10-Q 1 prgs8-31x1210xq.htm FORM 10-Q PRGS 8-31-12 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 August 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 October 2, 2012, there were 63,908,000 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE NINE MONTHS ENDED AUGUST 31, 2012
INDEX

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
 
(In thousands, except share data)
August 31,
2012
 
November 30, 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
294,398

 
$
161,095

Short-term investments
57,809

 
100,321

Total cash, cash equivalents and short-term investments
352,207

 
261,416

Accounts receivable (less allowances of $3,375 in 2012 and $6,683 in 2011)
75,849

 
110,927

Other current assets
26,863

 
22,110

Deferred tax assets
10,105

 
13,458

Assets held for sale
6,731

 

Total current assets
471,755

 
407,911

Property and equipment, net
64,479

 
66,206

Intangible assets, net
47,676

 
64,408

Goodwill
252,735

 
256,211

Deferred tax assets
32,808

 
30,361

Investments in auction rate securities
31,285

 
33,539

Other assets
5,588

 
5,627

Total assets
$
906,326

 
$
864,263

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

 
$
357

Accounts payable
4,827

 
7,039

Accrued compensation and related taxes
35,967

 
31,245

Income taxes payable
4,171

 
6,048

Other accrued liabilities
37,630

 
35,728

Short-term deferred revenue
129,606

 
145,727

Liabilities held for sale
5,265

 

Total current liabilities
217,466

 
226,144

Long-term deferred revenue
5,343

 
6,619

Deferred tax liabilities
1,499

 
1,533

Other noncurrent liabilities
2,574

 
4,857

Commitments and contingencies (Note 9)

 

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, 63,595,485 shares in 2012 and 61,788,629 shares in 2011
352,773

 
309,221

Retained earnings, including accumulated other comprehensive loss of $12,292 in 2012 and $11,653 in 2011
326,671

 
315,889

Total shareholders’ equity
679,444

 
625,110

Total liabilities and shareholders’ equity
$
906,326

 
$
864,263

See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Income
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Revenue:
 
 
 
 
 
 
 
Software licenses
$
30,983

 
$
38,713

 
$
102,148

 
$
135,466

Maintenance and services
76,190

 
85,798

 
235,010

 
250,905

Total revenue
107,173

 
124,511

 
337,158

 
386,371

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,927

 
2,321

 
6,488

 
7,023

Cost of maintenance and services
14,666

 
18,557

 
49,267

 
52,648

Amortization of acquired intangibles
3,648

 
3,966

 
11,013

 
11,871

Total costs of revenue
20,241

 
24,844

 
66,768

 
71,542

Gross profit
86,932

 
99,667

 
270,390

 
314,829

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
33,034

 
43,661

 
118,058

 
130,030

Product development
20,949

 
18,106

 
63,591

 
57,491

General and administrative
14,428

 
20,342

 
47,949

 
45,937

Amortization of acquired intangibles
1,737

 
1,909

 
5,270

 
6,108

Restructuring expenses
2,787

 
1,369

 
11,175

 
4,627

Acquisition-related expenses

 

 
215

 

Total operating expenses
72,935

 
85,387

 
246,258

 
244,193

Income from operations
13,997

 
14,280

 
24,132

 
70,636

Other income (expense):
 
 
 
 
 
 
 
Interest income and other
1,017

 
310

 
2,356

 
1,612

Foreign currency loss, net
(660
)
 
(1,083
)
 
(1,474
)
 
(2,215
)
Total other income (expense), net
357

 
(773
)
 
882

 
(603
)
Income from continuing operations before income taxes
14,354

 
13,507

 
25,014

 
70,033

Provision for income taxes
6,378

 
3,919

 
10,157

 
21,536

Income from continuing operations
7,976

 
9,588

 
14,857

 
48,497

Loss from discontinued operations, net
(2,138
)
 
(529
)
 
(3,438
)
 
(1,043
)
Net income
$
5,838

 
$
9,059

 
$
11,419

 
$
47,454

Earnings per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.15

 
$
0.24

 
$
0.73

Discontinued operations
(0.03
)
 
(0.01
)
 
(0.05
)
 
(0.02
)
Net income per share
$
0.09

 
$
0.14

 
$
0.18

 
$
0.71

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.12

 
$
0.14

 
$
0.23

 
$
0.71

Discontinued operations
(0.03
)
 
(0.01
)
 
(0.05
)
 
(0.02
)
Net income per share
$
0.09

 
$
0.13

 
$
0.18

 
$
0.69

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
63,469

 
65,861

 
62,888

 
66,581

Diluted
64,105

 
67,280

 
63,795

 
68,728

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended
(In thousands)
August 31,
2012
 
August 31,
2011
Cash flows from operating activities:
 
 
 
Net income
$
11,419

 
$
47,454

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
6,990

 
6,569

Amortization of acquired intangibles and other
18,379

 
18,064

Stock-based compensation
21,504

 
18,755

Asset impairment
875

 

Deferred income taxes
888

 
(3,768
)
Tax benefit from stock plans
563

 
5,945

Excess tax benefit from stock plans
(1,338
)
 
(3,998
)
Allowances for accounts receivable
774

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
30,250

 
40,255

Other assets
(5,412
)
 
4,244

Accounts payable and accrued liabilities
4,201

 
(27,240
)
Income taxes payable and uncertain tax positions
(2,760
)
 
11,093

Deferred revenue
(10,619
)
 
755

Net cash flows from operating activities
75,714

 
118,128

Cash flows from investing activities:
 
 
 
Purchases of investments
(27,924
)
 
(105,125
)
Sales and maturities of investments
70,185

 
50,435

Redemptions at par by issuers of auction rate securities
2,925

 
6,300

Purchases of property and equipment
(6,606
)
 
(13,956
)
Increase in other noncurrent assets
247

 
(814
)
Net cash flows from investing activities
38,827

 
(63,160
)
Cash flows from financing activities:
 
 
 
Proceeds from stock-based compensation plans
24,284

 
41,496

Purchases of common stock related to withholding taxes from the issuance of restricted stock units
(2,681
)
 
(1,720
)
Repurchases of common stock

 
(134,892
)
Excess tax benefit from stock plans
1,338

 
3,998

Payment of long-term debt
(357
)
 
(276
)
Payment of issuance costs for revolving line of credit

 
(752
)
Net cash flows from financing activities
22,584

 
(92,146
)
Effect of exchange rate changes on cash
(3,822
)
 
8,388

Net increase (decrease) in cash and cash equivalents
133,303

 
(28,790
)
Cash and cash equivalents, beginning of period
161,095

 
286,559

Cash and cash equivalents, end of period
$
294,398

 
$
257,769

Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $632 in 2012 and $8,441 in 2011
$
13,912

 
$
7,696

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, we have commenced 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 August 31, 2012, we have not yet met the criteria for reporting the non-Core product lines as either held for sale or as discontinued operations, with the exception of the FuseSource product line (Note 6).

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.

Immaterial Correction of Prior Period Amounts

In the third quarter of fiscal 2012, in connection with the filing of our Federal income tax return, we undertook a review of our income taxes payable. As part of the review, we identified errors relating to prior fiscal year financial statements. The errors relate to incorrect entries to income taxes payable as part of accounting for uncertain tax positions, purchase accounting, accounting for deferred tax assets and return to provision adjustments and had the cumulative impact of overstating income taxes payable, goodwill, deferred tax assets and the provision for income taxes in prior periods.

The errors are immaterial to all annual and quarterly periods previously presented. However, because the cumulative impact of the errors would have been significant to the current period condensed consolidated statement of income if corrected in the current period, we have corrected the prior period financial statements to reflect the corrections in the periods they occurred.

6


The effect of the corrections to the condensed consolidated balance sheet as of November 30, 2011, is as follows (in thousands):

 
As Previously Reported (1)
 
Adjustment
 
As Corrected
Assets:
 
 
 
 
 
Other current assets
$
21,143

 
$
967

 
$
22,110

Deferred tax assets
14,291

 
(833
)
 
13,458

Total current assets
407,777

 
134

 
407,911

Goodwill
257,824

 
(1,613
)
 
256,211

Total assets
865,742

 
(1,479
)
 
864,263

Liabilities and shareholders’ equity:
 
 
 
 
 
Income taxes payable
11,412

 
(5,364
)
 
6,048

Total current liabilities
231,508

 
(5,364
)
 
226,144

Other noncurrent liabilities
3,782

 
1,075

 
4,857

Retained earnings, including accumulated other comprehensive loss
313,079

 
2,810

 
315,889

Total shareholders’ equity
622,300

 
2,810

 
625,110

Total liabilities and shareholders’ equity
865,742

 
(1,479
)
 
864,263


(1)
The condensed consolidated balance sheet as of November 30, 2011 was revised in previous filings to reflect purchase accounting measurement period adjustments (Note 7).

The effect of the corrections to the condensed consolidated statements of income for the three and nine months ended August 31, 2011, is as follows (in thousands, except per share data):

 
Three Months Ended
 
Nine Months Ended
 
As Previously Reported (1)
 
Adjustment
 
As Corrected
 
As Previously Reported (1)
 
Adjustment
 
As Corrected
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
$
4,377

 
$
(458
)
 
$
3,919

 
$
21,909

 
$
(373
)
 
$
21,536

Income from continuing operations
9,130

 
458

 
9,588

 
48,124

 
373

 
48,497

Net income
8,601

 
458

 
9,059

 
47,081

 
373

 
47,454

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
0.14

 
0.01

 
0.15

 
0.72

 
0.01

 
0.73

Net income per share
0.13

 
0.01

 
0.14

 
0.71

 
0.01

 
0.71

Diluted:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
0.14

 
0.01

 
0.14

 
0.70

 
0.01

 
0.71

Net income per share
0.13

 
0.01

 
0.13

 
0.69

 
0.01

 
0.69


(1)
The condensed consolidated statements of income for the three and nine months ended August 31, 2011 have been revised to reflect the impact of discontinued operations (Note 6).

7


The effect of the corrections to the condensed consolidated statements of cash flows for the nine months ended August 31, 2011, is as follows (in thousands):

 
As Previously Reported
 
Adjustment
 
As Corrected
Cash flows from operating activities:
 
 
 
 
 
Net income
$
47,081

 
$
373

 
$
47,454

Changes in operating assets and liabilities:
 
 
 
 
 
Income taxes payable and uncertain tax positions
11,466

 
(373
)
 
11,093


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, results of operations or cash flows.

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 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, results of operations or cash flows.

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, results of operations or cash flows, 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 available-for-sale investments at August 31, 2012 is as follows (in thousands):
 
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
169,249

 
$

 
$

 
$
169,249

Money market funds
125,149

 

 

 
125,149

State and municipal bond obligations
53,586

 
300

 
(4
)
 
53,882

Auction rate securities – municipal bonds
27,175

 

 
(3,821
)
 
23,354

Auction rate securities – student loans
9,800

 

 
(1,869
)
 
7,931

Corporate bonds
3,928

 

 
(1
)
 
3,927

Total
$
388,887

 
$
300

 
$
(5,695
)
 
$
383,492



8


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


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
August 31, 2012
 
November 30, 2011
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
Cash
$
169,249

 
$

 
$

 
$
134,890

 
$

 
$

Money market funds
125,149

 

 

 
24,220

 

 

State and municipal bond obligations

 
53,882

 

 
1,985

 
82,413

 

Brazilian mutual funds

 

 

 

 
15,346

 

Auction rate securities – municipal bonds

 

 
23,354

 

 

 
22,931

Auction rate securities – student loans

 

 
7,931

 

 

 
10,608

Corporate bonds

 
3,927

 

 

 
2,562

 

Total
$
294,398

 
$
57,809

 
$
31,285

 
$
161,095

 
$
100,321

 
$
33,539


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 $31.3 million and $33.5 million at August 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 $5.7 million and $6.4 million at August 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 August 31, 2012 and November 30, 2011.

Based on our cash, cash equivalents and short-term investments balance of $352.2 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.


9


The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
August 31,
2012
 
November 30,
2011
Due in one year or less (1)
$
60,959

 
$
104,620

Due after one year
28,135

 
31,225

Total
$
89,094

 
$
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.

Investments with continuous unrealized losses and their related fair values are as follows at August 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
$
10,980

 
$
(4
)
 
$

 
$

 
$
10,980

 
$
(4
)
Auction rate securities – municipal bonds

 

 
23,354

 
(3,821
)
 
23,354

 
(3,821
)
Auction rate securities – student loans

 

 
7,931

 
(1,869
)
 
7,931

 
(1,869
)
Corporate bonds
2,618

 
(1
)
 

 

 
2,618

 
(1
)
Total
$
13,598

 
$
(5
)
 
$
31,285

 
$
(5,690
)
 
$
44,883

 
$
(5,695
)

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 August 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 nine months ended August 31, 2011, mark-to-market losses of less than $0.1 million and $0.5 million, respectively, on foreign currency option contracts were recorded in other income (expense) in the condensed consolidated statements of income. We did not hold any option contracts during the first nine months 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

10


nine months ended August 31, 2012 and 2011, realized and unrealized losses of $0.3 million, $0.0 million, $0.6 million and $2.6 million, respectively, from our forward contracts were recognized in other income (expense) 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):
 
 
August 31, 2012
 
November 30, 2011
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
5,773

 
$
(16
)
 
$
2,180

 
$
(54
)
Forward contracts to purchase U.S. dollars
20,448

 
(72
)
 
36,275

 
106

Total
$
26,221

 
$
(88
)
 
$
38,455

 
$
52


Note 4: Fair Value Measurements

The following table details the fair value measurements within the fair value hierarchy of our financial assets at August 31, 2012 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
125,149

 
$
125,149

 
$

 
$

State and municipal bond obligations
53,882

 

 
53,882

 

Auction rate securities – municipal bonds
23,354

 

 

 
23,354

Auction rate securities – student loans
7,931

 

 

 
7,931

Corporate bonds
3,927

 

 
3,927

 

Foreign exchange derivatives
(88
)
 

 
(88
)
 


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.


11


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.

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
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Balance, beginning of period
$
31,448

 
$
34,784

 
$
33,539

 
$
39,643

Redemptions and repurchases

 
(100
)
 
(225
)
 
(6,300
)
Transfer to Level 2 fair value measurement

 

 
(2,700
)
 

Unrealized (losses) gains included in accumulated other comprehensive loss
(163
)
 
(218
)
 
671

 
1,123

Balance, end of period
$
31,285

 
$
34,466

 
$
31,285

 
$
34,466


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 the end of the second quarter was based on observable inputs. The ARS was redeemed in the third quarter of fiscal 2012.

Note 5: Goodwill

During the third quarter of fiscal 2012, in furtherance of the Plan, we changed the structure of our internal organization and the way we manage our business. As a result, our reportable segment information has been restated to reflect the current structure (Note 16). Our evaluation of reporting units has also been reassessed and changed to reflect the current structure and operations. During the third quarter of fiscal 2012, we reassigned goodwill to the new reporting units and reportable segments based on the relative fair values of the reporting units. This resulted in goodwill of $225.9 million being assigned to our Core segment and $30.0 million being assigned to our non-Core segment.

In connection with the reassignment of goodwill to our new reporting units, we determined an impairment triggering event occurred that required us to perform an interim goodwill impairment test. We performed the test for both our old and new reporting units to ensure no impairment existed prior to the reassignment of goodwill or resulted after the reassignment of goodwill. The tests indicated that our reporting units under our old and new structures had estimated fair values that were in excess of their carrying values, and thus, no impairment was present.

We valued our reporting units for purposes of our goodwill impairment test and reassignment of our goodwill to the new reporting units using a market and income approach. However, a market approach was more heavily weighted to value the non-Core reporting unit given the current intentions to divest the non-Core product lines in furtherance of the Plan.

The change in value of our goodwill since November 30, 2011 is the result of foreign currency translations, the finalization of purchase accounting measurement period adjustments (Note 7), goodwill transfered to assets held for sale (Note 6) and the immaterial errors identified as part of our income taxes payable analysis (Note 1).

Note 6: Divestiture

In the third quarter of fiscal 2012, we entered into a definitive purchase and sale agreement to divest our FuseSource product line to Red Hat, Inc. The divestiture of the FuseSource product line is in furtherance of the Plan. The sale closed in September 2012, subsequent to our fiscal third quarter end, for a total price of $21.3 million. As of the end of the fiscal third quarter of 2012, we met the requirements to classify the FuseSource product line as both held for sale and discontinued operations in the condensed consolidated financial statements.


12


The assets and liabilities being sold to Red Hat, Inc. are classified as assets and liabilities held for sale on the condensed consolidated balance sheet as of August 31, 2012 and are recorded at the lower of their carrying values or fair values less costs to sell. The major categories of the assets and liabilities held for sale are as follows (in thousands):

Assets:
 
Accounts receivable
$
2,875

Other current assets
100

Goodwill
3,317

Other long-term assets
439

Total assets held for sale
$
6,731

Liabilities:
 
Deferred revenue
$
5,265

Total liabilities held for sale
$
5,265


Revenues and direct expenses of the FuseSource product line have been reclassified as discontinued operations for all periods presented. The components included in discontinued operations on the condensed consolidated statements of income are as follows (in thousands):

 
Three Months Ended
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Revenue
$
4,808

 
$
3,823

 
$
13,844

 
$
10,884

Loss before income taxes
(3,687
)
 
(769
)
 
(5,706
)
 
(1,600
)
Income tax benefit
1,549

 
240

 
2,268

 
557

Loss from discontinued operations, net
$
(2,138
)
 
$
(529
)
 
$
(3,438
)
 
$
(1,043
)

Note 7: 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 and are now included in our Core 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.

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

13


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 8: 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 August 31, 2012, there were no amounts outstanding under the revolving line and $0.2 million of letters of credit.

Note 9: 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, results of operations or cash flows.

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.

Note 10: 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 nine months ended August 31, 2012.

We repurchased and retired 5,154,000 shares of our common stock for $134.9 million in the nine months ended August 31, 2011 as part of a prior share repurchase program. The prior program was completed in fiscal 2011.

Note 11: 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.


14


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

 
$

 
$
7

 
$
7

Cost of maintenance and services
382

 
413

 
1,418

 
775

Sales and marketing
1,626

 
1,916

 
5,418

 
4,073

Product development
2,089

 
1,270

 
5,630

 
3,770

General and administrative
3,040

 
5,769

 
8,247

 
9,927

Stock-based compensation from continuing operations
7,139

 
9,368

 
20,720

 
18,552

Loss from discontinued operations, net
605

 
100

 
784

 
203

Total stock-based compensation
$
7,744

 
$
9,468

 
$
21,504

 
$
18,755


During fiscal 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 $1.8 million in the nine months ended August 31, 2012.

Note 12: 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
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Net income
$
5,838

 
$
9,059

 
$
11,419

 
$
47,454

Foreign currency translation adjustments
658

 
134

 
(1,365
)
 
5,086

Unrealized (losses) gains on investments
(93
)
 
(100
)
 
726

 
942

Total comprehensive income
$
6,403

 
$
9,093

 
$
10,780

 
$
53,482



Note 13: 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 first nine months of fiscal 2012 totaling $13.7 million, of which $2.0 million represents excess facilities and other costs and $11.7 million represents employee severances and related benefits. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income, with the exception of $2.5 million included in loss from discontinued operations. 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

15


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
1,967

 
11,738

 
13,705

Cash disbursements
(597
)
 
(4,691
)
 
(5,288
)
Asset impairment
(875
)
 

 
(875
)
Translation adjustments and other

 
(13
)
 
(13
)
Balance, August 31, 2012
$
495

 
$
7,034

 
$
7,529


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 $7.3 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 August 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 nine 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.

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
(2,067
)
 
(272
)
 
(2,339
)
Translation adjustments and other
110

 
5

 
115

Balance, August 31, 2012
$
2,956

 
$
431

 
$
3,387


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 restructuring reserve of $3.4 million is included in other accrued liabilities on the condensed consolidated balance sheet at August 31, 2012.


16


Note 14: Income Taxes

Our income tax provision for the third 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 15: 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 from continuing operations on an interim basis (in thousands, expect per share data):
 
 
Three Months Ended
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Income from continuing operations
$
7,976

 
$
9,588

 
$
14,857

 
$
48,497

Weighted average shares outstanding
63,469

 
65,861

 
62,888

 
66,581

Dilutive impact from common stock equivalents
636

 
1,419

 
907

 
2,147

Diluted weighted average shares outstanding
64,105

 
67,280

 
63,795

 
68,728

Basic earnings per share from continuing operations
$
0.13

 
$
0.15

 
$
0.24

 
$
0.73

Diluted earnings per share from continuing operations
$
0.12

 
$
0.14

 
$
0.23

 
$
0.71


We excluded stock awards representing approximately 4,877,000 shares, 4,071,000 shares, 3,098,000 shares and 1,386,000 shares of common stock from the calculation of diluted earnings per share in the three and nine months ended August 31, 2012 and 2011, respectively, because these awards were anti-dilutive.

Note 16: Segment Information

Operating segments, as defined under GAAP, are components of an enterprise that engage in business activities for 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 directly to each segment and utilize an allocation methodology to assign all other costs and expenses, primarily general and administrative, to each segment. 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. Our chief operating decision maker is our Chief

17


Executive Officer.

In the third quarter of fiscal 2012, as part of the Plan, we changed the structure of our internal organization and the way we manage our business (Note 1). Beginning in the third quarter of fiscal 2012, our internal reporting includes the following segments, each of which meet the criteria of a reportable segment: (1) the Core segment, which includes the OpenEdge, DataDirect Connect and Decision Analytics (comprised of Apama, Corticon and the Progress Control Tower) product lines; and (2) the non-Core segment, which includes the Actional, Artix, DataXtend, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic product lines. The segment information for the prior periods presented has been restated to reflect the change in our reportable segments.

The following table provides revenue and income from operations for our reportable segments on an interim basis (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
Revenue:
 
 
 
 
 
 
 
Core segment
$
78,317

 
$
88,683

 
$
243,934

 
$
267,160

Non-Core segment
28,856

 
35,828

 
93,224

 
119,211

Total revenue
$
107,173

 
$
124,511

 
$
337,158

 
$
386,371

Income (loss) from operations:
 
 
 
 
 
 
 
Core segment
$
20,461

 
$
39,327

 
$
84,066

 
$
119,192

Non-Core segment
8,868

 
(8,239
)
 
(7,382
)
 
(6,344
)
Unallocated items:
 
 
 
 
 
 
 
Amortization of acquired intangibles
(5,385
)
 
(5,875
)
 
(16,283
)
 
(17,979
)
Stock-based compensation
(7,139
)
 
(9,368
)
 
(20,720
)
 
(18,552
)
Transition expenses

 
(196
)
 

 
(1,054
)
Restructuring expenses
(2,787
)
 
(1,369
)
 
(11,175
)
 
(4,627
)
Acquisition-related expenses

 

 
(215
)
 

Litigation settlement

 

 
(900
)
 

Proxy contest-related costs
(21
)
 

 
(3,259
)
 

Total income from operations
$
13,997

 
$
14,280

 
$
24,132

 
$
70,636


Unallocated items are excluded from segment income from operations, as such amounts are not deducted from internal measurements of income from operations and are not allocated to our reportable segments.

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
 
Nine Months Ended
 
August 31,
2012
 
August 31,
2011
 
August 31,
2012
 
August 31,
2011
North America
$
54,032

 
$
56,445

 
$
161,613

 
$
175,496

EMEA
37,472

 
47,376

 
123,120

 
150,515

Latin America
8,167

 
10,411

 
25,781

 
28,984

Asia Pacific
7,502

 
10,279

 
26,644

 
31,376

Total revenue
$
107,173

 
$
124,511

 
$
337,158

 
$
386,371




18


Note 17: Subsequent Events

In October 2012, we entered into a definitive purchase and sale agreement to divest our Shadow product line to Rocket Software, Inc. Subject to customary closing conditions, the divestiture is expected to close in the fourth quarter of fiscal 2012.



19



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; our ability to absorb allocated costs, primarily general and administrative, into the Core segment as divestitures occur; disruptions that may result from the departure of our Chief Executive Officer; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, the Quarterly Reports on Form 10-Q for the quarters ended May 31, 2012 and February 29, 2012, 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 intend to 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.

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In addition to the initiatives above, in the first phase of our Plan, we are also executing on cost reductions, including a net $40.0 million reduction in budgeted 2012 expense run rate by consolidating facilities, implementing a simplified organizational structure and reducing the global workforce by approximately 10% to 15%. We also intend to 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.

In the second fiscal quarter of 2012, we entered into a definitive purchase and sale agreement to divest our FuseSource product line to Red Hat, Inc. The transaction closed in September 2012, after the end of our fiscal third quarter, for a total purchase price of $21.3 million. In October 2012, we entered into a definitive purchase and sale agreement to divest our Shadow product line to Rocket Software, Inc. Subject to customary closing conditions, we expect the divestiture to close in the fourth quarter of fiscal 2012. The process of identifying buyers and working with interested parties is continuing with respect to the remainder of our non-Core product lines.

In the first nine months of fiscal 2012, we recorded $13.7 million in restructuring expenses in furtherance of our cost reduction plans. This charge includes $11.7 million in severance and other employee benefits associated with the reduction of 11% 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.

In the third quarter of fiscal 2012, as part of the Plan, we changed the structure of our internal organization and the way we manage our business. Beginning in the third quarter of fiscal 2012, our internal reporting includes two segments: (1) the Core segment, which includes the OpenEdge, DataDirect Connect and Decision Analytics (comprised of Apama, Corticon and the Progress Control Tower) product lines; and (2) the non-Core segment, which includes the Actional, Artix, DataXtend, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic product lines. Our segments represent our product groups, however, our organization is managed primarily on a functional basis. We assign dedicated costs and expenses directly to each segment and utilize an allocation methodology to assign all other costs and expenses, primarily general and administrative, to each segment.

Our financial results for the first nine months of fiscal 2012 were adversely impacted by factors connected to the planning, announcement and execution of the 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, partners, customers and employees. In particular, during the second and third quarters of fiscal 2012, purchasing decisions were delayed, causing deal slippage at a greater rate than usual. This was caused both by uncertainty surrounding the Plan and generally deteriorating macroeconomic conditions, primarily in Europe.

Investments to improve the Core business were also initiated late during the second quarter of fiscal 2012, and will require time to impact performance. Until these investments are realized, 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 nine months of fiscal 2012 and we expect future declines in subsequent quarters until we divest the remaining product lines. 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 temporarily higher expense levels as we transition away from the non-Core portfolio.

We expect all of the disruptions caused by the Plan to continue in the fourth quarter of fiscal 2012.

On October 8, 2012, we announced that Jay H. Bhatt plans to step down as President and Chief Executive Officer and as Director, on December 7, 2012.  Mr. Bhatt will continue in his roles until December 7, 2012.  Our Board of Directors has initiated a search process and retained an executive search firm to identify a new President and Chief Executive Officer.   In light of this announcement, we expect disruption caused by the transition on our business, implementation of the Plan and operating results.

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

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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 fourth quarter of fiscal 2012, most particularly in Europe, the Middle East and Africa (EMEA).

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 fourth quarter 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 third 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 $252.7 million at August 31, 2012, which excludes $3.3 million of goodwill held for sale as part of the FuseSource product line divestiture. 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.


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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.

During the third quarter of fiscal 2012, in furtherance of the Plan, we changed the structure of our internal organization and the way we manage our business. As a result, our reportable segment information has been restated to reflect the current structure. Our evaluation of reporting units has also been reassessed and changed to reflect the current structure and operations. During the third quarter of fiscal 2012, we reassigned goodwill to the new reporting units and reportable segments based on the relative fair values of the reporting units.

In connection with the reassignment of goodwill to our new reporting units, we determined an impairment triggering event occurred that required us to perform an interim goodwill impairment test. We performed the test for both our old and new reporting units to ensure no impairment existed prior to the reassignment of goodwill or resulted after the reassignment of goodwill. The tests indicated that our reporting units under our old and new structures had estimated fair values that were in excess of their carrying values, and thus, no impairment was present. The fair values of our reporting units under our new segment structure are substantially in excess of their carrying values. As the organization continues to evolve under the Plan, we may have a change in reporting units in future periods, which could trigger additional interim impairment tests.


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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
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
29
 %
 
31
 %
 
30
 %
 
35
 %
 
(20
)%
 
(25
)%
Maintenance and services
71

 
69

 
70

 
65

 
(11
)
 
(6
)
Total revenue
100

 
100

 
100

 
100

 
(14
)
 
(13
)
Costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of software licenses
2

 
2

 
2

 
2

 
(17
)
 
(8
)
Cost of maintenance and services
14

 
15

 
15

 
14

 
(21
)
 
(6
)
Amortization of acquired intangibles
3

 
3

 
3

 
3

 
(8
)
 
(7
)
Total costs of revenue
19

 
20

 
20

 
19

 
(19
)
 
(7
)
Gross profit
81

 
80

 
80

 
81

 
(13
)
 
(14
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
31

 
35

 
35

 
34

 
(24
)
 
(9
)
Product development
19

 
15

 
19

 
15

 
16

 
11

General and administrative
13

 
16

 
14

 
12

 
(29
)
 
4

Amortization of acquired intangibles
2

 
2

 
2

 
1

 
(9
)
 
(14
)
Restructuring expenses
3

 
1

 
3

 
1

 
*
 
*
Acquisition-related expenses

 

 

 

 
*
 
*
Total operating expenses
68

 
69

 
73

 
63

 
(15
)
 
1

Income from operations
13

 
11

 
7

 
18

 
(2
)
 
(66
)
Other income (expense)

 
(1
)
 

 

 
146

 
246

Income from continuing operations before income taxes
13

 
10

 
7

 
18

 
6

 
(64
)
Provision for income taxes
6

 
3

 
3

 
6

 
63

 
(53
)
Income from continuing operations
7

 
7

 
4

 
12

 
(17
)
 
(69
)
Loss from discontinued operations, net
(2
)
 

 
(1
)
 

 
304

 
230

Net income
5
 %
 
7
 %
 
3
 %
 
12
 %
 
(36
)%
 
(76
)%
 
*
not meaningful

Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
August 31, 2012
 
August 31, 2011
 
As Reported
 
Constant
Currency
License
$
30,983

 
$
38,713

 
(20
)%
 
(16
)%
Maintenance
69,271

 
74,710

 
(7
)
 
(1
)
Professional services
6,919

 
11,088

 
(38
)
 
(34
)
Total revenue
$
107,173

 
$
124,511

 
(14
)%
 
(9
)%


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Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2012
 
August 31, 2011
 
As Reported
 
Constant
Currency
License
$
102,148

 
$
135,466

 
(25
)%
 
(22
)%
Maintenance
210,237

 
218,815

 
(4
)
 
(1
)
Professional services
24,773

 
32,090

 
(23
)
 
(20
)
Total revenue
$
337,158

 
$
386,371

 
(13
)%
 
(10
)%

Total revenue decreased $17.3 million, or 9% on a constant currency basis and 14% using actual exchange rates, in the third quarter of fiscal 2012 as compared to the same quarter last year and decreased $49.2 million, or 10% on a constant currency basis and 13% using actual exchange rates, in the first nine months of fiscal 2012 as compared to the same period in the prior year. The decline was primarily a result of decreases in license and professional services revenue. The revenue performance in the third quarter and first nine months of fiscal 2012 was impacted by 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 market place, we saw purchasing decisions delayed and we saw deal slippage at a greater rate than normal. We believe this was caused both by uncertainty surrounding our Plan and generally deteriorating macroeconomic conditions, primarily in Europe.

Total software license revenue decreased $7.7 million, 20%, in the third quarter of fiscal 2012 as compared to the same quarter last year, and decreased $33.3 million, or 25%, in the first nine 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 half of fiscal 2011 as compared to the same period in fiscal 2012.

Maintenance and services revenue decreased $9.6 million, or 11%, in the third quarter of fiscal 2012 as compared to the same quarter last year. Maintenance revenue decreased 7% and professional services revenue decreased 38% in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011. Maintenance and services revenue decreased $15.9 million, or 6%, in the first nine months of fiscal 2012 as compared to the same period last year. Maintenance revenue decreased 4% and professional services revenue decreased 23% in the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011.

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)
August 31, 2012
 
August 31, 2011
 
As Reported
 
Constant Currency
Core segment