10-Q 1 prgs5-31x1210xq.htm FORM 10-Q PRGS 5-31-12 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2012
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19417
 
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
 
04-2746201
(I.R.S. Employer
Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number: (781) 280-4000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of July 2, 2012, there were 63,359,000 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE SIX MONTHS ENDED MAY 31, 2012
INDEX

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
 
(In thousands, except share data)
May 31,
2012
 
November 30, 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
241,884

 
$
161,095

Short-term investments
86,364

 
100,321

Total cash, cash equivalents and short-term investments
328,248

 
261,416

Accounts receivable (less allowances of $3,026 in 2012 and $6,683 in 2011)
85,787

 
110,927

Other current assets
26,060

 
21,143

Deferred tax assets
10,856

 
14,291

Total current assets
450,951

 
407,777

Property and equipment, net
66,444

 
66,206

Intangible assets, net
53,437

 
64,408

Goodwill (1)
257,625

 
257,824

Deferred tax assets (1)
33,577

 
30,361

Investments in auction rate securities
31,448

 
33,539

Other assets
5,829

 
5,627

Total assets
$
899,311

 
$
865,742

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
71

 
$
357

Accounts payable
8,948

 
7,039

Accrued compensation and related taxes
31,472

 
31,245

Income taxes payable
1,910

 
11,412

Other accrued liabilities
41,126

 
35,728

Short-term deferred revenue
146,882

 
145,727

Total current liabilities
230,409

 
231,508

Long-term deferred revenue
5,517

 
6,619

Deferred tax liabilities
1,508

 
1,533

Other noncurrent liabilities (1)
2,333

 
3,782

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized, 1,000,000 shares; issued, none

 

Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 63,310,870 shares in 2012 and 61,788,629 shares in 2011
342,087

 
309,221

Retained earnings, including accumulated other comprehensive loss of $14,260 in 2012 and $13,056 in 2011
317,457

 
313,079

Total shareholders’ equity
659,544

 
622,300

Total liabilities and shareholders’ equity
$
899,311

 
$
865,742

(1) The November 30, 2011 balance sheet has been revised to reflect purchase accounting measurement period adjustments (Note 6).
See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Income
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Revenue:
 
 
 
 
 
 
 
Software licenses
$
29,673

 
$
45,417

 
$
71,165

 
$
96,753

Maintenance and services
84,923

 
89,267

 
167,857

 
172,168

Total revenue
114,596

 
134,684

 
239,022

 
268,921

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
2,273

 
2,321

 
4,561

 
4,702

Cost of maintenance and services
19,877

 
19,906

 
39,257

 
37,674

Amortization of acquired intangibles
3,631

 
3,930

 
7,365

 
7,905

Total costs of revenue
25,781

 
26,157

 
51,183

 
50,281

Gross profit
88,815

 
108,527

 
187,839

 
218,640

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
41,528

 
44,312

 
88,775

 
89,010

Product development
22,727

 
20,137

 
45,122

 
40,996

General and administrative
18,069

 
13,742

 
33,521

 
25,594

Amortization of acquired intangibles
1,767

 
1,982

 
3,588

 
4,256

Restructuring expenses
8,496

 
1,144

 
8,496

 
3,258

Acquisition-related expenses

 

 
215

 

Total operating expenses
92,587

 
81,317

 
179,717

 
163,114

(Loss) income from operations
(3,772
)
 
27,210

 
8,122

 
55,526

Other income (expense):
 
 
 
 
 
 
 
Interest income and other
743

 
714

 
1,335

 
1,301

Foreign currency loss, net
(494
)
 
(505
)
 
(816
)
 
(1,131
)
Total other income (expense), net
249

 
209

 
519

 
170

(Loss) income before income tax
(3,523
)
 
27,419

 
8,641

 
55,696

Income tax (benefit) provision
(1,615
)
 
9,459

 
3,060

 
17,215

Net (loss) income
$
(1,908
)
 
$
17,960

 
$
5,581

 
$
38,481

Earnings per share:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.27

 
$
0.09

 
$
0.57

Diluted
$
(0.03
)
 
$
0.26

 
$
0.09

 
$
0.55

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
63,051

 
66,897

 
62,598

 
66,942

Diluted
63,051

 
69,246

 
63,641

 
69,453

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2012
 
May 31,
2011
Cash flows from operating activities:
 
 
 
Net income
$
5,581

 
$
38,481

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
4,640

 
4,395

Amortization of acquired intangibles and other
12,339

 
12,161

Stock-based compensation
13,760

 
9,287

Asset impairment
848

 

Deferred income taxes
82

 
224

Tax benefit from stock plans
801

 
5,434

Excess tax benefit from stock plans
(1,171
)
 
(4,210
)
Allowances for accounts receivable
443

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
23,262

 
32,291

Other assets
(3,891
)
 
2,315

Accounts payable and accrued liabilities
5,614

 
(23,720
)
Income taxes payable and uncertain tax positions
(10,844
)
 
5,755

Deferred revenue
2,225

 
6,630

Net cash flows from operating activities
53,689

 
89,043

Cash flows from investing activities:
 
 
 
Purchases of investments
(25,887
)
 
(64,525
)
Sales and maturities of investments
44,855

 
21,827

Redemptions at par by issuers of auction rate securities
225

 
6,200

Purchases of property and equipment
(6,141
)
 
(8,494
)
Increase in other noncurrent assets
(52
)
 
(888
)
Net cash flows from investing activities
13,000

 
(45,880
)
Cash flows from financing activities:
 
 
 
Issuance of common stock
20,487

 
35,797

Withholding tax payments related to net issuance of restricted stock units
(2,452
)
 
(1,505
)
Repurchase of common stock

 
(64,899
)
Excess tax benefit from stock plans
1,171

 
4,210

Payment of long-term debt
(286
)
 
(190
)
Net cash flows from financing activities
18,920

 
(26,587
)
Effect of exchange rate changes on cash
(4,820
)
 
7,307

Net increase in cash and cash equivalents
80,789

 
23,883

Cash and cash equivalents, beginning of period
161,095

 
286,559

Cash and cash equivalents, end of period
$
241,884

 
$
310,442

Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $127 in 2012 and $7,796 in 2011
$
12,558

 
$
4,987

See notes to unaudited condensed consolidated financial statements.

5


Notes to Condensed Consolidated Financial Statements

Note 1: Nature of Business and Basis of Presentation

The Company

We are a global software company that simplifies and enables the development, deployment and management of business applications on-premise or on any Cloud, on any platform and on any device with minimal IT complexity and low total cost of ownership.

During the second quarter of fiscal 2012, we announced a new strategic plan (the "Plan"). Under the Plan, we will combine our OpenEdge, DataDirect Connect and Decision Analytics (comprised of Apama, Corticon and the Progress Control Tower) product lines ("Core" product lines) into a single, cohesive offering and provide a next generation application development and deployment platform in the Application Platform-as-a-Service (aPaaS) market. Also as part of the Plan, our Board of Directors approved the commencement of certain operational restructuring initiatives and the divestiture of the ten non-core product lines: Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic ("non-Core" product lines).

As of May 31, 2012, we had not yet fully reorganized the management team and employee base nor restructured our financial systems to report our operating results based on Core and non-Core reporting. As a result, our segment reporting is consistent with how we have historically presented our segments (Note 15) and with our management reporting through May 31, 2012. However, we intend to operate and report our business on a go forward basis as Core and non-Core. In addition, as of May 31, 2012, we have not yet met the criteria for reporting any of the non-Core product lines as either held for sale or as discontinued operations.

Basis of Presentation

We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2011.

We made no significant changes in the application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2011. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our Annual Report on Form 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The adoption of ASU 2011-08 is not anticipated to have any impact on our financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the effective date of only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-05 is effective for us in our

6


first quarter of fiscal 2013 and should be applied retrospectively. The adoption of ASU 2011-05 and ASU 2011-12 is not anticipated to have any impact on our financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We adopted ASU 2011-04 in our second quarter of fiscal 2012 and have applied the provisions prospectively. The adoption of ASU 2011-04 did not have any impact on our financial position or results of operations, but increased the disclosures included in the notes to the condensed consolidated financial statements.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and trading and available-for-sale investments at May 31, 2012 is as follows (in thousands):
 
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
211,052

 
$

 
$

 
$
211,052

Money market funds
29,832

 

 

 
29,832

State and municipal bond obligations
77,931

 
292

 
(8
)
 
78,215

Auction rate securities – municipal bonds
27,175

 

 
(3,804
)
 
23,371

Auction rate securities – student loans
12,500

 

 
(1,723
)
 
10,777

Corporate bonds
6,455

 

 
(6
)
 
6,449

Total
$
364,945

 
$
292

 
$
(5,541
)
 
$
359,696


A summary of our cash, cash equivalents and trading and available-for-sale investments at November 30, 2011 is as follows (in thousands):
 
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
134,890

 
$

 
$

 
$
134,890

Money market funds
24,220

 

 

 
24,220

State and municipal bond obligations
84,193

 
221

 
(16
)
 
84,398

Brazilian mutual funds
15,346

 

 

 
15,346

Auction rate securities – municipal bonds
27,200

 

 
(4,269
)
 
22,931

Auction rate securities – student loans
12,700

 

 
(2,092
)
 
10,608

Corporate bonds
2,562

 

 

 
2,562

Total
$
301,111

 
$
221

 
$
(6,377
)
 
$
294,955



7


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2012
 
November 30, 2011
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
Cash
$
211,052

 
$

 
$

 
$
134,890

 
$

 
$

Money market funds
29,832

 

 

 
24,220

 

 

State and municipal bond obligations
1,000

 
77,215

 

 
1,985

 
82,413

 

Brazilian mutual funds

 

 

 

 
15,346

 

Auction rate securities – municipal bonds

 

 
23,371

 

 

 
22,931

Auction rate securities – student loans

 
2,700

 
8,077

 

 

 
10,608

Corporate bonds

 
6,449

 

 

 
2,562

 

Total
$
241,884

 
$
86,364

 
$
31,448

 
$
161,095

 
$
100,321

 
$
33,539


As of May 31, 2012, we included in other accrued liabilities an amount of $2.0 million representing certain unsettled trades of state and municipal bond obligations included in short-term investments.

For each of the auction rate securities (ARS), we evaluated the risks related to the structure, collateral and liquidity of the investment, and forecasted the probability of issuer default, auction failure and a successful auction at par or a redemption at par for each future auction period. The weighted average cash flow for each period was then discounted back to present value for each security. Based on this methodology, we determined that the fair value of our ARS investments is $34.1 million and $33.5 million at May 31, 2012 and November 30, 2011, respectively. The temporary impairment recorded in accumulated other comprehensive loss to reduce the value of our available-for-sale ARS investments was $5.5 million and $6.4 million at May 31, 2012 and November 30, 2011, respectively.

We will not be able to access the funds associated with our ARS investments until a future auction for these ARS is successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As such, these remaining investments currently lack short-term liquidity and are therefore classified as long-term investments on the condensed consolidated balance sheets at May 31, 2012 and November 30, 2011, with the exception of one ARS with a fair value of $2.7 million which was redeemed by the issuer in the third quarter of fiscal 2012 which we classified as short-term investments on the condensed consolidated balance sheet at May 31, 2012.

Based on our cash, cash equivalents and short-term investments balance of $328.2 million, expected operating cash flows and the availability of funds under our revolving credit facility, we do not anticipate that the lack of liquidity associated with our ARS will adversely affect our ability to conduct business and believe we have the ability to hold the affected securities throughout the currently estimated recovery period. Therefore, the impairment of these securities is considered only temporary in nature. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates significantly, we may be required to adjust the carrying value of the ARS through an other-than-temporary impairment charge to earnings.

The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2012
 
November 30,
2011
Due in one year or less (1)
$
79,024

 
$
104,620

Due after one year
39,788

 
31,225

Total
$
118,812

 
$
135,845

 
(1)
Includes ARS which are tendered for interest-rate setting purposes periodically throughout the year. Beginning in February 2008, auctions for these securities began to fail, and therefore these investments currently lack short-term liquidity. The remaining contractual maturities of these securities range from 12 to 31 years.


8


Investments with continuous unrealized losses and their related fair values are as follows at May 31, 2012 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
State and municipal bond obligations
$
15,613

 
$
(8
)
 
$

 
$

 
$
15,613

 
$
(8
)
Auction rate securities – municipal bonds

 

 
23,371

 
(3,804
)
 
23,371

 
(3,804
)
Auction rate securities – student loans

 

 
8,077

 
(1,723
)
 
8,077

 
(1,723
)
Corporate bonds
2,626

 
(6
)
 

 

 
2,626

 
(6
)
Total
$
18,239

 
$
(14
)
 
$
31,448

 
$
(5,527
)
 
$
49,687

 
$
(5,541
)

Investments with continuous unrealized losses and their related fair values are as follows at November 30, 2011 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
State and municipal bond obligations
$
24,585

 
$
(16
)
 
$

 
$

 
$
24,585

 
$
(16
)
Auction rate securities – municipal bonds

 

 
22,931

 
(4,269
)
 
22,931

 
(4,269
)
Auction rate securities – student loans

 

 
10,608

 
(2,092
)
 
10,608

 
(2,092
)
Total
$
24,585

 
$
(16
)
 
$
33,539

 
$
(6,361
)
 
$
58,124

 
$
(6,377
)

The unrealized losses associated with state and municipal bond obligations and corporate bonds are attributable to changes in interest rates. The unrealized losses associated with ARS are discussed above. Management does not believe any unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of May 31, 2012.

Note 3: Derivative Instruments

We generally use foreign currency option contracts that are not designated as hedging instruments to hedge economically a portion of forecasted international cash flows for up to one year in the future. All foreign currency option contracts are recorded at fair value in other current assets on the condensed consolidated balance sheets at the end of each reporting period and expire within one year. In the three and six months ended May 31, 2011, mark-to-market losses of $0.1 million and $0.5 million, respectively, on foreign currency option contracts were recorded in other income in the condensed consolidated statements of income. We did not hold any option contracts in the first or second quarters of fiscal 2012.

We also use forward contracts that are not designated as hedging instruments to hedge economically 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. All forward contracts are recorded at fair value in other current assets on the condensed consolidated balance sheets at the end of each reporting period and expire within 90 days. In the three and six months ended May 31, 2012 and 2011, realized and unrealized gains (losses) of $2.5 million, $0.3 million, $(1.4) million and $(2.0) million, respectively, from our forward contracts were recognized in other income in the condensed consolidated statements of income. These losses were substantially offset by realized and unrealized gains on the offsetting positions.

The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 
May 31, 2012
 
November 30, 2011
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
4,717

 
$
20

 
$
2,180

 
$
(54
)
Forward contracts to purchase U.S. dollars
42,890

 
(192
)
 
36,275

 
106

Total
$
47,607

 
$
(172
)
 
$
38,455

 
$
52


9


Note 4: Fair Value Measurements

The following table details the fair value measurements within the fair value hierarchy of our financial assets at May 31, 2012 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
29,832

 
$
29,832

 
$

 
$

State and municipal bond obligations
78,215

 

 
78,215

 

Auction rate securities – municipal bonds
23,371

 

 

 
23,371

Auction rate securities – student loans
10,777

 

 
2,700

 
8,077

Corporate bonds
6,449

 

 
6,449

 

Foreign exchange derivatives
(172
)
 

 
(172
)
 


The following table details the fair value measurements within the fair value hierarchy of our financial assets at November 30, 2011 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
24,220

 
$
24,220

 
$

 
$

State and municipal bond obligations
84,398

 

 
84,398

 

Brazilian mutual funds
15,346

 
15,346

 

 

Auction rate securities – municipal bonds
22,931

 

 

 
22,931

Auction rate securities – student loans
10,608

 

 

 
10,608

Corporate bonds
2,562

 

 
2,562

 

Foreign exchange derivatives
52

 

 
52

 


When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets.

The valuation technique used to measure fair value for our Level 3 assets, which consists of our ARS, is an income approach, where the expected weighted average future cash flows are discounted back to present value for each asset. The significant unobservable inputs used in the fair value measurement of our ARS are the probability of earning the maximum rate until maturity, the probability of principal return prior to maturity, the probability of default, the liquidity risk premium and the recovery rate in default. Changes in the underlying assumptions used to value the ARS could significantly impact the fair value estimates recorded in the condensed consolidated balance sheets.


10


The following table reflects the activity for our financial assets measured at fair value using Level 3 inputs for each period presented (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Balance, beginning of period
$
33,343

 
$
39,839

 
$
33,539

 
$
39,643

Redemptions and repurchases

 
(6,000
)
 
(225
)
 
(6,200
)
Transfer to Level 2 fair value measurement
(2,700
)
 

 
(2,700
)
 

Unrealized gains included in accumulated other comprehensive loss
805

 
945

 
834

 
1,341

Balance, end of period
$
31,448

 
$
34,784

 
$
31,448

 
$
34,784


During the second quarter of fiscal 2012, we received a redemption notice for one of our ARS at par value. We transferred the ARS to a Level 2 fair value measurement, as the value at May 31, 2012 is based on observable inputs.

Note 5: Goodwill and Intangible Assets

Goodwill

During the first quarter of fiscal 2012, 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, 2011. For purposes of the annual impairment test, we assigned goodwill of $61.1 million to the Application Development Platforms segment, $96.3 million to the Enterprise Business Solutions segment and $100.4 million to the Enterprise Data Solutions segment. We valued our reporting units for purposes of the goodwill impairment test using a market and income approach, and all of our reporting units had an estimated fair value that was in excess of the carrying value.

During the second quarter of fiscal 2012, as a result of continued declines in certain reporting units and in connection with the announcement of the Plan, we determined an impairment triggering event occurred that required us to perform an interim goodwill impairment test. We utilized the same methodology and valuation techniques employed in our annual testing as of December 15, 2011. The test indicated that our reporting units had an estimated fair value that was in excess of their carrying values, and thus, no impairment was present. However, the difference between the carrying value and fair value of our Enterprise Business Solutions reporting unit has decreased since the annual test as a result of updates to our internal forecasts and projected cash flows.

During the third quarter of fiscal 2012 we expect to test our goodwill for impairment in connection with the reassignment of goodwill to our anticipated new reporting units (Note 1). Through the date and time our condensed consolidated financial statements were issued, we have not commenced this test.

The change in value of our goodwill since November 30, 2011 is the result of foreign currency translations and the finalization of purchase accounting measurement period adjustments (Note 6).

Intangible Assets

In addition to testing goodwill for impairment in the second quarter of fiscal 2012, we also performed an impairment test of our intangible assets. Our tests were primarily based on an income approach and resulted in a fair value which was in excess of the carrying value, indicating no impairment existed as of May 31, 2012.

Note 6: Business Combinations

On October 26, 2011, we acquired all of the equity interests in Corticon Technologies, Inc. (Corticon), a privately held business enterprise software company based in Redwood City, California, for $23.0 million. Corticon is a business rules management system vendor that enables organizations to make better, faster decisions by automating business rules. The Corticon products became part of our Enterprise Business Solutions segment. The purpose of the acquisition was to expand the product offerings within the Enterprise Business Solutions segment. The acquisition was accounted for as a purchase, and accordingly, the results of operations of Corticon are included in our operating results from the date of acquisition. We paid the purchase price in cash from available funds.


11


The allocation of the purchase price is as follows (in thousands):
 
 
Preliminary Allocation
 
Final Allocation
 
Life
Accounts receivable
$
835

 
$
835

 
 
Property and equipment
112

 
112

 
 
Other assets
125

 
125

 
 
Acquired intangible assets
4,910

 
4,910

 
3 to 7 years
Deferred taxes
(1,814
)
 
4,033

 
 
Goodwill
24,842

 
19,427

 
 
Accounts payable and other liabilities
(2,471
)
 
(2,903
)
 
 
Deferred revenue
(3,639
)
 
(3,639
)
 
 
Net cash paid
$
22,900

 
$
22,900

 
 

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $19.4 million of goodwill, which is not deductible for tax purposes. The allocation of the purchase price was completed in the second quarter of fiscal 2012, upon the finalization of our valuation of acquired deferred tax assets and liabilities.

We have not disclosed the amount of revenues and earnings of Corticon since acquisition, nor pro forma financial information, as those amounts are not significant to our condensed consolidated financial statements.

Note 7: Line of Credit

Our credit facility provides for a revolving line of credit in the amount of $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $20.0 million. The credit facility also permits us to increase the revolving line of credit by up to an additional $75.0 million subject to receiving further commitments from lenders and certain other conditions. As of May 31, 2012, there were no amounts outstanding under the revolving line and $0.2 million of letters of credit.

Note 8: Contingencies

We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material effect on our financial position or results of operations.

On January 21, 2010, JuxtaComm-Texas Software, LLC (JuxtaComm) filed a complaint in the Eastern District of Texas against Progress Software, two of our subsidiaries and 19 other defendants, alleging infringement of JuxtaComm’s U.S. patent 6,195,662 (“System for Transforming and Exchanging Data Between Distributed Heterogeneous Computer Systems”). In its amended complaint, JuxtaComm alleges that certain of the products within our Sonic, FuseSource, DataDirect Connect and DataServices product sets infringe JuxtaComm’s patent. In its complaint, JuxtaComm seeks unspecified monetary damages and permanent injunctive relief.

In May 2010, we filed a response to this complaint in which we denied all claims. The discovery phase of this litigation was completed in November 2011 and trial was scheduled to begin on January 9, 2012. However, on December 2, 2011, the court issued a so-called Markman ruling, in which certain disputes were resolved regarding interpretations of the patent. In this ruling, the court agreed with us on a key issue which we believed would severely impair the plaintiff’s claims. On December 8, 2011, the court issued an order staying the case until February 1, 2012 and gave JuxtaComm until February 1, 2012 to articulate an alternative theory and postponed the trial to an unspecified future date to fall in the second or third quarter of 2012.

In February 2012, we began settlement discussions with JuxtaComm and, in March 2012, the matter was settled upon our payment of $0.9 million. The Company received a release and discharge of any past damages related to potential infringement of the subject patent and a non-exclusive, non-transferable, fully paid, worldwide, perpetual license covering all future uses of the subject patent within our products. We recorded the settlement in the first quarter of fiscal 2012 as general and administrative expense in the condensed consolidated statement of income.


12



Note 9: Common Stock Repurchases

During the second quarter of fiscal 2012, in conjunction with the Plan, the Board of Directors authorized a $350.0 million return of capital to shareholders in the form of share repurchases through fiscal 2013. We did not repurchase any shares of our common stock in the six months ended May 31, 2012.

We repurchased and retired 2,193,000 shares of our common stock for $64.9 million in the six months ended May 31, 2011 as part of a prior share repurchase program. The prior program was completed in fiscal 2011.

Note 10: Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using either the current market price of the stock or the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is generally four or five years for options and three years for restricted stock units and restricted stock awards.

The following table provides the classification of stock-based compensation as reflected in our condensed consolidated statements of income (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Cost of software licenses
$
2

 
$
1

 
$
5

 
$
7

Cost of maintenance and services
510

 
155

 
1,094

 
372

Sales and marketing
1,707

 
901

 
3,841

 
2,191

Product development
1,668

 
1,290

 
3,614

 
2,559

General and administrative
2,782

 
2,756

 
5,206

 
4,158

Total stock-based compensation
$
6,669

 
$
5,103

 
$
13,760

 
$
9,287


During the six months ended May 31, 2012, the employment of three of our executives terminated. As part of the separation agreements, the executives were entitled to accelerated vesting of certain stock-based awards. Due to the separation and accelerated vesting, we recognized additional stock-based compensation of $1.2 million and $1.8 million in the three and six months ended May 31, 2012, respectively.

Note 11: Comprehensive Income

The components of comprehensive income include, in addition to net income, foreign currency translation adjustments and unrealized gains and losses on investments. The following table provides the composition of comprehensive income on an interim basis (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Net (loss) income
$
(1,908
)
 
$
17,960

 
$
5,581

 
$
38,481

Foreign currency translation adjustments
(5,056
)
 
989

 
(2,023
)
 
4,953

Unrealized gains on investments
396

 
638

 
819

 
1,042

Total comprehensive (loss) income
$
(6,568
)
 
$
19,587

 
$
4,377

 
$
44,476



13



Note 12: Restructuring Charges

2012 Restructuring

In the second quarter of fiscal 2012, in furtherance of the Plan, our management approved, committed to and initiated certain operational restructuring initiatives to reduce annual costs, including the simplification of our organizational structure and the consolidation of facilities. In addition, as part of the Plan, we intend to divest our non-Core product lines. Our restructuring actions include both our cost reduction efforts and qualifying costs associated with our divestitures.

Restructuring expenses primarily relate to employee costs, including severance, health benefits, outplacement services and transition divestiture incentives, but excluding stock-based compensation. Facilities costs include fees to terminate lease agreements and costs for unused space, net of sublease assumptions. Other costs include costs to terminate automobile leases of employees included in the workforce reduction, asset impairment charges for assets no longer deployed as part of cost reduction strategies, costs for unused software licenses as part of the workforce reduction and other costs directly associated with the restructuring actions taken.

As part of the 2012 restructuring, we incurred expenses in the second quarter of fiscal 2012 totaling $8.5 million, of which $1.5 million represents excess facilities and other costs and $7.0 million represents employee severances and related benefits. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income. We expect to incur additional costs through the remainder of fiscal 2012 and the first half of fiscal 2013. The total cost of the 2012 restructuring is expected to be approximately $3.5 million for excess facilities and other costs and approximately $16.0 million for employee severance and related benefits.

A summary of activity for the 2012 restructuring actions is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2011
$

 
$

 
$

Costs incurred
1,479

 
7,017

 
8,496

Cash disbursements
(290
)
 
(338
)
 
(628
)
Asset impairment
(848
)
 

 
(848
)
Translation adjustments and other

 
(35
)
 
(35
)
Balance, May 31, 2012
$
341

 
$
6,644

 
$
6,985


Cash disbursements under the 2012 restructuring are expected to be made through the first three quarters of fiscal 2013. The short-term portion of the restructuring reserve of $6.8 million is included in other accrued liabilities and the long-term portion of $0.2 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2012.

2010 Restructuring

During the first and third quarters of fiscal 2010, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations as a result of certain management and organizational changes and acquisitions. We reduced our global workforce primarily within the development, sales and administrative organizations. This workforce reduction was conducted across all geographies and also resulted in a consolidation of offices in certain locations. The total costs of the fiscal 2010 restructurings primarily relate to employee severance and excess facilities expenses. The excess facilities and other costs represent facilities costs for unused space and termination costs for automobile leases of employees included in the workforce reduction.

As part of the 2010 restructuring activities, we recorded cumulative expenses totaling $44.6 million, of which $9.3 million represents excess facilities and other costs and $35.3 million represents employee severances and related benefits. There were no charges to restructuring expense in the first six months of fiscal 2012 related to the 2010 activities and we do not expect to incur additional expenses related to these activities. The expenses are recorded as restructuring expense in the condensed consolidated statements of income.


14


A summary of activity for the 2010 restructuring actions is as follows (in thousands):
 
 
Excess
Facilities and
Other Costs
 
Employee
Severance and
Related Benefits
 
Total
Balance, December 1, 2011
$
4,913

 
$
698

 
$
5,611

Cash disbursements
(1,448
)
 
(191
)
 
(1,639
)
Translation adjustments and other
97

 
5

 
102

Balance, May 31, 2012
$
3,562

 
$
512

 
$
4,074


Cash disbursements for excess facilities costs are presented net of proceeds received from sublease agreements. The balance of the excess facilities and related costs is expected to be paid over a period of time ending in fiscal 2013. The balance of the employee severance and related benefits is expected to be paid over a period of time ending in December 2012. The short-term portion of the restructuring reserve of $3.6 million is included in other accrued liabilities and the long-term portion of $0.5 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2012.

Note 13: Income Taxes

Our income tax provision for the second quarter of fiscal 2012 and 2011 reflects our estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

The research and development credit was retroactively reinstated in December 2010. As a result, in the first quarter of fiscal 2011 we recorded a tax benefit of $2.0 million related to qualifying research and development activities for the period from January 2010 to November 2010. In fiscal 2012 there is a reduced expectation for research and development credits as the credit provisions in the tax code expired at the end of December 2011.

The Internal Revenue Service is currently examining our U.S. Federal income tax returns for fiscal years 2009 and 2010. Our Federal income tax returns have been examined or are closed by statute for all years prior to fiscal 2008, and we are no longer subject to audit for those periods. State taxing authorities are currently examining our income tax returns for years through fiscal 2010. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal 2008, and we are no longer subject to audit for those periods.

Tax authorities for certain non-U.S. jurisdictions are also examining returns affecting unrecognized tax benefits, none of which are material to our condensed consolidated balance sheets, cash flows or statements of income. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 2006.

We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material effect on our financial position or results of operations. However, there can be no assurances as to the possible outcomes.

Note 14: 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, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share on an interim basis (in thousands, expect per share data):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Net (loss) income
$
(1,908
)
 
$
17,960

 
$
5,581

 
$
38,481

Weighted average shares outstanding
63,051

 
66,897

 
62,598

 
66,942

Dilutive impact from common stock equivalents

 
2,349

 
1,043

 
2,511

Diluted weighted average shares outstanding
63,051

 
69,246

 
63,641

 
69,453

Basic earnings per share
$
(0.03
)
 
$
0.27

 
$
0.09

 
$
0.57

Diluted earnings per share
$
(0.03
)
 
$
0.26

 
$
0.09

 
$
0.55


15



We excluded stock awards representing approximately 7,890,000 shares, 3,668,000 shares, 768,000 shares and 529,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2012 and 2011, respectively, because these awards were anti-dilutive.

Note 15: Segment Information

Operating segments, as defined under GAAP, are components of an enterprise about which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. We internally report results to our chief operating decision maker on both a product group basis and a functional basis. Our product groups represent our reportable segments for financial reporting purposes. However, our organization is managed primarily on a functional basis. We assign dedicated costs and expenses, primarily costs of revenue and product development, directly to each segment and utilize an allocation methodology to assign all other costs and expenses, primarily sales and marketing and general and administrative, to each segment. A significant portion of the total costs and expenses assigned to each segment are allocated. Our chief operating decision maker is our Chief Executive Officer.

Our internal reporting through the second quarter of fiscal 2012 included three segments, each of which met the criteria for segment reporting: (1) Application Development Platforms, which includes the OpenEdge, Orbix, Orbacus and ObjectStore products; (2) Enterprise Business Solutions, which includes the Apama, Sonic, Artix, Actional, Savvion, Corticon, Control Tower and FuseSource products; and (3) Enterprise Data Solutions, which includes the DataDirect Connect, DataDirect Shadow and DataXtend products.

We do not manage our assets or capital expenditures by segment or assign other income and income taxes to segments. We manage and report such items on a consolidated company basis.

The following table provides revenue and (loss) income from operations for our reportable segments on an interim basis (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
Revenue:
 
 
 
 
 
 
 
Application Development Platform segment
$
71,898

 
$
83,896

 
$
147,467

 
$
162,973

Enterprise Business Solutions segment
29,940

 
34,162

 
60,834

 
71,289

Enterprise Data Solutions segment
12,758

 
16,626

 
30,721

 
34,659

Total revenue
$
114,596

 
$
134,684

 
$
239,022

 
$
268,921

(Loss) income from operations:
 
 
 
 
 
 
 
Application Development Platform segment
$
40,557

 
$
48,183

 
$
82,338

 
$
94,839

Enterprise Business Solutions segment
(21,949
)
 
(9,272
)
 
(42,615
)
 
(16,153
)
Enterprise Data Solutions segment
949

 
890

 
5,961

 
2,402

Unallocated items:
 
 
 
 
 
 
 
Amortization of acquired intangibles
(5,398
)
 
(5,912
)
 
(10,953
)
 
(12,161
)
Stock-based compensation
(6,669
)
 
(5,103
)
 
(13,760
)
 
(9,287
)
Transition expenses

 
(432
)
 

 
(856
)
Restructuring expenses
(8,496
)
 
(1,144
)
 
(8,496
)
 
(3,258
)
Acquisition-related expenses

 

 
(215
)
 

Litigation settlement

 

 
(900
)
 

Proxy contest-related costs
(2,766
)
 

 
(3,238
)
 

Total (loss) income from operations
$
(3,772
)
 
$
27,210

 
$
8,122

 
$
55,526


Unallocated items are excluded from segment (loss) income from operations as such amounts are not deducted from internal measurements of (loss) income from operations, and are not allocated to our reportable segments. In the first quarter of fiscal 2012, we eliminated our internal reporting use of purchase accounting adjustments for deferred revenue related to acquisitions, which had the impact of decreasing segment revenue and (loss) income from operations reported in the prior fiscal periods presented. We have revised the prior periods presented to reflect this change.

16



In the following table, revenue attributed to North America includes sales to customers in the U.S. and Canada and licensing to certain multinational organizations, substantially all of which is invoiced from the U.S. 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 U.S. Information relating to revenue from external customers from different geographical areas is as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2012
 
May 31,
2011
 
May 31,
2012
 
May 31,
2011
North America
$
54,703

 
$
60,448

 
$
114,770

 
$
124,926

EMEA
43,040

 
52,908

 
87,457

 
104,323

Latin America
8,324

 
9,415

 
17,653

 
18,574

Asia Pacific
8,529

 
11,913

 
19,142

 
21,098

Total revenue
$
114,596

 
$
134,684

 
$
239,022

 
$
268,921


Note 16: Subsequent Events

On June 27, 2012, we entered into a definitive purchase and sale agreement to divest our FuseSource product line to Red Hat, Inc. Subject to customary closing conditions, the divestiture is expected to close in the third quarter of fiscal 2012.

17



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements, including but not limited to the following: the receipt and shipment of new orders; the timely release and market acceptance of new products and/or enhancements to our existing products; the growth rates of certain market segments; the positioning of our products in those market segments; the customer demand and acceptance of any new product initiative; variations in the demand for professional services and technical support; pricing pressures and the competitive environment in the software industry; the continued uncertainty in the U.S. and international economies, which could result in fewer sales of our products and may otherwise harm our business; business and consumer use of the Internet; our ability to complete and integrate acquisitions; our ability to realize the expected benefits and anticipated synergies from acquired businesses; our ability to penetrate international markets and manage our international operations; our ability to execute on the strategic and operational initiatives we are currently undertaking, including any resulting disruption to our business, employees, customers and the manner in which we finance our operations; our ability to execute and complete divestitures in accordance with our divestiture plan; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2011. 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.

Use of Constant Currency

Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis helps improve the ability to understand our revenue results and evaluate our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).

Overview

We are a global software company that simplifies and enables the development, deployment and management of business applications on-premise or on any Cloud, on any platform and on any device with minimal IT complexity and low total cost of ownership. We are currently taking steps to implement the strategic plan (the "Plan") we announced during the second quarter of fiscal 2012. Under the Plan, we will become a leading provider of next-generation, context-aware application development and deployment platform in the Cloud for the Application Platform-as-a-Service (aPaas) market by investing in our OpenEdge, DataDirect Connect and Decision Analytics product lines ("Core" product lines) and integrating them into a single, cohesive offering.

We intend to execute on our Plan in two phases. In the first phase, which is currently underway, we are investing in our Core product lines and making them more Cloud-ready. We are also divesting ten non-core product lines: Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic ("non-Core" product lines). In the second phase, by unifying the product capabilities of our Core product lines, we will refine and enhance our next generation, feature-rich application development and deployment solution targeting the new market category of aPaaS.

In addition to the initiatives above, in the first phase of our Plan, we will also execute on cost reductions, including a net $40.0 million reduction in budgeted 2012 expense run rate by consolidating facilities, implementing a simplified organizational

18


structure and reducing the global workforce by approximately 10% to 15%. We will also repurchase at least $350.0 million of our common stock through fiscal 2013.

Through the filing of this quarterly report, we achieved a number of the steps needed to execute on our initiatives under the Plan.

We entered into a definitive purchase and sale agreement to divest our FuseSource product line to Red Hat, Inc. We expect this transaction to close in the third quarter of fiscal 2012, subject to customary closing conditions. The process of identifying buyers and working with interested parties continues for the remainder of our non-Core product lines.

We recorded $8.5 million in restructuring expenses in furtherance of our cost reduction plans. This charge includes $7.0 million in severance and other employee benefits associated with the reduction of 8% of our workforce. Further cost reduction measures are expected to be recorded through the remainder of fiscal 2012 and the first half of fiscal 2013 to achieve our cost reduction goals.

We still intend to execute the repurchase of up to $150.0 million of our common stock before November 30, 2012, and an additional $200.0 million in fiscal 2013.

We began the process of reorganizing our management structure and investing in our sales, marketing and strategic product development initiatives.

Our financial results for the first half of fiscal 2012 were adversely impacted by factors connected to the planning, announcement and execution of our new strategic plan, including the undertaking of large restructuring efforts and the marketing for divestiture of non-Core products. These factors contributed to a very uncertain environment for our company, our partners, customers and employees in the quarter. In particular, during the second quarter of fiscal 2012, purchasing decisions were delayed, causing deal slippage at a greater rate than usual. This was caused both by uncertainty surrounding our strategic plan and generally deteriorating macroeconomic conditions, primarily in Europe.

Investments to improve the Core business were also initiated late during the second quarter, and will require time to impact performance. Until these investments bear fruit, our operating margins will be adversely impacted. In addition, the new business focus and new strategy has required us to restructure our organization and the way we go to market, how we think about and implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption.

With respect to our non-Core products, although we continue to focus our efforts on selling these products, revenue from these product lines dropped significantly during the first half of fiscal 2012 and we expect future declines in subsequent quarters until we divest these products. Any such declines will adversely impact our results and we cannot give any assurance as to the timing of the completion of the divestitures, if at all. Furthermore, our operating performance will be adversely impacted by a temporarily higher expense need as we transition away from the non-Core portfolio.

We expect these disruptions to continue during the remainder of fiscal 2012.

Through the second quarter of fiscal 2012, we operated our business in three segments: Application Development Platforms, Enterprise Business Solutions and Enterprise Data Solutions. However, our organization was managed primarily on a functional basis. We assigned dedicated costs and expenses, primarily costs of revenue and product development, directly to each segment and utilized an allocation methodology to assign all other costs and expenses, primarily sales and marketing and general and administrative, to each segment. A significant portion of the total costs and expenses assigned to each segment were allocated. As part of the Plan, we intend to operate and report our business on a go forward basis as Core and non-Core. Core will consist of OpenEdge, DataDirect Connect, Apama, Corticon and the Progress Control Tower.

The U.S. and many foreign economies continue to experience uncertainty driven by varying macroeconomic conditions and recovery remains uneven. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in extreme volatility in credit, equity, and foreign currency markets, including the European sovereign debt markets and volatility in various markets including the financial services sector. We have been adversely impacted by these conditions as some customers have delayed software investments in response to this macroeconomic uncertainty. The continuation of this climate could cause our customers to further delay, forego or reduce the amount of their investments in our products or delay payments of amounts due to us. We expect these macroeconomic conditions to continue in the remainder of fiscal 2012, most particularly in Europe, the Middle East and Africa (EMEA).

19



We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations. We expect to be negatively impacted by weaker currencies in EMEA during the third quarter and remainder of fiscal 2012.

We believe that existing cash balances, together with funds generated from operations, amounts available under our revolving credit line and consideration received from the divestiture of non-Core product lines will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months, including our plans to repurchase shares of our common stock.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue recognition
Allowance for doubtful accounts
Goodwill and intangible asset impairment
Income tax accounting
Stock-based compensation
Investments in debt securities
Restructuring charges
Business combinations

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.

During the second quarter of fiscal 2012, there were no significant changes to our critical accounting policies and estimates, except as described below. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended November 30, 2011 for a more complete discussion of our critical accounting policies and estimates.

Goodwill Impairment

We have goodwill of $257.6 million at May 31, 2012. We assess the impairment of goodwill on an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We would record an impairment charge if such an assessment were to indicate that the fair value of the asset was less than the carrying value. When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price or in the value of one of our reporting units for a sustained period of time.

We utilize either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of our reporting units. We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums 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. The determination of reporting units also requires management judgment. We consider whether a reporting unit exists within a reportable segment based on the availability of discrete financial information that is regularly reviewed by segment management.

20



During the second quarter of fiscal 2012, as a result of continued declines in certain reporting units and in connection with the announcement of the Plan, we determined an impairment triggering event occurred that required us to perform an interim goodwill impairment test. The test indicated that our reporting units had an estimated fair value that was in excess of their carrying values, and thus, no impairment was present. However, the difference between the carrying value and fair value of our Enterprise Business Solutions reporting unit has decreased since the annual test as a result of updates to our internal forecasts and projected cash flows. The amount of goodwill allocated to the Enterprise Business Solutions segment is $96.3 million.

The assumptions used in the discounted cash flow model for the Enterprise Business Solutions segment are dependent on several variables and assume a highest and best use scenario. The assumptions include changes in selling and marketing strategies to increase revenue growth rates and changes in cost structure to improve segment profitability. We also used comparable companies and market transactions in our market approach to value the Enterprise Business Solutions reporting unit. A change in certain of the assumptions used in the discounted cash flow model or market approach could yield a different conclusion that may have resulted in an impairment charge.

In the third quarter of fiscal 2012, we plan to test goodwill for impairment in connection with the reassignment of goodwill to our new segments. Through the filing of this report, we have not commenced this test.

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
 
Percentage Change
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
May 31, 2012
 
May 31, 2011
 
May 31, 2012
 
May 31, 2011
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
26
 %
 
34
%
 
30
%
 
36
%
 
(35
)%
 
(26
)%
Maintenance and services
74

 
66

 
70

 
64

 
(5
)
 
(3
)
Total revenue
100

 
100

 
100

 
100

 
(15
)
 
(11
)
Costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of software licenses
2

 
2

 
2

 
2

 
(2
)
 
(3
)
Cost of maintenance and services
17

 
15

 
16

 
14

 

 
4

Amortization of acquired intangibles
3

 
3

 
3

 
3

 
(8
)
 
(7
)
Total costs of revenue
22

 
20

 
21

 
19

 
(1
)
 
2

Gross profit
78

 
80

 
79

 
81

 
(18
)
 
(14
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
36

 
33

 
37

 
33

 
(6
)
 

Product development
20

 
14

 
19

 
15

 
13

 
10

General and administrative
16

 
11

 
14

 
10

 
31

 
31

Amortization of acquired intangibles
2

 
1

 
2

 
2

 
(11
)
 
(16
)
Restructuring expenses
7

 
1

 
4

 
1

 
*
 
*
Acquisition-related expenses

 

 

 

 
*
 
*
Total operating expenses
81

 
60

 
76

 
61

 
14

 
10

(Loss) income from operations
(3
)
 
20

 
3

 
20

 
(114
)
 
(85
)
Other income (expense)

 

 

 

 
19

 
205

(Loss) income before income tax (benefit) provision
(3
)
 
20

 
3

 
20

 
(113
)
 
(84
)
Income tax (benefit) provision
(1
)
 
7

 
1

 
6

 
(117
)
 
(82
)
Net (loss) income
(2
)%
 
13
%
 
2
%
 
14
%
 
(111
)%
 
(85
)%
 
*
not meaningful


21


Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2012
 
May 31, 2011
 
As Reported
 
Constant
Currency
License
$
29,673

 
$
45,417

 
(35
)%
 
(32
)%
Maintenance
73,066

 
75,865

 
(4
)
 

Professional services
11,857

 
13,402

 
(12
)
 
(9
)
Total revenue
$
114,596

 
$
134,684

 
(15
)%
 
(12
)%

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2012
 
May 31, 2011
 
As Reported
 
Constant
Currency
License
$
71,165

 
$
96,753

 
(26
)%
 
(25
)%
Maintenance
145,362

 
146,944

 
(1
)
 
1

Professional services
22,495

 
25,224

 
(11
)
 
(9
)
Total revenue
$
239,022

 
$
268,921

 
(11
)%
 
(9
)%

Total revenue decreased $20.1 million, or 12% on a constant currency basis and 15% otherwise, in the second quarter of fiscal 2012 as compared to the same quarter last year and decreased $29.9 million, or 9% on a constant currency basis and 11% otherwise, in the first six months of fiscal 2012 as compared to the same period in the prior year, primarily as a result of decreases in license revenue. The revenue performance in the second quarter of fiscal 2012 reflects the impact of the planning for and announcement of our Plan on our employees, customers and partners. Given the uncertainties and concerns that resulted from the Plan, our go-to-market focus and momentum was disrupted, and our execution suffered as a result. In the field, we saw purchasing decisions delayed and we saw deal slippage at a greater rate than normal, caused both by uncertainty surrounding our Plan and generally deteriorating macroeconomic conditions, primarily in Europe.

Changes in prices from fiscal 2011 to 2012 did not have a significant impact on our revenue. Changes in foreign currency exchange rates negatively impacted our reported revenues.

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2012
 
May 31, 2011
 
As Reported
 
Constant
Currency

North America
$
54,703

 
$
60,448

 
(10
)%
 
(10
)%
As a percentage of total revenue
48
%
 
45
%
 
 
 
 
EMEA
$
43,040

 
$
52,908

 
(19
)%
 
(13
)%
As a percentage of total revenue
38
%
 
39
%
 
 
 
 
Latin America
$
8,324

 
$
9,415

 
(12
)%
 
 %
As a percentage of total revenue
7
%
 
7
%
 
 
 
 
Asia Pacific
$
8,529

 
$
11,913

 
(28
)%
 
(27
)%
As a percentage of total revenue
7
%
 
9
%
 
 
 
 


22


 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2012
 
May 31, 2011
 
As Reported
 
Constant
Currency
North America
$
114,770

 
$
124,926

 
(8
)%
 
(8
)%
As a percentage of total revenue
48
%
 
46
%
 
 
 
 
EMEA
$
87,457

 
$
104,323

 
(16
)%
 
(13
)%
As a percentage of total revenue
37
%
 
39
%
 
 
 
 
Latin America
$
17,653

 
$
18,574

 
(5
)%
 
3
 %
As a percentage of total revenue
7
%
 
7
%
 
 
 
 
Asia Pacific
$
19,142

 
$
21,098

 
(9
)%
 
(10
)%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 

Total revenue generated in North America decreased $5.7 million, or 10% on a constant and actual currency basis, as compared to the same quarter last year and represented 48% and 45% of total revenue in the second quarter of fiscal 2012 and 2011, respectively. Total revenue generated in markets outside North America decreased $14.3 million, or 14% on a constant currency basis and 19% otherwise, in the second quarter of fiscal 2012 as compared to the same quarter last year, and represented 52% and 55% of total revenue in the second quarter of fiscal 2012 and 2011, respectively. If exchange rates had remained constant in the second quarter of fiscal 2012 as compared to the exchange rates in effect in the second quarter of fiscal 2011, total revenue generated in markets outside North America would have represented 54% of total revenue.

Total revenue generated in North America decreased $10.2 million, or 8% on a constant and actual currency basis, as compared to the same period last year and represented 48% and 46% of total revenue in the first six months of fiscal 2012 and 2011, respectively. Total revenue generated in markets outside North America decreased $19.7 million, or 10% on a constant currency basis and 14% otherwise, in the first six months of fiscal 2012 as compared to the same period last year, and represented 52% and 54% of total revenue in the first six months of fiscal 2012 and 2011, respectively. If exchange rates had remained constant in the first six months of fiscal 2012 as compared to the exchange rates in effect in the first six months of fiscal 2011, total revenue generated in markets outside North America would have represented 53% of total revenue.

In the second quarter of fiscal 2012, all regions were negatively impacted by weaker local currencies. In the first six months of fiscal 2012, EMEA and Latin American were negatively impacted by weaker local currencies and Asia Pacific was helped by stronger local currencies.
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2012
 
May 31, 2011
 
Percentage
Change
 
May 31, 2012
 
May 31, 2011
 
Percentage
Change
Application Development Platform segment
$
71,898

 
$
83,896

 
(14
)%
 
$
147,467

 
$
162,973

 
(10
)%
Enterprise Business Solutions segment
29,940

 
34,162

 
(12
)
 
60,834

 
71,289

 
(15
)
Enterprise Data Solutions segment
12,758

 
16,626

 
(23
)
 
30,721

 
34,659

 
(11
)
Total revenue
$
114,596

 
$
134,684

 
(15
)%
 
$
239,022

 
$
268,921

 
(11
)%

During the second quarter of fiscal 2012 as compared to the same quarter last year, revenue from our Application Development Platform segment decreased $12.0 million, or 14%, revenue from our Enterprise Business Solutions segment decreased $4.2 million, or 12%, and revenue from our Enterprise Data Solutions segment decreased $3.9 million, or 23%.

During the first six months of fiscal 2012 as compared to the same period last year, revenue from our Application Development Platform segment decreased $15.5 million, or 10%, revenue from our Enterprise Business Solutions segment decreased $10.5 million, or 15%, and revenue from our Enterprise Data Solutions segment decreased $3.9 million, or 11%.

Segment results were also impacted by the disruption of our Plan to our employees, customers and partners. See further discussion of segment reporting in Note 15 of the condensed consolidated financial statements included in this report.


23


 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2012
 
May 31, 2011
 
Percentage
Change
 
May 31, 2012
 
May 31, 2011
 
Percentage
Change
License revenue
$
29,673

 
$
45,417

 
(35
)%
 
$
71,165

 
$
96,753

 
(26
)%
As a percentage of total revenue
26
%
 
34
%
 
 
 
30
%
 
36
%
 
 

Total software license revenue decreased $15.7 million, or 35%, in the second quarter of fiscal 2012 as compared to the same quarter last year, and decreased $25.6 million, or 26%, in the first six months of fiscal 2012 as compared to the same period last year. The decrease in license revenue is due to the disruption from our Plan and also a number of large non-recurring direct deals, particularly in EMEA, in the first and second quarters of fiscal 2011 as compared to the same period in fiscal 2012.

 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2012
 
May 31, 2011
 
Percentage
Change
 
May 31, 2012
 
May 31, 2011
 
Percentage
Change
Maintenance
$
73,066

 
$
75,865

 
(4
)%
 
$
145,362

 
$
146,944

 
(1
)%
Professional services
11,857

 
13,402

 
(12
)%
 
22,495

 
25,224

 
(11
)%
Total maintenance and services revenue
$
84,923

 
$
89,267

 
(5
)%
 
$
167,857

 
$
172,168

 
(3
)%
As a percentage of total revenue
74
%
 
66
%
 
 
 
70
%
 
64
%
 
 

Maintenance and services revenue decreased $4.3 million, or 5%, in the second quarter of fiscal 2012 as compared to the same quarter last year. Maintenance revenue decreased 4% and professional services revenue decreased 12% in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011.

Maintenance and services revenue decreased $4.3 million, or 3%, in the first six months of fiscal 2012 as compared to the same period last year. Maintenance revenue decreased 1% and professional services revenue decreased 11% in the first six months of fiscal 2012 as compared to the first six months of fiscal 2011.

Costs of Revenue
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2012
 
May 31, 2011
 
Percentage
Change
 
May 31, 2012
 
May 31, 2011
 
Percentage
Change
Cost of software licenses
$
2,273

 
$
2,321

 
(2
)%
 
$
4,561

 
$
4,702

 
(3
)%
As a percentage of software license revenue
8
%
 
5
%
 
 
 
6
%
 
5
%
 
 
As a percentage of total revenue
2
%
 
2
%
 
 
 
2
%
 
2
%
 
 
Cost of maintenance and services
$
19,877

 
$
19,906

 
 %
 
$
39,257

 
$
37,674

 
4
 %
As a percentage of maintenance and services revenue
23
%
 
22
%
 
 
 
23
%
 
22
%
 
 
As a percentage of total revenue
17
%
 
15
%