e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended November 30, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
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| MASSACHUSETTS
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04-2746201 |
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(I.R.S. Employer Identification No.) |
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)
Telephone Number: (781) 280-4000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock $.01 par value
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The NASDAQ Stock Market LLC |
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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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,
or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of May 31, 2007 (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 $1,348,000,000.
As of January 22, 2008, there were 42,353,000 common shares outstanding.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 24, 2008 are incorporated by reference into Part III.
PROGRESS SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2007
INDEX
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
empower partners and customers to dramatically improve their development, deployment, integration
and management of quality applications worldwide. We seek to achieve our mission by providing a
robust set of software platforms, tools and services that enable the highly distributed deployment
of responsive applications across internal networks, the Internet and occasionally-connected users
and simplify 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 that develop and market applications utilizing 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 and health care. OEMs are companies that
embed our products into their software products or devices. We also sell software products and
services directly 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.
Our Products
We develop, market and distribute software for the development, deployment, integration and
management of business applications. Our product lines are focused on three areas of the software
market — application platforms with the Progress® OpenEdge® and the Progress® Apama® product
lines, service oriented architecture (SOA) infrastructure with the Progress® Sonic™, Progress®
Actional®, Progress® DataXtend™ and DataDirect® Shadow® product lines and data infrastructure with
the DataDirect® Connect®, Progress® EasyAsk®, Progress DataXtend and Progress® ObjectStore® product
lines. 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
subscription licensing model.
Our application platform products empower both end-user organizations and independent software
vendors and developers to rapidly develop, deploy and manage sophisticated applications utilized in
an ever-changing business environment.
Using a SOA approach, information systems are built from shared components called “services” which
automate discrete business functions. Our SOA 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.
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Our data infrastructure product capabilities provide data management, integration, replication,
caching, access, and security spanning multiple data stores which can be multi-vendor and in
multiple locations including disconnected and mobile data. In support of an 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:
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 applications can be deployed and managed over virtually any computer
platform 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® Apama®
The Progress Apama 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® ESP.
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 with continuous availability features and one of
the leading enterprise service buses. 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 the business in new ways. The primary products
included in this product line are Sonic ESB®, Sonic Orchestration Server, Sonic WorkBench and
SonicMQ®.
Progress® Actional®
The Progress Actional product line delivers SOA and Web services management products that provide
visibility, security and control of the activities of services and end-to-end business processes in
the runtime environment. Actional capabilities include system and process-level visibility, as well
as policy enforcement across a SOA infrastructure deployed on any combination of platforms. The
primary products included in this product line are Actional Looking Glass™ and Actional
SOAPstation®.
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.
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®.
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Progress® EasyAsk®
Progress EasyAsk provides product search, navigation and merchandising for the web sites of many of
the nation’s largest retailers. EasyAsk also provides a unique natural language query and
reporting product that enables enterprise and ISV customers to reach a broader community of
non-technical users. The primary products included in this product line are EasyAsk® Commerce,
EasyAsk® Enterprise and EasyAsk® ISV.
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.
Progress® ObjectStore®
The Progress ObjectStore object data management system enables users to store C++ and Java data
much faster than with a relational database management system (RDBMS) 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 2007, we had three reporting units that qualified as reportable segments based upon the
aggregation criteria for segment reporting within consolidated financial statements. We also had
two reporting units, Apama and EasyAsk, that did not meet the criteria for separate segment
reporting. Results from each of these two operating units were included within the results of the
three primary segments as shown below:
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the OpenEdge segment, which consists primarily of the OpenEdge Division and the
EasyAsk Division, |
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the Enterprise Infrastructure segment, which consists primarily of the Enterprise
Infrastructure Division and the Apama Division, and |
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the DataDirect segment, which consists primarily of the DataDirect Technologies
operating unit. |
For financial information relating to business segments and international operations, see Note 11
of the Consolidated Financial Statements appearing in this Form 10-K.
At the beginning of fiscal 2008, we reorganized some of our field operations and product groups.
This resulted in changes in our operating units. We now have 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; (5) and the EasyAsk Division.
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.
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Our product development staff consisted of 450 employees as of November 30, 2007. We have eleven
development offices in North America, two development offices in EMEA and one development office in
India. We spent $80.3 million in fiscal year 2007, $77.3 million in fiscal 2006, and $64.0 million
in fiscal 2005 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 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.
Original Equipment Manufacturers (OEMs)
We enter into arrangements with OEMs whereby the OEM embeds our products into its solutions,
potentially either software or technology devices. The OEM channel is primarily utilized by
DataDirect Technologies and, to a lesser extent, the OpenEdge and SOA Group. 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 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 in the United States and in over 25 other
countries and through independent distributors in over 30 additional countries outside North
America. The sales, marketing and service groups are organized by operating unit and by region
within each operating unit as applicable. We conduct business through our five operating units.
Our two primary operating units are the OpenEdge and SOA Group and DataDirect Technologies. We
also conduct business through the Apama Division, the DataXtend Division and the EasyAsk Division.
The OpenEdge and SOA Group operates by region in North America, EMEA, Asia/Pacific and Latin
America. DataDirect Technologies operates by region within North America, EMEA and Japan. The
other three divisions maintain specialized sales groups focused on particular markets or
industries.
We believe that this structure allows us to maintain direct contact with and support the diverse
market requirements of our customers. Our international operations provide focused local marketing
efforts and are able to respond directly to changes in local conditions.
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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. These groups may provide evaluation copies to application partners or end-user
organizations to help qualify them as prospective customers, and also sell additional development
and deployment products to 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 operating units, generate
leads for the sales organization and promote our various product lines. These programs include
public relations, 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.
Customer 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 Progress products and technologies. PSDN
services provide access to the latest information on Progress technology. Through a subscription to
PSDN, developers gain priority access to a complete, continuously updated set of Progress
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. Personnel at our international subsidiaries and distributors provide consulting and training
services for customers located outside North America.
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 SOA 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.
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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 thirty four patents covering portions of our products. We also have forty-six 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, DataDirect, DataDirect Connect, DataDirect XQuery, DataXtend, EasyAsk, Progress,
ObjectStore, OpenEdge, Progress DataXtend, Progress OpenEdge, Progress Software Developers Network,
Shadow, SOAPstation, 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.
Looking Glass, Progress Sonic, PSE Pro, and Sonic are trademarks of Progress Software Corporation
or one of its 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, 2007, we had 1,662 employees worldwide, including 642 in sales and marketing,
303 in customer support and services (including manufacturing and distribution), 450 in product
development and 267 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.
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers.
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Joseph W. Alsop
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Co-Founder and Chief Executive Officer and Director |
James D. Freedman
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Senior Vice President and General Counsel |
David G. Ireland
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Executive Vice President |
Gordon A. Van Huizen
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Vice President, Products |
Richard D. Reidy
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Executive Vice President |
Norman R. Robertson
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Senior Vice President, Finance and Administration and Chief Financial Officer |
Jeffrey P. Stamen
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Senior Vice President, Corporate Development and Strategy |
John Goodson
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Vice President and General Manager, DataDirect Technologies |
Mr. Alsop, our co-founder, has been a director and Chief Executive Officer since our inception in
1981.
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Mr. Freedman was appointed Vice President and General Counsel in 1995 and was appointed Senior Vice
President and General Counsel in August 2004. Mr. Freedman joined us in 1992.
Mr. Ireland joined us in 1997 as Vice President, Core Products and Services and was appointed Vice
President and General Manager, Core Products and Services in 1998, Vice President and General
Manager, Worldwide Field Operations in 1999, President, Progress OpenEdge Division in 2000 and
Executive Vice President in December 2007.
Mr. Van Huizen was appointed Vice President, Product Management, Sonic Software Corporation in 2001
and was appointed Chief Technology Officer, Sonic Software Corporation in 2003, Chief Technology
Officer, Progress Software Corporation in 2005, Vice President, Products, Sonic Software Division
in March 2006, Vice President and General Manager, Enterprise Infrastructure Division in October
2006 and Vice President, Products in December 2007. Mr. Van Huizen joined us in 2001.
Mr. Reidy was appointed Vice President, Development Tools in 1996 and was appointed Vice President,
Product Development in 1997, Vice President, Products in 1999, Senior Vice President, Products and
Corporate Development in 2000, President, DataDirect Technologies in 2004 and Executive Vice
President in December 2007. Mr. Reidy joined us in 1985.
Mr. Robertson joined us in 1996 as Vice President, Finance and Chief Financial Officer and was
appointed Vice President, Finance and Administration and Chief Financial Officer in 1997 and Senior
Vice President, Finance and Administration and Chief Financial Officer in 2000.
Mr. Stamen joined us in June 2004 as Senior Vice President, Corporate Development and Strategy.
From 1999 to 2004, Mr. Stamen was Chief Executive Officer of Syncra Systems, Inc., a software
developer.
Mr. Goodson was appointed Vice President, Product Operations, DataDirect Technologies in 1999 and
was appointed Vice President and General Manager, DataDirect Technologies in December 2007. Mr.
Goodson joined DataDirect in 1992.
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.
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.
We face litigation risks relating to our past practices with respect to stock options that could
have a material adverse effect on our business. On August 17, 2006, a derivative complaint styled
Arkansas Teacher Retirement System, Derivatively on Behalf of Progress Software Corporation, v.
Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL was filed in the United States
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District Court for the District of Massachusetts by a party identifying itself as one of our
shareholders purporting to act on our behalf against our directors and certain of our present and
former officers. We were also named as a nominal defendant. The complaint alleged violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty,
aiding and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly
improper backdating of certain stock option grants. The complaint sought monetary damages,
restitution, disgorgement, rescission of stock options, punitive damages and other relief. A
Special Litigation Committee was formed by our Board of Directors to investigate and determine our
response to the complaint. On September 25, 2007, the Court, in response to our motion, dismissed
the Arkansas Teacher Retirement System complaint on the grounds that the Plaintiff failed to make a
proper pre-filing demand upon our Board of Directors, and entered judgment for Defendants. Also on
September 25, 2007, the Board received a demand from the Plaintiff regarding the allegedly improper
backdating, which stated that absent Board action the Plaintiff may again seek relief. The Special
Litigation Committee has taken the demand under advisement.
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges 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. The complaint seeks monetary damages and disgorgement,
among other forms of relief.
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to continue to incur legal expenses arising from these
matters, which may be significant, including the advancement of legal expenses to our directors and
officers. We have certain indemnification obligations to our directors and officers, and the
outcome of the derivative or any other litigation may require that we indemnify some or all of our
directors and officers for expenses they may incur in defending the litigation and other losses.
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. |
8
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.
Our international operations expose us to additional risks, and changes in global economic and
political conditions could adversely affect our international operations, our revenue and our net
income. We typically generate between 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.
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, if for any reason exchange or price
controls or other restrictions on the conversion of foreign currencies were imposed, our business
could be adversely affected.
Technology and customer requirements evolve rapidly in our industry, and if we do not continue to
develop new products and enhance our existing products in response to these changes, our business
could be harmed. Ongoing enhancements to our product sets will be required to enable us to
maintain our competitive position. We may not be successful in developing and marketing
enhancements to our products on a timely basis, and any enhancements we develop may not adequately
address the changing needs of the marketplace. Overlaying the risks associated with our existing
products and enhancements are ongoing technological developments and rapid changes in customer
requirements. Our future success will depend upon our ability to develop and introduce in a timely
manner new products that take advantage of technological advances and respond to new customer
requirements. The development of new products is increasingly complex and uncertain, which
increases the risk of delays. We may not be successful in developing new products incorporating
new technology on a timely basis, and any new products may not adequately address the changing
needs of the marketplace. Failure to develop new products and product enhancements that meet market
needs in a timely manner could have a material adverse effect on our business, financial condition
and operating results.
9
We are substantially dependent on our core product, Progress OpenEdge. We derive a significant
portion of our revenue from software license and maintenance revenue attributable to our core
product line, Progress OpenEdge, and other products that complement OpenEdge and are generally
licensed only in conjunction with OpenEdge. Accordingly, our future results depend on continued
market acceptance of OpenEdge, and any factor adversely affecting the market for OpenEdge could
have a material adverse effect on our business, financial condition and operating results.
Higher costs associated with some of our newer products could adversely affect our operating
margins. Some of our newer products, such as the 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 may make acquisitions or investments in new businesses, products or technologies that involve
additional risks, which could disrupt our business or harm our financial condition or results of
operations. As part of our business strategy, we have made, and expect to continue to make,
acquisitions of businesses or investments in companies that offer complementary products, services
and technologies, such as the acquisitions of Apama and EasyAsk in fiscal 2005 and the acquisitions
of Actional, NEON, Pantero and OpenAccess in fiscal 2006. These acquisitions 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. As in the Actional acquisition, consideration paid for
any future acquisitions could include our stock. As a result, future acquisitions could cause
dilution to existing shareholders and to earnings per share.
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 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 original equipment manufacturers (OEMs), and adverse developments in
the businesses of these third parties or in our relationships with them could harm our revenues and
results of operations. Our future results depend upon our continued successful distribution of our
products through our application partner and 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.
10
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 SOA infrastructure
products to achieve and maintain market acceptance could harm our business. We are developing and
enhancing our SOA 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 division 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 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.
11
The loss of technology licensed from third parties could adversely affect our ability to deliver
our products. We utilize certain technology that we license from third parties, including software
that is integrated with internally developed software and used in our products to perform key
functions. This technology, or functionally similar technology, may not continue to be available
on commercially reasonable terms in the future, or at all. The loss of any significant third-party
technology license could cause delays in our ability to deliver our products or services until
equivalent technology is developed internally or equivalent third-party technology, if available,
is identified, licensed and integrated.
Our common stock price may continue to be volatile, which could result in losses for investors.
The market price of our common stock, like that of other technology companies, is highly volatile
and is subject to wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by us or our competitors, changes in
financial estimates by securities analysts or other events or factors. Our stock price may also be
affected by broader market trends unrelated to our performance. As a result, purchasers of our
common stock may be unable at any given time to sell their shares at or above the price they paid
for them.
Item 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.
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 $1.7 million
as of November 30, 2007. In addition, we maintain offices in leased facilities in approximately 21
other locations in North America and approximately 38 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 August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively
on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL
was filed in the United States District Court for the District of Massachusetts by a party
identifying itself as one of our shareholders purporting to act on our behalf against our directors
and certain of our present and former officers. We were also named as a nominal defendant. The
complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust
enrichment arising from the allegedly improper backdating of certain stock option grants. The
complaint sought monetary damages, restitution, disgorgement, rescission of stock options, punitive
damages and other relief. A Special Litigation Committee was formed by our Board of Directors to
investigate and determine our response to the complaint. On September 25, 2007, the Court, in
response to our motion, dismissed the Arkansas Teacher Retirement System complaint on the grounds
that the Plaintiff failed to make a proper pre-filing demand upon our Board of Directors, and
entered judgment for Defendants. Also on September 25, 2007, the Board received a demand from the
Plaintiff regarding the allegedly improper backdating, which stated that absent Board action the
Plaintiff may again seek relief. The Special Litigation Committee has taken the demand under
advisement.
12
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges 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. The complaint seeks monetary damages and disgorgement,
among other forms of relief.
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to continue to incur legal expenses arising from these
matters, which may be significant, including the advancement of legal expenses to our directors and
officers. We have certain indemnification obligations to our directors and officers, and the
outcome of derivative or any other litigation may require that we indemnify some or all of our
directors and officers for expenses they may incur in defending the litigation and other losses.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these other claims cannot be
predicted with certainty, management does not believe that the outcome of any of these other legal
matters will have a material adverse effect on our consolidated financial position or results of
operations.
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, 2007.
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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
| |
| |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
| |
| |
First Quarter |
|
$ |
29.34 |
|
|
$ |
26.18 |
|
|
$ |
31.59 |
|
|
$ |
27.32 |
|
Second Quarter |
|
|
33.13 |
|
|
|
26.90 |
|
|
|
30.62 |
|
|
|
22.59 |
|
Third Quarter |
|
|
34.45 |
|
|
|
26.61 |
|
|
|
25.57 |
|
|
|
20.36 |
|
Fourth Quarter |
|
|
33.55 |
|
|
|
28.27 |
|
|
|
29.44 |
|
|
|
24.10 |
|
| |
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, 2007, our common stock was
held by approximately 3,700 shareholders of record or through nominee or street name accounts with
brokers.
13
Information related to our repurchases of our common stock by month in the fourth quarter of fiscal
2007 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 (1) |
|
|
per Share |
|
|
or Programs |
|
|
Programs (2) |
|
| |
| |
Sep. 1, 2007 — Sep. 30, 2007 |
|
|
9 |
|
|
$ |
30.51 |
|
|
|
— |
|
|
|
9,286 |
|
Oct. 1, 2007 — Oct. 31, 2007 |
|
|
134 |
|
|
$ |
31.87 |
|
|
|
134 |
|
|
|
9,866 |
|
Nov. 1, 2007 — Nov. 30, 2007 |
|
|
442 |
|
|
$ |
31.58 |
|
|
|
442 |
|
|
|
9,424 |
|
| |
Total |
|
|
585 |
|
|
$ |
31.63 |
|
|
|
576 |
|
|
|
9,424 |
|
| |
|
|
|
| (1) |
|
8,601 shares were purchased from employees in settlement of payroll withholding
obligations relating to the vesting of restricted share awards. |
| |
| (2) |
|
In September 2007, our Board of Directors authorized, for the period from October 1, 2007
through September 30, 2008, the purchase of up to 10,000,000 shares of our common stock. This
authorization superseded the previous authorization that expired on September 30, 2007. |
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
Revenue |
|
$ |
493,500 |
|
|
$ |
447,063 |
|
|
$ |
405,376 |
|
|
$ |
362,662 |
|
|
$ |
309,060 |
|
Income from operations |
|
|
57,216 |
|
|
|
40,943 |
|
|
|
59,950 |
|
|
|
42,414 |
|
|
|
32,421 |
|
Net income |
|
|
42,280 |
|
|
|
29,401 |
|
|
|
46,257 |
|
|
|
29,368 |
|
|
|
24,148 |
|
Basic earnings per share |
|
|
1.02 |
|
|
|
0.72 |
|
|
|
1.21 |
|
|
|
0.82 |
|
|
|
0.71 |
|
Diluted earnings per share |
|
|
0.96 |
|
|
|
0.68 |
|
|
|
1.12 |
|
|
|
0.76 |
|
|
|
0.65 |
|
Cash and short-term investments |
|
|
339,525 |
|
|
|
241,315 |
|
|
|
266,420 |
|
|
|
191,267 |
|
|
|
219,131 |
|
Total assets |
|
|
761,828 |
|
|
|
670,239 |
|
|
|
561,715 |
|
|
|
446,814 |
|
|
|
367,770 |
|
Long-term debt, including current portion |
|
|
1,657 |
|
|
|
1,938 |
|
|
|
2,200 |
|
|
|
2,438 |
|
|
|
— |
|
Shareholders’ equity |
|
|
517,874 |
|
|
|
444,564 |
|
|
|
374,004 |
|
|
|
265,317 |
|
|
|
220,760 |
|
| |
We have completed a number of acquisitions during fiscal years 2003 through 2006 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.
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 software products
and services that empower partners and customers to improve their development, deployment,
integration and management of quality applications worldwide. Our products include development
tools, databases, application servers, messaging servers, application management tools, data
connectivity products and integration products that enable the highly distributed deployment of
responsive applications across internal networks, the Internet and occasionally-connected users.
Through our various operating units, we market our products globally to a broad range of
organizations in manufacturing, distribution, finance, retail, healthcare, telecommunications,
government and many other fields. We derive a significant portion of our revenue from international
operations. In the 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. In the second half of fiscal 2006 and
all of fiscal 2007, the weakening of the U.S. dollar against most major currencies, primarily the
euro and the British pound, positively affected the translation of our operating results into U.S.
dollars.
14
In fiscal 2007, we conducted business through three primary operating units. Our principal
operating unit conducts business as the OpenEdge Division. The OpenEdge Division provides the
Progress® OpenEdge platform, a set of development and deployment technologies, including the
OpenEdge RDBMS, one of the leading embedded databases, for building business applications. Another
operating unit, the Enterprise Infrastructure Division, is focused on enterprise application
integration and the market for the enterprise service bus, or ESB, and provides distributed
infrastructure products that integrate applications and orchestrate business processes across the
extended enterprise. This operating unit also provides event stream processing, data management,
data access and synchronization products to enable the real-time enterprise. The third operating
unit, DataDirect, provides standards-based data connectivity software. The Apama operating unit is
included as part of our Enterprise Infrastructure segment, and the EasyAsk operating unit is
included as part of our OpenEdge segment.
We did not make any acquisitions in fiscal 2007. In fiscal years 2005 and 2006, we completed a
number of acquisitions, including Apama, Inc. in April 2005, EasyAsk, Inc. in May 2005, 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.
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 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 $209.0 million at
November 30, 2007. We assess the impairment of goodwill and identifiable intangible assets on an
annual basis and whenever events or changes in circumstances indicate that the carrying value of
the asset may not be recoverable. In fact, during the fourth quarter of 2007, we did identify
events that gave rise to a challenge of the carrying amounts of goodwill and resulted in a
write-down. 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, strategic changes in business strategy,
significant negative industry or economic trends or a
15
significant decline in our stock price or in the value of one of our reporting units for a
sustained period of time. We utilize discounted cash flow models or valuation models to assist in
determining the fair value of our operating 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 $27.8 million at November 30, 2007. 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. In fiscal 2008, we will adopt FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109.” We are currently evaluating the
adoption of FIN 48, but it will likely result in a change to the amount of reserves for prior year
taxes. Such changes will be recorded directly through equity. See Note 1 of the Consolidated
Financial Statements appearing in this Form 10-K.
Stock-Based Compensation — We account for stock-based compensation expense in accordance with
Statement of Financial Accounting Standards (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, is recognized over the relevant service
period, and is adjusted each period for anticipated forfeitures. We estimate the fair value of
each stock-based award on the 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. Many of these assumptions
are highly subjective and require the exercise of management judgment. Our management must also
apply judgment in developing an estimate of awards that may be forfeited. If our actual experience
differs significantly from our estimates and we choose to employ different assumptions in the
future, the stock-based compensation expense that we record in future periods may differ materially
from that recorded in the current period.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial
statements and prescribes a recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We will adopt FIN 48 in the first quarter of fiscal 2008. We
are currently evaluating the adoption of FIN 48, but it will likely result in a change to the
amount of reserves for prior year taxes. Such changes will be recorded directly through equity.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating whether adoption of SFAS 157 will
have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides a “Fair Value Option” under which a company
may irrevocably elect fair value as the initial and subsequent measurement attribute for certain
financial assets and liabilities. This Fair Value Option will be available on a
contract-by-contract basis with changes in fair value recognized in earnings as those changes
occur. The effective date for SFAS 159 for us was December
1, 2007.
16
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
establishes a framework to improve the relevance, representational faithfulness, 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.
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 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compared |
|
|
Compared |
|
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
to 2006 |
|
|
to 2005 |
|
| |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
|
38 |
% |
|
|
39 |
% |
|
|
39 |
% |
|
|
6 |
% |
|
|
12 |
% |
Maintenance and services |
|
|
62 |
|
|
|
61 |
|
|
|
61 |
|
|
|
13 |
|
|
|
9 |
|
| |
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
10 |
|
|
|
10 |
|
| |
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
8 |
|
|
|
(9 |
) |
Cost of maintenance and services |
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
12 |
|
|
|
10 |
|
Amortization of acquired intangibles for
purchased technology |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
24 |
|
|
|
59 |
|
| |
Total costs of revenue |
|
|
18 |
|
|
|
17 |
|
|
|
17 |
|
|
|
13 |
|
|
|
11 |
|
| |
Gross profit |
|
|
82 |
|
|
|
83 |
|
|
|
83 |
|
|
|
10 |
|
|
|
10 |
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
39 |
|
|
|
42 |
|
|
|
39 |
|
|
|
3 |
|
|
|
17 |
|
Product development |
|
|
16 |
|
|
|
17 |
|
|
|
15 |
|
|
|
4 |
|
|
|
21 |
|
General and administrative |
|
|
12 |
|
|
|
13 |
|
|
|
11 |
|
|
|
10 |
|
|
|
31 |
|
Amortization of other acquired intangibles |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
72 |
|
Compensation expense from repurchase
of subsidiary stock options |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
Impairment of goodwill |
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
* |
|
Acquisition-related expenses, net |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
* |
|
|
|
(46 |
) |
| |
Total operating expenses |
|
|
70 |
|
|
|
74 |
|
|
|
68 |
|
|
|
6 |
|
|
|
19 |
|
| |
Income from operations |
|
|
12 |
|
|
|
9 |
|
|
|
15 |
|
|
|
40 |
|
|
|
(32 |
) |
Other income (expense), net |
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
69 |
|
|
|
50 |
|
| |
Income before provision for income taxes |
|
|
13 |
|
|
|
10 |
|
|
|
15 |
|
|
|
43 |
|
|
|
(28 |
) |
Provision for income taxes |
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
|
|
41 |
|
|
|
(4 |
) |
| |
Net income |
|
|
9 |
% |
|
|
7 |
% |
|
|
11 |
% |
|
|
44 |
% |
|
|
(36 |
)% |
| |
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.
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.
17
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 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 consists primarily of costs of product media,
documentation, duplication, packaging, electronic software distribution, royalties and amortization
of capitalized software costs. Cost of software licenses increased 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 the sale 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
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 primarily represents the amortization of the value assigned to intangible
assets obtained in business combinations. 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
18
the first quarter of fiscal 2006. Our product development expenses also benefited from 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 include the costs of our finance,
human resources, legal, information systems and administrative departments. 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 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 slightly from $7.4 million in fiscal 2006 to $7.3 million in fiscal 2007.
Impairment of Goodwill. In the fourth quarter of fiscal 2007, an interim impairment test was
performed as recent 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. Income from
operations in our OpenEdge segment increased 5% from $123.4 million in fiscal 2006 to $129.3
million in fiscal 2007. Losses from operations in our Enterprise Infrastructure segment decreased
by 19% from $29.1 million in fiscal 2006 to $23.7 million in fiscal 2007. Income from operations
in our DataDirect segment increased 161% from $3.3 million in fiscal 2006 to $8.7 million in fiscal
2007. See Note 11 of the Consolidated Financial Statements appearing in this Form 10-K for a
reconciliation of segment income from operations to consolidated income from operations.
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 from 36% in fiscal 2006 to 35% 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. See Note 9 of
the Consolidated Financial Statements appearing in this Form 10-K for further discussion.
Fiscal 2006 Compared to Fiscal 2005
Revenue. Our total revenue increased 10% from $405.4 million in fiscal 2005 to $447.1 million in
fiscal 2006. Total revenue would have increased by 11% if exchange rates had been constant in
fiscal 2006 as compared to exchange rates in effect in fiscal 2005. Our revenue increased
principally due to an increase in the number of software licenses sold. Changes in prices in
fiscal 2006 from fiscal 2005 did not have a significant impact on our revenue.
19
Revenue from the Progress OpenEdge product line increased 3% from $308.2 million in fiscal 2005 to
$316.5 million in fiscal 2006. Revenue derived from the Enterprise Infrastructure product line
increased 12% from $61.5 million in fiscal 2005 to $68.6 million in fiscal 2006. Revenue from the
DataDirect product line increased 74% from $35.7 million in fiscal 2005 to $61.9 million in fiscal
2006. Revenue from the products obtained in the acquisitions of Actional, NEON, Pantero and
OpenAccess contributed less than 5% of total revenue in fiscal 2006.
Software license revenue increased 12% from $156.8 million in fiscal 2005 to $175.8 million in
fiscal 2006. Software license revenue would have increased by 13% if exchange rates had been
constant in fiscal 2006 as compared to exchange rates in effect in fiscal 2005. The increase in
software license revenue in fiscal 2006 was primarily due to growth from the DataDirect and
Enterprise Infrastructure product lines. These product lines accounted for 42% of software license
revenue in fiscal 2006 as compared to 36% in fiscal 2005. Software license revenue from indirect
channels, including application partners and OEMs, and from sales to direct end-users, both
increased in fiscal 2006 as compared to fiscal 2005. Software license revenue increased year over
year, primarily within our middleware products.
Maintenance and services revenue increased 9% from $248.5 million in fiscal 2005 to $271.2 million
in fiscal 2006. The increase in maintenance and services revenue was primarily the result of growth
in our installed customer base, renewal of maintenance agreements and an increase in professional
services revenue. Foreign exchange rate impact on maintenance and services revenue in fiscal year
2006 as compared to fiscal year 2005 was nominal.
Total revenue generated in markets outside North America increased 6% from $229.4 million in fiscal
2005 to $243.8 million in fiscal 2006 and represented 57% of total revenue in fiscal 2005 and 54%
of total revenue in fiscal 2006. Revenue from the three major regions outside of North America,
consisting of EMEA, Latin America and Asia Pacific, each increased in fiscal 2006 as compared to
fiscal 2005. Total revenue generated in markets outside North America would have represented 55% of
total revenue if exchange rates had been constant in fiscal 2006 as compared to the exchange rates
in effect in fiscal 2005. The decrease in the percentage of business derived from international
operations in fiscal 2006 is primarily the result of the higher percentage increase in revenue
generated in markets within North America.
Cost of Software Licenses. Cost of software licenses decreased 9% from $8.2 million in fiscal 2005
to $7.4 million in fiscal 2006, and decreased as a percentage of software license revenue from 5%
to 4%. The dollar decrease was primarily due to lower royalty expense associated with the sale of
third-party product sales and increased adoption by customers of electronic software delivery. 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 10% from $55.8 million
in fiscal 2005 to $61.2 million in fiscal 2006, and increased as a percentage of maintenance and
services revenue from 22% to 23%. The total dollar amount in fiscal 2006 increased due to an
increase in stock-based compensation and higher usage of third-party contractors for service
engagements. Cost of maintenance and services expenses included $1.6 million of stock-based
compensation in fiscal 2006 as compared to $0.2 million of stock-based compensation in fiscal 2005.
Our technical support, education and consulting headcount decreased by 6% from the end of fiscal
2005 to the end of fiscal 2006.
Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired intangibles
for purchased technology primarily represents the amortization of the value assigned to intangible
assets obtained in business combinations. Amortization of acquired intangibles for purchased
technology increased from $5.1 million in fiscal 2005 to $8.2 million in fiscal 2006. The increase
was due to amortization expense associated with the acquisitions of Actional, NEON, Pantero and
OpenAccess.
Gross Profit. Our gross profit increased 10% from $336.3 million in fiscal 2005 to $370.3 million
in fiscal 2006. The gross profit percentage remained the same at 83% of total revenue in fiscal
2005 and in fiscal 2006.
Sales and Marketing. Sales and marketing expenses increased 17% from $158.5 million in fiscal 2005
to $186.3 million in fiscal 2006, and increased as a percentage of revenue from 39% to 42%. The
increase in sales and marketing expenses was due to an increase in stock-based compensation, the
addition of sales and marketing personnel and related expenses resulting from the acquisitions of
Actional, NEON and Pantero, a slight increase in variable compensation expense as a result of
increased sales and an increase in severance related costs. In fiscal 2006, sales and marketing
expenses included $8.4 million of stock-
20
based compensation compared to $1.1 million of stock-based compensation in fiscal 2005. Our sales
support and marketing headcount increased by 4% from the end of fiscal 2005 to the end of fiscal
2006.
Product Development. Product development expenses increased 21% from $64.0 million in fiscal 2005
to $77.3 million in fiscal 2006, and increased as a percentage of revenue from 15% to 17%. The
dollar increase was primarily due to an increase in stock-based compensation, expenses related to
the development teams associated with the Actional and NEON acquisitions, an increase in headcount
related expenses and an increase in development expenses incurred in our offshore development
center in India. In fiscal 2006, product development expenses included $5.1 million of stock-based
compensation in fiscal 2006 compared to $0.5 million of stock-based compensation in fiscal 2005.
There were no capitalized software development costs in either fiscal 2005 or fiscal 2006, 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 14% from the
end of fiscal 2005 to the end of fiscal 2006.
General and Administrative. General and administrative expenses increased 31% from $43.3 million in
fiscal 2005 to $56.6 million in fiscal 2006, and increased as a percentage of revenue from 11% to
13%. The dollar increase was primarily due to an increase in stock-based compensation, headcount
related costs and higher legal and accounting costs related to the stock option review. General and
administrative expenses included $7.2 million of stock-based compensation compared to $0.9 million
of stock-based compensation in fiscal 2005. Professional services fees related to the stock option
review totaled $3.4 million in fiscal 2006 as compared to none in fiscal 2005. Our administrative
headcount increased 4% from the end of fiscal 2005 to the end of fiscal 2006.
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 increased from $4.3 million in fiscal 2005 to $7.4 million in fiscal 2006. The increase
primarily was due to amortization expense associated with the acquisitions of Actional, NEON,
Pantero and OpenAccess.
Compensation Expense from Repurchase of Subsidiary Stock Options. Compensation expense from
repurchase of subsidiary stock options in fiscal 2005 consisted of costs of $2.8 million related to
the settlement and pay-out to Sonic employees who held vested, in-the-money options to purchase
Sonic common stock.
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. Acquisition-related expenses for fiscal 2005 totaling
$3.4 million include expenses of $4.0 million for retention bonuses to Apama and EasyAsk employees
who joined us upon the close of the respective acquisitions. These costs were partially offset by
a credit of $0.6 million for settlement of pre-acquisition assets and liabilities related to a
previous acquisition.
Income from Operations. Income from operations decreased 32% from $60.0 million in fiscal 2005 to
$40.9 million in fiscal 2006 and decreased as a percentage of total revenue from 15% in fiscal 2005
to 9% in fiscal 2006. The decrease in income from operations in fiscal 2006 as compared to fiscal
2005 was primarily due to an increase in stock-based compensation. Stock-based compensation
totaled $22.4 million in fiscal 2006 as compared to $2.7 million in fiscal 2005.
Other Income. Other income increased 50% from $3.1 million in fiscal 2005 to $4.6 million in fiscal
2006. The increase was primarily related to an increase in interest income, partially offset by
foreign exchange hedging and transaction expenses. The increase in interest income was primarily
due to higher interest rates, partially offset by a slight decrease in our average cash and
short-term investment balances.
Provision for Income Taxes. Our effective tax rate increased from 27% in fiscal 2005 to 36% in
fiscal 2006. During the third quarter of fiscal 2005, the IRS completed an examination of our U.S.
income tax returns for fiscal years through 2002. The provision for taxes in fiscal 2005 includes a
tax benefit of $3.8 million resulting from the reversal of accruals for estimated income tax
liabilities that were no longer required. The increase in the effective tax rate in fiscal 2006 as
compared to fiscal
21
2005 was primarily due to this benefit and non-deductible stock-based compensation expenses in
fiscal 2006. See Note 9 of the Consolidated Financial Statements appearing in this Form 10-K for
further discussion.
Liquidity and Capital Resources
Our cash and short-term investments totaled $339.5 million and $241.3 million at November 30, 2007
and 2006, respectively. The increase of $98.2 million from the end of fiscal 2006 resulted
primarily from cash generated from operations.
We held approximately $240 million in tax-exempt auction rate securities at November 30, 2007, and
none of these investments have been impaired during the recent sub-prime mortgage market crisis.
Our investments in auction rate securities consist principally of insured governmental debt
obligations .None of the auction rate securities in our portfolio are asset or mortgage-backed, and
there have been no failed auctions related to those securities. If an auction were to fail for
securities in which we have invested, the investment will not be liquid. In the event that we need
access to these funds, we will not be able to do so until a future auction is successful, the
issuer redeems the outstanding securities or the securities mature which in substantially all cases
is in excess of one year. If an issuer of the securities is unable to successfully close future
auctions and its credit rating deteriorates or adverse developments occur in the bond insurance
market, we may be required to adjust the carrying value of our auction rate securities through a
future impairment charge.
We generated cash from operations of $104.0 million in fiscal year 2007, $67.9 million in fiscal
year 2006, and $80.6 million in fiscal year 2005. The components of our cash flows from operations
for fiscal years 2007, 2006 and 2005 are as follows:
(In thousands)
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
| |
Net income |
|
$ |
42,280 |
|
|
$ |
29,401 |
|
|
$ |
46,257 |
|
Depreciation, amortization and other noncash charges |
|
|
58,675 |
|
|
|
47,181 |
|
|
|
20,934 |
|
Tax benefit from stock plans |
|
|
1,614 |
|
|
|
1,064 |
|
|
|
17,745 |
|
Changes in operating assets and liabilities |
|
|
1,438 |
|
|
|
(9,731 |
) |
|
|
(4,306 |
) |
| |
Total |
|
$ |
104,007 |
|
|
$ |
67,915 |
|
|
$ |
80,630 |
|
| |
Accounts receivable at November 30, 2007 increased by $11.2 million from the end of fiscal 2006.
The increase was primarily the result of higher revenue. Accounts receivable days sales outstanding
(DSO) increased year over year by one day to 62 days at the end of fiscal 2007 as compared to 61
days at the end of fiscal 2006 and 56 days at the end of fiscal 2005. We target a DSO range of 60
to 80 days.
We purchased $18.3 million of property and equipment in fiscal year 2007, $21.7 million in fiscal
year 2006 and $10.9 million in fiscal year 2005. The amount for fiscal 2006 included the purchase
of a building adjacent to our headquarters for $6.3 million. The increase in fiscal 2007 and
fiscal 2006 as compared to fiscal 2005 was also due to costs associated with our ongoing ERP
implementation. 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 1,290,000 shares of our common stock for $38.0 million in fiscal year
2007, 481,000 shares for $13.0 million in fiscal year 2006, and 461,000 shares for $11.7 million in
fiscal year 2005. Since beginning our stock repurchase program in 1996, we have purchased and
retired 20,490,000 shares at a cost of $253.4 million. In September 2007, our Board of Directors
authorized, for the period from October 1, 2007 through September 30, 2008, 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 2007, we purchased certain technology for use in our products for $1.8 million.
In fiscal years 2006 and 2005, 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 are 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:
22
| |
• |
|
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. |
| |
| |
• |
|
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 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. The purchase price also included the
value of in-the-money stock options and warrants. |
| |
| |
• |
|
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. |
| |
| |
• |
|
In May 2005, we acquired substantially all of the assets and assumed certain liabilities
of EasyAsk for an aggregate purchase price of approximately $9.0 million, net of cash
acquired. |
| |
| |
• |
|
In April 2005, we acquired the stock of Apama for an aggregate purchase price of
approximately $24.7 million, net of cash acquired. |
We include standard intellectual property indemnification provisions in our licensing agreements in
the ordinary course of business. Pursuant to our product license agreements, we will indemnify,
hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to our
products. Other agreements with our customers provide indemnification for claims relating to
property damage or personal injury resulting from the performance of services by us or our
subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such
indemnity agreements have been insignificant. Accordingly, the estimated fair value of these
indemnification provisions is immaterial.
We 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.
Revenue Backlog — 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. 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, 2006 was approximately $160 million, of which $127
million was included on our balance sheet as deferred revenue, primarily related to unexpired
maintenance and support contracts. At November 30, 2006, the remaining amount of backlog of
approximately $33 million was composed of multi-year licensing arrangements of approximately $23
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, 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.
23
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, 2007:
(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 |
|
$ |
1,657 |
|
|
$ |
305 |
|
|
$ |
688 |
|
|
$ |
664 |
|
|
$ |
— |
|
Interest payment on long-term debt |
|
|
336 |
|
|
|
122 |
|
|
|
166 |
|
|
|
48 |
|
|
|
— |
|
Payments for re-pricing of stock options |
|
|
3,428 |
|
|
|
3,304 |
|
|
|
124 |
|
|
|
— |
|
|
|
— |
|
Operating leases |
|
|
41,968 |
|
|
|
11,779 |
|
|
|
15,034 |
|
|
|
9,666 |
|
|
|
5,489 |
|
| |
Total |
|
$ |
47,389 |
|
|
$ |
15,510 |
|
|
$ |
16,012 |
|
|
$ |
10,378 |
|
|
$ |
5,489 |
|
| |
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 and are primarily fixed-rate instruments. In addition, we have classified all of our debt
securities as available for sale. This classification reduces the income statement exposure to
interest rate risk if 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 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 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. There were 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. Major U.S. multinational banks are
counterparties to the option contracts. 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 gains (losses) of our
outstanding foreign currency forward contracts were $(0.3) million and $0.4 million at November 30,
2007 and 2006, respectively.
24
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, 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* |
|
| |
| |
Australian dollar |
|
|
— |
|
|
$ |
6,724 |
|
|
|
1.14 |
|
Brazilian real |
|
$ |
1,278 |
|
|
|
— |
|
|
|
1.80 |
|
Euro |
|
|
— |
|
|
|
41,606 |
|
|
|
0.68 |
|
Japanese yen |
|
|
4,564 |
|
|
|
— |
|
|
|
109.55 |
|
U.K. pound |
|
|
— |
|
|
|
30,581 |
|
|
|
0.48 |
|
| |
|
|
$ |
5,842 |
|
|
$ |
78,911 |
|
|
|
|
|
| |
|
|
|
| * |
|
expressed as local currency unit per U.S. dollar |
25
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
We have audited the accompanying consolidated balance sheets of Progress Software Corporation and
subsidiaries (the “Company”) as of November 30, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended November 30, 2007. 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, 2007
and 2006, and the results of their operations and their cash flows for each of the three years in
the period ended November 30, 2007, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the financial statements, the Company changed its method of accounting
for share-based payments upon the adoption of Financial Accounting Standards Board No. 123(R),
Share-Based Payment, effective December 1, 2005.
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,
2007, 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,
2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 29, 2008
26
Consolidated Financial Statements
Consolidated Balance Sheets
(In thousands, except share data)
| |
| |
|
|
|
|
|
|
|
|
| November 30, |
|
2007 |
|
|
2006 |
|
| |
| |
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
53,879 |
|
|
$ |
46,449 |
|
Short-term investments |
|
|
285,646 |
|
|
|
194,866 |
|
| |
Total cash and short-term investments |
|
|
339,525 |
|
|
|
241,315 |
|
Accounts receivable (less allowances of
$9,458 in 2007 and $8,549 in 2006) |
|
|
93,998 |
|
|
|
82,762 |
|
Other current assets |
|
|
17,891 |
|
|
|
17,943 |
|
Deferred income taxes |
|
|
13,009 |
|
|
|
18,119 |
|
| |
Total current assets |
|
|
464,423 |
|
|
|
360,139 |
|
| |
Property and equipment, net |
|
|
64,949 |
|
|
|
57,585 |
|
Intangible assets, net |
|
|
59,931 |
|
|
|
75,069 |
|
Goodwill |
|
|
149,057 |
|
|
|
157,858 |
|
Deferred income taxes |
|
|
17,617 |
|
|
|
14,153 |
|
Other assets |
|
|
5,851 |
|
|
|
5,435 |
|
| |
Total |
|
$ |
761,828 |
|
|
$ |
670,239 |
|
| |
| |
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
305 |
|
|
$ |
281 |
|
Accounts payable |
|
|
12,684 |
|
|
|
15,034 |
|
Accrued compensation and related taxes |
|
|
50,092 |
|
|
|
48,398 |
|
Income taxes payable |
|
|
3,409 |
|
|
|
6,316 |
|
Other accrued liabilities |
|
|
26,493 |
|
|
|
23,166 |
|
Short-term deferred revenue |
|
|
135,487 |
|
|
|
120,974 |
|
| |
Total current liabilities |
|
|
228,470 |
|
|
|
214,169 |
|
| |
Long-term debt, less current portion |
|
|
1,352 |
|
|
|
1,657 |
|
| |
Long-term deferred revenue |
|
|
11,200 |
|
|
|
6,355 |
|
| |
Deferred income taxes |
|
|
2,817 |
|
|
|
3,494 |
|
| |
Other noncurrent liabilities |
|
|
115 |
|
|
|
— |
|
| |
Commitments and contingencies (note 10) |
|
|
|
|
|
|
|
|
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,
42,380,338 in 2007 and 41,177,361 in 2006 |
|
|
240,647 |
|
|
|
197,748 |
|
Retained earnings, including accumulated other
comprehensive income of $4,833 in 2007 and $1,106 in 2006 |
|
|
277,227 |
|
|
|
246,816 |
|
| |
Total shareholders’ equity |
|
|
517,874 |
|
|
|
444,564 |
|
| |
Total |
|
$ |
761,828 |
|
|
$ |
670,239 |
|
| |
See notes to consolidated financial statements.
27
Consolidated Statements of Operations
(In thousands, except per share data)
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
187,080 |
|
|
$ |
175,845 |
|
|
$ |
156,846 |
|
Maintenance and services |
|
|
306,420 |
|
|
|
271,218 |
|
|
|
248,530 |
|
| |
Total revenue |
|
|
493,500 |
|
|
|
447,063 |
|
|
|
405,376 |
|
| |
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
|
8,050 |
|
|
|
7,441 |
|
|
|
8,170 |
|
Cost of maintenance and services |
|
|
68,614 |
|
|
|
61,196 |
|
|
|
55,752 |
|
Amortization of acquired intangibles for purchased technology |
|
|
10,092 |
|
|
|
8,150 |
|
|
|
5,122 |
|
| |
Total costs of revenue |
|
|
86,756 |
|
|
|
76,787 |
|
|
|
69,044 |
|
| |
Gross profit |
|
|
406,744 |
|
|
|
370,276 |
|
|
|
336,332 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
191,436 |
|
|
|
186,286 |
|
|
|
158,544 |
|
Product development |
|
|
80,345 |
|
|
|
77,269 |
|
|
|
64,010 |
|
General and administrative |
|
|
62,270 |
|
|
|
56,571 |
|
|
|
43,345 |
|
Amortization of other acquired intangibles |
|
|
7,303 |
|
|
|
7,358 |
|
|
|
4,277 |
|
Compensation expense from repurchase
of subsidiary stock options |
|
|
— |
|
|
|
— |
|
|
|
2,803 |
|
Impairment of goodwill |
|
|
8,174 |
|
|
|
— |
|
|
|
— |
|
Acquisition-related expenses, net |
|
|
— |
|
|
|
1,849 |
|
|
|
3,403 |
|
| |
Total operating expenses |
|
|
349,528 |
|
|
|
329,333 |
|
|
|
276,382 |
|
| |
Income from operations |
|
|
57,216 |
|
|
|
40,943 |
|
|
|
59,950 |
|
| |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other |
|
|
9,862 |
|
|
|
7,544 |
|
|
|
5,257 |
|
Foreign currency loss |
|
|
(2,031 |
) |
|
|
(2,904 |
) |
|
|
(2,158 |
) |
| |
Total other income, net |
|
|
7,831 |
|
|
|
4,640 |
|
|
|
3,099 |
|
| |
Income before provision for income taxes |
|
|
65,047 |
|
|
|
45,583 |
|
|
|
63,049 |
|
Provision for income taxes |
|
|
22,767 |
|
|
|
16,182 |
|
|
|
16,792 |
|
| |
Net income |
|
$ |
42,280 |
|
|
$ |
29,401 |
|
|
$ |
46,257 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.02 |
|
|
$ |
0.72 |
|
|
$ |
1.21 |
|
Diluted |
|
$ |
0.96 |
|
|
$ |
0.68 |
|
|
$ |
1.12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,554 |
|
|
|
40,976 |
|
|
|
38,227 |
|
Diluted |
|
|
43,943 |
|
|
|
43,269 |
|
|
|
41,424 |
|
| |
See notes to consolidated financial statements.
28
Consolidated Statements of Shareholders’ Equity
(In thousands)
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
197,748 |
|
|
$ |
160,911 |
|
|
$ |
87,725 |
|
Exercise of employee stock options |
|
|
36,144 |
|
|
|
7,514 |
|
|
|
49,822 |
|
Issuance of stock under the employee stock purchase plan |
|
|
6,248 |
|
|
|
5,484 |
|
|
|
5,373 |
|
Repurchase of common stock |
|
|
(22,329 |
) |
|
|
(8,309 |
) |
|
|
(6,932 |
) |
Repurchase of stock in subsidiary, net |
|
|
— |
|
|
|
— |
|
|
|
(467 |
) |
Present value of payments for re-pricing of stock options |
|
|
(2,604 |
) |
|
|
— |
|
|
|
— |
|
Stock-based compensation |
|
|
20,878 |
|
|
|
22,405 |
|
|
|
2,611 |
|
Issuance of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
5,840 |
|
Issuance of shares in connection with Actional business
combination |
|
|
— |
|
|
|
13,510 |
|
|
|
— |
|
Tax benefit from stock plans |
|
|
4,562 |
|
|
|
1,939 |
|
|
|
16,939 |
|
Reclassification from deferred compensation |
|
|
— |
|
|
|
(5,706 |
) |
|
|
— |
|
| |
Balance, end of year |
|
|
240,647 |
|
|
|
197,748 |
|
|
|
160,911 |
|
| |
Deferred compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
— |
|
|
|
(5,706 |
) |
|
|
— |
|
Issuance of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
(5,840 |
) |
Recognition of compensation expense |
|
|
— |
|
|
|
— |
|
|
|
134 |
|
Reclassification to additional paid-in capital |
|
|
— |
|
|
|
5,706 |
|
|
|
— |
|
| |
Balance, end of year |
|
|
— |
|
|
|
— |
|
|
|
(5,706 |
) |
| |
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
246,816 |
|
|
|
218,799 |
|
|
|
177,592 |
|
| |
Net income |
|
|
42,280 |
|
|
|
29,401 |
|
|
|
46,257 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments, net of tax |
|
|
158 |
|
|
|
148 |
|
|
|
(100 |
) |
Unrealized gains (losses) on foreign exchange hedging
contracts, net of tax |
|
|
— |
|
|
|
— |
|
|
|
593 |
|
Translation adjustments, net of tax |
|
|
3,569 |
|
|
|
3,140 |
|
|
|
(761 |
) |
| |
Comprehensive income |
|
|
46,007 |
|
|
|
32,689 |
|
|
|
45,989 |
|
Repurchase of common stock |
|
|
(15,596 |
) |
|
|
(4,672 |
) |
|
|
(4,782 |
) |
| |
Balance, end of year |
|
|
277,227 |
|
|
|
246,816 |
|
|
|
218,799 |
|
| |
Total shareholders’ equity |
|
$ |
517,874 |
|
|
$ |
444,564 |
|
|
$ |
374,004 |
|
| |
See notes to consolidated financial statements.
29
Consolidated Statements of Cash Flows
(In thousands)
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,280 |
|
|
$ |
29,401 |
|
|
$ |
46,257 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
|
9,492 |
|
|
|
9,093 |
|
|
|
8,547 |
|
Impairment of certain ERP costs |
|
|
2,388 |
|
|
|
— |
|
|
|
— |
|
Loss on disposal of fixed assets |
|
|
173 |
|
|
|
— |
|
|
|
— |
|
Amortization of capitalized software costs |
|
|
175 |
|
|
|
175 |
|
|
|
243 |
|
Amortization of intangible assets |
|
|
17,395 |
|
|
|
15,508 |
|
|
|
9,399 |
|
Impairment of goodwill |
|
|
8,174 |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation |
|
|
20,878 |
|
|
|
22,405 |
|
|
|
2,745 |
|
In-process research and development |
|
|
— |
|
|
|
900 |
|
|
|
— |
|
Tax benefit from stock plans |
|
|
4,562 |
|
|
|
1,939 |
|
|
|
17,745 |
|
Excess tax benefit from stock plans |
|
|
(2,948 |
) |
|
|
(875 |
) |
|
|
— |
|
Allowances for accounts receivable |
|
|
968 |
|
|
|
1,150 |
|
|
|
648 |
|
Deferred income taxes |
|
|
(4,127 |
) |
|
|
(7,219 |
) |
|
|
(5,896 |
) |
Changes in operating assets and liabilities, net of effects
from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,255 |
) |
|
|
(7,224 |
) |
|
|
(5,141 |
) |
Other assets |
|
|
973 |
|
|
|
(3,597 |
) |
|
|
1,628 |
|
Accounts payable and accrued expenses |
|
|
(2,277 |
) |
|
|
(5,542 |
) |
|
|
6,281 |
|
Income taxes payable |
|
|
1,350 |
|
|
|
5,091 |
|
|
|
(2,898 |
) |
Deferred revenue |
|
|
12,806 |
|
|
|
6,710 |
|
|
|
1,072 |
|
| |
Net cash provided by operating activities |
|
|
104,007 |
|
|
|
67,915 |
|
|
|
80,630 |
|
| |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments available for sale |
|
|
(334,296 |
) |
|
|
(310,539 |
) |
|
|
(373,963 |
) |
Sales and maturities of investments available for sale |
|
|
243,516 |
|
|
|
341,694 |
|
|
|
280,765 |
|
Purchases of property and equipment |
|
|
(18,482 |
) |
|
|
(21,738 |
) |
|
|
(10,909 |
) |
Purchase of technology |
|
|
(1,800 |
) |
|
|
— |
|
|
|
— |
|
Acquisitions, net of cash acquired and purchase price settlements |
|
|
— |
|
|
|
(79,288 |
) |
|
|
(31,488 |
) |
Decrease (increase) in other noncurrent assets |
|
|
(547 |
) |
|
|
103 |
|
|
|
(2,390 |
) |
| |
Net cash used for investing activities |
|
|
(111,609 |
) |
|
|
(69,768 |
) |
|
|
(137,985 |
) |
| |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
42,499 |
|
|
|
12,998 |
|
|
|
55,195 |
|
Repurchase of common stock |
|
|
(38,031 |
) |
|
|
(12,981 |
) |
|
|
(11,714 |
) |
Repurchase of stock in subsidiary, net |
|
|
— |
|
|
|
— |
|
|
|
(467 |
) |
Excess tax benefit from stock plans |
|
|
2,948 |
|
|
|
875 |
|
|
|
— |
|
Payment of long-term debt |
|
|
(281 |
) |
|
|
(262 |
) |
|
|
(238 |
) |
| |
Net cash provided by financing activities |
|
|
7,135 |
|
|
|
630 |
|
|
|
42,776 |
|
| |
Effect of exchange rate changes on cash |
|
|
7,897 |
|
|
|
7,274 |
|
|
|
(3,462 |
) |
| |
Net increase (decrease) in cash and equivalents |
|
|
7,430 |
|
|
|
6,051 |
|
|
|
(18,041 |
) |
Cash and equivalents, beginning of year |
|
|
46,449 |
|
|
|
40,398 |
|
|
|
58,439 |
|
| |
Cash and equivalents, end of year |
|
$ |
53,879 |
|
|
$ |
46,449 |
|
|
$ |
40,398 |
|
| |
See notes to consolidated financial statements.
30
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 deployed in a distributed, Web-based or client/server
environment. 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. We
eliminate all intercompany balances and transactions.
Reclassification
We have reclassified certain amounts in the fiscal 2006 cash flow presentation of operations to
conform to the fiscal 2007 cash flow presentation. We have not changed operating, investing or
financing cash flows as a result of this reclassification. The following table details the
reclassification:
(In thousands)
| |
| |
|
|
|
|
|
|
|
|
| Year Ended November 30, |
|
2006 |
|
|
2006 |
|
| |
| |
|
(As previously reported) |
|
|
(As reclassified) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Tax benefit from stock plans |
|
$ |
1,064 |
|
|
$ |
1,939 |
|
Excess tax benefit from stock plans |
|
|
— |
|
|
|
(875 |
) |
| |
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.
31
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 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.
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
| |
Beginning balance |
|
$ |
8,549 |
|
|
$ |
8,639 |
|
|
$ |
8,710 |
|
Charged to costs and expenses |
|
|
968 |
|
|
|
1,150 |
|
|
|
648 |
|
Write-offs and other |
|
|
(59 |
) |
|
|
(1,240 |
) |
|
|
(719 |
) |
| |
Ending balance |
|
$ |
9,458 |
|
|
$ |
8,549 |
|
|
$ |
8,639 |
|
| |
Cash Equivalents and Short-Term Investments
Cash equivalents include short-term, highly liquid investments purchased with remaining maturities
of three months or less. We classify short-term investments, which consist primarily of auction
rate securities and state and municipal obligations, as investments available for sale which are
stated at fair value. We include aggregate unrealized holding gains and losses as a component of
accumulated other comprehensive income in shareholders’ equity.
32
Supplemental Cash Flow Information
In fiscal years 2007, 2006 and 2005, we paid $21.7 million, $17.3 million and $8.4 million in
income taxes, respectively. Refunds from the Internal Revenue Service in fiscal 2007 were
insignificant. In fiscal years 2006 and 2005, we received refunds from the Internal Revenue
Service of $1.3 million and $1.7 million, respectively, related to the filing of original tax
returns and amended tax returns from prior years.
In fiscal year 2007, cash paid for interest on the mortgage totaled $0.1 million. In fiscal years
2006 and 2005, cash paid for interest on the mortgage totaled $0.2 million in each year.
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, short-term 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.
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 investments available for sale on current market value (Note 2). The carrying value of long-term
debt (Note 10) approximates its fair value. We measure and record derivative financial instruments
at fair value (Note 3).
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. 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. We periodically compare the unamortized costs of capitalized
software to the expected future revenues for the products. If the unamortized costs exceed the
expected future net realizable value, we write off the excess amount. There were no capitalized
software costs included in other assets at November 30, 2007, and $0.2 million (net of accumulated
amortization of $13.6 million) at November 30, 2006.
33
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 $11.9 million to the reporting units comprising the
OpenEdge operating segment, $57.2 million to the reporting units comprising the Enterprise
Infrastructure reporting segment and $88.2 million to the reporting unit comprising the DataDirect
reporting 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 valuation models. During fiscal 2007 and fiscal 2006, we completed our annual testing for
impairment of goodwill and, based on those tests, concluded that no impairment of goodwill existed
as of December 15, 2006 and December 15, 2005, the goodwill impairment measurement dates for fiscal
2007 and fiscal 2006, respectively. However, an interim impairment test was also performed in the
fourth quarter of fiscal 2007 as recent 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 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 recorded 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 portion 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.
Stock-based Compensation
On December 1, 2005, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
“Share-Based Payment” (SFAS 123R) using the modified prospective transition method. SFAS 123R is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), and requires a
company to measure the grant date fair value of equity awards given to employees in exchange for
services and recognize that cost over the period that such services are performed.
Prior to adopting SFAS 123R, we accounted for stock-based compensation under Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), as permitted by SFAS
123. Under APB 25, we recorded stock-based compensation expense associated with below-market
grants of stock options but generally did not otherwise record any stock-based compensation.
34
The following table illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of SFAS 123 to stock-based employee compensation in fiscal
year 2005.
| |
|
|
|
|
| (In thousands, except per share data) |
|
|
| |
| Year Ended November 30, |
|
2005 |
| |
|
|
|
|
|
Net income, as reported |
|
$ |
46,257 |
|
Add: stock-based compensation included above, net of tax |
|
|
1,805 |
|
Less: stock-based compensation expense determined under fair
value method for all awards, net of tax |
|
|
(27,888 |
) |
| |
Pro forma net income |
|
$ |
20,174 |
|
| |
Earnings per share: |
|
|
|
|
Basic, as reported |
|
$ |
1.21 |
|
| |
Basic, pro forma |
|
$ |
0.53 |
|
| |
| |
Diluted, as reported |
|
$ |
1.12 |
|
| |
Diluted, pro forma |
|
$ |
0.49 |
|
| |
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 $57.0 million at November 30, 2007.
Comprehensive Income
The components of comprehensive income include, in addition to net income, unrealized gains and
losses on investments, unrealized gains and losses on foreign exchange hedging contracts and
foreign currency translation adjustments.
Accumulated other comprehensive income is made up of the following components:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
| |
| November 30, |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, net of tax |
|
$ |
4,722 |
|
|
$ |
1,153 |
|
Accumulated unrealized gains (losses) on investments, net of tax |
|
|
111 |
|
|
|
(47 |
) |
| |
Total accumulated comprehensive income |
|
$ |
4,833 |
|
|
$ |
1,106 |
|
| |
The tax effect on cumulative translation adjustment in fiscal years 2007 and 2006 was $2.5 million
and $0.6 million respectively. The tax effect on accumulated unrealized gains (losses) on
investments was insignificant.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 in
the first quarter of fiscal 2008. We are currently evaluating the adoption of FIN 48, but it will
likely result in a change to the amount of reserves for prior year taxes. Such changes will be
recorded directly through equity.
35
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands fair value
measurement disclosures. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating whether adoption of SFAS 157 will
have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (SFAS 159). SFAS 159 provides a “Fair Value Option” under which a company
may irrevocably elect fair value as the initial and subsequent measurement attribute for certain
financial assets and liabilities. This Fair Value Option will be available on a
contract-by-contract basis with changes in fair value recognized in earnings as those changes
occur. The effective date for SFAS 159 for us was December
1, 2007.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
establishes a framework to improve the relevance, representational faithfulness, 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.
Note 2: Short-Term Investments
A summary of our investments available for sale by major security type at November 30, 2007 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| Security Type |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$ |
240,446 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
240,446 |
|
State and municipal bond obligations |
|
|
45,030 |
|
|
|
173 |
|
|
|
(3 |
) |
|
|
45,200 |
|
| |
Total |
|
$ |
285,476 |
|
|
$ |
173 |
|
|
$ |
(3 |
) |
|
$ |
285,646 |
|
| |
A summary of our investments available for sale by major security type at November 30, 2006 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| Security Type |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$ |
152,709 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
152,709 |
|
State and municipal bond obligations |
|
|
42,229 |
|
|
|
24 |
|
|
|
(96 |
) |
|
|
42,157 |
|
| |
Total |
|
$ |
194,938 |
|
|
$ |
24 |
|
|
$ |
(96 |
) |
|
$ |
194,866 |
|
| |
The fair value of debt securities at November 30, 2007 and 2006 by contractual maturity, is as
follows:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Due in one year or less (1) |
|
$ |
261,287 |
|
|
$ |
172,027 |
|
Due after one year |
|
|
24,359 |
|
|
|
22,839 |
|
| |
Total |
|
$ |
285,646 |
|
|
$ |
194,866 |
|
| |
|
|
|
| (1) |
|
Includes auction rate securities which are tendered for interest-rate setting purposes
periodically throughout the year. In the event that a future tender is not able to be
completed, the investment will not be liquid. In the event that we need access to these funds,
we will not be able to do so until a future tender is successful, the issuer redeems the
outstanding securities or the securities mature which in substantially all cases is in excess
of one year. |
36
Note 3: 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.
We 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. There were 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. Major U.S. multinational banks are
counterparties to the option contracts. 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
gains (losses) of our outstanding foreign currency forward contracts were $(0.3) million and $0.4
million at November 30, 2007 and 2006, respectively.
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* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar |
|
|
— |
|
|
$ |
6,724 |
|
|
|
1.14 |
|
Brazilian real |
|
$ |
1,278 |
|
|
|
— |
|
|
|
1.80 |
|
Euro |
|
|
— |
|
|
|
41,606 |
|
|
|
0.68 |
|
Japanese yen |
|
|
4,564 |
|
|
|
— |
|
|
|
109.55 |
|
U.K. pound |
|
|
— |
|
|
|
30,581 |
|
|
|
0.48 |
|
| |
|
|
$ |
5,842 |
|
|
$ |
78,911 |
|
|
|
|
|
| |
|
|
|
| * |
|
expressed as local currency unit per U.S. dollar |
37
The table below details outstanding forward contracts, which mature in ninety days or less, at
November 30, 2006 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* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar |
|
|
— |
|
|
$ |
2,645 |
|
|
|
1.28 |
|
Brazilian real |
|
$ |
868 |
|
|
|
— |
|
|
|
2.19 |
|
Euro |
|
|
— |
|
|
|
33,979 |
|
|
|
0.76 |
|
Japanese yen |
|
|
4,311 |
|
|
|
— |
|
|
|
115.98 |
|
South African rand |
|
|
140 |
|
|
|
— |
|
|
|
7.14 |
|
U.K. pound |
|
|
— |
|
|
|
16,050 |
|
|
|
0.51 |
|
| |
|
|
$ |
5,319 |
|
|
$ |
52,674 |
|
|
|
|
|
| |
* 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, |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Computer equipment and software |
|
$ |
53,520 |
|
|
$ |
59,316 |
|
Land, buildings and leasehold improvements |
|
|
52,587 |
|
|
|
53,340 |
|
Furniture and fixtures |
|
|
10,218 |
|
|
|
9,219 |
|
| |
Total |
|
|
116,325 |
|
|
|
121,875 |
|
Less accumulated depreciation and amortization |
|
|
51,376 |
|
|
|
64,290 |
|
| |
Property and equipment, net |
|
$ |
64,949 |
|
|
$ |
57,585 |
|
| |
In fiscal 2007, we recorded a write-down associated with a portion 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. There was
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, 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 |
|
| |
38
Intangible assets are composed of the following significant classes at November 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| |
|
Gross |
|
|
|
|
|
|
|
| |
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
| |
|
Amount |
|
|
Amortization |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology |
|
$ |
65,899 |
|
|
$ |
19,679 |
|
|
$ |
46,220 |
|
Customer-related and other |
|
|
44,904 |
|
|
|
16,055 |
|
|
|
28,849 |
|
| |
Total |
|
$ |
110,803 |
|
|
$ |
35,734 |
|
|
$ |
75,069 |
|
| |
We amortize intangible assets assuming no expected residual value. The weighted average
amortization period for all intangible assets is 6.6 years, including 6.5 years for purchased
technology and 6.8 years for customer-related and other intangible assets. Amortization expense
related to these intangible assets was $17.4 million, $15.5 million and $9.4 million in fiscal
years 2007, 2006 and 2005, respectively. We estimate future amortization expense from intangible
assets held as of November 30, 2007, to be approximately $15.7 million, $14.3 million, $13.4
million, $6.7 million and $4.9 million in fiscal years 2008, 2009, 2010, 2011 and 2012,
respectively.
Changes in the carrying amount of goodwill for fiscal year 2007 by segment 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 |
|
| |
Changes in the carrying amount of goodwill for fiscal year 2006 by segment is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
Acquisitions and |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance |
|
|
Purchase |
|
|
|
|
|
|
|
|
|
|
Balance |
|
| |
|
Dec. 1, |
|
|
Accounting |
|
|
|
|
|
|
Translation |
|
|
Nov. 30, |
|
| |
|
2005 |
|
|
Adjustments |
|
|
Write-down |
|
|
Adjustments |
|
|
2006 |
|
| |
| |
OpenEdge |
|
$ |
11,453 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
108 |
|
|
$ |
11,561 |
|
Enterprise Infrastructure |
|
|
27,036 |
|
|
|
30,172 |
|
|
|
— |
|
|
|
— |
|
|
|
57,208 |
|
DataDirect |
|
|
46,485 |
|
|
|
42,604 |
|
|
|
— |
|
|
|
— |
|
|
|
89,089 |
|
| |
Total |
|
$ |
84,974 |
|
|
$ |
72,776 |
|
|
$ |
— |
|
|
$ |
108 |
|
|
$ |
157,858 |
|
| |
39
Note 6: 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.
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,280 |
|
|
$ |
29,401 |
|
|
$ |
46,257 |
|
| |
Weighted average shares outstanding |
|
|
41,554 |
|
|
|
40,976 |
|
|
|
38,227 |
|
Dilutive impact from outstanding stock options |
|
|
2,389 |
|
|
|
2,293 |
|
|
|
3,197 |
|
| |
Diluted weighted average shares outstanding |
|
|
43,943 |
|
|
|
43,269 |
|
|
|
41,424 |
|
| |
Basic earnings per share |
|
$ |
1.02 |
|
|
$ |
0.72 |
|
|
$ |
1.21 |
|
| |
Diluted earnings per share |
|
$ |
0.96 |
|
|
$ |
0.68 |
|
|
$ |
1.12 |
|
| |
Stock options to purchase approximately 2,379,000 shares, 2,468,000 shares and 62,000 shares of
common stock were excluded from the calculation of diluted earnings per share in fiscal years 2007,
2006 and 2005, respectively, because these options were anti-dilutive.
Note 7: 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, 2007, 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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
|
41,177 |
|
|
|
40,436 |
|
|
|
36,422 |
|
Shares issued |
|
|
2,508 |
|
|
|
1,252 |
|
|
|
4,475 |
|
Shares repurchased |
|
|
(1,290 |
) |
|
|
(481 |
) |
|
|
(461 |
) |
Shares forfeited |
|
|
(15 |
) |
|
|
(30 |
) |
|
|
— |
|
| |
Ending balance |
|
|
42,380 |
|
|
|
41,177 |
|
|
|
40,436 |
|
| |
Common Stock Repurchases
In fiscal years 2007, 2006 and 2005, we purchased and retired 1,290,000 shares, 481,000 shares and
461,000 shares, respectively, of our common stock for $38.0 million, $12.9 million and $11.7
million, respectively. Since beginning our stock repurchase program in 1996, we have purchased and
retired 20,490,000 shares at a cost of $253.4 million.
In September 2007, our Board of Directors authorized, for the period from October 1, 2007 through
September 30, 2008, the purchase of up to 10,000,000 shares of our common stock. There were
9,424,000 shares of common stock available for repurchase under this authorization at November 30,
2007.
40
Stock Options and Stock Awards
We have three shareholder-approved stock plans: the 1992 Incentive and Nonqualified Stock Option
Plan (1992 Plan), the 1994 Stock Incentive Plan (1994 Plan) and the 1997 Stock Incentive Plan (1997
Plan). These plans permit the granting of stock awards to officers, members of the Board of
Directors, employees and consultants. Awards under the 1992, 1994 and 1997 Plans may include
nonqualified stock options (as well as incentive stock options in the case of the 1997 Plan),
grants of conditioned stock, unrestricted grants of stock, grants of stock contingent upon the
attainment of performance goals and stock appreciation rights. Prior to fiscal 2005, no awards
other than incentive and nonqualified stock options had been granted under the foregoing plans. The
options granted prior to fiscal 2005 generally vest over five years and had terms of ten years.
Options granted since fiscal 2005 generally vest over five years and have terms of seven years. A
total of 21,540,000 shares are issuable under these plans, of which 105,000 shares were available
for grant at November 30, 2007.
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). 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. Prior to fiscal 2005, no awards other than nonqualified stock
options had been granted under the 2002 Plan. The options granted prior to fiscal 2005 generally
vest over five years and had terms of ten years. The options granted in fiscal years 2007, 2006 and
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 248,000 shares were available for grant at November 30,
2007.
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. 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 vested
over five years and have terms of ten years. The options granted in fiscal years 2007, 2006 and
2005 generally vest over five years and have terms of seven years. A total of 700,000 shares are
issuable under the 2004 Plan, of which 272,000 shares were available for grant at November 30,
2007.
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, 2006 |
|
|
10,478 |
|
|
$ |
19.00 |
|
Granted |
|
|
1,495 |
|
|
|
31.67 |
|
Exercised |
|
|
(2,216 |
) |
|
|
16.31 |
|
Canceled |
|
|
(577 |
) |
|
|
23.36 |
|
| |
Options outstanding, November 30, 2007 |
|
|
9,180 |
|
|
$ |
22.47 |
|
| |
Options exercisable, November 30, 2007 |
|
|
6,016 |
|
|
$ |
19.99 |
|
| |
The weighted average remaining contractual term and the aggregate intrinsic value for options
outstanding at November 30, 2007 were 5.2 years and $83.1 million, respectively. The weighted
average remaining contractual term and the aggregate intrinsic value for options exercisable at
November 30, 2007 were 4.8 years and $69.1 million, respectively.
41
For various exercise price ranges, characteristics of outstanding and exercisable stock options at
November 30, 2007 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 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 7.21—13.50 |
|
|
1,285 |
|
|
|
3.60 |
|
|
$ |
13.08 |
|
|
|
1,285 |
|
|
$ |
13.08 |
|
13.88—16.99 |
|
|
1,100 |
|
|
|
3.89 |
|
|
|
15.75 |
|
|
|
1,047 |
|
|
|
15.70 |
|
17.42—21.86 |
|
|
2,638 |
|
|
|
5.86 |
|
|
|
20.30 |
|
|
|
2,098 |
|
|
|
20.28 |
|
21.87—25.01 |
|
|
1,424 |
|
|
|
5.15 |
|
|
|
23.92 |
|
|
|
610 |
|
|
|
23.74 |
|
27.09—32.40 |
|
|
2,733 |
|
|
|
5.87 |
|
|
|
30.94 |
|
|
|
976 |
|
|
|
30.73 |
|
| |
$ 7.21—32.40 |
|
|
9,180 |
|
|
|
5.20 |
|
|
$ |
22.47 |
|
|
|
6,016 |
|
|
$ |
19.99 |
|
| |
A summary of the status of our restricted stock awards as of November 30, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
Weighted Average |
|
| |
|
Number |
|
|
Grant date |
|
| |
|
of Shares |
|
|
Fair value |
|
| |
|
|
|
|
|
|
|
|
|
Restricted stock awards nonvested, December 1, 2006 |
|
|
72 |
|
|
$ |
30.81 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
(68 |
) |
|
|
30.81 |
|
Forfeited |
|
|
(4 |
) |
|
|
30.81 |
|
| |
Restricted stock awards nonvested, November 30, 2007 |
|
|
— |
|
|
|
— |
|
| |
In fiscal 2007, we issued 27,000 deferred stock units (DSU) with a fair value of $0.9 million to
outside members of our board of directors. Each DSU represents one share of our common stock. 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.
In April 2007, we completed a tender offer to amend stock options issued in previous years for
which it was determined that the exercise price was less than the fair value on the revised date of
grant in order to mitigate the unfavorable personal tax consequences under Section 409A of the
Internal Revenue Code (IRC). The amendment of such options resulted in a stock option modification
under SFAS 123R. The terms of the offer require us to make cash payments to approximately 400
option holders in an amount equal to the difference between the exercise price of the original
option and the amended exercise price of the new option. We recorded a liability of approximately
$2.5 million in fiscal 2007 for the present value of the fully vested cash payments to be paid in
January 2008, 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. The stock-based compensation
expense amount represents the incremental fair value of the new options, and was recognized in the
second quarter due to the fact that the future cash payments were fully vested as of the conclusion
of the tender offer. Also, as a result of the modification and subsequent remeasurement of the
options included in the tender offer, we accelerated the recognition of $0.4 million of unamortized
stock-based compensation associated with the partial settlement of the unvested portion of the
original award.
In April 2007, we cancelled certain outstanding options held by two members of the Compensation
Committee of the Board of Directors, due to their ineligibility to receive options under the 1997
Stock Incentive Plan. Approximately 117,000 options were cancelled, and subsequently re-granted
after the plan was amended to allow the granting of options to Compensation Committee members. The
cancel and re-grant of those options resulted in a stock option modification under SFAS 123R. Cash
payments totaling approximately $1.4 million were made to the two individuals in the second quarter
of fiscal 2007 to compensate them for the profits lost due to the cancellation of the original
options, calculated using the closing stock price on the cancellation date, versus the exercise
price of the options. The re-granted options were issued at fair market value on the
42
grant date, and had a total fair value of approximately $1.3 million. Since the re-granted options
were fully vested on the grant date, the total incremental fair value of $1.2 million was
recognized as stock-based compensation expense in fiscal 2007.
In December 2006, we also entered into option amendment agreements in order to mitigate the
unfavorable personal tax consequences under Section 409A of the IRC with five individuals for whom
the deadline for such an amendment was December 31, 2006. These agreements contained similar terms
to the tender offer except that the cash payments associated with unvested shares as of the date of
the agreements require the individuals to be employed by us on the payment dates. We accounted for
the impact of these option amendment agreements as a stock option modification under SFAS 123R. We
recorded a liability of approximately $0.7 million for the present value of the expected cash
payments, which will be paid in up to five installments, depending on the vest schedules of each
individual, through October 2009. 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. An additional incremental fair value of $0.1 million will be recorded to stock-based
compensation over the remaining vest period.
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, |
|
2007 |
|
2006 |
|
2005 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses |
|
$ |
129 |
|
|
$ |
144 |
|
|
$ |
21 |
|
Cost of maintenance and services |
|
|
1,518 |
|
|
|
1,645 |
|
|
|
203 |
|
Sales and marketing |
|
|
7,979 |
|
|
|
8,316 |
|
|
|
1,028 |
|
Product development |
|
|
5,083 |
|
|
|
5,130 |
|
|
|
545 |
|
General and administrative |
|
|
8,175 |
|
|
|
7,170 |
|
|
|
948 |
|
| |
Total stock-based compensation expense |
|
|
22,884 |
|
|
|
22,405 |
|
|
|
2,745 |
|
Income tax benefit included in provision for income taxes |
|
|
(5,728 |
) |
|
|
(6,554 |
) |
|
|
(856 |
) |
| |
Total stock-based compensation expense, net of tax |
|
$ |
17,156 |
|
|
$ |
15,851 |
|
|
$ |
1,889 |
|
| |
Of the total stock-based compensation expense of $22.9 million in fiscal 2007, $20.9 million was
recorded as an increase to additional paid-in capital, $1.4 million represented cash payments and
$0.6 million was recorded as an increase to accrued liabilities.
We estimated the fair value of options and employee stock purchase plan shares granted in fiscal
years 2007, 2006 and 2005 on the measurement dates using the Black-Scholes option valuation model
with the following weighted average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Purchase Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
25.4 |
% |
|
|
27.2 |
% |
|
|
32.6 |
% |
Risk-free interest rate |
|
|
4.6 |
% |
|
|
3.1 |
% |
|
|
2.4 |
% |
Expected life in years |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.5 |
|
Expected dividend yield |
|
None |
|
None |
|
None |
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
26.5 |
% |
|
|
29.3 |
% |
|
|
32.2 |
% |
Risk-free interest rate |
|
|
4.5 |
% |
|
|
4.8 |
% |
|
|
4.3 |
% |
Expected life in years |
|
|
4.9 |
|
|
|
4.8 |
|
|
|
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.
43
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.
Based on the above assumptions, the weighted average estimated fair value of options granted in
fiscal years 2007, 2006 and 2005 was $10.11, $8.38 and $11.05 per share, respectively. We estimate
forfeitures related to option grants at an annual rate of 7% per year. We amortize the estimated
fair value of options to expense over the vesting period. The weighted average estimated fair
value for shares issued under the ESPP in fiscal years 2007, 2006 and 2005 was $7.04, $6.70 and
$6.33 per share, respectively.
Other reasonable assumptions about these factors could provide different estimates of fair value.
Future changes in stock price volatility, life of options, interest rates, forfeitures and dividend
practices, if any, may require changes in our assumptions, which could materially affect the
calculation of fair value.
Total gross unrecognized stock-based compensation expense related to unvested stock options and
unvested restricted stock awards amounted to $29.2 million at November 30, 2007. These costs are
expected to be recognized over a weighted average period of 3.0 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 $2.9
million in fiscal 2007 and $0.9 million in fiscal 2006.
During fiscal years 2007, 2006 and 2005 the following activity occurred under our plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of stock options on date exercised |
|
$ |
32,767 |
|
|
$ |
6,615 |
|
|
$ |
63,129 |
|
Total fair value of DSUs on date vested |
|
|
872 |
|
|
|
— |
|
|
|
— |
|
Total fair value of restricted stock on date vested |
|
|
2,083 |
|
|
|
2,670 |
|
|
|
42 |
|
| |
Employee Stock Purchase Plan
The 1991 Employee Stock Purchase Plan (ESPP), as amended, 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. During fiscal years 2007, 2006 and 2005, we issued 292,000
shares, 283,000 shares and 324,000 shares, respectively, with weighted average purchase prices of
$21.42, $19.35 and $16.56 per share, respectively, under the ESPP. At November 30, 2007,
approximately 771,000 shares were available and reserved for issuance under the ESPP.
Repurchase of Outstanding Subsidiary Options
In fiscal 2005, we entered into an agreement and plan of merger with Sonic Software Corporation
(Sonic), a Delaware corporation and our majority-owned subsidiary, and Sonic Merger Corporation, a
Delaware corporation and our wholly-owned subsidiary (Merger Sub). The purpose of the merger was
for us to purchase the minority-owned shares and the in-the-money, vested stock options of Sonic.
The merger agreement was unanimously approved by our board of directors as well as the boards of
directors of Sonic and Merger Sub and was also approved by the requisite votes of the stockholders
of Sonic and Merger Sub. We consummated the merger on August 31, 2005 immediately after execution
of the merger agreement.
Pursuant to the merger agreement, we paid an aggregate of $0.6 million, recorded as a reduction in
shareholders’ equity, to the holders of Sonic common stock (other than us) and paid an aggregate of
$2.8 million, recorded as compensation expense in the
44
statement of operations, to Sonic employees who held vested, in-the-money options to purchase Sonic
common stock. The price per share paid to the minority stockholders and the option holders of Sonic
was determined by our board of directors and that of Sonic, based on a number of factors, including
the receipt of a recent valuation analysis of Sonic by an independent third-party and our desire
that Sonic employees perceive the merger as fair and reasonable under all of the circumstances.
Note 8: 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 $5.5 million, $5.3 million and $4.7 million for fiscal years 2007, 2006 and
2005, respectively.
Note 9: Income Taxes
The components of pretax income are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
50,485 |
|
|
$ |
28,613 |
|
|
$ |
50,110 |
|
Non-U.S. |
|
|
14,562 |
|
|
|
16,970 |
|
|
|
12,939 |
|
| |
Total |
|
$ |
65,047 |
|
|
$ |
45,583 |
|
|
$ |
63,049 |
|
| |
The provisions for income taxes are comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
19,046 |
|
|
$ |
15,265 |
|
|
$ |
20,829 |
|
State |
|
|
2,645 |
|
|
|
2,564 |
|
|
|
1,876 |
|
Foreign |
|
|
5,203 |
|
|
|
6,827 |
|
|
|
5,106 |
|
| |
Total current |
|
|
26,894 |
|
|
|
24,656 |
|
|
|
27,811 |
|
| |
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,896 |
) |
|
|
(6,622 |
) |
|
|
(10,902 |
) |
State |
|
|
(215 |
) |
|
|
(947 |
) |
|
|
117 |
|
Foreign |
|
|
(1,016 |
) |
|
|
(905 |
) |
|
|
(234 |
) |
| |
Total deferred |
|
|
(4,127 |
) |
|
|
(8,474 |
) |
|
|
(11,019 |
) |
| |
Total |
|
$ |
22,767 |
|
|
$ |
16,182 |
|
|
$ |
16,792 |
|
| |
45
The tax effects of significant items comprising our deferred taxes are as follows:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
| |
| November 30, |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
2,408 |
|
|
$ |
2,538 |
|
Other current assets |
|
|
588 |
|
|
|
582 |
|
Capitalized research costs |
|
|
6,971 |
|
|
|
7,540 |
|
Accrued compensation |
|
|
914 |
|
|
|
1,185 |
|
Accrued liabilities and other |
|
|
5,612 |
|
|
|
6,719 |
|
Deferred revenue |
|
|
1,336 |
|
|
|
1,640 |
|
Stock-based compensation |
|
|
6,756 |
|
|
|
5,221 |
|
Tax credit and loss carryforwards |
|
|
32,534 |
|
|
|
27,648 |
|
| |
Gross deferred tax assets |
|
|
57,119 |
|
|
|
53,073 |
|
Valuation allowance |
|
|
(17,201 |
) |
|
|
(6,224 |
) |
| |
Total deferred tax assets |
|
|
39,918 |
|
|
|
46,849 |
|
| |
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
(2,635 |
) |
|
|
(4,287 |
) |
Depreciation and amortization |
|
|
(9,474 |
) |
|
|
(13,784 |
) |
| |
Total deferred tax liabilities |
|
|
(12,109 |
) |
|
|
(18,071 |
) |
| |
Total |
|
$ |
27,809 |
|
|
$ |
28,778 |
|
| |
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 2007 primarily resulted from additional deferred tax assets
associated with changes in our estimates of tax credit carryforwards. The increase in the
valuation allowance in fiscal 2006 primarily related to the creation or acquisition of net
operating loss and capital loss carryforwards. Of the total valuation allowance at November 30,
2007, we would credit goodwill for $5.1 million if we reversed such valuation allowances upon
utilization of the balances related to net operating losses obtained in acquisitions.
At November 30, 2007, we have net operating loss carryforwards of $44.9 million expiring on various
dates through 2026 and $20.0 million that may be carried forward indefinitely. At November 30,
2007, we have tax credit carryforwards of approximately $10.2 million expiring on various dates
through 2027 and $0.6 million that may be carried forward indefinitely.
A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Foreign rate differences |
|
|
1.5 |
|
|
|
1.1 |
|
|
|
0.7 |
|
Extraterritorial income exclusion |
|
|
(0.3 |
) |
|
|
(3.3 |
) |
|
|
(3.4 |
) |
State income taxes, net |
|
|
2.4 |
|
|
|
2.3 |
|
|
|
2.1 |
|
Research credits |
|
|
(2.6 |
) |
|
|
— |
|
|
|
(0.6 |
) |
Tax-exempt interest |
|
|
(4.6 |
) |
|
|
(4.9 |
) |
|
|
(2.3 |
) |
Adjustment related to previously established tax reserve |
|
|
— |
|
|
|
— |
|
|
|
(6.0 |
) |
Nondeductible stock-based compensation |
|
|
3.3 |
|
|
|
3.8 |
|
|
|
— |
|
Other |
|
|
0.3 |
|
|
|
1.5 |
|
|
|
1.1 |
|
| |
Total |
|
|
35.0 |
% |
|
|
35.5 |
% |
|
|
26.6 |
% |
| |
During fiscal 2005, the IRS completed an examination of our United States income tax returns for
fiscal years through 2002. The provision for taxes in fiscal 2005 included a tax benefit of $3.8
million resulting from the reversal of accruals for estimated income tax liabilities that were no
longer required. The IRS is currently examining our United States income tax returns for fiscal
2004.
46
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.
Note 10: 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 |
|
| |
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
305 |
|
|
$ |
122 |
|
2009 |
|
|
330 |
|
|
|
97 |
|
2010 |
|
|
358 |
|
|
|
69 |
|
2011 |
|
|
388 |
|
|
|
39 |
|
2012 |
|
|
276 |
|
|
|
9 |
|
| |
Total |
|
$ |
1,657 |
|
|
$ |
336 |
|
| |
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, 2007:
| |
|
|
|
|
| (In thousands) |
|
|
|
|
| |
|
|
|
|
|
2008 |
|
$ |
11,779 |
|
2009 |
|
|
8,121 |
|
2010 |
|
|
6,913 |
|
2011 |
|
|
5,286 |
|
2012 |
|
|
4,380 |
|
Thereafter |
|
|
5,489 |
|
| |
Total |
|
$ |
41,968 |
|
| |
Total rent expense, net of sub-rental income which is insignificant, under operating lease
arrangements was approximately $11.5 million, $11.0 million and $9.4 million in fiscal years 2007,
2006 and 2005, 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
47
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.
Litigation
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 August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively
on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCL
was filed in the United States District Court for the District of Massachusetts by a party
identifying itself as one of our shareholders purporting to act on our behalf against our directors
and certain of our present and former officers. We were also named as a nominal defendant. The
complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust
enrichment arising from the allegedly improper backdating of certain stock option grants. The
complaint sought monetary damages, restitution, disgorgement, rescission of stock options, punitive
damages and other relief. A Special Litigation Committee was formed by our Board of Directors to
investigate and determine our response to the complaint. On September 25, 2007, the Court, in
response to our motion, dismissed the Arkansas Teacher Retirement System complaint on the grounds
that the Plaintiff failed to make a proper pre-filing demand upon our Board of Directors, and
entered judgment for Defendants. Also on September 25, 2007, the Board received a demand from the
Plaintiff regarding the allegedly improper backdating, which stated that absent Board action the
Plaintiff may again seek relief. The Special Litigation Committee has taken the demand under
advisement.
On January 16, 2007, another party identifying itself as one of our shareholders purporting to act
on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress
Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and
certain of our present and former officers in Massachusetts Superior Court. We are named as a
nominal defendant in this action as well. The complaint alleges 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. The complaint seeks monetary damages and disgorgement,
among other forms of relief.
Further, on March 28, 2007, an additional party identifying itself as one of our shareholders
purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf
Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in
Massachusetts Superior Court. This complaint involves substantially the same defendants,
allegations and demands for relief as the Acuna complaint described above. On June 26, 2007, the
White and Acuna cases were consolidated. The consolidated case has been stayed while the Special
Litigation Committee’s investigation is ongoing.
The ultimate outcome of any of these matters could have a material adverse effect on our results of
operations. These matters could divert the attention of our management and harm our business. In
addition, we have incurred, and expect to continue to incur legal expenses arising from these
matters, which may be significant, including the advancement of legal expenses to our directors and
officers. We have certain indemnification obligations to our directors and officers, and the
outcome of derivative or any other litigation may require that we indemnify some or all of our
directors and officers for expenses they may incur in defending the litigation and other losses.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these other claims cannot be
predicted with certainty, management does not believe that the
48
outcome of any of these other legal matters will have a material adverse effect on our consolidated
financial position or results of operations.
Note 11: Business Segments and International Operations
In fiscal 2007, we conducted our business through three primary operating units. Our principal
operating unit conducted business as the OpenEdge Division. The OpenEdge Division (OED) provided
the Progress® OpenEdge platform, a set of development and deployment technologies for building
business applications. Another significant operating unit, the Enterprise Infrastructure Division
(EID), was focused on enterprise application integration and the market for the enterprise service
bus, or ESB, and provided distributed infrastructure products that integrate applications and
orchestrate business processes across the extended enterprise. This operating unit also provided
event stream processing, data management, data access and synchronization products to enable the
real-time enterprise. The third significant operating unit, DataDirect, provided standards-based
data connectivity software. Our other two operating units are the Apama 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.
Based upon the aggregation criteria for segment reporting, we had three reportable segments: the
OpenEdge segment, which included OED and the EasyAsk Division; the Enterprise Infrastructure
segment, which included EID and the Apama Division; and the DataDirect segment. We have aggregated
our segment data based on similar product line characteristics. We did not manage our assets,
capital expenditures, total other income or provision for income taxes by segment. We managed such
items on a company basis.
The following table sets forth our revenue and income from operations from our reportable segments
for fiscal years 2007, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
OpenEdge segment |
|
$ |
366,139 |
|
|
$ |
334,541 |
|
|
$ |
318,921 |
|
Enterprise Infrastructure segment |
|
|
63,599 |
|
|
|
59,117 |
|
|
|
55,346 |
|
DataDirect segment |
|
|
73,776 |
|
|
|
62,316 |
|
|
|
36,106 |
|
Reconciling items |
|
|
(10,014 |
) |
|
|
(8,911 |
) |
|
|
(4,997 |
) |
| |
Total |
|
$ |
493,500 |
|
|
$ |
447,063 |
|
|
$ |
405,376 |
|
| |
| |
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
OpenEdge segment |
|
$ |
129,309 |
|
|
$ |
123,425 |
|
|
$ |
113,480 |
|
Enterprise Infrastructure segment |
|
|
(23,654 |
) |
|
|
(29,068 |
) |
|
|
(26,716 |
) |
DataDirect segment |
|
|
8,722 |
|
|
|
3,345 |
|
|
|
(1,063 |
) |
Reconciling items |
|
|
(57,161 |
) |
|
|
(56,759 |
) |
|
|
(25,751 |
) |
| |
Total |
|
$ |
57,216 |
|
|
$ |
40,943 |
|
|
$ |
59,950 |
|
| |
Amounts included under reconciling items represent intersegment sales, which are accounted for as
if sold under an equivalent arms-length basis arrangement, and certain expenses, including
amortization of acquired intangibles, compensation expenses for the repurchase of subsidiary stock
options, stock-based compensation, acquisition-related expenses and certain unallocated
administrative expenses, which are not considered in the CDM’s evaluation of segment performance.
49
Total revenue by significant product line, regardless of which segment generated the revenue, is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| |
| Year Ended November 30, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
DataDirect |
|
$ |
73,876 |
|
|
$ |
61,891 |
|
|
$ |
35,680 |
|
Enterprise Infrastructure |
|
|
83,028 |
|
|
|
68,648 |
|
|
|
61,453 |
|
Progress OpenEdge and other |
|
|
336,596 |
|
|
|
316,524 |
|
|
|
308,243 |
|
| |
Total |
|
$ |
493,500 |
|
|
$ |
447,063 |
|
|
$ |
405,376 |
|
| |
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
187,080 |
|
|
$ |
175,845 |
|
|
$ |
156,846 |
|
Maintenance |
|
|
252,562 |
|
|
|
230,072 |
|
|
|
212,290 |
|
Consulting and education |
|
|
53,858 |
|
|
|
41,146 |
|
|
|
36,240 |
|
| |
Total |
|
$ |
493,500 |
|
|
$ |
447,063 |
|
|
$ |
405,376 |
|
| |
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
211,782 |
|
|
$ |
203,265 |
|
|
$ |
176,015 |
|
EMEA |
|
|
225,164 |
|
|
|
196,104 |
|
|
|
185,039 |
|
Latin America |
|
|
29,158 |
|
|
|
24,346 |
|
|
|
21,624 |
|
Asia Pacific |
|
|
27,396 |
|
|
|
23,348 |
|
|
|
22,698 |
|
| |
Total |
|
$ |
493,500 |
|
|
$ |
447,063 |
|
|
$ |
405,376 |
|
| |
Revenue from the United Kingdom totaled $72.0 million, $64.1 million and $56.5 million for fiscal
years 2007, 2006 and 2005, 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 $60.2 million, $56.4 million and $39.8 million in the United States and $10.6 million, $6.6
million and $6.0 million outside of the United States at the end of fiscal years 2007, 2006 and
2005, 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 12: Business Combinations
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 an aggregate purchase price of
approximately $29.2 million, net of cash acquired. Actional is a leading provider of Web services
management software for visibility and run-time governance of distributed IT systems in a
service-oriented architecture. The purpose of the acquisition was to broaden the Sonic product
line. Upon the closing of the transaction, Actional became part of our 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.
Transaction costs related to this acquisition totaled $0.5 million of direct acquisition costs. We
paid approximately
50
$15.7 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 $51.9 million, net of cash acquired. The purchase price also
included the value of in-the-money stock options and warrants. NEON is a provider of mainframe
integration products and services. The purpose of the acquisition was to broaden the product
offerings of DataDirect. Upon the closing of the transaction, NEON became part of our DataDirect
operating unit. We accounted for the acquisition as a purchase, and accordingly, we included the
results of operations of NEON in our operating results from January 30, 2006, the date of
acquisition. Transaction costs related to this acquisition included $0.7 million of expenses
related to a facilities closure and $0.8 million of direct acquisition costs. We paid the purchase
price in cash from available funds.
On June 19, 2006, we acquired, through a wholly-owned subsidiary, the stock of Pantero Corporation
for an aggregate purchase price of approximately $5.7 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.
Transaction costs related to this acquisition included $0.1 million of direct acquisition costs.
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 ODBC and JDBC drivers as well as
ADO.NET and OLE DB providers. 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.
Research and development costs to bring the acquired products to technological feasibility are not
expected to have a material impact on our future results of operations or cash flows. The value of
in-process research and development was determined based on an appraisal from an independent third
party.
For all acquisitions we obtained valuations from independent appraisers for the amounts assigned to
intangible assets. The final allocation of the purchase prices, which differs from the preliminary
allocation in our previously issued 2006 financial statements, was as follows:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
| |
| |
|
Total |
|
|
Life (in years) |
|
| |
|
|
|
|
|
|
|
|
|
Assets and liabilities, including cash |
|
$ |
6,734 |
|
|
|
|
|
Acquired intangible assets |
|
|
41,859 |
|
|
|
1 to 10 years |
|
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 |
|
|
|
|
|
| |
51
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.
Fiscal 2005 Transactions:
In fiscal 2005, we paid a total of $31.5 million for acquisitions, net of the cash acquired and net
of a settlement related to a previous acquisition resulting in a purchase price adjustment and
return of funds to us of approximately $2 million. The settlement was recorded as a decrease to
goodwill.
On May 12, 2005, we acquired, through a wholly-owned subsidiary, substantially all of the assets
and assumed certain liabilities of EasyAsk, Inc. (EasyAsk) for an aggregate purchase price of
approximately $9.0 million, net of cash acquired. EasyAsk is a provider of natural language
question/answer solutions. The purpose of the acquisition was to broaden our product offerings.
Prior to the acquisition, we held a minority interest in EasyAsk, whose chairman was a member of
our Board of Directors until the closing of the purchase agreement. EasyAsk is included within the
OpenEdge segment. Transaction costs related to this acquisition included $0.4 million of expenses
related to excess facilities space and $0.2 million of direct acquisition costs. In addition, we
paid a total of $0.5 million in retention payments to EasyAsk employees who joined us and met
certain employment criteria. We recognized compensation expense associated with these payments
ratably over the related twelve-month service period. We accounted for the acquisition as a
purchase, and accordingly, we included the results of operations for EasyAsk in our operating
results from the date of acquisition. We paid the purchase price in cash from available funds. In
fiscal 2007, we wrote-off the goodwill associated with this acquisition.
On April 6, 2005, we acquired the stock of Apama, Inc. (Apama) for an aggregate purchase price of
approximately $24.7 million, net of cash acquired. Apama is a provider of event stream processing
software focused on the financial services industry. The purpose of the acquisition was to expand
the breadth of our product lines. Transaction costs related to this acquisition totaled $0.6
million of direct acquisition costs. In addition, we paid a total of $4.0 million in retention
payments to Apama employees who joined us and met certain employment criteria. We recognized
compensation expense ratably over the service period associated with each payment. We accounted for
the acquisition as a purchase, and accordingly, we included the results of operations for Apama in
our operating results from the date of acquisition. We paid the purchase price in cash from
available funds.
Acquisition-related expenses for fiscal 2005 totaling $3.4 million include expenses for retention
bonuses to Apama and EasyAsk employees who joined us of $4.0 million, of which $2.0 million is
attributable to sales and marketing, $1.6 million is attributable to product development, and $0.4
million is attributable to general and administrative, partially offset by a credit of $0.6 million
for settlement of pre-acquisition assets and liabilities related to a previous acquisition.
For both 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 |
|
|
Life (in years) |
|
| |
|
|
|
|
|
|
|
|
|
Assets and liabilities, including cash |
|
$ |
560 |
|
|
|
|
|
Acquired intangible assets |
|
|
17,500 |
|
|
|
1 to 10 years |
|
Goodwill ($16,087 not deductible for tax purposes) |
|
|
24,037 |
|
|
|
|
|
Deferred income taxes |
|
|
(4,726 |
) |
|
|
|
|
| |
Total purchase price |
|
|
37,371 |
|
|
|
|
|
Less: cash acquired |
|
|
(3,383 |
) |
|
|
|
|
Less: existing investment in EasyAsk held by us |
|
|
(300 |
) |
|
|
|
|
| |
Net cash paid |
|
$ |
33,688 |
|
|
|
|
|
| |
We have not presented pro forma financial information as the historical operations of Apama and
EasyAsk were not significant to our consolidated financial statements either individually or in the
aggregate.
52
In connection with certain of the above acquisitions, we established reserves for exit costs
related to facilities closures and related costs and employee severance. 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, 2004 |
|
$ |
2,352 |
|
|
|
— |
|
|
$ |
2,352 |
|
Establishment of reserve related to EasyAsk |
|
|
376 |
|
|
|
— |
|
|
|
376 |
|
Cash disbursements |
|
|
(930 |
) |
|
|
— |
|
|
|
(930 |
) |
| |
Balance, November 30, 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 |
|
| |
The remaining balance primarily relates to an abandoned lease for a sales office in the UK. Annual
payments of less than $0.1 million are required through the remaining lease term that ends in 2015.
Note 13: Selected Quarterly Financial Data (unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
103,921 |
|
|
$ |
109,586 |
|
|
$ |
111,362 |
|
|
$ |
122,194 |
|
Gross profit |
|
|
85,956 |
|
|
|
90,651 |
|
|
|
92,029 |
|
|
|
101,640 |
|
Income from operations |
|
|
8,270 |
|
|
|
11,007 |
|
|
|
12,187 |
|
|
|
9,479 |
|
Net income |
|
|
5,909 |
|
|
|
7,718 |
|
|
|
8,870 |
|
|
|
6,904 |
|
Diluted earnings per share |
|
|
0.14 |
|
|
|
0.18 |
|
|
|
0.21 |
|
|
|
0.16 |
|
Basic earnings per share |
|
|
0.15 |
|
|
|
0.19 |
|
|
|
0.22 |
|
|
|
0.17 |
|
| |
53
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) 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, 2007. 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, 2007, 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, 2007 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
(c) Changes in internal control over financial reporting
No changes in our internal control over financial reporting occurred during the quarter ended
November 30, 2007 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
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, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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 opinions.
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, 2007, 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, 2007 of the Company and our report dated January 29, 2008 expressed an unqualified opinion on
those financial statements.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 29, 2008
Item 9B. Other Information
None.
55
PART III
Item 10. Directors and Executive Officers of the Registrant
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 24, 2008, which will be filed
with the Securities and Exchange Commission (SEC) not later than 120 days after November 30, 2007.
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 24, 2008, which will be filed with the SEC not later than 120 days after
November 30, 2007.
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 24, 2008, which will be filed
with the SEC not later than 120 days after November 30, 2007.
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 24, 2008, which will be filed
with the SEC not later than 120 days after November 30, 2007.
Information related to securities authorized for issuance under equity compensation plans as of
November 30, 2007 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) |
|
|
5,787 |
(2) |
|
$ |
22.13 |
|
|
|
876 |
(3) |
Equity compensation plans not approved
by shareholders (4) |
|
|
3,393 |
|
|
|
23.06 |
|
|
|
520 |
|
| |
Total |
|
|
9,180 |
|
|
$ |
22.47 |
|
|
|
1,396 |
|
| |
|
|
|
| (1) |
|
Consists of the 1992 Incentive and Nonqualified Stock Option Plan, 1994 Stock Incentive
Plan, 1997 Stock 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 771,000 shares available for future issuance under the ESPP. |
| |
| (4) |
|
Consists of the 2002 Nonqualified Stock Plan and the 2004 Inducement Plan described below. |
56
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 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
7,200,000 shares are issuable under the two plans.
Item 13. Certain Relationships and Related Transactions
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 24, 2008, which will be filed
with the SEC not later than 120 days after November 30, 2007.
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 24, 2008, which will be filed
with the SEC not later than 120 days after November 30, 2007.
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, 2007 and 2006 |
| |
| |
• |
|
Consolidated Statements of Operations for the years ending November 30, 2007, 2006 and 2005 |
| |
| |
• |
|
Consolidated Statements of Shareholders’ Equity for the years ending November 30, 2007, 2006 and 2005 |
| |
| |
• |
|
Consolidated Statements of Cash Flows for the years ending November 30, 2007, 2006 and 2005 |
| |
| |
• |
|
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.
57
(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 Among Progress Software Corporation, Chopin Merger Sub, Inc. and eXcelon
Corporation (1) |
| |
|
|
|
| 2.2 |
|
|
Purchase Agreement dated as of December 5, 2003 by and among Progress Software Corporation, Diamond
Acquisition Corp. and DataDirect Technologies Limited (2) |
| |
|
|
|
| 2.3 |
|
|
Agreement and Plan of Merger dated as of April 6, 2005 by and among Progress Software Corporation, PSC
Merger Corp., Apama Inc., and certain stockholders of Apama Inc. (3) |
| |
|
|
|
| 2.4 |
|
|
Agreement and Plan of Merger dated August 31, 2005 by and among Progress Software Corporation, Sonic
Software Corporation and Sonic Merger Corporation (4) |
| |
|
|
|
| 2.5 |
|
|
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 (5) |
| |
|
|
|
| 3.1 |
|
|
Restated Articles of Organization, as amended (6) |
| |
|
|
|
| 3.2 |
|
|
By-Laws, as amended and restated (7) |
| |
|
|
|
| 4.1 |
|
|
Specimen certificate for the Common Stock (8) |
| |
|
|
|
| 10.1* |
|
|
1992 Incentive and Nonqualified Stock Option Plan (9) |
| |
|
|
|
| 10.2* |
|
|
1994 Stock Incentive Plan (10) |
| |
|
|
|
| 10.3* |
|
|
Employee Retention and Motivation Agreement as amended and restated, executed by each of the Executive
Officers (11) |
| |
|
|
|
| 10.4* |
|
|
2002 Nonqualified Stock Plan (12) |
| |
|
|
|
| 10.5* |
|
|
2004 Inducement Stock Plan (13) |
| |
|
|
|
| 10.6 |
|
|
Written offer of employment with Larry R. Harris dated April 29, 2005 (14) |
| |
|
|
|
| 10.7* |
|
|
Letter Agreement dated November 15, 2005 with Joseph W. Alsop regarding Fiscal 2005 Stock Option grant (15) |
| |
|
|
|
| 10.8* |
|
|
Progress Software Corporation 1991 Employee Stock Purchase Plan, as amended and restated (16) |
| |
|
|
|
| 10.9* |
|
|
Progress Software Corporation 1997 Stock Incentive Plan, as amended and restated (17) |
| |
|
|
|
| 10.10* |
|
|
Progress Software Corporation Corporate Executive Bonus Plan (18) |
| |
|
|
|
| 10.11* |
|
|
Progress Software Corporation 2007 Fiscal Year Director Compensation Program (19) |
| |
|
|
|
| 10.12* |
|
|
Form of Deferred Stock Unit Agreement under the Progress Software Corporation 1997 Stock Incentive Plan (20) |
| |
|
|
|
| 10.13* |
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Progress Software
Corporation 1997 Stock Incentive Plan (Initial Grant) (21) |
| |
|
|
|
| 10.14* |
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Progress Software
Corporation 1997 Stock Incentive Plan (Annual Grant) (22) |
| |
|
|
|
| 10.15* |
|
|
Letter Agreement, dated March 29, 2007, executed by Roger J. Heinen, Jr. regarding Cancellation of Stock
Options (23) |
| |
|
|
|
| 10.16* |
|
|
Letter Agreement, dated March 23, 2007, executed by Scott A. McGregor regarding Cancellation of Stock
Options (24) |
| |
|
|
|
| 10.17* |
|
|
Form of Option Amendment Agreement with Non-Employee Directors (25) |
| |
|
|
|
| 10.18* |
|
|
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 (26) |
58
| |
|
|
|
| 10.19* |
|
|
Form of Option Amendment Agreement with Cash Bonus executed by certain Executive Officers (27) |
| |
|
|
|
| 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 |
| |
|
|
|
| 99.1 |
|
|
Agreement and Plan of Merger dated as of September 26, 2004 by and among Progress Software Corporation, PSI
Acquisition Sub, Inc. and Persistence Software, Inc. (28) |
| |
|
|
|
| 99.2 |
|
|
Asset Purchase Agreement dated April 29, 2005 by and among Progress Development Corporation, EasyAsk, Inc.
and Sigma Partners LLP, as indemnification representative (29) |
| |
|
|
|
| 99.3 |
|
|
Agreement and Plan of Merger dated as of December 19, 2005 by and among Progress Software Corporation,
Noble Acquisition Corporation and NEON Systems, Inc. (30) |
|
|
|
| (1) |
|
Incorporated by reference to Exhibit 1 of Schedule 13D filed October 28, 2002. |
| |
| (2) |
|
Incorporated by reference to Exhibit 2.1 of Form 8-K filed January 7, 2004. |
| |
| (3) |
|
Incorporated by reference to Exhibit 2.1 of Form 8-K filed April 12, 2005. |
| |
| (4) |
|
Incorporated by reference to Exhibit 2.1 of Form 8-K filed September 7, 2005. |
| |
| (5) |
|
Incorporated by reference to Exhibit 2.1 of Form 8-K filed January 23, 2006. |
| |
| (6) |
|
Incorporated by reference to Exhibit 3.1 of Form 8-K filed May 1, 2006. |
| |
| (7) |
|
Incorporated by reference to Exhibit 3.2 of Form 8-K filed May 1, 2006. |
| |
| (8) |
|
Incorporated by reference to Exhibit 4.1 of Form 8-K filed May 1, 2006. |
| |
| (9) |
|
Incorporated by reference to Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 1992. |
| |
| (10) |
|
Incorporated by reference to Exhibit 10.16 to our Quarterly Report on Form 10-Q for the
quarter ended August 31, 1994. |
| |
| (11) |
|
Incorporated by reference to Exhibit 10.1 of Form 8-K filed March 28, 2007. |
| |
| (12) |
|
Incorporated by reference to Exhibit 10.10 to our Quarterly Report on Form 10-Q for the
quarter ended May 31, 2002. |
| |
| (13) |
|
Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal
year ended November 30, 2004. |
| |
| (14) |
|
Incorporated by reference to Exhibit 10.1 of Form 8-K filed May 5, 2005. |
| |
| (15) |
|
Incorporated by reference to Exhibit 10.1 of Form 8-K filed November 21, 2005. |
| |
| (16) |
|
Incorporated by reference to Appendix A to our definitive Proxy Statement filed March 27, 2007. |
| |
| (17) |
|
Incorporated by reference to Appendix B to our definitive Proxy Statement filed March 27, 2007. |
| |
| (18) |
|
Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the
quarter ended May 31, 2007. |
| |
| (19) |
|
Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. |
59
|
|
|
| (20) |
|
Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. |
| |
| (21) |
|
Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. |
| |
| (22) |
|
Incorporated by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. |
| |
| (23) |
|
Incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2007. |
| |
| (24) |
|
Incorporated by reference to Exhibit 10.9 to our Quarterly Report on Form 10-Q for the
quarter ended May 31, 2007. |
| |
| (25) |
|
Incorporated by reference to Exhibit 99.(d)(10) of Schedule TO filed December 22, 2006. |
| |
| (26) |
|
Incorporated by reference to Exhibit 99.(d)(9) of Schedule TO filed December 22, 2006. |
| |
| (27) |
|
Incorporated by reference to Exhibit 99.(d)(11) of Schedule TO filed December 22, 2006. |
| |
| (28) |
|
Incorporated by reference to Exhibit 99.1 of Form 8-K filed September 27, 2004. |
| |
| (29) |
|
Incorporated by reference to Exhibit 99.1 of Form 8-K filed May 5, 2005. |
| |
| (30) |
|
Incorporated by reference to Exhibit 99.1 of Form 8-K filed December 22, 2005. |
| |
| * |
|
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.
60
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, 2008.
| |
|
|
|
|
| |
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
Joseph W. Alsop
|
|
Chief Executive Officer and
Director
(Principal
Executive Officer)
|
|
January 29, 2008 |
|
|
|
|
|
/s/ NORMAN R. ROBERTSON
Norman R. Robertson
|
|
Senior Vice President, Finance and
Administration
and Chief Financial
Officer
(Principal Financial Officer)
|
|
January 29, 2008 |
|
|
|
|
|
/s/ DAVID H. BENTON, JR.
|
|
Vice President and Corporate Controller
|
|
January 29, 2008 |
David H. Benton, Jr.
|
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ BARRY N. BYCOFF
|
|
Director
|
|
January 29, 2008 |
Barry N. Bycoff |
|
|
|
|
|
|
|
|
|
/s/ ROGER J. HEINEN, JR.
|
|
Director
|
|
January 29, 2008 |
Roger J. Heinen, Jr. |
|
|
|
|
|
|
|
|
|
/s/ CHARLES F. KANE
|
|
Director
|
|
January 29, 2008 |
|
|
|
|
|
Charles F. Kane |
|
|
|
|
|
|
|
|
|
/s/ MICHAEL L. MARK
|
|
Director
|
|
January 29, 2008 |
|
|
|
|
|
Michael L. Mark |
|
|
|
|
|
|
|
|
|
/s/ SCOTT A. MCGREGOR
|
|
Director
|
|
January 29, 2008 |
Scott A. McGregor |
|
|
|
|
61