 | % | 27.2 | % | ||||||
Risk-free interest rate |
4.1 | % | 4.6 | % | 3.1 | % | ||||||
Expected life in years |
1.3 | 1.3 | 1.4 | |||||||||
Expected dividend yield |
None | None | None | |||||||||
Stock Options: |
||||||||||||
Expected volatility |
24.9 | % | 26.5 | % | 29.3 | % | ||||||
Risk-free interest rate |
2.9 | % | 4.5 | % | 4.8 | % | ||||||
Expected life in years |
4.8 | 4.9 | 4.8 | |||||||||
Expected dividend yield |
None | None | None | |||||||||
For each option award, the expected life in years is based on historical exercise patterns and
post-vesting termination behavior, and separate groups of employees that have different historical
exercise patterns are considered separately for valuation purposes. Expected volatility is based
on historical volatility of our stock, and the risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant. We do not currently pay cash dividends on our
common stock and do not anticipate doing so for the foreseeable future. Accordingly, our expected
dividend yield is zero.
For each stock purchase plan award, the expected life in years is based on the period of time
between the beginning of the offering period and the date of purchase, plus an additional holding
period of three months. Expected volatility is based on historical volatility of the company’s
stock, and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at each
purchase period.
47
Table of Contents
Based on the above assumptions, the weighted average estimated fair value of options granted in
fiscal years 2008, 2007 and 2006 was $6.46, $10.11 and $8.38 per share, respectively. We amortize
the estimated fair value of options to expense over the vesting period. The weighted average
estimated fair value for shares issued under our 1991 Employee Stock Purchase Plan, or ESPP, in
fiscal years 2008, 2007 and 2006 was $7.24, $7.04 and $6.70 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 and dividend practices,
if any, may require changes in our assumptions, which could materially affect the calculation of
fair value.
Total unrecognized stock-based compensation expense, net of expected forfeitures, related to
unvested stock options and unvested restricted stock awards amounted to $23.5 million at November
30, 2008. These costs are expected to be recognized over a weighted average period of 3.1 years.
SFAS 123R requires the cash flows resulting from excess tax benefits related to stock compensation
to be classified as cash flows from financing activities when realized. Excess tax benefits from
the exercise of stock options, classified as a cash flow from financing activities, were $1.7
million, $2.9 million and $0.9 million in fiscal years 2008, 2007 and 2006, respectively.
During fiscal years 2008, 2007 and 2006 the following activity occurred under our plans:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Total intrinsic value of stock options on date exercised |
$ | 14,462 | $ | 32,767 | $ | 6,615 | ||||||
Total fair value of DSUs on date vested |
695 | 872 | — | |||||||||
Total fair value of restricted stock on date vested |
— | 2,083 | 2,670 | |||||||||
Employee Stock Purchase Plan
The ESPP permits eligible employees to purchase up to a maximum of 4,000,000 shares of our common
stock through accumulated payroll deductions. The ESPP has a 27-month offering period comprised of
nine three month purchase periods. The purchase price of the stock is equal to 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. If the market price at any of the nine
purchase periods is less than the market price on the first date of the 27-month offering period,
subsequent to the purchase, the offering period is cancelled and the employee is entered into a new
27-month offering period with the then current market price as the new base price. We issued
301,000 shares, 292,000 shares and 283,000 shares with weighted average purchase prices of $22.30,
$21.42 and $19.35 per share, respectively, in fiscal years 2008, 2007 and 2006, respectively. At
November 30, 2008, approximately 470,000 shares were available and reserved for issuance under the
ESPP.
Note 9: Retirement Plan
We maintain a retirement plan covering all U.S. employees under Section 401(k) of the Internal
Revenue Code. Company contributions to the plan are at the discretion of the Board of Directors and
totaled approximately $5.2 million, $5.5 million and $5.3 million for fiscal years 2007, 2006 and
2005, respectively.
Note 10: Income Taxes
The components of pretax income are as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
United States |
$ | 49,462 | $ | 50,485 | $ | 28,613 | ||||||
Non-U.S. |
24,548 | 14,562 | 16,970 | |||||||||
Total |
$ | 74,010 | $ | 65,047 | $ | 45,583 | ||||||
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Table of Contents
The provisions for income taxes are comprised of the following:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Current: |
||||||||||||
Federal |
$ | 20,131 | $ | 19,046 | $ | 15,265 | ||||||
State |
1,639 | 2,645 | 2,564 | |||||||||
Foreign |
9,900 | 5,203 | 6,827 | |||||||||
Total current |
31,670 | 26,894 | 24,656 | |||||||||
Deferred: |
||||||||||||
Federal |
(2,499 | ) | (2,896 | ) | (6,622 | ) | ||||||
State |
(454 | ) | (215 | ) | (947 | ) | ||||||
Foreign |
(1,003 | ) | (1,016 | ) | (905 | ) | ||||||
Total deferred |
(3,956 | ) | (4,127 | ) | (8,474 | ) | ||||||
Total |
$ | 27,714 | $ | 22,767 | $ | 16,182 | ||||||
The tax effects of significant items comprising our deferred taxes are as follows:
| (In thousands) | ||||||||
| November 30, | 2008 | 2007 | ||||||
Deferred tax assets: |
||||||||
Accounts receivable |
$ | 1,911 | $ | 2,408 | ||||
Other current assets |
410 | 588 | ||||||
Capitalized research costs |
5,546 | 6,971 | ||||||
Accrued compensation |
2,804 | 914 | ||||||
Accrued liabilities and other |
17,059 | 5,612 | ||||||
Deferred revenue |
1,061 | 1,336 | ||||||
Stock-based compensation |
9,609 | 6,756 | ||||||
Tax credit and loss carryforwards |
34,791 | 32,534 | ||||||
Gross deferred tax assets |
73,191 | 57,119 | ||||||
Valuation allowance |
(21,100 | ) | (17,201 | ) | ||||
Total deferred tax assets |
52,091 | 39,918 | ||||||
Deferred tax liabilities: |
||||||||
Goodwill |
(4,414 | ) | (2,635 | ) | ||||
Depreciation and amortization |
(13,818 | ) | (9,474 | ) | ||||
Total deferred tax liabilities |
(18,232 | ) | (12,109 | ) | ||||
Total |
$ | 33,859 | $ | 27,809 | ||||
The valuation allowance primarily applies to net operating loss carryforwards, unutilized tax
credits and capital loss carryforwards where realization is not assured. The increase in the
valuation allowance during fiscal 2008 and fiscal 2007 primarily related to the creation or
acquisition of net operating loss and capital loss carryforwards. Of the total valuation allowance
at November 30, 2008, we would credit goodwill for $9.0 million if we reversed such valuation
allowances upon utilization of the balances related to net operating losses obtained in
acquisitions.
At November 30, 2008, we have net operating loss carryforwards of $39.7 million expiring on various
dates through 2026 and $27.7 million that may be carried forward indefinitely. At November 30,
2008, we have tax credit carryforwards of approximately $11.0 million expiring on various dates
through 2028 and $0.7 million that may be carried forward indefinitely.
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A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Tax at U.S. federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign rate differences |
1.7 | 1.5 | 1.1 | |||||||||
Extraterritorial income exclusion |
— | (0.3 | ) | (3.3 | ) | |||||||
State income taxes, net |
1.7 | 2.4 | 2.3 | |||||||||
Research credits |
(2.3 | ) | (2.6 | ) | — | |||||||
Tax-exempt interest |
(2.7 | ) | (4.6 | ) | (4.9 | ) | ||||||
Nondeductible stock-based compensation |
3.2 | 3.3 | 3.8 | |||||||||
Other |
0.9 | 0.3 | 1.5 | |||||||||
Total |
37.5 | % | 35.0 | % | 35.5 | % | ||||||
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in a multitude of jurisdictions across our global operations. We recognize
potential liabilities and record tax liabilities for anticipated tax audit issues in the United
States and other tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. We adjust these reserves in light of changing facts and
circumstances; however, due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the
tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate
assessment, an additional charge to expense would result. If payment of these amounts ultimately
proves to be less than the recorded amounts, the reversal of the liabilities may result in income
tax benefits being recognized in the period when we determine the liabilities are no longer
necessary.
The total amount of gross unrecognized tax benefits as of December 1, 2007 (the date of adoption of
FIN 48) was $4.4 million which was reclassified to noncurrent liabilities. In addition, as of the
date of adoption, $4.3 million of unrecognized benefits would affect our effective tax rate if
realized. The adoption of FIN 48 resulted in a nominal decrease to our retained earnings.
We recognize interest and penalties related to uncertain tax positions as a component of our
provision for income taxes. In fiscal 2008, we included $0.5 million of interest expense and
penalties in the provision for income taxes. We had accrued $0.9 million of estimated interest and
penalties at November 30, 2008.
A reconciliation of the balance of our unrecognized tax benefits is as follows:
| (In thousands) | ||||
| Total | ||||
Balance, December 1, 2007 |
$ | 4,367 | ||
Tax position related to current year |
325 | |||
Settlements with tax authorities |
(1,112 | ) | ||
Tax positions acquired |
1,204 | |||
Balance, November 30, 2008 |
$ | 4,784 | ||
Domestically, we have completed the IRS audit for the periods through fiscal 2005. Certain
issues are currently in the appeals process. State taxing authorities are currently examining our
income tax returns for years through fiscal 2005. With all domestic audit issues considered in the
aggregate, we believe it was reasonably possible that, as of November 30, 2008 the unrecognized tax
benefits related to these audits could decrease (whether by payment, release, or a combination of
both) in the next 12 months by as much as $1.8 million. Our U.S. federal and, with some exceptions,
our state income tax returns have been examined or are closed by statute for all years prior to
fiscal 2003, and we are no longer subject to audit for those periods.
Internationally, tax authorities for certain non-U.S. jurisdictions are also examining returns
affecting unrecognized tax benefits, none of which are material to our balance sheet, cash flows or
statements of operations. With some exceptions, we are generally no longer subject to tax
examinations in non-U.S. jurisdictions for years prior to fiscal 2002.
We believe that we have adequately provided for any reasonably foreseeable outcomes related to our
tax audits and that any settlement will not have a material adverse effect on our consolidated
financial position or results of operations. However, there can be no assurances as to the possible
outcomes.
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Note 11: Long-term Debt, Commitments and Contingencies
Long-term Debt
In connection with the purchase of a building adjacent to our headquarters building, we were
required to assume the existing mortgage under the terms of the agreement. The mortgage, secured
by the building, had a remaining principal balance of $2.4 million with a fixed annual interest
rate of 8.05% at the time of the purchase. We may repay the entire outstanding balance at any
time, subject to a potential penalty based on interest rates in effect at that time. The final
payment is due in June 2012.
Future principal and interest payments are as follows:
| (In thousands) | ||||||||
| Principal | Interest | |||||||
2009 |
$ | 330 | $ | 97 | ||||
2010 |
358 | 69 | ||||||
2011 |
388 | 40 | ||||||
2012 |
276 | 8 | ||||||
Total |
$ | 1,352 | $ | 214 | ||||
Leasing Arrangements
We lease certain facilities and equipment under non-cancelable operating lease arrangements.
Future minimum rental payments under these leases are as follows at November 30, 2008:
| (In thousands) | ||||
2009 |
$ | 14,001 | ||
2010 |
12,401 | |||
2011 |
9,676 | |||
2012 |
7,539 | |||
2013 |
4,497 | |||
Thereafter |
1,852 | |||
Total |
$ | 49,966 | ||
Total rent expense, net of sub-rental income which is insignificant, under operating lease
arrangements was approximately $11.2 million, $11.5 million and $11.0 million in fiscal years 2008,
2007 and 2006, respectively.
Guarantees and Indemnification Obligations
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.
On June 23, 2006, we received written notice that the Enforcement Staff in the Boston,
Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices
during the period December 1, 1995 through November 30, 2002. On December 19, 2006, the SEC
informed us that it had issued a formal order of investigation into our option-granting practices
during the period December 1, 1995 through the present. We are unable to predict with certainty
what consequences may arise from the SEC investigation. We have already incurred, and expect to
continue to incur, significant legal expenses arising from the investigation. 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 did not resolve the pending SEC
inquiry. The SEC has not indicated to us whether it has reviewed our restated financial statements,
and any SEC review could lead to further restatements or other modifications of our financial
statements.
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On September 5, 2008, we and the other named defendants entered into a Stipulation of Settlement
(the “Settlement Agreement”) resolving all pending shareholder derivative lawsuits relating to our
historical stock option-granting practices. As previously reported, three parties identifying
themselves as our shareholders purporting to act on our behalf filed separate derivative complaints
(two of which were consolidated after filing) against certain of our present and
former directors and officers in state and federal courts in Massachusetts. The complaints alleged breaches of
fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from
the allegedly improper backdating of certain stock option grants. A Special Litigation Committee
was formed by our Board of Directors to investigate and determine our response to the complaints.
On December 2, 2008, following a hearing, the Massachusetts Superior Court entered an order
approving the Settlement Agreement. The time to file any appeals of that order has expired with no
appeals having been filed. No further court or other approvals of the settlement are required.
Under the terms of the Settlement Agreement, which we entered into on the determination of the
Special Litigation Committee of our Board of Directors, we agreed to make certain corporate
governance changes principally relating to stock option-granting procedures. The Settlement
Agreement also reflects that eight of the individual defendants, previously (i) amended any
below-market, unexercised stock options they received to increase the exercise prices to an amount
equal to the fair market value of our common stock as of the actual measurement dates of those
options for accounting and tax purposes, and (ii) with respect to restated stock options previously
exercised, paid us the amount by which the fair market value of those options exceeded the exercise
price on the measurement date for accounting and tax purposes, reduced by the amount of any federal
and state taxes already paid by those individuals in connection with such exercises. The total
amount of the above-described reimbursements is valued at approximately $7.0 million (net of tax
payments), based on the transfer of shares of our common stock, the cancellation of vested stock
options, the repricing of unexercised stock options and cash consideration. The Settlement
Agreement also provided for the payment of $1.9 million to plaintiffs’ attorneys for their fees and
expenses, which amount was paid on our behalf by our insurers. Except as described above, we and
the individual defendants in these lawsuits agreed to the terms of the Settlement Agreement without
admitting any liability, fault or wrongdoing or incurring any additional liability of any kind.
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.
Note 12: Business Segments and International Operations
At the beginning of fiscal 2008, we reorganized our business into five operating segments. The
reorganization resulted in the separation of the DataXtend Division as its own operating segment
from the Enterprise Infrastructure Division and the combination of the remainder of the Enterprise
Infrastructure Division with the OpenEdge Division, which created the OpenEdge and SOA Group. Our
principal operating segment conducts business as the OpenEdge and SOA Group. The OpenEdge and SOA
Group provides the Progress® OpenEdge platform and the Sonic and Actional product sets,
interoperable, best-in-class service infrastructure products used to build, deploy and manage a
service-oriented architecture. Another significant operating segment, DataDirect Technologies,
provides standards-based data connectivity software. Our other three operating segments include
the Apama Division, the DataXtend Division and the EasyAsk Division.
Segment information is presented in accordance with SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information.” This standard is based on a management approach, which
requires segmentation based upon our internal organization and disclosure of revenue and operating
income based upon internal accounting methods. Our chief decision maker (CDM) is our Chief
Executive Officer.
For fiscal 2008, we have two operating segments which met the requirements for separate disclosure:
OpenEdge and SOA Group and DataDirect Technologies. The other three operating segments are below
the threshold for separate disclosure and are included in the Other segment. We do not manage our
assets, capital expenditures, other income or provision for income taxes by segment. We manage
such items on a consolidated company basis.
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The following table provides revenue and income from operations from our reportable segments for
fiscal year 2008:
| (In thousands) | ||||
| Year Ended November 30, | 2008 | |||
Revenue: |
||||
OpenEdge and SOA segment |
$ | 412,590 | ||
DataDirect Technologies segment |
77,507 | |||
Other segment |
33,890 | |||
Reconciling items |
(8,427 | ) | ||
Total |
$ | 515,560 | ||
Income (loss) from operations: |
||||
OpenEdge and SOA segment |
$ | 118,361 | ||
DataDirect Technologies segment |
10,743 | |||
Other segment |
(9,711 | ) | ||
Reconciling items |
(55,010 | ) | ||
Total |
$ | 64,383 | ||
The reconciling items within revenue primarily represent intersegment sales, which are accounted
for as if sold under an equivalent arms-length basis arrangement. Amounts included under
reconciling items within income from operations represent amortization of acquired intangibles,
restructuring expenses, stock-based compensation, acquisition-related expenses and certain
unallocated administrative expenses, which are not considered in the CDM’s evaluation of segment
performance.
We did not include prior year comparisons as it is not practical to restate the prior year’s data
into the fiscal 2008 structure or the fiscal 2008 data into the fiscal 2007 structure.
The following table sets forth our revenue and income from operations from our reportable segments
for fiscal years 2007 and 2006:
| (In thousands) | ||||||||
| Year Ended November 30, | 2007 | 2006 | ||||||
Revenue: |
||||||||
OpenEdge segment |
$ | 366,139 | $ | 334,541 | ||||
Enterprise Infrastructure segment |
63,599 | 59,117 | ||||||
DataDirect segment |
73,776 | 62,316 | ||||||
Reconciling items |
(10,014 | ) | (8,911 | ) | ||||
Total |
$ | 493,500 | $ | 447,063 | ||||
Income (loss) from operations: |
||||||||
OpenEdge segment |
$ | 129,309 | $ | 123,425 | ||||
Enterprise Infrastructure segment |
(23,654 | ) | (29,068 | ) | ||||
DataDirect segment |
8,722 | 3,345 | ||||||
Reconciling items |
(57,161 | ) | (56,759 | ) | ||||
Total |
$ | 57,216 | $ | 40,943 | ||||
The reconciling items within revenue primarily represent intersegment sales, which are accounted
for as if sold under an equivalent arms-length basis arrangement. Amounts included under
reconciling items within income from operations represent amortization of acquired intangibles,
stock-based compensation and certain unallocated administrative expenses, which are not considered
in the CDM’s evaluation of segment performance.
With the acquisition of IONA in the fourth quarter of fiscal 2008, we have reorganized into four
business units for fiscal 2009: (1) OpenEdge which includes the Progress OpenEdge and Progress
EasyAsk product lines; (2) Apama which includes the Progress Apama product lines; (3) Integration
Infrastructure which includes the Progress Sonic, Progress Actional, Orbix, Artix and FUSE product
lines; and (4) Data Infrastructure which includes the DataDirect Connect, DataDirect Shadow,
Progress DataXtend and Progress ObjectStore product lines. We expect to have three operating
segments which meet the requirements for separate financial statement disclosure: the OpenEdge
segment, the Enterprise Infrastructure segment (which includes our Integration Infrastructure
business unit and our Apama business unit), and the Data Infrastructure segment. In the first
quarter of fiscal 2009, we will realign our disclosures to conform to this new business unit
structure.
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Total revenue by significant product line, regardless of which segment generated the revenue, is as
follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
DataDirect |
$ | 77,518 | $ | 73,876 | $ | 61,891 | ||||||
Enterprise Infrastructure |
106,615 | 83,028 | 68,648 | |||||||||
Progress OpenEdge and other |
331,427 | 336,596 | 316,524 | |||||||||
Total |
$ | 515,560 | $ | 493,500 | $ | 447,063 | ||||||
Our revenues are derived from licensing our products, and from related services, which consist of
maintenance and consulting and education. Information relating to revenue from external customers
by revenue type is as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
Software licenses |
$ | 192,217 | $ | 187,080 | $ | 175,845 | ||||||
Maintenance |
272,532 | 252,562 | 230,072 | |||||||||
Consulting and education |
50,811 | 53,858 | 41,146 | |||||||||
Total |
$ | 515,560 | $ | 493,500 | $ | 447,063 | ||||||
In the following table, revenue attributed to North America includes shipments to customers in the
United States and Canada and licensing to certain multinational organizations. Revenue from Europe,
Middle East and Africa (EMEA), Latin America and Asia Pacific includes shipments to customers in
each region, not including certain multinational organizations, plus export shipments into each
region that are billed from the United States. Information relating to revenue from external
customers from different geographical areas is as follows:
| (In thousands) | ||||||||||||
| Year Ended November 30, | 2008 | 2007 | 2006 | |||||||||
North America |
$ | 216,574 | $ | 211,782 | $ | 203,265 | ||||||
EMEA |
234,037 | 225,164 | 196,104 | |||||||||
Latin America |
32,902 | 29,158 | 24,346 | |||||||||
Asia Pacific |
32,047 | 27,396 | 23,348 | |||||||||
Total |
$ | 515,560 | $ | 493,500 | $ | 447,063 | ||||||
Revenue from the United Kingdom totaled $68.8 million, $72.0 million and $64.1 million for fiscal
years 2008, 2007 and 2006, respectively. No other country outside of the United States accounted
for more than 10% of our consolidated total revenue in any year presented. Long-lived assets
totaled $60.4 million, $60.2 million and $56.4 million in the United States and $8.6 million, $10.6
million and $6.6 million outside of the United States at the end of fiscal years 2008, 2007 and
2006, respectively. No individual country outside of the United States accounted for more than 10%
of our consolidated long-lived assets. Long-lived assets exclude goodwill and intangible assets,
which are not allocated to specific geographies as it is impracticable to do so.
Note 13: Business Combinations
Fiscal 2008 Transactions:
| • | On February 5, 2008, we acquired, through a wholly-owned subsidiary, the stock of Xcalia SA (Xcalia) for a cash payment of $4.9 million, net of cash acquired. Xcalia is a leader in providing data access and integration for service oriented architectures. The purpose of the acquisition was to expand the product offerings within the DataDirect product line. Upon the closing of the transaction, Xcalia became part of our DataDirect Technologies operating segment. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of Xcalia in our operating results from February 5, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $0.9 million. We paid the purchase price in cash from available funds. |
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| • | On June 13, 2008, we acquired substantially all of the assets and assumed certain liabilities of Mindreef, Inc. (Mindreef) for a cash payment of $6.0 million, net of cash acquired. Mindreef develops and sells quality assurance and validation solutions for SOA deployments. The purpose of the acquisition was to expand the capabilities of our Actional product-line. The Mindreef assets were combined with our OpenEdge and SOA segment. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of Mindreef in our operating results from June 13, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $0.2 million. We paid the purchase price in cash from available funds. | ||
| • | On September 12, 2008, we completed the acquisition of IONA Technologies PLC (IONA) for $4.05 per share in cash, representing a cash payment of approximately $125.1 million, net of cash acquired. IONA is a provider of SOA infrastructure products and services. The purpose of the acquisition was to broaden our Enterprise Infrastructure product lines. Upon the closing of the transaction, IONA became part of our OpenEdge and SOA operating segment. We accounted for the acquisition as a purchase and accordingly, we included the results of operations of IONA in our operating results from September 12, 2008, the date of acquisition. In addition, we paid direct transaction costs related to this acquisition of $3.2 million. We paid the purchase price in cash from available funds. |
For all acquisitions we obtained valuations from independent appraisers for the amounts assigned to
intangible assets. The preliminary allocation of the purchase price was based upon a preliminary
valuation and our estimates and assumptions are subject to change within the purchase price
allocation period (generally one year from the acquisition date). The primary areas of the purchase
price allocation that are not yet finalized relate to restructuring costs, certain accruals, income
and non-income based taxes and residual goodwill. The preliminary allocation of the purchase
prices, on an aggregate basis, was as follows:
| (In thousands) | ||||
| Total | ||||
Cash and short-term investments |
$ | 28,562 | ||
Accounts receivable |
5,625 | |||
Property and equipment |
1,776 | |||
Investments in auction rate securities |
17,000 | |||
Other assets |
3,437 | |||
Acquired intangible assets (assigned lives of 1 to 8 years) |
77,120 | |||
Goodwill (tax deductible) |
2,074 | |||
Goodwill (not deductible for tax purposes) |
83,576 | |||
Accounts payable and other liabilities |
(34,019 | ) | ||
Deferred revenue |
(9,120 | ) | ||
Deferred tax liabilities |
(9,212 | ) | ||
Total |
166,819 | |||
Less: cash acquired |
(26,536 | ) | ||
Net cash paid |
$ | 140,283 | ||
The value of the intangible assets acquired as part of the acquisition of IONA was $52.2 million
for purchased technology and $16.9 million for customer-related and other intangibles with a
weighted average amortization period of 7.3 years and 7.0 years for each class of intangible
assets, respectively. The value of goodwill (not deductible for tax purposes) associated with the
acquisition of IONA was $79.3 million.
The following table sets forth supplemental, unaudited pro forma financial information that assumes
the acquisition of IONA was completed at the beginning of each pro forma period presented. The
information for the twelve months ended November 30, 2008 includes our historical results for
fiscal 2008 and the historical results of IONA for the nine-month period ended June 30, 2008, due
to different fiscal period ends. The information for the twelve months ended November 30, 2007
includes our historical results for fiscal 2007 and the historical results of IONA for the
twelve-month period ended September 30, 2007, due to different fiscal periods.
The unaudited pro forma results include estimates and assumptions regarding increased amortization
of intangible assets related to the acquisition, decreased interest income related to cash paid for
the purchase price of the acquisition and the related tax effects, which we believe are reasonable.
However, pro forma results are not necessarily indicative of the results that would have occurred
if the acquisitions had occurred on the date indicated, or that may result in the future.
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| (In thousands, except per share data, unaudited) | ||||||||
| Year Ended November 30, | 2008 | 2007 | ||||||
Pro forma revenue |
$ | 567,546 | $ | 575,852 | ||||
Pro forma net income |
27,385 | 33,116 | ||||||
Pro forma diluted earnings per share |
0.64 | 0.75 | ||||||
We have not included financial information for Xcalia and Mindreef in the pro forma results as the
historical operations were not significant to our consolidated financial statements either
individually or in the aggregate.
Fiscal 2006 Transactions:
| • | 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 a purchase price of approximately $28.7 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 our SOA product offerings. Upon the closing of the transaction, Actional became part of our Enterprise Infrastructure 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. In addition, we paid direct transaction costs related to this acquisition of $0.5 million. We paid $15.2 million of the purchase price in cash from available funds with the remainder approximating $13.5 million paid through the issuance of 460,011 shares of our common stock. | ||
| • | 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 $51.1 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. In addition, we paid direct transaction costs related to this acquisition of $0.8 million. 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 $5.6 million, net of cash acquired. Pantero is a provider of technology for validating business data in integration projects. The purpose of the acquisition was to broaden the product offerings within our Enterprise Infrastructure Division. Upon the closing of the transaction, Pantero became part of our Enterprise Infrastructure 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. In addition, we paid direct transaction costs related to this acquisition of $0.1 million. We paid the purchase price in cash from available funds. | ||
| • | On November 6, 2006, we acquired, through a wholly-owned subsidiary, the stock of OpenAccess Software Inc. for an aggregate purchase price of $6.0 million, net of cash acquired. Open Access is a provider of development toolkits for rapid development of data connectivity drivers. The purpose of the acquisition was to broaden the product offerings of DataDirect. Upon the closing of the transaction Open Access became part of our DataDirect operating unit. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of OpenAccess in our operating results from November 6, 2006, the date of acquisition. We paid the purchase price in cash from available funds. |
Acquisition-related expenses for 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. The
value of in-process research and development was determined based on an appraisal from an
independent third party.
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For all acquisitions we obtained valuations from independent appraisers for the amounts assigned to
intangible assets. The final allocation of the purchase prices was as follows:
| (In thousands) | ||||
| Total | ||||
Assets and liabilities, including cash |
$ | 6,734 | ||
Acquired intangible assets (assigned lives of 1 to 10 years) |
41,859 | |||
Goodwill (not deductible for tax purposes) |
71,586 | |||
In-process research and development |
900 | |||
Deferred tax liabilities |
(8,864 | ) | ||
Total purchase price |
112,215 | |||
Less: cash acquired |
(19,416 | ) | ||
Less: stock issuance |
(13,511 | ) | ||
Net cash paid |
$ | 79,288 | ||
We have not presented pro forma financial information as the historical operations of Actional,
NEON, Pantero and OpenAccess were not significant to our consolidated financial statements either
individually or in the aggregate.
In connection with certain of the above acquisitions, we established reserves for exit costs
related to facilities closures and related costs and employee severance included as part of the
purchase price allocation. The amounts included under cash disbursements are net of proceeds
received from subrental agreements. A summary of activity is as follows:
| (In thousands) | ||||||||||||
| Facilities Closures | Employee Severance | |||||||||||
| and Related Costs | and Related Benefits | Total | ||||||||||
Balance, December 1, 2005 |
$ | 1,798 | — | $ | 1,798 | |||||||
Establishment of reserve related to Actional |
— | $ | 277 | 277 | ||||||||
Establishment of reserve related to Neon |
657 | — | 657 | |||||||||
Establishment of reserve related to Pantero |
— | 113 | 277 | |||||||||
Cash disbursements |
(891 | ) | (390 | ) | (1,281 | ) | ||||||
Balance, November 30, 2006 |
1,564 | — | 1,564 | |||||||||
Reversal of previously established reserve |
(365 | ) | — | (365 | ) | |||||||
Cash disbursements |
(863 | ) | — | (863 | ) | |||||||
Balance, November 30, 2007 |
336 | — | 336 | |||||||||
Establishment of reserve related to IONA |
7,617 | 3,172 | 10,789 | |||||||||
Cash disbursements |
(560 | ) | (1,987 | ) | (2,547 | ) | ||||||
Balance, November 30, 2008 |
$ | 7,393 | $ | 1,185 | $ | 8,578 | ||||||
The balance of the employee severance and related benefits is expected to be paid in 2009. The
balance of the facilities closures and related costs is expected to be paid over a period of time
ending in 2013.
Note 14: Restructuring Charge
Fiscal 2008 Restructuring Plan
During the fourth quarter of fiscal 2008, our management approved, committed to and initiated plans
to restructure and improve efficiencies in our operations as a result of certain management and
organizational changes and our recent acquisitions. The total expected costs associated with the
restructuring aggregated to $6.9 million, primarily related to employee severance and facilities
related expenses, and were recorded to the restructuring expense line item within our consolidated
statements of operations. The excess facilities and other costs represent termination costs of
automobile leases for employees that have been terminated and excess facilities costs for unused
space.
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A summary of activity is as follows:
| (In thousands) | ||||||||||||
| Excess Facilities | Employee Severance | |||||||||||
| and Other Costs | and Related Benefits | Total | ||||||||||
Balance, December 1, 2007 |
$ | — | $ | — | $ | — | ||||||
Establishment of reserve related to restructuring |
676 | 6,239 | 6,915 | |||||||||
Cash disbursements |
— | (748 | ) | (748 | ) | |||||||
Balance, November 30, 2008 |
$ | 676 | $ | 5,491 | $ | 6,167 | ||||||
The balance of the employee severance and related benefits is expected to be paid in 2009. The
balance of the excess facilities and related costs is expected to be paid over a period of time
ending in 2010.
Note 15: Selected Quarterly Financial Data (unaudited)
| (In thousands, except per share data) | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
2008: |
||||||||||||||||
Revenue |
$ | 121,567 | $ | 127,942 | $ | 126,620 | $ | 139,431 | ||||||||
Gross profit |
98,957 | 105,246 | 103,885 | 115,583 | ||||||||||||
Income from operations |
17,148 | 20,604 | 18,107 | 8,524 | ||||||||||||
Net income |
12,836 | 14,471 | 12,537 | 6,452 | ||||||||||||
Diluted earnings per share |
0.29 | 0.33 | 0.30 | 0.16 | ||||||||||||
Basic earnings per share |
0.30 | 0.35 | 0.31 | 0.16 | ||||||||||||
2007: |
||||||||||||||||
Revenue |
$ | 115,229 | $ | 119,642 | $ | 121,804 | $ | 136,825 | ||||||||
Gross profit |
94,804 | 98,398 | 100,284 | 113,258 | ||||||||||||
Income from operations |
12,353 | 11,289 | 17,803 | 15,771 | ||||||||||||
Net income |
8,738 | 8,391 | 13,047 | 12,104 | ||||||||||||
Diluted earnings per share |
0.20 | 0.19 | 0.30 | 0.27 | ||||||||||||
Basic earnings per share |
0.21 | 0.20 | 0.31 | 0.29 | ||||||||||||
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) 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 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 effective to ensure
that the information required to be disclosed in the reports filed or submitted by us under the
Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the
requisite time periods.
(b) Scope of Management’s Annual Report on Internal Control over Financial Reporting
For purposes of evaluating the internal controls over financial reporting, management determined
that IONA’s internal controls would be excluded from the fiscal 2008 internal control assessment.
In September 2008, IONA was acquired for an aggregate purchase price of approximately $125 million,
net of cash acquired. IONA represented three percent of total assets at the end of fiscal 2008 and
three percent of total revenue and one percent of net income for fiscal 2008. Management has
excluded IONA from our Report on Internal Control over Financial Reporting for fiscal 2008 due to
the timing of the closing date of the acquisition and the expectation that controls over financial
reporting of information related to IONA will be changed to conform with our internal controls over
financial reporting in fiscal 2009. Activity related to IONA will be included in management’s
fiscal 2009 internal control assessment.
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(c) Management’s Annual Report on Internal Control Over Financial Reporting
The management of Progress Software Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Our internal control system was designed to provide reasonable
assurance to our management and board of directors regarding the preparation and fair presentation
of published financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of
November 30, 2008. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on our assessment we believe that, as of November 30, 2008, our internal control
over financial reporting is effective based on those criteria.
The effectiveness of our internal control over financial reporting as of November 30, 2008 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
(d) Changes in internal control over financial reporting
Notwithstanding the acquisition of IONA, no changes in our internal control over financial
reporting occurred during the quarter ended November 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Progress Software Corporation
Bedford, Massachusetts
Progress Software Corporation
Bedford, Massachusetts
We have audited the internal control over financial reporting of Progress Software Corporation and
subsidiaries (the “Company”) as of November 30, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in Scope of Management’s Annual Report on Internal Control Over Financial
Reporting, management excluded from its assessment the internal control over financial reporting at
IONA Technologies PLC, which was acquired on September 12, 2008 and whose financial statements
constitute 3% of total assets, 3% of revenue, and 1% of net income of the consolidated financial
statement amounts as of and for the year ended November 30, 2008. Accordingly, our audit did not
include the internal control over financial reporting at IONA Technologies PLC. The Company’s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel 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. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2008, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended November
30, 2008 of the Company and our report dated January 29, 2009 expressed an unqualified opinion on
those financial statements.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 29, 2009
Boston, Massachusetts
January 29, 2009
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Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and
Corporate Governance
The information regarding executive officers set forth under the caption “Executive Officers of the
Registrant” in Item 1 of this Annual Report is incorporated herein by reference.
The information required by this Item 10 is incorporated by reference to our definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, which will be filed
with the Securities and Exchange Commission (SEC) not later than 120 days after November 30, 2008.
The information regarding our code of ethics and audit committee required by this Item 10 is
incorporated by reference to our definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on April 23, 2009, which will be filed with the SEC not later than 120 days after
November 30, 2008.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, which will be filed
with the SEC not later than 120 days after November 30, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is incorporated by reference to our definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, which will be filed
with the SEC not later than 120 days after November 30, 2008.
Information related to securities authorized for issuance under equity compensation plans as of
November 30, 2008 is as follows:
| (In thousands, except per share data) | ||||||||||||
| Number of | Weighted-average | Number of | ||||||||||
| Securities to be | Exercise | Securities | ||||||||||
| Issued Upon | Price of | Remaining | ||||||||||
| Exercise of | Outstanding | Available | ||||||||||
| Outstanding | Options, | For | ||||||||||
| Options, Warrants | Warrants | Future | ||||||||||
| Plan Category | and Rights | and Rights | Issuance | |||||||||
Equity compensation plans approved by
shareholders (1) |
6,846 | (2) | $ | 23.09 | 2,561 | (3) | ||||||
Equity compensation plans not approved
by shareholders (4) |
2,923 | 23.01 | 815 | |||||||||
Total |
9,769 | $ | 23.07 | 3,376 | ||||||||
| (1) | Consists of the 1992 Incentive and Nonqualified Stock Option Plan, 1994 Stock Incentive Plan, 1997 Stock Incentive Plan, 2008 Stock Option and Incentive Plan and 1991 Employee Stock Purchase Plan (ESPP). | |
| (2) | Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period. | |
| (3) | Includes 470,000 shares available for future issuance under the ESPP. | |
| (4) | Consists of the 2002 Nonqualified Stock Plan and the 2004 Inducement Plan described below. |
We have adopted two equity compensation plans, the 2002 Nonqualified Stock Plan (2002 Plan) and the
2004 Inducement Stock Plan (2004 Plan), for which the 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 Global Select Market.
Executive officers and members of the Board of Directors are not eligible for awards under the 2002
Plan. An executive officer or director would be eligible to receive an award under the 2004 Plan
only as an
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inducement to join us. Awards under the 2002 Plan and the 2004 Plan may include nonqualified stock
options, grants of conditioned stock, unrestricted grants of stock, grants of stock contingent upon
the attainment of performance goals and stock appreciation rights. A total of 7,500,000 shares are
issuable under the two plans.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The information required by this Item 13 is incorporated by reference to our definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, which will be filed
with the SEC not later than 120 days after November 30, 2008.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2009, which will be filed
with the SEC not later than 120 days after November 30, 2008.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements (included in Item 8 of this report on Form 10-K):
– Report of Independent Registered Public Accounting Firm
– Consolidated Balance Sheets as of November 30, 2008 and 2007
– Consolidated Statements of Operations for the years ending November 30, 2008, 2007 and 2006
– Consolidated Statements of Shareholders’ Equity for the years ending November 30, 2008, 2007 and 2006
– Consolidated Statements of Cash Flows for the years ending November 30, 2008, 2007 and 2006
– Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedules are omitted as they are either not required or the information is
otherwise included in the consolidated financial statements.
(b) Exhibits
Documents listed below, except for documents followed by parenthetical numbers, are being filed as
exhibits. Documents followed by parenthetical numbers are not being filed herewith and, pursuant to
Rule 12b-32 of the General Rules and Regulations promulgated by the SEC under the Securities
Exchange Act of 1934 (the Act), reference is made to such documents as previously filed as exhibits
with the SEC. Our file number under the Act is 0-19417.
2.1
|
Agreement and Plan of Merger dated January 18, 2006 by and among Progress Software Corporation, ACTC Acquisition Corp., Actional Corporation, certain stockholders of Actional Corporation and Standish O’Grady, as the Company Stockholder Representative (1) | |
2.2
|
Implementation Agreement, dated as of June 25, 2008, by and among IONA Technologies PLC, SPK Acquisitions Limited and, with respect to Section 7.4 and Section 7.7 only, Progress Software Corporation (2) | |
3.1
|
Restated Articles of Organization, as amended (3) | |
3.2
|
By-Laws, as amended and restated (4) | |
4.1
|
Specimen certificate for the Common Stock (5) | |
10.1*
|
1992 Incentive and Nonqualified Stock Option Plan (6) | |
10.2*
|
1994 Stock Incentive Plan (7) | |
10.3*
|
1997 Stock Incentive Plan, as amended and restated (8) | |
10.4*
|
Employee Retention and Motivation Agreement as amended and restated, executed by each of the Executive Officers (9) | |
10.5*
|
2002 Nonqualified Stock Plan, as amended and restated | |
10.6*
|
2004 Inducement Stock Plan, as amended and restated | |
10.7*
|
Letter Agreement dated November 15, 2005 with Joseph W. Alsop regarding Fiscal 2005 Stock Option grant (10) | |
10.8*
|
Progress Software Corporation 1991 Employee Stock Purchase Plan, as amended and restated (11) | |
10.9*
|
Progress Software Corporation 2008 Stock Option and Incentive Plan (12) | |
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10.10*
|
Form of Notice of Grant of Stock Options and Grant Agreement under the Progress Software Corporation 2008 Stock Incentive Plan (13) | |
10.11*
|
Progress Software Corporation Corporate Executive Bonus Plan (14) | |
10.12*
|
Progress Software Corporation 2008 Fiscal Year Director Compensation Program, as amended | |
10.13*
|
Form of Deferred Stock Unit Agreement under the Progress Software Corporation 2008 Stock Incentive Plan (15) | |
10.14*
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Progress Software Corporation 2008 Stock Incentive Plan (Initial Grant) (16) | |
10.15*
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Progress Software Corporation 2008 Stock Incentive Plan (Annual Grant) (17) | |
10.16*
|
Letter Agreement, dated March 29, 2007, executed by Roger J. Heinen, Jr. regarding Cancellation of Stock Options (18) | |
10.17*
|
Letter Agreement, dated March 23, 2007, executed by Scott A. McGregor regarding Cancellation of Stock Options (19) | |
10.18*
|
Form of Option Amendment Agreement with Non-Employee Directors (20) | |
10.19*
|
Form of Option Amendment Agreement with Payment to Progress Software Corporation executed by each of Joseph W. Alsop, Norman R. Robertson and James D. Freedman (21) | |
10.20*
|
Form of Option Amendment Agreement with Cash Bonus executed by certain Executive Officers (22) | |
21.1
|
List of Subsidiaries of the Registrant | |
23.1
|
Consent of Deloitte & Touche LLP | |
31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Joseph W. Alsop | |
31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Norman R. Robertson | |
32.1
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Incorporated by reference to Exhibit 2.1 of Form 8-K filed January 23, 2006. | |
| (2) | Incorporated by reference to Exhibit 2.1 of Form 8-K filed June 26, 2008. | |
| (3) | Incorporated by reference to Exhibit 3.1 of Form 8-K filed May 1, 2006. | |
| (4) | Incorporated by reference to Exhibit 3.1 of Form 8-K filed September 22, 2008. | |
| (5) | Incorporated by reference to Exhibit 4.1 of Form 8-K filed May 1, 2006. | |
| (6) | Incorporated by reference to Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 1992. | |
| (7) | Incorporated by reference to Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended August 31, 1994. | |
| (8) | Incorporated by reference to Appendix B to our definitive Proxy Statement filed March 27, 2007. | |
| (9) | Incorporated by reference to Exhibit 10.1 of Form 8-K filed January 6, 2009. | |
| (10) | Incorporated by reference to Exhibit 10.1 of Form 8-K filed November 21, 2005. | |
| (11) | Incorporated by reference to Appendix A to our definitive Proxy Statement filed March 27, 2007. | |
| (12) | Incorporated by reference to Appendix A to our definitive Proxy Statement filed March 24, 2008. | |
| (13) | Incorporated by reference to Exhibit 10.2 of Form 8-K filed on April 28, 2008. | |
| (14) | Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. | |
| (15) | Incorporated by reference to Exhibit 10.5 of Form 8-K filed on April 28, 2008 | |
| (16) | Incorporated by reference to Exhibit 10.3 of Form 8-K filed on April 28, 2008. | |
| (17) | Incorporated by reference to Exhibit 10.4 of Form 8-K filed on April 28, 2008. | |
| (18) | Incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. | |
| (19) | Incorporated by reference to Exhibit 10.9 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. | |
| (20) | Incorporated by reference to Exhibit 99.(d)(10) of Schedule TO filed December 22, 2006. | |
| (21) | Incorporated by reference to Exhibit 99.(d)(9) of Schedule TO filed December 22, 2006. | |
| (22) | Incorporated by reference to Exhibit 99.(d)(11) of Schedule TO filed December 22, 2006. |
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| * | Management contract or compensatory plan or arrangement in which an executive officer or director of PSC participates |
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown on
the financial statements or notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29th day of January, 2009.
| PROGRESS SOFTWARE CORPORATION |
||||
| By: | /s/ JOSEPH W. ALSOP | |||
| Joseph W. Alsop | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
/s/ JOSEPH W. ALSOP
|
Chief Executive Officer and Director | January 29, 2009 | ||
| (Principal Executive Officer) | ||||
/s/ NORMAN R. ROBERTSON
|
Senior Vice President, Finance and | January 29, 2009 | ||
| Administration and Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
/s/ DAVID H. BENTON, JR.
|
Vice President and Corporate Controller | January 29, 2009 | ||
| (Principal Accounting Officer) | ||||
/s/ BARRY N. BYCOFF
|
Director | January 29, 2009 | ||
/s/ RAM GUPTA
|
Director | January 29, 2009 | ||
/s/ ROGER J. HEINEN, JR.
|
Director | January 29, 2009 | ||
/s/ CHARLES F. KANE
|
Director | January 29, 2009 | ||
/s/ DAVID A .KRALL
|
Director | January 29, 2009 | ||
/s/ MICHAEL L. MARK
|
Director | January 29, 2009 | ||
65